Is Ralph Lauren’s Stock Undervalued Despite Its Recent Rally?

Ralph Lauren (NYSE: RL) is the global leader in premium lifestyle products. The company’s business went through a rough patch in FY’18 (year ending March), but Ralph Lauren has done well to turn things around over the last couple of years. Ralph Lauren delivered strong results in Q3 2020 (ending December) – resulting in the company’s stock price rising by nearly 8%. We believe that the company’s stock still has room for more growth. Per Trefis analysis, Ralph Lauren’s valuation is around $129 per share, which is roughly 5% ahead of the current market price. Our price estimate takes into account the most recent earnings as well as the company’s guidance for the current fiscal year.

Fiscal Q3 2020 Earnings Recap and Full-Year Expectations

• Ralph Lauren posted an impressive performance for its fiscal Q3 (three months ended December 2019) – handily beating consensus expectations on revenues and earnings.
• Revenues for the quarter grew 1% y-o-y to $1.8 billion driven by growth across all regions led by Europe and Asia. At the same time, adjusted EPS jumped by 23% year-on-year to $2.86 as a result of reduced promotional activity and a favorable product, geographic, and channel mix and reduced restructuring charges.
• For the full year, Trefis expects the company’s revenues to grow by 1.5% to $6.4 billion. Also, we expect adjusted net income margin to improve from 6.8% in 2019 to 9.1% in 2020 on the back of steady revenue growth, lower operating expenses, and a lower effective tax rate.

Below we provide a detailed explanation of the key factors that could impact the company’s valuation.

#1. Asia Is Ralph Lauren’s Fastest-Growing Segment

• Ralph Lauren’s Asia segment has achieved robust growth in the last few years, with revenues increasing from $892 million in 2016 to over $1 billion in FY 2019, driven by higher comparable sales growth as well as accelerated store openings.
• China has been the most significant growth driver for Ralph Lauren – accounting for a bulk of the company’s growth. During FY’19, roughly 30% of Asia’s revenue growth came from Mainland China.
• We expect this segment to continue its strong growth trajectory, with revenues increasing at a rate of 3.5% to nearly $1.08 billion in FY’20.
• However, we have lowered our forecast for the region’s growth due to the business disruptions in Hong Kong resulting from ongoing protests and political unrest, as well as the coronavirus breakout in China, which is likely to adversely impact the company’s revenue in Q4 2020.

#2. Focus On Digital Segment

• Digital growth has been pivotal for Ralph Lauren. A global digital ecosystem has contributed significantly to Ralph Lauren’s top line in recent quarters. Digital sales improved in low double digits year-on-year for the fiscal third quarter, with strong performance noted across all regions.
• Ralph Lauren’s focus on the digital segment and strong brand building have led to enhanced consumer experience and higher quality of sales across all segments. Going forward, we expect the company to continue to focus on this segment as the digital channel holds strong growth potential

#3. Ralph Lauren Remains Focused On Improving Its AUR (Average Unit Retail)

• One of Ralph Lauren’s key objectives has been raising its AUR to elevate the brand globally and create value.
• Ralph Lauren’s strategy seems to be paying off as the company achieved AUR growth of 6% in Q3 2020 led by lower discounts, elevated product mix, geographic and channel shifts, and strategic ticket price increases.
• Moreover, the growth in AUR is also helping the company generate more profits. Ralph Lauren’s gross margin expanded by 60 basis points in the quarter, primarily due to the AUR growth.
• For fiscal 2020, the company expects AUR to expand in the low-single-digit – resulting in improved profitability.

Per Trefis estimates, Ralph Lauren’s adjusted EPS for 2020 is likely to be $7.75. Taken together with a P/E multiple of 16.6x, this works to a fair value of $129 for Ralph Lauren’s stock, which is roughly 5% ahead of the current market price.

We highlight how Ralph Lauren’s P/E multiple has trended over the years, and compare this key metric with that for its peers Gap, American Eagle Outfitters, and Urban Outfitters in our interactive dashboard.

See all Trefis Price Estimates and Download Trefis Data here

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