Ralph Lauren Corporation — Form 10-Q Summary
Reporting period: Fiscal 2015 second quarter and six months ended September 27, 2014; comparable periods ended September 28, 2013. Amounts are U.S. dollars in millions except per-share data.
Business context
Ralph Lauren designs, markets, and distributes premium lifestyle products through Wholesale, Retail, and Licensing segments. Retail includes stores, concession shops, and e-commerce. The company notes seasonal effects and cautions that interim results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net revenue | $1,994; up 4.1% reported and 3.7% constant currency | $3,702; up 3.8% reported and 3.1% constant currency |
| Gross profit / margin | $1,132 / 56.8%, up 20 basis points | $2,175 / 58.8%, up 30 basis points |
| Operating income / margin | $286 / 14.4%, versus $295 / 15.4% | $530 / 14.3%, versus $571 / 16.0% |
| Net income | $201, versus $205 | $363, versus $386 |
| Diluted EPS | $2.25, versus $2.23 | $4.05, versus $4.17 |
| Operating cash flow | Not presented separately for the quarter | $275, versus $220 |
For the six months, Retail revenue rose 7.8% reported, Licensing rose 2.8%, and Wholesale fell 0.7%. Retail growth reflected new stores, e-commerce expansion, and the Australia and New Zealand business; Wholesale weakness was primarily in domestic menswear. In the quarter, comparable sales increased 1% overall, while comparable sales excluding e-commerce declined 1%–2%; e-commerce comparable sales rose approximately 16%.
SG&A rose 7.8% in the quarter and 7.5% for the six months, faster than revenue. SG&A was 42.0% and 43.9% of revenue, respectively. Management attributed the increase to retail growth, store and infrastructure investment, marketing, and other initiatives. Six-month operating income also reflected the absence of the prior-year $16 million Chaps acquisition gain and higher restructuring charges.
Cash, debt, and liquidity
- At September 27, cash and cash equivalents were $483; short-term investments were $708; total debt was $510, including $210 of commercial paper and $300 of senior notes. Net cash and investments were $683, down from $987 at fiscal year-end.
- Six-month operating cash flow was $275; investing cash outflow was $440, including $176 of capital expenditures; financing cash outflow was $125. Cash declined $314 to $483.
- Current assets were $3,560 and current liabilities $1,283. The company reported $1,191 of cash, cash equivalents, and short-term investments, most held by non-U.S. subsidiaries; it said it did not expect to repatriate foreign funds for domestic needs.
- The $300 senior notes bear 2.125% interest and mature in 2018. Commercial paper borrowings averaged 0.23% interest, with a 34-day weighted-average remaining term. A $500 revolving facility runs through March 2016; no borrowings were outstanding under it, and the company reported no covenant default.
- Six-month share repurchases and shares surrendered for tax withholding totaled $281; dividends paid were $79. Remaining repurchase authorization was approximately $330.
Outlook, risks, and unusual items
- Management cited weak and inconsistent retail traffic, constrained discretionary spending, economic uncertainty, political unrest, disease risks, and unusually warm weather. These conditions could pressure sales, inventory, and operating margins.
- The company remained optimistic about longer-term growth, but expected investments in stores, the Polo store concept, renovations, and infrastructure to outpace near-term sales growth and cause operating expense deleverage. It provided no quantified full-year guidance in the supplied filing text.
- A customs authority pre-assessment could result in up to approximately $46 million of incremental duties and non-creditable VAT, including about $11 million of interest and penalties. The company disputes the asserted methodology; the outcome remains uncertain, and payment of an assessed amount may be required during appeals.
- A new North Carolina distribution-facility lease carries approximately $56 million in total commitments over an initial term of about 15 years. The company also disclosed ongoing Wathne litigation, but management did not expect it to materially affect the financial statements.
- Six-month restructuring charges were $6 million. The company reported no material impairment charges and said its annual goodwill assessment found reporting-unit fair values significantly above carrying values.
Key facts for investors to verify
- Progress and potential cash or earnings impact of the customs assessment and appeals.
- Whether Retail growth and e-commerce can offset weak comparable sales outside e-commerce and lower Wholesale revenue.
- Inventory growth and working-capital requirements, alongside continued store, infrastructure, and marketing investment.
- Commercial paper refinancing and liquidity needs, foreign cash availability, and continued share repurchases and dividends.
- Execution of the distribution-facility and SAP projects, including any changes to costs or internal controls.