Premium lifestyle retailer, Ralph Lauren Corp. (RL Quick QuoteRL - Free Report) has been suffering profit and sales declines 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% its market value since 2013. The company stock has fallen nearly 40% in two years.

Though a bit too late, the company’s new CEO Stefan Larsson identified key problems with its operations and is willing to rise to the occasion. Larsson noted that the company has too many brands and retail stores. Also, its huge dependence on department stores like Nordstrom Inc. (JWN Quick QuoteJWN - Free Report) and Macy’s Inc. (M Quick QuoteM - Free Report) , which generally embark on discounts to clear inventory, has lowered its profits. Not only this, the company is plagued with a high cost structure and inefficient inventory systems.

To clear the mess, Larsson put forward a comeback plan in yesterday’s investor meet that focuses on the revival of its three core brands: Ralph Lauren, Polo and Lauren. Also, Larsson identified that right-sizing the company’s cost structure and retail stores would help in turning around its operations. To do this, 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, meaning cutting down 1,000 jobs or 8% of the full-time staff.

Additionally, Larsson revealed plans to lower the company’s shipments to department stores as he expects the scarcity to result in more full-priced selling at these stores.

Following the announcement, the company’s stock lost nearly 10% in the early trading hours but recovered to close at down 2.3% yesterday.

In a nutshell, under the latest multi-year growth plan, the company will now refocus on its iconic brands and evolve its products, marketing, operating model and shopping experience to attract more shoppers. At the same time, the company will keep its focus on boosting its return on investment.

The execution of this plan is expected to cost the company nearly $400 million as restructuring charges in fiscal 2017 and nearly $150 million in inventory charges related to the reduction of inventory, which will be substantially realized by the end of fiscal 2017.

However, these restructuring actions in fiscal 2017 are expected to result in annual cost savings of nearly $180–$220 million related to streamlining the organizational structure and rightsizing its cost structure and retail stores. The company highlighted that these savings are in addition to the $125 million annual savings related to its fiscal 2016 restructuring plans.

Q1 and Fiscal 2017 Guidance

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 fiscal first-quarter sales to decline in the mid single-digit range, while operating margin to contract nearly 110–160 basis points year over year. The tax rate is expected to be nearly 29% in the fiscal first quarter.

For fiscal 2017, the company expects net revenues to decline in the low double-digit range owing to the intentional pullback in inventory receipts, store closures, price management, and other initiatives, alongside a soft retail traffic environment in the U.S. Operating margin for the full fiscal is expected to be about 10%, as cost savings will be offset by higher new store expenses, unfavorable currency movements, infrastructure investments and higher fixed expenses. Further, the company projects a tax rate of 29% and capital expenditures of nearly $375 million for the fiscal year. The guidance includes $200 million worth share repurchases.

However, the company’s guidance for first quarter and fiscal 2017 excludes restructuring and inventory charges related to the aforementioned restructuring plan.

Beyond Fiscal 2017

Though the restructuring actions will negatively impact the company’s results in fiscal 2017, 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.

Also, this Zacks Rank #4 (Sell) company targets market share growth and mid-teens operating margin in fiscal 2020.

Other Stocks to Consider

A better-ranked stock in the same industry is Delta Apparel Inc. carrying a Zacks Rank #1 (Strong Buy).

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