The Ralph Lauren Corporate Turnaround and 80/20 Analysis
If there were just 2 questions I could ask a CEO in the midst of a turnaround attempt they would probably be, “which 20% of your SKUs, products or services provide 80% of your revenue and what is your lead time to produce your product or service ?”. If the CEO can’t roll those off his tongue there is hidden cash flow within that company. One of the benefits of buying and operating distressed companies has been to live and work among the 20/ 80 rule. No matter what industry or size a company is, typically 80% of revenue comes from the top 20% customers, 20% of the products account for 80% of the sales and 20% of the cost categories in a trial balance account for 80% of the costs.
My goal is to drill this concept into the readers of this blog so that when you’re doing your analysis of a value stock you don’t forget to inquire if management has performed this analysis. If they have not the odds of a successful turnaround are low.
An example of a company that has gotten religion and is implementing 20/80 after a period of underperformance is Ralph Lauren. I have attached a copy of their investor-day-presentation- and the transcript for that day where they discuss the 20/80 rule. If you’re a student of turnarounds take time to read the transcript.
You will see that the new CEO tasked with fixing the company acknowledges that 20% of the SKUs generate 80% of the sales. In addition, those 20 % are all core brands that have been around since the start of Ralph Lauren. All the rest of the SKUs are underperforming and tying up a lot of cash in slow moving inventory.
The presentation talks about their plans to cut SKU counts which will lead to not only increased inventory turns but quicker product development. This will allow them to test new products quicker and get them into the marketplace faster.
No doubt this is why Ralph Laurens stock has risen from 60 to 100 since that presentation.
Unfortunately for most company’s, it takes a financial stumble for management to embrace an 20/80 analysis. Ralph Lauren got religion quicker than most because Mr. Lauren is a street-smart contrarian businessman. He also has the power to make the moves necessary to implement a 20/80 work environment.
it’s not easy for an organization to implement 20/80 analysis as it causes big disruptions for many employees. So, when you see a management team talking and doing 20/80, buy the stock because the odds of success are high. If you are interested in another apparel turnaround leader read my other blog post on Mickey Drexler who rescued JCrew and the Gap.
