Cowen: Ralph Lauren's Turnaround Starts To Pay Off In 2019

Ralph Lauren Corp RL shares have struggled for over three years, as the brand become relatively stale in a fashion market that is changing constantly.

A turnaround story is nearing, according to Cowen. 

The Analyst

Cowen analyst John Kernan upgraded Ralph Lauren from Market Perform to Outperform rating and raised the price target from $110 to $122.

The Thesis

Cowen raised its estimates on Ralph Lauren due to a valuation discount relative to its peers and a projection that a turnaround story is materializing as the apparel brands heads into 2019.

Four key initiatives are improving Ralph Lauren's business, Kernan said: 

• "Elevating the brand" and improving the quality of sales and distribution.
• Evolving product, marketing and experience to reach a new customer base.
• E-commerce and international growth.
• Productivity and shorter lead times are a key catalyst for revenue growth and better margins, Kernan said. 

While Kernan said his bullish call on Ralph Lauren could be early, “our confidence in management and cumulative free cash flow of $1.2 billion in fiscal 2019 and 2020 creates [a] cushion,” he said.

"We model North American sales of $3.1 billion in fiscal 2019 ... as the bottom with total sales of $6 billion as a base of future revenue expansion," the analyst said. 

Cowen's recent conversations suggest the Ralph Lauren brand is stabilizing. Square footage cuts within U.S. wholesale accounts have eased, inventory levels are in-line and average unit revenue rise in fiscal 2019, Kernan said. On top of the business turning around, the products are also more on-trend, he said. 

“We expect an expanded denim offering in fiscal 2019 and more innovation/newness. Markdown allowances should decrease in fiscal 2019, underpinning gross margin." 

Ralph Lauren’s management team, led by CEO Patrice Louvet, is misunderstood, Kernan said. The team is "laser-focused" on executing growth initiatives, focusing on digital and making productivity improvements, he said. 

Ralph Lauren is expected to hold its investor day in June, where Kernan predicts management will issue low-single digit top-line growth guidance after fiscal 2019. 

Price Action

Ralph Lauren shares were down 1.64 percent at the close Thursday. 

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