Ralph Lauren Earnings Review: Better-Than-Expected Wholesale Performance Drives Ralph Lauren’s Top Line Growth

Luxury lifestyle company, Ralph Lauren (NYSE:RL), posted better-than-expected earnings in the fourth quarter of fiscal 2014. The retailer posted year-on-year net revenue growth of 14% for the fourth quarter, helped by a double-digit sales expansion in North America, Europe and Asia.((Polo Ralph Lauren Investor Relations SEC Filings)) For the full-year, sales grew by 7.3% despite significant investment in growth initiatives and infrastructure, meeting the higher end of the company’s guidance of 5-7% growth. Excluding the impact of discontinued businesses and foreign exchange, sales growth for the full year came in at 9%. The outpacing of expectations is attributable to stronger wholesale revenue as the company gained market share in North America and returned to robust growth in Europe.((Ralph Lauren’s Q4 2014 Results Earnings Call, Seeking Alpha, May 2014))

Operating income jumped by an impressive 24% to $225 million in the fourth quarter, which was achieved on top of a 33% increase in the prior year period. Operating margin improved 90 basis points to 12%, which was at the high-end of the outlook provided by the company in the previous quarter. ^[1] For the full-year, operating income was $1.1 billion, implying a modest growth from the prior year. Operating margin declined 100 basis points to 15.2% due to an unfavorable foreign exchange rate and the mix impact from integrating the Chaps men’s sportswear operations.

We believe that the company’s revenue growth can accelerate going forward, benefiting from a variety of growth strategies we discuss below. We also expect the company’s profitability to improve over long term, as investments in these growth strategies bear fruit. Efficiencies gained through the improvement of its management information systems should contribute as well.

See our complete analysis for Ralph Lauren

Wholesale Outpaces Retail Sales As Expected

Retail sales increased by 5% during Q4 fiscal 2014, driven by growth in international operations and global store expansion, including newly transitioned operations in Australia and New Zealand. Excluding the impacts of discontinued businesses and foreign exchange, retail sales rose 7%. ((Ralph Lauren’s Q4 2014 Results Earnings Call, Seeking Alpha, May 2014)) North America retail operations were negatively affected by the cold and late start to spring and the Easter shift from March to April, which caused traffic to decline during the quarter. However, double-digit growth in European and Asian retail sales was strong enough to offset the losses in North America. Retail segment operating income was $51 million in the fourth quarter and the retail operating margin was 6.1%, 4% lower than the year before. The lower retail operating income margin reflects the expenditures made by the company on its global store expansion and e-commerce development efforts, and negative foreign exchange impacts. Retail operating margin was also affected by increased promotional activity in the U.S..

Wholesale revenues rose by an impressive 24% to $983 million. This strong growth was driven by the strong momentum in core North American sales, where the company continues to gain market share, the addition of Chaps menswear operations and improved trends in Europe. Profitability also improved in this segment as operating margin was up 40 basis points due to strong profitability in the core operations which more than offset the mix impacts from the integration of Chaps men’s sportswear and negative foreign exchange effects. ^[2]

Future Growth Drivers

Over the quarter, RL remained committed to three key initiatives that it believes will drive sales and profits over the next three to five years.

• The company has intensified the development of its Polo brand. Currently, 60% of the sales made by the company are in its men’s business, the reverse of the usual industry trend where sales are skewed towards women. During fiscal 2014, the company created Polo for women, which it expects to replace the existing Blue Label line for women. Therefore, the sales made from this switch will not be completely incremental. However, in the longer term the company expects the Polo brand to address a much broader market than the Blue Label line. Additionally, the retailer is still in the early stages of executing the expansion of its Polo stores worldwide. It operates 13 Polo stores currently, with plans of opening 15 to 20 more in fiscal 2015. Over the long term, the company believes there is an opportunity to have between 100 and 200 Polo stores worldwide, with significant concentration in international markets.((Ralph Lauren’s Q4 2014 Results Earnings Call, Seeking Alpha, May 2014))
• The second initiative involves the development of the e-commerce segment. In fiscal 2014, e-commerce brought $500 million in revenues. Based on the high growth and the profit creative dynamics of the channel, the retailer will continue investing in this space. In fiscal ‘15, RL will begin a three-year project to upgrade its e-commerce operations by transitioning to a new global operating platform. With the additional capabilities of a more sophisticated platform, and an expectation of continued double-digit growth for the channel, the company expects to raise annual revenues from this channel to the tune of $1 billion.((Ralph Lauren’s Q4 2014 Results Earnings Call, Seeking Alpha, May 2014))
• The third initiative involves accessories in general and leather goods in particular. The retailer converted footwear from a licensed to owned segment in 2006 and re-opened operations in 2008. At the same time, the company gained direct control of its licensed handbags and small leather goods business. Since then, the leather goods category has grown at an average of 20% annually. Currently, handbags, footwear and leather goods represent less than 10% of total consolidated sales. The company has stated that it wants to grow this category to about 20% of the top-line, which should favorable margin implications as it is a higher margin category than apparel.((Ralph Lauren’s Q4 2014 Results Earnings Call, Seeking Alpha, May 2014))

We are in the process of revising our price estimate for Polo Ralph Lauren, which stands at $174, implying a premium of around 17% to the market price.

1. Polo Ralph Lauren Q3 FY14  Earnings Call Transcript, Seeking Alpha, February 2014 [↩]
2. Ralph Lauren’s Q4 2014 Results Earnings Call, Seeking Alpha, May 2014 [↩]