Takeaway: RL missed a great opportunity to provide data to take down consensus estimates. Instead, est are 80% high in FY1 and 20% high in FY2&3.

I think that RL management was too bullish on the conference call, and ultimately will leave the consensus coming out well ahead of what is economically and financially feasible for RL. Management was positive about the direction of the business pre-Covid, but that’s irrelevant to the model today. The most important factor is how quickly RL can open up its business, and when we’re likely to see the level of revenue that will allow the company to leverage its fixed cost structure in a way that will allow it to hit earnings expectations. Management noted that mainland China will return to pre-covid levels by Q2 – setting an unfair precedent relative to what we’re likely to see in the US, which should be a much more drawn-out recovery period. In our model we have the US business down 40% in Q1 (June) – which is likely in the ballpark of where the consensus will come out. (we’re at a loss of $1.24 per share -- no guidance given other than that 1Q will be the worst). But then we have 2Q down 20%, 3Q down 10%, and 4Q flat. That de-levers to EPS of only $0.86 for the year – massively short of the consensus estimate of $4.43. Even if we consider Mar21 a throw-away year and focus on FY22, we still don’t have revenue back above pre-Covid levels and are coming out 20% below consensus at $5.12. Simply put, this was an opportunity for RL to raise the appropriate red flags for financial modeling purposes, and management blew it. RL’s not alone, as there are plenty of other companies that are feeding investors hope instead of cold hard numbers about how the companies are currently performing. But we don’t need hope, we need realism. Until then, expectations for the timing of a recovery remain too high at RL, and the stock remains a Best Idea short side.

RL | Management Blew It - RL Financials