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Here's Why Ralph Lauren (RL) Looks Poised for Growth in 2021

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Zacks Equity Research
·5 min read
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Ralph Lauren Corporation RL is one stock that has recovered recently from the ill-effects of the pandemic. The company has seen robust momentum lately, thanks to its accelerated business re-organizations plans as well as digital initiatives to support the shift in shopping preference amid the pandemic. Also, the company is keen on enhancing its store operations to remain strong in 2021.

These endeavors have not only aided stock performance but also helped return to an earnings surprise trend in second-quarter fiscal 2021, after delivering losses in the prior two quarters. Despite COVID-19-related disruptions and sudden changes in consumer behavior, the company witnessed improved performance on a sequential basis across all regions, driven by solid digital revenues. Moreover, improved gross margin and lower operating expenses aided the bottom line.

We note that shares of the Zacks Rank #3 (Hold) company have gained 41.9% in the past three months compared with the industry’s growth of 29%. Further, Ralph Lauren has comfortably outpaced the Consumer Staples sector’s growth of 19.3% and the S&P 500 index’s gain of 12.8% during the same period. Additionally, the company has registered robust growth of 43.1% since reporting second-quarter fiscal 2021 results on Oct 29.

 

 

Factors to Drive Growth in 2021

Ralph Lauren has been efficiently capitalizing on the shift in consumer shopping patterns to online portals amid the pandemic through the expansion of its digital and omni-channel capabilities. The company has extensively invested in mobile, omni-channel and fulfillment to support growth in online demand. Consequently, the company’s digital revenues in second-quarter fiscal 2021 grew year over year in mid-teens and recorded double-digit growth in all regions.

Notably, Ralph Lauren’s increased focus on home and loungewear in sync with consumers’ changing preferences along with the expansion in connected retail offerings has been contributing to digital sales. Further, its omni-channel services, including digital clienteling, Buy Online Ship from Store, curbside pickup, contactless delivery and mobile checkout options, bode well. Management intends to launch more virtual flagship shopping experiences starting this holiday season.

Not only this, Ralph Lauren is floating cloud-based human resources and planning system worldwide as part of its digital initiatives. It also plans to augment its capabilities to better serve its consumers through the Digitizing the Value Chain project. These initiatives are expected to simplify operations and improve team connect alongside digitalizing product journey.

In the fiscal second quarter, the company launched digital showrooms, expanded buying options, implemented 3D digital product creation and virtual fittings as part of this initiative. Moreover, Ralph Lauren is investing in its technological capabilities to support functions like omni-channel shopping, augmented reality, personalization and social commerce. These efforts are likely to help the company to register strong top-line growth in the holiday period and the year ahead.

Apart from a strong digital showdown, the company is well-poised to garner greater returns through the execution of the recently announced measures to accelerate its “Next Great Chapter plan”. These include creating a simplified global organizational structure and rolling out improved technological capabilities.

Moreover, the company plans to curtail its global workforce by the end of fiscal 2021 under its “Fiscal 2021 Strategic Realignment Plan”. By reducing workforce, it expects to see gross annualized pre-tax expense savings between $180 million and $200 million. These savings are anticipated to be realized mainly from the start of fiscal 2022. However, management is likely to incur total pre-tax charges of up to 160 million in this process.

As part of the initial targets under the plan, the company earlier revealed plans to deliver low- to mid-single-digit revenue compounded annual growth rate (CAGR) and mid-teen operating margin by fiscal 2023, in constant currency. Additionally, it anticipates marketing spend to grow nearly 5% of revenues by fiscal 2023, while capital expenditure is expected to represent 4-5% of revenues.

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

Conclusion

Despite the qualms of the coronavirus pandemic on the company’s business, we believe that the aforementioned efforts are likely to support its growth path in 2021. This rationale is further supported by a VGM Score of B and an expected long-term earnings growth rate of 8.5%.

Top 3 Consumer Discretionary Picks

Crocs, Inc. CROX has an impressive long-term earnings growth rate of 15%. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kontoor Brands, Inc. KTB, also a Zacks Rank #1 stock, has a long-term earnings growth rate of 6%.

Deckers Outdoor Corporation DECK has a long-term earnings growth rate of 18.6% and a Zacks Rank #2 (Buy).

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