Here’s Why Ralph Lauren Could See Better Days

Premium lifestyle brand, Ralph Lauren (NYSE:RL), has not been seeing its best days of late. While the stock attained a high of about $186 as early as December 2014, it has come plummeting down ever since to trade at rates, as low as $105 in August, with the latest quote standing at about $110. However, we believe that Ralph Lauren could very well be trading at a discount and here’s why. In particular, we look at the different reasons that are contributing to this development and analyze how long this could last.

Source: NASDAQ

Why Is Ralph Lauren Under Pressure?

— Top on the list of Ralph Lauren’s woes are currency headwinds, as the U.S. dollar continued to strengthen against a number of key currencies (See Figure 1). While on the one hand, a stronger dollar disrupted demand in North America, on the other hand it strayed tourists and consequently customers, to markets where the currency has weakened. Moreover, weaker domestic currency has led to fewer dollars on conversion to adversely impact the company’s financials. According to Ralph Lauren’s recent earnings report, the company witnessed a 5% decline in revenues on a reported basis, which includes a 500 basis point influence of currency related headwinds. ^[1] However, currency headwinds may not be reason enough to write off a company since these fluctuations could very well reverse over time. In fact, signs of this has already been seen, when the Fed held off an interest rate hike recently. The Financial Times sites a number of sources such as the strategists at the Commerzbank and RBC Capital Markets indicating that some ease in the U.S. dollar could be on its way. ^[2]

Figure 1: U.S. Dollar Index (DXY), Market Watch

— Second, is a slowdown in China, which until now had been seeing phenomenal economic growth leading to a rapid increase in purchasing power, and consequently luxury spending. Although Asia accounts for about 12% of Ralph Lauren’s revenues presently, Chinese customers in particular are important for the company’s well being. Part of this is because Asia, backed by China, was projected to be a high growth market, with sales from the region expected to account for about one-third of total sales in the long run. Moreover, Chinese citizens tend to promote sales even across countries in Europe and North America. Currently, Chinese consumers account for about 27% of the world’s luxury spending, 80% of which happens abroad. Moreover, this figure is expected to double by 2020. ^[3]

As per research by Bain & Co., luxury spending by Chinese consumers was projected to increase from about 2% in 2000 to about 30% this year. However, recent developments have proved to be a hindrance to these projections. First, was the massive “anti-extravagance” drive, which, with an aim of curtailing the gift giving culture in China, managed to hurt luxury spending. And then, came slower growth, with the Chinese economy projected to growth at a rate of 7% this year, the slowest in over two decades. ^[4]

Now, it may not be entirely accurate to be pessimistic about Ralph Lauren’s prospects based on developments in China for a number of reasons — For starters, the phenomenal growth that China has been achieving was bound to become hard to sustain at some point, and even at 7%, the economic growth in absolute terms is a lot higher than what a 14% growth rate could have achieved a decade ago. In this case, although China may not experience a decline in consumer spending, it could be slower than the growth rates that were otherwise expected. Second, China has been attempting to move to a “new normal,” where the focus is more on structural reform rather than economic growth, in that the government has resisted the use of policy to boost short-term growth.  In this circumstance, the economic situation in China, along with the impact of the “anti-extravagance,” could merely be a consequence of policy that could very well change over time.

Source: Statista

Factors That Could Improve Prospects

From looking at the problem areas, it is clear that Ralph Lauren is not really dealing with any fundamental problem in terms of their business. In fact, contrary to how the stock has been performing, Ralph Lauren actually seems to have a number of factors that could push prospects in their favor.

— Ralph Lauren has taken a number of steps to better the image of their brand. In this respect, the company has indicated a merger of its luxury brands to create one label for men and one for women, which is expected to simplify the luxury message surrounding the brand. Ralph Lauren has also taken steps to increase the luxury notion with the addition of the Ricky handbag line to their accessories segment. Apart from this, the Ralph Lauren brand could also benefit from new launches, which includes the new Polo Sport line, an extension of the company’s trademark Polo brand in active wear.

— Apart from brand restructuring, the company will also see restructuring on the management side of things in 2016. This entails breaking down the brand on the basis of six key brands, each of which will be headed by unique leadership to see the relevant division through integral functions, such as designing and merchandising. This move is expected to bring in significant productivity increases since it will increase the onus on the team in question for that brand’s performance. Furthermore, the relevant team could have more insight, and a better grasp over the required strategies, to see the brand through success. The management hopes that the new structure will result in “significant reduction in SKUs as well as sample and design costs, which will lead to better inventory turns, higher gross margins, and meaningful SG&A cost savings.”

Based on these factors, one could remain optimistic on future prospects for Ralph Lauren. This is evident when one looks at Wall Street numbers, which anticipates an approximate 4% increase in revenues and an 11% increase in EPS numbers for 2016. Even for the present fiscal year, the company expects to post a 3-4% increase in revenues on a constant currency basis. Clearly these numbers indicate that Ralph Lauren is just one other name that is being weighed down by circumstances, and could very well see brighter days going forward.

Other Sources:

1. Ralph Lauren Q1 2016 Results – Earnings Call Transcript
2. Ralph Lauren Q4 2015 Results – Earnings Call Transcript
3. Form 10-K, SEC

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Form-10Q, SEC [↩]
2. Dollar falls after Fed holds rates [↩]
3. Chinese consumers will double overseas spending by 2020: China Luxury Advisors [↩]
4. World Economic Outlook Update [↩]