Ralph Lauren Corporation — Form 10-Q Summary
Business context and period. Ralph Lauren designs, markets, and distributes premium lifestyle products through Wholesale, Retail, and Licensing segments. This filing covers the 13 weeks ended December 31, 2016 (fiscal 2017 Q3) and the nine months then ended; comparisons are with the periods ended December 26, 2015.
Key financial results
| Metric | Q3 FY2017 | Nine months FY2017 |
|---|---|---|
| Net revenues | $1.714 billion, down 11.9% reported (11.3% constant currency) | $5.087 billion, down 8.1% reported (8.0% constant currency) |
| Gross profit / margin | $983 million / 57.3%, up 110 basis points | $2.832 billion / 55.7%, down 160 basis points |
| Operating income / margin | $128 million / 7.5%, versus $189 million / 9.7% | $173 million / 3.4%, versus $515 million / 9.3% |
| Net income | $82 million, versus $131 million | $105 million, versus $355 million |
| Diluted EPS | $0.98, versus $1.54 | $1.25, versus $4.11 |
Cash flow and liquidity. Nine-month operating cash flow was $850 million, compared with $852 million; capital expenditures were $225 million, versus $325 million. Cash and cash equivalents were $928 million at December 31, 2016, and short-term investments were $453 million. Including $82 million of non-current investments and deducting $589 million of debt, net cash and investments were $874 million, up from $559 million at fiscal year-end. There were no borrowings outstanding under the commercial paper program, Global Credit Facility, or Pan-Asia facilities; $8 million of letters of credit used Global Credit Facility availability. The company reported no credit-facility default.
Total debt was $589 million, principally two senior-note issues due in 2018 and 2020. The company had $1.381 billion in cash, cash equivalents, and short-term investments, including $1.149 billion held by foreign subsidiaries. Nine-month dividends paid were $124 million and share repurchases, including shares withheld for taxes, were $115 million. The declared dividend was $0.50 per share.
Material changes and drivers
- Wholesale revenue fell 25.9% in Q3 and 14.2% year to date, principally reflecting weaker Americas sales and strategic shipment reductions under the Way Forward Plan. Retail revenue fell 2.3% in Q3 and 3.5% year to date; comparable sales declined 5% and 6%, respectively. Licensing revenue also declined.
- Management attributed pressure to weaker traffic, a competitive retail environment, lower sales in parts of the Americas and Europe, and foreign-exchange effects. Lower promotional activity and favorable geographic and channel mix supported Q3 gross margin, but higher restructuring-related inventory charges and currency effects weighed on year-to-date margin.
- Q3 SG&A declined in dollars but rose to 45.0% of revenue from 42.8%; the nine-month ratio rose to 47.0% from 45.1%, reflecting lower-sales deleverage and investment in stores, facilities, infrastructure, and initiatives.
- Reported results included restructuring-related charges of $91 million in Q3 and $400 million year to date, reducing nine-month net income by an estimated $298 million after tax, or about $3.57 per diluted share. The prior-year nine-month period included $113 million of restructuring charges and $47 million of other charges, principally for a customs assessment and litigation settlements.
Outlook, commentary, and risks
- The Way Forward Plan focuses on core brands, product and customer experience, shorter supply-chain lead times, sourcing, distribution, and cost reductions. It includes workforce reductions, store closures, and discontinuation of Denim & Supply, with denim offerings to be integrated into Polo Ralph Lauren. Substantial completion was expected by the end of fiscal 2017.
- Management expected annualized Way Forward Plan expense savings of approximately $180 million to $220 million. Estimated plan charges were approximately $400 million, including about $300 million cash-related and $100 million non-cash, plus up to $150 million in additional non-cash inventory charges. The assessment was ongoing and further charges could exceed these estimates.
- Management said investments and quality-of-sales initiatives were expected to pressure near-term operating margins while supporting longer-term shareholder value. It warned that constrained discretionary spending and weak, inconsistent retail traffic could continue to affect sales, inventory, and margins. No specific revenue or EPS forecast is provided in the filing text.
- CEO Stefan Larsson’s planned departure, announced February 2, 2017, was expected to result in approximately $20 million of charges across Q4 FY2017 and Q1 FY2018; a successor search had begun.
- Risks include foreign-exchange volatility, Brexit and potential trade-policy changes, consumer demand and inventory uncertainty, wholesale customer and licensing-partner relationships, restructuring execution and lease-termination costs, and cybersecurity and information-system implementation. The European SAP migration was in progress and expected to be completed in fiscal 2018.
- A customs authority had assessed $34 million, which the company paid while appealing; the company disputes the methodology and says a successful appeal would result in a refund with interest. The earlier notice had indicated potential incremental duty and tax exposure of up to $46 million. Management stated that pending other legal matters were not expected to have a material adverse effect, while noting outcomes remain uncertain.
Important facts for investors to verify
- Progress toward the Way Forward Plan’s projected $180 million to $220 million annualized savings, and final restructuring and inventory-related charges.
- Whether sales trends improve, especially Americas Wholesale, comparable-store sales, and e-commerce, and whether margin gains can persist without relying on mix or reduced promotions.
- Cash generation and working-capital trends, including the use of foreign-held cash, capital spending, dividends, and remaining share-repurchase authorization.
- The outcome and timing of the customs appeal and any related refund, as well as the expected CEO-transition costs and leadership succession.