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Investment Overview for Ralph Lauren (NYSE:RL)
WHAT HAS CHANGED
- In Q1, Ralph Lauren managed to meet expectations in terms of results, with revenues reaching $1.6 billion. Although this was 5% lower, on a year-on-year basis, Ralph Lauren is struggling from currency headwinds as the U.S. dollar gained strength in recent times. However, in terms of business fundamentals, there does not seem to be anything amiss in Ralph Lauren's strategies.
- Ralph Lauren has taken steps to hone productivity on the business side of things. In this, they have merged the different brands under their umbrella, into one for women and one for men. The aim of this step is to simplify the luxury status of the brands in the minds of consumers.
- Ralph Lauren has resorted to expanding their portfolio - with their own brands, and through the acquisition of other brands. In this respect, they have introduced a new Polo Sport line, an extension of the company's trademark Polo brand in active wear. Apart from this, they have also added the Ricky handbag line to their accessories portfolio, with the aim of driving the luxury notion in their accessories segment.
- The most drastic change that Ralph Lauren will be seen bringing in, is in their management side of things. This would entail breaking down the business on the basis of six key brands. Each of these subdivisions are expected to be headed by a unique leadership team, who, with the help of brand specific expertise, will see the division through integral functions such as designing and merchandising. The company hopes to save on costs and drive up performance through this restructuring.
Below are key drivers of Ralph Lauren's value that present opportunities for upside or downside to the current Trefis price estimate:
- Ralph Lauren Retail Segment Revenue per Square Foot: Ralph Lauren managed to grow its topline between 2004 and 2014 at an average rate of just over 10%, an extraordinary figure for a luxury brand, even as it posted gross margins of close to 60%. Luxury brands are characterized by features such as a commitment to cutting edge product design, iconic founders, control of all verticals, global presence, and an aspirational appeal. Ralph Lauren possesses all these qualities and this is what keeps its stores humming with customers. The company posts one of the highest figures in terms of retail revenue per square foot.
Going forward, we expect some pressure on the company's retail revenue per square foot due to the changing dynamics of the retail market. Retail shopping habits are undergoing a slow but steady change, as brands are shifting from pure play (online only or store only) strategies to mixed strategies (bricks-and-clicks), or omni-channel strategies. As a result, they are now using stores as only showrooms and warehouses and preferring to sell via their e-commerce platforms. This trend could result in a decline in the revenue per square foot figure, however, Ralph Lauren's current strength in its market space means that it should be able to transition to the new trends with ease.
- Specialty Stores & Other Department Stores EBITDA Margin: Specialty stores & other department stores EBITDA margin declined from 31.8% in 2010 to 25.6% in 2011. The decline was primarily due to lower wholesale gross profit margins in the U.S. and Europe, reflecting significant increases in raw material costs. However, since then, the figure has continued to rise gradually. In 2014, the margin stood at 34.3%. We forecast the figure to be at around 36% by the end of our forecast period.
If margins increase to 38% by the end of the Trefis forecast period, there could be a 10% upside to the Trefis estimate for Ralph Lauren. On the other hand, if it decreases to 31%, there could be a 10% 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 Polo 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
Ralph Lauren is a global brand and derives a lot of its revenue from outside North America. However, as both Asia 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 Portugal, 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 accounts for 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 2014, Ralph Lauren's store presence in Asia was stronger than that in Europe. Compared to only 27 Ralph Lauren brand stores in Europe, it had 58 stores in Asia. However, the number of wholesale distribution channels in Asia in still minuscule compared to that in North America and Europe (128 vs 7,308 in North America and 5,311 in Europe). Going forward, there is tremendous scope for the company to expand its presence in wholesale stores in Asia.
New Brand Categories
Ralph Lauren recently integrated its formerly licensed Chaps men's sportswear business into a directly operated wholesale business. This could contribute to higher revenue growth in the wholesale channel going forward.
Additionally, the retailer converted footwear from a licensed to an owned segment in 2006, and re-opened operations in 2008. At the same time, the company gained direct control of its licensed handbags and small leather goods business. Since then, the leather goods category has grown at an average of 20% annually. Currently, handbags, footwear, and leather goods represent less than 10% of Ralph Lauren's total consolidated sales. The company has stated that it wants to grow this category to about 20% of its top-line, which should have favorable margin implications, as it is a higher margin category than apparel.
Additionally, Ralph Lauren launched its Women’s Polo line late in 2014. The brand has been getting solid customer attention and offers the company the opportunity to expand its customer segment into another demographic. Ralph Lauren is unique among apparel based luxury brands in that it gets more revenue from its men’s business than from its women’s business. Additionally, its primary target audience is now rapidly aging, and newer, fresher brands, like Kate Spade and Tory Burch, are capturing the imaginations of the younger generations. The Polo for Women line offers the company the opportunity to address both concerns at once — it can increase its women’s business revenue collection and also penetrate a younger demographic.
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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