RL: The Flip Side of the CFO Announcement

Takeaway: There's a flip side to the chest-beating that the $RL bulls will all come out with regarding the CFO announcement.

This RL announcement of Chris Peterson as CFO is net positive. The guy is from P&G, and formerly the head of its largest division. He’s going from presiding over a $45bn business to a roughly $10bn biz (wholesale equivalent). You can bet that every sell side analyst out there will come out this morning beating their chest defending how great this is. The reality is that they're probably right... it is.

 

Roger Farrah runs an extraordinarily tight ship, and winning the top finance/ops job over a pool of thousands of prospects is a feat in itself. Moreover, the role of CFO has historically been somewhat weak at RL, but we can’t imagine that Mr. Peterson would leave his post at PG for a diminished role in a company 1/5 the size of his current business.

 

There is one negative consideration, however…Executives from Packaged Goods companies don’t exactly have the best track record in coming into fashion businesses and knocking the cover off the ball. It’s a fundamentally different business. When a CPG company beats/misses, it’s usually by 2-3% top line, and 6-8% EBIT. But in a discretionary fashion business with an outsourced production model, we’re talking 5-10% rev variations and 20-30% EBIT swings. Capital allocation is radically different, and takes place more heavily on the P&L (and off balance sheet) than it does in PP&E and in vertical sourcing ops.  Here’s a few examples of executives that were lauded as being exceptional ‘breaths of fresh air’ but turned out to be disasterous.

  1. Paul Charron: Everyone loved the guy (Campell Soup), but in reality he destroyed LIZ.
     
  2. Bill McComb: Cleaned up Charron’s mess, though admittedly got into a tougher bind than he expected coming from JNJ.
     
  3. Bill Perez: When he fell into the fountain at Nike’s campus on his first day, he should have known his days were numbered. Going from SC Johnson to Nike is not easy. Sometimes you need to go with a gut feel in pricing a pair of shoes at $300 regardless of what the data says. Bill could not understand this.
     
  4. Bob Eckert: From Kraft to Mattel. He’ll be the first to admit how fundamentally different the two businesses are and how much it hurts to not be on trend for an extended time period of time (Barbie v Bratz).
     
  5. Paul Pressler: From Disney and Avon to Gap…he couldn’t cut the mustard. Ousted after two bad holiday seasons.
     
  6. Glenn Murphy: From Shoppers Drug Mart to Gap. Lately credited with the stock’s rebound. But financial engineering has been the main driver, until JCP ceded share six months ago at a time when, by chance, GPS got colors right.
     
  7. Ron Johnson: JCP from Apple. ‘Nuff said.

 

Our point is, by no means, that Peterson will follow the footsteps of these gentlemen. Again, this is Roger’s show. But simply that the sell side will grant this guy a free pass. Let’s practice a little more risk management and be prepared for the challenges that lie ahead of him.


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