Polo Ralph Lauren Earnings Drop 36 Percent On Rising Cotton, Production Costs
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Why Ralph Lauren’s Plan to Ditch Discounts Is Paying Off

Aug 08, 2017

Investors are happy with Ralph Lauren today.

Despite a sharp sales decline in the first quarter, Ralph Lauren (rl) shares were up 10% on Thursday after the retailer reported better-than-expected second quarter results.

Ralph Lauren is in the midst of a brand transformation. In past years, the company pursued aggressive expansion and ubiquity at the cost of its luxury image. This strategy, which relied heavily on selling discounted items at department stores and outlets, ultimately devalued the brand.

Now, it's making a concerted effort to reclaim its place as a high-end, iconic U.S. fashion brand. The plan includes:

  • Reducing the levels of discounting, a move that lifted its gross profit margin on its merchandise by 2.1 percentage points.
  • Lowering inventory by 31% to reflect the dwindling fortunes of department stores and reduce risk of being stuck with merchandise Ralph Lauren would have to liquidate at bargain basement prices.
  • Lowering assortment by 20% this fall to offer a more focused, profitable line of merchandise, rather than being all things to all people.
  • Speeding up turnaround times so that 35% of sales come from product that can be designed, made and put on shelves in six months rather than the more typical nine months (earlier this year, the company parted way with a CEO, Stefan Larsson, who had been successful at fast fashion chain H&M and then Old Navy).
  • Getting out of up to 25% of the U.S. department stores it sells in (in additional to Macy's, Ralph Lauren is a fixture at chains from Kohl's (kss) to Nordstrom (jwn));

Ralph Lauren's latest results suggest these efforts are beginning to bear fruit. The company's decision to limit the number of items it discounts is evident in its rising gross margins and a higher profit of $1.11 per share, way above the 94 cents analysts expected.

Still, it is way too soon for the company to declare victory: While slightly above Wall Street forecasts, revenue fell 13.2% to $1.35 billion, and same-store sales, a closely watched metric, were down 7%.

The retailer is far from the only "accessible luxury" brand to rethink its strategy. Coach and Michael Kors are also getting out of department stores, tired of their promotion-driven business model and weary of chronic shopper traffic declines. Meanwhile, clothing chains like Gap Inc (gps) and Abercrombie & Fitch (anf) have been working to speed up production times to better compete with the likes of Zara and the other chains that have stolen market share from Ralph Lauren.

"We have significant opportunity ahead and we’re moving forward with urgency," said new CEO Patrice Louvet, a former Procter & Gamble (pg) executive appointed in May, in a statement.

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