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Earnings Review: Ralph Lauren Delivers Better Than Expected Fourth Quarter

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Luxury lifestyle company Ralph Lauren posted slightly better than expected earnings in the fourth quarter of fiscal 2015. The retailer posted year-on-year net revenue growth of 7% for the quarter (in constant currency terms), helped by a double-digit sales expansion in international sales and e-commerce business. Operating margin was 190 basis points below last year’s at 10.1%, but still higher than guided for by the company. Due to the timing of payments related to incremental investments in growth initiatives such as store expansion, infrastructure, and marketing, the company was expecting a lower margin but operational discipline and the favorable impact of currency fluctuations helped it achieve a better margin.

See our complete analysis for Ralph Lauren

Currency Fluctuations and Incremental Expenses Eat Into Profits

Retail sales increased by 6% on a constant currency basis driven by double-digit growth in international operations and e-commerce business, and global store expansion. By region, comparable store sales increased in the Americas and Europe, while Asia was slightly down compared to last year. Retail segment operating income was $527 million in the full fiscal year 2015, $45 million or 8% lower than last year’s, and the retail operating margin was 13.3%, 180 basis points lower than the year before, reflecting the costs associated with the development of international stores and newly transitioned operations.

Wholesale revenues declined 2% to $943 million from $963 million in 2014. This decline was due to the negative impact of currency fluctuations slightly offset by improved performance in core operations. Profitability also suffered in this segment over the quarter, as operating margin was down 60 basis points to 27% due to the fixed costs associated with shipments and the unfavorable impact of currency fluctuations.

Future Growth Drivers

Looking ahead, RL remains 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. Over the long term, the company believes there is an opportunity to have between 100 and 200 Polo stores worldwide, with a significant concentration in international markets.
  • The second initiative involves the development of the e-commerce segment. In fiscal 2015, e-commerce grew in the high teens in the fourth quarter and the company believes that it can achieve sales of $1 billion from this channel. Based on the high growth and the profitable creative dynamics of the channel, the retailer will continue investing in this space. At present, the company’s e-commerce operations behave very differently in different geographies. In the U.S., the management pointed out that if a consumer switches from shopping at a brick-and-mortar store to online, it is profitable for the company. However, the company’s e-commerce operations are only starting to achieve scale in Europe. RL will need to make further investments in its European e-commerce business to reach the same level of profitability as in the U.S. Meanwhile, it’s only just launched the e-commerce business in Asia. The company currently operates in Japan and Korea, with investments still ongoing to bring operations online in Greater China and Southeast Asia.
  • The third initiative involves accessories in general and leather goods in particular. The retailer converted footwear from a licensed to an 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 have favorable margin implications as it is a higher margin category than apparel.

We are in the process of revising our price estimate for Polo Ralph Lauren, which stands at $174, implying a premium of over 20% to the market price.

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