Lower customer demand saw Ralph Lauren Corporation post a revenue decline that was in line with its expectations for the second quarter, despite posting a 214.7% profit hike as CEO Patrice Louvet said he is “encouraged” by the early progress the US apparel giant is making to strengthen its brand and better connect with consumers.
In the three months ended 1 July, net income on a reported basis amounted to US$143.8m, compared to $45.7m in the year-ago period. Operating income for the period was $193.3m, including restructuring and other charges of $30m, compared to $76.3m last year.
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Gross profit margin was 59.8% and 59.9% on reported and adjusted basis respectively, and 300 basis points above the prior year on an adjusted basis, driven by initiatives to improve quality of sales through reduced promotional activity, favourable geographic and channel mix shifts, and improved product costs. Foreign currency benefited gross margin by 10 basis points in the second quarter.
Meanwhile, net revenues of $1.66bn were down from $1.82bn in the prior year period, marking a 9% drop on a reported basis. The decline was in line with the company’s guidance and was due to initiatives to increase quality of sales, reduce promotional activity, and elevate distribution, as well as brand exits and lower consumer demand.
Europe revenue in the second quarter increased 4% to $463m on a reported basis, while North America revenue was down 16% to $877m. Asia revenue in the second quarter was flat compared with the prior year period on a reported basis at $217m.
On a constant currency basis, comparable store sales were down in both North America and Europe, by 9% and 6% respectively. Meanwhile, comparable store sales increased by 3% in constant currency driven by improved traffic and conversion in Asia.
“We are focused on creating value for all of our stakeholders by continuing to drive productivity and re-igniting quality growth,” said CEO Patrice Louvet. “While there is a lot of work to be done, I am encouraged by the early progress we are making across multiple fronts to strengthen our brand and better connect with consumers.”
Looking ahead, Ralph Lauren said it is not able to provide a full reconciliation of the non-GAAP financial measures to GAAP because “certain material items that impact these measures, such as the timing and exact amount of charges related to our Way Forward plan, have not yet occurred or are out of the company’s control”.
It added fiscal 2018 non-GAAP guidance excludes estimated pre-tax restructuring-related and other charges expected to be recorded primarily in connection with the company’s Way Forward plan of about $200m.
Unveiled in June of last year, the strategy includes an overhaul of the company’s supply chain.
Faster supply chain is key to Ralph Lauren turnaround
Neil Saunders, managing director of GlobalData Retail, notes that as much as this quarter brings the usual dose of negative sales growth, there is “finally a faint light at the end of Ralph Lauren’s long tunnel of reinvention”.
Meanwhile, looking to the company’s turnaround efforts, Saunders says that while the turnaround plan is delivering a bottom line improvement, the impact on the top line is less obvious.
“To be fair, some of this decline is now deliberately engineered rather than being the result of a drop off in demand,” he explains. “Like many other brands, Ralph Lauren is cutting back on routes to market that it sees as unprofitable and out of line with the group’s future vision. This includes trimming back exposure in department stores, and reducing off-price shipments. In our view, these corrective steps are necessary, even if they do splash the sales line with more red ink.”
While reengineering the distribution strategy is all very well, Saunders says it is not enough to reinvigorate Ralph Lauren and instead has to be accompanied by a “host of other initiatives” to refocus product and connect more effectively with new customer segments, especially younger shoppers. “There is some evidence that this is happening, with, for example, limited edition lines being launched to stimulate interest and urgency, while at the same time avoiding ubiquity,” he explains. “Admittedly, this has had only a small impact on the top-line, but to us, it shows that Ralph Lauren is beginning to think along the right lines regarding product strategy.”
There is, however, more work to do in consolidating ranges and choice, Saunders says. “In our opinion, the company still has too many sub-brands, capsule collections, and labels. In theory, these are supposed to cater to different constituents of the market. In practice, there is no real delineation between many of the elements, and the result is a confused mass of product that is vaguely referred to as ‘Ralph Lauren.’ Trimming back here is necessary if the brand is to have any chance of cutting through in a very crowded and competitive marketplace.”
One of the positives Saunders takes from both this and the previous set of results is that Ralph Lauren and his new CEO, Patrice Louvet, seem to be working well together. “The dynamic between the two gentlemen is crucial as it will ultimately determine whether the turnaround plan succeeds or fails,” he says. “As the founder and iconic head of the brand, Ralph Lauren’s input and vision are vital, but it remains important that he allows a CEO to steer the business towards more fruitful waters. After some false starts, this now seems to be happening.”
