Ralph Lauren’s Revenues Decline And Margins Improve As It Cuts Back On Off-Price Sales

by Trefis Team
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Ralph Lauren (NYSE:RL) reported a mixed bag of results for its fourth quarter and financial year 2017 (ended March 2017). With its turnaround plans ongoing, it is pretty evident that while the cutback on discounting has resulted in an improved bottom-line, it has hurt its revenue, which declined for a 10th consecutive quarter.

RL Q4 2017 Earnings-1

The earnings per share came in at 89 cents, overshooting analysts’ estimations of 78 cents. Furthermore, the adjusted gross margin was 55.4%, 90 basis points higher than the corresponding prior year period. However, the company’s efforts to reduce the shipments to department stores, primarily responsible for the discounting, negatively impacted the sales. The comparable sales, on a constant currency basis, were noted to have declined by 11%, substantially higher than expectations of a 5.6% decline. This contributed to a fall in revenues by over 16% to $1.57 billion, marginally beating expectations. The decline in sales is expected to continue in the current quarter, along with gross margin improvement. Such a scenario presents a number of challenges for the new CEO, Patrice Louvet, who takes the helm in July.

RL Q4 2017 Earnings-2

Big Wins In The Way Forward Plan

Ralph Lauren created operational efficiencies by improving the cost structure, increasing the productivity of the assortment, and improving the quality of sales. The highlights of their achievements have been specified below:

1. Cutting Unproductive Styles

  • The number of SKUs (Stock Keeping Units) were reduced by 20% for Spring and Fall 2017.
  • Investment was focused on its core iconic products.

2. Reducing Lead Times

  • 50% of the business is now on a nine-month lead time, and the company is on track to reach 90% by the end of FY 2018.
  • For Spring 2018, approximately 35% of the business will be at a lead time of six months or less.

3. Bringing Down Inventory Levels

  • Inventory is more aligned to demand, with a 30% reduction compared to last year.
  • Warehouse space has been cut by 13%, with continued reductions planned for the first half of FY 2018.

4. Improving Distribution

  • 50 underperforming stores closed in its retail fleet.
  • The company is on track to shut down 20% to 25% of its wholesale points of distribution by the second half of FY 2018.

5. Optimizing Expense Structure

  • SG&A was reduced by $240 million.
  • Management layers were cut down from nine to six, with a 20% reduction in the executive population.
  • Regional operations were consolidated under a single international group to streamline costs and processes.

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