What’s Driving Ralph Lauren’s Average Revenue Per Square Foot

by Trefis Team
-3.24%
Downside
180
Market
174
Trefis
RL
Ralph Lauren
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Average Revenue per Square Foot (ARPSF) is the measure of a retail store’s productivity, and growth in this metric is a good indicator of comparable store sales growth. More than any other factors, Polo Ralph Lauren‘s (NYSE:RL) ARPSF has been influenced by macroeconomic conditions. The  ARPSF remained flat in 2013 due to currency challenges and to less consumer spending. The figure had been steadily improving from $700 in 2009 to ~$900 in 2012, a near 30% increase.

We forecast RL’s ARPSF to improve at a moderate pace in the near future and increase steadily thereafter over our Trefis forecast period. In this analysis, we take a look at the factors that are most likely to complement this growth. The economic recovery in the U.S.is likely to get better next year, which should have a positive impact on RL’s sales. In addition to macro-economic factors, RL’s ARPSF should get a boost from its increased focus on accessories and hard luxury segments such as watches and jewelry.

Our price estimate for Polo Ralph Lauren stands at $174, implying a premium of around 10% to the market price.

See our complete analysis for Polo Ralph Lauren

Opportunities in China

According to a report by Research and Markets, the global personal luxury goods market is expected to grow at a CAGR of 7.9 percent over the period 2012-2016. This growth is expected to be driven by rising demand from emerging economies such as China and Brazil. For the past few years, Ralph Lauren has been focusing on grabbing market share in these high-potential markets by targeting them with the optimal mix of retail, wholesale and licensed distribution. [1]

However, Ralph Lauren’s trajectory in China hasn’t been smooth. In 2011 Ralph Lauren closed 95 points of distribution, which represented roughly 60% of its network in China. This move was predicated on efforts to reposition the Ralph Lauren brand as a more premium brand in the country. In the following three years, Ralph Lauren opened approximately 60 new stores in Greater China, primarily in premium locations. 15 of these stores were opened in the later half of fiscal 2013 across many of the major cities including Beijing, Shanghai and Hong Kong.

There remains a question mark over whether Chinese customers will accept Ralph Lauren as a premium brand. Additionally, significant competition from established brands in China such as Coach, Louis Vuitton, and Burberry poses a threat for the company. However, since the personal luxury goods market in China is maturing, customers are becoming increasingly sophisticated. This means that first movers into the market might be at a disadvantage as their products might not be able to meet the niche demands of consumers in the country. As a result, as Ralph Lauren continues to improve its brand image in the country we expect its ARPSF to increase. Additionally, better brand recognition within China should result in higher revenues in Europe and the US driven by Chinese tourists.

Focus on New Product Categories

In the Q2 2014 Earnings Call, the company’s management announced that the accessories division will continue to be the main focus of its global merchandising, advertising and marketing efforts over the next several months. This shows that the company is clearly aligning its product offering with growth opportunities. [2] The accessories segment is expected to contribute nearly a third to the total revenues of the global personal luxury goods market by 2016. The outstanding growth in the accessories segment is due to the increasing demand for accessories from customers in emerging markets such as China, Brazil, and India.
Another high-potential opportunity lies in the hard luxury segment, which will be driven by increasing sales of watches and a rising number of jewelry brands, with strong demand coming from emerging markets, especially China. If Ralph Lauren can leverage its brand image to introduce new products, it can tap into this potential market.
Sponsorship of global sports tournaments

Ralph Lauren is the official apparel partner of Wimbledon and U.S. Open. All ball boys and girls, and on-court officials, are dressed in specially designed Ralph Lauren apparel. Additionally, the company also sponsors US professional golfers Webb Simpson, Tom Watson, Jonathan Byrd, Davis Love III and Luke Donald, as well as LPGA  golfer Morgan Pressel. These kinds of appearances in major sports events should drive sports apparel sales in the near-term. It will also help in uplifting Ralph Lauren’s brand image. [3]
Notes:
  1. Global Personal Luxury Goods Market Outlook []
  2. Ralph Lauren Q2 Fy14 Earnings Call Transcript []
  3. Wimbledon Polo Ralph Lauren []
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