Ralph Lauren Corp. (RL) has been a strong underperformer over the past 12 months, lagging the S&P 500 by almost -25%.
Still, the company ranks strongly on GuruFocus’ Predictability, Financial Strength and Profitability/Growth metrics, qualifying it as a selection of the Buffett-Munger Screener.
Given its strong underlying fundamentals, RL has performed well on a longer-term basis. Could the recent weakness in share price offer value to the intelligent investor?
Ralph Lauren’s business
Ralph Lauren produces clothing, accessories, footwear, fragrances and furniture all marketed under its portfolio of various brands.
- Men's brands: Polo Ralph Lauren, Black Label, Purple Label, Lauren Ralph Lauren, RLX (launched in 2008), RRL, Denim & Supply; and there is also Big & Tall, Golf sportswear (launched in 1998) and Tennis sportswear.
- Women's brands: Collection, Black Label, Polo Ralph Lauren, RLX (launched in 2008), Lauren Ralph Lauren, Denim & Supply; and there is also Golf and Tennis sportswear.
- Ralph Lauren Childrenswear
- Baby Ralph Lauren
- Ralph Lauren Home: Bedding and bath textiles and other home accessories.
- Ralph Lauren Paints: Home interior paints and paint accessories.
- Denim & Supply
Subsidiary fashion brands of Ralph Lauren:
- Club Monaco
- Chaps
- American Living
Retired lines:
- Polo Sport
- Polo Denim
- Ralph Lauren Jeans Co.
- Blue Label (Men's and Women's)
- Rugby Ralph Lauren
Brand list taken from Wikipedia.
RL operates three under three segments: Wholesale, Retail, and Licensing.
- Wholesale: Representing approximately 47% of revenues, consists of sales made to major department stores and specialty stores around the world.
- Retail: Representing approximately 51% of revenues, consists of sales made directly to consumers through retail stores and ecommerce channels.
- Licensing: Representing approximately 2% of revenues, consists of royalty-based arrangements under which RL licenses to unrelated third parties the right to operate retail stores and/or to use various trademarks in connection with the manufacture and sale of designated products, such as apparel, eyewear and fragrances.
Approximately 36% of revenues are from outside the U.S.
Competition
The competitors to best gauge RL’s operating performance against are PVH Corp (PVH) and VF Corp (VFC). All three companies operate global apparel brand portfolios. Shares of each have moved mostly in tandem over the past decade.
RL has led its peer group in both operating margins and ROE over that time.
Still, RL trades at the lowest P/E ratio:
Risks (10-K, 2013)
- The loss of the services of Mr. Ralph Lauren, members of our executive management team, or other key personnel could have a material adverse effect on our business. Our ability to maintain our brand image and leverage the goodwill associated with Mr. Lauren's name may be damaged if we were to lose his services.
- We cannot assure the successful implementation of our growth strategy. We may have difficulty integrating acquired businesses into our operations, hiring and retaining qualified key employees, or otherwise successfully managing such expansion. Furthermore, we may not be able to successfully integrate the business of any licensee that we acquire into our own business, we may incur additional costs, and we may fail to achieve any expected cost savings or synergies from such integration.
- Our profitability may decline as a result of increasing pressure on margins. Our industry is subject to significant pricing pressure caused by many factors, including intense competition and a highly promotional environment, consolidation in the retail industry, pressure from retailers to reduce the costs of products, and changes in consumer spending patterns. These factors may cause us to reduce our sales prices to retailers and consumers, which could cause our gross margin to decline if we are unable to appropriately manage inventory levels and/or otherwise offset price reductions with comparable reductions in our costs.
Management
Ralph Lauren
Chairman and Chief Executive Officer
Mr. R. Lauren has been chairman, chief executive officer and director since prior to the initial public offering in 1997. He founded the business in 1967.
Jackwyn L. Nemerov
President and Chief Operating Officer
President and chief operating officer since November 2013 and a director of the company since February 2007. She served as executive vice president of the company from September 2004 through October 2013. She was president and chief operating officer of Jones Apparel Group, Inc. from January 1998 until March 2002.
ISS Governance QuickScore: A score of 1 indicates lower governance risk and 10 indicates higher governance risk. Overall, RL currently ranks as a 10. The individual component scores are: Audit 1; Board 7; Shareholder Rights 10; Compensation 9.
Ownership
Insiders:
RL has been controlled by the Lauren family since the founding of the company. The family holds ~81% of the voting power of the outstanding common stock.
Gurus:
Institutions:
Short Interest:
Comments: While insiders own only a fraction of the shares, they effectively control the company through voting rights. While this is helpful in terms of retaining Mr. Lauren as the company leader and mascot, it may be detrimental to any shareholder activism.
Valuation
RL has been able to grow sales and EPS consistently over the long-term (including the financial crisis). While expectations are for sales and earnings to stagnate a bit, the company still holds a dominant portfolio of global brands and trademarks.
Despite the recent drastic resetting of growth expectations, analysts still expect ~7% of annual EPS growth over the next five years. This is roughly 50% lower than RL’s previous five-year growth rate of ~13%.
At the expected EPS growth rate and using GuruFocus’ DCF Tool, we can estimate that RL shares are currently a bit overvalued.
Investors would need to expect ~11% of annual growth for the shares to price out.
So while growth expectations have been tempered, investors who expect EPS growth rates to revert towards the company’s long-term average may be able to take advantage.
For more ideas like this one, see GuruFocus’ Buffett-Munger Screener.
