American luxury retailer Ralph Lauren (click ticker for report: ) reported results for its fiscal year 2013 first quarter Wednesday. Results weren’t terrible, but they weren’t good either. Revenue grew 4% year-over-year during its first quarter to $1.6 billion, which was in-line with the Street’s estimate. Earnings were much stronger than expected, growing 7% to $2.03 per share, while most of the Street predicted a slight earnings decline. The firm reiterated its mid-single digit revenue growth outlook, and it expects operating margins to increase modestly.
Wholesale revenue rose 3% during the first quarter to $694 million, which is somewhat positive, in our view. Management noted a double digit decline in sales in Europe, a conscious effort to avoid channel stuffing in the region, and the elimination of certain distribution in China. The firm, however, achieved robust growth in North America, where revenue advanced at a double digit pace. Clearly, the brand has some momentum in North America, which speaks well to potential international expansion down the road.
Retail sales increased 5% during the quarter, to $857 million, though same-store sales grew only 1% (3% on constant currency basis). The firm cited store closings in China as one of the main drivers behind the weakness, which doesn’t surprise us. Not only is retail sales growth decelerating in China, as evident by the results of many other retailers—such as Nike (click ticker for report: ) and Yum Brands (click ticker for report: )—but many retailers have struggled to figure out the appropriate business model in the region. Adidas (ADS) thought it had a great, quick growth model a few years ago, but then had several consecutive down quarters. The same China weakness appears to be happening with Nike, which reported poor growth in its most recent quarter.
Taking advantage of its tremendous cash balance, the firm repurchased $300 million in shares during the first quarter and still has $272 million remaining on its existing authorization. Since shares have traded within our fair value estimate range during the quarter, we would have preferred a dividend increase, but a buyback will still be accretive to earnings (though it won’t be significantly value-creative). Management sounded very cautious on the conference call, suggesting Europe could have a larger negative impact on earnings over the near term than initially expected. Shares remain fairly valued, and we do not think Ralph Lauren is a very compelling investment opportunity at this time.