Ralph Lauren says the company is making the “right strategic decisions” to support its future growth

Ralph Lauren says the company is making the “right strategic decisions” to support its future growth

Ralph Lauren Corporation has posted what one analyst has dubbed a "dire" set of results for its third quarter, after profit fell by more than one-third and sales saw a sharp double-digit decline.

The results coincided with a separate announcement that CEO Stefan Larsson is to leave the company after less than two years in the role, over differing views on the future direction of the firm.

Ralph Lauren CEO to depart over "different views"

In the three months ended 31 December, net income fell 37% to US$82m, down from $131m in the prior year period. The results were weighed down by restructuring and other related charges linked to the company's Way Forward turnaround plan.

Gross profit margin rose 140 basis points on last year to 58.2%, helped by favourable sales mix shifts and reduced promotional activity.

Meanwhile, net revenues of US$1.7bn were down from $1.9bn in the prior year period, marking a 12% decline on a reported basis and down 11% on constant currency basis. On a reported basis, international net revenue declined 6% in the third quarter, while North America revenue was down 15% on last year.

Retail sales in the quarter were down 2% to $1.1bn, with comparable store sales down 5% on a reported basis and 4% in constant currency. Wholesale revenues fell 26% on a reported basis and 25% on a constant currency basis to $582m, driven by a decline in North America where shipments were "strategically reduced". In Europe, a shift in timing of shipments of $18m into the fourth quarter also pressured the comparison.

"This quarter, we continued to drive the execution of the Way Forward plan – refocusing and evolving our iconic product core, cutting our lead times, and aligning supply with demand – to put the foundation in place to drive demand back to the business," said Larsson. 

In June of last year, the company revealed the restructuring plan, which included an overhaul of its supply chain.

Faster supply chain is key to Ralph Lauren turnaround

Progress made towards its goals in the third quarter included re-focusing its core product offering for autumn 2017; moderating discount levels; lowering  inventory levels by 23% to better match demand; reducing SKUs for spring 2017 by over 20%; and platforming all core fabrics, accounting for about 50% of unit volume.

Other changes have seen the business "significantly improve our ability to match supply to demand by reducing pre-market commitments to 15% of our inventory buys for Fall 2017 from 60% for Fall 2016." The company also says it is on track to get half-way to its goal of a 9-month lead time by the end of this fiscal year and 90% there by the end of next fiscal year.

For fiscal 2017, the company continues to expect consolidated net revenues to decrease at a low-double digit rate, and operating margin to be around 10%.

Neil Saunders, managing director of GlobalData Retail (formerly Conlumino) notes: "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 unfavourable 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%.

"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."