Ralph Lauren Stock Down 24% This Year, What’s Next?

+17.28%
Upside
85.43
Market
100
Trefis
RL: Ralph Lauren logo
RL
Ralph Lauren

Note: Ralph Lauren’s fiscal year 2022 ended on April 2, 2022.

After a 24% decline year-to-date (YTD), at the current price of around $90 per share, we believe Ralph Lauren’s stock (NYSE: RL), a company engaged in the design, marketing, and distribution of premium lifestyle products, including apparel, accessories, fragrances, and home furnishings, could see a rebound. RL stock has decreased from around $121 to $90 YTD, underperforming the broader indices, with the S&P falling about 17% over the same period. The company’s stock traded lower on anxiety over a potential recession, soaring inflation, and increasing manufacturing and transport costs. However, Ralph Lauren eased some of these worries in its recent Q1 earnings update, showing stable demand. While foreign currency fluctuations could be a drag for RL on a short-term basis, the company’s stock could see a higher upside in the long term if consumer spending stays strong through the holiday season.

In Q1 2023, Ralph Lauren’s revenues grew 8% year-over-year (y-o-y) to $1.5 billion. All the regions positively contributed to RL’s performances. The North American and European revenue (thanks to the travel rebound) increased by 6% and 28%, respectively, but the Chinese sales growth deserves special mention. RL China’s top-line sales experienced a 26% increase, despite their unrealistic zero-Covid policy and the fact that almost 50% of RL stores were closed during this period. Going down to the P&L, gross margin decreased and was mainly due to higher logistics costs. Also, operating profit further declined and the margin stood at 11.8% compared to the last year’s result at 12.7%. In North America, the reduction was more pronounced, while China partially offset the result. Compared to fiscal ’20 pre-pandemic levels, gross margin was 350 basis points higher in the first quarter. The company continues to expect freight, raw materials, and labor costs to pressure gross margins this year, particularly through Q2 until it starts to lap higher cost increases in the second half of the year.

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It is worth mentioning that RL’s inventory grew faster than sales in the recent first quarter. Ralph Lauren’s inventory level stood at $1.2 billion, up 47% compared to the prior year. This surge compares to just an 8% increase in first-quarter sales. Unlike Target or Walmart, the company mentioned that they deliberately shifted inventory receipts earlier to mitigate global supply chain disruptions as a precaution for the upcoming demand peak around the Christmas holidays. RL focuses on premium lifestyle products insulating it from the consumer demand shifts that other retailers have been witnessing in recent months. Thus, this subtly suggests that RL’s risky move of increasing inventory could be rewarded if consumers snap up the fall and winter products it has secured.

We have revised RL’s Valuation to $100 per share, based on a $7.81 expected EPS and a 12.8x P/E multiple for the fiscal year 2023 – almost 11% higher than the current market price. We forecast RL’s Revenues to be $6.3 billion for the fiscal year 2023, up 2% y-o-y. In light of rising interest rates and the threat of recession, the market at the moment is uncertain, but any further decline in the company’s stock could be used as an opportunity to buy.

For the second quarter, the company expects revenue growth to be in a range centered around 11% in constant currency to last year. In addition, it expects operating margin for the second quarter to be in a range of 15.4% to 15.7% in constant currency and a gross margin contraction of around 40 to 80 basis points y-o-y.

It is also helpful to see how its peers stack up. Check out how Ralph Lauren’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

With inflation rising and the Fed raising interest rates, Ralph Lauren has fallen 24% this year. Can it drop more? See how low can RL stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Sep 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 RL Return -1% -24% 0%
 S&P 500 Return 0% -17% 77%
 Trefis Multi-Strategy Portfolio 0% -16% 233%

[1] Month-to-date and year-to-date as of 9/2/2022
[2] Cumulative total returns since the end of 2016

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