Ralph Lauren (NYSE: RL) released its fourth quarter results earlier this week. The global leader in premium lifestyle products reported better-than-expected revenues and earnings for its fiscal fourth quarter, as growth in its international operations (especially in Asia) more than made up for declining sales in North America. Revenues for the quarter fell 1.5% y-o-y to $1.51 billion due to forex headwinds, but adjusted EPS jumped 18% year-on-year to $1.07 as a result of reduced promotional activity and a favorable product, geographic, and channel mix. For fiscal 2019, the company’s revenues increased 2% to $6.3 billion thanks to robust revenue growth in Asia and Europe, and an uptick in AUR (Average Unit Retail) globally.
Per Trefis estimates, Ralph Lauren’s shares have a fair value of $139 which is roughly 20% ahead of the current market price. We have summarized our key expectations from the earnings announcement in our interactive dashboard – How Did Ralph Lauren Fare In 2019 And What Can We Expect From Fiscal 2020? In addition, here is more Trefis Textiles, Apparel and Luxury Good Industry Data.
A Quick Look at Ralph Lauren’s Revenue Sources
Ralph Lauren reported $6.3 billion in Total Revenues for Fiscal 2019. This included 4 revenue streams:
- North America: $3.2 billion in FY 2019 (51% of Total Revenues). This segment primarily consists of sales of Ralph Lauren branded products made through wholesale and retail businesses in the U.S. and Canada.
- Europe: $1.6 billion in FY 2019 (26% of Total Revenues). This segment primarily consists of sales of Ralph Lauren branded products made through wholesale and retail businesses in Europe and the Middle East.
- Asia: $1 billion in FY 2019 (17% of Total Revenues). This segment primarily consists of sales of Ralph Lauren branded products made through wholesale and retail businesses in Asia, Australia, and New Zealand.
Others: $409 million in FY 2019 (6% of Total Revenues). This segment includes the company’s
- sales of Club Monaco branded products in the U.S., Canada, and Europe
- sales of Ralph Lauren branded products made through its wholesale business in Latin America
- royalty revenues earned through its global licensing alliances
Key Takeaways From Ralph Lauren’s FY 2019 Results
Focus On Attracting New Consumers
- Ralph Lauren’s primary objectives over recent years has been to attract a “new generation of consumers”. To fulfill this objective, the company has been elevating its brand-building content and increasing its marketing investment. The company increased its marketing spend by about 13% in fiscal 2019 to focus on digital and social-media channels. As a result, RL’s Instagram followers surged by 45% y-o-y to more than 15 million across its brand handles. Further, the brand continues to leverage celebrities, social media influencers and cultural events to attract younger customers.
- Ralph Lauren ended the year with marketing expenditure at 4.3% of sales, and intends to increase its marketing expenditure to about 5% of sales in the near future. This move is likely to attract new consumers to the company’s already large customer base.
Digital Segment Continues To Thrive
- Digital growth has been pivotal for Ralph Lauren over recent quarters, with a global digital ecosystem contributing significantly Ralph Lauren’s top line. Digital sales improved 11% in fiscal 2019, with a strong performance across regions. Moreover, the company expanded its partnerships with key digital wholesale players across regions.
- Ralph Lauren’s focus on the digital segment and on building its brand has led to enhanced consumer experience and higher quality of sales across all segments. Going forward, we expect the company to continue to focus on this segment as the digital channel holds strong growth potential.
China Continues To Lead Ralph Lauren’s Growth
- Ralph Lauren continued its strong momentum in Asia in FY 2019, with revenues increasing by 13% y-o-y while comps grew by 5% (constant currency terms) – being led by growth of over 30% in Mainland China. Additionally, the company remains focused on expanding retail operations in emerging markets. During the year, the company opened 94 stores in Asia, with 39 in China – which is its fastest-growing market. Ralph Lauren’s revenues in Greater China grew by just over 20% in constant currency, with a bulk of this growth coming from Mainland China.
- The company’s digital business in China continues to expand following the launch of its directly operated digital commerce site. Moreover, Ralph Lauren has a strong distribution network in China which includes its pure-play partners Tmall, JD.com, and WeChat. Taking all this into account, we expect China to continue to contribute a significant portion of Ralph Lauren’s growth.
- Ralph Lauren’s strong top-line performance in the past has been driven mainly by its core products. However, the company has taken considerable steps to bolster its new customized offerings through both online and in-store channels, especially in the European markets. Customization continues to represent an important long-term opportunity for direct-to-consumer channels, as it drives AURs higher.
Fiscal 2020 Outlook
- For fiscal 2020, we expect revenue to increase by about 3% to $6.5 billion. Higher revenue would most likely be driven by continued growth in international businesses and stabilization in North America. However, the top line is likely to be adversely impacted by foreign currency headwinds.
- Net income margin is expected to expand from 6.8% in FY2019 to about 8.6% in FY2020, due to a combination of gross margin expansion and operating leverage.
- Based on our forecast, Ralph Lauren’s adjusted EPS for fiscal 2020 is likely to be around $7.21. Using this figure with our estimated P/E ratio of 19x, this works out to a price estimate of $139 for Ralph Lauren’s shares, which is roughly 20% ahead of the current market price.
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