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Investment Overview for Ralph Lauren (NYSE:RL)
Below are key drivers of Ralph Lauren's value that present opportunities for upside or downside to the current Trefis price estimate:
- Ralph Lauren Factory Stores Revenue per Square Foot: Ralph Lauren factory stores revenue per square foot increased from $804 in 2006 to $1,183 in 2011. Since the recession in 2008-09, consumers have been more value focused and have been increasingly shopping at factory stores. Going forward, we expect the figure to increase and reach $1,904 by the end of the Trefis forecast period.
If the revenue per square foot increases to $2,400 by the end of the Trefis forecast period, there could be a 13% upside to the Trefis estimate for Ralph Lauren. On the other hand, if it decreases to $1,500, there could be a 11% downside to the Trefis estimate.
- Specialty Stores & Other Department Stores EBITDA Margin: Specialty stores & other department stores EBITDA margin declined by 5.2% in 2011 to reach 25.9%. The decline was primarily due to lower wholesale gross profit margins in the U.S. and Europe, reflecting significant increases in raw material costs. In 2012, the margin increased to 27.7% and we forecast the figure to increase to 28.6% by the end of our forecast period.
If margins increase to 31.8% by the end of the Trefis forecast period, there could be a 5% upside to the Trefis estimate for Ralph Lauren. On the other hand, if it decreases to 23.1%, there could be a 9% downside to the Trefis estimate.
Ralph Lauren is a global leader in the design, marketing and distribution of premium lifestyle products. Its products include apparel, accessories and fragrance collections for men and women as well as children's wear and home furnishings. The company's brands such as Ralph Lauren, Club Monaco, and Rugby are some of the world’s most widely recognizable consumer brands.
The company offers a broad spectrum of lifestyle products that include:
- Apparel: Products include men’s, women’s and children’s clothing
- Accessories: Products encompass a broad range, including footwear, eyewear, watches, jewelry, hats, belts and leathergoods, including handbags and luggage
- Home: Coordinated products for the home that include bedding and bath products, furniture, fabric and wallpaper, paint, tabletop and giftware
- Fragrance: Fragrance products are sold under Romance, Polo, Lauren, Safari, Ralph and Black Label brands, among others.
The company sells its products through company operated retail stores and its website ralphlauren.com as well as through upscale and mid-tier department stores and specialty stores.
We believe Ralph Lauren's factory stores, as well as Ralph Lauren's full-priced retail stores are significant sources of value for Ralph Lauren for the following reasons:
Factory stores, a highly attractive channel in current economic scenario
As both U.S and Europe are coping with weak macroeconomic conditions, factory stores have emerged as an attractive choice for value conscious consumers as they provide better bargains.
Increasing revenue share of Retail business
Over the past few years, Ralph Lauren has focused on increasing its direct-to-consumer reach to gain greater control over its brands and operations. As such, the firm has expanded its store base and increased products and services offered on its online store. This is Ralph Lauren's response to the ongoing e-commerce boom in the apparel industry.
The result has been a consistent increase in the share of revenues coming from Ralph Lauren's retail segment that includes company operated stores and the firm's e-commerce websites.
Ralph Lauren Has a Strong Brand Identity
Ralph Lauren's greatest competitive advantage has been its ability to maintain the strength of its brand for the past twenty years. While many fashion companies have struggled to retain customers with changing fashion trends, Ralph Lauren's brand has not only remained strong but has also expanded its brand to other products and geographies.
Another advantage of Ralph Lauren is its broad consumer appeal. The company offers products across a wide range of price points from discount (Chaps) to luxury (Ralph Lauren Collection) enabling it to appeal to a wide target demographic.
Weak Macroeconomic Conditions in Europe are a Near Term Threat
Current weak macroeconomic conditions in Europe, particularly in Spain, Greece and Italy pose a threat to Ralph Lauren's revenues in the near term. Ralph Lauren's wholesale business is most vulnerable to the situation, as Europe contributes a significant percentage of the company's total wholesale revenues.
Expansion in Asia Should Help Sustain Growth
Ralph Lauren has been focusing recently on expanding retail operations in emerging markets, especially in Asia. The Asian market has become a focal point of the global retail industry, with major brands across the globe aggressively expanding their footprint in the region. In 2010, Ralph Lauren acquired its previously licensed Ralph Lauren-branded apparel business in the Greater China and
Southeast Asia region. The brand perception had been diluted due to the licensee's focus on selling lower price point products. Re-positioning Ralph Lauren's brand perception into a more premium brand in the Chinese market remains one of the key priorities for the company. Over the next 3 years, Ralph Lauren plans to open nearly 60 new stores in Greater China, primarily in premium locations.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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