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Stock Strategist

This Premium Label's on the Sale Rack

We see long-term value for Ralph Lauren despite management's reduced outlook.

Mentioned:

We believe  Ralph Lauren's (RL) portfolio of brands and long-run growth prospects are unchanged, and thus we are maintaining our narrow Morningstar Economic Moat Rating and $165 fair value estimate. The company gave lower-than-expected guidance during its fiscal 2014 fourth-quarter financial release, causing a decline in the shares, which we think are now 10% undervalued. Given Ralph Lauren's strong returns on capital and narrow moat due to its portfolio of iconic brands, we view the current risk/reward as positive on a relative as well as an absolute basis.

In the fourth quarter, revenue and margins outperformed expectations, with net revenue coming in at $1.867 billion, representing growth of 13.6%. High growth of 23.5% in the wholesale division, to $983 million, drove the outperformance. Management cited an improving Europe and better-than-expected sales in the United States (where Macy's is roughly 25% of wholesale) and said order pull-forward was a tailwind but not meaningful. Retail growth was just 5%, dragged down 2% by exchange rates and weak traffic because of weather in North America. Management's guidance had been for 10%-12% growth in total sales, and for growth from wholesale to be above retail. Although gross margins were down 305 basis points to 56.2%, the selling, general, and administrative expense ratio improved 325 basis points, leading to an operating margin of 12.2% compared with a 12.0% adjusted operating margin last year.

Paul Swinand does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.