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Add style to your portfolio with this all-American brand

The 57-year-old name has successfully navigated the various ages of fashion and is once again pulling ahead of its rivals
Add style to your portfolio with this all-American brandPublished on July 11, 2024

When the US Olympic team walks out at the opening ceremony in Paris this month, they will be dressed head to toe in Ralph Lauren (US:RL). It will be the ninth time the preppy brand has attired the world’s most successful Olympians; the event will take place almost exactly a year after Beyonce appeared on stage in Washington DC in a full-length Ralph Lauren white satin gown during her 'Renaissance' world tour.

Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Expanding margins
  • Outperforming peers
  • Fresh customer base
  • Strong brand
Bear points
  • Slow recent revenue growth
  • Demand can be fickle

The continued sponsorship of the US team cements Ralph Lauren’s position as a patriotic, all-American brand. The company was founded in 1967 by the eponymous fashion designer who had been working at tie manufacturer Beau Brummell. Initially, Lauren had a sports focus. The first line of clothing was named Polo and it was just for men.

Not long after, Lauren convinced Manhattan department store Bloomingdale’s to stock his clothes. This was the first time Bloomingdale’s had given a designer his own boutique within its premises. In 1971, Lauren then opened his first standalone store in Beverly Hills, California. A decade later, the company launched its first European store on London's Bond Street and in 2000 it established itself online.

 

Female focus 

Lauren is no longer at the helm. He stepped down as chief executive in 2015 to be replaced by Stefan Larsson who, in turn, was replaced by Patrice Louvet in 2017, fresh from Procter & Gamble (US:PG). In the seven years since Louvet took over, financial performance has varied, partly as a result of the pandemic. Revenue slid from $6.7bn in 2017 to $6.3bn in 2019 before dropping to $4.4bn in 2021 as Covid forced the company to close stores.

Since then, however, Ralph Lauren has seen an impressive improvement in profitability. An increase in direct-to-consumer (DTC) sales is helping expand its operating margin by cutting out third-party distributors, while increasing the group's control of its image, pricing and customer data. DTC sales have increased from 51 per cent of total revenue to 66 per cent since Louvet took over.

It is also targeting new markets, pushing to increase its brand recognition with younger buyers and women. Beyonce isn’t the only pop icon Ralph Lauren has recruited as part of this push. Last year, Taylor Swift was named TIME Person of the Year and wore a Ralph Lauren jacket and denim shirt for the cover shoot. Analysis from broker Jefferies also shows that Ralph Lauren is employing almost twice as many social media content creators as Calvin Klein, and three times more than Tommy Hilfiger.

This marketing push is having an effect. In the year to March 2024, Ralph Lauren added 5mn new consumers to its DTC business. Meanwhile, its brand consideration and promoter score improved, led by consumers under the age of 35 and women. Women now make up 29 per cent of total revenue, up 100 basis points from last year, and management said womenswear “still represents our most significant long-term growth opportunity”.

The improved 'brand heat' has enabled Ralph Lauren to raise prices against a tough macroeconomic backdrop. Jefferies analyst Ashley Helgans estimated that the company had increased the average selling price of its clothes by more than 70 per cent over the past few years, helped by fewer promotions and a more expensive product mix. 

These price rises, combined with increased DTC sales, are offsetting higher marketing costs and driving margins up. In the year to March, Ralph Lauren's adjusted operating margin rose by half a percentage point to 12.5 per cent. Management expects this expansion to accelerate next year, with the company guiding for an increase of between 100 and 120 basis points. For comparison, PVH (US:PVH), which owns Calvin Klein and Tommy Hilfiger, reported an operating margin of just 10.3 per cent last year, and it is not expected to improve much in the near term.

 

Racing ahead of peers 

What makes Ralph Lauren’s recent performance all the more impressive is that many of its luxury peers are struggling. In 2020, PVH made $9.9bn in revenue, but this slipped to $9.2bn last year and is forecast by analysts to fall to $8.7bn in the 12 months to next January. By contrast, Ralph Lauren saw sales edge up from $6.2bn in 2020 to $6.6bn last year and is expected to rise to $6.8bn in FY2025.

This steady revenue growth, coupled with the margin expansion means Ralph Lauren’s earnings per share (EPS) have been expanding quickly. As such, it is currently trading on 15 times its 2025 earnings and just 12.5 times its predicted earnings for 2027. For a brand with such a long legacy, a fresh customer base and expanding margins, this doesn't look overly expensive.

One area of potential concern is China, which saw growth decelerate over the course of FY2024 (sales were up 30 per cent over the full year, but growth had slowed to low double digits by the final quarter). Asia has been an important driver of sales growth in recent years, so any slowdown could have an impact. However, China still only makes up 7 per cent of total revenue, with 44 per cent coming from North America and 30 per cent from Europe.

In fact, compared with other fashion brands, Ralph Lauren’s relative lack of exposure to China, which has been struggling to stimulate economic growth, can be seen as a strength. Beleaguered Burberry (BRBY), for examplehas been heavily reliant on the rise of the Chinese middle class for its growth. Now Asia Pacific is Burberry’s biggest market, making up more than 30 per cent of its revenue last year. However, this strength turned to weakness when the Chinese economy started to slow in 2022, and has contributed to Burberry's downward spiral over the past year.

The relative trajectory of Ralph Lauren compared with Burberry is reflected in return on invested capital (ROIC). This metric shows how well a company allocates its capital to profitable projects or investments. In the case of retailers, this closely relates to how much profit companies can expect to make from new stores or warehouses. Burberry has historically had a ROIC in the high teens but last year it fell to 10.5 per cent, while Ralph Lauren’s jumped to 13 per cent. In other words, Ralph Lauren is generating increasing returns from its investments and – all being well – over the long term this should compound.

Of course, there is always a risk that a fashion brand will lose its lustre; or that, by targeting younger audiences, Ralph Lauren will alienate its traditional, older, male customers. However, the brand has now been around for over 50 years, lending it a degree of pedigree than many new companies lack. This could prove particularly important as it continues to expand in Asia, where management is pushing an "old money" aesthetic.

Sports leisure brand Lululemon (US:LULU) was only founded in 1998, meaning it has only ever been popular with one generation. Yet, without the same track record, it trades on a forward price/ earnings ratio of 20, significantly ahead of Ralph Lauren. In fashion, age counts for something. It’s much more likely in 50 years’ time that people will still be wearing Ralph Lauren’s linen trousers than Lululemon’s part-nylon stretchy “canvas-like fabric”. Iconic style is always worth paying for.

Company DetailsNameMkt CapPrice52-Wk Hi/Lo
Ralph Lauren Corporation Class A (RL)$11.2bn$177.0719,203c / 10,860c
Size/DebtNAV per share*Net Cash / Debt(-)*Net Debt / EbitdaOp Cash/ Ebitda
3,910c-$889m-119%
ValuationFwd PE (+12mths)Fwd DY (+12mths)FCF yld (+12mths)EV/ EBITDA
151.9%6.2%10.9
Quality/ GrowthEBIT MarginROCE5yr Sales CAGR5yr EPS CAGR
12.3%15.5%1.0%13.0%
Forecasts/ MomentumFwd EPS grth NTMFwd EPS grth STM3-mth Mom3-mth Fwd EPS change%
-15%12%3.8%1.8%
Year End 31 MarSales ($bn)Profit before tax ($bn)EPS (c)DPS (c)
20226.220.78838241
20236.440.76834294
20246.630.851,031299
f'cst 20256.790.931,115329
f'cst 20267.101.001,247339
chg (%)+5+8+12+3
Source: FactSet, adjusted PTP and EPS figures 
NTM = Next Twelve Months   
STM = Second Twelve Months (ie one year from now) 
*Includes intangibles of $964mn, or 1,538¢ per share