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Ralph Lauren Reports First Quarter Fiscal 2018 Results

NEW YORK--(BUSINESS WIRE)--Ralph Lauren Corporation (NYSE:RL), a global leader in the design, marketing, and distribution of premium lifestyle products, today reported earnings per diluted share of $0.72 on a reported basis and $1.11 on an adjusted basis, excluding restructuring-related and other charges that were primarily related to activities associated with the Company’s Way Forward plan, for the first quarter of Fiscal 2018. This compared to earnings per diluted share of ($0.27) on a reported basis and $1.06 on an adjusted basis, excluding restructuring-related and other charges, for the first quarter of Fiscal 2017.

“I am thrilled to welcome Patrice Louvet as my partner to continue the exciting evolution of our Company,” said Ralph Lauren, Executive Chairman and Chief Creative Officer. “Patrice has the enthusiasm to discover what has made our brand so iconic and the capability to evolve our business. We are both committed to preserving the essence of our brand while actively evolving it to renew long-term growth. Our experiences and expertise will be a powerful and winning combination.”

“While we are addressing challenges in our business, we have significant opportunity ahead and we’re moving forward with urgency,” said Patrice Louvet, President and Chief Executive Officer. “Ralph and I are focused on actively evolving the brand expression and consumer experience so we can ultimately renew growth and get back to leading. We are continuing to build a strong foundation for future growth, as evidenced by our progress this quarter on the key elements of the Way Forward plan.”

In the first quarter, the Company delivered on the following key elements:

  • continuing to drive quality of sales up by moderating discount levels across all regions, generating 210 basis points of adjusted gross margin improvement in the first quarter;
  • lowering our inventory levels by 31% to last year to improve inventory turns;
  • increasing SKU productivity by reducing the number of SKUs by 20% for Fall 2017 and producing a more focused, higher margin assortment;
  • shortening our lead times to have 35% of our business on a 6-month calendar and 90% on 9-months by the end of Fiscal 2018 to drive improved buying and reduce markdowns;
  • reducing operating expenses by 13% on an adjusted basis to increase efficiency and achieve expense savings targets;
  • optimizing our wholesale distribution by closing 20-25% of our underperforming U.S. department store points of distribution by the end of Fiscal 2018;
  • selectively expanding our high-ROI concession network with 26 additional locations compared to last year at the end of the first quarter; and
  • evolving our product and marketing, including the launch of five limited edition Polo shirts, introduced monthly from July through November, each inspired by one of our signature design motifs and supported by social media through collaborations with influencers on Instagram.”

First Quarter Fiscal 2018 Income Statement Review

Net Revenues. In the first quarter of Fiscal 2018, revenue decreased by 13% to $1.3 billion on a reported basis and 12% in constant currency, driven by distribution and brand exits, a strategic reduction in shipments and promotional activity to increase quality of sales, as well as due to lower consumer demand.

The first quarter revenue decline is in line with the Company’s guidance of down low double-digits excluding 225 basis points of negative foreign currency impact. Foreign currency pressured the first quarter revenue growth by approximately 130 basis points. The foreign currency impact is less than guidance as foreign exchange rates moved favorably during the quarter.

As a reminder, during the fourth quarter of Fiscal 2017, the Company changed its reportable segments. Revenue performance for the Company’s new reportable segments in the first quarter compared to the prior year period was as follows:

  • North America Revenue. North America revenue in the first quarter decreased 17% to $710 million. The decline was due to lower sales in both the retail and wholesale channels, driven by distribution and brand exits, a strategic reduction in shipments and promotional activity to increase quality of sales, as well as due to lower consumer demand. On a constant currency basis, comparable store sales in North America were down 8%, including a 4% decline in brick and mortar stores and a 22% decrease in e-commerce that reflected a planned reduction in inventory, reduced SKU count and reduced promotional activity.
  • Europe Revenue. Europe revenue in the first quarter decreased 14% to $323 million on a reported basis and 10% in constant currency. The decline was primarily driven by shifts in timing of shipments in wholesale, brand exits, and reduced markdowns to improve quality of sales. On a constant currency basis, comparable store sales in Europe were down 8%, including an 8% decline in brick and mortar stores and a 5% decline in e-commerce as the Company intensified its focus on driving quality of sales with a pullback in promotions.
  • Asia Revenue. Asia revenue in the first quarter decreased 1% on a reported basis to $209 million and increased 1% in constant currency. Comparable store sales increased 2% in constant currency driven by higher traffic.

Gross Profit. Gross profit for the first quarter of Fiscal 2018 was $851 million on a reported basis and $852 million on an adjusted basis, excluding approximately $1 million of inventory charges related to our restructuring activities. Gross margin was 63.2% on both a reported and adjusted basis, 210 basis points above the prior year on an adjusted basis.

The gross margin increase was driven by initiatives to improve quality of sales through reduced promotional activity, favorable geographic and channel mix shifts, and improved product costs. Gross margin improvement was partially offset by unfavorable foreign currency effects of 50 basis points in the first quarter.

Operating Expenses. Operating expenses in the first quarter of Fiscal 2018 were $761 million on a reported basis, including $47 million in restructuring-related and other charges. On an adjusted basis, operating expenses were $714 million, down 13% compared to the prior year, primarily as a result of headcount reduction, store closures and other expense savings initiatives.

Adjusted operating expense rate was 53.0%, 10 basis points above the prior year period, excluding restructuring-related and other charges from both periods. This increase was due to fixed expense deleverage.

Operating Income. Operating income in the first quarter of Fiscal 2018 was $90 million, including restructuring-related and other charges of $47 million. On an adjusted basis, operating income of $138 million increased 8% and operating margin was 10.2%, 200 basis points above the prior year period, excluding restructuring-related and other charges from both periods.

The higher operating margin year-over-year was attributable to gross margin expansion that was partially offset by approximately 50 basis points of unfavorable foreign currency impact and fixed expense deleverage.

The adjusted operating margin was above the Company’s guidance of 9.5-10.0% excluding foreign currency pressure of 75 basis points. The outperformance was driven by 25 basis points of benefit from less negative FX impact than expected and 55 basis points from the decision by Mr. Ralph Lauren and the Company’s Compensation Committee that he would forgo his bonus for Fiscal 2017 in support of the Company in its rebuilding year. This decision was unanticipated at the time the Company provided guidance.

  • North America Operating Income. North America operating income in the first quarter was $151 million on a reported basis and $152 million on an adjusted basis excluding $1 million in restructuring-related and other charges. Adjusted North America operating margin was 21.4%, 110 basis point above last year, driven by gross margin improvement.
  • Europe Operating Income. Europe operating income in the first quarter was $67 million on a reported basis and million on an adjusted basis excluding $1 million in restructuring-related and other charges. Adjusted Europe operating margin was 21.1%, which was 120 basis points lower than prior year; however, on a constant currency basis, adjusted operating margin was up 90 basis points driven by gross margin improvement.
  • Asia Operating Income. Asia operating income in the first quarter was $30 million on both a reported and adjusted basis. Adjusted Asia operating margin was 14.5%, up 740 basis points to prior year, driven by both gross margin improvement and operating expense leverage.

Net Income and EPS. On a reported basis, net income in the first quarter of Fiscal 2018 was $60 million or $0.72 per diluted share. On an adjusted basis, net income was $91 million, or $1.11 per diluted share, excluding restructuring-related and other charges. This compared to a net loss of $22 million, or ($0.27) per diluted share on a reported basis, and net income of $90 million, or $1.06 per diluted share on an adjusted basis, for the first quarter of Fiscal 2017.

In the first quarter of Fiscal 2018, the Company had an effective tax rate of approximately 31% on a reported basis, including the impact of ASU 2016-09, and approximately 32% on an adjusted basis, excluding restructuring-related and other charges, slightly below our guidance of 33%. This compared to a reported and an adjusted effective tax rate of 33% and 29%, respectively, in the prior year period.

Balance Sheet and Cash Flow Review

The Company ended the first quarter of Fiscal 2018 with $1.7 billion in cash, short and long term investments and $590 million in total debt, compared to $1.2 billion and $692 million, respectively, at the end of first quarter of Fiscal 2017.

Inventory at the end of first quarter Fiscal 2018 was $860 million, down 31% to the prior year period, driven by both restructuring actions and improvement in operating processes, including a proactive pullback in receipts and moving towards a demand driven supply chain.

The Company had $42 million in capital expenditures in the first quarter of Fiscal 2018, compared to $78 million in the prior year period, primarily driven by lower IT and infrastructure investments as well as an increased focus on return on investment.

Full Year and Second Quarter Fiscal 2018 Outlook

The Company’s full year guidance on a constant currency basis is unchanged. The full year Fiscal 2018 and second quarter guidance excludes restructuring-related and other charges expected to be recorded primarily in connection with the Company’s Way Forward plan.

For Fiscal 2018, the Company continues to expect net revenue to decrease 8% to 9%, excluding the impact of foreign currency. Based on current exchange rates, foreign currency is expected to have minimal impact on revenue growth in Fiscal 2018; this is more favorable than the previous guidance of 150 basis points of negative impact given recent movements in foreign exchange rates.

The Company continues to expect operating margin for Fiscal 2018 to be 9.0%-10.5%, excluding the impact of foreign currency. Based on current exchange rates, foreign currency is expected to pressure operating margin for Fiscal 2018 by approximately 40-50 basis points, less than the previous guidance of 50-75 basis points due to recent movements in foreign exchange rates.

In the second quarter of Fiscal 2018, the Company expects net revenue to be down 9-10%, excluding the impact of foreign currency. Based on current exchange rates, foreign currency is expected to have approximately 40 basis points of negative impact on revenue growth in the second quarter of Fiscal 2018.

Operating margin for the second quarter of Fiscal 2018 is expected to be up 40-60 basis points, excluding foreign currency impacts. Foreign currency is estimated to pressure operating margin by approximately 40 basis points in the...


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