1 Business Valuation of Polo Ralph Lauren Corporation NYSE-RL As of April 1 of 2005 Ralph Lauren Chairman and Chief Executive Officer Polo Ralph Lauren Gerald M. Chaney Senior Vice President of Finance and Chief Financial Officer Polo Ralph Lauren Mark Moore Financial Statement Analysis Instructor Texas Tech University Prepared By: Team America Stephen H. Johnston [email protected]Tara Watkins [email protected]Colby Wright [email protected]_____________________________________________________________________ The information contained herein is of a confidential nature and is intended for the exclusive use of the persons or firm for who it was prepared. Reproduction, publication, or dissemination of all or portions hereof may not be made without prior approval from Team America.
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Business Valuation of Polo Ralph Lauren Corporation - Mark E. Moore
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Business Valuation of Polo Ralph Lauren Corporation NYSE-RL
As of April 1 of 2005
Ralph Lauren Chairman and Chief Executive Officer Polo Ralph Lauren Gerald M. Chaney Senior Vice President of Finance and Chief Financial Officer Polo Ralph Lauren Mark Moore Financial Statement Analysis Instructor Texas Tech University
The information contained herein is of a confidential nature and is intended for the exclusive use of the persons or firm for who it was prepared. Reproduction, publication, or dissemination of
all or portions hereof may not be made without prior approval from Team America.
______________________Table of Contents______________________
Executive Summary 3-4 Assumptions and Limiting Conditions Industry Overview and Analysis 5 Company Identification 5 Nature and History of the Company 5 Business Summary 6 Products and Services 7 Competitors 8 SWOT Analysis Strengths 9 Weaknesses 10 Opportunities 10 Threats 11 Five Forces Model Rivalry among Firms 12 Threat of New Entrants 12 Threat of Substitute Products 12 Bargaining Powers of Buyers 13 Bargaining Powers of Suppliers 13 Accounting Analysis of Firm and Industry Key Accounting Policies 14 Ratio Analysis 22
The objective of this report is to Estimate Polo Ralph Laurens’ Fair Market Value of Common Stock as of the first quarter of 2005. The purpose of this report is to deicide if Polo Ralph Lauren would be a good financial investment and where the company’s future looks like. To come to a conclusion with the future of Polo RL we proceeded to:
• Collect relevant historical statements. • Analyzed these statements and placed them into ratio form for basis to compare to
the industry. • We used the historical information and information from the company’s website,
located at www.Polo.com, and at www.marketguide.com, to prepare a 3 year projection of the income statement, balance sheet, retained earning statement, and the cash flow statement
• We also collected information on the industry that Polo Ralph Lauren operates in and collected information on the competition of the retail/apparel industry.
Used information available to me to establish a method to value the company Recommendation- Market Performer, slightly overvalued We have initiated coverage on Polo Ralph Lauren (RL) with a recommendation to buy. With the performance of the stock in the last five years, the recent growth overseas as well as the stronghold they continue to maintain in the United States this stock is a strong steady investment with growth opportunities. The apparel / accessory industry has been quite competitive in the past with Polo the leader in the higher end quality merchandise. Polo has a strong market share in the U.S. industry, and expects to continue the steady growth that it has maintained in the past. Polo sees large profits coming from its recently expanded with its Internet sales, and the sales of overseas department stores. Industry Demand Drivers The drivers for new growth will continue with sales overseas, internet sales, and the reduction in cost due to production in China, and other overseas manufactures. In addition the increase in sales due to the increase in market share, and new demand for the quality product that Polo has maintained year in and year out. Polo is well positioned
With Polo entering new markets such as home decor like bedding, bath products, furniture, fabric, and wall paper, they continue to contain the strength that they have shown in the past, and began to grasp these new markets with the strong brand name and quality product. Polo also is ahead of the industry in their production and manufacturing being done overseas and in various places around the globe. They currently have several manufacturing plants located in China which is an advantage over the competitors as the regulating laws will soon be changing. Margin Expansion Polo has maintained steady growth, and could see some margin expansion due to the strength of the sales overseas in the Europe and Chinese markets. Healthy Financials Polo has maintained the growth in the company as net income has increased every year except in 2001, when they proceeded to pay off their total debt which was their 1997 line of credit worth $225 million as well as their 1999 which was $300 million but was increased to $375 million. Polo has very little debt on their balance sheet, and have available credit if needed. Valuation Based on our valuation models, Polo Ralph Lauren’s stock price is very comparable to several of our valuation models; it is slightly overvalued that is still outperforming the market. The actual market price was $38.41, our best valuation is our Abnormal Earnings Growth model that valued the company at $38.11 which considering Polo does not pay very high dividends if the pay them at all this would be the best model to use. Most of our valuation models were within the 52 week range of prices, except for our discounted dividend model which would be obviously be undervalued considering Polo has only paid a dividend in the last 6 quarters. Looking Good on Other Criteria Polo is a well established company with a strong steady growth, its corporate structure is very strong with little to no debt, and has a constant growth in its stock value, that has outperformed the market. It showed little to no dip or slowed growth due to the tragedy of 9/11 as well as the economic downfall that followed that of 9/11. Risks The greatest risk that Polo RL posses right now is the law suit that they are currently involved in with Jones New York concerning a breach of licensing agreement. If Jones New York does potentially win this lawsuit then it could cost Polo RL $343 million in cash, which would potentially hurt the net income of next years earnings, but could be financed with the two revolving lines of credit that they have available. Also they have the seasonal department store challenges, with both competitors Tommy Hilfiger and Liz Clabourne introducing new styles and lines of clothes
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Industry Overview and Analysis.
Company Identification
Polo Ralph Lauren Corporation (NYSE:RL) is located at 650 Madison Avenue
New York, NY 10022, and was incorporated in New York as well.
Nature and History of the Company
What started with a tie 35 years ago has grown into an entire world that has
redefined the “American Style”. Polo has always been about selling quality products by
introducing style and inviting customers to follow. Polo was the first to create lifestyle
advertisements that told a story. Polo was the first to create stores that enabled their
customers to interact with a Lifestyle. They continue to lead the industry today as they
have expended world wide with the opportunities of Polo.com where across the world
you can read about adventure, style and culture. Polo Ralph Lauren was established in
1967 as Ralph Lauren created the Polo label with an instantly successful line of ties. The
1970s open with the introduction of Ralph Lauren women’s wear. Lauren creates a daring
line of men’s tailored shirts for women—reinventing a classic men’s look for women’s
style. The women’s line also brings the birth of the polo player emblem. The early 70’s
also brought the first polo store. The 1980’s followed just as strong as a New York Times
architecture critic Paul Goldberger states that the true design symbol of the 1980s was not
Philip Johnson or Robert Stern—but Ralph Lauren. The growth still increased as the
1990’s passed. In 2000 the internet brought a great increase in sales.
Business Summary:
Polo Ralph Lauren Corporation is a leader in the design, marketing and
distribution of premium lifestyle brands of clothing and accessories, home furnishings,
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and fragrances. For more than 35 years, Polo’s reputation and distinctive image have
been consistently developed across an expanding number of products, brands and
international markets. The company’s brand names constitute one of the world’s most
widely recognized families of consumer brands.
Located in prime retail areas, the Company's 110 full-price stores operate under
the names Polo Ralph Lauren, Club Monaco and Club Monaco Caban. Polo Ralph
Lauren stores feature the full-breadth of the Ralph Lauren apparel, accessory and home
product assortments in an atmosphere consistent with the distinctive attitude and luxury
positioning of the Ralph Lauren brand. The Company grants product and international
licensing partners the right to manufacture and sell at wholesale specified products under
one or more of its trademarks. Its international licensing partners produce and source
products independently, as well as in conjunction with Polo and its product licensing
partners.
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Products and Services:
Polo Ralph Lauren designs, markets and distributes luxury products domestically
and globally. The company’s brand names include Polo by Ralph Lauren, Ralph Lauren
Purple Label, Ralph Lauren, Black Label, Blue Label, Lauren by Ralph Lauren, Polo
Jeans Co., RRL, RLX, Rugby, RL Children’s wear, Chaps and Club Monaco. The
company offers, along with its licensing partners, broad lifestyle product collections in
four categories: apparel, which includes collections of men's, women's and children's
clothing; home, which includes coordinated products for the home, such as bedding and
bath products, furniture, fabric and wallpaper, paints, broadloom, tabletop and giftware;
accessories, which encompass products such as footwear, eyewear, jewelry and leather
goods, including handbags and luggage, and fragrance and skin care, of which products
are sold under the Glamorous, Romance, Polo, Lauren, Safari and Polo Sport brands. The
Company operates in three integrated business segments: wholesale, retail and licensing.
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Distribution is accomplished at a domestic and international level with methods including
retail, wholesale, online, and in stores.
Competitors:
Tommy Hilfiger Corporation (THC), through its subsidiaries, designs, sources and
markets men's and women's sportswear, jeans wear and children’s wear under the
Tommy Hilfiger trademarks. Through a range of strategic licensing agreements, the
Company also offers related apparel, accessories, footwear, fragrance and home
furnishings. Its products can be found in department and specialty stores throughout the
United States, Canada, Europe, Mexico, Central and South America, Japan, Hong Kong,
Australia and other countries in the Far East, as well as the Company's own network of
specialty and outlet stores in the United States, Canada and Europe. The Company
positions its apparel collections under three primary labels: H Hilfiger, Tommy Hilfiger
and Tommy. THC is engaged in three segments: Wholesale, Retail and Licensing.
Liz Claiborne Inc. (LIZ) designs and markets branded women's and men's apparel,
accessories and fragrance products. The Company operates in three business segments,
such as Wholesale Apparel, Wholesale Non-Apparel and Retail. Its portfolio of brands
includes most apparel and non-apparel categories, reaching consumers of various age,
gender, size, attitude, shopping or value preference. These products range from classic
and traditional apparel to modern and contemporary wear. The Liz Claiborne's brands are
available at over 30,000 different retail locations throughout the world, including the
Company's own specialty retail and outlet stores, and on its e-commerce sites. During
2004, the international sales represented 24.4% of the Company's total sales.
The Gap, Inc. (GPS) is a global specialty retailer selling casual apparel, accessories and
personal care products for men, women and children under a variety of brand names,
including Gap, Banana Republic and Old Navy. The Company's markets consist of the
United States, Canada, Europe and Japan. Gap sells its products through both traditional
retail stores and online stores. During the fiscal year ended January 31, 2004, the
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Company-operated a total of 3,022 store locations. Its stores offer a shopper friendly
environment with an assortment of casual apparel and accessories that emphasize style,
quality and good value. The Company's stores are open seven days per week and on most
holidays. All sales are tendered for cash, personal checks, debit cards or credit cards,
including Gap, Banana Republic and Old Navy private-label credit cards that are issued
by a third party.
SWOT Analysis
Strengths:
Polo Ralph Lauren’s strengths lie in its brand equity, infrastructure
improvements, its history, and it’s financial strength.
High Brand Recognition: Ralph Lauren’s brand name and Polo’s logo are both
recognizable and highly regarded in the fashion world. Polo Ralph Lauren’s classic style
has allowed the company to expand its product portfolio into markets beyond clothing,
and into apparel, scents, and home furnishings. High customer loyalty allows for a larger
profit margin than most other companies in its industry. The powerful brand equity
responsible for such a strong consumer following reduces the price sensitivity for retail
sales, which was a strong factor in maintaining good performance during the recent
recession.
Infrastructure Improvement: Polo Ralph Lauren has been finding new ways to reduce
costs through changes in its infrastructure, primarily in Europe. Sales in Europe have
shown little growth, but several distribution centers have been consolidated to increase
efficiency and growth. New cross-stocking merchandise methods at the North American
distribution center in North Carolina have reduced costs for American distribution.
Respectable History and Future: By consistently setting the fashion standard for three
decades, Polo Ralph Lauren’s products remains in high demand and new fashion lines are
anticipated among customers.
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Debt Ratio: Polo Ralph Lauren has a low debt to capital ratio that provides financial
strength, which allows for future growth. Polo recently in 2002 paid off their revolving
line of credit of 3 million dollars to become clear of any type of bank loans or loan able
funds.
Weaknesses:
Polo’s weaknesses are in its dependence on department store sales and
manufacturing.
Dependence on Department Stores: Sales from department stores make up for almost one
third of Polo Ralph Lauren’s revenues. Sales in department stores can be uncertain due to
shared housing with competitors and the financial stability of these stores.
Dependence on Manufacturing: Competition for quotas and capacity from other clothing
manufacturers has resulted in limitations with manufacturing for situations of high
demand. Product quality is also a factor hindered by manufacturing, due to the high
standards of the Polo fashions. Polo’s designs sometimes create new methods for quality
with manufacturing, which hinder future growth.
Opportunities:
Polo’s opportunities for growth include brand extension, specialty retail, and
international expansion.
Building and Extending the Brand: Polo Ralph Lauren is one of the world's premier
brands, universally recognized and associated with distinct design, luxury and quality.
Polo’s integrated approach to advertising and marketing uniquely showcases the world of
Ralph Lauren. Retail stores continue to be an important physical extension of its global
brand. Success with its specialty retail business has given Ralph Lauren the confidence to
apply its expertise to wholesale business, including merchandise mix, visual presentation
and excellent customer service. There is more to come as Polo expands and extends the
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Ralph Lauren lifestyle through new products, in new categories and in new parts of the
world.
Specialty Retail: Polo’s retail strategy starts with product and Ralph Lauren continues to
design the best and most sought-after products in the marketplace. Polo continues to
increase the amount of exclusive or limited-distribution product in its Ralph Lauren
stores. By adding experience and strength to the leadership of the specialty retail group
and coupling it with the right merchandise and marketing support, Polo is making
significant advances in how it operates its retail stores. Polo has also developed a strong
real estate and store strategy including the opening of 50 to 60 stores over the next five
years in the United States and 20 to 25 stores in Europe.
Expanding International Presence: International expansion presents a wealth of
opportunity for Polo Ralph Lauren. Their approach to each world region is specific to its
business climate and structure, while the common goal is to broaden their reach through
increasing direct brand ownership and control with new specialty retail store openings.
The strong, flexible infrastructure allows Polo to capitalize on opportunities and grow
businesses around the world.
Threats:
Two threats facing Polo Ralph Lauren are the seasonal competition of department
stores and the Jones New York lawsuit.
Department Store Competition: Women’s wear competition is increasing for the spring
and summer seasons for department store sales. Polo will have to compete with Liz
Claiborne’s Realities and Tommy Hilfiger’s new H women’s apparel lines. Jones New
York has also launched the Signature clothing line, which is modeled after Ralph
Lauren’s clothing line.
Current Lawsuit: Jones New York filed a lawsuit against Polo Ralph Lauren worth $550
million for a breach of a licensing agreement. Polo invoked their agreement with Jones
New York and dropped the company as a licensor of Ralph and Lauren fashion lines, due
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to Jones New York’s inability to meet the $100 million required at the end of 2002. If
Jones New York wins the lawsuit, it will materially impact the value of the company,
especially with $343 million in cash.
Five Forces Model
Rivalry Among Existing Firms:
The fashion retail industry is constantly growing with several competitors,
including Tommy Hilfiger, The Gap, Liz Claiborne, Lacoste, and Express. Polo Ralph
Lauren has managed to retain a large portion of the market with a competitive edge by
introducing popular designs and branching into new markets such as interior decorating.
The company is expanding and increasing sales overseas by acquiring smaller retail and
manufacturing companies around the world. The popularity of the internet has brought
more sales opportunities, which has led to an increased development of online marketing.
While entry barriers for matching Polo Ralph Lauren’s large scale operations are very
high, the cost of entering new markets is not so high in its position. This is why home
furnishings, interior decorations, and fragrances have been added to its product mix.
Licensing, opening new stores, and maintaining a global infrastructure are also key for
future growth.
Threat of New Entrants:
There will always be a threat of new entrants in the fashion retail industry, but it
is incredibly difficult and expensive to match the scale economy of Polo Ralph Lauren.
The company has dominated the market by creating and selling popular designs, and by
creating global operations of manufacturing, licensing, and retail.
Threat of Substitute Products:
Substitution plays a large role in the scope of Polo’s marketing strategy. Some of
its direct competitors attempt to introduce new styles to increase demand, while other
companies try to mimic the designs created by Polo. In order to compete, Polo Ralph
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Lauren must remain a respected innovator of quality fashions and expand into other
markets. The Polo Ralph Lauren brand name is part of the appeal of its products and is
essential to its profitability.
Bargaining Power of Buyers:
Polo Ralph Lauren’s customers understand that when purchasing its products,
they are buying quality merchandise and a much respected brand name at a fair cost.
Sales at retail locations attract customers with less spending power, but customers are
generally willing to pay the prices assigned to Polo’s products.
Bargaining Power of Suppliers:
The overwhelming volume of supplies needed for Polo Ralph Lauren’s
operations makes it a hot customer for providers of materials such as fabrics and
packaging. Several possible providers of cotton and other fabrics result in competition
among suppliers and reasonable costs for resources.
Accounting Analysis
Polo Ralph Lauren is a very large company with various operations in various parts of the
world. They use several different accounting policies to combine or shorten their
accounting information. The first one that they use is “Principal of Consolidation” which
basically says that all intercompany balances and transactions have been eliminated.
Polo also uses what is called the “Use of Estimates” which could distort the numbers
going on the financial statements. To derive the quantitative measures which consist of
screening ratios which are used to asses the reliability of Polo’s financial disclosures.
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Qualitative measures must be taken into account to fully evaluate the past accounting
performances and successes of Polo Ralph Lauren. These qualitative measures include
key accounting policies, potential accounting flexibility, strategy analysis, quality of
disclosures, potential red flags, and undue accounting distortions.
Key Accounting Policies
In order to measure the key success factors and risks pertained to Polo Ralph Lauren,
it is necessary to evaluate the policies and estimates the firm uses. Critical accounting
policies are those that are most important to the portrayal of the Company’s financial
condition and the results of operations and require management’s most difficult,
subjective and complex judgments. The Company’s most critical accounting policies
pertain to the following:
Revenue Recognition Revenue within the Company’s wholesale operations is recognized at the time title
passes and risk of loss is transferred to customers. Wholesale revenue is recorded net of
returns, discounts, allowances and operational chargeback’s. Discounts are based on trade
terms. Estimates for end-of-season allowances are based on historic trends, seasonal
results, an evaluation of current economic conditions and retailer performance.
Income Taxes Income taxes are accounted for under Statement of Financial Accounting Standards
(“SFAS”) No. 109, “Accounting for Income Taxes.” In accordance with SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases.
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Net Accounts Receivable A reserve for trade discounts is established based on open invoices where trade
discounts have been extended to customers and is treated as a reduction of sales.
Estimated customer end of season allowances (also referred to as customer markdowns)
are included as a reduction of sales. Costs associated with potential returns of products
are included as a reduction of sales. These reserves are based on current information
regarding retail performance, historical experience and an evaluation of current market
conditions.
Net Inventories Inventories, net are stated at lower of cost (using the first-in-first-out method,
“FIFO”) or market. The Company continually evaluates the composition of its
inventories assessing slow-turning, ongoing product as well as all fashion product.
Net Goodwill and other Intangibles SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill and
intangible assets with indefinite lives no longer be amortized, but rather be tested, at least
annually, for impairment.
Accrued Expenses Accrued expenses for employee insurance, workers’ compensation, contracted
advertising, professional fees, and other outstanding Company obligations are assessed
based on claims experience and statistical trends, open contractual obligations, and
estimates based on projections and current requirements.
Derivatives SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as
amended and interpreted, requires that each derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability and measured at its fair value. The statement also requires that
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changes in the derivative’s fair value be recognized currently in earnings in either income
(loss) from continuing operations or accumulated other comprehensive income (loss),
depending on whether the derivative qualifies for hedge accounting treatment.
Cash and Cash Equivalents All highly liquid investments with original maturity of three months or less at the date
of purchase are classified as cash equivalents.
Net Property and Equipment Property and Equipment is stated at cost less accumulated depreciation and
amortization. Buildings and building improvements are depreciated using the straight-line
method over 37.5 years. Machinery and equipment, and furniture and fixtures are
depreciated using the straight-line method over their estimated useful lives of three to ten
years.
Cost of Goods Sold Cost of goods sold includes the expenses incurred to acquire and produce inventory
for sale, including product costs, freight-in, import costs and provisions for shrinkage.
Shipping and Handling Costs Shipping and handling costs are included as a component of selling, general &
administrative expenses in the Consolidated Statements of Operations.
Stock Options They use the intrinsic value method to account for stock-based compensation in
accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for
Stock Issued to Employees.”
These accounting policies are not equally as important. Revenue Recognition is an
important factor, along with Inventory accounts. Polo Ralph Lauren is more focused on
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Inventory management as they are a retail company. Where as goodwill and intangibles
are not large factors in their financial statements.
Degree of Potential Accounting Flexibility There are ways for Polo Ralph Lauren to be Flexible in the Accounting Methods. But,
by using the FIFO method to account for Inventory, it is hard to manipulate. Net
Property and Equipment is made to be flexible because they use straight line
depreciation, as opposed to the Double Declining method. Net Goodwill and intangibles
is an area that is very flexible. There is no way to account for this asset, and they are not
amortized, but only tested for impairment maybe annually.
Cash flow forecasts show heavy losses from financing, but this is primarily due to the use
of financing cash flows as filler after determining other values. Net income after 2005 is
steadily on the rise, which is good news for the company.
Equity Valuations
Introduction
From our valuations, and the information that we had available for use in deriving
their capital structure, the Abnormal earnings growth model was the best valuation for
Polo Ralph Lauren due to the continued growth of the firm and the steady growth of the
earnings. We feel that with these valuations Polo Ralph Lauren is a fairly valued firm.
Despite the fact that it failed to supply us with the accounting data that we needed to
properly value their capital structure.
Method of Comparable Valuation
Forward P/E Ratio Competitor Price Per Share EPS Forward P/E Ratio Gap 21.51 $1.21 17.78 Liz Clairborne 40.02 2.86 13.99 Tommy Hilfiger 11.24 1.18 9.53 Average of Competitors: 13.77
Industry Fwd. P/E Ratio Forward EPS Expected Share Price
Polo Ralph Lauren 13.77 $1.61 $22.17 Forward P/E Ratio = (Price per Share)/(Forward EPS) Polo Expected Price = (Competitors Avg. P/E)*(Estimated Polo EPS)
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Based on the Comparable forward P/E, the implied stock valuation is well below
the Actual Current Value of $38.41. There were three main competitors used for this
valuation, and were based on the average of their forward P/E ratios. The Benchmark
group used has a large spread in their Price Per Shares which makes their P/E ratios
widely dispersed. This causes the comparable P/E ratio to have a lower quality since the
competitors used have such varying ratios.
The implied stock valuation of PEG resulted fairly the same as the Actual Current
Value of $38.41. The current earnings come close to the Forward PEG Valuation results,
and should reflect the Future earnings. The Forward PEG valuation uses the three
competitor’s averages of the Forward P/E ratios divided by the 5 year Growth Rate. The
Industry Forward PEG valuation is more narrowed and more precise than the Forward
P/E Valuation results.
Forward PEG Ratio Competitor Forward P/E 5 Yr. Growth Rate Fwd. PEG Gap 17.78 6.93 2.57 Liz Clairborne 13.99 10.54 1.33 Tommy Hilfiger 9.53 2.76 3.45 Average of Competitors: 2.45
Industry Fwd. PEG Average Fwd. EPS
5 Yr. Growth Rate
Expected Price
Polo Ralph Lauren 2.45 1.61 8.94 $35.24 Forward PEG = (Forward P/E)/(5 Yr Growth Rate) Polo Expected Price = (Competitors Fwd. PEG Avg)*(Fwd. EPS of Polo)*(5 Yr. Growth Rate of Polo)
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Price to Sales Ratio Competitor Price Per Share Sales/Share P/S Ratio Gap 21.51 16.55 1.30 Liz Clairborne 40.02 42.16 0.95 Tommy Hilfiger 11.24 20.05 0.56 Average of Competitors: 0.94
Industry P/S Ratio Sales/Share Expected Share Price
Polo Ralph Lauren 0.94 25.48 $23.95 P/S Ratio = (Price per Share)/(Sales per Share) Polo Expected Price = (Competitors Avg P/S Ratio)*(Sales per Share of Polo)
The P/S Valuation results are significantly lower than that of the Actual Current
Value of $38.41. The reasons for these poor results lie with in the Different and
Scattered Prices of the Competitors in the industry. The price per share ranges from
$11.24-$40.02. This would account for the Price to Sales ratio to be significantly lower
than the large industry averages.
Market to Book Valuation Competitor Book Value Price M/B Ratio Gap 5.74 21.51 3.75 Liz Clairborne 16.66 40.02 2.40 Tommy Hilfiger 13.3 11.24 0.85 Average of Competitors: 2.33
Expected Share Price
Polo Ralph Lauren 13.11 $30.57*all BV and Prices relate to the Most Recent Quarter (MRQ) found at http://finance.yahoo.com M/B Ratio = (Price per Share)/(Book Value per Share) Polo Expected Price = (Competitors Avg M/B Ratio)*(BV per Share of Polo)
By using the Market to Book Valuation, the estimated value produced is not
substantially lower than the Actual Current Value of the Stock. Tommy Hilfiger resulted
in a very low M/B ratio compared to the other competitors. This might have thrown off
the results because of the considerable differences in numbers of Tommy Hilfiger. This
PV of Terminal Value $0.00 Total PV of AEG $0.43 Average Perpetuity $2.04 Capitalization Rate (perpetuity) $0.054 Value Per Share pv $37.54 1-Apr-04 $38.04 fv $38.27 1-Apr-05 $38.78
Ke 0.08 g 0.03
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Residual Income 1 2 3 4 5 6 7 8 9 10 perp
Forecast Years
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Beginning BE (per share) $13.67 $13.73 $14.83 $15.38 $16.81 $18.36 $20.06 $21.80 $23.70 $25.35 Earnings Per Share $1.61 $1.66 $1.71 $1.76 $1.82 $1.87 $1.93 $1.99 $2.05 $2.11 Dividends per share $0.20 $0.20 $0.25 $0.25 $0.30 $0.30 $0.35 $0.35 $0.40 $0.40 Ending BE (per share) 15.09 15.20 16.30 16.89 18.32 19.94 21.64 23.44 25.34 27.06 Ke 0.0544 "Normal" Income 0.74 0.75 0.81 0.84 0.91 1.00 1.09 1.19 1.29 1.38 Residual Income (RI) 0.87 0.92 0.91 0.93 0.90 0.87 0.84 0.80 0.76 0.73 0.73 Present Value of RI 0.83 0.82 0.77 0.75 0.69 0.63 0.58 0.52 0.47 0.43 BV Equity (per share) 2004 16.11 Total PV of RI (end 2004) 6.50 Continuation (Terminal) Value 13.37 PV of Terminal Value (end 2004) 8.30 Estimated Value (2004) $30.91 Estimate April 1, 2005 Value $31.32 Actual Price per share Growth 0
49
50
Free Cash Flows (Amounts in millions of dollars except per share data)
2004 2005 2006 2007 2008 2009 2010 2011 2012 Cash Flow from Operations 260.2 268.0 276.1 284.4 292.9 301.7 310.7 320.1 Cash Provided (Used) by Investing Activities 86.6 (86.7) (109.3) (122.1) (133.2) (145.2) (141.7) (153.4) Free Cash Flow (to firm) 347 181 167 162 160 156 169 167 discount rate (4.78% WACC) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Present Value of Free Cash Flows -0.076 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Total Present Value of Annual Cash Flows -$0.08 Continuing (Terminal) Value (assume no growth) Present Value of Continuing (Terminal) Value $0.00 Value of the Firm (end of 2004) -$0.08 Book Value of Debt and Preferred Stock $848.00 Value of Equity (end of 2004) -$848.08 Estimated Value per Share at end 2004 -$8.15 Estimated Value per Share on April 1 -$8.26
Earnings Per Share 1.614 1.663 1.713 1.764 1.817 1.872 1.928 1.985 Dividends per share $0.20 $0.20 $0.25 $0.25 $0.30 $0.30 $0.35 $0.35 Book Value Per Share $13.67
Actual Price per share $38.39
Kd= 3.68% ke= 5.44% total assets $2,270,241.00 CL $501,130.00 SE $1,422,073.00 LTL $277,345.00
(Amounts in millions of dollars except per share data)
Polo Ralph Lauren Corp. As Reported Annual Income Statement 4/3/2004 3/29/2003 3/30/2002 3/31/2001 4/1/2000Currency USD USD USD USD USD
Auditor Status Not Qualified
Not Qualified
Not Qualified
Not Qualified Not Qualified
Consolidated Yes Yes Yes Yes Yes Scale Thousands Thousands Thousands Thousands Thousands Net sales 2,380,844 2,189,321 2,122,333 1,982,419 1,712,375Licensing revenue 268,810 250,019 241,374 243,355 236,302Other income - - - - 6,851Net revenues 2,649,654 2,439,340 2,363,707 2,225,774 1,955,528Cost of goods sold 1,326,335 1,231,739 1,216,904 1,162,727 1,002,390Gross profit (loss) 1,323,319 1,207,601 1,146,803 1,063,047 953,138Selling, general & administrative expenses 1,029,957 904,741 837,591 822,272 689,227Restructuring charge 19,566 14,443 16,000 123,554 - Total expenses 1,049,523 919,184 853,591 945,826 - Income (loss) from operations 273,796 288,417 293,212 117,221 263,911Foreign currency gains (losses) -1,864 -529 1,820 5,846 - Interest expense 10,000 13,502 19,033 25,113 15,025Income before income taxes - Domestic 198,957 190,167 287,291 127,071 215,270Income before income taxes - Foreign 62,975 84,219 -11,292 -29,117 33,616Income (loss) before provision for income tax - 274,386 275,999 97,954 248,886Income (loss) before provision for income tax 261,932 - - - - Current provision for income taxes-federal 81,781 77,299 58,529 27,984 71,565Current prov for income taxes-state & local 4,135 6,550 6,457 21,605 17,398Current provision for income taxes-foreign 10,450 7,401 17,297 12,533 5,698Total current provision for income taxes 96,366 91,250 82,283 62,122 94,661Dfd income tax provisions (credits)-federal -4,421 9,039 15,835 -11,689 4,527Dfd income tax provs (credits)-state & local -831 -2,045 4,672 -11,741 2,234Deferred provision for income taxes-foreign 3,941 1,907 709 - - Total dfd income tax provisions (credits) -1,311 8,901 21,216 -23,430 6,761Provision for income taxes 95,055 100,151 103,499 38,692 101,422Other income (expense), net 4,077 - - - -
Total current liabilities 501,130 500,347 391,771 439,577 406,228Long-term debt 277,345 248,494 285,414 296,988 342,707Other noncurrent liabilities 69,693 81,214 74,117 80,219 99,190Class A common stock 620 489 361 349 344Class B common stock 433 433 433 433 433Class C common stock - 106 227 227 227Additional paid-in-capital 563,457 504,700 490,337 463,001 450,030Retained earnings (accumulated deficit) 927,390 776,359 602,124 430,047 370,785Treasury stock, class A, at cost 78,975 77,928 73,246 71,179 57,346Accumulated other comprehensive income (loss) 23,942 10,787 -19,799 -10,529 9,655Unearned compensation 14,794 6,179 2,242 3,040 1,691Total stockholders' equity (deficit) 1,422,073 1,208,767 998,195 809,309 772,437
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Income (loss) bef cumul eff of chng in acctg - - - 59,262 147,464Cumulative eff of chng in accounting princ - - - - -3,967Net income (loss) 170,954 174,235 172,500 59,262 143,497Weighted average shares outstanding-basic 98,977 98,330.63 97,470.34 96,773.28 99,035.78Weighted average shares outstanding-diluted 100,960 99,263.05 98,522.72 97,446.48 98,926.99Year end shares outstanding 100,632.40 98,722.19 98,227.93 97,177.92 97,529.98Income (loss) per share-cont operations-basic - - - 0.61 1.49Income (loss) per share-acctg change-basic - - - - 0.04Net income (loss) per share-basic 1.73 1.77 1.77 0.61 1.45Income (loss) per share-cont opers-diluted - - - 0.61 1.49Income (loss) per share-acctg change-diluted - - - - 0.04Net income (loss) per share-diluted 1.69 1.76 1.75 0.61 1.45Total number of employees 13,000 10,800 10,100 10,400 9,500Number of class A common stockholders 1,174 1,320 1,270 1,226 1,237Number of class B common stockholders 4 5 5 4 4Number of class C common stockholders - 5 5 5 5Depreciation & amortization - - 83,919 78,599 66,280
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Polo Ralph Lauren Corp. As Reported Annual Cash Flow 4/3/2004 3/29/2003 3/30/2002 3/31/2001 4/1/2000Currency USD USD USD USD USD
Auditor Status Not Qualified
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Consolidated Yes Yes Yes Yes Yes Scale Thousands Thousands Thousands Thousands Thousands Net income (loss) 170,954 174,235 172,500 59,262 143,497Provision for (benefit from) dfd income taxes -4,233 8,901 21,216 -23,430 6,761Depreciation & amortization 83,189 78,645 83,919 78,599 66,280Cumulative effect of chng in acctg principle - - - - 3,967Provision for losses on accounts receivable 2,623 1,760 2,920 547 2,734Changes in other non-current liabilities -18,930 3,087 -15,628 -27,989 3,155Provision for restructuring 19,566 14,443 16,000 98,836 - Foreign currency (gains) losses 1,864 529 -1,820 -5,846 - Other adjs to reconcile net income (loss) 5,565 -1,152 9,173 -9,885 4,770Accounts receivable -55,032 -7,798 -92,314 -68,968 -32,746Inventories 17,227 6,365 82,721 -44,626 53,325Prepaid expenses & other current assets -32,439 -19,149 24,143 -22,967 1,216Other assets -37,163 2,868 6,142 8,042 -9,801Accounts payable -2,296 -5,080 -11,001 30,683 31,281Income taxes payable 27,658 - - - - Accrued expenses & other current liabilities 32,053 11,320 -4,213 28,028 -31,750Net cash flows from operating activiites 210,606 268,974 293,758 100,286 242,689Purchases of property & equipment, net -123,026 -98,664 -88,008 -105,170 -122,010Investments in marketable securities - - - -50,721 - Acquisitions, net of cash acquired -5,019 -30,326 -23,702 -20,929 -235,144Proceeds from restricted cash for Clb Mnc - - - - 44,217Equity interest investments -4,548 -47,631 - - - Purchase of trademark -7,500 - - - - Disposal of property & equipment 7,391 13,452 - - - Cash surrender value-officers' life insurance - -3,100 -4,242 -5,152 -5,385Net cash flows from investing activities -132,702 -166,269 -115,952 -181,972 -318,322Payment of dividends -14,847 - - - - Repurchases of common stock -1,047 -4,682 -2,067 -13,833 -41,262Proceeds from issuance of common stock, net - - - 10,297 - Proceeds from exercise of stock options 40,414 7,718 24,486 - - Procs fr (repayments of) sht-tm borrows, net - 68,000 -52,166 2,939 -39,400Repayments of long term debt - -7,700 -10,576 -25,289 -37,358Net payments of short-term debt -100,943 -80,000 - - -
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Proceeds from long term debt - - - - 319,610Net cash flows from financing activities -76,423 -16,664 -40,323 -25,886 201,590Effect of exchange rate changes on cash -1,610 12,832 -928 -5,501 -5,844Net incr (decr) in cash & cash equivalents -129 98,873 136,555 -113,073 120,113Cash & cash equivalents, beginning of period 343,606 244,733 102,219 164,571 44,458Cash & cash equivalents at end of period 343,477 343,606 238,774 51,498 164,571Cash paid for interest 9,396 19,654 20,193 25,318 7,713Cash paid for income taxes 60,810 65,163 58,328 72,599 112,202Cap obligs for completed shop-within-shops - - - - 2,463Liabilities assumed - 8,506 15,229 - 141,956