Ralph Lauren CEO Departs Amid A Better Than Expected Quarter

by Trefis Team
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Ralph Lauren (NYSE:RL) reported its third quarter FY 2017 results on February 2, 2017, wherein it beat consensus estimates for earnings per share by 22 cents. However, it declined by over 18% when compared with the same quarter last year. The revenue of the company fell almost 12% in the quarter, but managed to meet the expectations. The decline in revenue is expected to continue in the remainder of the financial year, in line with the company’s Way Forward Plan. Currency headwinds are expected to hurt revenue growth by 100 basis points, and will pressure gross margins by 70 basis points, along with a negative impact on operating margins by about 100 basis points.

RL Q3 2017 Earnings

Ralph Lauren Abruptly Announces CEO Departure

The biggest news to come out of the company in the day was the departure of Stefan Larsson as the CEO of the company, less than two years after taking the helm at a struggling Ralph Lauren, with the CEO set to exit by May 1. A difference in strategic approach to the creative and consumer facing parts of the business has been blamed for this. However, this news overshadowed the earnings beat of the company, sending its stock price tumbling. The shares fell 12.3%, to end the day at $76.61, after earlier falling to a six-year low of $76.18.

Stefan Larsson is perceived to be one of the top retail leaders in the industry, with a proven track record, with success at H&M and Old Navy. Larsson’s skills in efficiently managing the supply chain process could have helped with the difficult turnaround ahead for Ralph Lauren. The presence of a new CEO in the midst of the turnaround could also prove to be difficult, as each new leader comes with his/her own vision.

See Our Complete Analysis For Ralph Lauren Here

The Way Forward Plan Progresses

Ralph Lauren has refocused and evolved its core product offering, with an update to its color palette, materials, and fit, incorporating more consumer insights and market intelligence into the decision making. The company has also been able to reduce the number of SKUs (Stock Keeping Units) designed for Fall 2017, resulting in a more focused and productive assortment, as well as lower development cost. Furthermore, the disciplined assortment creation has enabled them to buy closer to market, and therefore, reduced early commitments. This results in more informed buying, significantly improving the company’s ability to match inventory to demand, resulting in a lowering of inventory levels by 23%. The retailer is also building a best-in-class sourcing facility, and a demand driven supply chain, remaining on track to reach its goal of a nine month lead time. The company expects to be half-way there by the end of FY 2017 (ended March 2017), and 90% there by the end of the next fiscal year.

Financial Performance In Line With Guidance

Revenues for the company fell by 12%, with an adjusted operating margin rate of 12.8%. The adjusted operating margin performance was better than the guidance provided by the company in its second quarter earnings conference call, driven by the gross margin, and proactive expense management. Operating expenses trended downwards, as a result of expense initiatives under the Way Forward Plan, including streamlining the organization to reduce the headcount, process changes and product development to reduce costs, and closing underperforming stores to improve the profitability of the fleet.

Ralph Lauren has also made a concerted effort to rebalance its distribution to the off-price wholesale business, due to the highly promotional nature of such stores. The high discounts offered by this channel makes it harder for consumers to pay full-price at its retail stores or online. As a result, wholesale revenues fell 26% in the quarter. The company is also cutting down on the promotions offered in its e-commerce channel, citing them to be “the most over promoted channel.” E-commerce revenues declined 9% in the quarter, driven by these initiatives, and this will affect its revenues from this channel in the fourth quarter as well. Even in Europe and Asia, the company reduced promotions, which drove up the AURs (Average Unit Retail), and expanded gross margins on a year-on-year basis in constant currency.

Ralph Lauren is also on track to close approximately 50 stores this financial year, with 12 stores shuttered in the third quarter, taking the total to 27 for the nine months. This puts the company on track to achieve savings from store closures in the amount of $70 million.

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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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