RL: Before The Quarter

Here we are again, waiting for another quarter from RL. And of course, the ONLY question I’m being asked is “How much will RL beat by given management’s sandbagging track record, and is it in the stock?”

The answer is they’re going to beat meaningfully. We’ve got ‘em at $1.52 vs. the Street at $1.29 (20%). Then we’ve got 4Q (Mar) at $1.28 vs. the Street at $0.88 (45%).

There are several factors to consider about this quarter.

1. The company guided to high-teens growth in total company sales, and noted that Retail will lead that growth. Huh?
   1. They guided to high teens for Wholesale too. Fall rollout of Lauren handbags to 150 US doors is partially driving this.
   2. But we’re just at the point now where RL’s retail segment is larger in size than wholesale.
   3. Let me get this straight…two divisions of equal size accounting for 95% of revenue. One will grow high teens, and the other will be more than that. How does that equate to high teens for the parent?
   4. We think that Retail will grow by 30% in the quarter. Why?
      1. First and foremost, The Chinese and Korean licenses are both being folded into Retail – instead of wholesale like all previous licenses have been. Is this just accounting? An optical illusion to goose the perception of growth? Perhaps. But strip out 4% of a 23% top line growth expectation, and I’ll still be impressed.
      2. RL turned on its UK dot.com business in October. This alone should boost e-commerce as a percent of total from 3.5% to 5%. And yes, it carries an incremental margin north of 50%, and serves as the best avenue to flush out goods at end of season.

In aggregate, we have sales  growing by 23%. If we’re right on that, then in order to justify their ‘GM down 100bp’ guidance, we’d need to peg SG&A up near 30% in order to get closer to the consensus. That’s not going to happen.

Is it in the stock? RL saw record selling activity in December by several senior executives. Regardless of what the stats say, my sense from talking to investors is that there simply is no consensus on this name.  But one trend is clear in looking at other names in retail – investors are paying for top-line growth. RL fits right in.

I wouldn’t chase it here, as there’s admittedly not enough controversy in the name. But If we’re right with $6.13, $7.34, and $8.34 for the next three years, respectively, then it suggest 20% CAGR EPS growth with a bullet proof balance sheet. We never like pulling multiples out of the air – but the reality is that others will. Let’s use a number a bit below the growth rate. 18%, or 18x? It suggests $110 today (where the stock is), $130 in a year, and $150 in 2.