Ralph Lauren makes headway in war on discounts, but sales suffer

[NEW YORK] Ralph Lauren Corp is making progress in its battle with the discount rack. But the effort is coming at a cost.

The fashion brand, which has seen its clothes heavily marked down at department stores and off-price chains, posted earnings that topped analysts' estimates last quarter - thanks in part to cutting its inventory and selling more apparel at full price.

The byproduct of that push: Sales plunged during the period.

The results reflect both the challenges and opportunities facing incoming Chief Executive Officer Patrice Louvet, who takes the helm in July. While there are more optimistic signs about Ralph Lauren's ability to bolster profit, he has to pull the company out of a sales tailspin.

"There is no denying that this has been the most dismal quarter of a gloomy year," Neil Saunders, an analyst at GlobalData Retail, said in a note. "However, it is now down to the new management team at Ralph Lauren to prove that the darkest hour comes before dawn." The stock dropped as much as 2.9 per cent to US$70.65 in New York trading on Thursday, reaching its lowest level since 2009. That follows a 19 per cent decline this year through Wednesday's close.

Louvet, a Proctor & Gamble Co veteran, was named to the CEO post on Wednesday. His appointment follows the abrupt announcement in February that Stefan Larsson was leaving the job. He had disagreed with the 77-year-old Ralph Lauren over the creative direction of the brand.

Profit was 89 cents a share in the fiscal fourth quarter, excluding some items. That handily beat the 78 cents predicted by analysts.

Same-store sales, meanwhile, were far worse than expected - though that's partly because the company is reining in its inventory so aggressively. The measure declined 11 per cent in the quarter, which ended April 1. Analysts had estimated a 5.6 per cent drop, according to Consensus Metrix.

Gross margin rose 0.9 of a percentage point to 55.4 per cent, underscoring that the effort to get shoppers to pay full price is bearing fruit. The company expects the margin to expand in the first quarter, interim CEO Jane Nielsen said on a conference call. The fashion house has also lowered its inventory level by 30 per cent during the quarter, and that will continue to come down in the first half of the year.

Ralph Lauren has been trying to cut down the time it takes to get new fashions to reach the market to nine months from 15 months. By spring 2018, about 35 per cent of its business will have a lead time of six months or less, Ms Nielsen said. It's also on track to close as much as 25 per cent of its retail partners' locations by the second half of fiscal 2018, she added.

For fiscal 2018, the company expects sales to fall 8 per cent to 9 per cent, excluding the impact of foreign currency. That would put the figure at roughly US$6.1 billion or more - higher than the average projection of US$6.07 billion.

BLOOMBERG