What Are The Main Facets Of Ralph Lauren’s Turnaround Plan?

Ralph Lauren’s (NYSE:RL) CEO Stefan Larsson recently revealed the company’s turnaround plan, called ‘The Way Forward,” which is designed to revitalize the core brand, and to be more in tune with the consumer. Since hitting a peak of $188 three years ago, the company’s stock price has tanked almost 50% to $99.76 on July 25th. The revenue growth for the company has fallen from a healthy 7% in FY 2014, to 2.2% in FY 2015, and further, to a negative 2.8% in FY 2016, which ended in March. The main reasons for the company’s poor performance in recent times has been a result of a decline in department store sales, the rise of fast fashion retailers, and the company’s own out of date supply chain model. The company’s focus itself was diluted with numerous brands and a multitude of initiatives. This was recognized by Larsson, who listed the steps being undertaken by the company to overcome such problems, which have been highlighted below.

1. Closing Underperforming Stores

The management stated it would be cutting down its store count, by closing about 50 high end stores. This is being done in an effort to right-size its real estate portfolio, by shutting down the underperforming stores that don’t strengthen the brand or drive any profitable sales growth. The company has already closed 43 stores in FY 2016, and with further closure, the resulting savings are expected to be $70 million.

2. Rightsizing The Organization

Larsson said the company will focus on restructuring the company to make it leaner, by eliminating three layers of management. Furthermore, ~8% of the headcount, or about a thousand jobs, will be reduced. Such a move would result in savings of $90 million in FY 2016 and $150 million in FY 2017.

3. Streamlining The Supply Chain

The key to the turnaround is fixing the supply chain, and improving the lead time from 15 months to 9, besides the introduction of an eight week test pipeline. This will enable the company to plan the inventory based on demand. Excess inventory problems have driven up discounting and transfers to outlet and off-price stores, which dilutes the brand value. This has also resulted in an inventory growth of 26% in the last three years, while the growth in sales in this period has only been 7%. Focusing on inventory will also help to boost margins in the future.

4. Focusing On Three Core Brands

The new management identified that the company has too many brands, which diluted the company’s image. Hence, several brands will be eliminated, in order to sharpen the focus on the Ralph Lauren, Polo, and Lauren labels. The company stated that the three main brands account for a vast majority of the brand strength and performance. Furthermore, the number of styles the company produces will also be reduced, as currently 30% of the styles contribute to 70% of the business, and moreover, 65% of the styles are considered unproductive. This has prompted the company to cut back a third of the unproductive styles in the past six months, and further cut the number of styles in the future. Ralph Lauren has also undertaken to focus on the core brands, while operating the smaller brands with an increased focus on ROI and strengthening the core. The marketing and shopping experience will also be evolved accordingly.

Ralph Lauren is attempting to improve operating margins and EPS by FY 2018, and return to profitable sales growth by FY 2019.

Have more questions on Ralph Lauren? See the links below:

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• What Led To A Sudden Drop In Ralph Lauren’s Share Price?
• What Percentage Of Ralph Lauren’s Stock Price Can Be Attributed To Growth?
• Ralph Lauren Q4 And FY 2016 Earnings And Revenue Beat Expectations
• Why Have Ralph Lauren’s Licensing Revenues Been Declining In Recent Years?
• How Have The Number Of Ralph Lauren Stores Operated By The Company Changed Over The Past Five Years?
• Why Is The Online Market Place The Next Big Thing For Ralph Lauren?
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• How Did Just The Month Of February Make Ralph Lauren One Of The Worst Performing Companies, Amongst Its Peers?
• Why Did We Revise Our Price Estimate Of Ralph Lauren To $102?
• How Will Ralph Lauren’s Revenue And EBITDA Composition Change In The Next 3 Years?
• What Is Ralph Lauren’s Fundamental Value Based On Expected 2016 Results?
• Ralph Lauren: Year 2015 In Review

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