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Ralph Lauren: Management Revised Its Guidance

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Management raised the margin outlook

Along with its 2Q18 results, Ralph Lauren’s (RL) management raised the lower end of its fiscal 2018 margin guidance and reiterated the sales outlook. It continues to expect an 8%–9% fall in its revenues (constant currency) for the year. The company will likely benefit by 80 basis points from foreign currency adjustments.

While discussing the reasons behind the sales decline, Jane Hamilton Nielsen, Ralph Lauren’s CFO, said, “Brand and distribution exits in both wholesale and retail account for approximately half of the decline, with quality-of-sales initiatives and challenging traffic trends representing the remainder, partially offset by new distribution and product and marketing initiatives.”

For the third quarter, sales are projected to fall 6%–8% (constant currency). Foreign currency benefits are expected to be as high as 160 basis points–170 basis points.

Restructuring initiatives appear to have paid off for Ralph Lauren. Now, it expects its fiscal operating margin (constant currency) to be 9.5%–10.5%—compared to the previous guidance of 9%–10.5%.

Valuations and earnings outlook 

Currently, Ralph Lauren is trading at a one-year forward price-to-earnings ratio of 16.2x. The company is trading at a premium to Hanesbrands (HBI) and PVH (PVH), which are valued at 9.6x and 15.2x.

However, the two apparel players have better earnings potential than Ralph Lauren. While Ralph Lauren’s earnings per share will likely fall 4.8% in the next 12 months, Hanesbrands and PVH are expected to witness an earnings increase of 3.6% and 16.7%, respectively.

ETF investors looking to add exposure to Ralph Lauren can consider the PowerShares Russell Midcap Pure Value Portfolio (PXMV), which invests 1.1% of its holdings in the company.

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