In this article, let's take a look at Ralph Lauren Corporation (RL, Financial), a $13.87 billion market cap company, which designs, markets and distributes men's and women's apparel, accessories, fine watches and jewelry as well as other premium lifestyle products.
Reasons to Buy
The company has built a portfolio of brands centered on the “one man show,” his founder, chairman and CEO Ralph Lauren. It is a brand that consumers keep in mind, and not only U.S. consumers but also abroad. This is very important in an apparel industry which is highly competitive.
Due to internal growth and acquisitions, Ralph has a track record of profits and solid growth that will surely continue in the future.
Management has executed two key strategies in a correct way, segmenting target customers and differentiation. Further, distribution of its products around the world without damaging the brand or introducing cannibalizing sales, also make the firm differs from its competitors.
Moreover, Ralph focuses on international markets for growth and has assumed direct distribution control from select licensees. New markets in Europe, the Americas, and Asia are growing fast in the last five years. So a scenario of expansion over the next decade is perfectly achievable. Additionally, it has begun to build out its Web-based operations and runs more than eight e-commerce sites.
Constant Cash
Since 2003, Ralph has a dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. Although the current dividend yield is not too high, it can improve in the future allowing higher shareholder´s returns.
Revenues, Margins and Profitability
Looking at profitability, revenue growth by 13.61% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.68 vs $1.37). During the past fiscal year, it increased its bottom line by earning $8.42 versus $8 in the prior year. This year, Wall Street expects an improvement in earnings ($8.68 versus $8.42).
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 | 19.24 |
| HBI | Hanesbrand Inc. | 26.86 |
| COH | Coach Inc. | 42.94 |
| PVH | PVH Corp. | 3.31 |
| VFC | VF Corp. | 19.91 |
| KORS | Michael Kors Holdings Ltd | 36.62 |
| Ă‚ | Industry Median | 6.60 |
The company has a current ROE of 19.24% which is higher than the one exhibited 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 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.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 18.7x, trading at a discount compared to an average of 24.3x for the industry. To use another metric, its price-to-book ratio of 3.5x indicates a premium versus the industry average of 1.76x while the price-to-sales ratio of 1.93x is above the industry average of 0.93x.
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 $26.933, which represents a 21.9% compound annual growth rate (CAGR).
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 Robert Olstein (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Steven Cohen (Trades, Portfolio) Jeremy Grantham (Trades, Portfolio), Lee Ainslie (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
