Business context and reporting period
Ralph Lauren Corporation is a global premium lifestyle company selling through retail, wholesale and licensing channels. This unaudited Form 10-Q covers the first quarter of Fiscal 2022, the 13 weeks ended June 26, 2021; the comparable prior-year quarter also comprised 13 weeks and ended June 27, 2020. Fiscal 2022 is a 53-week year. Results should be viewed in light of the prior-year quarter’s widespread COVID-19-related store closures and business disruption.
Financial performance and liquidity
- Revenue: $1.376 billion, up 182.3% reported and 175.8% in constant currency. Growth reflected fewer closures, stronger demand and continued digital commerce growth. North America revenue was $662.1 million, Europe $354.9 million and Asia $288.2 million.
- Profit and margins: Gross profit was $968.1 million; gross margin was 70.3%, down 120 basis points year over year. SG&A was $728.2 million, or 52.9% of revenue versus 104.2%. Operating income was $220.6 million, a 16.0% margin, versus an operating loss of $168.0 million. Net income was $164.7 million, or $2.18 diluted EPS, compared with a net loss of $127.7 million, or $1.75 per diluted share.
- Cash flow: Operating activities provided $247.6 million, versus $70.3 million used in the prior-year quarter. Investing activities used $199.4 million, including $170.6 million of net investment purchases; capital expenditures were $28.2 million. Financing activities used $34.3 million. Cash, cash equivalents and restricted cash ended at $2.605 billion.
- Debt and liquidity: Cash and cash equivalents were $2.596 billion and short-term investments were $368.0 million. Total debt was $1.634 billion, including $498.7 million of 1.700% notes due June 2022 classified as current. The company reported net cash and investments of $1.331 billion. Its $500 million Global Credit Facility had no borrowings and $491 million remaining availability after outstanding letters of credit; no event of default was reported.
- Other: The board reinstated the quarterly dividend at $0.6875 per share. The quarter’s dividend was declared but paid July 9, 2021, after quarter-end. The regular share repurchase program remained suspended; reported share purchases were shares withheld for employee tax obligations.
Material changes and unusual items
- Revenue rose sharply from the pandemic-affected comparison period; reported comparable sales increased 108% overall, including 42% for digital commerce. The rebound is not directly indicative of underlying growth against a normal operating quarter.
- Operating results included a net $10.4 million adverse impact from impairment, restructuring and other items, non-routine inventory benefits, and COVID-19-related bad-debt reversals; management said these reduced net income by $7.7 million, or $0.11 per diluted share. The prior-year quarter included a net $6.1 million favorable impact, or $0.07 per diluted share.
- The company recorded $18.6 million of non-cash asset impairment charges. Its strategic realignment plan had incurred $255.3 million of cumulative charges; total estimated pre-tax charges are $300 million to $350 million. Management expects gross annualized pre-tax savings of $200 million to $240 million once actions are substantially completed by the end of Fiscal 2022, with some savings reinvested.
- Club Monaco was sold on June 26, 2021, with no gain or loss recognized. Potential future consideration includes earn-outs tied to revenue thresholds over five years. Ralph Lauren will provide transitional operational support for up to 12 months. The Chaps brand transitioned to a multi-year licensed model effective August 1, 2021.
Outlook, management commentary and risks
Management expects Fiscal 2022 capital expenditures of approximately $250 million to $275 million, primarily for store openings and renovations and digital infrastructure. The filing provides no specific revenue or earnings guidance. Management said available cash, operating cash flows, credit facilities and access to capital markets should support foreseeable operating, investment and debt-service needs, but cautioned that prolonged adverse conditions could constrain obligations or planned spending.
COVID-19 and emerging variants remained uncertain; some regions continued to face operating restrictions, while digital commerce remained above pre-pandemic levels. Other cited risks include supply-chain capacity constraints and port congestion, inflation and higher input, transportation and labor costs, consumer demand and inventory forecasting, wholesale customer health, foreign-exchange movements, trade and tariff developments, and execution of restructuring and digital initiatives. Management reported no material changes to previously disclosed risk factors and stated disclosure controls were effective as of June 26, 2021.
Important facts for investors to verify
- How much of the substantial year-over-year sales and profit rebound reflects recovery from the prior-year shutdowns versus sustained demand and comparable growth.
- Whether gross margin stabilizes after the 120-basis-point decline, and whether reported profitability is affected by channel mix, promotions, impairment and other non-routine items.
- Progress toward completing the realignment plan, the remaining charges, and delivery of the stated $200 million to $240 million annualized savings.
- Repayment or refinancing plans for the $500 million notes due in June 2022, alongside compliance with amended revolving-credit-facility requirements.
- Actual capital spending, dividend decisions and any restart of discretionary share repurchases as pandemic and market conditions evolve.
- Any earn-out proceeds from the Club Monaco sale and the ongoing effect of the Chaps licensing transition.