SWEEPING OVERHAUL PLANS PROPEL POLO STOCK PRICE AHEAD
Byline: David Moin
NEW YORK — From the timing of markdowns and travel policies to store profits and its underdeveloped accessories business, the Polo Ralph Lauren Corp. has put itself through an exhaustive review. Now it intends to raise profitability, manage inventory better and jumpstart its long-depressed stock through a battery of restructurings. On Thursday, executives disclosed exactly how that will come about, and Wall street loved it, pushing the stock up $2.87 to $19, a gain of nearly 18 percent.
Among the steps announced:
Closing all 12 of the Polo Jeans Co. stores, thereby phasing out the chain over the next six months.
Closing 11 Club Monaco stores and taking a fiscal 2001 second-quarter charge of up to $115 million, the company said Thursday.
Increasing accessories to at least 20 percent of luxury sales, from well under 10 percent. Accessories, with its high margins and fewer markdowns, is a cash-cow category for many design firms, some of whom have built it up to as high as 50 to 60 percent of their offerings. Polo’s combined accessories, children’s and home products represents only 20 percent of Polo store inventories.
“We are presently focused on building an accessories business, which is the fastest-growing category in the luxury market,” Ralph Lauren, chairman and chief executive officer of the $2 billion Polo Ralph Lauren, said in a statement.
“There’s a tremendous opportunity to further develop our accessory business,” added Lance Isham, vice chairman, during a conference call with analysts. “Most of our luxury retail competitors are focused on accessories. The more difficult part is apparel and we seem to be doing that very well at the moment.”
Lauren also said that Polo stores would be enlarged in Dallas and Beverly Hills, partially to accommodate increased accessories assortments, and there will be a new store in Boston. Officials would not specify when the larger accessories areas will be rolling out. Lauren’s handbags, footwear, scarves, small leather goods and jewelry are licensed.
Analysts were as positive as the stock swing Thursday.
“The company is diversifying its revenues by a change in the merchandise mix in its own Polo stores. That’s a pretty big thing,” observed Jennifer Black, executive vice president at First Security Van Kasper.
“We changed our opinion from a buy to a strong buy,” Black added. “Our estimates went up from $1.61 to $1.70 for the fiscal year ending March 2001, and for fiscal 2002 from $1.77 to $1.98, and we’ve raised our price target from $24 to $30, over the next 12 to 18 months.
Generally, Wall Street reacts favorably when firms take decisive action, even if it involves shedding assets and illuminating problems. This season, Ralph Lauren has missed inventory plans and has been dissatisfied with the Club Monaco performance.
Lauren officials say their core luxury business, which has a dominant position in department stores, has been strong, as have other luxury businesses, though they acknowledged the Polo stores are not as profitable as desired.
On a different front, “Polo Jeans is a huge, huge business for us in department stores. It’s wildly successful,” Roger Farah, president and chief operating officer told WWD.
However, “It doesn’t make sense for us to run stand-alone units. We built 12 as an experiment, but we didn’t feel we were getting the return on the investment,” Farah said. One reason he cited for the lack of return is that the Polo Jeans units were not truly vertical. Polo Jeans merchandise is made via license by Jones New York.
Although some Club Monaco units are closing, and the corporation has not been happy with its overall performance this year, the trend-driven chain is still perceived by Lauren Corp. as a rollout vehicle, and a prior projection that it could grow to around 200 stores across the U.S. still stands. Polo Ralph Lauren acquired Club Monaco, a vertical lifestyle retailer based in Toronto, last year, and took over its management.
Farah said the Club Monaco stores closing are primarily small, suburban locations in Canada that once did well. But when the chain became fashion-forward, those stores went flat. “Club Monaco works spectacularly well in New York, but not so well in small Canadian markets,” he said.
Asked if more stores might close, he said, “No. I think we did everything we needed to do.” He said that the division would still end the year with a 9 percent square-footage gain, though the growth is less than originally anticipated. It will end the year with 62 to 64 stores, with about a third in the U.S. and the rest in Canada.
“When the business was bought, we viewed it as an expansion opportunity for really the entire U.S. and Canada,” Farah said. “I don’t believe there is any reason it can’t happen, but the merchandise and real estate strategy has to be in better alignment.
Lauren said: “We purchased Club Monaco because its concept is glamour and style at a price, and we believe we can build it into a profitable vertical retail operation. As the brand becomes more fashion-forward, we are refining the store rollout plan. We are opening Club Monaco stores in markets such as Los Angeles, New York and South Beach, Miami, and will close locations that don’t match these fashion merchandising sensibilities.”
The restructuring goes beyond retail and bolstering accessories. The corporation has also targeted operations improvements, such as creating efficiency in the supply chain to better support global retail operations, increase inventory turns by 10 to 15 percent, take markdowns faster, reduce SKU assortments and working capital needs and eliminate back office redundancies.
Company officials did not provide specific information on how many jobs could be lost as a result of the streamlining. However, they did emphasize that the restructuring would not affect spending in advertising, marketing or product design.
“They’ve put every aspect of their business under the microscope,” Black said. “It’s clear they’ve been frustrated with the price of the stock.”
Due to the restructuring, the company will record an after-tax charge ranging from $110 million to $115 million, or $1.13 to $1.18 per share, in its second quarter of fiscal 2001. About $73 to $75 million of the total stems from the retail changes, including writing down the assets of several stores to fair values, and closings.
Approximately $22 million to $24 million of the charge relates to write-downs associated with the acceleration in the reduction of older inventory, and approximately $15 million to $16 million related to operating efficiency initiatives, such as the consolidation of overseas sourcing operations, severences and other employee costs. The charge is expected to be cash flow neutral in fiscal 2001.
Excluding these charges, the company expects to report second-quarter fiscal 2001 earnings on Nov. 8 meeting expectations.
“We would expect to see improved results in the second half of fiscal 2001, based on continued strong demand for our brand and by implementing our new efficiencies,” Farah said. “We’re looking for a dramatic profit improvement of 200 basis points in the back half of this year.”
Also, the company sees earnings per share of 50 to 52 cents in the third quarter and 42 to 44 cents in the fourth quarter of fiscal 2001. As a result of the review, on a longer-term basis, the company expects earnings per share to increase from $1.93 to $1.98 for the fiscal year 2002.
The company also expects to grow the 28-unit Polo chain in the U.S., but officials gave no details.
The Polo company stores are currently in the 3 to 5 percent operating profit range, but Farah hopes they hit the 8 to 10 percent range in around two years.
Farah plans to accelerate slow-moving goods. “Historically, we’d pack it away and 12 months later bring it out in the outlets and other channels. We plan to accelerate our inventory turn, with more timely markdowns, moving end-of-season goods into other channels more quickly.”
The firm also plans to reduce the amount of piece good and fabric buying, consolidate back office functions in retail and MIS and standardize travel policies.