I would agree that reduced capacity will benefit all of the market share leaders, including Domino’s.
To be clear, this was NOT a great quarter – despite half the sell-side congratulating management on the call for beating lowered guidance. Yeh, RL printed $0.93 vs the Street at $0.71, but sales were up only 4% and EPS was about flat vs. last year. Nothing to write home about.
That said, there were several things I liked, and another that raised an important potential concern.
1) Comps were decent at 4%, and wholesale managed to be flat despite a truly abysmal US whole business (which by my math was down around 20%). This helps show the geographical evolution of this company.
2) Inventories were down 6% despite a meaningful boost in FX, and a horrific retail environment. On top of this, Gross Margins were up, meaning that RL did not simply take it on the chin with margin to clean its books. The chart below says it all. After 10 quarters of fixing distribution and investing in product, we’re finally starting to see the benefit on RL’s P&L. The P&L trajectory is on solid footing.
3) The cash cycle overall improved by 9 days. Not only did inventories improve by 6 days, but DSOs were down by 2, and payables were up by 1. Not bad, Ralph.
My Biggest Concern. There is the potential for us to look back 2-3 quarters down the road and view this quarter as the peak for RL from an FX standpoint – not immaterial when a third of cash flow comes from Europe. See my 7/25 and 8/5 posts outlining 1) materially slowing retail sales in Europe and 2) Europe serving as the buffer for Chinese apparel imports as the US shifts to other countries on the margin. Bottom line = growth is slowing in Europe, costs are headed higher, and any organic growth and/or FX benefit could be history for US brands/retailers.
The saving grace for RL is that in this quarter, it ONLY BEAT AS MUCH AS IT HAD TO! The company delivered SG&A rather meaningfully (by about 275bp) as it took up SG&A to plow capital back into the organization to keep brand momentum going. If the FX factor reverses course later this year, RL is one of the few brands that can pull back on key levers to gain share without meaningfully sacrificing profitability.
RL guided to $4.00-$4.10. I still think it prints better than $4.50 for the year.
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The 200 day moving average is where a lot of the slower moving capital lies. I generally do not use this line to manage my portfolio, but I am always aware of it in order to understand risks of potential behavioral breakdowns/breakouts.
The 200 day moving avg for the US Dollar Index is 74.23. I have attached a 3 year chart just to remind you how many times we have toyed with this goal line, and failed.
- Can The US Dollar Breakout With Bernanke Pandering To the Doves?
Japan's Finance Minister, Ibuki, actually used the word "stagflation", joining Ben Bernanke as the other major central banking head to do the same in recent weeks.
My short term target for the Nikkei is 12,807.
*Full Disclosure: I remain short Japan via the EWJ (ETF).
- Japan's Nikkei Is Breaking Down
At -49, the ABC confidence readings look primed to test their all time lows. This week's negative move is more negative if you consider that this occurred in the face of dropping oil prices.
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