Ralph Lauren Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended March 29, 2014 (52 weeks), compared with fiscal 2013 ended March 30, 2013. The filing is an annual report; it also provides unaudited fourth-quarter results.
Business context
Ralph Lauren designs, markets, and distributes premium lifestyle products through Wholesale, Retail, and Licensing. FY2014 revenue mix was approximately 47% Wholesale, 51% Retail, and 2% Licensing; about 36% of revenue came from outside the U.S. The company expanded direct operations by acquiring previously licensed Chaps menswear and Australia/New Zealand businesses.
Key financial metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net revenue | $7.450 billion | $6.945 billion |
| Gross profit / margin | $4.310 billion / 57.9% | $4.156 billion / 59.8% |
| Operating income / margin | $1.130 billion / 15.2% | $1.127 billion / 16.2% |
| Net income | $776 million | $750 million |
| Diluted EPS | $8.43 | $8.00 |
| Cash from operations | $907 million | $1.019 billion |
| Capital expenditures | $390 million | $276 million |
FY2014 revenue rose 7.3% reported and 7.9% excluding currency effects. Gross margin fell 190 basis points, chiefly reflecting the Chaps business and unfavorable currency. SG&A was $3.142 billion, or 42.2% of revenue, down from 42.8%; operating margin nevertheless declined 100 basis points. Lower tax expense helped lift net income 3.4%; the effective tax rate was 29.2%, versus 31.1%.
By segment, revenue was $3.486 billion Wholesale (up 11.1%), $3.798 billion Retail (up 4.8%), and $166 million Licensing (down 9.0%). Retail comparable sales were flat reported and up about 1% constant currency; e-commerce comparable sales grew 13% constant currency.
At year-end, cash and cash equivalents were $797 million, investments $490 million, and debt $300 million; management-defined net cash and investments were $987 million. Working capital was $2.359 billion. Current assets were $3.329 billion against current liabilities of $970 million. Inventory increased to $1.020 billion from $896 million. The company generated $907 million of operating cash flow, repurchased $558 million of stock, paid $149 million in dividends, and ended with $4.034 billion of equity.
FY2014 fourth-quarter revenue was $1.867 billion versus $1.644 billion in the prior-year quarter; net income was $153 million versus $127 million, and diluted EPS was $1.68 versus $1.37.
Material changes and unusual items
- Wholesale revenue growth included $210 million of incremental revenue from acquired or transitioned businesses. Licensing revenue declined partly because some licensed operations moved to company ownership.
- The Chaps acquisition produced a $16 million gain; FY2014 also included $8 million of restructuring charges and $10 million of accelerated stock-based compensation expense. FY2013 included $19 million of asset impairments, substantially related to Rugby closures and European locations.
- Operating cash flow fell $112 million, mainly due to working-capital changes, including higher receivables and prepaid expenses. Cash used in investing rose to $488 million, primarily reflecting higher capital spending.
- The company issued $300 million of 2.125% senior notes due 2018 and repaid its €209 million 4.5% notes at maturity. No revolving credit facility borrowings were outstanding at year-end.
- The quarterly dividend increased from $0.40 to $0.45 per share during FY2014. The remaining authorization under the share repurchase program was approximately $580 million.
Outlook, management commentary, and risks
Management described weak and inconsistent retail traffic, a more promotional environment, macroeconomic uncertainty, and adverse U.S. weather as pressures that could affect FY2015 sales, inventory, and margins. It anticipated some operating-expense deleverage from growth investments and forecast FY2015 capital expenditures of $400–$500 million. Priorities include international and direct-to-consumer expansion, the Polo store concept, infrastructure, and a global e-commerce platform. The filing provides no specific FY2015 revenue or earnings guidance.
Key risks include fashion and demand forecasting, markdowns and margin pressure, currency and sourcing-cost volatility, reliance on overseas third-party manufacturers, concentration among wholesale customers (Macy’s represented about 12% of total revenue), and execution risks from store expansion and the multi-year SAP implementation. The family controlled approximately 81% of voting power. The long-running Wathne contract dispute remained unresolved; management did not expect a material adverse financial-statement effect. Management and the auditor reported effective internal controls, and the auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether sales and margins improve despite promotional pressure, weak comparable sales excluding e-commerce, and the FY2014 gross-margin decline.
- Whether acquired operations deliver sustainable growth and whether associated costs and the $16 million acquisition gain distort comparisons.
- Whether inventory, receivables, and operating cash flow remain well managed as capital spending and store expansion increase.
- Whether FY2015 capital expenditures stay within the $400–$500 million outlook and support profitable returns.
- Progress and costs of SAP and e-commerce investments; foreign-cash availability, debt and lease commitments, and the status of material legal and tax contingencies.