Ralph Lauren’s Dividend Is Quite Healthy

Image: Ralph Lauren’s shares have done quite well since the beginning of 2022.

By Brian Nelson, CFA

Ralph Lauren (RL) reported better than expected fiscal first quarter results recently. Net revenue increased 1% in the quarter on a reported basis and was up 3% in constant currency. Foreign currency was a 170 basis-point headwind in the period. Europe revenue increased 6% (7% in constant currency), while Asia revenue increased 4% (9% in constant currency), with China up high-single-digits on a reported basis (up low-double digits in constant currency). North America revenue fell 4% in the quarter as improved direct-to-consumer performance was offset by planned declines in wholesale. Earnings per share in the quarter increased 15%, to $2.70 on an adjusted basis.

Management had the following to say about the quarterly performance:

Our brand has always been about inspiring a better life and celebrating the moments that bring us together. From our intimate runway show at our New York studio this spring to our elegant Salone del Mobile presentation in Milan and this summer’s Olympics, we are inviting people around the world to step into their dreams through authentic, timeless style.

We delivered a solid start to the year, with first quarter performance exceeding our expectations on the top- and bottom-line led by our direct-to-consumer and international businesses. The powerful combination of our brand strength and diverse growth drivers – together with our culture of agility and operating discipline – gives us confidence that our long-term strategy will continue to deliver even through these dynamic times.

During the quarter, Ralph Lauren’s adjusted gross margin came in at 70.5%, up 170 basis points from the same period a year ago thanks to favorable product, channel and geographic mix shifts and lower cotton costs. On an adjusted basis, its operating margin was 14.3% in the quarter, 90 basis points above the same period last year. Adjusted North America operating margin increased 10 basis points, adjusted Europe operating margin increased 370 basis points, while its adjusted Asia operating margin increased 270 basis points, all on a year-over-year basis.

Ralph Lauren ended its first quarter of fiscal 2025 with $1.8 billion in cash and short-term investments and $1.1 billion in total debt, good for a nice net cash position. Inventory was also down 13% at the end of the fiscal first quarter, while the company repurchased roughly $176 million in Class A common stock during the period. Cash flow from operations was $277.3 million in the fiscal first quarter, up from $270.7 million in the year-ago period. Capital spending fell to $33.4 million from $39.6 million in the same period last year. Free cash flow in its first fiscal quarter of $243.9 million easily covered its cash dividends paid of $47.5 million over the same time. 

For fiscal 2025, Ralph Lauren expects revenues to increase in the low-single digits on a constant currency basis, while it continues to expect its operating margin to increase 100-120 basis points in constant currency thanks to gross margin improvement and operating expense leverage. All told, we liked Ralph Lauren’s fiscal first quarter results and we’re particularly fans of its ability to drive strong free cash flow in excess of cash dividends paid. Our fair value estimate stands at $184 per share with the firm sporting a lofty Dividend Cushion ratio of 4.4.

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