Disastrous final quarter results show that Ralph Lauren is a business which has rapidly gone from bad to worse.
Ralph Lauren sales have been in steady decline across the whole fiscal year, but a 16.3 per cent drop – off the back of a 0.7 per cent dip in the prior year – is calamitous. Both the retail and wholesale divisions contributed to the decline, with sales at the former plunging by 16.2% on a total basis and by 11 per cent in same-store terms.
On the bottom line, Ralph Lauren posted a $268 million operating loss for the quarter. Some of this is down to one-off restructuring charges, which came in at $125 million, but most of it is the result of the significant headwinds buffeting the top line.
The one chink of light in a very dark set of figures comes from the fact that Ralph Lauren attributes some of the negative performance to its attempts to cut back distribution of the brand and to reduce promotional activity. Both these things are necessary if the brand is to rebuild its credibility and strengthen its image with consumers. Indeed, this is a path that has been followed by brands like Coach and Michael Kors, with notable success.
Taking three steps back to take three steps forward is painful, but we believe that if Ralph Lauren is serious, it is a move that following short-term pain will generate long-term success.
There are three main things on which Ralph Lauren needs to focus. The first of these is coherence and ubiquity. While Ralph Lauren is supposed to be a premium brand, it has become far too ubiquitous and in so doing has become less special. It simply isn’t credible for a high-end brand to simultaneously showcase itself in a glitzy store on Madison Avenue while at the same time hawking a random assortment of sweaters thrown in a ragtag way on a table in Macy’s. The two are incongruous and, ultimately, cheapen the image of the brand. There are some early signs of Ralph Lauren pulling back from less favorable channels, but it needs to work much faster if it is to rebuild its cachet.
Need for clarity
The second issue is clarity. One of the reasons for a multi-tiered channel approach is the fact that there are many parts of the Ralph Lauren empire. These various sub-brands are, in theory, supposed to cater to different constituents of the market. In practice, there is no real delineation between many of the elements, and the result is a confused mass of product that is vaguely referred to as ‘Ralph Lauren’. Much more discipline is required around ranging, and it is encouraging to see this coming through in spring assortments with a 20 per cent reduction in SKUs. That said, there is much more work to do on this front.
The third issue is price integrity. Against a challenging backdrop, Ralph Lauren has become too reliant on discounting to drive sales. This has damaged both margins and the brand image. GlobalData’s channel checks over the past few months show that there has, indeed, been much less discounting – a fact that shows up in better margin numbers. On this front, the company is starting to make some headway. However, as other brands going through this process have shown, weaning customers off promotions can be extremely painful over the short term.
As much as it is positive that Ralph Lauren now seems to be acting to address its challenges, it must move quickly. Given the company has been turning itself around in perpetuity, investors will be eager to see results.
The appointment of new CEO Patrice Louvet will help with the delivery, if only because it creates some stability at the top. While the appointment of someone from the consumer packaged goods industry (Procter & Gamble) may seem like an odd choice for a fashion brand, we believe there is some method in the madness. Louvet’s experience of customers, brands, and channels fit squarely with the areas on which Ralph Lauren needs to focus. Moreover, his lack of fashion expertise is likely a good thing as it should make him a more comfortable fit with Mr Lauren.
Ultimately, there is no denying that this has been the most dismal quarter of a gloomy year. However, it is now down to the new management team at Ralph Lauren to prove that the darkest hour comes before dawn.
Neil Saunders is MD of GlobalData Retail.