Ralph Lauren profits tumble
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US fashion label Ralph Lauren’s operating profit has tumbled almost 39 per cent year to date as it continues to restructure its operations.
The latest quarterly numbers just released show a solid sequential improvement on the prior quarter, with the strength of the US dollar responsible for most of the headline deterioration. When reported on a constant currency basis, net revenues look more respectable, rising four per cent over the prior year.
“Despite the fall in profits, Ralph Lauren has taken steps to help ease up its bottom line over the medium term,” comments Håkon Helgesen, retail analyst at Conlumino.
“These include the global reorganisation into a centralised structure run by six global brand groups which, by the end of 2017, should yield an annual $100 million in terms of efficiency savings. This measure has, however, come with short term costs attached – $38 million of which were recognised during this quarter, and more of which will filter through into subsequent quarters.
“Despite the squeeze this exerts on profits, we believe that Ralph Lauren is to be applauded for taking the long term view.”
The global launch of Polo Sport was completed during the quarter and initial indications suggest it has been well received.
“In our view this activewear brand gives Ralph Lauren a much more significant presence in a lucrative – and rapidly growing – part of the apparel market and will be a solid contributor to future growth,” said Helgesen.
“Despite the fall in profits, Ralph Lauren has taken steps to help ease up its bottom line over the medium term,”
Geographically, although international growth was deflated by the unfavorable exchange rate, it remains in double digits when expressed in local currency terms.
“The same cannot be said of Ralph Lauren’s home market where the company struggled to generate sales momentum. Stores in big city locations – which make up about half of the total fleet – have the legitimate excuse of reduced tourist spend, again related to the relative strength of the dollar. This has inevitably acted as a drag on growth.”
Helgesen says despite sluggish growth and a more promotional retail environment, Ralph Lauren continues to be conservative about discounting.
“Although this has likely cost it some sales in the US, it has helped to protect margins and, ultimately, brand equity. Again, this is an example of Ralph Lauren being confident enough to take the long term view.”
Responsibility for the day-to-day running of the company will now fall to Stefan Larsson, who takes over as CEO from its founder Ralph Lauren this month.
“While some have questioned Larsson’s background – he previously worked at the distinctly mass-market retailers Old Navy and H&M – this is, in our view, to ignore the skills he brings to the table. While these may not have been honed in a luxury brand environment, the operating disciplines of both fashion businesses are points of learning for Ralph Lauren as it continues its quest for efficiency.
“In any case, Ralph Lauren – and his design prowess – will still be on hand as he takes up his new role of chairman and chief creative officer,” concluded Helgesen.
Questions & Answers
Q.What is the primary reason for the large drop in Ralph Lauren’s operating profit this year?
What is the primary reason for the large drop in Ralph Lauren’s operating profit this year?
The main factor causing the significant decline in operating profit is the strength of the US dollar. On a constant currency basis, net revenues actually increased by four per cent over the previous year.
Q.What initiatives has Ralph Lauren taken to improve its financial performance in the medium term?
What initiatives has Ralph Lauren taken to improve its financial performance in the medium term?
The company is undergoing a global reorganisation into a centralised structure with six brand groups. This is expected to generate $100 million in annual efficiency savings by the end of 2017, despite incurring short-term costs.
Q.How has the launch of Polo Sport been received, and what is its strategic importance?
How has the launch of Polo Sport been received, and what is its strategic importance?
Initial indications suggest the global launch of Polo Sport has been well received. This activewear brand is expected to give Ralph Lauren a stronger presence in a lucrative and rapidly growing part of the apparel market, contributing to future growth.
Q.Why has Ralph Lauren struggled to generate sales momentum in its home market?
Why has Ralph Lauren struggled to generate sales momentum in its home market?
Sales in the US have been challenged by reduced tourist spend, particularly in big city locations. This reduction is linked to the relative strength of the dollar, which has created a drag on growth.
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