Business context and reporting period
Ralph Lauren Corporation (formerly Polo Ralph Lauren Corporation; name change effective August 15, 2011) designs, markets and distributes premium lifestyle products through Wholesale, Retail and Licensing segments. This unaudited Form 10-Q covers the 13 weeks ended October 1, 2011 (fiscal Q2 2012) and the six months then ended; comparisons are to the equivalent periods ended October 2, 2010. The six-month results include the South Korea business acquired from its former licensee on January 1, 2011.
Financial performance
| Metric | Fiscal Q2 2012 | Six months 2012 |
|---|---|---|
| Net revenues | $1,904.6 million, up 24.3% | $3,431.0 million, up 27.8% |
| Gross profit / margin | $1,078.6 million / 56.6%, down 140 bps | $2,040.1 million / 59.5%, down 10 bps |
| Operating income / margin | $350.8 million / 18.4%, up 14.1%; margin down 170 bps | $632.9 million / 18.4%, up 31.4%; margin up 50 bps |
| Net income | $233.5 million, up 13.8% | $417.6 million, up 28.1% |
| Diluted EPS | $2.46, versus $2.09 | $4.35, versus $3.30 |
For the six months, segment revenue was Wholesale $1,668.5 million (+23.6%), Retail $1,674.8 million (+33.8%) and Licensing $87.7 million (+4.0%). Segment operating income was $397.6 million, $319.1 million and $54.9 million, respectively. Retail growth reflected comparable-store gains, new stores and e-commerce, plus South Korea operations. Q2 reported comparable sales rose 13% overall (11% excluding currency); six-month comparable sales rose 16% (13% excluding currency).
Six-month operating cash flow was $283.5 million, versus $224.0 million. Investing used $12.6 million and financing used $316.1 million; cash declined $45.3 million to $407.7 million. Capital expenditures were $92.4 million and share repurchases, including tax-withholding shares, used $417.8 million. Receivables and inventory increased materially during the period, reflecting lower collections and inventory built to support growth, new stores and product expansion.
At October 1, 2011, cash and cash equivalents were $407.7 million, short- and non-current investments totaled $571.7 million, and debt was $373.7 million, producing reported net cash and investments of $605.7 million, down from $838.6 million at fiscal year-end. The company had $100 million of short-term revolving debt outstanding at quarter-end, subsequently repaid in November 2011. The $500 million Global Credit Facility had $384.6 million remaining availability after letters of credit; the company reported no default and compliance with its covenants. Euro notes of €209.2 million principal, due October 2013, carried a 4.5% coupon.
Changes, outlook and risks
- Revenue growth was broad-based, but Q2 margin pressure was pronounced: sourcing-cost inflation, especially in Wholesale, reduced gross margin; SG&A rose with compensation, store expansion, acquisitions and new initiatives. For the six months, operating leverage more than offset the modest gross-margin decline; Q2 operating margin nevertheless fell.
- Management reported weaker comparable-store sales growth beginning in September, particularly in the U.S. and Europe. It warned that continued or worsening macroeconomic weakness could weigh on sales and operating-margin growth for the rest of fiscal 2012.
- Management expected raw-material, transportation and labor-cost inflation, including manufacturing-region labor shortages, to significantly pressure product costs and gross profit percentages for the remainder of fiscal 2012. No numerical full-year revenue, earnings or margin guidance is provided in the filing.
- A Greater China restructuring plan initiated in May includes workforce reductions and store/concession closures; approximately $5 million of pretax charges were anticipated, primarily in fiscal Q4 2012. The company also launched a France e-commerce site in September and transitioned South Korea from licensed to wholly owned operations.
- Other notable items: the April 2011 termination of an interest-rate swap resulted in a $7.6 million loss being amortized into interest expense through October 2013; the six-month effective tax rate increased to 32.9% from 31.4%, partly because prior-year favorable tax adjustments did not recur. Unrecognized tax benefits including interest and penalties were $160.2 million. The company expected no significant change in gross unrecognized tax benefits over the next 12 months.
- Key risks include global economic and consumer-demand uncertainty, European sovereign-debt stress, cost and currency volatility, reliance on major wholesale customers, international expansion and integration, systems implementation and cybersecurity, and the ability to sustain dividends and repurchases. A longstanding Wathne Imports lawsuit remains in discovery; management said it did not expect a material adverse effect. The filing reports no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the September weakening in U.S. and European retail trends continued, and whether reported comparable-sales growth was sustained excluding foreign exchange.
- Whether cost inflation, pricing and channel mix caused further gross-margin deterioration, particularly in Wholesale.
- Whether receivables, inventory and days-sales-outstanding trends improved after the period, and the implications for cash conversion.
- Progress and actual charges from the Greater China restructuring, and performance of the South Korea and bedding-and-bath transitions.
- Current debt, revolving-credit availability, covenant headroom, and the sustainability of buybacks and dividends given the reduction in net cash and investments.