Ralph Lauren Earnings Review: Worn Out Results Sends Stock Price Tumbling

Luxury fashion retailer, Ralph Lauren (NYSE:RL), announced its third quarter results on February 4, reporting a massive 39% year-on-year drop in its earnings to $131 million, and a sales decline to $1.9 billion from $2 billion. ^[1] The company also lowered its fiscal 2016 guidance to a 3% revenue decline from an earlier estimation of flat sales. In the quarter, while international net revenue grew 6% in constant currency, North America revenue dropped 4%. This decline reflects approximately 300 basis points of negative impact from foreign currency effects.

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 A Number Of Headwinds Persist

Retail sales of the company fell 7%, including a negative currency effect of two percentage points, while wholesale revenue dropped 6%, dragged down by weaker performance at North American department stores. Ralph Lauren’s business with department stores, such as Macy’s and Nordstrom, which has long been a source of high growth, has suffered a great deal in recent quarters. Many clothing makers and big retailers in North America have been struggling as a result of a warmer than usual holiday season and general macroeconomic weakness. According to Stefan Larsson, CEO, the company is examining its pricing and distribution, and considers better inventory management as a partial solution, as that would prevent goods from piling up on the shelves, resulting in a mark down of prices.

Ralph Lauren’s sales in recent quarters have been hurt by a strong U.S. dollar, which has not only caused a reduction in international sales, when converted to U.S. dollars, but has also dampened tourism to the U.S. The drop in foreign tourist traffic is echoed in the positive comps in store locations where domestic customers represent more of the traffic. This has also compelled the company to raise its prices in Europe, Japan, Canada, and Australia, while also pressing suppliers for lower sourcing costs. ^[2]

Company Review Paves Way For Broad Changes

The disappointing results, the latest in a string of sub-standard quarters, has forced Ralph Lauren to conduct a review of the entire company in order to identify growth opportunities for leveraging its strengths. Such a process could lead to the company cutting down on its myriad labels, which are often confusing to customers and inefficient to produce. A factor working against the company is also its wide availability, in particular through off-price retailers, which results in the loss of the exclusivity factor. Ralph Lauren is also looking to right-size its cost structure in order to be more competitive. While the company was short on details, with more information to be provided in the Spring, Christopher H. Peterson, President-Global Brands, did say Ralph Lauren was on track to complete the SAP European implementation, as well as the e-commerce re-platforming next year. The company should also be able to deliver the $110 million of cost savings from the initial global brand restructuring implemented. The aim is also to create a demand-driven supply chain and to develop a holistic global expansion strategy for the future, while also taking pro-active steps to clear the end of season inventory in the short-term.

The growth in the future can be driven by two factors — the Polo brand and its e-commerce initiative. The company’s core Polo brand, which forms a large portion of the company’s sales, will benefit from CEO Larsson’s skills in efficiently managing the supply chain. Furthermore, the substantial investment undertaken by the company to in-source its e-commerce platform will reap benefits in the future. Comparable store sales related to the company’s e-commerce operations grew 1% on a reported basis, and 2% in constant currency, which helped to slightly offset the decline in revenues.

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1. Ralph Lauren- Q3 2016, Form 10Q, published on February 4, 2016 [↩]
2. Ralph Lauren, Q3 2016- Earnings Call Transcript [↩]