Ralph Lauren (NYSE:RL) is the global leader in 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 retailer’s business structure consists of retail, wholesale and licensing businesses.
In this analysis, we will look at Ralph Lauren’s wholesale business segment, how valuable it is for the company and what is the likely future for the business. Although both retail and wholesale businesses currently stand at the same level in terms of revenues and operating margin, we believe the retail segment will grow a lot faster than the wholesale segment and will be a much more valuable driver for the company’s stock in the long run.
Wholesale vs. Retail Business
Wholesale and retail are the two main business segments of Ralph Lauren, accounting for about 97% of its revenues. About 45% of the retailer’s revenue comes from the wholesale segment, and the retail segment constitutes about 52%. Under the wholesale segment, apparel and accessories are sold at more than 11,000 doors globally while Ralph Lauren operates around 500 retail outlets. 
According to our estimates, the wholesale segment constitutes about 30% of the company’s value and for retail it is almost double. While revenues and cash flow as of 2011 are similar for both segments, why such a big difference in the value we assign to the two? The answer lies in the direction in which the wholesale business is heading.
Wholesale Segment: Where It Was And Where It Is Going?
The wholesale business’ contribution to overall revenues has been declining since 2008. It stood at 58% of total revenues in 2008 and 45% in 2011. On the other hand, the retail segment improved from 39% to 52% during the same period. We believe this trend will continue in the future with wholesale’s contribution coming down to as low as 30%.
Ralph Lauren is planning for aggressive expansion in international markets, which will boost its retail business.
Moreover, the department stores’ market share has been declining in the U.S. retail market and this is likely to continue. The increasing competition from private label brands at department stores is also a concern for the retailers. With the increase in the share of private label brands, Ralph Lauren’s specialty stores and other department store revenues will be impacted. Other factors such as the discontinuation of American Living brand and consolidation of China network (to add retail stores) will also weigh on the wholesale segment’s growth.
Although revenues from the wholesale segment is likely to grow, we expect growth to be slower than the retail segment. This will facilitate the decline of revenue contribution of the wholesale segment and an increase in the retail segment’s revenue contribution. With operating margins for the two segments roughly being the same, cash profits will witness a similar trend. This justifies the huge difference in valuation for the two segments.
Our price estimate for Ralph Lauren stands at $160, which is roughly inline with the market price.Notes:
- Ralph Lauren’s SEC filings [↩]