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Robert Stephens, CFA
Robert Stephens, CFA
Articles (110) 

Why Ralph Lauren Has Growth Potential

The company’s strategy could boost its financial prospects

February 08, 2019 | About:

The ability to capture a broader range of customers could enhance Ralph Lauren Corp.'s (NYSE:RL) financial prospects in the coming months. Recent collaborations and product launches are attracting new customers and reducing the average age of its customer base. In addition, the company’s store opening program could help to provide a stronger omnichannel offering, which complements its investment in digital growth and includes features that may improve its competitive advantage.

Although there are risks ahead from a slowing Chinese economy, a focus on operational efficiency could enhance the overall performance of the business. This may lead to further growth in its stock price, which has soared 21% versus an increase of 3% for the S&P 500 over the past year. 

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Investment in growth

An increasing focus on widening the appeal of its products could boost the company’s financial performance. For instance, a recent collaboration with streetwear brand Palace helped it attract younger consumers. The collaboration generated over 2 billion impressions globally, and merchandise sold out in under an hour. Around 75% of the customers were new to the brand and a large percentage belonged to the millennial and generation z demographic, with the average age being a decade younger than the company’s typical customer.

The products sold in Ralph Lauren’s holiday campaign also attracted first-time customers. Around a third of them were new to the brand, and a large portion were under 35 years old. The company’s increasing use of influencers to promote its products is a key contributor to the decrease in the average age of its customer base. Further investment in this area is expected to take place over the medium term.

New store openings are also catalyzing the company’s growth rate. In the most recent quarter, it opened 39 new stores and concessions globally. Of the 24 locations opened in Asia, nine were in China, its fastest-growing market. It also opened two new full-price stores in Europe and two new factory stores last quarter. With only 23 full-price stores across Europe, Ralph Lauren believes it is underrepresented in the region. As a result, it plans to open two more stores in Europe in the current quarter. Future store openings are set to create an ecosystem that offers a more compelling omnichannel experience.

Changing business

Ralph Lauren is also aiming to improve its customer experience on digital platforms, thereby enhancing its competitive position. As part of this initiative, a new platform in Europe contributed to a 13% increase in comparable sales last quarter. Enhancements to its European sites included a ship from store service, which allows the company to leverage its in-store inventories more effectively. It has also launched increasing customization services and a fully localized Spanish e-commerce site.

Innovation is becoming an area where Ralph Lauren can more easily differentiate itself from peers. In the most recent quarter, the company built upon its customization programs with monogramming services in Europe. This represents an increasingly important long-term opportunity for its direct-to-consumer channels, where margins are relatively high. The company also continues to launch new products and designs in underdeveloped areas, such as fragrances and outerwear, which both recorded improved performance last quarter.

Risks

The uncertain outlook for the Chinese economy could pose a threat to the company’s long-term outlook. The country’s economic growth rate slowed in the final quarter of 2018, declining to a 28-year low of 6.4%. As a result, gross domestic product growth for 2018 was only 10 basis points higher than the politically-mandated minimum of 6.5%. Retail sales increased marginally to 8.2% in December, which fails to arrest a general decline in the sector over the last few years. This trend is expected to continue over the medium term.

In response, the company is aiming to improve its operational efficiency. In the most recent quarter, Ralph Lauren's adjusted operating expenses, excluding marketing, were slightly below top-line growth.

The company is also in the process of consolidating its warehouse and office real estate footprint in North America, delivering a refreshed inventory strategy which will enable it to reduce overall inventories, maximize full-price sales and reduce overhead costs. It is reducing its New York office footprint to four primary locations from over a dozen locations two years ago. This is expected to not only reduce costs, but also encourage greater collaboration between its divisions.

Verdict

Appealing to new demographics is widening the company’s customer base. Collaborations and new products are set to increase its appeal among a younger audience, which could catalyze its financial performance.

In addition, investments in product innovation are helping to differentiate Ralph Lauren from industry peers and may enhance customer loyalty. The company is also investing in new store openings and its omnichannel prospects as it seeks to improve the customer experience.

Although a slowdown in China is a cause for concern, Ralph Lauren's improving operational efficiency could help to offset pressure on its top-line growth.

Having outperformed the S&P 500 in the last year, the stock appears to offer investment potential over the long run.

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