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Introduction to Ralph Lauran Corporation

Ralph Lauran Corporation is one of the leading companies in designing, advertising, marketing and distribution of high quality lifestyle products. It offers products basically in 5 different categories, namely, home, accessories, apparel, hospitality and fragrances (Annual Report, 2020). The reputation and image of the company is developing continuously across the wide range of brands, number of products and international markets. Ralph Lauren has effectively maintained its level of long term debt at around US $585.80 million. There has been a significant rise in cash and cash equivalents of the company from US $584.10 million in 2019 to US $1620.40 million in 2020. Moreover, the company has efficiently generated US $754.60 million cash from operating activities and has incurred an additional capital expenditure of US $73 million in 2020.

Cash flow from investing activities has been increased substantially to US $702.10 million from the negative cash flows of US $879.30 million. Total payment of cash dividends amounted to US $203.90 million in 2020 which is more than the amount of dividends paid in 2019 (Ralph Lauren, 2020). The main purpose of the report is to analyze the financial position and health of the company by calculating various ratios, namely profitability, gearing, investment and liquidity ratios to help the investors in their decision making process. Also, various factors are to be identified that have influenced both short term and long term operations of the company. At last, recommendation is to be provided to the investors whether to invest in the shares of Ralph Lauren or not.

Financial Ratios Calculation

Profitability ratios

Profitability ratios

Particulars

Formula

2020

2019

Gross profit margin

(Revenue - COGS)/Revenue

0.59

0.62

Operating profit margin

Operating profit/Revenue

0.05

0.09

Net profit margin

Net income/Total sales

0.06

0.07

Return on assets

Net income/Average total assets

5.81

7.13

Return on equity

Net income/ total equity

12.85

12.78

Return on invested capital

Net operating profit after tax/Total invested capital

7.34

9.77

Profitability ratios help in assessing the ability and competency of the company to generate higher amount of revenue relative to its tax payments, operating expenses and shareholders’ equity. The total revenue of the company has been reduced to US $6159.80 million in 2020 from US $6313.00 million in 2019 while cost of revenue has increased to US $2504.30 million from US $2419.80 million due to which there is a fall in the gross profit of the company from US $3893.20 million to US $3655.50 million (Morningstar, 2020). Total operating expenses including selling and administrative expenses, labor expenses and other related expenses have also increased leading to decline in the net operating income off the company. Net operating income of the company is reduced by US $244.8 million in the current year. Finance costs related to interest expenses have been remained the same and there is substantial increase in the investment and interest income of the company. Analysis of income statement indicates that the profit of the company was reduced to US $259.00 million in 2020 from US $458.50 million in 2019 due to inflow of various unusual items (Infront Analytics, 2020). It cannot be considered as a positive indication that the company’s profits are getting affected by these unusual items. However, the financial position of the company will improve soon with a stipulated period of time (Simply Wall Street, 2018). There are many listed companies whose financial statements and position get affected by various unusual items but they disappear after some time. Therefore, there is high probability that the Ralph Lauren will generate higher amount of profit in the next year and undertake suitable measures to reduce the amount of operating expenses.

Gearing Ratios

Gearing ratio

Particular

Formula

2020

2019

Gearing ratio

Total Debt/Total equity

0.8

0.27

Gearing ratio help in achieving better understanding with regard to capital structure of the company by comparing shareholders’ equity with the total amount of debt borrowed by the company to finance its operations. This ratio has increased from 0.27 in 2019 to 0.8 in 2020. The rise in gearing ratio indicates that the capital structure of the company comprises of more amount of debt than total amount of equity (Simply Wall Street, 2019). This will raise the expenses in the form of interest which is to paid at regular intervals of time to the lenders and thus affect the overall profitability of the company. Also, the interest paid on debt is considered as a charge against profit; therefore, it is to be paid irrespective of profits earned by the company in a particular year.

Liquidity Ratios

Liquidity ratios

Particulars

Formula

2020

2019

Current ratio

Current assets/Current liabilities

1.61

3

Quick ratio

Quick assets/current liabilities

1.21

2.16

Liquidity ratios help in analyzing the capability of the company in meeting its short term liabilities or debt obligations. Current liabilities have been increased to US $2092 million in 2020 from US $1200 million in 2019 (Morningstar, 2020). However, amount of current assets have been lowered down by US $219.6 million. With this decreased level of current assets, the company has the ability to meet its short term debt obligations. Quick ratio has also been declined from 2.16 to 1.21 because of the increase in current liabilities.

Investment Ratios

Investment ratios

Particulars

Formula

2020

2019

Price - earnings (P/E) ratio

Price/EPS

17.99

20.41

Earnings Per Share

Net income/ No. Of shares

4.98

5.27

Payout ratio

Dividend per share/EPS

31.4

44.4

Investment ratios are used to determine and analyze the performance of the shares of the company in the market. Price earnings ratio, payout ratio and Earnings Per Share, all these are calculated to help the investors in undertaking investment decision regarding whether to invest in the company’s shares or not. The occurrence of unusual items has somehow reduced the earnings of the company over the last year. Therefore, profit-earnings ratio of the company has reduced to 17.99 in 2020 from 20.41 in 2019 (9CSI Market, 2020). Earning per share reduced to 4.98 from 5.27 over the last year. However, there are high chances that these ratios will get improve in the next year (Simply Wall Street, 2020). Fall in the payout ratio indicates that the company has reduced the payment of dividend amount to the shareholders. It has retained the larger amount of profits to meet the future growth opportunities. These opportunities will help the company in restoring its place in the industry.

Pestle Analysis

In order to determine and analyze the factors that have affected or may affect the future performance of the company, PESTLE analysis would be considered as an effective tool (Parera, 2017). This tool provides the list of various macroeconomic factors that may influence the performance and profitability of the company. Pestle stands for the acronym, political, economic, socio-cultural, technological, legal and environmental factors. The environment in which Ralph Lauren carries out its operations is dynamic and complex featured by growing competition, changing customer preferences, technological advancements, regulatory changes and legal amendments.

  • Political factors: There is a strong influence of political forces on the long term profitability and sustainability of the Ralph Lauren. Ralph Lauren is carrying out its different functions in a wide range of countries. Political instability and growing tensions have limited the growth opportunities present to the company. Changes in the policies made by the government have harmed the performance of the company. Large rate of taxes is being imposed in various countries that directly influence the profitability of the company as high rate of tax affects international trade and reduce exports. It can only enter the countries with low taxation rates to improve its profits in order to reinvest in the various research and development function.
  • Economic factors: Various economic factors like interest rate, foreign exchange rate, inflation, labor market conditions and savings rates exercises a great influence on the operations of the Ralph Lauren. Inefficient infrastructural development has affected the performance of the Ralph Lauren in a negative way. The growth of business can increases only with the development of effective infrastructural facilities. High fluctuation in the exchange rate has affected the growth and profitability from international trade. In case, there is high unemployment level in any specific country, it indicates high availability of labor at relatively lower wage rate. Carrying out operations in such countries will help in lowering down production expenditure. However, in some countries where Ralph Lauren is currently carrying out production process, have lower unemployment rate, thus leading to high production cost. The health and efficiency of financial markets in which it is operating is lower due to which it is facing difficulty in raising adequate amount of capital at fair rates.
  • Socio-cultural factors: The business operations can be affected by the changes in the demographic patterns such as migration trends, aging population and various socio-economic variables. Inefficient knowledge of demographics characteristics has lead to the ineffective selection of the market segments having low potential of growth. Inadequate formulation of marketing and business strategies has severely affected the operation of international organization like Ralph Lauren. Every society follows different norms, values and cultural practices that play a crucial role in shaping the behavior of consumers. There is a strong need to develop understanding with regard to online shopping behavior of customers by considering the generational gap as customers belonging to younger age group are more inclined towards online shopping as compared to older customers.
  • Technological factors: Follow up of technological trends in order to accomplish various objectives like rise in profitability, increase in operational efficiency and boosting up of innovation process. Ralph Lauren has not carried out effective campaigns that might help in establishing online brand communities. It has invested comparatively less amount than its competitors in research and development activities and thus have achieved lower amount of profits for the year 2020.
  • Environmental factors: Innovative waste management and recycling activities of material must be adopted in order to cope up with the growing environmental pollution. Ralph Lauren has not installed any renewable technology in order to make sure its long term profitability and sustainability (Li et al., 2019). Various regulations have been imposed with regard to green business practices. Excessive depletion of resources by Ralph Lauren has generated a negative response from various environment protection groups, media channels and general public.
  • Legal factors: Detailed study of regulatory structure and legal environment of the consumer market is important while entering any new market. Various regulations with respect to health and safety are to be followed in order to provide safe and secure environment to the workforce. The company can lose competitive advantage if it becomes unable to protect its intellectual property rights.

Stock Advice to Investors

The investors can buy the stock of Ralph Lauren although its financial performance has been decreased in the current year as compared to previous year figures because it has performed better as per industry averages. There are high chances that the financial ratios will get improve in the next year (Ralph Lauren, 2020). Fall in the payout ratio indicates that the company has reduced the payment of dividend amount to the shareholders. It has retained the larger amount of profits to meet the future growth opportunities. These opportunities will help the company in restoring its place. There are many listed companies whose financial statements and position get affected by various unusual items but they disappear after some time. Therefore, there is high probability that the Ralph Lauren will generate higher amount of profit in the next year and undertake suitable measures to reduce the amount of operating expenses.

Recommendations for The Company to Improve Its Financial Performance

Ralph Lauren should undertake effective control over the expenditure in order to improve its long term profitability and sustainability in the market. It must formulate and implement management strategies after thorough analysis of current trends followed in the market (Amatulli et al., 2017). It must establish an effective system to analyze the requirement for skilled employees and workers as shortage of labor at times, affect the efficiency of the business operations. It must consider fluctuations in exchange rate and interest rate while undertaking investment. Marketing and various business strategies must be developed after taking into consideration the demographic characteristics and must select the right segment of the market which has high potential of growth. The practices of business management must be changed at the time of entering the markets with low or high power distance. It must form local teams and develop partnerships with the local firms in order to get the idea about the societal norms and attitudes to customize its marketing strategies as per the culture of different society.

References for Ralph Lauran Corporation Finance Report

Amatulli, C., De Angelis, M., Costabile, M., & Guido, G. (2017). Sustainable luxury brands: Evidence from research and implications for managers. Springer.

Annual Report. (2020). Ralph Lauren Corporation. Retrieved from http://investor.ralphlauren.com/static-files/68fc21c4-168b-44eb-b23d-16e551109737

CSI Market. (2020). Ralph Lauren. Retrieved from https://csimarket.com/stocks/fundamentals_glance.php?code=RL

 Infront Analytics. (2020). Ralph Lauren Corporation. Retrieved from https://www.infrontanalytics.com/fe-EN/33151NU/Ralph-Lauren-Corp-/gprv-profitability

Li, Z., Minor, D. B., Wang, J., & Yu, C. (2019). A learning curve of the market: Chasing alpha of socially responsible firms. Journal of Economic Dynamics and Control109, 103772.

Morningstar. (2020). Key ratios. Retrieved from https://financials.morningstar.com/ratios/r.html?t=0P0000CJC8&culture=en&platform=sal

Morningstar. (2020). Ralph Lauren. Retrieved from https://www.morningstar.com/stocks/xmun/prl/financials

Perera, R. (2017). The PESTLE analysis. Nerdynaut.

Ralph Lauren. (2020). Financial Highlights. Retrieved from http://investor.ralphlauren.com/financial-information/fundamentals/income-statement

Ralph Lauren. (2020). Investor relations. Retrieved from http://investor.ralphlauren.com/news-releases/news-release-details/ralph-lauren-reports-first-quarter-fiscal-2020-results

Simply Wall Street Pty Ltd. (2018). Ralph Lauren Corporation (NYSE:RL): Financial Strength Analysis. Retrieved from https://simplywall.st/stocks/us/consumer-durables/nyse-rl/ralph-lauren/news/ralph-lauren-corporation-nyserl-financial-strength-analysis/

Simply Wall Street Pty Ltd. (2019). Is Ralph Lauren Corporation (NYSE: RL) A financially strong company? Retrieved from https://simplywall.st/stocks/us/consumer-durables/nyse-rl/ralph-lauren/news/is-ralph-lauren-corporation-nyserl-a-financially-strong-company/

Simply Wall Street Pty Ltd. (2020). Ralph Lauren’s (NYSE: RL) earnings are growing but is there more to the story? Retrieved from https://simplywall.st/news/ralph-laurens-nyserl-earnings-are-growing-but-is-there-more-to-the-story/

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