This Team USA Stock Looks Like a Gold Medal Pick, Here's Why

When the U.S. Olympic team walks out at the opening ceremony in Paris, they will be dressed head to toe in Ralph Lauren(RL) gear. The company is providing Team USA's opening and closing ceremonies apparel for the fifth-straight Summer Games.

Ralph Lauren is one of the world’s leading apparel manufacturers. It designs, markets, and distributes an array of premium lifestyle products, including apparel, accessories, home décor, and fragrances. The company’s global reach is extensive, with products sold at more than 9,600 wholesale stores worldwide. It directly operates 564 retail stores and 699 concession-based shop-within-shops.

The continued sponsorship of the U.S. team by Ralph Lauren is certainly apropos for this all-American brand. Founded in 1967 by the fashion designer himself, who had been working at tie manufacturer Beau Brummell, the Ralph Lauren brand initially had a sports focus. The first line of clothing was named Polo, and it was just for men.

But a lot has changed since then…

Ralph's Focus on Women

Ralph Lauren is no longer in charge at the company. He stepped down as CEO in 2015 to be replaced by Stefan Larsson who, in turn, was replaced by Patrice Louvet in 2017.

In the seven years since Louvet took over, financial performance has varied, partly as a result of the pandemic. Revenue actually slid from $6.7 billion in 2017 to $6.3 billion in 2019 before dropping to $4.4 billion in 2021 as COVID-19 forced the company to close stores.

Since then, however, Louvet has righted the ship, and guided Ralph Lauren to an impressive improvement in profitability. In response to poor inventory control and heavy discounting in years past, Ralph Lauren closed underperforming stores, reduced exposure to department stores and off-price channels, and cut product lead times. Louvet’s restructuring of the company over the past few years puts it on a solid footing.

Let’s look at the results of that restructuring…

An increase in direct-to-consumer (DTC) sales is helping Ralph Lauren expand its operating margin by cutting out third-party distributors, while increasing the control of its image, pricing and customer data. DTC sales have increased from 51% of total revenue to 66% since Louvet took the helm.

Importantly, Ralph Lauren is targeting new markets, and pushing to increase its brand recognition with younger women. The company recruited some pop icons to help in this task. 

A year ago, Beyonce appeared on stage in Washington, D.C., in a full-length Ralph Lauren white satin gown during her Renaissance world tour. Last year, when Taylor Swift was named TIME Person of the Year, she wore a Ralph Lauren jacket and denim shirt for the cover shoot. And earlier this month, actress Zendaya reportedly generated millions worth of brand exposure when she appeared at Wimbledon wearing Ralph Lauren.

Marketing Push

In addition, Ralph Lauren is employing about two to three times as many social media content creators as its fashion rivals.

This marketing push is having an effect. In the year to March 2024, Ralph Lauren added 5 million new customers to its direct-to-consumer (DTC) business. Also, its brand consideration and promoter score improved, led by consumers under the age of 35 and women.

Women now make up 29% of total revenue, up 100 basis points from last year. And there’s more to come - company management says womenswear “still represents our most significant long-term growth opportunity.”

Ralph Lauren’s successful marketing push has allowed it to raise prices against a slowing macroeconomic backdrop. The brokerage firm Jefferies estimates that the company increased the average selling price of its clothes by more than 70% over the past few years, helped by fewer promotions and a more expensive product mix.

Margins Are Rising

These price increases, combined with higher DTC sales, are offsetting the higher marketing costs and driving margins up. In the year to March, Ralph Lauren's adjusted operating margin rose by half a percentage point to 12.5%.

Management expects this margin expansion to actually accelerate in the next year, with the company guiding for an increase of between 100 and 120 basis points.

If we look at revenues, Ralph Lauren saw sales edge up from $6.2 billion in 2020 to $6.6 billion last year, and revenues are expected to rise to $6.8 billion in the 2025 fiscal year.

This steady revenue growth and margin expansion has added up to Ralph Lauren’s earnings per share (EPS) growing quickly. It is currently trading at 15 times its 2025 earnings and just 12.5 times its predicted earnings for 2027. For a brand with growing consumer awareness and expanding margins, this looks like a bargain.

Ralph Lauren has a strong cash position of $1.7 billion and just $1.1 billion in long-term debt. The company repurchased $398 million in shares in fiscal year 2023, and $454 million so far in the 2024 fiscal year.

I also expect the cash dividend to rise annually by low double-digits. Overall, I expect continued capital returns over the foreseeable future due to the company’s high free cash flow and a fortress balance sheet.

RL stock is a buy below $173.