UBS calls Ralph Lauren a 'turnaround stock,' sees fashion brand rallying 36%

Published Fri, Nov 11 20228:18 AM EST

Changes in Ralph Lauren 's business make the clothing brand a good investment coming out of the pandemic, according to UBS. Analyst Jay Sole reiterated his buy rating and increased his price target to $130 from $128, which implies an upside of 36.2% over Thursday's close. "We view RL as a strong turnaround stock," Sole said in a note to clients. "We think the market doesn't appreciate the transformational changes the company has made to its brand, distribution model, and cost structure." The stock has performed nearly in line with the S & P 500 , shedding 19.7% this year. Like other retail brands, the company has had to grapple with inflationary impacts to consumers and their shifts to services from goods coming out of the pandemic. But brands that target higher-income consumers have been able to avoid some of those pitfalls, as experts note inflation has been felt more deeply by those in lower income brackets. Sole said Ralph Lauren could soon reach pre-pandemic levels by rolling back promotions, improving its supply chain and lowering expenses. He also said the company has bettered its distribution and "quality of sale" by reducing weak accounts and areas that dilute the brand, which allow for the company to get more revenue from direct channels. "This positions RL well to grow in a postpandemic world, in our view," he said. Sole said the stock does not fit neatly within the descriptions of de-risked, defensive or growth stocks in the near-term, but it will be viewed as de-risked when the company offers fiscal 2024 guidance. He said that announcement will come on the back of "surprisingly strong" sales growth, rebounding margins and the company mitigates raw material and supply chain headwinds and a lower share count than expected. The firm modestly increased fiscal 2023 and 2025 earnings outlooks by 3% and 1%, respectively, given the increasingly bright future he sees. These increases come from expected improvements in constant currency revenue outlook, an expectation of lower costs in some areas and an improved expectations for future stock buybacks. Difficulties related to foreign exchange and the broader economy are weighing down the forecasts, he said. He also raised fiscal third- and fourth-quarter 2023 per-share earnings estimates by 1.3% and 13.1%, respectively, as outlook continues improving with the exception of easing foreign exchange headwinds. — CNBC's Michael Bloom contributed to this report.