Ralph Lauren falls after Bofa/Merrill downgrade cites 'dimming' margin story
Shares of Ralph Lauren (RL) are sliding after a Bank of America Merrill Lynch analyst downgraded the stock to Underperform from Neutral. DOWNGRADE: BofA/Merrill analyst Heather Balsky downgraded Ralph Lauren to Underperform and cut her price target to $80 from $100. Balsky said the margin story is "dimming" and brand demand is "still not bright." The analyst is forecasting negative sales growth through fiscal year 2019 and thinks margin story has passed as management focuses on sales catalysts, including a ramp in marketing and investment as well as ecommerce strategies and international expansion. Balsky said Ralph needs to rebuild its image to attract younger consumers, which is difficult to execute as apparel demand remains weak, the retail environment stays highly competitive and promotional and consumers become less brand-loyal. The analyst sees downside risk to sales growth if management announces more distribution cleanup, departure from additional brands, or further withdrawal in ecommerce discounting. Balsky also added that the company's revenues are estimated to be roughly 40% wholesale globally and 50% in North America in fiscal year 2018, which may impede Ralph's turnaround, especially as department stores manage inventory tightly. GUIDANCE: In its second quarter earnings announcement on November 2, Ralph said the company expects third quarter net revenue to be down 6% to 8% and operating margin to be down 50 to 70 basis points, both excluding the impact of foreign currency. For fiscal year 2018, the company expects net revenue to decrease 8% to 9%, excluding the impact of foreign currency. Based on the first half performance, Ralph expects operating margin for fiscal year 2018 to be 9.5% to 10.5%, excluding the impact of foreign currency. The company added, "We expect capital expenditures of approximately $225M for fiscal 2018, lower than our previous guidance of $300M, as we shift capital investments behind consumer-facing initiatives that have demonstrated a proof of concept and healthy rates of return." PRICE ACTION: Ralph Lauren dropped over 3.5%, or $3.52, to $96.62 in late morning trading.