By Alex Gavrish, Etalon Investment Research | Author of Story Investing
Conflict and drama mean that story continues to develop
Yesterday Ralpha Lauren Corp announced that Stefan Larsson, President and CEO will leave the company on May 1, 2017. According to company’s press release, Ralph Lauren and company’s CEO did not agree on “creative and consumer-facing parts of the business”. Investors reacted emotionally to these news and share price promptly fell 12.3% and closed at $76.6 per share.
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Ralph Lauren Corp’s share price declined about 59% over past two year, and many investors ask themselves if this presents an opportunity. Or maybe it is just another casualty of the retail sector and is a value trap?
The situation reminded me of what was happening at Adidas two and a half years ago. Share price also declined significantly and company was not performing well. The fall in stock price was the result of a prolonged decline in company’s share of the US market and failure to regain it. Adidas was loosing to competition. Shareholders got upset and started to put pressure on management and then CEO Herbert Hainer. There was even talk about company becoming a target for activist investors.
Why this comparison?
I think that every company is a story. And in any good story the subject must hit an obstacle, engage in a conflict, or go through a struggle. Kendall Have, in his book Story Proof identifies struggle as one of the seven guiding principles that define key story information. Our minds require struggle in order to understand, make sence of, and create meaning from information and narrative.
Even the most simple and classic action movies come with a must-have struggle element to them. Just as it would be dull to watch an action movie in which there is no “bad guy” and no struggle, it would be impossible to achieve attractive returns by investing only in companies where everythig is quite and well. Warren Buffett did so, but he is more an exception than the rule. Most investors do not have such an enduring commitment and a fifty years long (or eternal) investment horizon.
Leo Tolstoy begins Anna Karenina with following words: “All happy families are alike; each unhappy family is unhappy in its own way”.
It is the same with investments: each company’s share price declines for its own unique reasons. Adidas is a very different type of retail company. Certainly its problems were not in the realms of a business model, pricing or “creative design and consumer-facing parts of business”. Also during this period in 2014 Adidas announced a meaningful share buyback program and reiterated its intentions to continue paying dividends.
We recommended to buy Adidas in September of 2014 and the stock price climbed 142% since then.
I think that similarly to Adidas, the management conflict at Ralph Lauren is an important event and might indicate a major turning point for the company. It is therefore good for investors, as it allows to understand company’s story better and develop an investment thesis. However, it might be too early to press the BUY button. Firstly, more visibility and guidance is required as to the strategic direction in current retail environment. Secondly, in light of a significant share price decline over past two years, more shareholder friendly actionsare needed such as share buyback program or a more certain guidance for the cash flows.
What is certain is that yesterday’s announcement is an important turning point for the company and Ralph Lauren Corp’s story continues to develop.