Young and Invested

Ralph Lauren’s outperforming of earnings estimated for the 9-months ended September got the company and stock a lot of attention; RL beat S&P’s earnings estimate of $1.25 by $0.50, a 40% surprise, while still suffering a 4% decrease in sales (also above average expectations of -8%). Considering the recession we’ve been in, Polo Ralph Lauren’s premium lifestyle brand has shown the kind of inelasticity in its product offerings that show investors a durable competitive advantage.

Especially in a time when consumers are conscientious towards quality/value, RL is there with a diverse brand portfolio that uses its core brand to dominate across markets, price points, distribution channels and geographies. This was exhibited by the 8^th consecutive EPS outperformance – a positive sign of undervaluation you don’t want to neglect.

Financials

Most recent long term debt reported of $406 million represents about 9% of total capitalization which is incredible for a retailer, and current ratio of 3.05 poses no issues with liquidity or going concern. RL also raised its share repurchase program by $225 million to $431 million. Next to some main competitors, including PVH and VFC, RL earned $287,000 revenue per employee (compared to $216K and $155K, respectively), showing well-utilized personnel, commission schemes and sales execution.

The Lauren family currently controls 86% of the voting power of all outstanding shares (thereby increases in the share repurchase program may indicate desire for future privatization), but the company’s strong executive team and increasing global focus have been capable at building a luxury brand that is appealing to new clientele in Europe, Japan, Southeast Asia and the accessories markets (particularly footwear).

International Growth

RL’s goal is to draw a third of its revenue from each of North America/Europe/Asia. However, its current sales breakdown showed 72% in North America, 20% in Europe and 8% in Asia, meaning increased efforts of Asian growth are underway. On a related note, the reputable McKinsey Consulting predicts that luxury spending in Asia is poised to increase as the number of wealthy households multiplies 2-fold to 3-fold, and RL wants to be on top of this demographic change. Significant control has been taken of manufacturing and branding efforts in Japan and China to be ready for the market growth (high end luxury goods in Japan, family brand growth in China). If they can maintain current North American sales levels, total sales increases will be enormous.

Volatility

Even a Bollinger band analysis shows increasingly appealing technicals as a price increase indicator is more than moderately likely. The company has definitely built a lot of momentum over the last year and has an expected trend to reach highs of 100$+ from the last two years.

Overall

RL’s continued expansion through international boundaries and a brand name as well identified as Coca Cola, Nike and Disney, should give investors a long-term favourable view of this stock as it is definitely one of the strongest firms in the retail landscape. I strongly recommend RL as a short-term and long-term investment with a target 12-month price of $95 based on increased EPS estimates.

Image Credit: jaimelondonboy with a Creative Commons License

Disclosure: Long RL

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