Ralph Lauren’s China Consolidation Drags On Revenues But Retail Looks Good

Ralph Lauren (NYSE:RL) recently reported its Q2 fiscal 2013 earnings with mixed results from its wholesale and retail businesses. ^[1] The overall revenues were down marginally by 2.2% due to decline in wholesale and licensing revenues. The main factors contributing to this were the loss of sales of discontinued brand American Living, store closures in China and a decrease in shipments to European specialty stores. ^[1] Moreover, the year ago period generated healthy revenues due to the launch of denim and supply. ^[1] These trends are likely to put pressure on revenue growth in the next quarter as well.

However, the revenue decline was partially offset by an increase in the retail business revenues driven by Ralph Lauren’s strong brand recognition. ^[1] For the upcoming quarter, we expect a moderate increase in the overall revenues as a mix of revenue increase from the retail business and revenue decline from the wholesale business.

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China Consolidation And Brand Discontinuation Likely To Further Pressurize Revenue Growth

Wholesale and licensing business revenues declined by 8% and 5% respectively. ^[1] These were driven by China consolidation, discontinued American Living brand and weak European market. As a part of the strategy to reposition itself in China, Ralph Lauren closed down 60% of its distribution network in the region. This network included stores and boutiques run by local partners, and the retailer plans to replace these with its own stores. ^[2]

Ralph Lauren discontinued the low-priced American Living brand at J.C. Penny during the fall of 2012, which brought down the wholesale revenues. ^[1] We expect that these factors will play a key role in determining Ralph Lauren’s revenue growth for the next quarter as well. Without their impact, the revenues were up by 3%, which indicates their significance. Moreover, the tough retail environment in Europe due to sluggish economic growth has led to a reduction in shipments, and ultimately, lower revenues. ^[1]

Nevertheless, Strong Brand Recognition Will Help

The revenues from retail business increased by 5% due to strong brand recognition. Ralph Lauren continued its brand leadership in core men’s, women’s and children’s merchandise categories in the recently concluded quarter. ^[1] Its fashion trends have also gained significant acceptance. For instance, the success of color in spring and summer season continued with bright autumn palettes. ^[1] Silhouettes, strong prints and new patterns in apparel and accessories also saw a good response. ^[1] The retailer had a successful back-to-school season as well. ^[1]

All of these aspects have contributed to a comparable store sales growth of 5% in the retail business. ^[1] We expect this to continue in the upcoming quarter as well.

The retail segment (Factory stores, Ralph Lauren, Club Monaco & Rugby stores) contributes about 65% to the company’s value according to our estimates.

We are in the process of updating our valuation model for Ralph Lauren in light of the recent earnings and will have an update ready soon.

Our price estimate for Ralph Lauren stands at $160, implying a premium of about 5% to the market price.

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1. Ralph Lauren’s Q2 fiscal 2013 earnings transcript, Nov 2 2012 [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
2. Ralph Lauren’s profits beats as sales hold up, Reuters, Nov 2 2012 [↩]