- Offering fewer products lowers costs, offsets falling sales
- Reorganization aims to cut $110 million in annual expenses
Ralph Lauren Corp. rose the most in more than nine years after posting second-quarter profit that exceeded analysts’ estimates, helped by a cost-saving reorganization effort that’s beginning to show results.
Earnings in the quarter through Sept. 26 were $2.13 a share, excluding some items, the New York-based company said in a statement on Thursday. Analysts estimated $1.73, on average.
Ralph Lauren, which said in September that former Gap Inc. executive Stefan Larsson would succeed the company’s founder as chief executive officer, is working to cut $110 million in annual costs by the end of its fiscal 2017. A big focus of the plan is trimming the company’s product count to keep inventory low, which makes it less likely to resort to discounts to clear slow-moving merchandise.
“They’re doing this reorganization, and I think that’s a big positive,” said Paul Swinand, an analyst at Morningstar Inc. “There are two tangible things you can do in apparel to cut costs: have fewer people and carry fewer items.”
The shares surged 15 percent, or $16.93, to $130.50 at the close of trading in New York, the biggest gain since July 2006. The stock had declined 39 percent this year through Wednesday.
In May, the company announced it would reorganize from a regional to a global structure. That sparked the creation of six global presidents heading groups of brands. The company said it expects to incur one-time charges of $120 million to $150 million from the reorganization.
The company took $38 million of those charges in the second quarter, and those costs -- as well as the effect of the strong dollar -- took a bite out of profit. Net income fell 20 percent to $160 million, or $1.86 a share. Sales dipped 1.2 percent to $1.97 billion, beating analysts’ $1.95 billion average projection.
Even as the restructuring costs weighed on earnings, the initiatives are starting to bear fruit. Excluding currency effects, the company’s gross margin expanded 0.9 percentage points, helped by the product-reduction plan and increased full-price sales.
This month marks Larsson’s first as CEO. The executive has been credited with reviving Gap’s Old Navy brand and previously held several positions at Hennes & Mauritz AB. Lauren, 76, will remain executive chairman and chief creative officer.