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Understanding the Revenue Decline in Ralph Lauren’s Wholesale Channel

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Apr. 26 2016, Published 1:08 p.m. ET

Business segments

Ralph Lauren (RL) categorizes its business into three operating segments: Wholesale, Retail, and Licensing. Among North American apparel manufacturers, Wholesale has been the dominant channel. Under this channel, merchandise operates through the department stores, mass merchants, and specialty stores. Wholesale accounts for about half of the channel exposure for players like Michael Kors (KORS), PVH Corporation (PVH), VF Corporation (VFC), and Ralph Lauren (RL)

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Wholesale

RL distributes its products under its Wholesale channel through specialty stores and department stores such as Macy’s (M), Kohl’s (KSS) and The Home Depot (HD). The company sells through more than 13,000 points in North America, Latin America, Europe, and Asia. Macy’s (M) is RL’s largest wholesale customer, accounting for about 12% of the company’s total revenue and 26% of its wholesale revenue.

Financial performance

RL’s wholesale channel has grown by ~5% CAGR over the past five years to reach $3.5 billion in sales in fiscal 2015. This segment represented approximately 46% of the company’s fiscal 2015 net revenues. However, its contribution came down from 55% of sales in fiscal 2010. This fall in wholesale’s share reflects the general trend among apparel and fashion companies who are increasingly shifting toward the retail medium, which typically has higher gross margins.

RL’s Wholesale segment’s operating margin increased from 22% in fiscal 2010 to 27% in fiscal 2015, however, primarily on account of lower sourcing costs and favorable product mix across most of RL’s global wholesale businesses. The Wholesale segment’s operating income stood at $943 million in fiscal 2015, accounting for 58% of the company’s total operating income.

Notably, the First Trust Consumer Discretionary AlphaDEX Fund (FXD) invests 0.98% of its holdings in Ralph Lauren.

Now let’s take a closer look at RL’s retail channel.

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