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RL > SEC Filings for RL > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for RALPH LAUREN CORP

Form 10-Q for RALPH LAUREN CORP


7-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Special Note Regarding Forward-Looking Statements Various statements in this Form 10-Q, or incorporated by reference into this Form 10-Q, in future filings by us with the Securities and Exchange Commission (the "SEC"), in our press releases, and in oral statements made from time to time by us or on our behalf constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as "anticipate," "estimate," "expect," "project," "we believe," "is or remains optimistic," "currently envisions," and similar words or phrases and involve known and unknown risks, uncertainties, and other factors which may cause actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed in or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others:
the loss of key personnel, including Mr. Ralph Lauren;

         our ability to successfully implement our anticipated growth strategies
          and to capitalize on our repositioning initiatives in certain regions
          and merchandise categories;


         our ability to secure our facilities and systems and those of our
          third-party service providers from, among other things, cybersecurity
          breaches, acts of vandalism, computer viruses, or similar Internet or
          email events;


         our ability to continue to maintain our brand image and reputation and
          protect our trademarks;


         the impact of global economic conditions on us, our customers, our
          suppliers, and our vendors and on our ability and their ability to
          access sources of liquidity;


         the impact of the volatile state of the global economy or consumer
          preferences on purchases of premium lifestyle products that we offer
          for sale and our ability to forecast consumer demand, which could
          result in a build-up of inventory;


         changes in the competitive marketplace, including the introduction of
          new products or pricing changes by our competitors, and consolidations,
          liquidations, restructurings, and other ownership changes in the retail
          industry;


         a variety of legal, regulatory, tax, political, and economic risks,
          including risks related to the importation and exportation of products,
          tariffs, and other trade barriers which our international operations
          are subject to and other risks associated with our international
          operations, such as compliance with the Foreign Corrupt Practices Act
          or violations of other anti-bribery and corruption laws prohibiting
          improper payments, and the burdens of complying with a variety of
          foreign laws and regulations, including tax laws, trade and labor
          restrictions, and related laws that may reduce the flexibility of our
          business;


         our ability to continue to expand or grow our business internationally
          and the impact of related changes in our customer, channel, and
          geographic sales mix as a result;


         our exposure to currency exchange rate fluctuations and risks
          associated with increases in the costs of raw materials,
          transportation, and labor;

changes to our effective tax rates;

         changes in our relationships with department store customers and
          licensing partners;


         our efforts to improve the efficiency of our distribution system and to
          continue to enhance and upgrade our global information technology
          systems;


         our intention to introduce new products or enter into or renew
          alliances and exclusive relationships;


         our ability to access sources of liquidity to provide for our cash
          needs, including our debt obligations, payment of dividends, capital
          expenditures, and potential repurchase of our Class A common stock;


         our ability to open new retail stores, concession shops, and e-commerce
          sites in an effort to expand our direct-to-consumer presence;


         our ability to make certain strategic acquisitions and successfully
          integrate the acquired businesses into our existing operations;


         our ability to maintain our credit profile and ratings within the
          financial community;


         the potential impact on our operations and on our customers resulting
          from natural or man-made disasters; and


         the impact to our business of events of unrest and instability that are
          currently taking place in certain parts of the world, as well as from
          any terrorist action, retaliation, and the threat of further action or
          retaliation.

These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. A detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations is included in our Annual Report on Form 10-K for the fiscal year ended March 29, 2014 (the "Fiscal 2014 10-K"). There are no material changes to such risk factors, nor are there any identifiable previously undisclosed risks as set forth in Part II, Item 1A - "Risk Factors" of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
In this Form 10-Q, references to "Ralph Lauren," "ourselves," "we," "our," "us," and the "Company" refer to Ralph Lauren Corporation and its subsidiaries, unless the context indicates otherwise. We utilize a 52-53 week fiscal year ending on the Saturday closest to March 31. As such, fiscal year 2015 will end on March 28, 2015 and will be a 52-week period ("Fiscal 2015"). Fiscal year 2014 ended on March 29, 2014 and was also a 52-week period ("Fiscal 2014"). The first quarter of Fiscal 2015 ended on June 28, 2014 and was a 13-week period. The first quarter of Fiscal 2014 ended on June 29, 2013 and was also a 13-week period.

INTRODUCTION
Management's discussion and analysis of financial condition and results of
operations ("MD&A") is provided as a supplement to the accompanying unaudited
interim consolidated financial statements and footnotes to help provide an
understanding of our results of operations, financial condition, and liquidity.
MD&A is organized as follows:
         Overview.  This section provides a general description of our business,
          current trends and outlook, and a summary of our financial performance
          for the three-month period ended June 28, 2014. In addition, this
          section includes a discussion of recent developments and transactions
          affecting comparability that we believe are important in understanding
          our results of operations and financial condition, and in anticipating
          future trends.


         Results of operations.  This section provides an analysis of our
          results of operations for the three-month period ended June 28, 2014
          compared to the three-month period ended June 29, 2013.


         Financial condition and liquidity.  This section provides a discussion
          of our financial condition and liquidity as of June 28, 2014, which
          includes (i) an analysis of our financial condition compared to the
          prior fiscal year-end; (ii) an analysis of changes in our cash flows
          for the three-month period ended June 28, 2014 compared to the
          three-month period ended June 29, 2013; (iii) an analysis of our
          liquidity, including common stock repurchases, payments of dividends,
          our outstanding debt and covenant compliance, and the availability
          under our credit facilities and our commercial paper program; and (iv)
          any material changes in our contractual and other obligations since
          March 29, 2014.


         Market risk management.  This section discusses any significant changes
          in our risk exposures related to foreign currency exchange rates and
          our investments since March 29, 2014.


         Critical accounting policies.  This section discusses any significant
          changes in our critical accounting policies since March 29, 2014.
          Critical accounting policies typically require significant judgment and
          estimation on the part of management in their application. In addition,
          all of our significant accounting policies, including our critical
          accounting policies, are summarized in Note 3 to our audited
          consolidated financial statements included in our Fiscal 2014 10-K.


         Recently issued accounting standards.  This section discusses the
          potential impact on our reported results of operations and financial
          condition of certain accounting standards that have been recently
          issued or proposed.

OVERVIEW
Our Business
Our Company is a global leader in the design, marketing, and distribution of premium lifestyle products, including men's, women's, and children's apparel, accessories, fragrances, and home furnishings. Our long-standing reputation and distinctive image have been consistently developed across an expanding number of products, brands, sales channels, and international markets. Our brand names include Ralph Lauren, Ralph Lauren Collection, Purple Label, Black Label, Polo, Polo Ralph Lauren, Blue Label, RRL, RLX Ralph Lauren, Lauren Ralph Lauren, Ralph Lauren Childrenswear, Denim & Supply Ralph Lauren, Chaps, Club Monaco, and American Living, among others.
We classify our businesses into three segments: Wholesale, Retail, and Licensing. Our Wholesale business, which represented approximately 47% of our Fiscal 2014 net revenues, consists of sales made principally to major department stores and specialty stores around the world. Our Retail business, which represented approximately 51% of our Fiscal 2014 net revenues, consists of sales made directly to consumers through our integrated retail channel, which includes our retail stores around the world; concession-based shop-within-shops located in Asia, Australia, and Europe; and our retail e-commerce sites in North America, Europe, and Asia. Our Licensing business, which represented approximately 2% of our Fiscal 2014 net revenues, consists of royalty-based arrangements under which we license to unrelated third parties for specified periods the right to operate retail stores and to use our various trademarks in connection with the manufacture and sale of designated products, such as apparel, eyewear, and fragrances, in specified geographic areas for specified periods. Approximately 36% of our Fiscal 2014 net revenues were earned outside of the U.S.
Our business is typically affected by seasonal trends, with higher levels of wholesale sales in our second and fourth quarters and higher retail sales in our second and third quarters. These trends result primarily from the timing of seasonal wholesale shipments and key vacation travel, back-to-school, and holiday shopping periods in our Retail segment. In addition, fluctuations in net sales, operating income, and cash flows in any fiscal quarter may be affected by other events affecting retail sales, such as changes in weather patterns. Accordingly, our operating results and cash flows for the three-month period ended June 28, 2014 are not necessarily indicative of the operating results and cash flows that may be expected for the full Fiscal 2015. Current Trends and Outlook
Although the global economy has shown signs of a modest recovery, future expectations of growth reflect sustained uncertainty. The current global geopolitical environment has contributed to this uncertainty and is negatively impacting consumer travel, which affects global retail sales. While consumer confidence has been slowly improving, the level of spending on discretionary items remains constrained due to continued uncertainty. Additionally, adverse weather conditions in certain parts of the world, including the U.S., have resulted in a challenging Spring/Summer selling season for many retailers. As a result of these factors, consumer retail traffic remains relatively weak and inconsistent, which has led to a more promotional environment due to increased competition and a desire to offset traffic declines with increased levels of conversion. North American department stores have been especially promotional as they were contending with lower traffic and the late start to Spring, in addition to weaker than expected Easter and Father's Day holiday sales. Certain of our operations have experienced and have been impacted by these dynamics, with variations across the geographic regions and businesses in which we operate. Despite these challenges, we remain optimistic about our future growth prospects and continue to invest in our longer-term growth objectives, while continually monitoring macroeconomic risks and remaining focused on disciplined expense management. Although we continue to expect that the investments that we are making in our business will outpace our sales growth in the near-term, we expect that these initiatives will create longer-term shareholder value.


If the economic uncertainty and challenging industry trends continue or worsen, the constrained level of worldwide consumer spending and modified consumption behavior may continue to have a negative effect on our sales, inventory levels, and operating margin for the remainder of Fiscal 2015. We will continue to monitor these risks and evaluate and adjust our operating strategies and cost management opportunities to mitigate the related impact on our results of operations, while remaining focused on the long-term growth of our business and protecting the value of our brand.
For a detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations, see Part I, Item 1A - "Risk Factors" in our Fiscal 2014 10-K. Summary of Financial Performance
Operating Results
During the three months ended June 28, 2014, we reported net revenues of $1.708 billion, net income of $162 million, and net income per diluted share of $1.80. This compares to net revenues of $1.653 billion, net income of $181 million, and net income per diluted share of $1.94 during the three months ended June 29, 2013.
Our operating performance for the three months ended June 28, 2014 reflected revenue growth of 3.4% on a reported basis and 2.4% on a constant currency basis, as increased revenues from our retail businesses across all of our major geographies and net favorable foreign currency effects were partially offset by lower revenues from our domestic wholesale business, largely attributable to a shift in timing of certain wholesale shipments. Our revenue growth also reflected the inclusion of revenues from the previously licensed Australia and New Zealand Business acquired in July 2013 (see "Recent Developments" for further discussion). Our gross margin percentage increased by 30 basis points to 61.0% during the three months ended June 28, 2014, primarily attributable to favorable channel and geographic mix, partially offset by the unfavorable impact of certain foreign exchange rates on our derivative contracts. Selling, general, and administrative ("SG&A") expenses increased due to increased investments in our stores, facilities, and infrastructure consistent with our longer-term objectives, as well as operating expenses attributable to our recent acquisitions. In addition, during the three months ended June 29, 2013, we recognized a $16 million gain relating to our acquisition of the Chaps Menswear Business, as discussed within "Results of Operations" below.
Net income declined by $19 million during the three months ended June 28, 2014, as compared to the three months ended June 29, 2013, primarily due to a $32 million decrease in operating income, partially offset by an $11 million decline in our provision for income taxes, which was driven by lower pretax income and a decline in our reported effective tax rate of 60 basis points. Net income per diluted share declined due to lower net income, partially offset by lower weighted-average diluted shares outstanding, driven by our share repurchases over the last twelve months.
Financial Condition and Liquidity
We ended the first quarter of Fiscal 2015 in a net cash and investments position (cash and cash equivalents plus short-term and non-current investments, less total debt) of $1.071 billion, compared to $987 million as of the end of Fiscal 2014. The increase in our net cash and investments position was primarily due to our operating cash flows of $415 million, partially offset by our use of cash to support Class A common stock repurchases of $211 million, including withholdings in satisfaction of tax obligations for stock-based compensation awards, capital expenditures of $85 million, and dividend payments of $40 million during the three months ended June 28, 2014.
We generated $415 million of cash from operations during the three months ended June 28, 2014, compared to $295 million during the three months ended June 29, 2013. The increase in operating cash flows primarily relates to net favorable changes related to our operating assets and liabilities, including working capital, as well as an increase in our net income before non-cash items during the three months ended June 28, 2014 compared to the prior fiscal year period. Our equity declined to $3.972 billion as of June 28, 2014 compared to $4.034 billion as of March 29, 2014, primarily due to our repurchases of common stock and dividends declared, largely offset by our net income and the net impact of stock-based compensation arrangements during the three months ended June 28, 2014.


Recent Developments
Australia and New Zealand Licensed Operations Acquisition In July 2013, in connection with the transition of the Ralph Lauren-branded apparel and accessories business in Australia and New Zealand (the "Australia and New Zealand Business") from a licensed to a wholly-owned operation, we acquired certain net assets from Oroton Group/PRL Australia ("Oroton") in exchange for an aggregate payment of approximately $15 million (the "Australia and New Zealand Licensed Operations Acquisition"). Oroton was our licensee for the Australia and New Zealand Business. The operating results of the acquired business have been consolidated in our operating results beginning on July 1, 2013.
Chaps Menswear License Acquisition
In April 2013, in connection with the transition of the North American Chaps-branded men's sportswear business (the "Chaps Menswear Business") from a licensed to a wholly-owned operation, we entered into an agreement with The Warnaco Group, Inc. ("Warnaco"), a subsidiary of PVH Corp. ("PVH"), to acquire certain net assets in exchange for an aggregate payment of approximately $18 million (the "Chaps Menswear License Acquisition"). Warnaco was our licensee for the Chaps Menswear Business. The operating results of the Chaps Menswear Business have been consolidated in our operating results beginning on April 10, 2013.
Transactions Affecting Comparability of Results of Operations and Financial Condition
The comparability of our operating results for the three-month periods ended June 28, 2014 and June 29, 2013 has been affected by certain events, including:
pretax restructuring and other charges of $4 million recorded during the three-month period ended June 28, 2014 (see Note 9 to the accompanying unaudited interim consolidated financial statements); and

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