Ralph Lauren Corporation — Form 10-Q
Reporting period: Third quarter of Fiscal 2015, the 13 weeks ended December 27, 2014; comparisons are with the 13 weeks ended December 28, 2013. Nine-month results cover the periods ended on those same dates. Amounts are in U.S. dollars.
Business context and results
Ralph Lauren designs, markets, and distributes premium lifestyle products through Wholesale, Retail, and Licensing businesses. In the quarter, Retail accounted for $1.149 billion of revenue, Wholesale $837 million, and Licensing $47 million.
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Net revenues | $2.033 billion | $2.015 billion | $5.735 billion | $5.583 billion |
| Operating income | $315 million | $334 million | $845 million | $905 million |
| Net income | $215 million | $237 million | $578 million | $623 million |
| Diluted EPS | $2.41 | $2.57 | $6.46 | $6.74 |
| Gross margin | 57.0% | 58.2% | 58.1% | 58.4% |
| Operating margin | 15.5% | 16.6% | 14.7% | 16.2% |
Financial position and cash flow
- Cash and investments: $763 million cash and equivalents and $644 million short-term investments at December 27, 2014. Total cash and investments were $1.407 billion; total debt was $413 million, leaving reported net cash and investments of $994 million.
- Debt and liquidity: Debt comprised $300 million of 2.125% senior notes due 2018 and $113 million of commercial paper. The $500 million Global Credit Facility had no borrowings and $7 million of letters of credit outstanding. The company reported no event of default under the facility.
- Nine-month cash flow: Operating activities provided $890 million, versus $760 million a year earlier; investing activities used $525 million; financing activities used $352 million. Capital expenditures were $300 million. Cash and equivalents decreased $34 million to $763 million.
- Working capital: Inventory rose to $1.211 billion from $1.020 billion at fiscal year-end. Management attributed part of the year-over-year cash-flow improvement to working-capital movements and noted increased inventory to support new brands and stores.
Changes versus prior year
- Quarterly revenue grew 0.9% reported and 3.3% at constant currency; nine-month revenue grew 2.7% reported and 3.2% at constant currency. Unfavorable currency effects weighed on reported results.
- Quarterly operating income fell $19 million and net income fell $22 million. For nine months, operating income declined $60 million and net income declined $45 million.
- Retail revenue rose 1.7% in the quarter and 5.5% year to date, but Retail operating margin fell 260 basis points in the quarter and 160 basis points year to date. Quarterly comparable sales were nearly flat at constant currency; e-commerce growth was offset by declines at certain stores and concession shops.
- Wholesale revenue was down 0.4% for the quarter and 0.6% for nine months as reported. Licensing revenue increased in both periods.
- Margin pressure reflected a more promotional retail environment and less favorable domestic Wholesale product mix. SG&A increased 2.7% in the quarter and 5.8% year to date, with higher investments in stores, facilities, infrastructure, marketing, and new initiatives.
- Comparability also reflects the prior-year $16 million Chaps acquisition gain, prior-year $10 million accelerated stock compensation charge, and a prior-year tax benefit associated with a tax examination. The Australia and New Zealand business acquisition contributed incremental year-to-date revenue and costs.
Outlook, risks, and unusual items
- Management described global consumer spending and retail traffic as constrained and inconsistent, with economic weakness in parts of Europe and Asia. It warned that continued uncertainty could pressure sales, inventory, and operating margin, and that unfavorable exchange rates were expected to continue affecting results.
- No quantified earnings or revenue guidance is provided in the supplied filing text. Management expected near-term investment-related expense growth to outpace sales growth, while stating that investments were intended to support longer-term growth. It anticipated some operating expense deleverage for the rest of Fiscal 2015.
- Customs audit: An international subsidiary received a pre-assessment asserting up to approximately $46 million of incremental duty and non-creditable VAT, including about $11 million of interest and penalties. The company is appealing and contests the asserted methodology; an unfavorable outcome could materially affect financial condition, results, and cash flows.
- Other exposures: The company is contesting Wathne Imports litigation; management did not expect a material adverse effect. Risks also include foreign-exchange exposure, promotional intensity, inventory and demand forecasting, international operations, and execution of store, infrastructure, and SAP system investments. Management reported no material change to previously disclosed risk factors.
- The Board approved an increase in the quarterly dividend from $0.45 to $0.50 per share on February 3, 2015. A new North Carolina distribution-facility lease carries an approximately $56 million commitment, with possession expected in the second quarter of Fiscal 2016.
Important facts for investors to verify
- Whether comparable-store and e-commerce trends improve, and whether promotional activity continues to weigh on gross and Retail operating margins.
- Whether inventory growth is converted into sales without heavier markdowns, and whether higher store and infrastructure spending generates sufficient returns.
- How currency movements affect reported revenue, margins, and the value and timing of the company’s foreign-exchange hedges.
- The status and potential financial exposure of the customs audit appeal, including whether the stated maximum exposure changes.
- Liquidity and capital allocation, including overseas-held cash, commercial paper refinancing, planned capital spending, repurchases, and the increased dividend.