RL - Ralph Lauren is viewed cautiously at Wells Fargo due to margin pressures

Wells Fargo said Ralph Lauren Corporation ( NYSE: RL ) delivered a solid earnings report despite the choppy retail backdrop. The apparel giant posted better-than-expected revenue and EPS as core strategies continue to bear fruit.

Analyst Ike Boruchow called China a surprise bright spot in the quarter with revenue over 30%, although RL's overall margins were said to have disappointed due partially to FX and elevated product costs.

Those FX headwinds are expected tp continue to mount and are forecast to trim 730 bps from revenue and 170bps from gross margin.

The read-through by Wells Fargo on Ralph Lauren's North America business was largely positive.

"NA has remained relatively robust through 1H23, including AURs +mid-teens in 2Q, strong full price B&M and digital SSS, and foreign tourists sales seeing improvement. However, outlet performance has remained soft—weakness has been particularly acute among the value oriented customers (subset of outlet customer) and store traffic remains below pre-pandemic."

Looking ahead, Boruchow and team think RL' strategies are working, but note the macro setup remains tough.

"While we commend RL for adeptly navigating the choppy trading environment over the last 18 months (especially as evidenced by their very solid print today), we continue to believe that the unique AUR/GM dynamics at RL are likely to keep investors at bay as we continue to move through a highly uncertain pricing environment."

With the promotional environment likely intensifying into holiday, Wells Fargo is cautious on RL's ability to continue to hold merchandise margins over the next several quarters.

The firm kept an Equalweight rating on Ralph Lauren ( RL ) and price target of $95.

Read the Wells Fargo earnings call transcript.

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