The Way Forward Plan has been good so far for Ralph Lauren Corp.
The company on Thursday posted a 19-cent beat on Wall Street’s adjusted earnings per share projections for the second quarter. That sent Lauren’s shares up 6.5 percent shortly after the opening of the day’s trading session to $108.75, and at the end of the day they finished up 4 percent to $106.26.
For the quarter ended Oct. 1, net income was $45 million, or 55 cents a diluted share, down from $160 million, or $1.86, a year ago. On an adjusted basis, excluding restructuring and other charges connected with the turnaround plan, EPS was $1.90.
Total net revenues slipped 7.6 percent to $1.82 billion from $1.97 billion, which included a 10.4 percent decrease in wholesale net sales to $831 million and a 5.4 percent slip in retail net sales to $942 million. Consolidated comparable-store sales were down 8 percent. The balance was from licensing income, which rose 2.1 percent to $48 million.
Wall Street was expecting adjusted EPS of $1.71 on revenues of $1.82 billion.
Ralph Lauren, executive chairman and chief creative officer, said, “We are changing with the consumer, as we demonstrated in September with our first ‘see-now-buy-now’ runway show at our flagship on Madison Avenue.” He added that he was “confident that [the] industry-leading endeavor in combination with our other elements of the Way Forward Plan are strengthening our brand to support future profitable growth.”
Stefan Larsson, president and chief executive officer, said in the conference call to Wall Street analysts, “Our revenue in the quarter declined in line with our plan, down 8 percent versus the prior year. We’ve continued [to expect] and expected larger declines in wholesale than retail. Consistent with our Way Forward Plan, we continue to drive the quality of our sales up by moderating discount rates, tightening inventory buys and closing another seven underperforming stores in the quarter. These initiatives successfully reduced inventories which were down 15 percent to last year at the end of the quarter.”
By geography, international net revenue rose 2 percent, which was offset by a 12 percent decline in North America. Larsson said North America continued to be “our most challenged market,” noting that executing a plan to get back to winning in North America is “one of our biggest priorities.” In Asia, the company closed 72 points of distribution and opened 159 new, high-quality points of sale, the ceo said.
Larsson added: “We continue to see the positive impact of our initiatives on profitability. Over the past nine months our average unit retail prices are up 10 percent in constant currency and our gross profit margin continues to expand. In Europe, growth remains solid in the second quarter and our team centered on tighter inventory management [and] strengthening the assortment, resulting in improved margins.”
Larsson reiterated that the plan is built on two key parts: The first is consumer-facing, based on what products to focus on and how to evolve that core, while the second is evolving the operating model, such as stronger assortment, demand-driven supply chain and multichannel global expansion.
For fall, he said the company reduced stockkeeping units across its apparel brands by 10 percent, and is on track to achieve more than a 20 percent reduction for spring. For fall 2017, there will be additional sku reductions.
“The style and sku reduction frees up time resources,” Larsson said, to allow for a focus on creativity and the evolution of the core iconic products. “Our improved discipline in the assortment creation enables us to buy closer to market and reduce early commitments. We continue to expect to be halfway to our goal of a nine-month lead time by the end of this fiscal year and 90 percent there by the end of next fiscal year.”
Larsson noted that the key unlock for its shorter lead times is the fabric platforming for its core styles, with the majority to be completed by the end of this month. “This enables us to increase the quality of our fabric, secure better prices and decrease our lead times and increase our flexibility to react to selling season. We can now for the first time work in partnership with our big customers, and move from buying blind before their advice to buying our inventory based on their buys,” he explained.
As for its largest market, Larsson said past mistakes in its North American wholesale business was mostly due to buying too much inventory and then letting that overflow to the value channels, as well as buying too early before customers have bought and not creating room to chase in-season. To correct those mistakes, Larsson said the company will work closer with its wholesale customers to reduce overall buys to better match demand, focus on the core assortment and cut supplier lead times so customers can buy closer to season and allow for flexibility to chase sales in season, among other initiatives.
The company said it is on track to deliver against fiscal 2017 guidance. For fiscal 2017, the company said it is maintaining guidance. Consolidated net revenue is expected to decrease at a low-double-digit rate consistent with the Way Forward plan.
For the third quarter, the company said it expects consolidated net revenues to be down low-double digits to down low-teens on a reported basis, with continued execution of quality of sales initiatives, inventory receipt reductions and fleet optimization according to the Way Forward plan.
The company also said it expects fiscal 2017 restructuring activities to result in about $180 million to $220 million of annualized expense savings connected with its turnaround initiatives. Restructuring charges are expected to total $400 million, plus $150 million in an inventory charge connected with the Way Forward plan. The company said the charges are expected to be substantially realized by the end of fiscal 2017.
Wells Fargo Securities analyst Ike Boruchow kept his “market perform” rating on shares of the company. “We continue to be impressed with Ralph Lauren’s ability to drive improved operating profit despite plan pullbacks, sku reductions and brand consolidation. However, until we see a stabilization in top line, we remain on the sidelines absent a more compelling valuation.”
Credit Suisse’s Christian Buss has a “neutral” rating on the stock, noting initiatives such as the “decision to eliminate the bottom 20 to 25 percent of wholesale distribution and the trimming of clearance and made-for distribution into the off-price channels as appropriate long-term moves. As a result, we have increasing conviction that Ralph Lauren will be able to return to top-line growth and recover margins over time.” The concern centered on timing, with Buss noting that top-line growth was more likely delayed into late fiscal year 2018.