What Is Ralph Lauren’s Fair Value?

by Trefis Team
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RL
Ralph Lauren
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Ralph Lauren (NYSE:RL) has been grappling with declining sales and a relative loss of brand appeal in recent years. Consequently, the company has made a concerted effort to cut back on its promotional activities, and has 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 the top line. This trend reversed in the first half of FY 2019 (six months ended September 2018), as revenues improved 2%, driven by solid growth in Asia and digital commerce. The aforementioned initiatives undertaken continued to have a positive impact on the company’s gross and operating margins, which – coupled with the reduced tax rate – resulted in EPS growth of about 36%. Given the strong performance in the first half of 2019, the company upgraded its FY 2019 guidance. RL now expects net revenue to be flat to up slightly in constant currency (compared to down slightly earlier), along with a marked improvement in operating margin of approximately 40 to 60 basis points (guidance remains steady).

We have a $139 price estimate for Ralph Lauren, which is around 30% higher than the current market price. The charts have been made using our new, interactive platform. You can click here for our interactive dashboard on Our Outlook For Ralph Lauren In FY 2019, and modify the driver assumptions to gauge their impact on the company’s revenue, earnings, and price estimate.

We have arrived at a $139 price estimate for Ralph Lauren based on revenue projections of $6.2 billion for FY 2019, net income of $544 million, a P/E multiple of 21, and a share count of 80.1 million.

Factors That Should Impact Performance

1. Strategic Growth Plan: As part of its Strategic Growth Plan, RL aims to win over a host of new generation customers, improve its digital presence, and drive targeted expansion – mainly in regions that are under-penetrated. Owing to these efforts, Ralph Lauren expects its revenue to grow annually at the rate of low-to-mid-single digits in constant currency over the next five years (through FY 2023), and an operating margin in the mid-teens, along with a return to growth in FY 2020.

2. Introducing Customization: RL has taken considerable steps to bolster its customization offerings to both online and in stores. This should drive solid results during the holiday season. Given its potential, the company plans to further increase the offerings available for customizations, as well as the stores where this facility is available, including a second customization shop in Asia. As a result, this should provide for decent near-term opportunities.

3. Growth Driven By China: Ralph Lauren is bullish about strengthening its international footprint by expanding into underpenetrated markets. During the second quarter fiscal 2019, the company opened 25 stores in Asia, with 10 in China, which is its fastest-growing market. Further, its momentum has remained solid in the country. RL’s revenue in Greater China grew by just over 20% in Q2 FY’19, with more than 40% growth in Mainland China. The robust performance was largely due to comps improvement and new stores. Additionally, its digital efforts are also powering growth through partnerships with Tmall, Tmall’s Luxury Pavilion, JD.com, and WeChat. We expect these trends to continue through the financial year, resulting in strong growth in the region.

4. Focus On Digital Sales: Digital growth has been pivotal for Ralph Lauren. A global digital ecosystem, including its directly operated sites, department store dot-com, pure players, and social commerce has contributed significantly to RL’s top line in recent times. Digital sales improved 10% versus last year in the second quarter fiscal 2019, 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 expect the growth in this segment to accelerate modestly as the promotional pullback in the directly operated North America e-commerce business is broadly complete.

5. Increasing Marketing Expenditure: Ralph Lauren increased its marketing spend by about 20% and 30% in Q1 and Q2, respectively, 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 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. In addition, the increased marketing expenditure also 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 expenditures by high-single to low-double-digits.

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