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Takeaway: Mgmt grossly underinvesting in the brand. Looks cheap on sell off, until it will look expensive on real numbers at a lower share price.

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McGough: This Is Why We’re Short Ralph Lauren $RL - 10 29 2020 2 35 24 PM

All the reasons why we have $RL as a Best Idea Short are playing out in this quarter. The company put up a huge headline beat, but put up simply atrocious revenue trends and made up for it in SG&A cuts.

This brand is losing relevance by the day, but the good news is that it can absolutely be fixed. Almost any brand can with the right amount of capital. The bad news is that in this case it’s likely going to remain broken.

To regain momentum the company needs to take its SG&A cuts, and reinvest elsewhere in the organization at an outsized rate in order to increase consumer connectivity and make the brand both desirable and competitive again.

But it’s taking the easy route to grow earnings – cutting costs and flowing it through to the EBIT line without the reinvestment the brand so desperately needs. SG&A in aggregate was down 21% -- that’s $167mm, or 140bp in margin upside – and margins were STILL down 225bps due to the sorry state of the top line.

Some numbers to prove the point…North America wholesale was down 46% and comp sales at its own stores down a depressing 31%. It touted improved e-comm growth – but that was up only 10% in the US. A bit more impressive in Europe with digital up 26%, but a massive deceleration from the 44% rate we saw in 1Q.

This morning the Coach brand put up triple digit e-comm growth. And people think the Coach brand is dead? Not quite. If there was only one statistic I could look at for a company in a given quarter, it would be the level of ecomm sales.

That’s especially true in a covid world where there has been a permanent shift to e-comm as it relates to consumer shopping behavior – and we’re facing the biggest digital shift we’re likely to see in our lifetime. Brands with heat are comping up between 80% and 120% online. Heck, I gave Puma a hard time yesterday for only growing e-comm at 60%. And RL puts up a +10% in its core market?!? That’s simply inexcusable.

Ralph is trying to upscale its business and notes a 26% increase in Average Unit Retail – but that’s an irrelevant metric when you can’t hold onto a stable number of units to actually drive the top line higher. A -30% top line when all stores have reopened simply won’t cut it.

The problem here is management. It simply has the wrong philosophy for capital allocation and thinks that it can make the brand relevant again simply by working harder and smarter. Sorry folks…in 25 years I’ve never seen ‘hard work’ fix a fashion brand. It takes capital, and a lot of it. To RL’s credit, the stock looks cheap – especially with it selling off on a headline beat.

But at this rate, we’re unlikely to see $5 in EPS over a TAIL duration, and the Street is looking at $6.00 next year. Not gonna happen. This name is cheap, and is likely to get cheaper – until its expensive at a lower price once earnings flush out.