Two Fashion Giants: Which Is More Profitable?
Abir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Whenever we look at a person, we always notice how fashionably that person is dressed. The dress, the shoes, and the perfume that a person uses depict his/her character. Thus, the fashion designing companies play a pivotal role in human society.
Ann (NYSE: ANN) and Ralph Lauren (NYSE: RL) are two high-end fashion brands that have outperformed the S&P 500 in the past five years, and also have similar valuations based on a number of factors. However, Ralph Lauren has outperformed Ann significantly. Is this trend going to continue, or is Ann about to reverse the situation? In this article, we will go through each company's fundamentals, strategy, and competitive position, and will make an attempt to evaluate which company offers a better investment opportunity in the next five years.
With a market cap of $13.8 billion, Ralph Lauren is engaged in the design, marketing and distribution of a variety of products, including men's, women's and children's apparel, accessories (including footwear), fragrances, and home furnishings. On the other hand, Ann is a specialty retailer of women's apparel, shoes, and accessories, and has a market capitalization of $1.8 billion.
Ralph Lauren has a relatively small amount of long-term debt ($260 million). For an annualized yield of about 1%, RL pays a quarterly dividend of $0.40 per share, while Ann has no debt, and does not pay a dividend. Both companies have solid balance sheets, with Ralph Lauren holding $1 billion in cash, and Ann $132 million. For comparison, three major competitors fall between Ann and Ralph Lauren in terms of size: Chico's (NYSE: CHS), PVH (NYSE: PVH), Lululemon (NASDAQ: LULU).
The two companies are returning cash to shareholders by repurchasing shares. Ann Taylor repurchased 1.6 million shares for about $40 million in the second quarter (ended July 28, 2012) of its fiscal 2012, and Ralph Lauren repurchased 2 million shares for about $300 million during its first quarter (ended June 30, 2012) of its fiscal 2013.
Following the end of the latest quarter, and an additional share repurchase authorization in the amount of $500 million, Ralph Lauren has $777 million authorized to use to repurchase stock. Ann has $109 million remaining under its own stock buyback plan. Chico's has $149.4 million left under its buyback plan as of its most recent quarter’s end, while PVH and Lululemon do not repurchase shares currently.
Based on fundamentals, Ann appears to be a better investment choice. The only concern is its inventory levels at the end of its latest quarter. However, Ann is making improvements in its inventory management, and during its most recent earnings call stated that the build-up in inventory was due to earlier receipt of goods in transit. In fact, its LOFT brand had inventory shortages in July of 2012.
Strategy and Competitive Position
In terms of product and geography, Ralph Lauren is a more diversified brand than Ann. Recently, Ann decided to offer international shipping and expand internationally in Canada. Ralph Lauren, on the other hand, is a global company with over 50% of sales coming from abroad, including 38% from Europe and Asia.
Ralph Lauren does not provide too much information about its performance by region, although its management admitted that the recession in Europe and slowdown in Asia are having a negative impact. Recently, Ralph Lauren reduced its Chinese distribution network by 60%, and also closed its stores in Argentina. Thus it appears that Ann's cautious expansion in Canada and reliance on the domestic market could prove to be a more prudent approach going forward.
Ann has two major brands, Ann Taylor and LOFT, and sells exclusively to women. This makes it easier to balance prices and trends, and overall places the company in a better position competitively. Also, Ann is virtually the only company with an established name in the luxury business which sells exclusively through its own channels, and only to women. Thus, the brand recognition is much stronger than Ralph Lauren’s.
Finally, Ralph Lauren, who is 73, recently extended his employment contract with the company through 2017. While he might be a capable CEO and chairman for years to come, he might not have the energy and skills required to lead a global retailer in its successful growth. In fact, the company has admitted that it was slow in its expansion in Asia, and had an image hiccup by making the U.S. Olympics team suits in China. Katherine Krill, the CEO of Ann, appears more careful and risk averse, despite her younger age. Instead of simply growing the company as quickly as possible she is expanding more cautiously.
To End Up With
Ann seems to win over Ralph Lauren as an investment choice for the next five years. Compared to Ralph Lauren, Ann’s common stock is undervalued. In addition, Ralph Lauren's growth could be behind the company and Ann, which is just recently starting to look abroad, could be in the beginning of a strong and profitable period of expansion. Competitively, Ann is a more focused company and has less exposure to economically challenged European and Asian economies.
Graph from TheStreet.com
The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, increase in net income, revenue growth, and notable return on equity. Although the company may harbor some minor weaknesses, they are unlikely to have a significant impact on results. I am pretty bullish about Ann, so I think this company won’t disappoint its investors in the coming future.
abirk has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Lululemon Athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.