Ralph Lauren Corporation — Q2 Fiscal 2020 10-Q
Reporting period: The 13-week second quarter ended September 28, 2019; comparisons are with the 13 weeks ended September 29, 2018. The six-month figures cover the first half of Fiscal 2020. Ralph Lauren designs, markets, and distributes premium lifestyle products through retail, wholesale, and licensing channels.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | First half FY2020 | First half FY2019 |
|---|---|---|---|---|
| Net revenue | $1,706.2 million | $1,690.9 million | $3,135.0 million | $3,081.5 million |
| Gross margin | 61.5% | 60.9% | 62.8% | 62.5% |
| Operating income | $233.1 million | $210.0 million | $376.4 million | $340.1 million |
| Operating margin | 13.7% | 12.4% | 12.0% | 11.0% |
| Net income | $182.1 million | $170.3 million | $299.2 million | $279.3 million |
| Diluted EPS | $2.34 | $2.07 | $3.79 | $3.37 |
- Q2 reported revenue increased 0.9%; excluding unfavorable foreign-exchange effects, it rose 2.2%. First-half reported revenue increased 1.7%, or 3.4% in constant currency.
- Higher gross margins reflected favorable product and geographic mix and improved pricing. Lower SG&A as a share of revenue contributed to operating-margin expansion.
- Q2 revenue growth was strongest in Europe (+3.3% reported; +7.9% constant currency) and Asia (+4.3%; +4.6% constant currency). North America declined 0.8%, including a 0.7% constant-currency decline; weaker wholesale demand and strategic distribution reductions were partly offset by retail growth.
- First-half operating cash flow was $204.1 million, versus $213.0 million. Capital expenditures were $130.6 million, compared with $93.1 million. Cash, cash equivalents, and restricted cash ended at $563.3 million.
- At September 28, cash and short- and long-term investments totaled approximately $1.590 billion; debt was $693.4 million, leaving management-defined net cash and investments of $896.1 million, down from $1.343 billion at fiscal year-end. The debt includes $297.3 million of 2.625% notes due August 2020 and $396.1 million of 3.750% notes due September 2025.
- The company had $491 million of remaining availability under its $500 million Global Credit Facility and commercial-paper program, after $9 million of letters of credit; no facility borrowings were outstanding. It reported no credit-facility default. The facility requires a maximum adjusted-debt-to-EBITDAR ratio of 4.25; the filing does not provide the actual ratio.
- Inventory was $1.013 billion, up from $817.8 million at March 30, 2019. The company repurchased $400 million of shares and paid $101.9 million in dividends during the first half. The quarterly dividend was raised from $0.625 to $0.6875 per share; approximately $830 million remained available under the repurchase authorization.
Material changes, outlook, and risks
- Year-over-year earnings benefited from improved operating income and lower diluted share counts. First-half results included $52.4 million of restructuring, impairment, and other charges, versus $49.4 million a year earlier. Q2 charges were $21.0 million, versus $25.7 million.
- The company adopted the new lease standard in Fiscal 2020, recognizing substantial right-of-use assets and lease liabilities. At quarter-end, operating lease liabilities were $1.925 billion, in addition to $206.8 million of finance lease liabilities. These balances affect comparison with prior periods, which were not restated.
- The first half included a $20.8 million charge for donating proceeds from the sale of the corporate jet to the Polo Ralph Lauren Foundation. Cumulative charges under the Fiscal 2019 restructuring plan were $121.9 million; estimated total charges were $125 million–$150 million, with expected gross annualized savings of $60 million–$80 million.
- Management said it would continue investing in marketing, digital capabilities, stores, and productivity-enhancing infrastructure while controlling costs. It believes available cash, investments, credit facilities, and capital-market access will support foreseeable operating, capital, and debt-service needs. The filing provides no specific revenue or earnings forecast.
- Management cited U.S.–China tariffs, Hong Kong protests and reduced local retail traffic, Brexit uncertainty, currency movements, promotional retail conditions, department-store challenges, and consumer demand as risks. The company was assessing sourcing, pricing, and other measures to mitigate tariff exposure. Swiss tax implementation guidance could also materially affect future results.
- The company reported that pending legal matters were not expected to have a material adverse effect, while noting outcomes could change as facts develop. It reported no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether revenue and comparable-sales growth in Europe and Asia can continue, and whether North America wholesale demand stabilizes.
- Whether improved gross and operating margins persist amid inventory levels, promotions, foreign exchange, and ongoing investment.
- Inventory sell-through and working-capital trends, given the increase in inventory and the first-half operating cash-flow decline.
- Cash deployment and refinancing plans for the $297.3 million notes due in August 2020, alongside buybacks, dividends, and capital spending.
- The ongoing cash and earnings effects of lease obligations, restructuring actions, tariff mitigation, and potential Swiss tax changes.