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Ralph Lauren’s Patrice Louvet to Focus on Consumer Component of Turnaround

May 18, 2017

While the company is making progress on turning around the business, some observers think a nine-month lead time is still too long given the changing retail backdrop and shifts in consumer shopping patterns.

A collaborative leadership style, diverse experience across channels and an operations expert — plus a specialty in leveraging consumer insights.

According to Ralph Lauren Corp.’s chief financial officer Jane Nielsen, those were the key qualities on why Patrice Louvet is the right person to take on the role as the group’s president and chief executive officer in July. Nielsen provided some details on the hiring and thought process behind Louvet’s appointment during a company conference call to Wall Street analysts Thursday after it posted fourth-quarter and full-year earnings results.

Nielsen said the most important quality was Louvet’s collaborative leadership style, and her citing of his experience and operations expertise recalls the reputation of the highly respected, former executive vice chairman Roger Farah as an operations and efficiency expert. Farah retired in August 2014 but began at the company as chief operating officer and is often credited with growing the business and developing the corporate infrastructure so the company could begin its expansion overseas.

During the call, Nielsen said: “Patrice has a proven track record of leading major global consumer brands. And he’s really an operator who has had a career that’s focused on efficiency and effectiveness in the organizations he’s run. He has transformed and grown brands such as Olay and Pantene, with a real focus on leveraging consumer insights. He’s a global citizen and has a diverse experience across distribution channels, from e-commerce to wholesaler to retailer. So he really has had a breadth of experience.

“And probably, most importantly, he really has a collaborative leadership style that can work in partnership with Ralph and the senior team to ensure that we can move forward on the front-facing part of our plan to get demand back to our business,” Nielsen said.

The cfo also said Louvet knows what the team at Ralph Lauren has been doing to improve the business and that “he’s fully supportive in continuing that work to create an effective business, to continue to focus on our value-creating engines and to pivot to the consumer-facing side of our business, in partnership with Ralph.”

As for that consumer-facing side, Nielsen said the decision-making process would include Ralph Lauren, Louvet, herself and an operating committee of seasoned executives from different regions and functions. The committee meetings occur weekly to “address the performance of the business and develop strategy,” she said.  And while Nielsen spoke about the work so far on the Way Forward plan developed with former ceo Stefan Larsson, who left the company on May 1, it seems that the immediate focus for Louvet will be to put in place the “strategy for the consumer-facing part of our transformation, and that will be specific to marketing, to products and to store design.”

For the fourth quarter ended April 1, the company swung to the red, posting a net loss of $204 million, or $2.48 a diluted share, on a 16.3 percent decline in revenues to $1.57 billion. After adjusting for restructuring costs and other charges connected with the Way Forward plan, as well as severance connected with Larsson’s departure, adjusted earnings per share was 89 cents for the quarter. The adjusted EPS was good enough to beat Wall Street’s consensus estimate of 78 cents on revenues of $1.56 billion.

Still, there’s much more work to be done if the company wants to bring demand back to the business. The company said international revenues fell 9 percent, while North American revenues were down 21 percent from a year ago. By segment, wholesale revenues fell 17 percent to $777 million. At retail, revenues declined 16 percent to $745 million. Comparable store sales fell 11 percent for the quarter. Even excluding the calendar shifts for both the Christmas and Easter holidays, comps were still down by 8 percent for the period.

Lauren, executive chairman and chief creative officer, said, “The retail landscape today is more dynamic than ever, but within this environment, our brand continues to be one of the most recognized and beloved all over the world.”

As for progress on the Way Forward plan, Nielsen said “2017 was an important year as we strengthened the foundation of the company. We created operational efficiencies by improving our cost structure, increased the productivity of our assortment and improved quality of sales.”

Among the highlights, Nielsen told analysts that quality of sales improved through a moderation of discount levels and lowering of inventory levels by 30 percent. The company also reduced the number of stockkeeping units by 20 percent for both spring and fall 2017, while producing a more focused, higher margin assortment. As for distribution channel, Nielsen said the company recognizes the segment of consumers that like the “treasure hunt aspect” of the outlet stores and that it is “rebalancing” the channel in terms of amount of product and the types of product sold there. She said the company also has consolidated its regional operations under a single international group — led by Howard Smith, a 15-year veteran who recently was the company’s president of the Asia-Pacific region — to streamline costs and processes.

“Across our international groups, we have focused throughout the year on improving quality of distribution and quality of sales. The majority of this work is behind us, and we have a solid foundation in our international markets,” Nielsen said.

The company has shortened lead times and now has 50 percent of the business on a nine-month lead time, with 90 percent the targeted goal by the end of fiscal 2018, she said.

Jane Hali of Jane Hali & Associates, a research firm for buy-side analysts, said while the company is doing all of the right things, the one area that concerns her is the lead time, which she said at nine months is still a “very long lead time in today’s world.”

Craig Johnson, president of research consulting firm Customer Growth Partners, agreed, saying, “They need to bring it down more. It’s still way too long in today’s world in a declining market. Ralph Lauren doesn’t need to be the fast-fashion guy at six or seven weeks, and a portion of the product line could still be longer, but taking real time out of the equation is good. When you take time out, you’re also taking the cost out.”

Johnson said the company, while “it is one of the really great names and brands,” has gotten commoditized because of overdistribution. He thinks in addition to shortening the lead time some more that they also should further shrink distribution. “Every outlet mall in the country, although 40 percent is a different customer, is still cannibalizing the core product….Ralph Lauren in the old days had a greater sense of cache value because it wasn’t everywhere. That was part of the old magic,” Johnson said.

Wells Fargo Securities’ analyst Ike Boruchow has shares of Ralph Lauren at “Market Perform.” He noted that while the restructuring  continues to progress, the “primary issue is that the turnaround plan is taking longer than initially thought.” He noted that the “top-line remains under heavy pressure,” with management guiding sales down at least 10 percent, with the digital business still having to be right-sized. Boruchow said the digital business is being planned down 15 percent, with “management saying the amount of promotion still has a long clean up ahead of it.”

While the sell-side analyst said Louvet could very well be the right person for the job, he believes there are risks and concerns for investors. One of these is the “reality of a turnaround without the leader who developed it.” He noted that Larsson was perceived to be one of the top retail leaders in the industry and was a key confidence builder for investors, given the difficulties in turning around the business. With his departure, there now are risks that the turnaround might not be executed as expected due to strategic delays over disagreements on the consumer facing components, as well as the potential for exits by those hired by Larsson for the turnaround team. Further, there also is the “risk that a new leader may not be able to successfully work with Ralph Lauren or execute his/her own strategic vision given the tension that just took place.”

Shares of Ralph Lauren were trading down 2 percent at $71.34 at 3:17 p.m.

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