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Investment Overview for Ralph Lauren (NYSE:RL)
- Latest Earnings
Ralph Lauren released its second quarter 2017 earnings on November 10, for the period ending September 2016. While the revenues were largely in line with expectations, the company managed to beat EPS estimates by $0.19. In the second quarter, revenue of $1.8 billion was in line with the company's expectations, while the operating margin, despite a 110 basis point fall, was ahead of the target of a 200-250 point decline. This was driven by higher realized gross margins in the international markets, increased traction gained by the quality of sales initiatives, and planned SG&A expenses shifting into the third quarter. The quality of sales have been driven up as a result of moderating discounting activities, tightening inventory buys, and the closure of another seven underperforming stores in the quarter. Such initiatives have resulted in a reduction in inventories by 15%. The North American segment continues to be the most challenged market for Ralph Lauren, where revenue fell by 12%. Meanwhile, in the international markets, the revenue increased 2%, driven by improving quality of sales, right-sizing of the inventory, and optimization of the store count. In Asia, over the last nine months, the company has closed 72 points of distribution which were deemed to have weakened the brand, while at the same time RL has opened 159 new high-quality points of sale, at better locations, and with refreshed store environments. Reducing the length of sales periods and decreasing the depth of markdowns have resulted in the average unit retail prices to be up 10% in constant currency, and improved gross margins.
- Company Review
The disappointing Q3 2016 results forced Ralph Lauren to conduct a review of the entire company in order to identify growth opportunities for leveraging its strengths. Such a process could lead to the company cutting down on its myriad labels, which are often confusing to customers and inefficient to produce. Ralph Lauren is also looking to right-size its cost structure in order to be more competitive. The company is on track to complete the SAP European implementation, as well as the e-commerce re-platforming next year. The company should also be able to deliver the $125M of cost savings from the initial global brand restructuring being implemented, higher than the $110M expected earlier. The aim is also to create a demand-driven supply chain and to develop a holistic global expansion strategy for the future, while also taking pro-active steps to clear the end of season inventory in the short-term.
- Way Forward Plan
CEO Stefan Larsson recently revealed the company's turnaround plan, called 'The Way Forward," which is designed to revitalize the core brand, and to be more in tune with the consumer. Since hitting a peak of $188 three years ago, the company's stock price has tanked almost 50% to $99.76 on July 25th. The revenue growth for the company has fallen from a healthy 7% in FY 2014, to 2.2% in FY 2015, and further, to a negative 2.8% in FY 2016, which ended in March 2016. The main reasons for the company's poor performance in recent times has been a result of a decline in department store sales, the rise of fast fashion retailers, and the company's own out of date supply chain model. The company's focus itself was diluted with numerous brands and a multitude of initiatives. The main facets of the Plan involve the closure of about 50 underperforming stores, eliminating three layers of management and a thousand jobs, improving the lead time from 15 months to 9, and focusing on its three main brands of Ralph Lauren, Polo, and Lauren. In this regard, RL discontinued its Denim & Supply brand. The company will now be able to address the denim market more effectively through its Polo brand. The company is also working towards cutting down the unproductive styles, leading to a massive reduction in the number of SKUs (Stock Keeping Units). For fall 2016, the company achieved a 10% reduction in SKUs, and remains on track to achieve an over 20% reduction for spring 2017. This will help the company to refocus its resources and creativity on its core brands. CEO Stefan Larsson also stated that the company expects to be halfway to its goal of a nine-month lead time by the end of the fiscal year, and 90% there by the end of the next fiscal year.
Below are key drivers of Ralph Lauren's value that present opportunities for upside or downside to the current Trefis price estimate:
- Ralph Lauren Retail Segment Revenue per Square Foot
Ralph Lauren Retail Segment Revenue per Square Foot: Ralph Lauren witnessed substantial growth in this till 2013, reaching $904, a rate of over 30% during 2008 and 2013. However, thereafter the revenue per square foot has fallen to $676 in 2015, a figure lower than the corresponding 2008 figure. Luxury brands are characterized by features such as a commitment to cutting edge product design, iconic founders, control of all verticals, global presence, and an aspirational appeal.
Going forward, we expect some pressure on the company's retail revenue per square foot due to the changing dynamics of the retail market. Retail shopping habits are undergoing a slow but steady change, as brands are shifting from pure play (online only or store only) strategies to mixed strategies (bricks-and-clicks), or omni-channel strategies. As a result, they are now using stores as only showrooms and warehouses and preferring to sell via their e-commerce platforms. This trend could result in a decline in the revenue per square foot figure, however, Ralph Lauren's current strength in its market space means that it should be able to transition to the new trends with ease, and in the future the company should witness growth in this driver.
Specialty Stores & Other Department Stores EBITDA Margin
- Specialty Stores & Other Department Stores EBITDA Margin
: Specialty stores & other department stores EBITDA margin declined from 31.95% in 2010 to 25.64% in 2011. The decline was primarily due to lower wholesale gross profit margins in the U.S. and Europe, reflecting significant increases in raw material costs. The figure has continued to rise gradually and in 2014, the margin stood at 34.99%. However, in 2015, the margins fell to 32.78%. Many clothing makers and big retailers in North America have been struggling as a result of a warmer than usual holiday season and general macroeconomic weakness. This has been reflected in the lower margins for 2015. Going forward, while we expect the margins to decline in 2016, the figure should return to positive growth thereafter.
Ralph Lauren is a global leader in the design, marketing, and distribution of premium lifestyle products. Its products include apparel, accessories, and fragrance collections for men and women, as well as children's wear and home furnishings. The company's brands such as Ralph Lauren, Club Monaco, and Polo are some of the world’s most widely recognizable consumer brands.
The company offers a broad spectrum of lifestyle products that include:
- Apparel: Products include men’s, women’s, and children’s clothing
- Accessories: Products encompass a broad range, including footwear, eyewear, watches, jewelry, hats, belts, wallets, sleepwear, and leathergoods, including handbags and luggage
- Home: Coordinated products for the home that include bedding and bath products, furniture, fabric, rugs, lighting, barware, wallpaper, paint, tabletop, and giftware
- Fragrance: Fragrance products are sold under Romance, Polo, Lauren, Safari, Ralph, and Black Label brands, among others.
The company sells its products through company operated retail stores and its website ralphlauren.com, as well as through upscale and mid-tier department stores and specialty stores.
We believe Ralph Lauren's factory stores, as well as Ralph Lauren's full-priced retail stores, are significant sources of value for Ralph Lauren for the following reasons:
Factory stores, a highly attractive channel in current economic scenario
Ralph Lauren is a global brand and derives a lot of its revenue from outside North America. However, as both Asia and Europe are coping with weak macroeconomic conditions, factory stores have emerged as an attractive choice for value conscious consumers as they provide better bargains.
Increasing revenue share of Retail business
Over the past few years, Ralph Lauren has focused on increasing its direct-to-consumer reach to gain greater control over its brands and operations. As such, the firm has expanded its store base and increased products and services offered on its online store. This is Ralph Lauren's response to the ongoing e-commerce boom in the apparel industry.
The result has been a consistent increase in the share of revenues coming from Ralph Lauren's retail segment that includes company operated stores and the firm's e-commerce websites.
Ralph Lauren Has a Strong Brand Identity
Ralph Lauren's greatest competitive advantage has been its ability to maintain the strength of its brand for the past twenty years. While many fashion companies have struggled to retain customers with changing fashion trends, Ralph Lauren's brand has not only remained strong, but has also expanded its brand to other products and geographies. The company’s products are popular through all age groups, and in a study conducted by investment bank Piper Jaffray, Ralph Lauren was ranked in the top five favorite brands among teens, along with Nike, Urban Outfitters, and American Eagle, which target a different set of customers.
Another advantage of Ralph Lauren is its broad consumer appeal. The company offers products across a wide range of price points from discount (Chaps) to luxury (Ralph Lauren Collection) enabling it to appeal to a wide target demographic.
Weak Macroeconomic Conditions in Europe are a Near Term Threat
Current weak macroeconomic conditions in Europe, particularly in Spain, Greece, and Portugal, pose a threat to Ralph Lauren's revenues in the near term. Ralph Lauren's wholesale business is most vulnerable to the situation, as Europe accounts for a significant percentage of the company's total wholesale revenues.
Expansion in Asia Should Help Sustain Growth
Ralph Lauren has been focusing recently on expanding retail operations in emerging markets, especially in Asia. The Asian market has become a focal point of the global retail industry, with major brands across the globe aggressively expanding their footprint in the region. In 2015, Ralph Lauren's store presence in Asia was stronger than that in Europe. Compared to only 27 Ralph Lauren brand stores in Europe, it had more than double the number of stores - 58 - in Asia. However, the number of wholesale distribution channels in Asia in still minuscule compared to that in North America and Europe (128 vs 7,308 in the Americas and 5,311 in Europe). Going forward, there is tremendous scope for the company to expand its presence in wholesale stores in Asia.
New Brand Categories
Ralph Lauren recently integrated its formerly licensed Chaps men's sportswear business into a directly operated wholesale business. This could contribute to higher revenue growth in the wholesale channel going forward.
Additionally, 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. Currently, handbags, footwear, and leather goods represent less than 10% of Ralph Lauren's total consolidated sales. The company has stated that it wants to grow this category to about 20% of its top-line, which should have favorable margin implications, as it is a higher margin category than apparel.
Furthermore, Ralph Lauren 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. 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.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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