Business context and reporting period
Polo Ralph Lauren Corporation designs, markets and distributes premium apparel, accessories, fragrances and home products through Wholesale, Retail and Licensing businesses. This unaudited Form 10-Q covers fiscal Q1 2011, the 13 weeks ended July 3, 2010; the comparable quarter ended June 27, 2009, also 13 weeks. Results are seasonal and this quarter is not necessarily indicative of the full year.
Key financial results
Amounts are in millions, except per-share data and percentages.
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net revenues | $1,153.3 | $1,023.7 | +12.7% |
| Gross profit / margin | $712.2 / 61.8% | $601.2 / 58.7% | +310 bps margin |
| Operating income / margin | $174.2 / 15.1% | $116.7 / 11.4% | +49.3%; +370 bps margin |
| Net income | $120.8 | $76.8 | +57.3% |
| Diluted EPS | $1.21 | $0.76 | +59.2% |
| Operating cash flow | $171.4 | $292.3 | Down $120.9 |
SG&A was $531.9 million, up 11.1%, but declined to 46.1% of revenue from 46.8%. The effective tax rate fell to 28.7% from 32.7%. Dividends declared were $0.10 per share versus $0.05.
Financial position and material changes
- At July 3, cash and cash equivalents were $345.8 million; short-term investments were $644.9 million and non-current investments were $71.9 million. Net cash and investments, defined by the company as cash plus investments less debt, totaled $800.9 million, down from $940.6 million at fiscal year-end.
- Total assets were $4,499.0 million and total liabilities $1,533.2 million. Equity was $2,965.8 million, down from $3,116.6 million, primarily reflecting share repurchases.
- Long-term debt was $261.7 million, comprising €209.2 million of 4.5% notes due October 2013. The $450 million unsecured revolver had no borrowings; $13.1 million of letters of credit were outstanding. The company reported no credit-facility default and compliance with its covenants.
- Cash used in investing was $134.9 million, including $38.5 million of capital expenditures, versus $17.8 million in the prior-year quarter. Cash used in financing was $251.0 million, largely reflecting $247.0 million in repurchases and tax-withholding share surrenders. Cash declined by $217.3 million during the quarter.
- Inventory rose to $629.6 million from $504.0 million at April 3, 2010. Operating cash flow was lower year over year, with management citing working-capital timing, inventory receipts and higher cash tax payments.
Segment performance and drivers
Wholesale revenue rose 10.9% to $523.0 million and operating income increased to $107.6 million. Retail revenue rose 16.0% to $592.5 million and operating income increased to $103.7 million. Licensing revenue declined 8.3% to $37.8 million and operating income fell to $23.8 million. Retail comparable sales increased 7% as reported (8% excluding currency): full-price Ralph Lauren stores declined 2%, Club Monaco rose 25%, factory stores rose 8%, and RalphLauren.com rose 15%.
Management attributed stronger revenue and margins to higher Wholesale sales, improved comparable Retail sales, store expansion and the acquired Asia-Pacific business, as well as improved inventory management and less promotion. Foreign exchange was a partial revenue headwind. The Asia-Pacific licensed apparel operations were acquired in December 2009 and consolidated beginning January 1, 2010, affecting comparability; concessions-based sales were also reclassified from Wholesale to Retail, with no effect on total revenue or operating income.
Outlook, risks and unusual items
- No specific full-year revenue, earnings or margin guidance is provided. Management expects macroeconomic uncertainty and constrained consumer spending to continue affecting sales and margins. It expects raw-material and labor inflation, and labor shortages in some manufacturing regions, to pressure product costs and gross margins beginning in the second half of fiscal 2011.
- Management said existing cash sources should support foreseeable operating, capital and debt-service needs, including planned expansion and potential acquisitions. It intends to continue quarterly dividends, subject to board discretion and business conditions.
- After quarter-end, the company agreed to take direct control of its South Korea licensed apparel and accessories businesses effective January 1, 2011. Expected consideration is approximately $25 million plus an estimated $22 million for inventory and certain other net assets; closing conditions apply.
- The company reversed $1.5 million of a California class-action legal reserve in Q1 based on settlement coupon redemption experience. A separate California labor class settlement for $4 million had preliminary approval, with final approval hearing scheduled for August 20, 2010. The Wathne litigation continued; management did not expect a material adverse effect on liquidity or financial position.
- Unrecognized tax benefits, including interest and penalties, were $141.7 million, up from $126.0 million at fiscal year-end. Management did not anticipate a significant change in gross unrecognized tax benefits over the next 12 months, though outcomes and timing remain uncertain.
- On August 5, 2010, the board authorized an additional $250 million in share repurchases. The filing also notes shareholder approval of a new stock incentive plan after quarter-end.
Important facts for investors to verify
- How much of revenue and margin growth reflects underlying demand versus the Asia-Pacific acquisition, store expansion, currency and lower promotional activity.
- Whether inventory growth converts to sales and cash without increased markdowns, particularly given the company’s forecast cost pressures.
- Cash generation and liquidity after substantial buybacks, capital spending, dividends and planned acquisitions; review the $800.9 million net cash-and-investments measure and its components.
- Progress and total costs of the South Korea transition, and the operating performance of the acquired Asia-Pacific business.
- Developments in tax examinations, the California labor settlement, and remaining litigation exposure.