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Analysts Say Sourcing Shifts at Ralph Lauren Set to Improve Margins

Now that things in retail are amiss, companies are taking a closer look at their sourcing and supply chains to see where changes can be made.

That’s just what Ralph Lauren did last month when it shook up its executive team, pulling in top leaders from H&M and elsewhere to pave its leaner, more efficient “Way Forward.”

Analysts are saying the supply chain shifts are just what the staid retailer needed, and the moves are expected to boost margins.

In a report Wednesday, following a meeting with new Ralph Lauren CEO Stefan Larsson and vice president of investor relations Evren Kopelman, financial services firm Cowen and Company said that the changes will improve turn, gross margin and return on invested capital (ROIC) for the company.

Earlier this month, Larsson revealed at the company’s very first investors’ day that it would cut 8 percent of its full-time staff, reduce the layers in the organization from nine to six and shrink supply chain lead times from 15 months to nine.

“Focusing on the core and speed within the core, avoiding markdowns that cannibalize the core/iconic product by faster design processes, sourcing and supply chain leads to faster inventory turn, a flow of newness and margin—this is the essence of the H&M and Inditex high margin/ROIC model,” Cowen said.

Larsson said 35 percent of Ralph Lauren’s assortment drives 70 percent of the company’s sales, and 40 percent of that is iconic product and 28 percent is seasonal. Ralph Lauren’s turnaround is expected to help drive SKU rationalization for a more profitable, leaner and updated merchandise mix, Cowen said.

In addition, scaling back on organizational layers means fewer people—who can make necessary calls—will be able to do so more efficiently. “Empowering decision making throughout the company should lead to a faster design process and more on-trend merchandise,” Cowen said.

Larsson has plans to evolve the Ralph Lauren product to better thrive in today’s market, and to modernize the marketing to suit, but upgrading the store experience and incorporating internal systems to track inventory turn will aid in the process.

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Cowen analyzed 34 companies from 2012-2015, including Ralph Lauren, H&M and Inditex, and only 14 expanded their merchandise margins, with an average of +237 basis points. Twenty companies saw a contraction by an average of -249 basis points, demonstrating, as Cowen put it, “the difficulty around properly planning inventory levels and the forced markdowns most of the companies had to utilize to clear inventory.”

Ralph Lauren’s merchandise margins fell by 119 basis points, while H&M’s dropped 246 and Inditex by 192 basis points in the three-year period to 2015.

Larsson told Cowen he doesn’t think the more competitive trends in the apparel category will keep Ralph Lauren from meeting its targets.

The company hasn’t outlined what exactly its distribution mix will look like by 2020, but the Ralph Lauren brand will be wherever the consumer wants to shop for it.

Cowen said with estimates of 3 to 5 percent top line growth for Ralph Lauren in 2019 and 2020 and operating margin improvement to 13.5%, analysts project $8 in earnings per share by 2020, up from the $4.62 Ralph Lauren reported for fiscal 2016.

In the meantime, the company’s new dream team will be settling in, though according to Cowen, change will take time.

Jane Nielsen, who was most recently at Coach, was named Ralph Lauren’s new CFO, Halide Alagöz from H&M was hired as head of global sourcing, Bill Campbell, who spent 11 years at Amazon joins the team as corporate senior vice president of global supply chain and inventory management, and Fredrik Hjalmers, also from H&M, was named Ralph Lauren’s SVP of global expansion and business development.