Here’s Why Investors Are So Excited About Ralph Lauren (NYSE: RL)

They say what doesn’t kill you only makes you stronger. Investors of high-end fashion staple Ralph Lauren (NYSE: RL) will be hoping this is true at least, but all the signs right now are pointing towards it being the case. The New York-based retailer was one of the most vulnerable stocks on the front line against COVID-19 and would have winced at every one of the 53 percentage points that Wall Street took off its shares back in March. Even as we started into last month, shares were still at the lows and still trading at 2006 prices.

But after spending the better part of seven months consolidating, they’ve been able to convince Wall Street that they have what it takes to ride out the rest of the pandemic and get back to their winning ways. Let’s not forget, shares had rallied 50% in the four months before the pandemic hit so they were carrying solid momentum with them into the year. Now as we approach the final two trading weeks of the year, they look set on doing the same with 2021.

The Stars Align

Shares are up more than 50% in about as many days, as the good news just won’t stop coming for investors. It started with them smashing their Q2 earnings in October, posting non-GAAP EPS that was 65% higher than what analysts were expecting. Management reiterated an impressively strong balance sheet that had $2.4 billion in cash on it, posted a 30% increase in their sales numbers out of China, and showed investors double-digit percentage growth across all their digital channels.

On top of that, operating expenses fell 19% on the back of COVID led furloughs and layoffs. All music to Wall Street’s ears and exactly what shares needed to break out of the consolidation pattern they’d been holding.

And with the coming arrival of a COVID vaccine, 2021 is shaping up to be the recovery year for retailers who had the stomach to ride out 2020. Barclays recently upgraded the retail sector to a buy for the first time in over a decade pointing out how "in the wake of COVID, the retail segment is: 1) reducing supply on multiple levels and 2) forcing store closures as e-commerce growth accelerates.” Next year, they “foresee a return to brick-and-mortar sales growth and lean inventory supporting EBIT margin expansion.”

Upside Of 40%

The rally that was fuelled by these sentiments hasn’t gone unnoticed and Goldman Sachs were out with a rare double notch upgrade to shares yesterday morning. They moved their Sell rating straight up to a Buy, in light of growing confidence around Ralph Lauren’s growing digital channels and management’s impressive competence.

In a note to clients they said "while we remain guarded on underlying brand momentum, we acknowledge several management initiatives to elevate the brand and believe Ralph Lauren will benefit from an inflection in the overall apparel category. In addition, we view Ralph Lauren as a key beneficiary of the direct to consumer and digital channel shift detailed in this note."

With a fresh price target of $141, investors thinking about getting involved now can look forward to upside in the region of 40%. It’s been a cracking few weeks for a company that was on the ropes not too long ago, and with key fundamentals now in their favor, Ralph Lauren looks set to enter a new year stronger than they’ve been in a long time.