This quarter was in line with our view that RL’s recovery is going to take a lot longer than the consensus thinks. The company put up a 57% comp erosion (vs the Street at -41%) with a staggering 93% decline in its North America wholesale business. North America and Europe comps were down 64% and 62%, respectively (including ecomm and B&M), with Asia ‘only’ -33%. The EPS miss was muted though, as RL printed a loss of $1.82 vs expectations of $1.75 as the Gross Margin came in surprisingly strong – 730bp better than last year. That was, by a country mile, the only positive to come from this quarter. The mix shift to higher-margin Asian sales and the reduction in lower margin North American Wholesale and Factory Outlet (not sustainable) drove about 2/3 of the improvement, with the remainder driven by higher AUR, which is something the bulls are going to cling on to as it (falsely) suggests that the brand is becoming relevant again. In fact, NA ecomm – the best gauge for the real strength of the brand – was up only 3% during the quarter, which is a clear disappointment. Higher AUR was driven by less discounting coupled with selective price increases, which was nice to see, as it’s a clear focus for this management team. The company also ripped the band aid off of wholesale by exiting 200 North American doors to take up quality of sale and margins. Definite golf clap there – management did the right thing. But higher AUR only matters meaningfully when it applies to a big enough piece of the business to deliver absolute revenue growth. In RL’s case, it’s unrealistic to expect to see any kind of revenue growth for at least another year – and even then we’re not modeling that RL gets back to pre-covid levels of revenue over a TAIL duration. Over the near term, the company stopped shipping spring and summer product, which was a good idea. Though it also reduced fall/holiday orders by 2/3. While that might have been a prudent move, the reality is that it caps revenue growth over a TREND duration – particularly with inventories down over 20% vs last year. Heading into this event we were looking for annual EPS of $1.00 vs the Street at $2.13. But we’re lowering that to a loss of $0.75 for the year (ended March 2021). If we want to look at ‘recovery earnings’ (whatever that means) we’ve got RL clocking in at $3.43 and $4.80 for 2022 and 2023, respectively, which is roughly 40% below consensus. I don’t want to be too greedy on the short side here with RL trading down to $64 on this print, but the reality is that 90% of retail is overvalued and poorly positioned – and expectations for RL need to be rightsized very materially in that context. There’s no fundamental reason to be buying this stock at anything over $50. Best Idea Short.
