Shares of Polo Ralph Lauren (NYSE:RL) were off more than 8% on Wednesday after the upscale clothing retailer announced a 36% drop in earnings. Does it mean the stock is now a bargain?
The company said its fourth-quarter net income fell to $73.2 million, or 74 cents a share — five cents short of analysts surveyed by Bloomberg. Revenue was up 6.7% to $1.43 billion from a year earlier.
The cause of the earnings miss was higher cotton prices and higher pay for Asian workers that Ralph Lauren didn’t pass on in the form of higher prices to consumers. As a result, gross margin was down 2.2 percentage points to 56.8% — 0.7 percentage points less than the number expected by UBS Securities analyst Michael Binetti, who thinks the stock is a buy.
Is Binetti right? To help figure that out, we can look at its price-to-earnings-to-growth (PEG) ratio — a way to determine whether the value that the market assigns a stock is justified by the rate at which it expects the company’s earnings to grow. I think a PEG of 1.0 is a fair price, and anything below that is a bargain.
Ralph Lauren’s PEG of 1.52 makes it a little pricey. It trades at a P/E of 19.6 on earnings expected to grow 12.9% to $6.53 a share in 2012. If Ralph Lauren continues to suffer lower operating margins in the 1 percentage point to 1.5 percentage point range in the next year, its stock is likely to be under pressure.
But Ralph Lauren’s brand strength is such that I would keep an eye on the stock’s P/E relative to earnings to look for a cheaper entry point.
Peter Cohan has no financial interest in the securities mentioned.