By Neil Saunders
Sales and profits continue to tumble at Ralph Lauren and, worryingly, the pace of decline has worsened since last quarter even though the numbers come off the back of a very soft prior year comparative. In our view, the figures cast some doubt over the company’s recovery plan, if only in terms of timing rather than the correctness of its actions.
To be fair to Ralph Lauren, some of the steps backward are a part of its Way Forward plan. That wholesale revenues are down, for example, is a function of reduced shipments in the U.S. as the company dials back on the number of channels and doors through which its brand is sold. This may generate some short-term pain but, in our view, it is a necessary evil in order to rebuild the brand — as a company like Coach has shown.
More concerning is the retail decline. Thankfully, steps are being taken to remedy these issues with the ‘see-now-buy-now’ fashion show, much clearer delineation between ranges and collections, and the launch of the new Icons marketing campaign, all designed to help rebuild brand credentials and stimulate interest among consumers.
More concerning, however, is the retail decline where both total and comparable sales dips have deepened since last quarter. While some of this is related to the reinvention program which has involved reducing discounts, cutting back on the SKU count and shuttering some stores, part of it is also down to the fact that the Ralph Lauren brand is losing traction among consumers in general, and among younger consumers in particular.
Thankfully, steps are being taken to remedy these issues with the ‘see-now-buy-now’ fashion show, much clearer delineation between ranges and collections, and the launch of the new Icons marketing campaign, all designed to help rebuild brand credentials and stimulate interest among consumers. Given that these are recent steps, it is unreasonable to expect them to deliver immediately; however, Ralph Lauren has now been in some sort of turnaround mode for almost two years so it is critical that the plan shows signs of progress fairly promptly.
This quarter’s update does contain some initial signs that may drive future performance. Inventory levels have improved and, in turn, this has helped to drive up gross margins. This bodes well for the holiday quarter where Ralph Lauren will be up against some soft comparatives from last year when discounting was extensive thanks to elevated inventory levels. That said, we expect the company’s flagship locations in the U.S. will continue to come under pressure from reduced tourist spend, which could exert some downward pressure on revenue growth.
Overall, we believe that Ralph Lauren’s plan makes strategic sense and are encouraged at some of the initial initiatives, especially in terms of cost savings and rebuilding margins. However, we also maintain our view that the company has a lot more work to do in reinventing itself to create a more streamlined and well-defined brand proposition. This is the part that will take some time and we do not see a meaningful and sustainable recovery before the middle of next fiscal year at the earliest.
Neil Saunders is CEO of research firm Conlumino.