Khaled Capital recommends that Ralph Lauren acquire Tory Burch to strengthen its position in the women's apparel market. Ralph Lauren faces challenges from decreasing customer loyalty and lack of women's clothing offerings. Acquiring Tory Burch would allow Ralph Lauren to breach the women's retail market and leverage existing relationships between executives. Tory Burch adds a "new luxury" element and popular clothing lines like Tory Sport to diversify Ralph Lauren's revenue.
2. Khaled Capital Partners
Zachary Geremia
Kelley School of Business, 2019
Majors: Accounting & Finance
Terrell Rose
Kelley School of Business, 2019
Majors: Finance & Business Analytics
Jon Bikoff
Kelley School of Business, 2019
Majors: Finance & Real Estate
Winnie Chin
Kelley School of Business, 2019
Majors: Accounting & Finance
Sam Douglas
Kelley School of Business, 2019
Majors: Accounting & Finance
3. Table of Contents
I. Executive Summary 4
II. Apparel, Design, & Retail Industry 6
III. Ralph Lauren Overview 9
IV. Valuation Summary 16
V. Appendix 18
5. Executive Summary
Khaled Capital recommends that
Ralph Lauren acquire Tory Burch
to strengthen its women’s
apparel market
Overview
Ralph Lauren is a global luxury apparel company headquartered in New York, earning about half of its revenue from
its retail business and the other half from its wholesale business
The company is focused on creating value for their shareholders despite the strong dollar, slowing growth in China,
and falling sales
Current Positioning
Ralph Lauren’s 3rd quarter earnings reported a 39% decrease in net income from the same period a year earlier. RL
attributed this to unseasonably warm weather, a drop in foreign tourist traffic in North America, and product
assortment challenges. They also cut their fiscal 2016 estimates from 3-5% growth to only 1% growth
After exceeding financial projections in November, due to strength in Europe, contributions of new stores, and strong
global e-commerce, Ralph Lauren suffered a rough 4 months in which their stock fell 22% after earnings were reported
on February 4th
Strategic Alternatives Assessment
A strategic acquisition of Tory Burch would breach a new market for women’s retail that Ralph Lauren currently lacks
Ralph Lauren has existing relationships with executives at Tory Burch including the Co-CEO, Roger Farah, as well as
Tory Burch herself, both of whom previously worked at Ralph Lauren
Tory Burch adds a “new luxury” element to Ralph Lauren’s conventional presence in the luxury apparel market
Tory Burch also adds a highly demanded clothing line, Tory Sport, which will add diversity to Ralph Lauren’s revenue
stream
5
7. Macroeconomic Landscape
Unemployment, the strongest driver of consumer spending has been steadily decreasing over the past five
years, but a reversal in the rate could weaken the economy and retail industry as a whole
United State’s disposable personal income is forecasted to grow at an average rate of 2.5% through 2020,
along with consumer sentiment being forecasted to stay steady through the same time period.
Historically, low oil prices boost consumer spending, but it has been noted that consumers may be saving
more of their extra spending money than they have in the past
The strength of the US dollar continues to significantly weigh on Ralph Lauren’s revenues
US Real GDP is expected to grow 2.5% in 2016 and 2.4% in 2017
Growth in Europe is uncertain because of the low, even negative interest rates currently being enacted by
central banks in efforts to spur spending
China’s growth is starting to normalize, but by 2019, the Chinese online retail sector is forecasted to have a
value of $480.1 billion, an increase of 209% since 2014
Overall,
macroeconomic
trends show potential
strength in the retail
industry due to
confident consumers
and optimistic
forecasts despite
instability
0 100 200 300 400
2012
2022
China’s Income per household
Poor Mass Middle Class
Upper Middle Class Affluent
7
8. Industry Trends
Value of Personal Luxury Goods Market
In terms of apparel, China enjoyed a 43.3% market share of
global exports in 2013
80% ($137.3 billion) of sales at department stores
worldwide, as well as 60% ($25.9 billion) of sales at
sporting goods stores were apparel and shoes
Total online retail market value in America is $463.9 billion
There has been a large growth in Fast Fashion, a modern
fashion phenomenon where companies are swiftly taking
styles from fashion shows and moving them into retail
The US remains by far the biggest luxury goods market in
the world, accounting for almost 40% of all spending in the
industry
Current factors challenging the industry include economic
instability in Eastern markets, armed conflict in Central
Asia, and social unrest
Overall Fashion and Apparel expenditure in Asia has
increased 10% year over year for the last decade, despite
slower growth in China
Expenditure in Asia is expected to reach $340 billion by
2018
Mainland China is becoming more influential in online
markets, however, their retail spending within the country
has decreased
Western Europe luxury clothing and fashion markets are
strongly supported by Asian tourism
China Luxury Clothing Sales GrowthWith slowed
growth in Asia,
companies are
beginning to see
a shift in
industry activity
from East to
West
The impact of a
weakening
economy is
unlikely to stop
wealthy Chinese
consumers from
traveling to buy
their luxury
goods, but it
might change
their destination
of choice
8
10. Challenges Facing Ralph Lauren
Overview
Ralph Lauren has high brand recognition and customer loyalty; however the change in fashion market trend has shown an decrease in
customers’ loyalty
Ralph Lauren’s focus on male apparel and clothing restricts consumer population
The need for expansion and brand recognition within the international market
Ralph Lauren
currently
faces the
challenge of
the rapidly
shifting
fashion
industry and
diversification
in market and
apparel
Customer Loyalty
Customer loyalty is a crucial aspect in the retail
industry; however, it is also important to draw more
customers
Customer loyalty to a brand is decreasing. Statistics
have shown that 46% of consumers said they are
more likely to switch brands than 10 years ago and
31% would switch brand because of pricing
Women Clothing and Apparel
Lack of apparel and product marketed towards
women in general compared to Tory Burch, Kate
Spade, and Burberry
The fashion industry is rapidly changing. Ralph
Lauren’s competitors are companies that
continuously introduce new styles and lines of
clothing
Women are demanding more diverse and fashion
forward apparel and clothing
International Market
Ralph Lauren’s development in the United States and
Europe are more mature while the development in
the growing Asia market is lacking
65% of the top 20 emerging growing market are in
Asia
Forecast of Women’s Clothing Sales
10
11. Current Growth Drivers
The Chinese middle class is rapidly expanding while their disposable income increases as a percentage of their total net income
E-commerce platform sales have increased 150% within the last decade, allowing people easier access to online marketplaces
Ralph Lauren has proven themselves as a leading fashion brand internationally who holds a valuable brand name
Current Opportunities
US apparel retail market projected to grow 22% from 2015-2019
Online retail sales in China are expected to grow at an annual rate of 17% through 2018
Bottom Line
Continue to take advantage of online retail channels to reach more customers
Expand into clothing areas with weaker brands, mainly women’s apparel and sportswear
Continue to expand into China through brick and mortar locations and retail partnerships
If Ralph Lauren
can make larger
strides online and
in expanding retail
markets such as
China, they can
maintain the sales
and quality image
that they have
historically had in
the US
Opportunities and Growth Drivers
Percentage of Sales by
Region
North America Asia Europe
Percentage of Sales per Region
$3,500
$4,000
$4,500
$5,000
$5,500
2013 2014 2015 2016 2017 2018 2019 2020
Gross ProfitNet Income Growth
11
13. Diversification Play
Acquire Tory Burch to increase share in the women’s apparel market and extend growth in international markets. Tory Burch will
be a great addition to Ralph Lauren because although it will represent the brand with a different logo, it will maintain the same
quality standard
Alternative Solution
Acquire Burberry to build upon Ralph Lauren’s existing presence in Europe and the US
Internal-growth Play
Reinvest in technology to better handle consumer preferences for online retail
Strategic Recommendations
0
5
10
15
20
25
30
35
Asia Europe UK UAE South
America
0
20
40
60
80
Asia Europe UK UAE
Tory Burch Store Locations Ralph Lauren Store Locations
80 stores in US 247 stores in US
13
14. Tory Burch LLC
Overview
An American lifestyle brand that embodies the personal style and sensibility of its Chairman, CEO and Designer, Tory Burch
Room For Growth
In September 2015, Burch introduced Tory Sport, a separate performance active wear line
While Tory Burch has experienced significant growth since its founding, its true growth potential may lie outside of the U.S
It is very difficult for a company like Tory Burch to maintain double digit growth rates by doing business primarily in the
U.S. due to the saturation of the market
Meanwhile, China's growing middle and upper- class presents a huge market for luxury fashion that can support
unparalleled growth opportunities
To support a significant foreign expansion, the company will likely require additional outside funding
Current Ownership
Tory Burch- 28.3%
Tresalia Capital- 20%
BTD Capital Partners- 12.5%
Len Blavatnik- 10%
General Atlantic LLC- 7.5%
Christopher Burch- 3.3%
Tory Burch has
entered into new
categories with
eyewear in
partnership with
Luxottica in 2009,
fragrance and
beauty with Estée
Lauder in 2013,
and timepieces with
Fossil coming in
2014
14
15. Burberry
Company Overview
Burberry Group
BRBY (LSE)
CEO: Christopher Bailey
Headquarters: London, England
Worldwide ultra-luxury apparel company with brands
ranging from fashion forward runway designs to casual
weekend wear
Classic British designs
Key financials
Net Income 2015: $542.4
EBITDA 2015: $943.7
Current EV: $6524.3
Current Ratio: 14.08
EPS: 0.80
BRBY Price
As an established and respected
brand, Burberry will help Ralph
Lauren penetrate the ultra-luxury
market that it is currently struggling
to gain traction in
Burberry’s classic women’s apparel
will help Ralph Lauren increase
revenue in this market
Classic British apparel will boost
Ralph Lauren’s presence in the
United Kingdom and western
Europe as a whole
Burberry is a
British luxury
apparel company
that could reach a
market currently
untapped by Ralph
Lauren
15
20. Ralph Lauren Discounted Cash Flow Analysis Continued
Implied Equity Value and Share Price
Enterprise Value $ 10,016.60
Less: Total Debt $ 1,020.00
Plus: Cash $ 500.00
Implied Equity Value $ 9,496.60
Implied Share Price $ 110.04
Terminal Value % of Enterprise Value
Terminal Present Value $ 8,659.09
Enterprise Value $ 10,016.60
% of Enterprise Value 86.4%
Terminal Value Using Exit Multiple Method
2020E EBITDA $ 1,394.6
Exit Multiple 10
Terminal Value $ 13,945.6
Discount Rate 10.0%
Present Value $ 8,659.09
Enterprise Value using Exit Multiple Method
Enterprise Value $ 10,016.60
Implied Perpetuity Growth Rate
Terminal Year FCF $ 292.86
WACC 10.0%
Terminal Value $ 4,002.37
Implied Perpetuity Growth Rate 2.5%
20
21. Tory Burch LLC Valuation Summary
$2,700 $2,900 $3,100 $3,300
Comparable Companies Analysis
Precedent Transaction Analysis
Implied EV/EBITDA of 8.5x-9.5x
Implied EV/EBITDA of 7x-8x
Current Evaluation: $2,900 to $3,100 (millions)
21
25. Precedent Transactions
Date Completed Acquirer Target Type Transaction Value Premium EV/EBITDA
8/24/2015 Ascena Retail Group Inc. ANN Inc. Cash/Stock $2,006.31 23.64% 8.54x
6/19/2014 Men's Warehouse Inc. Jos A Bank Clothiers Inc. Cash $1,486.07 31.83% 11.16x
7/31/2013 TowerBrook Capital Partners LP True Religion Apparel Inc. Cash $635.13 16.97% 8.19x
2/14/2013 PVH Corp. Warnaco Group Inc. Cash/Stock $2,823.82 33.56% 11.28x
9/14/2011 VF Corp. The Timberland Co. Cash $1,971.75 36.11% 12.3x
3/7/2011 Leonard Green and Partners J. Crew Group Inc. Cash 2637.43 28.10% 9.21x
Mean $1,926.75 28.37% 10.11x
Median $1,989.03 29.97% 10.19x
High $2,823.82 36.11% 11.16x
Low $635.13 16.97% 8.19x
25