Ralph Lauren Focusing On Company Operated Stores And Improved Store Experience For Future Growth

For the year 2015, luxury lifestyle company Ralph Lauren (NYSE:RL) has made its growth strategy clear. The company is focusing on three specific areas — the development of a global store network, infrastructure development,  and new advertising and marketing initiatives to attract newer customers to the brand.  We have written about the advertising and marketing initiatives previously. (See: Ralph Lauren’s New Polo For Women Shows That It Is Now Moving With The Times) In our note below, we take a closer look at the company’s efforts at expanding its store presence and development of infrastructure to complement those stores.

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Global Store Network

Ralph Lauren has seen its stock fluctuate between $150 and $180 over the past year. The volatility can mostly be attributed to the decline in operating margins in the previous quarters.  In the recently concluded quarter, operating margin was 100 basis points below last year’s at 14.4%, due to the timing of payments related to incremental investments in growth initiatives, which was somewhat offset by operational discipline and the favorable impact of currency fluctuations. ((Ralph Lauren Q2 FY15 Earnings Call Transcript, Seeking Alpha, October 2014) The company issued guidance of further decline in margins in the upcoming quarters.

Ralph Lauren is facing a challenging market environment as it tries to transition from a wholesale dominated business model to one based on direct sales. Consumers are now showing a preference for shopping at retail stores and online instead of department stores. Ralph Lauren, which used to be a staple of department stores like Bloomingdale’s and Macy’s, has suffered because of this change in consumer preferences. As a result, the company is now trying to derive more of its sales from company owned stores and the e-commerce channel. The other step taken by the company to boost its margins, has been to increase the penetration of luxury accessories, like expensive watches and bags, in its stores.

Ralph Lauren is looking to expand its store presence in the calendar year 2015. In the first six months of the fiscal year 2015, the company managed to launch 20 new stores. It grew its international reach through the launch of the first Polo store in Singapore, a new flagship store in Hong Kong, and has plans of launching a new store in London sometime next year. It is also trying to develop its e-commerce segment. The company launched a new e-commerce website in Hong Kong late last year, gaining access to a large portion of the Chinese market. It is also developing a carefully curated social media presence in order to tap into the rapidly growing demand for luxury products in one of the fastest growing economies in the world. However, the company is still only in investment mode as far its operations in Mainland China are concerned.

In fiscal 2014, e-commerce brought in $500 million in revenues. Based on the high profitability of the channel, the retailer will continue investing in this space. At present, the company’s e-commerce operations behave very differently in different geographies. In the U.S., the management pointed out that if a consumer switches from shopping at a brick-and-mortar store to online, it is profitable for the company. However, the company’s e-commerce operations are only starting to achieve scale in Europe.  RL will need to make further investments in its European e-commerce business to reach the same level of profitability as in the U.S.  Meanwhile, it’s only just launched the e-commerce business in Asia. The company currently operates in Japan and Korea, with investments still ongoing to bring operations online in Greater China and Southeast Asia. ^[1]  These initiatives could lead to different avenues of future growth for the company.

Infrastructure Development

The company holds a rather long-term view of the improvement of its e-commerce operations. Currently, it is trying to take control of its front-end services, which will be operated by a single partner for at least the next 2-3 years. This should allow the company to improve the shopping experience of customers as well as cut costs at the same time. The operational efficiency that this plan hints towards should help the company achieve a much higher profitability in the next few years.

In recent quarters, the company has been feeling some pressure on the costs front, especially as it ramps up its investments in advertising and marketing initiatives. In addition to the launch of new stores in several geographies, Ralph Lauren has also spent considerable amounts on the launch of Polo for Women and the launch of Polo Sport, the company’s much anticipated active wear brand. ^[2]  However, these expenses should not weigh down the company’s margins too significantly as they are likely to be offset by growing revenues. These expenses should pile up incrementally in the coming quarters, but this fact should not worry investors since they are quite likely to be offset by a potential increase in revenues going forward.  Newer brands and store expansion in new geographies will help the company reach new customers, and hence increase the company’s top and bottom lines.

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1. Ralph Lauren Q1 FY15  Earnings Call Transcript, Seeking Alpha, August 2014 [↩]
2. Ralph Lauren Gets Ready to Enter the Activewear Game, Fashionista, October 2014 [↩]