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Why Did Ralph Lauren Have Lower Margins in Fiscal 4Q16?

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May. 16 2016, Published 10:33 a.m. ET

Profitability and margins in fiscal 4Q16

Ralph Lauren’s (RL) gross profit margin fell 90 basis points to 54.5% in 4Q16. The end-of-season inventory clearance and unfavorable foreign currency effects were the main reasons for this decline.

The operating profit fell 43% YoY (year-over-year) to $112 million in 4Q16. This caused the operating margin to fall from 10.5% in 4Q15 to 6% in 4Q16. The decline was driven by gross margin pressure and an increase in operating expenses as a percentage of sales by 290 basis points. Higher operating expenses were a result of incremental investments in infrastructure, new stores, marketing, and unfavorable foreign currency effects. The generally accepted accounting principles operating margin stood was 3.5% during the quarter.

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Segment-wise profitability

The wholesale operating income stood at $255 million in 4Q16—compared to $309 million in 4Q15. Retail operating income also registered a decline of $6 million to $22 million in 4Q16. It’s important to note that both of the comparisons are excluding restructuring and other charges. A decline in the operating income for both of the segments was a result of proactive measures taken in the US to clear end-of-season inventories related to the fall season and negative foreign currency effects.

The licensing operating income registered a 9% YoY increase to $35 million in fiscal 4Q16.

Net income and margin

Ralph Lauren reported fourth quarter net income decline of 68% to $74 million or $0.88 per diluted share—excluding restructuring and other charges. On a reported basis, the net income stood at $41 million or $0.49 per diluted share in 4Q16—compared to $124 million or 1.43 per diluted share in 4Q15.

The First Trust Large Cap Value AlphaDex ETF (FTA) invests 0.69% of its holdings in Ralph Lauren.

Comparing peers’ profitability

Ralph Lauren’s operating margin of 3.5% during its last reported quarter is among the lowest in the apparel and fashion peer group. Hanesbrands (HBI), VF Corporation (VFC), Coach (COH), and Michael Kors (KORS) reported operating margins of 10%, 11.8%,13%, and 29.3%, respectively, in their last reported quarters.

In the next part, we’ll discuss the company’s performance in fiscal 2016.

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