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Ralph Lauren Inc. Strategic OpportunitiesDiscussion Materials | February

12, 2016

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• Joshua Rindler • Indiana University, Kelley School of Business, 2019• Majors: Accounting & Finance

• Matthew Meyers • Indiana University, Kelley School of Business, 2019• Majors: Accounting & Finance

• Luke Gibson• Indiana University, Kelley School of Business, 2019• Majors: Accounting & Finance

• Pooja Sajeev• Indiana University, Kelley School of Business, 2019• Majors: Accounting & Finance

• Raj Desai• Indiana University, Kelley School of Business, 2019• Majors: Finance & Business Analytics

Rightview Partners

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Table of Contents

I. Executive Summary 4II. Apparel and Footwear Industry

6III. Ralph Lauren Overview

9IV. Primary Acquisition Target

12V. Valuation Summary 14VI. Secondary Acquisition Target

19VII. Appendix

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I. Executive Summary

Executive Summary

Overview• Ralph Lauren is a leader in the sale of premium lifestyle products all over the world with a market

cap of $7.2 billion• Currently, the company is implementing their Global Reorganization Plan, in which Ralph Lauren

aims to expand the brand’s international presence, as well as streamline costs to decrease operating costs

Current Positioning• Operating expenses have been very high for Ralph Lauren and it is something that the company is

looking to lower, although they are aware that the Global Reorganization Plan will significantly increase operating costs

• Sales have risen over the past five years due to recent acquisitions. As a result, Ralph Lauren has decided to keep investing in acquisitions, especially to further their Global Reorganization Plan

• Ralph Lauren is looking to expand their accessories sector in order to increase revenues, as well as to expand their product selection

Assessment• In order to increase shareholder value, Ralph Lauren must reduce operating costs, while continuing

to implement their Global Reorganization Plan• Ralph Lauren must buy a company that has the same brand reputation and quality for premium

lifestyle products whose main sale is accessories• The company being acquired must also sell globally with a main focus in Asia, since this is were

Ralph Lauren has the least stores• By buying a company, Ralph Lauren will be able to decrease operating expenses and increase

revenue, hence increasing shareholder value

Recommendation• We recommend that Ralph Lauren buys Salvatore Ferragamo, a leader in the luxury goods industry

that sells accessories globally through retail stores, third-party operated stores, department stores, and specialty stores

• As a backup, we recommend that Ralph Lauren buys Cole Haan, a global lifestyle brand company whose main revenue source is shoes

By decreasing operating costs and introducing new stores, Ralph Lauren will be able to increase shareholder value.

Our recommendation works in accord with the Global Reorganization Plan, by working to expand globally, while also completing Ralph Lauren’s goal of increasing accessories sales.

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II. Apparel and Footwear Industry

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Macroeconomic Landscape

• The US Federal Reserve has recently commenced an interest rate hike from 0% to 0.25% to a rate of 0.25% to 0.5%. Federal Reserve chairwoman Janet Yellen signaled that the opinion of the Federal Reserve is that the underlying health of the US economy is quite strong.

• The Consumer Sentiment Index has currently been rising pushing the sale of consumer goods across a variety of sectors. This increase has been occurring steadily since the end of 2011.

• By the same token Italian Consumer Confidence has been increasing over the past year, and is currently at a 5-month high at 118.9, as of January 2016. This is of no surprise considering that the Italian unemployment rate has also been steadily decreasing

• Despite the overall strength of the Italian economy as a whole with increases across the board in key economic indicators. The Italians struggle with their currency due to the declining value of the Euro.

• Banks have been increasing their lines of credits more freely toward subprime borrowers across a majority of areas. This can expect to trigger an uptick in consumer spending.

The dollar’s strong position against the Euro makes the current market optimal for European investments.

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• Men’s clothing sales has had an average annual sales growth of 17.4% since 2010. With increased access to ecommerce and the innovations with mobile application based sales, men’s interest in apparel has cited a strong projection and continued growth in the coming years.

• Shoes have had a 13.6% average annual sales growth online, alongside men’s clothing. This is a clear cut indicator as the fashion industry move farther towards online retailing, although the industry remains profitable, men’s clothing outpaces it by a considerable margin.

• With increased consumer discretionary spending, all sectors of luxury retail can expect an uptick in sales. Industry Outlook is expected a slow growth in 2016 in Shoes, with a growth rate hovering around 3.4%-3.7% for the next several years

• Industry is expected to have a relatively small fluctuation in revenue in recent years. Volatility in the market is linked to the recession, according to analysts across the board. However an increase in recent consumer discretionary spending will trigger back higher sales across all sectors of the luxury retail industry including shoes.

• Analysts are currently worried about the recent slowed growth in the Asian markets, in which much of the industry expansion has taken place over the past several years, given the high demand for American and European luxury goods. A few months of slowed growth can not counteract China’s past years of steady economic growth.

Industry Outlook

2014 2015 2016 2017 2018 2019012345678

Revenue Growth Rates in Men's & Boy's Apparel

Reve

nue

Gro

wth

(%)

2014 2015 2016 2017 2018 20190

0.51

1.52

2.53

3.54

4.55

Revenue Growth Rates in Footwear

Reve

nue

Grow

th (%

)

The worst year for the Men’s & Boy’s Apparel industry has just past us, with a huge projected uptick in revenue. Meanwhile the growth in footwear is projected to experience a large drop. From a pure industry analysis perspective, this is the perfect time for a footwear acquisition.

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III. Ralph Lauren Overview

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Ralph Lauren Company Overview

Overview• International leader in the business of premium lifestyle products, including

apparel, accessories, home furnishings, and other licensed product categories due to exceptional design, marketing, and distribution, as well as a long-standing reputation

• Ralph Lauren has an extensive global reach, with merchandise available through our wholesale distribution channels at approximately 13,000 different retail locations worldwide

• Ralph Lauren is currently concerned with their operating expenses. Due to both the decline in net income and high operating expenses, operating income decreased by $3 million over the past year

• Ralph Lauren competes with other retail brands primarily on the basis of service, which depends on their ability to obtain additional points of distribution and sufficient retail floor space

Company Management – Doug Black, CEO

• Former President and COO of Oldcastle, grew net sales more than 10x and oversaw over 100 acquisitions

• Brought with him highly qualified senior manager with functional expertise in strategy and development

• Undertaking a variety of initiatives including target pricing, category management, sales force performance and supply chain management

• At local level they have focused on gaining market share by empowering area managers and their teams to develop local strategies

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160

20406080

100120140160180200

Ralph Lauren Closing Prices

Clos

ing

Price

(In

Dolla

rs)

Trading prices depend on accuracy of estimated financial performance. Ralph Lauren predicts operating expenses to rise, leading to declining trading prices.

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The Americas 7308

Europe5311

Asia128

Wholesale Channels

Global Reorganization Plan

Global Reorganization Plan• Goal of this plan is to reorganize the company from its regional

structure to a global-brand based operating structure, which our plan caters towards

• The plan will ideally streamline Ralph Lauren’s business processes to improve the company’s cost structure and reduce operating expenses

• Ralph Lauren’s long-term strategy includes expanding the brand’s presence internationally, extending our direct-to-consumer reach, expanding our accessories offerings, and investing in our operational infrastructure

Recent Acquisitions Over Past Five Years• Over the past five fiscal years,

our sales have grown by approximately 35% to $7.620 billion in Fiscal 2015 from $5.660 billion in the fiscal year ended April 2, 2011. This growth has been attributable to acquisitions over these five years.

• Ralph Lauren has invested $1.741 billion for acquisitions and is willing to continue to invest more to implement their long-term strategy

2011 2012 2013 2014 20155

5.5

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6.5

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7.5

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Ralph Lauren Revenue

Reve

nue

(In B

illio

n Do

llars

)

The Amer-icas58

Europe27

Asia58

Retail Stores

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IV. Primary Acquisition Target

Overview• Salvatore Ferragamo, founded in 1927, is a leading producer in the

luxury goods industry that focuses on the creation, sale, and manufacturing of footwear, leather goods, silk products, and other accessories, all made in Italy.

• The company operates through four business segments (% of revenue by product category): Footwear (41.5%), Leather Goods (39.9%), Apparel (7.0%), Accessories/Fragrances (12.9%)

• Salvatore Ferragamo epitomizes the quality and craftsmanship of typical Italian-made goods, which has helped it penetrate the luxury goods market in over 90 countries.

Financials • Enterprise value of $3,232m• EBITDA of $353m

Strengths• Ferragamo’s largest revenue stream is out of the Asia Pacific, which

remains Ralph Lauren’s weakest area; therefore, they can utilize their Brick and Mortar locations as well as their target demographic to increase sales.

• Ferragamo is known for their luxury shoes, unlike Ralph Lauren where they struggle to make their shoe department a popular segment.

• Given that the acquisition goes through, RL shouldn’t rebrand the shoes as the opportunity costs for that sort of marketing campaign would be too high.

Weaknesses • Since they are an international company, there will always be risk

associated with currency value fluctuations. • Their cost structure will be difficult to manipulate based on the fact

that their core competencies are rooted in their expensive hand-made products.

• High levels of debt limits their capability to make a move in the market at the moment and if a financial problem were to occur, they would have trouble liquidating their assets.

Salvatore Ferragamo Group

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2012 2013 2014 2015 201605

1015202530

Ferragamo Closing Price

Year

Stoc

k Pr

ice

(in d

olla

rs)

37%

26%10%

23%

5%

% of Revenue

Asia Pacific Europe JapanNorth AmericaCentral and South America

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V. Valuation Summary

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Salvatore Ferragamo, Valuation Summary

By running three valuation models, a target of 11x LTM EBITDA multiple is derived as the mean

An 11x multiple results in a total purchase price of $3,434 million, using Salvatore Ferragamo’s LTM EBITDA

($ in millions, except for share price)

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Precedent Transactions Analysis

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Comparable Companies Analysis

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Discounted Cash Flow Analysis

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VI. Secondary Acquisition Target

Overview• Founded in Chicago, Illinois in 1928 Cole Haan began as simply a

men’s footwear label, but it has now expanded its product line to include not only shoes, but a variety of items in the fashion industry such as dress for both men and women, handbags, and various other accessories.

• Cole Haan was acquired by Nike in 1988 and was operated under them until Nike sold them to Apax partners in 2013

• Cole Haan prides itself on the ability to manufacture and distribute products that are both comfortable and fashionable.

Financials • Nike sold Cole Haan to Apax Partners for $570mm in 2013• Can expect to be purchased anywhere between $850mm and $950mm• During 2015, there were a total of 931 exits in the mid market

segment, totaling just over $98B

Strengths• Similar to Ferragamo, Cole Haan operates in Asia with 77 store

locations in Japan, which, by utilizing Ralph Lauren is given the opportunity to increase revenues in this area.

• Cole Haan is already a recognizable brand that offers Ralph Lauren further access into the area of both footwear and apparel.

Weaknesses• Cole Haan is currently going through a time of renovations and

new branding, which might deter certain customers• After so much time with Nike the brand’s image, in certain

categories, has shifted more towards comfort rather than top of the line fashion products.

Cole Haan Holdings Inc.

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$20

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$100

$120

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200

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1,200

$63

$78

$40

$22

$68

$71

$84

$73

$114

$98

Exit value ($B)

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VII. Appendix

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Discounted Cash Flow Analysis (Continued)

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