Ralph Lauren's Retreat From Discounting Helps Bolster Profit

(Bloomberg) -- Ralph Lauren Corp., the 50-year-old fashion brand known for its preppy style, is making good on its effort to rely less on markdowns -- even if it means selling fewer clothes.

The company posted earnings of $1.99 a share last quarter, topping analysts’ average projection by a dime. Ralph Lauren credited its pursuit of higher-quality sales channels and fewer discounts. Still, the push is taking a toll on revenue, which fell 9 percent in the period.

“As much as this quarter brings the usual dose of negative sales growth, there is finally a faint light at the end of Ralph Lauren’s long tunnel of reinvention,” said Neil Saunders, managing director of GlobalData Retail. “This comes in the form of both improved profit numbers and slightly less-bad revenue figures.”

The results reflect the trade-offs of Ralph Lauren’s comeback plan: The fashion house is willing to sacrifice some growth to restore the brand’s exclusivity. The New York-based company, now headed by Patrice Louvet, plans to retreat from 20 percent to 25 percent of its U.S. department-store distribution points by the second half of this fiscal year.

It’s also reducing its inventory, while improving its e-commerce sites and increasing marketing, he said on a conference call Thursday. The goal is to reel in new -- and possibly younger -- customers.

At the same time, Ralph Lauren has introduced limited-edition polo shirts and brought back some vintage pieces to generate buzz, while continuing to shorten the time it takes to bring fashion to the market.

“While there is a lot of work to be done, I am encouraged by the early progress we are making,” Louvet said in a statement.

Ralph Lauren shares climbed 2.4 percent to $91.60 as of 11:43 a.m. in New York. The stock had declined about 1 percent this year through Wednesday’s close.

China Expansion

The fashion house is focusing on expanding in China, where it has launched sites on Tmall, JD.com and WeChat. In five years, it aims to achieve $500 million sales in mainland China, Hong Kong, Macau and Taiwan, up from $170 million in the last fiscal year, Louvet said.

While it makes sense to capitalize on China, a profitable region for many global brands, the company shouldn’t lose sight of its U.S. turnaround, said Chen Grazutis, an analyst at Bloomberg Intelligence.

“The biggest challenge is -- and will remain -- consumer demand for the brand in the U.S.,” he said. “Only a recovery there will move the dial significantly enough.”

Second-quarter revenue amounted to $1.66 billion, just above the $1.64 billion predicted by analysts. But same-store sales declined 6 percent, slightly worse than the 5.4 percent average estimate compiled by Consensus Metrix.

Gross Margin

Gross margin rose to 59.9 percent on an adjusted basis, 3 percentage points above the prior year. Chief Financial Officer Jane Nielsen expects margins to expand further as the company retrenches from less profitable channels. But along the way, sales will maintain their slide. Ralph Lauren expects revenue to drop 6 percent to 8 percent in the third quarter.

Louvet replaced Stefan Larsson, who left the company after clashing with its eponymous founder over creative direction of the brand. Billionaire Ralph Lauren took back some of the control he gave to the former chief, raising questions about whether the new chief would have enough autonomy to execute a comeback.

Louvet said Ralph Lauren is still in its early progress of expanding its digital and international presence, as well as its marketing, but the company will partner with more influencers in a campaign that will be revealed during the third or fourth quarter.

While the company “is beginning to think along the right lines regarding product strategy,” Ralph Lauren still must go further, Saunders said.

“It has to be accompanied by a host of other initiatives to refocus products and connect more effectively with new customer segments, especially younger shoppers,” he said.

To contact the reporter on this story: Stephanie Wong in New York at swong139@bloomberg.net.

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Jonathan Roeder

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