NYSE:RL RALPH LAUREN CORPORATION
Sector financial performance:
This company, who primarily designs, markets, and distributes women’s apparel and accessories by whole sales and its own retail stores, has been grouped into women’s apparel sector in clothing industry.
The retail sales for women’s apparel seem to have been declining in the past several years all across the sector as indicated by continuing decrease in wholesale of apparel companies, which started from declining orders and then was hurt by reduced price of orders when companies had to lower price to maintain sale volume. Some of companies experienced more than 10% decrease in wholesale annually since 2015, which may be a reflection of decrease in comparable sales across the whole sector. In fact, those apparel companies’ own retail also experienced an average 3-4% annual decrease in their comparable sales in 2016/17.
However, there are no apparent evidences to prove that the decline in sales of women’s apparels has derived from decrease in demand for those products since we did not see any fundamental changes in factors such as macroeconomy or consumers’ lifestyle. We think the decrease in sales is from the decrease in traffic, which has been a result of less in-store shopping activities as many shopping activities are being replaced by online shopping. Therefore, the direct result is that for those products that consumers can buy online the sales move from in-store to e-commerce and for a small portion of those products that consumers do not like to buy online the sales may just go away. However, since consumers still need those products, while they are not buying as many as before due to reduced visits of stores, they still need them to maintain the basic demand.
In fact, there have been signals indicating that comparable sales are re-bouncing back in 2018 thanks to stronger demand, growth in e-commerce, and largely closure of low performance stores in the past several years. While the wholesale continued to decline since entering 2018 due to reduced orders probably as a result of store closures, it will eventually slow down as growth in e-commerce sales offset decline in in-store sales.
While unfavourable climate in retail industry certainly makes huge pressure on the profits of companies, which are usually very sensitive to changes in stores’ traffics and thus wholesales, women’s apparel companies, which have bigger margins because they usually sell more high end clothing with higher price, seem to still be able to keep high profitability. As we can see from a typical data, while companies in this sector have much higher SG&A as percentage of sales (around 50%, including occupancy costs) they can still manage to make a gross margin of 53% and keep their operating margin above 3%.
According our analysis, companies have an enterprise price/EBI of around 26 and enterprise price/sale of 1.5 with interest/EBI ratio of 4%
Data indicated that global wholesale and retail have been decreasing in the past three years, which double digits’ decreases in wholesales in 2016 and 2017 primarily, resulted from company’s strategy of improving margin. Our comparable stores sales data also indicates that average comparable sales in both this company’s stores and e-commerce have decreased during the same period. The significant decline in wholesale and ecommerce sales slowed down since late 2017 while store comparable sales continued to decline as about 3% annual rate.
First three months of fiscal 2019 compared with the same period of 2018 (ended 2018-06-30)
The organic net sales (excluding currency) of this company decreased about 1%, primarily attributable to decrease in wholesale and as well in retail in North America offset by increase in Europe (including currency). Average comparable stores sales decreased about 3% including both e-commerce (1%) and stores (3%).
Fiscal 2018 compared with 2017 (ended 2018-03-31)
The organic net sales (excluding currency) of this company decreased about 8.4%, primarily attributable to decrease in wholesale and as well in retail in North America offset by increase in Europe. Average comparable stores sales decreased about 7% including both e-commerce (22%) and stores (3%).
The organic net sales (excluding currency) of this company decreased about 12% in the first 3 months of fiscal 2018 compared with the same period of 2017, primarily attributable to decrease in wholesale and as well in retail in North America and Europe. Average comparable stores sales decreased about 6% including both e-commerce (16%) and stores (4%).
The organic net sales (excluding currency) of this company decreased about 10% in fiscal 2017 compared with 2016, primarily attributable to decrease in wholesale and as well in retail in North America. Average comparable stores sales decreased about 7% including both e-commerce (10%) and stores (7%).
The organic net sales (excluding currency) of this company decreased about 0.8% in fiscal 2016 compared with 2015, primarily attributable to decrease in wholesale and as well in retail in North America. Average comparable stores sales decreased about 3% including comparable stores sales (4%) offset by increase in e-commerce (3%).
This company’ gross margins is currently 61% (stores rental costs excluded), a significant improvement as a result of effort of company to reduce expenses. Due to deleverage of continuingly decreased sales, its SG&A as percentage of sales has increased from about 43% to 50% in 2018. Therefore, this company’s operating margin as percentage of sales has gone down to about 11% from 14%.
This stock currently has a stock price/cash flow ratio of 26. We think that its stock is being relatively fairly valued considering that the upward trend in its wholesale and comparable sales (ecommerce) may continue.