Ralph Lauren Corporation (NYSE:RL) is well known in the apparel clothing field. The corporation engages in the design, marketing and distribution of lifestyle product. This analysis paper will illustrate the current financial situation and forecast the future free cash flow based on the previous financial statement and financial data collected. These information and forecast are served for the potential investor to have a general understanding of RL Corporation and make the right choice on their money.
Ralph Lauren, an American designer, established the brand Polo Ralph Lauren in 1967. At first, Ralph Lauren’s collection was men’s ties. In 1971, Polo Ralph Lauren started its first women’s collection of apparel and the first stand- alone store was opened in Beverly Hills, California. The company entered the international market in 1981. In 1997, the company went public on the New York Stock Exchange.
Ralph Lauren Corporation (NYSE: RL) is an upscale American lifestyle company and fashion retailer founded by American designer Ralph Lauren. The company focuses on high-end clothes for men and women, as well as accessories, footwear, fragrances, home (bedding, towels) and housewares; presents media content of its lifestyle; and it also runs a line of restaurants. By 2007, Ralph Lauren had over 35 boutiques in the United States and other international locations in London, Beijing, Tokyo, and Moscow. CNN Money published the new Fortune 500 on May 2012. RL Corporation was ranked at No. 431 this year, better than the No. 451 on last year’s ranking. Obviously, the world admits the RL Corporation’s improvement.
To illustrate the financial situation of Ralph Lauren, we should first have a look at the financial statements for the recently 3 years. The balance sheet for RL from 2010 to 2012 is showed under the Form 1. The income statement from 2010 to 2012 is presented as the Form 2. The net sales are $6,678,800 and the licensing revenue is $180,700 in the RL’s 10-K form which was filed
to SEC on March 31, 2012. The total revenue of $6,859,500 showed in the form at the top of this page.
Average growth rate from 2008 to 2012 is 13.3%. The compound growth rate from 2008 to 2012 is the value for g in the equation: $419,800(1+g)4=$681,000. The value of g can be found by solving the equation with a financial calculator. Enter N = 4, PV = -419800, PMT = 0, and FV = 681000; then press I/YR to get g = 12.9%.
The market cap for RL Corporation is 14.0 billion, which ranks at number 8 under the worldwide Textile Apparel Clothing Industry and ranks at number 2 in the United States Market. The direct competitors for RL Corporation are Fifth & Pacific Companies, Inc. (FNP), The Jones Group Inc. (JNY), and PVH Corp.
According to the comparison in the prior form, RL Corporation obviously has stronger financial performance than other competitors. At first, RL Corporation obviously has a larger market cap compared to other competitors. The size of the corporation is larger than others too based on the number of employees. Meanwhile, the revenues, gross margin, EBITDA, and net income for RL Corporation are all much better than other three competitors. The current ratio for RL is 2.9, which means that the current assets are as almost three times as the current liability. As the creditors’ view, they prefer the high current ratio. The current ratio provides the best single indicator of the extent, which assets that are expected to be converted to cash fairly quickly cover the claims of short-term creditors. However, consider the current ratio from the perspective of a shareholder. A high current ratio could mean that the company has a lot of money tied up in nonproductive assets.
The return on equity, ROE, is as high as 20.69% (above 15%). It illustrate that the RL Corporation uses the investors’ money pretty effectively. As of return of assets, equals to 13.10%, which reveals how much profit a company earns for every dollar of its assets. Both ROE and ROA for RL Corporation seems really good and they provide a picture that managers are doing a good job of generating return from shareholders’ investments.
The current financial performance is pretty optimistic for RL Corporation. At the same time, we also need to forecast the future financial data after 2012. To forecast the future free cash flow, only the internal employees can get the real and accurate information and ratios. As an external observer, we usually analyze the linear relation between the cost of capital and growth rate, considered as the constant growth model. First of all, we need find the WACC, Weighted Average Cost of Capital. The weighted average of the after-tax component costs of capital-debt, preferred stock, and common equity. Each weighting factor is the proportion of that type of capital in the optimal, or target, capital structure. It can be presented as WACC = wdrd(1-T) + wsrs.
The long-term debt for RL Corporation is $274,400 on 2012. 4.5%, rd, is the interest rate for this long-term debt. rd(1-T), the after-tax component cost
of debt. The effective tax rate is 32.9%. Therefore, the rd(1-T) equals to 3.0%. For the cost of equity, rs = rRF + (RPM)b. From the Wall Street Journal, we can get the 10-year Treasury bond rate is 4.5%, which is considered as the risk free rate (rRF). The market risk premium (RPM) can be calculated by subtracting the required market return from the risk free rate. rm = D1/P + g = 1.6% + 12.9% = 14.5%. RPM = 14.5% – 4.5% = 10%. The beta equals to 1.24. Therefore, the rs = 4.5%+10.0%*1.24 = 16.9%.
WACC = (274,400/4,318,000)*3.0％ + (4,043,600/4,318,000)*16.9% = 0.0019 + 0.1583 = 16.0%.
Increase in operating capital885.3999.51128.41274.01438.4 Free cash flow245.3277.0312.7353.0398.5
FCF is calculated as: EBIT*(1-Tax Rate) + Depreciation & Amortization – Change in Net Working Capital – Change in Capital Expenditure. Capital expenditures (CAPEX) = Total Asset-Total Liability. Net Working Capital (NWC): Total current liabilities 946.2, total current assets for 2012 = 2,899.9, so the net working capital (NWC2012) =2899.9-946.2=1,953.7. On
2011, total current assets = 2,478.0, total current liabilities = 832.0, so the net working capital in 2011 (NWC2011)=1,646.0.Therefore, the change in Net working capital= 1953.7-1646.0= 307.7. As for CAPEX, total assets for 2012 is 5,416.4, total liabilities for 2012 is 1,763.9, and CAPEX=5,416.4-1,763.9= 3652.5. On 2011, total assets is 4981.1, total liabilities is 1676.4, so CAPEX for 2011 is 3304.7. Therefore, the change for CAPEX is 3652.5 – 3304.7 = 347.8. The free cash flow for the year of 2012 (FCF2012)=1039.4 * (1-35%) + 225.2 – 307.7 – 347.8 = 245.3. Based on the WACC and the forecast of the free cash flow, the value for the RL Corporation is possible to be calculated. Horizon value is the value of operations at the end of the explicit forecast period. It is equal to the present value of all free cash flows beyond the forecast period, discounted back to the end of the forecast period at the weighted average cost of capital.
Horizon Value of 2016= 〖FCF〗_2017/(WACC-g)=(〖FCF〗_2016 (1+g))/(WACC-g)=398.5(1+12.9%)/(16.0%-12.9%)=$9,181.8 million
Value of 2012= 〖FCF〗_1/(1+WACC)+〖FCF〗_2/〖(1+WACC)〗^2 +⋯+〖FCF〗_n/(1+WACC)^n +HVn=277.0/((1+16.0%) )+312.7/(1+16.0%)^2 +353.0/(1+16.0%)^3 +398.5/(1+16.0%)^4 +9,181.8/(1+16.9%)^4 =$ 5,071.03 million
According to the prior forecast and analysis for RL Corporation, the financial performance on 2012 is quite satisfactory. The debt-equity ratio is 0.068, which means the corporation only has quite little debt over this level of equity. Under the unstable global economic environment, the debt can be considered as a magnifier. The operating risk will be enlarged. On the other hand, the cost of the debt is the lowest capital in financial management. The low D/E ratio means the corporation has a bigger equity that may cost more. Under nowadays’ tough economic situation, Ralph Lauren Corporation has a pretty optimistic financial performance overall.
1. Ralph Lauren Investor Relations, http://investor.ralphlauren.com.
Finance Ralph Lauren Corporation, http://finance.yahoo.com/q?s=RL.
3. Michael C. Ehrhardt, Eugene F. Brigham, 2011,
4. Ralph Lauren Corporation – Wikipedia
5. “2012 Form 10-K, Polo Ralph Lauren Corporation”. United States Securities and Exchange Commission.
6. “Our Flagships”. Ralph Lauren Media, LLC. Retrieved May 10, 2012. 7. 431. Ralph Lauren, FORTUNE 500, CNN Money, May 2012, http://money.cnn.com/magazines/fortune/fortune500/2012/snapshots/10652.html.
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