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In this inaugural edition of Hedgeye's “Eye On The Election” series, Director of Research Daryl Jones delivers a distilled overview of the election cycle so far and what candidates on both sides of the aisle can expect moving forward.
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Talk about good timing...
Veteran Hedgeye Retail Sector Head Brian McGough added iconic retailer Ralph Lauren (RL) to his team's Core Long Idea List this past Monday. Shares of RL are up over 12% today following news of the company's apppointment of its new CEO Stefan Larsson.
Here's a complimentary look at the research note McGough and his team sent to subscribers yesterday following the big news.
RL | Fountain of Youth
We think this CEO change is a huge win for RL shareholders. It’s important, we think, for the age of the executive team at most consumer brands to be as closely aligned with its core customer as possible. For too long, that’s been going the wrong way at RL. But RL just made the biggest adjustment in that regard that we’ve seen at any company – perhaps ever.
We’re definitely more inclined to own RL on this announcement. Questions around management and Ralph’s oversight that we outlined in our June Vetting Book (CLICK HERE) were the biggest factors keeping us back from getting involved on the Long side. Those are now done. Now we need to get through the ongoing restructuring and SAP implementation, and yes, we’re still blown away that these two are happening at the same time. But that’s 2-3 quarters away from an improving delta on the EBIT line. We think that once the bottom is in (perhaps in the early Feb print), demand to own this one will be strong.
Some Thoughts On The Announcement
- It’s Long Overdue. Ralph will be 76 years old in two weeks, making him the 7th oldest CEO in the S&P500. Since Roger Farah left his COO post in May 2014, Ralph has been taking on more and more responsibility, at a time when his age dictates he should probably be doing less.
- Jackie Is Out. Jackie Nemerov, current President and COO, will also be leaving in November. It’s amicable, but our sense is that this wasn’t exactly in her immediate-term plan. Nobody will come out and say it…but here goes. We’re happy to see Jackie go. Jackie is tough as nails and is a great leader internally, but her external profile was not good – especially with Wall Street. In her mid-60s, she helped prop up the average age in the C-Suite along with Mr. Lauren.
- Chris Peterson (49) remains President of the newly formed Global Brands Group. In other words, the six-headed Hydra that is Ralph’s new Brand structure entirely reports to him. This is a massive project, and the company’s bottom line will go nowhere until it’s done. As noted, we think its 2-3 more quarters until the rate of change turns positive.
- New Guy Is From Where? All the calls we fielded this evening were hyper concerned about one thing…that Stefan Larsson, the new CEO is coming from none other than Old Navy – not exactly a fashion mecca. True. That said, Old Navy is Gap’s biggest division, and both knows and serves its customer extremely well – even if it’s not RL’s customer. While no one on our team has met him personally, everything we know about his resume is impressive – very much so. First off, he’s 40-years old. He spent the bulk of his time at H&M where he rose from Regional manager, to Head of US Expansion, Head of Global Expansion, and ultimately Head of Global Sales. This is key because one of the biggest threats to RL is getting beat by Fast Fashion retailers like H&M. Ultimately, he’s got age on his side, time at H&M, International experience, and a background in store growth – all the things that RL needs to grow.
- Too Young? We’ve already heard that one several times, and no, we’re not concerned. We’ll take a hyper-overachieving young gun over an ‘above average’ fifty-something anyday. We think age is irrelevant.
- Dramatic Changes? We heard this three times tonight. “Will the new CEO come in and make sweeping changes?” Keep in mind that Mr. Lauren’s office will still be occupied everyday, as he will maintain his role of a) Chairman of the Board, and b) driver of the creative process within Ralph Lauren. Also, there’s no coincidence at the massive age gap between Lauren and Larsson. Larsson could almost be Lauren’s son – in fact, he's 3-years younger than David Lauren, SVP Marketing at RL. Ralph was likely attracted to having someone young who is firmly entrenched to carry out his agenda by working side by side with him over the course of 2-3 years without rocking the boat. Remember, Ralph has 81% of the voting stock at RL – the second highest in the S&P (CEO of Universal Health is higher at 83%). In other words, Larsson will likely not so much as change the wattage of light bulbs in the Mansion without Ralph’s approval. The only friction we’d expect would be with Nemerov. But we don’t have to worry about that anymore.
Image Source: Gap
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