The unexpected surge in retail sales and department-store traffic in March caught Wall Street by surprise. So expect a lot of upgrades and earnings estimate revisions from analysts who follow industries whose fortunes depend on the rise and fall of consumer spending.
One company that stands to benefit hugely from all this is Polo Ralph Lauren (RL), the noted apparel designer and demigod of the "fashionistas." Since the recession hardly made a dent in its upward sales progress, Polo should have tremendous leverage in advancing in the economic recovery that's increasingly gaining traction.
Although shares of Polo have lagged its peers year-to-date, they've been galloping higher in part because of steady sales growth despite the recession. The stock has ramped up from a 52-week low of $45 on May 13, 2009, to a 52-week high of $91.36 on Apr. 14. Even before the news about rising retail sales came out, some analysts expected the stock to move to higher ground, with some forecasting it'll bolt to $105 in a year.
Continued Upward Revisions
"We are raising our estimates and our price target for Polo as we believe the order outlook has improved with recent department store trends, continuing the restocking theme which began last year," Barclays Capital analyst Robert S. Drbul told clients in a report before the release of news about the 1.6% jump in March retail sales. "We are beginning to see an increase in underlying demand in the luxury-goods market as macro conditions continue to improve," adds Drbul, who figures Polo will earn $4.30 per share in 2010 and $4.85 in 2011.
The recovery in consumer spending was indeed impressive given the high unemployment rate. Ed Yardeni, chief investment strategist and chief economist at Yardeni Research, notes that "real retail sales, excluding building materials, rose 3.8% on a seasonally adjusted annual rate -- the best since November 2007." The unexpectedly upbeat numbers, he says, are bound to convince analysts to keep revising upward their profit estimates for the Standard & Poor's 500 companies.
A Boost From Paris
Polo has about 6,100 retail stores worldwide, and with various licensing agreements its brand has expanded to include fragrance, eyewear, leather goods, jewelry and extensive home-merchandise products. "All told, we believe the Polo Ralph Lauren brand generates about $12 billion at retail worldwide," says Marie Driscoll, analyst at Standard & Poor's. She rates the stock a strong buy with a 12-month target of $105 a share, based on her earnings estimate of $4.80 a share for 2011. For 2010, she expects Polo to earn $4.20 a share, up from $4.01 in 2009. The stock hit its all-time high in 2007, when it traded at $102.
Apart from the pickup in U.S. apparel sales, Driscoll expects the opening of Polo's flagship store in Paris on Mar. 15 to stimulate foreign demand for its products. The company's 40 European company-owned stores, along with its wholesale business, account for 17% of total sales, says the analyst. Strong brand positioning combined with geographic expansion and more favorable product mix provide Polo "attractive long-term growth opportunities," says Driscoll.
Already, there are signs that orders have improved. "Industry checks suggest an improving outlook for fiscal 2011" (ending Mar. 31), says Michael Binetti, analyst at investment bank UBS, who notes that orders for fall 2010 are stronger than his initial expectations. He reports that some retailers have had difficulty getting sufficient inventory from Polo, "suggesting to us that U.S. and Europe trends are running above plans."
A Majority of Analysts Are Neutral
Further proof of improving conditions is the spread between same-store sales growth and planned inventory growth at U.S. department stores, which is " the widest it's been in over five years -- which could trigger restocking that would benefit Polo," says Binetti.
It's likely that Wall Street will start riding Polo's stock now that it's moving faster than many had expected. Currently, only six analysts of the 17 who follow it rate the stock a buy, while nine others are neutral. One analyst recommends selling.
Also a likelihood is that the major shareholders who took profits and sold some shares will come back to buy again. One of them is Fidelity Management, Polo's largest stakeholder with 13.58% of the stock, which sold 1.78 million shares as of Dec. 31, 2009. With what's going on in an animated retail market and rising consumer spending, it may not be too late for investors who have yet to own stock to start betting on Polo.
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