Ralph Lauren Corporation (NYSE: RL) is a leader in the design, marketing and distribution of premium lifestyle products in four categories: apparel, home, accessories and fragrances. For more than 46 years, Ralph Lauren’s reputation and distinctive image have been consistently developed across an expanding number of products, brands and international markets.
Although shares of the company have quadrupled in the last five years, they have cooled off lately. The stock hit a 52 week high of ~$192 in May 2013 but has since dropped to ~$163. Moreover, the decline in its comparable sales over the last two quarters has been a source of concern for investors. In the light of this drop off in performance, it makes sense for the company to re-evaluate its strategy going forward. The company’s management laid out a clear 3 pillar growth strategy focused on: expanding international presence, extending direct-to-consumer reach and investing in merchandise innovation.
In this article, we evaluate this growth strategy keeping in mind the outlook summary for the period 2012-16 by Research and Markets. Below we summarize the key results from the report and see how RL’s strategy shapes up.
See our complete analysis for Polo Ralph Lauren
Luxury Goods Market Driven by Accessories and “Hard” Luxury
The key points from the outlook summary can be summarized as follows:
- The global personal luxury goods market is expected to grow at a CAGR of 7.9% over the period 2012-2016.
- One of the key factors contributing to the growth of this market is the online personal luxury goods market.
- Demographic changes such as the aging baby boomers customer segment could pose a challenge to the growth of this market.
- The two key segments which are expected to drive the market are the accessories and hard luxury segments.
- The accessories segment, which accounted for 27.2% of the global personal luxury goods market in 2012, is expected to reach 29.3% by 2016.
- The hard luxury segment recorded a market share of 22.7% in 2012 and is expected reach 24.7% by 2016. 
The company’s management has articulated a goal of generating equal revenues from the Americas, Europe and Asia. Currently, nearly 2/3 rd of the revenues come from the Americas, while Europe and Asia contribute 20% and ~10% respectively to the top line. The trend for RL’s international revenues has generally been positive over the last 10 years. International revenues have gained about 13% of share in the company’s consolidated revenue mix. It is clear that the company is focused on grabbing market share in high-potential emerging markets, such as Greater China and Central and Eastern Europe, by targeting each market with the optimal mix of retail, wholesale and licensed distribution. Considering that the Research and Market’s outlook summary predicts the growth in the Global Personal Luxury Goods Market to come from these territories, this seems like a coherent strategy. Furthermore, taking into account the aging baby boomer demographic, RL’s main customer segment in the U.S., the shift in focus to younger demographic in emerging markets is the right way forward.
b) E-Commerce Critical To Expanding Consumer Reach
Currently, RL’s direct-to-consumer activities encompass a broad range of global retail formats, both physical and digital. The physical formats – Ralph Lauren, RRL, Denim & Supply, factory and Club Monaco stores, as well as concession shops and licensed stores in Europe and Asia, showcase RL’s brand messages and product assortment. However, the fastest growing distribution channel over the last several years for the company has been the e-commerce segment. We expect the momentum to continue as the internet allows the consumer the convenience of pre-selection research and of access to more products than the retail formats. Because of the ongoing importance of these online stores, e-commerce has been an area of significant investment for the company. RL has greatly expanded its distribution centers for its North American e-commerce operations, launched e-commerce in South Korea and is now transacting online in 10 European countries.
If RL’s e-commerce channel continues to record strong growth, the company can save operating costs (such as rental/leasing costs), boost profits and yield more returns over the longer run. Furthermore, the company can consider closing some of its redundant brick-and-mortar stores. With a maturing e-commerce channel, Ralph Lauren can also reach new regions. E-commerce sales stood at $624 million at the end of 2012, and we forecast the revenues to grow to $1.5 billion by the end of our forecast period. If sales exceed that figure by 10%, there could be a 5% upside to our $173.90 price estimate for Polo Ralph Lauren.
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. The accessories segment is expected to contributing 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. With time, customers have become sophisticated and demand more niche products. As a result, the early entrants in this market might now be at a disadvantage due to changing customer preferences. Ralph Lauren is a relatively smaller player in this segment but can gain market share by launching new products in vogue with the latest trends.