Tuesday, January 20, 2009

Ralph Lauren (NYSE:RL): Downgraded to Sell at Goldman Sachs

Goldman Sachs is downgrading Ralph Lauren (NYSE:RL) to Sell from Neutral with a reduced price target of $37 (vs $51 previously), reflecting 10% potential downside, as they see the following unfold:

1) likely next aspirational laggard to join this peer group (TIF, COH, JWN and EL) which have all negatively preannounced,

2) fundamental EPS risk on the horizon and a likely cautious outlook well below consensus, and

3) multiple contraction much like in past periods of slowing EPS and returns. 2008/2009/2010 estimates are moving to $3.79/$3.09/$3.35 from $3.88/$3.34/$3.68 to reflect a tougher outlook for RL’s retail division.

Goldman sees an on-gong shift in consumer spend from aspirational to desperational. RL has bucked this trend with impressive inventory and expense management; however, they believe the shift worsened over the past few months and will prove more challenging for RL to withstand. As such, when RL reports Q3 EPS on Feb 4th, they expect signs of weakened fundamentals across wholesale, retail, outlet and its European business as deep discounts were likely needed to drive sales. Given downside risk versus consensus expectations, shares are likely to be pressured. If EPS growth slows and returns see pressure, investors could even push valuation back to recent 8x lows which would compound the stress on the shares and potentially drive 20- 40% downside - well beyond $37 target. Firm notes RL saw similar valuation over 2001-2003 when returns and growth last slowed.

Notablecalls: This Goldman Sachs call makes RL a short. My only question is - will RL fall below $39 level today or will it take 2 days. I suspect it's going to happen today. Going sub-$38 is a real possibility.

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