Business context and reporting period
Ralph Lauren Corporation filed this Form 10-K for fiscal 2021, the 52-week year ended March 27, 2021; the filing does not provide a standalone fiscal fourth-quarter summary. The company designs, markets and distributes premium lifestyle products through retail, wholesale and licensing channels. Its reportable segments are North America, Europe and Asia. COVID-19 disruptions materially affected operations during the year, including store closures and capacity limits.
Financial performance and liquidity
| Metric | Fiscal 2021 | Fiscal 2020 |
|---|---|---|
| Net revenue | $4.401 billion | $6.160 billion |
| Gross profit / gross margin | $2.861 billion / 65.0% | $3.653 billion / 59.3% |
| SG&A / share of revenue | $2.639 billion / 60.0% | $3.238 billion / 52.6% |
| Operating income (loss) / margin | $(43.6) million / (1.0)% | $317.0 million / 5.1% |
| Net income (loss) | $(121.1) million | $384.3 million |
| Diluted EPS | $(1.65) | $4.98 |
| Cash from operating activities | $380.9 million | $754.6 million |
| Capital expenditures | $107.8 million | $270.3 million |
Revenue fell 28.6% reported and 29.9% at constant currency. Comparable sales declined 29% overall: digital commerce grew 20%, while comparable sales excluding digital fell 36%. By region, North America revenue fell 36.6%, Europe fell 28.6% reported (31.8% constant currency), and Asia rose 1.0% reported but declined 1.8% constant currency.
Gross margin improved 570 basis points, reflecting better pricing, less promotion, lower non-routine inventory charges and favorable geographic and channel mix. However, SG&A as a share of revenue rose 740 basis points as lower sales outweighed cost savings, contributing to the operating loss. Fiscal 2021 included $254.4 million of restructuring, impairment and other charges, with an after-tax impact of $201.5 million, or $2.71 per diluted share. The income tax provision was $46.3 million, including $46.6 million of net incremental tax expense related to tax legislation and COVID-related valuation allowances.
At year-end, cash and cash equivalents were $2.579 billion and short-term investments were $197.5 million. Debt was $1.633 billion, leaving net cash and investments of $1.144 billion. Total current assets were $4.208 billion and current liabilities were $1.585 billion. Operating cash flow declined by $373.7 million year over year. The company reported $571 million of remaining availability under credit and overdraft facilities and its commercial paper program; $8.9 million of letters of credit were outstanding. Equity was $2.604 billion, compared with $2.693 billion a year earlier.
Material changes versus the prior year
- COVID-19-related store closures and weak traffic drove steep sales declines, especially in North America and Europe; Asia was comparatively resilient.
- Operating results swung from $317.0 million of operating income and $384.3 million of net income to an operating loss of $43.6 million and a net loss of $121.1 million.
- Cash from operations decreased to $380.9 million from $754.6 million. Capital spending was reduced, while debt rose following the June 2020 issuance of $1.25 billion principal amount of senior notes.
- Fiscal 2020 benefited from a $122.9 million one-time Swiss tax reform benefit. Fiscal 2021 recorded a $13.8 million reduction of that benefit and other incremental tax expense.
Outlook, management commentary, risks and unusual items
Management said the pandemic remained volatile, with disruptions continuing into the first quarter of fiscal 2022, including in Europe and Japan and in sourcing operations in India. It did not provide a clear fiscal 2022 revenue or earnings forecast in the provided filing text. It expects fiscal 2022 capital expenditures of approximately $250 million to $275 million.
The Fiscal 2021 Strategic Realignment Plan is expected to incur total pre-tax charges of approximately $300 million to $350 million; $236.8 million was recorded in fiscal 2021. When substantially completed by the end of fiscal 2022, actions are expected to produce gross annualized pre-tax savings of $200 million to $240 million, some of which will be reinvested. Plans include workforce reductions, office and distribution-center consolidation, store closures, transition of Chaps to a licensed model, and the announced sale of Club Monaco, expected to close by the end of fiscal 2022 first quarter.
The quarterly dividend and share-repurchase program were suspended during fiscal 2021 to preserve cash. After year-end, the board reinstated the dividend at $0.6875 per share quarterly, with the first payment scheduled for July 9, 2021. Repurchases remained suspended at the filing date. Key risks include further pandemic disruption, discretionary-spending weakness, inventory and markdown exposure, wholesale customer concentration, foreign exchange and sourcing costs, tariffs, execution of restructuring, long-term lease obligations, cybersecurity and dependence on key leadership. The three largest wholesale customers represented approximately 14% of fiscal 2021 revenue and 30% of gross trade receivables. The company reported that pending legal matters were not expected to have a material adverse effect, while noting outcomes could change.
The company recorded $96.0 million of long-lived asset impairment charges and $170.5 million of restructuring and other charges in fiscal 2021. Auditors issued unqualified opinions on the financial statements and internal controls; critical audit matters included markdown reserves, inventory realizable value and long-lived asset impairment.
Important facts for investors to verify
- Whether sales, store traffic and digital growth recover as pandemic restrictions ease, particularly in North America and Europe.
- Whether planned restructuring savings are realized on schedule and within the estimated $300 million to $350 million charge range, including the impact of the Club Monaco sale.
- Whether liquidity and debt-service capacity remain adequate given $1.633 billion of debt, lease commitments and inventory purchase commitments.
- Whether inventory valuation, markdown reserves and wholesale receivable quality hold up as demand and customer conditions change.
- Whether the reinstated dividend can be sustained and when, if ever, share repurchases resume.