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What Triggered Ralph Lauren’s Falling Fiscal 1Q17 Operating Margin?

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A detailed look at Ralph Lauren’s margins

Ralph Lauren’s (RL) adjusted operating margin declined by 60 basis points from fiscal 1Q16 to 8.2% in fiscal 1Q17. This decline was, however, better than the guidance provided by the company of a 110–160 basis point decline as the company reaped the benefits from its inventory management initiatives and a better product mix.

On a GAAP[1. generally accepted accounting principles] basis, however, the company reported an operating loss of $31 million and an operating margin of -2% in fiscal 1Q17. This compared to an operating profit of $96 million and an operating margin of 5.9% in fiscal 1Q16.

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Segment-wise profitability

The decline in operating margin was a result of lower operating profit in all three segments. The Retail segment saw the greatest decline of 42.7% YoY. Retail operating income stood at $63 million on a reported basis in fiscal 1Q17, including $62 million in restructuring and other related charges. This compares to $110 million achieved in fiscal 1Q16.

Ralph Lauren’s Wholesale operating income declined by 2.9% YoY and stood at $133 million on a reported basis in fiscal 1Q17. This includes $11 million in restructuring and other related charges.

The Licensing segment also reported a 5.6% YoY decline on a reported basis. Operating income for the segment stood at $34 million as compared to $36 million in fiscal 1Q16.

Net income and margin

On an adjusted basis, Ralph Lauren’s (RL) net income stood at $90 million, or $1.06 per diluted share. This compares to adjusted net income of $95 million, or $1.09 per diluted share in fiscal 1Q16.

On a reported basis, the company reported a net loss of $22 million, or $0.27 per diluted share, in fiscal 1Q17. The net margin stood at -1.4% during the quarter.

In comparison, Ralph Lauren’s competitors reported strong margins. While Michael Kors (KORS) reported the best-in-class net margin of 14.8% in the last reported quarter, PVH Corp. (PVH) and Hanesbrands (HBI) followed with net margins of 12% and 8.7%, respectively.

The First Trust Large Cap Value AlphaDex ETF (FTA) invests 0.76% of its holdings in Ralph Lauren.

In the next part of this series, we’ll compare Ralph Lauren’s stock returns to its peers.

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