Ralph Lauren Corporation — Q3 FY2021 Form 10-Q
Reporting period: Third quarter ended December 26, 2020 (13 weeks); nine-month year-to-date period ended the same date. Comparatives are the periods ended December 28, 2019. Unless otherwise noted, amounts are U.S. dollars.
Business context and financial performance
Ralph Lauren designs, markets, and distributes premium lifestyle products through retail, wholesale, and licensing channels. Its reportable segments are North America, Europe, and Asia. COVID-19-related closures, capacity limits, reduced traffic and tourism, and weaker discretionary demand continued to disrupt the business; Europe closures also extended into Q4.
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net revenue | $1,432.8m | $1,750.7m | $3,113.8m | $4,885.7m |
| Gross margin | 64.9% | 62.2% | 66.7% | 62.6% |
| SG&A as % of revenue | 52.2% | 48.2% | 60.5% | 48.8% |
| Operating income (loss) | $170.4m | $224.4m | ($17.9m) | $600.8m |
| Net income (loss) | $119.8m | $334.1m | ($47.0m) | $633.3m |
| Diluted EPS | $1.61 | $4.41 | ($0.64) | $8.13 |
| Operating cash flow | Not separately provided | Not separately provided | $334.6m | $748.0m |
Q3 revenue declined 18.2% reported and 19.9% in constant currency; year-to-date revenue declined 36.3% reported and 36.9% in constant currency. Gross margin improved in both periods, mainly from better pricing, less promotion, and favorable geographic and channel mix. However, lower sales drove operating deleverage: SG&A fell in dollars but increased as a share of revenue.
Liquidity, debt, and cash flow
- At December 26, cash and cash equivalents were $2,621.5m, short-term investments $165.7m, and total debt $1,631.9m. The company reported net cash and investments of $1,155.3m, up $210.0m from fiscal year-end.
- Nine-month operating cash flow was $334.6m, down from $748.0m. Capital expenditures were $80.8m versus $216.0m. Cash and cash equivalents increased by $1,001.1m from March 28, 2020.
- The company issued $1.25bn of senior notes in June 2020: $500m at 1.700% due 2022 and $750m at 2.950% due 2030. Proceeds supported general corporate purposes, including repayment of credit-facility borrowings and $300m of notes that matured.
- No borrowings were outstanding under the $500m Global Credit Facility or the Pan-Asia facilities; $9.1m of letters of credit used Global Credit Facility capacity. The facility’s leverage covenant was temporarily waived through the quarter ending September 30, 2021, with stepped-up limits thereafter. The company reported no event of default.
Material changes, outlook, and risks
- Regional performance: Q3 North America revenue fell 21.4% and Europe fell 27.9%; Asia rose 13.8% reported (8.8% constant currency). Digital comparable sales increased globally, but total comparable sales fell 21%. For the nine months, revenue declined in all regions.
- Unusual items and comparability: Year-to-date results included $184.6m of net restructuring-related charges, asset impairments, other charges, and non-routine inventory charges, after COVID-related bad-debt adjustments. The prior-year period included a $134.1m Swiss tax-reform benefit; current-year tax expense also reflected new international tax legislation and COVID-related valuation allowances, partly offset by CARES Act benefits.
- Restructuring: The Fiscal 2021 Strategic Realignment Plan includes workforce reductions, store and office actions, North America distribution-center consolidation, and transition of Chaps to a licensing model effective August 1, 2021. Estimated total pre-tax charges are $300m–$350m, including $185m–$200m cash charges. Management expects gross annualized pre-tax savings of $200m–$240m when substantially complete by the end of FY2022; some savings will be reinvested.
- Management outlook: The filing provides no specific revenue or earnings guidance. Management said the pandemic remains volatile and its duration and effects cannot be predicted; it believes cash, credit availability, and capital-market access should support foreseeable operating, capital, and debt-service needs.
- Other risks and contingencies: Continued store closures and restricted capacity, consumer demand and inventory uncertainty, wholesale customer financial health, restructuring execution and costs, liquidity and covenant compliance, foreign exchange, trade and Brexit-related costs, and tax uncertainties may affect results. Management said pending legal matters were not expected to have a material adverse effect, while noting outcomes can change. The company reported no material changes to previously disclosed risk factors.
- Quarterly dividends and share repurchases were suspended beginning in Q1 FY2021 to preserve cash. No program repurchases were made in the nine months; the $49.8m of dividend payments reflected dividends declared in the prior fiscal year.
Important facts for investors to verify
- Whether COVID-related closures, capacity restrictions, and weak physical-store traffic persist into later periods, particularly in Europe.
- Progress against the realignment plan, including the $300m–$350m charge estimate, timing, and whether targeted annual savings are achieved.
- Cash generation and working-capital trends, given lower year-to-date operating cash flow and the role of accrued liabilities and extended vendor terms.
- Debt-facility covenant requirements, compliance, and liquidity headroom as temporary covenant relief and restrictions change.
- How much reported earnings comparisons reflect operating performance versus restructuring costs and one-time tax items, including the prior-year Swiss tax benefit.