Polo Ralph Lauren (RL)

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Polo Ralph Lauren (NYSE: RL) 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. RL's product lines range from relatively inexpensive brands (such as Chaps) to expensive, exclusive pieces (Ralph Lauren Collection). RL reported just over $4.9 billion in revenues in 2010 (fiscal year ended April 3, 2010), down 1% from 2009.^[1]

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 RL to exchange rate risk. In addition, new wealth in Asia has led RL to increase control over its own brand in that region.

Business Overview

Business Growth

Fiscal 2010 Performance (ended April 3, 2010)

• Ralph Lauren had slightly weaker net sales in fiscal 2010 ($4.795 billion) than fiscal 2009 ($4.823 billion).^[2]
• Net income rose 18% to $479.5 million.^[2]

Business Segments

Ralph Lauren's operations fall under three primary categories: Wholesale, Retail, and Licensing.

• Wholesale (50.9% of FY 2010 Net Sales)
• Retail (45.5%)
• Licensing (3.4)

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
• Club Monaco
• 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.

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 RL 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.^[3] The increasing popularity of private label brands 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 RL 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.

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.^[4] Given RL'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. RL operates 281 locations (many under the Club Monaco label) in Asia and began to see revenue contributions from those locations with more Asian expansion set to come in the future.^[5]

Increases in Commodity Prices Will Raise Clothing Retailer Prices

Cotton consumption exceeded cotton production for the fifth year in the row, making cotton prices increase by 80.5% from last year.^{[6] [7]} Natural disasters also severely damaged crops in many large cotton producer countries, such as China, India, and Pakistan. This led to decreases in cotton exports from these countries and increases in cotton imports as these countries sought to supplement their supply of cotton. ^[8][9] With limited cotton supplies and rising prices, retailers will either have to absorb these higher material costs, restructure the composition of their clothing to have less cotton, or pass these higher costs to its consumers. Higher clothing prices or lower quality clothing could discourage consumer spending, resulting in decreased net sales. However, adult or teen clothing retailers may not be too adversely affected as their clothing (which is usually 30-40% cotton based) has more flexibility in their composition and thus, costs.

In addition, raising commodity prices in other areas will also raise costs for retailers. While premium price and established brands may be able to pass their higher costs to their consumers, value based companies may not fare as well and may suffer from lower profit margins.^[6]

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):

• J. Crew Group (JCG) 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, it 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.

• Abercrombie & Fitch Company (ANF) 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 its 1,098 stores and its website.^[11] Ralph Lauren sells through retail stores and online as well as wholesale through department stores. 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).

• Gap (GPS): GPS targets customers (15-25 year-old males and females). Gap has clothing lines for the 25-40 year-old age group and a strong Baby Gap clothing line for toddlers. It has a much more extensive store network throughout the U.S. and has been an established player in the market for many years.

• V.F. Group, which is a holding company whose subsidiaries run the gamut from mass brands (Lee, Wrangler, Nautica) to high-end lines (John Varvatos, Seven for All Mankind) as well as The North Face and JanSport. 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. V.F. Corporation operates 750 for its brands throughout the world. ^[12]

Footnotes

1. ↑ RL 2010 Annual Report  
2. ↑ ^{2.0 2.1} Bloomberg, "Polo Ralph Lauren Reports Fourth Quarter and Full Year Fiscal 2010 Results," 05/19/2010
3. ↑ Alexandria Sage. ANALYSIS - Private label eclipsed by brands in US retail slump.
4. ↑ Polo Ralph Lauren to Assume Direct Control of Distribution.
5. ↑ RL 2010 Results
6. ↑ ^{6.0 6.1} http://seekingalpha.com/article/238731-more-evidence-of-inflation-retailers-report-escalating-commodity-prices
7. ↑ Gap, Wal-Mart Clothing Costs Rise on ‘Terrifying’ Cotton Prices
8. ↑ http://www.thegovmonitor.com/world_news/asia/recession-drought-hail-reduce-cotton-acreage-in-china-12256.html
9. ↑ CNN Money - Cotton Shortage Could Inflate Clothing Prices
10. ↑ Needham Cover Initiation: Competition (11)
11. ↑ Abercrombie and Fitch Annual Report 2009
12. ↑ VF Corporation 2009 10k