Ralph Lauren Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended March 31, 2012 (52 weeks), compared primarily with the 52-week year ended April 2, 2011. The filing also reports unaudited fourth-quarter results. Ralph Lauren operates Wholesale, Retail and Licensing businesses; approximately 38% of FY2012 revenue came from outside the U.S.
Financial performance
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Net revenue | $6.860 billion | $5.660 billion | +21.2% |
| Gross profit / margin | $3.998 billion / 58.3% | $3.318 billion / 58.6% | Margin down 30 bps |
| Operating income / margin | $1.039 billion / 15.2% | $845.1 million / 14.9% | +23.0%; margin up 30 bps |
| Net income attributable to RLC | $681.0 million | $567.6 million | +20.0% |
| Diluted EPS | $7.13 | $5.75 | +24.0% |
| Cash from operations | $885.3 million | $688.7 million | +$196.6 million |
Retail revenue rose 26.9% to $3.432 billion; Wholesale rose 16.9% to $3.247 billion; Licensing rose 1.2% to $180.7 million. Comparable retail sales increased 14% as reported (12% excluding currency), led by e-commerce, Club Monaco and factory stores. Segment operating margins were 20.5% Wholesale (down 150 bps), 16.3% Retail (up 200 bps) and 62.1% Licensing (up 140 bps).
Fourth quarter: Unaudited revenue was $1.623 billion versus $1.427 billion; gross profit was $926.4 million versus $810.3 million; net income was $94.4 million versus $73.2 million; diluted EPS was $0.99 versus $0.74.
Financial position and liquidity
- At March 31, 2012, cash and cash equivalents were $671.6 million, short-term investments $515.7 million, non-current investments $99.9 million and long-term debt $274.4 million. The company reported net cash and investments of $1.013 billion, up from $838.6 million.
- Current assets were $2.900 billion and current liabilities $946.2 million. Inventory was $841.6 million, up from $702.1 million; accounts receivable was $547.2 million, up from $442.8 million.
- Operating cash flow was $885.3 million; capital expenditures were $272.2 million. Financing uses included $419.4 million for repurchases and $74.3 million for dividends.
- The 4.5% euro-denominated notes, carrying value $274.4 million, mature in October 2013. No borrowings were outstanding under the $500 million revolving facility; $13.4 million of letters of credit were outstanding. Management said available liquidity was sufficient for foreseeable operating, capital and debt-service needs.
Material changes and unusual items
- Revenue growth reflected stronger comparable retail sales, wholesale growth, favorable currency effects, and the full-year contribution from the South Korea business acquired in January 2011. Revenue also benefited from assuming control of the Lauren bedding-and-bath wholesale business.
- Gross margin declined due primarily to higher sourcing costs, especially in Wholesale, partly offset by targeted pricing and favorable geographic/channel mix. SG&A rose 19.3% but fell as a share of revenue, to 42.5%, reflecting operating leverage.
- FY2012 included $12.4 million of restructuring charges and $2.2 million of asset impairments. Restructuring included an Asia-Pacific repositioning plan and severance tied to discontinuing most American Living products at J.C. Penney. The company said the American Living discontinuance was not expected to materially affect results.
- The company repurchased 3.2 million shares for $395.1 million under its program and withheld/surrendered additional shares for taxes. The quarterly dividend was $0.20 per share during FY2012; on May 21, 2012, the board raised it to $0.40 per share.
- Following termination of an interest-rate swap, $7.6 million of loss is being amortized through the October 2013 debt maturity; $3.0 million was recognized as FY2012 interest expense. The Japanese subsidiary’s reporting lag was eliminated; the change increased FY2012 pretax income by $1.0 million and net income by $0.6 million.
Outlook, commentary and risks
Management provided no numerical FY2013 revenue or earnings guidance in the supplied filing text. It planned continued international and direct-to-consumer expansion, including e-commerce, product extensions and investment in global systems and supply-chain infrastructure. Management warned that weak or worsening macroeconomic conditions—particularly European softness—could reduce FY2013 sales and margin growth. Sourcing cost pressures were expected to continue affecting product costs and gross margins, although the peak inflation levels had subsided.
- Key exposures include discretionary consumer demand, Europe’s sovereign-debt and currency uncertainty, competition and promotional pricing, changing fashion trends, inventory forecasting, foreign-exchange movements, and raw-material, labor, freight and import-cost increases.
- Wholesale customer concentration is notable: three major customers generated approximately 40% of wholesale revenue; Macy’s alone represented about 20% of wholesale revenue. The three largest customers accounted for about 25% of gross receivables.
- More than 98% of products by dollar value were manufactured outside the U.S. The company also cited third-party manufacturing and distribution reliance, cybersecurity/privacy and system-disruption risks, and risks from its multi-year global systems implementation.
- Unrecognized tax benefits, including interest and penalties, totaled $168.0 million; management said the gross balance excluding interest and penalties could potentially decline by up to approximately $30 million over the next 12 months, subject to uncertainty. The company had $1.363 billion of undistributed foreign subsidiary earnings intended for reinvestment.
- Wathne Imports litigation remained pending; management did not expect a material adverse financial-statement effect. A shareholder derivative action alleging fiduciary-duty breaches and related-party issues was also pending; the company and defendants moved to dismiss.
- Ernst & Young issued unqualified audit opinions, and management and the auditor concluded internal control over financial reporting was effective at fiscal year-end.
Investor verification priorities
- Verify the durability and composition of growth, including comparable-store trends, e-commerce contribution, currency effects and acquired-business contribution.
- Track sourcing-cost pass-through and margin trends, especially Wholesale margin and the balance between pricing, promotions and product costs.
- Monitor inventory growth, receivable collections and days sales outstanding, given the increases in inventory and receivables and customer concentration.
- Review the October 2013 euro-note maturity, credit-facility covenant headroom, and the timing and funding of contractual obligations, including $1.963 billion of operating-lease and $998.7 million of inventory-purchase commitments.
- Assess whether international expansion, store/e-commerce investment and the systems rollout deliver returns without disrupting operations or controls.
- Follow developments in the tax exposures and litigation noted above, and confirm the dividend and repurchase pace against cash generation and investment needs.