Decline In Revenue To Continue For Ralph Lauren In The Second Quarter

Ralph Lauren‘s (NYSE:RL) second quarter earnings will be released on November 10, 2016. The company’s revenue and earnings per share are expected to decline on a yearly basis.

See Our Complete Analysis For Ralph Lauren Here

Ralph Lauren’s recent results have been unsatisfactory; the downtrend which started in FY 2016, wherein the EPS fell over 37%, continued into the first quarter, when revenues declined over 4% and EPS was down almost 3%. This downward trajectory is expected to continue, to be reflected in the second quarter earnings, ended September 2016. Together with a revenue decline that the company has witnessed in recent quarters, there has also been a build up of inventory, which signifies a decrease in consumer demand for RL’s merchandise. In the last three years, while the revenue has increased 7%, the inventory has been up by 26% in the same period. The margins have also been decreasing for several years, pressured by poor sales, which have consequently resulted in a greater promotional environment, and the company’s out of date supply chain model.

These problems were recognized by CEO Stefan Larsson, and in response to that, RL released its Way Forward plan, designed to address the issues plaguing the company. Key measures to be undertaken include:

• 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 had already closed 43 stores in FY 2016, and with the further closures, the resulting savings are expected to be $70 million.

• 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 staff will lose their jobs in order to have a more efficient organization. This means about a thousand people will be affected by this move. Such a move would result in savings of $90 million in FY 2016 and $150 million in FY 2017.

• 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. Moreover, focusing on inventory will also help to boost margins in the future.

• Focus On Three Core Brands – The new management identified that the company had too many brands, which diluted their 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 on one-third of the unproductive styles in the first half of the year, and further cut the number of styles in the future.

In the first quarter, while the company’s domestic business remained challenged, where revenues fell 11%, its international business grew at a strong 10% rate. Ralph Lauren managed to improve its gross profit margin by 130 basis points, on the back of a favorable sales mix shift, lower product costs, and an improvement in Asia, where revenues increased 3%. The company also closed 43 stores, which were felt to be weakening the brand, while also cutting down on its average sale period by 30% and decreasing the depth of its markdowns. These factors helped to improve the AUR (average unit retail) and gross profit. Europe witnessed a 14% growth in net revenues, primarily driven by a benefit from the timing of wholesale shipments, relative to the previous year. The company also reduced buys for the year to protect full price selling, increase stock turnover, and reduce excess inventory. In the rest of Ralph Lauren’s FY 2017 (ended June 2017), the impact of the Brexit may also negatively affect the company’s earnings.

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

• Ralph Lauren Is The Latest Brand To Jump On The See-Now, Buy-Now Bandwagon
• Ralph Lauren Q1 2017 Earnings: Company Beats Low Expectations
• How Will Ralph Lauren Perform In The First Quarter Of Its FY 2017?
• What Are The Main Facets Of Ralph Lauren’s Turnaround Plan?
• How Will Ralph Lauren Perform In 2016?
• How Has Ralph Lauren Performed In Terms Of Inventory Management?
• What Are The Challenges Facing Ralph Lauren?
• 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?
• How Has Ralph Lauren Performed In Comparison To Its Peers?
• How Has Ralph Lauren’s Sales Breakdown According To Geographic Locations Changed Over The Past Five Years?
• How Will Ralph Lauren’s Retail Division Perform In The Next Five Years?
• 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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