Ralph Lauren Corporation has seen sales tumble by almost two-thirds in the first quarter as the Covid-19 pandemic forced the majority of its stores to close for up to ten weeks in key markets.
For the first quarter ended 27 June, net loss amounted to US$127.7m on a reported basis, compared to net income of $117.1m in the prior-year period. On an adjusted basis, net loss was $133m.
Gross margin was 71.5% and, on an adjusted basis, was 71.8%, 730 basis points above the prior year on a reported basis and up 880 basis points in constant currency. Gross margin expansion was primarily driven by favourable geographic and channel mix shifts due to Covid-19 as well as AUR improvements across all regions.
During the first quarter, the majority of stores in Ralph Lauren’s key markets were closed for an average of eight to ten weeks, resulting in significant adverse impact to the firm’s traffic and revenues.
Net revenue, meanwhile, tumbled 66% to $487m from $1.43bn on a reported basis and was down 65% in constant currency, with declines across all regions due to Covid-19 business disruptions. Foreign currency negatively impacted revenue growth by about 100 basis points in the first quarter.
North America revenue fell 77% to $165m. In retail, comparable store sales in the region were down 64%, driven by a 77% decrease in brick and mortar stores and a 3% increase in digital commerce.
Europe revenue was also down, plummeting 67% to $121m on a reported basis and 64% in constant currency. Comparable store sales declined by 62%, with a 75% decrease in brick and mortar stores partly offset by a 44% increase in digital commerce.
Sales in Asia, meanwhile, decreased 34% to $172m on a reported basis and by 32% in constant currency basis. Comparable store sales fell 33%, with a 35% decline in brick and mortar stores partly offset by a 68% increase in digital commerce.
“The past few months have marked a period of extraordinary challenge, but also agility and resilience,” said CEO Patrice Louvet. “Our financial performance this quarter reflects an unprecedented three months of Covid-19-related impact around the world. We are taking the opportunity to leverage this period of disruption to accelerate our core strategic focus areas, drive new areas of growth, and realign our resources accordingly.”
Ralph Lauren has suspended all future guidance but said it continues to expect its financial results for both the second quarter and full year fiscal 2021 to be significantly adversely impacted by the pandemic and prolonged demand recovery.
“Though the timing and path of recovery in each market presents many uncertainties, including the potential for second waves of outbreaks across various markets, we have developed scenarios through which we plan to safely return our businesses to growth and value creation,” it added.
More work required
Neil Saunders, managing director of data and analytics firm GlobalData Retail, notes almost two-thirds of Ralph Lauren’s revenue has been wiped out during its first-quarter.
“For North America, that figure rises to well over three quarters. These numbers highlight the extreme damage the pandemic has inflicted on retailers and underscores the scale of the consumer retrenchment in parts of the retail economy. However, in our view, they also show that Ralph Lauren’s offer and position is more exposed and vulnerable to shifts in demand that some other segments of retail.”
On the bottom line the numbers are no prettier, he adds. “Ralph Lauren racked up an operating loss of $168m and a net loss of just shy of $128m. These numbers could have been significantly worse if it wasn’t for the various cost-cutting measures the company has put in place; these included some rent abatements, furloughs, and reductions in executive compensation. Fortunately, Ralph Lauren is a company that has been well managed financially and, as a result, it has sufficient liquidity to see it through this crisis – even if this has come at the expense of sacrificing its traditionally low debt position.”
Saunders says while the sharp drop in sales is to be expected, the pace of decline at Ralph Lauren is far faster than that experienced in many other parts of the retail sector. This is especially so in the North American market.
“There are a few reasons for this,” he explains. “First, Ralph Lauren is more exposed to the occasion part of the apparel market than many mainstream retailers. As social events and activities have ground to a halt, so too has purchasing. The same dynamic also holds true for more formal products which are purchased for work. Second, while some customers have been prepared to pay premium dollars for luxury apparel, many middle-income shoppers have deprioritised their spending on clothing in favour of spending on the home – an area where Ralph Lauren does play, but not nearly as strongly as it should. Thirdly, wholesale revenues have been depleted as department stores and other channels have cut back on orders as a result of soft demand.
“The fact that the tumble in sales is partly the result of where Ralph Lauren plays, rather than because of general dynamics, is evident in the digital numbers. While sales of apparel online have soared during the past few months, Ralph Lauren only managed to notch up a 3% increase in digital commerce within North America this quarter. Some of this was not helped by the shutdown of the online operation early during the pandemic – which deterred some consumers from using the site – but a lot is simply down to Ralph Lauren being out of tune with patterns of demand during the pandemic and therefore not being a digital destination.”
There are areas where Ralph Lauren has performed better, Saunders notes, such as in comfort/sporting apparel and in home. “However, both offers are relatively underdeveloped and have not been able to offset sharp declines in more established areas of the business. These, along with greater efforts in connecting stores and online through services like curbside collection, are things Ralph Lauren should focus on over the remainder of this year.”
He adds: “Overall, Ralph Lauren cannot be blamed for the terrible numbers. However, as consumer preferences shift, the company needs to work harder to reinvent itself and to pivot into new channels and segments to secure growth.”