Asia a bright spot for cashed-up Ralph Lauren
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Luxury retailer Ralph Lauren saw online sales in Asia surge by 15 percent during the peak of Covid-19 lockdowns. But the company’s early decision to close stores around the world saw overall sales drop by 15.4 percent, resulting in an operating loss of $284 million and a net loss of $249 million for the March quarter.
Neil Saunders, MD of GlobalData Retail, says while the quarter ended before the peak of the pandemic in the US, the European market was hit hard with revenue down by 19.3 percent year on year and trade in North America down by 11.2 percent.
“Unfortunately, digital channels did not completely pick up the slack from stores as Ralph Lauren temporarily suspended online operations in late March to enhance health and safety protocols. On a comparable basis, this pushed down sales by 7 percent in North America and 2 percent in Europe.”
Saunders says that while Ralph Lauren’s loss may widen in the second quarter, the company has liquidity of more than $2 billion and a very strong balance sheet with minimal debt. “On top of this, actions to reduce expenditure in the near-term will help to minimize losses and preserve cash.”
Saunders says the crisis came at an unfortunate time for the brand. “This quarter should have been one which capped a year of recovery for the group, which has been trying to improve its brand image and connect with new customers. In our view, while progress was patchy – especially in North America – there were signs that things were going in the right direction with steady growth in comparable sales and some stronger results from Asia and Europe.
“On top of this, actions to reduce expenditure in the near-term will help to minimize losses and preserve cash.”
“Sadly, the severe downtick in trade has undone this advancement and for the full fiscal year the company will end up with a comparable sales decrease of 2 percent.”
He believes that many Asian markets will see a reasonable bounce back in retail sales for the brand in the current quarter, but doubts the same will be true of Europe and especially not in the US.
“The first issue in the US is that, even before the pandemic hit, the improvement in Ralph Lauren’s business was only partial. The company was moving in the right direction, but enhancements in marketing and assortments had not fully taken root and brand perception was only inching up by small increments.
“For this reason, we do not believe that there will be a mass of customers clambering to get back to the brand once things fully reopen. This is even more so as some of what Ralph Lauren sells will, at least in the near-term, be much less relevant to consumers who are staying at home more and going out less.”
Saunders says Ralph Lauren also faces challenges in its wholesale division, exposed to “some very unfavorable channels, especially department stores”.
“The recovery in these locations will be weak and protracted so, although Ralph Lauren has been reducing its reliance on third-parties, it will be unduly affected. Some of the flagship stores will also suffer from a reduction in tourist numbers, which are an important component of their success. Both these structural challenges to the business will not abate before 2021.”
Questions & Answers
Q.Why were Ralph Lauren's online sales not enough to offset the loss from closed stores globally?
Why were Ralph Lauren's online sales not enough to offset the loss from closed stores globally?
The company temporarily suspended online operations in late March to enhance health and safety protocols. This pushed down sales by 7 percent in North America and 2 percent in Europe, meaning digital channels could not fully compensate for store closures.
Q.What is Ralph Lauren's financial position despite the recent losses?
What is Ralph Lauren's financial position despite the recent losses?
Ralph Lauren has liquidity of over $2 billion and a very strong balance sheet with minimal debt. Actions to reduce expenditure in the near-term are also being taken to help minimise losses and preserve cash.
Q.Why is Neil Saunders doubtful about a strong bounce-back for Ralph Lauren in the US market?
Why is Neil Saunders doubtful about a strong bounce-back for Ralph Lauren in the US market?
Even before the pandemic, the improvement in Ralph Lauren's US business was only partial, with brand perception inching up slowly. Also, some products will be less relevant to consumers staying home more, so a mass return to the brand is not expected.
Q.What structural challenges does Ralph Lauren face beyond the pandemic's immediate impact?
What structural challenges does Ralph Lauren face beyond the pandemic's immediate impact?
The company faces challenges in its wholesale division due to unfavourable channels like department stores, where recovery will be weak. Flagship stores will also suffer from reduced tourist numbers, with these issues not abating before 2021.
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