04.02.2016, 17:28
Ralph Lauren Reports Third Quarter Fiscal 2016 Results
OREANDA-NEWS. Ralph Lauren Corporation (NYSE:RL) today reported net income of $193 million, or $2.27 per diluted share, for the third quarter of Fiscal 2016, which excludes restructuring and other charges that are primarily related to activities associated with the Company’s global brand reorganization and a pending customs audit. This compared to reported net income of $215 million, or $2.41 per diluted share, for the third quarter of Fiscal 2015. Earnings per diluted share increased 4% from the prior year period, excluding foreign currency impacts and restructuring and other charges. On a reported basis, net income was $131 million or $1.54 per diluted share in the third quarter of Fiscal 2016.
“2015 was a year of transition,” said Ralph Lauren, Executive Chairman and Chief Creative Officer. “While our recent results have been disappointing, I am greatly encouraged by the changes that are already taking place since the appointment of Stefan Larsson as our new CEO. He has my full support as he conducts his comprehensive review of our business and takes the lead to move us forward. We have built one of the strongest global brands in the industry and our goal is to further strengthen the brand, drive strong financial performance and deliver shareholder value.”
“I am excited to be part of Ralph Lauren,” said Stefan Larsson, President and Chief Executive Officer. “While we are disappointed with the current business results, I was brought on board as CEO to institute change that will drive improved performance and strengthen Ralph Lauren’s position among the top luxury companies in the world. I am finalizing an extensive assessment into all aspects of the Company and working with my team to build a comprehensive strategic and financial plan to win. There is a lot of work to be done, but I am confident we will succeed.”
Third Quarter Fiscal 2016 Income Statement Review
Net Revenues. Net revenues for the third quarter of Fiscal 2016 declined 1% on a constant currency basis and 4% on a reported basis to $1.9 billion. This was below the guidance provided in November of 0%-2% reported revenue growth. While international net revenue grew 6% in constant currency in the third quarter, North America revenue declined 4% primarily due to above-average temperatures for most of the Fall and Holiday period, a decline in foreign tourist traffic and product assortment challenges in the Lauren brand. The decline in reported net revenues included approximately 300 basis points of negative impact from foreign currency effects.
Wholesale Sales. In the third quarter of Fiscal 2016, wholesale segment sales decreased 3% on a constant currency basis as a decline in sales in North America offset increased sales in Europe. Reported wholesale segment sales declined 6% to $786 million.
Retail Sales. Retail sales were in line with the prior year on a constant currency basis in the third quarter as growth in new stores and e-commerce was offset by negative comparable store sales. Reported retail segment sales declined 3% to $1.1 billion. Consolidated comparable store sales decreased 5% on a constant currency basis during the third quarter and declined 7% on a reported basis.
Licensing. Licensing revenues of $47 million in the third quarter were in line with the prior year period in both constant currency and on a reported basis.
Gross Profit. Gross profit for the third quarter of Fiscal 2016 was $1.1 billion, excluding restructuring and other charges of $10 million. Gross profit margin was 56.8%, which was 20 basis points lower than the prior year period, reflecting unfavorable foreign currency effects. On a constant currency basis, gross margin was up 30 basis points compared to the prior year period due to benefits from the initial phases of stock-keeping unit (SKU) and style rationalization, product cost negotiations and favorable mix shifts.
Operating Expenses. Operating expenses in the third quarter of Fiscal 2016 were $838 million, excluding restructuring and other charges, 1% below the prior year period, due to better expense management. Operating expense rate of 43.1% increased 160 basis points compared with the third quarter of Fiscal 2015, due to fixed expense deleverage and incremental investments in infrastructure. As reported, operating expenses in the third quarter of Fiscal 2016 were $905 million, which included $67 million in restructuring and other charges, including $34 million related to a pending customs audit.
Operating Income. Operating income in the third quarter of Fiscal 2016 was $266 million, excluding restructuring and other charges. Operating margin of 13.7% was 180 basis points below the prior year period, which was better than the guidance of a 200-250 basis point decline provided in November, due to better expense management. The lower operating margin was primarily attributable to negative foreign currency effects, fixed expense deleverage and incremental investments in infrastructure.
Wholesale Operating Income. Wholesale operating income in the third quarter of Fiscal 2016 was $184 million, excluding restructuring and other charges, compared with $207 million in the prior year period. Wholesale operating margin decreased 120 basis points to 23.5% driven by fixed expense deleverage in North America and negative foreign currency effects, partially offset by strong performance in Europe.
Retail Operating Income. Retail operating income in the third quarter of Fiscal 2016 was $154 million, excluding restructuring and other charges, compared with $194 million in the prior year period. Retail operating margin declined 300 basis points to 13.9%, due to fixed expense deleverage and negative foreign currency effects.
Licensing Operating Income. Licensing operating income of $42 million in the third quarter of Fiscal 2016 was in line with the prior year period.
Net Income and Diluted EPS. Net income for the third quarter of Fiscal 2016 was $193 million, or $2.27 per diluted share, excluding restructuring and other charges. This compared to reported net income of $215 million, or $2.41 per diluted share, for the third quarter of Fiscal 2015. Earnings per diluted share increased 4% from the prior year period, excluding foreign currency impacts and restructuring and other charges. On a reported basis, net income was $131 million or $1.54 per diluted share in the third quarter.
The Company had an effective tax rate of approximately 25.1%, excluding restructuring and other charges, in the third quarter of Fiscal 2016, which compared to an effective tax rate of 28.6% in the third quarter of Fiscal 2015. On a reported basis, the effective tax rate was 27.5% in the third quarter.
Third Quarter Fiscal 2016 Balance Sheet and Cash Flow Review
The Company ended the third quarter with $1.2 billion in cash and investments, or $612 million in cash and investments net of debt ("net cash"), compared to $1.4 billion in cash and investments and $996 million in net cash at the end of the third quarter of Fiscal 2015. The third quarter ended with inventory of $1.3 billion compared to $1.2 billion in the prior year period. The increase in inventory reflects investments to support anticipated sales growth for existing operations, new businesses and new store openings.
The Company had $123 million in capital expenditures in the third quarter of Fiscal 2016, compared to $124 million in the prior year period. The Company repurchased approximately 803,000 shares of Class A Common Stock during the third quarter, utilizing $100 million of its share repurchase authorization and bringing year-to-date repurchases to $380 million. Approximately $200 million remains available for future share repurchases.
Global Retail Store Network
The Company ended the third quarter of Fiscal 2016 with 501 directly operated stores, comprised of 151 Ralph Lauren stores, 76 Club Monaco stores and 274 Polo factory stores. The Company also operated 589 concession shop locations worldwide at the end of the third quarter. In addition to Company-operated locations, international licensing partners operated 89 Ralph Lauren stores and 28 dedicated shops, as well as 133 Club Monaco stores and shops at the end of the third quarter.
Fiscal 2016 Outlook
The Company is adjusting its Fiscal 2016 outlook. The company expects consolidated net revenues for Fiscal 2016 to be up approximately 1% in constant currency and down approximately 3% on a reported basis. This compares to previous guidance of flat on a reported basis and up 3-5% in constant currency. Based on current exchange rates, the Company continues to expect that foreign currency will have an approximate 400 basis point negative impact on Fiscal 2016 revenue growth.
Operating margin for Fiscal 2016 is now expected to be 290-320 basis points below the prior year’s level due primarily to negative foreign currency effects. This guidance excludes restructuring and other charges that are primarily associated with our global brand reorganization and a pending customs audit charge. This compares to previous guidance of a 180-230 basis point decline. The full year Fiscal 2016 tax rate is now estimated at 28% versus previous guidance of 30%.
In the fourth quarter of Fiscal 2016, the Company expects consolidated net revenues to be flat to down 2% on a reported basis, and based on current exchange rates, foreign currency will have an approximate 150 basis point negative impact on revenue growth. Operating margin for the fourth quarter of Fiscal 2016 is expected to be approximately 400-450 basis points below the comparable prior year period, primarily due to proactive action the Company is taking to clear end-of-season inventories related to the sales challenges the Company faced in the third quarter, as well as infrastructure investments and negative foreign exchange impacts. The fourth quarter tax rate is estimated at 32%.
Conference Call
As previously announced, the Company will host a conference call and live online webcast today, Thursday, February 4th, at 9:00 a.m. Eastern. Listeners may access a live broadcast of the conference call on the Company's investor relations website at http://investor.ralphlauren.com or by dialing 517-623-4799. To access the conference call, listeners should dial in by 8:45 a.m. Eastern and request to be connected to the Ralph Lauren Third Quarter Fiscal 2016 conference call.
An online archive of the broadcast will be available by accessing the Company's investor relations website at http://investor.ralphlauren.com. A telephone replay of the call will be available from 12:00 P.M. Eastern, Thursday, February 4, 2016 through 6:00 P.M. Eastern, Thursday, February 11, 2016 by dialing 203-369-3768 and entering passcode 6582.
ABOUT RALPH LAUREN
Ralph Lauren Corporation (NYSE: RL) is a global leader in the design, marketing and distribution of premium lifestyle products in four categories: apparel, home, accessories and fragrances. For more than 48 years, Ralph Lauren's reputation and distinctive image have been consistently developed across an expanding number of products, brands and international markets. The Company's brand names, which include Ralph Lauren Purple Label, Ralph Lauren Collection, Double RL, Ralph Lauren Black Label, Polo Ralph Lauren, Polo Sport, Polo Ralph Lauren Children’s, Ralph Lauren Home, Lauren Ralph Lauren, RLX, Denim & Supply Ralph Lauren, American Living, Chaps and Club Monaco, constitute one of the world's most widely recognized families of consumer brands. For more information, go to http://investor.ralphlauren.com.
“2015 was a year of transition,” said Ralph Lauren, Executive Chairman and Chief Creative Officer. “While our recent results have been disappointing, I am greatly encouraged by the changes that are already taking place since the appointment of Stefan Larsson as our new CEO. He has my full support as he conducts his comprehensive review of our business and takes the lead to move us forward. We have built one of the strongest global brands in the industry and our goal is to further strengthen the brand, drive strong financial performance and deliver shareholder value.”
“I am excited to be part of Ralph Lauren,” said Stefan Larsson, President and Chief Executive Officer. “While we are disappointed with the current business results, I was brought on board as CEO to institute change that will drive improved performance and strengthen Ralph Lauren’s position among the top luxury companies in the world. I am finalizing an extensive assessment into all aspects of the Company and working with my team to build a comprehensive strategic and financial plan to win. There is a lot of work to be done, but I am confident we will succeed.”
Third Quarter Fiscal 2016 Income Statement Review
Net Revenues. Net revenues for the third quarter of Fiscal 2016 declined 1% on a constant currency basis and 4% on a reported basis to $1.9 billion. This was below the guidance provided in November of 0%-2% reported revenue growth. While international net revenue grew 6% in constant currency in the third quarter, North America revenue declined 4% primarily due to above-average temperatures for most of the Fall and Holiday period, a decline in foreign tourist traffic and product assortment challenges in the Lauren brand. The decline in reported net revenues included approximately 300 basis points of negative impact from foreign currency effects.
Wholesale Sales. In the third quarter of Fiscal 2016, wholesale segment sales decreased 3% on a constant currency basis as a decline in sales in North America offset increased sales in Europe. Reported wholesale segment sales declined 6% to $786 million.
Retail Sales. Retail sales were in line with the prior year on a constant currency basis in the third quarter as growth in new stores and e-commerce was offset by negative comparable store sales. Reported retail segment sales declined 3% to $1.1 billion. Consolidated comparable store sales decreased 5% on a constant currency basis during the third quarter and declined 7% on a reported basis.
Licensing. Licensing revenues of $47 million in the third quarter were in line with the prior year period in both constant currency and on a reported basis.
Gross Profit. Gross profit for the third quarter of Fiscal 2016 was $1.1 billion, excluding restructuring and other charges of $10 million. Gross profit margin was 56.8%, which was 20 basis points lower than the prior year period, reflecting unfavorable foreign currency effects. On a constant currency basis, gross margin was up 30 basis points compared to the prior year period due to benefits from the initial phases of stock-keeping unit (SKU) and style rationalization, product cost negotiations and favorable mix shifts.
Operating Expenses. Operating expenses in the third quarter of Fiscal 2016 were $838 million, excluding restructuring and other charges, 1% below the prior year period, due to better expense management. Operating expense rate of 43.1% increased 160 basis points compared with the third quarter of Fiscal 2015, due to fixed expense deleverage and incremental investments in infrastructure. As reported, operating expenses in the third quarter of Fiscal 2016 were $905 million, which included $67 million in restructuring and other charges, including $34 million related to a pending customs audit.
Operating Income. Operating income in the third quarter of Fiscal 2016 was $266 million, excluding restructuring and other charges. Operating margin of 13.7% was 180 basis points below the prior year period, which was better than the guidance of a 200-250 basis point decline provided in November, due to better expense management. The lower operating margin was primarily attributable to negative foreign currency effects, fixed expense deleverage and incremental investments in infrastructure.
Wholesale Operating Income. Wholesale operating income in the third quarter of Fiscal 2016 was $184 million, excluding restructuring and other charges, compared with $207 million in the prior year period. Wholesale operating margin decreased 120 basis points to 23.5% driven by fixed expense deleverage in North America and negative foreign currency effects, partially offset by strong performance in Europe.
Retail Operating Income. Retail operating income in the third quarter of Fiscal 2016 was $154 million, excluding restructuring and other charges, compared with $194 million in the prior year period. Retail operating margin declined 300 basis points to 13.9%, due to fixed expense deleverage and negative foreign currency effects.
Licensing Operating Income. Licensing operating income of $42 million in the third quarter of Fiscal 2016 was in line with the prior year period.
Net Income and Diluted EPS. Net income for the third quarter of Fiscal 2016 was $193 million, or $2.27 per diluted share, excluding restructuring and other charges. This compared to reported net income of $215 million, or $2.41 per diluted share, for the third quarter of Fiscal 2015. Earnings per diluted share increased 4% from the prior year period, excluding foreign currency impacts and restructuring and other charges. On a reported basis, net income was $131 million or $1.54 per diluted share in the third quarter.
The Company had an effective tax rate of approximately 25.1%, excluding restructuring and other charges, in the third quarter of Fiscal 2016, which compared to an effective tax rate of 28.6% in the third quarter of Fiscal 2015. On a reported basis, the effective tax rate was 27.5% in the third quarter.
Third Quarter Fiscal 2016 Balance Sheet and Cash Flow Review
The Company ended the third quarter with $1.2 billion in cash and investments, or $612 million in cash and investments net of debt ("net cash"), compared to $1.4 billion in cash and investments and $996 million in net cash at the end of the third quarter of Fiscal 2015. The third quarter ended with inventory of $1.3 billion compared to $1.2 billion in the prior year period. The increase in inventory reflects investments to support anticipated sales growth for existing operations, new businesses and new store openings.
The Company had $123 million in capital expenditures in the third quarter of Fiscal 2016, compared to $124 million in the prior year period. The Company repurchased approximately 803,000 shares of Class A Common Stock during the third quarter, utilizing $100 million of its share repurchase authorization and bringing year-to-date repurchases to $380 million. Approximately $200 million remains available for future share repurchases.
Global Retail Store Network
The Company ended the third quarter of Fiscal 2016 with 501 directly operated stores, comprised of 151 Ralph Lauren stores, 76 Club Monaco stores and 274 Polo factory stores. The Company also operated 589 concession shop locations worldwide at the end of the third quarter. In addition to Company-operated locations, international licensing partners operated 89 Ralph Lauren stores and 28 dedicated shops, as well as 133 Club Monaco stores and shops at the end of the third quarter.
Fiscal 2016 Outlook
The Company is adjusting its Fiscal 2016 outlook. The company expects consolidated net revenues for Fiscal 2016 to be up approximately 1% in constant currency and down approximately 3% on a reported basis. This compares to previous guidance of flat on a reported basis and up 3-5% in constant currency. Based on current exchange rates, the Company continues to expect that foreign currency will have an approximate 400 basis point negative impact on Fiscal 2016 revenue growth.
Operating margin for Fiscal 2016 is now expected to be 290-320 basis points below the prior year’s level due primarily to negative foreign currency effects. This guidance excludes restructuring and other charges that are primarily associated with our global brand reorganization and a pending customs audit charge. This compares to previous guidance of a 180-230 basis point decline. The full year Fiscal 2016 tax rate is now estimated at 28% versus previous guidance of 30%.
In the fourth quarter of Fiscal 2016, the Company expects consolidated net revenues to be flat to down 2% on a reported basis, and based on current exchange rates, foreign currency will have an approximate 150 basis point negative impact on revenue growth. Operating margin for the fourth quarter of Fiscal 2016 is expected to be approximately 400-450 basis points below the comparable prior year period, primarily due to proactive action the Company is taking to clear end-of-season inventories related to the sales challenges the Company faced in the third quarter, as well as infrastructure investments and negative foreign exchange impacts. The fourth quarter tax rate is estimated at 32%.
Conference Call
As previously announced, the Company will host a conference call and live online webcast today, Thursday, February 4th, at 9:00 a.m. Eastern. Listeners may access a live broadcast of the conference call on the Company's investor relations website at http://investor.ralphlauren.com or by dialing 517-623-4799. To access the conference call, listeners should dial in by 8:45 a.m. Eastern and request to be connected to the Ralph Lauren Third Quarter Fiscal 2016 conference call.
An online archive of the broadcast will be available by accessing the Company's investor relations website at http://investor.ralphlauren.com. A telephone replay of the call will be available from 12:00 P.M. Eastern, Thursday, February 4, 2016 through 6:00 P.M. Eastern, Thursday, February 11, 2016 by dialing 203-369-3768 and entering passcode 6582.
ABOUT RALPH LAUREN
Ralph Lauren Corporation (NYSE: RL) is a global leader in the design, marketing and distribution of premium lifestyle products in four categories: apparel, home, accessories and fragrances. For more than 48 years, Ralph Lauren's reputation and distinctive image have been consistently developed across an expanding number of products, brands and international markets. The Company's brand names, which include Ralph Lauren Purple Label, Ralph Lauren Collection, Double RL, Ralph Lauren Black Label, Polo Ralph Lauren, Polo Sport, Polo Ralph Lauren Children’s, Ralph Lauren Home, Lauren Ralph Lauren, RLX, Denim & Supply Ralph Lauren, American Living, Chaps and Club Monaco, constitute one of the world's most widely recognized families of consumer brands. For more information, go to http://investor.ralphlauren.com.
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