We maintain our long-term Neutral recommendation on
Ralph Lauren Corporation
), with a target price of $167.00 per share. The company also
retains a Zacks #3 Rank, implying a short-term Hold rating.
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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
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
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.
). 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