Ralph Lauren's 3 Pillars of Growth Will Drive the Business Forward

Ralph Lauren (NYSE: RL  ) has experienced sluggish market performance in the past 12 months, declining by more than 7.4% and significantly underperforming the S&P 500 index's gain of 17.7% during the same period. However, Ralph Lauren seems to be bullish about its future, raising its full-year 2014 revenue outlook to reflect 5%-7% revenue growth. Compared to its peers, including Fifth & Pacific (NYSE: KATE  ) and PVH (NYSE: PVH  ) , is Ralph Lauren attractive enough to buy now?

Ralph Lauren's three main pillars for growth
Ralph Lauren generated most of its income from its wholesale business, which accounted for nearly 48.8% of total operating income. The retail business ranks second, with $611.3 million in income in 2013, representing 42.2% of the company's operating profits. Among the company's three business segments, the wholesale business seems to be the most preferable because it requires the least amount of capital expenditures -- only $40 million in 2013 to produce the highest level of income. The retail segment demanded the highest capital expenditures of more than $158 million last year.

Looking forward, Ralph Lauren will focus on three main pillars to drive its future growth: expanding its international presence, broadening its direct-to-consumer reach, and investing in merchandise innovation. Currently, Ralph Lauren derives most of its business, or two-thirds of its total business, from the Americas. Only a low double-digit percentage of the business come from Asia. The company has set the goal to balance the revenue stream coming from three regions: the Americas, Europe, and Asia. Ralph Lauren will focus both on gaining market share in existing markets and exploring other high-growth emerging markets, including Greater China and Central and Eastern Europe.

In expanding the direct-to-consumer reach, Ralph Lauren offers a broad range of retail formats, including both physical retail stores such as Ralph Lauren, Denim & Supply, and Club Monaco, and e-commerce. In the second quarter of 2014, it expanded the distribution center for its North American e-commerce business, started an e-commerce segment in South Korea, and achieved online transactions in around 10 European countries. The third core pillar for business growth is merchandise innovation, with the main focus on the accessories segment. Ralph Lauren believes that the accessories business could represent one-third of the global personal-luxury goods market in the next three years.

Is Ralph Lauren a better pick compared to Fifth & Pacific and PVH?
At the current price, Ralph Lauren offers investors a decent dividend yield at 1.1%, with a conservative payout ratio of only 20%. Moreover, Ralph Lauren also returned cash to its shareholders via share buybacks. In the second quarter, it has returned nearly $50.2 million at an average cost of $176 per share. The company still has $427 million available for the future buybacks. Its peer, Fifth & Pacific, does not pay any dividends to investors.

Nevertheless, it could drive its operating performance by an ongoing business restructuring. It recently completed the intellectual property sale of the Juicy Couture brand for $195 million. These proceeds will be used to fund the fast-growth expansion of its Kate Spade brand. It could be a very wise decision for the company to grow the Kate Spade business. In the third quarter, Kate Spade experienced 76% sales growth, with sales reaching $180 million, and comp-sales growth at retail stores of 22%.

Another peer, PVH, offers some dividends to shareholders but in a very small amount. With only 5% payout, PVH yields only 0.1% at the current price. Recently, it lowered its non-GAAP sales outlook for the full fiscal 2013 from $8.24 billion to $8.22 billion, while reaffirming the earnings-per-share guidance of $7. The reduction in the sales outlook might have been caused by reduced traffic and a highly promotional retail environment in a challenging overall macro-economy.

My Foolish take
Among the three, Ralph Lauren seems to be the best pick with a reasonable cash return yield, including both dividend payments and share buybacks. Moreover, with a focus on three core pillars of growth, Ralph Lauren could improve its overall profitability and enhance shareholder value in the long run.

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