What’s Going On With Ralph Lauren (NYSE: RL)?

A 4.5% jump during yesterday’s session meant shares of high fashion retailer Ralph Lauren (NYSE: RL) were among the better performing stocks on a day that saw the major indices continue to rally off this week’s lows. While they were certainly buoyed by the boost in optimistic sentiment that was prevalent throughout the market, a fresh upgrade from JPMorgan made sure they made the most of it. 

Analyst Matthew Boss upgraded his rating on Ralph Lauren shares to Overweight from Neutral after pointing to attractive valuation with shares trading at 6X the firm's 2023 EBITDA or ~25% below the company's pre-pandemic multiple. He felt the macro-driven pullback that has dragged down almost all equities in recent weeks has opened up a solid buying opportunity in those of them with the strongest fundamentals. 

With that in mind, the fact that Ralph Lauren is exiting the pandemic with a multi-year mid-teens margin profile and a reset distribution model puts it high on the list. Boss is a fan of how the company’s three-pronged revenue streams are all set to play a role in the bounce back, that is the Polo (refined casual), Lauren (self-help), and luxury (reopen) units. The $1.4 billion net cash listed on their balance sheet also didn’t go unnoticed. 

Bullish Upgrade

They were much welcome comments for those in the bull camp, who were surely starting to get nervous as shares ticked lower all through the first half of this month. In fact, coming into the end of last week they were at their 52 week low and looking likely to fall even further. They’ve since popped almost 20% off that level which suggests there’s a good bit of cash waiting on the sidelines that’s ready to get involved once the risk-off sentiment dissipates. Investors will appreciate that it’s the fundamental factors at play in Ralph Lauren that are justifying this buying opportunity, rather than technicals. 

As Boss summed up in a note to clients, “putting the pieces together, our consolidated 4Q22 revenue growth of +13.5% y/y reported matches mgmt’s +13-14% guide w/ potential conservatism built into N/A and Europe noting recent fieldwork pointing to above plan N/A trends and lateral peer commentary citing limited Western European impact to-date. On FY23, we model +3.1% revenue growth or +5% 'core' growth adjusted for ~200bps of ‘one-time’ items by our math (including 53rd week lap, Chaps license transition, & Club Monaco sale) conservatively embedding Europe brick/mortar at only 80% of FY19 productivity."

The $142 price target suggests there’s upside to be had in the region of 20% from where shares closed on Thursday, and were they to hit this in the coming weeks they’d be at their highest level since 2018. That kind of opportunity should be enough to tempt most investors, who have an easy exit point protecting them to the downside in the form of this past month’s low. 

Getting Involved

Ralph Lauren’s most recent earnings report comfortably beat expectations on both the topline revenue and bottom line EPS, with management also going so far as to raise its outlook for the full fiscal year. This is one of the most bullish signals a company can give to investors, and makes the current buying opportunity all the more compelling as a result. Also of note was the board's approval of a new $1.5 billion stock repurchase program, which indicates that the top brass feel the existing share price is well below fair value. Other tailwinds exist in the form of a potential acquisition by LVMH, after it was recently revealed that they’ve had on again and off again talks on the subject with Ralph Lauren over the past number of years. 

In the context of the broader market right now, Ralph Lauren has a lot of good things going for it. Those of us on the sidelines with cash to deploy could do worse than picking a retailer that’s growing revenue by 25% year on year, has just raised its full year outlook, is deploying more than a billion dollars to repurchase its own shares, and was recently upgraded by JPMorgan.