EUR 850.00 For Business Accounts Only

Morningstar | Narrow-moat Ralph Lauren Remains Fashionable After Restructuring; FVE Increased. See Updated Analyst Note from 24 Jul 2019

We maintain our narrow-moat rating on Ralph Lauren but raise our fair value estimate to $118 from $107. We think Ralph Lauren’s restructuring has reduced discounting of its merchandise, thereby strengthening pricing and gross margins. In North America, we forecast 1% long-term growth each year on average versus our previous expectation of 1% annual average declines. In Asia-Pacific, we forecast average annual growth of 8% over the next 10 years, up from our previous forecast of 5%. Ralph Lauren has expanded both social commerce and traditional e-commerce in China and plans to open more than 100 small format stores in Asia. We also expect modestly higher long-term profits (12% operating margins versus 11.5% prior) as Ralph Lauren has made efforts to reduce costs through cost concessions from suppliers, organizational changes, and supply chain improvements.

Our narrow-moat rating is based on Ralph Lauren’s intangible brand asset. We view the firm as an important partner for leading retailers in many categories. We think key products, like Polo shirts, achieve premium pricing due to the power of the Ralph Lauren brand. While we expect Ralph Lauren’s North America wholesale business to continue to decline (to $1.1 billion in fiscal 2029 from $1.5 billion in fiscal 2019), we think its retail sales will increase. Ralph Lauren has been expanding its direct to consumer business (e-commerce and company-owned stores) to better control pricing, inventory, and marketing. We forecast the firm's retail business will account for 70% of sales by fiscal 2029.

We expect much of Ralph Lauren’s growth to come from international markets. We think the brand is viewed as more of a premium brand in Europe and Asia than in North America, allowing for less discounting and higher average unit retail. We forecast international sales will rise to 53% of total sales in fiscal 2029, up from 43% in fiscal 2019.

We view Ralph Lauren as undervalued at current levels.

Tariffs on imports to the U.S. from China or other trade barriers would likely have a negative effect on Ralph Lauren. We think competitive pressure would make it difficult for the firm to raise prices to offset tariffs. In fiscal 2019, approximately one third of its products were sourced from manufacturers in China. However, Ralph Lauren has already reduced its sourcing from China to about 25% of its cost of goods sold and plans further reductions.

We maintain our Poor stewardship rating on Ralph Lauren. Former CEO Stefan Larsson was controversially forced out in 2017 because of creative and business strategy differences with Ralph Lauren’s namesake founder, who retains considerable influence. More recently, in July, the resignation of Global Brand Group President Valerie Hermann was announced without explanation. Hermann has played a key role in Ralph Lauren's turnaround in recent years, so we view her resignation as a concern. While current CEO Patrice Louvet appears to be working well with Lauren, he lacks a background in fashion. We think Ralph Lauren should improve its governance to better serve outside shareholders.