Business context and reporting period
Ralph Lauren Corporation (PRLC) designs, markets and distributes premium lifestyle products through Wholesale, Retail and Licensing businesses. This unaudited Form 10-Q covers the 13-week second quarter and six months of Fiscal 2011, ended October 2, 2010; comparatives are the corresponding periods ended September 26, 2009. Fiscal 2011 ends April 2, 2011.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net revenues | $1,532.1 million, up 11.5% | $2,685.4 million, up 12.0% |
| Gross profit / margin | $887.9 million / 58.0%, versus 57.1% | $1,600.1 million / 59.6%, versus 57.8% |
| Operating income / margin | $307.4 million / 20.1%, versus $245.9 million / 17.9% | $481.6 million / 17.9%, versus $362.6 million / 15.1% |
| Net income | $205.2 million, up 15.6% | $326.0 million, up 28.2% |
| Diluted EPS | $2.09, versus $1.75 | $3.30, versus $2.51 |
| Effective tax rate | 32.9%, versus 26.7% | 31.4%, versus 28.6% |
Quarterly revenue growth reflected higher Retail and Wholesale sales, including the acquired Asia-Pacific business, partly offset by unfavorable currency effects. Retail revenue rose 17.1% and Wholesale 8.2%; Licensing declined 1.3%. Comparable-store sales increased 8% in the quarter and first half. Improved full-price sell-throughs, reduced promotions and better inventory management supported gross-margin expansion. SG&A rose 9.0% in the quarter and 10.0% in the first half, but declined as a share of revenue to 37.4% and 41.1%, respectively.
Cash flow, financial position and debt
Six-month operating cash flow was $224.0 million, down from $320.5 million, mainly reflecting inventory investment, weaker receivables cash collections and higher tax payments. Investing activities used $18.4 million, including $93.8 million of capital expenditures; financing activities used $342.6 million, including $347.7 million of share repurchases and tax-withholding share surrenders. Cash and cash equivalents declined to $435.9 million from $563.1 million at fiscal year-end.
At October 2, 2010, short-term investments were $500.4 million, non-current investments $61.1 million and long-term debt $285.2 million. Management reported net cash and investments of $712.2 million, down from $940.6 million at April 3, primarily due to repurchases and investment in the business. The company had no revolving-credit borrowings under its $450 million facility, which runs through November 2011, and $14.5 million of outstanding letters of credit. Euro-denominated 4.5% notes had principal of €209.2 million and mature October 2013. No credit-facility default was reported.
Outlook, management commentary and risks
Management gave no specific numeric revenue or earnings guidance in the provided filing text. It expects constrained consumer spending and macroeconomic uncertainty to continue affecting sales and margins. Raw-material and labor-cost inflation, as well as labor shortages in certain manufacturing regions, are expected to pressure product costs and gross margins in the second half of Fiscal 2011 and into Fiscal 2012. Results are seasonal and interim performance is not necessarily indicative of the full year.
PRLC agreed to assume direct control of its South Korea licensed apparel and accessories business effective January 1, 2011, subject to customary closing conditions, for approximately $25 million plus an estimated $22 million for inventory and certain net assets. Management said existing liquidity should support operating, capital and debt-service needs, including planned expansion and potential acquisitions. The board expanded the share-repurchase authorization; approximately $469 million remained available at quarter-end. Future dividends and repurchases remain subject to board discretion and business conditions.
Other notable items: the company recorded $1.5 million of net restructuring charges in the first half and reversed $1.9 million of California class-action legal reserves. A $4.1 million prior-year gain from partial debt extinguishment affected comparison-period results. Unrecognized tax benefits, including interest and penalties, totaled $151.3 million; management said gross unrecognized tax benefits could potentially decline by up to approximately $6 million over the next 12 months. The company reported that the Wathne litigation remained pending but did not expect a material adverse effect on liquidity or financial position; a separate California labor class action settled for $4 million. The proposed lease-accounting standard could significantly affect future financial statements, but its impact was not yet determinable. Management reported effective disclosure controls and no material change in internal control, apart from ongoing integration-related process and control development for the Asia-Pacific acquisition.
Important facts for investors to verify
- Whether revenue and margin gains persist after the favorable effects of lower promotions, improved inventory management and the Asia-Pacific acquisition.
- Inventory growth and working-capital demands, given lower operating cash flow and the substantial seasonal build.
- Expected cost and margin effects from raw-material and labor inflation, labor shortages, currency movements and constrained consumer spending.
- Execution, closing conditions, integration costs and returns for the South Korea transaction and other expansion initiatives.
- Cash allocation: share repurchases, remaining authorization, dividends, capital expenditures and liquidity under the credit facility.
- Tax-position developments, pending litigation, and any eventual effect of lease-accounting changes.