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Stock Strategist

Ralph Lauren's on the Sale Rack

We think the current stock price more than compensates for the risks.

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After years of solid growth and margin expansion,  Ralph Lauren (RL) has seen revenue growth slow and operating margins decline in the past two years. While the top line has had a number of understandable headwinds, other risks such as exposure to U.S. department stores and competition are also legitimate concerns. However, we believe these risks are currently being overemphasized by investors, and the resulting discount on the stock is too steep.

One of the biggest headwinds on revenue and operating margins is exchange rates, made worse by the location of the firm's European headquarters in Switzerland. Switzerland has various tax advantages, but the magnification of selling, general, and administrative costs that are measured in U.S. dollars versus Swiss francs is pressuring the ratio of expenses to sales and thus earnings in the short term. The dollar has appreciated more than 30% versus the euro through this last cycle, and the Swiss franc has had wide swings, appreciating more than 16% versus the dollar on a single day in January. In the first half of this fiscal year, the weighted average exchange rate impact on the firm has been over 500 basis points trimmed off the revenue line and 200-300 basis points trimmed off the operating margin.

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