Surging cotton prices over the past year have put pressure on gross margins. Google the following words, "rising cotton prices hurting gross margins", and stories appear about Nike (NYSE:NKE), Carter's (NYSE:CRI) and Wal-Mart (NYSE:WMT). That's just the first page. Companies have taken all kinds of different approaches to coping with higher input costs. Some have increased prices while others have sought alternative materials. Now it appears that rising cotton prices has led to a surge in production, which will ultimately lead to a drop in cotton prices. One company that appears to be fine either way is Ralph Lauren (NYSE:RL) the maker of Polo, one of the best investments in the apparel business.
TUTORIAL: Economic Indicators To Know

Financial Position
Ralph Lauren's situation is a thing of beauty. Its debt-to-capital ratio is a mere 7.5%; Its net debt is a surplus of slightly less than $1 billion, and its free cash flow for the trailing 12 months is 7.7% of revenues. The company is in a great position to generate cash and, despite cotton prices rising, operating margins are higher than they've ever been. Not many apparel companies can make this claim. Ralph Lauren has achieved double-digit returns from both metrics in nine out of the last 10 years. In this regard, it's unsurpassed.

Growth Strategy
Ralph Lauren's three-pronged attack has it building and extending the brand internationally, with a focus on specialty retail. Asia is the main beachhead of its international expansion. With the acquisition of its South Korean licensee in January, it now has most of Asia under its direct control, with 44 stores and 503 concession shops. In its third quarter conference call, President Roger Farah suggested that it has all kinds of opportunities in the region beyond traditional menswear including accessories, handbags, watches and jewelry. Current Asian operations are very modest in scope, representing just 9.2% of overall revenues. In five years, its Asian revenues should rival those in Europe.

Both its retail store network and its e-commerce businesses are doing fabulously. Same-store sales in the third quarter grew 15%, while experienced a 33% increase in revenues. The website continues to gain traction. In 2010, it averaged 3.5 million unique visitors each month, generating 390,000 new customers to go along with 1.7 million existing customers. Yet, its online sales represent no more than 5% of its overall revenues. Williams-Sonoma's (NYSE:WSM) are over 40%, so you can see the tremendous potential here. As for its retail stores, operating margins have never been higher. In Q3, they were 280 basis points higher at 18.6%, a record for the third quarter. Other retailers might be having a problem with cotton prices, but not Ralph.

The Bottom Line
Some pundits worry about Ralph Lauren after Ralph is gone, much like those who worry about Berkshire Hathaway after Warren Buffett goes to the big stock market in the sky. Ralph Lauren is 70. That's young these days, so shareholders likely won't have to worry for a few years. Whenever this happens, you can be sure it'll be even stronger than it is today. It's much ado about nothing. If you like apparel, this has to be in your portfolio. (For related reading, also take a look at Analyzing Retail Stocks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  9. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  10. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center