Ralph Lauren Corporation. Strategic OpportunitiesDiscussion Materials | February

12, 2016

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

Table of Contents

I. Executive Summary 4II. Apparel, Design, & Retail Industry

6III. Ralph Lauren Overview

9IV. Valuation Summary 16V. Appendix 18

I. Executive Summary

4

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

II. Apparel, Design, & Retail Industry

6

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

2012

2022

0 50 100 150 200 250 300 350 400

China’s Income per household

PoorMass Middle ClassUpper Middle ClassAffluent

7

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

III. Ralph Lauren Overview

9

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

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

2013

2014

2015

2016

2017

2018

2019

2020

$3,500 $4,000 $4,500 $5,000 $5,500

Gross ProfitNet Income Growth

11

V. Acquiring a Company

12

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

Asia Europe UK UAE South America

05101520253035

Asia Europe UK UAE01020304050607080

Tory Burch Store Locations Ralph Lauren Store Locations

80 stores in US 247 stores in US

13

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

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

IV. Valuation Summary

16

Ralph Lauren Valuation Summary

Discounted Cash Flow Analysis

Comparable Companies Analysis

Precedent Transactions Analysis

$8,000 $9,500 $11,000 $12,500 $14,000

Implied EV/EBITDA of 10x-11.5x

Implied EV/EBITDA of 8x-9.5x

Implied EV/EBITDA of 9x-10x

Current Evaluation: $10,900 to $11,300 (millions)Current Share Price: $86.16Implied EV/EBITDA multiple: 9.27x

17

VI. Appendix

18

Ralph Lauren Discounted Cash Flow Analysis

19

  2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E

Sales $ 6,945.00

$ 7,450.00

$ 7,620.00

$ 7,984.0

$ 8,265.8

$ 8,609.0

$ 8,939.7

$ 9,297.0

% Growth 7.3% 2.3% 4.8% 3.5% 4.2% 3.8% 4.0%

Less: Cost of Goods Sold $ 2,789.0

$ 3,140.0

$ 3,242.0

$ 3,353.3

$ 3,471.6

$ 3,615.8

$ 3,754.7

$ 3,904.8

% Sales 40.2% 42.1% 42.5% 42.0% 42.0% 42.0% 42.0% 42.0%

Gross Profit $ 4,156.0

$ 4,310.0

$ 4,378.0

$ 4,630.7

$ 4,794.1

$ 4,993.2

$ 5,185.0

$ 5,392.3

% Sales 59.8% 57.9% 57.5% 58.0% 58.0% 58.0% 58.0% 58.0%

Selling General and Administrative $ 2,971.0

$ 3,142.0

$ 3,301.0

$ 3,433.1

$ 3,554.3

$ 3,701.9

$ 3,844.1

$ 3,997.7

% Sales 42.8% 42.2% 43.3% 43.0% 43.0% 43.0% 43.0% 43.0%

EBITDA $ 1,185.0

$ 1,168.0

$ 1,077.0

$ 1,197.60

$ 1,239.86

$ 1,291.35

$ 1,340.96

$ 1,394.56

% Sales 17.1% 15.7% 14.1% 15.0% 15.0% 15.0% 15.0% 15.0%

Less: Depreciation & Amortization $ 233.00

$ 258.00

$ 294.00

$ 319.36

$ 330.63

$ 344.36

$ 357.59

$ 371.88

% Sales 3.4% 3.5% 3.9% 4.0% 4.0% 4.0% 4.0% 4.0%

EBIT $ 952.0

$ 910.0

$ 783.0

$ 878.2

$ 909.2

$ 947.0

$ 983.4

$ 1,022.7

% Sales 13.7% 12.2% 10.3% 11.0% 11.0% 11.0% 11.0% 11.0%

Taxes $ 296.07

$ 272.09

$ 226.29

$ 307.38

$ 318.23

$ 331.45

$ 344.18

$ 357.94

Tax Rate 31.1% 29.9% 28.9% 35.0% 35.0% 35.0% 35.0% 35.0%

EBIAT $ 655.9

$ 637.9

$ 556.7

$ 570.9

$ 591.0

$ 615.5

$ 639.2

$ 664.7

   Plus: Depreciation and Amortization of Intangibles

$ 233.0

$ 258.0

$ 294.0

$ 319.4

$ 330.6

$ 344.4

$ 357.6

$ 371.9

Less: Capital Expenditures $ 276.0

$ 390.0

$ 391.0

$ 399.20

$ 413.29

$ 430.45

$ 446.99

$ 464.85

% Sales 4.0% 5.2% 5.1% 5.0% 5.0% 5.0% 5.0% 5.0%

Less: Changes in Net Working Capital $ (112.2)

$ 296.5

$ 221.0

$ 239.5

$ 248.0

$ 258.3

$ 268.2

$ 278.9

% Sales -1.6% 4.0% 2.9% 3.0% 3.0% 3.0% 3.0% 3.0%Unlevered Free Cash Flow $

725.13 $ 209.41

$ 238.71

$ 251.50

$ 260.37

$ 271.18

$ 281.60

$ 292.86

Present Value of Free Cash Flow $ 251.50

$ 260.37

$ 271.18

$ 281.60

$ 292.86

Weighted Average Cost of Capital 10.0% 

Sum of PV Cash Flows $ 1,357.51

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

Tory Burch LLC Valuation Summary

Comparable Companies Analysis

Precedent Transaction Analysis

$2,700 $2,900 $3,100 $3,300

Implied EV/EBITDA of 8.5x-9.5x

Implied EV/EBITDA of 7x-8x

Current Evaluation: $2,900 to $3,100 (millions)

21

Tory Burch Financial Estimates

Blue cells represent estimates

22

  2010 2011 2012 2013 2014 2015 2016

Sales $

313.00 $

450.00 $

760.00 $

1,000.00 $

1,375.00 $

1,856.25 $

2,505.94 % Growth 43.8% 68.9% 31.6% 37.5% 35.0% 35.0%

EBITDA $

150.00 $

229.00 $

250.00 $

275.00 $

371.25 $

375.89 % Sales 33.3% 30.1% 25.0% 20.0% 20.0% 15.0%

Ralph Lauren Comparables

23

          EV/Revenue EV/EBITDA P/E EPS

Company Name Ticker Share Price Market Cap Enterprise Value LTM 2016E LTM 2016E LTM 2016E LTM 2016EPVH Corp PVH $70.86 $5,825.54 $8,822.00 1.11x 1.10x 10.64x 8.15x 12.09 10.15 $5.88 $7.00Burberry BRBY $1,604.00 $5,215.00 $6,524.30 1.90x 1.90x 7.98x 8.67x 14.71 16.40 $0.80 $0.71Lululemon LULU $60.52 $8,385.10 $7,992.00 4.66x 3.67x 21.15x 17.38x 33.73 33.94 $1.61 $1.94Hanesbrands Inc HBI $24.03 $9,411.85 $11,712.43 2.04x 2.00x 16.83x 11.28x 22.62 12.72 $1.06 $1.07

Ralph Lauren RL $86.61 $7,032.02 $6,684.02 0.90x 0.91x 6.73x 6.16x 15.15 13.15 $5.52 $6.37

Mean $7,173.90 $8,346.95 2.12x 1.92x 12.67x 10.33x 19.66 17.27 $2.97 $3.42Median $7,032.02 $7,992.00 1.90x 1.90x 10.64x 8.67x 15.15 13.15 $1.61 $1.94High $9,411.85 $11,712.43 4.66x 3.67x 21.15x 17.38x 33.73 33.94 $5.88 $7.00Low $5,215.00 $6,524.30 0.90x 0.91x 6.73x 6.16x 12.09 10.15 $0.80 $0.71

Tory Burch Comparables

          EV/Revenue EV/EBITDA P/E EPS

Company Name Ticker Share Price Market CapEnterprise

Value LTM 2016E LTM 2016E LTM 2016E LTM 2016ECoach COH $34.05 $9,455.55 $9,005.45 2.13x 2.01x 10.89x 9.27x 25.86 17.91 $1.92 $1.90Kate Spade KATE $15.64 $1,997.14 $2,177.58 1.80x 1.77x 29.14x 11.04x 25.02 31.79 $0.62 $0.49Michael Kors KORS $50.23 $9,102.81 $8,320.94 1.81x 1.78x 6.13x 6.20x 11.56 11.36 $4.28 $4.39Gildan Activewear GIL $25.09 $6,101.04 $6,662.88 2.91x 2.38x 20.05x 11.82x 27.93 15.53 $0.90 $1.62

Tory Burch LLC                        

Mean $6,664.14 $6,541.71 2.16x 1.99x 16.55x 9.58x 22.59 19.15 $1.93 $2.10Median $7,601.93 $7,491.91 1.97x 1.90x 15.47x 10.16x 25.44 16.72 $1.41 $1.76High $9,455.55 $9,005.45 2.91x 2.38x 29.14x 11.82x 27.93 31.79 $4.28 $4.39Low $1,997.14 $2,177.58 1.80x 1.77x 6.13x 6.20x 11.56 11.36 $0.62 $0.49

24

Precedent Transactions

Date Completed Acquirer Target Type Transaction Value Premium EV/EBITDA8/24/2015 Ascena Retail Group Inc. ANN Inc. Cash/Stock $2,006.31 23.64% 8.54x6/19/2014 Men's Warehouse Inc. Jos A Bank Clothiers Inc. Cash $1,486.07 31.83% 11.16x7/31/2013 TowerBrook Capital Partners LP True Religion Apparel Inc. Cash $635.13 16.97% 8.19x2/14/2013 PVH Corp. Warnaco Group Inc. Cash/Stock $2,823.82 33.56% 11.28x9/14/2011 VF Corp. The Timberland Co. Cash $1,971.75 36.11% 12.3x3/7/2011 Leonard Green and Partners J. Crew Group Inc. Cash 2637.43 28.10% 9.21x

Mean $1,926.75 28.37% 10.11xMedian $1,989.03 29.97% 10.19x

High $2,823.82 36.11% 11.16xLow $635.13 16.97% 8.19x

25