Despite facing strong headwinds associated with the Covid-19 pandemic, Ralph Lauren (RL, Financial) has come up fighting and has displayed a resilient performance in its most recent quarterly result.
The company recorded a revenue drop in the recent quarter, but it also added more than one million new consumers through its direct-to-consumer platforms, particularly women under 35 years of age.
The new digitization trend has given Ralph Lauren an opportunity to expand its partnerships with influential digital retailers around the world. Another green flag has been the management's advancement to the next stage of its Strategic Realignment Plan to drive increased efficiencies across its global real estate footprint. Given all its new initiatives, I think Ralph Lauren could be an interesting growth pick for 2021.
Financial performance
Ralph Lauren's performance has been below par in 2020 on account of the store closures and the lockdowns caused by Covid-19.
The company reported a top-line of $1.43 billion for its third quarter of fiscal 2021, which implied an -18.16% drop as compared to the $1.75 billion reported in the corresponding quarter of the previous fiscal year. The company also failed to live up to the analyst consensus estimate of $1.47 billion.
The only silver lining in the result was that Ralph Lauren's digital business displayed a robust performance with sales up more than 20% as compared to the previous year. The company benefitted from the scaling up of its connected retail offerings as well as creating innovative digital experiences.
Its revenues translated into a gross margin of 65.42% and an operating margin of 13.18%, which was lower than the same quarter of the 2020 fiscal. Ralph Lauren's net income of $119.80 million translated into adjusted earnings per share (EPS) of $1.67, which managed to surpass the average Wall Street expectation of $1.63.
In terms of cash flows, Ralph Lauren reported $347.3 million in the form of operating cash flows and generated positive free cash flows.
Brand building initiatives
The Ralph Lauren management has undertaken many brand-building initiatives to compensate for the slow in-store traffic. Firstly, the company executed a global launch campaign with Farfetch delivering lifestyle content tailored to next-generation consumers that reached over 15 million impressions globally.
They went on to become the first apparel company to launch Snapchat's logos scan, which allows the customers to scan its Polo Pony logo from any surface, bringing them into the website. The company has created an excellent virtual store experience where consumers around the world can view a full assortment of its clothes. Digital traffic in these virtual stores has been as much as eight times greater than the foot traffic in the company's physical stores over the same period.
All these new forms of selling and initiatives in social commerce are expected to become a greater part of the overall digital shopping experience in the long term. Moreover, the digital business of the company continues to be a key driver with digital sales accelerating in all its key markets. The company's heightened investment in digital marketing generated a 27% increase in new customers during a competitive holiday quarter.
The Lauren Look rental model
Earlier this month, Ralph Lauren announced the launch of The Lauren Look, the company's first subscription apparel rental initiative, with the Lauren Ralph Lauren brand. Membership will be provided to shoppers starting at $125, which will give them access to dresses, pants, tops and more from the Lauren collection. The platform will include all sizes that the Lauren Ralph Lauren collection offers.
This is the first initiative where a luxury brand has worked to develop a fully articulated rental model that adapts to a more dynamic apparel marketplace. Additionally, The Lauren Look also provides an opportunity for the company to generate direct feedback from existing customers while also helping to acquire new and younger consumers, who are more prone to use an apparel rental service platform.
As per Statista, the value of the apparel rental market in the U.S. is expected to reach $4.4 billion by 2028, and Ralph Lauren's entry into this space can act as a strong growth driver for the company in 2021.
Final thoughts
As we can see in the above chart, Ralph Lauren's stock price has shown a good recovery in the past six months, and most of this has been driven by multiples expansion. The current enterprise-value-to-revenue ratio of the company of 2.11 is still not too high in my view given the value of its huge brands and the new digitization initiatives.
I believe that Ralph Lauren should see a significant recovery in in-store traffic in the latter half of 2021, and it should also benefit heavily from the virtual store sales as well as the new apparel rental model. Overall, I give the company a "Hold" rating.
Disclosure: No positions.
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