Ralph Lauren (RL, Financial) has shown up in several great value manager portfolios. The company has an extraordinarily strong balance sheet and high free cash flow.
Ralph Lauren has 56.38 million shares, the stock trades at $103 and the market cap is $5.8 billion. The dividend is $2 and dividend yield 1.9%. Trailing twelve month earnings per share was $5.50. The stock trades at a price to earnings ratio of 18.7. Free cash flow yield is 8.4%. Ah, now I see why all of those value funds have been buying shares.
The balance sheet shows $457 million in cash, $619 million in short term investments and $398 million in accounts receivables. The liability side shows $1.2 billion in payables, $90 million in loans and $602 million in long term debt. The balance sheet is bulletproof.
Revenues were $7.4 billion in 2014, $7.62 billion in 2015 and $7.45 billion in fiscal year 2016, which ends in April. Ah, here is our problem. Sales have slowed. Earnings have fallen by 50% over that time frame.
In the most recent quarter, net revenues fell 4% from last year. Revenues fell 11% in North America.
The price to sales ratio is 1.15. Price to book 2.38. The return on equity is 8.41%. What I’m trying to do is find a reason to invest in Ralph Lauren. I know that you can quickly look this stuff up.
Back in 2007, operating margins were in the mid-teens, around 15%. Today, they are 6.2% of the trailing twelve months.
This article on Gurufocus from David Kolpak is a good read. Kolpack discusses the new CEO, Stefan Larsson, and his track record at Gap (GPS, Financial) and Hennes & Mauritz AB (HM B). Kolpack has attracted CFO Jane Nielsen from Coach (COH, Financial), Bill Campbell from Amazon (AMZN, Financial) and Jeffrey Kuster from HSN (HSNI, Financial) and VF Corp (VFC, Financial).
Third Avenue is a shareholder. I was kind of surprised that they bought shares, as this is outside of their wheelhouse.
“It meets our three pillar criteria as it is a credit worthy compounder trading at a discount to NAV," Third Avenue said. "Over the past five and ten year periods, RL has grown book value (including dividends) 11% and 13%, respectively. It is a blue-chip asset with a more stable operating history than most players in the space.”
Longleaf, managed by Mason Hawkins (Trades, Portfolio) and his team, are shareholders too. Two great value funds. Goldman Sachs thinks shares are going to rally 18%.
The brand name “Ralph Lauren” has fallen in a global ranking of brand names. Tech has replaced many great fashion names. I can tell you that when I was a kid, Ralph Lauren had about the best name out there. This takes me to my point of why I wouldn’t buy shares.
What’s the difference between a Ralph Lauren shirt and one you can get from Old Navy? They’re both made in some foreign country. There literally must be 1,000 different brands of knit shirts the consumer can buy in the U.S. Why pay $80 for a shirt that cost $10 to make?
The second reason I wouldn’t buy shares is that when a retailer, restaurant chain or clothing line begins to grow stagnant, things almost never turn themselves around. I think Ralph Lauren turning itself around is a pipe dream. I like the product. But then again, I’m one of the last people who dresses up and wears French-cuffed shirts. Most people are casual, which should portend good things for Ralph Lauren but probably won’t. The truth is you can get the same quality clothing for a lot less than buying Ralph Lauren.
Disclosure: We own Third Avenue.
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