Ralph Lauren: Lifestyle Retailer With Ample Growth Drivers
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Recently, Ralph Lauren (NYSE: RL) announced that Tracey Travis, the company's CFO, will be resigning effective July 30, 2012 to ''pursue other interests.'' She has been RL's CFO since January 2005. While this is a setback for the company, we believe when it comes to retail, investors should bet on the horse before the jockey.
Ralph Lauren expects to deliver mid-single-digit sales growth in FY13 and next several years, driven by expanding its international presence, increased direct to consumer reach and developing new merchandising innovations. Demand from emerging markets will be a key driver of growth in the near term. Ralph’s most important near-term priorities include re-positioning its brand in China into a more premium brand as Europe (which is a key market for Ralph Lauren) has started showing signs of a slowdown due to the sovereign debt crisis.
However, apart from European slowdown, there still remain short term concerns over the ease of image makeover in China. In the long run, we believe RL is well positioned for sustainable top-line growth given its strong brand equity and well-balanced offering demographically (Purple Label high end; Polo/Lauren mid-tier; RLX/Chaps lower end).
Multi-year robust growth in China to begin in 2H
Ralph Lauren followed franchise model in China. A lack of direct control of the business and its product strategy damaged the brand’s reputation in the region. RL is now repositioning its market presence in greater China with ~60% (closed 95 points of distribution) reduction in distribution leaving RL with a more brand appropriate presence. The company will be opening 15 new stores in the second half of FY13, all in premier locations (Beijing, Shanghai, and Hong Kong) with another 45 planned to open after that. Currently China constitutes less than 4% of total sales and Chinese tourist travellers only represent 2% of its global tourist business. Considering that China contributes a significant percentage of revenues for its competitors such as Coach (NYSE: COH) and Burberry, if Ralph Lauren is successful in China, it could increase retail revenues significantly in the future. We expect that RL’s gradual expansion into greater China and Hong Kong will act as a catalyst in building the brand globally and help increase the penetration of global retail sales outside of Asia for the traveling Chinese tourists.
Europe sales likely to grow more than company guidance
In FY12, the company’s European sales (~20% of total revenue) increased 26% to $1.5 billion despite challenging macro environment and moderate unit count increment as total wholesale door count only increased 12% and only 9 retail doors were opened. In spite of that the company provided a FY13 guidance of low-single-digit topline growth.
We believe this guidance will prove to be conservative given improving door productivity (as evidenced by FY12 results), category expansion, and e-commerce initiatives. Also the increasing brand awareness in China will provide a boost to door productivity within Europe as RL generates just ~3% of sales from Asian consumers as compared to other European luxury brands that generate nearly 30% of their European sales from Asian tourists within Europe.
Promising Global Revenue Outlook and Diminishing Costs
RL has one of the best top-line outlooks as compared to big cap apparel peers, and we believe the company is under-earning due to cyclical cost headwinds & above-trend investment spending. We expect revenue to accelerate by F2H13 as the drag from China store closures and FX diminish, and RL will begin to regress to generating natural margins as cyclical cost pressures & investment spending fade away. We believe there is a potential of earnings upside for the next few years as businesses revert to natural margins.
Additionally, RL’s financial strength should help support share. Ralph Lauren doubled its quarterly dividend to $0.40 per share, representing $1.60 in annual dividends. When it comes to EPS growth, Ralph Lauren is above Tiffany (NYSE: TIF) and Saks (NYSE: SKS) with an almost 14% annual increase in EPS for the last five years as compared to Tiffany’s 10.75% and Saks’ -2.5%. Going into FY13, the expected EPS growth for RL (~10.9%) is again better than Tiffany (1.9%) and Saks (~2.3%). The company is trading at a forward P/E of 15.83x. Considering a promising global revenue outlook, robust growth in China and margin upside we remain positive on the company’s growth drivers. We view this stock as a solid buy.
TheAnalystBlog has no positions in the stocks mentioned above. The Motley Fool owns shares of Tiffany & Co. Motley Fool newsletter services recommend Coach. 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.