Did Strong Momentum In Asia Help Ralph Lauren’s Fiscal Q4 Results?

by Trefis Team
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Ralph Lauren (NYSE: RL) is set to announce its fiscal fourth quarter results on May 14, followed by a conference call with analysts. The apparel retailer is expected to post adjusted quarterly earnings of $0.93 per share, which represents a year-over-year improvement of 3.3%, although revenues are expected to slide 4% to $1.47 billion. Higher earnings are likely to be driven by strong growth in international markets, particularly Asia, as well as  expansion in the company’s digital segment.

Per Trefis estimates, Ralph Lauren’s shares have a fair value of $137 which is roughly 10% ahead of  the current market price. We have summarized our key expectations from the earnings announcement in our interactive dashboard – How Is Ralph Lauren Likely To Have Fared In Fiscal Q3?  In addition, here is more Trefis Textiles, Apparel and Luxury Good Industry Data.

A Quick Look at Ralph Lauren’s Revenue Sources

Ralph Lauren reported $6.1 billion in Total Revenues in Fiscal 2018. This included 4 revenue streams:

  • North America: $3.2 billion in FY 2018 (52% of Total Revenues). This segment primarily consists of sales of Ralph Lauren branded products made through wholesale and retail businesses in the U.S. and Canada.
  • Europe: $1.6 billion in FY 2018 (26% of Total Revenues). This segment primarily consists of sales of Ralph Lauren branded products made through wholesale and retail businesses in Europe and the Middle East.
  • Asia: $933 million in FY 2018 (15% of Total Revenues). This segment primarily consists of sales of Ralph Lauren branded products made through wholesale and retail businesses in Asia, Australia, and New Zealand.
  • Others: $433 million in FY 2018 (7% of Total Revenues). This segment includes the company’s
    • sales of Club Monaco branded products in the U.S., Canada, and Europe
    • sales of Ralph Lauren branded products made through its wholesale business in Latin America
    • royalty revenues earned through its global licensing alliances

Key Factors To Watch for In Q4

Focus To Attract New Consumers

  • Ralph Lauren’s primary objectives over recent years has been to attract the ‘new generation of consumers’. To fulfill this objective, the company increased its marketing spend by about 18% in the previous quarter to focus on digital and social-media  channels. Further, the brand has also partnered with several celebrities to attract younger customers.
  • Ralph Lauren intends to increase its marketing expenditure by roughly 10% in the near future, which is likely to attract new consumers to the company’s already large customer base.

Focus On Digital Segment

  • Digital growth has been pivotal for Ralph Lauren. A global digital ecosystem has contributed significantly to RL’s top line in recent quarters. Digital sales improved 20% year-on-year for the fiscal third quarter, with strong performance noted across all regions.
  • Ralph Lauren’s focus on digital segment and strong brand building has led to enhanced consumer experience and higher quality of sales across all segments. Going forward, we expect the company to continue to focus on this segment as the digital channel holds strong growth potential.

China Will Continue To Lead Growth

  • Ralph Lauren has been focusing recently on expanding retail operations in emerging markets, especially in Asia. During the fiscal third quarter, the company opened 24 stores in Asia, with 9 in China – which is its fastest-growing market. RL’s revenues in Greater China grew by just over 19% in Q3 FY’19, with a bulk of this growth coming from Mainland China.
  • The company’s digital business in China continues to expand following the launch of its directly operated digital commerce site. Moreover, Ralph Lauren has a strong distribution network in China which includes its pure play partners Tmall, JD.com, and WeChat. Taking all this into account, we expect China to continue to contribute a significant portion of Ralph Lauren’s growth.

Customized Offerings

  • Ralph Lauren’s strong top-line performance in the past has been driven mainly by its core products. However, the company has taken considerable steps to bolster its new customized offerings through both online and in-store channels, especially in the European markets. Customization continues to represent an important long-term opportunity for direct-to-consumer channels, as it drives AURs (Average Unit Retails) higher.

Trefis Price Estimate

  • Based on our forecast, Ralph Lauren’s adjusted EPS for fiscal 2019 is likely to be around $7.08. Using this figure with our estimated P/E ratio of 19x, this works out to a price estimate of $137 for Ralph Lauren’s shares, which is roughly 15% ahead of the current market price.

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