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RL – Take Ralph Lauren Off Your Investment Portfolio Shelf

Lower top and bottom lines cause concerns


ralph_lauren_185Welcome to the Stock of the Day!

Ralph Lauren (RL) shares are on the rise today after the fashion icon reported solid results for the second quarter. This represents a departure from the lackluster earnings reports from previous quarters so let’s dig into the details and see if we should dress up our portfolio with this stock.

Company Overview

Ralph Lauren was launched in 1967 by American designer Ralph Lauren. Based in New York, Ralph Lauren Corp. is known for producing a number of fashion brands, including Polo, American Living, Chaps and Club Monaco. This company employs 14,000 workers across over 650 locations across the Americas, Europe and Asia. In the most recent year, the company brought in $6.94 billion in sales and $750 million in net income.

Earnings Rundown

Despite revenue growth, Ralph Lauren reported lower second-quarter profit than the year ago period. Net income declined from $214 million to $205 million on declines in operating income. Meanwhile, net sales ticked up 3% year-over-year to $1.915 billion. This topped the $1.91 billion consensus sales estimate. Looking ahead to fiscal 2014, Ralph Lauren forecasts between 5% to 7% annual sales growth. The company also declared a 12.5% increase in its quarterly cash dividend. Shareholders of record on December 27 will receive 45 cents  per share on January 10. RL shares rose following the earnings announcement, but as I’ll cover shortly, I wouldn’t buy this stock just yet.

Industry Breakdown

Ralph Lauren is a part of the Textile and Apparel Industry, which is composed of 153 different companies. Of those, Ralph Lauren is seventh largest in terms of market capitalization. Additionally, the company also stands out in terms of its dividend yield which is ranked at eighth highest. The company also falls in the top third in terms of earnings growth and return on equity.

Ralph Lauren Corp.’s largest competitors are Fifth & Pacific Companies (FNP) and The Jones Group (JNY). Of these three companies, Fifth & Pacific is currently the best buy right now due to superior buying pressure. Meanwhile, Jones Group is suffering from flat sales and deep-seated cash flow issues. I’ll discuss Ralph Lauren’s problems with attracting institutional investors shortly.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. While RL spent the first part of 2012 in buy territory, it has seen a sustained decline in institutional buying pressure since summer 2012.

Out of its competition, RL is the only stock that has been under performing the S&P 500 over the past year. It appears that investors are fixated on Ralph Lauren’s inability to grow sales as well as its paltry 0.9% annual dividend yield. So right now, RL receives an F for its Quantitative Grade, which indicates the current level of buying pressure.

Meanwhile, the company needs to improve most fundamental metrics, including sales growth, earnings surprises and analyst earnings revisions (all C- or D-rated). So despite high marks for cash flow (B) and return on equity (A), RL receives a C for its Fundamental Grade.

Bottom Line

As of this posting, November 6, I consider RL a D-rated Sell. It’s possible that institutional buying pressure will firm up in the wake of this report, but it’s just too risky right now to buy on the news.

Recommendation: D-rated Sell



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