Lifestyle company Ralph Lauren (NYSE:RL) posted $1.8 billion in revenues in Q3 2013 with a 2% annual increase. Excluding the impact of stores closures associated with its China strategy, the discontinuation of American Living and adverse currency impacts, revenues increased by 5% annually in Q3. 
The company capitalized on its brand image and strong merchandising strategies to enhance its revenues in the difficult holiday season, which was marked by challenges such as fiscal cliff concerns and hurricane Sandy. Strong revenue growth in the e-commerce channel and Club Monaco brand, growing factory stores worldwide and improving trends in Europe, helped the company achieve this growth.
Ralph Lauren’s gross margin increased to 59.3% in Q3 2013, compared to 57.1% in Q3 2012 due to lower input costs, a favorable product mix and disciplined expense management. Its net income increased by 28% annually to reach $216 million in Q3 on account of higher operating income and a lower effective tax rate of 27%. ((Ralph Lauren Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, February 6, 2013))
Going forward, Ralph Lauren aims to achieve growth by leveraging its direct-to-consumer business, expanding its international operations and innovative product categories.
Growth In Retail Segment Offset By Weakness In Wholesale Channel
Wholesale segment sales declined by 2% annually in Q3 2013, to reach $734 million. The discontinuation of American Living, reduced shipments to European wholesale customers and adverse currency impact were the main factors responsible for this decline. Retail sales increased by 6% annually to reach $1.1 billion along with comparable store sales growth of 4%. The addition of new company stores and higher sales at factory stores and e-commerce sites contributed to this growth. Hurricane Sandy negatively affected comparable store sales growth by around 1-2%.
Ralph Lauren continues to enhance its direct-to-consumer business by opening more stores, especially in China and focusing on e-commerce sales. We estimate its future growth to be driven by increased sales in the retail channel, which will help it in expanding its geographical presence and product portfolio.
Ralph Lauren Aims to Capitalize on E-Commerce Growth
Ralph Lauren’s e-commerce channel is witnessing strong growth. Online sales rose by double-digit rates, helped by rising worldwide adoption of smartphones and tablets. Traffic to RalphLauren.com from mobile phones marked a 35% increase in Q3. The company is capitalizing on this growth by opening and upgrading its e-commerce websites and enhancing its warehousing and distribution capacity. In Q3, it began servicing online customers in Italy, Greece, Spain and Portugal. Ralph Lauren now provides e-commerce sales in 11 countries in Europe.
Ralph Lauren also aims to expand its e-commerce business in Asia by opening e-commerce sites within Korea and China. To support growth of North American e-commerce operations, the company has purchased a distribution center in North America, and it aims to double its capacity to more than 800,000 square feet.
Growth In New Product Categories
In Q3 2013, Ralph Lauren registered sharp growth in its emerging product categories such as Denim & Supply and accessories (which includes handbags and small leather goods). The company plans to further drive sales in these categories by expanding their distribution globally and leveraging the e-commerce channel.
Outlook for Q4 2013
– Revenue to grow by mid-single-digit percentage (which includes a net negative impact of around 3% from China network re-positioning strategy, discontinuation of American Living and adverse currency impact)
– Retail segment to grow by 8-11% annually while wholesale sales to remain flat compared to Q4 2012.
– Operating margin to increase by approximately 125-150 basis points as compared to the prior year, on account of lower input costs and better expense management
– Tax rate to be around 29%Notes:
- Ralph Lauren Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, February 6, 2013 [↩]