Ralph Lauren's Muted Q1 Is Better Than Peers, The Stock Approaches Attractive Levels

seekingalpha08-09

Ralph Lauren Corporation had modest Q1 2025 results, but looks strong against luxury peers like LVMH and Kering.Margin expansion and continued intangible investments showcase the company's success in ...

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It also revisits the company's valuation, as it is slightly down since my last article from May. The RL results were modest in absolute terms, with revenues up 1% and 5% comparable, better in Asia and Europe and worse in the US. However, these results are much better when read against the background of disappointing sales from other luxury companies, like LVMH Moët Hennessy - Louis Vuitton, Société Européenne (OTCPK:LVMHF) or Kering SA (OTCPK:PPRUF). The company's investments in brand intangibles and the obvious effects they generate in the higher echelons of culture continue as well. From a valuation perspective, I tend to believe that the stock is fairly valued at 13x FY25E NOPAT. This implies a relatively low yield of 7.5%, plus some modest growth of 3% on top. A combined yield of 10.5% is not high for an apparel brand, considering the risk, especially in the current context. However, the company's brand strength is also evident, given the problems at other luxury brands. If the economy recovered, Ralph Lauren would be very well positioned to grow faster. I still believe the stock is a Hold, but will remain attentive to dips for potential investments. Modest 1Q25, but strong against peers Growing in a sea of red: Ralph Lauren posted revenues only moderately up 1% (3% in constant currency), relatively in line with the company's guidance of low single-digit growth for FY25. This may not seem like much, but it shows up as more impressive when considering the results of other luxury brands. LVMH's 1H24 sales were down 1% with fashion down 2%. Kering's 2Q24 revenues were down 11%, and Burberry was also disappointed this quarter. In particular, Ralph Lauren did very well in Asia and Europe, two regions generally considered challenged. In Asia, it was up 3% (9% in constant currency, but this does not account for the massive depreciation of the yen), and 6.5% in Europe. In the US, retail comparables grew LSD in B&M and were down in digital. Wholesale US was the most challenged sector, down 14%, because of lower value-channel sales and general caution. The divergence between US retail and US wholesale provides hope for a recovery of the latter as sell-in and sell-out normalize. Margin expansion: The company continues to post AUR growth of 6% (which in turn implies that the company was selling fewer items if revenues were up 3%). This marks the 29th quarter of higher AUR, marking a very successful elevation strategy. The result was gross margins reaching 71%, up 200 basis points for the year. Operating margins reached 13.7%, with operating income up 25% because of lower restructuring (which explains 17% of the growth). Continued intangible investments: One of the things I like about Ralph Lauren is the company's focus on communicating their intangible investments. In this case, the quarter had several runways, in New York and Milan as main points. The quarter also included the introduction of the Olympics Team USA outfit. The company shows that it is still creating fashion. For example, the Navajo Designs launched last year won the Innovation by Design Award from Fast Company. Finally, I wanted to call out the results of the company's investments in women's fashion. Women are about 30% of RL's business, but the company is nailing many free endorsements. Last year, it was Taylor Swift wearing a Polo hat. This quarter, we had Meghan Markle wearing RL in her CBS interview, and Kendall Jenner wearing a full Polo to the Olympics. These are top-of-the-line culture icons who wear RL without being compensated for it. Returning capital: RL generated $208 million in operating income in the quarter and FCF of about $250 million. The company returned all of it to shareholders, $200 million via share repurchases and $50 million via dividends. Again, this talks of a company with good capital allocation policies. The valuation is fair, turning to attractive Currently, Ralph Lauren trades at a market cap of $9.9 billion. The company has cash and securities for $1.8 billion, and debts of $1.1 billion. This results in an EV of $9.2 billion. With the company's guidance maintained and based on the forecasts made in my last article, we can expect RL to generate about $700 million in FY25 NOPAT. The above results in an earnings yield for FY25 of 7.6%, or conversely a multiple of about 13x. With top-line growth of 3%, and not a lot of room to continue improving margins meaningfully, the prospects for growth increase the yield to maybe 11%. I believe this is not super attractive because RL is still an apparel business that suffers from cyclicality in line with discretionary income and operating leverage. However, we should also consider that this level of growth is generated in a challenging context, with wholesalers being cautious in the US and the aspirational middle classes squeezed in many regions. This positive context offsets the risks of a more challenging macro. Overall, I continue to believe Ralph Lauren Corporation's stock price is fair, although it does not scream opportunity. I maintain my Hold view, but will be attentive to dips in the stock, given the company's brand quality.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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