This note is part of a series of analyses we will be publishing on luxury lifestyle company Ralph Lauren (NYSE:RL). In the whole series, we will evaluate several topics including market dynamics in the global luxury market, RL’s supply chain, as well as the competitive landscape in the luxury industry.
In this article, we will solely be focusing on the global luxury market and how Ralph Lauren’s business is positioned to its benefit or detriment. We believe Ralph Lauren could register strong growth in Americas in 2013, owing to favorable market dynamics coupled with its superior brand image in the region. European sales could pose challenges in the near term, owing to changing trends in the region. While the company’s Asian sales could continue to decline in the near term, we believe the long term outlook of this market is positive.
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Growth Dynamics In The Global Luxury Market
According to the Bain & Company Spring 2013 update, the global luxury goods market rose by 10% in 2012on a constant currency basis, and it is estimated to grow by around 4%- 5% in 2013 on a similar metric. It is likewise further expected to rise at around 5%-6% CAGR over 2013-2015, to reach approximately €250 billion by 2015.  Further, the consulting company identifies three key drivers for the global luxury market at present: 1) higher tourist demand (in the markets of Dubai, South East Asia and Australia); 2) the growing number of high-income earners; and, 3) the expanding middle class of developing economies.
Strong Growth Is Expected In Americas
According to Bain & Company, the luxury market in the Americas is expected to grow by around 5% to 7% in 2013. It will be driven by strong demand in the U.S., coupled with an estimated 12% growth across Central and Southern America. 
The Americas region accounted for around 66% of Ralph Lauren’s total net revenues in fiscal 2013. (Fiscal years end with March.) Sales in the region rose by 4.2% and 7.3% in fiscal 2013 and Q1 fiscal 2014, respectively. We expect the company’s sales to grow at a fairly strong rate in this region over the next two years, owing to its superior brand image, as well as its effective growth strategies in the region. These include expanding the e-commerce channel and and continuing to increase the retail footprint.
European Sales Could Present Challenges
Bain forecasts a more tepid 0% to 2% growth in European luxury sales in 2013, due to slowdown in tourism, decreased shopping by tourists, as well as macroeconomic challenges in Southern Europe. 
European sales contributed about 21% of Ralph Lauren’s sales in fiscal 2013. While revenues in this region fell by 2.7% in fiscal 2013, in line with a decline in wholesale shipments, they grew by 3.3% in Q1 fiscal 2014. Higher demand in Germany, the U.K., and Scandinavian markets drove the improvement. We expect RL’s sales in this region to grow at a slow rate in the near future, as macroeconomic challenges will likely weigh on the company’s sales growth in the region.
Asia Sales Could Decline In The Short Term
Japan’s luxury goods market is expected to rise by 5% in 2013, according to Bain & Company.  The recent devaluation of yen is expected to stimulate local spending in the country. However, RL’s sales in the region fell in Q1 2014 due to adverse currency effects and lower wholesale sales. We expect this market to remain challenging for the company in the near term as the currency devaluation could continue to offset increase in sales.
The Chinese luxury goods market is expected to grow at 7% in 2013. The growth rate is expected to decrease due to changing trends in the country. However, South East Asian sales (ex-China) are estimated to rise by 20% owing to new store openings and an emerging middle class. 
Accounting for around 13% of Ralph Lauren’s sales, Asian sales fell by 6% in fiscal 2013 owing to restructuring of businesses in the region. Moreover, it declined by around 13% in Q1 fiscal 2014 due to challenges in Japan and Korea. While we expect RL’s Asian sales to decline in the short term due to currency headwinds and other factors, we believe it could rise at a strong rate over the long run due to accelerating demand from China and South East Asia. The company is making heavy investments to expand its retail footprint and distribution channel in Asia, and we expect this move to yield positive results for the company in the long term.
While growth in worldwide apparel sales accelerated in 2012, as compared to the previous year, leather goods and other accessories continued to record the highest growth in comparison to other product categories, according to Bain & Company. 
To leverage this trend, Ralph Lauren aims to grow its new merchandise categories such as handbags, footwear, eye wear, watches and fragrance. Handbags, small leather goods, and footwear contributed 8% of RL’s revenues in fiscal 2013, and we believe this share will increase in the future with rapid sales growth in these product categories. 
Our $177 price estimate for RL’s stock, represents near 5% upside to the current market price.Notes:
- Worldwide luxury goods continues double-digit annual growth; global market now tops €200 billion, finds Bain & Company, Bain & Company, May 16, 2013 [↩] [↩] [↩] [↩] [↩] [↩]
- Ralph Lauren Management Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, August 7, 2013 [↩]