Ralph Lauren (NYSE:RL), a global leader in design, marketing and distribution of premium lifestyle products, recorded revenues of over $6.9 billion and net margin of 10.4% in 2012. While the company had achieved strong top line growth in 2010 and 2011, its growth declined to 3.9% in 2012, primarily on account of store closures associated with its Asia restructuring plan, the discontinued American Living brand and macroeconomic weakness in Europe. We believe in the long term growth potential of the company as it leverages its strategy of increasing its direct-to-consumer business and expanding in Asia.
In this article, we provide a quick overview of how Ralph Lauren sells its products, its geographical presence and the key growth strategies that impact its valuation.
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How Does Ralph Lauren Sell Its Products?
Ralph Lauren sells its products through wholesale channel (which consists of department stores and specialty stores), retail channel (which includes company-owned stores) and by licensing its products. While the retail channel accounts for around 52% of the revenues, the wholesale channel contributes 46% to its revenues.
Factory stores are the most important channel within direct sales and it contributes around 36% to our price estimate for Ralph Lauren. Revenue growth from factory stores has outpaced overall revenue growth over the last few years. The share of wholesale channel in overall revenues is decreasing as the company is focusing on its direct-to-consumer business. Ralph Lauren has discontinued its American Living brand, which was exclusively sold via JCPenney as a third-part distributor.
What Are The Major Geographical Regions for Ralph Lauren?
Ralph Lauren sells its products across North America, Europe, Asia and South America. The Americas accounts for 66% of its revenues followed by Europe and Asia, which contribute 21% and 13% to its revenue respectively.
Ralph Lauren has witnessed continuous sales growth in the Americas’ market on account of its strong brand identity. It offers products under different price points from discount (Chaps) to luxury (Ralph Lauren Collection), enhancing its brand appeal to a large demographic.
European sales have recorded some weakness over the recent past on account of weak macroeconomic conditions in the region. However, the company bounced back in Europe in Q3 2013, with annual sales growth of around 6% led by growth in retail sales. We feel this is an encouraging trend, which will positively impact Ralph Lauren’s top line in the future.
Asian sales have been negatively impacted in the recent past on account of Ralph Lauren’s Asia-Pacific restructuring plan wherein it closed down a large part of its distributor network in China to replace it with its own network of retail stores. We believe that as the company opens more stores in the region and bolsters its brand image, it will be able to realize significant sales growth from Asia.
What Is Ralph Lauren’s Growth Strategy?
Enhancing Direct-to-Consumer Channel
Ralph Lauren is expanding its direct-to-consumer business by opening more company-owned stores and enhancing its e-commerce business. Ralph Lauren has added 36 factory stores during the last three fiscal years. In Q3 2013, it started providing online sales in Italy, Greece, Spain and Portugal. Ralph’s Lauren strategy to close down a significant part of its distributor network in China was also part of the same long term strategy.
The revenue contribution of direct-to-consumer channel in overall revenues has increased from 46% in 2009 to 52% in 2012. We forecast Ralph Lauren’s future growth to be driven by growth in the retail channel, which will help it in expanding its geographical presence and product portfolio.
Expansion in Asia
Ralph Lauren is focused on expanding its operations in Asia (especially China) where the luxury market is growing rapidly due to rising surplus income. Ralph Lauren opened seven stores in Asia during Q2 2013 and plans to open 14 more stores in the region during 2013. It also plans to open e-commerce sites in Korea and China soon.
The revenue contribution of Asia in Ralph Lauren’s total revenues increased from 9.4% in fiscal 2010 to 14% in fiscal 2012. We expect the region to be a significant growth driver for Ralph Lauren as it opens more stores and enhances its e-commerce business in the future.
New Product Categories
Ralph Lauren aims to enhance its share in emerging product categories such as Denim & Supply and accessories (which includes handbags and small leather goods), by expanding their distribution globally and increasing the presence of these categories in the e-commerce channel.
Our price estimate for Ralph Lauren stands at $187, which is at a premium of near 10% to the market price