Ralph Lauren’s Earnings Will Show China Network Consolidation And Struggling Europe

by Trefis Team
+8.93%
Upside
160
Market
174
Trefis
RL
Ralph Lauren
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As Ralph Lauren (NYSE:RL) releases its Q2 fiscal 2013 earnings on November 1, investors will have a sharp eye on the impact of international business on its overall revenues. The company’s revenue growth slowed to 4% in the previous quarter mainly due to a decline in international revenues. [1] This decline came from Ralph Lauren closing 60% of its distribution network in China and reducing shipments of core merchandise in Europe. [2] We expect these factors, along with tough comparison against a healthy Q2 fiscal 2012, to negatively impact the upcoming financial results for Ralph Lauren. The year ago period delivered a strong performance due to increased shipments of the new brand, Denim and Supply. [1]

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International Revenues Decline Likely To Continue

In Q1 fiscal 2013, Ralph Lauren registered a revenue decline of $33 million in the European business driven by currency fluctuations and shipment reduction of core product line due to challenging European retail environment. [2] Furthermore, the specialty store business in the southern Europe remained weak throughout the last quarter. [2] We expect these trends to continue affecting the revenues in this quarter as well.

As part of its restructuring plan, Ralph Lauren closed down 60% of its distribution network in China. [2] This resulted in a revenue decline of $3 million in Greater China and Southeast Asia region in Q1 fiscal 2013. [2] The strategy behind the decision was to eliminate the third party distribution network. We expect this to further impact the revenue growth in Q2 fiscal 2013. Moreover, the Japanese business revenues declined by $6 million due to a shift in business model to retail-concession channel. [2]

Discontinued American Living Brand will Affect Domestic Business

During Q4 fiscal 2012, Ralph Lauren decided to discontinue the sales of a majority of its products sold under the American Living Brand. [2] The brand, which was exclusively created for J.C. Penny, was discontinued in the fall of 2012. [2] So apart from the international business, we also expect the domestic wholesale business to take a hit in this quarter. However, this decline will be offset by the growth from the Ralph Lauren Bedding and Bath products. Ralph Lauren took over the control of this business in May 2011, and it has generated good results in the past quarter. [2]

The trends in the international market notably impacted the revenue growth for Ralph Lauren in Q1 fiscal 2013. However, in the context of the last fiscal year’s high Q2 revenues ($1.9 billion), and the discontinuation of American Living, these might have a greater impact in this quarter. [2] In the domestic market, the consumer spending during the entire month of September was on the lower side. [3] Furthermore, the tough global economic situation has had a negative impact on discretionary spending in the international market. [1] Considering all of these factors, we expect the revenues to decline slightly in Q2 fiscal 2013 compared to the same quarter last year.

Our price estimate for Ralph Lauren stands at $160, implying a premium of about 5% to the market price.

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Notes:
  1. Ralph Lauren’s Q1 fiscal 2013 earnings transcript, Aug 8 2012 [] [] []
  2. Ralph Lauren’s SEC filings [] [] [] [] [] [] [] [] [] []
  3. U.S. Consumer Spending,Ycharts, Oct 29 2012 []
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