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RL AT A GLANCE

P/E ► 17.0 AVG EV/EBITDA ► 9.54 AVG ROA ► 9.4% AVG ROE ► 14.6% AVG Debt to Equity ► 0.590 AVG Current Ratio ► 2.49 AVG Interest Coverage Ratio ► 22.2 AVG

 

 

 

 

 

 

Polo Ralph Lauren is a premier global player in the design, distribution and marketing of lifestyle products such as men’s, women’s and children’s apparel, accessories, fragrances and home furnishings. The company's reported just over $4.8 billion in revenues in 2008, a $200 million increase from 2007.^[1] The largest part of its revenues come from its wholesale division, which sells Ralph Lauren products to department stores such as Macy's Inc. (M) and J.C. Penney (JCP). The company's product lines range from relatively inexpensive brands (such as Chaps) to expensive, exclusive pieces (Ralph Lauren Collection).

Consolidation amongst department stores has resulted in an increase in the purchasing power of department stores at the expense of brands such as Ralph Lauren. Fewer department stores means each store has more power over suppliers. Also, the fact that Polo Ralph Lauren sells its goods internationally exposes the company to exchange rate risk. Fluctuating exchange rates have had a substantial impact on sales: a gain of $1.6 million in Fiscal 2009 and a net loss of $6.4 million in Fiscal 2008.^[2] In addition, new wealth in Asia has led the company to increase control over its own brand in that region.

Business and Financials

Polo Ralph Lauren's revenues topped $4.8 billion in fiscal 2009 (ended March 28, 2009).^[1] In response to the poor economic conditions in the United States and European economies, the company has cut costs and inventories in order to prevent markdowns that would only decrease its net income. In the first quarter of fiscal 2010 (ended June 27, 2009) the company reported earnings of 76 cents per share, which outstripped analyst estimates of 49 cents per share.^[3] Net revenue and same-store sales fell by 8 and 9% respectively. The drop in same-store sales was an improvement over the two previous quarters, when they dropped by 15.9 and 13.5%.^[3] The company has managed to beat analyst estimates in an especially poor season for consumer spending through controlling costs and increased sales in Europe. Ralph Lauren's operations fall under three primary categories: Wholesale, Retail, and Licensing.

Wholesale (57% of FY09 sales)

Wholesale makes up the largest portion of Polo Ralph Lauren's revenues.^[5] Ralph Lauren has strong relations with several department stores allowing the company to indirectly target a wide range of customers. Wholesale sales increased by 4.68% in FY09 to over $2.8 billion.^[5] As Polo repurchases its licensed brands, a large portion of these sales are shifted to wholesale. One key area of growth in Wholesale could be the development of private labels with department stores, like the American Living brand Polo has launched in partnership with J.C. Penney (JCP).

Retail (39% of FY09 sales)

Ralph Lauren's retail stores focus on showcasing the "World of Ralph Lauren" by offering a wide selection of luxury products to customers. The retail presence serves as a platform for Ralph Lauren to launch new lines and maintain brand strength. The retail segment accounted for 39% of the company's total revenue in FY09 as retail sales grew to $1.94 billion.^[5] Ralph Lauren's retail segment operates through the chain of 326 retail and factory outlet stores, as well as the company's online store. In fiscal 2009, same store sales for the retail segment decreased by 5.2%^[6], a key signal of strong growth as same store sales figures exclude sales from new store locations and are more reflective of true organic sales growth. Ralph Lauren views internet sales as a prime source of future growth (online sales 26% in FY08 and 18.7% in FY09^[7]) and accordingly is investing in improving distribution centers and customer service to increase scales.

Licensing (4% of FY09 sales)

Many fashion designers license their products to third parties who independently produce and sell on a large scale while repaying the designer through royalties. Designers use licensing in order to achieve higher growth in the earlier phases of their business. While licensing provides the possibility of larger scales, it also reduces the control designers enjoy over the quality standards of their brand name.

Licensing once represented one of the largest revenue sources for Ralph Lauren, but the company has moved away from this area of late by re-purchasing several of its licensed products. Licensing revenues continued to fall in fiscal 2009, to $195 million.^[5] This move away from licensing reflects an attempt by the company to take greater control over its operations and brands.

Brands

Ralph Lauren's brands, in order from most luxurious to least, are as follows:

• Ralph Lauren Collection (womenswear only)
• Ralph Lauren Purple Label (menswear only)
• Ralph Lauren Blue Label (womenswear only)
• Ralph Lauren Black Label
• Polo Ralph Lauren
• Lauren Ralph Lauren
• Chaps Ralph Lauren

These brands are sold through retailers such as Saks (SKS), Macy's Inc. (M) and Kohl's (KSS), as well as through RL's own channels such as free-standing stores and online. In addition to the above Ralph Lauren also owns a number of niche lines such as the sports-influenced RLX and Ralph Lauren Golf, Rugby, Double RL and Club Monaco. Rugby and Club Monaco have their own stores. RL has also made an entry into home furnishings with its Ralph Lauren Home and Lauren Home lines.^[8]

American Living

As a part of Ralph Lauren's expansion plans, Polo Ralph Lauren's American Living line for J.C Penney debuted in 600 stores in February 2008 with plans to expand to all 1,048 J.C. Penney stores. With 50 merchandise categories ranging from apparel to home furnishings and a broad influence, the brand potentially allows Ralph Lauren to target a large demographic seeking high quality merchandise at lower prices. The private label partnership represents a significant opportunity for growth in the Wholesale segment for Polo, as the company could enter more partnerships with new brands with J.C. Penney (JCP) or other department stores.^[9]

Trends and Forces

Department Store Consolidation and Private Labels

In recent years a wave of consolidation amongst department store chains has resulted in the emergence of a small number of major players like Kohl's (KSS), Macy's Inc. (M), J.C. Penney (JCP) and Nordstrom (JWN). These giant chains benefit from greater purchasing power and the ability to eliminate redundant physical outlets. As a result these chains hold greater sway in negotiating lower prices from wholesalers such as Ralph Lauren and are able to cut down on unnecessary expenditure. Unfortunately, this translates into lower wholesale demand and lower margins for Ralph Lauren.

Department stores have begun to compete with established brands by releasing its own private label brands. The design and manufacture of private label brands are overseen by the department store itself. Thus the company has a large amount of control over what it wants to make and how much. In addition, a department store usually makes more profit per unit of private label merchandise sold as opposed to branded merchandise from a third party.^[10] The increasing popularity of private label brands--52% of J.C. Penney's 2008 sales came from private brands^[11]--means they will compete for floor space with other merchandise. Ralph Lauren has attempted to solve the issue of private brands through its American Living and Chaps brands, in that the company designs the merchandise but everything else is up to the particular department store that made an agreement with RL. Thereby, Ralph Lauren capitalizes on the increasing popularity of private label brands by cooperating with department stores in the production of new exclusive product lines.

International Status Exposes Company to Exchange Rate Risk

Ralph Lauren sells its goods throughout the world. Therefore changes in exchange rates will affect prices as well as foot traffic in stores where Ralph Lauren goods are sold. In Fiscal 2009, exchange rate fluctuations led to a gain of $1.6 million.^[2] In fiscal 2008, those fluctuations led to a loss of $6.4 million.^[2] In addition, during the fourth quarter of Fiscal 2009 comp store sales were down 29.3% at Ralph Lauren stores, 8% at factory stores and 20.8% at Club Monaco stores.^[12] These decreases in sales were attributed in part to lower amounts of tourist traffic brought about by the strength of the U.S. Dollar. As the dollar strengthens, the purchasing power of foreign currency decreases. Conversely, if the dollar weakens the purchasing power of foreign currency increases. Though having stores throughout the world exposes the company to multiple different markets, it also exposes the company to the whims of changing exchange rates.

Ralph Lauren Intends to Capitalize on Developing Economic Strength in Southeast Asia

Asia is experiencing the growth of a new affluent class. This class has demonstrated an appetite for luxury goods. Companies such as Coach (COH) and LVMH Moet Hennessy L.V. (LVMUY) have already started plans to expand into Asia in order to best access this new market. Ralph Lauren has decided to follow suit by deciding to take direct control of its retail and distribution in Asia, specifically China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, Taiwan and Thailand. Originally distribution was handled by Dickson Concepts International, which sold Ralph Lauren products through 140 outlets in southeast Asia.^[13] However, RL has decided to let the license expire on December 31, 2009 in order to have more control over its products and branding in Asia. Given the company's track record of brand-building, this move can result in large profits for Ralph Lauren, especially in a time when North American sales have slumped due to the recession.

Competition

As a result of Ralph Lauren's wide range of brands, it faces competition in every price point from discount to luxury.

Information on Ralph Lauren's upper tier competitors (such as Giorgio Armani and Zegna) is difficult to obtain due to the fact that many of them are privately-held companies. Of the publicly-owned firms, three of Ralph Lauren's close competitors are Abercrombie & Fitch Company (ANF), Nautica and J. Crew Group (JCG):

• Abercrombie & Fitch sells premium-priced apparel under four different brands: Abercrombie & Fitch, Abercrombie, Hollister and Gilly Hicks. Abercrombie and Hollister compete with Ralph Lauren's children's line. Abercrombie & Fitch competes with Rugby. ANF clothing is sold only through the company's 1,127 stores and its website.^[19] Ralph Lauren, on the other hand, has 326 freestanding stores^[20] , but it is also sold through Macy's Inc. (M) and the company website. Both companies have a product assortment that ranges from premium to lower-priced apparel; however Ralph Lauren's products reach the luxury market, whereas Abercrombie & Fitch is an affordable luxury retailer, which is lower-priced than luxury goods but more expensive than retailers such as Gap (GPS).

• Nautica is owned by V.F. Group, which is a holding company whose subsidiaries run the gamut from mass brands (Lee, Wrangler) to high-end lines (John Varvatos, Seven for All Mankind). Nautica has the traditional, preppy styling that is most similar to the Ralph Lauren ethos, and the two have a common retailer--Macy's. Although Nautica produces apparel for men and women, the women's line is only available at the website www.nautica.com and select Nautica outlet stores due to the line's lower sales in relation to menswear. Nautica's products are priced to attract a mid-tier consumer. The line does not have a high-fashion, high-priced division like Ralph Lauren does. The brand operates 110 outlet stores and 200 Nautica locations throughout the world, making it much smaller than Ralph Lauren.^[21]

• J. Crew is a producer and retailer of men's, women's and children's apparel and accessories. It's product assortment is traditional and mid-ranged in terms of pricing. However, the company has been making an entry into the high-end market through collaborations with luxury brands such as Mackintosh and Globetrotter. J. Crew is a smaller company than Ralph Lauren, both in terms of sales and number of stores. In addition, J. Crew merchandise is sold only through its own boutiques, whereas Ralph Lauren goods are sold in retailers from Macy's Inc. (M) and Saks (SKS) in addition to its own standalone boutiques. In addition, J. Crew's merchandise stays mainly in the mid-range level, with some expensive luxury pieces. Ralph Lauren, on the other hand, runs the gamut from discount (Chaps) to luxury (Ralph Lauren Collection), increasing its target demographic.

Footnotes

1. ↑ ^{1.0 1.1} RL 2009 Annual Report pg. F-56  
2. ↑ ^{2.0 2.1 2.2} RL 2009 Annual Report pg. 43  
3. ↑ ^{3.0 3.1} Polo profit soars past Street view, shares rise.
4. ↑ RL 2009 Annual Report pg. 3  
5. ↑ ^{5.0 5.1 5.2 5.3} RL 2009 Annual Report  
6. ↑ RL 2009 Annual Report  
7. ↑ RL 2009 Annual Report  
8. ↑ RL 2009 Annual Report pg. 5-8  
9. ↑ RL 2009 Annual Report pg. 5-8  
10. ↑ Alexandria Sage. ANALYSIS - Private label eclipsed by brands in US retail slump.
11. ↑ JCP 2009 Annual Report pg. 18  
12. ↑ Polo Ralph Lauren Corp. F4Q09 (Qtr End 03/28/09) Earnings Call Transcript.
13. ↑ Polo Ralph Lauren to Assume Direct Control of Distribution.
14. ↑ Needham Cover Initiation: Competition (11)
15. ↑ ^{15.0 15.1} RL 2009 Annual Report pg. F-53  
16. ↑ ^{16.0 16.1} VFC 2009 Annual Report pg. 24  
17. ↑ ^{17.0 17.1} ANF 2009 Annual Report pg. 23  
18. ↑ ^{18.0 18.1} JCG 2009 Annual Report pg. 23  
19. ↑ ANF 2008 Annual Report pg. 17  
20. ↑ RL 2009 Annual Report pg. 28  
21. ↑ VFC 2008 Annual Report