FINANCE

Analysis: Ralph Lauren needs more creative assortments, ‘must have’ products

Following on from a strong third quarter, the latest results from Ralph Lauren are considerably softer. Overall net revenue fell by 1.5%, reversing three consecutive quarters of growth. Sales in North America also declined by a sharp 6.7%, although both Europe and Asia reported respectable uplifts in revenue. On a comparable basis, sales just nudged into positive territory, rising by a modest 1%.

While it is disappointing that Ralph Lauren has not been able to continue the momentum of its holiday quarter into this final period, the weaker performance is not necessarily surprising. Comparatives from last year, when North American sales rose by 13.9%, were incredibly tough. Moreover, a later Easter put a slight dint in the sale of spring lines. Some unfavorable currency movements also took the edge of foreign growth. When all these factors are accounted for, the pressure on the top line is understandable.

Ralph Lauren exacerbated the slip in growth with a deliberate pullback from some wholesale channels, including off-price. This resulted in a 10.2% slide in wholesale revenues within North America. As damaging as this is to the sales numbers, we believe that the pullback from outlets that do little to enhance the brand image, and which actually undermine the premium status of the brands, is a necessary step on the road to recovery. This is helping to ease up margins and, over time, should result in improved brand perception.

We already see evidence that the various strategies, including increased marketing spend and the launch of new labels, are having an impact on customers. Our data show brand affinity to Ralph Lauren continues to rise and that brand recall and awareness remain elevated compared to a year ago. The uplift is pronounced among younger shoppers. Unfortunately, this quarter the conversion of consumers interested in the brand to customers buying the brand fell sharply, especially in the United States. In our view, there are a couple of reasons for this.

First, like many other brands, Ralph Lauren is having to contend with softer consumer sentiment. With the impact of last year’s tax cuts having worn off and with many households facing modestly higher costs, it has been more difficult for pricier brands to sell product, especially to middle-income customers. As much as this is outside of Ralph Lauren’s control, we also see a second reason that is more within the company’s purview – and that’s the strength of the offer. As much as there have been improvements, we believe that Ralph Lauren has much further to go in creating compelling assortments and ‘must have’ products. Current ranges remain a bit ‘hit and miss’ and are not good enough to maximize conversion by compelling customers to buy. This is particularly the case in North America where competition is fierce.

We also believe that more creativity and excitement is needed to connect with even younger shoppers. We note, for example, the upcoming limited collaboration between Vineyard Vines and Target. While this vehicle may not have been entirely appropriate for Ralph Lauren, it is an example of the type of ‘out of the box’ thinking that Ralph Lauren does not always employ.

Overall, we believe that Ralph Lauren is in a much better state than a year ago. We have general confidence in the recovery plan and can see early results coming through. However, much more work is needed to build momentum in sales and profits.

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