Ralph Lauren Corporation — Form 10-Q Summary
Reporting period: First quarter of Fiscal 2021, the 13 weeks ended June 27, 2020; comparable period ended June 29, 2019. The company designs, markets, and distributes premium lifestyle products through retail, wholesale, and licensing channels.
Key financial results
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net revenue | $487.5 million | $1,428.8 million |
| Gross profit / margin | $348.7 million / 71.5% | $920.8 million / 64.4% |
| SG&A expense / percent of revenue | $507.6 million / 104.2% | $746.7 million / 52.3% |
| Operating income (loss) / margin | ($168.0) million / (34.5%) | $143.3 million / 10.0% |
| Net income (loss) | ($127.7) million | $117.1 million |
| Diluted EPS | ($1.75) | $1.47 |
| Operating cash flow | ($70.3) million | $197.4 million |
Revenue declined 65.9% reported and 64.9% at constant currency. The net loss included a $44.9 million income tax benefit; the reported effective tax rate was 26.0%, partly reflecting expected CARES Act net operating loss carrybacks.
Material changes and business drivers
- COVID-19 drove steep sales declines across all regions. Most stores in key markets were closed for an average of 8 to 10 weeks; nearly all had reopened by quarter-end, generally with limited hours and capacity. Wholesale was particularly affected in North America and Europe.
- Regional revenue fell 77.0% in North America, 66.6% in Europe, and 33.5% in Asia, all reported. Digital comparable sales grew 13% globally, while total comparable sales fell 57%; comparable sales excluding digital fell 66%.
- Gross margin increased 710 basis points, primarily due to geographic and channel mix, improved pricing, and lower promotional activity. SG&A fell 32% in dollars, but rose sharply as a share of revenue because of sales deleverage.
- Digital commerce was comparatively resilient: comparable digital sales rose 3% in North America, 44% in Europe, and 68% in Asia. These gains did not offset declines in physical-store sales and other channels.
- Q1 results included a net favorable $6.1 million from specified benefits and charges, including $16.5 million of COVID-related bad-debt reserve adjustments, partly offset by restructuring and impairment charges. Prior-year results included $31.4 million of net charges, including a donation of corporate-jet sale proceeds.
Cash, debt, and liquidity
- At June 27, cash and cash equivalents were $2.451 billion and short-term investments were $259.3 million. Net cash and investments, defined by the company as cash plus investments less total debt, were $780.6 million, down from $945.3 million at fiscal year-end.
- Total debt was $1.930 billion, versus $1.171 billion at March 28. In June, the company issued $500 million of 1.700% notes due 2022 and $750 million of 2.950% notes due 2030; proceeds included repayment of $475 million drawn on its revolving credit facility. A $300 million 2.625% note was due August 2020.
- Cash, cash equivalents, and short-term investments totaled $2.711 billion. The $500 million Global Credit Facility had no borrowings outstanding, with $491 million reported as remaining availability after letters of credit. Management said available liquidity and capital-market access should support needs for the foreseeable future, while warning prolonged disruption could impair that capacity.
- The credit facility’s leverage covenant was temporarily waived through the quarter ending September 30, 2021, with stepped-up pricing and later leverage tests. No event of default was reported. The amendment also imposes liquidity and restrictions on dividends, repurchases, debt, investments, and acquisitions during specified periods.
- Operating cash outflow was $70.3 million. Investing cash inflow was $220.7 million, largely reflecting investment maturities and sales; financing cash inflow was $673.1 million, primarily due to the new notes. Capital expenditures were $21.3 million, down from $49.4 million.
Outlook, risks, and other notable items
- No specific revenue or earnings guidance is provided. Management said the pandemic’s duration and effects on operations and the global economy could not be predicted; Q1 results are not necessarily indicative of full-year results.
- The company suspended its quarterly dividend and stock repurchase program beginning in Q1 as cash-preservation measures. It also reduced some executive and director compensation, furloughed or reduced hours for employees, deferred non-critical investment, managed expenses and inventory, and pursued rent abatements and government support.
- Management identified risks from store capacity and traffic, discretionary consumer demand, wholesale-customer financial health, inventory forecasting, promotional pressure, trade and political tensions, Brexit, foreign exchange, and access to capital and covenant compliance.
- The Fiscal 2019 restructuring plan was complete; management reported cumulative charges of approximately $146 million and expected annualized savings of $60 million to $80 million. No further charges under that plan were expected.
- Pending legal matters were not expected by management to have a material adverse effect, individually or in aggregate, though outcomes could change with new facts or determinations. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether store traffic, operating restrictions, wholesale orders, and digital growth improved after quarter-end, and whether digital gains can offset physical-store weakness.
- Subsequent cash generation, working-capital needs, debt maturities, and compliance with the amended credit-facility conditions.
- How long the dividend and repurchase suspensions remain in place and whether the company resumes shareholder returns.
- The sustainability of gross-margin gains and expense savings as sales normalize, including the effects of discounting, mix, and temporary cost measures.
- The assumptions supporting credit-loss reserves, deferred tax asset recoverability, CARES Act benefits, and management’s liquidity assessment amid ongoing uncertainty.