Promotional Pullback Helps Ralph Lauren Beat Estimates

by Trefis Team
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Despite a decline in sales, shares of luxury retailer Ralph Lauren (NYSE:RL) were up 10% once the company delivered a beat on earnings expectations. The company is in the midst of a brand transformation, and is making concerted efforts to scale up its brand value after its apparel had gained ubiquity, at the cost of its image. It has made aggressive efforts to limit its merchandise in department stores and to reign in its discounting. Such efforts, while pressuring the sales, have improved the margins considerably, and given a boost to its earnings. This positive news, coupled with similar upbeat results from Michael Kors, provided a lift to the apparel sector, with shares in many such companies rising on the day.

Big Wins In The Turnaround Plan

New CEO Patrice Louvet is carrying on the transformation work started by former CEO Stefan Larsson, and in this regard, the company delivered on a number of elements, and set itself tough, but necessary, targets:

  • Gross margin improvement of 210 basis points, driven by moderating the discounting.
  • Inventory levels improved by 31%.
  • Stock Keeping Units (SKUs) reduced by 20% for Fall 2017, resulting in a more focused, higher margin assortment.
  • 35% of the business to be reduced to a 6-months lead time, and 90% on 9-months lead time by the end of FY 2018.
  • Operating expenses reduced by 13%, to increase efficiency and attain savings targets.
  • Closing 20-25% of its underperforming US department store locations by the end of FY 2018.

Such efforts undertaken by the company, to reduce promotion frequency and depth, optimize distribution, improve inventory, and increase productivity, will lay the groundwork for future growth. However, while the company is reducing its merchandise at the department stores, this segment still contributes to a significant portion of the company’s earnings, and 69% of its operating income in FY 2017 (year ended March 2017). If these luxury brands continue to deplete their assortment at these stores, it could lead to a further reduction in mall traffic, and may adversely impact apparel retailers.

E-Commerce Segment Hurt In The Aftermath

The company is aggressively going after the heavy promotional activity it had undertaken in the past. Such a strategy is being followed on its e-commerce platform as well, in order to have better price coherency across all segments. These actions resulted in the improvement of the gross margins in the North American segment by 220 basis points, as compared to last year. However, this step has put a considerable pressure on the revenues attained from the digital space. In the first quarter, the North America e-commerce comps plummeted 22%, reflecting the reduced promotional activity.

In order to improve the customer experience online, Ralph Lauren is transitioning its platform towards a cloud-based solution. With this new interface, the company aims to improve the transaction process, and enhance its omnichannel capabilities. The website is slated to be transformed by the end of the financial year, and the expectation is for it to be “the flagship store of the future.” Louvet is also looking at the online operations of the company’s top retail partners. In addition to this, Ralph Lauren is also aiming to improve its digital operations through pure plays. In this regard, the company partnered with Zulily, which is owned by home shopping retailer QVC. Ralph Lauren also sells a limited number of items through amazon.com, and while the company did not say whether it is increasing its presence on the website, Louvet did confirm that the company is conducting a thorough review to gauge what pure play partnerships fit better for the brand. The company considers digital, as well as the direct-to-consumer segment, to a key growth driver for the future. The gross margin expansion this financial year, and in the long term, is also expected to be driven by this segment.

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