02| 12 | 08

James Perkins CEO, Portfolio Manager jp@thrasherfunds.com		Download article
Khalid Reede Jones COO, General Counsel krj@thrasherfunds.com Johnathan M. Woods Investment Analyst jmw@thrasherfunds.com

Polo Ralph lauren (RL) $63.14 (2:45EST)

Current Price:	$63.14	YOY EPS:	-15.80%
Consensus PT:	$74.73	YOY Rev:	11.30%
PE:	17.42	Op Margin:	14.22%
FPE:	14.65	Cash:	$473.00 MM
52wk Perf:	-32.46%	Debt:	$602.60 MM
PEG:	1.09%	MKTCAP:	$6.41B
Short%:	3.80%	Vol:	1,970,730
Beta:	1.33	EV:	7%
OpCF:	$793.70 MM
LFCF:	$323.80MM	Idea Rating:	7

COMPANY DESCRIPTION

Polo Ralph Lauren Corporation engages in the design, marketing, and distribution of lifestyle products primarily in the United States, Canada, Europe, and Japan. The company offers apparel products, including a collection of men's, women's, and children's clothing; accessories, including footwear, eyewear, jewelry, and leather goods, such as handbags and luggage; home furnishing products that include bedding and bath products, furniture, fabric and wallpaper, paints, broadloom, tabletop, and giftware; and fragrance products under Glamorous, Romance, Polo, Lauren, Safari, Blue Label, and Black Label brands. It sells its products to department stores, specialty stores, and golf and pro shops in the United States and Europe; full-price and factory retail stores located in the United States, Canada, Europe, South America, and Asia; and online through Polo.com. In addition, the company licenses its products, such as apparel, eyewear, and fragrances to third parties. As of March 31, 2007, it operated 147 full price retail stores, including 74 Ralph Lauren stores, 64 Club Monaco stores, and 9 Rugby stores; and 145 factory stores. The company was founded in 1967 and is based in New York, New York.

COMPETITORS

• JNY:  Poor performing portfolio of brands; Continuing declines in sales in profit margins.
• LIV: Good portfolio of names such as Lucky & Juicy Couture;  Heavy cost structure.

IN SHORT

Good relevant company with a strong brand. Short term market outlook and uncertainty can provide buying opportunities. Continues to produce strong product.

RECENT NEWS

• Polo Ralph Lauren posted much better-than-expected quarterly profit and raised its full-year earnings outlook on Wednesday, surprising investors who sent the clothing company's shares up 11 percent.
• The maker of the Polo, Chaps and Club Monaco lines cited a lower tax rate, but it also benefited from an early launch of its American Living line of goods for J.C. Penney
• Net income increased by 2% for the fiscal 2008 3Q while net revenue was up 11%.
• Wholesale sales increased 17% because of rollout of American Living brand, menswear, and increased sales in Europe.
• Raised its full year 2008 earning look from $3.50-$3.60 to $3.64-$3.74 because of a reduced tax rate of 31.1 percent compared to 38.9% a year ago.
• Recently acquired Impact 21 and the remaining stake in Polo Ralph Lauren Japan.
• Chief Operating Officer Roger Farah said in the earnings statement: "Even in the context of macroeconomic uncertainty, our strategies remain intact."

CONSENSUS VIEW

• MorganStanley analyst depict RL as a value buy and looks at its ventures in new product lines as a key to future growth of the company.
• Lehman last month lowered its price target from $100 to $80 given the weak consumer environment. However believes that RL will have a more balanced global sales mix in the near future which will lead to increased revenue and profit margins.
• Recently downgraded by Citi, with a price target of $69
• ThomasWeisel Partners analyst Liz Dunn was less bullish on the results, however. "Don't read anything into the third-quarter beat," she wrote in a post-earnings note. In keeping a Market Weight rating and $55 price target, Dunn noted the company's new fiscal 2009 guidance "is much weaker than consensus" estimates.
• "Everyone expected they would miss (analysts' estimate) and lower their guidance, but instead they beat it and raised their guidance," Needham & Co analyst Christine Chen said.
• Excluding the impact of the lower tax rate, Chen said the new forecast is an affirmation of its previous one, and in a time where other chains, including Starbucks Corp (SBUX), AnnTaylor Stores Corp (ANN) and Charming Shoppes Inc (CHRS) are closing underperforming stores, that's a good thing.
• CreditSuisse has a price target of $80, and an Outperform rating.

BULL CASE

• For fiscal 2008 the company expects revenue to rise at a low double-digit percentage rate, which sounds pretty good in this market environment.
• RL is making a push to build a heavier presenceinternationally (which is of increasing importance to all companies) through its launch of newstores throughout Europe, specifically three new stores in Paris. 
• They recently reacquired the licensing from many of its affiliates specifically Impact21 and Ralph Lauren Japan.  This could help to increase revenue and help to bring more quality to the brand.
• They are making more of an appeal to the even higher luxury consumer by offering a new watch collection from Cartier watch maker Richemont and high end handbags. 
• The projected rollout out of these items is for the spring of 2009.  This is particularly of note because of the demand of high luxury goods is more apparent in Europe than in the US.  International sales have the most prominent growth in the company.
• They are also looking to increase revenue in wholesale by launching the AmericanLiving brand in JC Penney stores nationwide.  American Living hopefully would appeal to a broader consumer base in the US.
• The recent stockbuyback is still underway with the approx $298M still left to repurchase.   RL is showing their commitment to building a stronger company and build shareholder value.
• It will be interesting to watch how aggressively they buy back issues.

BEAR CASE

• RL said that they felt the impact of a consumer spending slowdown in the United States.
• "The abrupt change in spending patterns that began last fall is almost unprecedented," said Roger Farah, Polo's chief operating officer, on a conference call.
• He noted the wider macroeconomic picture also includes a number of uncertainties. "You've got election issues. You've got international issues. You have got the weak dollar at the moment. There are a lot of things that are depressing the customer more ... than I've seen in a while," he added.
• While 2008 is expected to grow at good rates, for fiscal 2009, RL expects earnings per share of $3.95 to $4.05 on revenue expected to increase by a low-to-mid single digit percentage rate.
• American Living, handbags, and watch collection are complete fashion misses.
• The overall US economy goes into a deep recession and heavily decreases consumer spending.
• The Japanese market takes a prolonged time to grow and higher costs occur with the intent to drive sales in stores cutting into margins.

BASE CASE

• Ralph Lauren continues to meet consensus numbers and its own guidance.
• Continued outlook of a weak consumer in the US in the short term.
• American Living provides steady wholesales profit margins but sees no increased demand.

THRASHER EDGE

• Strong brand and management makes us a long-term buyer.
• Ralph Lauren understands quality in a brand, and has a core customer which should exhibit resilience in difficult economic climates.
• RL will always be viewed upon as having a very classic look which in a since never goes out of style, and gives customers the feeling that they are always “investing” in each piece that they purchase.
• The risk return for RL granted looks a little bland, but in this market (that many feel will but up around 5% at best by the end of 2008) the prospects take on a different flavor.

CATALYST

• Market will need to communicate that some sort of bottom has been reached. Such as Warren Buffet’s offer to bond insurers to take over $800 BN in liabilities.
• Jobs and personal income numbers continue to hold up.
• GDP growth remains resilient.
• More clarity from the Presidential race.

DECISION TREE

Thrasher Price Target: $68.81

Yahoo Consensus Price Target: $67.55

newratings Avg. Price Target: $74.50

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