Can Ralph Lauren’s Asia Segment Grow To Be Bigger Than Its America Segment?

by Trefis Team
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Asia is quickly becoming a core apparel market for global brands. GDP growth in many Asian countries has been much higher than in European and American countries over the last decade. And the urbanization and internationalization of trade (particularly in China) is expected to drive growth in Asia over the foreseeable future. Notably, the apparel market in Asia has benefited from continued development of the Asian middle class and high savings rate.

Most of the largest global apparel retailers have seen revenues and profits from Asia swell steadily over recent years. The luxury apparel brand Ralph Lauren (NYSE: RL) has also benefited from this trend. Trefis captures the relative contribution of Asia to the revenues of key apparel companies in an interactive dashboard, parts of which are highlighted below. Additionally, you can find more Trefis Textiles, Apparel and Luxury Industry Data here.

A Quick Look At How Asia Revenues Have Trended For Key Apparel Companies:

Tapestry

  • As of 2018, Tapestry generated revenues of $1.9 billion in Asia while its America revenues stood at $3.7 billion .
  • Contribution of Asia to Tapestry’s total revenues was around 35% while its America business contributed more than 60%.
  • Tapestry has one of the most established business in Asia. Although, the revenue contribution of Asia to total revenue has gone down, the decline can be attributed to its ill-fated acquisition of Kate Spade which has limited presence in Asia.
  • On the contrary, Tapestry’s largest brand, Coach, has added $1 billion in total revenues from its Asia operations in the last three years.

Guess

  • As of 2018, Guess generated roughly $390 million in Asia while its America revenues stood at $1 billion.
  • Contribution of Asia to Guess’s total revenues was around 15% while its America business contributed over 38%.
  • Guess is one of the fastest growing apparel companies is Asia. Guess Asia has added roughly $140 million to total revenues since 2016, growing at an average annual rate of 25%
  • This growth has been led by accelerated store openings as well as positive comparable sales.

Gap

  • As of 2018, Gap generated revenues of $1.2 billion in Asia while its America revenues stood at $13.3 billion .
  • Contribution of Asia to Gap’s total revenues was just 7.5% while its America business was contributing in excess of 80%.
  • Interestingly, Gap is one of the few companies whose revenue in Asia has declined over the last three years – going down from $1.5 billion in 2016 to $1.2 billion in 2018.
  • This decline can be primarily attributed to the soft performance of its iconic brand, Gap Global, which has more than 330 stores in Asia

The Contribution Of Ralph Lauren’s Asia Segment Has Grown Steadily Over The Years

  • Asia segment has added roughly $150 million to Ralph Lauren’s Revenues at an average annual rate of 5.3% over the last 3 years.
  • Revenues of $1 billion for the segment in fiscal 2019 reflected a 11.5% y-o-y growth, and accounted for 16.5% of the company’s total revenue mix.
  • Robust revenue growth has helped Asia segment’s contribution to the top line increase from 12% in 2016 to around 16.5% in 2019
  • Although the Asia segment reported lowest operating margin of 15.5% among all geographic divisions, the segment’s revenue growth has comfortably outpaced Ralph Lauren’s total revenue growth over the recent years.

What’s Driving This Growth and What To Expect In The Near Term From Ralph Lauren?

  • Ralph Lauren’s Asia segment continues to achieve higher comparable sales growth as compared to the consolidated company. In fiscal 2019, Asia’s comparable sales growth of 5% was significantly higher than Ralph Lauren’s overall growth of just 1%.
  • Moreover, China has been the largest growth driver for Ralph Lauren. During FY2019, roughly 30% of the Asia segment’s revenue growth was led by Mainland China
  • Additionally, the company opened 94 stores in Asia during the year, with 39 of them in China – highlighting the company’s focus on growth in China.
  • We forecast Ralph Lauren’s Asia revenues to grow 5.5% in the ongoing fiscal 2020 to $1.1 billion, likely to be driven by growth across all markets in Asia, particularly Mainland China.
  • The company’s management indicated that its product and marketing initiatives have resonated well in Asia and they expect to increase their digital efforts while also expanding their store fleet. This should help Ralph Lauren achieve steady growth in Asia.
  • Moreover, the company’s digital business in China continues to expand following the launch of its directly-operated digital commerce site. With the Asian online apparel market projected to reach around $1.4 trillion by 2020, Ralph Lauren’s Asia segment is poised to achieve steady growth in FY 2020

Conclusion

  • Asia is the fastest growing division of Ralph Lauren, with China contributing a bulk of the growth in the Asia market. Despite a strong performance in the last few years, China only represents 3.5% of Ralph Lauren’s total global business.
  • With growth fundamentals remaining strong in Asia, we expect the Asia segment to be pivotal to the company’s long-term revenue growth, profitability improvement, and enhanced shareholder returns in the coming years.
  • Moreover, Ralph Lauren’s largest segment, North America, has struggled over the last couple of years – increasing the importance of the Asia segment to Ralph Lauren’s long-term growth
  • While Ralph Lauren is growing fast in Asia, it is unlikely to surpass its North America business for the foreseeable future.
  • While Asia remains the fastest-growing apparel market, there still exists a large gap between the scale of the business of companies in America and Asia.

Per Trefis estimates, Ralph Lauren’s EPS for fiscal 2020 is likely to be $7.40. Taken together with a P/E of 17.5x, this works to a fair value of $130 for Ralph Lauren’s stock.

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