Ralph Lauren Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, the 13 weeks ended June 28, 2014. Comparative period: 13 weeks ended June 29, 2013. Amounts are in millions of dollars except per-share data and percentages.
Business context and financial results
Ralph Lauren designs, markets, and distributes premium lifestyle products through Wholesale, Retail, and Licensing businesses. Net revenues were $1,708, up 3.4% reported and 2.4% excluding foreign currency effects. Retail growth and favorable currency effects more than offset lower Wholesale revenue.
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net revenues | $1,708 | $1,653 | +$55; 3.4% |
| Gross profit / margin | $1,043 / 61.0% | $1,004 / 60.7% | +$39; +30 bps |
| SG&A / share of revenue | $789 / 46.1% | $735 / 44.5% | +$54; +160 bps |
| Operating income / margin | $244 / 14.3% | $276 / 16.7% | -$32; -240 bps |
| Net income | $162 | $181 | -$19; 10.2% |
| Diluted EPS | $1.80 | $1.94 | -$0.14; 7.2% |
| Operating cash flow | $415 | $295 | +$120 |
Gross margin improved mainly from channel and geographic mix, partly offset by foreign-exchange effects on hedges. SG&A increased with retail growth, store and infrastructure investment, acquisitions, and currency effects. Operating income was also lower because the prior-year quarter included a $16 Chaps acquisition gain. The effective tax rate was 31.1%, versus 31.7%; the current-period rate benefited partly from foreign legal-entity restructuring, offset in part by additional tax reserves.
Segments and material changes
| Segment | Revenue | Operating income | Year-over-year change |
|---|---|---|---|
| Wholesale | $708 | $180 | Revenue -3.7%; operating income -$27 |
| Retail | $960 | $168 | Revenue +9.2%; operating income +$3 |
| Licensing | $40 | $36 | Revenue +3.8%; operating income +$1 |
Wholesale softness primarily reflected lower domestic menswear sales, shipment timing, and comparison with the prior-year Chaps transition. Retail growth included new stores and concessions, the Australia and New Zealand business acquired in July 2013, and e-commerce growth; comparable-store sales rose approximately 3% reported and 1% constant currency. Retail and Wholesale operating margins declined, while Licensing margin was 90.2% in both periods.
Other notable balance-sheet movements from March 29, 2014: cash was $711 (down $86), short-term investments were $658 (up $170), receivables were $357 (down $231), and inventories were $1,180 (up $160). Equity declined to $3,972, mainly due to share repurchases and dividends.
Cash flow, debt, and liquidity
Operating cash flow was $415, supported by working-capital movements, including lower receivables and higher payables and accrued liabilities; inventory growth partly offset these sources. Investing activities used $264, including $85 of capital expenditures and net investment purchases of $175. Financing activities used $238, including $211 for repurchases and tax-withholding shares and $40 of dividends. Cash and cash equivalents declined by $86 to $711.
Cash, short-term and non-current investments, less debt, totaled $1,071, compared with $987 at fiscal year-end. Long-term debt was $300: senior notes bearing 2.125% interest and due September 2018. There were no borrowings under the $500 revolving credit facility, the commercial paper program (authorized up to $300), or the Pan-Asia facilities. The company reported no credit-facility default. The quarterly dividend was $0.45 per share; approximately $400 remained available under the share repurchase authorization.
Outlook, risks, and unusual items
Management gave no specific numerical revenue or earnings guidance in the supplied filing text. It described weak and inconsistent retail traffic, promotional pressure, adverse weather, geopolitical uncertainty affecting consumer travel, and constrained discretionary spending. Management remained optimistic about longer-term growth but expected business investments to outpace sales growth in the near term and anticipated some operating-expense deleverage for the rest of fiscal 2015. A continued or worsening difficult environment could pressure sales, inventories, and operating margins.
Q1 included $4 of restructuring charges, mainly severance costs, expected to be paid by fiscal 2016. The prior-year quarter included the $16 Chaps acquisition gain; the Australia and New Zealand business has been consolidated since July 2013. The company entered a roughly 15-year lease for a North Carolina distribution facility, with an approximately $56 total commitment and expected possession in fiscal Q2 2016.
Risk areas cited include consumer demand and inventory forecasting, competition and promotional activity, foreign exchange, international and regulatory exposure, customer and licensing-partner relationships, brand protection, cybersecurity, and execution of growth and systems initiatives. The company said there were no material changes to previously disclosed risk factors. It also reported that disclosure controls were effective; SAP implementation continues in phases and requires ongoing monitoring of internal controls.
The Wathne Imports dispute remains pending, with no trial date scheduled. The company intends to contest the remaining claims and said it does not expect a material adverse financial effect. Management noted that litigation assessments could change as facts or proceedings develop.
Important facts for investors to verify
- Whether Retail growth and e-commerce momentum continue, and whether Wholesale shipment timing and demand recover.
- Whether higher inventories can be sold without increased discounting, and how promotional conditions affect gross and operating margins.
- Whether operating cash flow remains strong after the quarter’s favorable receivables and payables movements.
- How store, infrastructure, acquisition-related, and distribution-facility investments affect expenses, capital spending, and returns.
- Developments in tax reserves, the Wathne litigation, foreign-exchange exposure, and phased SAP implementation.