New Ralph Lauren CEO Creates a Buying Opportunity

Ralph Lauren, the 76-year-old founder of the namesake Ralph Lauren Corp. (NYSE: RL), is stepping down from his post as CEO. Filling his shoes will be Stefan Larsson, who was global president of The Gap’s (NYSE: GPS) Old Navy brand.
Larsson helped turn around Old Navy and investors are betting he can do the same with the floundering Ralph Lauren brand.
It’s been a tale of two very different companies over the last month. Shares of Ralph Lauren are now up 10%, with Gap shares off 15% over the same period.
The new Ralph Lauren CEO has created a buying opportunity. The question is which do you buy on the news: Ralph Lauren or The Gap?
The Gap offers a 3.4% dividend yield and its valuation appears compelling. Shares are trading at just 10 times earnings and it’s generating strong returns on invested capital.
On the surface, The Gap offers the best valuation and impressive dividend. Ralph Lauren offers a mediocre 1.7% dividend and is a bit more expensive.
Yet, don’t be fooled; it’s more about where these companies are headed than their current position. Both stocks are down over 30% for the year.

The Best Opportunity

For The Gap, Stefan Larsson’s departure is a big loss. He had helped make Old Navy the strongest brand in The Gap’s portfolio by optimizing the in-store experience and keeping value price points. He’s been great at responding to consumer demand.
The Gap as a whole has been struggling, driven by weak demand and pricing that has has put pressure on margins. The headwinds for The Gap will be the continued increase in competition from fast-fashion retailers.
For The Gap, the key is to right-size its store base and focus online. However, the bigger opportunity might lie with Ralph Lauren. As CEO, Larsson can bring a fresh new global perspective.
Ralph Lauren has a strong portfolio of brands, but a small footprint outside North America, meaning there’s plenty of potential growth for expansion in China and Europe. Then there’s the potential for retail expansion, including the build-out of its Web-based operations.
Beyond that, the beauty of Ralph Lauren is that its products are sold at a premium price point, which helps insulate the company a bit. The other part of finding stabilization should come from restructuring that focuses on margin expansion.

New Ralph Lauren CEO to Bring Change

Larsson is an especially interesting choice for chief executive. He brings a supply chain and operational focus to a company that already has a lot of design talent, which it can use to continue expanding its product portfolio while Larsson focuses on distribution and sales.
Larsson also knows the fast-fashion space, having spent 15 years at H&M. That means that with his help, Ralph Lauren could find stabilization faster than other major apparel retailers.
For The Gap, Larsson’s departure means the company will lose the prized asset that has been holding up the other underperforming brands. The Gap has a big hole to fill and it’s not obvious how it will manage to do it.
Ralph Lauren has superior margins compared to The Gap and is expected to grow earnings faster. When it comes to other apparel makers, like VF Corp. (NYSE: VFC) and PVH Corp. (NYSE: PVH), Ralph Lauren has a superior balance sheet.
With The Gap, cost savings only get you so far. Improvement requires structural change. It appears that needed change is coming for Ralph Lauren.

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