Ralph Lauren (NYSE:RL) will announce its Q3 2013 results on February 6, 2013. In Q2 2013, Ralph Lauren’s revenue witnessed a 2% decline y-o-y. Its strategy of closing down a large part of its distributor network in China (to replace it with its own retail stores) and the discontinuation of its American Living brand were among the main factors responsible for this decline. We feel that these factors will continue to weigh on Ralph Lauren’s Q4 financial results.
Weak consumer demand during the holiday season on account of fiscal cliff concerns, Hurricane Sandy, economic uncertainty in Europe and adverse currency impacts are some of the other factors that we feel will impact Ralph Lauren’s Q3 2013 earnings. While these factors affect Ralph Lauren in the short term, we believe that Ralph Lauren holds potential over the long run as the company gains through its strategy of increasing its direct-to-consumer business and expanding into Asia.
Enhancing Direct-To-Consumer Business
To gain greater control over its operations and brands, Ralph Lauren is focusing on expanding its direct-to-consumer business by opening more company-owned stores and focusing on its e-commerce channel. It has added 36 new factory stores during the last three fiscal years.
As part of its Asia-Pacific restructuring plan, Ralph Lauren closed down a large part of its distributor network in China, and is replacing it with its own network of retail stores. This strategy will also allow Ralph Lauren to enhance its brand image in the country. Additionally, Ralph Lauren has discontinued its American Living brand, which was exclusively sold via JCPenney (NYSE:JCP) (a third-part distributor). This has also contributed to the decline in its revenues from the wholesale segment.
Owing to these factors, the share of its retail segment in overall revenues has increased from 37.3% in Q2 2010 to 47.3% in Q2 2013. We believe that this strategy will help Ralph Lauren expand its geographical presence and product portfolio.
Expansion In Asia To Fuel Growth
Ralph Lauren is expanding its operations in Asian countries, especially China, to leverage the growing luxury market in the region. With its rapidly growing economy, China has become the key growth region for the global retail industry with global brands such as Ralph Lauren, Coach (NYSE:COH) and Gap (NYSE:GPS) looking to expand their presence in the country.
Ralph Lauren opened seven stores in Asia during Q2 2013, and intends to open 14 more stores in the region during 2013. The percentage contribution from Asia in Ralph Lauren’s total revenues has increased from 9.4% in fiscal 2010 to around 14% in fiscal 2012. With rapidly rising revenues from Asia, we believe that this region will become a key growth driver for Ralph Lauren in the future.
Entry Into New Product Categories
Ralph Lauren is also foraying into other product categories such as handbags, footwear and small leather goods to build a strong accessories business. Some of these product categories have received good initial traction, and if Ralph Lauren’s success continues in these categories, it will further drive its revenues.
We will update our price estimate of $161 for Ralph Lauren after the Q3 2013 earnings release.
Disclosure: No positions.