Ralph Lauren Profit Tops Estimates Amid Reorganizationby
Board authorizes additional $200 million in share buybacks
New CEO Stefan Larsson is working to revive sales growth
Ralph Lauren Corp. posted fourth-quarter profit that exceeded analysts’ estimates as the company revamps its operations to reignite sales growth.
Earnings were 88 cents a share, excluding some items, in the period ended April 2, the New York-based company said in a statement Thursday. Analysts projected 83 cents, on average. While revenue fell 0.7 percent to $1.87 billion, that topped analysts’ $1.86 billion average estimate.
The results provide some optimism that Ralph Lauren may be headed toward a revival as new Chief Executive Officer Stefan Larsson reorganizes the company. The retailer is working to cut $125 million in annual costs, remodel stores and reduce its product count to keep inventory low.
Larsson said on a conference call Thursday that he plans to “drastically” speed up the company’s supply chain, focus on its core products and cut more costs. He left more detailed plans to be unveiled at Ralph Lauren’s investor day on June 7, when the company will release its forecast for the first quarter and full fiscal 2017.
The shares rose 0.1 percent to $84.60 at 10:53 a.m. in New York, paring an earlier gain of as much as 6.7 percent. Ralph Lauren had slid 24 percent this year through Wednesday.
Sales to department stores and other specialty retailers dropped 5 percent on a constant currency basis, mainly because of a decline in North America amid a weak retail environment. Sales through Ralph Lauren’s own retail channels rose 7 percent on that basis, driven by new stores and e-commerce growth.
Ralph Lauren’s operating margin narrowed to 6.4 percent from 10.1 percent because of gross margin pressure, currency effects and investments in infrastructure and marketing.
“This kind of operating income decline is unacceptable,” Larsson said. “We have significant opportunity to further reduce costs and reinvest some of those savings in engines that will drive brand strength and profitable sales growth.”
Ralph Lauren has been offering promotions to goose sales, hoping to counteract discounts at department stores and off-price retailers, said Chen Grazutis, an analyst with Bloomberg Intelligence. That strategy, along with the stronger dollar, has put pressure on its profit margins.
“To reverse the deteriorating trend in margins, management may need to make some tough decisions going forward,” Grazutis said. “Third-party retailers are often an easy and convenient way to turn inventory, but the long-term effects to profitability and brand perception have to be considered as well.”
Ralph Lauren is planning $200 million in stock buybacks in addition to the $100 million it had available at the end of its fiscal fourth quarter.
Ralph Lauren has been suffering sluggish sales at malls and department stores, such as Macy’s, Hudson’s Bay and Nordstrom, where it generated about 24 percent of its annual revenue.
“With department stores doing so badly, and apparel in general being weak, everyone is relieved that they are in line with guidance to slightly better,” said Paul Swinand, an analyst at Morningstar Inc. “There’s still a question if there will be some big brand cut at the analyst day, but that’s in the stock now.”
Ralph Lauren’s brands include luxury menswear line Purple Label, vintage-inspired RRL and Polo Sport.
A stronger dollar has eroded the value of its sales overseas, which make up more than 30 percent of its revenue, and also deterred European and Asian tourists from making purchases at its outlet centers in North America, Grazutis said.
The company plans to maintain price increases in countries that have been affected by the stronger dollar, including Japan, Australia, Canada and some European nations, Chief Financial Officer Bob Madore said.