Why Has Ralph Lauren’s Stock Gained 40% Over Recent Years Despite Falling Revenues?

by Trefis Team
Ralph Lauren
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Ralph Lauren stock (NYSE: RL) has gained 40% in the last three years or so, since the end of 2016, and was up even more prior to the pandemic-driven market crash. But how did the company manage to pull off this feat considering its revenue fell more than 7% during this period?

As it turns out, Ralph Lauren managed to expand its earnings significantly despite a revenue decline, and investors rewarded this achievement by putting a higher value on the company’s future growth – thus, expanding its P/E ratio. This can be partially attributed to the company’s restructuring plan, which has helped the company improve its cost structure and free up resources to invest in the brand and improve sales quality. Our dashboard ‘Why Is There A Mismatch In The Rate At Which Ralph Lauren’s Revenues And Stock Price Have Changed? summarizes key factors that drove Ralph Lauren’s stock over the past three years.

What Has Driven An Improvement In Ralph Lauren’s Performance?

[A] Improvement In Net Margin

Between FY2017 and FY2020 (ending March), Ralph Lauren’s EPS (earnings per share) improved from -$1.50 to $5.07 despite a 7% fall in revenues. This was largely due to a significant improvement in net margins – which went up from -1.5% in 2017 to nearly 6.2% in FY2020.

What did the company do right?

  • It turned around its business with its ‘Way Forward Plan’ – discontinuing its underperforming brands and allocating resources better to underpenetrated areas. This resulted in Ralph Lauren’s average unit retail improving over the years due to full-price sales and lesser discounts.
  • Moreover, the company’s gross margin expanded from 54.9% in FY2017 to 59.2% in FY2020, owing to lower discounts – resulting in more than $500 million in cost savings.
  • In addition to that, as a part of its restructuring plan, the company closed its underperforming stores in North America while accelerating store openings in Asia- helping Ralph Lauren generate a greater chunk of its revenues from international markets.

[B] Expansion Of P/E Multiple

Driven by a significant jump in net income margins and a slight reduction in share count, Ralph Lauren’s EPS (earnings per share) improved from -$1.20 per share to $5.07 per share despite the 7% decline in revenue. While the stock price increased based on the EPS improvement, investors further rewarded the stock – thanks to the increased interest in Ralph Lauren’s restructuring plan that paved the way for not only improved profitability but also quicker expansion in newer markets. As a result, the P/E ratio expanded to 21.7x in 2019, up 20% from 2016 (P/E multiple in 2017 was not meaningful). While P/E is down to about 15.4x now, given the uncertainty surrounding the current situation,  the company’s stock could see a modest uptick if there are early signs of abatement of the crisis.

While Ralph Lauren’s stock has increased despite a decrease in revenues, Ralph Lauren’s peer, Tapestry, has seen its stock price decline despite growing revenues. Find out more about Why There Is A Mismatch In The Rate At Which Tapestry, Inc.’s Revenues And Stock Price Have Changed


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