Why Ralph Lauren Looks Best Positioned To Weather The Coronavirus Storm

by Trefis Team
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Apparel stocks have taken a hit since WHO declared the COVID-19 outbreak an international emergency. The global economic slowdown, as well as the lockdown of major economies, have hurt apparel stocks. The slump in demand in Asian countries – particularly China – is likely to weigh on these companies’ performance. Moreover, many apparel companies have temporarily shuttered their stores in North America.

As the world prepares to face the challenges of the coronavirus, Trefis takes a look at various operatic metrics to analyze which apparel company is best prepared to deal with the repercussions of the outbreak if the situation worsens. Our analysis concludes that given its strong cash position and low leverage ratio Ralph Lauren is in the best possible place to face the adverse impact of the virus.

We also provide a detailed comparison of -28% Coronavirus crash vs. four historic market crashes in a separate interactive dashboard.

 

Why Ralph Lauren Seems To Be Better Prepared To Bear The Impact Of Coronavirus?

#1 Limited Exposure To Asia

  • Gap derives less than 7% of its revenues from Asia, while the contribution of Asia to Tapestry’s revenues was as high as 32%.
  • On the other hand, Ralph Lauren generates around 16% of its revenues from its Asian business. In comparison, American Eagle’s business outside the U.S. accounted for just about 13% of its total revenues in 2019.

 

#2 Strong Net Cash Position

Net Cash = Total Cash – Debt

  • As per the latest available balance sheet, Ralph Lauren’s net cash balance stood at $1.2 billion – nearly 3x that of its rival, American Eagle.
  • American Eagle’s net cash balance of $417 million was higher than that of Gap’s $405 million, while Tapestry had a negative cash balance.
  • Ralph Lauren’s strong cash position will help it considerably over the coming months.
  • Notably, the company had around $600 million in debt, which could be quickly paid off using its $1.9 billion of cash reserves.
  • Also, American Eagle had no debt – putting the company too on solid ground to face the imminent challenges.

 

#3 Low Leverage Ratio

Leverage Ratio = Debt / Equity

  • Ralph Lauren’s leverage ratio stood at 22%, meaning that debt forms less than one-fourth of the company’s total equity. This provides the company additional cushion given the company has less fixed interest payments to make and also the option to make the full payment of the debt if the need arises.
  • On the other hand, Tapestry’s leverage ratio was as high as 48%, while Gap’s leverage ratio was around 38%.
  • As stated above, American Eagle had no debt and hence has a leverage ratio of 0%.

 

#4 Dependency on China Supplies

  • Although Tapestry derives nearly one-third of its revenues from Asia, it only sources around 10% of its goods from China – which has been hurt the most so far by the outbreak.
  • On the other hand, Ralph Lauren sources nearly 33% of its goods from China. This places the company in a tricky spot as the company’s supplies could be adversely impacted, given its dependency on the country.
  • Additional details regarding the percentage of goods sourced from China by competitors Gap and American Eagle Outfitters are available in our interactive dashboard.

 

Conclusion: Ralph Lauren Seems To Be In A Good Shape To Face The Crisis

To sum things up, although Ralph Lauren sources nearly one-third of its goods from China, Ralph Lauren’s strong cash reserves, as well as minimal exposure to debt, places the company in a strong position to face the consequences of coronavirus.

Additionally, you can read about the impact of the coronavirus outbreak on the stock of major U.S. companies, including Netflix, Disney, and P&G, among others on the Trefis coronavirus topic page.

 

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