Reasons Why Ralph Lauren Has Done Well Enough in the Past

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Oct 29, 2014

In this article, let's take a look at Ralph Lauren Corporation (RL, Financial), a $14.15 billion market cap company that designs, markets and distributes men's and women's apparel, accessories, fine watches and jewelry as well as other premium lifestyle products.

Past and bright future

The company has built a portfolio of brands centered on the “one man show,” founder, chairman and CEO Ralph Lauren. He established a well-known brand, not only in the U.S. but also in other markets around the world. Looking at the income statements, we can found a solid track record of profits, which is supposed to continue in the upcoming years.

Part of this growth is a consequence of the execution of two key strategies, segmenting target customers and good differentiation. We must remember that the firm operates about 20 labels. We cannot forget the fact that distributing its products around the world without damaging the brand or introducing cannibalizing sales also make the firm differs from its peers.

Another part of the growth came from international markets, where the apparel company has assumed direct distribution control from select licensees. The international expansion is in Europe and Asia. But also the Americas are growing fast in the last five years. We continue believe that a scenario of positive expansion over the next decade is perfectly achievable.

Revenues, margins and profitability

Looking at profitability, revenues grew by 3.32% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.80 vs $1.94). The gross profit margin for the company is considered rather high; currently at 61.07%. With respect to the net profit margin, it is similar than the industry average with a 9.48%.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
RL Ralph Lauren 19.12
HBI Hanesbrand Inc. 29.22
COH Coach Inc. 32.48
PVH PVH Corp. 7.85
VFC VF Corp. 22.31
KORS Michael Kors Holdings Ltd 45.00
Ă‚ Industry Median 6.80

The company has a current ROE of 19.12% which is higher than the one exhibit by PVH Corp. (PVH, Financial) and the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking at higher levels of ROE, VF Corp. (VFC, Financial) and Hanesbrand Inc. (HBI, Financial) could be the options. Coach Inc. (COH, Financial) and Michael Kors (KORS, Financial) have very good ratios. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

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Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 19.5x, trading at a discount compared to an average of 23.5x for the industry. To use another metric, its price-to-book ratio of 3.6x indicates a premium versus the industry average of 1.76x while the price-to-sales ratio of 2.00x is above the industry average of 0.92x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $21.129, which represents a 16.1% compound annual growth rate (CAGR).

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Final comment

As outlined in the article, the company has also put its focus on international markets and the development of the e-commerce business. By expanding, the company is gaining market share that should improve margins.

Further, the stock's relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund gurus like Andreas Halvorsen (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Robert Olstein (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned