Ralph Lauren’s Turnaround Efforts To Pressure The Top Line In Its Third Quarter

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Ralph Lauren (NYSE:RL) is set to release its third quarter (three months ended December 2017) earnings on February 1, 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 6% to 8%, 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 benefit the revenue growth by 160 to 170 basis points, and the operating margin by 10 to 20 basis points. Despite this, the operating margin is expected to decline, as a result of a decline in sales and a higher SG&A rate, offset by the foreign currency benefit and increased efficiency and savings from the turnaround plan.

We have a $90 price estimate for Ralph Lauren, which is lower than the current market price. The charts below have been made using our new, interactive platform. The driver assumptions can be modified to gauge their impact on the company’s valuation and price per share metric.

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 the 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 second quarter have been highlighted:

  • Adjusted gross margin improvement of 300 basis points, driven by moderating the discounting.

  • Continued the progress to achieve lead time goals and increased SKU productivity.
  • Expanded digital and international presence, with average unit retail across the direct-to-consumer network up 5% versus the prior year.
  • Inventory levels lowered by 26%.

  • Reduced operating expenses by 5%, to increase efficiency and attain savings targets.
  • On target to close 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, these efforts will have a negative impact on its revenues in the short term. Moreover, 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 luxury brands continue to deplete their assortment at these stores, it could lead to further reduction in mall traffic, and may adversely impact apparel retailers.

Increased Focus On The Digital Space

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. This step may put a considerable pressure on the revenues attained from the digital space. However, with a move seen towards the online space in the retail industry, a greater focus needs to be paid to this segment.

In order to improve the customer experience online, Ralph Lauren has stated its intention to transition its platform towards a cloud-based solution. With this new interface, the company aims to the improve 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 into 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.

Recently, the company also announced several appointments to drive the expansion of its digital segment, including the creation of a new Chief Digital Officer role, whose task has been described as “elevating the company’s global digital platforms and enhancing the digital experience for consumers across all channels to drive consumer acquisition, retention, value, and revenue.” The company’s aim is to expand its digital presence across the world, and be where the customer is — the online space.

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