At one end where we remain optimistic about Ralph Lauren Corporation (RL) based on its inorganic expansion initiatives, healthy balance sheet and impressive outlook, on the other hand macroeconomic challenges and risks faced by the company’s overseas operations makes us less constructive on the stock. As a result, we maintain our Neutral recommendation.
Why the Reiteration?
Ralph Lauren is one of the major specialty retailers of premium lifestyle merchandise in the U.S., commanding a stellar portfolio of globally recognized brands that provide it with a competitive edge. The company is aiming to strategically expand internationally, particularly in Asia.
Ralph Lauren has taken direct control of operations in Asia from its licensee in order to effectively capitalize on opportunities in emerging economies like China, Korea and India. We believe that this strategy will aid in gaining incremental revenues and profit.
Further, Ralph Lauren boasts a debt-free balance sheet and a cash balance of $1.4 billion at the end of first-quarter fiscal 2014 that provides it with the financial flexibility to drive future growth. The company’s ability to generate a strong operating cash flow has helped in the execution of its long-term strategies including global expansion, enhancing product and brand offerings as well as building operational infrastructure.
Moreover, management reiterated the guidance for fiscal 2014. It anticipates revenue growth of 4% to 7% and operating margin expansion of 25¬–75 basis points (bps) during fiscal 2014. Also, the company’s earnings had surpassed the Zacks Consensus Estimate in eight out of nine consecutive quarters and going forward, we expect its upbeat performance to continue.
All the above factors make Ralph Lauren an attractive option for investors. However, lingering macroeconomic factors are likely to hinder the company’s growth financials in the near term. In addition, the company’s performance may be adversely affected due to its significant presence in the international market which exposes it to unfavorable foreign currency translations, economic or political instability and other governmental actions on trade and repatriation of foreign profits. In addition, intense competition is likely to undermine the company’s growth prospects.
Other Stocks to Consider
Currently, Ralph Lauren carries a Zacks Rank #3 (Hold). Other stocks worth considering in the textile apparel sector include Michael Kors Holdings Ltd (KORS), Hanesbrands Inc. (HBI) and Gildan Activewear Inc. (GIL). While Michael Kors and Hanesbrands carry a Zacks Rank #1 (Strong Buy), Gildan Activewear has a Zacks Rank #2 (Buy).
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