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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 DECEMBER 26, 1998
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 of (I.R.S. Employer
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 February 4, 1999, 33,673,214 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 December 26, 1998 (Unaudited)
and March 28, 1998 .......................................... 3
Consolidated Statements of Income for the three months and
nine months ended December 26, 1998 and December 27, 1997
(Unaudited) ................................................. 4
Consolidated Statements of Cash Flows for the nine months ended
December 26, 1998 and December 27, 1997 (Unaudited) ......... 5-6
Notes to Consolidated Financial Statements...................... 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 11-18
PART II. OTHER INFORMATION
Item 5. Other Information............................................... 19
Item 6. Exhibits and Reports on Form 8-K................................ 19
2
POLO RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 26, MARCH 28,
1998 1998
------------ ----------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 21,077 $ 58,755
Accounts receivable, net of allowances of
$11,735 and $12,447, respectively 133,003 149,120
Inventories 380,054 298,485
Deferred tax assets 24,448 24,448
Prepaid expenses and other 39,144 25,656
--------- ---------
TOTAL CURRENT ASSETS 597,726 556,464
Property and equipment, net 247,641 175,348
Deferred tax assets 14,213 14,213
Other assets, net 104,514 79,105
--------- ---------
$ 964,094 $ 825,130
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes and acceptances payable - banks $ 40,000 $ --
Accounts payable 84,582 100,126
Income taxes payable 16,725 2,554
Accrued expenses and other 104,550 99,578
--------- ---------
TOTAL CURRENT LIABILITIES 245,857 202,258
Other noncurrent liabilities 51,901 38,546
Stockholders' equity
Common Stock
Class A, par value $.01 per share; 500,000,000 shares
authorized; 34,277,078 and 34,272,726 shares issued, respectively 343 343
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 448,031 447,918
Retained earnings 234,719 136,738
Treasury Stock, Class A, at cost (603,864 shares) (16,084) --
Unearned compensation (1,333) (1,333)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 666,336 584,326
--------- ---------
$ 964,094 $ 825,130
========= =========
See accompanying notes to financial statements.
3
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ----------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
-------------- ------------- ------------- -------------
Net sales $395,436 $361,222 $1,116,047 $989,294
Licensing revenue 49,164 44,450 153,951 125,468
Other income 2,930 2,625 11,115 6,539
-------------- ------------- ------------- -------------
Net revenues 447,530 408,297 1,281,113 1,121,301
Cost of goods sold 240,661 215,376 657,917 573,449
-------------- ------------- ------------- -------------
Gross profit 206,869 192,921 623,196 547,852
Selling, general and administrative expenses 163,009 143,695 456,756 393,978
-------------- ------------- ------------- -------------
Income from operations 43,860 49,226 166,440 153,874
Interest (expense) income (1,074) 453 (1,070) (2,056)
-------------- ------------- ------------- -------------
Income before income taxes 42,786 49,679 165,370 151,818
Provision for income taxes 17,435 20,368 67,389 32,936
-------------- ------------- ------------- -------------
Net income $25,351 $29,311 $97,981 $118,882
============== ============= ============= =============
PRO FORMA (NOTE 2) - (UNAUDITED)
Historical income before income taxes $151,818
Pro forma adjustments other than income taxes 3,162
-------------
Pro forma income before income taxes 154,980
Pro forma provision for income taxes 63,542
-------------
Pro forma net income $91,438
=============
Net income per share - Basic and Diluted $0.25 $0.29 $0.98 $0.91
============== ============= ============= =============
Common shares outstanding - Basic 99,622,932 100,222,444 99,881,675 100,222,444
============== ============= ============= =============
Common shares outstanding - Diluted 99,674,214 100,222,444 99,932,957 100,222,444
============== ============= ============= =============
See accompanying notes to financial statements.
4
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
----------------------------
DECEMBER 26, DECEMBER 27,
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 97,981 $ 118,882
Adjustments to reconcile net income to net
cash provided by operating activities
Benefit from deferred income taxes -- (21,746)
Depreciation and amortization 33,288 19,964
Provision for losses on accounts receivable 653 589
Changes in deferrred liabilities (1,557) 2,332
Other 358 297
Changes in assets and liabilities, net of acquisitions
Accounts receivable 15,515 30,215
Inventories (79,415) (30,538)
Prepaid expenses and other (13,438) 5,381
Other assets (9,879) (12,740)
Accounts payable (17,768) (30,888)
Income taxes payable and accrued expenses and other 16,601 47,073
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 42,339 128,821
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, net (94,991) (39,556)
Acquisition, net of cash acquired (6,981) (8,551)
Investments in joint venture -- (5,914)
Cash surrender value - officers' life insurance, net (1,737) (1,315)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (103,709) (55,336)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net 113 268,797
Repurchases of common stock (16,084) --
Proceeds from (repayments of) short-term borrowings, net 40,000 (26,777)
Repayments of borrowings against officers' life insurance policies -- (5,757)
Repayments of long-term debt and subordinated notes (337) (134,964)
Payment of dividend and Reorganization notes -- (43,024)
Distributions paid to partners -- (44,855)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 23,692 13,420
--------- ---------
Net (decrease) increase in cash and cash equivalents (37,678) 86,905
Cash and cash equivalents at beginning of period 58,755 29,599
--------- ---------
Cash and cash equivalents at end of period $ 21,077 $ 116,504
========= =========
See accompanying notes to financial statements.
5
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
----------------------------
DECEMBER 26, DECEMBER 27,
1998 1997
------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $127 $4,196
============= =============
Cash paid for income taxes $55,464 $38,485
============= =============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Foreign tax credits distributed to partners $509
=============
Capital obligations for completed shop-within-shops $2,701
=============
Fair value of assets acquired, excluding cash $14,868 $69,537
Less:
Cash paid 6,981 8,551
Promissory notes issued 5,000 --
Fair market value of common stock issued for acquisition -- 697
------------- -------------
Liabilities assumed $2,887 $60,289
============= =============
Fair market value of restricted stock grants $667
=============
See accompanying notes to financial statements.
6
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR DECEMBER 26, 1998 AND DECEMBER 27, 1997 IS UNAUDITED)
1 BASIS OF PRESENTATION
(A) UNAUDITED INTERIM FINANCIAL STATEMENTS
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 the March 28, 1998 audited consolidated
financial statements of Polo Ralph Lauren Corporation and subsidiaries
("Polo"). In the opinion of management, 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 nine months ended December 26, 1998 and
December 27, 1997 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 the
Company's fiscal 1998 audited consolidated financial statements.
(B) BASIS OF PRESENTATION
Polo Ralph Lauren Corporation ("PRLC") was incorporated in Delaware
in March 1997. On June 9, 1997, the partners and certain of their
affiliates contributed to PRLC all of the outstanding stock of, and
partnership interests in, the entities which comprise the predecessor
group of companies in exchange for common stock of PRLC and promissory
notes (the "Reorganization"). The accompanying consolidated financial
statements for the nine months ended December 27, 1997 include the
combined results of operations of Polo Ralph Lauren Enterprises, L.P.,
Polo Ralph Lauren, L.P. and subsidiaries and The Ralph Lauren Womenswear
Company, L.P. and subsidiaries (collectively, the "Predecessor Company")
through June 9, 1997 and the consolidated results of operations of Polo
thereafter (Polo, together with the Predecessor Company, is referred to
herein as the "Company"). The controlling interests of the Predecessor
Company were held by Mr. Ralph Lauren, with a 28.5% interest held by
certain investment funds affiliated with The Goldman Sachs Group, L.P.
(collectively, the "GS Group"). The financial statements of PRLC have not
been included prior to the Reorganization because PRLC was a shell company
with no business operations.
7
The accompanying consolidated financial statements as of and for the
three months and nine months ended December 26, 1998 and for the three
months ended December 27, 1997 include the results of operations of Polo.
The financial statements of the Predecessor Company have been
combined and included in the results for the nine months ended December
27, 1997 because of their common ownership. The combined financial
statements have been prepared as if the entities comprising the
Predecessor Company had operated as a single consolidated group since
their respective dates of organization.
All significant intercompany balances and transactions have been
eliminated.
(C) INITIAL PUBLIC OFFERING
On June 17, 1997, the Company completed the sale of 11,170,000
shares of its Class A Common Stock at $26.00 per share in connection with
its initial public offering. The net proceeds to the Company from the
initial public offering, after deducting underwriting discounts and
commissions and offering expenses, aggregated $268.8 million.
2 SIGNIFICANT ACCOUNTING POLICIES
(A) PRO FORMA ADJUSTMENTS
The pro forma statement of income data for the nine months ended
December 27, 1997 presents the effects on the historical financial
statements of certain transactions as if they had occurred at March 30,
1997. The pro forma statement of income data reflects adjustments for: (i)
income taxes based upon pro forma pre-tax income as if the Company had
been subject to additional Federal, state and local income taxes,
calculated using a pro forma effective tax rate of 41.0%; and (ii) the
reduction of interest expense resulting from the application of a portion
of the net proceeds from the initial public offering to outstanding
indebtedness.
(B) NET INCOME PER SHARE
Basic net income per share was calculated by dividing net income by
the weighted average number of shares outstanding during the period and
excluded any potential dilution. Diluted net income per share was
calculated similarly but includes potential dilution from the exercise of
stock options and awards. The weighted average number of shares
outstanding in the three months and nine months ended December 26, 1998
and in the three months ended December 27, 1997 represents the actual
number of shares outstanding during such period. For comparison purposes
only, the weighted average number of shares outstanding immediately
following the completion of the initial public offering was considered to
be outstanding in the nine months ended December 27, 1997.
(C) RECLASSIFICATIONS
For comparison purposes, certain prior period amounts have been
reclassified to conform to the current year's presentation.
8
(D) COMPREHENSIVE INCOME
Effective March 29, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. This Statement establishes standards for reporting
of comprehensive income and its components in the financial statements.
For the three months and nine months ended December 26, 1998 and December
27, 1997, comprehensive income was equal to net income.
(E) RECENTLY ISSUED PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. This Statement establishes standards for reporting
selected financial data and descriptive information about an enterprise's
reportable operating segments (as defined). This Statement also requires
the reconciliation of total segment information presented to the
corresponding amounts in the general purpose financial statements.
Additionally, SFAS No. 131 establishes standards for related disclosures
about products and services, geographic areas and major customers. The
required disclosures will be presented in the Company's Annual Report on
Form 10-K for the fiscal year ending April 3, 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires the recognition of all derivatives 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 will be effective in the Company's first
quarter of the fiscal year ending April 1, 2000 and retroactive
application is not permitted. The Company does not expect the application
of SFAS No. 133 to have a material impact on its financial position or
results of operations.
In April 1998, the American Institute of Certified Public
Accountants' ("AICPA") Accounting Standards Executive Committee issued
Statement of Position No. 98-5 ("SOP 98-5"), Reporting on the Costs of
Start-up Activities. SOP 98-5 requires that costs of start-up activities,
including store pre-opening costs, be expensed as incurred. The Company's
current accounting policy is to capitalize store pre-opening costs as
prepaid expenses and amortize such costs into selling, general and
administrative expenses over a twelve month period following store
opening. SOP 98-5 will be effective in the first quarter of the Company's
fiscal year ending April 1, 2000. The Company does not expect the
application of SOP 98-5 to have a material impact on its financial
position or results of operations.
9
3 INVENTORIES
DECEMBER 26, MARCH 28,
1998 1998
Raw materials $ 19,221 $ 26,364
Work-in-process 11,993 12,406
Finished goods 348,840 259,715
-------- --------
$380,054 $298,485
======== ========
Merchandise inventories of $186.4 million and $130.9 million at
December 26, 1998 and March 28, 1998, respectively, were valued utilizing
the retail method and are included in finished goods.
4 SUBSEQUENT EVENT
During the fourth quarter of fiscal 1999, the Company announced its
intention to formalize a strategic initiative to streamline operations
within its wholesale and retail businesses and reduce its overall cost
structure. In connection with this initiative, the Company will record a
charge of approximately $65.0 million in the fourth quarter of the fiscal
year ending April 3, 1999.
10
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
the Company's consolidated financial statements and related notes thereto which
are included herein and the Company's fiscal 1998 audited consolidated financial
statements filed with the Company's Form 10-K for the fiscal year ended March
28, 1998. The Company utilizes a 52-53 week fiscal year ending on the Saturday
nearest March 31. Accordingly, fiscal years 1999 and 1998 end on April 3, 1999
and March 28, 1998, respectively. Due to the collaborative and ongoing nature of
the Company's relationships with its licensees, such licensees are referred to
herein as "licensing partners" and the relationships between the Company and
such licensees are referred to herein as "licensing alliances." Notwithstanding
these references, however, the legal relationship between the Company and its
licensees is one of licensor and licensee, and not one of partnership.
Certain statements contained in this report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). See Part II. Other Information. Item 5. - "Statement
Regarding Forward-Looking Disclosure."
OVERVIEW
The Company began operations in 1968 as a designer and marketer of premium
quality men's clothing and sportswear. Since inception, the Company, through
internal operations and in conjunction with its licensing partners, has grown
through increased sales of existing product lines, the introduction of new
brands and products, expansion into international markets and development of its
retail operations. The Company's net revenues are generated from its three
integrated operations: wholesale, retail and licensing alliances.
RESULTS OF OPERATIONS
The following discussion provides information and analysis of the
Company's results of operations for the three months and nine months ended
December 26, 1998 compared to December 27, 1997. As a result of the Company's
initial public offering completed on June 17, 1997 and the use of a portion of
the net proceeds therefrom to reduce outstanding indebtedness, historical
interest expense for the nine months ended December 26, 1998 and December 27,
1997 is not discussed below because such information is not meaningful. The
effect of income taxes for the nine months ended December 26, 1998 and December
27, 1997 is also not discussed below because the historic taxation of the
operations of the Company is not meaningful with respect to periods following
the Reorganization.
11
The table below sets forth the percentage relationship to net revenues of
certain items in the Company's statements of income for the three months and
nine months ended December 26, 1998 and December 27, 1997:
DEC. 26, 1998 DEC. 27, 1997
THREE NINE THREE NINE
MONTHS MONTHS MONTHS MONTHS
Net sales .................................. 88.4% 87.1% 88.5% 88.2%
Licensing revenue .......................... 11.0 12.0 10.9 11.2
Other income ............................... 0.6 0.9 0.6 0.6
----- ----- ----- -----
Net revenues ............................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Gross profit ............................... 46.2 48.7 47.3 48.8
Selling, general and administrative expenses 36.4 35.7 35.2 35.1
----- ----- ----- -----
Income from operations ..................... 9.8% 13.0% 12.1% 13.7%
===== ===== ===== =====
THREE MONTHS ENDED DECEMBER 26, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 27,
1997
NET SALES. Net sales increased 9.5% to $395.4 million in the three months
ended December 26, 1998 from $361.2 million in the three months ended December
27, 1997. Wholesale net sales increased 2.8% to $190.3 million in the three
months ended December 26, 1998 from $185.1 million in the corresponding period
of fiscal 1998. Wholesale growth primarily reflects volume-driven sales
increases in existing menswear and womenswear brands and the timing of menswear
product shipments to retailers. These unit increases were offset by decreases in
average selling prices resulting from changes in product mix. Retail sales
increased by 16.5% to $205.1 million in the three months ended December 26, 1998
from $176.1 million in the corresponding period in fiscal 1998. Of this
increase, $29.8 million is attributable to the opening of one new Polo store
(net of one store closing) and six new outlet stores in fiscal 1999 and the
benefit of three months of operations for new Polo and outlet stores opened in
the second half of fiscal 1998. Comparable store sales for the three months
ended December 26, 1998 decreased by 0.4% largely due to the following: (i)
lower tourism, most notably in the Company's West Coast and Hawaiian stores; and
(ii) unseasonably warm weather conditions throughout the United States during
the fall selling season as well as other weather issues and store closings.
Comparable store sales represent net sales of stores open in both reporting
periods for the full portion of such periods. At December 26, 1998, the Company
operated 32 Polo stores and 95 outlet stores.
12
LICENSING REVENUE. Licensing revenue increased 10.6% to $49.2 million in
the three months ended December 26, 1998 from $44.5 million in the corresponding
period of fiscal 1998. This increase is primarily attributable to an overall
increase in sales of existing licensed products, particularly Chaps and Polo
Jeans, and the Company's continued expansion and growth in international
markets.
GROSS PROFIT. Gross profit as a percentage of net revenues decreased to
46.2% in the three months ended December 26, 1998 from 47.3% in the
corresponding period of fiscal 1998. Retail margins decreased significantly in
the current quarter due to higher promotional/point of sale markdowns during the
holiday season. These decreases were offset by an improvement in wholesale gross
margins due to lower off-price sales in the three months ended December 26,
1998. Additionally, licensing revenue, which has no associated cost of goods
sold, increased slightly as a percentage of net revenues to 11.0% in the three
months ended December 26, 1998 from 10.9% in the corresponding period in fiscal
1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased to $163.0 million or 36.4% of net
revenues in the three months ended December 26, 1998 from $143.7 million or
35.2% of net revenues in the corresponding period of fiscal 1998. The increase
in SG&A expenses as a percentage of net revenues is principally due to start-up
costs associated with the expansion of the Company's retail operations as well
as increased depreciation expense associated with the Company's shop-within-shop
development program.
INTEREST EXPENSE. Interest expense increased to $1.1 million in the three
months ended December 26, 1998 from interest income of $0.5 million in the
corresponding period of fiscal 1998. This increase is due to an increase in
working capital borrowing requirements, primarily for inventory, in the three
months ended December 26, 1998. The additional working capital requirements for
inventory were primarily driven by the overall growth of the business.
INCOME TAXES. The effective income tax rate was approximately 41% for the
three months ended December 26, 1998 and December 27, 1997.
NINE MONTHS ENDED DECEMBER 26, 1998 COMPARED TO NINE MONTHS ENDED DECEMBER
27, 1997
NET SALES. Net sales increased 12.8% to $1.1 billion in the nine months
ended December 26, 1998 from $1 billion in the nine months ended December 27,
1997. Wholesale net sales increased 14.1% to $594.1 million in the nine months
ended December 26, 1998 from $520.5 million in the corresponding period of
fiscal 1998. Wholesale growth primarily reflects increased menswear sales
resulting from the timing of shipments to retailers and volume-driven sales
increases in existing menswear and womenswear brands. These unit increases were
offset by decreases in average selling prices resulting from changes in product
mix. Retail sales increased by 11.3% to $521.9 million in the nine months ended
December 26, 1998 from $468.8 million in the corresponding period in fiscal
1998. Of this increase, $66.1 million is attributable to the opening of three
new Polo stores (net of two store closings) and 23 new outlet stores (net of one
store closing) in fiscal 1999 and the benefit of nine months of operations for
three new Polo stores and ten new outlet stores opened in fiscal 1998.
Comparable store sales for the nine months ended December 26, 1998 decreased by
2.7%
13
largely due to the following: (i) the effects of a more challenging economic
environment; (ii) lower tourism, most notably in the Company's West Coast and
Hawaiian stores; (iii) issues encountered during a conversion of the Company's
retail merchandising systems during its second fiscal quarter; and (iv)
unseasonably warm weather conditions throughout the United States during the
fall selling season as well as other weather issues and store closings.
LICENSING REVENUE. Licensing revenue increased 22.7% to $154.0 million in
the nine months ended December 26, 1998 from $125.5 million in the corresponding
period of fiscal 1998. This increase is primarily attributable to an overall
increase in sales of existing licensed products, particularly Chaps, Lauren and
Polo Jeans, and the Company's continued expansion and growth in international
markets.
GROSS PROFIT. Gross profit as a percentage of net revenues decreased
slightly to 48.7% in the nine months ended December 26, 1998 from 48.8% in the
corresponding period of fiscal 1998. This decrease was primarily attributable to
lower retail gross margins due to higher promotional/point of sale markdowns.
This decrease was offset by an increase in licensing revenue as a percentage of
net revenues to 12.0% in the nine months ended December 26, 1998 from 11.2% in
the corresponding period in fiscal 1998. Wholesale gross margins in the nine
months ended December 26, 1998 were consistent with the corresponding period in
fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased to
$456.8 million or 35.7% of net revenues in the nine months ended December 26,
1998 from $394.0 million or 35.1% of net revenues in the corresponding period of
fiscal 1998. The increase in SG&A expenses as a percentage of net revenues is
principally due to start-up costs associated with the expansion of the Company's
retail operations as well as increased depreciation expense associated with the
Company's shop-within-shops development program.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements primarily derive from working capital
needs, construction and renovation of shop-within-shops, retail expansion and
other corporate activities. The Company's main sources of liquidity are cash
flows from operations and credit facilities.
Net cash provided by operating activities decreased to $42.3 million in
the nine months ended December 26, 1998 from $128.8 million in the comparable
period in fiscal 1998. This reduction was primarily driven by increases in
inventories primarily due to timing (i.e., shipments and customer remittances)
and the overall growth of the business. Additionally, net cash provided by
operations decreased due to changes in accrued expenses as a result of the
timing of payments. Net cash used in investing activities increased to $103.7
million in the nine months ended December 26, 1998 from $55.3 million in the
comparable period in fiscal 1998 principally due to higher capital expenditures.
Net cash provided by financing activities increased to $23.7 million in the nine
months ended December 26, 1998 from $13.4 million in the comparable period in
fiscal 1998. This increase primarily reflects the utilization of short-term
borrowings against the Company's Credit Facility (as defined below) offset by
repurchases of common stock in the nine months ended December 26, 1998.
14
On June 9, 1997, the Company entered into a credit facility with a
syndicate of banks which consists of 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 (the "Credit Facility"). Borrowings
under the Credit Facility bear interest, at the Company's 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
London Interbank Offered Rate plus an interest margin. The agreement contains
customary representations, warranties, covenants and events of default,
including covenants regarding maintenance of net worth and leverage ratios,
limitations on indebtedness and incurrences of liens, and restrictions on sales
of assets and transactions with affiliates. Additionally, the agreement provides
that an event of default will occur if Mr. Lauren and related entities fail to
maintain a specified minimum percentage of the voting power of the Company's
common stock. As of December 26, 1998, the Company had $40.0 million outstanding
in direct borrowings and was contingently liable for $30.1 million in
outstanding letters of credit under the Credit Facility. The weighted average
interest rate on amounts outstanding under the Credit Facility on December 26,
1998 was 5.6%.
During the fourth quarter of fiscal 1999, the Company announced its
intention to formalize a strategic initiative to streamline operations within
its wholesale and retail businesses and reduce its overall cost structure. In
connection with this initiative, the Company will record a charge of
approximately $65.0 million in the fourth quarter of the fiscal year ending
April 3, 1999. See Part II. Other Information. Item 5. - "Statement Regarding
Forward-Looking Disclosure."
Capital expenditures were $95.0 million and $39.6 million in the nine
months ended December 26, 1998 and December 27, 1997, respectively. The increase
in capital expenditures represents primarily expenditures associated with the
Company's shop-within-shops development program which includes new shops,
renovations and expansions, as well as expenditures incurred in connection with
the expansion of the Company's retail operations. Additionally, capital
expenditure increases reflect the purchase by the Company of a distribution
center in North Carolina for $16.0 million which it had been previously leasing.
The Company plans to invest approximately $120.0 million, net of landlord
incentives, over the current fiscal year in its retail stores, including
flagship stores and expansion of its distribution facility, the
shop-within-shops development program and other capital projects. See Part II.
Other Information. Item 5. - "Statement Regarding Forward-Looking Disclosure."
In March 1998, the Board of Directors authorized the repurchase, subject
to market conditions, of up to $100.0 million of the Company's Class A Common
Stock. Share repurchases under this plan will be made from time to time in the
open market over a two-year period which commenced April 1, 1998. Shares
acquired under the repurchase program will be used for stock option programs and
for other corporate purposes. As of December 26, 1998, the Company had
repurchased 603,864 shares of its Class A Common Stock at an aggregate cost of
$16.1 million.
15
Management believes that cash from ongoing operations and funds available
under the Credit Facility will be sufficient to satisfy the Company's current
level of operations, capital requirements, stock repurchase program and other
corporate activities for the next twelve months. Additionally, the Company does
not intend to pay dividends on its Common Stock in the next twelve months. See
Part II. Other Information. Item 5. - "Statement Regarding Forward-Looking
Disclosure."
SEASONALITY OF BUSINESS
The Company's business is affected by seasonal trends, with higher levels
of wholesale sales in its second and fourth quarters and higher retail sales in
its 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 the
Company's 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.
EXCHANGE RATES
Inventory purchases from contract manufacturers in the Far East are
primarily denominated in United States dollars; however, purchase prices for the
Company's products may be affected by fluctuations in the exchange rate between
the United States dollar and the local currencies of the contract manufacturers,
which may have the effect of increasing the Company's cost of goods sold in the
future. During the last two years, exchange rate fluctuations have not had a
material impact on the Company's inventory cost. Additionally, certain
international licensing revenue could be materially affected by currency
fluctuations. From time to time, the Company hedges certain exposures to foreign
currency exchange rate changes arising in the ordinary course of business.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. This Statement establishes standards for
reporting selected financial data and descriptive information about an
enterprises' reportable operating segments (as defined). This Statement also
requires the reconciliation of total segment information presented to the
corresponding amounts in the general purpose financial statements. Additionally,
SFAS No. 131 establishes standards for related disclosures about products and
services, geographic areas and major customers. The required disclosures will be
presented in the Company's Annual Report on Form 10-K for the fiscal year ending
April 3, 1999.
16
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires the recognition of all derivatives 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 will be effective in the
Company's first quarter of fiscal year ending April 1, 2000 and retroactive
application is not permitted. The Company does not expect the application
of SFAS No. 133 to have a material impact on its financial position or results
of operations.
In April 1998, the American Institute of Certified Public Accountants'
("AICPA") Accounting Standards Executive Committee issued Statement of Position
No. 98-5 ("SOP 98-5"), Reporting on the Costs of Start-up Activities. SOP 98-5
requires that costs of start-up activities, including store pre-opening costs,
be expensed as incurred. The Company's current accounting policy is to
capitalize store pre-opening costs as prepaid expenses and amortize such costs
into selling, general and administrative expenses over a twelve month period
following store opening. SOP 98-5 will be effective in the first quarter of the
Company's fiscal year ending April 1, 2000. The Company does not expect the
application of SOP 98-5 to have a material impact on its financial position or
results of operations.
IMPACT OF THE YEAR 2000 ISSUE
The Company has, with the aid of outside consultants, initiated a program
to assess the impact of Year 2000 issues on its information technology ("IT")
systems and its non-IT systems and has formulated a plan to address its Year
2000 issues.
Through its assessment, the Company has identified potential date
deficiencies in its IT systems, both hardware and software and in its non-IT
systems (including functions involving embedded chip technology), and is in the
process of addressing these deficiencies through upgrades, replacements and
other remediation. The Company expects to complete remediation of its material
IT systems no later than the summer of 1999. In connection with other equipment
with date sensitive operating controls such as distribution center equipment,
HVAC, employee time clocks, security and other similar systems, the Company is
in the process of identifying those items which may require replacement or other
remediation. The Company expects to complete testing and replacement or other
remediation of this equipment no later than the summer of 1999.
The Company has made inquiries of third parties with whom it has material
business relationships (such as customers, suppliers, licensees, transportation
carriers, utility and other general service providers) to determine whether they
will be able to resolve in a timely manner any Year 2000 issues that will
materially and adversely impact the Company. This process includes the
solicitation of written responses to questionnaires, followed, in some cases, by
meetings with certain of such third parties. To date, approximately 60.0% of
those contacted have responded, none of whom have raised any Year 2000 issues
which the Company believes would have a material adverse affect on the Company.
The Company is in the process of sending follow-up inquiries to third parties
and expects to complete its survey of third parties in the spring of 1999.
17
To date, the Company has incurred expenses of approximately $4.4 million
related to the assessment of its Year 2000 issues and development and
implementation of its remediation plan. The total remaining cost of the
Company's Year 2000 project is estimated at $1.7 to $2.7 million and is being
funded through operating cash flows. Such costs do not include internal
management time and the deferral of other projects, the effects of which are not
expected to be material to the Company's results of operations or financial
condition. Of the total project cost, approximately $0.6 million is attributable
to the purchase of new software which will be capitalized. The remainder will be
expensed as incurred. The costs of the Year 2000 project and the dates upon
which the Company plans to complete its Year 2000 initiatives are based on
management's best estimates, which were derived by utilizing several assumptions
of future events including continued availability of certain resources, third
party modification plans and other factors. However, there can be no guarantee
that these estimates will be achieved, and actual results could differ
materially from those plans.
The Company believes that the cause of the most reasonable worst case Year
2000 scenario would be a failure by a significant third party in the Company's
supply chain (including, without limitation, utility or other general service
provider or government entity) to remediate its Year 2000 deficiencies that
continues for several days. If such failure interfered with the Company's
electronic data interface system, processing of customer orders and shipments
would be impaired and would result in the loss of sales and revenue. The extent
of lost revenue as a result of this scenario cannot be estimated at this time.
The Company is in the process of developing contingency plans to ensure
that it can address aspects of these and others of its IT and non-IT systems
that could be affected by Year 2000 issues and intends to finalize its
contingency plans by no later than the summer of 1999. As an example, the
Company is in the process of exploring, where possible, alternate service
providers. The Company's Year 2000 efforts are ongoing and its overall plan, as
well as its development of contingency plans, will continue to evolve as new
information becomes available. While the Company anticipates continuity of its
business activities, that continuity will be dependent upon its ability, and the
ability of third parties with whom the Company relies on directly, or
indirectly, to be Year 2000 compliant. See Part II. Other Information. Item 5. -
"Statement Regarding Forward-Looking Disclosure."
18
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
Certain statements in this Form 10-Q and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases,
and in oral statements made by or with the approval of an authorized executive
officer constitute "forward-looking statements" within the meaning of the Reform
Act. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the actual results, performance
or achievements of the Company 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:
changes in global economic conditions; risks associated with changes in the
competitive marketplace, including the introduction of new products or pricing
changes by the Company's competitors; risks associated with the Company's
dependence on sales to a limited number of large department store customers and
risks related to extending credit to customers; risks associated with the
Company's dependence on its licensing partners for a substantial portion of its
net income and risks associated with a lack of operational and financial control
over licensed businesses; risks associated with consolidations, restructurings
and other ownership changes in the retail industry; uncertainties relating to
the Company's ability to implement its growth strategy; risks associated with
the possible adverse impact of the inability of the Company's unaffiliated
manufacturers 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.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits--
27.1 Financial Data Schedule
(b) Reports on Form 8-K--
No reports on Form 8-K were filed by the Company in the quarter ended
December 26, 1998.
19
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: February 9, 1999 By: /s/ Nancy A. Platoni Poli
-------------------------
Nancy A. Platoni Poli
Senior Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
20
5
9-MOS
APR-03-1999
DEC-26-1998
21,077
0
144,738
11,735
380,054
597,726
404,416
156,775
964,094
245,857
0
0
0
1,003
665,333
964,094
1,116,047
1,281,113
657,917
657,917
456,756
0
1,070
165,370
67,389
97,981
0
0
0
97,981
0.98
0.98
