Ralph Lauren Corporation — Form 10-Q Summary
Business context and reporting period. The filing covers the unaudited 13 weeks ended June 27, 2015, Ralph Lauren’s first quarter of Fiscal 2016, compared with the 13 weeks ended June 28, 2014. The company designs, markets and distributes premium lifestyle products through Wholesale, Retail and Licensing segments. Fiscal 2016 is a 53-week year ending April 2, 2016.
Financial performance
| Metric | Quarter ended June 27, 2015 | Prior-year quarter |
|---|---|---|
| Net revenues | $1.618 billion | $1.708 billion |
| Gross profit / margin | $966 million / 59.7% | $1.043 billion / 61.0% |
| Operating income / margin | $96 million / 6.0% | $244 million / 14.3% |
| Net income | $64 million | $162 million |
| Diluted earnings per share | $0.73 | $1.80 |
| Operating cash flow | $332 million | $415 million |
- Revenue declined 5.3% as reported, but 0.4% at constant currency. Wholesale revenue fell 9.3% reported (5.7% constant currency); Retail fell 2.7% reported but rose 3.2% constant currency; Licensing rose 2.7% reported (6.0% constant currency).
- Comparable store sales fell 8% reported and 2% constant currency. Excluding e-commerce, comparable sales declined approximately 8%–9% reported and 2%–3% constant currency. Retail growth from new stores and e-commerce partly offset the comparable-sales decline.
- Gross margin decreased 130 basis points, primarily due to unfavorable foreign exchange. SG&A rose 4.2% to $822 million; as a share of revenue it increased 460 basis points to 50.7%, reflecting operating deleverage and continued investment.
- Operating income declined 60.5%. Net income fell 60.6%; lower pretax income was partly offset by a lower effective tax rate of 29.0%, versus 31.1%.
- Segment operating income was $137 million Wholesale, $110 million Retail and $36 million Licensing. Wholesale and Retail operating margins fell 420 and 570 basis points, respectively; Licensing margin fell 160 basis points.
- Cash from operations was $332 million; capital expenditures were $68 million. Cash and cash equivalents ended at $490 million, versus $500 million at fiscal year-end. Cash, cash equivalents and short-term investments totaled $1.151 billion; total debt was $452 million, producing reported net cash and investments of $707 million.
- Debt comprised $155 million of commercial paper and $297 million carrying value of 2.125% Senior Notes due September 2018. The company had no borrowings under its $500 million Global Credit Facility and reported no event of default.
- Inventory was $1.270 billion, up from $1.042 billion at March 28, 2015. The company attributed working-capital pressure in part to higher inventory supporting new brands and store expansion.
Material changes, outlook and risks
- Global Reorganization Plan: Approved May 12, 2015, the plan shifts the company to an integrated global brand-based structure and includes workforce reductions, store and shop-within-shop reviews, and consolidation of certain luxury lines. Management expects implementation substantially by fiscal year-end and approximately $100 million in annual operating-expense savings. Estimated total charges are $70 million–$100 million, including $55 million–$80 million cash restructuring charges and $15 million–$20 million non-cash charges. The quarter included $45 million of restructuring and non-cash charges, reducing net income by $31 million, or about $0.36 per diluted share.
- Management cited weak and inconsistent retail traffic, constrained discretionary spending, challenging seasonal selling conditions, global economic uncertainty and unfavorable currency movements. It warned these conditions could pressure sales, inventory and operating margins through the rest of Fiscal 2016. No specific revenue or earnings guidance was provided in the filing; management expects near-term margin pressure from investments while remaining optimistic about longer-term growth.
- Other stated risks include consumer-demand forecasting and inventory exposure, competition, foreign exchange and input costs, dependence on department-store and licensing relationships, brand protection, cybersecurity, international regulatory and tax matters, and execution of restructuring and systems initiatives. Management reported no material changes to previously disclosed risk factors.
- Contingencies: A customs matter had a potential assessment of up to approximately $46 million, including interest and penalties. The original notice was retracted after the company appealed; management believed it would prevail and did not expect a material adverse effect. The Wathne litigation, with remaining claimed damages of up to approximately $100 million plus interest, settled on August 5, 2015, after quarter-end; the company said the settlement had no material adverse effect, but did not state the settlement amount.
- The company repurchased $150 million of Class A shares and paid $43 million in dividends during the quarter. The board expanded the repurchase authorization by up to $500 million; approximately $430 million remained available at June 27, 2015. The quarterly dividend increased from $0.45 to $0.50 per share.
Most important facts for investors to verify
- Whether the reorganization achieves the projected $100 million annual savings, and whether total charges remain within the stated $70 million–$100 million range.
- Whether constant-currency sales trends, comparable-store performance and margins improve, particularly in Wholesale and Retail.
- Whether inventory growth converts into sales without additional markdowns or working-capital strain.
- The continuing impact of foreign exchange, higher operating expenses and investment spending on profitability and cash generation.
- The outcome of the customs re-audit and any material details of the post-quarter Wathne settlement.