Photographer: Chris Ratcliffe/Bloomberg

Ralph Lauren Forecasts Painful Transition Year

  • Sales will decline in the low double digits, company predicts
  • New CEO is closing stores and cutting jobs in turnaround bid

Ralph Lauren Corp. tumbled as much as 10 percent after predicting a plunge in sales this year, showing the challenges facing Chief Executive Officer Stefan Larsson as he tries to turn around the nearly 50-year-old brand.

Larsson, who unveiled his vision for the company for the first time since taking the reins last year, will eliminate three layers of management, slash 1,000 jobs and shutter stores as part of his “Way Forward” plan. The restructuring costs will amount to as much as $400 million, the company said on Tuesday. It also will refocus on its three core brands: Ralph Lauren, Polo and Lauren.

The New York-based company, facing an industrywide slowdown and an aging customer, is revamping its operations to bolster sagging earnings. Larsson’s plan to reinvigorate Ralph Lauren will generate cost savings of about $180 million to $220 annually, on top of an earlier belt-tightening effort. The CEO’s other challenge is making the brand cool again: He’s drawing on his experience at Old Navy and H&M to speed up the company’s supply chain and connect with younger shoppers.

“We see a clear path to tap into the potential and massively to drive brand strength growth and profitable sales growth,” Larsson said during the presentation. “It will take time though.”

Ralph Lauren shares fell as low as $86.25 in New York after the announcement, marking the biggest intraday decrease in four months. They recovered some of that ground later in the session, trading down just 1.7 percent as of 12:32 p.m. The stock had already lost 14 percent this year through Monday’s close, battered by investor fears that the company is mired in a long-term slump.

Sales Drop

Ralph Lauren now expects sales to fall by a percentage in the low double digits in fiscal 2017, which ends around March of next year. Analysts had estimated a 4 percent drop on average, according to data compiled by Bloomberg. Clearing out inventory, shutting down stores and trying to wean shoppers off of discounts -- combined with weak customer traffic -- will all conspire to hold down sales this year.

The brand has been suffering from sluggish demand at many malls and department stores, such as Macy’s, Hudson’s Bay and Nordstrom. A stronger dollar has also eroded the value of its sales overseas and curtailed spending from European and Asian tourists in North America.

Relying less on promotions and discounts will “position us for strength going forward,” Chief Financial Officer Bob Madore said. “We are taking very aggressive steps to reduce the level of inventory in the value channel.”

Making His Mark

Larsson took the helm in November after the company’s namesake founder stepped down as CEO. Since then, the executive has shaken up management and pushed forward with a cost-cutting plan, including a reduction of 5 percent of its workforce. He’s been working to eliminate $125 million in annual costs, remodel stores and reduce its product count to keep inventory low.

The plan unveiled on Tuesday goes further, and brings more short-term pain. In addition to the $400 million in restructuring expenses, the company will write off as much as $150 million in inventory that has to be liquidated.

The idea is to eventually get prices -- and margins -- back up, said Chen Grazutis, an analyst at Bloomberg Intelligence. The company expects its performance to stabilize in fiscal 2018, before emerging as a smaller, more profitable organization in 2019.

“They are willing to take an hit on sales in order to refine their distribution and restore full price sales and margins,” he said.

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