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‘Destructive’ Covid Lockdowns Weigh on Ralph Lauren in Q3

Ralph Lauren Corp. on Thursday reported third-quarter results, reflecting progress on restructuring initiatives as the company turns focus on realigning its real estate footprint.

In a Nutshell: An over 20 percent increase in global digital commerce sales, with double-digit growth across all regions, and a 19 percent increase in average unit retail in the quarter reflects growth in the “next generation” customer base that the company has been targeting, and more full-price selling.

“For more than 50 years we have stayed true to a set of values that define us—among them timelessness, quality, perseverance and optimism,” Ralph Lauren, executive chairman and chief creative officer, said. “And in this period of great challenge and change, it is these values that are enabling us to authentically and deeply connect with our consumers around the world.”

“Despite the disruptions and uncertainty we faced throughout our third quarter, our teams continued to elevate our brands and effectively engage with consumers around the world—delivering better than expected gross and operating margins through the holiday period, and continuing to meaningfully improve our digital profitability,” added president and CEO Patrice Louvet.

In a conference call, Louvet said strong sales in Asia were offset by Covid-related impacts in Europe. Sequential improvement in North America and Asia was led by digital channels, with sales in Mainland China rising more than 40 percent versus last year’s figures. He said the company also launched its Hong Kong digital flagship in time for the holiday selling period. In many ways, however, the recent lockdowns, particularly in Europe, were “more destructive” than the first two waves of the pandemic, he added.

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The company has been strengthening its brand, while bolstering its marketing capabilities. It also has scaled its retail offerings globally as it continued to prune offerings that didn’t resonate as well, while fine tuning cost structures. The company drove stronger performance in under-developed categories, including outerwear and fleece, along with gift assortments.

“Our brand awareness and purchase intent have accelerated since the start of the pandemic,” Louvet said, noting that the strongest growth came from consumers under the age of 35 and women.

Having simplified for greater agility, Louvet said Ralph Lauren’s next stage involves realigning and increasing global efficiency, which will help start Fiscal 2022 with important foundations in place.

While the pandemic remains a challenge, Ralph Lauren continues to “focus on what we can continue in this dynamic context,” said Jane Nielsen, chief financial officer.

As for stage two, she said the company will be reducing its North America corporate office footprint by up to 30 percent, and plans reductions in other corporate offices overseas. It will be closing up to 10 retail locations globally, depending on discussions with landlords. In addition to lease renegotiations, which will help drive brick-and-mortar profitability, Nielsen said the company also plans to consolidate North America distribution center operations to drive efficiencies, with an eye toward faster average delivery rates and an increased focus on connected retail.

Net Sales: Net revenue for the quarter ended Dec. 26 fell 18 percent to $1.43 billion from $1.75 billion.

Sales in North America were down 21 percent to $715.4 million, while retail comparable store sales fell 21 percent. A 30 percent decrease in brick-and-mortar sales was partially offset by a 9 percent increase in digital commerce. North American wholesale sales slumped 22 percent.

Sales in Europe tumbled 28 percent to $315.6 million. In retail, comparable store sales were down 38 percent, while wholesale revenue dropped 17 percent. Digital sales rose 68 percent in the quarter.

Sales in Asia climbed 14.0 percent to $329.6 million. Comparable store sales ticked up 3 percent, while sales in physical stores grew 1 percent and digital commerce saw gains of 54 percent.

Inventories shrank 4 percent at the end of the quarter. The company said it also “successfully managed peak holiday period logistics despite industry-wide shipping constraints, supported by solid inventory and capacity planning and agility with over 99% on-time delivery rate for Christmas.”

For the nine months, net revenues plunged 36 percent to $3.11 billion from $4.89 billion.

Earnings: Net income for the quarter fell 64 percent to $119.8 million, or $1.61 a diluted share, from $334.1 million, or $4.41, in the year-ago quarter. On an adjusted basis, diluted earnings per share was $1.67, excluding restructuring charges and one-time events.

Wall Street was expecting adjusted diluted earnings per share of $1.63 on revenue of $1.47 billion.

The company said it expects  financial results for both its fourth quarter and full year Fiscal 2021 to be adversely impacted by the pandemic and a “prolonged demand recovery.”

For the fourth quarter, revenues are expected to decline in the mid-to-high single digits to last year, reflecting a sequential improvement from the first three quarters of the fiscal year. The guidance reflects government-mandated lockdowns and other Covid-related restrictions across the company’s key markets, especially in Europe and Japan. Ralph Laurent said it expects capital expenditures in the range of $130 million to $140 million for the fiscal year, down from a projected $175 million to $200 million at the start of the year. The difference was due to the company’s decision to postpone or reduce certain IT, store and infrastructure projects in the midst of Covid, it said.

For the nine months, the company posted a net loss of $47.0 million, or 64 cents a diluted share, against net income of $633.3 million, or $8.13, a year ago.

CEO’s Take: “We remain focused on emerging from this period in a position of strength as we invest in key areas like our digital transformation, while taking a disciplined approach with expenses and ensuring we have the right resources, footprint and brand portfolio to support future growth and value creation,” Louvet said.