Ralph Lauren Corporation — Form 10-Q Summary
Business context and reporting period. Ralph Lauren designs, markets, and distributes premium lifestyle products through Wholesale, Retail, and Licensing segments. This filing covers the 13-week second quarter and six months of fiscal 2017, ended October 1, 2016; comparable periods ended September 26, 2015.
Financial performance
| Metric | Three months ended Oct. 1, 2016 | Six months ended Oct. 1, 2016 | Change versus prior comparable period |
|---|---|---|---|
| Net revenues | $1.821 billion | $3.373 billion | Down 7.6% and 6.0% reported; down 8.0% and 6.3% in constant currency |
| Gross profit / margin | $954 million / 52.4% | $1.849 billion / 54.8% | Margin down 410 and 310 basis points |
| Operating income / margin | $76 million / 4.2% | $45 million / 1.3% | Down from $230 million / 11.7% and $326 million / 9.1% |
| Net income | $45 million | $23 million | Down from $160 million and $224 million |
| Diluted earnings per share | $0.55 | $0.28 | Down from $1.86 and $2.58 |
| Operating cash flow | Not separately reported by quarter | $232 million | Down from $366 million |
Drivers and segments. Domestic Wholesale and Retail weakness drove the revenue declines; European Wholesale grew. Second-quarter segment revenue was $831 million Wholesale, $942 million Retail, and $48 million Licensing. Segment operating income was $203 million, $19 million, and $44 million, respectively; Retail operating income was particularly pressured. Total comparable-store sales declined 8% reported in the quarter and 7% for the six months. Six-month U.S. revenue was $2.002 billion, down from $2.276 billion.
Margins and unusual charges. Gross margin was reduced chiefly by restructuring-related, non-cash inventory charges of $81 million in the quarter and $135 million year to date, along with unfavorable currency effects. The company recorded total restructuring-plan and related charges of $150 million in the quarter and $309 million year to date; these reduced net income by $113 million and $225 million after tax, respectively. SG&A declined in dollars but rose as a share of revenue, to 44.1% for the quarter and 48.0% year to date, reflecting sales deleverage and investment spending.
Financial position and liquidity
- At October 1, cash and cash equivalents were $434 million; short-term investments were $531 million and non-current investments $122 million. Total debt was $692 million, comprising $95 million short-term and $597 million long-term. The company reported net cash and investments of $395 million.
- Operating cash flow of $232 million was below the prior-year $366 million, reflecting lower income before non-cash items and less favorable working-capital movements. Investing activities used $13 million, including $165 million of capital expenditures; financing activities used $227 million, including $82 million of dividends and $115 million for share repurchases and tax-withholding shares.
- Current assets were $2.976 billion and current liabilities $1.217 billion. Inventory was $1.173 billion, up from $1.125 billion at fiscal year-end.
- Commercial paper outstanding was $95 million. The $500 million combined Global Credit Facility and commercial-paper capacity had $397 million remaining availability, including $8 million of letters of credit; $58 million of Pan-Asia facilities was unused. The company reported no credit-facility default.
- $300 million of 2.125% senior notes mature in 2018 and $300 million of 2.625% senior notes in 2020. The company stated that existing liquidity and market access should be sufficient for foreseeable needs.
Material changes, outlook, and risks
- The June 2016 Way Forward Plan refocuses the business on core brands, product and shopping experience, faster supply-chain lead times, sourcing, and a leaner organization. It includes workforce reductions, store closures, and discontinuation of Denim & Supply, with denim products to be integrated into Polo Ralph Lauren.
- Management expects the plan to be substantially complete by fiscal year-end 2017 and to produce $180 million to $220 million in annualized expense savings. Estimated plan charges are approximately $400 million ($300 million cash-related and $100 million non-cash), plus a separate non-cash inventory charge of up to $150 million. Management cautions that additional charges may arise. The prior Global Reorganization Plan is complete; cumulative charges were $147 million.
- Management noted weak and inconsistent retail traffic, constrained discretionary spending, heightened competition, foreign-exchange volatility, and uncertainty related to Brexit. It expects near-term operating-margin pressure from business investments and quality-of-sales initiatives; no specific revenue or earnings guidance is provided in the filing.
- A customs authority assessed $34 million relating to import-duty valuation; the company paid the assessment and is appealing it, maintaining that its original method was correct. A successful appeal could result in a refund with interest. Other pending legal matters were not expected by management to have a material adverse effect, though outcomes remain uncertain.
- The six-month effective tax rate rose to 42.2% from 27.6%, primarily due to additional reserves associated with a tax settlement and audits. The company reported disclosure controls effective; its phased SAP implementation continues, with European migration expected to finish in fiscal 2018.
Most important facts for investors to verify
- Whether the Way Forward Plan delivers the stated savings on schedule, and whether total restructuring and inventory charges remain within estimates.
- Whether comparable-store sales, domestic demand, and Retail and Wholesale margins stabilize, especially after the substantial inventory charges.
- Whether operating cash flow and inventory management improve while the company funds capital investment, dividends, and repurchases.
- The outcome and timing of the $34 million customs appeal and the effect of tax audits or settlements.
- How currency movements, Brexit-related uncertainty, consumer spending, and the SAP rollout affect results and execution.