Can The New Restructuring Plan Revive Ralph Lauren?

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RL: Ralph Lauren logo
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Ralph Lauren

Recently, Ralph Lauren (NYSE:RL)  announced its Way Forward Plan to refocus on its core offering and “evolve its product, marketing and shopping experience to increase its desirability.” The company plans to evolve its operating model to enable sustainable, profitable sales growth by significantly reducing supply chain lead times and executing a disciplined multi-channel distribution and expansion strategy.  Under this restructuring plan, Ralph Lauren will close nearly 10% of its retail stores (50 stores), mainly the high end ones and reduce production time by six months as it moves towards building a more nimble organization. The company has been struggling with revenue growth and registered 3% year on year decline in net revenues for FY 2016.  Included in the plan are cost savings intended to free up resources to invest in the brand, faster cycle times, and supply chain enhancements.

See Our Complete Analysis For Ralph Lauren Here

Growth In Market Share And Mid-Teens Operating Margin Expected By 2020

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As Ralph Lauren goes through a proactive pull back in inventory receipts, store closures, pricing harmonization and other restructuring initiatives, the company expects a decline in net revenues and operating margin in the fiscal year 2017. It expects to stabilize its performance in FY 2018 and grow thereafter. In FY 2020, the company is targeting market share growth and a mid-teens operating margin. The company’s new CEO is confident about achieving a turnaround in the next few years.  we believe shorter production times will enable fresh inventory to hit stores faster, stimulating traffic and sales.  This will be a key factor in the revival of the company.   The company’s lower end brands face stiff competition from fast fashion brands such as Zara and H&M that  are able to bring fresh inventory to stores every few weeks.   Ralph Lauren will need a more efficient production cycles to compete with these players. Under the new restructuring plan, the company will increase its focus on the core Ralph Lauren, Polo and Lauren brands.  Ralph Lauren’s CEO believes that the company has too many brands and large retail stores.  As a result, its costs are bloated and its inventory system is inefficient.  While the “way forward” plan is aimed at addressing these issues, it will impact revenues and margins in the short term.

We expect the average revenue per square foot of Ralph Lauren’s retail segment to fall from $743 in 2016 to $ 732 in 2017 and start recovering thereafter reaching $ 781 by the end of our forecast period.

Focus on core areas, new product categories and a shorter production cycle should lead to an increase in average revenue per square foot in future. While the near term looks challenging and the restructuring plan will face execution hurdles, we believe it will enable Ralph Lauren to establish itself as a strong player in future as the company works on its new corporate strategy.

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