Ralph Lauren Reports Third Quarter Fiscal 2016 Results

04 Feb 2016, 00:00 AM EST

Third Quarter Net Revenues were $1.9 Billion in Constant Currency
Better-Than-Expected Operating Margin of 13.7%, Excluding
Restructuring and Other Charges, Reflects Better Expense Management
Earnings Per Diluted Share Was $2.27 in the Third Quarter, Excluding
Restructuring and Other Charges
The Company Adjusts Its Fiscal 2016 Outlook

NEW YORK–(BUSINESS WIRE)–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 4^th, 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.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This press release and oral statements made from time to time by
representatives of the Company contain certain “forward-looking
statements” within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements include the statements
under “Fiscal 2016 Outlook” and statements regarding, among other
things, our current expectations about the Company’s future results and
financial condition, revenues, store openings and closings, employee
reductions, margins, expenses and earnings and are indicated by words or
phrases such as “anticipate,” “estimate,” “expect,” “project,” “we
believe” and similar words or phrases. These forward-looking statements
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. Forward-looking
statements are based largely on the Company’s expectations and judgments
and are subject to a number of risks and uncertainties, many of which
are unforeseeable and beyond our control. The factors that could cause
actual results to materially differ include, among others: the loss of
key personnel or other changes in our executive and senior management
team or to our operating structure and our ability to effectively
transfer knowledge during periods of transition; our ability to achieve
anticipated operating enhancements and/or cost reductions from our
restructuring plans, including our transition to a global brand-based
operating structure; our ability to successfully implement our
anticipated growth strategies and to capitalize on our repositioning
initiatives in certain regions and merchandise categories; our exposure
to currency exchange rate fluctuations from both a transactional and
translational perspective, and risks associated with increases in the
costs of raw materials, transportation, and labor; our ability to secure
the technology facilities and systems used by the Company and those of
third party service providers from, among other things, cybersecurity
breaches, acts of vandalism, computer viruses or similar events; our
ability to continue to maintain our brand image and reputation and
protect our trademarks; the impact of the volatile state of the global
economy, stock markets, and other economic conditions on us, our
customers, our suppliers, and our vendors, and our ability and their
ability to access sources of liquidity; the impact of changes in
consumers’ ability or preferences on purchases of premium lifestyle
products that we sell and our ability to forecast consumer demand;
changes in the competitive marketplace; risks associated with our
international operations, including risks related to the importation and
exportation of products, and risks associated with 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; the impact to our business of events of unrest and instability
that are currently taking place in certain parts of the world; our
ability to continue to expand our business internationally; changes in
our effective tax rates or credit profile and ratings within the
financial community; changes in the business of, and our relationships
with, major department store customers and licensing partners; our
efforts to improve the efficiency of our distribution system and enhance
our information technology systems and e-commerce platform; the impact
to our business resulting from potential costs and obligations related
to the early termination of our long term, non-cancellable leases; the
potential impact to the trading prices of our securities if our Class A
Common Stock share repurchase activity and/or cash dividend rate differs
from investors’ expectations; the potential impact on our operations and
on our customers resulting from natural or man-made disasters; and other
risk factors identified in the Company’s Annual Report on Form 10-K,
Form 10-Q and Form 8-K reports filed with the Securities and Exchange
Commission. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new
information, future events or otherwise.


RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE SHEETS
Prepared in accordance with U.S. Generally Accepted Accounting Principles
(in millions)
(Unudited)



	December 26,			March 28,			December 27,
	2015			2015			2014

ASSETS
Current assets:
Cash and cash equivalents	$	527		$	500		$	763
Short-term investments		688			644			644
Accounts receivable, net of allowances		473			655			416
Inventories		1,271			1,042			1,211
Income tax receivable		70			57			60
Deferred tax assets		154			145			149
Prepaid expenses and other current assets		269			281			276

Total current assets		3,452			3,324			3,519

Property and equipment, net		1,564			1,436			1,454
Deferred tax assets		38			45			49
Goodwill		901			903			917
Intangible assets, net		248			267			273
Other non-current assets^(a)		138			131			130

Total assets	$	6,341		$	6,106		$	6,342

LIABILITIES AND EQUITY
Current liabilities:
Short-term debt	$	15		$	234		$	113
Accounts payable		195			210			229
Income tax payable		55			27			132
Accrued expenses and other current liabilities		949			715			784

Total current liabilities		1,214			1,186			1,258

Long-term debt		596			298			298
Non-current liability for unrecognized tax benefits		80			116			112
Other non-current liabilities		647			615			599

Total liabilities		2,537			2,215			2,267

Equity:
Common stock		1			1			1
Additional paid-in-capital		2,236			2,117			2,089
Retained earnings		6,015			5,787			5,706
Treasury stock, Class A, at cost		(4,248	)		(3,849	)		(3,699	)
Accumulated other comprehensive loss		(200	)		(165	)		(22	)

Total equity		3,804			3,891			4,075

Total liabilities and equity	$	6,341		$	6,106		$	6,342



Net Cash (incl. LT Investments)		612			620			996
Cash & Investments (ST & LT)		1,223			1,152			1,407

Net Cash (excl. LT Investments)		604			612			996
Cash & ST Investments		1,215			1,144			1,407

^(a) Includes non-current investments of:	$	8		$	8		$	–


RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Prepared in accordance with U.S. Generally Accepted Accounting Principles
(in millions, except per share data)
(Unaudited)


	Three Months Ended
	December 26,			December 27,
	2015			2014


Wholesale net sales	$	786		$	837
Retail net sales		1,113			1,149

Net sales		1,899			1,986

Licensing revenue		47			47

Net revenues		1,946			2,033

Cost of goods sold^(a)		(852	)		(874	)

Gross profit		1,094			1,159

Selling, general, and administrative expenses^(a)		(833	)		(837	)

Amortization of intangible assets		(5	)		(6	)

Impairment of assets		(9	)		–

Restructuring and other charges		(58	)		(1	)

Total other operating expenses, net		(905	)		(844	)

Operating income		189			315

Foreign currency losses		(3	)		(8	)

Interest expense		(6	)		(3	)

Interest and other income, net		2			–

Equity in losses of equity-method investees		(1	)		(3	)

Income before provision for income taxes		181			301

Provision for income taxes		(50	)		(86	)

Net income	$	131		$	215

Net income per share – Basic	$	1.55		$	2.44

Net income per share – Diluted	$	1.54		$	2.41

Weighted average shares outstanding – Basic		84.9			88.1

Weighted average shares outstanding – Diluted		85.5			89.0

Dividends declared per share	$	0.50		$	0.45

^(a) Includes total depreciation expense of:	$	(71	)	$	(72	)


RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Prepared in accordance with U.S. Generally Accepted Accounting Principles
(in millions, except per share data)
(Unaudited)


	Nine Months Ended
	December 26,			December 27,
	2015			2014


Wholesale net sales	$	2,355		$	2,488
Retail net sales		3,044			3,115

Net sales		5,399			5,603

Licensing revenue		135			132

Net revenues		5,534			5,735

Cost of goods sold^(a)		(2,361	)		(2,401	)

Gross profit		3,173			3,334

Selling, general, and administrative expenses^(a)		(2,494	)		(2,461	)

Amortization of intangible assets		(17	)		(19	)

Impairment of assets		(24	)		(2	)

Restructuring and other charges		(123	)		(7	)

Total other operating expenses, net		(2,658	)		(2,489	)

Operating income		515			845

Foreign currency losses		(9	)		(14	)

Interest expense		(14	)		(12	)

Interest and other income, net		5			4

Equity in losses of equity-method investees		(7	)		(9	)

Income before provision for income taxes		490			814

Provision for income taxes		(135	)		(236	)

Net income	$	355		$	578

Net income per share – Basic	$	4.15		$	6.53

Net income per share – Diluted	$	4.11		$	6.46

Weighted average shares outstanding – Basic		85.7			88.5

Weighted average shares outstanding – Diluted		86.3			89.5

Dividends declared per share	$	1.50		$	1.35

^(a) Includes total depreciation expense of:	$	(210	)	$	(200	)


RALPH LAUREN CORPORATION
OTHER INFORMATION
(in millions)
(Unaudited)

SEGMENT INFORMATION
Net revenues and operating income for the periods ended December 26, 2015 and December 27, 2014 for each segment were as follows:

	Three Months Ended						Nine Months Ended
	December 26,			December 27,			December 26,			December 27,
		2015			2014			2015			2014

Net revenues:
Wholesale	$	786		$	837		$	2,355		$	2,488
Retail		1,113			1,149			3,044			3,115
Licensing		47			47			135			132
Total net revenues	$	1,946		$	2,033		$	5,534		$	5,735

Operating income:
Wholesale	$	183		$	207		$	567		$	634
Retail		136			194			369			499
Licensing		42			42			120			120
		361			443			1,056			1,253

Unallocated corporate expenses		(114	)		(127	)		(418	)		(401	)
Unallocated restructuring and other charges		(58	)		(1	)		(123	)		(7	)
Total operating income	$	189		$	315		$	515		$	845


RALPH LAUREN CORPORATION
Constant Currency Financial Measures
(in millions)
(Unaudited)

Same – Store Sales Data

	Three Months Ended				Nine Months Ended
	December 26, 2015				December 26, 2015
	% Change				% Change
	As Reported		Constant Currency		As Reported	Constant Currency
Total Ralph Lauren		(7%)		(5%)	(7%)	(3%)


Operating Segment Data

	Three Months Ended				% Change
	December 26, 2015		December 27, 2014		As Reported	Constant Currency
Wholesale net sales	$	786	$	837	(6.0%)	(3.1%)
Retail net sales		1,113		1,149	(3.1%)	0.5%
Net sales		1,899		1,986	(4.4%)	(1.0%)
Licensing revenue		47		47	(0.4%)	0.1%
Net revenues	$	1,946	$	2,033	(4.3%)	(1.0%)


	Nine Months Ended				% Change
	December 26, 2015		December 27, 2014		As Reported	Constant Currency
Wholesale net sales	$	2,355	$	2,488	(5.4%)	(1.7%)
Retail net sales		3,044		3,115	(2.3%)	2.8%
Net sales		5,399		5,603	(3.6%)	0.8%
Licensing revenue		135		132	2.4%	4.2%
Net revenues	$	5,534	$	5,735	(3.5%)	0.9%


RALPH LAUREN CORPORATION
Reconciliation of Certain Non-GAAP Financial Measures
(in millions, except per share data)
(Unaudited)

	Three Months Ended December 26, 2015

	As Reported		Adjustments^(a)		As Adjusted (Including FX)		Foreign Exchange Impact		As Adjusted (Excluding FX)
Net revenues	$	1,946	$	–	$	1,946	$	67	$	2,013
Gross profit		1,094		10		1,104		49		1,153
Gross profit margin		56.2%				56.8%				57.3%
Total other operating expenses		(905)		67		(838)
Operating expense margin		46.6%				43.1%
Operating income		189		77		266
Operating margin		9.7%				13.7%
Income before provision for income taxes		181		77		258
Provision for income taxes		(50)		(15)		(65)
Effective tax rate		27.5%				25.1%
Net income	$	131	$	62	$	193
Net income per diluted share	$	1.54	$	0.73	$	2.27	$	0.24	$	2.51
SEGMENT INFORMATION –
OPERATING INCOME:
Wholesale	$	183	$	1	$	184
Operating margin		23.3%				23.5%
Retail		136		18		154
Operating margin		12.2%				13.9%
Licensing		42		–		42
Operating margin		89.4%				89.4%
Unallocated corporate expenses and restructuring and other charges, net		(172)		58		(114)
Total operating income	$	189	$	77	$	266


	Nine Months Ended December 26, 2015

	As Reported		Adjustments^(a)		As Adjusted (Including FX)		Foreign Exchange Impact		As Adjusted (Excluding FX)
Net revenues	$	5,534	$	–	$	5,534	$	253	$	5,787
Gross profit		3,173		13		3,186		202		3,388
Gross profit margin		57.3%				57.6%				58.6%
Total other operating expenses		(2,658)		147		(2,511)
Operating expense margin		48.0%				45.4%
Operating income		515		160		675
Operating margin		9.3%				12.2%
Income before provision for income taxes		490		160		650
Provision for income taxes		(135)		(43)		(178)
Effective tax rate		27.6%				27.5%
Net income	$	355	$	117	$	472
Net income per diluted share	$	4.11	$	1.36	$	5.47	$	0.94	$	6.41
SEGMENT INFORMATION –
OPERATING INCOME:
Wholesale	$	567	$	6	$	573
Operating margin		24.1%				24.3%
Retail		369		31		400
Operating margin		12.1%				13.2%
Licensing		120		–		120
Operating margin		89.1%				89.1%
Unallocated corporate expenses and restructuring and other charges, net		(541)		123		(418)
Total operating income	$	515	$	160	$	675