Narrow-Moat Ralph Lauren’s Focus on Its Key Brands Is Improving Its Profitability

In our view, narrow-moat Ralph Lauren's restructuring over the past few years puts it on solid footing as it navigates the extraordinary challenge of the COVID-19 pandemic. In response to poor inventory control and heavy discounting in years past, Ralph Lauren has closed more than 75 stores, reduced exposure to U.S. department store and off-price channels, and cut product lead times. These and other changes have resulted in steady improvements in gross margins. Although sales have declined in North America, we believe the restructuring has positioned Ralph Lauren for renewed growth and margin improvement in fiscal 2022 and beyond. We expect the firm to stabilize its North America sales and operating margins with new merchandise and better pricing on core products. Further, we forecast advertising support as a percentage of sales to increase to 5.0% by fiscal 2023 (five-year historical average of 4.4%). We anticipate direct-to-consumer sales rise to 70% of sales in fiscal 2030 from 63% in fiscal 2021, thereby reducing the brand’s dependence on U.S. physical retail and providing better control over pricing and positioning. We view an increasing direct-to-consumer business as essential as customer visitation is declining in many retail stores and malls.