Ralph Lauren Corp. is restructuring again — this time shifting its brand divisional structure as it transitions further to a new operating model that began last month.
The first move was to promote Christopher H. Peterson to president of global brands from chief financial officer and executive vice president. Now the focus is on the brands under the corporate umbrella as they get shifted into a new global brand management structure. There will be six brand groups: the Ralph Lauren luxury brands, excluding home, under the oversight of Valerie Hermann as brand president; Polo; Denim & Supply; Lauren, Chaps and American Living in the same group; Ralph Lauren Home, and Club Monaco.
According to Peterson, the moves will also see the end of Ralph Lauren Black Label, which is being consolidated into Purple Label on the men’s side and, in women’s, Ralph Lauren Collection.
Jackwyn Nemerov, president and chief operating officer, noted that although Black Label won’t be used, the Purple Label offerings would be slightly broader to incorporate the tiering price point range that existed between the two labels. She explained that the change was made because customer feedback indicated confusion over how the two brands were different, since they were both marketed as “luxury” lines, and that merging into one, whether its Purple Label for men or Collection for women, allows for a single branding message.
The thinking behind the structural changes, Peterson said, was to help with the overall worldwide reduction in inventory and allow for “more common merchandise assortments around the world.” He noted, “In the past, we used to operate separately by region and channel. The merchandise would be dissimilar between different stores, and moving to a similar merchandise assortment will help increase brand consistency and drive brand equity.”
The moves come as Ralph Lauren reported a 19 percent slide in profits in the fourth quarter. In a conference call to Wall Street analysts following the release of its results, Peterson said the company is “on track to achieve over $100 million of annual expense savings” from the transition to the operating model. One-time restructuring charges of $70 million to $100 million, which includes a 5 percent reduction in the company’s full-time workforce, is forecasted to be weighted in the first half of fiscal 2016.
While investors typically applaud cost-cutting moves, they weren’t pleased with the company’s earnings report, and sent shares down 3 percent to $129.18.
One reason might be that same-store sales fell 4 percent in the quarter, due in part to slower tourist traffic. Coupled with the charges expected in the first half of fiscal 2016, there’s a chance that the growth opportunities company executives touted on the conference call to analysts might take some time to materialize. Shares of Ralph Lauren are close to their 52-week low of $127.29 and, according to WWD’s Global Stock Tracker, are one of the worst performers over the past six months, down 25.4 percent and ranking seventh among the bottom 10 for the period based on market closing prices on May 13.
Ken Odeluga, a senior market analyst at City Index, said, “There’s really no window-dressing the fact that it was not the strongest of quarters nor years at Ralph Lauren, and this quite naturally shifts a lot of the focus to the forthcoming year….On a constant currency basis, revenues in the first quarter are expected to show zero growth, but that excludes more expenses for restructuring and brand reorganization.”
The analyst noted that while the company has generally been given a “luxury” valuation, it might be a “questionable market rating in view of the flat-to-weaker earnings outlook.”
The company said it will continue to make investments in stores and development of retail concepts.
John Kernan, analyst at Cowen & Co., said that given the level of investments in brand reorganization and the opening of 40 to 50 stores in fiscal year 2016, “[W]e do not see a linear path to margin improvement.” He projected that earnings per share could rebound to “well over $9 per share within the next three to four years” if operating margin recovers to 13 percent and if capital expenditures normalize to just 5 percent of sales. Currently capex is expected to be at 6 to 6.5 percent, while the implied operating margin for the fiscal year 2016 is 11.5 percent, mostly due to foreign exchange impact.
For the three months ended March 28, net income fell 19 percent to $124 million, or $1.41 a diluted share, from $153 million, or $1.68, a year ago. Net revenues rose 1 percent to $1.89 billion from $1.87 billion. Net revenues included a 1.1 percent gain in net sales to $1.85 billion, which included a 2.4 percent increase in wholesale sales to $1 billion and essentially flat retail net sales at $841 million. Wholesale sales benefited from an early Easter. Those results beat Wall Street’s expectations of $1.32 in EPS and $1.88 billion in revenues.
Ralph Lauren, chairman and chief executive officer, said the company opened several stores in key markets around the world, and “fueled the momentum of our luxury accessories business with the launch of the Drawstring Ricky bag.”
Nemerov said the dress category was still doing well, whether in Collection, Polo or Lauren by Ralph Lauren lines.
For the year, net income fell 9.5 percent to $702 million, or $7.88 a diluted share, on a 2.3 percent gain in net revenues to $7.62 billion.
The company said it was increasing price across all products to offset foreign currency exposure. The company also said it expects consolidated net revenues for fiscal year 2016 to increase by mid-single digits in constant currency.