Business context and reporting period
Ralph Lauren Corporation designs, markets and distributes premium lifestyle products through Wholesale, Retail and Licensing segments. This unaudited Form 10-Q covers the quarter and nine months ended December 29, 2012 (Fiscal 2013); the comparable quarter ended December 31, 2011. Each quarter was 13 weeks.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Net revenues | $1,846.1 million, up 2.2% | $5,301.5 million, up 1.2% |
| Gross profit / margin | $1,094.1 million / 59.3%, versus 57.1% | $3,181.5 million / 60.0%, versus 58.7% |
| Operating income / margin | $304.4 million / 16.5%, versus $270.1 million / 15.0% | $944.7 million / 17.8%, versus $903.0 million / 17.2% |
| Net income | $215.7 million, up 27.6% | $622.8 million, up 6.2% |
| Diluted EPS | $2.31, versus $1.78 | $6.63, versus $6.14 |
| Operating cash flow | Not presented separately | $897.3 million, versus $784.2 million |
| Capital expenditures | Not presented separately | $195.0 million, versus $160.1 million |
Cash flow and liquidity: Nine-month operating cash flow less capital expenditures was $702.3 million (a simple cash-flow measure, not company-reported free cash flow). Cash and cash equivalents were $999.1 million at December 29, 2012; short-term and non-current investments totaled $402.2 million. Net cash and investments, after $274.1 million of debt, were $1,127.2 million, up $114.4 million from March 31, 2012. The $500 million revolving credit facility had no borrowings outstanding; $13.9 million of letters of credit were outstanding. No borrowings were outstanding under the Pan-Asia facilities.
Debt and other balance-sheet items: €209.2 million of 4.5% notes, carried at $274.1 million, mature October 4, 2013 and were classified as current. The company reported no default under its global facility. Inventories were $981.1 million, up from $841.6 million at fiscal year-end. Equity was $3,769.7 million.
Material changes versus the prior comparable period
- Quarterly revenue growth was led by Retail (+5.6%); Wholesale revenue declined 2.1%, while Licensing rose 1.2%. For the nine months, Retail rose 5.2%, Wholesale fell 3.1%, and Licensing increased 1.1%.
- Management attributed improved gross margins mainly to lower sourcing costs and favorable wholesale product mix. Higher SG&A reflected compensation, marketing, retail growth and business initiatives; nine-month SG&A rose 2.7% and increased to 41.5% of revenue from 40.9%.
- Nine-month diluted EPS growth also reflected fewer weighted-average shares following repurchases. The company repurchased 3.0 million shares for $450.0 million and paid $127.8 million in dividends; the quarterly dividend had increased from $0.20 to $0.40 per share.
- Quarterly reported net income benefited from a lower effective tax rate: 26.8% versus 35.5%, including a $15.4 million tax benefit from settlement of a tax examination. The nine-month effective rate was 32.4%, versus 33.7%.
Outlook, management commentary, risks and unusual items
- No quantified revenue, earnings or margin guidance is provided. Management said results and cash flows for the interim periods are not necessarily indicative of full-year results, citing seasonality.
- Management described ongoing softness in European wholesale, inconsistent retail traffic and a highly promotional global retail environment. Certain Japan and Korea retail operations continued to show declining comparable-store sales. A weak or worsening global economy could pressure sales and operating margins.
- The company approved discontinuation of the Rugby brand: all 14 freestanding stores and Rugby.com were expected to close by the end of Fiscal 2013, with approximately 190 workforce reductions. It recorded $12.9 million of third-quarter pretax impairment and restructuring charges related to the plan and expected approximately $10 million of additional restructuring costs in the fourth quarter, primarily lease termination and store-closing costs.
- Other notable items included $3.4 million of nine-month restructuring charges and a $12.4 million impairment charge. The company had suspended its Argentina operations; management said the suspension did not materially affect consolidated or segment results. The majority of American Living products were discontinued, also without material reported impact.
- Risks include global economic and consumer-demand weakness, currency and input-cost movements, execution of growth and systems initiatives, customer and licensing relationships, and international operating risks. The company said previously disclosed risk factors had not materially changed. Its global financial-system implementation is continuing in phases and may change internal processes and controls; management said disclosure controls were effective at the reasonable-assurance level.
- In the Wathne Imports litigation, an appellate court reversed a lower-court order excluding the plaintiff’s proposed damages report; no trial date had been set. Management said it would contest the case and did not expect a material adverse effect. Other pending legal matters were also not expected to have a material adverse effect, though outcomes remain uncertain.
Important facts for investors to verify
- Whether retail growth and improved gross margins persist amid promotional activity and weakness in European wholesale and some Asian retail markets.
- Actual Rugby closure costs and timing compared with the expected $10 million of fourth-quarter restructuring costs and completion by fiscal year-end.
- Repayment or refinancing of the $274.1 million notes due October 2013 and continued compliance with credit-facility covenants.
- The sustainability of reported earnings growth given the tax-examination benefit, withholding-tax interest reserve, impairment and restructuring charges, and share repurchases.
- Developments in the Wathne litigation and any material changes to tax, currency, investment or other contingencies.