Ralph Lauren’s New Polo For Women Shows That It Is Now Moving With The Times

-6.32%
Downside
187
Market
175
Trefis
RL: Ralph Lauren logo
RL
Ralph Lauren

Ralph Lauren’s brand appeal was built on selling dreams of escape and transformation to a baby boomer demographic that was rapidly becoming richer and looking for new ways to spend the cash it was earning. However, that demographic, which formed the backbone of its prospective customer segment, is now aging. Consequently, the amount they spend on luxury clothes is also falling. The appeal of Ralph Lauren as a luxury brand is now somewhat limited  to those who are newly rich or aspire to be rich, and whose idea of luxury is the same as that of the baby boomer demographic. However, the idea of luxury for those already rich has shifted. Instead of Ralph Lauren, the merchants of choice for their dreams are now Kate Spade and Tory Burch. The plans to accelerate the development of the Polo brand might be an admission that Ralph Lauren’s management is becoming wise to these changing trends.

Appealing To A Younger Demographic

In management’s own words, the company’s Lauren brand, which forms the backbone of its department store business, serves a customer who is essentially in the 35+ age group. Its other popular brand, Denim & Supply, is defined under the millennial umbrella. These brands have helped Ralph Lauren solidify its bond with the older consumer. The introduction of the Polo for women product line shows that the company is not unaware of these changing trends. The new Polo women’s business will be targeted to younger customers, with its main competitors being Burberry and Tory Burch. The Polo women’s business will replace the Blue Denim line so the sales made from the segment will not be entirely incremental. However, since the business will serve a wider range of needs than the Denim line, it will bring in higher revenues over time. [1]

Relevant Articles
  1. What To Expect From Ralph Lauren’s Fiscal Q2 After Stock Up 9% This Year?
  2. What’s Next For Ralph Lauren Stock?
  3. Will Ralph Lauren Stock Trade Lower Post Fiscal Q3?
  4. Ralph Lauren Q2 Preview: What Are We Watching?
  5. Ralph Lauren Stock To Trade Lower After FY Q4 Results?
  6. Ralph Lauren Stock Slumped 14% In Last Ten Days, What’s Next?

The Polo women’s business is also consistent with Ralph Lauren’s stated aim of growing its women’s business to become an equal contributor to the overall revenues.  Currently, the split between revenues from the men’s and women’s mix is about 60/40. This is the reverse of the usual trend in the marketplace, and the opening of the women’s Polo line will allow the company to achieve greater share in the women’s luxury apparel market.

Earlier this year, Ralph Lauren opened a Polo flagship store on Fifth Avenue, New York. The store has done well, but the most interesting thing about the performance of that store is that nearly half of the sales from the store have been for the Women’s Polo business. As the management stated in the earnings call for the second quarter, this gives the company a new avenue for their retail strategy. The Polo for women brand differs from the Blue Label brand in several ways:  1) the average retail price for a product sold from the Polo brand is about 30 to 40 percent lower than under Blue Label, and 2) the product mix combines the preppy base of the company with a more rough-hewed street style. [2]  Instead of a product base built primarily around leather items, the Polo product mix is more cotton and torn jeans.  What this means is that in order for the Polo brand to replace the Blue Label brand successfully, Ralph Lauren needs to convince consumers to buy on average two more items per visit or attract enough new customers to be able to provide that same growth.

Global Opportunities for Polo

The decision to roll out Polo stores is not merely limited to growing the women’s business but also coincides with several high-potential product initiatives:
1) The debut of women’s Polo
2) The introduction of men’s polo suits, suit separates, sport jackets, and trousers, as a result of buying the men’s clothing license business.
3) The introduction of a more refined, dressier aspect to the Polo men’s line.

The company has 13 Polo stores operational today, with approximately 15 to 20 planned for fiscal 2015. Over the long-term, the company  has identified an opportunity for between 100 and 200 Polo stores worldwide, and with significant concentration in international markets.  At least 20 to 30% of the Polo stores are expected to be located in Europe.  Additionally, the company has noted that nearly 40% of the sales in its new Polo stores come from foreign tourists, the biggest group among which is the Chinese customer. [2]  The company is presently quite under-penetrated in China and the acceptance of the brand without that penetration bodes well for any prospective expansion plans into the Chinese market.

As with other product launches and license take-backs, these will require incremental resources for design, merchandising, production, and sales. Additionally, the company will have to support the Polo expansion strategy with increased global advertising and marketing to build awareness for the new stores and merchandise categories. These investments in Polo are consistent with the company’s strategy to divert resources to high-growth, high-margin opportunities. While each of these areas of investment could generate high returns in the long-term, the near-term impact on operating expenses means that the fiscal 2015 operating margin will likely be below 2014’s level. [3]   However, in the long run, with the opportunities opened up by these new initiatives, the company should be able to recoup these expenditures.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Researc

Notes:
  1. Ralph Lauren’s Q3 2014 Earnings Call Transcript, Seeking Alpha, February 2014 []
  2. Ralph Lauren (RL) Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, October 2014 [] []
  3. Ralph Lauren’s Q4 2014 Earnings Call Transcript, Seeking Alpha, May 2014 []