Revenue Pressure Remains For Ralph Lauren, But Margin Improvement Is A Good Sign

by Trefis Team
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Ralph Lauren
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Ralph Lauren (NYSE:RL) delivered a beat on both revenue and earnings estimates in its fourth quarter results, reported on May 23. The company has been plagued with declining revenues and loss of brand appeal in recent years. As a consequence, the retailer 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 exited 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. Revenue in the quarter fell 2% on a reported basis, and 7% in constant currency, better than the 8% to 9% decline expected by the company, benefiting from positive foreign currency translations. For FY 2019 as well, the company expects sales to decrease low single-digits in constant currency, with gross margin and operating margin expansion.

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 On Future Performance

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 FY 2018 have been highlighted:

  • Average unit retail across the direct-to-consumer (DTC) network was up 4% for the full year, with growth in every quarter.
  • Discount rates were down across all regions and all channels.
  • Adjusted gross margin was up 290 basis points for the full year, with growth in every quarter.
  • In Asia, RL expanded its store network and delivered 4% constant currency comp growth in Q4, and 3% for the year.
  • Achieved its goal of having 90% of its products on 9-month lead times and continued the progress to further speed up lead times.

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 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. 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. Growth Driven By China: China can be considered a key growth market for Ralph Lauren, where sales were up 25% in FY 2018. Given the increased potential in the region, the company opened 28 new points of distribution versus FY 2017, and ended the year with 111 directly operated and concession stores. 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. The company is also focusing on digital expansion through its partnerships with Tmall, JD.com, and WeChat. Ralph Lauren is aiming to garner $0.5 billion of revenue in five years from Greater China.

4. Focus On Digital Sales: Digital sales were approximately $1 billion for Ralph Lauren in FY 2018. The company expects the growth in this segment to accelerate as the promotional pullback in the directly operated North America e-commerce business is broadly complete. Ralph Lauren is focusing on improving the site’s functionality and increasing marketing to drive further growth in online sales. In Q1 2019, RL will be upgrading the technology platform for its directly operated European e-commerce business, similar to what it did in North America last fall, which should improve the consumer’s shopping experience through a better search, navigation, and checkout process.

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