With the weirdest presidential election in my lifetime coming to a close in just over two weeks, what better time to highlight an iconic American luxury brand. One based at 650 Madison Ave, New York, New York. Using the good name of its founder, Ralph Lauren, the company started with a collection of ties and now encompasses the gamut of fashion lines for both sexes, all ages, and beautiful home goods.
“It’s not just what you wear, but how you live, and what you surround yourself with. It’s a world beyond fashion, beyond trend, the World of Ralph Lauren.”Ralph Lauren
You have to hand it to the man; he created the perfect image of luxury for himself, sold it to millions of people, and amassed a $5.9 billion fortune in the process. Ralph Lauren has inspired generations of designers and business men and women.
With that said, looking at the company isn’t a matter of determining whether it will be around 10, 20, or even 50 years from now. I think the likelihood of that is fairly high, barring extremely abrupt changes in how human beings feel about fashion.
Thus, the valuation for Ralph Lauren (RL, Financial) comes down solely to the price paid, and that comes down to baseline mathematics. I want to touch on each part of the financials that I believe to be the most important to valuation.
Ralph Lauren has a current market capitalization of $8.18 billion
In the last decade, the company has grown its sales by 72%, from $4.2 billion to $7.4 billion. The company expanded gross margins from 54.4% to 56.1% to accompany this growth in sales over the period. It also bought back around 22 million shares, 20% of the outstanding A Class stock. This “financial engineering” helped the company’s book value increase from 22.18 to 45.28.
However, Ralph Lauren has seen the profit taper off in recent years, deciding not to make acquisitions like many of its competitors. Between 2007 and 2014, profit rose from $400 million to $776 million - almost 100%. Yet in the last 2 years, it’s fallen off a cliff, down to $310 million in the last twelve months with net profit margins dipping into single digits.
It’s easy to understand why the stock price is down over 40% since January 2015. And, while the stock does pay a $2 dividend, the company’s capital spending was more than its net income for the first time in more than a decade, a trend that cannot continue if the company plans on bringing future value to shareholders.
In fact, Ralph Lauren has brought on David Lauren, the son of its founder, to head up innovation at the company and follows the unveiling of a major transformation plan that includes a reduction in stores. All these efforts are geared at generating profit - a move that investors should profit from long term.
When the stock was at $200, it was extremely overpriced. Now, trading at $98, the stock is getting more and more attractive. There’s no denying the historical brand value of the company.
If successful with its short-term plan, the net income could get back to the $700 million level in the next 3 to 5 years, putting earning per share above $9 per share. At 20 - 25 times earnings, that would be a $180 to $228 price target, which may include higher dividend rates.
If unsuccessful, the company is taking measures to reduce its 1,000+ store count, shoring up the capital spending, and will need to look for acquisitions. This may keep the price below $100, but Ralph Lauren is already in bear market territory, any broad market or macro economic negativity should be baked in.
Disclosure:Ă‚ I do not have a position in the stock.
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