EUR 850.00 For Business Accounts Only

Morningstar | Ralph Lauren Continues to Improve Sales Quality Driving AUR Growth, Leading to Margin Expansion

Over the past 50 years, Ralph Lauren has developed a considerable portfolio underpinned by the Ralph Lauren and Polo brands, which have become embedded in consumers' minds with the connotation of American luxury and style, both domestically and abroad. We view this as important, given the competitive marketplace and low customer switching costs in apparel and accessories. The firm has a record of top-line growth and profitability (mostly organic), but struggled with revenue declines in 2016, 2017, and 2018. Profitability improvement has proved challenging, with the operating margin falling from 15% at the end of 2014 to 10% in 2017 and only ticking up 40 basis points in 2018 to remain at less than 11%.In our view, operating more than 10 labels brought complexity to operations and confusion to customers, resulting in an erosion in profitability relative to historical levels and the midteens levels that narrow-moat VF generates. We had hoped Ralph Lauren's prior strategy of focusing resources on the core brands, being more selective in distribution channels to support brand strength, and speeding up the supply chain would streamline costs and increase margin. However, we now believe that executional challenges, reflecting friction in creative control between Ralph Lauren and prior CEO Stefan Larsson, prompted Larsson's departure after just two years. While we don't deny the validity of the steps the firm is taking (closing stores, investing behind its e-commerce operations, and working to align its offerings with consumer trends), we maintain our outlook for low-single-digit sales growth and operating margins around 12%.We still think Ralph Lauren has some room for growth in international markets, specifically China, and we see the company reaching at least a 50/50 split of domestic and international revenue (versus the around 45% currently earned outside North America). With over 1,100 retail stores (roughly 501 total branded stores plus 651 concession shops as of the third quarter of fiscal 2019), the firm has room for retail expansion over the next decade, in our view.