Abstract
Ralph Lauren Corporation (NYSE:RL) is a renowned company in the apparel industry. The company specializes in designing, marketing, and distributing lifestyle products. This analysis paper aims to present the current financial state of the company and predict its future free cash flow by utilizing past financial statements and collected data. The provided information and forecasts are intended to assist potential investors in gaining a comprehensive understanding of RL Corporation and making informed investment decisions.
Financial Analysis for Ralph Lauren Corporation
Ralph Lauren, the founder of Polo Ralph Lauren, launched the brand in 1967. Initially, he concentrated on designing men’s ties. However, by 1971, Polo Ralph Lauren had broadened its range to incorporate women’s clothing as well. This expansion occurred simultaneously with the inauguration of the brand’s first standalone store in Beverly Hills, California. Recognizing the potential for expansion abroad, the company began exploring international markets in 1981. Ultimately, in 1997, Polo Ralph Lauren became a publicly traded company and conducted its IPO on the New York Stock Exchange.
Ralph Lauren Corporation (NYSE: RL) is a luxury American lifestyle company and fashion retailer founded by designer Ralph Lauren. The company specializes in premium clothing for men and women, along with accessories, footwear, fragrances, home goods (bedding, towels), and housewares. It also offers media content showcasing its lifestyle and operates a chain of restaurants. As of 2007, Ralph Lauren had more than 35 boutiques in the United States as well as international locations in London, Beijing, Tokyo, and Moscow. CNN Money published the latest Fortune 500 rankings in May 2012, where RL Corporation improved its position to No. 431 compared to No. 451 the previous year. This signifies the global recognition of RL Corporation’s progress.
To understand Ralph Lauren’s financial position, it is important to review the financial statements from the past three years. The balance sheet for Ralph Lauren from 2010 to 2012 can be found in Form 1, while Form 2 shows the income statement for that period. According to RL’s 10-K form submitted to the SEC on March 31, 2012, net sales were $6,678,800 and licensing revenue reached $180,700. The top section of this page indicates a total revenue of $6,859,500.
The compound growth rate between 2008 and 2012 can be found by solving the equation $419,800(1+g)^4=$681,000 using a financial calculator. By inputting N = 4, PV = -419800, PMT = 0, and FV = 681000 into the calculator, pressing I/YR will yield a value of g = 12.9%. The average growth rate during this period is stated as 13.3%.
The market cap for RL Corporation is $14.0 billion, making it the 8th largest company in the global Textile Apparel Clothing Industry and the second largest company in the US Market. Direct competitors of RL Corporation include Fifth & Pacific Companies, Inc. (FNP), The Jones Group Inc. (JNY), and PVH Corp.
RL Corporation is clearly superior to its competitors in terms of financial performance, as evidenced by the previous comparison. The corporation’s market cap exceeds that of its rivals, demonstrating its larger size. It also boasts a greater number of employees. Additionally, RL Corporation outperforms its three competitors by a significant margin in various financial metrics such as revenues, gross margin, EBITDA, and net income.
A noteworthy measure of RL Corporation’s financial strength is its current ratio which stands at 2.9. This indicates that the company’s current assets are nearly three times larger than its current liabilities. Creditors favor this high current ratio as it ensures a better ability to meet short-term obligations. However, shareholders may interpret this ratio differently as it could suggest that the company has substantial funds tied up in unproductive assets.
The RL Corporation effectively utilizes investors’ money, with a high return on equity (ROE) of 20.69% (above 15%). The company also demonstrates a strong return on assets (ROA) of 13.10%, indicating its ability to generate profit for every dollar of its assets. These impressive ROE and ROA figures reflect the managers’ successful efforts in generating returns from shareholders’ investments.
RL Corporation is currently experiencing positive financial performance, but it is also important to anticipate future financial data beyond 2012. Forecasting future free cash flow requires access to internal employees who possess accurate information and ratios. As an external observer, we typically evaluate the linear relationship between the cost of capital and growth rate using the constant growth model. To begin, we must determine the Weighted Average Cost of Capital (WACC), which is the weighted average of after-tax component costs of capital including debt, preferred stock, and common equity. The weights are based on the proportion of each type of capital in the optimal or target capital structure. The WACC can be calculated as WACC = wdrd(1-T) + wsrs.
The RL Corporation has a long-term debt of $274,400 at an interest rate of 4.5% (rd) in 2012. The after-tax component cost of debt (rd(1-T)) is calculated to be 3.0% using the effective tax rate of 32.9%. The cost of equity (rs) is determined by the formula rs = rRF + (RPM)b.
According to the Wall Street Journal, the risk-free rate (rRF) based on the 10-year Treasury bond rate is 4.5%. The market risk premium (RPM) is obtained by subtracting the required market return from the risk-free rate, resulting in RPM = 10%.
With a beta value of 1.24, the rs is calculated to be 16.9% using the formula rs = 4.5% + 10.0% * 1.24 = 16.9%.
By utilizing the provided figures and applying the WACC formula, we can determine the WACC as shown below:
WACC = (274,400/4,318,000)*3.0% + (4,043,600/4,318,000)*16.9% = 0.0019 + 0.1583 = 16.0%.
The operating capital has increased from 885.3 to 999.5, further increasing to 1128.4, with subsequent values of 1274.0 and 1438.4.
Similarly, the free cash flow has also shown an upward trend, rising from 245.3 to 277.0, then reaching 312.7, followed by 353.0 and finally reaching a value of 398.5.
The calculation for Free Cash Flow (FCF) is as follows: EBIT*(1-Tax Rate) + Depreciation & Amortization – Change in Net Working Capital – Change in Capital Expenditure. The formula for CAPEX is Total Asset minus Total Liability. For the year 2012, the total current liabilities were 946.2 and the total current assets were 2,899.9, so NWC2012 =2899.9-946.2=1,953.7. In 2011, the total current assets were 2,478.0 and the total current liabilities were 832.0, so NWC2011=1,646.0. Therefore, the change in Net working capital is calculated as 1953.7-1646.=307.. As for CAPEX, the total assets for 2012 was 5,4164 and the total liabilities were
1,763 . So CAPEX for that year is calculated as
5 ,4164 -1763 =36525 . For
the year
of
20ll,
the
total assets amounted to49811 while t he tota l li abi lities amoun ted t o16764.
Therefore,.t.heCAPEXfor20llis33047b.ThechangeinCAPEXiscalculatedas36525–33047=3478.FCFfor20lZ(FCFzolz)=10394* (I_35%) +225 .27-ZQ?.?-34?B=24531 .
Using WACC and forecasting FCF,the value of RL Corporation can be determined.Horizon value refers to the value of operations at the end of explicit forecast period,and it equals to present value of all FCFs beyond forecast period discounted back to end of forecast period at weighted average cost of capital.
The horizon value for 2016, calculated using the formula FCF_2017/(WACC-g) = (FCF_2016 (1+g))/(WACC-g), is $9,181.8 million.
The formula for calculating the value of 2012 is as follows:
Value of 2012 = 〖FCF〗_1/(1+WACC)+〖FCF〗_2/〖(1+WACC)〗^2 +⋯+〖FCF〗_n/(1+WACC)^n +HVn
This equation represents the value of 2012, where FCF denotes free cash flows and WACC denotes weighted average cost of capital.
To illustrate with an example, we calculate the value of 2012 as shown below:
Value of 2012 = 277.0/((1+16.0%) )+312.7/(1+16.0%)^2 +353.0/(1+16.0%)^3 +398.5/(1+16.0%)^4 +9,181.8/(1+16.9%)^4 = $ 5,071.03 million
According to the previous forecast and analysis for RL Corporation, the financial performance in 2012 is satisfactory. The debt-equity ratio is 0.068, meaning the corporation has a small amount of debt compared to its equity. In the current unstable global economic environment, debt can amplify operating risks. However, debt is also the cheapest form of capital in financial management. A lower D/E ratio indicates a higher equity, which may be more costly. Overall, Ralph Lauren Corporation has a positive financial performance in today’s challenging economic situation.
List of References
The URL http://investor.ralphlauren.com provides access to Ralph Lauren’s Investor Relations website.
2. Yahoo Finance Ralph Lauren Corporation, http://finance.yahoo.com/q?s=RL.
The text from a paragraph tag states “3. Michael C. Ehrhardt, Eugene F. Brigham, 2011,”.
The Ralph Lauren Corporation is a company that can be found on Wikipedia at the URL http://en.wikipedia.org/wiki/Ralph_Lauren_Corporation.
The relevant information is stated in the “2012 Form 10-K” document of Polo Ralph Lauren Corporation, according to the Securities and Exchange Commission of the United States.
You can find information about Ralph Lauren’s flagship stores on the Ralph Lauren Media, LLC website. The retrieval date was May 10, 2012. Additionally, in May 2012, Ralph Lauren is listed as a FORTUNE 500 company on CNN Money’s website. To access the snapshot, visit http://money.cnn.com/magazines/fortune/fortune500/2012/snapshots/10652.html.
