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Ralph Lauren (RL) is a global leader in the design, marketing and distribution of premium lifestyle products, including men's, women's and children's apparel, accessories, fragrances, and home furnishings. The company operates in three distinct but integrated segments: wholesale, retail, and licensing. As of March 31, 2012 the company operates 103 retail stores and 201 factory retail stores.

In Fiscal 2012, revenue came in at $6.86B, compared to $5.66B for 2011 and $4.98B for 2010. Approximately 38% of Fiscal 2012 net revenues were earned in international regions outside of the United States.

Competition

Competition is fierce in the segments of the fashion and consumer product industries in which Ralph Lauren operates. For example, they compete with numerous designers and manufacturers of apparel and accessories that include Michael Kors (KORS), The Jones Group (JNY), Fifth & Pacific Companies (FNP), and others.

The company competes primarily on the basis of fashion, quality, value and service, which depend on their ability to:

  1. Anticipate and respond to changing consumer demands in a timely manner;
  2. Maintain favorable brand recognition, loyalty and reputation for quality;
  3. Develop and produce high quality products that appeal to consumers;
  4. Appropriately source raw materials at cost-effective prices;
  5. Appropriately price our products;
  6. Provide strong and effective marketing support;
  7. Ensure product availability; and
  8. Obtain sufficient retail floor space and effectively present products at retail.

Weaknesses

Almost all products are manufactured by foreign suppliers. In Fiscal 2012 over 98%, by dollar value, of their products were produced outside the U.S. Therefore, their operations are susceptible to the enactment of new legislation or the administration of current international trade regulations, executive action affecting textile agreements, or changes in sourcing patterns resulting from the elimination of quota in the countries where their manufacturing facilities exist.

Opportunities

Ralph Lauren has core strengths that include a portfolio of global luxury lifestyle brands, a strong and experienced management team, a proven ability to develop and extend their brands distributed through multiple retail channels in global markets, a disciplined investment philosophy, and a solid balance sheet. I strongly believe their core strengths will allow them to continue to execute their strategy for long-term sustainable growth in revenue, net income and operating cash flow, including the expansion into Asia because the brand has not fully penetrated that geographic region. In addition, the company will continue to see higher revenue from the expansion of the Denim & Supply Ralph Lauren emerging brand, as well as the extension of their accessory product lines through existing and new channels of distribution and from continued global growth and expansion of e-commerce operations.

Valuation

The stock has a very attractive earnings yield of 4.76%, compared to 2.88% for the 30-year government bond. In addition, the stock has a decent dividend adjusted PEG ratio (5yr expected) of 1.37. Although its enterprise value to revenue multiple of 1.9 is slightly higher than its competitors, I do not necessarily find it excessive as the company will continue to see growth from all of its segments, in my opinion.

Outlook

Ralph Lauren has enjoyed excellent revenue growth from operations over the last four years. Specifically, since fiscal year 2009, operating income has increased at an annual compound rate of almost 15%. I believe this growth from operations will continue throughout the next five years as management is successfully executing its strategy with velocity by expanding its brands and e-commerce presence into new geographies and markets. I believe right now is a good time to grab some shares after the stock pulled back from a six-month high of around $164. The truth is that I find this stock attractive and I believe management will continue delivering good returns to shareholders.

Source: The Truth About Ralph Lauren