Will An LVMH Shakeup Work For Ralph Lauren?


Alexander Wei | March 03, 2022

Polo Ralph Lauren 2021 Holiday CampaignCredit: Courtesy of Ralph Lauren

Rumours of a potential bid for Ralph Lauren by LVMH has caused a stir in the industry. However, the power dynamics between these two fashion dynasties may be a major impediment to the deal.

Last week, independent news outlet Axios reported a potential fashion acquisition of Ralph Lauren Corporation, a U.S. fashion powerhouse with a market cap of more than $9.5 billion, by French luxury behemoth LVMH. The stock price of Ralph Lauren Corporation increased in response to the rumour.

LVMH's appetite appears to be on the rise, with the group's acquisition moves gradually heating up after setting a record for M&A deals in the luxury industry with its $15.8 billion acquisition of American jeweller Tiffany & Co. in early 2021.

In April 2021, LVMH acquired a 10 per cent stake in Italian luxury brand Tod's, and two months later, acquired the Emilio Pucci founding family’s remaining 33 per cent share in the label, gaining full ownership. The luxury conglomerate went on to announce an investment in veteran womenswear designer and ex-Celine alum Phoebe Philo to launch her personal brand, and in July, acquired a majority stake in streetwear brand Off-White, revealing the group’s intention of deepening its partnership with Virgil Abloh.

LVMH Luxury Ventures, the parent company's investment arm, is also expanding its investment footprint, looking beyond established brands like the ones mentioned above, and moving in on investment targets that appeal to a younger audience, such as New York designer brand Aimé Leon Dore and luxury blind box platform Heat. With each investment, the company is thrust into the spotlight.

Ralph Lauren Corporation, founded in 1967 by American businessman Ralph Lauren, encompasses several apparel brands at various price points, with product categories ranging from bespoke suits to home furnishings, and three restaurants located in Paris, New York, and Chicago.

Ralph Lauren, like its competitors, is on the path to recovery. According to the brand's FY2022 third quarter results, which were released in February, all regions achieved double-digit growth in the quarter, with North America, the brand's most important regional market, exceeding expectations and demonstrating positive momentum.

As a result, the brand has increased its full-year revenue outlook to 39 to 41 per cent year-on-year growth, with an operating margin of 13 per cent. Based on the group's revenue for FY21, which ends in March 2021, revenue for this year could range between $6.12 and $6.20 billion.

Looking back at some of the major M&A transactions in the luxury and fashion industries following the outbreak of COVID-19, the price-to-sales ratio – an important benchmark for assessing the value of a deal – is usually between 3 and 4 times. The $2.1 billion acquisition of streetwear brand Supreme by VF Corp in 2020 was expected to contribute $500 million to corporate sales in the same year (representing a P/S ratio of 4.2). Tiffany & Co.'s sales in 2019 were $4.38 billion, and LVMH's final purchase price was $15.8 billion (representing a P/S ratio of 3.6).

According to Ralph Lauren's forecast, if the group generates more than $6 billion in revenue by March for the fiscal year, the offer price will vary between $18 billion and $24 billion, putting the deal on track to surpass the Tiffany & Co. acquisition as the largest in the luxury industry.

The industry has reacted with mixed reactions. Richard Kestenbaum of Triangle Capital, a company that handles corporate M&A services, wrote in Forbes that Ralph Lauren's current scale and revenue represent “an accretive deal” for LVMH, and that LVMH's luxury savoir-faire could help Ralph Lauren strengthen its premium positioning in the market. However, some argue that the complex brand portfolio under Ralph Lauren Corporate, as well as a retail network focused on the mid- and low-end, will pose challenges for the company's future operations.

But whether LVMH's paternalistic approach to M&A will allow the brand vision created by Ralph Lauren himself to thrive, will impact the outcome of this potential deal and the future path of this American luxury powerhouse.

In recent years, newly acquired labels have served as a training ground for the Arnault family's next generation. Following an acquisition, an exodus of former executives typically ensues, and new executives – typically one of Arnault's heirs – are installed. This strategy is a proven formula for success that the company has fallen back on time and time again.

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In 2013, LVMH acquired an 80 per cent stake in Loro Piana, and the Loro Piana brothers Pier Luigi and Sergio, who had been Chairman and Chief Executive respectively, stepped down as Vice Presidents, and Antoine Arnault was appointed Chairman of the brand. When LVMH acquired German luggage brand Rimowa in 2016, Dieter Morszeck, the founder's grandson, became co-CEO along with Arnault's 26-year-old son, Alexandre. When Tiffany & Co.'s acquisition was completed in January 2021, Alessandro Bogliolo, former Chief Executive of the brand, stepped down, and Anthony Ledru, former Executive Vice President of Louis Vuitton, took over as President and Chief Executive Officer. At the same time, Alexandre Arnault left his role at Rimowa to join Tiffany & Co. as Executive Vice President, Products and Communication.

Recent history has demonstrated that a company taken over by LVMH is likely to undergo a complete personnel shakeup. However, should the deal go through, will this be the case for Ralph Lauren as well?

Ralph Lauren, founder of the American fashion conglomerate, is currently still the group's Executive Chairman and Chief Creative Officer. This eternal cowboy from the Bronx is the house's cornerstone, weaving an American dream of post-war prosperity with polo shirts, navy sport jackets, and white Chino trousers. The brand has never deviated from these elements for over 50 years.

Now at the age of 82, Mr. Lauren has yet to announce any succession plans. Unlike the Arnaults, only the Laurens' second son, David, works for Ralph Lauren Corporation as Chief Branding and Innovation Officer and Vice Chairman.

This is not to say that the Lauren family does not care about the group's heritage. For a first-generation family business, the founder is its most important brand asset. The search for a CEO successor to replace Ralph Lauren has been anything but smooth.

In September 2015, Stefan Larsson, once the Global President of Old Navy, took over as CEO in September 2015, succeeding Ralph Lauren. Larsson left in less than two years, saying on an analyst call that he and Mr. Lauren had worked “very hard to find common ground” but ultimately decided to part ways due to creative differences. Former P&G executive Patrice Louvet took over as Group President and Chief Executive Officer in May 2017, and is still in place, reporting to Mr. Lauren.

For the time being, Ralph Lauren appears to be staying on as Executive Chairman to keep an eye on the Chief Executive, especially as the fashion industry continues to recuperate from the effects of the pandemic.

Beyond the operational level, a takeover by LVMH often results in a major overhaul of the brand image, product offerings, and communication strategies – just look at today’s “not-your-mother's” Tiffany & Co. Following Alexandre Arnault's arrival at Tiffany & Co., the brand's former Chief Artistic Director and Chief Brand Officer departed, as did the “old” Tiffany & Co. A LVMH transition may not coincide with Mr. Ralph Lauren's vision for his namesake label, which appears to be something that continues to mean a great deal to this all-American legacy brand.

Behind-the-scenes of the Tiffany & Co. campaign featuring Jay-Z and BeyoncéCredit: Courtesy of Tiffany & Co.

The success of the LVMH takeover formula is also due in part to the lack of resistance against its tactics from the acquired brands: Dieter Morszeck of Rimowa and the Loro Piana brothers willingly took a back seat; and Tiffany & Co. was not a family business to begin with, making for an easy transition.

The potential takeover of Ralph Lauren by LVMH represents not only the jockeying of two dynasties, Arnault and Lauren, but also the amalgamation of European and American fashion. Ralph Lauren, whose brand has permeated every aspect of an American's life, may be more representative of the American luxury landscape than jeweller Tiffany & Co. Balancing these two cultural contexts may prove to be a larger battle than anticipated – and one that is likely to be echoed by more players than just LVMH and Ralph Lauren in the near future.

Finance | LVMH | M&A