May 12 2014, 1:14pm CDT | by Forbes
Luxury lifestyle company, Ralph Lauren, posted better-than-expected earnings in the fourth quarter of fiscal 2014. The retailer posted year-on-year net revenue growth of 14% for the fourth quarter, helped by a double-digit sales expansion in North America, Europe and Asia. For the full-year, sales grew by 7.3% despite significant investment in growth initiatives and infrastructure, meeting the higher end of the company’s guidance of 5-7% growth. Excluding the impact of discontinued businesses and foreign exchange, sales growth for the full year came in at 9%. The outpacing of expectations is attributable to stronger wholesale revenue as the company gained market share in North America and returned to robust growth in Europe.
Operating income jumped by an impressive 24% to $225 million in the fourth quarter, which was achieved on top of a 33% increase in the prior year period. Operating margin improved 90 basis points to 12%, which was at the high-end of the outlook provided by the company in the previous quarter. For the full-year, operating income was $1.1 billion, implying a modest growth from the prior year. Operating margin declined 100 basis points to 15.2% due to an unfavorable foreign exchange rate and the mix impact from integrating the Chaps men’s sportswear operations.
We believe that the company’s revenue growth can accelerate going forward, benefiting from a variety of growth strategies we discuss below. We also expect the company’s profitability to improve over long term, as investments in these growth strategies bear fruit. Efficiencies gained through the improvement of its management information systems should contribute as well.
Wholesale Outpaces Retail Sales As Expected
Retail sales increased by 5% during Q4 fiscal 2014, driven by growth in international operations and global store expansion, including newly transitioned operations in Australia and New Zealand. Excluding the impacts of discontinued businesses and foreign exchange, retail sales rose 7%. North America retail operations were negatively affected by the cold and late start to spring and the Easter shift from March to April, which caused traffic to decline during the quarter. However, double-digit growth in European and Asian retail sales was strong enough to offset the losses in North America. Retail segment operating income was $51 million in the fourth quarter and the retail operating margin was 6.1%, 4% lower than the year before. The lower retail operating income margin reflects the expenditures made by the company on its global store expansion and e-commerce development efforts, and negative foreign exchange impacts. Retail operating margin was also affected by increased promotional activity in the U.S..
Wholesale revenues rose by an impressive 24% to $983 million. This strong growth was driven by the strong momentum in core North American sales, where the company continues to gain market share, the addition of Chaps menswear operations and improved trends in Europe. Profitability also improved in this segment as operating margin was up 40 basis points due to strong profitability in the core operations which more than offset the mix impacts from the integration of Chaps men’s sportswear and negative foreign exchange effects.
Future Growth Drivers
Over the quarter, RL remained committed to three key initiatives that it believes will drive sales and profits over the next three to five years.
We are in the process of revising our price estimate for Polo Ralph Lauren, which stands at $174, implying a premium of around 17% to the market price.
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