Ralph Lauren Corporation — Fiscal 2019 Second-Quarter 10-Q
Reporting period: 13 weeks ended September 29, 2018; six-month results cover the period ended the same date. Comparisons are with the 13- and six-month periods ended September 30, 2017. Ralph Lauren designs, markets, and distributes premium lifestyle products through wholesale, retail, and licensing channels.
Financial results
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $1,690.9 million, up 1.6% reported and 2.1% constant currency | $3,081.5 million, up 2.3% reported and 1.7% constant currency |
| Gross profit / margin | $1,029.3 million / 60.9%, up 110 basis points | $1,925.0 million / 62.5%, up 120 basis points |
| Operating income / margin | $210.0 million / 12.4%, up from $193.3 million / 11.6% | $340.1 million / 11.0%, up from $283.6 million / 9.4% |
| Net income | $170.3 million, versus $143.8 million | $279.3 million, versus $203.3 million |
| Diluted EPS | $2.07, versus $1.75 | $3.37, versus $2.47 |
| Operating cash flow | Not separately presented for the quarter | $213.0 million, versus $437.0 million |
Gross-margin gains reflected improved pricing, lower promotional activity, and favorable product and geographic mix. SG&A rose 2.7% for the quarter and 3.3% for the half; as a share of revenue it increased 50 and 40 basis points, respectively, primarily due to higher marketing investment and sales mix. Six-month capital expenditures were $93.1 million.
Asia was the strongest reportable segment: revenue increased 12.8% for the quarter and 15.7% for the half, substantially supported by store openings and growth in digital commerce. Six-month North America revenue was nearly flat reported; Europe grew 3.0% reported but only 0.7% in constant currency.
Liquidity, debt, and capital allocation
At September 29, 2018, cash and cash equivalents were $553.1 million and short-term investments were $1,319.5 million; non-current investments were $69.9 million. Total debt was $683.9 million, all classified as long-term. The company reported net cash and investments of $1,258.6 million, down from $1,494.0 million at March 31, 2018.
Six-month operating cash flow fell $224.0 million year over year, with working capital—especially inventory—cited as a major factor. Inventory was $994.6 million at quarter-end, versus $761.3 million at fiscal year-end. Cash, cash equivalents, and restricted cash declined $759.0 million to $596.5 million; investment purchases were a significant use of cash, alongside repurchases, dividends, and capital spending.
In August 2018, the company issued $400 million of 3.750% senior notes due 2025, using part of the proceeds to repay $300 million of 2.125% notes that matured in September. The company had $490 million of remaining availability under the combined Global Credit Facility and commercial-paper program, and reported no facility borrowings. It was in compliance with the facility’s leverage covenant and reported no event of default.
During the half, the company paid $91.3 million in dividends and spent $192.3 million on share repurchases; an additional $31.6 million of shares was surrendered or withheld for employee tax obligations. The quarterly dividend rose from $0.50 to $0.625 per share. Approximately $907 million remained available under the repurchase authorization at September 29.
Outlook, commentary, and notable items
- Restructuring: The Fiscal 2019 plan targets $60 million to $80 million in gross annualized savings when substantially completed by fiscal year-end. Estimated charges are $100 million to $150 million, including $70 million to $110 million cash charges; $24.6 million had been incurred. The separate Way Forward Plan had approximately $115 million of expected remaining charges, primarily during the rest of Fiscal 2019.
- Investment priorities: Management expects continued spending on marketing, digital, retail expansion and renovations, and productivity infrastructure, while maintaining cost discipline. It cautioned that these investments and quality-of-sales initiatives may pressure near-term operating profit. No specific consolidated revenue or earnings guidance is provided in the filing text.
- Market and operating risks: Management highlighted U.S.-China tariffs and possible further trade measures, Brexit uncertainty, foreign-exchange movements, promotional retail conditions, consumer demand, inventory management, and financial difficulties among large wholesale customers. Three key wholesale customers represented approximately 34% of gross receivables at quarter-end.
- Tax and unusual items: A $4.7 million favorable Tax Cuts and Jobs Act measurement-period adjustment benefited second-quarter net income and reduced the effective tax rate. Restructuring, asset impairment, and other charges totaled $25.7 million for the quarter and $49.4 million for the half; management estimated their after-tax impact at $0.25 and $0.48 per diluted share, respectively.
- Contingencies and commitments: The company resolved not to further appeal a customs audit matter; it recorded $3.8 million of related net charges in the first quarter. Management said pending legal matters were not expected to have a material adverse effect, while noting outcomes could differ. New or amended corporate-office leases entail $346.6 million of minimum rental payments, excluding certain previously disclosed lease commitments.
Most important facts for investors to verify
- Whether Asia-led growth and digital-commerce performance can offset soft comparable-store sales, particularly in Europe and North America.
- Whether gross-margin improvement persists as marketing investment and international retail mix continue to raise SG&A as a percentage of revenue.
- Whether inventory growth converts into sales and operating cash flow; six-month operating cash flow was materially lower year over year.
- Progress, cash costs, savings realization, and timing for both restructuring plans.
- Final tax effects under the TCJA, and the potential effect of tariffs, Brexit, currency movements, and wholesale-customer concentration.
- Debt and liquidity after repurchases, dividends, capital spending, and the company’s substantial future lease commitments.