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4 Reasons Why Ralph Lauren is a Valued Investment for 2019

Zacks Equity Research

Ralph Lauren Corp. RL stock has displayed immense strength on back of its robust surprise trend, driven by stringent focus on consumer demands, efforts to elevate and energize brands, and balance growth and productivity. Notably, second-quarter fiscal 2019 marked the company’s 15th straight earnings beat, driven by significant progress on the Next Great Chapter strategic growth plan. Moreover, sales topped estimates for the third consecutive quarter, driven by double-digit top-line growth in Asia and sequential improvements in North America and Europe.

Despite improvements, softness in the North America segment due to weak in-store traffic and a challenging wholesale business are hurting the stock price. Consequently, the Ralph Lauren stock has witnessed a decline of 0.6% in the past year. Nevertheless, the stock still reflects an outperformance from the industry’s decline of 9.7%, the broader Consumer Discretionary sector’s fall of 17.9% and the S&P 500 index’s decline of 12.4%.



Furthermore, the Textile-Apparel industry’s rank of 79 (out of 257 Zacks industries) places it among the top 30% of all Zacks industries. This along with Ralph Lauren’s VGM Score of A and long-term earnings growth rate of 10.3% show a potential rise in the stock in 2019.

Let’s find out other factors that should aid the stock’s growth in 2019.

Immense International Opportunity to Boost Sales

Ralph Lauren is keen on bolstering international presence by constantly expanding in underpenetrated markets. In the past two years, the company has elevated the brand in Asia, particularly China, and built strong business foundation by enhancing the quality of sales and profitability. Ralph Lauren’s constant-currency revenues in Greater China grew more than 20% in second-quarter fiscal 2019, with more than 40% of growth in Mainland China. The company’s digital business in China reflected solid growth through Tmall, Tmall's Luxury Pavilion, JD.com and WeChat. Additionally, the company sees immense potential in Europe.

Digital — A Key Growth Avenue

Digital growth has been a winning growth strategy for Ralph Lauren. A digital ecosystem with directly-operated platforms, wholesale digital, pure plays and social commerce have contributed significantly to the company’s top line so far in fiscal 2018. Digital sales improved 10% globally in the fiscal second quarter, mainly attributed to its directly-operated North America digital business returning to growth with a 9% increase. The improvement in North America was driven by strong brand building, better consumer experience and higher quality of sales enabled by the company’s new platform that was launched last year.

Next Great Chapter Plan Shows Potential

Ralph Lauren is progressing well with the “Next Great Chapter” plan that was announced in June 2018. This plan focuses on delivering sustainable long-term growth and value creation by satisfying five strategic priorities. These include winning over a new generation of customers, energizing core products and accelerating under developed categories, drive targeted expansion in its regions and channels, lead with digital, and operate with discipline to fuel growth.

The plan targets delivering low to mid-single-digit revenue compounded annual growth rate (CAGR) and mid-teen operating margin by fiscal 2023, at constant currency. Further, the company expects returning to constant-currency revenue growth by fiscal 2020. Additionally, marketing spend is likely to increase nearly 5% of revenues by fiscal 2023, while capital expenditure is expected to represent 4-5% of revenues.

Furthermore, the company plans on returning 100% free cash flow to shareholders in the next five years, amounting to about $2.5 billion on a cumulative basis through fiscal 2023 in the form of dividends and share repurchases.

Restructuring Actions to Support Growth

In sync with the objective of operating with discipline, under the Next Great Chapter plan, Ralph Lauren outlined a restructuring plan (Fiscal 2019 Restructuring Plan). The company anticipates incurring restructuring charges of $100-$150 million, mainly from activities like rightsizing and consolidation of its global distribution network and corporate offices, and other severance actions. The company expects to realize most of these charges by the end of fiscal 2019.

These charges will be in addition to the $100 million charges related to the Way Forward Plan, which is expected to be recognized in fiscal 2019. The aforementioned restructuring plan is expected to deliver gross annualized expense savings of $60-$80 million. These savings will be incremental to savings of roughly $140 million to be realized in association with the Way Forward Plan.

Bottom Line

Though the company is still shy of returning to full growth in North America, growth in the digital platforms and international regions should drive the top and bottom lines in quarters to come. Thus, it is advisable to accumulate positions in this Zacks Rank #2 (Buy) stock in the New Year.

Looking for More Trending Picks?

Some other top-ranked stocks in the same industry are Cherokee Inc. CHKE and Crocs, Inc. CROX, each carrying a Zacks Rank #1 (Strong Buy), and lululemon LULU, sporting a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Cherokee has delivered a positive earnings surprise in the trailing two quarters and witnessed positive estimate revisions in the past 30 days. The company has long-term earnings growth rate of 15%.

Crocs has long-term earnings growth rate of 15%. Further, the company’s earnings outpaced the Zacks Consensus Estimate in three of the trailing four quarters, with average beat of 126.3%.

lululemon, with an impressive earnings growth rate of 19.3%, delivered average positive earnings surprise of 19.5% in the trailing four quarters.

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