Time to Buy This Restructured Company

Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

“Reaching directly to the customers” is the philosophy followed to the T by specialty retailer Ralph Lauren (NYSE: RL). Coming in direct contact with customers has a number of advantages, primarily that you get to know customers better. Hence, Ralph Lauren is gradually increasing its retail business, which has better margins and is enhancing the company's top line as well. However, this requires huge costs and time for the company to structure its operations accordingly.

Nonetheless, Ralph Lauren seems to be on the right track, which was evident in its sparkling second quarter results, which were ahead of market expectations and brought happiness to its investors.

Efforts Turn Fruitful

Though revenue dropped by 2% to $1.86 billion, this was very much expected by the company. The decline is mainly because of closure of partnership stores in China in an effort to have company-owned stores instead.

Also, it discontinued its American Living operations, which used to cater to the lower income group and was exclusively available at J.C. Penney (NYSE: JCP) stores. Both Ralph Lauren and J.C. Penney mutually decided to end the 5 year agreement, which was initiated in 2008. Ralph Lauren decided to terminate the contract because it wanted to concentrate on its core brands and expand its direct to consumer segment.

On the other hand, J.C. Penney agreed to the contract termination because the retailer is up for transformation of its business by creating a whole new identity. J.C. Penney is planning for a total makeover, with new brands in its portfolio, a newer pricing strategy, and all new renovated stores.

However, these restructuring initiatives by Ralph Lauren are a part of a larger plan of expanding its direct-to-consumer business segment. If we get rid of the one-time costs related to store closures in China and the termination of American Living Lifestyle operations, revenue actually grew 3% over last year; and it was all thanks to the growth of its retail operations during the quarter.

Moreover, the company opened new stores and added new colors and designs to its offerings, which lured customers to its stores, helping achieve higher sales than expected. Also, it expanded its e-commerce business and increased its advertising efforts, which helped in marketing its new products better.

As Against Peers

When compared to its peers, such as Kohl’s (NYSE: KSS) and True Religion Apparel (NASDAQ: TRLG), Ralph Lauren has proved its worth. The stock price performance of the industry players in the last 5 years is depicted in the chart below:

<img src="http://media.ycharts.com/charts/140c966b712d5d4dcf0427199779fdf2.png" />

RL data by YCharts

Clearly, Ralph Lauren has been the leader in providing returns to its investors. Its stock price has appreciated the highest, 146.8%, when compared to both Kohl’s and True Religion.

True Religion is a leading player in the premium denim market but has not been able to manage significant returns. But True Religion has been facing huge problems, mainly because of its higher prices, which has made customers avoid its stores.

Kohl’s has been a good performer with an 86% increase in its stock price. Kohl’s has also reported great same store sales growth of 3.3% for the month of October, beating analysts’ expectations. Also, its promotional activities, such as discounts, are expected to be beneficial.

Future Looks Bright

Ralph Lauren not only has a great past, but also seems to have a bright future ahead. It has been expanding its stores internationally and making its e-commerce operations stronger. This is particularly evident in Japan, where it opened 7 new stores and started its e-commerce operations. Moreover, its drive for product innovation, coupled with increased marketing efforts, can prove to be fruitful.

Additionally, the company’s growing retail business looks to bring in more profits and higher margins going forward. These strengths along with the peak holiday season on its way, makes this company increasingly attractive, throwing great opportunities to investors.


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