Called “The Lifestyle King” by many, this icon of American Style, born Ralph Lifshitz in the Bronx in 1939, has almost single-handedly transformed the US apparel market. His company, started in 1967, will pass $5.5 billion in sales this year and, at a time when many are struggling to salvage their brands, is picking and choosing which markets to enter, licenses to buy back, and product lines to launch. Will international growth be the vehicle to another phase of sustained meteoric growth?
Not Just A Pony In addition to Polo, the company’s brands include Ralph Lauren (and its many name variants), Purple Label, Club Monaco, Rugby, Chaps and American Living, an exclusive line at JC Penney. Originally a menswear company, Polo Ralph Lauren now has its various brands on women’s and children’s apparel, activewear, footwear, accessories, bedding, tablewear, furniture, paint (Lauren’s father was reportedly a house painter), eyewear, jewelry, fragrances, cosmetics, and underwear.
Brand Equity One of the company’s most amazing qualities is its ability to retain the exclusivity of the top shelf brands while introducing diffusion labels in the mainstream segments of the market through stores like Kohl’s and JC Penney. Like the mythological King Midas, Ralph Lauren’s attention to classic design, quality and the retail environment has helped him turn many businesses to gold.
The Business The three key revenue sources are wholesale, retail and licensing. The wholesale business, done largely through department stores such as Macy’s, Nordstrom, and others, comprised 51% of revenue in 2010, down from 57% in 2008. The company sells its products through a total of almost 9,000 doors worldwide, with 4,400 in the US and Canada, 4,400 in Europe, and 117 in Japan. Retail, or the business done through the company’s own stores, which include flagship stores in New York and other major cities, comprised 45%, up from 39% in 2008. The company has 376 directly operated stores, of which 110 are Ralph Lauren, and 520 concession shops, mostly abroad. The licensing business, driven by businesses such as fragrance and beauty and some foreign retail operations, totalled 4% of sales in 2010, down from its peak of 10% in 2004. Global licensing partners operate 786 Ralph Lauren stores 56 Club Monaco stores, and other dedicated shops internationally. The company has actively sought to reduce licensing activity to do more in-house, thus maintaining better control over its brands and consumer experience. The company also operates two online commerce sites, RalphLauren.com and Rugby.com, and boasts 2 million online customers. Sales through RalphLauren.com have grown 24% during the first 9 months of the current fiscal year.
Sales grew consistently for most of the last decade, but hit a bit of a wall in 2009 as consumer spending slowed. Through the first three quarters of this fiscal year, sales have grown 13%, with strength in all key segments and regions, leading most analysts to conclude that 2011 will be a blockbuster year.
Global Expansion With the US apparel market virtually flat, the company has correctly designated global expansion as a key strategy for growth. Although the concept of lifestyle brands has lost a bit of its former cachet here in the US, aspiring to the American lifestyle is still big business abroad. Between 2006 and 2010, North American sales have declined from 81% of total sales to 69%, while Asia has grown from 2% to 9%. Comp store sales dropped 4% in 2009 but rose by 1% in 2010, helped by international expansion, and are ahead 24% year-to-date. Ralph Lauren’s biggest Asian market is still Japan, but the company has distribution in Hong Kong, Malaysia, the Philippines, Taiwan and other countries as well, and has indicated that the time is right to look at China.
Financials A lot of indices are moving in the right direction. Gross margin grew 380 basis points in 2010, though the growth has slowed as raw materials costs have risen. SG&A expenses are under control. Earnings growth has been stellar so far this year, and all indications are that the company is back on track for remarkable sales and earnings growth. The big question will be whether Ralph has the clout to raise prices to pass along some of the skyrocketing raw materials and labor cost increases that are expected to impact cost of goods sold in the next year. Our guess is that if anyone has the leverage to do that, it’s Ralph Lauren.
The stock hit a 52-week high of over $128 last month, up from $30 in the past two years, giving it a market cap of $11.8 billion and a PE ratio of around 20.
Control Although the licensing business was a fast way for the brand to gain market share, Ralph knew that he needed to gain control over quality and design and forward integrate into retail – another control strategy – if he was to really maintain the standards necessary to preserve brand equity. The company has done this by buying back licenses and/or acquire licensees, and selling more of its product directly to the consumer. In the process, the development of state-of-the-art systems for product development, distribution, quality control and logistics has been key.
Selling Ralph Lauren announced last year he would divest up to a quarter of his stock, valued at up to $1 billion. Since he is now 71, and no doubt beginning to think about life beyond the business, this is probably nothing more than an estate planning, tax and portfolio diversification move.
Other Growth Possibilities A healthy wholesale business, which is declining as a percent of sales, is very important to the profitability of the company. In 2010 the wholesale business represented 62% of operating income, but only 51% of sales, while retail was 45% of sales but only 27% of sales. Might the company eye other brands where it could apply Ralph’s Midas touch, not to mention the company’s marketing, distribution and product development expertise? Right now, most of the company’s brands, with the exception of Club Monaco, are spinoffs of the original property, but that doesn’t mean it will stay that way. The time could certainly be right for the company to use some of its $640 million in cash for one or two good acquisitions in new brands with growth potential.