Can Ralph Lauren Reverse Declining Fortunes For Its North America Segment In 2020?

by Trefis Team
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Ralph Lauren (NYSE: RL) is the global leader in premium lifestyle products. The company’s business went through a rough patch in FY’18 (year ending March), but Ralph Lauren has done well to turn things around over the last couple of years. Trefis captures trends in Ralph Lauren’s Revenues over recent years in an interactive dashboard along with our forecast for the current year. We expect the company’s top line to grow by just 2% in FY’20. Although strong growth in the digital segment as well as robust demand in the international market (particularly Asia) should help revenues for the year, these gains will be muted to a large extent by sub-par performance by its North America segment which is responsible for over half the company’s revenues. You can view the Trefis interactive dashboard to better understand the revenue trends and division-wise revenue performance, and alter our assumptions to arrive at your estimate for Ralph Lauren’s Revenues.

A Quick Look at Ralph Lauren’s Revenues

Ralph Lauren reported $6.3 billion in Total Revenues for Fiscal 2019. This included 4 revenue streams:

  • North America: $3.2 billion in FY 2019 (51% 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 2019 (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: $1 billion in FY 2019 (17% 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: $409 million in FY 2019 (6% 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

 

How Has Ralph Lauren’s Historical Revenue Trended? 

  • Ralph Lauren has lost more than $1 billion in total revenue since 2016 at an average annual rate of 5.2% primarily as a result of the restructuring plan undertaken by the management with the objective of right-sizing its cost structure and implementing a financial model that focuses on return on investment to free up resources to invest in the brand and drive high-quality sales.
  • Despite the restructuring, the company’s Asia division has continued to excel – adding nearly $150 million to total revenues during the last three years.
  • Going forward, we expect Ralph Lauren’s revenues to increase by 2% and cross $6.4 billion in FY 2020.

A Detailed Look At Ralph Lauren’s segment performance and revenue change over the years:

1. North America’s Revenue Has Steeply Declined Over The Last Few Years

  • North America has been the company’s worst-performing segment, losing well over $1.2 billion in total revenues since 2016 at an average annual rate of 10.6%
  • This decline can be primarily attributed to a strategic reduction in shipments and points of distribution to align with the company’s long-term growth strategy, brand discontinuances, and challenging department store traffic trends.
  • However, North America is the still the company’s largest segment – accounting for nearly 50% of the company’s revenue in FY’19
  • While we expect this segment to reverse its declining trend, its growth rate is expected to be a rather weak 1% in FY’20.

2. Asia Is Ralph Lauren’s Fastest-Growing Segment

  • Ralph Lauren’s Asia segment has achieved robust growth in the last few years, with revenues increasing from $892 million in 2016 to over $1 billion in FY 2019 driven by higher comparable sales growth as well as accelerated store openings.
  • China has been the largest growth driver for Ralph Lauren – accounting for a bulk of the company’s growth. During FY’19, roughly 30% of Asia’s revenue growth came from Mainland China.
  • We expect this segment to continue its strong growth trajectory, with revenues increasing at a rate of 5.5% to nearly $1.1 billion in FY’20.
  • The segment’s contribution to total revenues has increased steadily over the years – a trend that we believe will continue for the foreseeable future.

3. The European Business Has Achieved Steady Revenue Growth Over The Last Few Years

4. The Other Segment Has Contributed ~7% Of The Top Line Over Recent Years

Additional details about how revenues for Ralph Lauren’s Europe and Other segments have changed over recent years is available in our interactive dashboard.

 

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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