RL - Ralph Lauren: Why There Could Be Renewed Upside

• Ralph Lauren has seen strong growth in sales - across both digital and brick and mortar channels.
• The company has shown a strengthening cash position.
• I take the view that the stock could see renewed upside if these trends continue.

Investment Thesis

Ralph Lauren (RL) has shown resilience in terms of a strong rebound in sales as well as strong growth in cash flow and a reduction in long-term debt. Should these trends continue despite an inflationary environment, then I take the view that the stock could see upside from here.

In a previous article back in May, I made the argument that Ralph Lauren could come under some pressure going forward as a result of rising costs - both due to inflation as well as the effects of supply chain disruptions as a result of COVID-19 lockdowns in China.

Since the beginning of this year, we have seen the stock take a significant decline:

The purpose of this article is to assess whether Ralph Lauren might see some potential upside once macroeconomic conditions become less volatile.

Performance

When looking at the company's 10-year P/E ratio, we can see that earnings per share has been rebounding back towards pre-March 2020 levels, while the P/E ratio itself is trailing near a 10-year low.

As such, this could be an indication that the stock is trading at attractive value at the present time.

From a balance sheet standpoint, we can see that the company's ratio of cash to current liabilities has increased significantly over the past four years - which indicates that Ralph Lauren is in a better position to meet its short-term debt obligations going forward:

Source: Figures sourced from Ralph Lauren Financial Highlights (Balance Sheet). Cash to current liabilities ratio calculated by author.

With that being said, we also observe that long-term debt has also increased on the whole over the past four years:

In this regard, while the growth in Ralph Lauren's cash flow has been encouraging, investors will increasingly look for further reduction in long-term debt. The fact that the company has managed to bring long-term debt levels down from the level seen in March 2021 is quite encouraging.

Looking Forward

In my view, growth for this stock will increasingly be driven by the degree to which Ralph Lauren can continue to bolster revenues while also maintaining a healthy cash position to deal with macroeconomic headwinds such as inflation and supply chain concerns.

The most recent quarter showed strong sales growth, with a 19% increase in North American sales, 26% growth for Europe, and 20% for Asia.

The rebound in comparable store sales of 77% in Europe was particularly pronounced, in spite of a 2% drop in digital commerce sales. In contrast, digital commerce sales in the United States were up by 27%.

While these sales growth figures are impressive - this is in part due to the rebound in sales that we have been seeing post-COVID. In this regard, I deem it realistic that sales growth will start to level off somewhat from here.

However, if sales across digital and brick and mortar channels can continue in spite of an inflationary environment - then this is likely to be perceived as good news by investors and the stock could see further upside.

Moreover, if Ralph Lauren can further strengthen its cash position and reduce its long-term debt to pre-COVID levels, then this could be a further catalyst for upside.

Conclusion

To conclude, Ralph Lauren has shown resilience in terms of a strong rebound in sales as well as strong growth in cash flow and a reduction in long-term debt. Should these trends continue despite an inflationary environment, then I take the view that the stock could see upside from here.

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