RALPH LAUREN SHARES CLIMB ON RESTRUCTURING PLAN’S PROGRESS

BY VICKI M. YOUNG

DATE: AUGUST 10, 2016

So far, so good. That was the view of Ralph Lauren and his chief executive officer Stefan Larsson on Wednesday about the restructuring at Ralph Lauren Corp., which both said is on track as the company aims to get leaner and reclaim the entrepreneurial culture that built the brand.

Wall Street, which likes nothing more than a restructuring, seems to agree, sending Ralph Lauren’s stock up sharply after the firm reported first-quarter results that beat expectations even though the company registered a loss and comparable-store sales were down.

Ralph Lauren, executive chairman and chief creative officer, said, “I am encouraged by the steps we are taking to refocus on and evolve our core and bring back the entrepreneurial spirit that made this company great.”

He added that the “team has my full support as we start to execute the Way Forward Plan.”

Larsson, the firm’s new chief executive officer, said on a conference call to Wall Street analysts, “The Way Forward Plan is our multiyear plan to build on the unique brand strength we have, go back to the core of what made us iconic, evolve from that core and build the business back to sustainable profitable growth.”

The company is still in the “early days in the execution of our Way Forward Plan,” he said, adding that the firm has guided the year as a “reset and stabilize year, and that is what we’re delivering on. We will continue to balance meeting our near-term commitments with staying on track to execute our long-term Way Forward Plan.”

According to Larsson, “The biggest positive effect of this is that we have become leaner, faster [and] we’ve empowered the doers and reclaimed the entrepreneurial culture….Completing the planned right sizing of the organization has give us a good start in fixing the overall cost structure and developing a disciplined financial model. We are also under way with closing the underperforming stores we identified as part of the Way Forward Plan.”

The company during the quarter closed eight of the 50-plus total stores that are under consideration in the U.S. to be shuttered.

Lauren also has acted aggressively over the last six months to drive quality of sales up in Asia, Larsson said. That included the closure of 43 locations and analysis of the sales cadence, including taking down the depth of markdown rates. The ceo noted that the company has seen some very encouraging results: “Our average unit retail prices and our gross profit dollars were both up significantly.”

In Europe, the team shifted the timing of its wholesale shipments, and reduced buys for the year “in a way that has protected full-price selling, increased the stock turnover and, if the current trend continues, will significantly reduce excess inventory at the end of the season.”

For the company overall, Larsson said as part of the execution of the Way Forward Plan, “you will see us increasingly focus on proactively driving quality of sales up. These initiatives will include pulling back on inventory receipts, cutting lead times, strengthening our assortment and store closures. These will be some of the most important drivers in getting us back to sustainable profitable growth.”

Halide Alagöz, the new head of global sourcing who joined in June, has already had a “positive effect on the sourcing decisions we are making,” Larsson said. He and Alagöz met with key suppliers in Asia and have “received a very strong response from many of our suppliers.”

The ceo said the company has already started to make improvements in driving quality up, costs down on comparable products and decreasing time to market. “We are also full-speed-ahead with shortening our lead times from 15 to nine months and even though the full effect will not be seen for a few seasons, we will be 50 percent there already by the end of the year,” Larsson said.

Next year, the company “should be 90 percent of the way there. Almost equally important to cutting the overall lead times down is the work we are doing in building an eight-week test and rapid response pipeline,” he said.

This year the company will focus on the early stage of setting that up and by next fall, it will have the “capability that will enable testing on most of the new product lines before introduction. The work of developing a demand-driven supply chain has just started,” according to Larsson.

As for inventory levels, those are projected to go down for the remainder of the year, Larsson said, which should reduce the depth of markdowns that have been driving cannibalization of sales.

“We believe the company is again moving in the right direction,” the ceo stressed.

Wall Street liked what it heard, driving Ralph Lauren shares up 8.5 percent to close at $103.14 in Big Board trading. The company bested Wall Street’s first-quarter earnings per share estimate by 17 cents. It also said it expects to incur restructuring charges of up to $400 million in fiscal 2017.

For the three months ended July 2, the net loss was $22 million, or 27 cents a diluted share, against net income of $64 million, or 73 cents, a year ago. On an adjusted basis, excluding restructuring and impairment and inventory-related charges, diluted EPS was $1.06.

Total revenues fell 4.1 percent to $1.55 billion from $1.62 billion. Revenues included a 4 percent decline in total net sales to $1.51 billion from $1.58 billion, which included a 5.5 percent decrease in wholesale net sales to $607 million and a 3 percent decrease in retail net sales to $907 million.

The company said consolidated comparable-store sales fell 6 percent, adding that retail revenues were driven by the comp decline that was partially offset by non-comparable store sales growth. Licensing income slipped 7.3 percent to $38 million.

Wall Street was expecting EPS of 89 cents on revenues of $1.53 billion.

In addition to restructuring charges, the company said it expects up to a $150 million inventory charge connected with its Way Forward Plan. The firm recorded $104 million in restructuring and impairment costs, plus $50 million in inventory charges, in the first quarter.

The restructuring activities are expected to result in annualized cost savings at between $180 million and $220 million, which is on top of the $125 million cost savings from fiscal 2016’s restructuring activities.

For the second quarter, the company guided net revenues to be down mid-to-high-single-digits. It said it expects foreign currency to have minimal impact on revenue growth based on current exchange rates. Initiatives under the Way Forward Plan are expected to have a greater impact in the second half of fiscal 2017 than the second quarter.

For fiscal 2017, the company said consolidated net revenues are expected to decrease at the low-double-digit rate, mostly due to a proactive pullback in inventory receipts, store closures and pricing harmonization and other quality-of-sale initiatives, all combined with the weak retail traffic and a highly promotional retail environment.

Analysts generally had an upbeat view about the quarter and Larsson’s moves.

Miller Tabak + Co. analyst Rick Snyder described the new executives Larsson has hired an “impressive group.” He noted that Alagöz has “hit the ground running” working with the Asian suppliers to shorten lead times and drive down costs.

Dana Telsey of Telsey Advisory Group, said, “Overall Stefan Larsson is executing on his Way Forward Plan….He’s moving forward and making positive changes to the business….The combination of taking down lead times for spring 2017 and new looks on the product are what’s going to help them regain some broader consumer awareness and demand for the product. Increasing the speed-to-market and having the receptivity of suppliers will help influence 2017 and beyond.”

She also said the eight-week test and rapid response program should help the company. “Stefan’s done that before and now he’s able to apply it to a different price point and different product, as well as the quality of the product. He’s confident that he knows how to test and what to look for. This is about investing in the winners and minimizing what’s not [resonating with consumers],” Telsey said.

Martin Okner, cofounder and managing director of strategic advisory firm SHM Corporate Navigators, said all mega fashion and beauty brands go through three- to five-year cycles when they are in favor with consumers. That’s when the company expands with new initiatives, sku’s and new store formats before the tide shifts the other way.

In Okner’s view, the Way Forward Plan is basic “textbook” planning to “reignite growth and create more cash flow in the fashion business.” He expects that by the third quarter of fiscal 2017, the company should “start to see positive income and enhanced free cash flow,” with more positive sales growth to follow. The key will be in their messaging to consumers through marketing efforts and social and digital media.

Okner also said the company will likely get back the attention of its core consumer base, and win over new customers. “The incremental growth, after the adjustments, will be from layering on the new consumers. The key then would be how to convert the best of these new consumers to become part of its core customer base,” Okner said.

Ike Boruchow at Wells Fargo Securities has a “market perform” rating on Ralph Lauren shares and Matthew R. Boss at J.P. Morgan has a “neutral” rating. They each noted that the restructuring efforts are in the early stages, but believe the company is taking the right steps to return to growth. Boss noted that the company’s balance sheet “remains a point of strength” at the end of the first quarter, with $475 million of cash on hand and short-term investments of $619 million.

Marty Okner is Chairman of ACG New York.

 

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