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Ralph Lauren's North American Sales Slide Spooked Investors

By Motley Fool Staff – May 16, 2019 at 10:40AM

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The apparel company beat earnings estimates this week, but shares still sold off.

The clothing business isn't easy, even for iconic brands like Ralph Lauren (RL -3.35%). The company delivered a moderately fashionable earnings beat, but the eye-catching stat was its declining revenue in its home market.

In this segment from MarketFoolery, host Mac Greer and senior analyst Jason Moser reflect on its financials, the investment thesis for its stock, the state of the industry broadly, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on May 14, 2019.

Mac Greer: OK, Jason, let's close with what has turned out to be a bad day for Ralph Lauren, the company behind Polo and Chaps. I used to wear Chaps. Woof.

Ralph Lauren, better-than-expected earnings, but a decline in North American sales. And that seems to be the story that the markets are focusing on. Shares down around 7% at the time of our taping.

Jason Moser: I can't say I ever wore Chaps cologne, but man, I had a lot of Polo gear in my high school days. Not so much anymore. So maybe that's speaking a little bit to the tough times Polo and Ralph Lauren are having. Listen, retail is really tough. We talk about this all the time. It is a brutal market, and it ebbs and flows. I do think it's interesting to note the challenges that Ralph Lauren is facing in North America. And that is something we've talked a lot about recently with Nike and Under Armour. North America has been a real point of weakness for Under Armour lately, whereas for Nike, it's actually been a point of strength. I mean, Under Armour's sales in North America were down a few percent this last quarter; Nike's were up about 7% or 8%. Ralph Lauren, sales in the North American segment were down 7%. Comps were down 4%. Six percent decline in digital sales. I mean, it's not apparently just Under Armour, there are some retailers who are having a tough time here domestically. Thankfully for Ralph Lauren, they do have Europe and Asia to fall back on. Those parts of the business were doing better. Gross margin was down incrementally. The balance sheet is in good shape with a net cash position around $1.3 billion. And they do yield 2% on the dividend, which is sustainable, they can totally afford it.

When you look at the stock price today, even with the sell-off, and you compare that to the expectations that Wall Street has set for this fiscal year, the stock is trading around 14.5 times full-year estimates, which isn't really crazy either way. And I think the thing that probably tips me a little bit more in favor of owning the stock is the fact that Ralph Lauren still owns about 22% of the shares and ultimately all of the voting rights for practical purposes. I feel like he's got a pretty good track record at this point of building a solid business that's done well over the course of time. I don't think he's going to do anything stupid to drive into the ground. I think he's very proud of what he's done and the brands that he's built. I don't know that I look at any retailer as the buy and just hold. But I do look at retailers and think, if you can find good prices to get in on them and then be OK with pulling the trigger and selling when things get out of control, then it's worth a look. And I think Ralph Lauren might just be worth a look today.

Jason Moser owns shares of NKE, UAA, and UA. Mac Greer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NKE, UAA, and UA. The Motley Fool has a disclosure policy.

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