Monday, May 04, 2009

Ralph Lauren (NYSE:RL): Downgraded to Underperform at Merrill/BAM

Merrill Lynch/BAM is out with cautious comments on Apparel players saying following easy sales and weather comparisons in March, underlying momentum may still be weak (adjusting for the Easter shift) as retailers continue to face traffic and ticket pressures.

Firm also notes relative outperformance of retail stocks (vs. SP500) usually ends in May as Retail stocks typically outperform the SP500 starting in Jan / Feb, peaking in Mar, and then underperform in May/Jun until Aug/Sep. Branded Apparel stocks typically start to underperform the SP500 in Jun and July.

They are downgrading Ralph Lauren (NYSE:RL) to Underperform from Neutral (with a $42 tgt) noting that after benefiting from the upward mobility in customer spending patterns (as key dep’t stores customers focused on up-scaling merchandise assortments through ‘06-’07), dep’t stores shift away from a higher AUR strategy and emphasis onsharper price points, coupled with continued customer traffic declines and tightening inventory plans, should be unfavorable to RL’s core US wholesale outlook through F10 (roughly 30% of RL’s global revenues concentrated in M, DDS, KSS, and JCP). RL will also face the difficult anniversary of the sell-in of American Living (initial shipments started in Dec 07 – F3Q08, launched Feb 08, with additional category launches throughout 2008).

Owned retail comps likely still weak
Owned retail comps (40% of F09E rev) at full-line and outlet stores are also deteriorating and could pressure results through F1H10, despite RL’s efforts to reduce inventory levels.

Europe should moderate; FX & Expenses pressure outlook
Declining trends, already impacting RL’s owned Retail in Europe, could pressure Europe wholesale (from the +DD% in constant currency for F3Q09), despite the Lauren launch Spring 09.

Notablecalls: I think the downgrade makes sense here - the stock is up a lot from March lows and there are only neg. catalysts on the horizon.

Can RL do 2 pts worth of downside today? Yes, unless the market goes bananas again.

1 comment:

notablecalls said...

The market went bananas.