VALUATION HIGHLIGHTS

1. North America constitutes 40% of the Trefis price estimate for Ralph Lauren's stock.
2. Europe constitutes 31% of the Trefis price estimate for Ralph Lauren's stock.
3. Asia constitutes 23% of the Trefis price estimate for Ralph Lauren's stock.

WHAT HAS CHANGED?

1. Ralph Lauren Q2 Snapshot
   • The retailer reported a 6% revenue growth, reaching $1.7 billion and exceeding expectations. This was driven by international successes, particularly in Europe and Asia, although there were challenges in North America. The adjusted earnings per share stood at $2.54, pointing to a 21% increase from the prior year.
   • Ralph Lauren noted significant growth in its international markets with Asia reporting a 10% sales increase, powered by strong performance in China. European sales increased 6%, driven by retail momentum. Conversely, North American revenue grew 3%, with strengths in direct-to-consumer channels offset by a 3% decline in wholesale operations due to strategic reductions.
   • In addition, Ralph Lauren's gross margin increased by 160 basis points to 67%, driven by a favorable shift toward premium-priced products and efficient cost management. The average unit price rose by 10%, reflecting strategic efforts toward full-price sales and elevated brand perception. Despite the encouraging figures, the digital channels in North America experienced a 2% decline, reflecting a larger consumer shift.

Note: Ralph Lauren's FY'24 ended on March 30, 2024. Q2 FY'25 refers to the quarter that ended on September 28, 2024.

2. Looking Ahead

The luxury apparel retailer raised its full-year revenue growth target, now expecting a 3% to 4% increase (on a constant currency basis). With anticipated operating margin expansion by 110 to 130 basis points, the company remains optimistic about its strategic initiatives, particularly international growth and direct-to-consumer channels.

Management also highlighted potential currency impacts, estimating a 40 to 60 basis point negative influence on annual revenue growth. Ralph Lauren's "Next Generation Transformation Project" continues to emphasize direct consumer interactions and efficiencies across its value chain.

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 2024, Ralph Lauren's store presence in Asia was stronger than that in Europe. Compared to 103 Ralph Lauren freestanding stores in Europe, there were 231 freestanding stores in Asia. However, the number of wholesale distribution channels in Asia is still minuscule compared to that in North America and Europe (802 vs. 3,329 in North America and 5,547 in Europe). Going forward, there is tremendous scope for the company to expand its presence in wholesale stores in Asia.