Ralph Lauren’s Turnaround Efforts to Hurt Second Quarter Earnings

Ralph Lauren (NYSE:RL) is set to release its second quarter (quarter ended September 2017) earnings on November 2, 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 9% to 10%, excluding the foreign currency impact, as a result of a focus on the quality of sales, inventory reduction, and fleet optimization, in conjunction with the Way Forward Plan. Furthermore, foreign currency is expected to pressure the revenue growth by 40 basis points, and the operating margin by a similar amount. Despite this, the operating margin is expected to be up 40 to 60 basis points, as a result of increased efficiency and savings from the turnaround plan.

We have an $89 price estimate for Ralph Lauren, which is about 2% less than the current market price.

Important Steps Taken In The Way Forward Plan

As part of its efforts to turn around its fortunes, Ralph Lauren had instituted a “Way Forward” plan, the goal of which was to improve the company’s efficiency and increase its sales, and consequently enhance shareholder value. While a lot of progress has been made regarding this, steps still need to be taken to halt the negative revenue growth that the company has been witnessing. Below, a few of the wins in the first quarter and certain targets have been highlighted:

• 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.

Increased Focus Needed For E-Commerce

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 in the first quarter, 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 by 22%, reflecting the reduced promotional activity. However, given the importance of this segment, with a move seen towards the online space in the retail industry, a greater focus needs to be paid to return to positive growth.

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.” CEO Patrice 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 be 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.

See Our Complete Analysis For Ralph Lauren Here

Have more questions on Ralph Lauren? See the links below:

• What Are The Challenges Facing Patrice Louvet At Ralph Lauren?
• Ralph Lauren’s Revenues Decline And Margins Improve As It Cuts Back On Off-Price Sales
• Ralph Lauren CEO Departs Amid A Better Than Expected Quarter