This is the second note in a series of analyses we will be publishing on luxury lifestyle company Ralph Lauren (NYSE:RL). In the previous article, we outlined the growth dynamics within the global luxury market and how it will affect the company. In this article, we analyze the supply chain of Ralph Lauren and examine the key challenges it could face in this arena going forward.
We believe the bargaining power of Ralph Lauren’s suppliers is low on account of a diverse supplier base. However, the bargaining power of certain wholesale customers such as Macy’s is fairly high. We expect the revenue growth for the company to be driven by increased sales in the wholesale and retail channels. However, we believe that retail channel sales growth will outpace the revenue growth of other channels in the long-run due to the ongoing expansion in the Direct-to-Consumer business.
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Suppliers Are Engaged To Manufacture Products
- Ralph Lauren does not produce its own products. It engages more than 700 different manufacturers globally to produce its products.
- No manufacturer accounted for over 4% of its total production in fiscal 2013. In addition, over 98% of its products (in dollar terms) in fiscal 2013 were manufactured outside the U.S. in the markets of Asia, Europe and Latin America.
- Both finished goods as well as raw materials inventories are sourced by the company.
- We believe the supplier power is limited due to diverse supplier base; however, the increased costs of raw material and labor are usually shared by suppliers with the company through pricing.
Products Are Sold Through Different Channels Such As Retail, Wholesale and Licensing
The wholesale, retail and licensing channels accounted for approximately 45%, 52% and 3% of its net revenues in fiscal 2013 respectively.
- Sales to major department stores and specialty stores are included within wholesales sales. The three largest wholesale customers comprised for around 45% of the total wholesale revenues in fiscal 2013, with Macy’s accounting for approximately 12% of the total net revenue.
- We believe these three key wholesale customers could exert significant bargaining power and any problem at these wholesale accounts could represent a potential threat for RL.
- In Q1 fiscal 2014, sales growth at the wholesale channel outpaced the overall revenue growth due to recent integration of Chap’s men’s sportswear business and high growth in the North American wholesale channel.
- However, the second quarter sales forecast is in line with the prior year, as the ongoing SAP implementation is expected to result in the delay of certain wholesale shipments from the second quarter to the third quarter.
- We expect continued sales growth at the wholesale channel for RL over the long run owing to integration of previously licensed businesses, coupled with continued growth in Americas. Recovery in Europe will also boost sales at this segment.
- Ralph Lauren is making several investments to expand its retail channel, which includes directly operated stores and e-commerce sites. The company plans to open new Polo, Denim & Supply, Club Monaco and factory stores around the world.
- It will also introduce e-commerce operations in South Korea later this year. We believe these accelerated investments will weigh on the company’s profitability in the short-term.
- In Q1 fiscal 2014, RL’s retail sales growth fell below the overall revenue growth of the company due to the negative impact of adverse currency and discontinued operations. However, we believe the sales growth at this channel will outpace the overall revenue growth of the company in the future owing to planned expansion in this channel.
Licensing revenue, which constitute for a small portion of overall sales, is projected to decline in the future, due to the integration of previously licensed businesses and the company’s effort to enhance its direct-to-consumer business.
Our $177 price estimate for RL’s stock, represents near 5% upside to the current market price.