Ralph Lauren (NYSE:RL) announced Q4 earnings May 23 that were 35% ahead of last year. Unfortunately, it also was very cautious on its 2014 revenue growth. Although its stock's had a good run in the past year up 25.5%, it's only been able to keep pace with the S&P 500. Sending mixed signals--I wonder if it's time to buy or sell?
In the last 11 years (including 2013 year-to-date) Ralph Lauren's achieved double-digit returns in eight of those years. It's no wonder then that its annualized total return over the past decade is 23.1%, almost three times higher than the S&P 500. Only twice--2007 and 2012--has it not outperformed the index.
How exactly has it done so well for so long?
In two words: earnings growth. In fiscal 2003 its earnings were $1.76 per share. This year they were exactly eight bucks. That's a compound annual growth rate (CAGR) of 16.4%. Its stock has achieved a compound annual growth rate of 23.8% between March 31, 2003, and May 23, 2013. Stock prices follow earnings; when you have 16% earnings growth over a decade, it's not unusual for stock prices to move ahead at a faster pace. Executing its business as well as it does, good things are going to happen.
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While nothing stands out across its three business segments of wholesale, retail and licensing that should set off alarms, there were a few things that happened this past fiscal year that should at least give investors pause.
- The biggest negative being the closure of its 14 Rugby retail stores along with its e-commerce website. When first conceived in 2004, the Rugby brand seemed a natural for a company so closely associated with the sport. Unfortunately, it couldn't differentiate the brand to the point where it could operate as a profitable, standalone business. This had to hurt.
- Less of a concern is the reduction in wholesale revenue as a result of its decision in last year's fourth quarter, along with JCPenney (NYSE:JCP), to cease selling goods under the American Living brand in 1,100 department stores. Not being associated with JCPenney's mess of a business is a good thing.
- A majority of the $108.2 million decrease in its wholesale revenue in 2013 was a result of softness in the European market combined with an appreciating U.S. dollar against the Euro. Wisely, it made a conscious effort to reduce its shipments to Europe where its product would have ended in a bargain bin somewhere. Its wholesale business in the Americas helped soften the blow slightly.
That's about it when it comes to Ralph Lauren's negatives in fiscal 2013. Ralph's got to be happy.
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One of the things well run businesses do is grow the bottom-line regardless of what's happening on the top line. So, it wasn't a surprise to read Ralph Lauren had increased earnings 35% in 2013. In fact, there were plenty of positives this past year. Here are a few that stand out for me.
- Despite its wholesale business declining 3.3%, it improved its operating margin by 230 basis points (BPs) to 22.5%. So, it increased its wholesale operating profit by $51.8 million on a revenue drop of $108.2 million. The top line's important but the bottom line is what keeps you in business.
- Almost like taking candy from a baby, its licensing margin increased 10 basis points to 71.5%. Ralph Lauren made $130.1 million in operating profits from revenues of $181.9 million. Although a small part of its business, it's like an annuity that keeps giving. Every apparel company should be this successful in its licensing program. Heck, Iconix Brand Group (Nasdaq:ICON) makes all its revenue licensing.
- Its retail stores delivered comparable store sales growth of 4% (constant currency) in fiscal 2013, 7% revenue growth which includes new stores and e-commerce, and an 80 basis point improvement in its operating margin to 16.9%. None of this profit talk happens without the 150 basis point increase in its gross margin to 59.8%. Some of the increase was due to lower cotton prices. However, VF Corp. (NYSE:VFC) had the same tailwind and its gross margin for the latest 12 months was considerably lower at 47%. That's something when you consider that VF's one of the best apparel companies anywhere in the world.
- On April 1, Robert Gagnon, formerly in charge of Gap's (NYSE:GPS) online business in North America, joined Ralph Lauren as its senior vice president of e-commerce. While I don't know what its 2013 e-commerce revenue was, Internet Retailer says its 2012 revenue grew 30% to $480 million. I'm guessing it was close to $600 million this past year.
- Lastly, you have to love its cash position. Ralph Lauren finished the year with zero long-term debt and $1.1 billion in net cash. Its free cash flow (FCF) came to $613 million, much of which I'm sure it will use for additional share repurchases.
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As long as it keeps earnings growing at double digits, I see no reason why a buy-and-hold investor wouldn't want to own its stock and that's despite being within 5% of its all-time high of $192.03. You can't do much better than Ralph Lauren when it comes to apparel.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.
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