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Strong Tailwinds Favour Ralph Lauren
By
Will Ellis
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Last Updated on May 6, 2023
- Ralph Lauren Corporation’s success may be attributed to the company’s well-known name, consistent customer demand, and the expansion of its distribution channels.
- In addition to the company’s development drivers, Ralph Lauren’s appealing qualities might excite investors.
Ralph Lauren Corporation investors need to be aware of the fact that a downturn in the economy poses a serious threat to the firm’s financial health. But are there positive tailwinds on the horizon if it holds out?
Current Market Standing
The Ralph Lauren Corporation (NYSE:RL) designs, manufactures, and sells apparel, footwear, accessories, housewares, perfumes, and services for the luxury hotel industry. RL’s growth may be attributed to the company’s solid reputation, consistent customer demand, and innovative distribution strategies. Strong online attendance and rising average unit retail, or AUR, bode well for their development.
In addition to these strong growth levers, RL also has appealing features that, when taken along with the business’ growth KPIs, might pique investors’ interest. Its attractive features include its high ROI and rising P/E ratio. Due to these factors, I have an optimistic view of the company’s stock and recommend it to investors.
Solid and Assuring Growth Drivers in RL
Companies like RL, who operate in a highly competitive market, understand the need for growth. In this light, it is heartening to note that the company is making use of growth levers that are, in my view, very effective and financially rewarding, as seen by its track record. Its primary growth drivers are outlined below.
Reason 1: Strong Online Program
With a focus on omni-channel, mobile, and fulfilment, Ralph Lauren has made considerable investments to develop its omni-channel and digital capabilities. In the Q2 of 2023, digital business continued to be a primary growth driver, leading to increases in digital sales across the board.
The growth of the digital economy has continued, with year-over-year revenue increases in the teen percentage range. After growing by almost 30% in only the previous year, all of Ralph Lauren’s internet sites are now expanding by the mid-single digits.
The company introduced cutting-edge digital assets in key markets including Korea and Australia during the Q2 of the year.
They owned digital sites saw a year-over-year revenue in the mid-single digits rise thanks to increased full-price sales brought on by a more profitable product mix, as well as investments in Ai targeting and customer acquisition. Its online search has risen by low double digits yearly, and on social media it has over 50 million connections throughout the globe.
An increasing number of Ralph Lauren stores now provide cutting-edge connected retail services including virtual sales meetings, “buy online, pick up in store,” and infinite aisle product availability. By using its connected retail capabilities, the business has created the first-ever complete Ralph Lauren catalogue mobile app, making it the most personalised and content-rich platform available.
Reason 2: Expanding AUR
Consistently rising AUR has been a major factor in this expansion. The AUR increased by 18% in Q2 FY2023, continuing a 22-quarter streak of increases. The firm has been successful during the protracted inflationary atmosphere because of its diverse product offering and ability to set its own prices.
To help counteract cost inflation in the medium to high single digits, the company expects to achieve yearly AUR increases through 2023 fiscally in the single digits (low to middle).
Elevating products, attracting high-spending customers, establishing a balanced distribution of sales channels and geographies, and stepping up targeted and individualised marketing are all factors that should contribute to the company’s long-term AUR development. It is anticipated that this will continue to encourage the growth of the gross margin.
For 2023, we anticipate a 30-50 bps increase in margin grossly on a 52-week comparable basis, thanks to strong AUR growth and a favourable product mix. It is expected that this would greatly reduce the impact of the recently observed increases in freight and product prices.
It is simple to understand why I am confident in the company’s prospects in light of all these factors. With the introduction of Next Great Chapter: Accelerate, RL intends to simplify its worldwide operations and bring new technical capabilities to further strengthen its foundation for future development.
The first phase of its portfolio realignment, which required transforming Chaps into a legally recognized business, is now complete. This change will enable them to place more emphasis on their most important brands, helping them rise to the next level in preparation for their Next Great Chapter.
RL projected fiscal 2023 sales increase of 8 percent (cc) on a 52-week comparative basis. For the third quarter of fiscal 2023, the company projects sales rise year over year in the single digits (low to mid).
Reason 3: Inference (What Can We Infer from the Data?)
Given these robust and encouraging growth levers, we can only speculate as to their output by extrapolating the company’s track record. Because of these factors, RL has been on a streak of positive surprises that carried over into Q2 of 2023.
The corporation reported its ninth straight quarter of increased profits and its seventh consecutive quarter of increased revenues. Net sales rose by 5% year-over-year to $1,579.9 m. Over the same period last year, revenues increased by 13% when converted to constant currency [cc].
There was a significant increase in the indicator worldwide. Based on these findings, I feel confident in predicting that the company’s long-term expansion will come from secure sources.
Reason 4: ROI and Profit Interaction
The profitability of a business may be measured by its return on equity [ROE]. A key measure of a company’s potential for development is the rate at which its earnings are reinvested (or “retained”) for growth. A business with a greater return on equity (ROE) and better profit retention would beat its rivals if all other factors are equal.
To begin, the 21% ROE seems to be fair. The company’s returns are even more impressive when contrasted to the 16% ROE typically seen in its industry. Ralph Lauren’s modest net income rise of 14% over the previous five years may probably be traced back to this.
A company’s worth is largely dependent on its future earnings potential. The following figures demonstrate that over the last three years, the median payout ratio for RL has been 33% (equating to a retention ratio of 67%), but the company has also shown significant profits growth. This indicates that the corporation has been prudent with its financial resources.
Ralph Lauren has performed to my expectations. I like that the corporation is making such a good rate of return on its investments. As a consequence, earnings have been on the rise.
Reason 5: Risk
Although RL appears to be a promising opportunity, it is impossible to predict the impact of the global economy on their biggest vendors, suppliers, consumers, and lenders, as well as the impact of the COVID-19 epidemic.
The inability to ship might cause major manufacturers to miss delivery deadlines to customers. If the global capital or financial markets were to deteriorate, it may be harder for the company to get the money it needs in the future, or the financing it does get would be more expensive.
A tangible negative effect on its business could result if its important customers were unable for liquidity capital, as this could cause big disruptions or a general business decline, which in turn could cause fewer orders for their products and less ability to meet debt obligations.
Conclusion
Brand power, great demand, a strong online show, and large AUR growth bode well for Ralph Lauren Corporation’s long-term prosperity, even in the face of unfavourable economic circumstances. As a result, I think growth investors should purchase shares in Ralph Lauren Corporation.
