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Ralph Lauren Corp (RL): A Deeper Look Into Ralph Lauren's Stock

 July 02, 2013 01:35 PM

Ralph Lauren's present stock price trades around $174, which is 90% of its 52 week high. Several investors that are keen on investing in the apparel retail sector may find this as an attractive option given the industry trends and company fundamentals.

So let's begin with Ralph Lauren's earnings distribution. The company generates maximum earnings through specialty stores at round 37%, which is followed by Ralph Lauren factory outlets at around 27%. The remaining earnings are split between Ralph Lauren, Club Monaco & Rugby stores, Macy Stores and licensing authorities at around 18%, 9.5% and 7% respectively.

Ralph Lauren is a leading luxury apparel retailer with operations across the globe. During the latest quarterly results, the company reported a 35% increase in earnings. In addition, during the previous fiscal year the net income grew 10% to $750 million or $8 per share.

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Recently, the company reduced its revenue growth guidance for the first quarter of 2014, sighting an increase in its operating costs. It expects the revenue growth at around a low single digit percentage of 4% to 7%, which can be a cause of concern for potential investors in the near term, however, in the long term the growth story is expected to continue.

Ralph Lauren, over the years has consistently exhibited depth in apparel range and brand superiority as it continues to post growth in a depressing economic environment. During the last quarter, the luxury retailer struggled to post any top line growth; however, supreme operating efficiency coupled with sourcing capabilities led to marginal profitability.

[Related -Futures Plunge After China Data; HP Surges]

Ralph Lauren generates maximum value through its specialty retail stores. Even though the retailer has a diversified revenue model across demographics, it still operates on several risks, which has limited its ability to outdo its competitors such as VF corp, PVH, Liz Claiborne and Jones Group that have developed a wide portfolio of brands over the years.

It is well worth noting that Macy's stores contributed approximately 10% to Ralph Lauren's overall earnings during last year. Going forward, any reduction in orders from Macy's could seriously damage the top line earnings of Ralph Lauren.

At present, Ralph Lauren trades at around $174.40, which makes it worth approximately $16 billion (Market Cap), further, the EV/EBITDA stands at 10.8x.

What makes it a Reliable Investment?

What sets Ralph Lauren apart from its peers is its ability to sustain its brand heritage over the last two decades. As several luxury brands have been unsuccessful in holding on to customers predominantly due to rapidly changing fashion trends, in contrast, Ralph Lauren has successfully sustained its brand positioning and incrementally developed on its product offerings. In addition, the company has a large brand masstige (extension), which implies it offers a range of products at different price points making it accessible to all types of customers.

Asia seems to be at the forefront of expansion for most apparel retailers based in the U.S. The retailer is restructuring its operations in regions such as China in order to re-create its brand image and increase its global foot print. During 2010, the licensed business of Ralph Lauren in China and South Asia was acquired by the company in order to revamp its brand perception and reintroduce itself as a premium-luxury brand, which keeps its honest to its true brand values. Over the next few years, the luxury retailer plans to launch 60 new stores in the high footfall premium locations of China.

In the near term, the guidance for the first quarter of fiscal 2014 is marginally conservative with an estimated single digit growth in net revenues and a possible negative impact of currency translation. In addition, operating margin may suffer due to increased investment in Chap's footwear business. However, company fundamentals remain strong, and growth prospects remain healthy, therefore, I give it a buy rating.



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