Ralph Lauren Corporation — Q1 Fiscal 2012 Form 10-Q
Reporting period: 13 weeks ended July 2, 2011; comparable quarter ended July 3, 2010. Unaudited results. The company designs, markets and distributes premium lifestyle products through Wholesale, Retail and Licensing segments.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net revenues | $1,526.4 million | $1,153.3 million | +32.4% |
| Gross profit / margin | $961.5 million / 63.0% | $712.2 million / 61.8% | Margin +120 bps |
| Operating income / margin | $282.1 million / 18.5% | $174.2 million / 15.1% | +61.9%; margin +340 bps |
| Net income attributable to PRLC | $184.1 million | $120.8 million | +52.4% |
| Diluted EPS | $1.90 | $1.21 | +57.0% |
| Cash from operations | $212.4 million | $171.4 million | +$41.0 million |
Revenue grew across all segments: Wholesale $673.0 million (+28.7%), Retail $813.5 million (+37.3%) and Licensing $39.9 million (+5.6%). Comparable retail sales increased 19% as reported and 15% excluding currency effects. Segment operating income was $151.1 million in Wholesale, $173.1 million in Retail and $25.2 million in Licensing.
SG&A rose 26.4% to $672.3 million, but declined to 44.0% of revenue from 46.1%, reflecting operating leverage. The effective tax rate increased to 32.9% from 28.7%; management attributed this mainly to the absence of prior-year tax benefits, partly offset by a greater share of earnings in lower-tax jurisdictions.
Cash, liquidity and debt
At July 2, 2011, cash and cash equivalents were $431.5 million, short-term investments $520.0 million and non-current investments $29.6 million. Debt totaled $304.4 million: $296.7 million carrying value of euro-denominated notes and $7.7 million of short-term China facility borrowings. Management reported net cash and investments of $676.7 million, down from $838.6 million at fiscal year-end, primarily due to share repurchases and capital spending.
Operating cash flow was $212.4 million. Investing activities provided $91.9 million, chiefly reflecting investment maturities and sales exceeding purchases; capital expenditures were $39.3 million. Financing activities used $330.7 million, including $324.5 million for repurchases and related tax withholding and $18.9 million for dividends. Inventories rose to $896.3 million from $702.1 million at April 2, 2011.
The $500 million Global Credit Facility, available through March 2016, had no borrowings outstanding; $16.2 million of letters of credit were outstanding. The company reported no covenant default. The $7.7 million China facility had approximately $3 million of remaining availability. The euro notes bear 4.5% interest and mature October 2013.
Changes, outlook and notable items
- Growth was driven by comparable retail sales, new stores and e-commerce, higher wholesale revenue, favorable currency effects, and consolidation of the South Korea business acquired from its former licensee in January 2011. South Korea contributed about $46 million of retail revenue in the quarter.
- Management expected raw-material, transport and labor inflation, including labor shortages in some sourcing regions, to weigh more significantly on product costs and gross margins in Q2 and the remainder of FY2012. First-quarter margin benefits from full-price sales, lower promotions and favorable mix had partly offset those pressures.
- A Greater China restructuring begun in May was expected to produce approximately $10 million of pretax charges in FY2012, principally in Q2 and Q4, as the company repositions distribution and closes certain stores and concession shops.
- No formal numerical revenue or earnings guidance is stated in the provided filing text. Management said existing liquidity should cover operating, capital and debt-service needs for the foreseeable future, including business development and expansion.
- On April 11, 2011, the company terminated an interest-rate swap at a $7.6 million loss, to be amortized through the debt’s October 2013 maturity; $0.8 million was recognized as interest expense in the quarter. A change aligning the Japanese subsidiary’s reporting period added $1.0 million to pretax income and $0.6 million to net income, without retrospective application.
- Risks include macroeconomic uncertainty and constrained consumer spending, sourcing-cost inflation, foreign-exchange exposure, reliance on key wholesale customers, international expansion and execution of new systems. The filing reported no material changes to previously disclosed risk factors. The long-running Wathne litigation remained pending; management did not expect a material adverse financial effect.
- Quarterly dividend was increased from $0.10 to $0.20 per share. The board expanded the repurchase authorization by $500 million; approximately $670 million remained available at quarter-end.
Important facts for investors to verify
- Whether the anticipated cost inflation materialized and how it affected gross margin in subsequent quarters.
- How much reported growth and profitability depended on currency, new locations and South Korea consolidation versus comparable underlying demand.
- Inventory growth, subsequent sell-through and markdown or return reserves.
- Actual Greater China restructuring charges and progress implementing the new global financial system and related controls.
- Cash deployed for repurchases and dividends relative to operating cash generation, and continued compliance with credit-facility covenants.
- Developments in uncertain tax positions and the remaining Wathne claims.