Ralph Lauren Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended April 2, 2016, a 53-week year. Fiscal 2015 was 52 weeks. The filing also reports fourth-quarter results for the 14 weeks ended April 2, 2016; the comparable prior-year quarter was 13 weeks.
Business context
Ralph Lauren designs, markets, and distributes premium lifestyle products through Wholesale, Retail, and Licensing. FY2016 revenue mix was approximately 45%, 53%, and 2%, respectively; 37% of revenue was earned outside the U.S.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net revenue | $7.405 billion | $7.620 billion |
| Gross profit / margin | $4.187 billion / 56.5% | $4.378 billion / 57.5% |
| Operating income / margin | $582 million / 7.9% | $1.035 billion / 13.6% |
| Net income | $396 million | $702 million |
| Diluted EPS | $4.62 | $7.88 |
| Cash from operations | $1.007 billion | $894 million |
| Capital expenditures | $418 million | $391 million |
Reported revenue fell 2.8%, but increased 0.8% in constant currency; the extra fiscal week contributed $72 million of revenue. Gross margin declined 100 basis points. SG&A was $3.389 billion, or 45.8% of revenue, versus 43.3% a year earlier. The effective tax rate was 28.2%, compared with 28.9%.
Revenue by segment was $3.297 billion in Wholesale (down 5.7% reported; down 2.7% constant currency), $3.933 billion in Retail (down 0.6% reported; up 3.7% constant currency), and $175 million in Licensing (up 3.7% reported). Comparable store sales declined 3% in constant currency; e-commerce comparable sales rose 3% in constant currency.
At year-end, cash and cash equivalents were $456 million, short-term investments $629 million, non-current investments $187 million, and total debt $713 million. The company reported net cash and investments of $559 million, down from $620 million. Working capital was $1.855 billion. Long-term debt included $300 million of 2.125% notes due 2018 and $300 million of 2.625% notes due 2020; short-term debt included $90 million commercial paper and $26 million of Pan-Asia facility borrowings. The $500 million Global Credit Facility had $491 million remaining availability, subject to its terms.
FY2016 fourth-quarter revenue was $1.871 billion and net income was $41 million. Diluted EPS was $0.49. The quarter included $52 million of pretax charges associated with restructuring, the customs audit, litigation settlements, and store impairments; the 14th week added about $72 million revenue and $8 million net income.
Material changes and unusual items
- Net income declined 43.6%, primarily reflecting a $453 million reduction in operating income. FY2016 operating results included $142 million of Global Reorganization Plan charges, $48 million of other charges—primarily the customs audit and litigation settlements—and $22 million of non-cash impairment charges for underperforming stores. Together, these charges reduced net income by $150 million after tax, or about $1.74 per diluted share.
- Unfavorable currency effects reduced FY2016 net income by $94 million, or about $1.10 per diluted share. The extra week increased net income by $8 million, or about $0.10 per diluted share.
- Cash from operations increased by $113 million, mainly due to favorable changes in working capital and other operating assets and liabilities, partly offset by lower net income before non-cash charges. Share repurchases were $480 million under the program, with a further $20 million withheld for stock-compensation taxes; dividends paid were $170 million.
- The company recorded a $34 million customs assessment in FY2016 and paid it while appealing. It disputes the customs authority’s methodology and states that a successful appeal would result in a refund plus interest.
Outlook, management commentary, and risks
The Global Reorganization Plan was substantially completed in FY2016 and is expected to reduce annual operating expenses by approximately $125 million. The company expects about $5 million of additional plan charges in FY2017; further restructuring and charges may follow completion of its strategic growth plan.
Management cited uncertain global conditions, weak and inconsistent retail traffic, constrained discretionary spending, consumers shifting spending toward experiences, competitive and promotional pressure, and unfavorable currency movements. It expected near-term operating-margin pressure from investment and foreign exchange, while continuing to invest in restructuring, stores, infrastructure, and growth initiatives. FY2017 capital expenditures were projected at approximately $400 million. The filing does not provide a clear numerical FY2017 revenue or earnings forecast in the supplied text.
Other key risks include leadership transition (Stefan Larsson became CEO in November 2015; Ralph Lauren became Executive Chairman and Chief Creative Officer), reliance on Ralph Lauren’s brand leadership, execution of restructuring and systems projects, concentration in major wholesale customers, foreign sourcing and currency exposure, inventory and fashion-demand risk, long-term lease commitments, cybersecurity, and tax and legal contingencies. Operating lease commitments totaled $2.207 billion; inventory purchase commitments were $941 million. Management stated that it believed available cash, operating cash flow, facilities, and market access would meet foreseeable needs. The auditor issued unqualified opinions on the financial statements and internal controls; management also reported controls effective at fiscal year-end.
Investor verification priorities
- Assess whether the expected $125 million annual cost savings materialize, and whether further restructuring charges or store closures are required.
- Track comparable-store sales, e-commerce growth, wholesale demand, margins, and the impact of promotions and currency movements.
- Monitor the customs appeal and any additional exposure beyond the $34 million assessment already paid and recorded.
- Review cash conversion and working-capital trends, investment spending, debt maturities, lease obligations, and the company’s share repurchase and dividend commitments.
- Evaluate execution of the CEO transition, SAP and e-commerce platform rollouts, and management’s ability to protect the brand and restore profitability.