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 unaudited filing covers the second quarter and first six months of fiscal 2013, ended September 29, 2012; comparable periods ended October 1, 2011. Each quarter was 13 weeks. Fiscal 2013 ends March 30, 2013.
Financial performance and liquidity
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Net revenue | $1,862.0m | $1,904.6m | $3,455.4m | $3,431.0m |
| Gross margin | 58.8% | 56.6% | 60.4% | 59.5% |
| Operating income | $348.3m | $350.8m | $640.3m | $632.9m |
| Operating margin | 18.7% | 18.4% | 18.5% | 18.4% |
| Net income attributable to RLC | $213.7m | $233.5m | $407.1m | $417.6m |
| Diluted EPS | $2.29 | $2.46 | $4.32 | $4.35 |
| Effective tax rate | 37.6% | 32.8% | 35.0% | 32.9% |
Quarterly comparison: Revenue fell 2.2%, mainly from weaker Wholesale sales and unfavorable currency, partly offset by Retail growth. Excluding currency, revenue increased 0.2%. Wholesale revenue fell 8.1%; Retail rose 4.6%; Licensing declined 2.5%. Gross margin improved 220 basis points, but SG&A rose 2.8% to $740.2m and reached 39.8% of revenue. Operating income declined 0.7%, while net income fell 8.5%, primarily reflecting the higher tax rate and slightly lower operating income.
Six-month comparison: Revenue rose 0.7% (3.0% excluding currency). Wholesale fell 3.6%, Retail increased 5.0%, and Licensing rose 1.0%. Gross margin improved 90 basis points, while SG&A increased 2.9% to $1,433.6m. Operating income rose 1.2%, but net income decreased 2.5%, primarily due to the higher effective tax rate.
Cash flow and balance sheet: Operating cash flow was $306.7m for the six months, versus $283.5m a year earlier. Investing activities used $81.6m, including $117.3m in capital expenditures; financing activities used $353.5m, including $346.7m for repurchases and tax-withholding shares and $55.0m in dividends paid. Cash decreased $127.9m to $543.7m. At September 29, cash and short- and non-current investments totaled $1,097.7m; net cash and investments, after debt, were $831.9m, down from $1,012.8m at March 31. Long-term debt was $265.8m, consisting of €209.2m of 4.5% notes due October 4, 2013. No borrowings were outstanding under the $500m global revolving facility or the Chinese facility; $14.3m of letters of credit were outstanding. The company reported no default under its global facility.
Material changes, outlook, risks and unusual items
- Management cited lower sourcing costs and favorable product mix as supporting gross margin, offset by promotional activity, weaker European Wholesale demand, and sourcing-cost pressure in Retail. SG&A increased to support Retail growth, new initiatives and Asia-Pacific repositioning.
- Management warned that continued or worsening macroeconomic weakness could pressure sales and operating margins, particularly given softness in European Wholesale and declining comparable-store trends in some Asian Retail operations. Other risks include currency and input-cost volatility, consumer demand, competition, key personnel, international operations and cybersecurity. The filing states that previously disclosed risk factors were not materially changed.
- On October 30, 2012, the company approved closure of all 14 Rugby freestanding stores and its domestic e-commerce site, with closure expected by fiscal year-end. It expects $20m–$30m in pretax charges in the second half of FY2013, including severance, lease costs and asset write-downs; estimated cash costs are $10m–$20m.
- On October 23, 2012, the company reached a preliminary IRS settlement and expects a $12m–$15m income-tax benefit in Q3 FY2013 and an approximately $30m reduction in unrecognized tax benefits, excluding interest and penalties. The Q2 tax provision included an interest-assessment reserve relating to a prior-year withholding tax; management said no underlying tax exposure existed and did not expect the assessment to be material for full-year FY2013.
- In the Wathne litigation, an appellate court on October 18, 2012 reversed a ruling that had excluded the plaintiff’s proposed damages report. No trial date was set; management intends to contest the case and does not expect a material adverse financial effect. The company also reported a shareholder derivative matter dismissed for failure to make a pre-suit demand, followed by a board demand from the plaintiff.
- The company increased its quarterly dividend from $0.20 to $0.40 per share and authorized an additional $500m of repurchases. Management said it intends to continue regular quarterly dividends, subject to board discretion and business conditions.
- Management reported effective disclosure controls. A multi-year global financial and operating system rollout continues, with further domestic-system migrations planned for FY2014; management expects the system to strengthen controls but will monitor them as implementation proceeds.
Important facts for investors to verify
- Whether Retail growth and improved gross margins can offset continued Wholesale weakness, especially in Europe, and promotional activity.
- The drivers and persistence of the higher tax rate, the accounting and timing of the IRS settlement benefit, and the final resolution of the withholding-tax interest assessment.
- Rugby closure timing, actual restructuring charges and cash costs, and any operational or brand effects.
- Cash generation and inventory levels: inventories were $1,060.2m at September 29, up from $841.6m at March 31; operating cash flow included a $215.8m inventory-related cash outflow.
- Repurchase and dividend spending relative to cash generation, the approaching October 2013 Euro Debt maturity, and compliance with credit-facility covenants.
- Developments in Wathne and other litigation, and wholesale-customer concentration: the three largest customers represented about 40% of FY2012 Wholesale revenue and 30% of gross receivables at September 29, 2012.