Contemplating an investment in luxury stocks like Ralph Lauren Corp. (RL, Financial) in wartime is a Sisyphean undertaking. As such, you may want to consider holding them if you own them because chasing them on the downslide is risky. Its levered beta is 1.58, reflecting the shares’ high-side volatility.
The escalating war threatens to disrupt Ralph Lauren’s European sales, inventories, deliveries and retailing. Worldwide inflation has food and energy costs competing with the company’s luxury products for consumer dollars. Management will have to maintain tight-fisted control over operations and expectations through 2022 from the effects of the war.
Lifestyle
The iconic fashion house prospered through 18 months of the Covid-19 pandemic, but the stock popped and stumbled. Ralph Lauren (Lifshitz) founded the eponymous Ralph Lauren Corp. in 1967. The company designs, markets and distributes lifestyle products on three continents. Products include high-quality, high-end apparel, footwear, eyewear, jewelry, leather goods, home products and fragrances.
The company's brands include Ralph Lauren Collection, Polo Ralph Lauren, Lauren Ralph Lauren and Double RL. Distribution channels for Ralph Lauren include wholesale (including department stores and specialty stores), retail (including company-owned retail stores and e-commerce) and licensing. The company was an official outfitter of Team USA in the 2022 Winter Olympics. After years of closing stores, ending promotions and raising prices, the company revitalized with plans to open 90 stores in fiscal 2022.
Ralph Lauren’s shares emerged as a bullish opportunity as the world returned to normal. The share price entered 2020 at about $122. It spent the next year floundering in the mid-$70s. Shares climbed to nearly $140 in May 2021, seesawed and closed February 2022 at $132. On March 7, the stock plummeted over 12%, bottoming at $101.86. Competitors Levi Strauss & Co. (LEVI, Financial) and Columbia Sportswear Co. (COLM, Financial) fared better.
Volatile stock
The stock is volatile for three reasons.
First, sentiment for the brand fell. Management closed stores and became more selective about the class of retail outlets. Second, sentiment has slipped for investments in the apparel and retail sectors, evidenced by the performance of the SPRD Retail ETF (XRT, Financial). Concomitantly, an influential analyst downgraded Ralph Lauren on worsening news about the Russia-Ukraine conflict and its effects on European economies.
Ralph Lauren’s European sales were on the increase before the invasion. They reportedly rose $500 million in nine months. Operating income tripled to $350 million. Europe, Asia and North America are the enormous markets for Ralph Lauren appurtenances.
Management’s aspirational projects led them to forecast as much as a 41% leap in sales for this fiscal year. They forecast the operating margin will rise about 13%. They expected a lot of growth in the European market. However, the war and tensions between the U.S. and China make buying Ralph Lauren a tenuous investment right now. Before the invasion, analysts forecasted a decline in earnings per share from 38 cents for fourth-quarter 2021 to 36 cents quarter over quarter. The next report date is May 18.
Insider selling far outpaced buy trades over the past 18 months. Sales in the $117 to $130 price range totaled nearly $600,000 over the last three months. Hedge funds decreased holdings in Ralph Lauren beginning in early 2021.
The consensus among analysts before the current tensions arose was a 12-month target price of $145. Some had it pegged at over $170. That is an implied upside of over 40% from the low $101 price per share. Short Interest is a moderate 5.44%, suggesting the stock might slip approximately 5%.
Unknowns
What is the impact of less revenue and cash flow on Ralph Lauren’s ability to manage its debt? What if sanctions cannot stymie Russia’s military adventures? How will classic luxe companies generate enough cash flow to carry them through another 12 or 24 months?
Ralph Lauren has $1.64 billion in debt. It holds almost $3 billion in cash and equivalents. Plus, the company’s market capitalization is about $8.6 billion. Borrowing money, especially at today’s low cost, will not be difficult or too pressing on the balance sheet. The Ebit skyrocketed 639% last year.
The cause of worry is extrinsic events on future earnings and operating cash flow. Management is going to have to balance pressures on revenue, earnings and cash flow to snake through chaotic times. Cutting the dividend (1.78% trailing 12-month yield) or diluting shareholders will only speed up a downward pressure on the share price.
Last button
Foremost, management needs to reconsider the timing and pace for implementing the expanded $1.5 billion share buyback program announced in February. Then comes decisions about new store openings and the investment that takes. Good management got the company through tough times before. There is little reason to doubt this too shall pass, but when?
On the bright side, the number of billionaires and millionaires is expanding exponentially. Ralph Lauren and Polo rank in the top 500 most recognized brands worldwide. They are symbols of the American spirit. The brands attract the affluent and other consumers who want to feel they are affluent. All this bodes well for the sustainability of Ralph Lauren's sales and earnings and a healthy share price. Caution and patience are the best guides for value investors.
