As Ralph Lauren (NYSE:RL) continues to shut down its Rugby stores, we take a look at the underlying strategy and its impact. The Rugby brand has been losing out to competitors such as Michel Kors and Tory Burch.  The store traffic has been decreasing and the retailer stated in its earnings call last month that it can cater to Rugby’s customers through its other brands such as Denim & Supply and Club Monaco.  With this in mind, Ralph Lauren wants to focus on global opportunities for its other brands rather than U.S. centric Rugby. In this analysis, we’ll look at the potential impact of this strategy on Ralph Lauren.
The Rugby stores offer aspirational lifestyle collections of apparel and accessories for men and women. The brand is characterized by a youthful and preppy attitude which resonates through its product lines and store experience.
Rugby: Why It Started And Why It Is Ending
Ralph Lauren launched Rugby in 2004, specifically targeting college students with preppy fashion. Preppy is a word derived from expensive prep and pre-college preparatory schools in the U.S., and preppy fashion is associated with blazers, stripped ties, khaki pants and tasseled loafers. This fashion boomed in 1980s and has subsequently subsided. Ralph Lauren had the idea of combining punk rock and preppy style to create a distinct fashion range of its own.  Preppy fashion is somewhat related to a vintage look and thus might not appeal to a large customer base.
Meanwhile, competition from Michael Kors and Tory Burch had been intensifying and Rugby’s accessories were performing poorly.  The company stated last month that it can serve Rugby’s loyal customers with Denim & supply and Club Monaco and doesn’t need a separate brand.  With the closure of Rugby stores, the retailer wants to focus its resources on other lucrative global brands.
At the end of fiscal 2012, Ralph Lauren operated 16 Rugby stores, out of which 13 were in the U.S. The retailer reports the comparable store sales results of all its brands except Rugby, which might indicate its low significance.  Ralph Lauren will discontinue Rugby’s store and e-commerce business in February 2013.
More Focus On Global Brands
Compared to Rugby, Ralph Lauren’s other brands have a much better presence in international markets. For instance, at the end of fiscal 2012, the retailer operated around 42 Ralph Lauren retail stores and 58 factory stores in Europe and Asia.  Its Club Monaco brand also has an international footprint via the licensing channel. These brands have performed quite well with Ralph Lauren retail, factory stores and Club Monaco registering comparable store sales growth of 8%, 13% and 18% respectively in fiscal 2012. 
Ralph Lauren’s focus on global markets is evident from the fact that out of the 38 factory stores opened in the last four years, 31 were in international markets.  Similarly, it opened 20 Ralph Lauren retail stores internationally while it consolidated 15 stores in the U.S. International markets such as Asia have proved to be quite lucrative for the U.S. apparel retailers. For instance, in China, the initial stores of retailers such as Abercrombie & Fitch (NYSE:ANF) and Gap (NYSE:GPS) have performed well.  Additionally, Luxury retailer Coach (NYSE:COH) reported 40% growth from the region in its latest earnings. Ralph Lauren has a moderate presence in the Asian markets with 16 Ralph Lauren retail stores and 23 factory stores.
Ralph Lauren Will Experience Positive Impact In Longer-Term
Ralph Lauren does not report Rugby’s revenues separately. However, we have estimated combined revenues of Ralph Lauren, Club Monaco and Rugby stores in our pricing model. Assuming that Rugby’s revenue contribution is proportional to the number of its stores, we conclude that this brand constitutes just 2% to Ralph Lauren’s overall value. Thus, adjusting for the absence of this business in our pricing model, we get negligible downside to the retailer’s stock. However, given the increased focus on other brands, this decision is likely to complement Ralph Lauren’s growth in the future.
Our price estimate for Ralph Lauren stands at $160, implying a premium of about 10% to the market price.Notes:
- Haute 100 Update: Ralph Lauren To Eliminate Rugby Label, Haute Living, Dec 13 2012 [↩] [↩]
- Ralph Lauren’s Q2 fiscal 2013 Earnings Transcript, Nov 2 2012 [↩] [↩]
- Ralph Lauren’s Rugby Brings EDGY PREP WEAR To Campus, International Council Of Shopping Centers, Feb 2005 [↩]
- Ralph Lauren’s SEC filings [↩] [↩] [↩] [↩]
- Companies’ SEC filings [↩]