The Better Retail Bet: Macy’s Vs. Ralph Lauren

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Considering how paltry U.S. economic growth has been and how stubbornly high unemployment remains, retailers must be suffering terribly, right? Not at all. With the wealthy enjoying a great decade, upscale American retailers are booming — not solely in the U.S., but in Asia and Europe as well. Among those are Ralph Lauren (NYSE:RL) and Macy’s (NYSE:M). Both reported earnings early Wednesday, so it’s a good time see if  you should stock up your portfolio with their shares.

Wall Street was looking for some earnings and revenue growth for RL. But when it reported Wednesday, its results were better than expected. EPS of $2.46 a share was well ahead of analyst estimates of $2.24, and revenues of $1.9 billion were $60 million more than analysts had forecast.

But RL stock tumbled 7% on the report since its third-quarter revenue guidance fell short of analyst expectations, even though RL raised its 2012 full-year guidance. Plus, stocks overall were getting pummeled on Wednesday over escalating concerns about Italy’s role in Europe’s never-ending debt drama.

This isn’t the first time RL beat expectations — it also blew through first-quarter 2012 forecasts. In August 2011, it reported EPS of $1.90 that were 44 cents higher than analysts polled by Capital IQ were calling for.

A contributing factor was growth in international revenues, which rose 60% in the first quarter and accounted for 36% of RL’s consolidated sales. International growth included expansion in Europe, where the company added “new wholesale and retail distribution, [expanded] existing and highly productive locations and [generated sales from] new merchandized categories such as Lauren and accessories,” according to RL’s first-quarter earnings transcript.

But RL is hardly the only upscale retailer that’s been bucking the sluggish economy. Macy’s has been among those rolling strongly lately. But Macy’s Wednesday report showed it didn’t beat its estimates as well as RL had. While M easily exceeded EPS expectations, it fell short on revenue.  Specifically, Macy’s reported EPS of 32 cents a share — double expectations — but  its revenue of $5.85 billion came in $20 million under of analysts’ forecasts. Its stock was down around 3% in midmorning trading.

Underlying Macy’s financial performance are three key strategic choices regarding pricing, merchandising and product selection. Macy’s has been raising prices to preserve margins as production costs rise; its merchandising strategy aims to tailor stores to local markets; and it’s trying to “lock up exclusive brands,” according to the Associated Press. Investors will be seeking details on how consumers are reacting to these initiatives.

Here’s what the investment choice between RL and M boils down to:

  • Ralph Lauren: Steady growth, decent margins; expensive stock. RL’s sales have increased 13.7% in the past 12 months to $6 billion, while net income rose 18.4% to $631 million — yielding a 10.46% net profit margin. Its price-earnings to growth ratio of 1.62 (where a PEG of 1.0 is considered fairly priced) is expensive on a P/E of 24.7 and expected earnings growth of 15.22% to $7.89 in fiscal 2013.
  • Macy’s: Decent growth, thin margins; cheap stock. Macy’s sales have increased 6.4% in the past 12 months to $25.7 billion, while net income jumped 157% to $1.1 billion — yielding a slim 4.08% net profit margin. Its PEG of 0.93 is cheap on a P/E of 13.18 and expected earnings growth of 14.15% to $3.04 in 2012.

Both stocks have been performing well — near their 52 week highs. But Macy’s gets the nod due to its far more reasonable valuation.


Article printed from InvestorPlace Media, https://investorplace.com/2011/11/macys-ralph-lauren-retail-stocksy/.

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