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Can Ralph Lauren (RL) Stock Sustain its Solid Run on Bourses?

Zacks Equity Research

Ralph Lauren Corporation RL is benefiting from continued strength in its international markets and digital platforms. Also, its strategic endeavors to boost growth, including the ‘Next Great Chapter’ plan, bode well.

These factors have boosted shares of this leading designer and marketer of premium lifestyle apparel that surged 33.9% in the past three months. The stock has also outperformed the industry’s 15.9% rally.



Delving Deeper

Within its international expansion efforts, Ralph Lauren is keen on bolstering its foothold in the underpenetrated markets. In the past two years, the company has elevated its brand in Asia, particularly China, and strengthened its foothold by enhancing the quality of sales and profitability.

Moreover, the company sees immense potential to expand in Europe, where it currently has only 40 full-price stores. Going forward, the company is on track to expand real estate locations to expand the brand globally, and in turn, drive sales as well as profitability.

Expansion of digital platforms is a key aspect of Ralph Lauren’s growth strategy. The company has developed a winning digital ecosystem, including directly-operated flagship sites, wholesale digital, pure plays and social commerce. Furthermore, management continues to expand into new digital distribution platforms — including rental, subscription and resale models.

Additionally, the company has been adding digital partners as well as expanding presence with key digital pure players. The partnerships, strong brand-building efforts and higher quality of sales are likely to boost the company’s digital business, particularly in the international regions.

Furthermore, average unit retail (AUR) across Ralph Lauren’s direct-to-consumer network remains impressive, driven by momentum in under-developed categories owing to strength in denim. Management expects AURs to be incrementally stronger in the second half of fiscal 2020 compared with the first half. The improvement will likely be fueled by expected price increases in select channels and categories as well as accelerated product mix shifts.

Moreover, Ralph Lauren plans to deliver sustainable long-term growth and value creation through the ‘Next Great Chapter’ plan. Management expects to execute this growth plan through five strategic priorities including — 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.

As part of the plan, the company intends to deliver low to mid-single digit revenue compounded annual growth rate (CAGR) and mid-teen operating margin by fiscal 2023, at 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 few years, amounting to about $2.5 billion on a cumulative basis through fiscal 2023 via dividends and share repurchases.

However, escalating headwinds in Hong Kong and foreign currency impacts are likely to hurt the top line in fiscal 2020. Moreover, soft wholesale business and lower digital sales to international shoppers are likely to mar revenues for the North America business in the near term.

Wrapping Up

Nevertheless, the aforesaid growth drivers make us optimistic about Ralph Lauren’s upbeat performance going forward. The Zacks Rank #3 (Hold) company also boasts a Value Score of B with an expected long-term earnings growth rate of 8.4%, which further drives optimism.

Better-Ranked Consumer Discretionary Stocks

lululemon athletica inc LULU has an impressive long-term earnings growth rate of 17.6% and currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

NIKE, Inc NKE, also a Zacks Rank #2 stock, has an expected long-term earnings growth rate of 13.1%.

Steven Madden, Ltd SHOO has an expected long-term earnings growth rate of 9% and a Zacks Rank of 2.
 
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