By Neil Saunders
There is no getting around the fact that this is a dire set of results from Ralph Lauren. Not only is the 12% revenue decline a significant step down from the prior quarter, it comes off the back of a very soft comparative from 2016 when overall sales dipped by just over 4%, partly thanks to very unfavorable weather. Under the headline number, the wholesale division is in freefall, while retail sales remain firmly in negative territory. Both things, along with some costs from the transformation plan, have resulted in a sharp net income decline of 37%.
To remedy the problem of ubiquity, Ralph Lauren is becoming more selective about the channels it sells through. This is necessary, even though it comes with the short-term pain of diminishing the wholesale side of the business. However, to work economically it must be counterbalanced with a step up in the retail side of the business.
As if all of this was not bad enough, the company has also announced that it is to part ways with Stefan Larsson, the CEO and Chairman brought in just over a year ago to help turn the business around. This sudden departure gives the impression of a brand in crisis, and we believe it signals significant internal wrangling over the future direction of the firm. It also demonstrates the founder’s continued dominance over the business. As much as Ralph Lauren should be respected for his significant achievements, and his undeniable design talent, we are concerned by the orthodoxy of his leadership, under which questioning and fresh thinking are relatively rare. This, in our view, is not the way to reinvent a brand that has clearly lost its way.
That Ralph Lauren is lost is evident from our own consumer data which shows, over the past two years, a steady decline in the number of shoppers considering it and buying from it. The same data also show that the brand has lost some of its cachet, especially with younger shoppers. There are several reasons behind this slide in popularity.
The first is a change in consumer tastes and sensibilities. For a long time, Ralph Lauren, through its various brands, was the undoubted king of preppy cool. That aesthetic is no longer as popular as it once was: and for many consumers it stands for old world, old money exclusivity. Such concepts are an anathema to today’s younger shoppers. To be fair, designs have changed and the latest fall/winter collections are a step away from the preppy vibe and incorporate more ‘democratic’ aesthetics like western and street wear. Unfortunately, because Ralph Lauren is such a strong and distinctive brand, it is hard to shed its historic image.
The second issue is that the Ralph Lauren brand has become too ubiquitous and diffuse. At the higher end the brand is carefully controlled and curated, but as it filters down through retail channels that control is lost. The Ralph Lauren flagship in New York’s Upper East Side is a world away from the selection of random Polo sweaters thrown onto a fixture at Macy’s, and it is becoming increasingly difficult for the two to coexist without causing brand confusion.
Admittedly, steps are being taken to remedy the problem of ubiquity, with Ralph Lauren becoming more selective about the channels it sells through. In our view, this is a necessary step, even though it comes with the short-term pain of diminishing the wholesale side of the business. However, to work economically it must be counterbalanced with a step up in the retail side of the business. Those uplifts are not yet coming through, and we see few signs that they will do so any time soon. There is a lot more work to do before retail is back on track.
For the sake of balance, it is important to recognize the external pressures on the company. A strong dollar is foremost among these. It both depletes foreign earnings and reduces tourist spend at flagships within the US. However, this simply does not explain away all the declines; even on a constant currency basis, Ralph Lauren’s sales and profits are tumbling.
Ralph Lauren has made some progress, and does have a general sense of the direction it wants to move in — a direction that we believe is broadly sensible. However, execution has been extremely poor, and will not be improved by management squabbling or the absence of key executives. As such, the year ahead is likely to be another one of treading water rather than of significant progress.
Neil Saunders is managing director of GlobalData Retail