Ralph Lauren: From Reality, Not From Models

June 2, 2022

After accumulating some amount of experience analyzing companies, I came to conclusion that in the equity markets it is much more important to know what not to do, instead of knowing what to do.

During 2020, besides the fact that market was overwhelmed by covid narrative, there was a positive side to all the chaos. A lot of noise, and non-sense, and conflicts of interest, and lies were washed away. And the exercise of plain common sense, without the need for too much of sophistication, was enough to achieve good results.

While restaurants and hotels are closed, supermarkets were doing fine. While airlines and travel companies suffered, consumer goods packaging was in demand. While banks became questionable, home improvement retailers such as Home Depot, Lows and Tractor Supply Company were doing well because people stayed at home and went to purchase appropriate products.

Plain common sense, nothing more.

While many retail companies declined last week, certain companies reported strong results.

For example, Ralph Lauren reported fourth quarter and fiscal 2020 results “ahead of expectations“.

Ralph Lauren Corporation is a global leader in the design, marketing, and distribution of premium lifestyle products.

Company also provided a positive guidance for next year and expects to grow revenues by 8% percent and achieve an operating margin of about 14.25% percent.

Company also announced that it increases its quarterly dividend by 9% percent to $0.75 per share for a total annual dividend amount of $3 per share (3% percent annual dividend yield at current share price of $101.2 per share.

In addition to this, company emphasized that during FY 2022 it returned value to shareholders with the repurchase of 3.7 million shares, spending approximately $450 million.

Assuming company will continue this policy in the next year, total shareholder yield (dividends plus share buybacks) could reach 9% percent.

Using our valuation assumptions and applying an EV/EBITDA valuation of multiple of x10 we believe that shares of Ralph Lauren Corporation could be valued at $243 per share in three years.

This would provide an upside of about 140% or approximately 47% percent annual return.

We also think that given current story of company and its shares, increased dividend and recent share buyback, Ralph Lauren represents an attractive investment opportunity.