Ralph Lauren Reports Better-Than-Expected Second Quarter Fiscal 2013 Results
Ralph Lauren Reports Better-Than-Expected Second Quarter Fiscal 2013 Results
• Second Quarter Revenues Were $1.9 billion, Led by Retail Segment Growth
• Consolidated Comparable Store Sales Increased 5% in Constant Currency in the Second Quarter
• Second Quarter Operating Income Was $348 million and Operating Income Margin Rose 30 Basis Points to 18.7%
• Earnings Per Diluted Share Was $2.29 in the Second Quarter
NEW YORK--(BUSINESS WIRE)--Nov. 2, 2012-- Ralph Lauren Corporation (NYSE:RL) today reported net income of $214 million, or $2.29 per diluted share, for the second quarter of Fiscal 2013, compared to net income of $233 million, or $2.46 per diluted share, for the second quarter of Fiscal 2012. Net income and net income per diluted share for the second quarter of Fiscal 2013 include the net negative impact of an approximate $15 million one-time discrete tax item.
“Our year-to-date results affirm the tremendous resilience of our business,” said Ralph Lauren, Chairman and Chief Executive Officer. “We continue to make excellent progress on our long-term growth objectives as we invest along many dimensions, including new stores and e-commerce platforms and emerging merchandise categories and regions. Our clarity of vision and purpose has us focused on the most compelling opportunities that we believe will create significant shareholder value over the long term."
“I am proud of our better-than-expected second quarter and first half results,” said Roger Farah, President and Chief Operating Officer. “In the context of a more challenging operating environment, and on top of double-digit sales and profit gains in the prior two years, disciplined execution enabled us to strengthen the margin structure of our business once again. While we expect continued margin improvement in the back half of the year, macroeconomic conditions lead us to be incrementally more cautious on near-term customer demand trends worldwide. Notwithstanding these macroeconomic challenges, the desirability of the Ralph Lauren brand is undeniable and we are well positioned for the upcoming Holiday season.”
Second Quarter Fiscal 2013 Income Statement Review
Net Revenues. Net revenues for the second quarter of Fiscal 2013 were $1.9 billion, 2% below the comparable period last year. The decline in net revenues primarily reflects a planned contraction in wholesale shipments that was partially offset by continued retail segment expansion. Excluding the impact of strategic decisions to discontinue American Living and store closures associated with the Company’s Greater China network repositioning efforts, in addition to the net negative impact from foreign currency translation, net revenues increased approximately 3% in the second quarter.
•Wholesale Sales. Wholesale segment sales of $915 million in the second quarter were 8% below the prior year period, as a proactive reduction in shipments to certain European specialty stores and the net negative impact of foreign currency translation more than offset continued growth in core and emerging merchandise categories in the Americas. Comparisons with the prior year period were also impacted by the discontinuation of American Living in Fiscal 2013 and the global launch of Denim & Supply in the prior year period.
•Retail Sales. Retail sales rose 5% to $901 million from $861 million in the second quarter last year, reflecting growth in comparable store sales and the incremental contribution from new stores and e-commerce operations that was partially offset by store closures associated with the Company’s Greater China network repositioning efforts. Consolidated comparable store sales rose 3% on a reported basis during the second quarter and increased 5% in constant currency.
•Licensing. Licensing revenues of $47 million in the second quarter were 3% below the prior year period. The decline in licensing revenues is primarily due to the discontinuation of certain American Living and South American licensing arrangements.
Gross Profit. Gross profit for the second quarter of Fiscal 2013 increased 2% to $1.1 billion and gross profit margin improved 220 basis points to 58.8%. The higher gross profit margin was primarily driven by lower input costs, beneficial channel mix and operational discipline.
Operating Expenses. Operating expenses rose 3% in the second quarter to $747 million from $728 million in the second quarter of Fiscal 2012. The growth in operating expenses primarily reflects continued investment in the Company’s long-term strategic growth initiatives; increased marketing and advertising expense during the quarter; and increased retail channel mix compared to the prior year period. Operating expense rate was 40.1%, 190 basis points above the prior year period.
Operating Income. Operating income for the second quarter of Fiscal 2013 was $348 million, 1% below the prior year. Operating margin was 18.7%, 30 basis points greater than the second quarter last year, primarily due to the higher gross profit margin that was partially offset by the higher operating expense rate.
•Wholesale Operating Income. Wholesale operating income declined 4% in the second quarter of Fiscal 2013 to $233 million from $242 million last year. Wholesale operating margin was 25.5% in the second quarter, 120 basis points stronger than the prior year. The improvement in wholesale operating margin was primarily due to higher gross margins as a result of lower input costs and operational discipline.
•Retail Operating Income. Retail operating income was $157 million, 8% greater than the $145 million achieved in the second quarter of Fiscal 2012, and retail operating margin was 17.4%, 60 basis points higher than the prior year period. The growth in retail operating income and the expansion in operating margin is a result of comparable store sales growth and disciplined operational management that more than offset continued investment in global e-commerce and the impact of the Company’s Greater China network repositioning efforts.
•Licensing Operating Income. Licensing operating income declined 2% to $35 million from $36 million in the second quarter of Fiscal 2012, primarily due to lower licensing revenues.
Net Income and Diluted EPS. Net income for the second quarter of Fiscal 2013 was $214 million, 8% below the $233 million achieved last year. Net income per diluted share declined 7% to $2.29 from $2.46 last year. The decline in net income and diluted EPS results for the second quarter of Fiscal 2013 principally relates to a higher effective tax rate of 38% compared to 33% in the prior year period. The higher effective tax rate is related to the net negative impact of an approximate $15 million one-time discrete tax item.
Second Quarter Fiscal 2013 Balance Sheet Review
The Company ended the second quarter with $1.1 billion in cash and investments, or $832 million in cash and investments net of debt ("net cash"), compared to $979 million in cash and investments and $606 million in net cash at the end of the second quarter of Fiscal 2012. The Company had $55 million in capital expenditures in the second quarter, compared to $53 million in the prior year period. The second quarter ended with inventory up 7% to $1.1 billion from $988 million in the second quarter of last year.
Global Retail Store Network
The Company ended the second quarter of Fiscal 2013 with 385 directly operated stores, comprised of 107 Ralph Lauren stores, 58 Club Monaco stores, 206 Polo factory stores and 14 Rugby stores. The Company also operated 488 concession shop locations worldwide at the end of the second quarter. In addition to Company-operated locations, international licensing partners operated 58 Ralph Lauren stores and 29 dedicated concession shops as well as 64 Club Monaco stores and shops at the end of the second quarter.
Subsequent to the end of the second quarter, the Company approved a plan to discontinue operations for the Rugby brand in order to focus resources on higher growth, more scalable global opportunities with the core Ralph Lauren brand. As a result, the Company expects to close 14 stores and an e-commerce-enabled website over the balance of Fiscal 2013 and to record associated pretax charges of $20 million - $30 million during the second half of the year. Approximately 75% of the pretax charges is expected to be incurred in the third quarter of Fiscal 2013, with the remainder booked in the fourth quarter.
Fiscal 2013 Outlook
The Company expects consolidated net revenues for Fiscal 2013 to increase by 2%-3%, which compares to its previous expectation for mid-single-digit consolidated net revenue growth. Included in the Fiscal 2013 net revenue expectation is an approximate 400-500 basis point net negative impact associated with strategic decisions regarding certain operations, including store closures associated with the Company’s Greater China network repositioning efforts and the discontinuation of American Living, in addition to unfavorable foreign currency effects. Operating margin from continuing operations for Fiscal 2013 is expected to be approximately 50 basis points above the prior year period as anticipated gross profit margin expansion is largely offset by continued investment in the Company's long-term growth initiatives and the impact of overall channel mix. The full year Fiscal 2013 sales and operating margin expectations outlined in this press release do not include the anticipated pretax charges related to the closure of the Rugby brand noted above. The Company continues to estimate the full year Fiscal 2013 tax rate at approximately 33%.
In the third quarter of Fiscal 2013, the Company expects consolidated net revenues to increase by a low-single-digit percentage, as a mid-single-digit increase in retail revenues is partially offset by a low-single-digit decline in wholesale revenues. Included in the third quarter net revenue expectation is an approximate 400 basis point net negative impact from strategic decisions regarding certain operations, including store closures associated with the Company’s Greater China network repositioning efforts and the discontinuation of American Living, in addition to unfavorable foreign currency effects. Operating margin from continuing operations for the third quarter of Fiscal 2013 is expected to be approximately 25-75 basis points above the comparable prior year period, as an anticipated increase in gross profit margin is partially offset by incremental investment to support the Company's strategic growth objectives and the impact of overall channel mix. The third quarter sales and operating margin expectations outlined in this press release do not include the anticipated pretax charges related to the closure of the Rugby brand noted above. Subsequent to the end of the second quarter, the Company had a favorable resolution of a discrete tax item. As such, the Company currently expects the third quarter tax rate to be approximately 29%.
As previously announced, the Company will host a conference call and live online webcast today, Friday, November 2, 2012, at 9:00 a.m. Eastern