Almost exactly three years ago, Ralph Lauren Corp’s CEO Patrice Louvet announced an ambitious strategic growth plan, called “Next Great Chapter.” Two years in, it showed modest success, then Covid hit and the bottom fell out.
Now the company’s revenues are at levels passed by in 2007. Ralph Lauren faces a long steep climb back to pre-Covid levels, not to mention growth beyond.
The original “Next Great Chapter” plan had five goals:
- Win over a new generation of consumers
- Energize core products and accelerate under-developed categories
- Drive targeted expansion in its regions and channels
- Lead with digital across all activities
- Operate with discipline to fuel growth
Some progress was achieved throughout 2019 and most of 2020, tracking 2% revenue growth in fiscal 2019 and a 1.6% increase through third-quarter fiscal 2020 just before Covid hit.
Then it all came to a screeching halt, with fiscal 2020 ending down 2%. All the gains since implementing the growth plan were lost, with 2020 revenues reaching $6,159.8 million compared with $6,182.3 million in fiscal 2018.
Facing challenges unlike any other in the company’s 53-year history, Louvet announced in September 2020 that it was accelerating two of its “Next Great Chapter” priorities: to streamline the organizational structure and to move more aggressively in digital transformation.
“The changes happening in the world around us have accelerated the shifts we saw pre-Covid and we are fast-tracking some of our plans to match them,” Louvet said in a statement. “These steps will enable us to progress our brand elevation journey and deliver Ralph’s vision in today’s dynamic environment.”
Ending the Covid year
Recently Louvet and COO/CFO Jane Nielsen delivered fiscal 2021 year-end results and try as hard as they might, the picture wasn’t pretty.
There were some bright spots, including ending the year with more cash on hand; anticipating the sale of Club Monaco and transitioning Chaps to a licensed model; driving digital revenue growth up more than 60%, including 4 million new DTC customers and reaching in excess of 25% of total sales; achieving the highest gross margins in the company’ history; increasing average unit retail by 26% and reinstating quarterly dividends suspended due to Covid.
Louvet and his team have to dig Ralph Lauren out of a deep hole. It ended fiscal 2021 with revenues of $4,400.8 million, just about where they were in 2007.
With only a 1% uptick in revenues in the fourth quarter, sales ended the year down 29%. The company remains optimistic it can increase revenues between 20% to 25% in 2022, but it will still be back where it was in 2010 and 2011.
Most worrisome was the nearly 40% decline in North America, the brand’s homeland and where in fiscal 2019 and 2020, just over 50% of the company’s sales were made.
In 2021, North America revenues decreased to $1,992.4 million or 45% of total sales. As promising as the Chinese mainland market looks, with fourth quarter sales increasing 70% compared to fourth quarter pre-Covid fiscal 2019, Asia is still less than 25% share of total sales.
Louvet went into detail in the earning call about how he plans to turn around sales in North America. More about that later.
But the one statement that gripped me in the earnings call was this: “Our brand remains bigger than our business.”
Brand strength or weakness?
There is no question that Ralph Lauren business has been and should be bigger than it is. It dropped off the latest Forbes Global 2000 list measuring the world’s largest public companies after having ranked at No. 1,810 last year.
But Louvet’s other contention – “Our brand remains bigger”– required a further look. This is an especially critical metric for him, since he said “brand elevation” or variation thereof over two-dozen times in the earnings call.
Ralph Lauren doesn’t appear on the Forbes World’s Most Valuable Brands list either, though Louis Vuitton, Gucci, Hermès and Chanel do.
But perhaps the most authoritative and comprehensive measure of brand strength comes from the RepTrak Company, formerly the Reputation Institute, which has been tracking company reputations for over a decade.
Its 2021 Global RepTrak report measures a company’s global reputation across seven dimensions: products, governance, citizenship, performance, innovation, leadership and workplace.
RepTrak CEO Kylie Wright-Ford explains: “Brand expression impacts corporate reputation, but it is not the same thing. A company’s brand is its promise and reputation is the ultimate result of whether the company has kept its promises.”
Ralph Lauren has been a fixture on the top 100 RepTrak listings since 2016 and to be ranked within the top 100 is a major achievement for any company. It arrived in that esteemed group at No. 46 and remained in the mid-range until 2019 when it jumped to No. 34, only to revert back to the middle at No. 53 in 2020.
But in 2021, it nearly fell off the list, ending at No. 91, right above Amazon, which came in at No. 92.
While Ralph Lauren took a steep dive, a number of its luxury peers made it onto the list for the first time, including Chanel arriving at No. 34, Burberry at No. 83, Prada at No.84 and Hermès at No. 88. They join Ralph Lauren and luxury stalwarts LVMH (No. 63), Giorgia Armani (No. 61) and Hugo Boss (No. 58) as the world’s most reputable luxury companies.
It is not unusual for a company’s ranking to shift up or down a few slots from year to year, but Ralph Lauren’s drop wasn’t mirrored by its three long-term partners on the GlobTrak list, which have more or less been stable through the years.
While RepTrak’s Wright-Ford did not comment on Ralph Lauren specifically, she did say:
“The apparel industry still has a huge opportunity in the area of citizenship. Citizenship is an important driver of reputation and low scores in this domain lead to lower ‘benefit of doubt’ in a crisis. A good reputation depends on a company’s ability to be good citizens as well as offering consumers a high-quality experience, genuine and authentic brand relationship, and uniqueness to ensure stakeholder support.”
Getting the benefit of the doubt during the Covid crisis would have served Ralph Lauren well, especially as it aims to elevate the stature and perception of its brand.
Troubles in the homeland
Drawing conclusions from the company’s latest reporting, it faces the biggest hurdle in elevating the Ralph Lauren brand in the North American market. North America fourth-quarter sales this year decreased by 10% compared to last year when the world was virtually shut-down for Covid.
On that score, the heavy penetration of off-price factory stores is perhaps the greatest drag to brand elevation. Today there are nearly five times as many Factory Stores (193) in North America as there are full-price Ralph Lauren Stores (~40).
And the number of Factory Stores has been going in the wrong direction, rising from 183 in fiscal 2019. While COO/CFO Neilsen stated the company was “significantly reducing our off-price business,” no color was shared about how that was being accomplished.
For any brand that aspires to be luxury class, maintaining tight distribution with little or no discounting is de rigueur. On a positive note, the company has pulled back on department stores – where discounting is rampant – by exiting more than 200 doors. Its aim is to improve the quality of wholesale distribution, which now accounts for about 10% of revenues.
In concluding the earnings call, Louvet expressed confidence that the company was ready to bring the Ralph Lauren franchise back in North America. But the bigger question is how did it get so bad in the first place.
Since launching the “Next Great Chapter” plan in 2018, North America sales went from $3,202.9 million in fiscal 2019 to $3,140.5 in fiscal 2020. It is now starting at $1,992.4 million and has a long way to get back where it was before, let alone get ahead.
Describing the past three years as a “reset,” Louvet said, “It’s been a year of clean up, to get to a healthy base, to be positioned for growth. And so most of that work is complete.”
The plan now is to open more full-priced Ralph Lauren Stores, recognizing that the company has been “under developed in many key cities across the U.S., particularly in the west and in the south.” Those stores will implement a “connected retail footprint,” which is described as “centered around the consumer” and how he or she wants to connect with the company.
It all sounds well and good and Louvet and company express the utmost confidence that real, sustainable growth for Ralph Lauren in North America can be achieved.
“We feel like North America will be a source of growth for us, driven by digital, driven by pure plays and driven by market share gains in the distribution footprint which we now feel very good about,” Louvet said.
It is very obvious that he feels “very good about where we are,” but he added, “Obviously, we’ve got to deliver.” And for that we have to wait and see.