Ralph Lauren Corporation — Q1 FY2017 10-Q
Reporting period: 13 weeks ended July 2, 2016; comparison is the 13 weeks ended June 27, 2015. All amounts are U.S. dollars.
Financial performance
| Metric | Q1 FY2017 | Prior-year quarter |
|---|---|---|
| Net revenues | $1.552 billion | $1.618 billion |
| Gross profit / margin | $895 million / 57.6% | $966 million / 59.7% |
| SG&A / share of revenue | $815 million / 52.5% | $822 million / 50.7% |
| Operating income (loss) / margin | $(31) million / (2.0)% | $96 million / 6.0% |
| Net income (loss) | $(22) million | $64 million |
| Diluted EPS | $(0.27) | $0.73 |
| Operating cash flow | $243 million | $332 million |
Revenue declined 4.1% reported and 4.2% at constant currency. Wholesale revenue fell 5.4%, Retail fell 3.0%, and Licensing fell 8.3%. Comparable store sales declined 6% reported and 7% at constant currency. The Americas wholesale business weakened, partly offset by higher European wholesale shipments.
Gross margin contracted 210 basis points, primarily reflecting increased restructuring-related inventory charges. SG&A as a share of revenue rose 180 basis points because of lower sales and continued investment. Restructuring-related charges totaled $159 million, versus $45 million a year earlier; management estimated their after-tax impact at $112 million, or about $1.33 per diluted share, versus $31 million, or about $0.36 per share.
Segment operating income was $133 million in Wholesale (21.9% margin), $63 million in Retail (6.9%), and $34 million in Licensing (89.6%). Retail operating margin fell 490 basis points; Wholesale margin rose 60 basis points.
Financial position and liquidity
- Cash and cash equivalents were $457 million; short-term investments were $619 million and non-current investments $149 million.
- Total debt was $692 million: $90 million of commercial paper and $602 million of long-term debt. Net cash and investments were $533 million, down from $559 million at fiscal year-end.
- Operating cash flow was $243 million; capital expenditures were $78 million. Cash used in investing was $41 million and cash used in financing was $186 million. Cash ended the quarter at $457 million.
- The company reported $402 million of remaining availability under its combined $500 million Global Credit Facility and Commercial Paper Program, after $90 million of commercial paper and $8 million of letters of credit. No Global Credit Facility default was reported; the company stated it expected liquidity to meet foreseeable needs.
- Quarterly dividend declared was $0.50 per share. Share repurchases and shares withheld for taxes used $115 million of cash.
Outlook, management commentary, and risks
The June 2016 “Way Forward Plan” aims to refocus on core brands, shorten supply-chain lead times, reshape the operating model, and reduce management layers from an average of nine to six. It includes workforce reductions and store closures, and was expected to be substantially completed by the end of FY2017. Management expected annualized expense savings of $180–$220 million when completed.
Management estimated up to $400 million of Way Forward restructuring charges—approximately $300 million cash and $100 million non-cash—plus up to $150 million of additional non-cash charges to reduce inventory in liquidation channels. The assessment remained ongoing and additional charges could occur. Q1 included $154 million of Way Forward charges and $5 million related to the prior Global Reorganization Plan.
No specific full-year revenue or earnings guidance is stated in the provided filing text. Management expected near-term operating-margin pressure from business investments and expense deleverage, partly offset by restructuring savings, and said challenging consumer and industry conditions could weigh on sales, inventory, and margins through the remainder of FY2017. It cited weak and inconsistent retail traffic, constrained discretionary spending, foreign-exchange volatility, and uncertainty following the U.K. Brexit vote.
Contingencies include a disputed customs assessment of $34 million, paid while the company appeals; management said it believes it should prevail, but the outcome is uncertain. The filing also identifies tax, legal, international regulatory, currency, consumer-demand, and execution risks. Management reported disclosure controls effective at the reasonable-assurance level and noted the ongoing phased SAP implementation.
Most important facts for investors to verify
- Whether the Way Forward Plan achieves the targeted $180–$220 million annualized savings, and whether total restructuring and inventory charges remain within disclosed estimates.
- Whether revenue trends, comparable-store sales, and margins stabilize, especially in domestic Wholesale and Retail.
- Whether operating cash flow and liquidity remain adequate amid ongoing capital spending, dividends, and share repurchases.
- The outcome and potential refund implications of the $34 million customs assessment, as well as the anticipated tax settlement and other uncertain tax positions.
- How Brexit, foreign-exchange movements, consumer demand, and the SAP rollout affect future results and operations.