Features, Retail Insights

Ralph Lauren: The Great American Brand Takes a Look in the Mirror and Decides to Change

Earlier this fall I ran into a friend who is well connected and well versed in the chic Manhattan universe of society, celebrity and fashion. “That’s a great dress,” he said, complimenting me on the brighter-than-navy blue, three-quarter sleeved, gabardine wool stretch shift I wore. “Ralph,” I said. “Oh! I hear Ralph is going down the tubes,” he replied.

My friend’s idea that Ralph Lauren was in trouble likely stemmed from reports of the company’s depressed stock price and sales numbers. In 2015, the company’s stock tumbled 40 percent, and then another 20 percent in 2016. Revenues slumped from $7.6 billion in 2015 to $7.4 billion in 2016. Although the company added more than $1.7 billion in sales over the previous five years, operating income was down and some growth measures didn’t pay off. Employees were dismissed and stores closed in the company’s recent restructuring. Change was needed and change was happening.

A New Face At The Door

The company announced on September 29, 2015 that Stefan Larsson, then 41, would be the company’s new president, CEO and partner of America’s most famed and successful designer.

Larsson was an unusual choice for the job. Recommended by a board member and reportedly recruited by the search firm Spencer Stuart, Larsson, a Swedish native, spent 15 years at the low-price house of style, H&M, in several posts during the chain’s rapid global climb, from $3 billion to $17 billion in sales with outlets in 44 countries. Eventually, Larsson became head of global sales, responsible for 2,300 stores. He jumped to Gap in 2012 as president of its Old Navy division. He is credited with increasing Old Navy’s sales by nearly $1 billion in his three-year tenure there, with an eye for both product and production. Lauren wooed Larsson at the clubby Upper East Side restaurant, Sette Mezzo. Like any good first date, there was instant chemistry and dreams for the future. Ralph Lauren stock jumped 12 percent with the announcement of Larsson’s hiring; Gap’s slipped 6 percent.

By now, nearly everyone knows the bromance didn’t last. On February 2, 2017, not even two years into his run as President and CEO, Ralph Lauren announced that the company and Stefan Larsson had “mutually agreed to part ways” effective May 1, 2017. Ralph Lauren shares fell 12 percent on the news.

Ralph Lauren, now 77, is celebrating his 50th year in business— his first tie was introduced in 1967. The founder, and the company, which went public in 1997, has been hit recently with pressures including a strong dollar, intense competition in the luxury space and weakness in the retail sector, especially department stores.

The challenges facing the company are substantial. The company’s three largest wholesale accounts represented 53 percent of FY 2016 net revenues, with Macy’s alone accounting for 11 percent of total net revenues and 25 percent of total wholesale net revenues. Other headaches included bloated inventory, frequent mark-downs, too much business in too many outlet stores, and a new generation of customers who act, think, communicate and dress differently than the brand’s previous generations.

There was also a need for succession planning to shore up the company’s future, the visionary founder’s legacy, and the corporate infrastructure, which must nourish and maintain Ralph Lauren’s artfully created masterpiece, the World of Ralph Lauren.

Larsson, with no wholesale experience, but plenty of fast-fashion knowledge and globally sourced product expertise, took his time to learn the Ralph Lauren business, not unlike a politician on a listening tour. The company’s multi-year global reorganization plan, mostly completed during fiscal 2016, had recognized a need for change.

The “Way Forward”

In June 2016, at Ralph Lauren’s first ever Investors Day Conference, Larsson introduced “The Way Forward,” a plan to further streamline the company and “…evolve our operating model.” The “Way Forward” — yes, it does sound like something out of Mao’s China, translated into 50 store closings, staff reductions of 8 percent or about 1,000 people, cuts in corporate layers that reported directly to Larsson (from nine to six), and a speedier supply chain with shorter lead times to nine months from as much as 15. All designed to lower costs and produce efficiency.

At the November 2016 earnings call, analysts greeted the plan’s progress positively, but not without question. Morningstar viewed Ralph Lauren shares as undervalued. Wells Fargo was not quite so sanguine: “…all in, the story continues to be intriguing…” but, “…we need to see more tangible proof…”

On February 2, 2017, Larsson was present at the company’s most recent earnings call announcing both his departure and progress of The Way Forward plan. Inventory levels have been reduced; discount levels moderated, and the company is on track to get to its goal of a nine-month production lead-time. Still, reaction to the dual news of plan progress and Larsson’s departure was sharp. “Whoa, that was unexpected …” said Wells Fargo; “…we expect investors likely have questions around the reality of the turnaround without the leader who developed it.” Credit Suisse echoed a similar note: “…the abrupt departure of CEO Stefan Larsson suggests that the dramatic changes under way in production, branding, and distribution are at risk. ”

What Now

Jane Nielsen, Chief Financial Officer, will run the company until a new CEO is found. “Ralph is not interested in running the company,” Nielsen said. A search is underway. Larsson will leave Ralph Lauren after his less than two-year stint with $10 million in cash and as much as $26 million in exit pay, depending on the company’s performance over the next few years.

There are many reports, both official and gossip, about why the relationship failed. The official rendering is that while the two “share a love and respect for the DNA of this great brand,” and both “recognize the need to evolve,” they “have different views on how to evolve the creative and consumer-facing parts of the business.” The unofficial view is that Larsson wanted control over the creative side of the business, meaning the hiring and firing of creative talent. Reportedly, Ralph Lauren, whose hand at shaping the look and image of the brand has not waivered for 50 years, refused. A sales associate speaking off the record told me, “after all, it is Mr. Lauren’s company.” Ralph Lauren and his family control 82 percent of the company’s voting stock.

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Change is Hard: The Ralph Lauren Future

Forget predictions; just witness the recent presidential election. But equal-opportunity Ralph Lauren dressed Melania Trump in gorgeous powder blue double-faced cashmere and Hillary Clinton in white for the Inauguration.

Ralph Lauren remains the preeminent American brand. And I expect it will continue to be so. Yes, the company has stumbled with product proliferation, too many unprofitable distribution points, less-than-nimble production processes, and perhaps a bit of a stratified (and possibly ossified) corporate culture. But the company and its aging, but visionary and controlling leader, is committed to change. While the new fashion outsider CEO did not work out as planned, it moved the company toward a more streamlined and productive business. The company says it remains committed to The Way Forward plan. But who knows. Change is a process. Not an event.

The key to the future will be to maintain the elegant, classic American design and product integrity when there is no Ralph Lauren to inspire, bless and control it. This seems to be why the relationship between Larsson and Lauren failed. Creativity can be managed, but it requires inspiration, not just business savvy. It can be done. The fabled house of Chanel, founded in 1909, stands strong today 46 years after Coco Chanel died, although it did not come easily. It will take continued creative leadership, good brand stewardship and investment, as well as financial and operational control, to do that at Ralph Lauren. It seems like Mr. Lauren is taking steps, even if they are “one forward, two back” to secure the future of his empire, his World of Ralph Lauren.

I for one say, keep at it.

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