Ralph Lauren Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter ended December 31, 2011 (13 weeks), and nine months ended December 31, 2011. Comparisons are with the corresponding periods ended January 1, 2011, except balance-sheet comparisons, which are with April 2, 2011. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and performance
Ralph Lauren designs, markets and distributes premium lifestyle products through Wholesale, Retail and Licensing segments. Fiscal 2012 results include the South Korea business acquired from a former licensee on January 1, 2011; the company also brought distribution of bedding and bath products in-house during the year.
Key financial metrics
| Metric | Three months | Nine months |
|---|---|---|
| Net revenues | $1,805.6; up 16.6% | $5,236.6; up 23.7% |
| Gross profit / margin | $1,031.6 / 57.1%; down 150 bps | $3,071.7 / 58.7%; down 50 bps |
| Operating income / margin | $270.1 / 15.0%; up 9.7%, margin down 90 bps | $903.0 / 17.2%; up 24.1%, margin unchanged |
| Net income | $169.0; up 0.4% | $586.6; up 18.6% |
| Diluted EPS | $1.78; up 3.5% | $6.14; up 22.6% |
| Cash from operations | Not reported for the quarter alone | $784.2, versus $594.3 |
Quarterly revenue growth was led by Retail (+22.4%) and Wholesale (+10.9%); Licensing declined 1.0%. For nine months, Retail rose 29.3%, Wholesale 19.4%, and Licensing 2.2%. Comparable sales rose 12% in the quarter and 14% year to date as reported; excluding currency effects, year-to-date comparable sales rose 12%.
For the quarter, Wholesale operating income fell to $115.5 from $130.3, with margin down 390 bps to 15.4%; Retail operating income rose to $194.4, with margin up 70 bps to 19.3%; Licensing operating income was $31.9, with margin up 500 bps to 64.3%. For nine months, Wholesale operating income was $513.1 (margin 21.2%), Retail $513.5 (19.2%), and Licensing $86.8 (63.2%).
At December 31, cash and cash equivalents were $815.8, short-term investments $386.3, non-current investments $72.5, and long-term debt $265.6. Management-defined net cash and investments were $1,009.0, up $170.4 from fiscal year-end. No borrowings were outstanding under the $500 million revolving facility; $15.8 of letters of credit were outstanding. Current assets were $2,826.5 and current liabilities $979.2. Inventories increased to $894.7 from $702.1 at fiscal year-end.
Operating cash flow of $784.2 was partly offset by $160.1 of capital expenditures, $419.4 of share repurchases and tax-withholding share surrenders, and $55.8 of dividends paid. Cash increased $362.8 to $815.8 over the nine months. The company had €209.2 million principal amount of 4.5% notes due October 2013 (carrying value $265.6). It reported compliance with its revolving facility and no event of default.
Changes versus prior periods
Revenue and operating income grew substantially year to date, while quarterly net income was nearly flat: higher quarterly operating income was largely offset by a $23.1 increase in income-tax expense. The effective tax rate rose to 35.5% from 29.4% for the quarter and to 33.7% from 30.7% year to date. Management attributed the increases primarily to the absence of prior-period tax reserve reductions and other favorable discrete items. Gross margin declined in both comparisons, chiefly because sourcing costs rose faster than pricing actions, particularly in Wholesale. SG&A rose in dollars but declined as a percentage of revenue. Share repurchases reduced weighted-average shares and supported EPS growth.
Year-to-date operating cash flow increased by $189.9, driven mainly by higher earnings before non-cash expenses and the timing of income-tax payments; inventory growth, lower receivable collections and payment timing were offsets. The investing cash-flow comparison also reflects investment purchases and maturities, and lower acquisition spending than in the prior period.
Outlook, risks and unusual items
- Management said global economic uncertainty, especially in the U.S. and Europe, could constrain consumer spending and weigh on sales and operating-margin growth through the remainder of fiscal 2012 and into fiscal 2013.
- Higher raw-material, transportation and labor costs, including labor shortages in some sourcing regions, were expected to pressure product costs and gross margins at least through the remainder of fiscal 2012. Targeted pricing and favorable channel and geographic mix partly mitigated the pressure.
- Management stated that available cash, investments, operating cash flows and credit capacity should fund operating, capital and debt-service needs for the foreseeable future. No quantified earnings or revenue guidance was provided in the filing text.
- A Greater China restructuring plan was expected to result in pretax charges of approximately $5–$10 million, primarily in fiscal fourth quarter 2012. The company said discontinuing most American Living products after the Fall 2012 wholesale season was not expected to have a material impact.
- The South Korea acquisition contributed to reported growth and added operating expenses; its transition-services agreement with Doosan was extended through June 30, 2012. The company also noted a $1.0 pretax income benefit from aligning its Japanese subsidiary’s fiscal reporting period.
- The $7.6 loss on termination of an interest-rate swap is being amortized through interest expense over the remaining term of the Euro notes; $2.3 was recognized in the first nine months.
- Wathne litigation remained pending, with a trial scheduled for April 2012 but timing uncertain; management did not expect a material adverse financial effect. A shareholder derivative action filed in November 2011 alleged fiduciary-duty breaches, waste and unjust enrichment; defendants moved to dismiss in January 2012. Management described other pending matters as not expected to be material.
- Risks identified include macroeconomic and consumer-demand weakness, currency and sourcing-cost movements, competition, international expansion and operations, brand and trademark protection, key-person dependence, systems and cybersecurity, and legal and regulatory matters. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether retail growth and comparable-sales momentum continue, particularly after separating organic growth from new stores, e-commerce expansion, currency effects and the South Korea acquisition.
- Whether pricing and mix can offset sourcing-cost inflation, and how Wholesale margins perform relative to Retail.
- Whether higher inventories convert to sales without greater discounting, markdowns or working-capital pressure.
- How tax rates, uncertain tax positions and potential audit settlements affect reported earnings and cash taxes.
- Actual costs and execution of the Greater China restructuring, and the financial effects of the South Korea integration and system implementation.
- Progress and outcomes in the Wathne and derivative litigation, alongside continued liquidity, debt-covenant compliance, dividends and share repurchases.