Ralph Lauren Corporation — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2019, the 13 weeks ended December 29, 2018; comparisons are with the 13 weeks ended December 30, 2017. The nine-month period also ended December 29, 2018. Dollars are in millions unless stated otherwise.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $1,725.8 | $1,641.8 | $4,807.3 | $4,653.1 |
| Gross margin | 61.4% | 60.7% | 62.1% | 61.1% |
| Operating income | $193.8 | $189.2 | $533.9 | $472.8 |
| Operating margin | 11.2% | 11.5% | 11.1% | 10.2% |
| Net income (loss) | $120.0 | $(81.8) | $399.3 | $121.5 |
| Diluted EPS | $1.48 | $(1.00) | $4.85 | $1.47 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $683.1 | $951.1 |
- Quarterly revenue increased 5.1% reported and 6.3% at constant currency; nine-month revenue rose 3.3% on both bases. Digital comparable sales increased 18% for the quarter and 10% year to date; total comparable sales increased 4% and 1%, respectively.
- For the quarter, Europe revenue grew 9.7% reported and Asia 9.5%; North America grew 2.5%. Year to date, Asia led growth at 13.4%, while other non-reportable segment revenue declined 5.7%.
- Gross-margin improvement reflected better pricing, less promotional activity, and favorable product and geographic mix. SG&A rose 5.6% in the quarter and 4.1% year to date; as a share of revenue it increased 20 and 40 basis points, respectively, reflecting marketing, store expansion, and mix.
- Quarterly operating income increased 2.4%, but operating margin fell 30 basis points as higher restructuring and other charges and SG&A costs offset gross-margin gains. Nine-month operating income increased 12.9% and margin improved 90 basis points.
- Net income comparisons were materially affected by U.S. tax-reform charges: $32.3 in Q3 FY2019 versus $231.3 in Q3 FY2018; $27.6 for nine months FY2019 versus $231.3 in the prior-year period. The FY2019 nine-month effective tax rate was 27.0%, compared with 73.8%.
Balance sheet, cash flow, debt, and liquidity
- At December 29, 2018, cash and cash equivalents were $680.5, short-term investments $1,382.5, and non-current investments $45.7. Total debt was $686.8, all long-term. The company reported net cash and investments of $1,421.9, down from $1,494.0 at March 31, 2018.
- Nine-month operating cash flow was $683.1, down $268.0 year over year. Management attributed the decline mainly to less favorable working-capital movements, including inventory growth and tax-related changes. Investing cash outflow was $810.1, including $149.2 of capital expenditures and net investment purchases; financing cash outflow was $481.1.
- Inventory increased to $914.5 from $761.3 at fiscal year-end. Cash, cash equivalents, and restricted cash totaled $723.5 at December 29, compared with $1,355.5 at March 31; the company also held substantial short-term investments.
- The company issued $400 of 3.75% senior notes due 2025 and repaid $300 of 2.125% notes at maturity. It had no borrowings under its commercial paper program, global credit facility, or Pan-Asia facilities; $490 of combined Global Credit Facility/commercial-paper availability remained after $10 of letters of credit. No credit-facility default was reported.
- Nine-month share repurchases and shares withheld for taxes totaled $431.9; dividends paid were $141.6. The quarterly dividend increased from $0.50 to $0.625 per share. Approximately $700 remained available under the repurchase authorization at December 29.
Outlook, management commentary, and risks
- No revenue or earnings forecast is stated in the supplied filing text. Management expected fiscal 2019 capital expenditures of approximately $250, reduced from its previous estimate of $275 as some investment shifts to fiscal 2020. It planned continued investment in marketing, digital, stores, and productivity-enhancing infrastructure.
- The fiscal 2019 restructuring plan is expected to generate annualized gross savings of approximately $60–$80, with total charges estimated at $100–$150 ($70–$110 cash-related). Charges recorded through December 29 were $59.6.
- The older Way Forward Plan had $683.9 of cumulative charges recorded and approximately $105 of estimated charges remaining. A lease assignment was being pursued; if unsuccessful before fiscal year-end, adoption of the new lease standard could instead trigger an impairment charge against opening fiscal 2020 retained earnings that management said could be material.
- Management cited U.S.–China tariffs and broader trade uncertainty, Brexit, currency movements, promotional retail conditions, changing consumer preferences and channels, inventory management, wholesale-customer financial health, cybersecurity, and execution of restructuring and digital initiatives as risks. The company said there were no material changes to previously disclosed risk factors.
- The customs-duty dispute was not further appealed; management said the revised method would result in an incremental annual duty charge that was not material. Other pending legal matters were not expected by management to have a material adverse effect, though outcomes remain uncertain.
- The company adopted new revenue-recognition guidance in fiscal 2019 without a material overall financial-statement impact; it reduced opening retained earnings by $5.2. The company anticipated that the fiscal 2020 lease-standard adoption would significantly increase recognized assets and liabilities, while lease expense was not expected to change significantly.
Key facts for investors to verify
- Underlying earnings and tax effects: distinguish operating improvement from prior-year tax-reform charges and current-period tax measurement adjustments.
- Cash conversion and inventory: track operating cash flow, inventory levels, and working-capital trends against revenue growth.
- Restructuring execution: confirm realized savings, remaining cash charges, and progress on store, office, and distribution actions.
- Lease exposure: monitor the unresolved lease assignment and any potential material impairment upon lease-standard adoption.
- Growth quality and risk: assess digital and regional comparable-sales performance, promotional conditions, tariff exposure, and the sustainability of repurchases and dividends.