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The Ralph Lauren Corporation: Dressing up your portfolio.

Opdateret: for 1 dag siden

During uncertain economic times, consumers tend to gravitate towards brands they are familiar with and trust, as well as styles that have lasting appeal beyond just one season. The Ralph Lauren brand has demonstrated longevity for decades. Thus, the Ralph Lauren Corporation may outperform its peers as long as the world is facing uncertain economic times. In this analysis, I will investigate whether now is the right time to invest in the Ralph Lauren Corporation.

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Ralph Lauren. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I don't own any stocks in Ralph lauren's competitors either. Thus, I have no personal stake in Ralph Lauren. If you want to purchase shares or fractional shares of Ralph Lauren, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.

The Ralph Lauren Corporation was founded in New York, United States, in 1967 by Ralph Lauren. The Ralph Lauren Corporation is a worldwide leader in designing, marketing, and distributing luxury lifestyle products, such as apparel, footwear, accessories, home goods, fragrances, and hospitality. The Ralph Lauren Corporation owns brands such as Ralph Lauren Collection, Ralph Lauren Purple Label, Polo Ralph Lauren, Double RL, and Chaps. The Ralph Lauren Corporation has three reportable segments: North America, which contributed 47% of the revenue in fiscal 2023; Europe, which contributed 29% of the revenue in fiscal 2023; and Asia, which contributed 22% of the revenue in fiscal 2023. In addition to these reportable segments, the company also has other non-reportable segments, which accounted for approximately 2% of revenues in fiscal 2023. These segments primarily consist of royalty revenues earned through global licensing alliances for the Ralph Lauren and Chaps brands. The Ralph Lauren Corporation sells its products directly to customers worldwide through 553 retail stores and 722 concession-based shop-within-shops, as well as through its own digital commerce sites and those of various third-party digital partners. Their products are also available through our wholesale distribution channels at over 9.000 shops worldwide. The Ralph Lauren brand is synonymous with timeless American style and luxury. It is known for classic and elegant designs that often incorporate elements of sport, and it has a global reputation. Thus, I believe that the Ralph Lauren Corporation has a strong brand moat.

Their CEO is Patrice Louvet. He joined the Ralph Lauren Corporation as CEO in 2017. He holds an MBA from ESCP Business School in Paris and a second MBA from the University of Illinois. Prior to joining the Ralph Lauren Corporation, Patrice Louvet spent nearly three decades in leadership roles across three continents at Procter & Gamble. He has led and expanded multi-billion-dollar global consumer brands, including Gillette, Pantene, and SK-II, through various distribution channels and geographies. Patrice Louvet has also served as a Naval Officer in the French Navy. He currently serves on the Board of Directors of Danone and the Hospital for Special Surgery. Additionally, he is a member of the CEO Advisory Council of the Fashion Pact, a coalition dedicated to promoting environmental sustainability in the fashion and textile industries. When Patrice Louvet was appointed as CEO, Ralph Lauren expressed his excitement about finding the right partner to work with him. He endorsed Patrice Louvet's collaborative working style, transformation experience, and intense focus on results. Since joining the Ralph Lauren Corporation, he has spearheaded the company's global digital transformation and brand elevation strategy, significantly advancing its international and direct-to-consumer retail expansion. This is beneficial as international and direct-to-consumer sales typically yield higher margins. According to Comparably, he has an employee rating of 71/100, which places him in the top 35% of businesses of similar size. I believe that Patrice Louvet has the experience to lead the Ralph Lauren Corporation moving forward, and I appreciate his focus on high-margin businesses. Therefore, I am comfortable with Patrice Louvet moving forward.

I believe that the Ralph Lauren Corporation has a moat, and I feel confident with the management. Now, let us analyze the numbers to determine if the Ralph lauren Corporation meets our criteria for possessing a strong competitive advantage. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.

The first number we will investigate is the return on invested capital, also known as ROIC. I would like a 10-year history with all figures showing growth of over 10% for each year. The Ralph Lauren Corporation has reported mixed financial results. They have exceeded 10% in the majority of years, but there have also been years with negative numbers. One of these years was fiscal year 2021, which occurred during the pandemic, while fiscal year 2017 was before Patrice Louvet became CEO. Thus, I don't want to place too much importance on those years. Fiscal years 2022 and 2023 have delivered the highest Return on Invested Capital (ROIC) since 2015, which is encouraging to see. Particularly, fiscal 2023 is impressive despite all the macroeconomic headwinds. Overall, I believe the numbers are acceptable but not remarkable. I would like to see ROIC increasing in the future.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. The numbers are declining almost every year, which is not a positive trend. We saw an increase in equity in fiscal year 2022, only to see it drop to its lowest level in the past ten years in fiscal 2023. Hopefully, we will see equity increasing in the future.

Finally, we will examine the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provides a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. It is not surprising to see that the Ralph Lauren Corporation has consistently generated positive free cash flow every year for the past decade. Looking at the actual numbers, we see that free cash flow reached its lowest point in fiscal year 2023, which isn't surprising as many companies faced macroeconomic headwinds in that period. It is slightly concerning that three out of the last four years have shown significantly lower free cash flow than before. However, it is important to consider that these years encompass a global pandemic and surging inflation. I would like to see the free cash flow grow in the future and the levered free cash flow margin to exceed 10% again.

Another important aspect to consider is the level of debt. It is crucial to determine if a business has manageable debt that can be repaid within a three-year period. We calculate this by dividing the total long-term debt by earnings. After performing the calculation on the Ralph Lauren Corporation, I found that the company has 2,18 years of earnings in debt. It is within the three-year timeframe, so debt is not a concern for me.

Based on my findings so far, I believe that Ralph Lauren Corporation is an intriguing company. However, no investment is without risk, and the Ralph Lauren Corporation also has its fair share of risks. One risk is competition. In their annual report, the Ralph Lauren Corporation mentions that they face intense competition worldwide in the markets in which they operate. They are facing increasing competition from companies selling apparel, footwear, accessories, home, and other products in their categories through the internet. The heightened competition and promotional activity in the global apparel, footwear, accessory, and home product industries from online-based competitors could diminish their sales, prices, and margins. They also face intense competition from other domestic and foreign fashion-focused apparel, footwear, accessory, and casual apparel producers that distribute products through physical retail stores, wholesale, and licensing channels. Decline in sales in North America. North America is the Ralph Lauren Corporation's largest segment, contributing 47% of the total revenue. Therefore, it is slightly concerning that sales in North America have declined. Management has mentioned that they are remaining cautious about North America, especially in regards to wholesale, where year-to-date demand has been weak. Unfortunately, management does not expect sales in North America to improve anytime soon, as they anticipate a low single-digit decline based on softer spring trends. The CEO is selling shares. Insider transactions can often provide valuable insights into a company's prospects and the sentiment of its top executives. Thus, there is some concern that CEO Patrice Louvet has sold a total of 142.026 shares and has not made any purchases in the past year, which means he now holds 91.972 shares. There can be several reasons for a CEO to sell shares, and according to the latest filing on November 29, 2023, Patrice Louvet sold shares as part of a long-term strategy for estate planning and investment diversification. Nonetheless, it is more reassuring when a CEO buys shares instead of selling them.

There are also many reasons to invest in the Ralph Lauren Corporation. One reason is that the Ralph Lauren Corporation should perform well during economic downturns. In uncertain times, consumers continue to gravitate towards brands they know and trust, as well as styles that have enduring appeal beyond just one season. Management has mentioned that they are aware that consumers tend to gravitate back to core products and brands they know and trust. Management could be correct in their assessment, as their iconic core products, which account for about 70% of their business, continue to grow at a faster rate than the overall company growth. Management also mentioned that they are operating in a highly uncertain world and believe that this has become the norm. They also stated that they are adept at navigating this environment. Therefore, the Ralph Lauren Corporation may outperform many of its peers if we experience a prolonged recession. Higher profit margins. Management expects margins to increase in the future and anticipates that the operating margin will reach 15% by 2025. The way to achieve an operating margin of 15% is through international and direct-to-consumer sales. Direct-to-consumer sales now account for two-thirds of their business and continue to grow, with every channel (brick-and-mortar shops and digital sales) experiencing growth in every region. Furthermore, international sales are also growing, with the fastest growth occurring in Asia. This is encouraging, as the Asia segment has the highest profit margins. New opportunities. Management believes that they will experience significant growth in their high-potential categories: women's wear, outerwear, and home products. Management is particularly optimistic about women's outerwear, which they believe will be their most significant long-term opportunity. Furthermore, management also believes that our product offering means they have significant opportunities for trade-up. By "trade-up opportunities," management means selling fewer T-shirts and more tweed jackets, RL 888 bags, and outerwear. Hence, management believes that trade-up presents a significant growth opportunity that will benefit them for years, if not decades.

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 7,58, which is from fiscal year 2023. I have selected a projected future EPS growth rate of 11% (Finbox expects EPS to grow by 10,7%). Additionally, I have chosen a projected future P/E ratio of 22, which is twice the growth rate. This decision is based on the fact that the Ralph Lauren Corporation has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $117,04. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy the Ralph Lauren Corporation at a price of $58,52 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 636, and capital expenditures were 218. I attempted to review their annual report to calculate the proportion of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 153 in our calculations. The tax provision was 138. We have 64,7 outstanding shares. Hence, the calculation will be as follows: (636 – 153+ 138) / 64,7 x 10 = $95,98 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With the Ralph Lauren Corporation's free cash flow per share at $8,22 and a growth rate of 11%, if you want to recoup your investment in 8 years, the Payback Time price is $108,21.

I find the Ralph Lauren Corporation to be an intriguing company. I like the management because it offers extensive experience and focuses on high-margin businesses. The Ralph Lauren Corporation has faced competition since its inception, and while competition may have become more intense, it isn't much of a concern to me. It is slightly concerning that sales in North America are decreasing, but many companies have faced challenges in this high inflation environment. The majority of the decrease is in wholesale sales, which have lower margins, making it less concerning. There are many reasons why a CEO might sell shares, but I do find it concerning that the CEO has sold so many shares in the last year. This is something I will monitor. I appreciate the management's optimism about the company's performance during economic headwinds, and I particularly value their belief that margins will increase in the future. I also believe that the Ralph Lauren Corporation can increase sales through new opportunities. However, I am not particularly impressed with the historical numbers, and I will require a 50% discount to the intrinsic value before considering opening a position in the Ralph Lauren Corporation. Thus, unless the shares drop to the Ten Cap price of $95,98, which would result in a discount on two out of three calculations, I will not open a position.

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