Retooling Ralph Lauren (RL) has been a long time coming.
And let me tell you, what was shared by Polo's new CEO Stefan Larsson on Tuesday shouldn't come as any surprise. Walk into any Macy's (M) store and Polo's shop-in-shops basically have the same fixtures from when I was a kid wearing a knock-off polo shirt from the local flea market. The clothes on the racks in Macy's, in my view, have long lacked inspiration; they shout out that the company got too complacent that the market would be there ready to buy up for its trademark styles.
Good luck finding a pair of Polo jeans in Macy's. Keep in mind all of this is happening as Macy's, and other department stores that Polo's brand is in, have introduced scores of upstart fashion brands in sleek-looking settings. Outside of the department stores, H&M and Zara are capturing the Polo customer.
But Polo's issues are not resigned to the mall setting. How about the Club Monaco in New York City I recently toured with a bestie -- most of the store was stocked with white colored women's clothing that lacked a sense of cool, in my eyes. Furthermore, any men's product was absent from the store! Given the power of the Polo brand and high rents in NYC, each store should be dual gender. Note that Polo admitted, on its investor call, that it dropped the ball with retail store site selection and development.
Meantime, why in the world is Ralph Lauren operating three restaurants in major markets globally, selling $20 cocktails and $30 glasses of wine in a completely over-the-top setting? Founder Ralph Lauren really expressed his affinity for a high-class hamburger at one of these restaurants on the call Tuesday, but come on, give me a break.
Sure, while Lauren is absurdly rich and could afford pet projects, he shouldn't be doing it on the company's dime. If he wants a high-class burger overseas or in New York City, head over to Shake Shack (SHAK). In fact, given the plunge in Shake Shack's stock since its 2015 IPO, maybe Lauren should bid for the entire company in order to satisfy his hunger to be a faux Gordon Ramsey (renowned restaurateur and celebrity chef).
I think Polo's deep restructuring -- from shortening lead times to closing unprofitable stores -- will be a slow and painful process. Over the next year, the company could very likely under-perform its lackluster sales and profit guidance. Moreover, I think the company will announce more retail store closures than it guided, as well as exit many unproductive venues at department stores.
I would not be a buyer of the stock here. Retail turnarounds, even for a brand as iconic as Ralph Lauren, do not occur overnight and often take close to two years before they gain momentum -- see Coach (COH).
Ultimately, Polo's overhaul will have several knock-on effects.
Off-price retailers: For years, TJ Maxx (TJX) (and its Marshall's chain), Ross Stores (ROST) and local off-price retailers have feasted on excess clothing from Polo. In fact, dare I say they have built entire business models on the company making too many women's shoes, handbags, sneakers and polo shirts.
As Polo shortens product lead times, tries to better match inventory with demand, and slashes slow-moving product lines, off-price retailers will find themselves in the new position of being absent a great deal of Polo merchandise. That is great news for Polo, which is trying to get people to pay full price for the brand in Macy's or one of their retail stores, but bad news for off-price retailers that have long made great margins on Polo's excess wares.
Department stores: In the short term, Polo's efforts to clean up its department store inventory may weigh on profits for department stores. I wouldn't be surprised if Polo offerings could be had for nice deals going into the back-to-school selling season. But over time what Polo is doing is good news for department stores.
I suspect Polo will follow Coach's lead and upgrade the shopping environment for its shops, maybe even add a dedicated salesperson. The merchandise in the shops will be the very best from Polo. That should lead to stronger results for department stores, which have devoted sizable portions of floor space to Polo merchandise that is simply not selling like it once did.
Fast fashion retailers: Companies such as H&M and Zara have a unique opportunity to gain more customer loyalty this holiday season, as Polo restructures and tries to reconnect with customers. This is partially why I think Polo could come up short relative to its tepid guidance it just laid out. Although not a fast fashion house by any means, I think Coach could benefit too in the medium term, as Polo fixes itself. Coach is back on track with its handbag styles and is quietly making nice inroads into key clothing items (jackets, shoes, sneakers) for men and women.
While I have your eyeballs, I left impressed with Polo's new Swedish CEO. He laid out quite a detailed plan to concerned investors, one that is easy to understand and could conceivably be executed upon well enough to return to growth within the next three years.
The detailed plan is in stark contrast with the absolute disaster that is Gap (GPS) and CEO Art Peck, who in my opinion has not broken down to investors the root problems with Gap and how they could be addressed within any reasonable timeframe. Polo's Larsson has my confidence; Gap's Peck should be sent packing after this holiday season.
