Ralph Lauren Q2 2016 Earnings Review: Results Exceed Expectations With Strategic Initiatives Paying Off

New York-based Ralph Lauren (NYSE:RL) reported net income of $184 million for the second quarter of fiscal 2016 (ending September), compared with $201 million in the corresponding period in 2015. ^[1] Foreign currency impacts and a one-time charge for restructuring activities undertaken for the brand’s reorganization have not been incorporated in the current figures. Revenues increased 4% and profits were also better than expectations, driven by gross margin and SG&A enhancement.  Strong currency headwinds have been dampening the outlook for the company; however, the company is reaping massive cost savings from its corporate realignment strategy. The key takeaways from Ralph Lauren’s Q2 earnings are listed below, highlighting a positive outlook for the company.

Current Trends-

• Regional Performance: Currency movements continued to influence foreign tourist traffic around the world; a strong U.S. Dollar reduced the tourist influx to the U.S., while a weak Euro and Japanese Yen had a converse effect. Consequently, a 2% increase in net revenues was witnessed in the Americas, while there was a double-digit growth in Europe, triggered by increased sales to locals as well as tourists. Asia revenues were up 7% on a constant currency basis in the second quarter, with double-digit growth in Japan, China, Southeast Asia, and Australia — an upshot of successful merchandising and marketing strategies.
• SKU, Style Rationalization and Brand Reorganization: Earlier than expected expense reductions from the reorganization strategy resulted in meaningful SG&A cost savings and lower margins. Tremendous progress was made with regards to changes in the management structure; all six brand presidents and their leadership teams are in place with line planning processes initiated. The Men’s Polo brand is an example of this process and is expected to result in double-digit reductions in SKUs. The global line planning process will be subsequently applied to other brands, culminating in expected cost savings of $110 million as a result of a decline in SKUs and sample and design cost, better inventory turnover, improved gross margins, and better SG&A levels. ^[2]
• Direct-to-Consumer Strategy: Across all brands, Ralph Lauren opened 14 directly operated stores and numerous licensed locations. For Polo, five new stores were opened — two in the U.S. and three in Asia. Certain stores were repositioned to either Ralph Lauren Luxury or Polo concept in North America to improve brand clarity, store productivity, and efficiency. Furthermore, renovation was also undertaken to fortify the luxury tag of the company. This could help attract more customer traffic.
• E-Commerce Initiative: The e-commerce strategy has also proved to be successful with an increase of 10% in the second quarter (compared to 2% in the first quarter), primarily in the international markets. Other initiatives such as ‘Buy Online, Ship from Store,’  ‘Hold Online, Pickup in Store,’ and the waitlist feature, have been implemented resulting in improved conversion rates in the U.S. stores.

Going Forward

• Stefan Larsson’s Global Retailing Skills: The new CEO has a proven track record with success at H&M and Old Navy. With a rather large portion of Ralph Lauren’s sales attributed to basic products like Polo shirts, Larsson’s skills in efficiently managing the supply chain process could prove to be profitable to the company. Logistical efficiencies will help in maintaining higher margins and could accelerate growth.
• Global Line Planning Process: The annual expense savings connected to the restructuring have been revised upwards by $10 million to $110 million. The global strategic planning process should be accomplished in the coming months, setting up a holistic strategy for brands athwart all geographies and channels.
• Foreign Currency Impact: Foreign currency had a negative impact of 500 basis points on the income of the company, in line with expectations. The net revenues are expected to rise between 0 and 2 percent on a reported basis going into the next quarter. Foreign currency will have an estimated 250 basis point downward impact on the revenues and the operating margin will be lower than the corresponding period in 2015 by 200 to 250 basis points. Careful planning has been made to counteract such headwinds and push forward new strategies.
• New E-Commerce Platform: Plans have been made to move to a new e-commerce platform in the next 12 to 18 months, eliminating the current payment made to eBay Enterprise, which is a percent of the e-commerce revenue.

In conclusion, Ralph Lauren has proved to be resilient in the face of currency headwinds. A transition to the new structure has proved to be smooth for the company, and will continue to reap benefits in terms of cost savings and improved margins. Effective implementation of marketing and growth strategies could result in augmented revenues in the long term.

Key Financial Results – Q2 2016

• Net revenues of $2.0 billion, an increase of 4% in constant currency, driven by double-digit growth in international markets.
• Operating margin of 13.5% as a result of brand reorganization and operational management.
• Earnings per diluted share of $2.13, rising 13% over the prior year in constant currency.
• Wholesale revenues up by 3% in constant currency, with double-digit growth in Europe.
• Gross profit margin was 56.5% in the second quarter, 30 basis points below the prior year period.

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1. Ralph Lauren 10-K [↩]
2. Ralph Lauren earnings call transcript [↩]