Strong Growth In Asia And Digital Segment Prompts Ralph Lauren To Raise Full Year Outlook

by Trefis Team
Ralph Lauren
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Ralph Lauren (NYSE:RL) posted an impressive second quarter (three months ended September 2018) performance, handily beating consensus expectations on revenues and earnings. The retailer posted an adjusted EPS of $2.26 on sales of $1.69 billion, versus $2.15 and $1.65 billion anticipated. The sales increase was led by an impressive performance in Asia, as well as a strong showing in its digital segment. The revenue increase, reduced promotional activity, share repurchases, and a reduced tax rate resulted in growth in the earnings per share. These trends can be expected to continue through the remainder of the financial year as well. Given the solid results posted by the company in the first six months of its financial year, the company has upped its full year revenue guidance. For FY 2019, RL now expects net revenue to be approximately flat to up slightly in constant currency (versus down slightly earlier), along with an operating margin improvement of 40 to 60 basis points (guidance remains the same).

We have a $134 price estimate for Ralph Lauren, which is higher than the current market price. We are in the process of updating our model based on the new guidance. The charts have been made using our new, interactive platform. You can click here for our interactive dashboard on Ralph Lauren’s Performance In Q2 & Estimating Its Fair Price, and modify the driver assumptions to gauge their impact on the company’s revenue, earnings, and price estimate.

Factors That May Impact Future Performance

1. Increasing Marketing Expenditure: Ralph Lauren increased its marketing spend by about 30% in the second quarter when compared to last year, leveraging its 50th Anniversary Fashion Show, 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 that it drove the highest share of voice across New York Fashion Week (nearly 30% of Fashion Week impressions included Ralph Lauren). For the full-year, RL intends to increase marketing expenditure by high-single to low-double-digits.

2. Strategic Wins: 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. Some of the wins, in this regard, include:

  • Average unit retail across its direct-to-consumer network was up 5%, through better assortment and reduced discounts.
  • Delivered 6% constant currency Asia comps growth and expanded its store network in the region, primarily through 10 new points of distribution in China in Q2.
  • Global digital revenue grew 10% compared to last year.
  • The adjusted gross margin was up 100 basis points driven by quality of sales.

3. Introducing Customization: RL has expanded its customization offerings, both online and in stores. This should bode well during the holiday season. Given its potential, the company intends to further expand the offerings available for customizations, as well as the stores where this facility is available, including a second customization shop in Asia.

4. China Potential: During the quarter, the company opened 25 stores in Asia, with 10 in China, which is its fastest-growing market. Its momentum has remained strong in the country, with 20% revenue growth reported in Greater China, including over 40% growth in Mainland China, driven by comps improvement and new stores. Its digital efforts are also powering growth through partnerships with Tmall, Tmall’s Luxury Pavilion,, and WeChat. We expect these trends to continue through the financial year, resulting in strong growth in the region.

5. Digital Segment Strength: Ralph Lauren’s global digital business, including its directly operated sites, department store dot-com, pure players, and social commerce, was up 10% versus last year in the second quarter, with strong performance noted across the board. The company’s directly operated North America digital flagship returned to growth, and delivered a 9% comps increase. RL has also launched its mid-tier brand – Chaps – on Amazon. We can expect the growth in this segment to accelerate as the promotional pullback in the directly operated North America e-commerce business is broadly complete.

6. 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 had also earlier 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.

7. Lower Tax Rate: As a result of the lowering of the corporate tax rate in the U.S., from 35% to 21%, from January 2018, the company’s effective tax rate should fall considerably. Ralph Lauren expects the metric to be 21% for FY 2019, much lower than the over 66% in FY 2018, which should provide a boost to its earnings.

See Our Complete Analysis For Ralph Lauren Here


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