Why Ralph Lauren Looks Undervalued Despite Underperforming The Broader Market?

Despite a 15% rise since the March 23 lows of this year, at the current price near $72 per share we believe Ralph Lauren Stock (NYSE: RL) has more room to go. Ralph Lauren stock has increased from $60 to $72 off the recent bottom compared to the S&P which moved 46% over the same time period.  Lower discretionary spending, as well as lower demand for luxury goods, has led to the stock lagging overall markets. However, the stock is down 27% from levels seen in early 2018, over two years ago, and is well below the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the steady rise since the March 23 lows, we feel that the company’s stock still has potential as it will see an upswing in demand as the situation normalizes, and its valuation implies it has further to go. Our dashboard, ‘Why Ralph Lauren Stock Moved -27%?‘ provides the key numbers behind our thinking, and we explain more below.

Some of the stock price rise of the last 2 years is justified by the roughly 2.4x growth seen in Ralph Lauren’s net margin from 2.6% in FY2018 to 6.2% in FY2020 (ending March). This combined with a 7.2% reduction in share count due to stock repurchases worth $1.2 billion helped the earnings per share basis swell 155%. Ralph Lauren discontinued its underperforming brands and allocated resources to under penetrated areas-helping the company in improving its profitability. Notably, though, Ralph Lauren’s revenues remained flat over this period.

However, a sizeable drop in Ralph Lauren’s P/E multiple has partially mitigated gains to its stock from an upbeat earnings trend. Ralph Lauren’s P/E multiple fell from 49x (P/E multiple was unusually high due to lower EPS resulting from one-time charges due to the changes in tax rate) at the end of 2017, to 23x by the end of 2019. While the company’s P/E has now decreased to 14x, it seems undervalued, when the current P/E is compared to levels seen in the past years-P/E of 23x at the end of 2019 and 19x as late as in 2018. We believe the stock is likely to see a decent upside despite the recent rally and the potential weakness from a recession-driven by the Covid outbreak.

How Is Coronavirus Impacting Ralph Lauren’s Stock?

The Coronavirus crisis has hit the apparel industry hard. Fading consumer demand, reduced discretionary spending, and stay-at-home orders resulting in stores remaining closed continue to take their toll on the apparel industry. Ralph Lauren has faced the brunt of the outbreak of coronavirus with the company’s revenues shrinking by nearly 15% in Q4 2020 (ending March). However, Ralph Lauren has a well-diversified business, with the company deriving more than 50% of its revenues from outside the North American region. Furthermore, almost all of Ralph Lauren’s stores have reopened in Asia, which is Ralph Lauren’s fastest-growing segment. Despite the recent store openings, Ralph Lauren’s revenues are likely to remain suppressed for at least a couple more quarters. To sum things up, although Ralph Lauren’s revenues are likely to be lower in FY’21, Ralph Lauren’s stock currently seems undervalued due to its strong underlying fundamentals and brand appeal.

Moreover, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus, which set a floor on fear, the market has been willing to “look through” the current weak period and take a longer-term view,  with investors now mainly focusing their attention on 2021 results.

Looking for outsized outperformance? Here is a shortlist of 4 companies that beat the S&P 500, every single year, year after year, for the last 10 years. Separately, our dashboard looks into Ralph Lauren’s peer, Tapestry’s historical performance and summarizes Why Is There A Mismatch In The Rate At Which Tapestry, Inc.’s Revenues And Stock Price Have Changed?

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