Ralph Lauren: Perfect Entry Point For Long-Term Value Creator

Aug.12.12 | About: Polo Ralph (RL)

Shares of Ralph Lauren (RL) ended the week with modest gains of 3%. The apparel retailer reported its first quarter results for its fiscal 2013 on Wednesday.

First Quarter Results

Ralph Lauren reported first quarter revenues of $1.6 billion, up 4% compared to last year. Net income rose from $184 million last year to $193 million, or $2.03 per diluted share. On average, analysts were expecting the company to earn $1.81 per share.

During the quarter the company repurchased approximately 2 million shares for $300 million in total. The company still has $277 million under its old repurchase authority. Ralph Lauren's board remains confident about the business prospects, as it has authorized to expand its repurchase authority by $500 million to $777 million.

CEO and Chairman Ralph Lauren commented on the results, "The growing global appeal of the World of Ralph Lauren is supported by our continued reinvestment in the business. Our products are the lifeblood of our success and we are building on our leadership position in apparel to create exciting new avenues of growth with handbags, footwear, watches and jewelry."

Segmental Information

Wholesale revenues rose 3% to $694 million. The North American unit reported double digit revenue growth driven by continued momentum at the core apparel categories. European shipments fell at double-digit rates due to the strong dollar and lower shipments. Retail sales rose 5% to $857 million, driven by store openings, increased e-commerce business and comparable store sales growth. Sales growth was partially offset due to store closures in China and a strong dollar. Licensing revenues rose 5% to $42 million, driven by apparel and fragrance royalties.

Outlook

Ralph Lauren expects full year 2013 revenues to increase by a mid-single digit percentage. Reduced distribution in China and for American Living are limiting revenue growth. Furthermore a strong dollar is not helpful as well. Operating margins are expected to increase modestly.

For the second quarter, the company expects net revenues to fall by a mid-single digit percentage. This is the result of strategic decisions, including cuts in distribution to China and American Living, and the strong US dollar. Those factors will impact revenues by 7-8% for the current quarter.

Valuation

Ralph Lauren ended its first quarter of its fiscal 2013 with $1.1 billion in cash and equivalents. It operates with roughly $250 million in debt, for a net cash position of roughly $850 million.

For its full year of 2012, the company reported revenues of $6.9 billion. The company net earned $681 million, or $7.13 per diluted share. Currently, the market values the firm at $13.7 billion, or roughly $12.9 billion for its operating assets. This values the firm at 1.9 times annual revenues and 19 times annual earnings.

Currently, Ralph Lauren pays a quarterly dividend of $0.40 per share for an annual dividend yield of 1.1%

Investment Thesis

Year to date, shares of Ralph Lauren trade with gains of 9%. Shares peaked around $180 per share during the spring, but fell back amidst worries about the global economy. Investors grew particularly worried about the impact on discretionary spending at premium brands.

After consolidating its revenues during the recession years, the company managed to significantly boost its revenues, profits and dividends in 2011 and 2012. At the same time, the company retired approximately 5% of its shares outstanding over the past three years.

Investors have noticed this as well and shares have roughly doubled over the past five years. Shares more than five-folded over the past decade reaching all time highs earlier this year.

Ralph Lauren's management is leading the business well. They are not afraid to restructure underperforming businesses, while nurturing the brand value. Besides operational excellence, the company engaged in a very shareholder-friendly strategy, boosting investor returns. The latest $500 million increase in its share repurchase authority is therefore seen as an absolute vote of confidence for the future.

The 15-20% correction from the highs earlier this year provides long term investors with a perfect entry-point.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.