VALUATION HIGHLIGHTS

1. North America constitutes 40% of the Trefis price estimate for Ralph Lauren's stock.
2. Europe constitutes 30% of the Trefis price estimate for Ralph Lauren's stock.
3. Asia constitutes 23% of the Trefis price estimate for Ralph Lauren's stock.

WHAT HAS CHANGED?

1. Ralph Lauren Tops Q1 Results
   • The retailer reported a profit and revenue beat for its first quarter results, as higher sales from international markets offset the weakness in North American demand. Revenue rose 1.3% to $1.51B and was ahead of the consensus estimate by $20M. Excluding items, the New York-based fashion giant earned $2.70 a share, beating the average analyst estimate by 23 cents.
   • During Q1, North America revenue fell 4% to $608M, hurt by a shift in the timing of Easter, which impacted comps by about 120 bps. Europe and Asia revenue rose 6% and 4% to $479M and $391M, respectively.

Note: Ralph Lauren's FY'24 ended on March 30, 2024. Q1 FY'25 refers to the quarter that ended on June 29, 2024.

2. Looking Ahead

The luxury apparel retailer expects constant currency revenue to grow about low- to mid-single digits in the current quarter at around 3% to 4%, while forex is expected to negatively impact revenue growth by about 160 bps and gross and operating margins by about 40 and 50 bps. The company continues to expect capital expenditures of $300-$325M for fiscal 2025 and reaffirmed its outlook of low-single-digit revenue growth and adjusted operating margin expansion of 100 to 120 bps.

BUSINESS SUMMARY

Ralph Lauren is a global leader in the design, marketing, and distribution of premium lifestyle products. Its products include apparel, accessories, and fragrance collections for men and women, as well as children's wear and home furnishings. The company's brands, such as Ralph Lauren, Club Monaco, and Polo, are some of the world's most widely recognized consumer brands.

The company offers a broad spectrum of lifestyle products that include:

1. Apparel: Products include men's, women's, and children's clothing
2. Accessories: Products encompass a broad range, including footwear, eyewear, watches, jewelry, hats, belts, wallets, sleepwear, and leather goods, including handbags and luggage
3. Home: Coordinated products for the home that include bedding and bath products, furniture, fabric, rugs, lighting, barware, wallpaper, paint, tabletop, and giftware
4. Fragrance: Fragrance products are sold under Romance, Polo, Lauren, Safari, Ralph, and Black Label brands, among others.

The company sells its products through company-operated retail stores and its website ralphlauren.com, as well as through upscale and mid-tier department stores and specialty stores.

SOURCES OF VALUE

We believe Ralph Lauren's North American and European divisions are significant sources of value for Ralph Lauren for the following reasons:

Margin Opportunity

RL has also aimed to reduce its dependence on department stores to generate sales, and in this regard, the company has been in the process of exiting 20% to 25% of such stores that sell its merchandise. While this strategy has had a negative impact on its top line, it has been a boon to the bottom line. These efforts should continue to drive margin growth for the company.

Increasing Revenue Share Of Retail business

Over the past few years, Ralph Lauren has focused on increasing its direct-to-consumer reach to gain greater control over its brands and operations. As such, the firm has expanded its store base and increased the products and services offered on its online store. This is Ralph Lauren's response to the ongoing e-commerce boom in the apparel industry.

The result has been a consistent increase in the share of revenues coming from Ralph Lauren's company-operated stores and the firm's e-commerce websites.

KEY TRENDS

Ralph Lauren Has a Strong Brand Identity

Ralph Lauren's greatest competitive advantage has been its ability to maintain the strength of its brand for the past twenty years. While many fashion companies have struggled to retain customers with changing fashion trends, Ralph Lauren's brand has not only remained strong but has also expanded its brand to other products and geographies. The company's products are popular among all age groups. In a study conducted by investment bank Piper Jaffray, Ralph Lauren was ranked in the top five favorite brands among teens, along with Nike, Urban Outfitters, and American Eagle, which target a different set of customers.

Another advantage of Ralph Lauren is its broad consumer appeal. The company offers products across a wide range of price points from discounts (Chaps) to luxury (Ralph Lauren Collection), enabling it to appeal to a wide target demographic.

Weak Macroeconomic Conditions in Europe are a Near-Term Threat

Current weak macroeconomic conditions in Europe, particularly in Spain, Greece, and Portugal, pose a threat to Ralph Lauren's revenues in the near term. Ralph Lauren's wholesale business is most vulnerable to the situation, as Europe accounts for a significant percentage of the company's total wholesale revenues.

Expansion in Asia Should Help Sustain Growth

Ralph Lauren has been focusing on expanding retail operations in emerging markets, especially in Asia. The Asian market has become a focal point of the global retail industry, with major global brands aggressively expanding their footprint in the region.

In FY 2024, Ralph Lauren's store presence in Asia was stronger than that in Europe. Compared to 103 Ralph Lauren freestanding stores in Europe, there were 231 freestanding stores in Asia. However, the number of wholesale distribution channels in Asia is still minuscule compared to that in North America and Europe (802 vs. 3,329 in North America and 5,547 in Europe). Going forward, there is tremendous scope for the company to expand its presence in wholesale stores in Asia.