The stock of the company declined due to concerns about a possible recession, high inflation, and higher costs for manufacturing and

The stock of the company declined due to concerns about a possible recession, high inflation, and higher costs for manufacturing and transportation.

HONG KONG, CHINA - 2022/02/10: A pedestrian walks past the American fashion brand Ralph Lauren store ... [+] and in Hong Kong. (Photo by Budrul Chukrut/SOPA Images/LightRocket via Getty Images)SOPA Images/LightRocket via Getty Images
The American fashion brand Ralph Lauren is doing well in Hong Kong, with strong sales and a loyal customer base. The store is doing well in spite of the current economic conditions, and is a sign that the brand is here to stay.

Looking ahead to fiscal year 2022, Ralph Lauren is confident that it will continue to provide shareholders with value and growth. The company's strong performance in recent years has been driven by innovation, strategic investments, and a focus on execution.

I believe that Ralph Lauren's stock will rebound in the near future. The company's recent earnings update showed stable demand, which should ease some of the worries about a potential recession. Additionally, foreign currency fluctuations could be a drag on the company's stock in the short term, but I believe that the stock will see a higher upside in the long term if consumer spending remains strong through the holiday season.

In Q1 2023, Ralph Lauren's revenues grew 8% year-over-year (y-o-y) to $1.5 billion. All the regions positively contributed to RL's performances. The North American and European revenue (thanks to the travel rebound) increased by 6% and 28%, respectively, but the Chinese sales growth deserves special mention. RL China's top-line sales experienced a 26% increase, despite their unrealistic zero-Covid policy and the fact that almost 50% of RL stores were closed during this period. Going down to the P&L, gross margin decreased and was mainly due to higher logistics costs. Also, operating profit further declined and the margin stood at 11.8% compared to the last year's result at 12.7%. In North America, the reduction was more pronounced, while China partially offset the result. Compared to fiscal '20 pre-pandemic levels, gross margin was 350 basis points higher in the first quarter. The company continues to expect freight, raw materials, and labor costs to pressure gross margins this year, particularly through Q2 until it starts to lap higher cost increases in the second half of the year.

It is worth mentioning that RL’s inventory grew faster than sales in the recent first quarter. Ralph Lauren’s inventory level stood at $1.2 billion, up 47% compared to the prior year. This surge compares to just an 8% increase in first-quarter sales. Unlike Target or Walmart, the company mentioned that they deliberately shifted inventory receipts earlier to mitigate global supply chain disruptions as a precaution for the upcoming demand peak around the Christmas holidays. RL focuses on premium lifestyle products insulating it from the consumer demand shifts that other retailers have been witnessing in recent months. Thus, this subtly suggests that RL’s risky move of increasing inventory could be rewarded if consumers snap up the fall and winter products it has secured.

We have revised RL's Valuation to $100 per share, based on a $7.81 expected EPS and a 12.8x P/E multiple for the fiscal year 2023 - almost 11% higher than the current market price. We forecast RL's Revenues to be $6.3 billion for the fiscal year 2023, up 2% y-o-y. In light of rising interest rates and the threat of recession, the market at the moment is uncertain, but any further decline in the company's stock could be used as an opportunity to buy.

Looking ahead to the second quarter, the company anticipates revenue growth of around 11% in constant currency compared to last year. Additionally, it expects operating margin for the quarter to be in the range of 15.4% to 15.7% in constant currency, with a gross margin contraction of approximately 40 to 80 basis points year-over-year.

It is always helpful to see how a company's peers are doing in order to get a better idea of how the company is performing. Ralph Lauren's peers can be found here, and it is interesting to see how they fare on different metrics. There are also other valuable comparisons for companies across industries at Peer Comparisons.

Ralph Lauren has been one of the hardest hit stocks this year, falling 24% in value. With inflation on the rise and the Fed raising interest rates, many are wondering if the stock can drop any further. In order to get a better idea of how low RL stock can go, it is helpful to compare its performance to other stocks during previous market crashes. While all stocks tend to take a hit during a market crash, some fare worse than others. From the data, it appears that RL stock could potentially fall much lower in value in the event of a market crash. However, it is worth noting that past performance is not necessarily indicative of future results. So while the stock could drop significantly in value, there is no guarantee that this will happen.

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RL Return Compared With Trefis Multi-Strategy Portfolio  Trefis
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