Polo Ralph Lauren (NYSE:RL) is a leading American luxury lifestyle company that specializes in high-end apparel for men and women as well as accessories, fragrance and home decor. The company competes with other premium apparel and accessories players like Coach (NYSE:COH), Liz Claiborne (NYSE:LIZ) and AnnTaylor (NYSE:ANN).
Polo Ralph Lauren generates nearly half its revenues by selling products to department stores such as Macy’s (NYSE:M), Dillard’s (NYSE:DDS) and Kohl’s (NYSE:KSS). But as department stores reduce their inventory of designer products in favor of so-called private label apparel and accessories, we expect Polo’s department and specialty store sales to decline, putting pressure on the stock. Our analysis follows below.
Why department stores like private labels…
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Over the past few years, U.S. department stores have faced stiff competition from mass merchandisers and specialty retailers. In response, department stores have increasingly focused on selling private label apparel that they produce themselves and sell through their own stores. Today private label sales account for up to 50% of total apparel sales by U.S. department stores, up from 25% a decade ago.
Department stores like private labels because they command 20% higher profit margins than their designer counterparts. Private labels also offer more control over product development and distribution, enabling department stores to release new products as much as 60 to 90 days ahead of their name-brand competitors. In addition, the exclusivity that private labels provide generates customer loyalty, especially among more upscale middle class consumers.
In a mature industry, apparel vendors are always looking for new ways to leverage their existing assets. Because department stores already control large distribution networks, private labels allow them to capture a greater share of each product’s value. On the other hand, name-brand manufacturers like Polo and Coach are investing heavily to develop their own retail outlets.
And why this trend hurts Polo
We expect Polo’s department store revenues to decline as private labels increasingly eat up Polo’s share of sales. We estimate that sales to Macy’s and Dillard’s currently account for 9% of Polo’s stock value. In the chart below, you can change our forecast for Polo revenues from Macy’s & Dillard’s to see how it impact the company’s stock.
The surge in private label sales will also hurt Polo’s specialty store and other department store revenues, which account for about 34% of the company’s stock value. (Revenues from this segment have grown sharply in recent years, driven by Polo’s acquisition of various licensing businesses.) We expect specialty store and other department store revenues to grow at a declining rate going forward.
You can see our $70.27 price estimate for Polo Ralph Lauren’s stock here.