Citigroup upgraded luxury clothing and accessories manufacturer Ralph Lauren Corp (NYSE:RL) to ‘Buy’ from ‘Neutral’ on Thursday. The bank has a $125 price target on the stock, noting Ralph Lauren’s attractive valuation given the company’s foreign exchange troubles. Shares of Ralph Lauren are flat on the news at a time when the broader market is down by 1%. In this article, we will take a closer look at the luxury retailer and see if the smart money agrees with the Citigroup upgrade.
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Ralph Lauren Corp (NYSE:RL)‘s shares are down by 40% year-to-date because of decelerating growth and lower operating margins. First quarter fiscal 2016 revenue declined by 5.3% year-over-year to $1.62 billion. Gross margin fell by 1.2% year-over-year to 59.8% and operating margin dropped by 5.5% year-over-year to 8.8%. The first quarter numbers are very weak compared to Ralph Lauren’s historical annual revenue growth of 10% and historical operating margin of 15-16%.
Fortunately, Ralph Lauren Corporation’s weak numbers are not due to a drop in consumer demand. Most of the operating margin and revenue weakness can be attributed to foreign exchange issues, by which the rising U.S dollar lowers Ralph Lauren’s international revenues and margins. Eventually the foreign exchange issues will reverse or at least stabilize, and Ralph Lauren will benefit from its international presence. Analysts expect Ralph Lauren’s revenue to grow by an average of 5-6% per year for the next five years as increased capital expenditures and store expansions begin to take effect.
Because of the stock price drop, Ralph Lauren’s shares are firmly in value territory. The luxury company trades at a forward PE of 14 and a trailing twelve-month PE of 15.8, which favorably compares to the S&P 500’s forward PE of 16.5 and trailing twelve-month PE of 21. Ralph Lauren Corporation also pays its shareholders a 1.85% dividend yield.