Ralph Lauren Corporation — FY2011 Form 10-K
Business context and period. The company designs, markets and distributes premium lifestyle products through Wholesale, Retail and Licensing segments. This annual filing covers the 52-week fiscal year ended April 2, 2011; FY2010 was a 53-week year. Fiscal 2011 results include acquired Asia-Pacific operations for a full year and South Korea operations from January 2011.
Financial performance and liquidity
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net revenues | $5,660.3 million | $4,978.9 million | +13.7% |
| Gross profit / margin | $3,318.3 million / 58.6% | $2,899.1 million / 58.2% | Margin +0.4 percentage points |
| Operating income / margin | $845.1 million / 14.9% | $706.9 million / 14.2% | +19.6%; margin +0.7 points |
| Net income attributable to PRLC | $567.6 million | $479.5 million | +18.4% |
| Diluted EPS | $5.75 | $4.73 | +21.6% |
| Cash from operations | $688.7 million | $906.5 million | -$217.8 million |
| Capital expenditures | $255.0 million | $201.3 million | +$53.7 million |
- Segment revenues: Wholesale $2,777.6 million (+9.7%); Retail $2,704.2 million (+19.5%); Licensing $178.5 million (-2.7%). Retail growth reflected acquisitions, store expansion, and comparable-sales growth; licensing fell partly as licensed Asian businesses were brought in-house.
- Comparable sales rose 10% overall, including 23% for RalphLauren.com, 10% for factory stores, 14% for Club Monaco full-price stores, and 1% for full-price Ralph Lauren stores as reported.
- Operating cash flow declined primarily due to working-capital timing, including higher inventory, increased receivables and tax-payment timing. Inventory increased to $702.1 million from $504.0 million.
- At year-end, cash and cash equivalents were $453.0 million; short- and non-current investments totaled $677.5 million; debt was $291.9 million. Management reported net cash and investments of $838.6 million, down from $940.6 million. Working capital was $1,646.0 million.
- Debt consisted principally of €209.2 million of 4.5% notes due October 2013, carried at $291.9 million. The $500 million revolving facility had no borrowings outstanding; $16.8 million of letters of credit were outstanding.
- Share repurchases were $594.6 million, dividends paid were $38.5 million, and the quarterly dividend was raised to $0.20 per share during the year. Equity was $3,304.7 million, versus $3,116.6 million.
Material changes and unusual items
- Revenue growth was 14.0% excluding foreign currency effects. Growth also benefited from acquired operations and store expansion; FY2010 included an extra week that added approximately $70 million of revenue and $13 million of net income.
- Gross margin improved on stronger full-price sell-through and less discounting, partly offset by weaker wholesale margins and rising sourcing costs. SG&A rose 13.2% to $2,442.7 million, while remaining broadly stable as a share of revenue at 43.2%.
- FY2011 included $2.5 million of asset impairment charges and $2.6 million of restructuring charges. FY2010 included $6.6 million and $6.9 million, respectively. FY2010 also included a $4.1 million gain on debt extinguishment.
- The South Korea licensed operations acquisition cost $47 million, funded from cash on hand. In May 2011, the company expanded its repurchase authorization by a further $500 million.
Outlook, risks and contingencies
- No specific FY2012 revenue or earnings guidance is provided in the filing. Management expects higher raw-material, freight and labor costs, including labor shortages in some sourcing regions, to pressure product costs and gross margins more significantly in FY2012.
- Management expected the Japan earthquake and tsunami to negatively affect Japanese sales and operating margins in FY2012; broader regional and global economic effects remained uncertain.
- A Greater China restructuring initiated in May 2011 is expected mainly in FY2012, including workforce reductions and selected store and concession closures, with estimated pretax charges of $10–$20 million.
- Key risks include discretionary consumer demand, intense competition and fashion execution, customer concentration, dependence on Ralph Lauren and key personnel, overseas sourcing and import costs, foreign currency movements, and integration of acquired businesses. Four wholesale customers generated about 40% of wholesale revenue; Macy’s alone represented about 19% of total wholesale revenue.
- Contractual commitments totaled $3,339.9 million, including $1,891.1 million of operating leases and $991.6 million of inventory purchase commitments. Unrecognized tax benefits, including interest and penalties, were $156.4 million; settlement timing is uncertain.
- The Wathne Imports case had remaining breach-of-contract claims; management did not expect a material adverse financial-statement impact. The company reported effective disclosure controls and internal control over financial reporting; the South Korea acquisition was excluded from the year-end internal-control assessment.
Important facts for investors to verify
- How much of sales and profit growth came from comparable operations versus acquisitions, new stores, and currency movements.
- Whether expected FY2012 input-cost inflation and Japan-related weakness reduce gross and operating margins.
- Whether inventory growth converts into sales and cash, and whether operating cash flow recovers from FY2011’s decline.
- The performance of the acquired Asian businesses and the costs and benefits of the Greater China restructuring.
- Wholesale customer concentration, the $156.4 million uncertain-tax-position liability, lease and inventory commitments, and remaining litigation exposure.
- The impact of ongoing global financial-system implementation and the sustainability of the company’s buybacks and dividend increases.