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The Amendment also (a) imposes a new requirement that would remain in effect until the Ratings-Based Toggle Date that the aggregate amount of unrestricted cash of the Company and its subsidiaries plus the undrawn amounts available under the Global Credit Facility may not be less than $750 million, (b) restricts the amount of dividends and distributions on, or purchases, redemptions, retirements or acquisitions of, the Company's stock until the Specified Period Termination Date (as defined below), (c) until March 31, 2021, amends the material adverse change representation to disregard pandemic-related impacts to the business, and (d) until the Specified Period Termination Date, adds certain other restrictions on indebtedness incurred by the Company and its subsidiaries and investments and acquisitions by the Company and its subsidiaries.0.00250.0006505730000057800000 0001037038 2020-03-29 2020-09-26 0001037038 us-gaap:SalesReturnsAndAllowancesMember 2020-03-29 2020-09-26 0001037038 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-13057
Ralph Lauren Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
13-2622036
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
650 Madison Avenue,
 
10022
New York,
New York
 
(Zip Code)
(Address of principal executive offices)
 
 
(212318-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on which Registered
Class A Common Stock, $.01 par value
RL
New York Stock Exchange
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 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
At October 30, 2020, 48,222,564 shares of the registrant's Class A common stock, $.01 par value, and 24,881,276 shares of the registrant's Class B common stock, $.01 par value, were outstanding.






 
 


RALPH LAUREN CORPORATION
INDEX
 





1
 


RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
September 26,
2020
 
March 28,
2020
 
 
(millions)
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
2,012.0

 
$
1,620.4

Short-term investments
 
434.1

 
495.9

Accounts receivable, net of allowances of $218.2 million and $276.2 million
 
354.0

 
277.1

Inventories
 
887.0

 
736.2

Income tax receivable
 
61.1

 
84.8

Prepaid expenses and other current assets
 
158.9

 
160.8

Total current assets
 
3,907.1

 
3,375.2

Property and equipment, net
 
921.5

 
979.5

Operating lease right-of-use assets
 
1,406.3

 
1,511.6

Deferred tax assets
 
352.9

 
245.2

Goodwill
 
935.0

 
915.5

Intangible assets, net
 
131.1

 
141.0

Other non-current assets
 
97.7

 
111.9

Total assets
 
$
7,751.6

 
$
7,279.9

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
Short-term debt
 
$

 
$
475.0

Current portion of long-term debt
 

 
299.6

Accounts payable
 
284.5

 
246.8

Income tax payable
 
82.4

 
65.1

Current operating lease liabilities
 
317.7

 
288.4

Accrued expenses and other current liabilities
 
869.1

 
717.1

Total current liabilities
 
1,553.7

 
2,092.0

Long-term debt
 
1,631.0

 
396.4

Long-term operating lease liabilities
 
1,460.0

 
1,568.3

Income tax payable
 
118.7

 
132.7

Non-current liability for unrecognized tax benefits
 
87.6

 
88.9

Other non-current liabilities
 
356.5

 
308.5

Commitments and contingencies (Note 13)
 

 

Total liabilities
 
5,207.5

 
4,586.8

Equity:
 
 
 
 
Class A common stock, par value $.01 per share; 106.0 million and 104.9 million shares issued; 48.2 million and 47.6 million shares outstanding
 
1.0

 
1.0

Class B common stock, par value $.01 per share; 24.9 million shares issued and outstanding
 
0.3

 
0.3

Additional paid-in-capital
 
2,629.0

 
2,594.4

Retained earnings
 
5,827.2

 
5,994.0

Treasury stock, Class A, at cost; 57.8 million and 57.3 million shares
 
(5,813.9
)
 
(5,778.4
)
Accumulated other comprehensive loss
 
(99.5
)
 
(118.2
)
Total equity
 
2,544.1

 
2,693.1

Total liabilities and equity
 
$
7,751.6

 
$
7,279.9

See accompanying notes.




2
 


RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
September 26,
2020
 
September 28,
2019
 
September 26,
2020
 
September 28,
2019
 
 
(millions, except per share data)
Net revenues
 
$
1,193.5

 
$
1,706.2

 
$
1,681.0

 
$
3,135.0

Cost of goods sold
 
(394.1
)
 
(657.2
)
 
(532.9
)
 
(1,165.2
)
Gross profit
 
799.4

 
1,049.0

 
1,148.1

 
1,969.8

Selling, general, and administrative expenses
 
(628.2
)
 
(795.3
)
 
(1,135.8
)
 
(1,542.0
)
Impairment of assets
 
(31.0
)
 
(6.1
)
 
(33.1
)
 
(7.3
)
Restructuring and other charges
 
(160.5
)
 
(14.5
)
 
(167.5
)
 
(44.1
)
Total other operating expenses, net
 
(819.7
)
 
(815.9
)
 
(1,336.4
)
 
(1,593.4
)
Operating income (loss)
 
(20.3
)
 
233.1

 
(188.3
)
 
376.4

Interest expense
 
(12.8
)
 
(4.4
)
 
(22.4
)
 
(8.6
)
Interest income
 
2.2

 
9.6

 
5.1

 
21.2

Other income (expense), net
 
1.8

 
(1.7
)
 
3.9

 
(5.8
)
Income (loss) before income taxes
 
(29.1
)
 
236.6

 
(201.7
)
 
383.2

Income tax benefit (provision)
 
(10.0
)
 
(54.5
)
 
34.9

 
(84.0
)
Net income (loss)
 
$
(39.1
)
 
$
182.1

 
$
(166.8
)
 
$
299.2

Net income (loss) per common share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.53
)
 
$
2.37

 
$
(2.27
)
 
$
3.86

Diluted
 
$
(0.53
)
 
$
2.34

 
$
(2.27
)
 
$
3.79

Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
73.5

 
76.7

 
73.3

 
77.4

Diluted
 
73.5

 
77.9

 
73.3

 
78.9

Dividends declared per share
 
$

 
$
0.6875

 
$

 
$
1.375

See accompanying notes.





3
 


RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
September 26,
2020
 
September 28,
2019
 
September 26,
2020
 
September 28,
2019
 
 
(millions)
Net income (loss)
 
$
(39.1
)
 
$
182.1

 
$
(166.8
)
 
$
299.2

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation gains (losses)
 
17.3

 
(19.9
)
 
30.3

 
(15.9
)
Net gains (losses) on cash flow hedges
 
(7.3
)
 
13.6

 
(11.3
)
 
3.9

Net gains (losses) on defined benefit plans
 
(0.2
)
 
0.1

 
(0.3
)
 

Other comprehensive income (loss), net of tax
 
9.8

 
(6.2
)
 
18.7

 
(12.0
)
Total comprehensive income (loss)
 
$
(29.3
)
 
$
175.9

 
$
(148.1
)
 
$
287.2

See accompanying notes.




4
 


RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended
 
 
September 26,
2020
 
September 28,
2019
 
 
(millions)
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
(166.8
)
 
$
299.2

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization expense
 
125.2

 
132.8

Deferred income tax benefit
 
(86.9
)
 
(15.4
)
Non-cash stock-based compensation expense
 
34.6

 
50.8

Non-cash impairment of assets
 
33.1

 
7.3

Bad debt expense (benefit)
 
(25.4
)
 
1.5

Other non-cash charges (benefits)
 
(2.1
)
 
1.6

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(49.7
)
 
(91.0
)
Inventories
 
(129.3
)
 
(202.3
)
Prepaid expenses and other current assets
 
11.1

 
(47.1
)
Accounts payable and accrued liabilities
 
221.6

 
47.3

Income tax receivables and payables
 
12.8

 
17.1

Deferred income
 
(2.0
)
 
0.9

Other balance sheet changes
 
11.1

 
1.4

Net cash provided by (used in) operating activities
 
(12.7
)
 
204.1

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(53.9
)
 
(130.6
)
Purchases of investments
 
(407.0
)
 
(571.6
)
Proceeds from sales and maturities of investments
 
471.5

 
976.1

Acquisitions and ventures
 
(0.5
)
 
0.9

Proceeds from sale of property
 

 
20.8

Settlement of net investment hedges
 
3.7

 

Net cash provided by investing activities
 
13.8

 
295.6

Cash flows from financing activities:
 
 
 
 
Repayments of borrowings on credit facilities
 
(475.0
)
 

Proceeds from the issuance of long-term debt
 
1,241.9

 

Repayments of long-term debt
 
(300.0
)
 

Payments of finance lease obligations
 
(5.7
)
 
(7.7
)
Payments of dividends
 
(49.8
)
 
(101.9
)
Repurchases of common stock, including shares surrendered for tax withholdings
 
(35.5
)
 
(442.7
)
Other financing activities
 
(8.6
)
 
(0.7
)
Net cash provided by (used in) financing activities
 
367.3

 
(553.0
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
 
23.6

 
(9.9
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
 
392.0

 
(63.2
)
Cash, cash equivalents, and restricted cash at beginning of period
 
1,629.8

 
626.5

Cash, cash equivalents, and restricted cash at end of period
 
$
2,021.8

 
$
563.3

See accompanying notes.




5
 


RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
 
 
Three Months Ended September 26, 2020
 
 
Common Stock(a)
 
Additional
Paid-in
Capital
 
 
 
Treasury Stock
at Cost
 
 
 
 
 
 
 
 
Retained
Earnings
 
 
 
 
Total
Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
AOCI(b)
 
 
 
(millions)
Balance at June 27, 2020
 
130.9

 
$
1.3

 
$
2,609.5

 
$
5,866.3

 
57.8

 
$
(5,812.3
)
 
$
(109.3
)
 
$
2,555.5

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
 
 
 
 
 
 
(39.1
)
 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
9.8

 
 
Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(29.3
)
Dividends declared
 
 
 
 
 
 
 

 
 
 
 
 
 
 

Repurchases of common stock
 
 
 
 
 
 
 
 
 

 
(1.6
)
 
 
 
(1.6
)
Stock-based compensation
 
 
 
 
 
19.5

 
 
 
 
 
 
 
 
 
19.5

Balance at September 26, 2020
 
130.9

 
$
1.3

 
$
2,629.0

 
$
5,827.2

 
57.8

 
$
(5,813.9
)
 
$
(99.5
)
 
$
2,544.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 28, 2019
 
 
Common Stock(a)
 
Additional
Paid-in
Capital
 
 
 
Treasury Stock
at Cost
 
 
 
 
 
 
 
 
Retained
Earnings
 
 
 
 
Total
Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
AOCI(b)
 
 
 
(millions)
Balance at June 29, 2019
 
129.6

 
$
1.3

 
$
2,516.8

 
$
5,878.6

 
52.4

 
$
(5,274.7
)
 
$
(109.2
)
 
$
3,012.8

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
182.1

 
 
 
 
 
 
 
 
Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(6.2
)
 
 
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
175.9

Dividends declared
 
 
 
 
 
 
 
(51.3
)
 
 
 
 
 
 
 
(51.3
)
Repurchases of common stock
 
 
 
 
 
 
 
 
 
2.7

 
(251.6
)
 
 
 
(251.6
)
Stock-based compensation
 
 
 
 
 
27.8

 
 
 
 
 
 
 
 
 
27.8

Shares issued pursuant to stock-based
compensation plans
 
0.1

 

 

 
 
 
 
 
 
 
 
 

Balance at September 28, 2019
 
129.7

 
$
1.3

 
$
2,544.6

 
$
6,009.4

 
55.1

 
$
(5,526.3
)
 
$
(115.4
)
 
$
2,913.6

 
(a) 
Includes Class A and Class B common stock. During the three months ended September 28, 2019, 0.5 million shares of Class B common stock were converted into an equal number of shares of Class A common stock pursuant to the terms of the Class B common stock (see Note 14).
(b) 
Accumulated other comprehensive income (loss).






6
 


RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (Continued)
(Unaudited)
 
 
Six Months Ended September 26, 2020
 
 
Common Stock(a)
 
Additional
Paid-in
Capital
 
 
 
Treasury Stock
at Cost
 
 
 
 
 
 
 
 
Retained
Earnings
 
 
 
 
Total
Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
AOCI(b)
 
 
 
(millions)
Balance at March 28, 2020
 
129.8

 
$
1.3

 
$
2,594.4

 
$
5,994.0

 
57.3

 
$
(5,778.4
)
 
$
(118.2
)
 
$
2,693.1

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
 
 
 
 
 
 
(166.8
)
 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
18.7

 
 
Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(148.1
)
Dividends declared
 
 
 
 
 
 
 

 
 
 
 
 
 
 

Repurchases of common stock
 
 
 
 
 
 
 
 
 
0.5

 
(35.5
)
 
 
 
(35.5
)
Stock-based compensation
 
 
 
 
 
34.6

 
 
 
 
 
 
 
 
 
34.6

Shares issued pursuant to stock-based compensation plans
 
1.1

 

 

 
 
 
 
 
 
 
 
 

Balance at September 26, 2020
 
130.9

 
$
1.3

 
$
2,629.0

 
$
5,827.2

 
57.8

 
$
(5,813.9
)
 
$
(99.5
)
 
$
2,544.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended September 28, 2019
 
 
Common Stock(a)
 
Additional
Paid-in
Capital
 
 
 
Treasury Stock
at Cost
 
 
 
 
 
 
 
 
Retained
Earnings
 
 
 
 
Total
Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
AOCI(b)
 
 
 
(millions)
Balance at March 30, 2019
 
128.8

 
$
1.3

 
$
2,493.8

 
$
5,979.1

 
50.7

 
$
(5,083.6
)
 
$
(103.4
)
 
$
3,287.2

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
299.2

 
 
 
 
 
 
 
 
Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(12.0
)
 
 
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
287.2

Dividends declared
 
 
 
 
 
 
 
(104.4
)
 
 
 
 
 
 
 
(104.4
)
Repurchases of common stock
 
 
 
 
 
 
 
 
 
4.4

 
(442.7
)
 
 
 
(442.7
)
Stock-based compensation
 
 
 
 
 
50.8

 
 
 
 
 
 
 
 
 
50.8

Shares issued pursuant to stock-based compensation plans
 
0.9

 

 

 
 
 
 
 
 
 
 
 

Cumulative adjustment from adoption of new accounting standards
 
 
 
 
 
 
 
(164.5
)
 
 
 
 
 
 
 
(164.5
)
Balance at September 28, 2019
 
129.7

 
$
1.3

 
$
2,544.6

 
$
6,009.4

 
55.1

 
$
(5,526.3
)
 
$
(115.4
)
 
$
2,913.6

 
(a) 
Includes Class A and Class B common stock. During the six months ended September 28, 2019, 1.0 million shares of Class B common stock were converted into an equal number of shares of Class A common stock pursuant to the terms of the Class B common stock (see Note 14).
(b) 
Accumulated other comprehensive income (loss).
See accompanying notes.




7
 


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and where otherwise indicated)
(Unaudited)
1.
Description of Business
Ralph Lauren Corporation ("RLC") is a global leader in the design, marketing, and distribution of premium lifestyle products, including apparel, footwear, accessories, home furnishings, fragrances, and hospitality. RLC's long-standing reputation and distinctive image have been developed across an expanding number of products, brands, sales channels, and international markets. RLC's brand names include Ralph Lauren, Ralph Lauren Collection, Ralph Lauren Purple Label, Polo Ralph Lauren, Double RL, Lauren Ralph Lauren, Polo Ralph Lauren Children, 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 diversifies its business by geography (North America, Europe, and Asia, among other regions) and channel of distribution (retail, wholesale, and licensing). This allows the Company to maintain a dynamic balance as its operating results do not depend solely on the performance of any single geographic area or channel of distribution. The Company sells directly to consumers through its integrated retail channel, which includes its retail stores, concession-based shop-within-shops, and digital commerce operations around the world. The Company's wholesale sales are made principally to major department stores, specialty stores, and third-party digital partners around the world, as well as to certain third-party-owned stores to which the Company has licensed the right to operate in defined geographic territories using its trademarks. In addition, the Company licenses to third parties for specified periods the right to access its various trademarks in connection with the licensees' manufacture and sale of designated products, such as certain apparel, eyewear, fragrances, and home furnishings.
The Company organizes its business into the following three reportable segments: North America, Europe, and Asia. In addition to these reportable segments, the Company also has other non-reportable segments. See Note 17 for further discussion of the Company's segment reporting structure.
2.
Basis of Presentation
Interim Financial Statements
These interim consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC") and are unaudited. In the opinion of management, these consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the consolidated financial position, income (loss), comprehensive income (loss), and cash flows of the Company for the interim periods presented. In addition, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") and the notes thereto have been condensed or omitted from this report as is permitted by the SEC's rules and regulations. However, the Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading.
This report should be read in conjunction with the Company's Annual Report on Form 10-K filed with the SEC for the fiscal year ended March 28, 2020 (the "Fiscal 2020 10-K").
Basis of Consolidation
These unaudited interim consolidated financial statements present the consolidated financial position, income (loss), comprehensive income (loss), and cash flows of the Company, including all entities in which the Company has a controlling financial interest and is determined to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Fiscal Periods
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to March 31. As such, fiscal year 2021 will end on March 27, 2021 and will be a 52-week period ("Fiscal 2021"). Fiscal year 2020 ended on March 28, 2020 and was also a




8
 


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

52-week period ("Fiscal 2020"). The second quarter of Fiscal 2021 ended on September 26, 2020 and was a 13-week period. The second quarter of Fiscal 2020 ended on September 28, 2019 and was also a 13-week period.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and notes 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, operational chargebacks, and certain cooperative advertising allowances; the realizability of inventory; reserves for litigation and other contingencies; useful lives and impairments of long-lived tangible and intangible assets; fair value measurements; accounting for income taxes and related uncertain tax positions; valuation of stock-based compensation awards and related forfeiture rates; reserves for restructuring activity; and accounting for business combinations, among others.
Reclassifications
Certain reclassifications have been made to prior period financial information in order to conform to the current period's presentation.
Seasonality of Business
The Company's business is typically affected by seasonal trends, with higher levels of retail sales in its second and third fiscal quarters and higher wholesale sales in its second and fourth fiscal quarters. These trends result primarily from the timing of key vacation travel, back-to-school, and holiday shopping periods impacting its retail business and the timing of seasonal wholesale shipments. As a result of changes in its business, consumer spending patterns, and the macroeconomic environment, including those resulting from disease pandemics and other catastrophic events, historical quarterly operating trends and working capital requirements may not be indicative of the Company's future performance. In addition, fluctuations in sales, operating income (loss), and cash flows in any fiscal quarter may be affected by other events affecting retail sales, such as changes in weather patterns. Accordingly, the Company's operating results and cash flows for the three-month and six-month periods ended September 26, 2020 are not necessarily indicative of the operating results and cash flows that may be expected for the full Fiscal 2021.
COVID-19 Pandemic
A novel strain of coronavirus commonly referred to as COVID-19 has spread rapidly across the globe in recent months, including throughout all major geographies in which the Company operates (North America, Europe, and Asia), resulting in adverse economic conditions and business disruptions, as well as significant volatility in global financial markets. Governments worldwide have imposed varying degrees of preventative and protective actions, such as temporary travel bans, forced business closures, and stay-at-home orders, all in an effort to reduce the spread of the virus. Such factors, among others, have resulted in a significant decline in retail traffic, tourism, and consumer spending on discretionary items. Additionally, during this period of uncertainty, companies across a wide array of industries have implemented various initiatives to reduce operating expenses and preserve cash balances, including work furloughs and reduced pay, which could lower consumers' disposable income levels or willingness to purchase discretionary items. Further, even after such government restrictions and company initiatives are lifted, consumer behavior, spending levels, and/or shopping preferences, such as willingness to congregate in shopping centers or other populated locations, could be adversely affected.
In connection with the COVID-19 pandemic, the Company has experienced varying degrees of business disruptions and periods of closure of its stores, distribution centers, and corporate facilities, as have the Company's wholesale customers, licensing partners, suppliers, and vendors. During the first quarter of Fiscal 2021, the majority of the Company's stores in key markets were closed for an average of 8 to 10 weeks, resulting in significant adverse impacts to its operating results. Although nearly all of the Company's stores were reopened by the end of the first quarter of Fiscal 2021, the majority are still operating at limited hours and customer capacity levels in accordance with local health guidelines, with traffic remaining challenged. The Company's wholesale business has also been adversely affected, particularly in North America and Europe, as a result of department store closures and lower traffic and consumer demand. Additionally, there has recently been a resurgence in the number of cases of COVID-19 in




9
 


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

certain parts of the world, which could result in further shutdowns and business disruptions for the Company and/or its wholesale customers, licensing partners, suppliers, and vendors.
Throughout the pandemic, the Company's priority has been to ensure the safety and well-being of its employees, consumers, and the communities in which it operates around the world. The Company continues to take into account the guidance of local governments and global health organizations and has implemented new health and safety protocols in its stores, distribution centers, and corporate facilities. The Company has also taken various preemptive actions to preserve cash and strengthen its liquidity position, including:
amending its Global Credit Facility in May 2020 to temporarily waive its leverage ratio requirement (see Note 10);
issuing $1.250 billion of unsecured senior notes in June 2020, the proceeds of which are being used for general corporate purposes, including repayment of certain of the Company's outstanding borrowings (see Note 10);
temporarily suspending its quarterly cash dividend and common stock repurchase program, effective beginning in the first quarter of Fiscal 2021 (see Note 14);
temporarily reducing the base compensation of its executives and senior management team, as well as its Board of Directors, for the first quarter of Fiscal 2021;
furloughing or reducing work hours for a significant portion of its employees, who nevertheless remain eligible to receive employee benefits during such period;
carefully managing its expense structure across all key areas of spend, including aligning inventory levels with anticipated demand, negotiating rent abatements with certain of its landlords, and postponing non-critical capital build-out and other investments and activities;
pursuing relevant government subsidy programs related to COVID-19 business disruptions; and
improving upon its cash conversion cycle largely driven by its accounts receivable collection efforts and extended vendor payment terms.
The COVID-19 pandemic remains highly volatile and continues to evolve. Accordingly, the Company cannot predict for how long and to what extent the pandemic will impact its business operations or the global economy as a whole. The Company will continue to assess its operations location-by-location, taking into account the guidance of local governments and global health organizations to determine when its operations can begin returning to normal levels of business.
3.
Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue across all channels of the business when it satisfies its performance obligations by transferring control of promised products or services to its customers, which occurs either at a point in time or over time, depending on when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized considers terms of sale that create variability in the amount of consideration that the Company ultimately expects to be entitled to in exchange for the products or services, and is subject to an overall constraint that a significant revenue reversal will not occur in future periods. Sales and other related taxes collected from customers and remitted to government authorities are excluded from revenue.
Revenue from the Company's retail business is recognized when the customer takes physical possession of the products, which occurs either at the point of sale for merchandise purchased at the Company's retail stores and concession-based shop-within-shops, or upon receipt of shipment for merchandise ordered through direct-to-consumer digital commerce sites. Such revenues are recorded net of estimated returns based on historical trends. Payment is due at the point of sale.




10
 


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Gift cards issued to customers by the Company are recorded as a liability until they are redeemed, at which point revenue is recognized. The Company also estimates and recognizes revenue for gift card balances not expected to ever be redeemed (referred to as "breakage") to the extent that it does not have a legal obligation to remit the value of such unredeemed gift cards to the relevant jurisdiction as unclaimed or abandoned property. Such estimates are based upon historical redemption trends, with breakage income recognized in proportion to the pattern of actual customer redemptions.
Revenue from the Company's wholesale business is generally recognized upon shipment of products, at which point title passes and risk of loss is transferred to the customer. In certain arrangements where the Company retains the risk of loss during shipment, revenue is recognized upon receipt of products by the customer. Wholesale revenue is recorded net of estimates of returns, discounts, end-of-season markdowns, 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 customer notifications of order fulfillment discrepancies and historical trends. The Company reviews and refines these estimates on at least a quarterly basis. The Company's historical estimates of these amounts have not differed materially from actual results.
Revenue from the Company's licensing arrangements is recognized over time during the period that licensees are provided access to the Company's trademarks (i.e., symbolic intellectual property) and benefit from such access through their sales of licensed products. These arrangements require licensees to pay a sales-based royalty which, for most arrangements, may be subject to a contractually-guaranteed minimum royalty amount. Payments are generally due quarterly and, depending on time of receipt, may be recorded as a liability until recognized as revenue. The Company recognizes revenue for sales-based royalty arrangements (including those for which the royalty exceeds any contractually-guaranteed minimum royalty amount) as licensed products are sold by the licensee. If a sales-based royalty is not ultimately expected to exceed a contractually-guaranteed minimum royalty amount, the minimum is generally recognized as revenue ratably over the respective contractual period. This sales-based output measure of progress and pattern of recognition best represents the value transferred to the licensee over the term of the arrangement, as well as the amount of consideration that the Company is entitled to receive in exchange for providing access to its trademarks. As of September 26, 2020, contractually-guaranteed minimum royalty amounts expected to be recognized as revenue during future periods were as follows:
 
 
Contractually-Guaranteed
Minimum Royalties(a)
 
 
(millions)
Remainder of Fiscal 2021
 
$
36.4

Fiscal 2022
 
68.4

Fiscal 2023
 
44.4

Fiscal 2024
 
26.6

Fiscal 2025 and thereafter
 
1.1

Total
 
$
176.9


 
(a) 
Amounts presented do not contemplate anticipated contract renewals or royalties earned in excess of the contractually-guaranteed minimums.




11
 


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Disaggregated Net Revenues
The following tables disaggregate the Company's net revenues into categories that depict how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors for the fiscal periods presented:
 
 
Three Months Ended
 
 
September 26, 2020
 
September 28, 2019
 
 
North America
 
Europe
 
Asia
 
Other
 
Total
 
North America
 
Europe
 
Asia
 
Other
 
Total
 
 
(millions)
Sales Channel(a):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
$
314.7

 
$
174.2

 
$
219.3

 
$
21.1

 
$
729.3