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Evaluating Ralph Lauren’s Current Valuations

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Management’s outlook for fiscal 2016

Ralph Lauren’s (RL) financial performance has been quite disappointing during the first nine months of 2016, both on the top line and the bottom line.

The company has registered a 3.5% YoY (year-over-year) fall in sales and a 38.6% YoY fall in net income during the first nine months of fiscal 2016, as of December 26, 2015.

The company is not expecting any reversal in its performance during the last quarter of its fiscal 2016. It’s looking for a flat to -2% fall in its top line, resulting from lower foreign tourist traffic and higher allowance in its US wholesale segment.

The company is also expecting its operating margin to contract by 400–450 basis points in fiscal 4Q16 compared to the last quarter of fiscal 2015. End-of-season inventory clearance and high infrastructure investments are likely to be the key reasons for RL’s lower operating profit.

For fiscal 2016, RL is expecting a 3% YoY fall in sales and a fall of 290–320 basis points in its operating margin. The First Trust Consumer Discretionary AlphaDEX ETF (FXD) invests 0.98% of its holdings in Ralph Lauren.

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Wall Street’s view on Ralph Lauren

Wall Street’s consensus for revenue is in line with the company’s outlook for fiscal 2016. Wall Street is expecting a 3.2% YoY revenue fall for RL in fiscal 2016. The company’s EPS (earnings per share) are predicted to fall by more than 18% to $6.41 in fiscal 2016, compared to $7.88 in fiscal 2015.

Ralph Lauren’s valuations versus its peers’

Ralph Lauren is currently trading at a one-year forward PE (price-to-earnings) multiple of 14.9x. This means that the company’s shareholders are paying 14 times its next four quarters’ EPS of $6.11.[1. As of May 6, 2016] At this valuation, the company is cheaper than Kate Spade (KATE), VF Corporation (VFC), and Coach (COH), which are trading at one-year forward PE multiples of 29.2x, 19.3x, and 18.4x, respectively.

Ralph Lauren’s earnings multiples are comparable to those of PVH Corporation (PVH) and Hanesbrands (HBI), which are 14.2x and 14.1x, respectively. While RL and PVH are expecting falls in their EPS, HBI’s EPS are expected to rise over the next 12 months.

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