Though Q1 eroded Ralph Lauren’s revenues, the company sees opportunities to take market share amid the shifting fashion retail landscape.
In a Nutshell: The company has been focusing on its global online platform, viewing the challenges of the coronavirus pandemic and potential resurgences as opportunities to deepen and expand its digital capabilities. In the quarter, the Ralph Lauren accelerated the rollout of connected retail programs and shifted to a true omnichannel model that includes virtual selling appointments, livestream selling, ship from store and personalized consumer engagement that includes personalized promotional offers. In men’s Purple Label, the company expanded its digital product creation, and on the horizon is the rollout of digital showrooms.
“We are living through an incredible period of change—whether related to the devastating spread of COVID-19 around the world or the call to systemically address racial injustice,” Ralph Lauren, executive chairman and chief creative officer, said. “Through it all, we are focused on continuing to build a business that stands the test of time—staying true to who we are while taking action that enables us to deliver our brand vision for decades to come.”
“The past few months have marked a period of extraordinary challenge, but also agility and resilience,” Patrice Louvet, president and CEO, said. “Our financial performance this quarter reflects an unprecedented three months of COVID-19 related impact around the world. We are taking the opportunity to leverage this period of disruption to accelerate our core strategic focus areas, drive new areas of growth, and realign our resources accordingly.”
In a conference call with Wall Street analysts, Louvet said the company’s goal is to become “leaner, be more nimble and ultimately take market share.”
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The CEO said nearly all stores are now open in Asia, Europe and North America. While stores that reopened initially saw significant traffic and comparable store sales declines, they’ve also seen sequential improvement in brick-and-mortar comps in the weeks that followed, Louvet told analysts, noting, “We are watching resurgences closely.”
To that end, the company is remaining cautious on the pace of recovery at retail and is continuing with its inventory discipline that was in place before the coronavirus outbreak. The aim is to generate double-digit AUR (average unit retail) growth and have less discounting, Louvet added.
The company stopped shipping spring and summer product to nearly all wholesale accounts in March to enable stores to sell through merchandise on hand prior to store closures. That action helped to prevent any buildup in inventory, Louvet said.
Looking ahead, the company continues to realign inventory to expected demand and help with its strategy of brand elevation. “We have actively reduced our fall and holiday product and introduced existing product throughout the collection,” Louvet said. In addition to filling in appropriate seasonal product, the company also limited June replenishment shipments.
As part of its decision to realign inventory, the company also exited more than 200 wholesale doors in the U.S. this spring to focus on more productive locations. Louvet said the decision was part of a two-pronged approach to increase productivity in brick-and-mortar doors and shift sales towards digital. Wholesale sales and inventory levels are currently on track, if not better than expected, he added.
Net Sales: For the three months ended June 27, total revenues dropped 65.9 percent to $487.5 million from $1.43 billion.
By region, net revenues for North America fell 77.1 percent to $165.1 million from $719.4 million, with retail comparable store sales down 64 percent and North America wholesale revenue declining 93 percent. Europe revenue was down 66.5 percent to $120.7 million from $360.8 million, as retail comps fell 62 percent and wholesale revenue decreased 71 percent. Asia revenue decreased 33.5 percent to $171.9 million from $258.6 million, with comparable store sales down 33 percent. Other non-reportable segments also saw a decline of 66.9 percent to $29.8 million from $90.0 million.
Gross margin for the quarter was 71.5 percent. “Gross margin expansion was primarily driven by favorable geographic and channel mix shifts due to COVID-19 as well as AUR (average unit retail) improvements across all regions,” the company said.
While consumers have been shifting back to Ralph Lauren’s core pre-COVID-19 categories as stores reopen, the clothing company has also identified home and loungewear as emerging high potential, under-developed lifestyle categories.
“As uncertainty lingers through the balance of the year, we expect the company will leverage the strength of its financial position and focused execution of its strategic growth initiatives to emerge even stronger as the dust settles on the COVID-19 pandemic,” said Dana Telsey, chief investment officer at Telsey Advisory Group, who has an “outperform” rating on the company’s shares. She noted that the company exited the first quarter with $2.7 billion in cash and investments and $1.9 billion in total debt versus $2.0 billion in cash and $692 million in total debt at the end of same year-ago quarter.
Earnings: The quarter saw a net loss of $127.7 million, or $1.75 a diluted share, against net income of $117.1 million, or $1.47, a year ago. Excluding restructuring and other charges, the adjusted loss was $1.82 a diluted share.
Wall Street was expecting a diluted earnings-per-share loss of $1.72 on revenues of $615.0 million.
Like many of its competitors, Ralph Lauren will not provide guidance for full year fiscal 2021 or the second quarter due to the uncertainty around COVID-19. The company said it expects financial results for the second quarter and full year to be significantly adversely impacted by the pandemic and prolonged demand recovery.
“We are in the process of carefully evaluating our long-term operating structure to align with our evolving strategic priorities, with a focus on six key areas: team organizational structures, enterprise-wide processes, our distribution center and corporate office real estate footprint, our door presence across owned direct-to-consumer and wholesale partners, discretionary expenses, and our brand portfolio,” the company said.
CEO’s Take: Louvet said cost discipline allowed Ralph Lauren to reduce near-term expenses so the company can “emerge stronger than when we came into it and pivot quickly back to growth.”