Ralph Lauren Corporation — Q3 Fiscal 2020 Form 10-Q
Reporting period: Third quarter ended December 28, 2019 (13 weeks); comparative quarter ended December 29, 2018. Nine-month results cover the periods ended on those dates. Amounts are in U.S. dollars.
Business context
Ralph Lauren designs, markets and distributes premium lifestyle products through retail and digital commerce, wholesale, and licensing. Its reportable segments are North America, Europe and Asia. Fiscal 2020 ends March 28, 2020.
Financial results
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Revenue | $1,750.7m | $1,725.8m | $4,885.7m | $4,807.3m |
| Gross margin | 62.2% | 61.4% | 62.6% | 62.1% |
| Operating income | $224.4m | $193.8m | $600.8m | $533.9m |
| Operating margin | 12.8% | 11.2% | 12.3% | 11.1% |
| Net income | $334.1m | $120.0m | $633.3m | $399.3m |
| Diluted EPS | $4.41 | $1.48 | $8.13 | $4.85 |
- Revenue increased 1.4% in Q3 and 1.6% year to date as reported; growth was 2.0% and 2.9%, respectively, at constant currency. Europe and Asia were the main growth drivers. Digital comparable sales rose 8% globally in Q3; total comparable sales rose 2%.
- Gross margin improved 80 basis points in Q3 and 50 basis points year to date, mainly from improved pricing, fewer promotions and favorable mix. Year-to-date SG&A as a share of revenue decreased 30 basis points to 48.8%; in Q3 it increased 50 basis points to 48.2%, reflecting marketing investment and mix.
- Net income growth substantially reflects tax items, not just operating improvement. Q3 included a one-time $134.1m Swiss tax-reform benefit ($1.77 per diluted share); the nine-month benefit was $1.72 per diluted share. Prior-year results included TCJA-related tax charges of $32.3m in Q3 and $27.6m year to date. Current-period restructuring, impairment and other charges totaled $21.4m in Q3 and $73.8m year to date.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $748.0m, versus $683.1m. Capital expenditures were $216.0m, compared with $149.2m.
- Cash and cash equivalents were $1,079.9m and short-term investments $828.5m at December 28, 2019. Total debt was $694.4m; management’s net cash and investments measure was $1,214.0m, down from $1,343.3m at fiscal year-end.
- Financing cash outflows included $542.1m for share repurchases and related tax withholding and $153.2m for dividends. The quarterly dividend increased from $0.625 to $0.6875 per share. Approximately $732m remained available under the repurchase authorization.
- The $300m 2.625% senior notes mature August 18, 2020; $396.3m of 3.750% notes mature in 2025. No commercial paper or revolving-credit borrowings were outstanding; $491m remained available under the combined $500m facility/program, after letters of credit. The company reported compliance with its credit-facility covenants and no event of default.
- Adoption of new lease accounting brought $1,925.0m of operating lease liabilities and $201.4m of finance lease liabilities onto the balance sheet. The company reported total lease liabilities of $2,126.4m.
Changes, outlook and risks
- North America revenue was nearly flat in Q3: retail growth was offset by weaker wholesale demand and department-store traffic. Europe and Asia revenue grew; Hong Kong protests weighed on Asia comparable sales and traffic.
- The Fiscal 2019 restructuring plan was largely completed, with cumulative charges of about $129m against an expected total of $135m–$150m. Management expects gross annualized savings of approximately $60m–$80m.
- Management planned continued investment in marketing, digital capabilities, store openings and renovations, and productivity infrastructure during the rest of FY2020. It stated existing cash, credit availability and capital-market access should meet foreseeable operating and investment needs; the filing provides no specific full-year revenue or earnings guidance.
- Management said tariffs enacted to date were not expected to materially affect consolidated financial statements, citing sourcing and other mitigation actions. Risks discussed include Hong Kong unrest, trade tensions, Brexit uncertainty, currency movements, promotional retail conditions, wholesale customer difficulties, and the emerging coronavirus outbreak. Management reported no material changes to previously disclosed risk factors.
- Lease-standard adoption reduced opening retained earnings by $164.5m in cumulative adjustments, including impairment of certain lease right-of-use assets. The company also donated $20.8m of proceeds from selling its corporate jet to the Polo Ralph Lauren Foundation.
Investor verification priorities
- Separate underlying operating performance from the $134.1m Swiss tax benefit and prior-year TCJA charges when assessing earnings and EPS growth.
- Monitor North America wholesale demand, promotional levels and inventory; inventory was $904.6m, up from $817.8m at March 30, 2019.
- Track Hong Kong and broader Asia trading conditions, along with tariff, Brexit, currency and coronavirus impacts.
- Assess cash deployment, including buybacks, dividends and elevated capital expenditures, against the 2020 note maturity and substantial lease obligations.
- Verify delivery of the restructuring plan’s stated savings and whether continuing investment supports growth without eroding margins.