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Ralph Lauren Corp. says it’s monitoring the evolving situation in China but the luxury label has already taken steps in response to the coronavirus outbreak, closing about half of its 110 stores in the region.
Chief Executive Patrice Louvet said China represents less than 4% of the company’s total business.
Still Louvet said Ralph Lauren RL, +11.52% will have to wait until workers return from the Lunar New Year holiday to determine how much the supply chain has been impacted. The company has taken steps to diversify its supply chain.
“As far as supply chain is concerned… while the China opportunity is a massive growth opportunity to some extent, it’s a blessing to be underpenetrated today,” said Louvet on the earnings call, according to a FactSet transcript.
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China is critical for the luxury market, both in the U.S. and abroad. S&P Global says Chinese customers account for about 35% of the global luxury industry.
“We believe the coronavirus illness will substantially curtail store traffic in China and neighboring countries, may negatively impact incoming Chinese tourism and is also likely to disrupt supply chains,” wrote Cowen analyst Oliver Chen in a note.
The luxury sector could experience the most material impact, Cowen says, noting that the average revenue exposure for the category is about 14%.
For Ralph Lauren, UBS analysts say there are two stories to tell: one that focuses on the potential impact of coronavirus and one that looks at the fundamentals of the company.
Ralph Lauren reported a fiscal third-quarter earnings and revenue beat. Guidance for “slight” revenue growth in the fourth quarter takes into account the disruptions in Hong Kong and other factors, but not the coronavirus.
The news comes during the brand’s continued turnaround effort, which includes increased digital capabilities and a focus on core merchandise.
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Based on the fundamentals and indications that the company’s turnaround plan is working, UBS analysts said shares should rise. The stock was up 10.5% in Tuesday trading.
UBS maintained its neutral stock rating with a $121 price target. UBS published its note before the Tuesday morning earnings call.
“Q3 was a reaffirming data point that Ralph Lauren’s strategies are bearing fruit and revenue/margin drivers remain in place (with good visibility into the next fiscal year),” wrote Wells Fargo analysts led by Ike Boruchow. “On top of that, their low exposure to China makes them more appealing from a tail-risk perspective relative to other brands under coverage.”
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Wells Fargo rates Ralph Lauren shares overweight with a $140 price target.
Ralph Lauren stock has gained 9.4% over the past year, the SPDR S&P Retail ETF XRT, +1.17% is down 1.1%, and the S&P 500 index SPX, +1.73% has rallied 21.3% for the period.