Ralph Lauren vs. V.F. Corp: Which Apparel Manufacturing Stock is a Better Buy?

Ralph Lauren Corporation (RL) and V.F. Corporation (VFC) are two prominent companies in the apparel manufacturers industry. RL designs, markets, and distributes apparel, accessories, home furnishings, fragrances, and hospitality internationally. On the other hand, VFC is engaged in the design, production, distribution, and marketing of branded lifestyle apparel, footwear, and accessories internationally. Both the companies sell their products primarily to specialty stores, department stores, national chains, and direct-to-consumer operations.

Owing to pandemic-led travel restrictions and lower foot traffic, clothing and clothing accessories sales in the United States fell more than 24% year-over-year in 2020. However, rising e-commerce sales and the introduction of new fashion trends to keep pace with the changing consumer trends enabled most apparel companies to rebound gradually.

Despite rising inflation and supply chain disruptions affecting production, the wide availability of COVID-19 vaccines, and rising consumer spending ahead of the holiday season, the apparel industry is witnessing sales growth. The National Retail Federation (NRF) forecasts holiday retail sales to rise between 8.5% -10.5% during November and December. The global apparel market is expected to grow at 7.5% CAGR to $797.30 billion by 2025. So, both RL and VFC should benefit from these tailwinds in the coming months.

While VFC lost 13.9% year-to-date, RL has surged 12.7%. RL is a clear winner with 4.6% gains versus VFC’s 4.4% returns in terms of their past three months’ performance. But which of these stocks is a better pick now? Let us find out.

Latest Developments

On December 9, 2021, VFC’s Timberland brand introduced the FW21 NL Sky Collection inspired by the Northern Lights natural phenomena by partnering with the digital fashion house and industry leader The Fabricant. The collection is weather-ready and responsibly made, with materials like ReBOTL fabric made from recycled plastic and 100% recycled insulation. VFC expects to witness great demand for this collection in the coming months.

On December 8, 2021, RL made its debut in the metaverse by introducing The Ralph Lauren Winter Escape, a gender-neutral digital clothing collection featuring limited-edition items, on Roblox Corporation’s (RBLX) Roblox platform. This digital collection allows users to customize their avatars with iconic winter sportswear styles and purchase at the ‘Polo Shops’ within the experience. RL is looking forward to building on digital innovation and providing a better experience to the next generation of consumers.

Recent Financial Results

VFC’s revenues for the fiscal second quarter, ended October 2, 2021, increased 22.6% year-over-year to $3.20 billion. The company’s adjusted gross profit came in at $1.72 billion, up 29.9% from the prior-year period. Its operating income came in at $534.34 million, indicating a 56.5% rise from the year-ago period. VFC’s net income came in at $464.05 million, indicating an 80.8% rise from the year-ago period. Its adjusted EPS increased 62.7% year-over-year to $1.09. As of October 2, 2021, the company had $1.36 billion in cash and equivalents.

For the fiscal third quarter ended October 30, 2021, RL’s net revenues increased 26% year-over-year to $1.50 billion. The company’s adjusted gross profit came in at $1.01 billion, representing a 27.4% rise from the prior-year period. Its adjusted operating income came in at $256.60 million, up 70% from the prior-year period. RL’s adjusted net income came in at $197 million for the quarter, indicating an 83.9% rise from the year-ago period. Its adjusted EPS increased 81.9% to $2.62. The company had $2.39 billion in cash and cash equivalents as of September 25, 2021.

Past and Expected Financial Performance

VFC’s net income and total assets have increased at CAGRs of 13.9% and 7.7%, respectively, over the past three years.

Analysts expect VFC’s EPS to grow 142.7% year-over-year in the current year and 17% next year. Its revenue is expected to grow 13.4% year-over-year in the current year and 7.5% next year. The stock’s EPS is expected to rise at a 45.7% rate per annum over the next five years.

In comparison, RL’s net income and total assets grew at CAGRs of 19.1% and 9.9%, respectively, over the past three years.

The stock’s EPS is expected to increase 335.3% year-over-year in the current year and 9.7% next year. Its revenue is expected to increase 34.9% year-over-year in the current year and 4.4% next year. Analysts expect RL’s EPS to grow at a rate of 74.9% per annum over the next five years.

Valuation

In terms of non-GAAP forward PEG, VFC is currently trading at 0.77x, which is 381.3% higher than RL’s 0.16x. In terms of forward EV/Sales, RL’s 1.59x compares with VFC’s 2.95x.

Profitability

VFC’s trailing-12-month revenue is almost twice as much as RL's. However, RL is more profitable, with a 66.4% gross profit margin versus VFC’s 54.6%.

Furthermore, RL’s EBITDA margin of 16.9% compares favorably with VFC’s 14.9%.

POWR Ratings

While RL has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, VFC has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.  

Both RL and VFC have a B grade for Momentum, owing to its impressive price gains over the past year. RL has delivered 4.6% price returns over the past three months. VFC surged 4.4% over the past three months.

RL has a B grade for Value, which is in sync with its lower-than-industry valuation ratios. RL has a forward EV/EBITDA ratio of 9.40, 10% lower than the industry average of 10.44x. VFC’s C grade for Value is consistent with its slightly higher valuation ratios. VFC’s 18.88 forward EV/EBITDA multiple is 80.9% higher than the industry average of 10.44x.

Of the 63 stocks in the A-rated Fashion & Luxury industry, RL is ranked #34, while VFC is ranked #55.

Beyond what we have stated above, our POWR Ratings system has also rated RL and VFC for Growth, Stability, Sentiment, and Quality. Get all RL ratings here. Also, click here to see the additional POWR Ratings for VFC.

The Winner

Rising consumer spending and the introduction of apparel to keep pace with new fashion trends should enable RL and VFC to deliver solid returns in the upcoming months. However, higher profit margins and lower valuation make RL a better buy here.

Our research shows that the odds of success increase if one bet on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Fashion & Luxury industry.

VFC shares were trading at $73.69 per share on Wednesday afternoon, up $0.12 (+0.16%). Year-to-date, VFC has declined -11.48%, versus a 25.66% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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