Should you really buy Ralph Lauren after stocks jump 47%?

IInvestors were pleased to learn that Ralph Lauren (NYSE:RL) is still aiming for solid sales and profit growth this year. Wall Street worried about slowing demand, supply chain challenges and declining profitability from impressive results in those areas last year.

Ralph Lauren eased some of those concerns with its latest earnings update showing stable demand and a stable profit margin outlook. The stock is doing well against the broader market in 2022, likely because investors see the potential for a rally if consumer spending remains strong over the holiday season.

That enthusiasm should be tempered by major risks with the apparel and accessories specialist, the most significant of which is Ralph Lauren entering the key holiday shopping season with too much inventory.

Let’s take a closer look.

Supply

In early July, Ralph Lauren’s inventory level stood at $1.2 billion, up 47% from a year earlier. This increase compares to only a 13% increase in sales in the first quarter.

Executives described the increased inventory as a precaution to secure enough goods for the upcoming season’s peak demand around the Christmas holidays. “We deliberately change[ed] earlier inventory receipts to mitigate global supply chain disruptions,” management explained in a press release in early August.

This change sets Ralph Lauren apart from major retailers like Target, who slowed down and delayed their buying plans to reduce the risk of holding lots of stocks. Target executives said in July that the current demand environment requires these changes to “remain nimble” as demand trends evolve rapidly.

Ralph Lauren admits his approach is risky. “The global operating environment remains more volatile than ever,” CEO Patrice Louvet said in a press release. But leaders always make the bold bet that they know consumer tastes well.

Will it work?

Investors have encouraging signs suggesting Ralph Lauren won’t have to follow companies like walmart and Target by cutting prices and taking inventory write-down charges. After all, demand was strong until early July and the company posted surprisingly high profitability.

Its focus on high-end lifestyle products insulates it from some of the shifts in demand that have hurt others retailers, and it should also be noted that Ralph Lauren does not sell bulky home furnishings. These niches have been the hardest hit by shifts in consumer demand over the past few months.

Nevertheless, investors should be aware of the significant risk associated with packing warehouses with goods today. Economic growth trends are slowing in key markets like Europe, and shoppers are changing their spending habits faster than usual. Balancing supply and demand is always a major challenge for retail, but that goal is even more difficult right now.

Ralph Lauren’s gamble could pay off big for investors if consumers pick up the products he secured for the fall and winter shopping seasons. On the other hand, a wrong prediction would lead to lower profitability and lower earnings for the rest of fiscal 2023.

Of course, the retailer’s latest results show no sign of that shortfall along the way. But investors won’t know for several months whether Ralph Lauren was right about its customers’ continued demand for apparel and lifestyle products. This means that the risk profile of the stock is increasing and investors should be careful when buying stocks.

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Demitri Kalogeropoulos has no position in the stocks mentioned. The Motley Fool has positions in and recommends Target and Walmart Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.