What a difference a year makes.
At this time last year, Ralph Lauren (RL) had just a named a new CEO to replace a star executive who had abruptly left after a short tenure and the fashion company was grappling with how to fix a brand brought low by years of discounting. Fast forward to today, and that CEO, Patrice Louvet, won kudos not only from Ralph Lauren’s namesake founder but also from a Wall Street impressed by the company’s quickly improving financial results.
Ralph Lauren’s sales and profit easily beat analyst expectations, sending shares up 14% to their highest levels in three years.
Revenue fell 2.3% to $1.53 billion, the company said on Wednesday, with much of the decline coming from its efforts to get out of many department stores as well as off-price discount stores in the past year as it works to get back some of its higher-end aura and the improved profit that comes with that. Analysts had been expecting $1.48 billion. And comparable sales at its own Ralph Lauren stores fell 1%, much less than the 2.3% drop analysts were projecting.
Louvet, a mild-mannered technocrat who came from Procter & Gamble (PG), replaced Stefan Larsson as CEO of Ralph Lauren in May 2017 after the latter, credited with previously turning Gap Inc’s (GPS)Old Navy into a sales juggernaut, was not on the same page as Ralph Lauren on how to get the company back on its feet. And Lauren, who founded the company 51 years ago, made clear he likes the new guy, giving him an endorsement that suggested no new conflicts were in the offing.
“Patrice and I have developed a strong partnership,” Lauren said in a statement. “I am confident that we are on the right path.”
And his confidence was bolstered by the improvements in Ralph Lauren’s numbers. Average revenue by item was up 16% and average profit 22%. Ralph Lauren has sacrificed a lot of its U.S. revenue to close many of its own stores and to get out of the many department stores that are struggling, exiting 25% of such locations in the past year. Ralph Lauren is also now selling less at off-price retailers that include the likes of T.J. Maxx. At the same time, the company has updated its shops at the 80 best North American department stores. Less discounting led to a 4.4 percentage point increase in Ralph Lauren’s gross margins.
The moves echo those of “accessible” luxury peers like Coach (owned by Tapestry (TPR)) and Michael Kors (KORS), which similarly got so hooked on discounting to juice sales that the overall brand image suffered, forcing them in the past few years to take radical steps to fix that.
Ralph Lauren’s effort helped it return to a profit, reporting net income of $41.3 million, or 50 cents a share, in the quarter, from a loss of $204 million, or $2.48 a share, a year earlier. On an adjusted basis, the company made 90 cents a share, easily beating Wall Street estimates for 83 cents.
“We’re on a journey to establish a health foundation to get the company back to sustainable long-term growth,” Louvet told analysts on a conference call. So far, so good.