Ralph Lauren (RL) reported 4Q14 earnings this past Friday (May 9th, 2014). RL reported a profit of $1.68 for the quarter, beating forecasts of $1.63. Additionally revenue climbed 14% (to 1.87B), surpassing estimates for $1.83B. For the year, RL stated that EPS rose 4% to $8.44, beating by 5 cents.
Despite reporting results that were better than The Street's expectations, the stock dropped (~2%) largely due to RL's warning that the substantial growth initiative costs will erode their operating margin. The company noted that the substantial costs would in part be driven by: retail store development (opening approximately 40 - 45 new stores in FY15), SAP implementation (In FY15 the transition from legacy systems to SAP will be completed in North America (whole operations). Likewise, RL will begin the implementation process in Europe), and upgrades to their global e-commerce operating platform.
RL's guidance for 1Q15 and FY 15 fell just shy of analysts' estimates, contributing to the stock's decline. For FY15 management forecasted revenue growth in the range of 6-8% to come in at $7.9 billion. On the other hand, analysts were expecting profits of $9.2 per share with $8 billion in revenues.
Although the 4Q14 conference call left many investors weary of the company's future, RL has continually surpassed expectations. RL has been able to pinpoint the growth initiatives that will push the company higher, and is in the process of implementation. While the process will decrease RL's operating profit margins, RL is putting their money in all the right areas and success of such initiatives will be apparent in the future.
It is not clear to me why investors were so shocked about RL's decreasing margins, for the company had forewarned of such event in their 3Q14 conference call. I am not overtly concerned about the margins, for I had expected this. RL still demonstrates tremendous opportunities for growth - their clear strategies place them on the right track to maximize their sales and profit growth in the long-term.