FINANCIAL ANALYSIS
REPORT 2017-2018
BY CALISTA HUYNH
Fifty years ago, I started out with an idea and a
dream. For me, it was never about fashion; it was
about enduring style and building a life with the
people you love.
TABLE OF CONTENTS
BACKGROUND OF COMPANY........................................................................................................1
HORIZONTAL & VERTICAL TREND ANALYSIS...............................................................................2
RATIO ANALYSIS...................................................................................................................................9
LIQUIDITY RATIOS...................................................................................................................9
ASSET MANAGEMENT RATIOS..........................................................................................11
DEBT RATIOS...........................................................................................................................15
PROFITABILITY RATIOS..........................................................................................................18
DECODING DUPONT........................................................................................................................23
EXECUTIVE SUMMARY.......................................................................................................................25
BIBLIOGRAPHY.....................................................................................................................................27
APPENDIX..............................................................................................................................................28
BACKGROUND OF COMPANY
Founded in 1967, Ralph Lauren Corporation is a publicly traded holding American fashion
company based in New York. The Company is an industry pioneer specializing in a diverse
collection of mid-range to luxury products. They carry five categories including apparel, home,
accessories, fragrance, and hospitality. Globally recognized as the quintessential all-American
brand, their notable reputation stems from Polo Ralph Lauren and its infamous Polo collared shirts.
Tommy Hilfiger emerged as one of its main competitors with their similar Americana aesthetics and
target market. PVH Corporation, who owns Tommy Hilfiger, also houses Calvin Klein, Van Heusen,
Arrow, and other companies that compete in this genre. In this report, we will analyze Ralph
Lauren’s financial status from fiscal years 2017-2018. By comparing Ralph Lauren to its main
competitor, PVH, we can provide appropriate recommendations to further strengthen the
Company’s position to compete in a fast-paced, growing market.
1
TREND ANALYSIS:
RL HORIZONTAL & VERTICAL
HORIZONTAL ANALYSIS FORMULA:
CHANGE IN ABSOLUTE AMOUNT = CURRENT YEAR VALUE – BASE YEAR VALUE
PERCENTAGE CHANGE = CURRENT YEAR’S TOTAL = PREVIOUS YEAR’S TOTAL / PREVIOUS
YEAR’S TOTAL * 100
Ralph Lauren utilized its cash and cash equivalents to make short-term investments of
$704m, therefore explains the cash decrease by $720.5m, roughly a similar estimate. The
company expects these investments to convert into cash within one year. The cash was used to
support Class A common stock repurchases, dividends and towards short-term investments
including tax obligations, capital expenditures, and unfavorable exchange rate changes.
Inventory stock spiked up, portioning 26% of the change in total assets, which may be due to
unsellable stock from the past year despite revenue increase.
From this inference, the Company’s property and equipment saw a decrease as part of
their “Way Forward Plan” set in 2016 to sacrifice growth to restore brand exclusivity and
relevance. This meant reevaluating its depreciable assets of what stores they need to focus on
such as closing shop-within-shops, where to renew property leases based on underperforming
store locations, and retreat from discounting (outlet stores) to sell at higher price points. For
instance, the Company recorded $14.1m depreciation expenses associated with the former
Polo store at 711 Fifth Avenue in New York City closing after the first quarter of Fiscal 2018 as
part of their new plan. The Way Forward Plan aims to strengthen a return on investment-driven
financial model and drive high quality sales.
Furthermore, Ralph Lauren reported $401.1m of long-term debt by end of March 2019
in order to purchase their own common stock from shareholders costing 500m, including
unsecured senior notes. This would allow the Company to regain more control and ownership
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over their ambition to update their brand image and restructuring from their traditional business
model. Upon research, this is not a surprising strategy since they implemented a common stock
repurchase program in June 2016. The Board of Directors also approved quarterly cash
dividends on its common stock to increase per dividend. The increase awarded the existing
shareholders since it repurchased its own common stock. The debt was also used to repay the
Company’s previously outstanding $300m balance of unsecured senior notes from September
2018. Collectively, short term and long-term debt equal to $586.1m, but 298.1m of the current
portion of long-term debt was paid off by fiscal year 2018. Paying this accrued long-term debt up
to $698.1m. Overall, the asset base is -200.50m and primarily financed by $100m from loans to
pay off the long-term debt as well as common stock, retained earnings, and repurchasing
treasury stock. Retained earnings, the net income for the year, saw a healthy 3.9% raise at 226.9m.
VERTICAL ANALYSIS FORMULA:
(INCOME STATEMENT): INCOME STATEMENT ITEM / TOTAL SALES X 100
(BALANCE SHEET): BALANCE SHEET ITEM / TOTAL ASSETS X 100
On the Ralph Lauren balance sheet, the dip in cash and cash equivalents from 21.2% to
9.8% of total assets is understandable considering they made short-term investments that
included buying common stock back from shareholders. Hence, why there is a negative in
treasury stock from -74.6% to -85.5%.
If we look at the Ralph Lauren income statement, the net sales went up by 130.7m despite
going through external and internal company changes. For every $100 of sales revenue, the
Company generates $62 of gross profit in 2018. This is only a dollar more from 2017, an
incremental change. It is important to note the Company’s sales is based from its largest
wholesale customer, Macy’s, accounting for 8% of total net revenues in both years. While Ralph
Lauren seeks renovation in their retailer locations, wholesalers provide a large revenue stream for
the Company. Selling expenses, such as marketing and advertising materials, are noticeably a
high cost in the past two years. For every $100 in net sales, $50 is from marketing.
3
It shows the Company is focusing on a digital push, additionally creating a new chief digital
officer role. Maintaining its digital media presence is a priority to compete with emerging
companies in the industry.
After all expenses are included, the Company’s net income decreased 4% in just one year
from 7% to 3% which shows a poor financial standing. This stems from “extraordinary items”,
representing events and transactions distinguished by unusual nature or infrequency of their
occurrence. In Ralph Lauren’s annual report, it states that on December 22, 2017, President Trump
signed into law new tax legislation, also known as the Tax Cuts and Jobs Act (TJCA) effective
beginning January 1, 2018. The TCJA revised U.S. tax law created “a territorial tax system that
includes a one-time mandatory transition tax on previously deferred foreign earnings, and
eliminating or reducing certain income tax deductions.” In 2018, $221.4m was recorded within its
income tax provision and paid this net charge. The subsequent year, the TJCA enactment-related
charges totaled to $27.6m.
4
5
TREND ANALYSIS:
PVH HORIZONTAL & VERTICAL
HORIZONTAL ANALYSIS
PVH’s asset base decreased $22m. The Company’s cash and cash equivalents decreased
by $41.9m impacted by in summary: common stock repurchases, long-term debt repayments,
and acquisition of the Geoffrey Beene tradename, and benefit pension plans. The inventory stock
rose with an 8.9% increase and goodwill decreased by 4.3%. This may be due to the recent
closure of 205w39nyc, Calvin Klein’s ready to wear line and the exit of their creative director, Raf
Simons in December 2018. Its unsuccessful attempt to branch outside of denim and underwear
and approach the luxury market did not intrigue their consumer base. Inventory unsold from
previous collections are still piling up due to this reason. The asset base is financed mainly from
$313m in long-term debt and other liabilities as well as increase of $76m of common stock and
$724.9m of retained earnings. In addition, PVH gradually continues a three-year stock repurchase
program implemented in 2015 like Ralph Lauren; aspiring to purchase common stock from their
shareholders to own more control of the company. This has allowed their common stock
dividends increase per share. Treasury stocks were repurchased for $323.70m, thus subtracting
from the asset base.
The Company’s accounts payable increased by 3.9%, but it exceeds the amount of cash
they currently have. It could be that the trade (account) receivables can make up for the difference
of cash they do not have to pay to suppliers. Other accumulated comprehensive losses, such as
the $186.4m listed under liabilities, is because of Calvin Klein’s ready to wear closure. Not only
does this account for unsold cost of goods, but includes store closures and retracting the line
from wholesalers.
6
VERTICAL ANALYSIS
The PVH income statement shows that for the past two years, the company has a total
revenue exceeding 105% as of 2018. As of the fiscal years 2017 and 2018, for every $100 of sales
revenue, the Company generates $58 of gross profit and $48 contribute to cost of goods sold.
These two categories have remained consistent, signifying that they may be in solid, profitable
financial standing. As for net income, 8% is generated after subtracting the additional expenses
(for every $100, the Company receives $8 of net income). This is a higher net income margin
compared to Ralph Lauren at 3%. E-commerce, in-store retailers, wholesalers, and local outlet
malls are main revenue streams for PVH. Overall, the Company is more profitable than Ralph
Lauren.
Royalty revenue stands at 4% unchanged. The annual report mentions that the third
quarter has the highest level of royalty revenue due to higher sales by licensees before the
holiday selling season. They hope this seasonal pattern will continue and possibly increase.
Although the Company’s trade receivables impressively stand at 18% of the change in
total assets, its net sales are only at 8.5% on the consolidated income statement. That means PVH
is not successfully selling all of their inventory, 8.9% of the total. If their trade receivables are at a
high percentage, their net sales should be too. We will dive into this further in the Days Sales
Outstanding inventory analysis.
7
8
RATIO ANALYSIS:
LIQUIDITY RATIOS
CURRENT RATIO
The current ratio measures how well a firm can meet its short-term obligations come due.
Ralph Lauren’s current ratio saw a jump increase from 2.24 to 3.00. Both years prove a ratio
greater than 1, suggesting that the Company is in good standing especially since it rose by 0.76.
The increase may be from paying off the current portion of long-term debt and short-term debt.
By doing this, additional loans were taken out and long-term debt increased. Hypothetically,
Ralph Lauren is in a liquid enough to be able to meet short-term liabilities, but it is mainly
because of loans that cushion the Company to be in this financial position. A high ratio gives an
impression to outside stakeholders they are sitting on cash. We know they are effectively using
their cash towards short-term investments and continually paying their debt. Stakeholder
impressions are not a priority concern since Ralph Lauren is in the process of repurchasing their
common stock back.
PVH has a much lower but positive current ratio of 1.71 and 1.61 from the year prior.
Despite only a .10 increase, it is in appropriate financial standing to meet short-term obligations.
They are utilizing cash to pay off long-term debt as well and investment opportunities like
purchasing the Geoffrey Beene tradename and True & Co, an intimate apparel digital commerce
retailer. Both companies hold a current ratio above 1, an optimistic stance to be in. Ralph Lauren’s
is noticeably higher due to the fact that they had to take out loans in 2018 and added to a pile of
long-term debt.
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QUICK RATIO
The acid test ratio, also known as the quick ratio, measures a firm’s ability to pay off
short-term obligations without relying on the sale of inventories. Ralph Lauren’s quick ratio
escalated from 1.75 to 2.31, a significant increase like its current ratio. PVH saw a slight change of
.3 from 0.76 to 0.79, overall equaling less than 1. PVH holds a lot more inventory compared to
Ralph Lauren. This means a great portion of cash is tied up to their inventory. Though inventory is
the most liquid ratio, until it is sold, inventory generates zero revenue. The Company is not
reaching its full potential to hit higher sales and is slowly paying the cost as unsold inventory.
Unsold will be converted to markdown goods rather than be sold at its original retail price.
Current Ratio
Quick Ratio
Ralph Lauren Liquidity Ratios
2018
2017
3.00
2.24
2.31
1.75
PVH Liquidity Ratios
2018
2017
1.71
1.61
0.79
0.76
10
RATIO ANALYSIS:
ASSET MANAGEMENT RATIOS
1) INVENTORY TURNOVER
2) DAYS SALES OUTSTANDING
3) TOTAL ASSETS TURNOVER
Inventory ratio measures a firm’s efficiency in turning inventory into sales. When evaluating
Ralph Lauren’s inventory, its turnover inventory has slowed down over the past year. (3.18 to 2.96
times a year). They are currently pursuing to refine their inventory stock that means less markdown
items and selling more stock at full retail price to boost brand exclusivity.
PVH has an even slower turnover rate (2.53 times a year). Ralph Lauren’s Polo store closure
in New York City contributed to the slight decrease since inventory in this location was not being
sold. Similarly, PVH recorded low cost of goods sold and inventory markdowns from the Calvin
Klein North America & International segments. As part of Calvin Klein’s restructuring plan, the
Company closed its flagship store on Madison Avenue in New York, originally dedicated to selling
its now terminated ready to wear line.
11
Days Sales Outstanding measures the number of days between making a sale and
receiving the cash (account receivable). In 2017, Ralph Lauren has a fairly moderate number of
receivables with a DSO of 25 days. By 2018, it shortens by only two days but shows no dramatic
change. Reaching almost a month is adequate considering Ralph Lauren’s extensive assortment of
goods aside from apparel such as home goods, accessories, fragrances along with selling in-store
retail, franchises, and wholesale. A reducing DSO ratio is a consistent, optimistic path the Company
should stay on. The faster the turnover rate, the better.
PVH has a higher DSO growing from 28 to 31 days, exactly one month, in 2018;
corresponding to the trade receivables showing a growth change of 18.1%. The high inventory
and slow turnover rate can be caused by a multitude of reasons. Calvin Klein’s ready-to-wear
closure and its slowing sales furthermore with PVH’s varied brand selection like Ralph Lauren that
sell through their own stores and franchises. Thus, both brands have to wait for the franchises and
wholesalers to owe them for the products they sell to customers on top of royalty fees. PVH
specifies royalty revenues amounting to 376m, 9.6% increase difference from the year before. The
raise further supports why its DSO rate is going up.
Total assets turnover is another ratio that measures how efficiently a company is using its
total assets to generate sales. In 2017, for every $1 in assets Ralph Lauren invested, the Company
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generates back that $1, perfectly hitting the margin. In other words, for every 6 billion in total
assets, the Company has the ability to generate approximately the same amount back in sales.
2018 increases to for every $1 in assets, the Company generates $1.6 in sales. The ratio suggests
they are investing the right amount of total assets relative to its sales. 2018 is a clear indication of
this. In PVH’s fiscal year 2018, for every $1 in assets they invested, the Company generates $0.71.
Interpreted as for every $9 billion invested, $6.4 billion is generated. Though lower than
competitor rates, we see the rate go up to $0.77 showing improvement for the company’s
investments in assets. Overall, Ralph Lauren uses its assets more efficiently than PVH does.
Considering PVH’s closures within the Calvin Klein brand, it is understandable that the
turnover inventory and days sales outstanding of account receivable does not read well. They may
hopefully view this change as an opportunity to re-strategize a direction to put themselves back on
track since they have room to expand. It has already begun with the acquirement of Geoffrey
Beene and True & Co. In comparison, Ralph Lauren appears to be in a better state, but is still
facing closures to remodel the brand which is inevitably affecting their overall asset management.
With this in mind, they should continue to make up for the revenue loss and unsold inventory by
focusing on sales. Being more selective with franchise relationships and product
selection/availability can help refine the brand’s image, prevent overstock, and gain better control
of the DSO.
13
LONG-TERM ASSET TURNOVER RATIO
Ralph Lauren’s long-term asset turnover performance improved from 5.2 to 6.1 while PVH
soars at 9.3, proving it is more efficient in utilizing its long-term assets to produce sales revenues.
Ralph Lauren’s increase of short-term investments are a factor as to why the Company’s total asset
turnover has a higher efficiency level. This does not mean they have neglected long-term assets.
They are more focused on other investment strategies such as taking out long-term loans to
repurchase common stock from shareholders rather than other long-term assets like brick and
mortar stores. PVH has a similar repurchase investment strategy but has consistently paid off their
long-term loans for two years. Both companies have closed several retail stores, deciding that it is
not an attractive asset to bring profit. Moreover, digital commerce has become a main priority as a
long-term asset they have invested in. On March 30, 2017, PVH acquired True & Co, a
direct-to-consumer intimate apparel digital commerce retailer. The acquisition enabled the
Company further to integrate themselves in online channels and serve consumers across this
channel of distribution. The Company has enhanced digital commerce through their wholesale
partners as well. It demonstrates that Ralph Lauren and PVH prioritize in differing investment
strategies, and are interestingly out-performing one another in different areas.
Although both competitors have diverse brand images, aesthetics, and target customers,
they share relative business models. Their product selection and price points of mid-range to
luxury segments.
Inventory Turnover Ratio
Days Sales Outstanding
Asset Turnover Ratio
Long-Term Asset
Turnover Ratio
Ralph Lauren Asset Management Ratios
PVH Asset Management Ratios
2018
2.96
23
1.06
6.07
2018
2.51
31
0.77
9.2
2017
3.18
25
1.00
5.2
2017
2.53
28
0.71
9.3
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RATIO ANALYSIS:
DEBT RATIOS
1) DEBT TO TOTAL ASSETS
2) DEBT TO EQUITY
3) TIME INTEREST EARNED
Debt to total assets ratio measures how much of the company’s assets are financed by
borrowing. Ralph Lauren’s debt to total assets ratio increases from 10% to 12%. By 2018, 12% of
Ralph Lauren’s assets are financed by borrowing. Meanwhile, PVH’s assets of 26% in 2017 reduced
to 24%. PVH’s debt to asset ratio is twice as high as Ralph Lauren. 24% of its asset base is financed
by borrowing.
Debt to equity ratio, also known as financial leverage, indicates the proportion of debt and
equity used to finance the business entity’s assets. In 2017, Ralph Lauren encountered a leverage
ratio of 0.78 and grew to 0.80 by 2018. The Company used long-term debt to repurchase
dividends from shareholders, therefore shrinking shareholders’ equity and the asset base. PVH has
a 1.4 leverage ratio which is much higher than Ralph Lauren. PVH is leveraging more debt and is in
a risky position if planning to finance additional debt. Shareholders would view Ralph Lauren as a
more financially stable company. They should not be worried because they have repurchasing
plans installed for the next five years where more stocks will be purchased and stakeholders will be
rewarded higher dividends.
Both companies are able to take on additional debt but does not necessarily mean they
should. Ralph Lauren still has a bulk of outstanding long-term debt (689.1m) despite paying the
short-term and current portion of long-term debt. The use of debt lowers the tax bill (taxes are
deductible) and leaves more operating income available to its investors.
15
Except President Trump’s sudden tax bill passed in the beginning of 2018 forced Ralph Lauren to
pay an unwanted tax fee taken out of their cash position. Depending on the political climate, the
Company should be cautious as to whether debt would relieve tax bills or pile on to other
unexpected charges in the years ahead. If there are no tax items, Ralph Lauren has the flexibility to
take on more debt in the forthcoming years. PVH is able to take on more financial debt in the
future, but remain aware of its debt to total assets ratio.
Time Interest Earned Ratio (TIE) measures whether a business can make interest payments
on its outstanding debt on a pretax basis. Ralph Lauren has a high time table but is
understandable considering the size of the company and its abundance of operating brands. It
shrunk from 55 (55 times the annual interest expense), to 27 (27 times the annual interest
expense), but this ratio is considered too high. It may mean the Company is playing too safe and
not taking advantage of the leverage affect. After understanding their debt position, we can argue
that they are doing the right thing to play it safe during this reconstruction period. Ralph Lauren is
already in a risky financial state with a decreasing net income; that is why it is crucial to be able to at
least cover interest expenses with their accruing debt, specifically long-term debt. On the other
hand, PVH reports a standard ratio of 5 from 2017 and up to 7 in 2018. A lower number than Ralph
Lauren is not a bad thing since PVH’s TIE is greater than 1. It is also positive that it increased by
almost half, signifying they have enough assets to cover interest from debt.
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Debt to Total Assets
Ratio
Debt to Equity Ratio
(Leverage Ratio)
Time Interest Earned
Ralph Lauren Debt Ratios
2018
2017
12%
10%
PVH Debt Ratios
2018
2017
24%
26%
0.80
0.78
1.4
1.5
27
55
7
5
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RATIO ANALYSIS:
PROFITABILITY RATIOS
1) NET PROFIT MARGIN
2) GROSS PROFIT MARGIN
3) BASIC EARNING POWER
4) RETURN ON ASSET
5) RETURN ON EQUITY
Profitability ratios provide key insights on the company’s ability to generate income
through assets, revenue, equity, etc. We first evaluate the net profit margin to start off the analysis.
The net profit margin ratio measures the percentage of net profit generated over the stated
financial period (earned per dollar of sales). This is also known as looking at the net income. Ralph
Lauren’s profit margin dropped 4% in just a year. The net income from fiscal year 2017 was at 7%
then went down to barely 3% by 2018. This sudden spike, as mentioned before, is partially
affected by the extraordinary item payment of 241m (remaining 27.6m paid in 2018) from the
Trump Administration’s mandatory transition tax reform passed in 2017. Other factors include
58.7m increase primarily used for marketing & advertising purposes and new store expansions
(even with some closures throughout the year). Another is paying workers, an expense that
increased 14.1m, tying back to restructuring-related charges. It is clear that Ralph Lauren
prioritizes its marketing materials to push sales not only in its retail and wholesale stores, but a
new opportunity in digital marketing efforts. The restructure of its business model is a heavy
investment that has yet to show results once followed through. As shown below, impairment of
assets were a charge of 25.8m and restructuring charges totaled 137.3m just from fiscal 2018.
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PVH is doing well seeing growth from 6% to 8% in net income. This is an impressive net
profit margin considering its recent collection and store closures. The Company’s marketing
expenses are roughly more than 25% than Ralph Lauren in 2018, a similar percentage to the year
before as well. Unlike Ralph Lauren, the Company did not have to pay Trump’s TCJA reform.
Nevertheless, Calvin Klein’s restructure does show as great of an impact compared to Ralph
Lauren’s undergoing business renovation. Thus, PVH’s consistent net profit margin is considered
normal.
Next, the gross profit margin ratio measures the gross profit per dollar of sales. The gross
profit margin for Ralph Lauren had no significant changes of 62%. The gross profit is driven by
improved pricing straying away from markdowns and selling at full price as part of their “Way
Forward Plan”. It is also from favorable product and geographic mix, strategic allocation, according
to the Company’s annual report. PVH remains no changes at all with a gross profit margin of 58%.
Gross profit and net sales both increase at relatively same rates which explains the unchanged.
Standing at only a 4% difference in gross profit margin, it proves that they are edging competitors
but both have alternative revenue streams and different financial strategies.
To continue, Basic Earning Power (BEP) measures the raw earning power of the company’s
assets, before the taxes and leverage. Calculating the BEP reflects Ralph Lauren’s raw earnings and
proves the significance the TCJA reform played in its income the last two fiscal years. Without the
tax’s impact, the Company reports an 10% BEP, increasing 2%. PVH had a low BEP in 2017 of 5%
but caught up in the past year to 8%. Based on the PVH annual report of EBIT by segment in the
chart below, Tommy Hilfiger makes up almost half of the 891.7m total earnings before interest and
taxes in 2018 and 632.4m in 2017. In 2017, Tommy Hilfiger North America generated 97m and
boosted to 233.8m in 2018. Tommy Hilfiger International in 2017 generated 225.5m alone and
grew to 377.1m by 2018. PVH’s main stream of raw earnings, in this case which brand, is primarily
financed by Tommy Hilfiger followed by Calvin Klein. We can infer that Hilfiger is a revenue stream
PVH heavily relies on. Furthermore, Heritage Brands Wholesale reported income loss meaning its
sales are down.
19
Return on Asset Ratio (ROA) measures the return on total assets after interest and taxes.
The ROA for Ralph Lauren improved from 3% to 7%. Closures with specific store locations and
outlets have allowed the Company to focus on its existing brick & mortar, wholesale, and
e-commerce assets. To add, strategic short-term investments made contributed to the rising ROA.
PVH’s ROA improved from 5% to 6%. Although, this percentage can be higher if not for their high
inventory stock.
The last profitability ratio is the Return on Equity (ROE) and it measures how effectively the
Company uses equity to generate net profits. Ralph Lauren’s ROE starts out low at 5% similar to
its ROA but increases to 13%. The shareholders’ equity is essentially being put back into the
Company because of the common stock repurchasing program. PVH matches these ratios raising
from 10% to the equivalency of 13%. Their coherent growth is from a repurchasing program that
was instituted several years before Ralph Lauren’s plan.
Net Profit Margin Ratio
Gross Profit Margin
Basic Earning Power
Return on Asset
Return on Equity
Ralph Lauren Profitability Ratios
2018
2017
3%
7%
62%
61%
10%
8%
7%
3%
13%
5%
PVH Profitability Ratios
2018
2017
8%
6%
58%
58%
8%
5%
6%
5%
13%
10%
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21
22
DECODING DUPONT
DUPONT EQUATION FORMULIA:
NET PROFIT MARGIN * ASSET TURNOVER * EQUITY MULTIPLIER
(TOTAL ASSETS / TOTAL STOCKHOLDER’S EQUITY)
The DuPont analysis provides us a deeper understanding of a company's return on equity
compartmentalized into three parts. The first component is operating efficiency, measured by net
profit margin. Secondly, asset use efficiency is measured by total assets turnover. The last is
financial efficiency measured by the equity multiplier.
As mentioned before, Ralph Lauren’s profit margin alarmingly declined 4% in one fiscal
year. The Company’s sales, high inventory stock, tax extraordinary payments, and financial
restructuring are all key factors in the low profit margin. PVH, its main competitor, saw the margin
go up by 2% standing at 8%. The asset turnover rate has increased from 1.00 in 2017 to 1.06 in
2018. This is considered the industry average. It also means Ralph Lauren effectively makes use of
its assets more than PVH’s asset turnover of 0.71 in 2017 and 0.77 in 2018. Lastly, the equity
multiplier shows the number of assets that are financed by the shareholders. Ralph Lauren’s went
up to 1.81 which is beneficiary for the Company because of their common stock repurchasing. In
comparison, PVH has a higher number of assets that are financed by shareholders at 2.04 in
2018. These three ratios accumulatively make up the DuPont return on equity. The return on
equity ratio significantly decreased from 12% to 6% compared to PVH rose from 9% to 13%.
Management must strategize how to boost sales to increase profitability as well as look at asset
and debt management. This would allow the Company to understand how to prevent ineffective
use of funds to maintain competitively in the market.
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Profit Margin
Asset Turnover
Equity Multiplier
DuPont Return on Equity
Ralph Lauren DuPont
2018
2017
3%
7%
1.06
1.00
1.81
1.78
6%
12%
PVH DuPont
2018
8%
0.77
2.04
13%
2017
6%
0.71
2.15
9%
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EXECUTIVE SUMMARY:
RECOMMENDATIONS
Overall, Ralph Lauren as a whole, is in a financially steady position. Most of its ratios fall
within the industry average, but can definitely seek several improvements. The profit margin spike
decline has jolted the Company in negative ways and created a domino effect in other areas. For
instance, inventory stock increased and a slower turnover rate from 3.18 to 2.96 times a year
therefore lowering the margin. As mentioned before, management must strategize how to boost
sales to increase profitability and how to prevent ineffective use of funds to maintain competitively
in the market.
Moreover, with a debt to total assets ratio of 12% and debt to equity ratio of 0.80, Ralph
Lauren is in good condition to take on more debt as long as it implements a long-term loan
payment plan. The Company can continue its digital expansion and overall renovation by utilizing
its loaned funds effectively and carefully.
Macy’s is Ralph Lauren’s largest wholesaler and accounts for 8% of their net income. The
Company depends greatly on this wholesaler every season to produce sales. While this has proved
effective in the past, e-commerce retailers have rose in age of digital. Ralph Lauren needs to be
cautious relying on this traditional revenue stream since Macy’s net sales have fell in the past year.
This pertains to the abundance of retail stores but lack of customers shopping in person.
Continuing their “going digital” strategy is the best direction to focus on and forming relations with
new wholesalers to keep up with evolving consumer demands. PVH is entering the digital arena to
gain online customer traction as well. Both companies are closing retail stores and expanding
e-commerce presence.
Conducting a thorough evaluation of Ralph Lauren’s financial position as well as comparing
to its competitor, PVH, is an ambiguous task considering both are undergoing financial
25
restructuring plans beginning these two fiscal years. A proper analysis within the next five years
after the plan has been fully implemented can finalize to a more adequate conclusion. Both
companies report a majority of stable numbers, but have entirely different capital structures. This is
where they differentiate in financial health. Through calculating the Basic Earning Power (BEP) and
profitability ratio analysis, PVH reports rising numbers but a majority of its growing sales come from
Tommy Hilfiger while other brands within its portfolio report losses. Ralph Lauren’s growth is more
cohesive as a company where it does not soley rely on one brand under the umbrella to project
higher sales.
Ralph Lauren has remained an industry leader for the past 50 years, and understands how
to operate at such a mass scale in every facet. What is important to note is continuing to adapt to
consumers’ ever-changing demands in the retail market. The Company should beware of
modernized substitutes and rising competitors. It has a strong customer loyalty base that should
26
BIBLIOGRAPHY
Bloomberg. “Ralph Lauren’s Plan to Lure Younger Shoppers: Hype.” Business of Fashion. February
5, 2019.
Accessed October 20, 2019. https://www.businessoffashion.com/articles/news-analysis/ralph-laurens-plan-to-lure-younger-shoppers-hype.
Lauren, Ralph. “Ralph Lauren Form 10-K.” Ralph Lauren Investors. March 2019.
Accessed October 12, 2019. http://investor.ralphlauren.com/static-files/68fc21c4-168b-44eb-b23d-16e551109737.
PVH Corp. “Announces Marie Gulin-Merle as First-Ever Global Chief Digital Officer.” PVH News.
May 10, 2019.
Accessed October 20, 2019. https://www.pvh.com/news/19221.
PVH Corp. “2018 PVH Annual Report.” PVH Reports. February 2019.
Accessed October 12, 2019. https://www.pvh.com/~/media/PVH/Files/Investors/Reports/2018-PVH-Annual-Report.ashx.
All images used in this report reserved to Ralph Lauren copyright.
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APPENDIX
Appendices 1: Ralph Lauren 2017-2018 Financial Statements
Appendices 1.1: Ralph Lauren Consolidated Income Statement (Consolidated Statements of
Operations)
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Appendices 1.2: Ralph Lauren Consolidated Balance Sheet
30
Appendices 1.3: Ralph Lauren Statement of Cash Flows
31
Appendices 2: PVH 2017-2018 Financial Statements
Appendices 2.1: PVH Consolidated Income Statement
32
Appendices 2.2 PVH Consolidated Balance Sheet
33
Appendices 2.3: PVH Statement of Cash Flows
34
Appendices 3: Ralph Lauren Ratios (View Appendices 1, 1.1, and 1.2)
Appendices 3.1: Ralph Lauren Liquidity Ratios
2017 Current Ratio:
3548.4/1587.2 = 2.24
2018 Current Ratio:
3594.8/1200.1 = 3.00
2017 Quick Ratio:
3,548.40 - 761.3/1587.2 = 1.75
2018 Quick Ratio:
3,594.80 - 817.8/1200.1 = 2.31
Appendices 3.2: Ralph Lauren Asset Management Ratios
2017 Inventory Turnover Ratio:
2423/761.3 = 3.18
2018 Inventory Turnover Ratio:
2419.8/817.8 = 2.96
2017 Days Sales Outstanding:
421.4*360/6182.3 = 25 (rounded)
2018 Days Sales Outstanding:
398.1*360/6313 = 23 (rounded)
2017 Asset Turnover Ratio:
6182.3/ 6,143.30 = 1.00
2018 Asset Turnover Ratio:
6313/ 5,942.80 = 1.06
2017 Long-Term Asset Turnover Ratio:
6182.3/1,186.30 = 5.2
2018 Long-Term Asset Turnover Ratio:
6313/1,039.20 = 6.07
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Appendices 3.3: Ralph Lauren Debt Ratios
2017 Debt to Total Assets Ratio: 10%
10.1+288+298.1/6143.3 = 0.10
2018 Debt to Total Assets Ratio:
689.1 / 5,942.80 = 12%
2017 Debt to Equity Ratio:
2685.9/ 3,457.4 = 0.78
2018 Debt to Equity Ratio:
2655.6/ 3,287.2 = 0.80
2017 Time-Interest-Earning Ratio:
498.2/-9 = 55
2018 Time-Interest-Earning Ratio:
561.8/20.7 = 27
Appendices 3.4: Ralph Lauren Profitability Ratios
2017 Net Profit Margin Ratio:
162.8/6182.3 = 7%
2018 Net Profit Margin Ratio:
430.9/6313 = 3%
2017 Gross Profit Margin Ratio:
3759.3/6182.3 = 61%
2018 Gross Profit Margin Ratio:
3893.2/6313 = 62%
2017 Basic Earning Power Ratio:
489.2/6143.3 = 8%
2018 Basic Earning Power Ratio:
82.5/5942.8 = 10%
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2017 Return on Asset Ratio:
162.8/6143.3 = 3%
2018 Return on Asset Ratio:
430.9/5942.8 = 7%
2017 Return on Equity Ratio:
162.8/3457.4 = 5%
2018 Return on Equity Ratio:
430.9/3287.2 = 13%
Appendices 4: PVH Ratios (View Appendices 2.1, 2.2, and 2.3)
Appendices 4.1: PVH Liquidity Ratios
2017 Current Ratio:
3,030.80/1,871.60 = 1.61
2018 Current Ratio:
$3,238.60/1,893.90 = 1.71
2017 Quick Ratio:
3,030.80 - 1,591.30/1,871.60 = 0.76
2018 Quick Ratio:
3,238.60 - 1,732.40/1,893.90 = 0.79
Appendices 4.2: PVH Asset Management Ratios
2017 Inventory Turnover Ratio:
4,020.4/1,591.30 = 2.53
2018 Inventory Turnover Ratio:
4,348.50/1,732.40 = 2.51
2017 Days Sales Outstanding:
658.5*360/8439.4 = 28 (rounded)
2018 Days Sales Outstanding:
777.8*360/9154.2 = 31 (rounded)
37
2017 Total Assets Turnover Ratio:
8,439.40/11,885.70 = 0.71
2018 Total Assets Turnover Ratio:
9,154.20/11,863.70 = 0.77
2017 Long-Term Asset Turnover Ratio:
8,439.40/899.80 = 9.3
2018 Long-Term Asset Turnover Ratio:
9,154.20/984.50 = 9.2
Appendices 4.3: PVH Debt Ratios
2017 Debt to Total Assets Ratio:
3,080.8 / 11,885.70 = 26%
2018 Debt to Total Assets Ratio:
2832.2/11863.7 = 24%
2017 Debt to Equity Ratio:
8,220.90/5,536.40 = 1.5
2018 Debt to Equity Ratio:
7,929.80/5,827.80 = 1.4
2017 Time-Interest-Earning Ratio:
632.4/128.5 = 5
2018 Time-Interest-Earning Ratio:
891.7/120.8 = 7
Appendices 4.4: PVH Profitability Ratios:
2017 Net Profit Margin Ratio:
536.1/8,439.40 = 6%
2018 Net Profit Margin Ratio:
744.6/9,154.20 = 8%
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2017 Gross Profit Margin:
4894.4/8439.4 = 58%
2018 Gross Profit Margin:
5308.3/9154.2 = 58%
2017 Basic Earning Power Ratio:
632.4/11885.7 = 5%
2018 Basic Earning Power Ratio:
891.7/11863.7 = 8%
2017 Return on Asset Ratio:
536.1/11885.7 = 5%
2018 Return on Asset Ratio:
744.6/11863.7 = 6%
2017 Return on Equity Ratio:
536.1/5536.4 = 10%
2018 Return on Equity Ratio:
744.6/5827.8 = 13%
39