Red Doesn’t Look Good on Ralph Lauren

Ralph Lauren Corp NYSE: RL was out of style with Wall Street following the release of their first quarter sales and earning results. Despite exceeding the consensus earnings estimate and sales projections, the clothing company’s shares fell more than 4%.

Analysts forecasted earnings-per-share of $1.66 for the quarter on sales of $1.42 billion. Management delivers beyond the street’s outlook with EPS of $1.77 and revenue of $1.43 billion. RL investors must be wondering, “what’s up with the stock falling on better than expected numbers?”

Perhaps President and Chief Executive Officer Patrice Louvet telling earnings conference call listeners that “we continue to invest in elevating our brands and stabilize our North America business against the more volatile backdrop [compared to Europe and Asia]”1  had something to do with the red price reaction.

Or maybe it’s Louvet saying that the company needs to “win over a new generation of consumers; in the first quarter, we increased marketing investments by 19% to last year. We continued to shift our spend to channels that matter most to consumers today; namely, digital and social.”

In other words, the kids aren’t buying our stuff as much as we would like and it’s a problem.

Analyst Matthew Boss of JP Morgan appears to agree. He downgraded Ralph Lauren to Neutral from Overweight, putting a price tag of $124 on the stock. Boss believes it might take a while before RL’s marketing boost shows up in North American e-commerce sales, saying it will get “worse before it gets better.”

Just how much worse could it get for investors?

Let’s examine the company’s historical price-to-earnings (P/E) and price-to-sales (P/S) ratios to develop some possible price targets. Analysts believe Ralph Lauren will earn $7.72 per share for the current fiscal year on sales of $6.44 billion. At the moment, RL trades at 20.33 times earnings and at 1.31 times sales.

In the last five-years, investors paid an average P/E of 16.33 for Ralph’s stock. Using the five-year average price-to-earnings ratio and the 2020 consensus estimate of $7.72 produces a $126.07 price target. That’s not too far off from JP Morgan’s $124.

On the low end, the five-year minimum P/E for the company was 11.58 times earnings. Using this year’s consensus EPS forecast, RL’s price would fall to $89.40 – OUCH! a 16.43% loss from its July 30, 2019 closing price of $107.13.

At the top end of the last half-decade’s range, the street paid 23.59 times earnings. Again, same math generates a potential price of $182.11. WHOA – a make-you-smile 70% profit, but most likely not going to happen.

Revenue-wise, the average price-to-sales ratio in the last five years was 1.27, close to today’s level. If Ralph Lauren hits the street’s sales target of $6.44 billion for the year, its average P/S ratio calls for a $157.92 price. Not bad, a 47.4% return. Since July of 2015, the lowest P/S valuation was 0.8, which equals $99.27.

Using historical P/E and P/S, we can determine a possible range using the street’s outlook for the year. We’ll use price-to-sales on the bottom and set the minimum price in the next 12 months or so at $99.27. Going any lower would require a new five-year low P/S valuation.

As for the top end, we’ll use the five-year average P/E price of $126 that hugs Matthew Boss’ $124 price target.

In the short-term, RL’s price is currently in a downtrend. The 200-day moving average of $100 could provide the first safety net. If it falls below the triple-digit mark, then $95 will be a key price for the stock to hold. After $95, it could be an escalator ride to $80 bucks.

The Play: With RL’s shares currently in a downtrend, the price could get worse before it gets better. Long-term investors might wait for a better price before entering Ralph Lauren Corp.