How Ralph Lauren Inventory Issues Could Let VF, Kors Steal the Spotlight

NEW YORK (TheStreet) -- Amid the Fashion Week buzz this month, popular apparel companies such as Ralph Lauren (RL) and Michael Kors (KORS) have been pushed to the forefront of investors' minds. However, a closer look at Ralph Lauren reveals some possible inventory problems that investors need to consider.

Ralph Lauren stock closed Tuesday at $172.60, up 3.75% over the past 52 weeks, but down 2.25% for the year to date. Kors closed at $76.38, up 3.17% over the past 52 weeks.

Based on Ralph Lauren's finanical statements, Morningstar found that the time RL takes to convert its products into cash through sales -- the cash conversion cycle -- has increased over 20% during the past decade. And, taking apart the components of this measure, Morningstar's calculations show that the number of days' worth of inventory that Ralph Lauren holds on its books has increased 25% over that time. Meanwhile, the average time the company takes to pay its bills has decreased over 50%.

Essentially, Ralph Lauren has paid its bills faster while increasing the amount of inventory it has on hand. Considering that this is a multi-year trend, there may be a larger issue at play in the company's inventory management.

This trend isn't unique to Ralph Lauren, but compared to its major competitors -- Michael Kors, PVH (PVH) and VF (VFC) -- Ralph Lauren has the longest average cash conversion cycle over recent years.

Meanwhile, the same trend can be seen in how quickly Ralph Lauren's inventory is sold and replaced. This measure, known as the inventory turnover ratio, has slowed almost 20% over the past 10 years, according to Morningstar

Again, this declining trend is most severe for Ralph Lauren compared to its aforementioned competitors. Yet it should be noted that each company's longer-term average is within a similar range.

Ultimately, it is the trend that is important. A lower turnover ratio could imply poor sales and/or excess inventory. So Ralph Lauren's future inventory trends should be watched carefully by shareholders. Investors considering Ralph Lauren -- especially at current levels -- might be better served by buying into competitors Kors, PVH or VF instead.

Kors has demonstrated impressive margin and revenue growth over the years, but the company's stock has recently been knocked down. Since the end of February, shares are down almost 25% from their high and now trade at a discount to their long-term valuation metrics.

At time of publication, a Ralph Lauren spokesman had not responded to requests for comment.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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