How Ralph Lauren Can Grow In 2015

Luxury lifestyle company Ralph Lauren (NYSE:RL) is one of the world’s premier designer, marketer, and distributor of men’s, women’s, and children’s apparel, accessories, fragrances, and home furnishings. The company operates through wholesale, retail, and licensing channels. It operates ten different brands which range from the reasonably priced aspirational brands such as Polo and Chaps, to the luxury market brands like Black Label. In 2014, the company got 51% of its revenue from retail, 47% from wholesale, and 2% from licensing. ^[1] In terms of geographical split, the company got 67% of its revenue from the U.S. and Canada, 21% from Europe, and 12% from Asia and other regions. ^[2]

The company has outlined key growth strategies going forward: expanding international presence, especially in Europe and Asia; increasing the reach of its direct-to-consumer channel and growing e-commerce sales; expanding merchandise categories, like accessories; and investing in infrastructure and employee talent pool to support its growth investments. We believe that the company’s revenue growth can accelerate going forward, benefiting from a variety of growth strategies in the manner discussed below. We also expect the company’s profitability to improve over the long term, as investments in these growth strategies bear fruit. Efficiencies gained through the improvement of its management information systems should contribute, as well.

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International Expansion

Ralph Lauren’s management stated in its most recent earnings announcement that its number one tourist shopper in the United States is the Chinese consumer. ^[3] Moreover, the company feels there is strong product acceptance and demand in China for Ralph Lauren. The company is very under-penetrated in the region and is still only in investment mode in the country. Ralph Lauren opened its first e-commerce site in Hong Kong in June 2014, which also gives it the capability of shipping to several other South East Asian markets. However, it is yet to open one in mainland China and is still considering a plan of action in this regard. It has launched marketing and advertising campaigns to this effect, but its strategy is yet to be made clear.

Meanwhile in Europe, revenue in 2014 was up. ^[2] The European retail business increased in double-digits in the previous year and the wholesale business was up as well. (Ref: 1)) The company has a strong presence in the U.K. and Northern Europe, while its performance in Southern Europe seems to have stabilized, offering good signs of growth in the future. Additionally, the company also transitioned its operations in Australia and New Zealand in mid-2013. This is another area where the company can increase its revenues going forward.

Growing DTC Segment

The second initiative involves the development of the e-commerce segment. In fiscal 2014, e-commerce brought in $500 million in revenues. Based on the high growth and the profitable dynamics of the channel, the retailer will continue investing in this space. ^[2] 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. ((Ralph Lauren Q1 FY15  Earnings Call Transcript, Seeking Alpha, August 2014))

Expanding Merchandise Categories

The third initiative involves accessories in general and leather goods in particular. The retailer converted footwear from a licensed to an owned segment in 2006 and re-opened operations in 2008. At the same time, the company gained direct control of its licensed handbags and small leather goods business. Since then, the leather goods category has grown at an average of 20% annually. ^[4] Currently, handbags, footwear, and leather goods represent less than 10% of total consolidated sales. ^[2] The company has stated that it wants to grow this category to about 20% of the top-line, which should have  favorable margin implications, as it is a higher margin category than apparel. ^[2]

Additionally, the company launched its Women’s Polo line late in 2014. The brand has been getting solid customer attention and offers the company the opportunity to expand its customer segment into another demographic. Ralph Lauren is unique among apparel based luxury brands in that it gets more revenue from its men’s business than from its women’s business. Additionally, its primary target audience is now rapidly aging and newer, fresher brands like Kate Spade and Tory Burch are capturing the imaginations of the younger generations. The Polo for Women line offers the company the opportunity to address both concerns at once — it can increase its women’s business revenue collection and also penetrate a younger demographic.

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1. Ralph Lauren 10-K, SEC [↩]
2. Ref: 1 [↩] [↩] [↩] [↩] [↩]
3. Polo Ralph Lauren’s (RL) Management on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, February 2015 [↩]
4. Ref: 2 [↩]