Why Ralph Lauren’s Expenses Are Likely To Level Off After Shrinking 15% In 3 Years

by Trefis Team
Ralph Lauren
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Ralph Lauren (NYSE: RL) has been extremely successful in reducing costs over the years and moving towards its long-term growth strategy of balanced productivity and growth. The fashion giant has been able to cut down costs across all cost heads – creating $1.1 billion in savings since 2016. This has helped improve its earnings margin (i.e. revenues less all expenses, expressed as a percent of revenues) from 5.4% in fiscal 2016 to an expected 9.3% in fiscal 2020 (ending March 2020) thanks to a combination of stable revenues as well as lower costs across all operating heads. Notably, this should make 2020 Ralph Lauren’s most profitable year since 2016.

Trefis highlights trends in Ralph Lauren’s Expenses over the years along with our expectations for 2020 in an interactive dashboard, key elements of which are discussed below. Selling costs (SG&A) (which represents the selling, general and administrative expenses, and other management costs) are expected to be $3.1 billion in FY 2020, making up 54% of Ralph Lauren’s $5.85 billion in expected total costs for the year. Ralph Lauren’s selling costs are the company’s largest expense driver and are nearly 130% of the company’s manufacturing costs or cost of goods sold (COGS).

  • Ralph Lauren’s total expenses have declined 16% since 2016, falling from $7 billion to $5.9 billion in 2019 and are expected to remain stable in 2020. COGS have been the largest contributor to this decline, with the cost of sales falling from $3.2 billion in 2016 to just $2.4 billion in 2019.
  • Ralph Lauren’s total expenses in absolute terms are expected to remain stable in 2020 as a decrease in selling expenses is likely to be offset by an expected increase in the cost of sales.
  • However, the company’s total expenses as % revenue are projected to decline by 200 basis points, from 93.2% in 2019 to 91.2% in 2020.

Breaking Down Ralph Lauren’s Total Expenses

Cost Of Goods Sold

  • The cost of goods sold includes the expenses incurred to acquire and produce inventory for sale, including product costs, freight-in, and import costs. COGS is the second largest expense driver, accounting for nearly 41% of the company’s total expenses in 2019.
  • COGS have declined by nearly 25% over the last few years, falling from $3.2 billion in 2016 to $2.4 billion in 2019 driven by improved pricing and lower levels of promotional activity, and favorable product and geographic mix, partially offset by higher inventory reserves.
  • Lower COGS coupled with stable revenues have helped Ralph Lauren’s gross margin expand from 54.9% in 2017 to 61.6% in 2019.
  • We expect COGS to remain constant at $2.4 billion in 2020, representing a gross margin figure of 62% using our estimate of $6.4 billion for Ralph Lauren’s Revenues for the year.

Operating Expenses

  • Ralph Lauren’s Operating Expenses include selling, general and administrative (SG&A) expenses, and impairment and other restructuring charges.
  • Operating expenses have declined 8% since 2016, falling from $3.6 billion in 2016 to $3.3 billion in 2019, led by a $ 245 million decrease in SG&A as well as a $35 million decrease in restructuring and other expenses.
  • However, SG&A expenses as % of revenues have been on the rise – increasing from 46.1% in 2016 to around 50.2% in 2019.
  • Ralph Lauren’s restructuring and impairment expenses have declined 19% falling from $191 million in 2016 to $156 million in 2019. This figure was unusually high in 2017 as the company incurred restructuring charges of $294 million and $94.9 million, respectively, in connection with its restructuring plans, consisting of severance and benefits costs, lease termination and store closure costs.
  • We expect total operating expenses to decline by 1.7% in 2020 due to a reduction in SG&A as well as restructuring and impairment charges.

Non-Operating Income

  • Ralph Lauren’s non-operating income has increased from -$31 million in 2016 to $21 million in 2019.

Additional details about how Ralph Lauren’s Non-Operating Income has trended over the years are available in our interactive dashboard.

Income Taxes

  • The company’s effective tax rate has been highly volatile, ranging from 5.3% in 2017 to more than 66.7% in 2018. The company’s effective tax rate for 2018 included an additional income tax expense of $221.4 million related to the enactment of the Tax Reform, which negatively impacted the Company’s effective tax rate by 45.2% in fiscal 2018.
  • The effective tax rate is expected to be around 22% in FY’2020.

Per Trefis estimates, Ralph Lauren’s EPS for fiscal 2020 is likely to be $7.51. Taken together with a P/E of 16.5x, this works to a fair value of $123 for Ralph Lauren’s stock, which is roughly 5% ahead of the current market price.

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