Ralph Lauren Corporation — Q1 Fiscal 2018 10-Q
Reporting period: First quarter ended July 1, 2017, a 13-week period; comparison is with the 13 weeks ended July 2, 2016. The company designs, markets, and distributes premium lifestyle products through wholesale, retail, and licensing channels, across North America, Europe, and Asia. All amounts are in U.S. dollars.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net revenue | $1,347.1 million | $1,552.2 million |
| Gross profit / margin | $851.2 million / 63.2% | $894.6 million / 57.6% |
| SG&A / revenue | $708.4 million / 52.6% | $814.7 million / 52.5% |
| Operating income (loss) / margin | $90.3 million / 6.7% | $(31.2) million / (2.0)% |
| Net income (loss) | $59.5 million | $(22.3) million |
| Diluted EPS | $0.72 | $(0.27) |
| Operating cash flow | $334.2 million | $242.9 million |
Revenue fell 13.2% reported and 11.9% in constant currency, including $20.5 million of unfavorable currency effects. Comparable store sales declined 7% reported (6% constant currency); e-commerce comparable sales fell 16%. Gross margin improved 560 basis points, primarily reflecting substantially lower restructuring-related inventory charges, less promotion, favorable mix, and lower sourcing costs, partly offset by currency. SG&A declined in dollars but increased 10 basis points as a share of sales, due to sales deleverage and mix, largely offset by cost savings.
Revenue by segment: North America $709.7 million, down 17.1%; Europe $323.5 million, down 14.3% reported and 10.2% constant currency; Asia $209.1 million, down 1.0% reported but up 0.5% constant currency. The sales decline was concentrated in North America and Europe, reflecting lower demand, selected brand discontinuances, reduced shipments and promotional activity; Europe also had shipment-timing effects.
Net income improved by $81.8 million year over year, primarily on a $121.5 million operating-income improvement, partly offset by a $38.2 million higher income-tax provision. Restructuring, impairment, and other charges totaled $47.2 million versus $159.1 million a year earlier, reducing after-tax income by $31.6 million ($0.39 per diluted share) versus $111.8 million ($1.33 per diluted share). Accordingly, the reported earnings improvement includes a substantial reduction in these charges.
Cash, debt, and liquidity
- Cash and cash equivalents were $830.4 million; short-term investments were $740.5 million and non-current investments were $80.1 million. Net cash and investments, after $590.4 million of debt, were $1.061 billion, up $274.4 million from fiscal year-end.
- Current assets were $3.087 billion and current liabilities $1.217 billion. Inventory was $859.9 million, up from $791.5 million at April 1, 2017.
- Operating cash flow was $334.2 million. Investing used $128.5 million, including $41.9 million of capital expenditures and net investment purchases; financing used $61.0 million, including $40.5 million of dividends. Cash, cash equivalents, and restricted cash rose $164.6 million to $876.4 million.
- Long-term debt comprised $300 million principal of 2.125% notes due September 2018 and $300 million principal of 2.625% notes due August 2020; carrying value was $590.4 million. There were no commercial-paper or credit-facility borrowings. The $500 million Global Credit Facility had $490 million remaining availability after $10.2 million of letters of credit; no covenant default was reported.
- Quarterly dividend declared was $0.50 per share. Management said it did not expect share repurchases under the program during FY2018; approximately $100 million remained authorized.
Outlook, management commentary, and material items
- The Way Forward Plan focuses on core brands, product and customer experience, improved sourcing and supply-chain lead times, disciplined distribution, and a leaner cost structure. Management expects the earlier actions to generate $180–$220 million in gross annualized savings, with additional actions expected to generate about $140 million. These are estimates, not guaranteed results.
- Additional actions—including transitioning the e-commerce platform to Salesforce Commerce Cloud, closing the Polo store at 711 Fifth Avenue, and further organizational streamlining—were expected to be substantially completed by the end of FY2018. Management expects continued operating-expense deleverage during the remainder of FY2018 as sales initiatives affect revenue, while it continues strategic investments.
- Estimated total Way Forward Plan charges are approximately $770 million: about $450 million cash-related and $320 million non-cash. The filing reports cumulative charges differently in different contexts: MD&A cites $603.4 million incurred since inception, while the note table reports $758.6 million including inventory-related charges. The filing separately identifies a $155.2 million FY2017 non-cash inventory-destruction charge; investors should verify the scope of each cumulative total.
- Stefan Larsson departed as CEO effective May 1, 2017; Patrice Louvet became CEO in July. The company recorded cumulative departure-related charges of $17.0 million and said it expected no further such charges.
- Management expects sufficient liquidity for foreseeable operating, capital, and debt-service needs, but cautions that quarterly results are seasonal and not necessarily indicative of full-year results. No specific revenue or earnings guidance is provided in this filing.
- Key risks discussed include weak department-store traffic and promotional retail conditions, demand and inventory forecasting, execution of restructuring and e-commerce/IT changes, foreign exchange and trade-policy uncertainty, wholesale-customer distress, and leadership transition. A customs audit assessment of $34.1 million was paid and is being contested; the company says it believes it should prevail, but the outcome is uncertain. It reported no material change to previously disclosed risk factors.
- The company completed migration of its European operations to SAP during the quarter; management said controls remained effective at the reasonable-assurance level and will continue to be monitored as processes evolve.
Most important facts for investors to verify
- Whether sales declines, particularly in North America and Europe and in e-commerce, stabilize as shipment reductions and lower promotion continue.
- How much of gross-margin and earnings improvement persists after the prior-year inventory charges and other restructuring comparisons fade.
- Progress, timing, cash costs, and realized savings from the Way Forward Plan, including reconciliation of the cumulative charge totals.
- Execution and financial impact of the Salesforce e-commerce transition, SAP implementation, store closures, and planned U.S. department-store distribution reductions.
- Resolution and potential further exposure from the customs assessment, and changes in tax reserves and the effective tax rate.
- Liquidity and capital-allocation choices, including the dividend, the stated pause in share repurchases, and the 2018 maturity of the 2.125% notes.