Ralph Lauren stock is in the buy range

Ralph Lauren Corp. NYSE:RL The stock is in a buy range following its first pullback since surging nearly 17% following better-than-expected fiscal third-quarter results.

The clothing maker, whose iconic logo is the pony and rider, has galloped up 29.41% in the past month and 44.28% in the past three months.

Clothing stocks become fashionable

As a group, apparel stocks have risen significantly over the past six months, with Ralph Lauren among the best performing stocks. Apparel stocks fall into the consumer discretionary category. However, despite being considered discretionary, apparel stocks often show resilience, even during weaker economic and market cycles, as consumers replace items or spruce up their wardrobes to keep up with trends.

The SPDR Consumer Discretionary Fund NYSEARCA: XLY has been dominated by fast-growing names like Amazon Inc. NASDAQ:AMZN and Tesla Inc. NASDAQ:TSLA, none of which pay dividends. As a result, the industry yield is only 0.8%.

However, Ralph Lauren’s dividend yield is 1.61%, giving it an edge in its sector for income-seeking investors.

Here are five reasons why Ralph Lauren stock is worth watching.

1. Bullish Chart Action: Ralph Lauren’s chart shows a gap breakout on Feb. 8, when the stock broke out of a six-week consolidation with a buy point above $148.03.
Trading volume was more than five times higher than average, indicating massive investor belief in the stock’s prospects.

Ralph Lauren shares are currently in a usable zone, having retreated from the Feb. 23 high of $190.41 and gaining support at its 10-day moving average.

2. Sales Resilience: The company is advancing its “Next Great Chapter” plan to accelerate growth around the world. It has realigned its brand portfolio and entered into new licensing agreements to better focus on areas with the highest growth potential.

Ralph Lauren’s earnings data shows a pickup in revenue growth over the past two quarters, and earnings growth picked up in the third quarter.

Sales during the holiday season were higher than analysts expected, with sales in China being a key driver of growth.

“By region, growth was once again led by Asia with a particularly strong performance in China where sales increased more than 30% this quarter on both comp and new store growth,” said the CEO Patrice Louvet on earnings conference call. “This result was beyond our expectations, even with easier comparisons last year due to the increase in Covid cases.”

Additionally, the company is looking for more robust digital sales channels to increase revenue worldwide.

3. Earnings and Margin Growth: Wall Street expects the company to earn $10.21 per share this year, up 22%. Next year it is expected to rise another 10% to $11.19 per share.

Both estimates have been revised upwards recently.

“We expect a slight improvement in operating margin in fiscal 24 as transportation costs and supply chain issues improve,” CFRA analyst Zachary Warring wrote in a Feb. 24 note.

“Inventories in the subsector remain elevated and will continue to drive promotional activity in the near term. We expect an operating margin of 12.2% in FY24, following 11.6% in FY23,” Warring added. “We expect an operating margin of 12.0% over the long term. Before the pandemic, RL’s operating margin ranged from 9% to 11%.”

4. Industry Strength: The apparel industry as a whole is outperforming others. An uptrend within a particular sector shows broad demand. This, in turn, translates into strong performance of individual stocks.

Investors are seeing this play out right now with semiconductor stocks, but it’s also true for other sectors, including biotech stocks and apparel.

Other apparel industry leaders include G-III Apparel Group Ltd. NASDAQ: GIIIPVH Corp. New York Stock Exchange: PVH and Tapestry Inc. NYSE:TPR. All of these companies produce or market well-known global clothing brands.

5. Analyst Actions: Ralph Lauren analysts’ forecasts show a consensus view of “moderate buy”.

After the third-quarter report, Goldman Sachs raised its price target to $151 from $132, although this is a conservative target compared to many others.

CFRA Warring maintains a “hold” rating on the stock.

“Our Hold view and price target reflect our view that RL has benefited from brand momentum and pent-up demand since the onset of the pandemic, which we have seen normalize in recent quarters,” he wrote. “RL continues to see momentum in its digital ecosystem even as traffic normalizes at its physical stores, which should help margins moving forward.”

Before you consider Ralph Lauren, you’ll want to hear this.

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