VALUATION HIGHLIGHTS
- North America constitutes 41% of the Trefis price estimate for Ralph Lauren's stock.
- Europe constitutes 31% of the Trefis price estimate for Ralph Lauren's stock.
- Asia constitutes 23% of the Trefis price estimate for Ralph Lauren's stock.
WHAT HAS CHANGED?
- Ralph Lauren Q3 Snapshot
- RL reported its third-quarter fiscal year 2025 earnings, surpassing analysts' expectations with earnings per share (EPS) of $4.82 against a forecast of $4.50. The company's revenue (up 11% year-over-year) for the quarter reached $2.1 billion, exceeding the anticipated $2.01 billion
- The company reported significant growth in its core products and high-potential categories, such as women's apparel and handbags. Revenue growth was driven by better-than-expected holiday performance in all geographies. Global direct-to-consumer comparable store sales increased 12%. Revenue in North America increased by 7% to $998 million, Europe jumped by 16% to $604 million, and Asia climbed by 14% to $507 million.
- The operating margin also expanded, reflecting improved operational efficiency. Operating margin was 18.2%, and operating income for the quarter jumped 22.6% to $389.7 million. Adjusted operating margin was 18.7%, 230 basis points above the prior year. Gross profit was $1.5 billion, with a gross margin of 68.4%. Adjusted gross margin was also 68.4%, 200 basis points above the prior year.
Note: Ralph Lauren's FY'24 ended on March 30, 2024. Q3 FY'25 refers to the quarter that ended on December 28, 2024.
- Looking Ahead
The luxury apparel retailer raised its full-year constant currency revenue growth guidance to 6-7% and expects operating margin expansion of 120-160 basis points. The company plans to maintain its marketing spend at around 7% of revenue and anticipates starting its next-generation transformation project in FY2027.
For the fourth quarter, the company expects revenues to be up 6% – 7% on a constant currency basis. The company sees an operating margin expansion of 120 – 140 basis points in constant currency.
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:
- Apparel: Products include men's, women's, and children's clothing
- Accessories: Products encompass a broad range, including footwear, eyewear, watches, jewelry, hats, belts, wallets, sleepwear, and leather goods, including handbags and luggage
- Home: Coordinated products for the home that include bedding and bath products, furniture, fabric, rugs, lighting, barware, wallpaper, paint, tabletop, and giftware
- 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.
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.
