Stefan Larsson and Ralph Lauren

Even after naming Stefan Larsson his chief executive officer in November 2015 in an attempt to evolve his iconic brand, Ralph Lauren always seemed to have his doubts about the choice.

On Thursday, those doubts became certainty when Ralph Lauren Corp. said Larsson would exit the company on May 1, raising questions over the future of the strategy Larsson was implementing — as well as who Lauren will be able to find to help turn around his company. That uncertainty rattled investors, sending the firm’s shares down 12.3 percent to close at $76.60 in Big Board trading.

While Larsson is remaining for another three months, the departing ceo didn’t hide the reasons for his exit. On a morning earnings conference call — the company on Thursday also posted third-quarter results that showed profits and sales continuing to slide — Larsson admitted that he was leaving because of disagreements — presumably with Lauren — over creative and consumer-facing parts of the business including product, marketing and store experience. The company, and Larsson, said it was a mutual decision following extensive discussions to find common ground.

The company, which will conduct a search for a new ceo, said it would continue to execute the Way Forward Plan that Larsson laid out in June. Chief financial officer Jane Nielsen will lead the execution of the plan until the ceo search is completed.

Wall Street analysts weren’t thrilled with the news and were quick to react.

Dana Telsey, ceo of Telsey Advisory Group, downgraded the shares of the company to “market perform” from “outperform.” “The hiring of Mr. Larsson and his expertise in turning around brands previously was an important part of our ‘outperform’ rating for Ralph Lauren. The exit of Mr. Larsson creates a cloud over the fundamentals of the story,” she said. “It takes time to find and hire a ceo, and then there is always the learnings and integrating of their approach.”

She added that while the company seems to be making progress on its Way Forward Plan, “at this junction we believe it could just now be a Band-Aid until the Ralph Lauren brand can ultimately be reinvigorated.”

Cowen & Co.’s John Kernan lowered the stock’s price target to $84 from $98, and noted that Larsson will receive $10 million over a two-year period as part of his severance package. There is also a non-compete clause in the employment agreement that he signed.

Credit Suisse’s Christian Busse lowered the stock’s price target even further to $78 and reiterated his “neutral” rating. “Ralph Lauren’s turnaround had been starting to take shape, with our view increasingly positive as the company started to rationalize brands and distribution. However, the abrupt departure of ceo Stefan Larsson suggests that the dramatic changes under way in production, branding and distribution are at risk. We now believe that required brand and market repositioning may not take place at the pace or magnitude previously anticipated.”

Busse added that with persistent comp challenges and continued wholesale distribution difficulties, revenue stabilization isn’t likely to occur until the second half of fiscal year 2019.

Wells Fargo’s Ike Boruchow also has a “market perform” rating on shares of Ralph Lauren. While Boruchow noted that the surprising departure of Larsson “comes as a shock,” he also said the departure now raises concerns over turnaround plans. Given the disclosure of contrary views on the going forward strategy, Boruchow said that “could potentially revert the company strategy back to a vision which had not been working before.”

The analyst also cited a concern that the recent hires that comprised Larsson’s team for the turnaround plan might elect to depart, which could cause additional disruption to the business. Finally, Boruchow said there’s another risk to the business, which is that “a new leader may not be able to successfully work with Ralph Lauren or execute his/her own strategic vision given the tension that just took place.”

That tension is certainly now the topic of industry speculation over who might succeed Larsson. Sources have said it took Lauren some time to identify him as his ceo, choosing Larsson based on his success at Old Navy and H&M even though the two retailers have little in common with one of America’s premier designer companies. Larsson took the executive job after Roger Farah, the company’s former vice chairman, retired in May 2014. Before becoming vice chairman, Farah was the firm’s president and chief operating officer and is widely credited with turning the company into what was at the time one of the best-run in the fashion industry.

Some believe that a strong candidate to replace Larsson could be Farah, who is now co-ceo of Tory Burch. Farah was traveling and didn’t return a phone call seeking comment about his plans. A spokeswoman for Tory Burch said Farah is not leaving that company.

Farah also has said repeatedly that he wouldn’t want to run a public company again.

It had all started so well between Larsson and Lauren, who when his appointment was announced vociferously praised the younger man. Larsson equally praised Lauren’s vision and brand.

But signs of ambivalence on Lauren’s part seemed more evident over time as the restructuring changes came fast.

At the company’s annual shareholders’ meeting in August 2016, Lauren said relinquishing the reins as ceo has been “interesting.” He described how the company has been “my baby,” explaining that having a new partner and ceo is all “about the future.” He even said of his first meeting with Larsson: “Why am I interviewing this guy, who I know is from another company that’s not at all like my company?” And while Lauren said he concluded that Larsson is a “great guy,” it was the question-and-answer session that was intriguing.

Larsson was asked about how often he asks Lauren for his advice, with Larsson stating that the two have a relationship where “it’s less about advice, but an ongoing conversation. It’s about where we’re going. What I’m good at is knowing what I don’t know.” Lauren, trying to emphasize how the two really are working as partners, said, “What you don’t know is how often I go into his office.”

When Lauren was interviewed in September about the “see-now-buy-now show,” he was asked how the turnaround was going.

“It’s going well,” he said.  He said the changes have been good for some people and not good for others. “A new ceo comes into a company and makes changes. He’s very smart. I think he’s the right man,” Lauren said.

In October when Lauren received WWD’s first John B. Fairchild Honor, the designer spoke about how much he loved “the game,” and how he feels younger than ever. “When I look in the mirror, I’m 32,” he said. And in telling the audience to be passionate about what they do, Lauren said: “I love the passion, I love the work. I come in every day and I’m excited to be in my office.”

But even then Lauren couldn’t conceal his doubts about Larsson, pointing him out in the audience and saying that he “hoped” he was the right choice as ceo.

Given that Lauren and his family control the vast majority of the company’s voting stock, it was always going to be difficult for the designer to scale back at the group he founded. There also had been widespread questions about why Lauren gave Larsson so much authority to begin with, since the family has such a strong hold on the company.

Then there were Larsson’s expectations. A source indicated that Larsson thought he’d be the real ceo, and didn’t realize that Lauren would continue to exert his influence over the company — as he has done since founding it 50 years ago.

Some of these individuals said they knew over a year ago when Larsson was named ceo that it wouldn’t work because of Lauren’s hands-on approach — an approach that has made his brand one of the most recognized in the world. One person said that while the company has improved its bottom line, and the business was getting better, “he [Ralph] wanted to be more involved in design and marketing.”

Further, others believe that Larsson might have become frustrated because so much of the decision-making at the company is done by committee, and the final decision doesn’t rest with Larsson, but rather Lauren. “He [Larsson] is a highly ambitious man and is used to getting his own way and being the final box for decision-making,” one source said.

Some also said Larsson tried to change too much and cut too much without a game plan to excite and regenerate the brand. Larsson repeatedly talked about taking Ralph Lauren back to its “core,” but often couldn’t articulate what that “core” was. One rebuilding move occurred last month when Kevin Carrigan joined the company as senior vice president, creative director, women’s Lauren and Chaps brands.

A lot of Larsson’s plan was work that was much-needed at the company, including trimming layers of management and tightening the supply chain from what was 18 months when he arrived to a target of nine months and eventually six months. But with the fast-changing nature of retail and fashion these days, even six months can be seem slow when competing against the likes of Zara and H&M.

All of Larsson’s changes were coming as Ralph Lauren’s performance continues to struggle. On Thursday, the company said net income for the third quarter ended Dec. 31 fell 37.4 percent to $82 million, or 98 cents a diluted share, from $131 million, or $1.54, a year ago. On an adjusted basis, net income was $155 million, or $1.86 a diluted share, excluding restructuring and other related charges. Net revenues were down 11.9 percent to $1.71 billion from $1.95 billion.

Revenues included a net sales decline of 12.1 percent to $1.67 billion for the quarter. By segment, wholesale net sales fell 26 percent to $582 million, while retail net sales slipped 2.2 percent to $1.1 billion. Consolidated comparable-store sales fell 5 percent but were down 4 percent on a constant currency basis.

The company’s adjusted earnings per share of $1.86 beat Wall Street’s consensus estimate of $1.64.

During the company conference call to Wall Street analysts, Larsson said the company’s cfo would “take charge of the execution of our [Way Forward Plan]. Jane and I have been copilots since she joined and will work closely together to make this transition successful.”

Company executives also spoke briefly about border adjustment taxes in response to an analyst question. They noted that there isn’t much clarity right now on the various proposals,” which is giving rise to much. They emphasized that the company is monitoring any decisions made by the new administration and that it is looking across its supply chain for opportunities to mitigate any possible impact.

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