RL: Quantifying Japan Risk

Our best shot in quantifying Japan gets us to about a $0.43 risk to Fiscal 2012(Mar) EPS. That STILL leaves us a buck above consensus.

 

We definitely cannot say that the devastation in Japan will not impact Ralph Lauren. There will be logistical disruptions in Japan, which probably don’t matter as much as a dried up tourist market, and what can only be a massive distaste for luxury shopping as Japanese consumers cope with the magnitude of how their Country has changed. We hate to bring this into a stock discussion, but hey… we need to manage risk. It’s what we do.

First of all, let’s focus on some numbers.

 

Ralph’s overall exposure to Asia is about $850million, with most of that focused on Japan and South Korea. That number sounds colossal when looking up RL’s $5.7bn GAAP revenue base. But remember that RL has wholesale, retail, and licensing revenue streams.

  • Retail is the most pure at about $2.7bn
  • Licensing’s $175mm in GAAP revenue needs to be grossed up by an average royalty rate of 7%, which gets us to global brand value of another $2,500
  • Wholesale sales of $2.8bn needs to be grossed up to a retail equivalent of about $5.5bn

All in, we’re looking at just over $10billion in global Ralph-related sales at retail.

 

If we conservatively assume that 80% of the existing $850mm business is Japan, Then we’re looking at 6.5% of total global brand sales.

 

Profitability is below company average.

 

Management on 3Q call: “As you can imagine, it takes a fair amount of time for us to execute our plans. Japan, South Korea and what I'll call China territories are each at different stages of development for us and it takes time to understand the varying tastes and preferences of our customers throughout this region. We are simultaneously looking for ways to maximize operational efficiencies throughout the region. This is easiest to do with our corporate shared services and creative teams, but we are also exploring synergies with inventory management and merchandising initiatives; again, recognizing there are often substantial differences between countries. We’ve made good progress in Japan in a relatively short period of time and despite extremely unfavorable market conditions, but we're still far away from where we want to be.”

 

All in, when we stress test the model and assume that JAPANESE REVENUE GOES AWAY,  we get to $0.33-$0.43 per share.

 

There are other factors to consider, including the shared services factor as it relates to implementation and integration of the Chinese and South Korean businesses. Could we see extra costs? Yes. Pushed back by 1-2 quarters? Yep.

 

But that would take our Fiscal 2012(Mar) estimate down to about $7.40-$7.50. Yes, that's STILL a buck above consensus.

 

 

Brian McGough

Managing Director

 

 

 

 

 


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