VALUATION HIGHLIGHTS

1. North America constitutes 43% of the Trefis price estimate for Ralph Lauren's stock.
2. Asia constitutes 24% of the Trefis price estimate for Ralph Lauren's stock.
3. Europe constitutes 21% of the Trefis price estimate for Ralph Lauren's stock.

WHAT HAS CHANGED?

1. Ralph Lauren Tops Q3 Results
   • The retailer reported adjusted earnings per share of $3.35 and revenues of $1.8 billion (up 0.9% y-o-y) in the fiscal third quarter. The company noted that adjusted gross margins expanded 300 basis points y-o-y.
   • Trying to offset the effect of lower net income as a result of increased expenses, the company has been buying back shares. That's something that peers have been doing as well. Ralph Lauren's share count ended fiscal Q3 at 68 million, down from 74 million at the same point in fiscal 2022. In addition, to support its stock price development while investing in strategic growth initiatives, the company returned $560 million to shareholders combined between its ongoing buyback and its quarterly dividend payment.
   • Of note, inventory rose to $1.3 billion, up 33% from the prior year period, due to earlier receipts and higher goods-in-transit to mitigate global supply chain delays and meet strong consumer demand along with increased production costs and continued elevation in product mix.

     Note: Ralph Lauren's FY'22 ended on April 2, 2022. Q3 FY'23 refers to the quarter that ended on December 31, 2022.

2. FY 2023 Guidance For the full year, the company continues to expect constant currency revenues to increase by about 8% from the prior year. Revenue is also expected to decrease by 100 basis points based on the absence of a 53rd week in the current fiscal year. Currency fluctuations are expected to affect a 600 basis point negative impact on full-year earnings results, improved from a prior expectation of a 730 basis point impact. Gross margin is expected to be about flat in constant currency y-o-y. Management also trimmed capital expenditure forecasts for the year to $240M to $250M, down from a prior guide of $290M to $310M.

3. RL sets Long-term Sales, Margin Growth
   • The company expects an annual revenue growth rate in the mid-to-high-single digits through the 2025 fiscal year. Through that point, the operating margin is expected to expand to at least 15%.
   • Operating profit growth is expected to exceed the rate of top-line growth as a result of continued operating margin expansion. Operating margin is expected to expand to at least 15% by Fiscal 2025 in constant currency, driven by a combination of modest gross margin expansion and operating expense leverage balanced with continued investments in the company's long-term strategic priorities
   • The company also plans to return approximately $2B to shareholders on a cumulative basis through Fiscal 2025 via dividends and buybacks

BUSINESS SUMMARY

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 recognized consumer brands.

The company offers a broad spectrum of lifestyle products that include:

1. Apparel: Products include men's, women's, and children's clothing
2. Accessories: Products encompass a broad range, including footwear, eyewear, watches, jewelry, hats, belts, wallets, sleepwear, and leather goods, including handbags and luggage
3. Home: Coordinated products for the home that include bedding and bath products, furniture, fabric, rugs, lighting, barware, wallpaper, paint, tabletop, and giftware
4. 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.

SOURCES OF VALUE

We believe Ralph Lauren's North American and European divisions are significant sources of value for Ralph Lauren for the following reasons:

Margin Opportunity

RL has also aimed to reduce its dependence on department stores to generate sales, and in this regard, the company has been in the process of exiting 20% to 25% of such stores that sell its merchandise. While this strategy has had a negative impact on its top line, it has been a boon to the bottom line. These efforts should continue to drive margin growth for the company.

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 the 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 company-operated stores and the firm's e-commerce websites.

KEY TRENDS

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 among all age groups. 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 discounts (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 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 global brands aggressively expanding their footprint in the region. In FY 2022, Ralph Lauren's store presence in Asia was stronger than that in Europe. Compared to 95 Ralph Lauren freestanding stores in Europe, there were 170 freestanding stores in Asia. However, the number of wholesale distribution channels in Asia is still minuscule compared to that in North America and Europe (446 vs. 3,373 in North America and 5,184 in Europe). Going forward, there is tremendous scope for the company to expand its presence in wholesale stores in Asia.