Financial Analysis of Ralph Lauren Corporation and Burberry Plc.

Ralph Lauren

Vs.

Burberry

Financial Analysis

MiFPT2019 - study group 8

Introduction

Over the past decade, the luxury retail industry has seen a 5.5% annual growth. In this report, we compare two key players in the market: Ralph Lauren Corporation and Burberry Plc. By analysing both companies’ financial statements for the period FY08-17, we aim to explain how these firms create value, and describe the economics of the business by focusing on select key metrics. We will also explore how the differences in accounting standards and disclosure limitations impede our ability to fully evaluate the companies’ performance.

Comparative Financial Performance

Growth, Profitability & Return

Burberry and Ralph Lauren have shown consistent growth in the past decade, overcoming the shocks of the financial crisis. Despite the minor setback of declining revenue in FY10 (ended 31 Mar for Burberry, 1 Apr for Ralph Lauren), both luxury brands managed to pick up pace in the years following the economic downturn. During FY08-17, Ralph Lauren recorded CAGR 3.5% in revenue, and Burberry achieved an impressive CAGR 12%. Burberry’s EBIT margin (20.2% in FY08) has decreased to 14.1% in FY17 while Ralph Lauren’s stands lower at 10.2% in FY17.

Although it is evident that both companies have been creating value, the pace of growth has slowed down in the past four years. EBIT is showing a downward trend with more volatile comprehensive income, indicating the challenging environment faced by the luxury retail sector. Especially with Ralph Lauren’s current restructuring programme, Comprehensive Return on Equity is on the decline to 10.0% in FY16 even reaching negatives in FY17 (vs. 20.4% in FY14), and the company has been running a negative accumulated comprehensive income since FY15.

Despite the challenging retail climate, Burberry and Ralph Lauren continue to create value for investors. While the firms’ returns on capital tend to converge towards the cost of capital in competitive markets, both companies enjoy returns significantly higher than the cost of capital. The 10-year average after-tax ROCE for Ralph Lauren is 19.6% while after-tax WACC is estimated at 3.1%; Burberry’s much higher return of 35.9% with after-tax WACC of 3.1%. These companies have been generating significant economic profit throughout the past decade, with the exception of Burberry in FY09. However, WACC and ROCE may be distorted by accounting policies, some of which will be addressed later in the balance sheet completeness section.

Total annual shareholder returns for both companies peaked in FY10 (Ralph Lauren 101.9%, Burberry 157.7%) and dropped thereafter. Burberry’s and Ralph Lauren’s total annual shareholder return fluctuated heavily and recorded 28.4% and -13.1% respectively in FY17. Earnings per share (EPS) ratios have followed similar fluctuations as Net Income for both companies, as the changes in the number of shares outstanding was eclipsed by earnings volatility. Perhaps to restore investor confidence by stabilizing share prices, Burberry repurchased shares amounting to £100m in FY17, due to increase to £300m in FY18. Ralph Lauren has been more aggressive in share repurchases, spending $424.2m on average compared to £33.3m by Burberry, effectively reducing the total number of outstanding shares by 19% (99.5 million in FY08 to 81.0 million in FY17). Four years of declining EPS proved worse for investor sentiment, resulting in consistent decrease in market capitalization. Ralph Lauren’s market cap dropped from a peak of $16.2bn in FY12 to $6.6bn in FY17, and stands far below Burberry’s, which increased over the same period and was more valuable at £9.8bn (equivalent to $12.2bn) in FY17.