Ralph Lauren (RL) Downgraded To Strong Sell: Find Out Why

On Jun 10, 2016, Zacks Investment Research downgraded the New York-based Ralph Lauren Corp. (NYSE:RL) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

The stock of this premium lifestyle retailer witnessed a significant decline after it announced restructuring plans early this week that will comprise job cuts and store closures. Ralph Lauren has been suffering profit and sales decline for over three years mainly due to little focus on core brands, marketing flaws and poor inventory management. This has led the popular American fashion house to lose more than 50% of its market value since 2013. The company’s stock has fallen nearly 40% in two years.

RALPH LAUREN CP Price and Consensus

RALPH LAUREN CP Price and Consensus | RALPH LAUREN CP Quote

To revive the company, the new CEO Stefan Larsson put forward a comeback plan in a recent investor meet. It focuses on the revival of its three core brands: Ralph Lauren, Polo and Lauren. Also, he announced plans to close nearly 50 high-end stores that make for about 10% of the company’s retail footprint. At the same time, he plans to reduce six months from production time and eliminate three layers of management which means the cutting down of 1,000 jobs or 8% of the full-time staff.

The company expects the restructuring plan to cost up to $400 million in fiscal 2017, as well as an inventory charge of up to $150 million. The company provided a bleak outlook for the first quarter and fiscal 2017, expecting lower sales and margins on account of the aforementioned restructuring plan. The company expects the plan to result in a double-digit revenue decline in fiscal 2017 and a mid single-digit decline in the first quarter.

Despite the losses, these restructuring actions in fiscal 2017 are expected to result in annual cost savings of nearly $180–$220 million, in addition to the $125 million annual savings related to its fiscal 2016 restructuring plans. Also, the company expects performance to stabilize in fiscal 2018 and return to growth in fiscal 2019, resulting in an improved operating margin in both the fiscal years. The company also targets market share growth and mid-teens operating margin in fiscal 2020.

While we believe the restructuring plans will help Ralph Lauren return to long-term profitability and growth, the company will continue suffer from lower sales and profits during the execution phase of this plan.

Stocks to Consider

A couple of better-ranked stocks in the same industry include Delta Apparel Inc. (NYSE:DLA) sporting a Zacks Rank #1 (Strong Buy) and Perry Ellis International Inc. (NASDAQ:PERY) carrying a Zacks Rank #2 (Buy). Another favorably ranked retail-apparel stock is The Children's Place Inc. (NASDAQ:PLCE) , also holding a Zacks Rank #2.