STOCK WATCH


Polo Ralph Lauren: Classic Style

Manuel Schiffres

Strong brands, well-off customers and an eye to future growth make this clothing company fashionable now -- and quite possibly later.



If you like thematic investing, you'll love Polo Ralph Lauren. The New York City-based apparel company embodies two themes that a growing body of stock pickers has embraced enthusiastically: It owns some of the world's great fashion brands, and it is a beneficiary of increasing global wealth, which means more and more people can pay up for fancy threads.

In recent years, Polo and its stock have been at their Sunday best. By the time Polo completes its fiscal year on March 30, annual sales will have climbed 62% over the past three years, to some $4.3 billion. Earnings will have doubled. The stock (symbol RL) has climbed more than five-fold since late 2002.

The shares got a further boost on March 23, when Goldman Sachs upgraded Polo from neutral to buy. They closed at $89.57, up 2.8% for the day and are now within 12% of Goldman's 12-month price target of $100.

In addition to acknowledging the great brand names and strong spending by high-end consumers, Goldman analyst Margaret Mager cited four other reasons for the upgrade:

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  • Polo is gaining market shares in all of its distribution channels for all of its labels, including the Purple label in the designer category, Polo and Lauren brands in the better-fashion category, and Chaps in the moderate price range. "Retailers such as Saks, Federated Department Stores and Kohl's, among others, consistently indicate the Ralph Lauren family of brands are among the best performing in their stores," Mager says.

  • The company is exhibiting strong sales gains in the 282 Ralph Lauren, Club Monoco and Polo outlet stores that it owns.

  • Polo has a "robust" pipeline of new products and licensing agreements. For example, the company launched Global Brand Concepts in early 2007 to develop new lifestyle brands. The unit has already announced a plan to launch American Living, a new brand created exclusively for J.C. Penney.

  • Management seems intent on improving returns and "maximizing shareholder value." Polo repurchased 840,000 shares in the December quarter for $62 million, and recently announced plans to purchase an additional $250 million worth of stock to augment its ongoing $250 million buyback program.

In sum, Mager says she expects "Polo's powerful operational and earnings momentum to continue with the potential to surprise to the upside."

What are the risks? Pretty much what you'd expect from an apparel company that sells high-priced goods -- the potential for poor execution, fashion missteps or a global economic slowdown. The stock, trading at 22 times the $4.09 per share that Mager expects Polo to earn in the fiscal year that ends March 2008, isn't dirt cheap. But the price isn't unreasonable for a company that Mager thinks can generate long-term earnings growth of 13% to 15% a year. If she's right, this is one stock that could stay in fashion for a long time to come.




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