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 13 weeks ended June 30, 2012 (first quarter of Fiscal 2013); the comparable quarter ended July 2, 2011. Results are seasonal and are not necessarily indicative of the full fiscal year.
Financial performance and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net revenues | $1,593.4 million | $1,526.4 million |
| Gross profit / margin | $992.1 million / 62.3% | $961.5 million / 63.0% |
| Operating income / margin | $292.0 million / 18.3% | $282.1 million / 18.5% |
| Net income attributable to RLC | $193.4 million | $184.1 million |
| Diluted EPS | $2.03 | $1.90 |
| Operating cash flow | $268.7 million | $212.4 million |
Revenue increased 4.4% reported and 6.4% excluding foreign currency effects. Wholesale revenue was $694.1 million (+3.1%), Retail $857.3 million (+5.4%) and Licensing $42.0 million (+5.3%). Segment operating income was $155.5 million in Wholesale, $180.2 million in Retail and $26.6 million in Licensing.
Gross margin fell 70 basis points, primarily due to sourcing-cost pressure in Retail, less favorable European Wholesale customer mix and currency effects; targeted pricing, improved Asian inventory management and lower domestic sourcing costs partly offset the decline. SG&A rose 3.1% to $693.4 million, but declined as a share of revenue to 43.5% from 44.0%. The effective tax rate was 31.9%, down from 32.9%.
At June 30, cash and cash equivalents were $468.5 million, short-term investments $563.0 million, non-current investments $82.1 million, and long-term debt $261.0 million. The company reported net cash and investments of $852.6 million, compared with $1,012.8 million at March 31. Cash declined $203.1 million during the quarter. Investing activities used $121.2 million, including $61.6 million of capital expenditures; financing activities used $345.6 million, largely for share repurchases. Inventories were $964.1 million, up from $841.6 million at March 31.
Debt consisted principally of €209.2 million of 4.5% notes due October 2013, carried at $261.0 million. There were no borrowings on the $500 million revolving Global Credit Facility (through March 2016), with $15.0 million of letters of credit outstanding; the company also had no borrowings under its new, uncommitted Chinese facility. Management reported no Global Credit Facility default and believed available liquidity was sufficient for foreseeable operating, capital and debt-service needs.
Material changes versus the comparable period
- Revenue, operating income, net income and diluted EPS increased, while gross and operating margins declined modestly. Domestic Wholesale and Retail growth was partly offset by lower European Wholesale sales and unfavorable currency effects.
- Operating cash flow increased by $56.3 million, primarily reflecting receivables collections and inventory-related working-capital changes; cash taxes paid were $78.1 million versus $11.4 million in the prior-year quarter.
- Share repurchases and capital returns remained substantial: $300.0 million of program repurchases plus $46.5 million of shares withheld for taxes. The quarterly dividend was raised from $0.20 to $0.40 per share.
- Comparability includes the company’s assumption of control over bedding and bath distribution in May 2011 and Asia-Pacific store and concession repositioning. The majority of American Living products were planned for discontinuance beginning Fall 2012; management did not expect a material consolidated operating-statement impact.
Outlook, commentary, risks and contingencies
No quantitative revenue or earnings guidance is provided in the filing text. Management expected margin recovery during Fiscal 2013 as peak goods-cost inflation subsided, but said sourcing pressures would continue. It cited global economic uncertainty, weaker consumer confidence and a highly promotional retail environment, with softness in certain European Wholesale businesses; prolonged weakness could adversely affect sales and operating margin for at least the remainder of the fiscal year.
Other disclosed risks include foreign-exchange volatility, raw-material, transportation and labor costs, consumer-demand and forecasting uncertainty, competition, customer and licensing-partner relationships, international regulatory and political risks, and execution of growth and information-technology initiatives. The phased global operating and financial reporting system rollout was continuing, with further core-system migration planned to begin in the second half of Fiscal 2013; management said controls were effective at the reasonable-assurance level and would continue to be monitored during implementation.
Management did not expect the remaining Wathne Imports litigation to have a material adverse financial effect, though timing of trial was uncertain. A shareholder derivative action was dismissed in June 2012 for failure to make a presuit demand; the plaintiff made a demand on the board in July. The company also disclosed uncertain tax benefits and interest and penalties totaling $164.2 million; gross unrecognized tax benefits could potentially decline by up to approximately $30 million over the next 12 months, subject to uncertain audit and statute-of-limitations events.
After quarter-end, on August 9, 2012, the board authorized an additional $500 million of Class A share repurchases. The filing also notes that proposed lease-accounting changes could significantly affect the company’s financial statements, but the impact could not yet be determined.
Important facts for investors to verify
- Whether European demand and currency movements continue to weigh on Wholesale revenue and margins, and whether anticipated margin recovery materializes.
- Inventory growth, working-capital conversion and the sustainability of the quarter’s operating cash flow.
- Capital allocation and liquidity after the additional $500 million repurchase authorization, increased dividend and approaching October 2013 Euro-note maturity.
- Developments in the Wathne matter, the renewed shareholder demand, and tax audits or other contingencies.
- Execution and control implications of the phased global financial-system implementation.