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Ralph Lauren Stock (and Flagship Store) has Sunk But Here’s Why You Should Buy

Ralph Lauren is trading at a huge discount after accounting for cash & brand equity making its shares hard to ignore. It is very undervalued right now.

Jun 14, 2017 | By Jonathan Ho

Ralph Lauren stock is sinking. Amidst news of a mishandled CEO transition, Ralph Lauren too announced that it would close its flagship store on Fifth Avenue, New York. A Gatsbyesque throwback to classic elegance, the Fifth Avenue Ralph Lauren flagship was so iconic that it become a tourist destination. Now, as part of US$370 million shakeup, the Ralph Lauren flagship is no more as the quintessential rags-to-riches American retail story is in jeopardy as millennials shop for US$245 jeans discounted at online stores while Lauren figures out how to push the firm in the digital direction of eCommerce.

For close to 50 years, Lauren built the Ralph Lauren story on the back of rising American elites. In pop culture, this mythology was enhanced with the likes of Adam West’s Bruce Wayne sporting a Ralph Lauren blazer with the iconic family crest. When Stefan Larsson joined Ralph Lauren less than two years ago, Ralph Lauren’s new CEO had big ideas for taking one of the world’s most iconic brands into the 21st century. Instead, what happened was a mismatch in direction as Lauren and Larsson clashed on how to modernise Ralph Lauren. Just two months ago, Larsson resigned (his last day with the company is on May 1), leaving Lauren beleaguered and struggling to navigate a retail landscape vastly different from the one he was familiar with when he started selling his iconic over-sized neck ties from the trunk of his car.

Adam West as Bruce Wayne, talking to his Butler Alfred Pennyworth, dressed in Ralph Lauren sportcoat.

Adam West as Bruce Wayne, talking to his Butler Alfred Pennyworth, dressed in Ralph Lauren sportcoat.

The Ralph Lauren flagship has sunk and when bad news follows in chain, stock prices tend to follow consumer confidence (or lack thereof) in a downward direction. At its core, the Ralph Lauren debacle is a reminder of that industry truism that when brand founders (fashion or otherwise) find it difficult to cede control of the business they created, evolving realities render a previously successful business model obsolete. BUT there’s a silver lining to this story.

Ralph Lauren CEO Stefan Larsson with Mr. Ralph Lauren during better days.
Image rights: Photo by Jason DeCrow/ Shutterstock (6314641a)

Ralph Lauren Stock (and Flagship Store) has Sunk But Here’s Why You Should Buy

When Stefan Larsson joined, analysts and fans were upbeat on the appointment of the 42 year old to the Chief position at Ralph Lauren. Larsson was credited with revamping Old Navy’s image and putting the brand into positive territory. The symbolism of old school clashing with new world realities were not lost on media outlets as Melania Trump channeled Jacqueline Kennedy dressed in a Ralph Lauren cerulean cashmere overcoat, evoking the ire of left-wing supporters to boycott Ralph Lauren in protest of Trump’s draconian politics.


Editor’s note: Ralph Lauren also dressed Hillary Clinton and Michelle Obama for Trump’s inauguration weekend. It is our view that the brand is not politically aligned.

Ralph Lauren: Most Undervalued Brand In The World?

A financial analyst writing for Seeking Alpha recently looked into the cash positions of the brand and summed that as a brand, Ralph Lauren has incredibly low valuation based on their earnings, earning potential and cash flow.

“Stefan and I share a love and respect for the DNA of this great brand, and we both recognize the need to evolve. However, we have found that we have different views on how to evolve the creative and consumer-facing parts of the business. After many conversations with one another, and our Board of Directors, we have agreed to part ways. – Ralph Lauren

With brand value and cash exceeding Market Cap, the recent self-inflicted drama of a closed flagship store and the high profile departure of Larsson as Chief Executive has led to stock valuation and movement based on sentiment and perception rather than real fundamentals. These factors coupled with a potential deal with investing legend Warren Buffet has the columnist upbeat for a Ralph Lauren turnaround. Meanwhile, Patrice Louvet has been named as Ralph Lauren’s new Chief Executive Officer, he was most recently Group President, Global Beauty at Procter & Gamble (P&G).

In short, Ralph Lauren is trading at a huge discount after accounting for cash and brand equity that it makes its shares hard to ignore. Ralph Lauren is literally the most undervalued brand in the world right now.

Ralph Lauren was built on a foundation of neck ties and preppy outfits for the Ivy League crowd eventually following their young consumers as they transitioned into elite captains of industry.

Ralph Lauren was built on a foundation of neck ties and preppy outfits for the Ivy League crowd eventually following their young consumers as they transitioned into elite captains of industry.

Why you should buy Ralph Lauren Stock

Ralph Lauren Corporation NYSE is considered a global leader in the design, marketing and distribution of premium lifestyle products in four categories: apparel, home, accessories and fragrances across a swath of namesake spin-off brands and others including Club Monaco. Uncertainty and poor performance in the retail sector have contributed to Ralph Lauren’s poor stock performance.

For Fiscal 2016, Ralph Lauren report net revenues in the fourth quarter as having decreased 16% to $1.6 billion excluding the impact of foreign currency and on a 13-week to 13-week basis, revenue was down 12% to last year.

 

Ralph Lauren's classically elegant and preppy collections extend beyond men as well.

Ralph Lauren’s classically elegant and preppy collections extend beyond men as well.

Preppy appeal also extends to women. Ralph Lauren's tastes are impeccable.

Preppy appeal also extends to women. Ralph Lauren’s tastes are impeccable.

That said, better stock control and a focused, high margin collection strategy executed by reducing SKUs by 20% for Spring and Fall 2017; combined with lowered inventory levels by 30% are expected put Ralph Lauren on a path of recovery. Taking a leaf from fast fashion titans Zara, shortened lead times of 50% on a 9-month lead is expected to remain on track, hitting 90% by end Fiscal 2018.

Even then, Ralph Lauren ended Fiscal 2017 with $1.4 billion in cash and short-term investments and $588 million in total debt, compared to $1.1 billion and $713 million, respectively, at the end of Fiscal 2016. That is to say, the company not only had a net gain in cash but also reduced their debt. Ample liquidity, cash flow and earnings is an incredibly positive position.

That said, founder Ralph Lauren owns 83% of the stock and he could also decide to take the company private and even decide to block a potential Berkshire Hathaway transaction.

Luxuo and Heart Media makes no guarantees as to the investment potential of Ralph Lauren and as editorial policy, is not liable for financial decisions made as a result of this story. Views and perspectives representative of the author and not the company.

 

 

 

 

 
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