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 businesses. This unaudited filing covers the 13 weeks ended June 29, 2013, the first quarter of fiscal 2014; the comparable quarter ended June 30, 2012. The company’s fiscal year ends March 29, 2014.
Key financial metrics
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net revenues | $1.653 billion | $1.593 billion |
| Gross profit / margin | $1.004 billion / 60.7% | $992 million / 62.3% |
| Operating income / margin | $276 million / 16.7% | $292 million / 18.3% |
| Net income | $181 million | $193 million |
| Diluted EPS | $1.94 | $2.03 |
| Operating cash flow | $295 million | $269 million |
- Revenue grew 3.7% year over year, or 4.8% excluding foreign-currency effects. Wholesale revenue rose 5.9% to $735 million; Retail rose 2.5% to $879 million; Licensing fell 8.1% to $39 million.
- Gross margin declined 160 basis points. SG&A rose 6.0% to $735 million and increased from 43.5% to 44.5% of revenue. The reported effective tax rate was 31.7%, versus 31.9%.
- Cash from operations was $295 million; investing used $107 million and financing used $217 million. Cash and cash equivalents ended at $940 million.
- Cash, short- and non-current investments totaled approximately $1.36 billion against $271 million of debt, giving reported net cash and investments of $1.089 billion, down $24 million from March 30, 2013.
- Current assets were $3.084 billion and current liabilities were $1.179 billion. Inventories were $1.053 billion, up $157 million from fiscal year-end.
- The $271 million carrying value of €209 million principal amount of 4.5% Euro notes was classified as current and due October 4, 2013. The $500 million global revolving facility had no borrowings outstanding; $9 million of letters of credit were outstanding.
Material changes versus the prior comparable period
- Revenue growth reflected domestic Wholesale and Retail growth and European Retail growth, partly offset by European Wholesale weakness, lower Asia revenue, and unfavorable currency. Acquired Chaps menswear and the previously acquired Latin American business contributed to reported growth; Chaps contributed $53 million of Wholesale revenue.
- Net income fell 6.6% and diluted EPS fell 4.4%, despite revenue growth. Operating income declined $16 million; lower gross margin and higher SG&A more than offset a $16 million Chaps acquisition gain.
- Wholesale operating income was flat at $154 million, while Retail operating income fell $19 million to $160 million. Licensing operating income was $29 million, unchanged. Unallocated corporate expenses rose $13 million to $83 million.
- Comparable-store sales declined 1% as reported but increased 1% on a constant-currency basis. Retail revenue growth also benefited from new stores, concession shops, and e-commerce expansion.
- Operating cash flow increased $26 million, mainly from changes in operating assets and liabilities, including tax-payment timing. Cash use for repurchases, capital expenditures, and dividends contributed to the decline in net cash and investments.
Outlook, commentary, risks, and unusual items
- Management provided no specific numerical revenue or earnings guidance in the filing. It said weak global economic conditions, inconsistent retail traffic, and a promotional retail environment could continue to pressure sales and operating margin during the rest of fiscal 2014. European Wholesale remained soft, and certain retail operations had declining comparable sales and traffic.
- Management said available cash, investments, operating cash flow, and financing access should be sufficient for foreseeable operating, capital, and debt-service needs, including repayment of the Euro notes at maturity. Most cash and short-term investments were held outside the U.S. and intended to be permanently reinvested.
- The Chaps menswear transition to a wholly owned business generated a $16 million acquisition gain; the acquired net assets had a preliminary fair value of $34 million against $18 million consideration. The acquisition’s operating results were consolidated from April 10, 2013.
- On July 1, 2013, the company acquired certain Australia and New Zealand licensed-business assets for approximately $13 million; results will be consolidated beginning that date. The company also entered a Fifth Avenue flagship-store build-to-suit lease with a stated $235 million total commitment.
- Risks identified include consumer-demand weakness, foreign-currency and input-cost volatility, customer and licensing-partner relationships, international and regulatory exposures, cybersecurity, systems implementation, and execution and integration of acquired businesses. The company reported no material changes to its previously disclosed risk factors.
- Wathne Imports litigation remained pending, with no trial date scheduled. Management said it intended to contest the remaining claims and did not expect the matter to have a material adverse effect. The filing also notes that the global financial-reporting system implementation is underway and controls for the acquired Chaps business are still being evaluated.
Important facts for investors to verify
- Whether the lower gross and operating margins persist, particularly given product and geographic mix, currency effects, and higher operating costs.
- How the Chaps and Australia/New Zealand transitions affect revenue, margins, integration costs, and working capital after consolidation.
- The company’s repayment or refinancing of the €209 million notes due in October 2013, and its liquidity after scheduled investments, dividends, and repurchases.
- Inventory growth, comparable-store trends, and continued weakness in European Wholesale and certain Asian retail operations.
- The final purchase accounting for the Australia/New Zealand acquisition, the cost and timing of the Fifth Avenue lease, and developments in the Wathne litigation.