Ralph Lauren Corporation — Form 10-Q Summary
Business and period: Global premium lifestyle products company with wholesale, retail, e-commerce, and licensing operations; reportable segments are North America, Europe, and Asia. This filing covers fiscal Q3 and the nine months ended December 30, 2017 (13-week quarter), compared with periods ended December 31, 2016.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net revenue | $1,641.8m | $1,714.6m | $4,653.1m | $5,087.4m |
| Gross margin | 60.7% | 57.3% | 61.1% | 55.7% |
| Operating income | $189.2m | $128.3m | $472.8m | $173.4m |
| Net income (loss) | $(81.8)m | $81.3m | $121.5m | $104.7m |
| Diluted EPS | $(1.00) | $0.98 | $1.47 | $1.25 |
- Revenue and segments: Revenue fell 4.2% in Q3 (6.1% constant currency) and 8.5% over nine months (8.9% constant currency). North America was the main weakness: revenue declined 11.4% in Q3 and 14.8% year to date, reflecting lower wholesale shipments, fewer points of distribution, and weaker comparable sales. Q3 Europe revenue rose 8.4% reported but only 0.3% constant currency; Asia rose 6.7% and 6.6%, respectively.
- Margins and operating results: Gross margin improved year over year, helped by less promotion, favorable mix, lower sourcing costs, and substantially lower restructuring-related inventory charges. Operating income also benefited from fewer restructuring, impairment, and other charges: $27.2m in Q3 versus $91.4m, and $104.8m year to date versus $400.0m. SG&A as a share of revenue increased to 47.1% in Q3 and 48.3% year to date, due largely to lower sales and mix-related operating deleverage.
- Tax and earnings: Q3 included provisional one-time Tax Cuts and Jobs Act charges of $231.3m, including a $215.5m transition-tax charge and $15.8m from revaluing deferred taxes. The charges reduced diluted EPS by about $2.80 and drove the 143.9% quarterly effective tax rate and reported net loss. The nine-month effective tax rate was 73.8%. Management expects the law to benefit future results primarily through the lower U.S. federal tax rate, but says estimates remain subject to refinement.
- Cash flow and investment: Nine-month operating cash flow was $951.1m, versus $850.7m. Capital expenditures were $123.0m, down from $225.5m; management expected about $200m for FY2018, revised down from $225m, with some investment shifted to FY2019. Investing cash outflow was $317.8m, including net investment purchases of $190.2m. Dividends paid were $121.7m.
- Liquidity and debt: At December 30, cash and cash equivalents were $1,175.7m and short-term investments were $862.3m. Net cash and investments (including $83.3m of non-current investments and less debt) were $1,532.7m, versus $786.2m at fiscal year-end. Total debt was $588.6m; $298.3m of the 2.125% Senior Notes due September 2018 was classified as current, and $290.3m of 2.625% notes is due in 2020. No commercial paper or credit-facility borrowings were outstanding; the company reported $491m remaining availability under the combined $500m facility/program, after letters of credit.
Material changes, outlook, and risks
- The Way Forward Plan focuses on core brands, better-quality sales, lower inventory, cost reductions, and a more efficient operating model. Management estimated total plan charges of about $770m and cited expected gross annualized savings of $180m–$220m from earlier actions and about $140m from additional actions. It expected about $50m of further charges in Q4 FY2018 and $75m–$85m in FY2019; remaining activity was expected to be largely completed by FY2018-end, with primarily lease-related actions extending into FY2019.
- Management anticipated continued operating expense deleverage in Q4 as sales declines from quality-of-sale initiatives outpaced expense reductions. It was investing in marketing, retail renovations, and consumer-facing initiatives. The filing provides no specific full-year revenue or earnings guidance.
- Comparable store sales fell 5% reported in Q3 overall; e-commerce comparable sales declined 19%. Management attributed pressure chiefly to North America, lower promotional activity, planned shipment reductions, brand discontinuances, and weak department-store traffic. It planned to close 20%–25% of underperforming U.S. department-store points of distribution by FY2018-end.
- Other notable items include the departure of CEO Stefan Larsson effective May 1, 2017, and the appointment of Patrice Louvet in July 2017. The company was transitioning its e-commerce platform to Salesforce Commerce Cloud and had completed migration of European operations to SAP; management said controls remained effective while it monitored changes from the system implementation.
- Key risks include execution of restructuring and growth initiatives, promotional competition and consumer demand, wholesale customer health, inventory and margins, foreign-exchange movements, international trade and tax changes, cybersecurity and information-system implementation, and lease obligations. The company was contesting a customs assessment of $34.1m that it had paid; a second re-audit was ordered, and a successful appeal could result in a refund with interest. Management said the outcome remained uncertain. It also reported no material adverse effect expected from other pending legal matters based on its current assessment.
Important facts for investors to verify
- How much revenue and comparable-sales weakness persists, especially in North America and e-commerce, and whether quality-of-sale initiatives support sustainable growth.
- Whether gross-margin gains continue after accounting for prior-year inventory charges, foreign exchange, promotions, and mix; and whether cost savings offset operating deleverage.
- The final accounting and cash-payment schedule for the provisional $231.3m tax-reform charge and the transition-tax obligation.
- Progress and remaining cash costs of the Way Forward Plan, including expected savings, lease-related charges, and the revised FY2018 capital-spending outlook.
- Refinancing or repayment plans for the $298.3m notes due in September 2018, and the outcome of the customs appeal.