In this article, let's take a look at Ralph Lauren Corporation (RL, Financial), a $15.25 billion market cap company, which is a company that designs, markets and distributes men's and women's apparel, accessories, fine watches and jewelry as well as other premium lifestyle products.
One-man show
The company has a wide portfolio of brands, thanks to founder, chairman and CEO Ralph Lauren. With about 83% of the voting power of the company's outstanding common stock, he can elect directors and control any matter.
The company grew and achieved profits over the years through a combination of internal growth and acquisitions.
International operations
More than one-third of fiscal 2014 net revenues were earned outside of the U.S. So, expanding the firm abroad is an attractive growth opportunity. Regions in Europe and Asia are the long-term scope to increase the participation to about a third each of its total business. For example, in Asia, Ralph Lauren plans to improve its brand positioning through upgrades.
Management
Management has made an effective job in operating more or less 20 labels, segmenting customers and product price points to ensure apparel differentiation.
The company's brands include Polo Ralph Lauren, Ralph Lauren Purple Label, Black Label, Blue Label, Lauren Ralph Lauren, RRL, Denim & Supply Ralph Lauren, RLX Ralph Lauren, Ralph Lauren Childrenswear, Club Monaco and Chaps.
Web commerce
We believe the company has plenty of room for retail expansion. It will be very important its Web-based operations and the e-commerce sites for this projected growth.
Revenues, margins and profitability
Looking at profitability, revenue growth by 3.32% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.80vs $1.94).
With respect to the gross profit margin, we think it is rather high at 61%. The net profit margin of 9.48% is above that of the industry average.
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 | 19.06 |
| GIL | Gildan Activewear Inc | 17.35 |
| FOSL | Fossil Group Inc. | 35.39 |
| LULU | Lululemon Athletica Inc. | 21.62 |
| VFC | VF Corp. | 22.22 |
| Â | Industry Median | 6.83 |
The company has a current ROE of 19.06% which is higher than the industry median. Also, is higher than the one exhibit by Gildan Activewear (GIL, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Fossil Group (FOSL, Financial), Lululemon (LULU, Financial) and VF Corp. (VFC, Financial) could be some options. 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 20.9x, trading at a discount compared to an average of 25.4x for the industry. To use another metric, its price-to-book ratio of 3.9x indicates a premium versus the industry average of 1.89x while the price-to-sales ratio of 2.11x is above the industry average of 0.98x.
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 $26,884, which represents a 21.9% compound annual growth rate (CAGR).
Final comment
The brand has entered in the consumers' minds, which is good considering the low customer switching costs in apparel industry. International revenue has increased very fast and the company targets an expansion in countries in Europe, the Americas, and Asia, where we consider them as promising regions.
The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus have been active in the company. Gurus like Louis Moore Bacon (Trades, Portfolio), Andreas Halvorsen (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
