Ralph Lauren’s Turnaround Plans To Weigh On The Fourth Quarter Earnings

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Ralph Lauren (NYSE:RL) is set to release its fourth quarter and financial year 2017 (year ended March 2017) earnings on May 18, wherein a decline in revenue and earnings per share is expected. Even the company’s guidance provides for a decline in consolidated net revenues by mid-teens on a reported basis, as a result of a focus on the quality of sales, inventory reduction, and fleet optimization, in accordance with the Way Forward Plan. Furthermore, foreign currency is expected to pressure the revenue growth by 100 basis points, and the gross margin by approximately 70 basis points. FY 2016 also included a 53rd week, a part of the fourth quarter, which impacts the year-on-year comparisons.

RL Q4 2017 Pre Earnings

The Way Forward Plan Soldiers On

The company’s turnaround plan, dubbed the “Way Forward Plan” was unveiled in June 2016 by then-CEO Stefan Larsson, designed to streamline the operations and revitalize its core brand. The revenue growth for the company had fallen from a healthy 7% in FY 2014, to 2.2% in FY 2015, and further to a negative 2.8% in FY 2016, which ended in March 2016. The main reasons for the company’s poor performance in recent times has been a result of a decline in department store sales, the rise of fast fashion retailers, and the company’s own out of date supply chain model. The company’s focus itself was diluted with numerous brands and a multitude of initiatives. This was recognized by Larsson, who listed the steps being undertaken by the company to overcome such problems, which involved refocusing on the product, marketing, and shopping experience, while at the same time evolving its operating model to a more demand-driven supply chain, better sourcing, and a multi-channel global expansion strategy.

While announcing the departure of Larsson, the company also provided an update into its progress on the Way Forward Plan during its third quarter earnings (ended December 2016) conference call. Larsson stated that the company 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, reduce 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.

Plagued with declining sales, affordable luxury company Ralph Lauren announced its decision to close its dedicated Polo store located on Fifth Avenue. The company also intends to increase the focus on its e-commerce operations,  and in this regard, move to a “more cost-effective, flexible e-commerce platform” through a collaboration with Salesforce’s Commerce Cloud. Such a move is expected to deliver a more seamless customer experience, with a lower operating cost. These new moves follow an abrupt announcement of the departure of CEO Stefan Larsson less than two years after taking the helm of a struggling Ralph Lauren, and are an extension of the aforementioned turnaround plan. These steps would save the company $140 million in annual expenses, and would cost $370 million in one-time charges. These savings are in addition to the $180-$200 million in savings expected to be realized from the earlier steps. The company is also considering new retail concepts, including leveraging Ralph’s Coffee, and developing new store formats. The plan also involves an unspecified reduction in the workforce, though no news was also provided if the store closure is linked to its proximity to the Trump Tower, also located on Fifth Avenue. The Tower has been under heavy security, resulting in reduced traffic, and the area has also been the site for heavy protests during the presidential campaign, as well as after the election.

The Decline Of Brand Value

Ralph Lauren was one of the first luxury companies to provide a range of products across different price points in order to drive sales, and make the brand accessible to a wider spectrum of consumers. This move was adopted by other brands such as Michael Kors, Calvin Klein, and Coach. In this way the growth in sales seemed to be the focus, while the brand value was being diluted. The brands were also then widely available in factory stores, where the products are priced at a much cheaper rate.

With a decline in traffic to malls in recent years, these department stores have resorted to further discounts in order to spur their sales. The heavy discounts offered in this channel make it harder for consumers to spend more on a similar bag at the company’s own stores or its e-commerce websites. Keeping this in mind, many brands have now started to limit the merchandise they sell through this channel.

While the company is selling less merchandise to department stores, it is still highly dependent on its wholesale segment, with this channel accounting for 44% of its total revenues. The sales to its three largest wholesale customers are responsible for 24% of its revenue, with Macy’s alone contributing 11% of the company’s sales. Hence, the challenges faced by the company are substantial, and the company seems to be on a tough road to recovery.

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