Back in January, Ralph Lauren (RL) fell off its high horse, and the iconic design house has not been able to get back in the saddle. Is this the bottom for the apparel maker, or is it time to send Ralph Lauren out to pasture, for a while?
On Jun. 7, Ralph Lauren management held an analyst meeting to explain its strategy going forward. Revenue growth has fallen from a rise of 7.3% in fiscal 2014 to a dismal 2.8% decline in fiscal 2016. Likewise, operating margin has collapsed. Operating margins went from 16.2% in 2013 to 10.7% by 2016. The stock price has followed suit.
Of the company's 12 brands, just three (Ralph Lauren, Polo and Lauren) account for the majority of sales. Manufacturing so many lines has diluted the company's brand equity with consumers and driven expenses higher. In a world of fast fashion, it takes RL 15 months to design, manufacture and distribute its products to retailers. Surprisingly, the company lacks a centralized inventory control system. Because of the long lead times and poor inventory management, in the last three years, sales rose 7% while inventory jumped 26%. As a result of poor controls, excess inventory is driving discounting and off-price retail.
Ralph Lauren is slimming down. The company will put more emphasis on its core, iconic looks and seasonal fashion, while dispatching unproductive styles. Itplans to get its 15-month lead time down to nine months. It plans to limit discounting and improve inventory control by strengthening its collaboration with its suppliers and retailers. Management plans to "right size" the organization -- aking it down from nine layers of management to six. It plans to close more than 50 stores that are not profitable.
Added together, these initiatives are projected to save the company $445 million over the next three years.
At the analyst meeting, management updated guidance. Fiscal 2017 sales are expected to be down mid-single-digits with an operating margin of 10%. The company plans to cut $180 to $220 million of expenses this year and take a restructuring charge of about $400 million. RL will also take a $150 million loss on inventory.
So, for the June quarter, that puts revenue growth down 4.8%, or $1.5 billion. With an operating margin of 5%, earnings per share will come in at a disappointing $0.84.
I think the company is making all the right moves. Ralph Lauren needs to slim down and get more competitive. It must speed up the design and manufacturing process. The company has to get rid of its excess inventory and all of its unproductive styles.
This year is a transition year. Value investors have to look past the year and focus on next year, when the company is expected to return to growth. If you believe management can accomplish this massive turnaround, you probably won't be able to buy the stock this low again.
This is a huge transition, and frankly, I'm surprised the previous management let things go to this extent. (RL was supposed to be well managed.) For the time being, I will sit on the sidelines and monitor the company's progress. Management has $300 million left on its share buyback, which could be used to light a fire under the stock, assuming the company can execute on its strategy.
For me to buy this stock, I would need to see better-than-expected operating margins and some revenue growth. For now, I think Ralph Lauren can stay in the paddock.