If 2015 was a year of transition, 2016 is a year of change at Ralph Lauren Corp.
President and chief executive officer Stefan Larsson, in a conference call to Wall Street analysts after the company posted mixed third-quarter results, said he’s working with the team in conducting an inclusive review of the company’s operations. He said the assessment and the company’s multiyear growth strategy will be completed in the coming weeks and months, and he would share those findings with Wall Street in late spring.
While the development of the growth strategy is good news, it did nothing to mitigate investors’ reaction either to third-quarter results or to the company’s cut in fiscal 2016 guidance. The company beat on profit forecasts, but missed on the revenue front. Investors sent shares of Ralph Lauren down 22.2 percent to close at $89.95 in trading on the Big Board.
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The company adjusted guidance for fiscal 2016. It expects consolidated net revenues to be up 1 percent in constant currency and down 3 percent on a reported basis. The prior forecast estimated flat net revenues on a reported basis and up 3 to 5 percent in constant currency.
For the fourth quarter, the company guided consolidated net revenues to be flat to down 2 percent on a reported basis.
For the three months ended Dec. 26, net income fell 39.1 percent to $131 million, or $1.54 a diluted share, from $215 million, or $2.41, a year ago. On an adjusted basis, excluding certain charges such as restructuring costs, net income was $193 million, or $2.27 a diluted share. Wall Street was expecting earnings per share of $2.13.
Net revenues slipped 4.3 percent to $1.95 billion from $2.03 billion. Wall Street was expecting revenues of $2.03 billion. By category, wholesale net sales fell 6.1 percent to $786 million, while retail net sales dropped 3.1 percent to $1.11 billion. Consolidated comparable store sales fell 7 percent, and were down 5 percent on a constant currency basis. Like other fashion companies, warmer temperatures in the U.S. hurt sales of cold weather apparel and accessories, such as outerwear and boots.
Macro trends going into the fourth quarter include strong sales of denim and the ath-leisure categories, according to Christopher H. Peterson, president of global brands, in a telephone interview. He also said the company plans to reduce the inventory buy at the wholesale and retail channels. Peterson said that is part of a “broad strategy” the company is embarking on for fiscal-year 2017 to reduce the amount of product being sold on promotion “as a way to strengthen the brand.” He also said “[o]ur retail partners are very much in sync” with the company’s strategy.
Ralph Lauren, executive chairman and chief creative officer, referred to 2015 as the “year of transition.” He also said: “While our recent results have been disappointing, I am greatly encouraged by the changes that are already taking place since the appointment of Stefan Larsson as our new ceo. He has my full support as he conducts his comprehensive review of our business and takes the lead to move us forward.”
Larsson, who began in November, spoke to analysts about his first 90 days on the job.
“I have done a lot of travels. I have been to London, Paris, Geneva, Frankfurt, Tokyo, Hong Kong, Shanghai, Beijing and all over the U.S., including our distribution center in North Carolina.…In many of these meetings, I received direct feedback from team members and customers,” Larsson said.
The ceo said the goal of the traveling and meetings was to learn as much as possible about the brand and the environment it competes in. He explained that the review goes beyond the cost savings plans initiated before he joined the company, and covered “value creators in the business from brand, product, marketing, to supply chain distribution, geographies, as well as customers and competitors.”
Larsson, who described the performance of the business as “very disappointing” and said the “challenges we are facing did not materialize overnight,” provided analysts with insight on the kind of deep dive his team is eyeing in the overall review.
He said for each brand, it starts with an analysis on how to build authenticity, evolve the brand in a way that its DNA stands out and how to balance the assortment. The team is also looking at how to shorten the lead times as they relate to supply chain and inventory management. One key question that needs to be answered, he said, is “relating to the increasingly disruptive environment we are in. How do we strengthen the brand and develop the business model fast enough to succeed in an increasingly disruptive world?”
Larsson also told analysts there are two main components to the “plan framework.” The first involves strengthening the customer component, which includes product offerings, marketing and the shopping experience. The other is “to radically strengthen the underlying business engines. These engines will include developing a systematic, repeatable way to creating a stronger assortment and [a] more demand-driven supply chain and a holistic global expansion strategy.”
The ceo concluded: “It is complex work that will take time. We will show you the pacing through the plan we will present in late spring and we will show progress every year.”