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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13057
POLO RALPH LAUREN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2622036
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
650 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212-318-7000
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 registrants were
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
At August 9, 2001, 31,603,083 shares of the registrant's Class A Common Stock,
$.01 par value, were outstanding, 43,280,021 shares of the registrant's Class B
Common Stock, $.01 par value, were outstanding and 22,720,979 shares of the
registrant's Class C Common Stock, $.01 par value were outstanding.
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POLO RALPH LAUREN CORPORATION
INDEX TO FORM 10-Q
PART 1. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2001
(Unaudited) and March 31, 2001............................. 3
Consolidated Statements of Income for the three
months ended June 30, 2001 and July 1, 2000 (Unaudited).... 4
Consolidated Statements of Cash Flows for the three
months ended June 30, 2001 and July 1, 2000 (Unaudited).... 5-6
Notes to Consolidated Financial Statements................... 7-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 14-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 21
PART II. OTHER INFORMATION
Item 6. Reports on Form 8-K.............................................. 22
2
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, MARCH 31,
2001 2001
----------- -----------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 76,658 $ 51,498
Marketable securities 52,943 50,721
Accounts receivable, net of allowances
of $9,970 and $12,090 237,039 269,010
Inventories 448,123 425,594
Deferred tax assets 28,608 31,244
Prepaid expenses and other 55,414 73,654
----------- -----------
TOTAL CURRENT ASSETS 898,785 901,721
Property and equipment, net 324,357 328,929
Deferred tax assets 63,299 61,056
Goodwill, net 244,701 249,391
Other assets, net 86,149 84,996
----------- -----------
$ 1,617,291 $ 1,626,093
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes and acceptances payable - banks $ 36,372 $ 86,112
Accounts payable 224,156 178,293
Accrued expenses and other 128,672 175,172
----------- -----------
TOTAL CURRENT LIABILITIES 389,200 439,577
Long-term debt 290,132 296,988
Other noncurrent liabilities 80,196 80,219
Stockholders' equity
Common Stock
Class A, par value $.01 per share; 500,000,000 shares
authorized; 35,365,906 and 34,948,730 shares issued 353 349
Class B, par value $.01 per share; 100,000,000 shares
authorized; 43,280,021 shares issued and outstanding 433 433
Class C, par value $.01 per share; 70,000,000 shares
authorized; 22,720,979 shares issued and outstanding 227 227
Additional paid-in-capital 473,907 463,001
Retained earnings 461,098 430,047
Treasury Stock, Class A, at cost (3,771,806 shares) (71,179) (71,179)
Accumulated other comprehensive loss (4,236) (10,529)
Unearned compensation (2,840) (3,040)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 857,763 809,309
----------- -----------
$ 1,617,291 $ 1,626,093
=========== ===========
See accompanying notes to consolidated financial statements.
3
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
-----------------------------
JUNE 30, JULY 1,
2001 2000
------------ ------------
Net sales $ 461,058 $ 434,861
Licensing revenue 56,771 52,436
------------ ------------
Net revenues 517,829 487,297
Cost of goods sold 255,468 234,750
------------ ------------
Gross profit 262,361 252,547
Selling, general and administrative expenses 208,773 206,400
------------ ------------
Income from operations 53,588 46,147
Foreign currency gains 2,827 --
Interest expense (5,924) (6,505)
------------ ------------
Income before income taxes 50,491 39,642
Provision for income taxes 19,440 15,659
------------ ------------
Net income $ 31,051 $ 23,983
============ ============
Net income per share - Basic and Diluted $ 0.32 $ 0.25
============ ============
Weighted average common shares outstanding - Basic 97,108,788 97,092,017
============ ============
Weighted average common shares outstanding - Diluted 98,493,077 97,350,907
============ ============
See accompanying notes to consolidated financial statements.
4
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
-----------------------
JUNE 30, JULY 1,
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 31,051 $ 23,983
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 20,923 20,327
Provision for losses on accounts receivable 357 904
Changes in deferred liabilities (2,265) 9,323
Other (5,276) 554
Changes in assets and liabilities, net of acquisitions
Accounts receivable 28,401 31,480
Inventories (23,143) (56,646)
Prepaid expenses and other 24,901 3,393
Other assets 975 2,348
Accounts payable 30,110 24,884
Accrued expenses and other (21,022) (17,970)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 85,012 42,580
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, net (16,237) (17,987)
Investments in marketable securities (3,136) --
Acquisitions, net of cash acquired -- (21,637)
Cash surrender value - officers' life insurance (837) (1,108)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (20,210) (40,732)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchases of common stock -- (7,998)
Proceeds from issuance of common stock 10,114 --
Repayments of short-term borrowings, net (48,665) (18,713)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (38,551) (26,711)
--------- ---------
Effect of exchange rate changes on cash (1,091) 199
--------- ---------
Net increase (decrease) in cash and cash equivalents 25,160 (24,664)
Cash and cash equivalents at beginning of period 51,498 164,571
--------- ---------
Cash and cash equivalents at end of period $ 76,658 $ 139,907
========= =========
See accompanying notes to consolidated financial statements.
5
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
-----------------------
JUNE 30, JULY 1,
2001 2000
--------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 1,848 $ 2,742
======== =========
Cash paid for income taxes $ 1,417 $ 3,077
======== =========
See accompanying notes to consolidated financial statements.
6
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 2001 AND JULY 1, 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
1 BASIS OF PRESENTATION
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements include
the accounts of Polo Ralph Lauren Corporation ("PRLC") and its wholly and
majority owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. PRLC and its subsidiaries are
collectively referred to herein as "we," "us" and "our."
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and in a manner consistent with that used in
the preparation of our March 31, 2001 audited consolidated financial
statements. In our opinion, the accompanying consolidated financial
statements reflect all adjustments, consisting only of normal and recurring
adjustments, necessary for a fair presentation of the financial position
and results of operations and cash flows for the periods presented.
Operating results for the three months ended June 30, 2001 and July 1,
2000 are not necessarily indicative of the results that may be expected for
a full year. In addition, the unaudited interim consolidated financial
statements do not include all information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles. These consolidated financial statements
should be read in conjunction with our March 31, 2001 audited consolidated
financial statements included in our Form 10-K for the year then ended.
RECLASSIFICATIONS
For comparative purposes, certain prior period amounts have been
reclassified to conform to the current period's presentation.
7
2 COMPREHENSIVE INCOME
For the three months ended June 30, 2001 and July 1, 2000,
comprehensive income was as follows:
THREE MONTHS ENDED
------------------------
JUNE 30, JULY 1,
2001 2000
--------- ---------
Net income $ 31,051 $ 23,983
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments 2,421 (5,407)
Cumulative transition adjustment gains, net 4,028 -
Unrealized losses on cash flow hedge contracts, net (156) -
--------- ---------
Comprehensive income $ 37,344 $ 18,576
========= =========
The income tax effect related to foreign currency translation
adjustments, cumulative transition adjustment gains, net and unrealized
losses on cash flow hedge contracts, net was an expense of $3.9 million in
the three months ended June 30, 2001 and a benefit of $3.5 million in the
three months ended July 1, 2000.
3 RECENTLY ISSUED PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, BUSINESS
COMBINATIONS. This Statement addresses the financial accounting and
reporting for business combinations and supersedes Accounting Principles
Bulletin ("APB") No. 16, BUSINESS COMBINATIONS, and SFAS No. 38, ACCOUNTING
FOR PREACQUISITION CONTINGENCIES OF PURCHASED ENTERPRISES. SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and establishes criteria to
separately recognize intangible assets apart from goodwill. We do not
believe that the adoption of this pronouncement will have a material impact
on our consolidated results of operations.
In July 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. This Statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes
APB No. 17, INTANGIBLE ASSETS. This Statement requires, among other things,
that goodwill and intangible assets that have indefinite useful lives
should not be amortized, but rather should be tested at least annually for
impairment, using the guidance for measuring impairment set forth in the
Statement. SFAS No. 142 is effective for our first quarter in the fiscal
year ending March 29, 2003, or for any business combinations initiated
after June 30, 2001. We have not yet determined the impact of adopting this
pronouncement on our consolidated results of operations.
8
In April 2001, the FASB's Emerging Issues Task Force reached a
consensus on Issue No. 00-25, VENDOR INCOME STATEMENT CHARACTERISTICS OF
CONSIDERATION PAID TO A RESELLER OF THE VENDOR'S PRODUCTS ("EITF No.
00-25"). EITF No. 00-25 concluded that consideration from a vendor to a
reseller of the vendor's products is presumed to be a reduction of the
selling prices of the vendor's products and, therefore, should be
characterized as a reduction of revenue when recognized in the vendor's
income statement. That presumption is overcome and the consideration
characterized as a cost incurred if a benefit is or will be received from
the recipient of the consideration if certain conditions are met. This
pronouncement is effective for our first quarter in the fiscal year ending
March 29, 2003. We have not yet determined the impact of adopting this
pronouncement on our consolidated results of operations.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This Statement, as amended and
interpreted, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires the recognition of all
derivatives, whether designated in hedging relationships or not, as either
assets or liabilities in the statement of financial position, and
measurement of those instruments at fair value. The accounting for changes
in the fair value of a derivative is dependent upon the intended use of the
derivative. SFAS No. 133 defines new requirements for designation and
documentation of hedging relationships as well as ongoing effectiveness
assessments in order to use hedge accounting. For a derivative that does
not qualify as a hedge, changes in fair value will be recognized in
earnings.
We adopted the provisions of SFAS No. 133 as of April 1, 2001. As of
this date, we had outstanding interest rate swap agreements and forward
foreign exchange contracts that qualify as cash flow hedges under SFAS No.
133. In accordance with SFAS No. 133, we recorded the fair value of these
derivatives at April 1, 2001, and the resulting net unrealized gain, after
taxes, of approximately $4.0 million was recorded in other comprehensive
income as a cumulative transition adjustment.
4 INVENTORIES
JUNE 30, MARCH 31,
2001 2001
---------- ----------
Raw materials $ 5,853 $ 7,024
Work-in-process 8,476 6,251
Finished goods 433,794 412,319
---------- ----------
$ 448,123 $ 425,594
========== ==========
9
5 RESTRUCTURING AND SPECIAL CHARGES
(A) 2001 OPERATIONAL PLAN
During the second quarter of fiscal 2001, we completed an internal
operational review and formalized our plans to enhance the growth of our
worldwide luxury retail business, to better manage inventory and to
increase our overall profitability (the "Operational Plan"). The major
initiatives of the Operational Plan included: refining our retail strategy;
developing efficiencies in our supply chain; and consolidating corporate
strategic business functions and internal processes.
In connection with refining our retail strategy, we closed all 12 Polo
Jeans Co. full-price retail stores and 11 under-performing Club Monaco
retail stores. Costs associated with this aspect of the Operational Plan
included lease and contract termination costs, store fixed asset write
downs (primarily leasehold improvements of $21.5 million) and severance and
termination benefits.
Additionally, as a result of changes in market conditions combined with
our change in retail strategy in certain locations in which we operate
full-price retail stores, we performed an evaluation of the recoverability
of the assets of certain of these stores in accordance with SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. We concluded from the results of this evaluation
that a significant permanent impairment of long-lived assets had occurred.
Accordingly, we recorded a write down of these assets (primarily leasehold
improvements) to their estimated fair value based on discounted future cash
flows.
In connection with the implementation of the Operational Plan, we
recorded a pretax restructuring charge of $123.6 million in fiscal 2001.
The activity for the three months ended June 30, 2001, was as follows:
LEASE AND
SEVERANCE AND ASSET CONTRACT
TERMINATION WRITE TERMINATION OTHER
BENEFITS DOWNS COSTS COSTS TOTAL
------------- ------- ----------- ------- -------
Balance at March 31, 2001 .................. $ 2,942 $ -- $ 4,169 $ 782 $ 7,893
2002 activity .............................. (992) -- (1,244) (467) (2,703)
------- ------ ------- ------- -------
Balance at June 30, 2001 ................... $ 1,950 $ -- $ 2,925 $ 315 $ 5,190
======= ====== ======= ======= =======
Total severance and termination benefits as a result of the Operational
Plan related to approximately 550 employees, 450 of whom have been
terminated as of June 30, 2001. Total cash outlays related to the
Operational Plan are expected to be approximately $24.7 million, $19.5
million of which have been paid to date. We expect to complete the
implementation of the Operational Plan by the end of our second quarter of
fiscal 2002 and expect to settle the remaining liabilities in accordance
with contract terms which extend until fiscal 2003.
10
(B) 1999 RESTRUCTURING PLAN
During the fourth quarter of fiscal 1999, we formalized our plans to
streamline operations within our wholesale and retail operations and reduce
our overall cost structure ("Restructuring Plan"). The major initiatives of
the Restructuring Plan included the following: (1) an evaluation of our
retail operations and site locations; (2) the realignment and operational
integration of our wholesale operating units; and (3) the realignment and
consolidation of corporate strategic business functions and internal
processes.
In connection with the implementation of the Restructuring Plan, we
recorded a pretax restructuring charge of $58.6 million in our fourth
quarter of fiscal 1999. The activity for the three months ended June 30,
2001, was as follows:
LEASE AND
SEVERANCE AND ASSET CONTRACT
TERMINATION WRITE TERMINATION OTHER
BENEFITS DOWNS COSTS COSTS TOTAL
------------- ------- ----------- ------- -------
Balance at March 31, 2001 .................. $ 4,246 $ -- $ 1,747 $ -- $ 5,993
2002 activity .............................. (857) -- (310) -- (1,167)
------- ------ ------- ------- -------
Balance at June 30, 2001 ................... $ 3,389 $ -- $ 1,437 $ -- $ 4,826
======= ====== ======= ======= =======
Total severance and termination benefits as a result of the
Restructuring Plan related to approximately 280 employees, all of whom have
been terminated. Total cash outlays related to the Restructuring Plan are
approximately $39.5 million, $34.7 million of which have been paid to date.
We completed the implementation of the Restructuring Plan in fiscal 2000
and expect to settle the remaining liabilities in accordance with contract
terms that extend until fiscal 2003.
6 SEGMENT REPORTING
We have three reportable business segments: wholesale, retail and
licensing. Our reportable segments are individual business units that offer
different products and services. The segments are managed separately
because each segment requires different strategic initiatives, promotional
campaigns, marketing and advertising, based upon its own individual
positioning in the market. Additionally, these segments reflect the
reporting basis used internally by senior management to evaluate
performance and the allocation of resources.
11
Our net revenues and income from operations for the three months ended
June 30, 2001 and July 1, 2000, by segment were as follows:
THREE MONTHS ENDED
-------------------------------
JUNE 30, JULY 1,
2001 2000
---------- ----------
NET REVENUES:
Wholesale $ 245,173 $ 226,154
Retail 215,885 208,707
Licensing 56,771 52,436
---------- ----------
$ 517,829 $ 487,297
========== ==========
INCOME FROM OPERATIONS:
Wholesale $ 21,545 $ 21,264
Retail 3,466 (61)
Licensing 28,577 24,944
---------- ----------
$ 53,588 $ 46,147
========== ==========
Our net revenues for the three months ended June 30, 2001 and July 1,
2000, and our long-lived assets as of June 30, 2001 and March 31, 2001, by
geographic location were as follows:
THREE MONTHS ENDED
-------------------------------
JUNE 30, JULY 1,
2001 2000
---------- ----------
NET REVENUES:
United States $ 405,182 $ 394,830
France 62,008 50,860
Foreign countries 50,639 41,607
---------- ----------
$ 517,829 $ 487,297
========== ==========
JUNE 30, MARCH 31,
2001 2001
---------- ----------
LONG-LIVED ASSETS:
United States $ 279,064 $ 286,257
Foreign countries 45,293 42,672
---------- ----------
$ 324,357 $ 328,929
========== ==========
12
7 SUBSEQUENT EVENT
In July 2001, we signed a letter of intent to acquire PRL Fashions of
Europe SRL ("PRL Fashions") which holds licenses to sell our women's Ralph
Lauren apparel in Europe, our men's and boys' Polo Ralph Lauren apparel in
Italy and men's and women's Polo Jeans Co. collections in Italy. PRL
Fashions had revenues of approximately $75.0 million for calendar year
2000. The purchase price of this transaction will be approximately $22.0
million in cash plus earn-out payments based on achieving profitability
targets over the first three years. The acquisition is expected to close in
September 2001 and will be accounted for as a purchase from the effective
date of the transaction.
13
POLO RALPH LAUREN CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO WHICH ARE
INCLUDED HEREIN. WE UTILIZE A 52-53 WEEK FISCAL YEAR ENDING ON THE SATURDAY
NEAREST MARCH 31. FISCAL YEARS 2002 AND 2001 END ON MARCH 30, 2002 AND MARCH 31,
2001, RESPECTIVELY. DUE TO THE COLLABORATIVE AND ONGOING NATURE OF OUR
RELATIONSHIPS WITH OUR LICENSEES, SUCH LICENSEES ARE REFERRED TO HEREIN AS
"LICENSING PARTNERS" AND THE RELATIONSHIPS ARE REFERRED TO HEREIN AS "LICENSING
ALLIANCES." NOTWITHSTANDING THESE REFERENCES, HOWEVER, THE LEGAL RELATIONSHIP
BETWEEN OUR LICENSEES AND US IS ONE OF LICENSOR AND LICENSEE, AND NOT ONE OF
PARTNERSHIP.
CERTAIN STATEMENTS IN THIS FORM 10-Q AND IN FUTURE FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION, IN OUR PRESS RELEASES AND IN ORAL STATEMENTS
MADE BY OR WITH THE APPROVAL OF AUTHORIZED PERSONNEL CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. SUCH 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 THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO
BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE,
AMONG OTHERS, THE FOLLOWING: RISKS ASSOCIATED WITH CHANGES IN THE COMPETITIVE
MARKETPLACE, INCLUDING THE INTRODUCTION OF NEW PRODUCTS OR PRICING CHANGES BY
OUR COMPETITORS; CHANGES IN GLOBAL ECONOMIC CONDITIONS; RISKS ASSOCIATED WITH
OUR DEPENDENCE ON SALES TO A LIMITED NUMBER OF LARGE DEPARTMENT STORE CUSTOMERS,
INCLUDING RISKS RELATED TO EXTENDING CREDIT TO CUSTOMERS; RISKS ASSOCIATED WITH
OUR DEPENDENCE ON OUR LICENSING PARTNERS FOR A SUBSTANTIAL PORTION OF OUR NET
INCOME AND RISKS ASSOCIATED WITH A LACK OF OPERATIONAL AND FINANCIAL CONTROL
OVER LICENSED BUSINESSES; RISKS ASSOCIATED WITH FINANCIAL DISTRESS OF LICENSEES,
INCLUDING THE IMPACT ON OUR NET INCOME AND BUSINESS OF ONE OR MORE LICENSEE'S
REORGANIZATION; RISKS ASSOCIATED WITH CONSOLIDATIONS, RESTRUCTURINGS AND OTHER
OWNERSHIP CHANGES IN THE RETAIL INDUSTRY; RISKS ASSOCIATED WITH COMPETITION IN
THE SEGMENTS OF THE FASHION AND CONSUMER PRODUCT INDUSTRIES IN WHICH WE OPERATE,
INCLUDING OUR ABILITY TO SHAPE, STIMULATE AND RESPOND TO CHANGING CONSUMER
TASTES AND DEMANDS BY PRODUCING ATTRACTIVE PRODUCTS, BRANDS AND MARKETING, AND
OUR ABILITY TO REMAIN COMPETITIVE IN THE AREAS OF QUALITY AND PRICE; RISKS
ASSOCIATED WITH UNCERTAINTY RELATING TO OUR ABILITY TO IMPLEMENT OUR GROWTH
STRATEGIES; RISKS ASSOCIATED WITH OUR ENTRY INTO NEW MARKETS EITHER THROUGH
INTERNAL DEVELOPMENT ACTIVITIES OR THROUGH ACQUISITIONS; RISKS ASSOCIATED WITH
THE POSSIBLE ADVERSE IMPACT OF OUR UNAFFILIATED MANUFACTURERS' INABILITY TO
MANUFACTURE IN A TIMELY MANNER, TO MEET QUALITY STANDARDS OR TO USE ACCEPTABLE
LABOR PRACTICES; RISKS ASSOCIATED WITH CHANGES IN SOCIAL, POLITICAL, ECONOMIC
AND OTHER CONDITIONS AFFECTING FOREIGN OPERATIONS AND SOURCING, AND THE POSSIBLE
ADVERSE IMPACT OF CHANGES IN IMPORT RESTRICTIONS; RISKS RELATED TO OUR ABILITY
TO ESTABLISH AND PROTECT OUR TRADEMARKS AND OTHER PROPRIETARY RIGHTS; RISKS
RELATED TO FLUCTUATIONS IN FOREIGN CURRENCY AFFECTING OUR FOREIGN SUBSIDIARIES'
AND FOREIGN LICENSEES' RESULTS OF OPERATIONS AND THE RELATIVE PRICES AT WHICH WE
AND OUR FOREIGN COMPETITORS SELL PRODUCTS
14
IN THE SAME MARKET AND OUR OPERATING AND MANUFACTURING COSTS OUTSIDE OF THE
UNITED STATES; AND, RISKS ASSOCIATED WITH OUR CONTROL BY LAUREN FAMILY MEMBERS
AND THE ANTI-TAKEOVER EFFECT OF MULTIPLE CLASSES OF STOCK. WE UNDERTAKE NO
OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER
AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
OVERVIEW
We began operations in 1968 as a designer and marketer of premium quality
men's clothing and sportswear. Since our inception, we have grown through
increased sales of existing product lines, the introduction of new brands and
products, expansion into international markets, development of our retail
operations and acquisitions. Our net revenues are generated from our three
integrated operations: wholesale, retail and licensing.
RESULTS OF OPERATIONS
The table below sets forth the percentage relationship to net revenues of
certain items in our statements of income for the three months ended June 30,
2001 and July 1, 2000:
JUNE 30, JULY 1,
2001 2000
-------- -------
Net sales............................................ 89.0% 89.2%
Licensing revenue.................................... 11.0 10.8
---- ----
Net revenues......................................... 100.0 100.0
----- -----
Gross profit......................................... 50.7 51.8
Selling, general and administrative expenses......... 40.3 42.4
----- -----
Income from operations............................... 10.4 9.4
Foreign currency gains............................... 0.5 0.0
Interest expense .................................... (1.1) (1.3)
----- -----
Income before income taxes........................... 9.8% 8.1%
===== =====
15
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JULY 1, 2000
NET SALES. Net sales increased 6.0% to $461.1 million in the three months
ended June 30, 2001, from $434.9 million in the three months ended July 1, 2000.
Wholesale net sales increased 8.4% to $245.2 million in the three months ended
June 30, 2001, from $226.2 million in the corresponding period of fiscal 2001.
Wholesale growth primarily reflects increased unit sales of existing products,
principally from our international wholesale business in Europe and our domestic
women's business.
Retail sales increased by 3.4% to $215.9 million in the three months ended
June 30, 2001, from $208.7 million in the corresponding period in fiscal 2001.
This increase is primarily attributable to a $12.6 million benefit from the
following:
o new store openings in the three months ended June 30, 2001 (3 stores,
net of store closures); and
o a full quarter of revenues for new stores opened in fiscal 2001.
This increase was offset by decreases of 2.9% in our comparable store
sales, which represent net sales of stores open in both reporting periods for
the full portion of such periods. Although our stores remain productive, the
comparable store declines were due to the effects of a promotionally driven and
highly competitive retail store environment. At June 30, 2001, we operated 232
stores, including 29 Polo brand stores, seven Polo concept stores, 56 Club
Monaco full-price stores, 93 Polo full line outlet stores, 27 Polo Jeans Co.
outlet stores, 11 European outlet stores and nine Club Monaco outlet stores.
LICENSING REVENUE. Licensing revenue increased 8.3% to $56.8 million in the
three months ended June 30, 2001, from $52.4 million in the corresponding period
of fiscal 2001. This increase is primarily due to strong results from our
international businesses, particularly in Asia.
GROSS PROFIT. Gross profit as a percentage of net revenues decreased to
50.7% in the three months ended June 30, 2001, from 51.8% in the corresponding
period of fiscal 2001. Wholesale gross margins decreased due to an increase in
off-price sales and allowances as a result of the softer economic environment.
Additionally, wholesale gross margins were negatively impacted in our European
operations due to higher inventory costs on unhedged purchases driven by
unfavorable foreign exchange rates. Retail gross margins were slightly down in
comparison to last year's corresponding quarter due to an increase in
promotional markdowns in our European outlet stores. These decreases were offset
by increases in licensing revenue that has no associated cost of goods sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses as a percentage of net revenues decreased to
40.3% in the three months ended June 30, 2001, from 42.4% of net revenues in the
corresponding period of fiscal 2001. This decrease in SG&A expenses as a
percentage of net revenues was primarily due to leveraging of our expenses in
conjunction with the increase in net revenues. Additionally, in connection with
our fiscal 2001
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operational review, we closed 23 full-price stores that carried high operating
expense margins.
INTEREST EXPENSE.Interest expense decreased to $5.9 million in the three
months ended June 30, 2001, from $6.5 million in the comparable period in fiscal
2001. This decrease was due to lower levels of borrowings during the current
quarter primarily as a result of repurchases of a portion of our outstanding
Euro debt in fiscal 2001.
INCOME TAXES.The effective tax rate decreased to 38.5% in the three months
ended June 30, 2001, from 39.5% in the corresponding period in fiscal 2001. This
decline is primarily a result of the benefit of tax strategies implemented.
LIQUIDITY AND CAPITAL RESOURCES
Our cash requirements primarily derive from working capital needs,
construction and renovation of shop-within-shops, retail expansion and other
corporate activities. Our main sources of liquidity are cash flows from
operations, credit facilities and other borrowings.
Net cash provided by operating activities increased to $85.0 million in the
three months ended June 30, 2001, from $42.6 million in the comparable period in
fiscal 2001. This improvement was primarily driven by favorable changes in
inventory levels during the current quarter as a result of the timing of
shipments to retailers. Net cash used in investing activities decreased to $20.2
million in the three months ended June 30, 2001, from $40.7 million in the
comparable period in fiscal 2001. This decrease principally reflects the use of
cash in the three months ended July 1, 2000 to complete the acquisition of our
European license. Net cash used in financing activities increased to $38.6
million in the three months ended June 30, 2001, from $26.7 million in the
comparable period in fiscal 2001. This increase is primarily due to the use of
funds to repay short-term borrowings.
In June 1997, we entered into a credit facility with a syndicate of banks
which provides for a $225.0 million revolving line of credit available for the
issuance of letters of credit, acceptances and direct borrowings and matures on
December 31, 2002. Borrowings under the credit facility bear interest, at our
option, at a Base Rate equal to the higher of: (i) the Federal Funds Rate, as
published by the Federal Reserve Bank of New York, plus 1/2 of one percent; and
(ii) the prime commercial lending rate of The Chase Manhattan Bank in effect
from time to time, or at the Eurodollar Rate plus an interest margin.
In March 1999, we entered into a $100.0 million senior credit facility with
a syndicate of banks consisting of a $20.0 million revolving line of credit and
an $80.0 million term loan. The revolving line of credit is available for
working capital needs and general corporate purposes and matures on June 30,
2003. The term loan was used to finance the acquisition of all of the
outstanding common stock of Club Monaco Inc. and to repay their indebtedness.
The term loan is also repayable on June 30, 2003. Borrowings under the 1999
senior credit facility bear interest, at our option, at a Base Rate equal to the
higher of: (i) the Federal Funds Rate, as published by the Federal Reserve Bank
of New York, plus 1/2 of one percent; and (ii) the prime commercial lending rate
of The Chase Manhattan Bank in effect from time to time, or at the Eurodollar
Rate plus an interest margin. In April 1999,
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we entered into interest rate swap agreements with an aggregate notional amount
of $100.0 million to convert the variable interest rate on the 1999 senior
credit facility to a fixed rate of 5.5%.
The syndicated bank credit facility and 1999 senior credit facility contain
customary representations, warranties, covenants and events of default,
including covenants regarding maintenance of net worth and leverage ratios,
limitations on indebtedness, loans, investments and incurrences of liens, and
restrictions on sales of assets and transactions with affiliates. Additionally,
the agreements provide that an event of default will occur if Mr. Ralph Lauren
and related entities fail to maintain a specified minimum percentage of the
voting power of our common stock.
In November 1999, we issued Euro 275.0 million of 6.125 percent notes due
November 2006. Our Euro debt is listed on the London Stock Exchange. The net
proceeds from the Euro offering were $281.5 million based on the Euro exchange
rate on the issuance date. Interest on the Euro debt is payable annually. A
portion of the net proceeds from the issuance was used to acquire our European
license while the remaining net proceeds were retained for general corporate
purposes. In fiscal 2001, we repurchased Euro 27.5 million, or $25.3 million
based on Euro exchange rates, of our outstanding Euro debt.
As of June 30, 2001, we had $36.4 million outstanding in direct borrowings,
$80.0 million outstanding under the term loan and $210.1 million outstanding in
Euro debt based on the quarter end exchange rate. We were also contingently
liable for $24.3 million in outstanding letters of credit related to commitments
for the purchase of inventory. The weighted average interest rate on outstanding
borrowings at June 30, 2001, was 6.0%.
During fiscal 2001, we completed an internal operational review and
formalized our plans to enhance the growth of our international luxury retail
business, to better manage inventory and to increase our overall profitability.
Total cash outlays related to the operational review are expected to be
approximately $24.7 million, $19.5 million of which has been paid through June
30, 2001. The remaining obligations approximated $5.2 million at June 30, 2001,
and primarily relate to severance and lease termination agreements, which extend
until fiscal 2003.
Total cash outlays related to the 1999 restructuring plan are approximately
$39.5 million, $34.7 million of which has been paid through June 30, 2001. The
remaining obligations approximated $4.8 million at June 30, 2001, and primarily
relate to severance and lease termination agreements, which extend until fiscal
2003.
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Capital expenditures were $16.2 million and $18.0 million in the three
months ended June 30, 2001 and July 1, 2000, respectively. Capital expenditures
primarily reflect costs associated with the following:
o our retail stores;
o the expansion of our European operations;
o the shop-within-shops development program which includes new shops,
renovations and expansions;
o our information systems; and
o other capital projects.
In March 1998, the Board of Directors authorized the repurchase, subject to
market conditions, of up to $100.0 million our Class A common stock. Share
repurchases under this plan were made in the open market over a two-year period
which commenced April 1, 1998. On March 2, 2000, the Board of Directors
authorized a two-year extension to the stock repurchase program. Shares acquired
under the repurchase program will be used for stock option programs and for
other corporate purposes. As of June 30, 2001, we had repurchased 3,771,806
shares of our Class A common stock at an aggregate cost of $71.2 million.
In July 2001, we signed a letter of intent to acquire PRL Fashions of
Europe SRL ("PRL Fashions") which holds licenses to sell our women's Ralph
Lauren apparel in Europe, our men's and boys' Polo Ralph Lauren apparel in Italy
and men's and women's Polo Jeans Co. collections in Italy. PRL Fashions had
revenues of approximately $75.0 million for calendar year 2000. The purchase
price of this transaction will be approximately $22.0 million in cash plus
earn-out payments based on achieving profitability targets over the first three
years. The acquisition is expected to close in September 2001 and will be
accounted for as a purchase from the effective date of the transaction.
We believe that cash from ongoing operations and funds available under our
credit facilities and from our Euro offering will be sufficient to satisfy our
current level of operations, the operational review, the restructuring plan,
capital requirements, the stock repurchase program, the acquisition of PRL
Fashions and other corporate activities for the next 12 months. Additionally, we
do not currently intend to pay dividends on our common stock in the next 12
months.
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SEASONALITY OF BUSINESS
Our business is 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 to retail customers and key vacation travel and
holiday shopping periods in the retail segment. As a result of the growth in our
retail operations and licensing revenue, historical quarterly operating trends
and working capital requirements may not accurately reflect future performances.
In addition, fluctuations in sales and operating income in any fiscal quarter
may be affected by the timing of seasonal wholesale shipments and other events
affecting retail.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, BUSINESS
COMBINATIONS. This Statement addresses the financial accounting and reporting
for business combinations and supersedes Accounting Principles Bulletin ("APB")
No. 16, BUSINESS COMBINATIONS, and SFAS No. 38, ACCOUNTING FOR PREACQUISITION
CONTINGENCIES OF PURCHASED ENTERPRISES. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 and establishes criteria to separately recognize intangible assets
apart from goodwill. We do not believe that the adoption of this pronouncement
will have a material impact on our consolidated results of operations.
In July 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS. This Statement addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB No. 17, INTANGIBLE
ASSETS. This Statement requires, among other things, that goodwill and
intangible assets that have indefinite useful lives should not be amortized, but
rather should be tested at least annually for impairment, using the guidance for
measuring impairment set forth in the Statement. SFAS No. 142 is effective for
our first quarter in the fiscal year ending March 29, 2003, or for any business
combinations initiated after June 30, 2001. We have not yet determined the
impact of adopting this pronouncement on our consolidated results of operations.
In April 2001, the FASB's Emerging Issues Task Force reached a consensus on
Issue No. 00-25, VENDOR INCOME STATEMENT CHARACTERISTICS OF CONSIDERATION PAID
TO A RESELLER OF THE VENDOR'S PRODUCTS ("EITF No. 00-25"). EITF No. 00-25
concluded that consideration from a vendor to a reseller of the vendor's
products is presumed to be a reduction of the selling prices of the vendor's
products and, therefore, should be characterized as a reduction of revenue when
recognized in the vendor's income statement. That presumption is overcome and
the consideration characterized as a cost incurred if a benefit is or will be
received from the recipient of the consideration if certain conditions are met.
This pronouncement is effective for our first quarter in the year ending March
29, 2003. We have not yet determined the impact of adopting this pronouncement
on our consolidated results of operations.
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In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This Statement, as amended and interpreted,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires the recognition of all derivatives, whether
designated in hedging relationships or not, as either assets or liabilities in
the statement of financial position, and measurement of those instruments at
fair value. The accounting for changes in the fair value of a derivative is
dependent upon the intended use of the derivative. SFAS No. 133 defines new
requirements for designation and documentation of hedging relationships as well
as ongoing effectiveness assessments in order to use hedge accounting. For a
derivative that does not qualify as a hedge, changes in fair value will be
recognized in earnings. SFAS No. 133 is effective for our first quarter of our
fiscal year ending March 30, 2002.
We adopted the provisions of SFAS No. 133 as of April 1, 2001. As of this
date, we had outstanding interest rate swap agreements and forward foreign
exchange contracts that qualify as cash flow hedges under SFAS No. 133. In
accordance with SFAS No. 133, we recorded the fair value of these derivatives at
April 1, 2001, and the resulting net unrealized gain, after taxes, of
approximately $4.0 million was recorded in other comprehensive income as a
cumulative transition adjustment.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The market risk inherent in our financial instruments represents the
potential loss in fair value, earnings or cash flows arising from adverse
changes in interest rates or foreign currency exchange rates. We manage these
exposures through operating and financing activities and, when appropriate,
through the use of derivative financial instruments. Our policy allows for the
use of derivative financial instruments for identifiable market risk exposures,
including interest rate and foreign currency fluctuations. Since March 31, 2001,
there have been no significant changes in our interest rate and foreign currency
exposures, changes in the types of derivative instruments used to hedge those
exposures, or significant changes in underlying market conditions.
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PART II. OTHER INFORMATION
ITEM 6. REPORTS ON FORM 8-K.
(b) Reports on Form 8-K--
No reports on Form 8-K were filed in the three months
ended June 30, 2001.
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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.
POLO RALPH LAUREN CORPORATION
Date: August 14, 2001 By: /s/ GERALD M. CHANEY
------------------------------------
Gerald M. Chaney
Senior Vice President of Finance and
Chief Financial Officer
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