What Are The Challenges Facing Patrice Louvet At Ralph Lauren?

by Trefis Team
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In mid-May, Ralph Lauren (NYSE:RL) announced the appointment of Patrice Louvet as the President and Chief Executive Officer. He was most recently the Group President at the beauty division for  Procter & Gamble, overseeing a segment which had approximately $11.5 billion in revenue in 2016. The appointment will become effective on July 17, after which Louvet will dually report to Ralph Lauren and to the Board of Directors. This comes on the back of news that Stefan Larsson would step down from his role, less than two years after taking the helm, with the former CEO exiting on May 1.  A difference in strategic approach to the creative and consumer facing parts of the business had been blamed for this. 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 prove to be difficult for Ralph Lauren, as the new leader comes with his own vision. Below we’ll underline certain challenges facing the new CEO.

Getting Acquainted With The Fashion Market

Patrice Louvet comes with more than 25 years of experience at P&G, where he has overseen several different multi-billion dollar brands, holding numerous management and leadership roles in Europe, North America, and Asia. However, the question remains whether his experience in the consumer packaged goods industry can be transferred to the fashion industry. In a volatile fashion market, it is hard for even insiders to tread a successful path; for an outsider, this may prove to be even more difficult.

On top of this, the company even faces the daunting task of overcoming declining 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, the company has decided to limit the sale of its merchandise through the wholesale channel, reflected in the declining sales, but improving margins in the fourth quarter of FY 2017.

Halting The Revenue Slide

Ralph Lauren 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. 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 would confront the new CEO, Patrice Louvet, once he starts on July 17.

Improving Speed To Market Of Merchandise

The key to the turnaround at Ralph Lauren is fixing the supply chain, and improving the lead time from 15 months to 9, besides the introduction of an eight week test pipeline. This will enable the company to plan the inventory based on demand. Excess inventory problems have driven up discounting and transfers to outlet and off-price stores, which have diluted the brand value. This has also resulted in a massive growth in inventory in the past few years, while the rate of growth in sales has slowed down considerably. Focusing on the supply chain, and thus, the inventory, will also help to boost margins in the future.

Larsson had identified this problem, and had undertaken a number of steps to curb this situation. As a result of the initiatives implemented by him, the company, while declaring its fourth quarter 2017 results, reported that 50% of the business is on a nine-month lead time, with the company on track to reach 90% by the end of FY 2018. The company also stated that for Spring 2018, approximately 35% of the business will be at a lead time of six months or less. Given the success that the company has had in reigning in this issue, it would be paramount that Louvet carries on with these efforts.

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