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Holmes Osborne, CFA
Holmes Osborne, CFA
Articles (216)  | Author's Website |

Ralph Lauren Still a Value Trap

We called company a value trap in October when the stock was $103; it's now $77

February 02, 2017 | About:

Four months ago, I wrote an article on GuruFocus titled, “Ralph Lauren Is Probably a Value Trap.” At the time, the stock was $103. It trades at $77.15.

CEO Steffan Larrson announced that he was leaving. The stock has been pummeled on the news and is down 11%. Larrson reportedly had disagreements with Ralph Lauren. Chief Financial Officer Jane Nielsen will lead the company until a replacement is found.

Third-quarter results were released Thursday. Earnings per share were 98 cents, down from $1.54 in third-quarter 2015. Normalized EPS were $1.86, down from $2.27 last year. Revenues were down 12%.

The balance sheet shows $1.381 billion in cash and $285 million in receivables. The liability side shows $158 million in payables and $589 million in debt – net cash and strong balance sheet.

Credit Suisse lowered its target from $96 to $78. Its analysts believe Larrson’s departure shows the company is having problems implementing needed changes. Morgan Stanley has a $90 target and is concerned with Larrson’s departure, too.

Ralph Lauren (NYSE:RL) is a value trap. It is probably not going to turn things around. There is too much competition out there. Why pay $80 for a knit shirt when you only have to pay $20? Is the little polo man going to make you that much more successful? No.

Third Avenue and Longleaf both got taken in. All value investors get caught in value traps. Looking at the numbers, the stock looks enticing. Knowing the industry is what will keep you out of trouble.

Retail, restaurants, grocery stores and many other businesses have a finite life. They last for a few decades and then somebody new comes along. Technology is like this, too.

If sales are increasing quarter after quarter, invest. When they stop, get off the merry-go-round. You can buy these types of stocks when they hit bottom – if you are lucky enough to pick the bottom.

Looking at the web site, I see a knit shirt for $89.50. I see another shirt with a bigger horse for $135. Who buys this stuff? Oligarchs and sheiks? Here’s a $400 cashmere sweater, $995 loafers. Its stuff on sale isn’t too badly priced.

Ferragamo (SFER) has been increasing sales and earnings over that time frame. Hermes (HESAF) return on equity is so high that it ought to be illegal – 29.21%. These brands are more exclusive. You might be able to find one store on some continents. Ralph Lauren can now be found everywhere.

I’d buy Ralph Lauren at a lot less than where it is trading today – still a value trap.

Disclosure: We own Third Avenue funds.

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About the author:

Holmes Osborne, CFA
Holmes Osborne is principal of Osborne Global Investors.

Visit Holmes Osborne, CFA's Website


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