Ralph Lauren (RL) is seeing firsthand that less can sometimes mean more.
The 50-year American preppy standard-bearer reported stronger than expected revenue and profit margins, thanks in part to the painful restructuring of its business in which it is seeking to rely less on discounting to generate sales and restore luster to the Ralph Lauren brand.
The company, founded in 1967 by its namesake, has been in the process of exiting some 20% to 25% of the department stores that sells its wares, and also is trying to reduce its exposure to the so-called “off-price” chains, even as this means sales are taking a dive. The ubiquity of the brand, along with the endless discounting and promotions at many stores where it is sold, have in recent years severely damaged the Ralph Lauren name. Much like Coach-parent Tapestry (COH) and Michael Kors (KORS), Ralph Lauren has been looking to regain some of its high-end cred by being more selective about who gets to sell it. The company has also pared its assortment to focus more on higher-end merchandise.
The result in its second fiscal quarter, ended Sept. 30, was a much higher profit, and more significantly for Ralph Lauren, a higher gross margin, which rose 3 percentage points to 59.9%. And the company said it expects further expansion as it continues to exit hyper promotional stores. The average revenue generate per item at Ralph Lauren rose 5% in the quarter thanks to those efforts.
“We’ve made very good progress on improving the quality of our distribution,” said recently appointed CEO Patrice Louvet on a conference call with Wall Street analysts. The Frenchman, a long time high-up at Procter & Gamble, (PG) was named chief executive in May following an abruptly shortened 18-month stint by former Old Navy head Stefan Larsson.
Still, more pain is on the way for the company whose revenue fell 9% and is expected by Ralph Lauren to fall 6$ to 8% in the current quarter, as it continues to shift away from sales for the sake to sales to revenue from brand-enhancing efforts.
While Ralph Lauren has made clear it wants less exposure to U.S. department stores such as Macy’s (M), which generate 25% of its global sales, and off-price chains, Louvet made clear the company doesn’t want out of such stores altogether. But the company does want more focus on its product and less on promotions in such stores. As for off-price chains, Louvet did not name names, but TJX Cos’ (TJX) T.J. Maxx are typically full of Ralph Lauren, and the company is cutting back on its presence in this area of retail.
Louvet said department stores will remain crucial to Ralph Lauren and indeed the brand introduced a limited-edition collection of knitwear product with the Polo logo at Macy’s and its sister brand Bloomingdale’s in September. The company has looked to create new buzz by bringing back some vintage pieces and speeding up the time it takes to get a new product to market.
For all the progress, the company faces a long slog to get back to its previous form: comparable sales at its own store fell 6%, a deeper drop than the 5.4% drop expected by Wall Street analysts, according to Consensus Metrix. As Louvet himself put it, “While there is a lot of work to be done, I am encouraged by the early progress we are making,” he said. And Wall Street seem to share that sentiment: shares were up 2% on Thursday.
