Ralph Lauren’s Turnaround Efforts Pressure Top-Line, Improve Bottom-Line

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RL: Ralph Lauren logo
RL
Ralph Lauren

Despite a decline in revenues, Ralph Lauren (NYSE:RL) was able to produce an improvement in its third quarter (three months ended December) earnings, reported on February 1, as a result of its restructuring efforts which focuses on less discounting. The company was able to beat consensus estimates on earnings by 18 cents a share, with the credit going to its pursuit of full-price sales. RL has also aimed to reduce its dependence on department stores to generate sales, and in this regard, the company has been in the process of exiting 20% to 25% of such stores that sell its merchandise. However, while this has been a boon to the bottom-line, it has had a negative impact on its top-line. In fact, this factor is expected to continue to pressure the sales of the company this entire fiscal year, with the revenues expected to be down 8% to 9%, as compared to the previous year.

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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 third quarter have been highlighted:

  • Average unit retail (AUR) across RL’s direct-to-consumer network was up 4% to last year.
  • Adjusted gross margin was up 250 basis points compared to last year, as a result of reducing off-price penetration within the wholesale segment.
  • Discount rates were down across all regions in retail.
  • Inventory levels were lowered by 16% versus last year, with an improved inventory turnover ratio.
  • Adjusted operating expenses in constant currency fell as a result of increased efficiency, despite a 27% increase in marketing investment year-over-year.
  • In Asia, RL expanded its store network and delivered 3% constant currency comp growth.

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 medium 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, reflected in the 27% drop in North American e-commerce comps. 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 recently transitioned its platform towards a cloud-based solution. With this new interface, the company aims to the improve transaction process, and enhance its omnichannel capabilities, 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, which is the fastest growing part of RL’s e-commerce presence. This pure-play business is more developed in Europe, where the company currently sells through over 40 online retailers, including Zalando, Boozt, ASOS, YOOX, and MR PORTER. Meanwhile, in Asia, RL currently works with 11 pure players including T-mall, JD.com, WeChat, ZOZOTOWN, and THE ICONIC. In the U.S., RL is beginning to launch with new brand appropriate sites, having added seven year-to-date, with several more expected in the fourth quarter. 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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