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.
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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. 
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