Improved Top And Bottom Line Performance Results In A Beat For Ralph Lauren

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 had a negative impact on its top-line. However, this trend reversed in the first quarter, when revenues improved 3%, driven by strong growth in Asia and digital commerce. The aforementioned initiatives undertaken continued to have a positive impact on the gross and operating margins, which together with the reduced tax rate resulted in an EPS growth of 39%. Given the strong performance in the first quarter, the company revised its FY 2019 guidance. RL now expects net revenue to be down slightly in constant currency, from a low-single-digit decline earlier, along with an operating margin improvement of 40 to 60 basis points versus a slight improvement anticipated before.

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 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 Q1 have been highlighted:

  • Average unit retail across the direct-to-consumer (DTC) network was up 8% for Q1, through greater full-price sales and lesser discounts.
  • Gross margin was up 120 basis points for the quarter due to lower discounts.
  • In Asia, RL expanded its store network and delivered 19% revenue growth, and 6% constant currency comp growth.
  • Under-developed categories outpaced overall growth, led by denim and outerwear.

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. These efforts may have a small negative impact in the coming quarters, with the company expecting revenues to be down slightly in constant currency. The revenue trend is expected to be more challenging in the second half of the year versus the first half, due to heavier planned reductions in off-price shipments in Q3 and Q4.

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 constant currency, including over 40% growth in Mainland China. Given the increased potential in the region, the company opened 8 new points of distribution in Q1, and remains on track to open more than 50 by the end of FY 2019. 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,, 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 upgraded the technology platform for its directly operated European e-commerce business, similar to what it did in North America last fall, which improved the consumer’s shopping experience through a better search, navigation, and checkout process. RL’s overall digital business was up 7% globally in the first quarter, driven by 24% growth in international markets with North America up slightly. The company noted 8% growth in average unit retail at its DTC (Direct-To-Consumer) network in the quarter.

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.

8. Increasing Marketing Expenditure: Ralph Lauren increased its marketing spend by about 20% in the first quarter when compared to last year, with the aim of winning over “a new generation of customers.” The brand has tied up with a number of celebrities, including artists, movie stars, and sportspeople. One of the wins of the increased marketing was its Spring Polo campaign featuring an iconic white Polo shirt, as a result of which sales of the Polo shirts in the first quarter outpaced the company’s overall revenue trend, and were up double digits in men’s. For the full-year, RL intends to increase marketing expenditure by high-single to low-double-digits, with incremental growth in the second quarter to support the global amplification of its 50th anniversary fashion show.

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