Takeaway: This recovery is going to take a lot longer than the consensus thinks. No reason to be buying over $50. Still a Best Idea Short.

EDITOR'S NOTE: Our Retail analyst Brian McGough added Ralph Lauren (RL) to his "Best Idea" short list on 3/30/20.

If you are an institutional investor interested in accessing McGough's research email sales@hedgeye.com

FLASHBACK | Short Ralph Lauren $RL - 8 4 2020 12 30 50 PM

WHAT MCGOUGH WROTE Today: 

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.

WHAT MCGOUGH WROTE ON 5/28/20: 

This was a decent quarter for RL. Yah, I get it, the company put up a big headline beat – but half of it was a lower tax rate, and the reality is that in this ‘killer’ quarter (as defined by the market’s reaction), the top line only grew by 1.4%, and EBIT was up a whopping 2.8%. The company is making strides in lowering promotions hence taking up AUR (up 6% this quarter – though transactions were down), and is also succeeding on the margin online – Digital comp was up teens% this quarter after #failing online more often than not over the past two years.

But seriously, should we be celebrating such sub-par EBIT growth for a brand that is half as relevant as it was a decade ago? The stock is not egregiously expensive at 15x earnings and 10x EBITDA, but you won’t catch me paying those multiples for such a slowly growing P&L. This company needs to take up its marketing spend by 2-3x and jack up its capex (things Stefan Larsson wanted to do before he was fired).

We need a focus on giving the brand a material shot in the arm such that it’s once again relevant to a younger generation. But instead the company is following a P&G growth algorithm – sorry but that doesn’t work in fashion.

You won’t catch me getting behind RL until I’m convinced that it could grow the global portfolio at a high single digit rate – which seems like a pipe dream based on the anemic growth numbers we see today.

If you are an institutional investor interested in accessing McGough's research email sales@hedgeye.com