Fashion is a dynamic and competitive business, but it can also be enormously lucrative for well-run companies with strong competitive advantages. Ralph Lauren (RL +1.39%), Ross Stores (ROST +0.59%), and The Buckle (BKE +0.25%) know how to provide the right merchandise for their customers and generate growing dividends for investors over time.
Ralph Lauren
Ralph Lauren founded the business that bears his name in 1967, and he has led the company to becoming a global high-end-fashion player, with more than 416 directly operated stores and 523 concession shops across the planet since then. The company's brands include names like Polo by Ralph Lauren, Denim & Supply by Ralph Lauren, Chaps, and Club Monaco, among several others.
Brand differentiation and pricing power allow Ralph Lauren to generate above-average profit margins in the area of 15.4% of sales at the operating level. Besides, an affluent customer base seems to be protecting the company from the aggressively promotional retail environment: Ralph Lauren delivered better-than-expected earnings numbers for the quarter ended on Sept. 28, and the company also raised its sales guidance for the rest of the year.
Even if accelerated investments in its global retail operations are expected to have a negative impact on profit margins, healthy demand in a challenging retail landscape is a remarkably positive sign for investors in terms of evaluating Ralph Lauren's brand value and overall competitive strengths.
The company has increased its dividends at an amazing speed over the last several years, from $0.05 quarterly per share in 2009 to $0.45 quarterly per share currently. The dividend yield is not very impressive at 1.1%, but Ralph Lauren has abundant room for further dividend growth considering that the payout ratio is comfortably low in the area of 20% of earnings.
Ross Stores
In a highly competitive context for retailers in different categories, consumers are getting used to obtaining big discounts on their purchases. The rise of the price-conscious consumer is a permanent phenomenon, and Ross Stores is well positioned to be one of the major beneficiaries from a changing consumer landscape over the coming years.
The company owns 1,154 Ross Dress for Less stores and 131 dd's Discounts stores for a total of 1,285 stores in 33 states as of November 2013. This makes Ross Stores the largest off-price apparel and home fashion retailer in the U.S.
Scale advantages allow the company to purchase inventory at opportunistic prices and distribute the right merchandise to the most convenient locations in a cost-efficient way. The company translates its cost savings into pricing discounts of between 20% and 60% off typical department-store prices.
Ross Stores has an impressive track record when it comes to capital distributions: The company has increased dividends over the last 19 consecutive years, including a big increase of 21% announced in January 2013. The company has a remarkably safe payout ratio of 17% and pays a dividend yield of 1%.
The Buckle
Buckle operates 450 retail stores in 43 states, selling apparel, accessories, and footwear mostly targeted to fashion-oriented teenagers and young customers. The company offers a wide selection of denim assortments, and it combines its own private-level brands with popularly recognized brand names like Nike, Oakley, and Fossil, among many others.
Young people don't have much money to spend lately, and Buckle is feeling the pressure as comparable net sales for the five-week period ended on Jan. 4 decreased by 2.2% due to weak demand and a highly aggressive competitive scenario for teen apparel retailers.
On the other hand, this well-managed company has succeeded in consistently generating growing sales and earnings for investors over the years in spite of industry headwinds, thanks to its dynamic inventory management and efficient cost-management initiatives.
Besides, Buckle has a smart dividend policy, which allows for both flexibility in capital distributions and high dividend payments. The company pays a regular quarterly dividend of $0.22 per share, which represents a dividend yield of 2% at current prices. In addition to this, Buckle usually distributes big special dividends on an annual basis; in December 2013 the company announced a special dividend of $1.20 per share, which means an extra 2.5% yield versus the current stock price.
Bottom line
Fashion comes and goes, but well-run companies with sound competitive advantages manage to deliver healthy returns for investors through both good and bad times. Ralph Lauren, Ross Stores, and Buckle have proven their ability to generate consistently growing dividend payments, and they have what it takes to sustain dividend growth in the future. The three names are worth some consideration by fashion-conscious dividend growth investors.
