Introduction:

RL is a well-loved brand that embodies middle-class luxury, it may not have the prestige of Gucci or Louis Vuitton but it is still well respected in its own rights and has recently been making shifts towards trying to be perceived as a more luxurious brand, attracting attention of both the middle-class and the upper echelons as well. RL's main way of growing the topline is marketing, through different marketing initiatives that try to appeal to and remain relevant to a broader range of audiences. With initiatives like the vegan fragrance “Polo Earth”, their appearance in the Winter Olympics, and breaking into TikTok.

Revenue:

When forecasting Revenue, I took into account “our value perception, our quality score, and our purchase intent have strengthened through the pandemic, even with the backdrop of us taking pricing up 50% over the last two years.” – 2022 Q4 Earnings Conference. And,

despite COVID-19, the War in Ukraine, and inflation RL seems resilient. Their customers are willing to spend despite worsening backdrop and price increases.

When forecasting RL owned stores, I don’t believe this number will grow drastically as RL is trying to position itself as a luxury brand, so there needs to be a degree of “scarcity”. So, I assumed a meager growth rate till perpetuity. Overall, store growth had a CAGR of 1.5% in my base case.

When forecasting Revenue/RL owned stores, I assumed that Revenue/RL owned stores would increase at a meager pace at the start in order for the brand to be able to integrate more easily into consumers before accelerating price increase.

When forecasting wholesale distribution doors, to avoid being overly granular I assumed that the door would increase at a meager pace in line with the historic average.

When forecasting Revenue/Door, according to the 2023 Q4 Earnings conference (March 2023), wholesale is expected to suffer whereas full price store is expected to perform even better. This is a testament to how RL is perceived as a luxury brand as it is deemed way too expensive to price-conscious consumers who believe the brand is not worth the price. So, since wholesaler mainly targets price-conscious consumers, I assumed that revenue/door only grew in line with inflation.

COST:

According to management, the main drivers of cost increase are freight and cotton.

Cotton going forward will be the largest hurdle to clear in order to reduce margins. “AUR growth of 12% and lower air freight were offset by peak levels of raw material costs, notably cotton”

When forecasting COGS, 2022 numbers are skewed by elevated freight cost and cotton cost which continued increasing into 2023. However, according to the 2023 Q4 earnings conference management expects their hedging efforts against cotton price increase to show up in 2024. So I assumed that beyond 2024, management will keep their cost under control and COGS as a %sales will drop.

When forecasting SG&A, according to management marketing spending is likely to remain constant as a % of sales. However, in the past 2 years labor is a cost that is likely elevated given the tight labor market so I assume that in 2 years' time, the labor market will loosen. On top of that, given management’s willingness to pivot their stores online, I argue that there is a lesser need for more employees per physical store which helps to reduce cost.

WACC:

Cost of Equity

The US has a bond rating of AA+

10Y T-Bond yield (1M Avg) = 4.67%

AA+ Risk Spread (1M Avg) = 0.63

RFR = 4.04%

Beta (SOURCE) = 1.43

4050 = (4050 * 4.25%) * (1+16%) / (1+R) + [((4050 * 4.25%) * (1+16%)) * (1+3.82%) / (R – 3.82%)] / (1 + R) ^ 2

R = 10.3%, ERP = 6.26%

Cost of Equity = 12.99%

Cost of Debt

RL has a bond rating of A-

A- Bond yield (1M Avg) = 5.89%

Marginal Tax Rate = 21.00%

Cost of Debt = 4.65%

Weightage

Share price(5D Avg) = $122.62

Shares O/S = 65.40M

MV Equity = 8019.35M

When accounting for debt, I took into account Senior Note, Ops & Finance lease, and Mandatory Inventory Commitment.

Weighted Average Debt Maturity = 3 Years

FY23 Interest Expense = 40.40M

MV Debt = 3579.94M

%Debt = 30.86%

%Equity = 69.14%

WACC = 10.42%

CONCLUSION:

Ultimately, in the base case, I value RL at $146.38 per share. I believe that RL is reasonably priced given its consistently strong performance over the years. Taking into account the fact that its sales prices have been consistently increasing and the worsening microenvironment, it still managed to increase its topline regardless. I believe management has taken the right direction in trying to improve the premium image of RL.

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