Ralph Lauren Earnings: Targets Remain in Reach Despite Near-Term Uncertainty; Shares Undervalued

Narrow-moat Ralph Lauren RL closed its March-ended fiscal 2023 with sales and profitability above our expectations. While the near-term outlook is clouded by slowing demand for apparel in Europe and North America, we believe we have adequately incorporated the impact into our model. Our medium-term estimates for 3%-4% annual sales growth and 13%-14% operating margins are lower than the mid- to high-single-digit and 15% respective targets that Ralph Lauren laid out at its analyst event last year. Thus, given the fiscal 2023 outperformance, we are comfortable raising our $127 fair value estimate by a mid-single-digit percentage and view the shares as undervalued, even after they jumped about 6% on the earnings report. We believe Ralph Lauren has made great strides in lifting its average unit retail pricing (up about 77% over the past five years) and profitability (gross margins now in the mid-60s, up from the high 50s a decade ago). In addition, it offers a solid balance sheet, having closed fiscal 2023 with about $6.30 per share in net cash despite more than $650 million in combined dividends and share repurchases in the year.