Analyst Note| David Swartz |
Narrow-moat Ralph Lauren’s third quarter of fiscal 2021 was in line with our expectations. However, the near-term outlook is clouded by the resurgence of the virus, especially in Europe and Japan. Ralph Lauren now expects a sales decline in the mid- to high single digits in the fourth quarter, below our prior forecast of a 10% increase, as its stores in Japan, Germany, the United Kingdom, and other regions are currently closed. Moreover, Ralph Lauren expects higher operating expenses in the fourth quarter due to a 50% increase in marketing, whereas we had forecast a decline. Regardless, as the virus is a short-term issue, we still expect Ralph Lauren to produce long-term gross and operating margins of about 63% and 10%, respectively, on annual sales growth of about 2%. Thus, we do not expect to make any material change to our fair value estimate of $93 on its shares, which we view as overvalued.