Ralph Lauren (RL) investors had a rude awakening Tuesday. The retailer’s stock plunged as much as 10% before recouping losses and closing down 2% for the day.
The drop followed Ralph Lauren’s announcement saying it’s cutting its 2017 guidance significantly, and more importantly, unveiling a new turnaround plan, the “Way Forward Plan” – which includes eliminating 8% of its workforce. You might guess the stock drop meant shareholders weren’t impressed.
But as the fashion company’s management added more specifics over a three-hour investor presentation, the stock price climbed back up, and it ended the day off just 2%. Clearly, the market was willing to give the new plan the benefit of the doubt.
So how viable is the turnaround plan?
Ralph Lauren has enjoyed decades of success as a top-tier luxury clothing company. Yet its stock price peaked in late 2014, at $185 per share. It now sits around $93, nearly 50% down from the all-time high. As Ralph Lauren showed in its own presentation, the falling stock has matched the decline in its revenue and operating margins.
One big factor for the recent margin falloff has been heavy marketing and the addition of a number of new product lines, that attracted little interest from consumers, including watches and handbags. This led to big markdowns and increased inventory. Margins have also been weakened by lower-priced product lines such as Chaps, which has polos that retail for as low as $30. By comparison, the iconic Polo line sells polos for around $100. Another big factor impacting margins was the strong dollar, with international sales being hit hard.
Of course, industry-wide trends for retail in general have not been favorable either—a fact most people who’ve visited a mall in the last year can tell you. Kohl’s (KSS), Macy’s (M) and JC Penney (JCP) had bad earnings reports. American Apparel, Sports Authority, City Sports, Eastern Mountain Sports, Sport Chalet, Bob’s Stores, and Aeropostale have all filed for bankruptcy. Ralph Lauren is suffering in the same market.
Lest you think Ralph Lauren just isn’t cool anymore, the company presented a study by marketing research firm Millward Brown that concluded Polo, Lauren, and Ralph Lauren are still perceived to have high brand value relative to the company’s competitors.
Ralph Lauren CEO Stefan Larsson expanded on the brand value by citing two metrics from the Millward Brown study: power and premium. Power is the expected market share for a product based on brand perception alone, while premium represents how well that product’s pricing matches its perceived brand value. Both Polo and Lauren were ranked No. 1 for both metrics relative to 11 other luxury clothing brands, while Ralph Lauren was No. 1 for power, but No. 3 for premium.