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 in the Ralph Lauren Corporation. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of the Ralph Lauren Corporation either. Thus, I have no personal stake in the Ralph Lauren Corporation. If you want to purchase shares (or fractional shares) of the Ralph Lauren Corporation, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with 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 44% of the revenue in fiscal 2024; Europe, which contributed 30% of the revenue in fiscal 2024; and Asia, which contributed 24% of the revenue in fiscal 2024. In addition to these reportable segments, the company also has other non-reportable segments, which accounted for approximately 2% of revenues in fiscal 2024. 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 564 retail stores and 699 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 its wholesale distribution channels at over 9.600 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. It means that the Ralph Lauren brand defines a luxury lifestyle that is uniquely its own. 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. In 2023, the Ralph Lauren Corporation was named as one of Forbes World's Best Employers. 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. I also like the management. Let's now analyze the financials to evaluate if the Ralph Lauren Corporation meets our criteria for a strong competitive advantage. For further clarification on the financial metrics, please refer to "MY STRATEGY" on the website.
The first number we will investigate is the return on invested capital (ROIC). Ideally, we look for 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. The Ralph Lauren Corporation managed to deliver some of its highest ROIC following the pandemic in fiscal years 2022 and 2023, and increased the ROIC in fiscal year 2024 despite the many macroeconomic headwinds, which is very impressive. Thus, I'm encouraged by the numbers since Patrice Louvet became the CEO, and I expect that the Ralph Lauren Corporation will continue to deliver a ROIC above 10% moving forward.
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 have declined in most years, and while the equity increased in 2024 compared to 2023, it is still significantly lower than it was in 2015. One reason could be that the Ralph Lauren Corporation has used debt to buy back shares, as shares outstanding have decreased by approximately 27% over the decade. There are different views on companies using debt to buy back shares, but it means that I'm not concerned that equity has decreased over a ten-year period.
Finally, we will analyze 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 provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected 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. The Ralph Lauren Corporation has had some challenging years in fiscal 2021 and fiscal 2023, but had an exceptional year in fiscal 2024, where the company delivered its highest free cash flow ever, which is very encouraging. The Ralph Lauren Corporation also managed to deliver its highest levered free cash flow margin in the past ten years in 2024, which bodes well for the future, especially because management expects higher margins going forward. The free cash flow yield is higher than the ten-year average, suggesting that the shares are trading at a reasonable valuation, but this is something we will revisit later in the analysis.
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 1,76 years of earnings in debt. This is below the three-year threshold, meaning that debt is not a concern for me if I were to invest in the Ralph Lauren Corporation.
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Based on my findings so far, I believe that Ralph Lauren Corporation is an intriguing company. However, no investment is without risk, and Ralph Lauren Corporation also has its fair share of risks. One significant risk is competition. Ralph Lauren Corporation has mentioned that they face increasing competition from companies selling apparel, footwear, accessories, home goods, and other products through the Internet. Although the company sells its products online, they have noted that the Internet, along with increased competition and promotional activity in the global apparel, footwear, accessory, and home product industries from Internet-based competitors, could reduce Ralph Lauren Corporation's sales, prices, and margins. Additionally, the company faces intense competition from other domestic and foreign fashion-oriented apparel, footwear, and accessory companies that sell products through brick-and-mortar stores, as well as wholesale and licensing channels. Some of these competitors are significantly larger and more diversified and may have greater financial, marketing, and distribution resources, more desirable store locations, and/or a stronger digital commerce presence than Ralph Lauren Corporation. These competitive advantages may enable them to better withstand unfavorable economic conditions, compete more effectively on price and production, and more quickly respond to rapidly changing fashion trends and consumer preferences than Ralph Lauren Corporation. Relying on third-party suppliers is another significant risk. Ralph Lauren Corporation does not own or operate any manufacturing facilities and depends exclusively on independent third parties for the production of its products. Consequently, the company competes with other businesses for the production capacity of these manufacturers. Some of these competitors may place larger orders than Ralph Lauren Corporation, giving them an advantage in securing production capacity. If Ralph Lauren Corporation experiences a significant increase in demand or needs to replace an existing manufacturer, they may have to expand their third-party manufacturing capacity. However, there is no guarantee that this additional capacity will be available when required or on acceptable terms. Additionally, approximately 19% of Ralph Lauren Corporation's products are sourced from Vietnam and 15% from China. With the rapid development of the Chinese and Vietnamese economies, the cost of labor has increased and may continue to rise in the future. This could potentially negatively impact profit margins, as the products will become more expensive for Ralph Lauren Corporation. Failing to adapt to changing fashion trends poses another significant risk for Ralph Lauren Corporation. The company's success hinges on its ability to respond promptly to constantly evolving fashion and retail trends and consumer preferences. This includes developing products that resonate with existing customers while attracting new ones. Historically, the fashion industry has been subject to rapidly changing trends and consumer preferences. Ralph Lauren Corporation must not only originate and define fashion product trends but also anticipate, gauge, and react to these changing consumer preferences in a timely manner. Ralph Lauren Corporation's products need to appeal to a diverse range of consumers worldwide across various price points. These preferences are unpredictable and subject to rapid changes influenced by fashion trends, economic conditions, and weather conditions, among other factors. This challenge is further exacerbated by the increasing use of digital and social media by consumers, which accelerates the speed at which information and opinions are shared globally.
There are also many reasons to invest in the Ralph Lauren Corporation. One significant reason is the growth in Direct-to-Consumer (DTC) sales. Under Patrice Louvet's leadership, the company has focused on increasing its DTC sales, achieving notable success. DTC sales now represent about two-thirds of Ralph Lauren Corporation's total business, up from 55% when Patrice Louvet joined the company. Management expects DTC sales to continue growing, with healthy increases across both brick-and-mortar shops and digital channels. They plan to open new stores in North America, Europe, and Asia. Additionally, the company is now less dependent on North American wholesale sales, which have decreased from 25% to 16% of the business. This shift is significant because North American wholesalers have faced many challenges over the past few years due to macroeconomic factors. Moreover, management has highlighted that DTC sales serve as a consumer recruitment tool, providing valuable data on customers that can be used for targeted marketing efforts—data that is not available through wholesale sales. Growing in China. China sales were up by 30% in fiscal 2024, meaning that the Ralph Lauren Corporation's China business has more than doubled compared to pre-pandemic levels and now represents 7% of total company sales. Management has mentioned that they expect the China business to lead the company's growth moving forward. They attribute this success to the brand's strong connection with local consumers, especially by tapping into the "quiet luxury" trend. Management believes that the core values and brand identity of Ralph Lauren resonate effectively with Chinese consumers. The company plans to continue its growth journey in China by focusing on key city clusters, supported by dynamic local marketing and a digitally-led ecosystem expansion. This strategy aims to recruit new customers and offer an elevated assortment of high-quality products that align well with the "old money" or "quiet luxury" aesthetic. If the Ralph Lauren Corporation manages to sustain its growth in China, it could significantly increase profitability, as margins from its China sales are strongly accretive to the total company according to management. New opportunities. Management believes they will experience significant growth in high-potential categories such as women's wear, outerwear, and home products. They are particularly optimistic about women's outerwear, considering it their most significant long-term opportunity. Women's wear now comprises about 29% of total company sales, up 100 basis points from fiscal 2023. Management also believes their product offering provides significant opportunities for trade-up, meaning moving from selling lower-priced items like T-shirts to higher-priced items like tweed jackets, RL 888 bags, and outerwear. Regarding home products, the Ralph Lauren Corporation has decided to move its directly-operated furniture business to a highly experienced licensed partner with proven success in luxury furniture design, production, and distribution. Management still sees significant long-term growth opportunities for the home category and believes this move will enable them to better serve home customers and expand the category with elevated products and services consistent with their brand.
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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 9,71, which is from fiscal year 2024. I have selected a projected future EPS growth rate of 8% (Finbox expects EPS to grow by 8,3%). Additionally, I have chosen a projected future P/E ratio of 16, 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 $82,91. 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 $41,46 (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 1.070, and capital expenditures were 165. 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 116 in our calculations. The tax provision was 131. We have 63,3 outstanding shares. Hence, the calculation will be as follows: (1.070 – 116 + 131) / 63,3 x 10 = $171,4 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 $14,16 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $162,66.
I find the Ralph Lauren Corporation to be an intriguing company. I appreciate the management team for its extensive experience and focus on high-margin businesses. The Ralph Lauren Corporation has increased its ROIC since the pandemic and has just delivered its highest free cash flow ever. The company operates in a highly competitive industry, and competition will always be a risk, especially since some of its competitors are larger and more diversified than the Ralph Lauren Corporation. Relying on third-party suppliers is also a consistent risk, as the company has no plans to own or operate any manufacturing facilities. These suppliers have their interests in mind and may choose larger orders from some of the Ralph Lauren Corporation's competitors, which could lead to the company not getting all the products they need. The fashion industry is constantly changing, and the Ralph Lauren Corporation needs to respond to consumer preferences in a timely manner. While they have historically managed this well, the present and future are different from the past due to the increasing use of social media. The Ralph Lauren Corporation is increasing its Direct-to-Consumer sales, which not only comes with higher profit margins but also provides valuable customer data that can be used to drive further Direct-to-Consumer sales. The company is also growing rapidly in China, with its Chinese market having doubled since the pandemic. The company has a clear strategy to continue increasing sales in China, and if successful, it will make the company more profitable due to higher margins on China sales. Finally, the Ralph Lauren Corporation is growing its women's wear sales, while they have moved their directly-operated furniture business to a highly experienced licensed partner, which should improve that business. I believe that the Ralph Lauren Corporation could be a good investment for long-term investors if shares can be purchased below the Payback Time price of $162.
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