In 1967, an ambitious Ralph Lauren created the Polo brand. The first product? It was a line of ties. And yes, it was a big hit. Until then, ties were fairly conventional and boring.
Of course, Lauren did not stop there. He has turned his business into Polo Ralph Lauren (NYSE:RL), which now has a market value of $11.72 billion. It’s an amazing achievement since the fashion industry is quite fickle.
Over the past year, Polo Ralph Lauren has demonstrated it still knows how to grow its business. During this period, the stock returned 45%.
But what about the next 12 months? Here’s a look at the pros and cons of the stock:
Pros
Global Platform. Polo Ralph Lauren has three main businesses: wholesale, retail and licensing. The company has 664 stores across the globe, which include 180 factory locations and 301 concession shops. Polo Ralph Lauren has also been investing heavily in its ecommerce business (the main retail sites are www.RalphLauren.com and www.Rugby.com)
Growth. As countries in Asia get wealthier, there will be growing demand for premium apparel products. No doubt, this will be a nice boost for Polo Ralph Lauren. For some time, the company has been investing heavily in foreign markets. One smart move was to take control of its South Korean distribution network.
Light Model. Polo Ralph Lauren does not have its own production facilities. Rather, the company has assembled an intricate network of more than 400 manufacturers across the globe. It allows for faster response times, lower costs and even more diversity.
Cons
Leadership. It’s a cliché, but it’s true – one person can have a huge impact on a company. This is certainly the case with company founder Lauren. Besides having a tremendous fashion sense, he also understands marketing and even operations. But he’s also 71 years old. In other words, if he dies, it’s likely to have a major impact on the company and its stock price.
Margin Pressure. The fashion industry is intensely competitive. Some of Polo Ralph Lauren’s rivals include Liz Claiborne (NYSE:LIZ), Phillips-Van Heusen (NYSE:PVH) and Perry Ellis (Nasdaq:PERY). Because of this, there is the threat of lower prices and even worthless inventory. What’s more, the surge in commodities – such as with cotton – is another factor that can hit margins.
Customer Concentration. Polo Ralph Lauren has a massive distribution footprint, with over 9,000 retailers like TJX Cos. (NYSE:TJX). However, some customers represent a large amount of revenue, like Macy’s. Its take is about 10% of total sales. Also, keep in mind that major retailers are starting to use their market power to exact better terms.
Verdict
As the U.S. economy improves, there should be a nice increase in business for Polo Ralph Lauren. Besides, the opportunities in Asia are substantial.
It’s true that the valuation of Polo Ralph Lauren is a bit rich. After all, the price-to-earnings ratio is 20. But the fact is that Polo Ralph Lauren continues to show momentum. Over the past nine months, net income increased 35% to $494 million, with revenue up 16% to $4.2 billion. The balance sheet is clean and has $1.3 billion in cash.
When adding things up, the pros outweigh the cons on this stock.
As of this writing, Tom Taulli did not own a position in any of the stocks named here.
