Business context and reporting period
Ralph Lauren Corporation designs, markets and distributes premium lifestyle products through Wholesale, Retail and Licensing segments. This unaudited Form 10-Q covers the third quarter and first nine months of fiscal 2011, ended January 1, 2011. The comparable quarter ended December 26, 2009; both quarters were 13 weeks. Fiscal 2011 ends April 2, 2011.
Financial performance and position
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 FY11 | Q3 FY10 | Nine months FY11 | Nine months FY10 |
|---|---|---|---|---|
| Net revenues | $1,548.0 | $1,243.9 | $4,233.4 | $3,641.8 |
| Gross profit | $907.9 | $723.7 | $2,508.0 | $2,109.7 |
| Gross margin | 58.6% | 58.2% | 59.2% | 57.9% |
| Operating income | $246.3 | $172.5 | $727.9 | $535.1 |
| Operating margin | 15.9% | 13.9% | 17.2% | 14.7% |
| Net income attributable to PRLC | $168.4 | $111.1 | $494.4 | $365.4 |
| Diluted EPS | $1.72 | $1.10 | $5.01 | $3.60 |
- Quarter revenue grew 24.4%; nine-month revenue grew 16.2%. Retail and Wholesale drove growth, while Licensing revenue was slightly lower over nine months.
- Q3 comparable global store sales, including e-commerce, rose 15%; nine-month comparable sales rose 10% as reported (11% excluding currency effects). Q3 Retail revenue was $821.6, Wholesale $676.3 and Licensing $50.1.
- SG&A was $655.4 in Q3 and $1,760.2 for nine months. As a share of revenue it fell to 42.3% from 43.4% for the quarter and to 41.6% from 42.4% for nine months.
- Effective tax rate was 29.4% for Q3 versus 32.9%; nine-month rate was 30.7% versus 30.0%.
- Nine-month operating cash flow was $594.3, down from $804.3. Investing used $240.8 and financing used $281.8; cash and cash equivalents increased $80.3 to $643.4.
- At January 1, cash and cash equivalents were $643.4, short-term investments $599.4, non-current investments $65.5 and long-term debt $275.1. Management reported net cash and investments of $1,033.2, up $92.6 from fiscal year-end. No borrowings were outstanding on the $450 revolving facility; $15.4 of letters of credit were outstanding.
- Current assets were $2,513.1 and current liabilities $792.5. Inventory increased to $697.7 from $504.0 at April 3, 2010.
Material changes and notable items
- Operating income rose 42.8% in Q3 and 36.0% for nine months; net income rose 51.6% and 35.3%, respectively. Margin improvement reflected stronger full-price retail selling and lower promotional activity, partly offset by lower Wholesale margins.
- Growth includes the Asia-Pacific licensed-business acquisition, consolidated from January 1, 2010. On January 1, 2011, the company acquired South Korean licensed operations for approximately $47, funded with cash; the preliminary allocation included a $26 customer-relationship intangible. Acquired South Korea results are expected to enter the income statement in Q4.
- Q3 FY10 included $4.9 of asset impairment charges; nine-month FY10 included $6.6 of impairments and $7.3 of restructuring charges. FY11 had no impairment charges and $1.4 of net restructuring charges for nine months. Prior-year nine-month results also included a $4.1 debt-extinguishment gain.
- Share repurchases totaled $347.7 over nine months, including tax-withholding shares; the company reported $469 remaining under its repurchase authorization at January 1. After quarter-end, the board authorized an additional $250 repurchase capacity and doubled the quarterly dividend from $0.10 to $0.20 per share.
- The company’s €209.2 principal amount of 4.5% notes is due October 2013. A July 2010 swap converted the fixed rate to three-month Euribor plus 299 basis points. The revolving facility expires November 2011 and requires a maximum leverage ratio of 3.75; no default had occurred.
Outlook, risks and contingencies
- Management said rising raw-material and labor costs, including labor shortages in some sourcing regions, are expected to pressure product costs and gross margins for the remainder of FY11, more significantly in FY12. No specific earnings or revenue guidance is provided in the filing.
- Management cited continued macroeconomic uncertainty, unemployment and constrained consumer spending as risks to discretionary-product demand. Other stated exposures include foreign exchange, competition, customer and licensee relationships, international expansion and acquisition integration.
- Management said existing cash sources should meet operating, capital and debt-service needs for the foreseeable future. Nine-month capital expenditures were $171.5, primarily for stores, shop-in-shops, facilities and technology.
- Unrecognized tax benefits, including interest and penalties, totaled $144.7; up to approximately $3 of gross unrecognized tax benefits could potentially be reduced over the next 12 months, though timing and outcomes remain uncertain.
- Wathne Imports litigation remains pending on limited claims; management does not expect a material adverse effect on liquidity or financial position. A California labor class action settled for $4, and a prior California customer class-action reserve was partly reversed. The company says other pending matters are not expected to have a material adverse effect, but outcomes could differ from its assessment.
- Management reported effective disclosure controls. It was still evaluating and building supporting controls for the newly acquired South Korean business. A proposed lease-accounting standard could significantly affect future financial statements; the impact was not yet determinable.
Important facts for investors to verify
- How much of reported sales and profit growth reflects organic comparable-store and Wholesale performance versus acquired operations, store openings and currency.
- Whether inventory growth and the lower year-over-year operating cash flow reflect planned timing and expansion needs or emerging demand and working-capital risks.
- The extent and timing of sourcing-cost inflation, and whether price, sourcing or mix actions can offset pressure on gross margins.
- South Korea acquisition integration, preliminary purchase-price allocation and the contribution of the acquired operations once results are consolidated.
- Available liquidity and compliance with the revolving facility, which expires in November 2011, as well as the effects of continued buybacks and the higher dividend.
- Developments in tax audits and litigation, including the remaining Wathne claims, and any material changes to management’s stated risk assessments.