Ralph Lauren Corporation

When I first started constructing my simulated portfolio, it was at the peak of the eurozone debt crisis. Due to the uncertainty in Europe and with "safe havens" offering negative real interest rates, I looked towards the equity markets for returns, especially from iconic brands. According to Stock For The Long Run by Jeremy Siegel, stocks have significantly outperformed any other asset class over a long period of time, and although controversial, it is generally accepted that there is a positive equity premium. Of course, there are flaws in the argument presented, for example survivorship bias and relatively small data size.

(This piece of research was done in early January but I still want to capture my findings in one centralised space.)

Ralph Lauren Corporation:

• Price paid: $145.71
• Summary:
• Ralph Lauren is a lifestyle company, specialising in high-end menswear, womenswear, accessories, fragrances and houseware. There is a multitude of brands and subsidiaries under the Ralph Lauren umbrella with the most well known being Polo Ralph Lauren.
• Three main revenue drivers:
• Wholesale - selling products to third party retailers. Products sold in over 10,000 stores and have invested over $35m to provide the RL aesthetic.
• Retail - selling directly to end consumers.
• Licensing.
• Averaged 22% earnings growth in the last 5 years with rising earnings last 6 years in a row. They have been profitable every year since going public in 1997.
• However, signs of slowing sales in Europe and Asia but US revenue continues to be strong with the fastest growing sales in 4 years. RL generates less than 1/3 of revenues outside the US with Europe only contributing 1/5.
• There are around 100 stores in Asia which sells RL. To address this issue, they have opened Ralph Lauren flagship stores in Beijing, Shanghai and Hong Kong to reposition themselves in the Asian markets and take advantage of the surge in demand for luxury products. They are also looking to open company owned stores in second and third-tier cities. This is a conscious decision to move away from concessions/leased space in department stores.
• The relatively young Rugby Ralph Lauren line is also demonstrating strong performance with new flagship stores opening in Tokyo, Japan in 2010 and London, UK in 2011.
• Historical correlation with competitors companies like PVH who are also seeing revenue growths (for example, 21% increase for Burberry).
• Strategy:
• Increased physical and online presence in Asia. This strategy was also employed by Coach in 2008 which led to rapid expansion in China, Taiwan and Hong Kong.
• Increase in exclusive/limited edition products. For example, Rugby launched Covent Garden only bags and accessories to celebrate the opening of the London store.
• Continued wide distribution through both flagship and department stores as well as applying expertise to wholesale business.
• Increasing prices on higher end items to prevent hurting low-income consumers.
• Affiliated with large sporting events like Wimbledon, organisations like the United States Tennis Association, sponsors pro golfers and is the Official Patron of The Open Championship and official outfitter of the US Olympic and Paralympic teams for 2012.
• 176 full-priced stores and 191 factory retail stores allows the company to maximise profits from past season stock without harming the brand.
• Production is contracted with 98% of manufacturing coming from outside the US.
• Personel - the current executive officers all have a consistent track record of success and has been relatively stable. The majority of the board were present during the previous recession and Ralph Lauren performed strongly during the crisis, I believe they have the experience and expertise to direct the company through these difficult macro-economic times. The leadership of Ralph Lauren is obviously critical to the economic success and lifestyle projections of the company.
• Ralph Lauren - Chairman and CEO since founding the company in 1967.
• Roger N Farah - President, COO since 2000. Previous experience at Venator Group.
• Jackwyn L Nemerov - Executive VP since 2004. Previously COO of Jones Apparel Group.
• Tracey T Travis - Senior VP and CFO since 2005. Long history of CFO experience at other large multinationals.
• Recently named Daniel LaLonde President of Ralph Lauren International, who has vast experience in this industry including involvement with Moet and Chandon, LV and head of LVMH's watch department: Tag. He will be overseeing RL's international operations and has specifically targeted Asia as an area of focus.
• Judith McHale (current Under Secretary of State for Public Diplomacy and Public Affairs) named on Board of Directors. (Re)appointed to strengthen their global franchise and develop international relations.
• Financials
• Policy to pay a consistent dividend of $0.20 per quarter.
• Despite being a seasonal business, FQ3 2012 net revenues up 17% from comparable period last year - over 22% growth in both retail and wholesale sales.
• Gross profit up 14% to $1b from same period last year.
• In fact, the company has outperformed each quarter year on year for the last three years without fail.
• Although a P/E ratio of 23.32 TTM is higher than the sector average, it is not outrageously high and perhaps we should not be too concerned.
• Surprisingly, the beta of this stock is 1.52 which compared to 0.92 of the sector means we have to generally be cautious due to higher price volatility. However, it also means we can expect higher returns than the market, and with indications of US recovery and upticks in the US equity indexes, we can expect this stock to outperform significantly.
• Ralph Lauren's real strengths lie in its financial stability. With both the current ratio (2.72) and quick ratio (1.81) significantly above industry average, it demonstrates they are able to meet short-term liabilities with ease. It also shows their ability for quick inventory turnover reinforcing their strong sales results. 
• Looking at the Days Sales Outstanding (approx 27 days) and Inventory Turnover (0.78), we seem Ralph Lauren outperforming direct competitors like PPR, Burberry and Richemont. It demonstrates their ability to quickly turn inventory back into working capital for reinvestment.
• Being leveraged at 1.57, close to the industry norm shows their reluctance to take on further debt, possibly because of the cost of borrowing will eat into profit margins. However, looking at their working capital and current ratio, it seems like lack of funding is definitely not a concern for the company.
• Return on invested capital of nearly 3% is also higher than their closest competitors. This metric is used as it takes into account the cost of finance and gives us the opportunity to back out amortisation and goodwill.
• Price target of around $180 by mid-August.
• Shorting the Dow Jones US Apparel Retail Index could be a useful hedge to highlight Ralph Lauren's performance against the rest of the industry. 

It will be very interesting to see their FQ4 2012 results on 22nd May 2012. I will do a follow up if my estimates/views need amending.