Ralph Lauren Corporation — Form 10-Q Summary
Business and reporting period. Ralph Lauren designs, markets, and distributes premium lifestyle products through Wholesale, Retail, and Licensing segments. This filing covers the 13-week third quarter of fiscal 2014 ended December 28, 2013, and the nine months then ended; comparisons are with the corresponding fiscal 2013 periods. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Net revenues | $2,015 | $1,846 | $5,583 | $5,301 |
| Gross profit / margin | $1,172 / 58.2% | $1,094 / 59.3% | $3,260 / 58.4% | $3,181 / 60.0% |
| Operating income / margin | $334 / 16.6% | $305 / 16.5% | $905 / 16.2% | $945 / 17.8% |
| Net income | $237 | $216 | $623 | $623 |
| Diluted EPS | $2.57 | $2.31 | $6.74 | $6.63 |
| Operating cash flow | Not separately provided | Not separately provided | $760 | $897 |
Q3 revenue rose 9.1% (9.9% excluding currency); operating income rose 9.7% and net income rose 9.6%. For the nine months, revenue rose 5.3% (6.2% excluding currency), but operating income fell 4.2% and net income was unchanged. Diluted EPS increased in both periods, partly reflecting lower average diluted share counts following repurchases.
Segment trends. Q3 revenue was $840 Wholesale (+14.5%), $1,130 Retail (+6.4%), and $45 Licensing (-11.9%). Nine-month revenue was $2,503 Wholesale (+6.8%), $2,953 Retail (+4.7%), and $127 Licensing (-8.7%). Nine-month segment operating income declined to $524 in Wholesale and $518 in Retail, from $532 and $537, respectively; Licensing operating income was $98 versus $101. Retail growth included new stores and strong e-commerce, while comparable sales excluding e-commerce were flat to down slightly on a constant-currency basis in Q3. E-commerce comparable sales increased about 18% in Q3 and 17% for the nine months.
Financial position, cash flow, and capital allocation
- At December 28, 2013, cash and cash equivalents were $882; short-term investments were $533 and non-current investments $5. Debt was $300, leaving reported net cash and investments of $1,120, versus $1,113 at fiscal year-end.
- Nine-month operating cash flow was $760, down $137 year over year, attributed primarily to working-capital changes and lower income before non-cash items. Inventory rose to $1,117 from $896 at March 30, 2013.
- Investing cash outflow was $440, including $295 of capital expenditures and net investment purchases. Financing cash outflow was $414, including $408 for share repurchases and $109 of dividends. Cash declined $92 to $882.
- The company issued $300 of 2.125% senior notes due 2018 and repaid its 4.5% euro notes at maturity. There were no borrowings under the $500 revolving facility or Pan-Asia facilities; $8 of letters of credit was outstanding under the global facility. The global facility has a 3.75 maximum leverage covenant; no default was reported.
- The quarterly dividend increased from $0.40 to $0.45 per share. On February 4, 2014, after quarter-end, the board authorized up to an additional $500 of Class A share repurchases.
Material changes, outlook, and risks
- Gross margin declined year over year in both reporting periods. Management cited foreign exchange, product and geographic mix, the inclusion of the acquired Chaps business, and lower concession-shop profitability. Nine-month SG&A as a share of revenue also edged up, reflecting business growth, acquisitions, retail expansion, and systems investment.
- Results include a $16 gain on the Chaps acquisition in the nine-month period and $14 of Q3 restructuring and other charges, including $10 of accelerated stock-based compensation tied to new executive employment agreements. The company also acquired the Chaps menswear business and Australia/New Zealand licensed operations, bringing those businesses in-house; licensing revenue consequently declined. Rugby retail operations were wound down.
- Management described weak and inconsistent store traffic, promotional competition, and uncertain consumer confidence. It warned that continued or worsening macroeconomic weakness could pressure sales and margins. Foreign exchange, demand forecasting and inventory, competition, international operations, key personnel, brand reputation, and system implementation are among the cited risks. The filing reports no material changes to previously disclosed risk factors.
- No specific numerical fiscal 2014 earnings or revenue guidance is provided in the supplied filing text. Management said existing liquidity and capital-market access should meet foreseeable operating, investment, and debt-service needs. It cautioned that nine-month results may not indicate full-year performance because of seasonality.
- A $235 commitment relates to a new Fifth Avenue flagship-store lease; taking possession resulted in a $230 asset and capital-lease obligation. The long-running Wathne Imports case remained unresolved, with no trial date scheduled; management did not expect a material adverse financial effect. Disclosure controls were deemed effective, while the company continued a multiyear global systems rollout and evaluation of controls at acquired businesses.
Important facts for investors to verify
- Whether revenue growth and e-commerce performance can offset weaker comparable sales excluding e-commerce, currency effects, and softness in parts of Wholesale.
- Whether gross-margin pressure and nine-month operating-income declines persist, and how much reported earnings benefited from the Chaps gain and tax-related benefits.
- Inventory levels and operating cash flow conversion, given the year-over-year cash-flow decline and inventory increase.
- The cash and investment position, capital spending, new lease obligations, dividends, and pace of repurchases relative to ongoing business investment.
- Progress and control effectiveness during the global systems implementation and integration of acquired operations; developments in the Wathne litigation and uncertain tax positions.