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Ralph Lauren Corp (RL), PVH Corp (PVH), Fifth & Pacific Companies Inc (FNP): Comparing Investment Options

For consumers, Ralph Lauren Corp (NYSE:RL) is synonymous with style. For investors, the name implies impressive long-term returns. However, since Ralph Lauren Corp (NYSE:RL) relies heavily on discretionary spending, its management is concerned about the current penny-pinching macroeconomic environment. And even if Ralph Lauren can endure challenging economic times, it still may not be the best investment option in its peer group.

Revenue breakdown

Ralph Lauren Corp (NYSE:RL) operates in three segments: Wholesale, Retail, and Licensing, which accounted for 45%, 52%, and 3% of its FY2013 net revenues, respectively.

Wholesale revenue: sales to department stores.

Retail revenue: direct-to-consumer sales via retailers and e-commerce.

Licensing revenue: royalties from other companies using Ralph Lauren’s trademarks.

Ralph Lauren Corp

In the recent first quarter, net revenue increased 4% to $1.7 billion year over year. While Ralph Lauren saw strength in domestic wholesale and European retail, the acquisition of Chaps Menswear in April 2013 aided its revenue bump. The revenue increase was also partially offset by weakness in European wholesale markets, and overall softness in China. Ralph Lauren is looking to mend its operating strategies and cost management in order to improve in these regions.

In addition to the Chaps Menswear acquisition, Ralph Lauren carried out its plan to close 13 of its 14 Rugby locations; it’ll use the freed capital for higher-growth operations. Furthermore, Ralph Lauren Corp (NYSE:RL) has discontinued sales of most products under its American Living brand. The company took these measures to reduce costs, which could ultimately boost earnings.

Overall, Ralph Lauren is making adjustments to perform better in a tough economy. This might sound like a logical approach, but many retailers are in denial about the health of the consumer, and have made little to no such moves themselves, simply hoping that consumers will somehow strengthen without any specific catalyst. This isn’t likely, and it’s refreshing to see a company admit its external challenges and prepare accordingly.

Economic concerns

Ralph Lauren is especially concerned about the United States, Europe, and Asia, because of high unemployment rates, foreign exchange losses, volatile commodity prices, and an overall lack of consumer confidence. Perhaps more concerning is that Ralph Lauren doesn’t seem to be hopeful about a potential turnaround, citing reduced government spending in the United States and continued austerity in Europe. Ralph Lauren noted inconsistent consumer traffic and spending (all three regions), and that retailers have needed to run sales and cut prices to attract customers, thinning out margins and threatening earnings.

Comparing investment options

Many investors who consider Ralph Lauren Corp (NYSE:RL) also consider PVH Corp (NYSE:PVH). While Ralph Lauren and PVH Corp (NYSE:PVH) have both proven to be quality long-term investments, PVH Corp (NYSE:PVH) has outperformed Ralph Lauren over the long haul:

RL Chart

RL data by YCharts

While Ralph Lauren is well-known for its namesake brand, PVH offers popular brands such as Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, Bass, Arrow, and Eagle. This broad diversification allows PVH Corp (NYSE:PVH) to effectively target different markets at once. It has also led PVH to consistent top- and bottom-line performances. That said, both Ralph Lauren Corp (NYSE:RL) and PVH have remained strong over the past several years, despite challenging circumstances.

Ralph Lauren:

 Metric 2009 2010 2011 2012 2013
Revenue (in billions) $5.02 $4.98 $5.66 $6.86 $6.95
Diluted EPS $4.01 $4.73 $5.75 $7.13 $8.00

 PVH:

 Metric 2009 2010 2011 2012 2013
Revenue (in billions) $2.49 $2.40 $4.64 $5.89 $6.04
Diluted EPS $1.76 $3.08 $0.80 $4.36 $5.87

Ralph Lauren is more attractive in two areas. First, its net margin (the percentage of revenue dollars it turns into profits) is considerably higher, at 10.54% versus 4.88% for PVH Corp (NYSE:PVH). Ralph Lauren management has been more effective at keeping costs low. Second, its dividend currently yields 0.90%, versus 0.10% for PVH. Ralph Lauren should continue to outperform PVH in the dividend area thanks to its stellar balance sheet: $1.25 million cash/$271 million in long-term debt. PVH Corp (NYSE:PVH) isn’t as impressive: $746 million cash/$4.48 billion long-term debt.

If you’re looking for a long-term investment, they’re both likely to be winners. That said, it’s important to note that both stocks plummeted more than 50% during the market crash of 2008-2009. If you’re concerned about the broader market’s ability to remain afloat, you won’t find much resiliency here.

A much easier comparison is Ralph Lauren versus Fifth & Pacific Companies Inc (NYSE:FNP). The latter (formerly Liz Claiborne) has a market cap of $3.02 billion, making it a much smaller company than Ralph Lauren Corp (NYSE:RL), with a market cap of $15.40 billion. Sometimes smaller companies make better investments, but that’s not likely to be the case here.

While Ralph Lauren has seen stock appreciation of 112% over the past three years, Fifth & Pacific Companies Inc (NYSE:FNP) has appreciated 435%. But this stemmed from Fifth & Pacific Companies Inc (NYSE:FNP)’s stock losing more than 75% of its value in 2008/2009. Therefore, it had more upside potential from the bottom. Plus, smaller-cap stocks tend to move faster (in either direction).

Fifth & Pacific Companies Inc (NYSE:FNP) offers several well-known brands, including Juicy Couture, Kate Spade New York, Jack Spade, and Lucky Brand. But unlike Ralph Lauren, Fifth & Pacific has had difficulty growing its top line and delivering profits.

Fifth & Pacific:

2008 2009 2010 2011 2012
Revenue (in billions) $3.99 $3.01 $2.50 $1.52 $1.51
Diluted EPS ($10.17) ($3.26) ($2.67) ($1.35) ($0.68)

Yes, the losses are narrowing, but whether this trend is capable of moving into profitable territory and sustaining and upward move is questionable. Fifth & Pacific Companies Inc (NYSE:FNP) hasn’t been able to overcome declining consumer demand, but it has managed to cut costs in order to aid the bottom line.  

Fifth & Pacific sports a net negative net margin of (3.56%), and it’s trading at 60 times earnings, making it wildly expensive compared to Ralph Lauren and PVH, which trade at 17 and 16 times earnings, respectively. Fifth & Pacific Companies Inc (NYSE:FNP) also doesn’t pay a dividend. While Fifth & Pacific might make a decent speculative trade, it’s not likely to outperform Ralph Lauren or PVH Corp (NYSE:PVH) over the long haul.

Conclusion

As stated above, Ralph Lauren Corp (NYSE:RL) is likely to be a good long-term investment. But macroeconomic trends, combined with managements’ concern about consumers’ willingness to spend, lead me to believe that now isn’t likely an ideal entry point. That said, keep Ralph Lauren on your watch list and consider buying in if the stock suffers in the future — albeit only after investors have stopped selling it off.

The article A Top-Tier Apparel Stock Fighting Macro Trends originally appeared on Fool.com and is written by Dan Moskowitz.

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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