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Ralph Lauren reports better than expected financials for the second quarter fiscal 2016

Ralph Lauren today reported net income of $184 million, or $2.13 per diluted share, for the second quarter of Fiscal 2016, which excludes one-time charges which are primarily related to restructuring activities associated with the Company’s global brand reorganization. This compared to reported net income of $201 million, or $2.25 per diluted share, for the second quarter of Fiscal 2015. Earnings per diluted share increased 13% from the prior year period, excluding foreign currency impacts and one-time charges. On a reported basis, net income was $160 million or $1.86 per diluted share in the second quarter of Fiscal 2016.

Net revenues for the second quarter of Fiscal 2016 were 4% above the prior year period on a constant currency basis, driven by double-digit growth internationally, contribution from new stores and strong global e-commerce growth. Reported net revenues declined 1% to $2.0 billion in the second quarter compared to the prior year period. The decline in reported net revenues included approximately 500 basis points of negative impact from foreign currency effects.

  • Wholesale Sales. In the second quarter of Fiscal 2016, wholesale segment sales increased 3% on a constant currency basis, driven by strength in Europe across all brands. Reported wholesale segment sales declined 2% to $927 million.
  • Retail Sales. Retail sales increased 5% on a constant currency basis in the second quarter over the prior year period, driven by contribution from new stores and strong global e-commerce growth. Reported retail sales declined 1% compared to the second quarter of Fiscal 2015 to $996 million, negatively impacted by foreign currency movements. Consolidated comparable store sales decreased 1% on a constant currency basis during the second quarter and declined 6% on a reported basis.
  • Licensing. Licensing revenues of $47 million in the second quarter were 7% above the prior year period in constant currency and grew 5% on a reported basis, reflecting higher royalties from increased sales of Ralph Lauren, Polo, Chaps and Lauren products worldwide.

Gross Profit. Gross profit for the second quarter of Fiscal 2016 was $1.1 billion and gross profit margin was 56.5%. Gross profit margin was 30 basis points lower than the prior year period, reflecting unfavorable foreign currency effects. On a constant currency basis, gross margin was up 90 basis points compared to the prior year period due to lower negotiated sourcing costs, benefit from the initial phases of stock-keeping unit (SKU) and style rationalization, increased full-priced selling and mix benefits.

Operating Expenses. Operating expenses in the second quarter of Fiscal 2016 were $845 million, excluding one-time charges, in line with the prior year period. Operating expense rate of 43.0% increased 50 basis points compared with the second quarter of Fiscal 2015, due to incremental investments in infrastructure. As reported, operating expenses in the second quarter of Fiscal 2016 were $883 million, which included $38 million in one-time charges.

Operating Income. Operating income in the second quarter of Fiscal 2016 was $268 million, excluding one-time charges. Operating margin of 13.5% was 90 basis points below the prior year period, which was better than the outlook of a 275-325 basis point decline provided in August, due to better-than-expected gross margin, cost savings from the global brand reorganization plan, and disciplined expense management. The lower operating margin was primarily attributable to negative foreign currency effects and incremental investments in infrastructure.

  • Wholesale Operating Income. Wholesale operating income in the second quarter of Fiscal 2016 was $249 million, excluding one-time charges, compared with $247 million in the prior year period. Wholesale operating margin increased 60 basis points to 26.8% driven by gross margin improvement and disciplined expense management.
  • Retail Operating Income. Retail operating income in the second quarter of Fiscal 2016 was $128 million, excluding one-time charges, compared with $137 million in the prior year period. Retail operating margin declined 80 basis points to 12.8%, due to fixed expense deleverage and negative foreign currency effects.
  • Licensing Operating Income. Licensing operating income of $42 million in the second quarter of Fiscal 2016 was in line with the prior year period.

Net Income and Diluted EPS. Net income for the second quarter of Fiscal 2016 was $184 million, or $2.13 per diluted share, excluding one-time charges. This compared to reported net income of $201 million, or $2.25 per diluted share, for the second quarter of Fiscal 2015. Earnings per diluted share increased 13% from the prior year period, excluding foreign currency impacts and one-time charges. On a reported basis, net income was $160 million or $1.86 per diluted share in the second quarter.

The Company had an effective tax rate of approximately 29%, excluding one-time charges, in the second quarter of Fiscal 2016, which compared to an effective tax rate of 28% in the second quarter of Fiscal 2015. On a reported basis, the effective tax rate was 27% in the second quarter.

Update On The Global Brand Reorganization

In the first six months since the announcement of the new global brand management organizational structure, the Company has made significant progress with its transition. All six brand Presidents and their leadership teams have been established, and the new global line planning process, which is a significant component of the new structure, has successfully been launched. The Company now expects to achieve approximately $110 million in annual expense savings associated with the restructure.

The Company expects to incur one-time charges of approximately $120-150 million primarily as a result of this reorganization, of which $38 million was recognized in the second quarter and $83 million in the first half of Fiscal 2016.

Second Quarter Fiscal 2016 Balance Sheet and Cash Flow Review

The Company ended the second quarter with $1.1 billion in cash and investments, or $407 million in cash and investments net of debt (“net cash”), compared to $1.2 billion in cash and investments and $685 million in net cash at the end of the second quarter of Fiscal 2015. The second quarter ended with inventory of $1.4 billion compared to $1.3 billion in the prior year period. The increase in inventory reflects investments to support anticipated sales growth for existing operations, new businesses and new store openings.

The Company had $134 million in capital expenditures in the second quarter of Fiscal 2016, compared to $91 million in the prior year period. The Company repurchased approximately 1.1 million shares of Class A Common Stock during the second quarter, utilizing $130 million of its share repurchase authorization and bringing year-to-date repurchases to $280 million. Approximately $300 million remains available for future share repurchases.

Global Retail Store Network

The Company ended the second quarter of Fiscal 2016 with 480 directly operated stores, comprised of 144 Ralph Lauren stores, 68 Club Monaco stores and 268 Polo factory stores. The Company also operated 576 concession shop locations worldwide at the end of the second quarter. In addition to Company-operated locations, international licensing partners operated 81 Ralph Lauren stores and 26 dedicated shops, as well as 130 Club Monaco stores and shops at the end of the second quarter.

Fiscal 2016 Outlook

The Company is maintaining its Fiscal 2016 outlook. The company expects consolidated net revenues for Fiscal 2016 to be approximately flat on a reported basis and increase by 3-5% in constant currency. Based on current exchange rates, foreign currency will have an approximate 400 basis point negative impact on Fiscal 2016 revenue growth. Operating margin for Fiscal 2016 is still expected to be 180-230 basis points below the prior year’s level due to negative foreign currency effects. The full year Fiscal 2016 tax rate is estimated at 30%. This guidance excludes one-time charges that are primarily associated with our global brand reorganization.

In the third quarter of Fiscal 2016, the Company expects consolidated net revenues to be up 0-2% on a reported basis, and based on current exchange rates, foreign currency will have an approximate 250 basis point negative impact on revenue growth. Operating margin for the third quarter of Fiscal 2016 is expected to be approximately 200-250 basis points below the comparable prior year period, primarily due to negative foreign currency effects and infrastructure investments. The third quarter tax rate is estimated at 31%.

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