POLO RALPH LAUREN'S WEBSITE OF fers fashionistas smart advice on how to wear this season's hot item, super-skinny denim jeans: Pair them with a cropped jacket, or tuck them into thigh-high boots. The metaphor is apt. Despite a 44% run-up in the company's shares (ticker: RL) in the past 12 months, to Thursday's all-time high of 78.75, Polo is likely to stay in fashion and make a fine tuck-in to an investment portfolio.
Although the stock has soared 188% since Barron's wrote a positive piece on the company three years ago ("The Lat est Fashion," Sept. 29, 2003), earnings continue to grow at an impressive rate. Analysts expect earnings per share to rise 21%, to $3.63, in the year ending March 2007. The shares could advance into the mid-80s in the next year or so.
Polo isn't as cheap· as it was in Sep- . tember 2005, when we wrote a fol low-up ("In the Black," Sept. 12, 2005), urging investors to hang on after the stock had risen to 49-and-change. But, at 19 times analysts' fiscal 2008 earn ings estimates of $4.08 a share, neither is it expensive. Its price-to-earnings growth ratio is an appealing 1.18.
Some critics, like Douglas Kass of Seabreeze Partners, think the shares will unravel as consumer" rein in spend ing.Kass says he has been "shorting Polo aggressively" on a bet that it will retreat to the low 60s. The hedge-fund manager expects Polo and other upscale retailers to face a downbeat Christmas, as a slowdown in cash refinancing of home mortgages curtails the purchase of high-priced items.
Kass also cites "enormous" insider selling, by Chairman Ralph Lauren, among others: Insiders unloaded more than 300,000 shares over the past six months, according to regulatory filings.
Polo senior vice president Nancy Mur ray says most of the transactions are programmed and tax-related selling. "We think the stock is just beginning to enter its appropriate valuation level," she says. ''And I stress 'beginning.'''
The company is a smooth operator, with a keen fashion sense. The compa ny's operating margins continue to rise. and its products, which include apparel. accessories, housewares and linens, com mand full price in both the wholesale and retail markets. An expanding inter national presence also has contributed to the company's growth.
Polo could be energized by new store openings, which are expected to jump to 40 to 50 a year, from 20 to 25. "We firmly believe that [company-owned] re tail represents the company's largest growth opportunity," says Credit Suisse analyst Omar Saad, who has an 87 price target for the shares.
Some investors might be tempted to follow Lauren's lead and take some prof its at current levels. But the fabled Polo pony has proved to be a long-distance runner, and isn't tired yet.
~CHRISTOPHER C. WILLIAMS
