Stock Analysis & Ideas

Ralph Lauren Stock: Rags to Riches

Ralph Lauren (RL) designs, markets, and sells premium lifestyle products worldwide. The bulk of retail sales is apparel, accessories, home furnishings, and licensed products. Ralph Lauren labeled paints for home and office come in a unique pallet of colors.

Mr. Lauren founded the New York-headquartered company in 1967. Longevity in the fashion industry, in which life-spans for style and fad is 18 months to two years, is its hallmark. I am bullish on Ralph Lauren Corp as an investment for retail value investors.

The luxe of the fashion industry is recovering from the pandemic – but unevenly. The stock’s levered beta is a high-side 1.65.

RL fared poorly through 2020. Earnings recovered to profitability in 2021. The Fiscal Q3 EPS reported in February 2021 was $1.67 to the positive. By Q2 in November 2021, the EPS hit $2.62. The consensus among nine analysts is the next Q3 EPS to be reported on February 2, 2022, will be $2.18.

The actual EPS numbers of the last five quarterly forecasts exceeded the forecasts. I expect the next Q3 actual EPS to be about $2.21, and for earnings to grow about 7% per year.

TipRanks’ Smart Score Rating

People expect RL to outperform. Ralph Lauren’s Smart Score rating comes in at 9 out of 10. Sentiments among investors and in the media are bullish. Hedge fund confidence is returning, with funds increasing shares in the last quarter.

In May 2021 and continuing throughout the year, insiders bought shares; 10 insiders executed buy orders again in January 2022. The company’s fundamentals are also bullish, with its return on equity sitting at 14.9%.

Where Ralph Lauren Is Vulnerable

Vulnerabilities underlie the positive attitude investors must keep in mind.

First, garment workers face worse working conditions during COVID-19, resulting in product shortages, a slowdown in deliveries, and rising costs. This unsettling concern is probably the leading cause for the short interest to hover around 7.5%.

A substantial market crash is a popular prediction (there is some hedging about precious metals); a crash will setback the fashion industry and undercut its stocks. Fashion sales plummeted about 30% during the ~18 months of lockdowns and layoffs.

Next, RL skipped a dividend payment. RL’s dividend remained unchanged for three years prior to the pandemic. The yield is 2.4%, and the payout ratio stands just below 30%. I expect the company will maintain the dividend for now at $0.69 per share.

The fourth caveat is the $1.63 billion of debt as of September 2021. It is about the same as the prior year. RL holds ~$3.1 billion in cash, total assets are over $8 billion, and liabilities are about $5.2 billion. Its market cap is at $8.6 billion. RL can borrow money easily. Higher interest rates on the horizon will stymie net income growth after returning to profitability this year.

Brighter Future

Lockdowns, despite the Omicron wave of infections, are no longer a viable strategy for protecting the public. Concomitantly, consumer confidence sentiment is on the rise. The public’s five-year outlook is positive again, and Americans have higher income expectations.

Industry number crushers think fashion sales will rise over 7% in 2022. Of utmost importance to RL is that the clothing industry holds the first position in e-commerce sales globally.

RL’s online sales grew 9% in the last fiscal year, and the digital customer base experienced 38% growth in North America. RL needs to invest more in social media marketing and sales platforms to appeal to Gen-X and Gen-Z consumers. The shift boosts margins.

The returns are worth it. An RL social media campaign generated an 18% increase in online sales from millennials, and product page views increased 41% among Gen-Z members.

Management pointed to the strong momentum in new digital stores in its March 2021 earnings call. They sell into China, Japan, and Hong Kong. RL is the number one menswear brand through Asian business partnerships. Revenues in China grew 6% at last report.

TipRanks’ website traffic tool estimates that visits on all devices to the RL site for Q3 were up 30.83% from the previous quarter. However, that is down ~14.7% from the same quarter last year. generates 53.4% of visits from searches. Display ads and social media generate the most hits. The brand is so well known that the keywords Ralph Lauren and Polo generate ~27% of the users. E-commerce sales for the company grew 20% in 2021.

Wall Street’s Take

Turning to Wall Street, Ralph Lauren stock earns a Moderate Buy consensus rating based on five Buys, three Holds, and one Sell rating assigned in the past three months.

The average Ralph Lauren price target is $133.88, with an implied upside of 14.1% over the next 12 months. The high share price forecast is $162, a 4% slip below my fair valuation of $168.

The Last Button

Ralph Lauren has proven staying power. RL enjoys broad-based positive sentiment, Moderate Buy recommendations, and an Outperform consensus from other analysts and myself. Profit-taking spurred some share sales in the last 30 days, but hedge fund and insider buying are up. 

Sales and earnings are slowly growing but at a steady pace. The stock is undervalued, in my opinion, but at low risk for any precipitous drop. The company is among a crush of competitors.

Online sales are growing in double digits. More investment is needed to move RL into the top tier of e-commerce companies, which presents a problem. The company cannot afford to alienate the owners of the 13,000 retail outlets carrying the lines or cannibalize sales from company-owned Polo stores.

Ralph Lauren is approaching 82 years. He is one of the last fashion icons active in his eponymous luxury label business. Ralph Lauren offers investors a piece of the American heritage. His products personify exquisite craftsmanship in an age of disposables and good financial incentives for a higher share price.

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