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Ralph Lauren Misses on Q3 Sales and Earnings, Says Big Structural and Management Changes Ahead

Ralph Lauren Corporation (RL) reported third quarter sales and earnings results yesterday that missed expectations, sending its stock sliding 18 percent to under $140, a multiyear low.

Revenues rose by less than 1 percent to $2.03 billion in the three months ending in December, falling short of expected sales of $2.11 billion. Excluding the net negative impact from foreign currency effects, the increase was 3 percent, with growth in all geographic regions.

Wholesale segment sales of $837 million were flat with the prior year period. Growth in European wholesale shipments was offset by lower shipments in the Americas. Excluding currency effects, wholesale sales increased 2 percent. Retail sales increased 2 percent to $1.1 billion, led by 17 percent growth in global e-commerce and the contribution from new store openings. Excluding the negative impact from foreign currency translation, retail sales rose 5 percent over the prior year period. Consolidated comparable store sales declined 2 percent, but were flat on a constant currency basis. Licensing revenues rose 6 percent to $47 million.

On the quarterly earnings conference call with analysts, president and COO Jacki Nemerov blamed the strong dollar, the negative impact of geopolitical tensions on global tourism, and heightened promotional activity in the U.S. marketplace for the sales shortfall.

Sales in China and Europe were strong, while those in Russia and the Middle East were very disappointing. Moderate sales growth in the U.S was impacted by lower customer traffic in bricks-and-mortar stores.

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Nemerov said although the company’s brands gained share early in the holiday shopping period, the tide turned as the environment became more competitive in the three weeks before Christmas.

There were some bright spots in the quarter in the U.S., however. Nemerov reported that “the dress business is on fire. Lauren represents the number one dress brand in almost every department store. We’ve had a phenomenal footwear season, with accelerated growth in footwear…our coat business also was spectacular for the season.”

However, about the recent launch of Polo for women, she gave the somewhat lukewarm report that “the business is off to a nice start” and “momentum is growing with each new delivery.”

The company plans a global launch of Polo Sport for men and boys in the fall to take advantage of the attractive growth potential in activewear.

Gross profit fell by 1 percent to $1.2 billion. Gross profit margin of 57 percent was 120 basis points lower than the comparable prior year period, due to mix impacts, the more promotional U.S. marketplace and currency effects.

Operating expenses rose 1 percent above the prior year period to $844 million, but fell slightly as a percent of revenue due to careful expense management despite significant investments in global retail development, marketing and infrastructure.

Operating income declined 6 percent to $315 million, 110 basis points below the prior year, primarily due to the hit to gross margin.

Net income fell 9 percent to $215 million, or $2.41 per share, from $237 million, or $2.57, missing analyst consensus of $2.52 per share.

Based on the third quarter results and continued unfavorable foreign currency movements, the company now expects revenue growth for the full fiscal year of 4 percent in constant currency instead of 5 to 7 percent growth, and lower operating margins than previously expected.

The company will reportedly be taking some bold measures to offset the external pressures. CFO Chris Peterson revealed during the conference call that big changes are ahead in the way the organization is structured, how processes are designed and managed, and how decisions are made.

Peterson said the company first turned to upgrading infrastructural systems in order to integrate what was a highly fragmented channel and regional organization. Next, it began to globalize several critical corporate functions, such as finance, IT, supply chain and merchandising.

He said, “Last year we designed 130,000 SKUs across the Company with a commonality rate, by brand, in like-locations around the world that is very low. The new structure and processes will enable a significant reduction in SKUs, which will lead to lower inventory levels, better gross margins, and SG&A cost savings. Our goal once the new structure is fully implemented is to achieve over $100 million in annual expense savings. Only a modest amount will be realized in FY16, with more significant savings in FY17 and beyond. We expect to incur restructuring charge as a result of this re-organization, and we are currently working through the details of the plan. We will provide more insight in May.”

The company’s board upped its quarterly dividend by 11 percent to $0.50 per share.