Ralph Lauren Corporation — Form 10-Q Summary
Reporting period: Fiscal 2014 second quarter ended September 28, 2013 (13 weeks), with six-month results compared with the periods ended September 29, 2012. The filing is unaudited. Ralph Lauren designs, markets, and distributes premium lifestyle products through Wholesale, Retail, and Licensing businesses.
Financial performance
| Metric | Q2 FY2014 | Six months FY2014 | Comparable change |
|---|---|---|---|
| Net revenues | $1.915 billion | $3.568 billion | +2.9% and +3.3%; constant-currency growth was 3.6% and 4.2% |
| Gross margin | 56.6% | 58.5% | Down 220 and 190 basis points |
| Operating income / margin | $295 million / 15.4% | $571 million / 16.0% | Operating income down 15.2% and 10.8%; margins down 330 and 250 basis points |
| Net income | $205 million | $386 million | Down 3.7% and 5.1% |
| Diluted EPS | $2.23 | $4.17 | Down 2.6% and 3.5% |
| Operating cash flow | $220 million for six months | Down from $307 million |
Quarterly net revenues rose in Wholesale to $928 million (+1.4%) and Retail to $944 million (+4.8%); Licensing declined to $43 million (-5.8%). For six months, Wholesale was $1.663 billion (+3.4%), Retail $1.823 billion (+3.7%), and Licensing $82 million (-6.9%). Quarterly comparable-store sales declined 1% reported, but increased 1% on a constant-currency basis; six-month comparable-store sales had the same reported and constant-currency direction. E-commerce helped offset weaker concession-store trends.
Margins were pressured by foreign currency, less favorable geographic mix, the acquired Chaps business, and lower concession-shop profitability. SG&A rose 5.3% in Q2 and 5.6% year to date, reflecting acquired-business costs, growth initiatives, and infrastructure investment. Effective tax rates fell to 28.8% for Q2 and 30.2% year to date, partly due to foreign-operations restructuring benefits and the absence of a prior-year withholding-tax interest reserve.
Financial position and liquidity
- At September 28, cash and cash equivalents were $839 million; short-term and non-current investments totaled $579 million; total debt was $583 million. The company reported net cash and investments of $835 million, down $278 million from fiscal year-end.
- Current assets were $3.558 billion and current liabilities $1.218 billion. Inventory was $1.215 billion, up from $896 million at March 30.
- Six-month investing cash outflow was $408 million, including $214 million of capital expenditures and $152 million of net investment purchases. Financing cash inflow was $51 million.
- The company issued $300 million of 2.125% senior notes due 2018. The $283 million carrying value of 4.5% euro notes was current at quarter-end and was repaid at maturity on October 4, 2013. No borrowings were outstanding under the $500 million revolving facility or Pan-Asia facilities; $9 million of letters of credit were outstanding under the global facility.
- Six-month dividends paid were $73 million and share repurchases cost $200 million under the program, with approximately $427 million of authorization remaining. On November 5, after quarter-end, the board raised the quarterly dividend from $0.40 to $0.45 per share.
Material changes, outlook, and risks
- Revenue growth included newly consolidated Chaps menswear operations (acquired in April) and Australia/New Zealand operations (acquired in July); the six-month comparison also included Latin American operations acquired in 2012. The company recorded a $16 million gain on the Chaps acquisition in the first half. Rugby retail operations were wound down, with all stores and the related U.S. e-commerce site closed by September 28.
- A new Fifth Avenue flagship-store build-to-suit lease created a $230 million asset and matching capital lease obligation. Total lease commitment was $235 million, with stated minimum payments beginning in fiscal 2015.
- Management said uncertain global economic conditions, inconsistent retail traffic, promotional competition, and constrained discretionary spending were weighing on the business. Japan and South Korea were particularly affected. A prolonged or worsening weak macroeconomic environment could pressure sales and operating margin for the remainder of FY2014. The filing provides no specific numerical earnings or revenue guidance.
- Key risks include demand and inventory forecasting, foreign-currency exposure, international operations, brand and trademark protection, competition, customer and licensee relationships, acquisitions and integration, store expansion, cybersecurity, and implementation of global information systems. Management reported no material change to previously disclosed risk factors.
- The Wathne Imports litigation remains pending; trial had not been scheduled. The company intends to contest the remaining claims and stated it does not expect a material adverse effect. Tax audits and uncertain tax positions also remain subject to potential changes; the company could not estimate the reasonably possible change in unrecognized tax benefits.
Most important facts for investors to verify
- Whether revenue growth from acquisitions and new stores can offset weak comparable-store and international wholesale trends, particularly in Asia and Europe.
- Whether gross-margin pressure, higher SG&A, and inventory growth persist through the holiday and remainder-of-year periods.
- How operating cash generation develops after the first-half working-capital outflow and elevated capital expenditures.
- The cash and debt impact of the euro-note repayment, the new senior notes, the flagship-store lease, and the increased dividend.
- Progress integrating Chaps and Australia/New Zealand operations, implementing the global systems, and resolving tax and litigation matters.