Factors Justifying Our Valuation For Ralph Lauren
Ralph Lauren (NYSE:RL) has exceeded expectations with their Q2 earnings on the back of certain strategic initiatives implemented by the company. Despite foreign currency fluctuations negatively impacting the income of the company by 5%, the financial results presented some positives that can be seen in rising earnings per share and high gross profit margins in the last quarter.
Trefis has a $144 price estimate for Ralph Lauren, which is above the current market price.
See Our Complete Analysis For Ralph Lauren Here
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The company’s shares have slumped greatly after hitting a high of $189 in December last year, as a result of falling sales. However, better than expected results in the second quarter, together with optimism over sales during the holiday period, have given it a rosier outlook. New changes to the management structure have also been to the company’s advantage, with the appointment of Stefan Larsson as the CEO, culminating in a reorganization of the operations of the company by brand, rather than by product. This has been made in an attempt to trim down the annual costs by over $100 million annually. The focus on the e-commerce platform has been another plus for the company, with a growth of 10% witnessed in the second quarter. Further plans of e-commerce re-platforming will reap additional benefits. [1]
Ralph Lauren Banking On Its Brand Popularity
The company’s products are popular through all age groups, and in a study conducted by investment bank Piper Jaffray, Ralph Lauren was ranked in the top five favorite brands among teens, along with Nike, Urban Outfitters, and American Eagle, which target a different set of customers. [2]
While investment has taken a hit in China, consumer spending continues to rise. Retail sales increased by 11% in October, the highest rate of growth this year. A number of steps have also been taken by the Chinese Government to spur spending such as reducing central bank interest rates, removing the cap on deposit rates, and cutting the tax on purchases. [3] Ralph Lauren’s popularity among the millionaires in China should also bode well for the company.
Foreign Currency Fluctuations Wipe Out Organic Growth
Gross margin remain fairly high at over 50%, but this figure fell in Q2, compared to the same period last year, and the company’s net profit margin lags behind those of its peers in the Textiles, Apparel & Luxury Goods industry. In terms of growth in net income, as well, Ralph Lauren has been weaker in comparison to the industry. [4]
Although the company surpassed expectations with its earnings in the second quarter, foreign currency fluctuations negatively impacted results by a great extent. This trend could continue as the U.S. dollar continues to grow stronger, and the Fed keeps interest rate increases on hold. Robert L. Madore, Chief Financial Officer and Senior Vice President of Ralph Lauren, stated in their Q2 earnings call, that a 2.5% reduction in revenues and operating margin is to be anticipated in the next quarter.
Despite these pessimistic financials, Ralph Lauren is trading at a trailing twelve month PE of 18.61, well below the industry average of 30.12 and its price to sales ratio is at 1.37, as compared to the industry’s ratio of 2.91. [5]
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