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Companies: Polo Ralph Lauren (NYSE:RL) and True Religion (NASDAQ:TRLG)

Rating:

RL - Maintain at Hold

TRLG - Downgrade from Buy to Hold

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We have dropped both of our price targets for Ralph Lauren and True Religion after recent results have not met expectations, and we have reduced our outlook for the current fiscal years for both companies.

Ralph Lauren's latest report was disappointing to us as sales came in lower than we had expected. Revenues declined for the company about 2% year-over-year, which was expected, but we were expecting a larger offset from retail sales. Profitability did increase year-over-year for the company despite higher costs. The company's guidance was also slightly disappointing. RL reduced revenue expansion to 2-3%, which comes in lower than the 4-5% we were expecting. The company is seeing some growth issues in China, but we do believe that its long-term prospects there are solid. We reduced our FY13 expectations as macroeconomic headwinds have been stronger than we expected. One area, though, that we do believe could be very promising is the company's online business. That area continues to grow. At this point, though, we believe the stock is fairly priced. Until the company starts to see growth resume, the stock will remain fairly flat. At the same time, the company is still very strong and should remain a decent Hold for the time being.

True Religion was one of our favorite stocks about halfway through the year, but the company has shown some unforeseen weaknesses lately that have caused us to slash our targets and estimates. While the company did beat earnings and revenue expectations in its latest quarter, same-store sales dropped nearly 5% year-over-year. Further, the company guided for Q4 below what we were expecting for the stock as well. The company's miss in Q3, decline in Q4 expectations, and decline in profitability margins all made us drop our expectations. We did not drop expectations as strongly due to our belief that TRLG is an appealing buyout. The company has been rumored to be potentially looking to be bought up, and that potential does create some excitement around shares. Right now, the issue for TRLG, though, is that they are not paying for premium-priced jeans. The company has had to increase costs despite rising revenue, which has led to lower margins. SG&A costs rose 11% in Q3. The company's best bet for a rise seems to be a buyout until macroeconomic conditions change.

Profitability:

RL -

TRLG -

Ralph Lauren has increased profitability despite dropping income while True Religion has seen rising sales and decreasing margins. RL has very strong operating margins that the company expects to increase even further through the end of the year. TRLG, on the other hand, guided EPS below our expectations, and until the company can get their SG&A costs under control, they will continue to suffer.

Value:

RL -

TRLG -

Right now, value is very important to True Religion. In reality, the company wants its shares to stay relatively cheap so that it can be bought up. If shares become too expensive, potential buyers may move away from the stock. At this point, though, shares are fairly cheap. Outlook is definitely not strong for TRLG with the current macroconditions, but these shares are definitely cheap at these levels. RL shares are fair valued. We look for an 18-22 PE for fair value and 15-17 for future PE. If shares were to dip below the $130 area, we would start to be intrigued by the valuation.

Financial Health:

RL -

TRLG -

As far as financial health, both companies have very strong financial health. Both companies have very healthy current ratios above the 1.5 mark that we look for in healthy companies. TRLG, however, has a current and quick ratio that is probably too high. The company is not appropriately maximizing their assets it would appear based on how high the current ratio is. Either way, both companies are very healthy. The financial strength of TRLG makes it an appealing potential buyout candidate.

Source: Ralph Lauren Maintained At Hold, True Religion Downgraded To Hold From Buy