Ralph Lauren has undergone an impressive turnaround. Its next growth plan looks a tad ambitious.
By guest author Jinjoo Lee from the Wall Street Journal, Sept. 20, 2022.
Ralph Lauren RL started out as a tie business 55 years ago before it eventually became known for its iconic polo shirt. The brand now wants to keep the spirit of that expansion going, setting its sights on women’s apparel and less penetrated cities such as Atlanta and Houston.
At an investor day on Monday, Ralph Lauren set out a target to grow revenue at a compound annual growth rate in the mid- to high-single-digit percentage range over the next three years, a clear upgrade from its 0.15% CAGR over the past four years. It also expects adjusted operating margins to reach 15% in fiscal year 2025, taking that number closer to American luxury brand peers Capri Holdings, which owns Michael Kors and Jimmy Choo, and Coach-owner Tapestry. That margin target doesn’t seem like such a stretch given that it already expects adjusted operating margins to reach 14% to 14.5% in the current fiscal year, an impressive upgrade from a 5.6% margin four years ago.
Investors seem to trust the company’s plan: Ralph Lauren’s shares rose 3% following the investor day presentation. Since Patrice Louvet joined as chief executive officer in 2017, the company has arrested its decline in market share and margins. In the past four years, the company has solidly positioned itself as a luxury brand, increasing average unit retail—or average selling price—by 64% over that period.
But much of the low-hanging fruit has already been picked. Ralph Lauren has been able to inch closer to luxury margins by pulling its clothes out of lower-end department stores and off-price stores such as T.J. Maxx. Over the past four years, the company reduced exposure to department stores by two-thirds and to off-price stores by more than 50%. Much of that selling-channel reset is now behind it, though the company could still consider pullbacks here and there as neighborhoods change and shopping malls shift, Jane Nielsen, chief financial officer of Ralph Lauren, said in an interview.
Now that the most obvious margin driver is behind Ralph Lauren, its future growth will depend on expanding its customer base. It plans to do so by growing sales of women’s products, which comprise less than 30% of the company’s revenue. That is somewhat surprising, given that 56% of Ralph Lauren’s customers are women. Not only is that a revenue expansion opportunity, but women’s apparel is also a higher-margin business, the company said on Monday.
While Ralph Lauren has a record of success in introducing new products such as denim and outerwear, succeeding in a category as large as women’s apparel could prove tougher, especially in a luxury market that comes with entrenched expectations. Another area of growth—expansion into less-exposed markets, like Houston, Atlanta and Seattle—will come with some competition from luxury brands such as Prada, Gucci and Givenchy, which are among those opening up shops in some of the same American cities. Ralph Lauren plans to do all that while also keeping a lid on costs: The company expects to reduce the cost of goods sold and operating expenses by at least $400 million by fiscal 2025, a rather steep target compared with the roughly $236 million it was able to cut over the past three years.
Optimism is still a good look on Ralph Lauren investors, though perhaps best worn with a shade of caution.