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Why Ralph Lauren Offers Good Value for Money

Ralph Lauren (NYSE:RL)'s digital growth strategy could catalyze its stock price after its 37% decline in the last year.

The premium apparel retailer is also investing in store expansion in order to increase the size of its total addressable market, while it is aiming to attract a younger demographic of consumers through increased marketing.

The stock's low valuation and improving financial outlook suggest that it offers good value for money.

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An evolving business

The company is seeking to attract a new generation of consumers through adapting its products and brand message to focus on pertinent social issues such as sustainability and inclusivity. For example, it launched an Earth Polo product in the most recent quarter that uses a waterless dying process and is made entirely of recycled plastic bottles.

Alongside this, the company's current global marketing campaign focuses on inclusivity, aiming to position itself to resonate with a younger demographic of consumers. As part of this, it increased marketing spending by 19% in the most recent quarter in order to boost its presence on social and digital media.

Ralph Lauren is refreshing a wide range of its core products, as it seeks to accelerate growth in its under-developed categories. This is set to further broaden the company's appeal to new and younger customers, with special projects and limited edition variations of its core products expected to differentiate its offering versus sector peers.

Omnichannel growth potential

The company's continuing investment in its digital growth opportunities could enhance its competitive position. For example, it added two new digital partners in Asia in the last quarter that will increase its distribution capabilities in order to expand its total addressable market.

In addition, it added six new wholesale digital partners in Europe in the last quarter. They contributed to a rise in the company's digital sales of almost 10% across its international markets. The company also added a range of new products to its digital offering in a variety of international markets that are expected to resonate with a younger demographic.

Alongside its digital growth, Ralph Lauren is expanding its store estate. It opened 21 new stores in concessions globally in the most recent quarter, with a third of them being in China. It plans to open additional stores in China, which is its fastest-growing market. In addition, the company plans to increase its pace of store opening in Europe, where it has scope to reach a wider range of consumers due to it having only 36 full-price stores.

Possible threats

Ralph Lauren's performance in North America in the last quarter was disappointing. For example, its comparative sales in the retail channel increased by 1% even though they included 300 basis points of benefit from the Easter shift into the quarter. The company's brick-and-mortar comparative sales in North America increased by just 1% in the same period, with its digital sales flat when compared to the same quarter of the prior year. A key reason for its poor performance was increased headwinds from foreign exchange, with the company expecting a decline in international shoppers to continue to pressure its North America digital comparative sales through the remainder of fiscal 2020.

In response, the company is focusing on driving higher conversion among domestic consumers through an increasingly favorable product mix towards popular categories such as outerwear. It is also investing in greater personalization and improved mobile functionality in order to enhance the customer experience.

Additionally, Ralph Lauren is aiming to further reduce costs in order to become increasingly efficient. In the most recent quarter, it increased operating margin by 110 basis points. This was driven by disciplined expense management that the company expects to continue to offset its soft sales growth in North America over the near term.

Outlook

The stock is forecast to grow earnings per share 11% in the next fiscal year. Its forward price-earnings ratio of 11 suggests that it offers a margin of safety.

Its omnichannel growth strategy and focus on attracting a new generation of customers could mean that it offers recovery potential after underperforming the S&P 500 by 35% in the last year.

Disclosure: the author has no position in any stocks mentioned.

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This article first appeared on GuruFocus.