RALPH LAUREN CORP quarterly report, Q1 FY2020

Business context and reporting period

Ralph Lauren Corporation designs, markets, and distributes premium lifestyle products through wholesale, retail, digital, and licensing channels. This unaudited Form 10-Q covers the 13 weeks ended June 29, 2019 (Fiscal 2020 first quarter); the comparison is the 13 weeks ended June 30, 2018.

Financial results and liquidity

• Revenue rose 2.7% reported and 4.9% in constant currency; unfavorable foreign exchange reduced reported growth by $29.7 million. Comparable sales rose 2% overall, including 4% digital commerce growth.
• SG&A was $746.7 million, or 52.3% of revenue, versus 53.3% a year earlier. Management attributed the ratio improvement mainly to revenue leverage and expense discipline, partly offset by increased marketing and channel/geographic mix.
• Net income included $31.4 million of restructuring, impairment, and other charges, versus $23.7 million in the prior-year quarter. These charges reduced net income by $24.4 million, or $0.30 per diluted share, compared with $18.9 million, or $0.23 per share.
• Cash, cash equivalents, and short-term investments totaled $1.929 billion; total debt was $692.1 million. The company reported net cash and investments of $1.271 billion, down $72.2 million from March 30, 2019. Cash and short-term investments are not all immediately equivalent to cash.
• Operating cash flow fell $33.2 million year over year, with working-capital movements—including higher inventory—among the drivers. Inventory was $988.6 million, up from $817.8 million at fiscal year-end and $890.0 million at June 30, 2018.
• Long-term debt comprised $300 million of 2.625% senior notes due 2020 and $400 million of 3.750% notes due 2025; carrying value was $692.1 million. No commercial paper, revolving-facility, or Pan-Asia facility borrowings were outstanding; $9 million of letters of credit used Global Credit Facility capacity. The company reported no facility default.
• Cash and cash equivalents were $648.4 million and current liabilities were $1.591 billion. The company also held $1.281 billion in short-term investments and had $491 million of remaining Global Credit Facility/Commercial Paper Program availability.

Material changes versus the prior comparable period

• Operating income increased $13.2 million, while the operating margin improved 60 basis points. Higher restructuring and other charges partly offset lower SG&A as a percentage of revenue.
• Revenue increased across all reportable segments on a constant-currency basis: North America 3.3%, Europe 7.1%, and Asia 7.8%. North America operating margin declined 100 basis points; Europe and Asia margins improved 120 and 140 basis points, respectively.
• Net income rose 7.5%; diluted EPS rose 12.2%, reflecting higher net income and fewer weighted-average diluted shares, partly associated with share repurchases. The effective tax rate increased to 20.1% from 18.0%.
• Investing cash flow was $107.2 million provided, versus $827.1 million used in the prior-year quarter, chiefly because investment purchases and maturities differed substantially. Financing cash outflow increased to $244.8 million, including $191.1 million for repurchases and tax-withholding shares and $48.8 million for dividends.

Outlook, management commentary, risks, and unusual items

• Management did not provide a clear full-year revenue or earnings forecast in the supplied filing text. It expects approximately $300 million of Fiscal 2020 capital expenditures, primarily for stores, renovations, and technology.
• The Fiscal 2019 Restructuring Plan is expected to generate $60–$80 million of gross annualized expense savings and incur total charges of approximately $125–$150 million; cumulative charges were $106.1 million through June 29, 2019.
• Management plans continued investment in marketing, digital, stores, concession shops, and productivity infrastructure, alongside cost discipline. It cautioned these initiatives may pressure near-term operating profit.
• Fiscal 2020 adoption of the new lease standard put operating lease right-of-use assets of $1.416 billion and operating lease liabilities of $1.778 billion on the balance sheet. Adoption-related lease impairments reduced opening retained earnings by $169.4 million, net of tax. The quarter also included $163.5 million of total lease cost; comparisons with prior-period rent expense are affected by the accounting change.
• Other unusual items included a $20.8 million charge for donating proceeds from the sale of the corporate jet to the Polo Ralph Lauren Foundation, plus charges for previously exited locations. The jet sale proceeds were $20.8 million, with no gain or loss on sale.
• Key disclosed risks include trade tensions and potential tariffs, Brexit uncertainty, foreign-exchange changes, promotional retail conditions, consumer demand and inventory forecasting, wholesale customer health, cybersecurity and systems transitions, and long-term lease obligations. Management said there were no material changes to previously disclosed risk factors. It believes pending legal matters are not expected to have a material adverse effect, while noting outcomes remain uncertain.
• The quarterly dividend increased from $0.625 to $0.6875 per share. The board also authorized an additional $600 million of repurchases; remaining authorization was approximately $1.080 billion at quarter-end.

Important facts for investors to verify

• Whether constant-currency and comparable-sales growth persists, particularly in digital and international markets, and how foreign exchange affects reported results.
• Inventory levels, reserves, promotional activity, and wholesale-customer exposure; the three largest wholesale customers represented about 26% of gross receivables at quarter-end.
• Delivery of the restructuring plan’s projected savings relative to remaining charges, and the trajectory of ongoing store and corporate lease costs.
• Capital spending against the approximately $300 million plan, and cash generation after repurchases and dividends.
• Liquidity, refinancing or repayment planning for the $300 million notes due in 2020, and continued compliance with the revolving facility’s leverage covenant.
• Potential tariff, Brexit, tax, legal, and systems-transition developments, including their possible effects on costs, controls, and operations.