Ralph Lauren’s Turnaround Efforts Reflect In Its Bottom-Line

by Trefis Team
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Despite a decline in revenues, Ralph Lauren (NYSE:RL) was able to produce an improvement in its second quarter (three months ended September) earnings as a result of its restructuring efforts which focuses on less discounting. The company was able to beat consensus estimates on earnings by 11 cents a share, with the credit going to its pursuit of full-price sales. 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. However, while this has been a boon to the bottom-line, it has had a negative impact on its top-line. In fact, this factor is expected to continue to pressure the sales of the company this entire fiscal year, with the revenues expected to be down 8% to 9%, as compared to the previous year.

We have an $89 price estimate for Ralph Lauren, which is about 2% less than the current market price.

Focus On China

Ralph Lauren garners 13% of its revenues from Asia. However, given the high growth rates attained in this region, it can be said that the brand is underrepresented in the region. Meanwhile, Mainland China currently accounts for less than 1% of the total company revenue. However, awareness levels regarding the brand are strong, and hence, there is a significant opportunity for growth. Based on Millward Brown data, the company stated that “Polo’s aided brand awareness in Mainland China is 83%,” which is at a higher level than that of its competitors, despite their increased penetration.

In order to spur its sales in the country, Ralph Lauren has increased its digital efforts and engagement with local influencers. The company is also tailoring social content to cater to Chinese consumers, along with dressing Chinese celebrities who have social followings nearing 1 billion in total, such as Li Bingbing and Yao Chen. Furthermore, RL is ramping up its presence on digital platforms, and as a part of this strategy, the company successfully launched on T-mall and JD.com, and with commerce on WeChat. Complementing its digital presence, RL is also expanding its fleet of stores. The company opened 15 smaller format stores year-to-date in Mainland China and expects to have a total of 60 stores on the Mainland. With an average age of 34 years among its customers, a 50-50 male-female mix, and a greater demand for its higher-priced products, there is a significant opportunity for growth in the region. Along with Hong Kong, Macau, and Taiwan, RL’s goal for Greater China is to reach almost $0.5 billion of revenue in five years, from about $170 million in fiscal 2017, driven by both comp growth and new distribution guidance.

Although it makes sense to concentrate on China, the company should not abandon its US turnaround, as it still contributes to more than half of its revenues, and the operating margin in North America is at least 10 percentage points higher than that attained in Asia. Only a recovery in this segment will enable the company to return to positive sales growth.

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