Ralph Lauren's 'Way Forward' Plan Should Yield Way Higher Earnings

Ralph Lauren Corp's RL "way forward" program should yield strong earnings growth, CLSA analyst Rick Patel said, initiating coverage of the stock with a Buy rating and target price of $125.

Patel views Street estimates as "too low" in the out years as the company is in a turnaround phase with several levers to pull including potential margin drivers, new management team, potential for efficient inventory management and growth opportunities in China.

"We see Ralph Lauren as an early stage turnaround story with the potential to significantly improve earnings through higher operating margins," Patel wrote in a note.

The analyst expects operating margins increasing from about 10 percent this year (FY17) to 13.4 percent in FY20, implying about $9 of EPS.

"Beyond FY17, we don't believe the Street is giving Ralph Lauren enough credit for being able to realize better margins through expense cuts, which are a several-hundred-basis-point tailwind by itself, with the potential to be revised upward, in our view," Patel highlighted.

Further, the analyst expects sales to grow at a low-single-digit rate starting in the second half of FY 2018 after declining double-digits in FY 2017 as it right-sizes inventory in department stores and closes underperforming doors.

Patil believes the improvements in supply chain, inventory management and quality should result in better acceptance of products and improvement in average ticket. The analyst also sees the opportunity for Ralph Lauren to grow in underpenetrated Asian region, as well as in e-commerce.

"Ralph Lauren's size will likely prohibit the company from being a high-growth story, but we also don't think it needs to be in order to hit higher-margin targets and improve EPS," Patil added.

At time of writing, shares of Ralph Lauren rose 1.95 percent to $99.83.