Takeaway: Bottom line, if you can get RL at sub-15x EPS on a trough earnings number, you take that trade all day.

We’re taking RL from the bottom of our Long Idea Bench to the very top. The reality is that RL is one of the few stocks we can find in retail that has arguably found a floor, and has potential catalysts to take it higher. To be clear, we’re not certain of the fat tailed ‘recovery call’ yet, as we still have too many long-term concerns about management, the latest restructuring, and ultimately the Brand. As the research gets us past even just one of these concerns, we’re very likely to get full-on bullish.  

Here’s what’s changed in our mind.

  1. We think that earnings have bottomed. RL is likely to earn around $6.50 this year. That’s no surprise to the consensus. But remember that just 18 months ago, it was widely (and wrongly) ‘accepted’ that RL was going to earn $10 this year. The consensus was wildly wrong back then, and if it’s wrong again over the next 12 months, we think it will prove to be on the conservative side.
  2. EPS Looks Doable. The earnings report is on May 12, and we think that the Street’s $0.83 will be very tough to miss – especially when compared to $1.41 last year (-41%) and $1.68 (-51%) two years back in this quarter. That says something for a stock that traded down an average of 11% in 4 of the past 5 earnings reports, and has missed only twice during this economic cycle.
  3. What about a guide-down?  We all know that Ralph Lauren is a perennial sandbagger. But we can say for certain that the consensus (on either Side of the Street) is absolutely not expecting a blow-away quarter on the 12th.  But can the company guide-down? Yes. A bit. But we’d be surprised to see much.  The Street is at $1.01 for the June quarter, which compares to $1.80 in June just two-years ago, and business does not appear to have gotten meaningfully worse.
  4. The Last to be the First. If there is a guide-down on the print, the company will almost certainly point to the analyst meeting the first week of June. To be clear on this…it is Ralph Lauren’s first analyst meeting in the history of the company. We’re gonna bank on the assumption that RL is not all of a sudden going to invite Wall Street into its mahogany-paneled offices on Madison Ave to explain why it does not have a clue about its future.  
  5. It’s Cheap. This is never enough of an argument on its own – as a cheap stock with earnings risk is a land-mine waiting to make a big, ugly and painful mess. But RL is near its lowest multiple in over a decade. The only time it was lower is when we were in the Great Recession – but then the base of earnings expectations had not come down yet. Today it has.
  6. The Larsson effect. Is it possible that new CEO Steffan Larsson steps up the spending, and subsequently takes a bite out of EPS? Definitely. But we welcome that. RL has been a very good steward of capital in the past. We won’t welcome higher spending by most companies, but RL makes the cut.  In fact, we heard twice from investors in the past two days that there’s the potential for a lot of cost cuts at RL. We disagree. You can’t sustainably grow earnings for a Consumer Nondurable brand that is restructuring one company into six divisions and whose core distribution channel is in a secular decline. If ‘cost-cutting’ becomes a pillar to this story, then we want no part of it.

We admit that the text above reads like a ‘Buy RL Now’ note. If you have a duration of 2-3 months, then you read it right. But we definitely need more of an edge on the TAIL part of this story before we can truly get on board as a long-term investment. Then it’s not a call about simply going to $120…then we’re potentially talking $220+.

RL | From Last To First - 4 19 2016 Idea List chart1