Ralph Lauren’s Earnings Decline As It Moves Forward With Its Turnaround Plan

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RL: Ralph Lauren logo
RL
Ralph Lauren

Ralph Lauren (NYSE:RL) released its second quarter earnings on November 10, for the period ending September 2016. While the revenues were largely in line with expectations, the company managed to beat EPS estimates by $0.19.

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Ralph Lauren soldiers on with its Way Forward plan, designed to turn around the fortunes of the company. In this regard, the company seems to be on track to achieve its full-year fiscal 2017 guidance. In the second quarter, revenue of $1.8 billion was in line with the company’s expectations, while the operating margin, despite a 110 basis points fall, was ahead of the target of a 200-250 points decline. This was driven by higher realized gross margins in the international markets, increased traction gained by the quality of sales initiatives, and planned SG&A expenses shifting into the third quarter. The quality of sales have been driven up as a result of moderating discounting activities, tightening inventory buys, and the closure of another seven underperforming stores in the quarter. Such initiatives have resulted in a reduction in inventories by 15%.

The North American segment continues to be the most challenged market for Ralph Lauren, where revenue fell by 12%. Meanwhile, in the international markets, the revenue increased 2%, driven by improving quality of sales, right-sizing of the inventory, and optimization of the store count. In Asia, over the last nine months, the company has closed 72 points of distribution which were deemed to have weakened the brand, while at the same time RL has opened 159 new high-quality points of sale, at better locations, and with refreshed store environments. Reducing the length of sales periods and decreasing the depth of markdowns have resulted in the average unit retail prices to be up 10% in constant currency, and improved gross margins.

Another important step taken by the company in the quarter was to discontinue the Denim & Supply brand, in line with the companies efforts to focus on its core brands. The company will now be able to address the denim market more effectively through its Polo brand. The company is also working towards cutting down the unproductive styles, leading to a massive reduction in the number of SKUs (Stock Keeping Units). For fall 2016, the company achieved a 10% reduction in SKUs, and remains on track to achieve an over 20% reduction for spring 2017. This will help the company to refocus its resources and creativity on its core brands. CEO Stefan Larsson also stated that the company expects to be halfway to its goal of a nine-month lead time by the end of the fiscal year, and 90% there by the end of the next fiscal year.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Ralph Lauren.
 
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