Which Affordable Luxury Retailer Is A Better Bet: Ralph Lauren Or Tapestry?

by Trefis Team
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Ralph Lauren stock  (NYSE: RL) has declined by nearly 45% since early February after the WHO declared the Coronavirus a global health emergency, while Tapestry stock  (NYSE: TPR) has also lost roughly 50% of its value. The global economic slowdown, as well as the lockdown of major economies, have hurt apparel stocks. Moreover, the companies have had to shutter their stores temporarily, and the stores are expected to remain closed until the end of May as the pandemic continues to spread, particularly in Europe and the U.S., which are the largest markets for apparel companies. There has been a slump in demand for affordable luxury products, as evident from Tapestry’s Q3 2020 (ending March) results, which saw its revenues shrink by nearly 20%. However, we believe Ralph Lauren has the edge over Tapestry and is likely to fare better over the coming months because of its better brand recognition, larger geographical diversification, and a stronger balance sheet as compared to Tapestry.

Ralph Lauren has a well-diversified business, with the company deriving more than 50% of its revenues from outside the North American region. On the other hand, Tapestry was garnering nearly two-thirds of its revenues from North America. In addition to that, 43% (675) of the Tapestry’s stores are located in North America, while only 20% (226) of Ralph Lauren’s stores are located in North America. Notably, as the U.S. makes up a majority of the stores (and, hence, revenues) in North America, we believe Tapestry is on a weaker footing given that the U.S. has become the epicenter of the COVID-19 outbreak with the largest numbers of cases.

Ralph Lauren also has a stronger balance sheet compared to Tapestry. As per the latest balance sheet, Ralph Lauren’s cash balance stood at $1.9 billion – more than 3x that of Tapestry. Additionally, Tapestry’s debt balance of $1.6 billion was more than 2.5x to that of Ralph Lauren’s $600 million. Ralph Lauren has ample cash reserves and limited debt exposure that places the company in a stronger position compared to its rival. Overall, we believe that Ralph Lauren would outperform Tapestry over the coming months due to the reasons highlighted above. Our conclusion is supported by our detailed dashboard analysis, ‘Is Ralph Lauren Expensive Or Cheap vs. Tapestry, Inc.?’ wherein we compare trends in key metrics for the two apparel companies over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.

 

Stock Price For Ralph Lauren And Tapestry Has Seen A Similar Decline Over Recent Weeks

Ralph Lauren’s P/E based on 2019 earnings has declined from 22x in 2019 to 12x currently, while Tapestry’s multiple has declined from 12x to about 5.4x. The steeper decline in Tapestry’s multiple can be attributed to the difference in their geographic diversification and stronger balance sheet, as highlighted above.

However, Tapestry’s multiple appears at greater risk, considering that the company’s revenues and margins are more vulnerable compared to Ralph Lauren. While stocks for Ralph Lauren as well as Tapestry are trading at a multi-year-low P/E multiple, Tapestry stock seems to be riskier- indicating that any negative news could result in the figure further shrinking to around 4.5x.

Overall, it’s likely that Ralph Lauren stock will continue to outperform Tapestry, which could see its P/E multiple shrink further if the outbreak of virus increases.

But How Long Will Tapestry Stock Remain Under Pressure?

  • The expected timeline for recovery in global economic conditions, and in Tapestry’s stock, hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
  • Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of Tapestry’s multinational peers, including Gap and American Eagle. The complete set of coronavirus impact and timing analyses is available here.
  • We believe there will be a recovery in demand for most sectors by late May/early June, with the gradual lifting of lockdowns and a gradual rise in the number of COVID-19 cases remaining within the manageable capacity of hospitals and care providers.
  • Although most companies will report poor results starting mid-July, market expectations will be buoyed by a visible improvement in the situation on the ground.

 

While Ralph Lauren looks like the better stock compared to Tapestry, which apparel retail looks like a better bet: Lululemon or Nike?

 

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