If you go into a high-end mall or department store, you are likely to come across Ralph Lauren (RL -0.27%) products. They aren't cheap, even in the company's discount stores, but that's the point of the brand. However, there are some interesting aspects of the company that change the normal equation of a high-end fashion retailer.
Here's why Ralph Lauren is a long-term buy in an industry that sees brands swing in and out of favor on a regular basis.
Trends matter, sometimes
When it comes to fashion, most retailers are almost entirely at the whim of fickle consumer tastes. Brands that ride the fashion trends up often wind up left behind when the next trend comes along. It is highly unlikely that a hot brand will remain permanently hot. That's not to suggest that demand will go to zero, but a company that misses a new trend shift will likely be left with inventory that it can't get rid of easily.
Image source: Getty Images.
The way to clear out unwanted inventory is pretty obvious -- hold a sale. But while discounting clears out the old inventory, freeing the company up to bring in new styles, it has a notable impact on margins. The basic math is pretty simple to understand. If you planned to sell a t-shirt for $100 but end up having to let it go for $50 just to get rid of it, you've made a lot less money than you planned. If you don't act quickly by trimming prices, meanwhile, you risk having to sell for an even lower price since three-fashion-cycle-old fashions are even less desirable!
Ralph Lauren has to deal with this to some degree, but it isn't exactly the same as what some other competitors face. That's because Ralph Lauren tends to focus on basics. A polo shirt, for example, is likely to be just as desirable this year as it will be next year as long as the style is fairly classic. This changes the dynamic a little bit, because it means that Ralph Lauren doesn't need to resort to discounting just to move old merchandise. It can simply keep it until the next appropriate selling season rolls along.
The balance sheet
The long product cycle of Ralph Lauren's offerings alone, however, isn't enough to set it apart. Indeed, if a company needs the cash tied up in its inventory, it has to sell it in order to keep funding its business. That could mean resorting to discounts for products that might have longer staying power.
Ralph Lauren's answer to this is pretty simple: It has a long history of carrying a lot of cash on its balance sheet. Very often it has more cash than it has long-term debt. In fact, as of the fiscal fourth quarter of 2023 the company had a little over $1.5 billion in cash and just $1.1 billion in long-term debt.
That's what many call a zero-net-debt position, since, if it wanted to, the company could just use its cash to completely pay off its long-term debt. It is an incredibly strong position for the company to be in, financially speaking.
RL Total Long Term Debt (Quarterly) data by YCharts
Essentially, where a luxury retailer with a lot of leverage might be forced to discount its wares to generate cash, Ralph Lauren doesn't have to do so. It can simply pack its high-end basics away in storage and bring them back out again next year. Maybe it has to dip into its cash hoard a bit to make that happen, but that's hardly the end of the world, and it preserves the value of the inventory.
One-two punch
The thing for investors to keep in mind is that neither producing basics nor having a strong balance sheet is enough on its own. Ralph Lauren's basics products coupled with its zero net debt are what give it the ability to ride the ups and downs of the fashion cycle with relative ease. If you are looking for a luxury stock, differentiated Ralph Lauren could be just what your portfolio needs.
