Ralph Lauren Corporation — Form 10-Q Summary
Reporting period: First quarter of Fiscal 2019, the 13 weeks ended June 30, 2018; comparable quarter ended July 1, 2017. Amounts are unaudited and in U.S. dollars.
Business context
Ralph Lauren designs, markets, and distributes premium lifestyle products through wholesale, retail, and licensing channels. Its reportable segments are North America, Europe, and Asia. Results are seasonal and the company cautions that this quarter is not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 FY2019 | Prior-year quarter |
|---|---|---|
| Net revenue | $1,390.6 million | $1,347.1 million |
| Gross profit / margin | $895.7 million / 64.4% | $851.2 million / 63.2% |
| Operating income / margin | $130.1 million / 9.4% | $90.3 million / 6.7% |
| Net income | $109.0 million | $59.5 million |
| Diluted EPS | $1.31 | $0.72 |
| Operating cash flow | $230.6 million | $334.2 million |
| Capital expenditures | $42.3 million | $41.9 million |
- Revenue rose 3.2% reported and 1.1% at constant currency; favorable foreign exchange contributed $28.6 million.
- Gross margin improved 120 basis points, attributed primarily to better pricing, lower promotional activity, and favorable product mix. SG&A rose 3.8%, and its share of revenue increased 30 basis points to 53.3%, reflecting marketing investment and geographic/channel mix, partly offset by cost savings.
- Asia revenue increased 18.6% reported (16.0% constant currency), supported by new stores and comparable growth. Europe increased 8.4% reported but 1.5% constant currency. North America declined 1.7% reported and 1.8% constant currency. Total comparable store sales declined 3%.
- Net income benefited from higher operating income and a lower effective tax rate: 18.0%, versus 31.4%. The filing cites the lower U.S. federal tax rate and tax effects of stock-award settlements among the factors.
Financial position and liquidity
- At June 30, cash and cash equivalents were $532.3 million, short-term investments $1,487.7 million, and non-current investments $69.5 million. Net cash and investments, as defined by the company, were $1,502.5 million.
- Total debt was $587.0 million: $299.0 million current and $288.0 million long-term. The $300 million 2.125% Senior Notes were due September 26, 2018; the $300 million 2.625% notes were due August 18, 2020. No borrowings were outstanding under the revolving facility or commercial paper program; $10.3 million of letters of credit were outstanding.
- Cash, cash equivalents, and restricted cash decreased $779.7 million to $575.8 million. Investing cash outflow of $827.1 million chiefly reflected net investment purchases of $780.3 million. Financing outflow was $164.4 million, including $100.0 million of share repurchases, $30.0 million of shares withheld for taxes, and $40.6 million of dividends.
- Operating cash flow fell $103.6 million year over year, primarily due to working-capital movements, including higher inventory. Inventory was $890.0 million, up from $761.3 million at March 31, 2018.
Material changes, outlook, and notable items
- Operating income rose 44.0%; the company recorded $23.7 million of restructuring, impairment, and other charges, versus $47.2 million in the prior-year quarter. These charges reduced current-quarter net income by $18.9 million, or $0.23 per diluted share.
- A new Fiscal 2019 restructuring plan, approved June 4, targets distribution-network and corporate-office consolidation, severance, and selected store and shop closures. Management expects $60 million to $80 million in gross annualized savings when substantially completed by fiscal year-end, with total charges of approximately $100 million to $150 million. The existing Way Forward Plan is expected to incur approximately $95 million of remaining charges during the rest of Fiscal 2019.
- Management expects continued investment in marketing, digital, stores, concession shops, and productivity-enhancing infrastructure, while maintaining cost discipline. It said these investments may pressure near-term operating profit. No full-year revenue or EPS guidance is provided in the supplied filing text.
- The company expanded its share-repurchase authorization by $1.0 billion and increased its quarterly dividend from $0.50 to $0.625 per share. Future dividends remain subject to board discretion and business conditions.
- The company entered a New Jersey corporate-office lease with an approximately 16-year initial term and $116.7 million in minimum commitments; possession is expected in Fiscal 2020. It also expects adoption of the new lease standard in Fiscal 2020 to significantly increase reported assets and liabilities, with no significant change anticipated in lease expense.
- A customs dispute resulted in a $3.8 million charge in the quarter. After a prior re-audit refund and voluntary disclosures, the company decided not to further appeal for the periods reviewed; it said the revised methodology creates an incremental annual duty charge that is not material.
- Key risks discussed include potential U.S.–China tariffs and broader trade changes, foreign-exchange movements, promotional retail conditions and wholesale-customer health, inventory and consumer-demand uncertainty, execution of restructuring and digital initiatives, and tax-law changes. Management reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether the September 2018 note maturity was repaid or refinanced, and the resulting effect on liquidity and interest expense.
- Progress toward the new plan’s $60 million to $80 million savings target and the remaining restructuring charges.
- Whether Asia growth can offset weakness in North America and Europe, particularly comparable-store sales and digital performance.
- Whether inventory growth and lower operating cash flow reverse as seasonal sales develop.
- Actual exposure to proposed tariffs, the customs-duty outcome, and the effects of the long-term office lease and lease-accounting adoption.