With its strong brand identity, Ralph Lauren (NYSE:RL) is the global leader in design, marketing and distribution of premium lifestyle products including apparel, accessories and fragrance collections for men and women as well as children’s wear.  Amid the weak macro-economic conditions in the U.S. and Europe, Ralph Lauren has been able to sustain its growth with a strong network of its factory stores. The revenues from this channel have grown at a much faster rate than the overall revenue growth. While the Asian expansion will complement the retailer’s growth, the weak European economy poses a near term threat.
Strong Brand Identity Is Key Advantage
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One of Ralph Lauren’s competitive advantage has been its ability to maintain its brand strength for the past twenty years. The retailer offers products across a wide range of price points from discount (Chaps) to luxury (Ralph Lauren Collection), enabling it to appeal to a large demographic.  While retailers such Aeropostale (NYSE:ARO) have struggled to retain customers, Ralph Lauren has remained strong with its offerings and fashion responsiveness.
In the second quarter of fiscal 2013, Ralph Lauren continued its brand leadership in core men’s, women’s and children’s merchandise categories, and its fashion trends gained significant acceptance. For instance, the success of color in spring and summer season continued with bright autumn palettes.  Silhouettes, strong prints and new patterns in apparel and accessories also received good response, according to the company. 
Increasing Revenue Share Of The 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. The firm has expanded its store base and increased products and services offered on its online portal.
Ralph Lauren’s main business proposition is its factory stores, which have grown the fastest over the past four years.  Revenues have increased at an average of 18% annually, and the retailer has added 38 factory stores during 2008-2011.  On the other hand, the wholesale revenues have increased by just 3% annually. As a result, the retail business’ revenue share increased from 40% in 2007 to 50% in 2011. 
The department stores’ market share has been declining in the U.S. retail market, and this is likely to continue. With the increase in the share of private label brands, Ralph Lauren’s specialty stores and other department store revenues will witness a negative impact. These factors have led to the discontinuation of Ralph Lauren’s American Living brand at J.C. Penny. Therefore, the retail channel becomes critical as it is devoid of the aforementioned issues.
Expansion In Asia Should Help Sustain Growth
Ralph Lauren has been focusing on expanding its retail operations in Asian markets, especially in China. China has become a focal point of the global retail industry, with major brands such as Abercrombie & Fitch (NYSE:ANF) and Gap (NYSE:GPS) looking to expand their footprint in the region. In 2010, Ralph Lauren acquired its previously licensed Ralph Lauren-branded apparel business in Greater China and Southeast Asia regions. As a part of its strategy to reposition itself in China, Ralph Lauren recently closed down 60% of its distribution network in the region.  This network included stores and boutiques run by the local partners, and the retailer plans to replace these with its own stores.
The China network consolidation further points towards Ralph Lauren’s strategy to increase its focus on retail business. Although this will have some negative impact in the near future, it will place Ralph Lauren in a good position to leverage its brand strength to attract Chinese buyers in the long run. However, the weakness in Chinese economy might continue to act as a deterrent.
Weak Macroeconomic Conditions In Europe Are A Near Term Threat
Current weak macro-economic conditions in Europe, particularly in Spain, Greece and Italy pose a threat to Ralph Lauren’s revenue growth in the near term. Ralph Lauren’s wholesale business is most vulnerable to this situation as Europe contributes significantly to the retailer’s overall wholesale revenues, with over 4,000 department & specialty stores.  Ralph Lauren sells through 11,000 wholesale doors worldwide.
Our price estimate for Ralph Lauren stands at $160, implying a premium of about 5% to the market price.Notes: