We maintain our long-term Neutral recommendation on Ralph Lauren Corporation (RL), with a target price of $167.00 per share. The company also retains a Zacks #3 Rank, implying a short-term Hold rating.
Ralph Lauren is one of the leading specialty retailers of premium lifestyle merchandise in the U.S. Moreover, the company commands a strong portfolio of globally recognized brands, which provides it with a competitive edge and strengthens its well-established position in the market.
We positively view Ralph Lauren’s strategic plans to expand and elevate its international presence, specifically in Asia. In an effort to attain this goal and effectively capitalize on opportunities in emerging markets, such as China, South Korea and India, Ralph Lauren recently took direct control of operations in Asia from its licensee. This provides a significant upside potential for the company.
Moreover, we remain impressed by Ralph Lauren’s first-quarter 2013 earnings of $2.03 per share, which surpassed the Zacks Consensus Estimate of $1.79 and grew 6.8% from $1.90 posted in the prior-year period. The robust performance was primarily driven by solid top-line growth, a lower tax rate and reduced number of shares outstanding.
Further, anticipating a low-single-digit decline in wholesale sales and low-double-digit growth in retail segment sales, Ralph Lauren expects net revenue in fiscal 2013 to increase by the mid single-digit percentage. Moreover, the company expects moderate operating margin expansion to be mainly driven by gross margin expansion, partially offset by the negative impact from the continued investment in long-term growth initiatives and overall channel mix.
Moreover, the company has a very strong balance sheet with cash and investments of $1.1 billion and long-term debt-to-capitalization ratio of just 7% at the end of first quarter of fiscal 2013. We believe a solid cash position and an almost debt-free balance sheet provide Polo Ralph support in times of dividend payout, share repurchase and strategic acquisitions. This offers Polo Ralph Lauren financial flexibility to drive future growth.
However, Polo Ralph’s financial performance may be substantially affected by its significant presence in international markets (almost 36% of net revenue in fiscal 2012), which exposes it to unfavorable foreign currency translations, economic or political instability and other governmental actions on trade and repatriation of foreign profits.
Moreover, consumer confidence and spending behavior may dampen due to macroeconomic factors including increase in fuel and energy costs, credit availability, high unemployment levels, and high household debt levels, which may negatively affect their disposable income, and in turn, the company’s growth and profitability.
Above all, Polo Ralph Lauren operates in a highly fragmented market and competes with a number of well-established players, such as Estee Lauder Companies Inc. (EL), Coach Inc. (COH) and V.F. Corporation (VFC). The company primarily competes on the basis of fashion, quality and service. To retain the existing market share, Polo Ralph may have to reduce its sales prices, which could affect its margins.
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