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Summary

  • Ralph Lauren has consistently beat analyst estimates lately and has been aligning its strategy with its strengths.
  • The company is positioning itself to take advantage of the market and that combined with strong fundamentals points to good things on the horizon.
  • Ralph Lauren is a bargain for investors looking to invest in the luxury retail market.

Ralph Lauren (RL) is a luxury lifestyle brand that keeps surprising analysts. The $14 billion market cap company surprised on earnings Wednesday for the third quarter in a row.

Ralph Lauren Corporation - Earnings Surprise | FindTheBest

The company's fiscal 1Q15 came in at $1.80 per diluted share, while analysts were expecting $1.75 per share. While this figure was far under the same quarter last year, when the company posted a diluted EPS of $1.94, the figure was encouraging, sending shares to a day high of $159.96 on Thursday.

INVESTMENT THESIS

Ralph Lauren may have posted results under the same quarter last year but it has surprised analysts three quarters in a row. The company is aligning its strategy with its strengths and making good on its promises. Ralph Lauren is also strong on fundamentals, suggesting the company is undervalued and a good candidate for a long term position.

STRONG RETAIL AND LICENSING LEADS THE WAY

Ralph Lauren's net revenues increased by 3%. Strong retail and licensing offset a decline in wholesale revenues. The company's wholesale segment slipped 4% compared to the same quarter last year. According to a press release issued by the company, "The decline in wholesale sales was due to higher revenues associated with the initial transition of Chaps men's sportswear to a wholly-owned operation in the prior year period and a shift in the timing of shipments between quarters."

Retail sales were much stronger, rising 9% over the same quarter last year. This growth was driven by new stores, international expansion, and ecommerce. Ralph Lauren expects to capitalize on this trend going forward.

"Our first quarter results demonstrate that we are making the right strategic decisions and investments to support our long-term growth objectives," said Ralph Lauren, Chairman and Chief Executive Officer. "Later this month, we'll mark an important milestone for the Polo brand with the introduction of Polo for women. That launch will be supported by the opening of our first Polo flagship store in New York City. This Fall, we'll open a 20,000-square-foot Ralph Lauren luxury flagship store in Greater China, a critical brand expression in an important market for us. As exciting as these first steps are now, the long-term potential is even more compelling."

STRATEGIC FOCUS

Ralph Lauren's strategy is centered on its highest ROI activities, including retail, international sales, and ecommerce - the best performing divisions currently in its portfolio. And, its performance suggests the company is making good on those initiatives. "Our better-than-expected first quarter profitability reflects excellent progress on our strategic initiatives, including double-digit revenue growth for our international and global e-commerce operations," said Jacki Nemerov, President and Chief Operating Officer.

The company also identifies a concentration on accessories going forward. This is a similar strategy that employed by Michael Kors (NYSE:KORS). I discussed the importance of accessories in the luxury retail segment in a previous article on Kors, noting that "the largest area of growth in the luxury goods industry is accessories. From 2005 to 2013, this subset was the fastest growing category in luxury goods. In 2013, 'the accessories product category is estimated to have generated sales of approximately $79.6 billion, representing 28% of total luxury goods sales." (Read the article here)

LOOKING AHEAD

Ralph Lauren reiterated its expectation that consolidated net revenues for FY 2015 will increase by 6%-8%. Ralph Lauren is currently trading at $158.12 on a 52-week range of $141.93 to $181.07. It carries a one-year target estimate of $176.67 and priced at roughly 19 times its earnings. In contrast, its industry is priced at almost 22 times earnings.

Moreover, the company's earnings per share is has grown consistently and that growth is expected to continue. Analyst are predicting Ralph Lauren will bring in roughly $8.69 per share in FY 2015 and $10 per share in FY 2016. Given that Ralph Lauren's revenue growth of 13.6% is also outpacing its industry average of 8.3%, the company is priced fairly low.

Ralph Lauren carries low levels of debt - its debt-equity ratio is just 0.14 - and a quick ratio of 2.10 as well, suggesting strong management of company finances across the board and an ability to easily cover its obligations.

TAKEAWAY

The stock itself has not performed as well - it is currently down over 11% year to date - but given its relative strengths, the company could be undervalued and perfect for long term investors looking to invest in the luxury retail sector.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Ralph Lauren: Undervalued And Poised For Long-Term Gains