Scandinavians are nothing if not minimalists, and Ralph Lauren’s new president and chief executive officer, the Swedish Stefan Larsson, wants to revive the iconic company’s business by going back to basics and trimming the fat.
The fast-fashion impresario, who moved from Old Navy in November, presented his “Way Forward” plan and financial outlook at Ralph Lauren’s first-ever investors’ day on Tuesday, outlining a strategy that includes reducing the company’s full-time headcount by 8 percent in an effort “to create a more nimble organization by moving from an average of nine to six layers” and shifting from a handover model to one of cross-functional teamwork.
Another key part of the plan will involve “significantly reducing supply-chain lead times” by “employing best-in-class sourcing.” To that end, Ralph Lauren has made a major hire, snagging Halide Alagoz to be the company’s head of global sourcing. Her robust background includes 18 years of experience leading global supply chain and sourcing initiatives for H&M in several locales, including China, Hong Kong and Turkey.
Larsson also revealed plans to right-size Ralph Lauren’s real-estate portfolio by closing roughly 50 stores that don’t drive profitable sales growth and executing a more “disciplined multi-channel distribution and expansion strategy” going forward.
Expense savings related to this streamlining are estimated to be in the range of $180 million and $220 million annually, in addition to the $125 million of annualized cost savings associated with the company’s last round of restructuring activities in fiscal 2016. However, it also expects to incur charges of up to $400 million as a result of the streamlining and up to a $150 million inventory charge associated with the reduction of inventory out of current liquidation channels in line with the Way Forward plan.
“The business has struggled over the past three years,” Larsson said. “We’re still very profitable and very strong financially so we do business from a very strong base but performance-wise the trend has been down over the last three years.”
Indeed, the company’s profits plummeted from $702 million to $396 million, or $4.62 per diluted share, in fiscal 2016 as net sales decreased to $7.2 billion, causing revenues to drop to $7.41 billion.
“When it comes to diagnosing our challenges we’ve had an undisciplined and far too siloed approach to how we drive our channels. That has led to the quality of sales in wholesale, e-commerce and retail going down, which has led to excess inventory growing the value channels out of the balance. That has grown a retail channel in an undisciplined way and a siloed way without looking at it from a consumer’s perspective,” Larsson said.
In a bid to “super-charge the consumer offering,” the company will cut lead times from 15 months to nine months, introduce an eight-week test pipeline and plan inventory based on demand.
“We want to make sure that every single product in the assortment has an intention. Every product has to either be a test, has to grow or it has to be optimized, or it has to be reinvented. If it doesn’t qualify, it’s the long tail and needs to leave the assortment,” Larsson explained, noting that 35 percent of the assortment currently drives 70 percent of sales. “We want to sell more with less, and that’s possible through working differently.”
He added, “We need to stop thinking about it as if it’s one lead time. It’s not one lead time. Some things you need to commit nine months out, others six months out, three months, and a continuous test pipeline of eight weeks where we can see which products work and then we grow those.”
Larsson said he expects this will help cut excess inventory to as low of a level as the company possibly can.
“That means that we will have less excess inventory, less discounting in our full-price channels, which means the transfer of inventory from full-price to off-price will go down and we will become much more disciplined with how we distribute our products in the different channels,” he said.
The overall focus on sourcing, he said, needs to continuously drive down costs and drive up quality by developing closer relationships with its supplier base.
“Best-in-class sourcing is not all about speed. It’s about optimizing quality, optimizing price, speed, but it’s also about flexibility,” he said.
Other management changes announced Tuesday included Valerie Hermann’s newly expanded role of brand president, as well as the following strategic hires: Frederik Hjalmers, formerly of H&M, was named head of global expansion; and Marcelle Parrish, who spent four years as general manager of eBay Fashion, is the new head of North American e-commerce.
Larsson also mentioned that three more c-level hires will be announced soon, but did not provide any further details.
With that being said, Ralph Lauren doesn’t expect to stabilize performance until fiscal 2018 and is forecasting a “pivot to growth off of a smaller, more profitable base in fiscal 2019.” In fiscal 2020, the company is targeting market growth and a mid-teens operating margin.
“We have assessed every value-creating component of the company and, with our Way Forward plan, we will build on our strengths, refocusing on our core brands and instilling a financial discipline that is highly focused on return on investment,” Larsson said. “We have a powerful, authentic brand with unique elasticity, and we will bring our company to a stronger place than ever before by connecting our brand voice more closely to consumers and evolving our operating model. Our multi-year growth plan will lead Ralph Lauren—one of the few truly iconic brands in the industry—to profitable sales growth and long-term shareholder value creation.”
Ralph Lauren stock (RL) fell by more than 7 percent in early-morning trading Tuesday.