Business context and reporting period
Ralph Lauren Corporation designs, markets, and distributes premium lifestyle products through retail, wholesale, and licensing channels. This Form 10-Q covers the 13-week second quarter and six months of Fiscal 2021, ended September 26, 2020; comparisons are with periods ended September 28, 2019. Results were heavily affected by COVID-19 disruptions, including store closures and limited operating hours and capacity.
Key financial results
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net revenue | $1,193.5 million | $1,706.2 million | $1,681.0 million | $3,135.0 million |
| Gross profit / margin | $799.4 million / 67.0% | $1,049.0 million / 61.5% | $1,148.1 million / 68.3% | $1,969.8 million / 62.8% |
| Operating income (loss) | $(20.3) million | $233.1 million | $(188.3) million | $376.4 million |
| Net income (loss) | $(39.1) million | $182.1 million | $(166.8) million | $299.2 million |
| Diluted EPS | $(0.53) | $2.34 | $(2.27) | $3.79 |
| Operating cash flow | Six months: $(12.7) million | Prior six months: $204.1 million |
Q2 revenue fell 30.0% reported (31.0% constant currency); six-month revenue fell 46.4% (46.5% constant currency). Q2 gross margin increased 550 basis points, attributed mainly to improved pricing, lower promotional activity, and favorable geographic and channel mix. SG&A was $628.2 million in Q2 and $1,135.8 million for six months; as a share of revenue it rose to 52.6% and 67.6%, respectively, reflecting deleverage despite expense reductions.
Q2 comparable sales declined 28% overall, while digital commerce comparable sales grew 12%. North America revenue declined 38.4%, Europe 25.1%, and Asia 7.3% in Q2. For the six months, declines were 55.8%, 42.9%, and 20.5%, respectively.
Financial position and liquidity
At September 26, 2020, cash and cash equivalents were $2,012.0 million and short-term investments were $434.1 million. Total debt was $1,631.0 million, all long-term; management reported net cash and investments of $815.1 million, down from $945.3 million at fiscal year-end. Total equity was $2,544.1 million. Six-month operating cash use was $12.7 million; capital expenditures were $53.9 million. Cash, cash equivalents, and restricted cash increased $392.0 million to $2,021.8 million, largely reflecting debt issuance.
The company issued $1.25 billion of senior notes in June, including $500 million at 1.700% due 2022 and $750 million at 2.950% due 2030. Proceeds included repayment of $475 million drawn under its revolving facility and repayment at maturity of $300 million of notes. The $400 million 3.750% notes due 2025 remain outstanding. No borrowings were outstanding under the $500 million Global Credit Facility; $491 million remained available after letters of credit. The company reported no facility default.
Material changes, outlook, and risks
- COVID-19 continued to depress store traffic, tourism, wholesale demand, and discretionary spending. Nearly all stores had reopened by the end of Q1, but many continued with restricted hours or capacity; management cited renewed infection risks and possible further disruptions.
- A Fiscal 2021 Strategic Realignment Plan was approved in September. The company expects workforce reductions by fiscal year-end, charges of up to approximately $160 million, and gross annualized pretax savings of approximately $180 million to $200 million, with savings expected to begin primarily in Fiscal 2022. Q2 restructuring and other charges were $160.5 million, and impairment charges were $31.0 million.
- To preserve liquidity, the company suspended its quarterly dividend and share repurchase program beginning in Q1, reduced or furloughed employee hours, controlled expenses and capital spending, and negotiated rent abatements. The $49.8 million of dividends paid in the six-month period had been declared before the suspension.
- The Global Credit Facility’s leverage covenant was temporarily waived through the quarter ending September 30, 2021, subject to amended terms and restrictions. The amendment also requires at least $750 million in unrestricted cash plus undrawn facility availability during the specified period. Management said available liquidity and financing sources should support foreseeable needs, while warning that prolonged adverse conditions could impair that capacity.
- On October 29, 2020, the company announced a planned transition of Chaps to a fully licensed model, effective August 1, 2021 after a transition period. No numeric near-term revenue or earnings guidance is provided in this filing. Management cautioned that pandemic duration and effects are unpredictable.
- Other identified exposures include wholesale customer financial distress, inventory and promotional pressure, foreign exchange, trade and political developments, Brexit, and the execution and transition risks of restructuring. Management said pending legal matters were not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether revenue and store traffic recover, particularly in North America and Europe, and whether digital growth offsets continued weakness in physical retail and wholesale.
- Whether gross-margin improvement persists and expense reductions can offset fixed-cost deleverage without harming the brand or operating capabilities.
- The final scope, cash cost, timing, and realized savings of the strategic realignment plan, including any further real estate or brand actions.
- Cash generation, working-capital and inventory trends, and compliance with the amended credit-facility liquidity and covenant terms as restrictions change.
- The duration of dividend and repurchase suspensions and any material changes in credit exposure, tax contingencies, or impairment assumptions.