Ralph Lauren Likely To See Continued Revenue Pressure In Q4 Earnings

by Trefis Team
Ralph Lauren
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Ralph Lauren (NYSE:RL) has been plagued with declining revenues and loss of brand appeal in recent years. As a consequence, the company has made a concerted effort to cut back on its promotional stance of recent times, and 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. For the full year, the company expects the revenues to be down by 8% to 9%, and the operating margin to be 10.0%-10.5%. As per consensus estimates, the revenues are anticipated to fall by 8%, while earnings per share should improve by over 4%.

We have a $104 price estimate for Ralph Lauren, which is lower than the current market price. The charts have been made using our new, interactive platform. You can click here for our interactive dashboard, and modify the driver assumptions to gauge their impact on the company’s revenue, earnings, and price estimate.

Factors That May Have An Impact

1. Way Forward Plan: As part of its efforts to turn around its fortunes, Ralph Lauren had instituted a “Way Forward” plan, the goal of which was to improve the company’s efficiency and increase its sales, and consequently enhance the shareholder value. While a lot of progress has been made regarding this, steps still need to be taken to halt the negative revenue growth that the company has been witnessing. Below, a few of the wins in the third quarter have been highlighted:

  • Average unit retail (AUR) across RL’s direct-to-consumer network was up 4% compared to last year.
  • Adjusted gross margin was up 250 basis points compared to last year, as a result of reducing off-price penetration within the wholesale segment.
  • Discount rates were down across all regions in retail.
  • Inventory levels were lowered by 16% versus last year, with an improved inventory turnover ratio.
  • Adjusted operating expenses in constant currency fell as a result of increased efficiency, despite a 27% increase in marketing investment year-over-year.
  • In Asia, RL expanded its store network and delivered 3% constant currency comp growth.

2. Negative Impact On Revenue: Efforts undertaken as part of its Way Forward plan to reduce promotion frequency and depth, optimize distribution, improve inventory, and increase productivity, will lay the groundwork for future growth. However, these efforts will have a negative impact on its revenues in the medium term. Moreover, while the company is reducing its merchandise at the department stores, this segment still contributes to a significant portion of the company’s earnings, and 69% of its operating income in FY 2017 (year ended March 2017). If luxury brands continue to deplete their assortment at these stores, it could lead to further reduction in mall traffic, and may adversely impact apparel retailers.

3. Increased Focus On Digital: In order to improve the customer experience online, Ralph Lauren has recently transitioned its platform towards a cloud-based solution. With this new interface, the company aims to improve the  transaction process, and enhance its omnichannel capabilities, and the expectation is for it to be “the flagship store of the future.” CEO Patrice Louvet is also looking into the online operations of the company’s top retail partners. In addition to this, Ralph Lauren is also aiming to improve its digital operations through pure plays, which is the fastest growing part of RL’s e-commerce presence. This pure-play business is more developed in Europe, where the company currently sells through over 40 online retailers, including Zalando, Boozt, ASOS, YOOX, and MR PORTER. Meanwhile, in Asia, RL currently works with 11 pure players including T-mall, JD.com, WeChat, ZOZOTOWN, and THE ICONIC. In the U.S., RL is beginning to launch with new brand appropriate sites, having added seven up till the third quarter, with several more expected in Q4. The company considers digital, as well as the direct-to-consumer segment, to be key growth drivers for the future. The gross margin expansion this financial year, and in the long term, is also expected to be driven by this segment.

4. Growth Driven By China: China can be considered a key growth market for Ralph Lauren, where sales were up 28% in the third quarter. Given the increased potential in the region, the company opened 10 new points of distribution in the third quarter, and has aimed for a total of 60 stores in the country by the end of FY 2018, besides the increased digital focus as mentioned earlier. The brand awareness level in the country is in the 70s currently, which is impressive given the limited store footprint. However, when compared with the U.S., where the metric is at 90%, there is considerable room to grow.

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