Luxury goods companies Ralph Lauren and Tapestry saw their respective shares moving in opposite directions following their calendar fourth quarter earnings releases as both issued guidance revisions. Ralph Lauren appears to be executing well, while Tapestry can’t avoid macroeconomic and geopolitical uncertainty.
By Kris Rosemann
Ralph Lauren Raises Fiscal 2019 Guidance as Gross Margin Expands
Shares of premium lifestyle product designer Ralph Lauren (RL) jumped following the release of its fiscal 2019 third quarter results February 5, as it turned in revenue growth of 5% on a year-over-year basis. Revenue in North America advanced 3% from the year-ago period, while revenue in Europe and Asia rose by 10% in each region, including 19% growth in Greater China in constant currency. Global digital revenue leapt 20% from the comparable period of fiscal 2018 thanks in part to growth in its digital flagships exceeding expectations and ongoing expansion of its digital commerce site in China.
Gross margin in the quarter expanded 90 basis points as adjusted on a year-over-year basis due to reduced promotional activity and improved pricing in addition to the positive impact of favorable product and channel sales mix. Adjusted operating margin (excludes restructuring charges) expanded 70 basis points from the year-ago period to 13.9% and was mainly driven by gross margin expansion. A materially lower tax bill boosted adjusted net income per diluted share to $2.32 compared to $2.03 in the comparable period of fiscal 2018.
Free cash flow generation in the first three quarters of fiscal 2019 fell more than 35% from the year-ago period to $534 million but was still more than sufficient in covering cash dividends paid of $142 million in the period. However, share repurchases exploded higher to $432 million from just $16 million in the first three quarters of fiscal 2018. As of the end of calendar 2018, Ralph Lauren held nearly $2.1 billion in cash, cash equivalents, and short-term investments compared to $687 million in long-term debt. Its Dividend Cushion ratio is an impressive 4.1 at last check thanks to the combination of its strong balance sheet and solid dividend coverage with free cash flow. Shares yield ~2% as of this writing.
For the full fiscal year ending March 2019, Ralph Lauren now expects net revenue to be up slightly in constant currency compared to prior expectations for the measure to be flat to up slightly. Gross margin expansion is now expected to drive 60 basis points of operating margin expansion in constant currency, up from previous guidance for 40-60 basis points of operating margin expansion. Management is confident in its ability to evolve with changing consumer preferences while maintaining the iconic status of its brand, the latter of which had been a struggle for the company as its brand portfolio became increasingly extensive earlier this decade. Recent improvement in terms of lower promotional activity (protecting aspirational nature of its brands) in tandem with a rising digital presence suggests it is right to hold this confidence.
Our fair value estimate for the company currently sits at $118 per share.
Tapestry Drops on Macro Weakness Warning; Lowers Guidance
Tapestry (TPR), the company formerly known as Coach, faced material selling pressure following its fiscal second quarter report February 7 after it noted that results came up short of expectations due to, “an increasingly volatile macroeconomic and geopolitical backdrop.” Net sales advanced 1% on an as reported basis, and non-GAAP gross margin was roughly flat compared to the year-ago period at 67%. Non-GAAP operating margin contracted by 70 basis to 22.3% due to higher levels of investment in its business as it continues to integrated the recent acquisition of Kate Spade. Non-GAAP net income per share came in at $1.07, which was directly in line with the year-ago period.
As a result of the aforementioned macroeconomic and geopolitical uncertainty, Tapestry has lowered its fiscal 2019 guidance. It now expects top-line growth in the low-to-mid-single digit range (was mid-single digits), and earnings per diluted share guidance now comes in a range of $2.55-$2.60 (was $2.75-$2.80) as headwinds will provide a drag on the improvements from synergies related to the Kate Spade acquisition, which remains on track. Management noted that China was not a driver of its uncertainty-related guidance reduction, but a continued headwind from tourist spending in North America was highlighted.
We rid the simulated Dividend Growth Newsletter of shares of Coach after it announced the acquisition of Kate Spade in May 2017, prior to its name change, due to the increasingly acquisitive nature of management, which drove its debt load higher. Since then its share price has fallen from $44.65 to the ~$33 range, and the company has not raised its quarterly dividend in several years. As of the end of the second quarter of fiscal 2019, Tapestry held a net debt position of $106 million, which is not unbearable but is not nearly as appealing as the net cash position that originally drew us to the name as a dividend growth idea. Its Dividend Cushion ratio is a solid 1.9 at last check, and our fair value estimate for Tapestry sits at $41 per share.
Luxury Goods – Ultra & Aspirational: BID, CFRUY, FOSL, KORS, LVMHF, RL, TIF, TPR
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.