Ralph Lauren: More style than substance

July 19, 2016 09:00 AM

Ralph Lauren Corp. (RL), the global apparel and lifestyle retailer focusing on three segments; wholesale, retail and licensing, is suffering from severe performance declines from 2015, making it a ripe candidate for shorting. 

The company, which was founded in 1967 and operates 493 retail locations and an additional 583 sub-retail facilities, ranks as one of the most iconic brands in the world. However, while RL’s cache may be still intact, its overall operating margin continues to contract.

New York City-based Ralph Lauren’s fiscal performance rose 1% to $7.4 billion in 2016, which is a 26% decline from 2015. Its wholesale revenue dropped 3% to $3.3 billion from North American sales alone. This in tandem with its operating margin, currently at 25.15% compared to 27% in 2015, and its 4% increase in retail via the Internet and new store expansion has led to a 1% decline to $3.9 billion with comparable store sales decreasing by 3%. As a result, RL’s operating margin stands at 10.7% (a 260-basis point decline), and a revised EPS projection for 2017 from $6.73-$6.90 to $6.34-$6.46 is a sign that RL’s chance of rebounding in the near term is slim. 

RL’s operating profit and revenues are being squeezed by insufficient sourcing and extreme costs. Their dependence on department stores and discounting have been the culprit of bloated costs that continue to linger. Management has been slow to react, and as a result they are now overwhelmed with expenses in excess of 45.8%, putting them at a disadvantage with their competitors. There are also internal management structuring issues that have become less streamlined and consequently inefficient from their high numbers of entry-level employees and upper level management. For the June 2016 quarter, RL is expecting to earn 98¢ per share year-over-year on revenue of $1.56 billion, down 3.7% year-over-year. For the fiscal year ending March 2017, projected earnings will decline 0.47% to $6.33 per share on expected revenue of $7.10 billion, which is a 4.1% decline year-over-year.

RL has been in a consistent declining mode since November 2015. Its reversal in early January 2016 from $97.64 met resistance at $115 followed by its one-day plunge below $90 that gapped lower from $110 to $103, and that continued on to set a new low of $81.72. This reversal continued to have difficulty during a breakout attempt through its primary resistance at $96.99. Now, trading below its 50- and 200-week moving average has positioned RL in a critical divergence mode. This is a result of continuous negative accumulation and distribution evident through its March to May trading range of $89 to $99. A retesting of its previous low of $81.72 set on Feb. 8 was also not an optimistic sign and the subsequent reversals from $83.66 to its early June 2016 level are simply the hallmarks of short-covering boosts. During the past 12 months, RL shares have declined 30%, while the S&P 500 Index has risen 0.23%. With such a difficult task to penetrate its primary resistance and secondary resistance of $103, an additional plunge is in the offing. Ralph Lauren’s elevated volatility may appeal to some as an opportunity to trade on its attempted rebounds, but the short-selling potential far outweighs any such variance. While Ralph Lauren’s clothing and lifestyle line imbue a life of luxury, currently in the words from Christian Andersen’s tale, “The Emperor has no clothes.”

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