Business context and reporting period
Ralph Lauren Corporation designs, markets, and distributes premium lifestyle products through wholesale, directly operated retail and e-commerce, and licensing. This Form 10-K covers the 52-week fiscal year ended April 1, 2017 (Fiscal 2017); the comparable prior year ended April 2, 2016 and had 53 weeks. Fiscal 2017 fourth-quarter figures are also provided below. Beginning in the fourth quarter, the company reported North America, Europe, and Asia as its reportable segments; prior-period segment data was recast.
Financial performance and liquidity
| Metric | Fiscal 2017 | Fiscal 2016 |
|---|---|---|
| Net revenue | $6.653 billion | $7.405 billion |
| Gross profit / margin | $3.651 billion / 54.9% | $4.187 billion / 56.5% |
| SG&A / share of revenue | $3.149 billion / 47.3% | $3.390 billion / 45.8% |
| Operating income (loss) / margin | $(94.8) million / (1.4%) | $581.9 million / 7.9% |
| Net income (loss) | $(99.3) million | $396.4 million |
| Diluted EPS | $(1.20) | $4.62 |
| Cash from operations | $952.3 million | $1.007 billion |
| Capital expenditures | $284.0 million | $417.7 million |
Revenue declined 10.2% reported and 9.9% in constant currency. Comparable store sales fell 7% overall, including a 10% decline in e-commerce. North America revenue fell 15.6% (15.5% constant currency); Europe fell 1.2% reported but rose 2.9% constant currency; Asia fell 1.2% reported and 6.1% constant currency. About 40% of revenue was earned outside the U.S.
Fiscal 2017 operating results included $770.3 million of restructuring-related, impairment, and other charges, compared with $211.8 million in Fiscal 2016. The company attributed the margin decline primarily to greater inventory-related charges and unfavorable currency, with lower revenue contributing to SG&A deleverage. Fiscal 2016 also benefited from its extra week, which added $72.2 million of revenue and $8.3 million of net income.
Fiscal 2017 fourth-quarter revenue was $1.565 billion, gross profit was $819.1 million, and net loss was $204.0 million. The quarter included $370.3 million of pretax restructuring, impairment, and other charges.
At year-end, cash and cash equivalents were $668.3 million, short-term investments $684.7 million, non-current investments $21.4 million, and total debt $588.2 million. Net cash and investments were $786.2 million, up from $559.2 million. Working capital was $1.795 billion. The company had $492 million of remaining availability under its global credit facility/commercial paper program and $57 million under Pan-Asia facilities at year-end; the latter availability was reduced to approximately $49 million after a subsequent facility renewal. It paid $164.8 million in dividends and spent $200 million on share repurchases. The company said it did not expect to repurchase shares in Fiscal 2018.
Material changes, outlook, and management commentary
- The Way Forward Plan refocuses the business on core brands, product and shopping experience, supply-chain speed and sourcing, disciplined distribution, and a leaner cost structure. It discontinued Denim & Supply and moved its denim offerings into Polo Ralph Lauren.
- Management estimated gross annualized savings of $180–$220 million from the plan’s initial actions and an additional approximately $140 million from further actions approved in March 2017. The company estimated total Way Forward Plan charges of approximately $770 million, comprising about $450 million cash-related and $320 million non-cash. Fiscal 2017 also included $197.9 million of restructuring-related inventory charges, including $155.2 million for inventory destruction.
- Actions include workforce reductions, store and shop closures, and replacing the in-development e-commerce platform with Salesforce Commerce Cloud. Management expected the additional actions to be substantially completed by the end of Fiscal 2018.
- The company forecast Fiscal 2018 capital expenditures of approximately $300–$320 million. It expected continued near-term operating expense deleverage from sales declines and currency effects, alongside continued strategic investment; no clear full-year revenue or earnings guidance is provided in the filing text.
- CEO Stefan Larsson departed effective May 1, 2017; Patrice Louvet was announced as successor, expected to take office July 10, 2017. The company recorded $11.4 million of related Fiscal 2017 charges and expected approximately $6 million more in Fiscal 2018.
Risks, contingencies, and unusual items
- Key risks include weak discretionary spending and retail traffic, heavy industry promotions and margin pressure, inventory forecasting and markdown exposure, dependence on major department-store customers, foreign exchange, imported-product costs and trade policy, and execution of restructuring and technology changes.
- Macy’s accounted for approximately 10% of Fiscal 2017 revenue; the three largest wholesale customers represented approximately 21% of revenue and 34% of gross trade receivables.
- A customs authority assessed $34.1 million in a dispute over import valuation; the company paid the assessment and is appealing, maintaining that it should prevail. The earlier notice had indicated potential incremental duties and taxes of up to $46 million, including interest and penalties.
- Contractual obligations totaled $3.537 billion, including $1.869 billion of operating leases, $674.8 million of inventory purchase commitments, and $600 million principal on senior notes. Store leases are generally long-term and non-cancellable; the closed Fifth Avenue Polo flagship had a $160.2 million remaining lease commitment at year-end.
- The company reported an unqualified audit opinion and effective internal controls. It identified ongoing risks around the CEO transition, SAP and e-commerce implementation, cybersecurity, and potential changes in tax and trade rules.
Important facts for investors to verify
- Whether revenue and comparable-sales declines stabilize, particularly in North America, and whether international growth persists on a constant-currency basis.
- Whether the planned savings are realized on schedule and offset restructuring costs, sales deleverage, and continuing investment.
- How much of the Fiscal 2017 loss reflects one-time charges versus underlying operating performance, including the substantial inventory write-downs and store/platform impairments.
- Cash generation, investment and dividend needs, debt maturities, overseas-held cash, and the company’s capacity to meet lease and purchase commitments.
- Progress on the CEO transition, the Salesforce platform migration, the customs appeal, and the remaining restructuring actions and charges.