However this negative shock was not enough to change the uptrend of RL profits. During the last year and in the following two, Ralph Lauren will be opening sixty stores in China, mainly in the principal avenues of the main cities. The idea is to diversify demand risks. Ralph Lauren has been investing in opening new stores in Asia as well as in online sales so as to cover the fewer sales that took place in Europe – which represents 22% of Ralph Lauren’s total sales.
It is important to remark that Standard & Poors expects that China could experience an economic correction in the short term, due to the country’s low investment productivity levels. This could affect Ralph Lauren Corp (NYSE:RL)’s expansion plans and diversification targets. While I do not think this is a short-term risk, is an issue to keep an eye on. If Chinese economy show clear signs of trouble, I think that Ralph Lauren’s investors should hedge their equity positions.
A close eye on valuation
It´s essential to consider valuation in every investment decision. Let´s compare how the market is valuing Ralph Lauren over its top peers:
Source: Google Finance
Ralph Lauren stock looks quite overvalued compared to Phillips-Van Heusen and Maidenform Brands, Inc. (NYSE:MFB). While Ralph Lauren has a much higer Return on Equity and Profit Margin than PVH Corp (NYSE:PVH) and Maidenform, the stock trades at P/S an P/BV multiples that are 2 times and 4 times the ones from PVH Corp (NYSE:PVH) and Maidenform Brands, Inc. (NYSE:MFB). Yes, I agree that Ralph Lauren has better profitability metrics, but that does not deserve such higher valuation ratios when compared to other companies. In addition Ralph Lauren´s exposure to Europe is high and could be a risk if macro conditions deteriorate.
When looking at these table, Hanesbrands Inc. (NYSE:HBI) looks attractive considering it trades at only 1 times sales with considerable future growth (Macy´s introduction in April and Wal-Mart shelf space gains are two good catalysts) combined with a high ROE, which is evidence of good management execution.
Foolish conclusion
Despite the different risks that the company has to face, this company doesn’t seem to have a bad performance. Prominent hedge fund managers Lee Ainslie (Maverick Capital) and John Griffin (Blue Ridge Capital) added to their Ralph Lauren position last quarter, which is a vote of confidence on Ralph Lauren’s medium term prospects. While I think that Ralph Lauren Corp (NYSE:RL) is not immune to an economic correction or a material increase in commodity prices, I think that those risks do not represent a short term concern for long term, fundamental oriented investors.
The article 3 Risks That Ralph Lauren Investors Should Consider originally appeared on Fool.com and is written by Victor Selva.
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