This Retailer Is Out Of Fashion

Ralph Lauren Corp. (RL), previously shorted in Modern Trader’s July 1issue, is still unravelling at the seams (then, we recommended to short at $96.91 and to cover short at $71.00). One of the world’s most visibly known apparel and lifestyle retailer focuses on three segments — wholesale, retail and licensing — and is still suffering from its continuous performance declines from 2015, making this a long-term short position. 

The company, which was founded in 1967 and operates 493 retail locations plus 583 sub-retail facilities, ranks as one of the most iconic brands in the world. While RL’s brand cache may still remain intact, its overall operating margin continues to contract further from July.

Overall, retail stocks continue diving as companies mark down their higher-end inventory. The recent news marking the sudden and abrupt departure of Ralph Lauren’s CEO Stefan Larrson has made investors concerned over the company’s managerial decisions. Larsson, who was hired by RL only one year ago, reportedly stepped down from his role due to disagreements with founder Ralph Lauren, who serves as executive chairman and chief creative officer, over the direction of the brand. This “changing of the guard” is not exclusive to RL, as the purge of executives within the retail sector has heightened anxiety, as evidenced by Frederic Cumenal’s departure from Tiffany & Co. (TIF) due to disappointing earnings results only 22 months after moving from LVMH Moet Hennessy Louis Vuitton (MC). 

Ralph Lauren’s reported results for its fiscal Q3 pertain to the period ending Dec. 31, 2016. Surprisingly, it delivered better-than-expected earnings and in-line revenues. Its earnings-per-share (EPS) fell 18%, while its year-over-year revenue reported at $1.86. On average, analysts were expecting a 28% year-over-year fall to $1.64 per share. RL’s total revenues fell 12% year-over-year to $1.7 billion, signaling its seventh straight quarterly decline. Fiscal Q3 wholesale revenues were 26% lower year-over-year primarily due to the strategic reduction in North American shipments.

RL’s stock price touched a six-year low on Feb. 2, closing at $76.61, or 12.3% below the previous day’s closing price. Currently RL is trading 48% below its 52-week-high price and has fallen 15% year-to-date (YTD). By comparison, apparel and accessory competition including Coach (COH) and HanesBrands (HBI) have gained 5.6% and 5.3%, YTD respectively, while PVH Corporation (PVH) and VF Corporation (VFC) have stayed in the red. Notably, the S&P 500 Apparel and Accessories Index, a seven-company index based on Ralph Lauren, HanesBrands, VF Corporation, Coach, PVH Corporation, Michael Kors and Under Armour have all fallen 6% YTD.

Technical picture

In decline since late 2014, RL rebounded beyond the 38.2% Fibonacci level in late 2015 before once again retreating, and traded between $90 and $114 during the second half of 2016. After a post-election rally that saw RL rocket through the 50- and 200-day moving average, RL topped at $114 and began a step pattern decline. 
A tepid rebound failed at $92 in late January leading to a further decline that pushed the 50-day MA below the 200-day (see “Marked down”). That technical weakness most likely exacerbated the recent plunge on Larrson’s departure, which was accompanied by heavy volume and could carry the price in a stair-step decline into the $50 area. An attempt to fill the Feb. 2 gap between $81-$86 is possible, but not likely, so shorts can place stop just above the high of the gap.