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Here's What Ralph Lauren's Investors Need to Watch

Global lifestyle brand, Ralph Lauren (NYSE: RL  ) , is set to give us a peek into its business this Friday. With arch rival PVH Corp (NYSE: PVH  ) nipping at its heels, and a rough macro environment for apparel stocks, investors are anxious to see if Ralph Lauren's growth can continue. When Ralph Lauren announces earnings on May 9th, these three keys will provide investors with some insight on its performance. 

Profit margins are key
Certain performance metrics just matter more to some businesses; that's the case with profit margins at Ralph Lauren. Interbrand listed Ralph Lauren as number eighty-eight on its list of the top 100 brands of 2013; that is, by far, the highest brand ranking of a menswear apparel company, and the brand's value grew substantially last year. The company relies on pricing power, for example, a Ralph Lauren Polo sells for nearly double what PVH's Tommy Hilfiger Polo does, on brand name alone. That pricing advantage has helped Ralph Lauren beat PVH on gross profit margin in recent years, as its smashed the apparel industry's profit margins as a whole. 

RL Gross Profit Margin (Quarterly) Chart

RL Gross Profit Margin (Quarterly) data by YCharts

In its last quarter, Ralph Lauren's gross profit margin of 58.2% was more than respectable. However, that figure was 110 basis points lower, year over year, due in part to a negative foreign currency charge. While other results for the quarter were largely positive, this figure was a disappointment. When Ralph Lauren reports earnings on Friday, let's look for positive growth in gross profit margins. 

Strong growth in the retail segment
During its last quarter, Ralph Lauren reported strong top-line growth of 9%; but the business mix, of where most growth came from, is worth keeping an eye on. The strongest growth was in the wholesale sector, which consists of sales at department stores, specialty stores and golf and pro shops, at 14%. Retail sales, on the other hand, grew 6% year over year. 

Ralph Lauren's retail segment consists of e-commerce sales and its 435 directly operated Ralph Lauren stores. Investors would be best served if those figures (wholesale vs. retail growth) were flip-flopped. Ideally, the retail segment, which is direct-to-consumer and boasts higher profit margins, would lead the way. Not only is the retail business more profitable, but the wholesale business relies too heavily on struggling department stores as outlets to customers. 

Digging a bit deeper, online sales have actually been the bright spot for the retail segment ($800m vs. $600m in 2012). Meanwhile, company owned retail stores saw same-store sales growth of just 1% last quarter. One key to watch for this quarter will be for continued growth in the retail segment, and a better same-store sales number out of the company owned retail stores. 

Image of Ralph Lauren in 1978. Source: Wikimedia Commons, Edgar de Evia

Outlook on track
In its most recent quarter Ralph Lauren reported earnings growth of 11%, much better than competitor PVH's 10.6% earnings drop, and a figure that bucked the apparel industries recent swoon. While that's outstanding, the news that the company was boosting its full year revenue guidance (to 7% annual growth) was even better. A big part of that growth is projected to occur this quarter; Ralph Lauren has guided revenue growth of 10%-12% for this quarter.

The stock market always looks forward, it doesn't particularly matter what Ralph Lauren has done in the past, and we also know that investors are increasingly leery of apparel stocks. While it doesn't matter too much to the underlying business if analysts expectations are met, we do want to see the business keep its word and meet growth promises. Doing so would simply give us more faith that the business is improving, now, and in the future.

Ralph Lauren is telling us that growth (revenues and margin's), will be robust this quarter. Let's look for them to keep that promise.

Foolish conclusion: proof of value
The apparel industry has been in free fall lately; excuses of bad weather and cut throat competition are everywhere. Ralph Lauren, meanwhile, is guiding for stronger margins and higher revenue. This business is exhibiting pricing power at a time when nearly every other retailer is discounting, which brings us to the stock. Ralph Lauren trades at just 16 times forward earnings, that's pretty cheap for a business of this quality. The stock market, again, looks forward, and things can change quickly in apparel. This quarter, we're looking for proof that things are improving, and these three keys will tell us whether they are. Assuming the result is positive, this stock looks like a good value right now. 

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Adem Tahiri

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