On one hand we remain optimistic about Ralph Lauren Corporation (RL) based on its global expansion initiatives, a healthy balance sheet and an impressive outlook, while on the other hand macroeconomic challenges and risks faced by the company’s overseas operations make us less constructive on the stock. As a result, we maintain our Neutral recommendation.
Why the Reiteration?
Ralph Lauren is one of the major specialty retailers of premium lifestyle merchandise in the U.S., commanding a stellar portfolio of globally recognized brands that provide it with a competitive edge. The company is aiming to strategically expand internationally, particularly in Asia.
Ralph Lauren has taken direct control of operations in Asia from its licensee in order to effectively capitalize on opportunities in emerging economies like China, Korea and India. We believe that this strategy will aid in gaining incremental revenues and profit.
Further, Ralph Lauren boasts a debt-free balance sheet and a cash balance of $1.4 billion at the end of second-quarter fiscal 2014 that provides it with the financial flexibility to drive future growth. The company’s ability to generate a strong operating cash flow has helped in the execution of its long-term strategies including global expansion, enhancing product and brand offerings as well as building operational infrastructure.
Moreover, we remain optimistic about the company’s upbeat performance in the upcoming quarters, given its track record of surpassing the Zacks Consensus Earnings Estimate in nine of the last ten quarters and a raised company outlook. Bolstered by better-than-expected results, Ralph Lauren raised its lower-end revenue guidance for fiscal 2014 to 5%–7% from its previous guidance range of 4%–7%.
All the above factors make Ralph Lauren an attractive option for investors. However, lingering macroeconomic factors are likely to hinder the company’s growth financials in the near term. In addition, the company’s performance may be adversely affected due to its significant presence in the international market, which exposes it to unfavorable foreign currency translations, economic or political instability and other governmental actions on trade and repatriation of foreign profits. In addition, intense competition is likely to undermine the company’s growth prospects.
Other Stocks to Consider
Currently, Ralph Lauren carries a Zacks Rank #3 (Hold). Better-ranked stocks in the textile apparel sector include Hanesbrands Inc. (HBI), Michael Kors Holdings Ltd (KORS) and Quicksilver Inc. (ZQK). While Hanesbrands carries a Zacks Rank #1 (Strong Buy), Micheal Kors and Quicksilver have a Zacks Rank #2 (Buy).
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