e10vq
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended October 1,
2011
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number:
001-13057
Ralph Lauren
Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
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13-2622036
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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650 Madison Avenue,
New York, New York
(Address of principal
executive offices)
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10022
(Zip
Code)
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(212) 318-7000
(Registrants telephone
number, including area code)
Polo Ralph Lauren
Corporation
(Former name, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large accelerated filer
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þ
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Accelerated filer
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o
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Non-accelerated
filer
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o
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(Do not check if a smaller reporting company)
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Smaller reporting company
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o
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Indicate by check mark whether the
registrant is a shell company (as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
At November 4, 2011, 61,298,249 shares of the
registrants Class A common stock, $.01 par
value, and 30,831,276 shares of the registrants
Class B common stock, $.01 par value, were outstanding.
RALPH
LAUREN CORPORATION
INDEX
2
RALPH
LAUREN CORPORATION
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October 1,
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April 2,
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2011
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2011
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(millions)
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(unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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407.7
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$
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453.0
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Short-term investments
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477.9
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593.9
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Accounts receivable, net of allowances of $248.2 million
and $230.9 million
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633.5
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442.8
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Inventories
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988.4
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702.1
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Income tax receivable
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5.9
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57.8
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Deferred tax assets
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103.6
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92.1
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Prepaid expenses and other
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156.9
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136.3
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Total current assets
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2,773.9
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2,478.0
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Non-current investments
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93.8
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83.6
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Property and equipment, net
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833.5
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788.8
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Deferred tax assets
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75.5
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76.7
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Goodwill
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1,024.5
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1,016.3
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Intangible assets, net
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378.6
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387.7
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Other assets
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148.6
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150.0
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Total assets
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$
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5,328.4
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$
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4,981.1
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LIABILITIES AND EQUITY
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Current liabilities:
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Short-term debt
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$
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100.0
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$
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Accounts payable
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190.0
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141.3
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Income tax payable
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123.1
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8.9
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Accrued expenses and other
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709.3
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681.8
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Total current liabilities
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1,122.4
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832.0
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Long-term debt
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273.7
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291.9
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Non-current liability for unrecognized tax benefits
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160.2
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156.4
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Other non-current liabilities
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388.2
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396.1
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Commitments and contingencies (Note 13)
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Total liabilities
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1,944.5
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1,676.4
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Equity:
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Class A common stock, par value $.01 per share;
90.5 million and 89.5 million shares issued;
61.3 million and 63.7 million shares outstanding
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0.9
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0.9
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Class B common stock, par value $.01 per share;
30.8 million shares issued and outstanding
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0.3
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0.3
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Additional
paid-in-capital
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1,529.4
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1,444.7
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Retained earnings
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3,816.0
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3,435.3
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Treasury stock, Class A, at cost (29.2 million and
25.8 million shares)
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( 2,210.1
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)
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(1,792.3
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)
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Accumulated other comprehensive income
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247.4
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215.8
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Total equity
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3,383.9
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3,304.7
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Total liabilities and equity
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$
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5,328.4
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$
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4,981.1
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See accompanying notes.
3
RALPH
LAUREN CORPORATION
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Three Months Ended
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Six Months Ended
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October 1,
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October 2,
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October 1,
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October 2,
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2011
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2010
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2011
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2010
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(millions, except per share data)
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(unaudited)
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Net sales
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$
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1,856.8
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$
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1,485.6
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$
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3,343.3
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$
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2,601.1
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Licensing revenue
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47.8
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46.5
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87.7
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84.3
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Net revenues
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1,904.6
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1,532.1
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3,431.0
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2,685.4
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Cost of goods
sold(a)
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(826.0
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)
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(644.2
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)
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(1,390.9
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)
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(1,085.3
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)
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Gross profit
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1,078.6
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887.9
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2,040.1
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1,600.1
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Other costs and expenses:
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Selling, general and administrative
expenses(a)
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(720.3
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)
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(574.3
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)
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(1,392.6
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)
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(1,106.3
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)
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Amortization of intangible assets
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(7.5
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)
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(6.2
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)
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(14.6
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)
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(12.2
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)
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Total other costs and expenses
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(727.8
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)
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(580.5
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)
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(1,407.2
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)
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(1,118.5
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)
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Operating income
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350.8
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307.4
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632.9
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481.6
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Foreign currency gains (losses)
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1.8
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2.2
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(2.0
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)
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1.4
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Interest expense
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(6.4
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)
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(4.4
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)
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(12.5
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)
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(8.9
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)
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Interest and other income, net
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2.4
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1.6
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6.6
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3.4
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Equity in income (loss) of equity-method investees
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(1.1
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)
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(0.8
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)
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(3.0
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)
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(2.0
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)
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Income before provision for income taxes
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347.5
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306.0
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622.0
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475.5
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Provision for income taxes
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(114.0
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)
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(100.8
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)
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(204.4
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)
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(149.5
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)
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Net income attributable to RLC
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$
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233.5
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$
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205.2
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$
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417.6
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$
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326.0
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Net income per common share attributable to RLC:
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Basic
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$
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2.53
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$
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2.15
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$
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4.49
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$
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3.38
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Diluted
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$
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2.46
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$
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2.09
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$
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4.35
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$
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3.30
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Weighted average common shares outstanding:
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Basic
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92.2
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95.5
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93.1
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96.4
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Diluted
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94.9
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98.0
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95.9
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98.9
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Dividends declared per share
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$
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0.20
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$
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0.10
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$
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0.40
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$
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0.20
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(a)
Includes total depreciation expense of:
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$
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(48.5
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)
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$
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(40.2
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)
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$
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(96.8
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)
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$
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(80.2
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)
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See accompanying notes.
4
RALPH
LAUREN CORPORATION
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Six Months Ended
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October 1,
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October 2,
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2011
|
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|
2010
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(millions)
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(unaudited)
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Cash flows from operating activities:
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Net income
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$
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417.6
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$
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326.0
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation and amortization expense
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111.4
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92.4
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Deferred income tax benefit
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(13.7
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)
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(22.1
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)
|
Equity in losses of equity-method investees, net of dividends
received
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3.0
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2.0
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Non-cash stock-based compensation expense
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34.0
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30.8
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Excess tax benefits from stock-based compensation arrangements
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(21.2
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)
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(7.0
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)
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Other non-cash charges (benefits), net
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0.6
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(3.7
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)
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Changes in operating assets and liabilities:
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Accounts receivable
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(195.8
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)
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(138.1
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)
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Inventories
|
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(284.4
|
)
|
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(219.2
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)
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Accounts payable and accrued liabilities
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32.7
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|
|
|
113.4
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Income tax receivables and payables
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|
184.9
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|
23.8
|
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Deferred income
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(8.6
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)
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|
|
(11.6
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)
|
Other balance sheet changes
|
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|
23.0
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|
|
37.3
|
|
|
|
|
|
|
|
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Net cash provided by operating activities
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|
|
283.5
|
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|
224.0
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|
|
|
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Cash flows from investing activities:
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|
|
|
|
|
|
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Acquisitions and ventures, net of cash acquired and purchase
price settlements
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(7.9
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)
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(21.4
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)
|
Purchases of investments
|
|
|
(792.9
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)
|
|
|
(567.7
|
)
|
Proceeds from sales and maturities of investments
|
|
|
880.3
|
|
|
|
667.7
|
|
Capital expenditures
|
|
|
(92.4
|
)
|
|
|
(93.8
|
)
|
Change in restricted cash deposits
|
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|
0.3
|
|
|
|
(3.2
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)
|
|
|
|
|
|
|
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Net cash used in investing activities
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|
|
(12.6
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)
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|
|
(18.4
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)
|
|
|
|
|
|
|
|
|
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Cash flows from financing activities:
|
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|
|
|
|
|
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Proceeds from credit facilities
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|
107.7
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|
|
|
|
Repayments of borrowings on credit facilities
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(7.7
|
)
|
|
|
|
|
Payments of capital lease obligations
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(4.2
|
)
|
|
|
(3.9
|
)
|
Payments of dividends
|
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|
(37.4
|
)
|
|
|
(19.4
|
)
|
Repurchases of common stock, including shares surrendered for
tax withholdings
|
|
|
(417.8
|
)
|
|
|
(347.7
|
)
|
Proceeds from exercise of stock options
|
|
|
29.5
|
|
|
|
21.9
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
21.2
|
|
|
|
7.0
|
|
Payment on interest rate swap termination
|
|
|
(7.6
|
)
|
|
|
|
|
Other financing activities
|
|
|
0.2
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(316.1
|
)
|
|
|
(342.6
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(0.1
|
)
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(45.3
|
)
|
|
|
(127.2
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
453.0
|
|
|
|
563.1
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
407.7
|
|
|
$
|
435.9
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
|
|
1.
|
Description
of Business
|
Ralph Lauren Corporation (RLC) is a global leader in
the design, marketing and distribution of premium lifestyle
products, including mens, womens and childrens
apparel, accessories, fragrances and home furnishings.
RLCs long-standing reputation and distinctive image have
been consistently developed across an expanding number of
products, brands and international markets. RLCs brand
names include Polo Ralph Lauren, Purple Label, Ralph Lauren
Collection, Black Label, Blue Label, Lauren by Ralph Lauren,
RRL, RLX, Ralph Lauren Denim & Supply, Rugby Ralph
Lauren, Ralph Lauren Childrenswear, American Living, Chaps
and Club Monaco, among others. RLC and its
subsidiaries are collectively referred to herein as the
Company, we, us,
our and ourselves, unless the context
indicates otherwise.
The Company classifies its businesses into three segments:
Wholesale, Retail and Licensing. The Companys wholesale
sales are made principally to major department and specialty
stores located throughout the U.S., Canada, Europe, Asia and
South America. The Company also sells directly to consumers
through full-price and factory retail stores located throughout
the U.S., Canada, Europe, Asia and South America; through
concessions-based shop-within-shops located primarily in Asia;
and through its retail
e-commerce
channel, which includes domestic sites located at
www.RalphLauren.com and www.Rugby.com and its United Kingdom
site located at www.RalphLauren.co.uk. In September 2011, the
Company expanded its
e-commerce
presence by launching a new retail
e-commerce
site in France located at www.RalphLauren.fr, which also ships
products to Belgium, Luxembourg and the Netherlands. The Company
also licenses the right to unrelated third parties to use its
various trademarks in connection with the manufacture and sale
of designated products, such as apparel, eyewear and fragrances,
in specified geographical areas for specified periods.
On August 11, 2011, at the Annual Meeting of Stockholders,
the Companys stockholders approved an amendment to the
Companys Amended and Restated Certificate of Incorporation
to change the Companys name from Polo Ralph Lauren
Corporation to Ralph Lauren Corporation. The Companys name
change became effective on August 15, 2011.
Interim
Financial Statements
The interim consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and
Exchange Commission (the SEC). The interim
consolidated financial statements are unaudited. In the opinion
of management, however, such consolidated financial statements
contain all normal and recurring adjustments necessary to
present fairly the consolidated financial condition, results of
operations and changes in cash flows of the Company for the
interim periods presented. In addition, certain information and
footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the U.S. (US GAAP) have been
condensed or omitted from this report as is permitted by the
SECs rules and regulations. However, the Company believes
that the disclosures herein are adequate to make the information
presented not misleading.
The consolidated balance sheet data as of April 2, 2011 is
derived from the audited consolidated financial statements
included in the Companys Annual Report on
Form 10-K
filed with the SEC for the fiscal year ended April 2, 2011
(the Fiscal 2011
10-K),
which should be read in conjunction with these interim unaudited
consolidated financial statements. Reference is made to the
Fiscal 2011
10-K for a
complete set of financial statements.
Basis
of Consolidation
The unaudited interim consolidated financial statements present
the financial position, results of operations and cash flows of
the Company, including all entities in which the Company has a
controlling financial interest and
6
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
is determined to be the primary beneficiary. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Fiscal
Year
The Company utilizes a
52-53 week
fiscal year ending on the Saturday closest to March 31. As
such, fiscal year 2012 will end on March 31, 2012 and will
be a 52-week period (Fiscal 2012). Fiscal year 2011
ended on April 2, 2011 and also reflected a 52-week period
(Fiscal 2011). Accordingly, the second quarter of
Fiscal 2012 ended on October 1, 2011 and was a 13-week
period. The second quarter of Fiscal 2011 ended on
October 2, 2010 and also was a 13-week period.
Prior to the first quarter of Fiscal 2012, the financial
position and operating results of the Companys Japanese
subsidiary, Ralph Lauren Corporation Japan (formerly Polo Ralph
Lauren Kabushiki Kaisha) were reported on a one-month lag.
During the first quarter of Fiscal 2012, the Companys
Japanese subsidiary changed its fiscal year to conform to the
Companys fiscal-year basis. The previously existing
reporting lag was eliminated as the lag was no longer required
to achieve a timely consolidation due to the Companys
investments in technology to enhance its financial statement
close process. The Company believes this change is preferable as
it resulted in contemporaneous reporting of the
subsidiarys operating results. The Company has not
retrospectively applied this change in accounting principle as
the effect was not material to its previously reported annual
and interim consolidated financial statements. The cumulative
effect of this change was reflected within Interest and
other income, net in the Companys consolidated
statement of operations, and increased the Companys pretax
income and net income by $1.0 million and
$0.6 million, respectively, for the six months ended
October 1, 2011.
Use of
Estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ materially from
those estimates.
Significant estimates inherent in the preparation of the
consolidated financial statements include reserves for bad debt,
customer returns, discounts,
end-of-season
markdowns and operational chargebacks; the realizability of
inventory; reserves for litigation and other contingencies;
useful lives and impairments of long-lived tangible and
intangible assets; accounting for income taxes and related
uncertain tax positions; the valuation of stock-based
compensation and related expected forfeiture rates; reserves for
restructuring; and accounting for business combinations.
Reclassifications
Certain reclassifications have been made to the prior
periods financial information in order to conform to the
current periods presentation.
Seasonality
of Business
The Companys business is typically affected by seasonal
trends, with higher levels of wholesale sales generated in its
second and fourth quarters and higher retail sales generated in
its 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 the Retail segment. Accordingly,
the Companys operating results and cash flows for the
three-month and six-month periods ended October 1, 2011 are
not necessarily indicative of the results and cash flows that
may be expected for the full Fiscal 2012.
7
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Summary
of Significant Accounting Policies
|
Revenue
Recognition
Revenue is recognized across all segments of the business when
there is persuasive evidence of an arrangement, delivery has
occurred, price has been fixed or is determinable and
collectability is reasonably assured.
Revenue within the Companys Wholesale segment is
recognized at the time title passes and risk of loss is
transferred to customers. Wholesale revenue is recorded net of
estimates of returns, discounts,
end-of-season
markdown allowances, operational chargebacks and certain
cooperative advertising allowances. Returns and allowances
require pre-approval from management and discounts are based on
trade terms. Estimates for
end-of-season
markdown reserves are based on historical trends, actual and
forecasted seasonal results, an evaluation of current economic
and market conditions, retailer performance and, in certain
cases, contractual terms. Estimates for operational chargebacks
are based on actual notifications of order fulfillment
discrepancies and historical trends. The Company reviews and
refines these estimates on a quarterly basis. The Companys
historical estimates of these costs have not differed materially
from actual results.
Retail store and concessions-based shop-within-shop revenue is
recognized net of estimated returns at the time of sale to
consumers.
E-commerce
revenue from sales of products ordered through the
Companys retail Internet sites is recognized upon delivery
and receipt of the shipment by its customers. Such revenue is
also reduced by an estimate of returns.
Gift cards issued by the Company are recorded as a liability
until they are redeemed, at which point revenue is recognized.
The Company recognizes income for unredeemed gift cards when the
likelihood of a gift card being redeemed by a customer is remote
and the Company determines that it does not have a legal
obligation to remit the value of the unredeemed gift card to the
relevant jurisdiction as unclaimed or abandoned property.
Revenue from licensing arrangements is recognized when earned in
accordance with the terms of the underlying agreements,
generally based upon the higher of (a) contractually
guaranteed minimum royalty levels or (b) actual sales and
royalty data, or estimates thereof, received from the
Companys licensees.
The Company accounts for sales and other related taxes on a net
basis, excluding such taxes from revenue.
Shipping
and Handling Costs
The costs associated with shipping goods to customers are
reflected as a component of selling, general and administrative
(SG&A) expenses in the consolidated statements
of operations. Shipping costs were $10.1 million and
$18.3 million during the three-month and six-month periods
ended October 1, 2011, respectively, and $7.8 million
and $14.0 million during the three-month and six-month
periods ended October 2, 2010, respectively. The costs of
preparing merchandise for sale, such as picking, packing,
warehousing and order charges (handling costs) are
also included in SG&A expenses. Handling costs were
$35.0 million and $65.5 million during the three-month
and six-month periods ended October 1, 2011, respectively,
and $26.2 million and $49.0 million during the
three-month and six-month periods ended October 2, 2010,
respectively. Shipping and handling costs billed to customers
are included in revenue.
Net
Income per Common Share
Basic net income per common share is computed by dividing the
net income applicable to common shares after preferred dividend
requirements, if any, by the weighted-average number of common
shares outstanding during the period. Weighted-average common
shares include shares of the Companys Class A and
Class B common stock. Diluted net income per common share
adjusts basic net income per common share for the effects of
outstanding stock options, restricted stock, restricted stock
units and any other potentially dilutive financial instruments,
only in the periods in which such effect is dilutive under the
treasury stock method.
8
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted-average number of common shares outstanding used to
calculate basic net income per common share is reconciled to
those shares used in calculating diluted net income per common
share as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 1,
|
|
|
October 2,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(millions)
|
|
|
Basic
|
|
|
92.2
|
|
|
|
95.5
|
|
|
|
93.1
|
|
|
|
96.4
|
|
Dilutive effect of stock options, restricted stock and
restricted stock units
|
|
|
2.7
|
|
|
|
2.5
|
|
|
|
2.8
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
94.9
|
|
|
|
98.0
|
|
|
|
95.9
|
|
|
|
98.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase shares of common stock at an exercise price
greater than the average market price of the common stock during
the reporting period are anti-dilutive and therefore not
included in the computation of diluted net income per common
share. In addition, the Company has outstanding restricted stock
units that are issuable only upon the achievement of certain
service
and/or
performance goals. Performance-based restricted stock units are
included in the computation of diluted shares only to the extent
that the underlying performance conditions (a) are
satisfied prior to the end of the reporting period or
(b) would be satisfied if the end of the reporting period
were the end of the related contingency period and the result
would be dilutive under the treasury stock
method. As of October 1, 2011 and
October 2, 2010, there was an aggregate of approximately
0.7 million and 1.7 million, respectively, of
additional shares issuable upon the exercise of anti-dilutive
options and the contingent vesting of performance-based
restricted stock units that were excluded from the diluted share
calculations.
Accounts
Receivable
In the normal course of business, the Company extends credit to
customers that satisfy defined credit criteria. Accounts
receivable, net, as shown in the Companys consolidated
balance sheets, is net of certain reserves and allowances. These
reserves and allowances consist of (a) reserves for
returns, discounts,
end-of-season
markdowns and operational chargebacks and (b) allowances
for doubtful accounts. These reserves and allowances are
discussed in further detail below.
A reserve for sales returns is determined based on an evaluation
of current market conditions, historical returns experience and,
in certain cases, contractual terms. Charges to increase the
reserve are treated as reductions of revenue.
A reserve for trade discounts is determined based on open
invoices where trade discounts have been extended to customers,
and charges to increase the reserve are treated as reductions of
revenue.
Estimated
end-of-season
markdown charges are included as reductions of revenue. The
related markdown provisions are based on retail sales
performance, seasonal negotiations with customers, historical
and forecasted deduction trends, an evaluation of current
economic and market conditions and, in certain cases,
contractual terms.
A reserve for operational chargebacks represents various
deductions by customers relating to individual shipments.
Charges to increase this reserve, net of expected recoveries,
are included as reductions of revenue. The reserve is based on
actual notifications of order fulfillment discrepancies and past
experience.
9
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A rollforward of the activity in the Companys aggregate
reserve for returns, discounts,
end-of-season
markdowns and operational chargebacks is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 1,
|
|
|
October 2,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(millions)
|
|
|
Beginning reserve balance
|
|
$
|
197.1
|
|
|
$
|
162.1
|
|
|
$
|
213.2
|
|
|
$
|
186.0
|
|
Amount charged against revenue to increase reserve
|
|
|
169.1
|
|
|
|
135.1
|
|
|
|
282.1
|
|
|
|
228.6
|
|
Amount credited against customer accounts to decrease reserve
|
|
|
(129.9
|
)
|
|
|
(101.6
|
)
|
|
|
(261.7
|
)
|
|
|
(213.3
|
)
|
Foreign currency translation
|
|
|
(5.3
|
)
|
|
|
6.5
|
|
|
|
(2.6
|
)
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending reserve balance
|
|
$
|
231.0
|
|
|
$
|
202.1
|
|
|
$
|
231.0
|
|
|
$
|
202.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
An allowance for doubtful accounts is determined through
analysis of periodic aging of accounts receivable, assessments
of collectability based on an evaluation of historic and
anticipated trends, the financial condition of the
Companys customers, and an evaluation of the impact of
economic conditions, among other factors.
A rollforward of the activity in the Companys allowance
for doubtful accounts is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 1,
|
|
|
October 2,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(millions)
|
|
|
Beginning reserve balance
|
|
$
|
17.7
|
|
|
$
|
19.8
|
|
|
$
|
17.7
|
|
|
$
|
20.1
|
|
Amount recorded to expense to increase
reserve(a)
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
0.9
|
|
|
|
1.3
|
|
Amount written off against customer accounts to decrease reserve
|
|
|
(0.5
|
)
|
|
|
(1.1
|
)
|
|
|
(1.1
|
)
|
|
|
(1.3
|
)
|
Foreign currency translation
|
|
|
(0.6
|
)
|
|
|
0.9
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending reserve balance
|
|
$
|
17.2
|
|
|
$
|
20.1
|
|
|
$
|
17.2
|
|
|
$
|
20.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Amounts charged to bad debt expense are included within
SG&A expenses in the unaudited interim consolidated
statements of operations. |
Concentration
of Credit Risk
The Company sells its wholesale merchandise primarily to major
department and specialty stores across the U.S., Canada, Europe,
South America and Asia, and extends credit based on an
evaluation of each customers financial capacity and
condition, usually without requiring collateral. In the
Companys wholesale business, concentration of credit risk
is relatively limited due to the large number of customers and
their dispersion across many geographic areas. However, the
Company has four key wholesale customers that generate
significant sales volume. For Fiscal 2011, these customers in
the aggregate contributed approximately 40% of all wholesale
revenues. Further, as of October 1, 2011, the
Companys four key wholesale customers represented
approximately 30% of gross accounts receivable.
Derivative
Financial Instruments
The Company records all derivative instruments on the
consolidated balance sheets at fair value. In addition, for
derivative instruments that qualify for hedge accounting, the
effective portion of changes in their fair value is either
(a) offset against the changes in fair value of the hedged
assets, liabilities or firm commitments through earnings or
(b) recognized in equity as a component of accumulated
other comprehensive income (loss) (AOCI)
10
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
until the hedged item is recognized in earnings, depending on
whether the derivative is being used to hedge changes in fair
value or cash flows, respectively.
Each derivative instrument entered into by the Company which
qualifies for hedge accounting is expected to be highly
effective at reducing the risk associated with the exposure
being hedged. For each derivative that is designated as a hedge,
the Company formally documents the related risk management
objective and strategy, including the identification of the
hedging instrument, the hedged item and the risk exposure, as
well as how effectiveness is to be assessed prospectively and
retrospectively. To assess the effectiveness of derivative
instruments that are designated as hedges, the Company uses
non-statistical methods, including the dollar-offset method,
which compare the change in the fair value of the derivative to
the change in the fair value or cash flows of the hedged item.
The extent to which a hedging instrument has been and is
expected to continue to be effective at achieving offsetting
changes in fair value or cash flows is assessed and documented
by the Company on at least a quarterly basis.
To the extent that a derivative contract designated as a cash
flow hedge is not considered to be effective, any changes in
fair value relating to the ineffective portion are immediately
recognized in earnings within foreign currency gains (losses).
If it is determined that a derivative has not been highly
effective, and will continue not to be highly effective at
hedging the designated exposure, hedge accounting is
discontinued. If a hedge relationship is terminated, the change
in fair value of the derivative previously recorded in AOCI is
recognized when the hedged item affects earnings consistent with
the original hedging strategy, unless the forecasted transaction
is no longer probable of occurring in which case the accumulated
amount is immediately recognized in earnings.
As a result of the use of derivative instruments, the Company is
exposed to the risk that counterparties to derivative contracts
will fail to meet their contractual obligations. To mitigate the
counterparty credit risk, the Company has a policy of only
entering into contracts with carefully selected financial
institutions based upon their credit ratings and certain other
financial factors, adhering to established limits for credit
exposure. The Companys established policies and procedures
for mitigating credit risk on derivative transactions include
continually reviewing and assessing the creditworthiness of
counterparties.
For cash flow reporting purposes, the Company classifies
proceeds received or amounts paid upon the settlement of a
derivative instrument in the same manner as the related item
being hedged.
Forward
Foreign Currency Exchange Contracts
The Company primarily enters into forward foreign currency
exchange contracts as hedges to reduce its risk from exchange
rate fluctuations on inventory purchases, intercompany royalty
payments made by certain of its international operations,
intercompany contributions to fund certain marketing efforts of
its international operations, interest payments made in
connection with outstanding debt and other foreign
currency-denominated operational cash flows. To the extent
foreign currency exchange contracts designated as cash flow
hedges at hedge inception are highly effective in offsetting the
change in the value of the hedged item, the related gains
(losses) are initially deferred in equity as a component of AOCI
and subsequently recognized in the consolidated statements of
operations as follows:
|
|
|
|
|
Forecasted Inventory Purchases Recognized as
part of the cost of the inventory purchases being hedged within
cost of goods sold when the related inventory is sold.
|
|
|
|
Intercompany Royalty Payments and Marketing Contributions
Recognized within foreign currency gains
(losses) generally in the period in which the related royalties
or marketing contributions being hedged are received or paid.
|
|
|
|
Interest Payments on Euro Debt Recognized
within foreign currency gains (losses) in the period in which
the recorded liability impacts earnings due to foreign currency
exchange remeasurement.
|
11
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Hedge of
a Net Investment in a Foreign Operation
Changes in the fair value of a derivative instrument or a
non-derivative financial instrument (such as debt) that is
designated as a hedge of a net investment in a foreign operation
are reported in the same manner as a translation adjustment, to
the extent it is effective as a hedge. In assessing the
effectiveness of a non-derivative financial instrument that has
been designated as a hedge of a net investment, the Company uses
the spot rate method of accounting to value foreign currency
exchange rate changes in both its foreign subsidiaries and the
financial instrument. If the notional amount of the financial
instrument designated as a hedge of a net investment is greater
than the portion of the net investment being hedged, hedge
ineffectiveness is recognized immediately in earnings within
foreign currency gains (losses). To the extent the financial
instrument remains effective, changes in its fair value are
recorded in equity as a component of AOCI until the sale or
liquidation of the hedged net investment.
Undesignated
Hedges
All of the Companys undesignated hedges are entered into
to hedge specific economic risks, such as foreign currency
exchange rate risk. Changes in fair value of undesignated
derivative instruments are immediately recognized in earnings
within foreign currency gains (losses).
See Note 12 for further discussion of the Companys
derivative financial instruments.
For a summary of all of the Companys significant
accounting policies, refer to Note 3 to the audited
consolidated financial statements included in the Companys
Fiscal 2011
10-K.
|
|
4.
|
Recently
Issued Accounting Standards
|
Goodwill
Impairment Testing
In September 2011, the Financial Accounting Standards Board
(FASB) issued revised guidance for goodwill
impairment testing as Accounting Standards Update
(ASU)
No. 2011-08,
Testing Goodwill for Impairment (ASU
2011-08).
ASU 2011-08
simplifies goodwill impairment testing by providing entities
with the option of performing a qualitative assessment to
determine whether it is more likely than not that the fair value
of a reporting unit is less than its carrying amount. The
results of such assessment may be used as a basis for
determining whether it is necessary to perform the two-step
quantitative impairment test currently required under Accounting
Standards Codification (ASC) topic 350,
Intangible Goodwill and Other. ASU
2011-08 is
effective for annual and interim goodwill impairment tests
beginning in Fiscal 2013. The application of ASU
2011-08 is
not expected to have an impact on the Companys
consolidated financial statements.
Presentation
of Comprehensive Income
In June 2011, the FASB issued revised guidance on the
presentation of comprehensive income as ASU
No. 2011-05,
Comprehensive Income: Presentation of Comprehensive
Income (ASU
2011-05).
ASU 2011-05
eliminates the option to present the components of other
comprehensive income (OCI) as part of the
consolidated statement of equity and provides two alternatives
for presenting the components of net income and OCI, either:
(i) in a single continuous statement of comprehensive
income or (ii) in two separate but consecutive financial
statements, consisting of an income statement followed by a
separate statement of comprehensive income. Additionally, items
that are reclassified from AOCI to net income must be presented
on the face of the financial statements. ASU
2011-05
requires retrospective application, and is effective for the
Company as of the beginning of fiscal year 2013. The application
of ASU
2011-05 is
not expected to have a significant impact on the Companys
consolidated financial statements, but will result in a change
in the presentation of the Companys consolidated
statements of operations and equity.
12
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value Measurements
In May 2011, the FASB issued new guidance to improve and align
fair value measurement and disclosure requirements as ASU
No. 2011-04,
Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRSs
(ASU
2011-04).
ASU 2011-04
amends and clarifies certain existing fair value measurements
guidance, including limiting the highest and best
use concept to nonfinancial assets, permitting certain
financial assets and liabilities with offsetting positions in
market or counterparty credit risks to be measured on a net
basis and providing guidance on the use of premiums and
discounts. ASU
2011-04 also
expands the disclosure requirements for Level 3 fair value
measurements, including for transfers between Levels 1 and
3 and Levels 2 and 3 of the fair value hierarchy and in
instances where the use of a nonfinancial asset differs from its
highest and best use. In addition, ASU
2011-04
requires disclosure of the fair value hierarchy level for
financial instruments not measured at fair value but for which
disclosure of fair value is required. ASU
2011-04
requires prospective application, and is effective for the
Company beginning in the fourth quarter of Fiscal 2012. The
application of ASU
2011-04 is
expected to expand the Companys quarterly and annual
disclosures, but will not have an impact on its consolidated
financial statements.
Proposed
Amendments to Current Accounting Standards
The FASB is currently working on amendments to existing
accounting standards governing a number of areas including, but
not limited to, accounting for leases. In August 2010, the FASB
issued an exposure draft, Leases (the Exposure
Draft), which would replace the existing guidance in
Accounting Standards Codification (ASC) topic 840,
Leases. Under the Exposure Draft, among other
changes in practice, a lessees rights and obligations
under all leases, including existing and new arrangements, would
be recognized as assets and liabilities, respectively, on the
balance sheet. Subsequent to the end of the related comment
period, the FASB made several amendments to the exposure draft,
including revising the definition of the lease term
to include the non-cancelable lease term plus only those option
periods for which there is significant economic incentive for
the lessee to extend or not terminate the lease. The FASB also
redefined the initial lease liability to be recorded on the
Companys balance sheet to contemplate only those variable
lease payments that are in substance fixed. In July
2011, the FASB re-exposed the proposed lease standard for
comment, with a final standard expected to be issued by
mid-2012. When and if effective, this proposed standard will
likely have a significant impact on the Companys
consolidated financial statements. However, as the
standard-setting process is still ongoing, the Company is unable
to determine the impact this proposed change in accounting will
have on its consolidated financial statements at this time.
South
Korea Licensed Operations Acquisition
On January 1, 2011, in connection with the transition of
the Ralph Lauren-branded apparel and accessories business in
South Korea (the Ralph Lauren South Korea business)
from a licensed to a wholly owned operation, the Company
acquired certain net assets (including inventory) and employees
from Doosan Corporation (Doosan) in exchange for an
initial payment of approximately $25 million plus an
additional aggregate payment of approximately $22 million
(the South Korea Licensed Operations Acquisition).
Doosan was the Companys licensee for the Ralph Lauren
South Korea business. The Company funded the South Korea
Licensed Operations Acquisition with available cash on-hand. In
conjunction with the South Korea Licensed Operations
Acquisition, the Company also entered into a transition services
agreement with Doosan for the provision of certain financial and
information systems services for a period of up to twelve months
commencing on January 1, 2011.
The Company accounted for the South Korea Licensed Operations
Acquisition as a business combination during the third quarter
of Fiscal 2011. The acquisition cost of $47 million
(excluding transaction costs) has been allocated to the net
assets acquired based on their respective fair values as
follows: inventory of $8 million; property and equipment of
$7 million; customer relationship intangible asset of
$26 million; other net assets of $3 million;
13
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and non tax-deductible goodwill of $3 million. Goodwill
represents the excess of the purchase price over the fair value
of net tangible and identifiable intangible assets acquired.
Transaction costs of $3 million were expensed as incurred
and classified within SG&A expenses in the consolidated
statement of operations during Fiscal 2011.
The customer relationship intangible asset was valued using the
excess earnings method. This approach discounts the estimated
after tax cash flows associated with the existing base of
customers as of the acquisition date, factoring in expected
attrition of the existing customer base. The customer
relationship intangible asset is being amortized over its
estimated useful life of ten years.
The operating results for the Ralph Lauren South Korea business
have been consolidated in the Companys operating results
commencing on January 1, 2011.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
April 2,
|
|
|
October 2,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
|
(millions)
|
|
|
Raw materials
|
|
$
|
6.1
|
|
|
$
|
7.5
|
|
|
$
|
3.8
|
|
Work-in-process
|
|
|
1.1
|
|
|
|
1.8
|
|
|
|
0.5
|
|
Finished goods
|
|
|
981.2
|
|
|
|
692.8
|
|
|
|
728.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
988.4
|
|
|
$
|
702.1
|
|
|
$
|
732.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Property
and Equipment
|
Property and equipment, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
April 2,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
(millions)
|
|
|
Land and improvements
|
|
$
|
9.9
|
|
|
$
|
9.9
|
|
Buildings and improvements
|
|
|
118.4
|
|
|
|
115.3
|
|
Furniture and fixtures
|
|
|
551.0
|
|
|
|
490.9
|
|
Machinery and equipment
|
|
|
152.3
|
|
|
|
144.4
|
|
Capitalized software
|
|
|
185.4
|
|
|
|
165.4
|
|
Leasehold improvements
|
|
|
876.5
|
|
|
|
826.3
|
|
Construction in progress
|
|
|
46.1
|
|
|
|
58.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,939.6
|
|
|
|
1,810.3
|
|
Less: accumulated depreciation
|
|
|
(1,106.1
|
)
|
|
|
(1,021.5
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
833.5
|
|
|
$
|
788.8
|
|
|
|
|
|
|
|
|
|
|
14
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Accrued
Expenses and Other Current Liabilities
|
Accrued expenses and other current liabilities consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
April 2,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
(millions)
|
|
|
Accrued operating expenses
|
|
$
|
186.1
|
|
|
$
|
167.0
|
|
Accrued payroll and benefits
|
|
|
160.2
|
|
|
|
209.3
|
|
Accrued inventory
|
|
|
154.6
|
|
|
|
132.0
|
|
Accrued capital expenditures
|
|
|
60.3
|
|
|
|
8.6
|
|
Deferred income
|
|
|
51.8
|
|
|
|
46.8
|
|
Other taxes payable
|
|
|
56.2
|
|
|
|
66.2
|
|
Other accrued expenses and current liabilities
|
|
|
40.1
|
|
|
|
51.9
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses and other current liabilities
|
|
$
|
709.3
|
|
|
$
|
681.8
|
|
|
|
|
|
|
|
|
|
|
Uncertain
Income Tax Benefits
A reconciliation of the beginning and ending amounts of
unrecognized tax benefits, excluding interest and penalties, for
the three-month and six-month periods ended October 1, 2011
and October 2, 2010 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 1,
|
|
|
October 2,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(millions)
|
|
|
Unrecognized tax benefits beginning balance
|
|
$
|
127.0
|
|
|
$
|
111.5
|
|
|
$
|
125.0
|
|
|
$
|
96.2
|
|
Additions related to current period tax positions
|
|
|
0.9
|
|
|
|
1.3
|
|
|
|
1.9
|
|
|
|
2.1
|
|
Additions related to prior period tax positions
|
|
|
0.1
|
|
|
|
2.5
|
|
|
|
0.2
|
|
|
|
27.3
|
|
Reductions related to prior period tax positions
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
|
|
(0.7
|
)
|
|
|
(8.2
|
)
|
Additions (reductions) related to foreign currency translation
|
|
|
(2.9
|
)
|
|
|
3.5
|
|
|
|
(1.6
|
)
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits ending balance
|
|
$
|
124.8
|
|
|
$
|
118.7
|
|
|
$
|
124.8
|
|
|
$
|
118.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company classifies interest and penalties related to
unrecognized tax benefits as part of its provision for income
taxes. A reconciliation of the beginning and ending amounts of
accrued interest and penalties related to unrecognized tax
benefits for the three-month and six-month periods ended
October 1, 2011 and October 2, 2010 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 1,
|
|
|
October 2,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(millions)
|
|
|
Accrued interest and penalties beginning balance
|
|
$
|
33.8
|
|
|
$
|
30.2
|
|
|
$
|
31.4
|
|
|
$
|
29.8
|
|
Net additions charged to expense
|
|
|
2.1
|
|
|
|
1.7
|
|
|
|
4.1
|
|
|
|
4.7
|
|
Reductions related to prior period tax positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.1
|
)
|
Additions (reductions) related to foreign currency translation
|
|
|
(0.5
|
)
|
|
|
0.7
|
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest and penalties ending balance
|
|
$
|
35.4
|
|
|
$
|
32.6
|
|
|
$
|
35.4
|
|
|
$
|
32.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The total amount of unrecognized tax benefits, including
interest and penalties, was $160.2 million as of
October 1, 2011 and $156.4 million as of April 2,
2011 and is included within non-current liability for
unrecognized tax benefits in the consolidated balance sheets.
The total amount of unrecognized tax benefits that, if
recognized, would affect the Companys effective tax rate
was $113.5 million as of October 1, 2011.
Future
Changes in Unrecognized Tax Benefits
The total amount of unrecognized tax benefits relating to the
Companys tax positions is subject to change based on
future events including, but not limited to, the settlements of
ongoing audits
and/or the
expiration of applicable statutes of limitations. Although the
outcomes and timing of such events are highly uncertain, the
Company does not anticipate that the balance of gross
unrecognized tax benefits, excluding interest and penalties,
will change significantly during the next twelve months.
However, changes in the occurrence, expected outcomes and timing
of those events could cause the Companys current estimate
to change materially in the future.
The Company files tax returns in the U.S. federal and
various state, local and foreign jurisdictions. With few
exceptions for those tax returns, the Company is no longer
subject to examinations by the relevant tax authorities for
years prior to Fiscal 2004.
Euro
Debt
As of October 1, 2011, the Company had outstanding
209.2 million principal amount of 4.5% notes due
October 4, 2013 (the Euro Debt). The Company
has the option to redeem all of the outstanding Euro Debt at any
time at a redemption price equal to the principal amount plus a
premium. The Company also has the option to redeem all of the
outstanding Euro Debt at any time at par plus accrued interest
in the event of certain developments involving U.S. tax
law. Partial redemption of the Euro Debt is not permitted in
either instance. In the event of a change of control of the
Company, each holder of the Euro Debt has the option to require
the Company to redeem the Euro Debt at its principal amount plus
accrued interest. The indenture governing the Euro Debt (the
Indenture) contains certain limited covenants that
restrict the Companys ability, subject to specified
exceptions, to incur liens or enter into a sale and leaseback
transaction for any principal property. The Indenture does not
contain any financial covenants.
As of October 1, 2011, the carrying value of the Euro Debt
was $273.7 million, compared to $291.9 million as of
April 2, 2011.
Revolving
Credit Facilities
Global
Credit Facility
The Company has a credit facility that provides for a
$500 million senior unsecured revolving line of credit
through March 2016, also used to support the issuance of letters
of credit (the Global Credit Facility). Borrowings
under the Global Credit Facility may be denominated in
U.S. dollars and other currencies, including Euros, Hong
Kong Dollars and Japanese Yen. The Company has the ability to
expand its borrowing availability to $750 million, subject
to the agreement of one or more new or existing lenders under
the facility to increase their commitments. There are no
mandatory reductions in borrowing ability throughout the term of
the Global Credit Facility.
In August 2011, the Company borrowed $100.0 million under
the Global Credit Facility to be used for general corporate
purposes. These borrowings have been classified as short-term
debt in the Companys unaudited consolidated balance sheet
as of October 1, 2011. The Company was also contingently
liable for $15.4 million of outstanding letters of credit,
and the remaining availability under the Global Credit Facility
was $384.6 million as of October 1, 2011.
16
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Subsequent to the end of the second quarter of Fiscal 2012, in
November 2011, the Company repaid the $100.0 million in
borrowings outstanding under the Global Credit Facility.
The Global Credit Facility contains a number of covenants that,
among other things, restrict the Companys ability, subject
to specified exceptions, to incur additional debt; incur liens,
sell or dispose of assets; merge with or acquire other
companies; liquidate or dissolve itself; engage in businesses
that are not in a related line of business; make loans,
advances, or guarantees; engage in transactions with affiliates;
and make investments. The Global Credit Facility also requires
the Company to maintain a maximum ratio of Adjusted Debt to
Consolidated EBITDAR (the leverage ratio) of no
greater than 3.75 as of the date of measurement for the four
most recent consecutive fiscal quarters. Adjusted Debt is
defined generally as consolidated debt outstanding plus 8 times
consolidated rent expense for the last four consecutive fiscal
quarters. Consolidated EBITDAR is defined generally as
consolidated net income plus (i) income tax expense,
(ii) net interest expense, (iii) depreciation and
amortization expense and (iv) consolidated rent expense. As
of October 1, 2011, no Event of Default (as such term is
defined pursuant to the Global Credit Facility) has occurred
under the Companys Global Credit Facility.
Chinese
Credit Facility
The Company also has an uncommitted credit facility in China
that provides for a revolving line of credit of up to
70 million Chinese Renminbi (approximately $11 million
as of October 1, 2011) through February 9, 2012
(the Chinese Credit Facility). The Chinese Credit
Facility is used to fund general working capital needs of the
Companys operations in China. The borrowing availability
under the Chinese Credit Facility is at the sole discretion of
JPMorgan Chase Bank (China) Company Limited, Shanghai Branch
(the Bank) and is subject to availability of the
Banks funds and satisfaction of certain regulatory
requirements. Borrowings under the Chinese Credit Facility are
guaranteed by RLC and bear interest at either (i) at least
90% of the short-term interest rate published by the
Peoples Bank of China or (ii) a rate determined by
the Bank at its discretion based on prevailing market
conditions. The Chinese Credit Facility does not contain any
financial covenants.
During the second quarter of Fiscal 2012, the Company repaid its
previously outstanding borrowings under the Chinese Credit
Facility, and there were no borrowings outstanding as of
October 1, 2011.
Refer to Note 14 of the Fiscal 2011
10-K for
detailed disclosure of the terms and conditions of the
Companys debt and credit facilities.
|
|
11.
|
Fair
Value Measurements
|
US GAAP establishes a three-level valuation hierarchy for
disclosure of fair value measurements. The determination of the
applicable level within the hierarchy of a particular asset or
liability depends on the inputs used in valuation as of the
measurement date, notably the extent to which the inputs are
market-based (observable) or internally derived (unobservable).
The three levels are defined as follows:
|
|
|
|
|
Level 1 inputs to the valuation
methodology based on quoted prices (unadjusted) for identical
assets or liabilities in active markets.
|
|
|
|
Level 2 inputs to the valuation
methodology based on quoted prices for similar assets and
liabilities in active markets for substantially the full term of
the financial instrument; quoted prices for identical or similar
instruments in markets that are not active for substantially the
full term of the financial instrument; and model-derived
valuations whose inputs or significant value drivers are
observable.
|
|
|
|
Level 3 inputs to the valuation
methodology based on unobservable prices or valuation techniques
that are significant to the fair value measurement.
|
A financial instruments categorization within the
valuation hierarchy is based upon the lowest level of input that
is significant to the fair value measurement.
17
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the Companys financial
assets and liabilities measured at fair value on a recurring
basis:
|
|
|
|
|
|
|
|
|
|
|
October 1, 2011
|
|
|
April 2, 2011
|
|
|
|
(millions)
|
|
|
Financial assets carried at fair value:
|
|
|
|
|
|
|
|
|
Government and municipal
bonds(a)
|
|
$
|
90.7
|
|
|
$
|
100.4
|
|
Corporate
bonds(a)
|
|
|
82.3
|
|
|
|
|
|
Variable rate municipal
securities(a)
|
|
|
7.4
|
|
|
|
14.5
|
|
Auction rate
securities(b)
|
|
|
2.4
|
|
|
|
2.3
|
|
Other
securities(a)
|
|
|
0.4
|
|
|
|
0.5
|
|
Derivative financial
instruments(b)
|
|
|
32.5
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
215.7
|
|
|
$
|
119.7
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities carried at fair value:
|
|
|
|
|
|
|
|
|
Derivative financial
instruments(b)
|
|
$
|
6.0
|
|
|
$
|
17.8
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6.0
|
|
|
$
|
17.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Based on Level 1 measurements. |
|
(b)
|
|
Based on Level 2 measurements. |
Certain of the Companys municipal bonds, and all of the
Companys government bonds, corporate bonds and variable
rate municipal securities are classified as
available-for-sale
securities and recorded at fair value in the Companys
consolidated balance sheets based upon quoted market prices in
active markets.
The Companys auction rate securities are classified as
available-for-sale
securities and recorded at fair value in the Companys
consolidated balance sheets. Third-party pricing institutions
may value auction rate securities at par, which may not
necessarily reflect prices that would be obtained in the current
market. When quoted market prices are unobservable, fair value
is estimated based on a number of known factors and external
pricing data, including known maturity dates, the coupon rate
based upon the most recent reset market clearing rate, the
price/yield representing the average rate of recently successful
traded securities, and the total principal balance of each
security.
Derivative financial instruments are recorded at fair value in
the Companys consolidated balance sheets and valued using
a pricing model, primarily based on market observable external
inputs including forward and spot rates for foreign currencies,
which considers the impact of the Companys own credit
risk, if any. Changes in counterparty credit risk are considered
in the valuation of derivative financial instruments.
Cash and cash equivalents, restricted cash, investments
classified as
held-to-maturity
and accounts receivable are recorded at carrying value, which
approximates fair value. The Companys short-term debt,
Euro Debt (adjusted for foreign currency fluctuations and the
loss on the termination of the Companys preexisting
interest rate swap, as discussed in Note 12) and
investments in equity method investees are also reported at
carrying value. However, other than differences in the fair
value of the Companys Euro debt, the differences between
fair value and carrying value were not significant as of
October 1, 2011 or April 2, 2011.
The Companys non-financial instruments, which primarily
consist of goodwill, intangible assets, and property and
equipment, are not required to be measured at fair value on a
recurring basis and are reported at carrying value. However, on
a periodic basis whenever events or changes in circumstances
indicate that their carrying value may not be fully recoverable
(and at least annually for goodwill), non-financial instruments
are
18
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assessed for impairment and, if applicable, written-down to and
recorded at fair value, considering external market participant
assumptions.
|
|
12.
|
Financial
Instruments
|
Derivative
Financial Instruments
The Company is primarily exposed to changes in foreign currency
exchange rates relating to certain anticipated cash flows from
its international operations and potential declines in the value
of reported net assets of certain of its foreign operations, as
well as changes in the fair value of its fixed-rate debt
relating to changes in interest rates. Consequently, the Company
periodically uses derivative financial instruments to manage
such risks. The Company does not enter into derivative
transactions for speculative or trading purposes.
The following table summarizes the Companys outstanding
derivative instruments on a gross basis as recorded on its
consolidated balance sheets as of October 1, 2011 and
April 2, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amounts
|
|
|
Derivative Assets
|
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
Balance
|
|
|
|
|
Balance
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
|
|
|
|
|
|
|
|
Line(b)
|
|
Value
|
|
|
Line(b)
|
|
Value
|
|
|
Line(b)
|
|
Value
|
|
|
Line(b)
|
|
Value
|
|
Derivative
Instrument(a)
|
|
October 1, 2011
|
|
|
April 2, 2011
|
|
|
October 1, 2011
|
|
|
April 2, 2011
|
|
|
October 1, 2011
|
|
|
April 2, 2011
|
|
|
|
(millions)
|
|
|
Designated Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FC Inventory purchases
|
|
$
|
583.5
|
|
|
$
|
342.4
|
|
|
(c)
|
|
$
|
26.2
|
|
|
PP
|
|
$
|
1.1
|
|
|
AE
|
|
$
|
(2.8
|
)
|
|
AE
|
|
$
|
(9.4
|
)
|
FC I/C royalty payments
|
|
|
130.8
|
|
|
|
46.8
|
|
|
PP
|
|
|
3.7
|
|
|
|
|
|
|
|
|
(d)
|
|
|
(1.6
|
)
|
|
AE
|
|
|
(3.6
|
)
|
FC Interest payments
|
|
|
13.4
|
|
|
|
9.3
|
|
|
|
|
|
|
|
|
PP
|
|
|
0.4
|
|
|
AE
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
FC Other
|
|
|
33.9
|
|
|
|
29.6
|
|
|
PP
|
|
|
0.6
|
|
|
PP
|
|
|
0.5
|
|
|
AE
|
|
|
(0.6
|
)
|
|
AE
|
|
|
(0.1
|
)
|
IRS Euro Debt
|
|
|
|
|
|
|
295.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ONCL
|
|
|
(3.3
|
)
|
NI Euro Debt
|
|
|
273.7
|
|
|
|
291.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTD
|
|
|
(292.9
|
)(e)
|
|
LTD
|
|
|
(305.0
|
)(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Designated Hedges
|
|
$
|
1,035.3
|
|
|
$
|
1,015.5
|
|
|
|
|
$
|
30.5
|
|
|
|
|
$
|
2.0
|
|
|
|
|
$
|
(298.7
|
)
|
|
|
|
$
|
(321.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undesignated Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FC Other
|
|
$
|
54.9
|
|
|
$
|
40.0
|
|
|
(f)
|
|
$
|
2.0
|
|
|
|
|
$
|
|
|
|
AE
|
|
$
|
(0.2
|
)
|
|
(g)
|
|
$
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Hedges
|
|
$
|
1,090.2
|
|
|
$
|
1,055.5
|
|
|
|
|
$
|
32.5
|
|
|
|
|
$
|
2.0
|
|
|
|
|
$
|
(298.9
|
)
|
|
|
|
$
|
(322.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
FC = Forward exchange contracts for the sale or purchase of
foreign currencies; IRS = Interest Rate Swap; NI = Net
Investment Hedge; Euro Debt = Euro-denominated 4.5% notes
due October 4, 2013. |
|
(b)
|
|
PP = Prepaid expenses and other; OA = Other assets; AE =
Accrued expenses and other; ONCL = Other non-current
liabilities; LTD = Long-term debt. |
|
(c)
|
|
$14.4 million included within PP and $11.8 million
included within OA. |
|
(d)
|
|
$1.5 million included within AE and $0.1 million
included within ONCL. |
|
(e)
|
|
The Companys Euro Debt is reported at carrying value in
the Companys consolidated balance sheets. The carrying
value of the Euro Debt was $273.7 million as of
October 1, 2011 and $291.9 million as of April 2,
2011. |
|
(f)
|
|
$0.3 million included within PP and $1.7 million
included within OA. |
|
(g)
|
|
$0.4 million included within AE and $1.0 million
included within ONCL. |
19
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables summarize the impact of the Companys
derivative instruments on its unaudited consolidated financial
statements for the three-month and six-month periods ended
October 1, 2011 and October 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Recognized in
OCI(b)
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 1,
|
|
|
October 2,
|
|
Derivative
Instrument(a)
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(millions)
|
|
|
Designated Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FC Inventory purchases
|
|
$
|
32.5
|
|
|
$
|
(14.5
|
)
|
|
$
|
23.8
|
|
|
$
|
(1.8
|
)
|
FC I/C royalty payments
|
|
|
3.2
|
|
|
|
(5.6
|
)
|
|
|
4.1
|
|
|
|
(7.5
|
)
|
FC Interest payments
|
|
|
|
|
|
|
0.8
|
|
|
|
(0.4
|
)
|
|
|
|
|
FC Other
|
|
|
(0.6
|
)
|
|
|
0.5
|
|
|
|
(1.0
|
)
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35.1
|
|
|
$
|
(18.8
|
)
|
|
$
|
26.5
|
|
|
$
|
(8.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated Hedge of Net Investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro Debt
|
|
$
|
23.7
|
|
|
$
|
(23.1
|
)
|
|
$
|
15.4
|
|
|
$
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Designated Hedges
|
|
$
|
58.8
|
|
|
$
|
(41.9
|
)
|
|
$
|
41.9
|
|
|
$
|
(11.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Reclassified from
AOCI(b)
to Earnings
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 1,
|
|
|
October 2,
|
|
|
Location of Gains (Losses)
|
Derivative
Instrument(a)
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Reclassified from
AOCI(b)
to Earnings
|
|
|
(millions)
|
|
|
|
|
Designated Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FC Inventory purchases
|
|
$
|
(2.3
|
)
|
|
$
|
5.8
|
|
|
$
|
0.9
|
|
|
$
|
6.1
|
|
|
Cost of goods sold
|
FC I/C royalty payments
|
|
|
(1.0
|
)
|
|
|
(1.8
|
)
|
|
|
(3.5
|
)
|
|
|
(1.2
|
)
|
|
Foreign currency gains (losses)
|
FC Interest payments
|
|
|
(1.0
|
)
|
|
|
0.3
|
|
|
|
(0.4
|
)
|
|
|
0.3
|
|
|
Foreign currency gains (losses)
|
FC Other
|
|
|
0.6
|
|
|
|
0.3
|
|
|
|
0.9
|
|
|
|
0.1
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Designated Hedges
|
|
$
|
(3.7
|
)
|
|
$
|
4.6
|
|
|
$
|
(2.1
|
)
|
|
$
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Recognized in Earnings
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 1,
|
|
|
October 2,
|
|
|
Location of Gains (Losses)
|
Derivative
Instrument(a)
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Recognized in Earnings
|
|
|
(millions)
|
|
|
|
|
Undesignated Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FC Other
|
|
$
|
2.7
|
|
|
$
|
0.3
|
|
|
$
|
2.6
|
|
|
$
|
1.3
|
|
|
Foreign currency gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Undesignated Hedges
|
|
$
|
2.7
|
|
|
$
|
0.3
|
|
|
$
|
2.6
|
|
|
$
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
FC = Forward exchange contracts for the sale or purchase of
foreign currencies; Euro Debt = Euro-denominated 4.5% notes
due October 4, 2013. |
|
(b)
|
|
AOCI, including the respective fiscal periods OCI, is
classified as a component of total equity. |
|
(c)
|
|
Principally recorded within foreign currency gains (losses). |
Over the next twelve months, it is expected that approximately
$13 million of net gains deferred in AOCI related to
derivative financial instruments outstanding as of
October 1, 2011 will be recognized in earnings. No material
gains or losses relating to ineffective hedges were recognized
during any of the fiscal periods presented.
20
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of the Companys risk management
strategies and the effect of those strategies on the
consolidated financial statements.
Foreign
Currency Risk Management
Forward
Foreign Currency Exchange Contracts
The Company primarily enters into forward foreign currency
exchange contracts as hedges to reduce its risk from exchange
rate fluctuations on inventory purchases, intercompany royalty
payments made by certain of its international operations,
intercompany contributions to fund certain marketing efforts of
its international operations, interest payments made in
connection with outstanding debt and other foreign
currency-denominated operational cash flows. As part of its
overall strategy to manage the level of exposure to the risk of
foreign currency exchange rate fluctuations, primarily to
changes in the value of the Euro, the Japanese Yen, the Hong
Kong Dollar, the Swiss Franc, and the British Pound Sterling,
the Company hedges a portion of its foreign currency exposures
anticipated over the ensuing twelve-month to two-year periods.
In doing so, the Company uses foreign currency exchange forward
contracts that generally have maturities of three months to two
years to provide continuing coverage throughout the hedging
period.
Hedge of
a Net Investment in Certain European Subsidiaries
The Company designated the entire principal amount of its
outstanding Euro Debt as a hedge of its net investment in
certain of its European subsidiaries. To the extent this hedge
remains effective, changes in the value of the Euro Debt
resulting from fluctuations in the Euro exchange rate will
continue to be reported in equity as a component of AOCI.
Interest
Rate Risk Management
Interest
Rate Swap Contracts
During the first quarter of Fiscal 2011, the Company entered
into a
fixed-to-floating
interest rate swap with an aggregate notional value of
209.2 million, which was designated as a fair value
hedge to mitigate its exposure to changes in the fair value of
its Euro Debt due to changes in the benchmark interest rate. The
interest rate swap was executed to swap the 4.5% fixed interest
rate on the Companys Euro Debt for a variable interest
rate. On April 11, 2011, the interest rate swap agreement
was terminated by the Company at a loss of $7.6 million.
This loss has been recorded as an adjustment to the carrying
value of the Companys Euro Debt and will be recognized
within interest expense over the remaining term of the debt,
through October 4, 2013. During the three-month and
six-month periods ended October 1, 2011, $0.7 million
and $1.5 million of this loss, respectively, was recognized
as interest expense within the Companys unaudited
consolidated statements of operations.
See Note 3 for further discussion of the Companys
accounting policies relating to its derivative financial
instruments.
21
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investments
The following table summarizes the Companys short-term and
non-current investments recorded in the consolidated balance
sheets as of October 1, 2011 and April 2, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2011
|
|
|
April 2, 2011
|
|
|
|
Short-term
|
|
|
Non-current
|
|
|
|
|
|
Short-term
|
|
|
Non-current
|
|
|
|
|
Type of Investment
|
|
< 1 year
|
|
|
1 - 3 years
|
|
|
Total
|
|
|
< 1 year
|
|
|
1 - 3 years
|
|
|
Total
|
|
|
|
(millions)
|
|
|
Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
15.0
|
|
|
$
|
1.5
|
|
|
$
|
16.5
|
|
|
$
|
90.8
|
|
|
$
|
12.7
|
|
|
$
|
103.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity
investments
|
|
$
|
15.0
|
|
|
$
|
1.5
|
|
|
$
|
16.5
|
|
|
$
|
90.8
|
|
|
$
|
12.7
|
|
|
$
|
103.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and municipal bonds
|
|
$
|
37.3
|
|
|
$
|
53.4
|
|
|
$
|
90.7
|
|
|
$
|
32.3
|
|
|
$
|
68.1
|
|
|
$
|
100.4
|
|
Corporate bonds
|
|
|
46.2
|
|
|
|
36.1
|
|
|
|
82.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate municipal securities
|
|
|
7.4
|
|
|
|
|
|
|
|
7.4
|
|
|
|
14.5
|
|
|
|
|
|
|
|
14.5
|
|
Auction rate securities
|
|
|
|
|
|
|
2.4
|
|
|
|
2.4
|
|
|
|
|
|
|
|
2.3
|
|
|
|
2.3
|
|
Other securities
|
|
|
|
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
investments
|
|
$
|
90.9
|
|
|
$
|
92.3
|
|
|
$
|
183.2
|
|
|
$
|
46.8
|
|
|
$
|
70.9
|
|
|
$
|
117.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits and other
|
|
$
|
372.0
|
|
|
$
|
|
|
|
$
|
372.0
|
|
|
$
|
456.3
|
|
|
$
|
|
|
|
$
|
456.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
477.9
|
|
|
$
|
93.8
|
|
|
$
|
571.7
|
|
|
$
|
593.9
|
|
|
$
|
83.6
|
|
|
$
|
677.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No significant realized or unrealized gains or losses on
available-for-sale
investments or
other-than-temporary
impairment charges were recorded in any of the fiscal periods
presented.
See Note 3 to the Companys Fiscal 2011
10-K for
further discussion of the Companys accounting policies
relating to its investments.
|
|
13.
|
Commitments
and Contingencies
|
Wathne
Imports Litigation
On August 19, 2005, Wathne Imports, Ltd.
(Wathne), the Companys then domestic licensee
for luggage and handbags, filed a complaint in the
U.S. District Court in the Southern District of New York
against the Company and Ralph Lauren, its Chairman and Chief
Executive Officer, asserting, among other things, federal
trademark law violations, breach of contract, breach of
obligations of good faith and fair dealing, fraud and negligent
misrepresentation. The complaint sought, among other relief,
injunctive relief, compensatory damages in excess of
$250 million and punitive damages of not less than
$750 million. On September 13, 2005, Wathne withdrew
this complaint from the U.S. District Court and filed a
complaint in the Supreme Court of the State of New York, New
York County, making substantially the same allegations and
claims (excluding the federal trademark claims), and seeking
similar relief. On February 1, 2006, the court granted the
Companys motion to dismiss all of the causes of action,
including the cause of action against Mr. Lauren, except
for breach of contract related claims, and denied Wathnes
motion for a preliminary injunction. Following some discovery,
the Company moved for summary judgment on the remaining claims.
Wathne cross-moved for partial summary judgment. In an
April 11, 2008 Decision and Order, the court granted Ralph
Laurens summary judgment motion to dismiss most of the
claims against the Company, and denied Wathnes
cross-motion for summary judgment. Wathne appealed the dismissal
of its claims to the Appellate Division of the Supreme Court.
Following a hearing on May 19, 2009, the Appellate Division
issued a Decision and Order on June 9, 2009 which, in large
part, affirmed the lower courts ruling.
22
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Discovery on those claims that were not dismissed is ongoing and
a trial date has not yet been set. The Company intends to
continue to contest the remaining claims in this lawsuit
vigorously. Management does not expect that the ultimate
resolution of this matter will have a material adverse effect on
the Companys financial statements.
Other
Matters
The Company is otherwise involved, from time to time, in
litigation, other legal claims and proceedings involving matters
associated with or incidental to its business, including, among
other things, matters involving credit card fraud, trademark and
other intellectual property, licensing, and employee relations.
The Company believes that the resolution of currently pending
matters will not individually or in the aggregate have a
material adverse effect on its financial statements. However,
the Companys assessment of the current litigation or other
legal claims could change in light of the discovery of facts not
presently known or determinations by judges, juries or other
finders of fact which are not in accord with managements
evaluation of the possible liability or outcome of such
litigation or claims.
Summary
of Changes in Equity
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(millions)
|
|
|
Balance at beginning of period
|
|
$
|
3,304.7
|
|
|
$
|
3,116.6
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
Net income attributable to RLC
|
|
|
417.6
|
|
|
|
326.0
|
|
Foreign currency translation adjustments
|
|
|
(2.7
|
)
|
|
|
45.5
|
|
Net realized and unrealized gains (losses) on derivatives
|
|
|
34.8
|
|
|
|
(8.0
|
)
|
Net unrealized gains (losses) on
available-for-sale
investments
|
|
|
(0.1
|
)
|
|
|
|
|
Net unrealized gains (losses) on defined benefit plans
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
449.2
|
|
|
|
363.5
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
|
(36.9
|
)
|
|
|
(19.1
|
)
|
Repurchases of common stock
|
|
|
(417.8
|
)
|
|
|
(347.7
|
)
|
Shares issued and equity grants made pursuant to stock-based
compensation plans
|
|
|
84.7
|
|
|
|
59.2
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,383.9
|
|
|
$
|
3,172.5
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Repurchase Program
On May 24, 2011, the Companys Board of Directors
approved an expansion of the Companys existing common
stock repurchase program that allows it to repurchase up to an
additional $500 million of Class A common stock.
Repurchases of shares of Class A common stock are subject
to overall business and market conditions.
During the six months ended October 1, 2011,
3.2 million shares of Class A common stock were
repurchased by the Company at a cost of $393.5 million
under its repurchase program. The remaining availability under
the Companys common stock repurchase program was
approximately $579 million as of October 1, 2011. In
addition, 0.2 million shares of Class A common stock
at a cost of $24.3 million were surrendered to, or withheld
by, the Company in satisfaction of withholding taxes in
connection with the vesting of awards under the Companys
1997 Long-Term Stock Incentive Plan, as amended (the 1997
Incentive Plan) and 2010 Long-Term Stock Incentive Plan
(the 2010 Incentive Plan).
23
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the six months ended October 2, 2010,
4.0 million shares of Class A common stock were
repurchased by the Company at a cost of $331.0 million
under its repurchase program, including a repurchase of
1.0 million shares of Class A common stock from its
principal stockholder, Mr. Ralph Lauren, at a cost of
$81.0 million in connection with the Companys
secondary public offerings of 10 million shares of
Class A common stock on behalf of Mr. Lauren on
June 14, 2010. In addition, 0.2 million shares of
Class A common stock at a cost of $16.7 million were
surrendered to, or withheld by, the Company in satisfaction of
withholding taxes in connection with the vesting of awards under
the 1997 Incentive Plan.
Repurchased and surrendered shares are accounted for as treasury
stock at cost and will be held in treasury for future use.
Dividends
Since 2003, the Company has maintained a regular quarterly cash
dividend program on its common stock. On February 8, 2011,
the Companys Board of Directors approved an increase to
the Companys quarterly cash dividend on its common stock
from $0.10 per share to $0.20 per share. The second quarter
Fiscal 2012 dividend of $0.20 per share was declared on
September 19, 2011, was payable to stockholders of record
at the close of business on September 30, 2011, and was
paid on October 14, 2011. Dividends paid amounted to
$37.4 million during the six months ended October 1,
2011 and $19.4 million during the six months ended
October 2, 2010.
|
|
15.
|
Stock-based
Compensation
|
Long-term
Stock Incentive Plans
On August 5, 2010, the Companys stockholders approved
the 2010 Incentive Plan, which replaced the Companys 1997
Incentive Plan. The 2010 Incentive Plan provides for up to
3.0 million of new shares authorized for issuance to
participants, in addition to the shares that remained available
for issuance under the 1997 Incentive Plan as of August 5,
2010 that are not subject to outstanding awards under the 1997
Incentive Plan. In addition, any outstanding awards under the
1997 Incentive Plan that expire, are forfeited, or are
surrendered to the Company in satisfaction of taxes, will be
transferred to the 2010 Incentive Plan and be available for
issuance. Any new grants are being issued under the 2010
Incentive Plan. However, awards that were outstanding as of
August 5, 2010 continue to remain subject to the terms of
the 1997 Incentive Plan.
Under both the 2010 Incentive Plan and the 1997 Incentive Plan
(the Plans), there are limits as to the number of
shares available for certain awards and to any one participant.
Equity awards that may be made under the Plans include, but are
not limited to (a) stock options, (b) restricted stock
and (c) restricted stock units (RSUs).
Impact
on Results
A summary of the total compensation expense recorded within
SG&A expenses and the associated income tax benefits
recognized related to stock-based compensation arrangements is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 1,
|
|
|
October 2,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(millions)
|
|
|
Compensation expense
|
|
$
|
16.1
|
|
|
$
|
15.3
|
|
|
$
|
34.0
|
|
|
$
|
30.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
(5.5
|
)
|
|
$
|
(5.5
|
)
|
|
$
|
(11.9
|
)
|
|
$
|
(11.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company issues its annual grant of stock-based compensation
awards in the second quarter of its fiscal year. Due to the
timing of the annual grant, stock-based compensation cost
recognized during the three-month and six-month periods ended
October 1, 2011 is not indicative of the level of
compensation cost expected to be incurred for the full Fiscal
2012.
24
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options
Stock options are granted to employees and non-employee
directors with exercise prices equal to the fair market value of
the Companys unrestricted Class A common stock on the
date of grant. Generally, the options become exercisable ratably
(a graded-vesting schedule) over a three-year vesting period.
Stock options generally expire seven years from the date of
grant. The Company recognizes compensation expense for
share-based awards that have graded vesting and no performance
conditions on an accelerated basis.
The Company uses the Black-Scholes option pricing model to
estimate the fair value of stock options granted, which requires
the input of both subjective and objective assumptions. The
Company develops its assumptions by analyzing the historical
exercise behavior of employees and non-employee directors. The
Companys weighted-average assumptions used to estimate the
fair value of stock options granted during the six months ended
October 1, 2011 and October 2, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
October 1,
|
|
October 2,
|
|
|
2011
|
|
2010
|
|
Expected term (years)
|
|
|
4.7
|
|
|
|
4.6
|
|
Expected volatility
|
|
|
44.7
|
%
|
|
|
44.2
|
%
|
Expected dividend yield
|
|
|
0.73
|
%
|
|
|
0.51
|
%
|
Risk-free interest rate
|
|
|
1.3
|
%
|
|
|
1.6
|
%
|
Weighted-average option grant date fair value
|
|
$
|
49.06
|
|
|
$
|
27.86
|
|
A summary of the stock option activity under all plans during
the six months ended October 1, 2011 is as follows:
|
|
|
|
|
|
|
Number of
|
|
|
|
Shares
|
|
|
|
(thousands)
|
|
|
Options outstanding at April 2, 2011
|
|
|
3,804
|
|
Granted
|
|
|
539
|
|
Exercised
|
|
|
(514
|
)
|
Cancelled/Forfeited
|
|
|
(74
|
)
|
|
|
|
|
|
Options outstanding at October 1, 2011
|
|
|
3,755
|
|
|
|
|
|
|
Restricted
Stock and RSUs
The Company grants restricted shares of Class A common
stock and service-based RSUs to certain of its senior executives
and non-employee directors. In addition, the Company grants
performance-based RSUs to such senior executives and other key
executives, as well as certain other employees of the Company.
The fair values of restricted stock shares and RSUs are based on
the fair value of unrestricted Class A common stock, as
adjusted to reflect the absence of dividends for those
restricted securities that are not entitled to dividend
equivalents. The Companys weighted average grant date fair
values of performance-based RSUs granted during the six months
ended October 1, 2011 and October 2, 2010 were $124.62
and $74.34, respectively. The Company did not grant any
restricted stock or service-based RSUs during the six months
ended October 1, 2011 or October 2, 2010.
Restricted stock shares granted to non-employee directors vest
over a three-year period of time. Service-based RSUs generally
vest over a five-year period of time, subject to the
executives continuing employment. Performance-based RSUs
generally vest (a) upon the completion of a three-year
period of time (cliff vesting), subject to the employees
continuing employment and the Companys achievement of
certain performance goals over the three-year period or
(b) ratably, over a three-year period of time (graded
vesting), subject to the employees
25
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
continuing employment during the applicable vesting period and
the achievement by the Company of certain performance goals in
the initial year of the three-year vesting period.
A summary of the restricted stock and RSU activity during the
six months ended October 1, 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service-
|
|
|
Performance-
|
|
|
|
Restricted Stock
|
|
|
based RSUs
|
|
|
based RSUs
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Number of
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
|
|
|
|
(thousands)
|
|
|
|
|
|
Nonvested at April 2, 2011
|
|
|
8
|
|
|
|
342
|
|
|
|
1,416
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
461
|
|
Vested
|
|
|
|
|
|
|
(120
|
)
|
|
|
(468
|
)
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at October 1, 2011
|
|
|
8
|
|
|
|
222
|
|
|
|
1,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has three reportable segments based on its business
activities and organization: Wholesale, Retail and Licensing.
Such segments offer a variety of products through different
channels of distribution. The Wholesale segment consists of
womens, mens and childrens apparel,
accessories, home furnishings, and related products which are
sold to major department stores, specialty stores, golf and pro
shops and the Companys owned and licensed retail stores in
the U.S. and overseas. The Retail segment consists of the
Companys worldwide retail operations, which sell products
through its full-price and factory stores, its concessions-based
shop-within-shops, and its
e-commerce
websites. The stores, concessions-based shop-within-shops and
websites sell products purchased from the Companys
licensees, suppliers and Wholesale segment. The Licensing
segment generates revenues from royalties earned on the sale of
the Companys apparel, home and other products
internationally and domestically through licensing alliances.
The licensing agreements grant the licensees rights to use the
Companys various trademarks in connection with the
manufacture and sale of designated products in specified
geographical areas for specified periods.
The accounting policies of the Companys segments are
consistent with those described in Notes 2 and 3 to the
Companys consolidated financial statements included in the
Fiscal 2011
10-K. Sales
and transfers between segments generally are recorded at cost
and treated as transfers of inventory. All intercompany revenues
are eliminated in consolidation and are not reviewed when
evaluating segment performance. Each segments performance
is evaluated based upon operating income before restructuring
charges and certain other one-time items, such as legal charges,
if any. Corporate overhead expenses (exclusive of certain
expenses for senior management, overall branding-related
expenses and certain other corporate-related expenses) are
allocated to the segments based upon specific usage or other
allocation methods.
Net revenues and operating income for each of the Companys
segments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 1,
|
|
|
October 2,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(millions)
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
995.5
|
|
|
$
|
826.8
|
|
|
$
|
1,668.5
|
|
|
$
|
1,349.8
|
|
Retail
|
|
|
861.3
|
|
|
|
658.8
|
|
|
|
1,674.8
|
|
|
|
1,251.3
|
|
Licensing
|
|
|
47.8
|
|
|
|
46.5
|
|
|
|
87.7
|
|
|
|
84.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
1,904.6
|
|
|
$
|
1,532.1
|
|
|
$
|
3,431.0
|
|
|
$
|
2,685.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
RALPH
LAUREN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 1,
|
|
|
October 2,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(millions)
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
246.5
|
|
|
$
|
238.0
|
|
|
$
|
397.6
|
|
|
$
|
345.6
|
|
Retail
|
|
|
146.0
|
|
|
|
105.4
|
|
|
|
319.1
|
|
|
|
209.1
|
|
Licensing
|
|
|
29.7
|
|
|
|
27.4
|
|
|
|
54.9
|
|
|
|
51.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
422.2
|
|
|
|
370.8
|
|
|
|
771.6
|
|
|
|
605.8
|
|
Unallocated corporate expenses
|
|
|
(71.4
|
)
|
|
|
(63.4
|
)
|
|
|
(138.7
|
)
|
|
|
(124.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
350.8
|
|
|
$
|
307.4
|
|
|
$
|
632.9
|
|
|
$
|
481.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for each segment is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 1,
|
|
|
October 2,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(millions)
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
16.3
|
|
|
$
|
13.6
|
|
|
$
|
31.8
|
|
|
$
|
26.1
|
|
Retail
|
|
|
28.2
|
|
|
|
21.1
|
|
|
|
56.5
|
|
|
|
42.7
|
|
Licensing
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.6
|
|
|
|
0.6
|
|
Unallocated corporate expenses
|
|
|
11.3
|
|
|
|
11.4
|
|
|
|
22.5
|
|
|
|
23.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
56.0
|
|
|
$
|
46.4
|
|
|
$
|
111.4
|
|
|
$
|
92.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.
|
Additional
Financial Information
|
Cash
Interest and Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 1,
|
|
|
October 2,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(millions)
|
|
|
Cash paid for interest
|
|
$
|
2.2
|
|
|
$
|
1.9
|
|
|
$
|
7.1
|
|
|
$
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
13.9
|
|
|
$
|
89.0
|
|
|
$
|
25.3
|
|
|
$
|
123.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
Transactions
Significant non-cash investing activities included the
capitalization of fixed assets and recognition of related
obligations in the net amount of $60.3 million for the six
months ended October 1, 2011, largely reflecting amounts
capitalized in connection with the launch of our Ralph Lauren
Denim & Supply product line, and $20.3 million
for the six months ended October 2, 2010.
Significant non-cash financing activities during the six months
ended October 2, 2010 included the conversion of
11.3 million shares of Class B common stock into an
equal number of shares of Class A common stock by
Mr. Ralph Lauren, pursuant to the terms of the security.
There were no other significant non-cash investing or financing
activities for the fiscal periods presented.
27
|
|
Item 2.
|
Managements
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. Although we believe that our expectations are based
on reasonable assumptions within the bounds of our knowledge of
our business and operations, certain risks, uncertainties and
other factors may cause results to differ materially from
expectations and may also effect our forward-looking statements,
including, among other items:
|
|
|
|
|
the loss of key personnel, including Mr. Ralph Lauren;
|
|
|
|
the impact of global economic conditions, including the ongoing
sovereign debt crisis in Europe, on our ability, as well as the
ability of our customers, suppliers and vendors to access
sources of liquidity;
|
|
|
|
our ability to maintain our credit profile and ratings with the
financial community;
|
|
|
|
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 events;
|
|
|
|
our efforts to improve the efficiency of our distribution system
and to continue to enhance our global information technology
systems;
|
|
|
|
changes to our anticipated growth strategies;
|
|
|
|
our ability to continue to expand or grow our business
internationally;
|
|
|
|
the impact of fluctuations in the U.S. or global economy on
consumer purchases of premium lifestyle products that we offer
for sale and our ability to forecast consumer demand;
|
|
|
|
our ability to open new retail stores and
e-commerce
websites, and expand our
direct-to-consumer
presence;
|
|
|
|
our ability to make certain strategic acquisitions of certain
selected licenses held by our licensees and successfully
integrate recently acquired businesses, including our recently
acquired Asian operations (such as South Korea), and certain of
our operations relating to our home products;
|
|
|
|
our intention to introduce new products or enter into or renew
alliances and exclusive relationships;
|
|
|
|
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;
|
|
|
|
changes to our anticipated effective tax rates in future years;
|
|
|
|
our exposure to domestic and foreign currency fluctuations and
risks associated with raw materials, transportation and labor
costs;
|
|
|
|
future expenditures for capital projects;
|
|
|
|
our ability to continue to pay dividends and repurchase
Class A common stock;
|
|
|
|
our ability to continue to maintain our brand image and
reputation and protect our trademarks;
|
|
|
|
changes in our relationships with department store customers and
licensing partners;
|
|
|
|
our ability to continue to initiate cost cutting efforts and
improve profitability;
|
28
|
|
|
|
|
the impact of the downgrade by Standard & Poors
(S&P) on the credit ratings of the United
States and the risk of further downgrades by S&P or other
credit agencies on the credit rating of the United States;
|
|
|
|
the potential impact on our operations and customers resulting
from natural or man-made disasters, such as the recent
earthquake, tsunami and infrastructure disasters in Japan;
|
|
|
|
the impact to our business of events that are currently taking
place in the Middle East, as well as from any terrorist action,
retaliation and the threat of further action or
retaliation; and
|
|
|
|
a variety of legal, regulatory, political and economic risks,
including risks related to the importation and exportation of
products, tariffs and other trade barriers, to which our
international operations are subject and other risks associated
with our international operations, such as violations of laws
prohibiting improper payments, and the burdens of complying with
a variety of foreign laws and regulations, including trade and
labor restrictions and related laws that may reduce the
flexibility of our business.
|
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 April 2, 2011 (the Fiscal
2011
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.
On August 11, 2011, at the Annual Meeting of Stockholders
of the Company, our stockholders approved an amendment to the
Companys Amended and Restated Certificate of Incorporation
to change the Companys name from Polo Ralph Lauren
Corporation to Ralph Lauren Corporation. The Companys name
change became effective on August 15, 2011. In this
Form 10-Q,
references to Ralph Lauren, ourselves,
we, our, us and the
Company refer to Ralph Lauren Corporation and its
subsidiaries (RLC), unless the context indicates
otherwise. Due to the collaborative and ongoing nature of our
relationships with our licensees, such licensees are sometimes
referred to in this
Form 10-Q
as licensing alliances. We utilize a
52-53 week
fiscal year ending on the Saturday closest to March 31. As
such, fiscal year 2012 will end on March 31, 2012 and will
be a 52-week period (Fiscal 2012). Fiscal year 2011
ended on April 2, 2011 and also reflected a 52-week period
(Fiscal 2011). The second quarter for Fiscal 2012
ended on October 1, 2011 and was a 13-week period. The
second quarter of Fiscal 2011 ended on October 2, 2010 and
was also a 13-week period.
INTRODUCTION
Managements 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 financial condition and liquidity, changes
in our financial position, and results of our operations.
MD&A is organized as follows:
|
|
|
|
|
Overview. This section provides a general
description of our business and a summary of financial
performance for the three-month and six-month periods ended
October 1, 2011. 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 and
six-month periods ended October 1, 2011 and October 2,
2010.
|
|
|
|
Financial condition and liquidity. This
section provides an analysis of our cash flows for the six-month
periods ended October 1, 2011 and October 2, 2010, as
well as a discussion of our financial condition and liquidity as
of October 1, 2011 as compared to the end of Fiscal 2011.
The discussion of our financial condition and liquidity includes
(i) a discussion of our financial position compared to the
end of Fiscal 2011, (ii) the available financial capacity
under our credit facilities, (iii) a summary of our key
debt compliance
|
29
|
|
|
|
|
measures, and (iv) any material changes in our financial
condition and contractual obligations since the end of Fiscal
2011.
|
|
|
|
|
|
Market risk management. This section discusses
any significant changes in our interest rate, foreign currency
and investment risk exposures, the types of derivative
instruments used to hedge those exposures,
and/or
underlying market conditions since the end of Fiscal 2011.
|
|
|
|
Critical accounting policies. This section
discusses any significant changes in our accounting policies
since the end of Fiscal 2011. Significant changes include those
considered to be important to our financial condition and
results of operations, and which 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 as
included in our Fiscal 2011
10-K.
|
|
|
|
Recently issued accounting standards. This
section discusses the potential impact to our reported financial
statements of 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 mens,
womens and childrens apparel, accessories,
fragrances and home furnishings. Our long-standing reputation
and distinctive image have been consistently developed across an
expanding number of products, brands and international markets.
Our brand names include Polo Ralph Lauren, Purple Label,
Ralph Lauren Collection, Black Label, Blue Label, Lauren by
Ralph Lauren, RRL, RLX, Ralph Lauren Denim & Supply,
Rugby Ralph Lauren, Ralph Lauren Childrenswear, American Living,
Chaps and Club Monaco, among others.
We classify our businesses into three segments: Wholesale,
Retail and Licensing. Our Wholesale business (representing
approximately 49% of Fiscal 2011 net revenues) consists of
wholesale-channel sales made principally to major department
stores and specialty stores located throughout the U.S., Canada,
Europe, Asia and South America. Our retail business
(representing approximately 48% of Fiscal 2011 net
revenues) consists of retail-channel sales directly to consumers
through full-price and factory retail stores located throughout
the U.S., Canada, Europe, Asia and South America; through
concessions-based shop-within-shops located primarily in Asia;
and through our retail
e-commerce
channel, which includes our domestic sites located at
www.RalphLauren.com and www.Rugby.com and our United Kingdom
site located at www.RalphLauren.co.uk. In September 2011, we
expanded our
e-commerce
presence by launching a new retail
e-commerce
site in France located at www.RalphLauren.fr, which also ships
products to Belgium, Luxembourg and the Netherlands. Our
licensing business (representing approximately 3% of Fiscal
2011 net revenues) consists of royalty-based arrangements
under which we license the right to third parties to use our
various trademarks in connection with the manufacture and sale
of designated products, such as apparel, eyewear and fragrances,
in specified geographical areas for specified periods.
Approximately 33% of our Fiscal 2011 net revenues were
earned in international regions outside of the U.S. and
Canada.
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 the Retail segment. Accordingly,
our operating results for the three-month and six-month periods
ended October 1, 2011, and cash flows for the six-month
period ended October 1, 2011 are not necessarily indicative
of the results and cash flows that may be expected for the full
Fiscal 2012.
Summary
of Financial Performance
Global
Economic Developments
The state of the global economy continues to influence the level
of consumer spending for discretionary items. This affects our
business as it is highly dependent on consumer demand for our
products. The current political and
30
economic environments in the U.S. and certain countries in
Europe have resulted in significant macroeconomic risks,
including high rates of unemployment, high fuel prices and
continued global economic uncertainty largely precipitated by
the European debt crisis. These risks, combined with
expectations of slower global economic growth and increased
austerity measures, have adversely affected consumer and
business sentiment.
Despite the challenging economic environment, we continued to
experience reported revenue growth during the first half of
Fiscal 2012. However, beginning in September 2011, our Retail
segment began to experience weaker comparable store sales
growth, particularly in the U.S. and Europe. If the global
macroeconomic environment continues to be weak or worsens, the
related constrained level of worldwide consumer spending and
modified consumption behavior will likely have a negative effect
on the Companys sales and operating margin growth rates
for at least the remainder of the current fiscal year.
In addition, we continue to experience the cost of goods
inflation that began during the second half of Fiscal 2011 as a
result of rising raw material, transportation and labor costs,
as well as labor shortages in certain regions where our products
are manufactured. While the impact of such cost of goods
inflation on our reported results was mitigated to some extent
by targeted pricing actions and a more favorable channel mix
during the second quarter of Fiscal 2012, these sourcing
pressures are expected to continue to have a significant
negative effect on the cost of most of our products and the
related gross profit percentages for the remainder of Fiscal
2012.
We continue to monitor these risks and evaluate our operating
strategies in order to adjust to changes in economic conditions,
including increases in global labor rates and commodity pricing.
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 2011
10-K.
Operating
Results
Three
Months Ended October 1, 2011 Compared to Three Months Ended
October 2, 2010
During the second quarter of Fiscal 2012, we reported revenues
of $1.905 billion, net income attributable to RLC of
$233.5 million and net income per diluted share
attributable to RLC of $2.46. This compares to revenues of
$1.532 billion, net income attributable to RLC of
$205.2 million and net income per diluted share
attributable to RLC of $2.09 during the second quarter of Fiscal
2011.
Our operating performance for the three months ended
October 1, 2011 was driven by 24.3% revenue growth,
primarily due to increased comparable global retail store sales
and the inclusion of revenues from our South Korea business
acquired on January 1, 2011 (see Recent
Developments for further discussion), as well as
higher revenues from our global wholesale businesses. Our gross
margin percentage declined by 140 basis points to 56.6%
during the second quarter of Fiscal 2012, primarily due to
substantial sourcing cost pressures experienced across our
global businesses, particularly in our Wholesale segment. The
decrease in gross margin percentage was partially offset by a
more favorable channel and geographic mix driven by our retail
businesses in Asia, including our recently acquired business in
South Korea. Selling, general and administrative
(SG&A) expenses increased largely due to higher
compensation-related costs and additional expenses to support
our growth in sales, as well as our new business initiatives and
recent acquisitions.
Net income attributable to RLC increased during the second
quarter of Fiscal 2012 as compared to the second quarter of
Fiscal 2011, primarily due to a $43.4 million increase in
operating income, partially offset by a $13.2 million
increase in the provision for income taxes. The increase in the
provision for income taxes was primarily driven by the overall
increase in pretax income, slightly offset by a 10 basis
point decline in our effective tax rate. Net income per diluted
share attributable to RLC also increased due to the effect of
higher net income coupled with lower weighted-average diluted
shares outstanding during the second quarter of Fiscal 2012.
Six
Months Ended October 1, 2011 Compared to Six Months Ended
October 2, 2010
During the six months ended October 1, 2011, we reported
revenues of $3.431 billion, net income attributable to RLC
of $417.6 million and net income per diluted share
attributable to RLC of $4.35. This compares to revenues
31
of $2.685 billion, net income attributable to RLC of
$326.0 million and net income per diluted share
attributable to RLC of $3.30 during the six months ended
October 2, 2010.
Our operating performance for the six months ended
October 1, 2011 was driven by 27.8% revenue growth,
primarily due to increased comparable global retail store sales
and the inclusion of revenues from our South Korea business
acquired on January 1, 2011, as well as higher revenues
from our global wholesale businesses. Our gross margin
percentage declined slightly by 10 basis points to 59.5%
during the six months ended October 1, 2011, primarily due
to lower global Wholesale margins reflecting sourcing cost
pressures. The decrease in gross margin percentage was mostly
offset by a more favorable channel and geographic mix, as well
as stronger full-price sell-throughs driven by our retail
businesses in Asia. SG&A expenses increased largely due to
higher compensation-related costs and additional expenses to
support our growth in sales, as well as our new business
initiatives and recent acquisitions.
Net income attributable to RLC increased during the six months
ended October 1, 2011 as compared to the six months ended
October 2, 2010, primarily due to a $151.3 million
increase in operating income, partially offset by a
$54.9 million increase in the provision for income taxes.
The increase in the provision for income taxes was driven by the
overall increase in pretax income, along with a 150 basis
point increase in our effective tax rate. Net income per diluted
share attributable to RLC also increased due to the effect of
higher net income coupled with lower weighted-average diluted
shares outstanding during the six months ended October 1,
2011.
Financial
Condition and Liquidity
Our financial position reflects the overall relative strength of
our business results. We ended the second quarter of Fiscal 2012
in a net cash and investments position (cash and cash
equivalents plus short-term and non-current investments, less
total debt) of $605.7 million, compared to
$838.6 million as of the end of Fiscal 2011. The decrease
in our net cash and investments position was primarily due to
our treasury stock repurchases and capital expenditures,
partially offset by our operating cash flows during the six
months ended October 1, 2011. Our equity increased to
$3.384 billion as of October 1, 2011 compared to
$3.305 billion as of April 2, 2011, primarily due to
our net income and equity issuances pursuant to stock-based
compensation arrangements, partially offset by our share
repurchase activity during the six months ended October 1,
2011.
We generated $283.5 million of cash from operations during
the six months ended October 1, 2011, compared to
$224.0 million during the six months ended October 2,
2010. The increase in operating cash flows primarily relates to
the increase in net income before non-cash expenses during the
six months ended October 1, 2011, partially offset by
changes in working capital. We also borrowed $100 million
in cash under our Global Credit Facility (as defined in
Note 10 to our unaudited interim consolidated financial
statements) during the six months ended October 1, 2011. We
used some of our cash availability to support our common stock
repurchase program and to reinvest in our business through
capital spending. In particular, we used $417.8 million to
repurchase 3.4 million shares of Class A common stock,
including shares surrendered for tax withholdings. We also used
$92.4 million for capital expenditures primarily associated
with our global retail store expansion, construction and
renovation of department store
shop-in-shops,
and investments in our facilities and technological
infrastructure.
Transactions
Affecting Comparability of Results of Operations and Financial
Condition
The comparability of our operating results for the three-month
and six-month periods ended October 1, 2011 and
October 2, 2010 has been affected by the South Korea
Licensed Operations Acquisition (as defined and discussed under
Recent Developments) that occurred on
January 1, 2011.
The following discussion highlights, as necessary, the
significant changes in operating results arising from the above
acquisition. However, unusual items or transactions may occur in
any period. Accordingly, investors and other financial statement
users individually should consider the types of events and
transactions that have affected operating trends.
32
Recent
Developments
Greater
China Restructuring Plan
In May 2011, we initiated a restructuring plan to reposition and
upgrade our existing distribution network in the Greater China
region, which is comprised of mainland China, Macau, Hong Kong,
Taiwan, Malaysia and Singapore. This plan includes a reduction
in workforce and the closure of certain retail stores and
concession shops that do not support the new merchandising
strategy. Actions related to the restructuring plan continue to
be refined, particularly related to the determination of
locations to be exited, and are anticipated to result in pretax
charges of approximately $5 million, primarily in the
fourth quarter of Fiscal 2012.
South
Korea Licensed Operations Acquisition
On January 1, 2011, in connection with the transition of
the Ralph Lauren-branded apparel and accessories business in
South Korea (the Ralph Lauren South Korea Business)
from a licensed to a wholly owned operation, we acquired certain
net assets (including inventory) and employees from Doosan
Corporation (Doosan) in exchange for an initial
payment of approximately $25 million plus an additional
aggregate payment of approximately $22 million (the
South Korea Licensed Operations Acquisition). Doosan
was our licensee for the Ralph Lauren South Korea business. We
funded the South Korea Licensed Operations Acquisition with
available cash on-hand. In conjunction with the South Korea
Licensed Operations Acquisition, we also entered into a
transition services agreement with Doosan for the provision of
certain financial and information systems services for a period
of up to twelve months commencing on January 1, 2011.
33
RESULTS
OF OPERATIONS
Three
Months Ended October 1, 2011 Compared to Three Months Ended
October 2, 2010
The following table summarizes our results of operations and
expresses the percentage relationship to net revenues of certain
financial statement captions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
$
|
|
|
%
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
Change
|
|
|
|
(millions, except per share data)
|
|
|
|
|
|
Net revenues
|
|
$
|
1,904.6
|
|
|
$
|
1,532.1
|
|
|
$
|
372.5
|
|
|
|
24.3%
|
|
Cost of goods
sold(a)
|
|
|
(826.0
|
)
|
|
|
(644.2
|
)
|
|
|
(181.8
|
)
|
|
|
28.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,078.6
|
|
|
|
887.9
|
|
|
|
190.7
|
|
|
|
21.5%
|
|
Gross profit as % of net revenues
|
|
|
56.6
|
%
|
|
|
58.0
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses(a)
|
|
|
(720.3
|
)
|
|
|
(574.3
|
)
|
|
|
(146.0
|
)
|
|
|
25.4%
|
|
SG&A expenses as % of net revenues
|
|
|
37.8
|
%
|
|
|
37.5
|
%
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
(7.5
|
)
|
|
|
(6.2
|
)
|
|
|
(1.3
|
)
|
|
|
21.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
350.8
|
|
|
|
307.4
|
|
|
|
43.4
|
|
|
|
14.1%
|
|
Operating income as % of net revenues
|
|
|
18.4
|
%
|
|
|
20.1
|
%
|
|
|
|
|
|
|
|
|
Foreign currency gains (losses)
|
|
|
1.8
|
|
|
|
2.2
|
|
|
|
(0.4
|
)
|
|
|
(18.2)%
|
|
Interest expense
|
|
|
(6.4
|
)
|
|
|
(4.4
|
)
|
|
|
(2.0
|
)
|
|
|
45.5%
|
|
Interest and other income, net
|
|
|
2.4
|
|
|
|
1.6
|
|
|
|
0.8
|
|
|
|
50.0%
|
|
Equity in income (loss) of equity-method investees
|
|
|
(1.1
|
)
|
|
|
(0.8
|
)
|
|
|
(0.3
|
)
|
|
|
37.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
347.5
|
|
|
|
306.0
|
|
|
|
41.5
|
|
|
|
13.6%
|
|
Provision for income taxes
|
|
|
(114.0
|
)
|
|
|
(100.8
|
)
|
|
|
(13.2
|
)
|
|
|
13.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax
rate(b)
|
|
|
32.8
|
%
|
|
|
32.9
|
%
|
|
|
|
|
|
|
|
|
Net income attributable to RLC
|
|
$
|
233.5
|
|
|
$
|
205.2
|
|
|
$
|
28.3
|
|
|
|
13.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share attributable to RLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.53
|
|
|
$
|
2.15
|
|
|
$
|
0.38
|
|
|
|
17.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.46
|
|
|
$
|
2.09
|
|
|
$
|
0.37
|
|
|
|
17.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes total depreciation expense of $48.5 million and
$40.2 million for the three-month periods ended
October 1, 2011 and October 2, 2010, respectively. |
|
(b) |
|
Effective tax rate is calculated by dividing the provision for
income taxes by income before provision for income taxes. |
Net Revenues. Net revenues increased by
$372.5 million, or 24.3%, to $1.905 billion in the
second quarter of Fiscal 2012 from $1.532 billion in the
second quarter of Fiscal 2011. The increase was primarily due to
higher revenues from our global retail and wholesale businesses,
which included favorable foreign currency effects. Excluding the
effect of foreign currency, net revenues increased by
$322.2 million, or 21.0%.
34
Net revenues for our three business segments are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
$
|
|
|
%
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
Change
|
|
|
|
(millions)
|
|
|
|
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
995.5
|
|
|
$
|
826.8
|
|
|
$
|
168.7
|
|
|
|
20.4%
|
|
Retail
|
|
|
861.3
|
|
|
|
658.8
|
|
|
|
202.5
|
|
|
|
30.7%
|
|
Licensing
|
|
|
47.8
|
|
|
|
46.5
|
|
|
|
1.3
|
|
|
|
2.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
1,904.6
|
|
|
$
|
1,532.1
|
|
|
$
|
372.5
|
|
|
|
24.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale net revenues The net increase
primarily reflects:
|
|
|
|
|
a $112 million net increase in our domestic businesses
primarily due to increased menswear revenues, including sales
from our newly launched Ralph Lauren Denim & Supply
product line, as well as higher childrenswear revenues. The
increase also reflected incremental home product revenues
related to the assumption of control over the distribution of
our previously licensed bedding and bath business as of
May 1, 2011;
|
|
|
|
a $47 million net increase in our European businesses on a
constant currency basis primarily driven by increased revenues
from our menswear and womenswear product lines, as well as
increased revenues from our accessories product lines (including
footwear) reflecting new product offerings and an increased
presence at department stores;
|
|
|
|
a $26 million net increase in revenues due to favorable
foreign currency effects primarily related to the strengthening
of the Euro and the Yen, both in comparison to the
U.S. dollar during the second quarter of Fiscal
2012; and
|
|
|
|
a $2 million net increase in our businesses in the Greater
China and Southeast Asia region, which is comprised of China,
Hong Kong, Indonesia, Malaysia, the Philippines, Singapore,
Taiwan and Thailand, on a constant currency basis.
|
These increases were partially offset by:
|
|
|
|
|
a $19 million net decrease related to our Japanese
businesses on a constant currency basis, including the effect of
a business model shift to the Retail concessions-based channel.
|
Retail net revenues For purposes of the
discussion of Retail operating performance below, we refer to
the measure comparable store sales. Comparable store
sales refer to the growth of sales in stores that are open for
at least one full fiscal year. Sales for stores that are closing
during a fiscal year are excluded from the calculation of
comparable store sales. Sales for stores that are either
relocated, enlarged (as defined by gross square footage
expansion of 25% or greater) or generally closed for 30 or more
consecutive days for renovation are also excluded from the
calculation of comparable store sales until such stores have
been in their new location or in a newly renovated state for at
least one full fiscal year. Comparable store sales information
includes our full-price Ralph Lauren stores (including
concession-based shop-within-shops and Rugby stores), Club
Monaco stores and RalphLauren.com (including Rugby.com).
The net increase in Retail net revenues primarily reflects:
|
|
|
|
|
a $129 million aggregate net increase in non-comparable
store sales primarily driven by:
|
|
|
|
|
Ø
|
an increase of approximately $75 million related to a
number of new full-price and factory store openings within the
past twelve months, including our flagship store on Madison
Avenue in New York, as well as our recently launched retail
e-commerce
sites in the United Kingdom and France. This increase includes
an aggregate favorable foreign currency effect of approximately
$9 million primarily related to the strengthening of the
Euro and the Yen, both in comparison to the U.S. dollar
during the second quarter of Fiscal 2012. Excluding those stores
and shops assumed in connection
|
35
|
|
|
|
|
with the South Korea Licensed Operations Acquisition, there was
a net increase in our average global physical store count of 51
stores and concession shops as compared to the second quarter of
Fiscal 2011. Our total physical store count as of
October 1, 2011 included 374 freestanding stores and 522
concession shops, including 5 freestanding stores and 175
concession shops in South Korea; and
|
|
|
|
|
Ø
|
the inclusion of approximately $54 million of revenues from
stores and concession-based shop-within-shops assumed in
connection with the South Korea Licensed Operations Acquisition.
|
|
|
|
|
|
a $61 million aggregate net increase in comparable physical
store sales primarily driven by our global factory stores and
growth from our Club Monaco stores. This increase includes an
aggregate favorable foreign currency effect of approximately
$15 million primarily related to the strengthening of the
Euro and the Yen, both in comparison to the U.S. dollar
during the second quarter of Fiscal 2012. The increase in Retail
net revenues was also due to a $13 million increase in
RalphLauren.com sales. Comparable store sales are presented
below:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
October 1, 2011
|
|
Increases in comparable store sales as reported:
|
|
|
|
|
Full-price Ralph Lauren store sales
|
|
|
5
|
%
|
Full-price Club Monaco store sales
|
|
|
24
|
%
|
Factory store sales
|
|
|
14
|
%
|
RalphLauren.com sales
|
|
|
25
|
%
|
Total increase in comparable store sales as reported
|
|
|
13
|
%
|
Increases in comparable store sales excluding the effect of
foreign currency:
|
|
|
|
|
Full-price Ralph Lauren store sales
|
|
|
0
|
%
|
Full-price Club Monaco store sales
|
|
|
24
|
%
|
Factory store sales
|
|
|
12
|
%
|
RalphLauren.com sales
|
|
|
25
|
%
|
Total increase in comparable store sales excluding the effect
of foreign currency
|
|
|
11
|
%
|
Licensing revenues The net increase in
revenues primarily reflects:
|
|
|
|
|
a $4 million increase in domestic product licensing
royalties principally driven by higher apparel-related
royalties, partially offset by lower fragrance-related royalties.
|
The above increase was partially offset by:
|
|
|
|
|
a $2 million decrease in international licensing royalties
primarily due to the recent South Korea Licensed Operations
Acquisition; and
|
|
|
|
a $1 million decrease in home licensing revenues primarily
due to the transition of our previously licensed bedding and
bath business to directly controlled operations as of
May 1, 2011.
|
Gross Profit. Cost of goods sold includes the
expenses incurred to acquire and produce inventory for sale,
including product costs, freight-in, and import costs, as well
as changes in reserves for shrinkage and inventory
realizability. The costs of selling merchandise, including those
associated with preparing the merchandise for sale, such as
picking, packing, warehousing and order charges, are included in
SG&A expenses.
Gross profit increased by $190.7 million, or 21.5%, to
$1.079 billion in the second quarter of Fiscal 2012 from
$887.9 million in the second quarter of Fiscal 2011. Gross
profit as a percentage of net revenues decreased by
140 basis points to 56.6% in the second quarter of Fiscal
2012 from 58.0% in the second quarter of Fiscal 2011. This
decrease was primarily due to substantial sourcing cost
pressures experienced across our global businesses, particularly
in our Wholesale segment, partially mitigated by targeted
pricing actions. The decrease in gross profit as a percentage of
net revenues was partially offset by a more favorable channel
and geographic mix driven by our retail businesses in Asia,
which generally carry higher margins, including our recently
acquired business in South Korea.
36
Gross profit as a percentage of net revenues is dependent upon a
variety of factors, including changes in the relative sales mix
among distribution channels, changes in the mix of products
sold, the timing and level of promotional activities, foreign
currency exchange rates, and fluctuations in material costs.
These factors, among others, may cause gross profit as a
percentage of net revenues to fluctuate from period to period.
We expect that current macroeconomic challenges, including
inflationary pressures on raw materials and labor costs and
labor shortages in certain regions where our products are
manufactured, will continue to negatively affect the cost of
most of our products and related gross profit percentages to a
significant degree for the remainder of Fiscal 2012. See
Global Economic Developments for further
discussion of the current macroeconomic environment.
Selling, General and Administrative
Expenses. SG&A expenses primarily include
compensation and benefits, marketing, distribution, bad debts,
information technology, facilities, legal and other costs
associated with finance and administration. SG&A expenses
increased by $146.0 million, or 25.4%, to
$720.3 million in the second quarter of Fiscal 2012 from
$574.3 million in the second quarter of Fiscal 2011. This
increase included an unfavorable foreign currency effect of
approximately $20 million, primarily related to the
strengthening of the Euro and the Yen, both in comparison to the
U.S. dollar during the second quarter of Fiscal 2012.
SG&A expenses as a percentage of net revenues increased to
37.8% in the second quarter of Fiscal 2012 from 37.5% in the
second quarter of Fiscal 2011. The 30 basis point increase
was primarily due to the increase in operating expenses
attributable to our recent acquisitions and new business
initiatives and a shift in channel mix to a greater Retail
concentration, partially offset by operating leverage related to
the increase in net revenues. The $146.0 million increase
in SG&A expenses was primarily driven by:
|
|
|
|
|
higher compensation-related costs of approximately
$52 million primarily related to the global increase in
Retail sales and worldwide store expansion, as well as increased
incentive and stock-based compensation expenses;
|
|
|
|
the inclusion of SG&A costs of approximately
$31 million related to our newly acquired business in South
Korea (see Recent Developments for further
discussion);
|
|
|
|
an approximate $17 million increase in rent and occupancy
costs primarily to support the ongoing growth of our global
businesses;
|
|
|
|
an approximate $11 million increase in depreciation expense
primarily associated with global retail store expansion;
|
|
|
|
increased shipping, warehousing and distribution expenses of
approximately $11 million to support increased sales;
|
|
|
|
increased brand-related marketing and advertising costs of
approximately $6 million; and
|
|
|
|
increased consulting costs of approximately $6 million,
including costs relating to new global information technology
systems.
|
Amortization of Intangible
Assets. Amortization of intangible assets
increased by $1.3 million, or 21.0%, to $7.5 million
in the second quarter of Fiscal 2012 from $6.2 million in
the second quarter of Fiscal 2011. This increase was primarily
due to the amortization of the intangible assets acquired in
connection with the South Korea Licensed Operations Acquisition
at the end of the third quarter of Fiscal 2011.
Operating Income. Operating income increased
by $43.4 million, or 14.1%, to $350.8 million in the
second quarter of Fiscal 2012 from $307.4 million in the
second quarter of Fiscal 2011. Operating income as a percentage
of net revenues declined 170 basis points, to 18.4% in the
second quarter of Fiscal 2012 from 20.1% in the second quarter
of Fiscal 2011. The decrease in operating income as a percentage
of net revenues primarily reflected the decline in gross profit
margin and the increase in SG&A expenses as a percentage of
net revenues, both as previously discussed.
37
Operating income and margin for our three business segments is
provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
October 1, 2011
|
|
|
October 2, 2010
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Operating
|
|
|
Operating
|
|
|
Operating
|
|
|
$
|
|
|
Margin
|
|
|
Income
|
|
|
Margin
|
|
|
Income
|
|
|
Margin
|
|
|
Change
|
|
|
Change
|
|
|
(millions)
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
(millions)
|
|
|
|
|
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
246.5
|
|
|
|
24.8
|
%
|
|
$
|
238.0
|
|
|
|
28.8
|
%
|
|
$
|
8.5
|
|
|
(400) bps
|
Retail
|
|
|
146.0
|
|
|
|
17.0
|
%
|
|
|
105.4
|
|
|
|
16.0
|
%
|
|
|
40.6
|
|
|
100 bps
|
Licensing
|
|
|
29.7
|
|
|
|
62.1
|
%
|
|
|
27.4
|
|
|
|
58.9
|
%
|
|
|
2.3
|
|
|
320 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
422.2
|
|
|
|
|
|
|
|
370.8
|
|
|
|
|
|
|
|
51.4
|
|
|
|
Unallocated corporate expenses
|
|
|
(71.4
|
)
|
|
|
|
|
|
|
(63.4
|
)
|
|
|
|
|
|
|
(8.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
350.8
|
|
|
|
18.4
|
%
|
|
$
|
307.4
|
|
|
|
20.1
|
%
|
|
$
|
43.4
|
|
|
(170) bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale operating margin decreased by 400 basis
points, primarily due to lower global gross profit margins
reflecting significant sourcing cost pressures during the second
quarter of Fiscal 2012, as well as an increase in SG&A
expenses as a percentage of net revenues largely driven by
additional costs to support our new business initiatives,
including the assumption of our previously licensed bedding and
bath business during the six months ended October 1, 2011.
Retail operating margin increased by 100 basis
points, primarily as a result of higher gross profit margins
driven by our retail businesses in Asia due to a more favorable
product mix and the inclusion of our recently acquired business
in South Korea, which more than offset the substantial sourcing
cost pressures experienced during the second quarter of Fiscal
2012. The increase in retail operating margin was also partially
offset by an increase in SG&A expenses as a percentage of
revenues, primarily driven by increased compensation-related
costs and other operating expenses to support the ongoing growth
of our global retail businesses.
Licensing operating margin increased by 320 basis
points, primarily as a result of increased revenues, as well as
lower net costs associated with the transition of our licensed
businesses to wholly owned operations, including our recently
acquired business in South Korea.
Unallocated corporate expenses increased by
$8.0 million, primarily as a result of higher
compensation-related expenses.
Foreign Currency Gains (Losses). The effect of
foreign currency exchange rate fluctuations resulted in a gain
of $1.8 million in the second quarter of Fiscal 2012,
compared to a gain of $2.2 million in the second quarter of
Fiscal 2011. The lower foreign currency gains were primarily due
to the timing of the settlement of foreign currency-denominated
third party and intercompany receivables and payables (that were
not of a long-term investment nature), partially offset by
$2.2 million of higher gains relating to foreign currency
hedge contracts. Foreign currency gains and losses are unrelated
to the impact of changes in the value of the U.S. dollar
when operating results of our foreign subsidiaries are
translated to U.S. dollars.
Interest Expense. Interest expense includes
the borrowing costs of our outstanding debt, including
amortization of debt issuance costs, and interest related to our
capital lease obligations. Interest expense increased by
$2.0 million, or 45.5%, to $6.4 million in the second
quarter of Fiscal 2012 from $4.4 million in the second
quarter of Fiscal 2011. The increase in interest expense was
primarily due to amortization of the loss associated with the
termination of an interest rate swap during the first quarter of
Fiscal 2012 (see Note 12 to the accompanying unaudited
interim consolidated financial statements) and unfavorable
foreign currency effects due to the strengthening of the Euro
during the second quarter of Fiscal 2012.
Interest and Other Income, net. Interest and
other income, net, increased by $0.8 million, or 50.0%, to
$2.4 million in the second quarter of Fiscal 2012 from
$1.6 million in the second quarter of Fiscal 2011. The
increase was primarily due to higher yields, particularly
related to our European investment portfolio, during the second
quarter of Fiscal 2012.
38
Equity in Income (Loss) of Equity-Method
Investees. The equity in losses of equity-method
investees of $1.1 million and $0.8 million during the
second quarter of Fiscal 2012 and Fiscal 2011, respectively,
related to our share of losses from our joint venture, the Ralph
Lauren Watch and Jewelry Company, S.A.R.L. (the RL Watch
Company), which is accounted for under the equity method
of accounting.
Provision for Income Taxes. The provision for
income taxes represents federal, foreign, state and local income
taxes. The provision for income taxes increased by
$13.2 million, or 13.1%, to $114.0 million in the
second quarter of Fiscal 2012 from $100.8 million in the
second quarter of Fiscal 2011. The increase in provision for
income taxes was primarily due to the overall increase in our
pretax income, partially offset by a slight decrease in our
reported effective tax rate of 10 basis points, to 32.8%
for the second quarter of Fiscal 2012 from 32.9% for the second
quarter of Fiscal 2011. The effective tax rate differs from
statutory rates due to the effect of state and local taxes, tax
rates in foreign jurisdictions and certain nondeductible
expenses. Our effective tax rate will change from period to
period based on non-recurring factors including, but not limited
to, the geographic mix of earnings, the timing and amount of
foreign dividends, enacted tax legislation, state and local
taxes, tax audit findings and settlements, and the interaction
of various global tax strategies.
Net Income Attributable to RLC. Net income
increased by $28.3 million, or 13.8%, to
$233.5 million in the second quarter of Fiscal 2012 from
$205.2 million in the second quarter of Fiscal 2011. The
increase in net income primarily related to the
$43.4 million increase in operating income, partially
offset by the $13.2 million increase in the provision for
income taxes, both as previously discussed.
Net Income per Diluted Share Attributable to
RLC. Net income per diluted share increased by
$0.37, or 17.7%, to $2.46 per share in the second quarter of
Fiscal 2012 from $2.09 per share in the second quarter of Fiscal
2011. The increase in diluted per share results was due to the
higher level of net income, as previously discussed, and the
lower weighted-average diluted shares outstanding during the
second quarter of Fiscal 2012 driven by our share repurchases.
39
Six
Months Ended October 1, 2011 Compared to Six Months Ended
October 2, 2010
The following table summarizes our results of operations and
expresses the percentage relationship to net revenues of certain
financial statement captions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
$
|
|
|
%
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
Change
|
|
|
|
(millions, except per share data)
|
|
|
|
|
|
Net revenues
|
|
$
|
3,431.0
|
|
|
$
|
2,685.4
|
|
|
$
|
745.6
|
|
|
|
27.8
|
%
|
Cost of goods
sold(a)
|
|
|
(1,390.9
|
)
|
|
|
(1,085.3
|
)
|
|
|
(305.6
|
)
|
|
|
28.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,040.1
|
|
|
|
1,600.1
|
|
|
|
440.0
|
|
|
|
27.5
|
%
|
Gross profit as % of net revenues
|
|
|
59.5
|
%
|
|
|
59.6
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses(a)
|
|
|
(1,392.6
|
)
|
|
|
(1,106.3
|
)
|
|
|
(286.3
|
)
|
|
|
25.9
|
%
|
SG&A expenses as % of net revenues
|
|
|
40.6
|
%
|
|
|
41.2
|
%
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
(14.6
|
)
|
|
|
(12.2
|
)
|
|
|
(2.4
|
)
|
|
|
19.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
632.9
|
|
|
|
481.6
|
|
|
|
151.3
|
|
|
|
31.4
|
%
|
Operating income as % of net revenues
|
|
|
18.4
|
%
|
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
Foreign currency gains (losses)
|
|
|
(2.0
|
)
|
|
|
1.4
|
|
|
|
(3.4
|
)
|
|
|
NM
|
|
Interest expense
|
|
|
(12.5
|
)
|
|
|
(8.9
|
)
|
|
|
(3.6
|
)
|
|
|
40.4
|
%
|
Interest and other income, net
|
|
|
6.6
|
|
|
|
3.4
|
|
|
|
3.2
|
|
|
|
94.1
|
%
|
Equity in income (loss) of equity-method investees
|
|
|
(3.0
|
)
|
|
|
(2.0
|
)
|
|
|
(1.0
|
)
|
|
|
50.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
622.0
|
|
|
|
475.5
|
|
|
|
146.5
|
|
|
|
30.8
|
%
|
Provision for income taxes
|
|
|
(204.4
|
)
|
|
|
(149.5
|
)
|
|
|
(54.9
|
)
|
|
|
36.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax
rate(b)
|
|
|
32.9
|
%
|
|
|
31.4
|
%
|
|
|
|
|
|
|
|
|
Net income attributable to RLC
|
|
$
|
417.6
|
|
|
$
|
326.0
|
|
|
$
|
91.6
|
|
|
|
28.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share attributable to RLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.49
|
|
|
$
|
3.38
|
|
|
$
|
1.11
|
|
|
|
32.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
4.35
|
|
|
$
|
3.30
|
|
|
$
|
1.05
|
|
|
|
31.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes total depreciation expense of $96.8 million and
$80.2 million for the six-month periods ended
October 1, 2011 and October 2, 2010, respectively. |
|
|
|
(b) |
|
Effective tax rate is calculated by dividing the provision for
income taxes by income before provision for income taxes. |
Net Revenues. Net revenues increased by
$745.6 million, or 27.8%, to $3.431 billion for the
six months ended October 1, 2011 from $2.685 billion
for the six months ended October 2, 2010. The increase was
primarily due to higher revenues from our global retail and
wholesale businesses, which included favorable foreign currency
effects. Excluding the effect of foreign currency, net revenues
increased by $646.1 million, or 24.1%.
40
Net revenues for our three business segments are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
$
|
|
|
%
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
Change
|
|
|
|
(millions)
|
|
|
|
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
1,668.5
|
|
|
$
|
1,349.8
|
|
|
$
|
318.7
|
|
|
|
23.6
|
%
|
Retail
|
|
|
1,674.8
|
|
|
|
1,251.3
|
|
|
|
423.5
|
|
|
|
33.8
|
%
|
Licensing
|
|
|
87.7
|
|
|
|
84.3
|
|
|
|
3.4
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
3,431.0
|
|
|
$
|
2,685.4
|
|
|
$
|
745.6
|
|
|
|
27.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale net revenues The net increase
primarily reflects:
|
|
|
|
|
a $202 million net increase in our domestic businesses
primarily due to increased revenues from our menswear and
childrenswear product lines, as well as incremental home product
revenues related to the assumption of control over the
distribution of our previously licensed bedding and bath
business;
|
|
|
|
a $79 million net increase in our European businesses on a
constant currency basis primarily driven by increased revenues
from our menswear and womenswear product lines, reflecting new
product offerings and an increased presence at department stores;
|
|
|
|
a $46 million net increase in revenues due to favorable
foreign currency effects primarily related to the strengthening
of the Euro and the Yen, both in comparison to the
U.S. dollar during the second quarter of Fiscal
2012; and
|
|
|
|
a $5 million net increase in our businesses in the Greater
China and Southeast Asia region on a constant currency basis.
|
These increases were partially offset by:
|
|
|
|
|
a $14 million net decrease related to our Japanese
businesses on a constant currency basis, including the effect of
a business model shift to the Retail concessions-based channel.
|
Retail net revenues The net increase
primarily reflects:
|
|
|
|
|
a $254 million aggregate net increase in non-comparable
store sales primarily driven by:
|
|
|
|
|
Ø
|
an increase of approximately $154 million related to a
number of new full-price and factory store openings within the
past twelve months, including our flagship store on Madison
Avenue in New York, as well as our recently launched retail
e-commerce
sites in the United Kingdom and France. This increase includes
an aggregate favorable foreign currency effect of approximately
$17 million primarily related to the strengthening of the
Euro and the Yen, both in comparison to the U.S. dollar
during the six months ended October 1, 2011. Excluding
those stores and shops assumed in connection with the South
Korea Licensed Operations Acquisition, there was a net increase
in our average global physical store count of 56 stores and
concession shops as compared to the six months ended
October 2, 2010. Our total physical store count as of
October 1, 2011 included 374 freestanding stores and 522
concession shops, including 5 freestanding stores and 175
concession shops in South Korea; and
|
|
|
Ø
|
the inclusion of approximately $100 million of revenues
from stores and concession-based shop-within-shops assumed in
connection with the South Korea Licensed Operations Acquisition.
|
|
|
|
|
|
a $142 million aggregate net increase in comparable
physical store sales primarily driven by our global factory
stores. This increase includes an aggregate favorable foreign
currency effect of approximately $35 million primarily
related to the strengthening of the Euro and the Yen, both in
comparison to the
|
41
|
|
|
|
|
U.S. dollar during the six months ended October 1,
2011. The increase in Retail net revenues was also due to a
$28 million increase in RalphLauren.com sales. Comparable
store sales are presented below:
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
October 1, 2011
|
|
Increases in comparable store sales as reported:
|
|
|
|
|
Full-price Ralph Lauren store sales
|
|
|
9
|
%
|
Full-price Club Monaco store sales
|
|
|
20
|
%
|
Factory store sales
|
|
|
17
|
%
|
RalphLauren.com sales
|
|
|
26
|
%
|
Total increase in comparable store sales as reported
|
|
|
16
|
%
|
Increases in comparable store sales excluding the effect of
foreign currency:
|
|
|
|
|
Full-price Ralph Lauren store sales
|
|
|
3
|
%
|
Full-price Club Monaco store sales
|
|
|
20
|
%
|
Factory store sales
|
|
|
14
|
%
|
RalphLauren.com sales
|
|
|
26
|
%
|
Total increase in comparable store sales excluding the effect
of foreign currency
|
|
|
13
|
%
|
Licensing revenues The net increase in
revenues primarily reflects:
|
|
|
|
|
an $8 million increase in domestic product licensing
royalties, including higher apparel-related and
fragrance-related royalties.
|
The above increase was partially offset by:
|
|
|
|
|
a $4 million decrease in international licensing royalties
primarily due to the recent South Korea Licensed Operations
Acquisition; and
|
|
|
|
a $1 million decrease in home licensing revenues primarily
due to the transition of our previously licensed bedding and
bath business to directly controlled operations.
|
Gross Profit. Gross profit increased by
$440.0 million, or 27.5%, to $2.040 billion for the
six months ended October 1, 2011 from $1.600 billion
for the six months ended October 2, 2010. Gross profit as a
percentage of net revenues declined slightly by 10 basis
points to 59.5% for the six months ended October 1, 2011
from 59.6% for the six months ended October 2, 2010. This
decrease was primarily due to lower global Wholesale margins
reflecting sourcing cost pressures, mostly offset by a more
favorable channel and geographic mix and stronger full-price
sell-throughs driven by our retail businesses in Asia.
Selling, General and Administrative
Expenses. SG&A expenses increased by
$286.3 million, or 25.9%, to $1.393 billion for the
six months ended October 1, 2011 from $1.106 billion
for the six months ended October 2, 2010. This increase
included an unfavorable foreign currency effect of approximately
$43 million, primarily related to the strengthening of the
Euro and the Yen, both in comparison to the U.S. dollar
during the six months ended October 1, 2011. SG&A
expenses as a percentage of net revenues decreased to 40.6% in
the six months ended October 1, 2011 from 41.2% in the six
months ended October 2, 2010. The 60 basis point
decrease was primarily due to operating leverage related to the
increase in net revenues, which more than offset the increase in
operating expenses attributable to our recent acquisitions and
new business initiatives. The $286.3 million increase in
SG&A expenses was primarily driven by:
|
|
|
|
|
higher compensation-related costs of approximately
$100 million primarily due to increased incentive-based
compensation expenses;
|
|
|
|
the inclusion of SG&A costs of approximately
$60 million related to our newly acquired business in
South Korea (see Recent Developments for
further discussion);
|
|
|
|
an approximate $36 million increase in rent and occupancy
costs primarily to support the ongoing growth of our
international businesses;
|
42
|
|
|
|
|
increased shipping, warehousing and distribution expenses of
approximately $21 million to support increased sales;
|
|
|
|
an approximate $19 million increase in depreciation expense
primarily associated with global retail store expansion; and
|
|
|
|
increased consulting costs of approximately $16 million,
including costs relating to new global information technology
systems.
|
Amortization of Intangible
Assets. Amortization of intangible assets
increased by $2.4 million, or 19.7%, to $14.6 million
for the six months ended October 1, 2011 from
$12.2 million for the six months ended October 2,
2010. This increase was primarily due to the amortization of the
intangible assets acquired in connection with the South Korea
Licensed Operations Acquisition at the end of the third quarter
of Fiscal 2011.
Operating Income. Operating income increased
by $151.3 million, or 31.4%, to $632.9 million for the
six months ended October 1, 2011 from $481.6 million
for the six months ended October 2, 2010. Operating income
as a percentage of net revenues increased 50 basis points,
to 18.4% for the six months ended October 1, 2011 from
17.9% for the six months ended October 2, 2010. The
increase in operating income as a percentage of net revenues
primarily reflected the decrease in SG&A expenses as a
percentage of net revenues, partially offset by the slight
decrease in gross profit margin, both as previously discussed.
Operating income and margin for our three business segments is
provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
October 1, 2011
|
|
|
October 2, 2010
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Operating
|
|
|
Operating
|
|
|
Operating
|
|
|
$
|
|
|
Margin
|
|
|
Income
|
|
|
Margin
|
|
|
Income
|
|
|
Margin
|
|
|
Change
|
|
|
Change
|
|
|
(millions)
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
(millions)
|
|
|
|
|
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
397.6
|
|
|
|
23.8
|
%
|
|
$
|
345.6
|
|
|
|
25.6
|
%
|
|
$
|
52.0
|
|
|
|
(180) bps
|
|
Retail
|
|
|
319.1
|
|
|
|
19.1
|
%
|
|
|
209.1
|
|
|
|
16.7
|
%
|
|
|
110.0
|
|
|
|
240 bps
|
|
Licensing
|
|
|
54.9
|
|
|
|
62.6
|
%
|
|
|
51.1
|
|
|
|
60.6
|
%
|
|
|
3.8
|
|
|
|
200 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
771.6
|
|
|
|
|
|
|
|
605.8
|
|
|
|
|
|
|
|
165.8
|
|
|
|
|
|
Unallocated corporate expenses
|
|
|
(138.7
|
)
|
|
|
|
|
|
|
(124.2
|
)
|
|
|
|
|
|
|
(14.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
632.9
|
|
|
|
18.4
|
%
|
|
$
|
481.6
|
|
|
|
17.9
|
%
|
|
$
|
151.3
|
|
|
|
50 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale operating margin decreased by 180 basis
points, primarily due to lower global gross profit margins
reflecting sourcing cost pressures and additional costs to
support our new business initiatives, including the assumption
of our previously licensed bedding and bath business during the
six months ended October 1, 2011. This decrease in
Wholesale operating margin was partially offset by a decrease in
SG&A expenses as a percentage of net revenues due to
improved operating leverage.
Retail operating margin increased by 240 basis
points, primarily as a result of higher gross profit margins due
to stronger full-price sell-throughs and a more favorable
product mix driven by our retail businesses in Asia, which more
then offset the sourcing cost pressures experienced during the
six months ended October 1, 2011. The increase in Retail
operating margin was also offset by a net increase in SG&A
expenses as a percentage of revenues, primarily driven by an
increase in operating expenses to support the ongoing growth of
our international retail businesses, including our recently
acquired business in South Korea.
Licensing operating margin increased by 200 basis
points, primarily as a result of increased revenues, as well as
lower net costs associated with the transition of our licensed
businesses to wholly owned operations, including our recently
acquired business in South Korea.
Unallocated corporate expenses increased by
$14.5 million, primarily as a result of higher
compensation-related expenses.
43
Foreign Currency Gains (Losses). The effect of
foreign currency exchange rate fluctuations resulted in a loss
of $2.0 million for the six months ended October 1,
2011, compared to a gain of $1.4 million for the six months
ended October 2, 2010. The higher foreign currency losses
were primarily attributable to higher losses of
$0.9 million relating to foreign currency hedge contracts,
as well as the timing of the settlement of foreign
currency-denominated third party and intercompany receivables
and payables (that were not of a long-term investment nature).
Foreign currency gains and losses are unrelated to the impact of
changes in the value of the U.S. dollar when operating
results of our foreign subsidiaries are translated to
U.S. dollars.
Interest Expense. Interest expense increased
by $3.6 million, or 40.4%, to $12.5 million for the
six months ended October 1, 2011 from $8.9 million for
the six months ended October 2, 2010. The increase in
interest expense was primarily due to amortization of the loss
associated with the termination of an interest rate swap during
the first quarter of Fiscal 2012 (see Note 12 to the
accompanying unaudited interim consolidated financial
statements) and unfavorable foreign currency effects due to the
strengthening of the Euro during the six months ended
October 1, 2011 compared to the same prior year period.
Interest and Other Income, net. Interest and
other income, net, increased by $3.2 million, or 94.1%, to
$6.6 million for the six months ended October 1, 2011
from $3.4 million for the six months ended October 2,
2010. This increase was primarily due to higher yields,
particularly related to our European investment portfolio,
during the six months ended October 1, 2011, as well as the
inclusion of pretax income of approximately $1.0 million
related to the change in fiscal year of the Companys
Japanese subsidiary, Ralph Lauren Corporation Japan (formerly
Polo Ralph Lauren Kabushiki Kaisha), to conform to our
consolidated fiscal-year basis during the first quarter of
Fiscal 2012 (see Note 2 to the accompanying interim
unaudited consolidated financial statements).
Equity in Income (Loss) of Equity-Method
Investees. The equity in losses of equity-method
investees of $3.0 million and $2.0 million for the six
months ended October 1, 2011 and October 2, 2010,
respectively, related to our share of losses from our joint
venture, the RL Watch Company, which is accounted for under the
equity method of accounting.
Provision for Income Taxes. The provision for
income taxes increased by $54.9 million, or 36.7%, to
$204.4 million for the six months ended October 1,
2011 from $149.5 million for the six months ended
October 2, 2010. The increase in provision for income taxes
was primarily due to the overall increase in our pretax income,
as well as the increase in our reported effective tax rate of
150 basis points, to 32.9% for the six months ended
October 1, 2011 from 31.4% for the six months ended
October 2, 2010. The higher effective tax rate was
primarily due to the absence of certain favorable adjustments
related to intercompany charges and tax reserve reductions
associated with the conclusion of a tax examination during the
six months ended October 2, 2010. The effective tax rate
differs from statutory rates due to the effect of state and
local taxes, tax rates in foreign jurisdictions and certain
nondeductible expenses. Our effective tax rate will change from
period to period based on non-recurring factors including, but
not limited to, the geographic mix of earnings, the timing and
amount of foreign dividends, enacted tax legislation, state and
local taxes, tax audit findings and settlements, and the
interaction of various global tax strategies.
Net Income Attributable to RLC. Net income
increased by $91.6 million, or 28.1%, to
$417.6 million for the six months ended October 1,
2011 from $326.0 million for the six months ended
October 2, 2010. The increase in net income primarily
related to the $151.3 million increase in operating income,
partially offset by the $54.9 million increase in the
provision for income taxes, both as previously discussed.
Net Income per Diluted Share Attributable to
RLC. Net income per diluted share increased by
$1.05, or 31.8%, to $4.35 per share for the six months ended
October 1, 2011 from $3.30 per share for the six months
ended October 2, 2010. The increase in diluted per share
results was due to the higher level of net income, as previously
discussed, and the lower weighted-average diluted shares
outstanding during the six months ended October 1, 2011
driven by our share repurchases.
44
FINANCIAL
CONDITION AND LIQUIDITY
Financial
Condition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
April 2,
|
|
|
$
|
|
|
|
2011
|
|
|
2011
|
|
|
Change
|
|
|
|
(millions)
|
|
|
Cash and cash equivalents
|
|
$
|
407.7
|
|
|
$
|
453.0
|
|
|
$
|
(45.3
|
)
|
Short-term investments
|
|
|
477.9
|
|
|
|
593.9
|
|
|
|
(116.0
|
)
|
Non-current investments
|
|
|
93.8
|
|
|
|
83.6
|
|
|
|
10.2
|
|
Short-term debt
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
(100.0
|
)
|
Long-term debt
|
|
|
(273.7
|
)
|
|
|
(291.9
|
)
|
|
|
18.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash and
investments(a)
|
|
$
|
605.7
|
|
|
$
|
838.6
|
|
|
$
|
(232.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
$
|
3,383.9
|
|
|
$
|
3,304.7
|
|
|
$
|
79.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Net cash and investments is defined as cash and cash
equivalents plus short-term and non-current investments, less
total debt.
|
The decrease in our net cash and investments position at
October 1, 2011 as compared to April 2, 2011 was
primarily due to our use of cash to support treasury stock
repurchases and capital expenditures, partially offset by our
operating cash flows. We used $417.8 million to repurchase
3.4 million shares of Class A common stock, including
shares surrendered for tax withholdings, and spent
$92.4 million for capital expenditures.
The increase in equity was primarily attributable to our net
income and equity issuances pursuant to stock-based compensation
arrangements during the six months ended October 1, 2011,
partially offset by an increase in treasury stock as a result of
our common stock repurchase program.
Cash
Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
$
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
|
(millions)
|
|
|
Net cash provided by operating activities
|
|
$
|
283.5
|
|
|
$
|
224.0
|
|
|
$
|
59.5
|
|
Net cash used in investing activities
|
|
|
(12.6
|
)
|
|
|
(18.4
|
)
|
|
|
5.8
|
|
Net cash used in financing activities
|
|
|
(316.1
|
)
|
|
|
(342.6
|
)
|
|
|
26.5
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(0.1
|
)
|
|
|
9.8
|
|
|
|
(9.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(45.3
|
)
|
|
$
|
(127.2
|
)
|
|
$
|
81.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities. Net
cash provided by operating activities increased to
$283.5 million during the six months ended October 1,
2011, as compared to $224.0 million during the six months
ended October 2, 2010. This net increase in operating cash
flow was primarily driven by:
|
|
|
|
|
an increase in net income before depreciation, amortization,
stock-based compensation and other non-cash expenses; and
|
|
|
|
an increase related to income taxes due to the timing of income
tax payments.
|
The above increases in operating cash flow were partially offset
by:
|
|
|
|
|
a decrease related to accounts payable and accrued liabilities
primarily due to the timing of payments;
|
|
|
|
a decrease related to inventories primarily attributable to an
increase in inventory levels to support our sales growth and
product expansion, new store openings and recently acquired
businesses, as well as the timing of inventory receipts. The
higher inventory levels also reflect increased sourcing costs
during the six months ended October 1, 2011; and
|
45
|
|
|
|
|
a decrease related to accounts receivable primarily due to lower
cash collections during the six months ended October 1,
2011, which resulted in an increase in days sales outstanding
compared to the prior year period.
|
Other than the items described above, the changes in operating
assets and liabilities were attributable to normal operating
fluctuations.
Net Cash Used in Investing Activities. Net
cash used in investing activities was $12.6 million during
the six months ended October 1, 2011, as compared to
$18.4 million of net cash used in investing activities
during the six months ended October 2, 2010. The net
decrease in cash used in investing activities was primarily
driven by:
|
|
|
|
|
a decrease in net cash used to fund our acquisitions and
ventures from $21.4 million during the six months ended
October 2, 2010 to $7.9 million during the six months
ended October 1, 2011. During the six months ended
October 2, 2010, we used $17.0 million to fund the
acquisition of certain finite-lived intellectual property
rights; and
|
|
|
|
a $3.5 million net decrease related to cash deposits
restricted in connection with taxes.
|
The above decreases in cash used in investing activities were
partially offset by:
|
|
|
|
|
a decrease in proceeds from sales and maturities of investments,
less cash used to purchase investments. During the six months
ended October 1, 2011, we received $880.3 million of
proceeds from sales and maturities of investments and used
$792.9 million to purchase investments. On a comparative
basis, during the six months ended October 2, 2010, we
received $667.7 million of proceeds from sales and
maturities of investments and used $567.7 million to
purchase investments.
|
Net Cash Used in Financing Activities. Net
cash used in financing activities was $316.1 million during
the six months ended October 1, 2011, as compared to
$342.6 million during the six months ended October 2,
2010. The increase in net cash from financing activities was
primarily driven by:
|
|
|
|
|
an increase in net proceeds from credit facilities. During the
six months ended October 1, 2011, we borrowed
$100.0 million under our Global Credit Facility. We also
borrowed $7.7 million under our Chinese Credit Facility
during the six months ended October 1, 2011, which was
repaid in full during the same period; and
|
|
|
|
increase in excess tax benefits from stock-based compensation
arrangements of $14.2 million during the six months ended
October 1, 2011, as compared to the related prior year
period.
|
These increases in cash from financing activities were partially
offset by:
|
|
|
|
|
an increase in cash used in connection with repurchases of our
Class A common stock. During the six months ended
October 1, 2011, 3.2 million shares of Class A
common stock at a cost of $393.5 million were repurchased
pursuant to our common stock repurchase program and
0.2 million shares of Class A common stock at a cost
of $24.3 million were surrendered or withheld in
satisfaction of withholding taxes in connection with the vesting
of awards under our 1997 Long-Term Stock Incentive Plan, as
amended (the 1997 Incentive Plan), and our 2010
Long-Term Stock Incentive Plan (the 2010 Incentive
Plan). On a comparative basis, during the six months ended
October 2, 2010, 4.0 million shares of Class A
common stock at a cost of $331.0 million were repurchased
pursuant to our common stock repurchase program and
0.2 million shares of Class A common stock at a cost
of $16.7 million were surrendered or withheld for
taxes; and
|
|
|
|
an increase in cash used to pay dividends. During the six months
ended October 1, 2011, we used $37.4 million to pay
dividends as compared to $19.4 million during the six
months ended October 2, 2010, largely due to an increase in
the quarterly cash dividend on our common stock from $0.10 per
share to $0.20 per share in February 2011.
|
Liquidity
Our primary sources of liquidity are the cash flows generated
from our operations, the availability under our Global Credit
Facility (as defined below), our available cash and cash
equivalents (most of which is considered permanently reinvested
outside the U.S.) and investments, and our other available
financing options. These sources
46
of liquidity are used to fund our ongoing cash requirements,
including working capital requirements, global retail store
expansion and renovation, construction and renovation of
shop-in-shops,
investment in technological infrastructure, acquisitions, joint
ventures, dividends, debt repayment/repurchase, stock
repurchases, contingent liabilities (including uncertain tax
positions) and other corporate activities. Management believes
that our existing sources of cash will be sufficient to support
our operating, capital and debt service requirements for the
foreseeable future, including the ongoing development of our
recently acquired businesses and our plans for further business
expansion.
As discussed in the Debt and Covenant Compliance
section below, we had revolving credit borrowings of
$100 million outstanding under our Global Credit Facility
as of October 1, 2011. As discussed further below, we may
elect to further draw on our Global Credit Facility or other
potential sources of financing for, among other things, a
material acquisition, settlement of a material contingency
(including uncertain tax positions) or a material adverse
business or macroeconomic development, as well as for other
general corporate business purposes. We believe that our Global
Credit Facility is adequately diversified with no undue
concentrations in any one financial institution. In particular,
as of October 1, 2011, there were nine financial
institutions participating in the Global Credit Facility, with
no one participant maintaining a maximum commitment percentage
in excess of approximately 16%. Management has no reason at this
time to believe that the participating institutions will be
unable to fulfill their obligations to provide financing in
accordance with the terms of the Global Credit Facility in the
event of our election to draw funds in the foreseeable future.
Common
Stock Repurchase Program
On May 24, 2011, our Board of Directors approved an
expansion of our existing common stock repurchase program that
allows us to repurchase up to an additional $500 million of
Class A common stock. Repurchases of shares of Class A
common stock are subject to overall business and market
conditions.
During the six months ended October 1, 2011, we repurchased
3.2 million shares of Class A common stock at a cost
of $393.5 million under our share repurchase program. The
remaining availability under our common stock repurchase program
was approximately $579 million as of October 1, 2011.
In addition, during the six months ended October 1, 2011,
0.2 million shares of Class A common stock at a cost
of $24.3 million were surrendered to, or withheld by, us in
satisfaction of taxes in connection with the vesting of awards
under the 1997 Incentive Plan and the 2010 Incentive Plan.
Repurchased and surrendered shares are accounted for as treasury
stock at cost and will be held in treasury for future use.
Dividends
Since 2003, we have maintained a regular quarterly cash dividend
program on our common stock. On February 8, 2011, our Board
of Directors approved an increase to our quarterly cash dividend
on our common stock from $0.10 per share to $0.20 per share. The
second quarter Fiscal 2012 dividend of $0.20 per share was
declared on September 19, 2011, was payable to stockholders
of record at the close of business on September 30, 2011,
and was paid on October 14, 2011. Dividends paid amounted
to $37.4 million during the six months ended
October 1, 2011 and $19.4 million during the six
months ended October 2, 2010.
We intend to continue to pay regular quarterly dividends on our
outstanding common stock. However, any decision to declare and
pay dividends in the future will be made at the discretion of
our Board of Directors and will depend on, among other things,
our results of operations, cash requirements, financial
condition and other factors that our Board of Directors may deem
relevant.
Debt
and Covenant Compliance
Euro
Debt
As of October 1, 2011, we had outstanding
209.2 million principal amount of 4.5% notes due
October 4, 2013 (the Euro Debt). We have the
option to redeem all of the outstanding Euro Debt at any time at
a redemption price
47
equal to the principal amount plus a premium. We also have the
option to redeem all of the outstanding Euro Debt at any time at
par plus accrued interest in the event of certain developments
involving U.S. tax law. Partial redemption of the Euro Debt
is not permitted in either instance. In the event of a change of
control, each holder of the Euro Debt has the option to require
us to redeem the Euro Debt at its principal amount plus accrued
interest. The indenture governing the Euro Debt (the
Indenture) contains certain limited covenants that
restrict our ability, subject to specified exceptions, to incur
liens or enter into a sale and leaseback transaction for any
principal property. The Indenture does not contain any financial
covenants.
As of October 1, 2011, the carrying value of our Euro Debt
was $273.7 million, compared to $291.9 million as of
April 2, 2011.
Revolving
Credit Facilities
Global
Credit Facility
We have a credit facility that provides for a $500 million
senior unsecured revolving line of credit through March 2016,
also used to support the issuance of letters of credit (the
Global Credit Facility). Borrowings under the Global
Credit Facility may be denominated in U.S. dollars and
other currencies, including Euros, Hong Kong Dollars and
Japanese Yen. We have the ability to expand the borrowing
availability to $750 million, subject to the agreement of
one or more new or existing lenders under the facility to
increase their commitments. There are no mandatory reductions in
borrowing ability throughout the term of the Global Credit
Facility.
In August 2011, we borrowed $100.0 million under the Global
Credit Facility to be used for general corporate purposes. These
borrowings have been classified as short-term debt in our
unaudited consolidated balance sheet as of October 1, 2011.
We were also contingently liable for $15.4 million of
outstanding letters of credit, and our remaining availability
under the Global Credit Facility was $384.6 million as of
October 1, 2011.
Subsequent to the end of the second quarter of Fiscal 2012, in
November 2011, we repaid the $100.0 million in borrowings
outstanding under the Global Credit Facility.
The Global Credit Facility contains a number of covenants that,
among other things, restrict our ability, subject to specified
exceptions, to incur additional debt; incur liens, sell or
dispose of assets; merge with or acquire other companies;
liquidate or dissolve; engage in businesses that are not in a
related line of business; make loans, advances, or guarantees;
engage in transactions with affiliates; and make investments.
The Global Credit Facility also requires us to maintain a
maximum ratio of Adjusted Debt to Consolidated EBITDAR (the
leverage ratio) of no greater than 3.75 as of the
date of measurement for the four most recent consecutive fiscal
quarters. Adjusted Debt is defined generally as consolidated
debt outstanding plus 8 times consolidated rent expense for the
last four consecutive fiscal quarters. Consolidated EBITDAR is
defined generally as consolidated net income plus
(i) income tax expense, (ii) net interest expense,
(iii) depreciation and amortization expense and
(iv) consolidated rent expense. As of October 1, 2011,
no Event of Default (as such term is defined pursuant to the
Global Credit Facility) has occurred under our Global Credit
Facility.
Chinese
Credit Facility
We also have an uncommitted credit facility in China that
provides for a revolving line of credit of up to 70 million
Chinese Renminbi (approximately $11 million as of
October 1, 2011) through February 9, 2012 (the
Chinese Credit Facility). The Chinese Credit
Facility is used to fund general working capital needs of our
operations in China. The borrowing availability under the
Chinese Credit Facility is at the sole discretion of JPMorgan
Chase Bank (China) Company Limited, Shanghai Branch (the
Bank) and is subject to availability of the
Banks funds and satisfaction of certain regulatory
requirements. Borrowings under the Chinese Credit Facility are
guaranteed by RLC and bear interest at either (i) at least
90% of the short-term interest rate published by the
Peoples Bank of China or (ii) a rate determined by
the Bank at its discretion based on prevailing market
conditions. The Chinese Credit Facility does not contain any
financial covenants.
During the second quarter of Fiscal 2012, we repaid our
previously outstanding borrowings under the Chinese Credit
Facility, and there were no borrowings outstanding as of
October 1, 2011.
48
Refer to Note 14 of the Fiscal 2011
10-K for
detailed disclosure of the terms and conditions of our debt and
our credit facilities.
MARKET
RISK MANAGEMENT
As discussed in Note 16 to our audited consolidated
financial statements included in our Fiscal 2011
10-K and
Note 12 to the accompanying unaudited interim consolidated
financial statements, we are exposed to a variety of risks,
including changes in foreign currency exchange rates relating to
certain anticipated cash flows from our international operations
and possible declines in the value of reported net assets of
certain of our foreign operations, as well as changes in the
fair value of our fixed-rate debt relating to changes in
interest rates. Consequently, in the normal course of business
we employ established policies and procedures, including the use
of derivative financial instruments, to manage such risks. We do
not enter into derivative transactions for speculative or
trading purposes.
As a result of the use of derivative instruments, we are exposed
to the risk that counterparties to our derivative contracts will
fail to meet their contractual obligations. To mitigate the
counterparty credit risk, we have a policy of only entering into
contracts with carefully selected financial institutions based
upon their credit ratings and other financial factors. Our
established policies and procedures for mitigating credit risk
on derivative transactions include reviewing and assessing the
creditworthiness of counterparties. As a result of the above
considerations, we do not believe that we are exposed to any
undue concentration of counterparty risk with respect to our
derivative contracts as of October 1, 2011.
Foreign
Currency Risk Management
We manage our exposure to changes in foreign currency exchange
rates through the use of foreign currency exchange contracts.
Refer to Note 12 to the accompanying unaudited interim
consolidated financial statements for a summarization of the
notional amounts and fair values of our foreign currency
exchange contracts outstanding as of October 1, 2011.
From time to time, we may enter into forward foreign currency
exchange contracts as hedges to reduce our risk from exchange
rate fluctuations on inventory purchases, intercompany royalty
payments made by certain of our international operations,
intercompany contributions made to fund certain marketing
efforts of our international operations, interest payments made
in connection with outstanding debt, and other foreign
currency-denominated operational cash flows. As part of our
overall strategy to manage the level of exposure to the risk of
foreign currency exchange rate fluctuations, primarily to
changes in the value of the Euro, the Japanese Yen, the Hong
Kong Dollar, the Swiss Franc and the British Pound Sterling, we
hedge a portion of our foreign currency exposures anticipated
over the ensuing twelve-month to two-year periods. In doing so,
we use foreign currency exchange contracts that generally have
maturities of three months to two years to provide continuing
coverage throughout the hedging period.
Our foreign exchange risk management activities are governed by
policies and procedures approved by our Audit Committee. Our
policies and procedures provide a framework that allows for the
management of currency exposures while ensuring the activities
are conducted within our established guidelines. Our policies
include guidelines for the organizational structure of our risk
management function and for internal controls over foreign
exchange risk management activities, including but not limited
to authorization levels, transactional limits, and credit
quality controls, as well as various measurements for monitoring
compliance. We monitor foreign exchange risk using different
techniques, including a periodic review of market value and
sensitivity analyses.
Interest
Rate Risk Management
During the first quarter of Fiscal 2011, we entered into a
fixed-to-floating
interest rate swap with an aggregate notional value of
209.2 million, which was designated as a fair value
hedge to mitigate our exposure to changes in the fair value of
our Euro Debt due to changes in the benchmark interest rate. The
interest rate swap was executed to swap the 4.5% fixed interest
rate on our Euro Debt for a variable interest rate. On
April 11, 2011, we terminated the interest rate swap
agreement at a loss of $7.6 million. This loss has been
recorded as an adjustment to the carrying value of our Euro Debt
and is being recognized within interest expense over the
remaining term of the debt, through October 4, 2013. During
the three-month and six-month periods ended October 1,
2011, $0.7 million and
49
$1.5 million of this loss, respectively, was recognized as
interest expense within our consolidated statement of operations.
As of October 1, 2011, there have been no other significant
changes in our interest rate and foreign currency exposures or
in the types of derivative instruments used to hedge those
exposures.
See Note 3 to the accompanying unaudited interim
consolidated financial statements for further discussion of our
interest rate and foreign currency exposures and the types of
derivative instruments used to hedge those exposures.
Investment
Risk Management
As of October 1, 2011, we had cash and cash equivalents
on-hand of $407.7 million, primarily invested in money
market funds, time deposits and treasury bills with original
maturities of 90 days or less. Our other significant
investments included $477.9 million of short-term
investments, primarily in time deposits, municipal bonds and
corporate bonds with original maturities greater than
90 days; $50.2 million of restricted cash placed in
escrow with certain banks as collateral primarily to secure
guarantees in connection with certain international tax matters;
$91.0 million of investments with maturities greater than
one year in municipal bonds and corporate bonds;
$2.4 million of auction rate securities issued through a
municipality; and $0.4 million of other securities.
We evaluate investments held in unrealized loss positions for
other-than-temporary
impairment on a quarterly basis. Such evaluation involves a
variety of considerations, including assessments of risks and
uncertainties associated with general economic conditions and
distinct conditions affecting specific issuers. We consider the
following factors: (i) the length of time and the extent to
which the fair value has been below cost, (ii) the
financial condition, credit worthiness and near-term prospects
of the issuer, (iii) the length of time to maturity,
(iv) future economic conditions and market forecasts,
(v) our intent and ability to retain our investment for a
period of time sufficient to allow for recovery of market value,
and (vi) an assessment of whether it is
more-likely-than-not that we will be required to sell our
investment before recovery of market value.
CRITICAL
ACCOUNTING POLICIES
Our significant accounting policies are described in Note 3
to the audited consolidated financial statements included in our
Fiscal 2011
10-K. Our
estimates are often based on complex judgments, probabilities
and assumptions that our management believes to be reasonable,
but that are inherently uncertain and unpredictable. It is also
possible that other professionals, applying reasonable judgment
to the same facts and circumstances, could develop and support a
range of alternative estimated amounts. For a complete
discussion of our critical accounting policies, see the
Critical Accounting Policies section of the
MD&A in our Fiscal 2011
10-K. The
following discussion only is intended to update our critical
accounting policies for any significant changes in policy
implemented during the six months ended October 1, 2011.
There have been no significant changes in the application of our
critical accounting policies since April 2, 2011.
Goodwill
Impairment Assessment
We performed our annual impairment assessment of goodwill as of
the beginning of the second quarter of Fiscal 2012. Based on the
results of the impairment assessment as of July 3, 2011, we
confirmed that the fair value of our reporting units exceeded
their respective carrying values and there are no reporting
units at risk of impairment.
RECENTLY
ISSUED ACCOUNTING STANDARDS
See Note 4 to the accompanying unaudited interim
consolidated financial statements for a description of certain
recently issued or proposed accounting standards which may
impact our financial statements in future reporting periods.
50
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Item 3.
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Quantitative
and Qualitative Disclosures About Market Risk.
|
For a discussion of the Companys exposure to market risk,
see Market Risk Management presented in Part I,
Item 2 MD&A of this
Form 10-Q
and incorporated herein by reference.
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Item 4.
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Controls
and Procedures.
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The Company maintains disclosure controls and procedures that
are designed to provide reasonable assurance that information
required to be disclosed in the reports that the Company files
or submits under the Securities and Exchange Act is recorded,
processed, summarized, and reported within the time periods
specified in the SECs rules and forms, and that such
information is accumulated and communicated to the
Companys management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures.
The Company carried out an evaluation, under the supervision and
with the participation of its management, including its Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys
disclosure controls and procedures pursuant to
Rules 13(a)-15(e)
and 15(d)-15(e) of the Securities and Exchange Act of 1934.
Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective at the
reasonable assurance level as of October 1, 2011. Except as
discussed below, there has been no change in the Companys
internal control over financial reporting during the fiscal
quarter ended October 1, 2011, that has materially
affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
South
Korea Licensed Operations Acquisition
On January 1, 2011, the Company acquired control of the
Ralph Lauren-branded apparel business in South Korea from Doosan
that was formerly conducted under a licensed arrangement (the
South Korea Licensed Operations Acquisition, as
discussed in Note 5 to the accompanying unaudited interim
consolidated financial statements). In connection with the South
Korea Licensed Operations Acquisition, the Company has continued
to develop supporting infrastructure covering all critical
operations, including but not limited to, merchandising, sales,
inventory management, customer service, distribution, store
operations, real estate management, finance and other
administrative areas. As part of the continued development of
this infrastructure, the Company has implemented and enhanced
various processes, systems, and internal controls to support
this business during the second quarter of Fiscal 2012.
Global
Financial and Reporting System Implementation
We are in the process of implementing a new global financial and
reporting system as part of a multi-year plan to integrate and
upgrade our operational and financial systems and processes. The
implementation of this global system is scheduled to occur in
phases over the next several years. During the second quarter of
Fiscal 2012, we continued to develop and enhance those domestic
operational and financial systems transitioned to the new global
financial and reporting system in the beginning of Fiscal 2012.
As the phased implementation of this system occurs, we are
experiencing certain changes to our processes and procedures
which in turn result in changes in internal control over
financial reporting. While we expect this new system to
strengthen our internal financial controls by automating manual
processes and standardizing business processes across our
organization, management will continue to evaluate and monitor
our internal controls as processes and procedures in each of the
affected areas evolve. For a discussion of risks related to the
implementation of new systems, see Item 1A
Risk Factors Risks Related to Our
Business Our business could suffer if our computer
systems and websites are disrupted or cease to operate
effectively in our Annual Report on
Form 10-K
for the fiscal year ended April 2, 2011.
51
PART II.
OTHER INFORMATION
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Item 1.
|
Legal
Proceedings.
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Reference is made to the information disclosed under
Item 3 LEGAL PROCEEDINGS in our
Annual Report on
Form 10-K
for the fiscal year ended April 2, 2011. The following is a
summary of recent litigation developments.
Wathne
Imports Litigation
On August 19, 2005, Wathne Imports, Ltd.
(Wathne), Ralph Laurens then domestic licensee
for luggage and handbags, filed a complaint in the
U.S. District Court in the Southern District of New York
against our Company and Ralph Lauren, our Chairman and Chief
Executive Officer, asserting, among other things, federal
trademark law violations, breach of contract, breach of
obligations of good faith and fair dealing, fraud and negligent
misrepresentation. The complaint sought, among other relief,
injunctive relief, compensatory damages in excess of
$250 million and punitive damages of not less than
$750 million. On September 13, 2005, Wathne withdrew
this complaint from the U.S. District Court and filed a
complaint in the Supreme Court of the State of New York,
New York County, making substantially the same allegations
and claims (excluding the federal trademark claims), and seeking
similar relief. On February 1, 2006, the court granted our
motion to dismiss all of the causes of action, including the
cause of action against Mr. Lauren, except for breach of
contract related claims, and denied Wathnes motion for a
preliminary injunction. Following some discovery, we moved for
summary judgment on the remaining claims. Wathne cross-moved for
partial summary judgment. In an April 11, 2008 Decision and
Order, the court granted Ralph Laurens summary judgment
motion to dismiss most of the claims against our Company, and
denied Wathnes cross-motion for summary judgment. Wathne
appealed the dismissal of its claims to the Appellate Division
of the Supreme Court. Following a hearing on May 19, 2009,
the Appellate Division issued a Decision and Order on
June 9, 2009 which, in large part, affirmed the lower
courts ruling. Discovery on those claims that were not
dismissed is ongoing and a trial date has not yet been set. We
intend to continue to contest the remaining claims in this
lawsuit vigorously. Management does not expect that the ultimate
resolution of this matter will have a material adverse effect on
our financial statements.
Other
Matters
We are involved, from time to time, in litigation, other legal
claims and proceedings involving matters associated with or
incidental to our business, including, among other things,
matters involving credit card fraud, trademark and other
intellectual property, licensing, and employee relations. We
believe that the resolution of currently pending matters will
not individually or in the aggregate have a material adverse
effect on our financial statements. However, our assessment of
the current litigation or other legal claims could change in
light of the discovery of facts not presently known or
determinations by judges, juries or other finders of fact which
are not in accord with managements evaluation of the
possible liability or outcome of such litigation or claims.
The Companys Annual Report on
Form 10-K
for the fiscal year ended April 2, 2011 contains a detailed
discussion of certain risk factors that could materially
adversely affect the Companys business, operating results,
and/or
financial condition. There are no material changes to the risk
factors previously disclosed, nor has the Company identified any
previously undisclosed risks that could materially adversely
affect the Companys business, operating results
and/or
financial condition.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
Items 2(a) and (b) are not applicable.
52
The following table sets forth the repurchases of shares of the
Companys Class A common stock during the fiscal
quarter ended October 1, 2011:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Total Number of
|
|
|
|
|
|
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Average
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|
Shares Purchased
|
|
Approximate Dollar Value
|
|
|
Total Number of
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|
Price
|
|
as Part of Publicly
|
|
of Shares That May Yet be
|
|
|
Shares
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|
Paid per
|
|
Announced Plans
|
|
Purchased Under the Plans
|
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|
Purchased(1)
|
|
Share
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|
or Programs
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|
or Programs
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|
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|
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(millions)
|
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July 3, 2011 to July 30, 2011
|
|
|
|
|
|
|
|
|
|
|
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$
|
670
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|
July 31, 2011 to August 27, 2011
|
|
|
|
|
|
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670
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|
August 28, 2011 to October 1, 2011
|
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784,305
|
(2)
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|
$
|
119.02
|
|
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|
773,200
|
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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784,305
|
|
|
|
|
|
|
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773,200
|
|
|
|
|
|
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(1) |
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Except as noted below, these repurchases were made on the open
market under the Companys Class A common stock
repurchase program. |
|
(2) |
|
Includes 11,105 shares surrendered to, or withheld by, the
Company in satisfaction of withholding taxes in connection with
the vesting of awards issued under the 2010 Long-Term Stock
Incentive Plan and the 1997 Long-Term Stock Incentive Plan. |
|
|
Item 5.
|
Other
Information.
|
|
|
(a)
|
Submission
of Matters to a Vote of Security Holders
|
On August 11, 2011, at the Annual Meeting of Stockholders,
in a non-binding vote of the Companys stockholders
regarding the frequency of holding future advisory votes on
executive compensation, the proposed frequency that received the
highest number of votes was every one year. In light of this
result and the other factors considered by the Companys
Board of Directors in making its original recommendation to the
stockholders, the Company will hold a non-binding advisory vote
on executive compensation every year until the Companys
Board of Directors determines that a different frequency for
such advisory vote is in the Companys best interest or the
next required vote in six years on the frequency of such vote.
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(b)
|
Director
Compensation
|
At its August 11, 2011 meeting, the Board of Directors of
the Company determined to change the Companys policy with
respect to the compensation of non-employee directors. Effective
August 12, 2011, the compensation for non-employee
directors is as follows:
|
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|
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an annual retainer fee for each non-employee director of $60,000;
|
|
|
|
an annual retainer fee for the Chair of the
Compensation & Organizational Development Committee of
$20,000;
|
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|
|
an annual retainer fee for the Chair of Audit Committee of
$20,000;
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an annual retainer fee for the Chair of the
Nominating & Governance Committee of $15,000; and
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an annual equity award for each non-employee director with a
target equity value of $100,000. One-half of the target equity
value will be delivered in the form of options to purchase
shares of the Companys Class A common stock and
one-half will be delivered in the form of restricted shares of
Class A common stock. The options and the restricted shares
of Class A common stock will vest over three years in equal
annual installments. The exercise term for the stock options is
seven years. The annual equity award to a non-employee director
is awarded on April 1st of each year to a non-employee
director who has served as a director for at least half of the
preceding fiscal year.
|
53
The fee paid to a non-employee director for each meeting of a
committee of the Board of Directors that such director attends
remains unchanged at $2,000 per committee meeting. The annual
retainer and attendance fees are paid to the non-employee
directors in quarterly installments in arrears.
A new non-employee director also receives a grant of options to
purchase 7,500 shares of the Companys Class A
common stock at the time that such director joins the Board of
Directors of the Company. These options will vest over three
years in equal annual installments and the exercise term is
seven years.
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3.1
|
|
Certificate of Amendment to the Amended and Restated Certificate
of Incorporation (filed as Exhibit 3.1 to the Form 8-K filed on
August 16, 2011 (Commission File No. 001-13057)).
|
3.2
|
|
Restated Bylaws of Ralph Lauren Corporation (filed as Exhibit
3.2 to the Form 8-K filed on August 16, 2011 (Commission File
No. 001-13057)).
|
10.1
|
|
Credit Agreement, dated March 10, 2011, among Polo Ralph Lauren
Corporation, Polo JP Acqui C.V., Polo Ralph Lauren Kabushiki
Kaisha and Polo Ralph Lauren Asia Pacific Limited, as the
borrowers, the lenders party thereto, and JP Morgan Chase Bank,
N.A., as administrative agent (replaces Exhibit 10.27 to the
Form 10-K for the fiscal year ended April 2, 2011).
|
10.2
|
|
Employment Agreement, effective as of October 14, 2009, between
Polo Ralph Lauren Corporation and Jackwyn Nemerov (replaces
Exhibit 10.28 to the Form 10-K for the fiscal year ended April
2, 2011).*
|
10.3
|
|
Employment Agreement, effective as of September 28, 2009,
between Polo Ralph Lauren Corporation and Tracey T. Travis
(replaces Exhibit 10.29 to the Form 10-K for the fiscal year
ended April 2, 2011).*
|
10.4
|
|
Employment Agreement, effective as of October 14, 2009, between
Polo Ralph Lauren Corporation and Mitchell A. Kosh (replaces
Exhibit 10.30 to the Form 10-K for the fiscal year ended April
2, 2011).*
|
31.1
|
|
Certification of Ralph Lauren, Chairman and Chief Executive
Officer, pursuant to 17 CFR 240.13a-14(a).
|
31.2
|
|
Certification of Tracey T. Travis, Senior Vice President and
Chief Financial Officer, pursuant to 17 CFR 240.13a-14(a).
|
32.1
|
|
Certification of Ralph Lauren, Chairman and Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2
|
|
Certification of Tracey T. Travis, Senior Vice President and
Chief Financial Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
101
|
|
Interactive data files pursuant to Rule 405 of Regulation S-T:
(i) the Consolidated Balance Sheets at October 1, 2011 and April
2, 2011, (ii) the Consolidated Statements of Operations for the
three-month and six-month periods ended October 1, 2011 and
October 2, 2010, (iii) the Consolidated Statements of Cash Flows
for the six months ended October 1, 2011 and October 2, 2010 and
(iv) the Notes to Consolidated Financial Statements.
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|
|
|
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*
|
Portions of this exhibit have been omitted and are the subject
of a request for confidential treatment filed separately with
the SEC.
|
Exhibits 32.1, 32.2 and 101 shall not be deemed
filed for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the
liability of that Section. Such exhibits shall not be deemed
incorporated by reference into any filing under the Securities
Act of 1933 or Securities Exchange Act of 1934.
54
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
RALPH LAUREN CORPORATION
Tracey T. Travis
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 9, 2011
55