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Massive Ralph Lauren restructuring to include shuttering 50 stores

Ralph Lauren Corp. is seeking to rectify what it acknowledges have been operational mistakes with a program of cuts and organizational streamlining it calls “The Way Forward Plan.”

In the company’s first-ever investor presentation, founder Ralph Lauren admitted it had “dropped the ball,” but was prepared to turn things around. Perhaps most significantly, the vertical retailer plans to close more than 50 stores, or about 10% of its total footprint. Ralph Lauren also intends to bring in a new executive who will be tasked with overseeing the location and design of new stores.

In other belt-tightening moves, the company will reduce shipments of inventory to department stores and eliminate an unspecified number of jobs, reducing corporate hierarchy to an average of six from nine layers. Other organizational improvements will include reducing supply chain lead times, employing best-in-class sourcing and executing a disciplined multi-channel distribution and expansion strategy.

The company will also implement an ROI-driven financial model to free up resources to invest in the brand and drive sales. The new plan also includes strengthening the leadership team, as well as refocusing on core brands.

In the short term, Ralph Lauren expects to incur some sizable costs from this transformation effort. The company expects charges of up to $400 million as a result of the fiscal 2017 restructuring activities and up to a $150 million inventory charge associated with the reduction of inventory out of current liquidation channels.

However, the retailer expects most charges to be realized by the end of fiscal 2017. It also forecasts its fiscal 2017 restructuring activities to result in approximately $180 million-$220 million of annualized expense savings related to its initiatives to streamline the organizational structure and reduce its cost structure and real estate portfolio. This is in addition to the $125 million of annualized cost savings associated with the company’s existing fiscal 2016 restructuring activities.

Looking at expected fiscal performance results, in the first quarter of fiscal 2017, the company expects consolidated net revenues to decline at a mid-single digit rate. Operating margin for the first quarter of fiscal 2017 is expected to be down approximately 1.1%-1.6%. First quarter tax rate is estimated to be approximately 29%.

In addition, Ralph Lauren currently expects consolidated net revenues for fiscal 2017 to decrease at a low-double digit rate due to a pullback in inventory receipts, store closures, pricing harmonization and other initiatives. Fiscal 2017 tax rate is estimated to be approximately 29%. Capital expenditures are expected to be approximately $375 million in fiscal 2017. This guidance assumes approximately $200 million in share repurchases.

As a result of its Way Forward Plan, the company expects to stabilize performance in fiscal 2018 and pivot to growth off of a smaller, more profitable base in fiscal 2019, with improving operating margins in both fiscal years. In fiscal 2020, Ralph Lauren is targeting market share growth and a mid-teens operating margin.

“We have assessed every value-creating component of the company and, with our Way Forward Plan, we will build on our strengths, refocusing on our core brands and instilling a financial discipline that is highly focused on return on investment,” said Stefan Larsson, president and CEO. “We have a powerful, authentic brand with unique elasticity, and we will bring our company to a stronger place than ever before by connecting our brand voice more closely to consumers and evolving our operating model. Our multi-year growth plan will lead Ralph Lauren – one of the few truly iconic brands in the industry – to profitable sales growth and long-term shareholder value creation.”
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