Will Ralph Lauren Have A Positive Start To FY 2019?

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. However, while this has been a boon to the bottom-line, it has had a negative impact on its top-line. These trends are expected to continue in the first quarter, with the company expecting the revenue to be flat to down slightly in constant currency, and global comp store sales to be negatively impacted by approximately 1.5 points. However, with a 150 to 200 basis points favorable currency impact, we expect the revenues to be up slightly. On the other hand, the gross margin should expand 50 to 75 basis points, and operating margin is anticipated to be up slightly in constant currency. A lower tax rate, expected to be 18% in Q1 2019 versus 31% in Q1 2018, should also help the company deliver an earnings improvement.

We have a $125 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 on RL’s First Quarter Expected Performance, 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 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. Strategic Growth Plan: At the beginning of June, RL presented its ‘Strategic Growth Plan’ aimed at winning over a new generation of customers, driving targeted expansion, particularly in under-penetrated regions, and focusing on the digital segment. As a result of these efforts, the company expects its revenue to grow at a compounded annual growth rate of low to mid-single digits in constant currency over the next five years (till FY 2023), and an operating margin in the mid-teens, along with a return to growth in FY 2020.

3. 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.

4. FY 2019 Restructuring Plan: The company has also detailed a restructuring plan associated with its strategic objective of operating with discipline to drive sustainable long-term growth, by rightsizing and consolidating its global distribution network and corporate offices, and through severance actions. In connection with this, RL expects to incur restructuring charges of $100-$150 million, which should result in approximately $60-$80 million of gross annualized expense savings.

5. 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 in FY 2018, and ended the fiscal 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.

6. 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.

7. Share Repurchases: RL’s Board of Directors authorized a $1 billion stock repurchase program this year, which is in addition to the $100 million available at the end of Q4 2018 as part of a previously authorized stock repurchase program. This step should help to boost the earnings of the company. RL also declared a 25% increase in its dividend, and stated its plans to return 100% of free cash flow to shareholders over the next five years, amounting to over $2.5 billion on a cumulative basis through Fiscal 2023 through dividends and repurchases.

See Our Complete Analysis For Ralph Lauren Here


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