See accompanying notes.
There were no other significant non-cash investing or financing activities for any of the fiscal periods presented.
Various statements in this Form 10-Q, or incorporated by reference into this Form 10-Q, in future filings by us with the Securities and Exchange Commission (the "SEC"), in our press releases, and in oral statements made from time to time by us or on our behalf constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements regarding our future operating results and sources of liquidity (especially in light of the COVID-19 pandemic), the implementation and impact of our strategic plans, initiatives and capital expenses, and our ability to meet environmental, social, and governance goals. Forward-looking statements are based on current expectations and are indicated by words or phrases such as "anticipate," "outlook," "estimate," "expect," "project," "we believe,"believe," "is or remains optimistic,"envision," "currently envisions,"goal," "target," "can," "will," and similar words or phrases and involve known and unknown risks, uncertainties, and other factors which may cause actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed in or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others:
Management's discussion and analysis of financial condition and results of operations ("MD&A") is provided as a supplement to the accompanying consolidated financial statements and notes thereto to help provide an understanding of our results of operations, financial condition, and liquidity. MD&A is organized as follows:
•Recently issued accounting standards. This section discusses the potential impact on our reported results of operations and financial condition of certain accounting standards that have been recently issued or proposed.issued.
OVERVIEW
Our Business
Our Company is a global leader in the design, marketing, and distribution of premium lifestyle products, including apparel, footwear, accessories, home furnishings, fragrances, and other licensed product categories.hospitality. Our long-standing reputation and distinctive image have been developed across an expanding numbera wide range of products, brands, sales channels, and international markets. Our 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,Chaps, among others.
We diversify our business by geography (North America, Europe, and Asia, among other regions) and channelschannel of distribution (wholesale, retail,(retail, wholesale, and licensing). This allows us to maintain a dynamic balance as our operating results do not depend solely on the performance of any single geographic area or channel of distribution. Our wholesale sales are made principally to major department stores and specialty stores around the world. We also sell directly to consumers through our integrated retail channel, which includes our retail stores, concession-based shop-within-shops, and e-commercedigital commerce operations around the world. Our 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 we have licensed the right to operate in defined geographic territories using our trademarks. In addition, we license to unrelated third parties for specified periods the right to operate retail stores and/or to useaccess our various trademarks in connection with the licensees' manufacture and sale of designated products, such as certain apparel, eyewear, fragrances, and home furnishings.
We organize our business into the following three reportable segments:
•North America — Our North America segment, representing approximately 57%45% of our Fiscal 20172021 net revenues, primarily consists of sales of our Ralph Lauren branded products made through our wholesaleretail and retailwholesale businesses in the U.S. and Canada, excluding Club Monaco.Canada. In North America, our retail business is primarily comprised of our Ralph Lauren stores, our factory stores, and our digital commerce site, www.RalphLauren.com. Our wholesale business in North America is comprised primarily of sales to department stores, and to a lesser extent, specialty stores. Our retail business in North America is comprised of our Ralph Lauren stores, our factory stores, and our e-commerce site, www.RalphLauren.com.
•Europe — Our Europe segment, representing approximately 23%27% of our Fiscal 20172021 net revenues, primarily consists of sales of our Ralph Lauren branded products made through our wholesaleretail and retailwholesale businesses in Europe, and the Middle East, excluding Club Monaco.and Latin America. In Europe, our retail business is primarily comprised of our Ralph Lauren stores, our factory stores, our concession-based shop-within-shops, and our various digital commerce sites. Our wholesale business in Europe is comprised of a varying mix of sales to both department stores and specialty stores, depending on the country.country, as well as to various third-party digital partners.
•Asia — Our Asia segment, representing approximately 23% of our Fiscal 2021 net revenues, primarily consists of sales of our Ralph Lauren branded products made through our retail and wholesale businesses in Asia, Australia, and New Zealand. Our retail business in EuropeAsia is primarily comprised of our Ralph Lauren stores, our factory stores, our concession-based shop-within-shops, and our various e-commercedigital commerce sites.
Asia — Our Asia segment, representing approximately 13% of our Fiscal 2017 net revenues, primarily consists of sales of our Ralph Lauren branded products made through our wholesale and retail businesses in Asia, Australia, and New Zealand. Our retail business in Asia is comprised of our Ralph Lauren stores, our factory stores, and our concession-based shop-within-shops. In addition, we sell our products online through various third-party digital partner e-commercecommerce sites. In Asia, ourOur wholesale business in Asia is comprised primarily of sales to department stores, with related products distributed through shop-within-shops.
No operating segments were aggregated to form our reportable segments. In addition to these reportable segments, we also have other non-reportable segments, representing approximately 7%5% of our Fiscal 20172021 net revenues, which primarily consist of (i) sales of our Club Monaco branded products made through our retail and wholesale businesses in the U.S., Canada, and Europe, and our licensing alliances in EuropeAsia, and Asia, (ii) sales of our Ralph Lauren branded products made through our wholesale business in Latin America, and (iii) royalty revenues earned through our global licensing alliances, excluding Club Monaco. As discussed in Note 8 to our accompanying consolidated financial statements, we completed the sale of our Club Monaco business on June 26, 2021.
During the fourth quarter of Fiscal 2017, we realigned our segment reporting structure as a result of significant organizational changes implemented in connection with the Way Forward Plan, as defined within "Recent Developments"below. Refer to Note 20Approximately 52% of our Fiscal 2017 Form 10-K for further discussion. All prior period segment information has been recast to reflect the realignment of our segment reporting structure on a comparative basis.
Approximately 40% of our Fiscal 20172021 net revenues were earned outside of the U.S. See Note 17 to the accompanying consolidated financial statements for a summaryfurther discussion of net revenues and operating income (loss) byour segment as well as net revenues by geographic location.reporting structure.
Our business is typically affected by seasonal trends, with higher levels of retail sales in our second and third fiscal quarters and higher wholesale sales in our second and fourth fiscal quarters and higher retail sales in our second and third fiscal quarters. These trends result primarily from the timing of seasonal wholesale shipments and key vacation travel, back-to-school, and holiday shopping periods impacting our retail business.business and timing of seasonal wholesale shipments. As a result of changes in our business, consumer spending patterns, and the macroeconomic environment, including those resulting from pandemic diseases and other catastrophic events, historical quarterly operating trends and working capital requirements may not be indicative of our future performance. In addition, fluctuations in net sales, operating income (loss), and cash flows in any fiscal quarter may be affected by other events impactingaffecting retail sales, such as changes in
weather patterns. Accordingly, our operating results and cash flows for the three-month and nine-month periodsperiod endedDecember 30, 2017 June 26, 2021 are not necessarily indicative of the operating results and cash flows that may be expected for the full Fiscal 20182022.
Recent Developments
COVID-19 Pandemic
Beginning in the fourth quarter of Fiscal 2020, a novel strain of coronavirus commonly referred to as COVID-19 emerged and spread rapidly across the globe, including throughout all major geographies in which we operate (North America, Europe, and Asia), resulting in adverse economic conditions and business disruptions, as well as significant volatility in global financial markets. Since then, governments worldwide have periodically 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, companies across a wide array of industries have implemented various initiatives to reduce operating expenses and preserve cash balances during the pandemic, including work furloughs, reduced pay, and severance actions, which could lower consumers' disposable income levels or willingness to purchase discretionary items. Such government restrictions, company initiatives, and other macroeconomic impacts resulting from the pandemic could continue to adversely affect consumer behavior, spending levels, and/or shopping preferences, such as willingness to congregate in indoor shopping centers or other populated locations.
As a result of the COVID-19 pandemic, we have experienced varying degrees of business disruptions and periods of closure of our stores, distribution centers, and corporate facilities, as have our wholesale customers, licensing partners, suppliers, and vendors. During the first quarter of Fiscal 2021 at the peak of the pandemic, the majority of our stores in key markets were closed for an average of 8 to 10 weeks due to government-mandated lockdowns and other restrictions, resulting in significant adverse impacts to our operating results. Resurgences and outbreaks in certain parts of the world resulted in further business disruptions periodically throughout Fiscal 2021, most notably in Europe where a significant number of our stores were closed for approximately two to three months during the second half of Fiscal 2021, including during the holiday period, due to government-mandated lockdowns and other restrictions. Such disruptions continued into the first quarter of Fiscal 2022 in certain regions, although to a lesser extent than the comparable prior year fiscal period. Further, throughout the pandemic, the majority of our stores that were able to remain open have periodically been subject to limited operating hours and/or customer capacity levels in accordance with local health guidelines, with traffic remaining challenged. However, our digital commerce operations have grown significantly from pre-pandemic levels, due in part to our investments and enhanced capabilities, as well as changes in consumer shopping preferences. Our wholesale and licensing businesses have experienced similar impacts, particularly in North America and Europe.
Throughout the pandemic, our priority has been to ensure the safety and well-being of our employees, customers, and the communities in which we operate around the world. We continue to consider the guidance of local governments and global health organizations and have implemented new health and safety protocols in our stores, distribution centers, and corporate facilities. We also took various preemptive actions in the prior fiscal year to preserve cash and strengthen our liquidity position, as described in the Fiscal 2021 10-K.
Despite the introduction of COVID-19 vaccines and recent improvements in the global economy as a whole, the pandemic remains volatile and continues to evolve, including the emergence of variants of the virus, such as the Delta variant. Accordingly, we cannot predict for how long and to what extent the pandemic will impact our business operations or the overall global economy. We will continue to assess our operations location-by-location, considering the guidance of local governments and global health organizations. See Item 1A — "Risk Factors — Risks Related to Macroeconomic Conditions — Infectious disease outbreaks, such as the COVID-19 pandemic, could have a material adverse effect on our business" in the Fiscal 2021 10-K for additional discussion regarding risks to our business associated with the COVID-19 pandemic.
Fiscal 2021 Strategic Realignment Plan
We have undertaken efforts to realign our resources to support future growth and profitability, and to create a sustainable, enhanced cost structure. The key initiatives underlying these efforts involve evaluation of our: (i) team organizational structures and ways of working; (ii) real estate footprint and related costs across our corporate offices, distribution centers, and direct-to-consumer retail and wholesale doors; and (iii) brand portfolio.
In connection with the first initiative, on September 17, 2020, our Board of Directors approved a restructuring plan (the "Fiscal 2021 Strategic Realignment Plan") to reduce our global workforce. Additionally, during a preliminary review of our store portfolio during the second quarter of Fiscal 2021, we made the decision to close our Polo store on Regent Street in London.
Shortly thereafter, on October 29, 2020, we announced the planned transition of our Chaps brand to a fully licensed business model, consistent with our long-term brand elevation strategy and in connection with our third initiative (see "Transition of Chaps Brand to a Fully Licensed Business Model" further below for additional discussion).
Later, on February 3, 2021, our Board of Directors approved additional actions related to our real estate initiative. Specifically, we are in the process of further rightsizing and consolidating our global corporate offices to better align with our organizational profile and new ways of working. We also have closed, and expect to continue to close, certain of our stores to improve overall profitability. Additionally, we plan to complete the consolidation of our North America distribution centers in order to drive greater efficiencies, improve sustainability, and deliver a better consumer experience.
Finally, on June 26, 2021, in connection with our brand portfolio initiative, we sold our Club Monaco business to Regent, L.P. ("Regent"), a global private equity firm, with no resulting gain or loss on sale realized during the first quarter of Fiscal 2022. Regent acquired Club Monaco's assets and liabilities in exchange for potential future cash consideration payable by Regent, including earn-out payments based on Club Monaco meeting certain defined revenue thresholds over a five-year period. Accordingly, we may realize amounts in the future related to the receipt of such contingent consideration. Additionally, in connection with this divestiture, we will provide Regent with certain operational support for a transitional period of up to 12 months, varying by functional area.
In connection with these collective realignment initiatives, we expect to incur total estimated pre-tax charges of approximately $300 million to $350 million. Cumulative charges incurred since inception were $255.3 million, of which $18.5 million and $6.0 million were recorded during the three-month periods ended June 26, 2021 and June 27, 2020, respectively. Once substantially completed by the end of our Fiscal 2022, these actions are expected to result in gross annualized pre-tax expense savings of approximately $200 million to $240 million, a portion of which will be reinvested back into the business.
See Note 8 to our accompanying consolidated financial statements for additional discussion regarding charges recorded in connection with the Fiscal 2021 Strategic Restructuring Plan.
Transition of Chaps Brand to a Fully Licensed Business Model
On October 29, 2020, we announced the planned transition of our Chaps brand to a fully licensed business model, consistent with our long-term brand elevation strategy. Specifically, we have entered into a multi-year licensing partnership, which took effect on August 1, 2021 following a transition period, with an affiliate of 5 Star Apparel LLC, a division of the OVED Group, to manufacture, market, and distribute Chaps menswear and womenswear. The products will be sold at existing channels of distribution with opportunities for expansion into additional channels and markets globally.
This agreement is expected to create incremental value for the Company by enabling an even greater focus on elevating our core brands in the marketplace, reducing our direct exposure to the North America department store channel, and setting up Chaps to deliver on its potential with an experienced partner that is focused on nurturing the brand.
Global Economic Conditions and Industry Trends
The global economy and ourretail industry are impacted by many different influences. Most recently, the U.S. enacted new tax legislation known as the TCJA (as definedfactors. The COVID-19 pandemic has resulted in "Recent Developments" below), which is intended to stimulate economic growth and capital investment in the U.S. by, among its other provisions, lowering tax rates for both corporations and individuals alike. Certain other worldwide events, including political unrest, acts of terrorism, monetary policy changes, and currency and commodity price changes, increase volatility in the global economy. In addition, the current domestic and international political environment, including potential changes to other U.S. policies related to global trade, immigration, and healthcare, have also resulted inheightened uncertainty surrounding the future state of the global economy.economy, as well as significant volatility in global financial markets. As our internationaldiscussed in "Recent Developments," governments worldwide have periodically imposed varying degrees of preventative and protective actions throughout the pandemic, such as temporary travel bans, forced business continuesclosures, and stay-at-home orders, all in an effort to grow, and becausereduce the majority of our products are produced outsidespread of the U.S., majorvirus. Such actions, together with changes in consumers' willingness to congregate in populated areas and lower levels of disposal income due to high unemployment rates, have resulted in significant business disruptions across a wide array of industries and an overall decline of the global tax policies or trade relations could have a material adverse effect on our business or operating results. Our results also have been, and are expected to continue to be, impacted by foreign exchange rate fluctuations.
economy since the
outbreak of the pandemic. Despite the introduction of COVID-19 vaccines and recent improvements in the global economy as a whole, resurgences and outbreaks continue to occur in certain geographic locations, including those resulting from variants of the virus, such as the Delta variant. Accordingly, it is not clear at this time how much longer and to what extent the pandemic will last.
The global economy has also been impacted by the domestic and international political environment, including volatile international trade relations and civil and political unrest taking place in certain parts of the world. The U.S. in particular has experienced civil unrest centered around racial inequality and political allegiances. Additionally, the United Kingdom recently withdrew from the European Union, commonly referred to as "Brexit," whereby it ceased to be a member effective January 31, 2020. In addition,December 2020, the United Kingdom and the European Union entered into an agreement that defines their future relationship, including terms of trade, that among its provisions will result in new tariffs on goods imported to the United Kingdom from the European Union that were manufactured elsewhere, as well as require additional administrative effort to import and export goods, adding friction and cost to transportation. Further, certain other worldwide events and factors, including diplomatic tensions between the U.S. and China, acts of terrorism, taxation or monetary policy changes, inflation, fluctuations in commodity prices, and rising healthcare costs, also increase volatility in the global economy.
The retail landscape in which we operate is evolving, withhas been significantly disrupted by the COVID-19 pandemic, including periods of temporary closures of stores and distribution centers and declines in retail traffic, tourism, and consumer spending on discretionary items. Prior to the COVID-19 pandemic, consumers continuing to diversify the channels in which they transact andhad been increasingly shifting their shopping preference from physical stores to online. This along with other factors,shift in preference has resultedaccelerated during the pandemic and could be further amplified in the future as consumers may continue to prefer to avoid populated locations, such as shopping centers, in fear of exposing themselves to infectious diseases. Even before the pandemic, many retailers, including certain of our large wholesale customers, becominghave been highly promotional and have aggressively markingmarked down their merchandise on a periodic basis in an attempt to offset declines in physical store traffic. The retail industry, particularly in the U.S., has also experienced numerous bankruptcies, restructurings, and ownership changes in recent years. Certain of our operations, including our North America wholesale business, have been negatively impacted by these dynamics.Despite recent improvements in the global economy, supply chain-related risks continue to exist as manufacturers and transportation providers alike are finding it difficult to meet increased consumer demand. The continuation of these industry trends could further impact consumer spending and consumption behavior in our industry, which could have a material adverse effect on our business or operating results. Additionally, changes in economic conditions, including those that may result from the TCJA, can further impact consumer discretionary income levels and spending. While we are optimistic that the TCJA will stimulate economic growth, it is still too early to determine the resulting impact on consumer spending and consumption behavior.
We have implemented various operating strategies globally to help address many of these current challenges and continue to build a foundation for long-term profitable growth centered around strengthening our consumer-facing areas of product, stores, and marketing across channels and driving a more efficient operating model. In connectionresponse to the COVID-19 pandemic, during the prior fiscal year we took preemptive actions to preserve cash and strengthen our liquidity position, as described in our Fiscal 2021 10-K, which better enabled us to continue to execute upon our long-term growth strategy despite unfavorable economic conditions. Investing in our digital ecosystem remains a primary focus and is a key component of our integrated global omni-channel strategy and driving consumer engagement, particularly in light of the current COVID-19 pandemic, which has and could continue to reshape consumer shopping preferences. Additionally, we have accelerated our marketing investments, with these strategies, we are takinga focus on supporting new customer acquisition, digitally-amplified brand campaigns, and resumption of in-store programs as markets continue to reopen worldwide. We also continue to take deliberate actions to ensure promotional consistency across channels and to enhance the overall brand and shopping experience, including reducingbetter aligning shipments to better alignand inventory levels with underlying demand and lower inventory levels. Additionally, we aredemand. We also remain committed to optimizing our wholesale distribution channel by closing 20% to 25%and enhancing our department store consumer experience. In connection with our long-term brand elevation strategy, we recently completed the sale of our underperforming U.S. department store points of distribution by the end of Fiscal 2018. Further, in October 2017, we began to shift to a more cost-effective and flexible e-commerce platform for our directly operated digital businesses, which is expected to deliver a more brand-enhancing and consistent customer experience across our global digital ecosystem. See our restructuring activities as described within "Recent Developments" below for further discussion. Although the investments that we are making in ourClub Monaco business, and our qualityChaps business is scheduled to transition to a fully licensed business model during the second quarter of sales initiatives may create operating profit pressure inFiscal 2022, thereby enabling our teams to focus our resources on our core brands. We are also closely monitoring the near-term, we expect that these initiatives will create longer-term shareholder value.latest Brexit developments, including the December 2020 trade agreement, and are assessing risks and opportunities and developing strategies to mitigate our exposure.
We will continue to monitor these conditions and trends and will evaluate and adjust our operating strategies and foreign currency and cost management opportunities to help mitigate the related impactimpacts on our results of operations, while remaining focused on the long-term growth of our business and protecting and elevating the value of our brand.
For a detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations, see Part I, Item 1A — "Risk Factors" in our Fiscal 2017 10-K, as well as Part II, Item 1A — "Risk Factors" of this Form 10-Q.2021 10-K.
Summary of Financial Performance
Operating Results
During the three months ended December 30, 2017,June 26, 2021, we reported net revenues of $1.642$1.376 billion, net income of $164.7 million, and net income per diluted share of $2.18, as compared to net revenues of $487.5 million, a net loss of $81.8$127.7 million, and net loss per diluted share of $1.00, as compared to net revenues of $1.715 billion, net income of $81.3 million, and net income per diluted share of $0.98$1.75 during the three months ended December 31, 2016. During the nine months ended December 30, 2017, we reported net revenues of $4.653 billion, net income of $121.5 million, and net income per diluted share of $1.47, as compared to net revenues of $5.087 billion, net income of $104.7 million, and net income per diluted share of $1.25 during the nine months ended December 31, 2016.June 27, 2020. The comparability of our operating results has been affected by one-time charges recorded during the third quarter of Fiscal 2018 in connection with the TCJA,net adverse impacts related to COVID-19 business disruptions, as well as restructuring-related charges, impairment of assets, and certain other charges,benefits (charges), as discussed further below.
Our operating performance for the three-month and nine-month periodsthree month ended December 30, 2017June 26, 2021 reflected declines in net revenuesrevenue increases of 4.2% and 8.5%, respectively,182.3% on a reported basis and 6.1% and 8.9%, respectively,175.8% on a constant currency basis, as defined within "Transactions and Trends Affecting Comparability of Results of Operations and Financial Condition"below. The declinesincrease in reported net revenues for the three-month and nine-month periods ended December 30, 2017 were primarily due to lower sales from our North America segmentreflected growth across all regions largely driven by the impactabsence of wide-spread store closures and other severe COVID-19-related business disruptions experienced during the prior fiscal year period, coupled with continued growth in our quality of distributiondigital commerce operations and sales initiatives, including lower levels of promotional activity and a strategic reduction in shipments, as well as brand discontinuances and loweroverall stronger consumer demand.
Our gross profit as a percentage of net revenues increaseddeclined by 340120 basis points to 60.7%70.3% during the three months ended December 30, 2017, and by 540 basis points to 61.1% during the nine months ended December 30, 2017. These increases wereJune 26, 2021, primarily driven by lower levelsthe absence of promotional activity in connection with our long-term growth strategy, favorableunusual geographic and channel mix and lower sourcing costs, as well as lower non-cash inventory-related charges recordedbenefits experienced during the prior fiscal year period in connection with the Way Forward Plan.
COVID-19-related business disruptions in North America and Europe.
Selling, general, and administrative ("SG&A") expenses as a percentage of net revenues increased by 210 basis points to 47.1% during the three months ended December 30, 2017, andJune 26, 2021 declined by 1305,130 basis points to 48.3% during the nine months ended December 30, 2017. These increases were52.9%, primarily due todriven by operating deleverageleverage on lowerhigher net revenues, and the unfavorable impact attributable to geographic and channel mix, as a greater portion of our revenue was generated by our international retail businesses (which typically carry higher operating expense margins). These increases were largelypartially offset by our operational discipline and cost savings associated with our restructuring activities.higher expenses across various categories as we returned to more normalized operations in comparison to the prior fiscal year period.
Net income decreasedincreased by $163.1$292.4 million to $164.7 million during the three months ended December 30, 2017 to a loss of $81.8 millionJune 26, 2021 as compared to the three months ended December 31, 2016,June 27, 2020, primarily due to a $226.3$388.6 million increase in our operating income, partially offset by a $90.2 million increase in our income tax provision largely driven by one-time charges recorded in connection with the TCJA, partially offset by a $60.9 million increase in operating income. Net income increased by $16.8 million during the nine months ended December 30, 2017 to $121.5 million as compared to the nine months ended December 31, 2016, primarily due to a $299.4 million increase in operating income, partially offset by a $283.9 million increase in our income tax provision largely driven by one-time charges recorded in connection with the TCJA.
provision. Net income per diluted share declinedincreased by $1.98$3.93 to a loss of $1.00$2.18 per share during the three months ended December 30, 2017, due to the lower level of net income and lower weighted-average diluted shares outstanding. Net income per diluted share increased by $0.22 to $1.47 per share during the nine months ended December 30, 2017,June 26, 2021, primarily due to the higher level of net income and lower weighted-average diluted shares outstanding.income.
Net income for the three-month and nine-month periods ended December 30, 2017 reflected one-time charges of $231.3 million, or $2.80 per diluted share, recorded in connection with the TCJA. Our operating results during the three-month and nine-month periodsthree months ended December 30, 2017June 26, 2021 were also negatively impacted by net restructuring-related charges impairment of assets, and certain other charges totaling $27.2$10.4 million, and $104.8 million, respectively, which had an after-tax effect of reducing net income by $17.9$7.7 million, or $0.23$0.11 per diluted share, and $69.8 million, or $0.85 per diluted share, respectively. Ourshare. During the three months ended June 27, 2020, our operating results during the three-month and nine-month periods ended December 31, 2016 were negatively impactedincluded a net favorable impact of $6.1 million related to certain net benefits partially offset by restructuring-related charges, impairment of assets, and certain other charges totaling $91.4 million and $400.0 million, respectively, which had an after-tax effect of reducingincreasing net income by $73.6$5.5 million, or $0.88$0.07 per diluted share, and $298.0 million, or $3.57 per diluted share, respectively.share.
Financial Condition and Liquidity
We ended the thirdfirst quarter of Fiscal 20182022 in a net cash and investments position (cash and cash equivalents plus short-term and non-current investments, less total debt) of $1.533$1.331 billion, as compared to $786.2 million$1.144 billion as of the end of Fiscal 2017.2021. The increase in our net cash and investments position at December 30, 2017June 26, 2021 as compared to April 1, 2017March 27, 2021 was primarily due to our operating cash flows of $951.1$247.6 million, partially offset by our use of cash to support Class A common stock repurchases of $28.8 million, representing withholdings in satisfaction of tax obligations for stock-based compensation awards, and to invest in our business through $123.0$28.2 million in capital expenditures and to make dividend payments of $121.7 million.expenditures.
We generated $951.1 million ofNet cash from operations during the nine months ended December 30, 2017, compared to $850.7provided by operating activities was $247.6 million during the ninethree months ended December 31, 2016.June 26, 2021, compared to net cash used in operating activities of $70.3 million during the three months ended June 27, 2020. The increase in ourcash provided by operating cash flowsactivities was due to an increase in net income before non-cash charges, partially offset by a net favorableunfavorable change related to our operating assets and liabilities, including our working capital, as compared to the prior fiscal year period, partially offset by a decline in net income before non-cash charges.period.
Our equity increased to $3.408$2.718 billion as of December 30, 2017June 26, 2021 compared to $3.300$2.604 billion as of April 1, 2017, primarily attributableMarch 27, 2021, due to our comprehensive income partially offset by our dividends declared and the net impact of stock-based compensation arrangements partially offset by our dividends declared during the ninethree months ended December 30, 2017.
Recent Developments
U.S. Tax Reform
On December 22, 2017, President Trump signed into law new tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"), which became effective January 1, 2018. The TCJA significantly revises U.S. tax law by, among other provisions, lowering the U.S. federal statutory income tax rate from 35% to 21%, creating a territorial tax system that includes a mandatory one-time transition tax on previously deferred foreign earnings, and eliminating or reducing certain income tax deductions.
During the third quarter of Fiscal 2018, we recorded one-time charges of $231.3 million within our income tax provision in connection with the TCJA, of which $215.5 million related to the mandatory transition tax, which we expect to pay over an
June 26, 2021.
eight-year period. The remaining charge of $15.8 million related to the revaluation of our deferred tax assets and liabilities. Collectively, these one-time charges, which were recorded on a provisional basis as permitted by SEC Staff Accounting Bulletin No. 118 ("SAB 118"), negatively impacted our effective tax rate by 12,410 basis points and 4,980 basis points during the three-month and nine-month periods ended December 30, 2017, respectively, and lowered our diluted earnings per share by $2.80 during each of these periods. The provisional amounts were based on our present interpretations of the TCJA and current available information, including assumptions and expectations about future events, such as our projected financial performance, and are subject to further refinement as additional information becomes available (including our actual full Fiscal 2018 results of operations and financial condition, as well as potential new or interpretative guidance issued by the Financial Accounting Standards Board or the Internal Revenue Service and other tax agencies) and further analyses are completed.
Despite these one-time charges, we expect the TCJA will ultimately benefit our results of operations and financial condition in future periods, primarily due to the lower U.S. federal statutory income tax rate.
See Note 9 to the accompanying consolidated financial statements and Part II, Item 1A — "Risk Factors" of this Form 10-Q for additional discussion.
Change in Chief Executive Officer
Consistent with our announcement on February 2, 2017, Mr. Stefan Larsson departed as the Company's President and Chief Executive Officer and as a member of our Board of Directors, effective as of May 1, 2017. In connection with Mr. Larsson's departure, we recorded cumulative other charges of $17.0 million, of which $5.6 million and $11.4 million was recorded during the first quarter of Fiscal 2018 and fourth quarter of Fiscal 2017, respectively. We do not expect to incur additional charges related to Mr. Larsson's departure. See Note 8 to our accompanying consolidated financial statements for further discussion of the charges recorded in connection with Mr. Larsson's departure.
Subsequent to Mr. Larsson's departure, Mr. Patrice Louvet was appointed as the Company's new President and Chief Executive Officer and as a member of our Board of Directors, effective in July 2017.
Way Forward Plan
On June 2, 2016, our Board of Directors approved a restructuring plan with the objective of delivering sustainable, profitable sales growth and long-term value creation for shareholders (the "Way Forward Plan"). We are refocusing on our core brands and evolving our product, marketing, and shopping experience to increase desirability and relevance. We are also evolving our operating model to enable sustainable, profitable sales growth by significantly improving quality of sales, reducing supply chain lead times, improving our sourcing, and executing a disciplined multi-channel distribution and expansion strategy. As part of the Way Forward Plan, we are rightsizing our cost structure and implementing a return on investment-driven financial model to free up resources to invest in the brand and drive high-quality sales. The Way Forward Plan includes strengthening our leadership team and creating a more nimble organization by moving from an average of nine to six layers of management. The Way Forward Plan also includes the discontinuance of our Denim & Supply brand and the integration of our denim product offerings into our Polo Ralph Lauren brand. Collectively, these actions, which were substantially completed during Fiscal 2017, resulted in a reduction in workforce and the closure of certain stores and shop-within-shops, and are expected to result in gross annualized expense savings of approximately $180 million to $220 million.
On March 30, 2017, our Board of Directors approved the following additional restructuring-related activities associated with the Way Forward Plan: (i) the restructuring of our in-house global e-commerce platform which was in development and shifting to a more cost-effective, flexible e-commerce platform through a new agreement with Salesforce's Commerce Cloud, formerly known as Demandware; (ii) the closure of our Polo store at 711 Fifth Avenue in New York City; and (iii) the further streamlining of the organization and the execution of other key corporate actions in line with the Way Forward Plan. These actions, which are expected to result in additional gross annualized expense savings of approximately $140 million, are an important part of our efforts to achieve our stated objective to return to sustainable, profitable growth and invest in the future. These additional restructuring-related activities will result in a further reduction in workforce and the closure of certain corporate office and store locations, and are expected to be largely completed by the end of Fiscal 2018. The remaining activities, which are primarily lease-related, are expected to shift into Fiscal 2019.
In connection with the Way Forward Plan, we currently expect to incur total estimated charges of approximately $770 million, comprised of cash-related restructuring charges of approximately $450 million and non-cash charges of approximately $320 million. Cumulative charges incurred since inception were $645.4 million, of which $22.0 million and $79.0 million were recorded during the three-month and nine-month periods ended December 30, 2017, respectively. Of the remaining charges yet
to be incurred, we expect approximately $50 million will be recorded during the fourth quarter of Fiscal 2018 and approximately $75 million to $85 million will be recorded during Fiscal 2019. In addition to these charges, we also incurred an additional non-cash charge of $155.2 million during Fiscal 2017 associated with the destruction of inventory out of current liquidation channels in line with our Way Forward Plan. See Notes 7 and 8 to our accompanying consolidated financial statements for detailed discussions of the charges recorded in connection with the Way Forward Plan.
Transactions and Trends Affecting Comparability of Results of Operations and Financial Condition
The comparability of our operating results for the three-month and nine-month periods endedDecember 30, 2017 June 26, 2021 and December 31, 2016June 27, 2020 has been affected by restructuring-relatedcertain events, including:
•pretax charges impairment of assets, andincurred in connection with our restructuring activities, as well as certain other charges,benefits (charges), including those related to COVID-19 business disruptions, as summarized below (references to "Notes" are to the notes to the accompanying consolidated financial statements):
| | | | | Three Months Ended | | Nine Months Ended | | | | Three Months Ended |
| | | December 30,
2017 | | December 31,
2016 | | December 30,
2017 | | December 31,
2016 | | | | June 26,
2021 | | June 27,
2020 |
| | | (millions) | | | | (millions) |
| Impairment of assets (see Note 7) | | $ | (3.9 | ) | | $ | (10.3 | ) | | $ | (24.8 | ) | | $ | (56.7 | ) | Impairment of assets (see Note 7) | | | $ | (18.6) | | | $ | (2.1) | |
| Restructuring and other charges (see Note 8) | | (23.3 | ) | | (66.7 | ) | | (78.7 | ) | | (193.9 | ) | Restructuring and other charges (see Note 8) | | | (0.7) | | | (7.0) | |
Restructuring-related inventory charges (see Note 8)(a) | | — |
| | (14.4 | ) | | (1.3 | ) | | (149.4 | ) | |
| Total charges | | $ | (27.2 | ) | | $ | (91.4 | ) | | $ | (104.8 | ) | | $ | (400.0 | ) | |
Non-routine inventory benefits (charges)(a) | | Non-routine inventory benefits (charges)(a) | | | 8.0 | | | (1.3) | |
COVID-19-related bad debt expense reversals(b) | | COVID-19-related bad debt expense reversals(b) | | | 0.9 | | | 16.5 | |
| Total benefits (charges) | | Total benefits (charges) | | | $ | (10.4) | | | $ | 6.1 | |
| |
(a)
| Non-cash restructuring-related inventory charges(a)Non-routine inventory benefits (charges) are recorded within cost of goods sold in the consolidated statements of operations. The benefit recorded within cost of goods sold in the consolidated statements of operations. |
Additionally, during the third quarterthree months ended June 26, 2021 related to reversals of Fiscal 2018, weamounts previously recorded one-time charges of $231.3 million within our income tax provision in connection with COVID-19 business disruptions. The charge recorded during the TCJA, which negatively impactedthree months ended June 27, 2020 related to our effective tax rate by 12,410 basis points and 4,980 basis pointsrestructuring plans (see Note 8).
(b)COVID-19-related bad debt expense reversals are recorded within SG&A expenses in the consolidated statements of operations.
•other adverse impacts related to COVID-19 business disruptions during the three-month and nine-month periods ended December 30, 2017, respectively. See Note 9 to the accompanying consolidated financial statements for further discussion of the TCJA.June 26, 2021 and June 27, 2020.
SinceBecause we are a global company, the comparability of our operating results reported in U.S. Dollars is also affected by foreign currency exchange rate fluctuations because the underlying currencies in which we transact change in value over time compared to the U.S. Dollar. These rateSuch fluctuations can have a significant effect on our reported results. As such, in addition to financial measures prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP"), our discussions often contain references to constant currency measures, which are calculated by translating the current-year and prior-year reported amounts into comparable amounts using a single foreign exchange rate for each currency. We present constant currency financial information, which is a non-U.S. GAAP financial measure, as a supplement to our reported operating results. We use constant currency information to provide a framework to assessfor assessing how our businesses performed excluding the effects of foreign currency exchange rate fluctuations. We believe this information is useful to investors to facilitatefor facilitating comparisons of operating results and better identifyidentifying trends in our businesses. The constant currency performance measures should be viewed in addition to, and not in lieu of or superior to, our operating performance measures calculated in accordance with U.S. GAAP. Reconciliations between this non-U.S. GAAP financial measure and the most directly comparable U.S. GAAP measure are included in the "Results of Operations" section where applicable.
Our discussion also includes reference to comparable store sales. Comparable store sales refer to the growthchange in sales of sales inour stores that arehave been open for at least one13 full fiscal year.months. Sales from our digital commerce sites are also included within comparable sales for those geographies that have been serviced by the related site for at least 13 full fiscal months. Sales for stores or digital commerce sites that are closed or shut down during a fiscalthe year are excluded from the calculation of comparable store sales. Sales for stores that are either relocated, enlarged (as defined by gross square footage expansion of 25% or greater), or generally closed for 30 or more consecutive days for renovation are also excluded from the calculation of comparable store sales until such stores have been operating in their new location or in their newly renovated state for at least one13 full fiscal year. Sales from our e-commerce sites are included withinmonths. All comparable store sales for those geographies that have been serviced by the related site for at least one full fiscal year. Sales for e-commerce sites thatmetrics are shut down duringcalculated on a fiscal year are excluded from the calculation of comparable store sales. We use an integrated omni-channel strategy to operate our retail business, in which our e-commerce operations are interdependent with our physical stores.constant currency basis.
Our "Results of Operations" discussion that follows includes the significant changes in operating results arising from these items affecting comparability. However, unusual items or transactions may occur in any period. Accordingly, investors and other financial statement users should consider the types of events and transactions that have affected operating trends.
RESULTS OF OPERATIONS
Three Months Ended December 30, 2017June 26, 2021 Compared to Three Months Ended December 31, 2016June 27, 2020
The following table summarizes our results of operations and expresses the percentage relationship to net revenues of certain financial statement captions. All percentages shown in the below table and the discussion that follows have been calculated using unrounded numbers.
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | |
| | | December 30,
2017 | | December 31,
2016 | | $ Change | | % / bps Change |
| | | (millions, except per share data) | | |
| Net revenues | | $ | 1,641.8 |
| | $ | 1,714.6 |
| | $ | (72.8 | ) | | (4.2 | %) |
Cost of goods sold(a) | | (645.6 | ) | | (731.4 | ) | | 85.8 |
| | (11.7 | %) |
| Gross profit | | 996.2 |
| | 983.2 |
| | 13.0 |
| | 1.3 | % |
| Gross profit as % of net revenues | | 60.7 | % | | 57.3 | % | | | | 340 bps |
|
Selling, general, and administrative expenses(a) | | (773.8 | ) | | (771.9 | ) | | (1.9 | ) | | 0.2 | % |
| SG&A expenses as % of net revenues | | 47.1 | % | | 45.0 | % | | | | 210 bps |
|
| Amortization of intangible assets | | (6.0 | ) | | (6.0 | ) | | — |
| | (0.6 | %) |
| Impairment of assets | | (3.9 | ) | | (10.3 | ) | | 6.4 |
| | (62.3 | %) |
Restructuring and other charges(a) | | (23.3 | ) | | (66.7 | ) | | 43.4 |
| | (65.1 | %) |
| Operating income | | 189.2 |
| | 128.3 |
| | 60.9 |
| | 47.5 | % |
| Operating income as % of net revenues | | 11.5 | % | | 7.5 | % | | | | 400 bps |
|
| Foreign currency gains (losses) | | 0.6 |
| | (2.7 | ) | | 3.3 |
| | (120.8 | %) |
| Interest expense | | (4.8 | ) | | (3.6 | ) | | (1.2 | ) | | 37.2 | % |
| Interest and other income, net | | 2.8 |
| | 2.5 |
| | 0.3 |
| | 13.6 | % |
| Equity in losses of equity-method investees | | (1.5 | ) | | (1.4 | ) | | (0.1 | ) | | 5.2 | % |
| Income before income taxes | | 186.3 |
| | 123.1 |
| | 63.2 |
| | 51.4 | % |
| Income tax provision | | (268.1 | ) | | (41.8 | ) | | (226.3 | ) | | 540.9 | % |
Effective tax rate(b) | | 143.9 | % | | 34.0 | % | | | | 10,990 bps |
|
| Net income (loss) | | $ | (81.8 | ) | | $ | 81.3 |
| | $ | (163.1 | ) | | (200.7 | %) |
| Net income (loss) per common share: | | | | | | | | |
| Basic | | $ | (1.00 | ) | | $ | 0.98 |
| | $ | (1.98 | ) | | (202.0 | %) |
| Diluted | | $ | (1.00 | ) | | $ | 0.98 |
| | $ | (1.98 | ) | | (202.0 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | |
| | | June 26,
2021 | | June 27,
2020 | | $
Change | | % / bps
Change |
| | | (millions, except per share data) | | |
Net revenues | | $ | 1,376.3 | | | $ | 487.5 | | | $ | 888.8 | | | 182.3 | % |
| Cost of goods sold | | (408.2) | | | (138.8) | | | (269.4) | | | 194.2 | % |
Gross profit | | 968.1 | | | 348.7 | | | 619.4 | | | 177.6 | % |
| Gross profit as % of net revenues | | 70.3 | % | | 71.5 | % | | | | (120 bps) |
| Selling, general, and administrative expenses | | (728.2) | | | (507.6) | | | (220.6) | | | 43.4 | % |
| SG&A expenses as % of net revenues | | 52.9 | % | | 104.2 | % | | | | (5,130 bps) |
| Impairment of assets | | (18.6) | | | (2.1) | | | (16.5) | | | NM |
| Restructuring and other charges | | (0.7) | | | (7.0) | | | 6.3 | | | (90.6 | %) |
Operating income (loss) | | 220.6 | | | (168.0) | | | 388.6 | | | NM |
| Operating income (loss) as % of net revenues | | 16.0 | % | | (34.5 | %) | | | | 5,050 bps |
| Interest expense | | (13.3) | | | (9.6) | | | (3.7) | | | 39.2 | % |
| Interest income | | 1.8 | | | 2.9 | | | (1.1) | | | (38.7 | %) |
| Other income, net | | 0.9 | | | 2.1 | | | (1.2) | | | (55.6 | %) |
Income (loss) before income taxes | | 210.0 | | | (172.6) | | | 382.6 | | | NM |
| Income tax benefit (provision) | | (45.3) | | | 44.9 | | | (90.2) | | | NM |
Effective tax rate(a) | | 21.6 | % | | 26.0 | % | | | | (440 bps) |
Net income (loss) | | $ | 164.7 | | | $ | (127.7) | | | $ | 292.4 | | | NM |
| Net income (loss) per common share: | | | | | | | | |
Basic | | $ | 2.23 | | | $ | (1.75) | | | $ | 3.98 | | | NM |
Diluted | | $ | 2.18 | | | $ | (1.75) | | | $ | 3.93 | | | NM |
| |
(a)
| Includes total depreciation expense of $66.7 million and $71.9 million for the three-month periods ended December 30, 2017 and December 31, 2016, respectively. |
| |
(b)
| Effective tax rate is calculated by dividing the income tax provision by income before income taxes. |
(a)Effective tax rate is calculated by dividing the income tax benefit (provision) by income (loss) before income taxes.
NM Not meaningful.
Net Revenues. Net revenues decreasedincreased by $72.8$888.8 million, or 4.2%182.3%, to $1.642$1.376 billion during the three months ended December 30, 2017June 26, 2021 as compared to the three months ended December 31, 2016,June 27, 2020, including net favorable foreign currency effects of $31.3$31.8 million. On a constant currency basis, net revenues decreasedincreased by $104.1$857.0 million, or 6.1%175.8%. The increase in net revenues reflected growth across all regions largely driven by the absence of wide-spread store closures and other severe COVID-19-related disruptions experienced during the prior fiscal year period, coupled with continued growth in our digital commerce operations and overall stronger consumer demand.
The following table summarizes the percentage change in our consolidated comparable store sales for the three months ended December 30, 2017June 26, 2021 as compared to the prior fiscal year period on both a reported and constant currency basis:period:
|
| | | | | | |
| | | As Reported | | Constant Currency |
| E-commerce comparable store sales | | (19 | %) | | (20 | %) |
| Comparable store sales excluding e-commerce | | (1 | %) | | (3 | %) |
| Total comparable store sales | | (5 | %) | | (6 | %) |
| | | | | | | | |
| | % Change |
| Digital commerce comparable store sales | | 42 | % |
| Comparable store sales excluding digital commerce | | 136 | % |
| Total comparable store sales | | 108 | % |
Our global average store count decreased by 622 stores and concession shops during the three months ended December 30, 2017June 26, 2021 compared with the three months ended December 31, 2016, primarily due to global store closures primarily associated withJune 27, 2020, largely driven by the Way Forward Plan, largelysale of our Club Monaco business on June 26, 2021, partially offset by new concession shop openings in Asia. The following table details our retail store presence by segment as of the periods presented:
| | | | | December 30,
2017 | | December 31,
2016 | | | June 26,
2021 | | June 27,
2020 |
| Freestanding Stores: | | | | | Freestanding Stores: | | | | |
| North America | | 218 |
| | 222 |
| North America | | 233 | | | 230 | |
| Europe | | 82 |
| | 87 |
| Europe | | 94 | | | 95 | |
| Asia | | 103 |
| | 93 |
| Asia | | 155 | | | 136 | |
| Other non-reportable segments | | 78 |
| | 83 |
| Other non-reportable segments | | — | | | 72 | |
| Total freestanding stores | | 481 |
| | 485 |
| Total freestanding stores | | 482 | | | 533 | |
| | | | | | |
| Concession Shops: | | | | | Concession Shops: | |
| North America | | 2 |
| | 1 |
| North America | | 1 | | | 2 | |
| Europe | | 25 |
| | 34 |
| Europe | | 29 | | | 29 | |
| Asia | | 599 |
| | 598 |
| Asia | | 617 | | | 619 | |
| Other non-reportable segments | | 2 |
| | 2 |
| Other non-reportable segments | | — | | | 4 | |
| Total concession shops | | 628 |
| | 635 |
| Total concession shops | | 647 | | | 654 | |
| Total stores | | 1,109 |
| | 1,120 |
| Total stores | | 1,129 | | | 1,187 | |
In addition to our stores, we sell products online in North America, Europe, and EuropeAsia through our various e-commercedigital commerce sites, which include www.RalphLauren.comas well as through our Polo mobile app in North America and www.ClubMonaco.com, among others. In Asia, wethe United Kingdom. We also sell products online through e-commerce sites of various third-party digital partners.partner commerce sites, primarily in Asia.
Net revenues for our segments, as well as a discussion of the changes in each reportable segment's net revenues from the comparable prior fiscal year period, are provided below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | $ Change | | Foreign Exchange Impact | | $ Change | | % Change |
| | | June 26,
2021 | | June 27,
2020 | | As
Reported | | | Constant
Currency | | As
Reported | | Constant
Currency |
| | | (millions) | | | | |
| Net Revenues: | | | | | | | | | | | | | | |
| North America | | $ | 662.1 | | | $ | 165.1 | | | $ | 497.0 | | | $ | 1.3 | | | $ | 495.7 | | | 300.9 | % | | 300.1 | % |
| Europe | | 354.9 | | | 120.7 | | | 234.2 | | | 18.2 | | | 216.0 | | | 194.1 | % | | 179.0 | % |
| Asia | | 288.2 | | | 171.9 | | | 116.3 | | | 12.2 | | | 104.1 | | | 67.7 | % | | 60.6 | % |
| Other non-reportable segments | | 71.1 | | | 29.8 | | | 41.3 | | | 0.1 | | | 41.2 | | | 138.4 | % | | 138.2 | % |
| Total net revenues | | $ | 1,376.3 | | | $ | 487.5 | | | $ | 888.8 | | | $ | 31.8 | | | $ | 857.0 | | | 182.3 | % | | 175.8 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | $ Change | | Foreign Exchange Impact | | $ Change | | % Change |
| | | December 30,
2017 | | December 31,
2016 | | As Reported | | | Constant Currency | | As Reported | | Constant Currency |
| | | (millions) | | | | |
| Net Revenues: | | | | | | | | | | | | | | |
| North America | | $ | 886.4 |
| | $ | 1,000.8 |
| | $ | (114.4 | ) | | $ | 1.3 |
| | $ | (115.7 | ) | | (11.4 | %) | | (11.6 | %) |
| Europe | | 378.5 |
| | 349.2 |
| | 29.3 |
| | 28.1 |
| | 1.2 |
| | 8.4 | % | | 0.3 | % |
| Asia | | 251.0 |
| | 235.2 |
| | 15.8 |
| | 0.3 |
| | 15.5 |
| | 6.7 | % | | 6.6 | % |
| Other non-reportable segments | | 125.9 |
| | 129.4 |
| | (3.5 | ) | | 1.6 |
| | (5.1 | ) | | (2.7 | %) | | (4.0 | %) |
| Total net revenues | | $ | 1,641.8 |
| | $ | 1,714.6 |
| | $ | (72.8 | ) | | $ | 31.3 |
| | $ | (104.1 | ) | | (4.2 | %) | | (6.1 | %) |
North America net revenues — Net revenues decreasedincreased by $114.4$497.0 million, or 11.4%300.9%, during the three months ended December 30, 2017June 26, 2021 as compared to the three months ended December 31, 2016,June 27, 2020, including net favorable foreign currency effects of $1.3 million. On a constant currency basis, net revenues decreasedincreased by $115.7$495.7 million, or 11.6%300.1%.
The $114.4$497.0 million net declineincrease in North America net revenues was driven by:
•a $66.6$269.6 million net decreaseincrease related to our North America wholesaleretail business, largely driven by a strategic reductionreflecting the absence of shipments (including withinwidespread COVID-19-related store closures and other business disruptions experienced during the off-price channel) and points of distribution in connection with our long-term growth strategy, the impact of brand discontinuances,prior fiscal year period and the continued challenging department store traffic trends; and
growth in our digital commerce operations. On a $48.2constant currency basis, net revenues increased by $268.8 million net decreasedriven by increases of $252.3 million in comparable store sales primarily driven by lower sales from our Ralph Lauren e-commerce operations and certain of our retail stores due$16.5 million in part to a decline in traffic, as well as lower levels of promotional activity and a planned reduction in inventory in connection with our long-term growth strategy.non-comparable store sales. The following table summarizes the percentage change in comparable store sales related to our North America retail business on both a reported and constant currency basis:business:
|
| | | | | | |
| | | As Reported | | Constant Currency |
| E-commerce comparable store sales | | (27 | %) | | (27 | %) |
| Comparable store sales excluding e-commerce | | (3 | %) | | (3 | %) |
| Total comparable store sales | | (10 | %) | | (10 | %) |
These decreases were partially offset by
| | | | | | | | |
| | % Change |
| Digital commerce comparable store sales | | 51 | % |
| Comparable store sales excluding digital commerce | | 278 | % |
| Total comparable store sales | | 176 | % |
•a $0.4$227.4 million net increase in non-comparable store sales.related to our North America wholesale business largely driven by minimal shipments during the comparable prior fiscal year period due to significant COVID-19-related business disruptions and overall stronger consumer demand.
Europe net revenues — Net revenues increased by $29.3$234.2 million, or 8.4%194.1%, during the three months ended December 30, 2017June 26, 2021 as compared to the three months ended December 31, 2016,June 27, 2020, including net favorable foreign currency effects of $28.1$18.2 million. On a constant currency basis, net revenues increased by $1.2$216.0 million, or 0.3%179.0%.
The $29.3$234.2 million net increase in Europe net revenues was driven by:
•a $21.9$142.6 million net increase related to our Europe wholesale business primarilylargely driven by minimal shipments during the comparable prior fiscal year period due to significant COVID-19-related business disruptions and overall stronger consumer demand, as well as net favorable foreign currency effects of $11.7$8.1 million; and
•a $91.6 million net increase related to our Europe retail business, reflecting the absence of widespread COVID-19-related store closures and a shift in the timing of certain shipments that occurredother business disruptions experienced during the prior fiscal year period;period and
an $8.8 million net increase the continued growth in non-comparable store sales, primarily driven by new store openings andour digital commerce operations, as well as net favorable foreign currency effects of $3.9$10.1 million.
These On a constant currency basis, net revenues increased by $81.5 million driven by increases were partially offset by:
a $1.4of $77.2 million net decrease in comparable store sales including net favorable foreign currency effects of $12.5 million. Our comparableand $4.3 million in non-comparable store sales decreased by $13.9 million on a constant currency basis, primarily driven by lower sales from certain of our retail stores due in part to lower levels of promotional activity in connection with our long-term growth strategy.sales. The following table summarizes the percentage change in comparable store sales related to our Europe retail business on both a reported and constant currency basis:business:
| | | | | | | | |
| | % Change |
| Digital commerce comparable store sales | | 23 | % |
| Comparable store sales excluding digital commerce | | 154 | % |
| Total comparable store sales | | 98 | % |
|
| | | | | | |
| | | As Reported | | Constant Currency |
| E-commerce comparable store sales | | 8 | % | | (1 | %) |
| Comparable store sales excluding e-commerce | | (2 | %) | | (9 | %) |
| Total comparable store sales | | (1 | %) | | (8 | %) |
Asia net revenues — Net revenues increased by $15.8$116.3 million, or 6.7%67.7%, during the three months ended December 30, 2017June 26, 2021 as compared to the three months ended December 31, 2016,June 27, 2020, including net favorable foreign currency effects of $0.3$12.2 million. On a constant currency basis, net revenues increased by $15.5$104.1 million, or 6.6%60.6%.
The $15.8$116.3 million net increase in Asia net revenues was driven by:
•a $5.8 million net increase in non-comparable store sales, primarily driven by new concession shop openings and net favorable foreign currency effects of $0.4 million, partially offset by the strategic closure of certain of our retail stores;
a $5.7$106.3 million net increase related to our Asia wholesaleretail business, primarily driven byreflecting less severe COVID-19-related store closures and other business disruptions during the first quarter of Fiscal 2022 as compared to the prior fiscal year period and the continued growth in our expansion in Japan and netdigital commerce operations, as well as favorable foreign currency effects of $0.1 million; and
$11.6 million. On a $4.3constant currency basis, net revenues increased by $94.7 million, net increasereflecting increases of $66.8 million in comparable store sales including net unfavorable foreign currency effects of $0.2 million. Our comparableand $27.9 million in non-comparable store sales increased by $4.5 million on a constant currency basis, primarily driven by higher sales from certain of our retail locations due in part to improved conversion, partially offset by the impact of lower levels of promotional activity in connection with our long-term growth strategy.sales. The following table summarizes the percentage change in comparable store sales related to our Asia retail business on both a reported and constant currency basis:
|
| | | | | | |
| | | As Reported | | Constant Currency |
Total comparable store sales(a) | | 3 | % | | 3 | % |
| % Change |
| Digital commerce comparable store sales | | 42 | % |
|
| |
(a)
| Comparable store sales for our Asia segment were comprised primarily ofexcluding digital commerce | | 43 | % |
Total comparable store sales made through our stores and concession shops. | | 43 | % |
•a $10.0 million net increase related to our Asia wholesale business, reflecting increases across all regions, most notably in Australia and Japan.
Gross Profit. Gross profit increased by $13.0$619.4 million, or 1.3%177.6%, to $996.2$968.1 million for the three months ended December 30, 2017. Gross profit during the three months ended December 31, 2016 reflected non-cash inventory-related charges of $14.4 million recorded in connection with the Way Forward Plan. The increase in gross profit also included aJune 26, 2021, including net favorable foreign currency effecteffects of $23.7$30.0 million. Gross profit as a percentage of net revenues increaseddeclined to 60.7%70.3% for the three months ended December 30, 2017June 26, 2021 from 57.3%71.5% for the three months ended December 31, 2016.June 27, 2020. The 340120 basis point increasedecline was primarily driven by lower levelsthe absence of promotional activity in connection with our long-term growth strategy, favorableunusual geographic and channel mix and lower sourcing costs, as well asbenefits experienced during the absence of non-cash inventory-related charges recordedprior fiscal year period in connection with the Way Forward Plan during the three months ended December 30, 2017 as compared to the comparable prior year period.COVID-19-related business disruptions in North America and Europe.
Gross profit as a percentage of net revenues is dependent upon a variety of factors, including changes in the relative sales mix among distribution channels, changes in the mix of products sold, pricing, the timing and level of promotional activities, foreign currency exchange rates, and fluctuations in material costs. These factors, among others, may cause gross profit as a percentage of net revenues to fluctuate from period to period.
Selling, General, and Administrative Expenses. SG&A expenses primarily include costs relating to compensation and benefits, advertising and marketing, rent and occupancy, distribution, information technology, legal, depreciation and amortization, bad debt, information technology, facilities, legal, and other costs associated with financeselling and administration.administrative costs. SG&A expenses increased by $1.9$220.6 million, or 0.2%43.4%, to $773.8$728.2 million for the three months ended December 30, 2017. This increase included aJune 26, 2021, including net unfavorable foreign currency effecteffects of $12.3$17.7 million. The increase in SG&A expenses reflects a reduction in the magnitude of COVID-19 business disruptions and our related mitigating actions, which during the prior fiscal year period included (i) lower compensation-related expenses driven by employee furloughs, reduced pay for our executives, senior management team, and Board of Directors, as well as COVID-19-related government subsidies, and (ii) lower rent and occupancy costs largely driven by reduced percentage-of-sales-based rent due to widespread store closures and a reduction in traffic, as well as rent abatements negotiated with certain of our landlords. SG&A expenses as a percentage of net revenues increaseddeclined to 47.1%52.9% for the three months ended December 30, 2017June 26, 2021 from 45.0%104.2% for the three months ended December 31, 2016.June 27, 2020. The 2105,130 basis point increasedecline was primarily due todriven by operating deleverageleverage on lowerhigher net revenues, as previously discussed, and the unfavorable impact attributable to geographic and channel mix, as a greater portion of our revenue was generated by our international retail businesses (which typically carry higher operating expense margins). These increases were partially offset by our operational discipline and cost savings associated with our restructuring activities.higher expenses across various categories as we returned to more normalized operations in comparison to the prior fiscal year period.
The $1.9$220.6 million net increase in SG&A expenses was driven by:
|
| | | | |
| | | Three Months Ended December 30, 2017 Compared to
Three Months Ended December 31, 2016 |
| | | (millions) |
| SG&A expense category: | | |
| Marketing and advertising expenses | | $ | 13.2 |
|
| Compensation-related expenses | | 9.2 |
|
| Depreciation expense | | (8.7 | ) |
| Shipping and handling costs | | (5.5 | ) |
| Selling-related expenses | | (3.3 | ) |
| Other | | (3.0 | ) |
| Total change in SG&A expenses | | $ | 1.9 |
|
During the fourth quarter of Fiscal 2018, we continue to expect a certain amount of operating expense deleverage driven by the anticipated decline in sales associated with our quality of sale initiatives outpacing the decline in our operating expenses, as we anniversary certain cost savings initiatives executed during Fiscal 2017 in connection with the Way Forward Plan. In addition, we will continue to invest in our key strategic initiatives, including our marketing and advertising programs, as well as expansion and renovations of our retail stores and concession shops.
Amortization of Intangible Assets. Amortization of intangible assets remained flat at $6.0 million during the three-month periods ended December 30, 2017 and December 31, 2016.
| | | | | | | | |
| | Three Months Ended June 26, 2021 Compared to
Three Months Ended June 27, 2020 |
| 50 | (millions) |
| SG&A expense category: | | |
| Compensation-related expenses | | $ | 93.3 | |
| Marketing and advertising expenses | | 38.7 | |
| Rent and occupancy costs | | 30.6 | |
| Selling-related expenses | | 20.0 | |
| Bad debt expense | | 15.5 | |
| Shipping and handling costs | | 14.3 | |
| Other | | 8.2 | |
| Total increase in SG&A expenses | | $ | 220.6 | |
We have been carefully evaluating our organizational and operating cost structures to better support long-term growth, with a focus on our (i) team organizational structures and ways of working; (ii) real estate footprint and related costs across our corporate offices, distribution centers, and direct-to-consumer retail and wholesale doors; and (iii) brand portfolio. Additionally, we continue to closely manage our discretionary spending.
Impairment of Assets. During the three-month periods ended December 30, 2017June 26, 2021 and December 31, 2016,June 27, 2020, we recorded non-cash impairment charges of $2.2$18.6 million and $10.3$2.1 million, respectively, to write offwrite-down certain fixed assets related to our domestic and international stores, shop-within-shops, and corporate offices in connection with the Way Forward Plan. Additionally, during the three months ended December 30, 2017, we recorded non-cash impairment charges of $1.7 million to write off certain fixed assets related to underperforming shop-within-shops as a result of our on-going store portfolio evaluation.long-lived assets. See Note 7 to the accompanying consolidated financial statements.
Restructuring and Other Charges. During the three-month periods ended December 30, 2017June 26, 2021 and December 31, 2016,June 27, 2020, we recorded restructuring (benefits) charges of $19.8$(0.1) million and $66.7$2.6 million, respectively, in connection with the Way Forward Plan,primarily consisting of severance and benefitbenefits costs, lease termination and store closure costs, other cash charges, and non-cash accelerated stock-based compensation expense. In addition, during the three months ended December 30, 2017, we recordedas well as other charges of $3.5$0.8 million and $4.4 million, respectively, primarily related to depreciation expenserent and occupancy costs associated with our former Polo store at 711 Fifth Avenue in New York City recorded aftercertain previously exited real estate locations for which the store closed during the first quarter of Fiscal 2018 in connection with the Way Forward Plan.related lease agreements have not yet expired. See Note 8 to the accompanying consolidated financial statements.
Operating Income. OperatingIncome (Loss). We reported operating income increased to $189.2of $220.6 million for the three months ended December 30, 2017, from $128.3June 26, 2021, as compared to an operating loss of $168.0 million for the three months ended December 31, 2016.June 27, 2020. The increase in operating income reflects the return to more normalized operations in comparison to the prior fiscal year period, as previously discussed, as well as net favorable foreign currency effects of $12.3 million. Our operating results during the three-month periodsthree months ended December 30, 2017 and December 31, 2016 were negatively impactedJune 26, 2021 included a net unfavorable impact of $10.4 million related to restructuring-related charges partially offset by restructuring-related charges, impairment of assets, and certain other charges totaling $27.2 million and $91.4 million, respectively, as previously discussed. The increase innet
benefits. During the three months ended June 27, 2020, our operating income alsoresults included a net favorable foreign currency effectimpact of $11.4 million.$6.1 million related to certain net benefits partially offset by restructuring-related charges. Operating income as a percentage of net revenues increased to 11.5%was 16.0% for the three months ended December 30, 2017 from 7.5% for the three months ended December 31, 2016. The 400June 26, 2021, reflecting a 5,050 basis point increase from the prior fiscal year period. The increase in operating income as a percentage of net revenues was primarily driven by the net decline in restructuring-related charges, impairment of assets, and certain other charges and the increase in our gross profit margin, partially offset by the increasedecrease in SG&A expenses as a percentage of net revenues, partially offset by the decrease in our gross margin and higher net restructuring-related charges and certain other charges recorded during the three months ended June 26, 2021 as compared to the prior fiscal year period, all as previously discussed.
Operating income (loss) and margin for our segments, as well as a discussion of the changes in each reportable segment's operating margin from the comparable prior fiscal year period, are provided below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | |
| June 26, 2021 | | June 27, 2020 | | | | |
| Operating
Income (Loss) | | Operating
Margin | | Operating
Income (Loss) | | Operating
Margin | | $
Change | | Margin
Change |
| (millions) | | | | (millions) | | | | (millions) | | |
| Segment: | | | | | | | | | | | | |
| North America | | $ | 186.3 | | | 28.1% | | $ | (24.8) | | | (15.0%) | | $ | 211.1 | | | 4,310 bps |
| Europe | | 94.5 | | | 26.6% | | (16.9) | | | (14.0%) | | 111.4 | | | 4,060 bps |
| Asia | | 60.4 | | | 20.9% | | 10.1 | | | 5.9% | | 50.3 | | | 1,500 bps |
| Other non-reportable segments | | 35.4 | | | 49.8% | | 0.9 | | | 3.0% | | 34.5 | | | 4,680 bps |
| | 376.6 | | | | | (30.7) | | | | | 407.3 | | | |
| Unallocated corporate expenses | | (155.3) | | | | | (130.3) | | | | | (25.0) | | | |
| Unallocated restructuring and other charges | | (0.7) | | | | | (7.0) | | | | | 6.3 | | | |
| Total operating income (loss) | | $ | 220.6 | | | 16.0% | | $ | (168.0) | | | (34.5%) | | $ | 388.6 | | | 5,050 bps |
|
| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | |
| | December 30, 2017 | | December 31, 2016 | | | | |
| | Operating
Income (Loss) | | Operating
Margin | | Operating
Income (Loss) | | Operating
Margin | | $
Change | | Margin
Change |
| | (millions) | | | | (millions) | | | | (millions) | | |
| Segment: | | | | | | | | | | | | |
| North America | | $ | 196.6 |
| | 22.2% | | $ | 206.4 |
| | 20.6% | | $ | (9.8 | ) | | 160 bps |
| Europe | | 81.0 |
| | 21.4% | | 63.8 |
| | 18.3% | | 17.2 |
| | 310 bps |
| Asia | | 44.3 |
| | 17.6% | | 23.3 |
| | 9.9% | | 21.0 |
| | 770 bps |
| Other non-reportable segments | | 37.1 |
| | 29.5% | | 33.2 |
| | 25.7% | | 3.9 |
| | 380 bps |
| | | 359.0 |
| | | | 326.7 |
| | | | 32.3 |
| | |
| Unallocated corporate expenses | | (146.5 | ) | | | | (131.7 | ) | | | | (14.8 | ) | | |
| Unallocated restructuring and other charges | | (23.3 | ) | | | | (66.7 | ) | | | | 43.4 |
| | |
| Total operating income | | $ | 189.2 |
| | 11.5% | | $ | 128.3 |
| | 7.5% | | $ | 60.9 |
| | 400 bps |
North America operating marginimproved by 1604,310 basis points, primarily due to the favorable impactimpacts of 80approximately 3,170 basis points and 1,950 basis points related to our retail business and 80 basis points related to our wholesale business,businesses, respectively, both largely driven by the increase in our gross profit margin, partially offset by an increase in SG&A expenses as a percentage of net revenues.
Europe operating margin improved by 310 basis points, primarily due to the favorable impact of 180 basis points related to our wholesale business, largely driven by a decline in SG&A expenses as a percentage of net revenues. Therevenues driven by operating leverage on higher net revenues, as well as an increase also reflected favorable foreign currency effectsin our gross margin. These improvements in operating margin were partially offset by the unfavorable impact of 50approximately 810 basis points and the favorable impact of 40 basis points relatedattributable to lower non-cash chargesnet favorable COVID-19-related bad debt expense and non-routine inventory adjustments recorded in connection with the Way Forward Plan during the three months ended December 30, 2017June 26, 2021 as compared to the prior fiscal year period.
Europe operating margin improved by 4,060 basis points, primarily due to the favorable impacts of approximately 2,050 basis points and 1,660 basis points related to our retail and wholesale businesses, respectively, both largely driven by a decline in SG&A expenses as a percentage of net revenues driven by operating leverage on higher net revenues. The basis point improvement of our retail business also reflected an increase in our gross margin, while the improvement in our wholesale business reflected a decline in our gross margin. The overall improvement in operating margin also reflected approximately 370 basis points attributable to favorable channel mix and 40 basis points attributable to favorable foreign currency effects. These improvements in operating margin were partially offset by the unfavorable impact of approximately 60 basis points attributable to lower net favorable COVID-19-related bad debt expense adjustments recorded during the three months ended June 26, 2021 as compared to the prior fiscal year period.
Asia operating margin improved by 1,500 basis points, primarily due to the favorable impacts of approximately 1,060 basis points and 160 basis points related to our retail and wholesale businesses, respectively, both largely driven by a decline in SG&A expenses as a percentage of net revenues driven by operating leverage on higher net revenues, as well as an increase in our retail business' gross margin. The overall improvement in operating margin also reflected approximately 130 basis points attributable to favorable foreign currency effects, as well as approximately 110 basis points attributable to lower net non-routine inventory charges and impairment of assets recorded during the three months ended June 26, 2021 as compared to the prior fiscal year period. The remaining 40 basis point increase in operating margin related to our retail business, largelyimprovement was primarily driven by the increase in our gross profit margin, partially offset by an increase in SG&A expenses as a percentage of net revenues.
favorable channel mix.
Asia operating margin improved by 770 basis points, primarily due to the favorable impact of 630 basis points related to lower non-cash charges recorded in connection with the Way Forward Plan during the three months ended December 30, 2017 as compared to the prior fiscal year period, as well as favorable foreign currency effects of 130 basis points. The increase also reflected the favorable impact of 30 basis points related to our retail business, primarily driven by the increase in our gross profit margin, partially offset by an increase in SG&A expenses as a percentage of net revenues. These increases in operating margin were partially offset by a 20 basis point decline related to our wholesale business.
Unallocated corporate expenses increased by $14.8$25.0 million to $146.5$155.3 million during the three months ended December 30, 2017June 26, 2021. The increase in unallocated corporate expenses was due to higher compensation-related expenses of $8.4$32.1 million, higher impairment charges of $17.5 million, and higher marketing and advertising expenses of $2.5$4.6 million, partially offset by higher impairmentintercompany sourcing commission income of asset charges of $1.7$21.2 million (which is offset at the segment level and highereliminates in consolidation) and lower other expenses of $2.2$8.0 million.
Unallocated restructuring and other charges decreased by $43.4$6.3 million to $23.3$0.7 million during the three months ended December 30, 2017,June 26, 2021, as previously discussed above and in Note 8 to the accompanying consolidated financial statements.
Non-operating Expense, net. Income (Expense), Net. Non-operating expense,income (expense), net is comprised of interest expense, interest income, and other income (expense), net, which includes foreign currency gains (losses), interest expense, interest and other income, net, and equity in lossesincome (losses) from our equity-method investees. Non-operatinginvestees, and other non-operating expenses. During the three-month periods ended June 26, 2021 and June 27, 2020, we reported non-operating expense, net decreasedof $10.6 million and $4.6 million, respectively. The $6.0 million increase in non-operating expense, net was driven by:
•a $3.7 million increase in interest expense, primarily driven by $2.3 million to $2.9 millionthe higher average level of outstanding debt during the three months ended December 30, 2017June 26, 2021 as compared to the prior fiscal year period (see "Financial Condition and Liquidity — Cash Flows");
•a $1.2 million decline in other income, net, primarily driven by lower net foreign currency gains during the three months ended December 31, 2016,June 26, 2021 as compared to the increases in foreign currency gainsprior fiscal year period; and interest and other income, net were partially offset by the increases
•a $1.1 million decline in interest expense and equityincome, primarily driven by lower interest rates in losses of equity-method investees.financial markets.
Income Tax Provision.Benefit (Provision). The income tax provisionbenefit (provision) represents federal, foreign, state and local income taxes. The income tax provision and effective tax rate for the three months ended December 30, 2017 were $268.1 million and 143.9%, respectively, as compared to $41.8 million and 34.0%, respectively, for the three months ended December 31, 2016. The $226.3 million increase in the income tax provision was primarily due to one-time charges of $231.3 million recorded during the third quarter of Fiscal 2018 in connection with the TCJA (as discussed within "Recent Developments"), which negatively impacted our effective tax rate by 12,410 basis points, as well as the increase in pretax income. The increase in our effective tax rate also reflected the net favorable impact of 1,420 basis points, primarily due to the tax impact of earnings in lower taxed foreign jurisdictions versus the U.S. and foreign income tax reserve releases. The effective tax rate differs from the statutory tax rate due to the effect of state and local taxes, tax rates in foreign jurisdictions, and certain nondeductible expenses. Our effective tax rate will change from period to period based on various factors including, but not limited to, the geographic mix of earnings, the timing and amount of foreign dividends, enacted tax legislation, state and local taxes, tax audit findings and settlements, and the interaction of various global tax strategies.
We reported an income tax provision of $45.3 million and an effective tax rate of 21.6% for the three months ended June 26, 2021, as compared to an income tax benefit of $44.9 million and an effective tax rate of 26.0% for the three months ended June 27, 2020. The $90.2 million increase in our income tax provision was driven by the increase in our pretax income, partially offset by the 440 basis point decline in our reported effective tax rate. The decline in our effective tax rate was primarily driven by the absence of a prior year income tax benefit recorded in connection with expected net operating loss carrybacks allowed under the CARES Act which negatively impacted our effective tax rate during the prior fiscal year period. The decline in our effective tax rate also reflected the favorable impact of an income tax benefit associated with adjustments to deferred tax liabilities, partially offset by additional income tax reserves recorded for certain income tax audits and other unfavorable adjustments primarily related to non-deductible expenses and changes in valuation allowances. See Note 9 to the accompanying consolidated financial statements.
Net Income (Loss). We reported a net lossincome of $81.8$164.7 million for the three months ended December 30, 2017,June 26, 2021, as compared to a net incomeloss of $81.3$127.7 million for the three months ended December 31, 2016.June 27, 2020. The $163.1$292.4 million decreaseincrease in net income was primarily due to the increase in our operating income, tax provision, partially offset by the increase in operatingour income as previously discussed. Net loss for the three months ended December 30, 2017 reflected one-time charges of $231.3 million recorded in connection with the TCJA,tax provision, both as previously discussed. Our operating results during the three-month periodsthree months ended December 30, 2017 and December 31, 2016 were also negatively impacted byJune 26, 2021 included net restructuring-related charges impairment of assets, and certain other charges totaling $27.2$10.4 million, and $91.4 million, respectively, which had an after-tax effect of reducing net income by $17.9$7.7 million. During the three months ended June 27, 2020, our operating results included a net favorable impact of $6.1 million and $73.6 million, respectively.related to certain net benefits partially offset by restructuring-related charges, which had an after-tax effect of increasing net income by $5.5 million.
Net Income (Loss) per Diluted Share. We reported net income per diluted share of $2.18 for the three months ended June 26, 2021, as compared to a net loss per diluted share of $1.00$1.75 for the three months ended December 30, 2017, as compared to net income per diluted share of $0.98 for the three months ended December 31, 2016.June 27, 2020. The $1.98 per share decline was due to the lower level of net income, as previously discussed, and lower weighted-average diluted shares outstanding during the three months ended December 30, 2017 driven by our share repurchases during the last twelve months. Net loss per diluted share for the three months ended December 30, 2017 was negatively impacted by approximately $2.80 per share as a result of one-time charges recorded in connection with the TCJA, as previously discussed. Net income (loss) per diluted share for the three-month periods ended December 30, 2017 and December 31, 2016 were also negatively impacted by approximately $0.23 per share and $0.88 per share, respectively, as a result of restructuring-related charges, impairment of assets, and certain other charges, as previously discussed.
Nine Months Ended December 30, 2017 Compared to Nine Months Ended December 31, 2016
The following table summarizes our results of operations and expresses the percentage relationship to net revenues of certain financial statement captions. All percentages shown in the below table and the discussion that follows have been calculated using unrounded numbers.
|
| | | | | | | | | | | | | | | |
| | | Nine Months Ended | | | | |
| | | December 30,
2017 | | December 31,
2016 | | $ Change | | % / bps Change |
| | | (millions, except per share data) | | |
| Net revenues | | $ | 4,653.1 |
| | $ | 5,087.4 |
| | $ | (434.3 | ) | | (8.5 | %) |
Cost of goods sold(a) | | (1,809.9 | ) | | (2,255.4 | ) | | 445.5 |
| | (19.8 | %) |
| Gross profit | | 2,843.2 |
| | 2,832.0 |
| | 11.2 |
| | 0.4 | % |
| Gross profit as % of net revenues | | 61.1 | % | | 55.7 | % | | | | 540 bps |
|
Selling, general, and administrative expenses(a) | | (2,248.9 | ) | | (2,389.9 | ) | | 141.0 |
| | (5.9 | %) |
| SG&A expenses as % of net revenues | | 48.3 | % | | 47.0 | % | | | | 130 bps |
|
| Amortization of intangible assets | | (18.0 | ) | | (18.1 | ) | | 0.1 |
| | (0.9 | %) |
| Impairment of assets | | (24.8 | ) | | (56.7 | ) | | 31.9 |
| | (56.3 | %) |
Restructuring and other charges(a) | | (78.7 | ) | | (193.9 | ) | | 115.2 |
| | (59.4 | %) |
| Operating income | | 472.8 |
| | 173.4 |
| | 299.4 |
| | 172.7 | % |
| Operating income as % of net revenues | | 10.2 | % | | 3.4 | % | | | | 680 bps |
|
| Foreign currency gains | | 2.4 |
| | 0.8 |
| | 1.6 |
| | 201.1 | % |
| Interest expense | | (14.4 | ) | | (11.1 | ) | | (3.3 | ) | | 30.6 | % |
| Interest and other income, net | | 7.1 |
| | 5.7 |
| | 1.4 |
| | 23.0 | % |
| Equity in losses of equity-method investees | | (3.6 | ) | | (5.2 | ) | | 1.6 |
| | (31.1 | %) |
| Income before income taxes | | 464.3 |
| | 163.6 |
| | 300.7 |
| | 183.7 | % |
| Income tax provision | | (342.8 | ) | | (58.9 | ) | | (283.9 | ) | | 481.5 | % |
Effective tax rate(b) | | 73.8 | % | | 36.0 | % | | | | 3,780 bps |
|
| Net income | | $ | 121.5 |
| | $ | 104.7 |
| | $ | 16.8 |
| | 16.0 | % |
| Net income per common share: | | | | | | | | |
| Basic | | $ | 1.49 |
| | $ | 1.26 |
| | $ | 0.23 |
| | 18.3 | % |
| Diluted | | $ | 1.47 |
| | $ | 1.25 |
| | $ | 0.22 |
| | 17.6 | % |
| |
(a)
| Includes total depreciation expense of $201.4 million and $213.8 million for the nine-month periods ended December 30, 2017 and December 31, 2016, respectively. |
| |
(b)
| Effective tax rate is calculated by dividing the income tax provision by income before income taxes. |
Net Revenues. Net revenues decreased by $434.3 million, or 8.5%, to $4.653 billion during the nine months ended December 30, 2017 as compared to the nine months ended December 31, 2016, including net favorable foreign currency effects of $18.3 million. On a constant currency basis, net revenues decreased by $452.6 million, or 8.9%.
The following table summarizes the percentage change in our consolidated comparable store sales for the nine months ended December 30, 2017 as compared to the prior fiscal year period on both a reported and constant currency basis:
|
| | | | | | |
| | | As Reported | | Constant Currency |
| E-commerce comparable store sales | | (16 | %) | | (17 | %) |
| Comparable store sales excluding e-commerce | | (3 | %) | | (4 | %) |
| Total comparable store sales | | (6 | %) | | (6 | %) |
Our global average store count decreased by 2 stores and concession shops during the nine months ended December 30, 2017 compared with the nine months ended December 31, 2016, primarily due to global store closures primarily associated with the Way Forward Plan, largely offset by new concession shop openings in Asia.
Net revenues for our segments, as well as a discussion of the changes in each reportable segment's net revenues from the comparable prior year period, are provided below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended | | $ Change | | Foreign Exchange Impact | | $ Change | | % Change |
| | | December 30,
2017 | | December 31,
2016 | | As Reported | | | Constant Currency | | As Reported | | Constant Currency |
| | | (millions) | | | | |
| Net Revenues: | | | | | | | | | | | | | | |
| North America | | $ | 2,471.7 |
| | $ | 2,901.2 |
| | $ | (429.5 | ) | | $ | 1.6 |
| | $ | (431.1 | ) | | (14.8 | %) | | (14.9 | %) |
| Europe | | 1,165.0 |
| | 1,172.6 |
| | (7.6 | ) | | 28.4 |
| | (36.0 | ) | | (0.7 | %) | | (3.1 | %) |
| Asia | | 676.9 |
| | 662.8 |
| | 14.1 |
| | (11.8 | ) | | 25.9 |
| | 2.1 | % | | 3.9 | % |
| Other non-reportable segments | | 339.5 |
| | 350.8 |
| | (11.3 | ) | | 0.1 |
| | (11.4 | ) | | (3.2 | %) | | (3.2 | %) |
| Total net revenues | | $ | 4,653.1 |
| | $ | 5,087.4 |
| | $ | (434.3 | ) | | $ | 18.3 |
| | $ | (452.6 | ) | | (8.5 | %) | | (8.9 | %) |
North America net revenues — Net revenues decreased by $429.5 million, or 14.8%, during the nine months ended December 30, 2017 as compared to the nine months ended December 31, 2016, including net favorable foreign currency effects of $1.6 million. On a constant currency basis, net revenues decreased by $431.1 million, or 14.9%.
The $429.5 million net decline in North America net revenues was driven by:
a $311.7 million net decrease related to our North America wholesale business, largely driven by a strategic reduction of shipments (including within the off-price channel) and points of distribution in connection with our long-term growth strategy, the impact of brand discontinuances, and the continued challenging department store traffic trends; and
a $115.0 million net decrease in comparable store sales, primarily driven by lower sales from our Ralph Lauren e-commerce operations and certain of our retail stores due in part to a decline in traffic, as well as lower levels of promotional activity and a planned reduction in inventory in connection with our long-term growth strategy. The following table summarizes the percentage change in comparable store sales related to our North America retail business on both a reported and constant currency basis:
|
| | | | | | |
| | | As Reported | | Constant Currency |
| E-commerce comparable store sales | | (23 | %) | | (23 | %) |
| Comparable store sales excluding e-commerce | | (5 | %) | | (5 | %) |
| Total comparable store sales | | (9 | %) | | (9 | %) |
a $2.8 million net decrease in non-comparable store sales.
Europe net revenues — Net revenues decreased by $7.6 million, or 0.7%, during the nine months ended December 30, 2017 as compared to the nine months ended December 31, 2016, including net favorable foreign currency effects of $28.4 million. On a constant currency basis, net revenues decreased by $36.0 million, or 3.1%.
The $7.6 million net decline in Europe net revenues was driven by:
a $26.4 million net decrease in comparable store sales, including net favorable foreign currency effects of $9.3 million. Our comparable store sales decreased by $35.7 million on a constant currency basis, primarily driven by lower sales from certain of our retail stores due in part to lower levels of promotional activity in connection with our long-term growth strategy. The following table summarizes the percentage change in comparable store sales related to our Europe retail business on both a reported and constant currency basis:
|
| | | | | | |
| | | As Reported | | Constant Currency |
| E-commerce comparable store sales | | (2 | %) | | (6 | %) |
| Comparable store sales excluding e-commerce | | (5 | %) | | (8 | %) |
| Total comparable store sales | | (5 | %) | | (7 | %) |
a $15.9 million net decrease related to our Europe wholesale business, driven by the impact of brand discontinuances and a strategic reduction of shipments within the off-price channel in connection with our long-term growth strategy, partially offset by net favorable foreign currency effects of $15.2 million.
These declines were partially offset by a $34.7 million net increase in non-comparable store sales, primarily driven by new store openings and net favorable foreign currency effects of $3.9 million.
Asia net revenues — Net revenues increased by $14.1 million, or 2.1%, during the nine months ended December 30, 2017 as compared to the nine months ended December 31, 2016, including net unfavorable foreign currency effects of $11.8 million. On a constant currency basis, net revenues increased by $25.9 million, or 3.9%.
The $14.1 million net increase in Asia net revenues was driven by:
a $5.8 million net increase related to our Asia wholesale business, primarily driven by our expansion in Japan, partially offset by net unfavorable foreign currency effects of $0.6 million; and
a $4.8 million net increase in comparable store sales, including net unfavorable foreign currency effects of $6.9 million. Our comparable store sales increased by $11.7 million on a constant currency basis, primarily driven by higher sales from certain of our retail locations due in part to improved conversion, partially offset by the impact of lower levels of promotional activity in connection with our long-term growth strategy. The following table summarizes the percentage change in comparable store sales related to our Asia retail business on both a reported and constant currency basis:
|
| | | | | | |
| | | As Reported | | Constant Currency |
Total comparable store sales(a) | | 1 | % | | 3 | % |
| |
(a)
| Comparable store sales for our Asia segment were comprised primarily of sales made through our stores and concession shops. |
a $3.5 million net increase in non-comparable store sales, primarily driven by new store openings, partially offset by net unfavorable foreign currency effects of $4.3 million.
Gross Profit. Gross profit increased by $11.2 million, or 0.4%, to $2.843 billion for the nine months ended December 30, 2017. Gross profit during the nine-month periods ended December 30, 2017 and December 31, 2016 reflected non-cash inventory-related charges of $1.3 million and $149.4 million, respectively, recorded in connection with the Way Forward Plan. The increase in gross profit also included a net favorable foreign currency effect of $10.4 million. Gross profit as a percentage of net revenues increased to 61.1% for the nine months ended December 30, 2017 from 55.7% for the nine months ended December 31, 2016. The 540 basis point increase was primarily driven by the lower non-cash inventory-related charges recorded in connection with the Way Forward Plan during the nine months ended December 30, 2017 as compared to the comparable prior year period, lower levels of promotional activity in connection with our long-term growth strategy, favorable geographic and channel mix, and lower sourcing costs.
Selling, General, and Administrative Expenses. SG&A expenses decreased by $141.0 million, or 5.9%, to $2.249 billion for the nine months ended December 30, 2017. This decrease included a net unfavorable foreign currency effect of $1.7 million. SG&A expenses as a percentage of net revenues increased to 48.3% for the nine months ended December 30, 2017 from 47.0% for the nine months ended December 31, 2016. The 130 basis point increase was primarily due to operating deleverage on lower net revenues, as previously discussed, and the unfavorable impact attributable to geographic and channel mix, as a greater portion of our revenue was generated by our international retail businesses (which typically carry higher operating expense margins). These increases were partially offset by our operational discipline and cost savings associated with our restructuring activities, as well as the favorable impact related to Mr. Ralph Lauren electing to forgo his Fiscal 2017 executive incentive bonus.
The $141.0 million net decline in SG&A expenses was driven by:
|
| | | | |
| | | Nine Months Ended December 30, 2017 Compared to Nine Months Ended December 31, 2016 |
| | | (millions) |
| SG&A expense category: | | |
Compensation-related expenses(a) | | $ | (40.3 | ) |
| Depreciation expense | | (22.7 | ) |
| Shipping and handling costs | | (16.3 | ) |
| Rent and occupancy expenses | | (16.2 | ) |
| Consulting fees | | (11.6 | ) |
| Marketing and advertising expenses | | (9.9 | ) |
| Selling-related expenses | | (9.1 | ) |
| Other | | (14.9 | ) |
| Total change in SG&A expenses | | $ | (141.0 | ) |
| |
(a)
| Includes the favorable impact of $7.6 million related to Mr. Ralph Lauren electing to forgo his Fiscal 2017 executive incentive bonus. |
Amortization of Intangible Assets. Amortization of intangible assets decreased slightly by $0.1 million, or 0.9%, to $18.0 million during the nine months ended December 30, 2017 due to favorable foreign currency effects.
Impairment of Assets. During the nine-month periods ended December 30, 2017 and December 31, 2016, we recorded non-cash impairment charges of $14.0 million and $56.7 million, respectively, to write off certain fixed assets related to our domestic and international stores, shop-within-shops, and corporate offices in connection with the Way Forward Plan. Additionally, during the nine months ended December 30, 2017, we recorded non-cash impairment charges of $10.8 million to write off certain fixed assets related to underperforming stores and shop-within-shops as a result of our on-going store portfolio evaluation. See Note 7 to the accompanying consolidated financial statements.
Restructuring and Other Charges. During the nine-month periods ended December 30, 2017 and December 31, 2016, we recorded restructuring charges of $63.7 million and $193.9 million, respectively, in connection with our restructuring plans, consisting of severance and benefit costs, lease termination and store closure costs, other cash charges, and non-cash accelerated stock-based compensation expense. In addition, during the nine months ended December 30, 2017, we recorded net other charges of $15.0 million primarily related to depreciation expense associated with our former Polo store at 711 Fifth Avenue in New York City recorded after the store closed during the first quarter of Fiscal 2018 in connection with the Way Forward Plan, the departure of Mr. Stefan Larsson, and the reversal of reserves associated with the settlement of certain non-income tax issues. See Note 8 to the accompanying consolidated financial statements.
Operating Income. Operating income increased to $472.8 million for the nine months ended December 30, 2017, from $173.4 million for the nine months ended December 31, 2016. Our operating results during the nine-month periods ended December 30, 2017 and December 31, 2016 were negatively impacted by restructuring-related charges, impairment of assets, and certain other charges totaling $104.8 million and $400.0 million, respectively, as previously discussed. The increase in operating income also included a net favorable foreign currency effect of $8.7 million. Operating income as a percentage of net revenues increased to 10.2% for the nine months ended December 30, 2017 from 3.4% for the nine months ended December 31, 2016. The 680 basis point increase was primarily driven by the net decline in restructuring-related charges, impairment of assets, and certain other charges and the increase in our gross profit margin, partially offset by the increase in SG&A expenses as a percentage of net revenues, all as previously discussed.
Operating income (loss) and margin for our segments, as well as a discussion of the changes in each reportable segment's operating margin from the comparable prior year period, are provided below:
|
| | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended | | | | |
| | December 30, 2017 | | December 31, 2016 | | | | |
| | Operating Income (Loss) | | Operating Margin | | Operating
Income (Loss) | | Operating Margin | | $ Change | | Margin Change |
| | (millions) | | | | (millions) | | | | (millions) | | |
| Segment: | | | | | | | | | | | | |
| North America | | $ | 549.3 |
| | 22.2% | | $ | 574.6 |
| | 19.8% | | $ | (25.3 | ) | | 240 bps |
| Europe | | 273.6 |
| | 23.5% | | 239.2 |
| | 20.4% | | 34.4 |
| | 310 bps |
| Asia | | 101.0 |
| | 14.9% | | (80.3 | ) | | (12.1%) | | 181.3 |
| | 2,700 bps |
| Other non-reportable segments | | 96.9 |
| | 28.6% | | 91.0 |
| | 25.9% | | 5.9 |
| | 270 bps |
| | | 1,020.8 |
| | | | 824.5 |
| | | | 196.3 |
| | |
| Unallocated corporate expenses | | (469.3 | ) | | | | (457.2 | ) | | | | (12.1 | ) | | |
| Unallocated restructuring and other charges | | (78.7 | ) | | | | (193.9 | ) | | | | 115.2 |
| | |
| Total operating income | | $ | 472.8 |
| | 10.2% | | $ | 173.4 |
| | 3.4% | | $ | 299.4 |
| | 680 bps |
North America operating margin improved by 240 basis points, primarily due to the favorable impact of 140 basis points related to our retail business, largely driven by the increase in our gross profit margin and decline in SG&A expenses as a percentage of net revenues. The increase also reflected the favorable impact of 100 basis points related to lower non-cash charges recorded in connection with the Way Forward Plan during the nine months ended December 30, 2017 as compared to the prior fiscal year period. Our wholesale business did not have a meaningful impact on our North America operating margin, as the improved gross margin was offset by operating expense deleverage on lower net revenues.
Europe operating margin improved by 310 basis points, primarily due to the favorable impact of 180 basis points related to our retail business, largely driven by the increase in our gross profit margin, partially offset by an increase in SG&A expenses as a percentage of net revenues. The increase also reflected the favorable impact of 120 basis points related to lower non-cash charges recorded in connection with the Way Forward Plan during the nine months ended December 30, 2017 as compared to the prior fiscal year period, as well as the favorable impact of 60 basis points related to our wholesale business, largely driven by a decrease in SG&A expenses as a percentage of net revenues. These increases in operating margin were partially offset by unfavorable foreign currency effects of 50 basis points.
Asia operating margin improved by 2,700 basis points, primarily due to the favorable impact of 2,160 basis points related to lower non-cash charges recorded in connection with the Way Forward Plan during the nine months ended December 30, 2017 as compared to the prior fiscal year period. The increase also reflected the favorable impact of 420 basis points related to our retail business, largely driven by a decline in SG&A expenses as a percentage of net revenues and the increase in our gross profit margin. The improvement also reflected favorable foreign currency effects of 150 basis points. These increases in operating margin were partially offset by a 30 basis point decline related to our wholesale business.
Unallocated corporate expenses increased by $12.1 million to $469.3 million during the nine months ended December 30, 2017. The increase in unallocated corporate expenses was primarily due to lower intercompany sourcing commission income of $28.0 million (which is offset at the segment level and eliminates in consolidation) driven by the planned reduction in inventory, and higher impairment of asset charges of $10.4 million, partially offset by lower marketing and advertising expenses of $12.6 million, lower consulting fees of $6.3 million, lower compensation-related expenses of $5.9 million, and lower other expenses of $1.5 million.
Unallocated restructuring and other charges decreased by $115.2 million to $78.7 million during the nine months ended December 30, 2017, as previously discussed and in Note 8 to the accompanying consolidated financial statements.
Non-operating Expense, net. Non-operating expense, net decreased by $1.3 million to $8.5 million during the nine months ended December 30, 2017 as compared to the nine months ended December 31, 2016, as the decline in equity in losses of equity-method investees and increases in foreign currency gains and interest and other income, net were largely offset by the increase in interest expense.
Income Tax Provision. The income tax provision and effective tax rate for the nine months ended December 30, 2017 were $342.8 million and 73.8%, respectively, as compared to $58.9 million and 36.0%, respectively, for the nine months ended December 31, 2016. The $283.9 million increase in the income tax provision was primarily due to one-time charges of $231.3 million recorded during the third quarter of Fiscal 2018 in connection with the TCJA (as discussed within "Recent Developments"), which negatively impacted our effective tax rate by 4,980 basis points, as well as the increase in pretax income. The increase in our effective tax rate also reflected the net favorable impact of 1,200 basis points, primarily due to the tax impact of earnings in lower taxed foreign jurisdictions versus the U.S. and the absence of (i) income tax reserve adjustments largely associated with an income tax settlement and certain income tax audits, and (ii) valuation allowances on and adjustments to deferred tax assets, both of which were recorded during the nine months ended December 31, 2016. The 1,200 basis points also reflected the unfavorable tax impact of the adoption of Accounting Standards Update No. 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). See Note 4 to the accompanying consolidated financial statements for additional information relating to our adoption of ASU 2016-09.
Net Income. Net income increased to $121.5 million for the nine months ended December 30, 2017, from $104.7 million for the nine months ended December 31, 2016. The $16.8 million increase in net income was primarily due to the $299.4 million increase in operating income, partially offset by the $283.9 million increase in our income tax provision, as previously discussed. Net income for the nine months ended December 30, 2017 reflected one-time charges of $231.3 million recorded in connection with the TCJA, as previously discussed. Our operating results during the nine-month periods ended December 30, 2017 and December 31, 2016 were also negatively impacted by restructuring-related charges, impairment of assets, and certain other charges totaling $104.8 million and $400.0 million, respectively, which had an after-tax effect of reducing net income by $69.8 million and $298.0 million, respectively.
Net Income per Diluted Share. Net income per diluted share increased to $1.47 per share for the nine months ended December 30, 2017, from $1.25 for the nine months ended December 31, 2016. The $0.22$3.93 per share increase was due todriven by the higher level of net income, as previously discussed, and lower weighted-average diluted shares outstanding during the nine months ended December 30, 2017 driven by our share repurchases during the last twelve months. Net income per diluted share for the nine months ended December 30, 2017 was negatively impacted by approximately $2.80 per share as a result of one-time charges recorded in connection with the TCJA, as previously discussed. Net income per diluted share for the nine-month periodsthree months ended December 30, 2017 and December 31, 2016 were alsoJune 26, 2021 was negatively impacted by $0.85$0.11 per share and $3.57 per share, respectively, as a result ofrelated to net restructuring-related charges impairment of assets, and certain other charges, as previously discussed. During the three months ended June 27, 2020, net loss per diluted share included a net favorable impact of $0.07 per share related to certain net benefits partially offset by restructuring-related charges, as previously discussed.
FINANCIAL CONDITION AND LIQUIDITY
Financial Condition
The following table presents our financial condition as of December 30, 2017June 26, 2021 and April 1, 2017:March 27, 2021:
|
| | | | | | | | | | | | |
| | | December 30,
2017 | | April 1,
2017 | | $
Change |
| | | (millions) |
| Cash and cash equivalents | | $ | 1,175.7 |
| | $ | 668.3 |
| | $ | 507.4 |
|
| Short-term investments | | 862.3 |
| | 684.7 |
| | 177.6 |
|
Non-current investments(a) | | 83.3 |
| | 21.4 |
| | 61.9 |
|
Current portion of long-term debt(b) | | (298.3 | ) | | — |
| | (298.3 | ) |
Long-term debt(b) | | (290.3 | ) | | (588.2 | ) | | 297.9 |
|
Net cash and investments(c) | | $ | 1,532.7 |
| | $ | 786.2 |
| | $ | 746.5 |
|
| Equity | | $ | 3,407.5 |
| | $ | 3,299.6 |
| | $ | 107.9 |
|
| | | | | | | | | | | | | | | | | | | | |
| | June 26,
2021 | | March 27,
2021 | | $
Change |
| | | (millions) |
| Cash and cash equivalents | | $ | 2,596.4 | | | $ | 2,579.0 | | | $ | 17.4 | |
| Short-term investments | | 368.0 | | | 197.5 | | | 170.5 | |
| | | | | | |
| | | | | | |
Current portion of long-term debt(a) | | (498.7) | | | — | | | (498.7) | |
Long-term debt(a) | | (1,135.0) | | | (1,632.9) | | | 497.9 | |
Net cash and investments(b) | | $ | 1,330.7 | | | $ | 1,143.6 | | | $ | 187.1 | |
| Equity | | $ | 2,717.7 | | | $ | 2,604.4 | | | $ | 113.3 | |
| |
(a)
| Recorded within other non-current assets in our consolidated balance sheets. |
| |
(b)
| See Note 10 to the accompanying consolidated financial statements for discussion of the carrying value of our debt. |
| |
(c)
| "Net cash and investments" is defined as cash and cash equivalents, plus short-term and non-current investments, less total debt. |
(a)See Note 10 to the accompanying consolidated financial statements for discussion of the carrying values of our debt.
(b)"Net cash and investments" is defined as cash and cash equivalents, plus investments, less total debt.
The increase in our net cash and investments position at December 30, 2017June 26, 2021 as compared to April 1, 2017March 27, 2021 was primarily due to our operating cash flows of $951.1$247.6 million, partially offset by our use of cash to support Class A common stock repurchases of $28.8 million, representing withholdings in satisfaction of tax obligations for stock-based compensation awards, and to invest in our business through $123.0$28.2 million in capital expenditures and to make dividend payments of $121.7 million.expenditures.
The increase in our equity was primarily attributable to our comprehensive income, partially offset by our dividends declared and the net impact of stock-based compensation arrangements partially offset by our dividends declared during the ninethree months ended December 30, 2017.June 26, 2021.
Cash Flows
The following table details our cash flows for the nine-monththree-month periods ended December 30, 2017June 26, 2021 and December 31, 2016:June 27, 2020:
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | |
| | | June 26,
2021 | | June 27,
2020 | | $
Change |
| | | (millions) |
| Net cash provided by (used in) operating activities | | $ | 247.6 | | | $ | (70.3) | | | $ | 317.9 | |
| Net cash provided by (used in) investing activities | | (199.4) | | | 220.7 | | | (420.1) | |
| Net cash provided by (used in) financing activities | | (34.3) | | | 673.1 | | | (707.4) | |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | | 3.3 | | | 7.6 | | | (4.3) | |
| Net increase in cash, cash equivalents, and restricted cash | | $ | 17.2 | | | $ | 831.1 | | | $ | (813.9) | |
|
| | | | | | | | | | | | |
| | | Nine Months Ended | | |
| | | December 30,
2017 | | December 31,
2016 | | $
Change |
| | | (millions) |
| Net cash provided by operating activities | | $ | 951.1 |
| | $ | 850.7 |
| | $ | 100.4 |
|
| Net cash provided by (used in) investing activities | | (317.8 | ) | | 16.3 |
| | (334.1 | ) |
| Net cash used in financing activities | | (158.7 | ) | | (369.5 | ) | | 210.8 |
|
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | | 36.8 |
| | (29.0 | ) | | 65.8 |
|
| Net increase in cash, cash equivalents, and restricted cash | | $ | 511.4 |
| | $ | 468.5 |
| | $ | 42.9 |
|
Net Cash Provided by (Used in) Operating Activities. Net cash provided by operating activities increased to $951.1was $247.6 million during the ninethree months ended December 30, 2017,June 26, 2021, as compared to $850.7net cash used in operating activities of $70.3 million during the ninethree months ended December 31, 2016.June 27, 2020. The $100.4$317.9 million net increase in cash provided by operating activities was due to an increase in net income before non-cash charges, partially offset by a net favorableunfavorable change related to our operating assets and liabilities, including our working capital, as compared to the prior fiscal year period, partially offset by a decline inperiod.
The net income before non-cash charges. The decline in net income before non-cash charges reflected a one-time charge of $215.5 million recorded in connection with the TCJA's mandatory transition tax. This charge, which is expectedunfavorable change related to be paid over an eight-year period net of previously available foreign tax credit carryovers (see "Contractual and Other Obligations" below), did not impact our cash flows from operating activities during the nine months ended December 30, 2017 as reflected in the offsetting favorable change in our income taxes payable. Excluding the impact of this one-time charge, our operating assets and liabilities, including our working capital, increasedwas primarily due to:driven by:
favorable changes•an unfavorable change related to our accounts receivable, largely driven by an increase in wholesale revenue during the first quarter of Fiscal 2022 as compared to the prior year period;
•a year-over-year increase in our (i) otherinventory levels largely to support revenue growth; and
•an unfavorable change in our income tax receivables and payables, (excluding the impact of the one-time mandatory transition tax) and (ii) prepaid expenses and other current assets, both largely driven by the timing of cash collectionsreceipts and payments; and
a decline in our inventory levels, largely driven by our inventory management initiatives, lower sourcing costs, and the timing of inventory receipts.payments, respectively.
These increasesdecreases related to our operating assets and liabilities were partially offset by an unfavorableby:
•a favorable change in our accounts receivable,payable, largely driven by an increase in our expenses during the timingfirst quarter of cash collections.Fiscal 2022 as compared to the prior year period.
Net Cash Provided by (Used in) Investing Activities. Net cash used in investing activities was $317.8$199.4 million during the ninethree months ended December 30, 2017,June 26, 2021, as compared to cash provided by investing activities of $220.7 million during the three months ended June 27, 2020. The $420.1 million net decrease in cash provided by investing activities was primarily driven by:
•a $408.9 million decrease in proceeds from sales and maturities of investments, less purchases of investments. During the three months ended June 26, 2021, we made net purchases of investments of $170.6 million, as compared to receiving net proceeds from sales and maturities of investments of $238.3 million during the three months ended June 27, 2020; and
•a $6.9 million increase in capital expenditures. During the three months ended June 26, 2021, we spent $28.2 million on capital expenditures, as compared to $21.3 million during the three months ended June 27, 2020. Our capital expenditures during the three months ended June 26, 2021 primarily related to international store openings and renovations, as well as enhancements to our information technology systems.
Over the course of Fiscal 2022, we continue to expect to spend approximately $250 million to $275 million on capital expenditures, in-line with our pre-pandemic levels, primarily related to store openings and renovations, as well as further investment in our digital infrastructure.
Net Cash Provided by (Used in) Financing Activities. Net cash used in financing activities was $34.3 million during the three months ended June 26, 2021, as compared to net cash provided by investingfinancing activities of $16.3$673.1 million during the ninethree months ended December 31, 2016.June 27, 2020. The $334.1 million net increase in cash used in investing activities was primarily driven by:
a $434.5 million increase in purchases of investments, less proceeds from sales and maturities of investments. During the nine months ended December 30, 2017, we made net investment purchases of $190.2 million, as compared to net investment sales of $244.3 million during the nine months ended December 31, 2016.
This increase in cash used in investing activities was partially offset by:
a $102.5 million decline in capital expenditures. During the nine months ended December 30, 2017, we spent $123.0 million on capital expenditures, as compared to $225.5 million during the nine months ended December 31, 2016. Our capital expenditures during the nine months ended December 30, 2017 primarily related to our global retail and
department store renovations, new store openings, and the continued enhancements to our global information technology systems.
We currently expect to spend approximately $200 million in capital expenditures during Fiscal 2018, lower than our previous estimate of $225 million, as we shift certain capital investments into Fiscal 2019 and focus on consumer-facing initiatives that have demonstrated a proof of concept and healthy rates of return.
Net Cash Used in Financing Activities. Net cash used in financing activities was $158.7 million during the nine months ended December 30, 2017, as compared to $369.5 million during the nine months ended December 31, 2016. The $210.8$707.4 million net decrease in cash used inprovided by financing activities was primarily driven by:
•a $116.1$766.9 million declinedecrease in cash used to repayproceeds from the issuance of debt, less proceeds from debt issuances. Werepayments. During the three months ended June 26, 2021, we did not issue or repay any debt during the nine months ended December 30, 2017.debt. On a comparative basis, during the ninethree months ended December 31, 2016,June 27, 2020, we made $90.0 millionreceived $1.242 billion in net repayments relatedproceeds from the issuance of our 1.700% unsecured notes and 2.950% unsecured senior notes, a portion of which was used to our commercial paper note issuances and repayments and repaid $26.1repay $475.0 million of borrowings previously outstanding under our credit facilities; andfacilities.
a $99.1 million declineThis decrease in cash usedprovided by financing activities was partially offset by:
•a $49.8 million decrease in payments of dividends due to repurchase sharesthe temporary suspension of our Class A common stock. During the nine months ended December 30, 2017, $15.9 millionquarterly cash dividend program as a preemptive action to preserve cash and strengthen our liquidity position, as discussed in shares of Class A common stock were surrendered or withheld in satisfaction of withholding taxes in connection with the vesting of awards under our long-term stock incentive plans. On a comparative basis, during the nine months ended December 31, 2016, we used $100.0 million to repurchase shares of Class A common stock pursuant to our common stock repurchase program, and an additional $15.0 million in shares of Class A common stock were surrendered or withheld for taxes."Dividends" below.
Sources of Liquidity
Our primary sources of liquidity are the cash flows generated from our operations, our available cash and cash equivalents and short-term investments, availability under our credit and overdraft facilities our issuances ofand commercial paper notes,program, and other available financing options.
During the ninethree months ended December 30, 2017,June 26, 2021, we generated $951.1$247.6 million of net cash flows from our operations. As of December 30, 2017,June 26, 2021, we had $2.038$2.964 billion in cash, cash equivalents, and short-term investments, of which $1.203$1.090 billion were held by our subsidiaries domiciled outside the U.S. We are not dependent on foreign cash to fund our domestic operations. Given recent changesUndistributed foreign earnings that were subject to the taxationTax Cuts and Jobs Act's one-time mandatory transition tax as of December 31, 2017 are not considered to be permanently reinvested and may be repatriated to the U.S. in the future with minimal or no additional U.S. taxation. We intend to permanently reinvest undistributed foreign earnings in connection withgenerated after December 31, 2017 that were not subject to the TCJA (as discussed within "Recent Developments"), we are exploring repatriation possibilities. Ifone-time mandatory transition tax. However, if our plans change and we choose to repatriate any fundspost-2017 earnings to the U.S. in the future, we could potentiallywould be subject to applicable state, local, and/orU.S. and foreign taxes. Any further changes in tax regulations could potentially change our future intentions regarding the reinvestment of our foreign earnings and we continue to monitor governing tax rules, as well as our cash needs.
The following table presents ourthe total availability, borrowings outstanding, and remaining availability under our credit and overdraft facilities and Commercial Paper Program as of December 30, 2017:June 26, 2021:
|
| | | | | | | | | | | | |
| | | December 30, 2017 |
Description(a) | | Total Availability | | Borrowings Outstanding | | Remaining Availability |
| | | (millions) |
Global Credit Facility and Commercial Paper Program(b) | | $ | 500 |
| | $ | 9 |
| (c) | $ | 491 |
|
| Pan-Asia Credit Facilities | | 51 |
| | — |
| | 51 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | June 26, 2021 |
Description(a) | | Total
Availability | | Borrowings
Outstanding | | Remaining
Availability |
| | | (millions) |
Global Credit Facility and Commercial Paper Program(b) | | $ | 500 | | | $ | 9 | | (c) | $ | 491 | |
| Pan-Asia Credit Facilities | | 34 | | | — | | | 34 | |
| Japan Overdraft Facility | | 45 | | | — | | | 45 | |
| |
(a)
| As defined in Note 10 to the accompanying consolidated financial statements. |
| |
(b)
| Borrowings under the Commercial Paper Program are supported by the Global Credit Facility. Accordingly, we do not expect combined borrowings outstanding under the Commercial Paper Program and the Global Credit Facility to exceed $500 million. |
| |
(c)
| Represents outstanding letters of credit for which we were contingently liable under the Global Credit Facility as of December 30, 2017. |
(a)As defined in Note 10 to the accompanying consolidated financial statements.
(b)Borrowings under the Commercial Paper Program are supported by the Global Credit Facility. Accordingly, we do not expect combined borrowings outstanding under the Commercial Paper Program and the Global Credit Facility to exceed $500 million.
(c)Represents outstanding letters of credit for which we were contingently liable under the Global Credit Facility as of June 26, 2021.
We believe that ourthe Global Credit Facility is adequately diversified with no undue concentration in any one financial institution. In particular, as of December 30, 2017,June 26, 2021, there were nineeight financial institutions participating in the Global Credit Facility, with no one participant maintaining a maximum commitment percentage in excess of 20%. In accordance with the terms of the agreement, we have the ability to expand our borrowing availability under the Global Credit Facility to $1 billion through the full term of the facility, subject to the agreement of one or more new or existing lenders under the facility to increase their commitments.
Borrowings under the Pan-Asia Credit Facilities and Japan Overdraft Facility (collectively, the "Pan-Asia Borrowing Facilities") are guaranteed by the parent company and are granted at the sole discretion of the participating regional branches of JPMorgan Chase (the "Banks")banks (as described within Note 10 to the accompanying consolidated financial statements), subject to availability of the Banks'respective banks' funds and satisfaction of certain regulatory requirements. We have no reason to believe that the participating institutions will be unable to fulfill their obligations to provide financing in accordance with the terms of the Global Credit Facility and the Pan-Asia CreditBorrowing Facilities in the event of our election to draw additional funds in the foreseeable future.
Our sources of liquidity are used to fund our ongoing cash requirements, including working capital requirements, global retail store and e-commercedigital commerce expansion, construction and renovation of shop-within-shops, investment in infrastructure, including technology, acquisitions, joint ventures, payment of dividends, debt repayments, Class A common stock repurchases, settlement of contingent liabilities (including uncertain tax positions), and other corporate activities, including our restructuring actions. We believe that our existing sources of cash, the availability under our credit facilities, and our ability to access capital markets will be sufficient to support our operating, capital, and debt service requirements for the foreseeable future, the ongoing development of our businesses, and our plans for further business expansion. However, prolonged periods of adverse economic conditions or business disruptions in any of our key regions, or a combination thereof, such as those resulting from the COVID-19 pandemic, could impede our ability to pay our obligations as they become due or return value to our shareholders, as well as delay previously planned expenditures related to our operations.
See Note 10 to the accompanying consolidated financial statements and Note 1211 of the Fiscal 20172021 10-K for detailed disclosure of the terms and conditions of our credit facilities.
Common Stock Repurchase Program
As of December 30, 2017, the remaining availability under our Class A common stock repurchase program was approximately $100 million. Repurchases of shares of Class A common stock are subject to overall business and market conditions. We currently do not expect to repurchase shares under our Class A common stock repurchase program during Fiscal 2018, as we evaluate the cash needs of our business, the sector dynamics, and recent changes to U.S. tax law.
See Note 14 to the accompanying consolidated financial statements for additional information relating to our Class A common stock repurchase program.
Dividends
Since 2003, we have maintained, and intend to continue to maintain, a regular quarterly cash dividend program on our common stock. However, any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on our results of operations, cash requirements, financial condition, and other factors that the Board of Directors may deem relevant.
See Note 14 to the accompanying consolidated financial statements for additional information relating to our quarterly cash dividend program.credit facilities.
Debt and Covenant Compliance
In September 2013,August 2018, we completed a registered public debt offering and issued $300$400 million aggregate principal amount of unsecured senior notes due September 26, 2018,15, 2025, which bear interest at a fixed rate of 2.125%3.750%, payable semi-annually (the "2.125%"3.750% Senior Notes"). In August 2015,June 2020, we completed a secondanother registered public debt offering and issued an additional $300$500 million aggregate principal amount of unsecured senior notes due August 18, 2020,June 15, 2022, which bear interest at a fixed rate of 2.625%1.700%, payable semi-annually (the "2.625%"1.700% Senior Notes"), and $750 million aggregate principal amount of unsecured senior notes due June 15, 2030, which bear interest at a fixed rate of 2.950%, payable semi-annually (the "2.950% Senior Notes").
The indenture and supplemental indentures governing the 2.125%3.750% Senior Notes, 1.700% Senior Notes, and 2.625%2.950% Senior Notes (as supplemented, the "Indenture") contain certain covenants that restrict our ability, subject to specified exceptions, to incur certain liens; enter into sale and leaseback transactions; consolidate or merge with another party; or sell, lease, or convey all or substantially all of our property or assets to another party. However, the Indenture does not contain any financial covenants.
We have a credit facility that provides for a $500 million senior unsecured revolving line of credit through August 12, 2024, which is also used to support the issuance of letters of credit and the maintenance of the Commercial Paper Program (the "Global Credit Facility"). Borrowings under the Global Credit Facility may be denominated in U.S. Dollars and other currencies, including Euros, Hong Kong Dollars, and Japanese Yen. We have the ability to expand the borrowing availability under the Global Credit Facility to $1 billion, subject to the agreement of one or more new or existing lenders under the facility to increase their commitments. There are no mandatory reductions in borrowing ability throughout the term of the Global Credit Facility.
The Global Credit Facility contains a number of covenants, as described in Note 10 to the accompanying consolidated financial statements. As of December 30, 2017,June 26, 2021, no Event of Default (as such term is defined pursuant to the Global Credit Facility) has occurred under our Global Credit Facility. The Pan-Asia CreditBorrowing Facilities do not contain any financial covenants.
See Note 10 to the accompanying consolidated financial statements and Note 1211 of the Fiscal 20172021 10-K for additional information relating to our debt and covenant compliance.
Common Stock Repurchase Program
On May 13, 2019, our Board of Directors approved an expansion of our existing common stock repurchase program that allowed us to repurchase up to an additional $600 million of Class A common stock. As of June 26, 2021, the remaining availability under our Class A common stock repurchase program was approximately $580 million. Repurchases of shares of Class A common stock are subject to certain restrictions under our Global Credit Facility and more generally overall business and market conditions. Accordingly, in response to business disruptions related to the COVID-19 pandemic, effective beginning in the first quarter of Fiscal 2021 we temporarily suspended our common stock repurchase program as a preemptive action to preserve cash and strengthen our liquidity position.
See Note 14 to the accompanying consolidated financial statements for additional information relating to our Class A common stock repurchase program.
Dividends
Except as discussed below, we have maintained a regular quarterly cash dividend program on our common stock since 2003.
In response to business disruptions related to the COVID-19 pandemic, effective beginning in the first quarter of Fiscal 2021 we temporarily suspended our quarterly cash dividend program as a preemptive action to preserve cash and strengthen our liquidity position. On May 19, 2021, our Board of Directors approved the reinstatement of our quarterly cash dividend program at the pre-pandemic amount of $0.6875 per share. The first quarterly dividend declared since such reinstatement was payable to shareholders of record at the close of business on June 25, 2021 and was paid on July 9, 2021.
We intend to continue to pay regular dividends on our outstanding common stock. However, any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on our results of operations, cash requirements, financial condition, and other factors that the Board of Directors may deem relevant, including economic and market conditions.
See Note 14 to the accompanying consolidated financial statements for additional information relating to our quarterly cash dividend program.
Contractual and Other Obligations
In connection withThere have been no material changes to our contractual and other obligations as disclosed in our Fiscal 2021 10-K, other than those which occur in the TCJA's provision that subjects previously deferred foreign earnings to a one-time mandatory transition tax (as described in "Recent Developments"), we recorded a chargeordinary course of $215.5 million within our income tax provision during the third quarter of Fiscal 2018, together with a corresponding current and non-current income tax payable obligation within our consolidated balance sheets based upon the estimated timing of payments. This obligation, which was recorded on a provisional basis and is subject to change, is expected to be paid over an eight-year period as follows:
|
| | | | |
| | | Mandatory Transition
Tax Payments(a) |
| | | (millions) |
| Fiscal 2019 | | $ | 27.3 |
|
| Fiscal 2020 | | 14.0 |
|
| Fiscal 2021 | | 14.0 |
|
| Fiscal 2022 | | 14.0 |
|
| Fiscal 2023 | | 23.2 |
|
| Fiscal 2024 and thereafter | | 85.5 |
|
| Total mandatory transition tax payments | | $ | 178.0 |
|
| |
(a)
| The expected mandatory transition tax payments have been presented net of previously available foreign tax credit carryovers of $37.5 million, which we expect to utilize to partially reduce this tax obligation. |
business. Refer to the"Financial Condition and Liquidity — Contractual and Other Obligations"section of the MD&A in our Fiscal 20172021 10-K for detailed disclosure of our other commitmentscontractual and contractualother obligations as of April 1, 2017.March 27, 2021.
MARKET RISK MANAGEMENT
As discussed in Note 1413 of the Fiscal 20172021 10-K and Note 12 to the accompanying consolidated financial statements, we are exposed to a variety of levels and types of risks, including the impact of changes in foreign currency exchange rates relating toon foreign currency-denominated balances, certain anticipated cash flows fromof our international operations, and possible declines in the value of reported net assets of our foreign operations, as well as changes in the fair value of our fixed-rate debt obligations relating to changesfluctuations in benchmark interest rates. Consequently, at times,Accordingly, in the normal course of business we employassess such risks and, in accordance with our established policies and procedures, including themay use of derivative financial instruments to manage such risks.and mitigate them. We do not enter into derivative transactionsuse derivatives for speculative or trading purposes.
As a result of theGiven our use of derivative instruments, we are exposed to the risk that the counterparties to oursuch contracts will fail to meet their contractual obligations. To mitigate thissuch counterparty credit risk, we have ait is our policy ofto only enteringenter into contracts with carefully selected financial institutions based upon an evaluation of their credit ratings and certain other factors, adhering to established limits for credit exposure. Our established policies and procedures for mitigating credit risk from derivative transactions include ongoing review and assessment of the creditworthiness of our counterparties. We also enter into master netting arrangements with counterparties, when possible, to further mitigate credit risk associated with our derivative instruments.risk. As a result of the above considerations, we do not believe that we are exposed to any undue concentration of counterparty risk with respect to our derivative contracts as of December 30, 2017.June 26, 2021. However, we do have in aggregate $4.2$11.9 million of derivative instruments in net asset positions with threeheld across six creditworthy financial institutions.
Foreign Currency Risk Management
We manage our exposure to changes in foreign currency exchange rates through the use ofusing forward foreign currency exchange and cross-currency swap contracts. See Refer to Note 12 to the accompanying consolidated financial statements for a summary of the notional amounts and fair values of our outstanding forward foreign currency exchange and cross-currency swap contracts, outstandingas well as the impact on earnings and other comprehensive income of such instruments as of December 30, 2017.
June 26, 2021.
Forward Foreign Currency Exchange Contracts
We enter into forward foreign currency exchange contracts as hedges to reduce ourmitigate risk related to exchange rate fluctuations on inventory transactions made in an entity's non-functional currency, intercompany royalty payments made by certain of our international operations, and the settlement of foreign currency-denominated balances.balances, and the translation of certain foreign operations' net assets into U.S. Dollars. As part of our overall strategy to managefor managing the level of exposure to the risk of foreign currencysuch exchange rate fluctuations,risk, relating primarily to changes in the value of the Euro, the Japanese Yen, the South Korean Won, the Australian Dollar, the Canadian Dollar, the British Pound Sterling, the Swiss Franc, the Swedish Krona,and the Chinese Yuan, the New Taiwan Dollar, and the Hong Kong Dollar,Renminbi, we generally hedge a portion of our foreign currencyrelated exposures anticipated over a two-year period. In doing so, we usethe next twelve months using forward foreign currency exchange contracts that generally havewith maturities of two months to two yearsone year to provide continuing coverage throughoutover the hedging period of the respective exposure.
Our foreign exchange risk management activities are governed by our Company's established policies and procedures. These policies and procedures provide a framework that allows for the management of currency exposures while ensuring the activities are conducted within our established guidelines. Our policies include guidelines for the organizational structure of our risk management function and for internal controls over foreign exchange risk management activities, including, but not limited to, authorization levels, transaction limits, and credit quality controls, as well as various measurements for monitoring compliance. We monitor foreign exchange risk using different techniques, including a periodic review of market values and performance of sensitivity analyses.
Cross-Currency Swap Contracts
During our fiscal year ended April 2, 2016 ("Fiscal 2016"), we entered into two pay-floatingWe periodically designate pay-fixed rate, receive-floating ratereceive fixed-rate cross-currency swaps, with notional amounts of €280 million and €274 million, which we designatedswap contracts as hedges of our net investment in certain of our European subsidiaries (the "Cross-Currency Swaps"). The Cross-Currency Swaps, which mature on September 26, 2018 and August 18, 2020, respectively,subsidiaries.
Our pay-fixed rate, receive-fixed rate cross-currency swap thecontracts swap U.S. Dollar-denominated variablefixed interest rate payments based on the 3-month London Interbank Offered Rate ("LIBOR") plus acontract's notional amount and the fixed spreadrate of interest payable on certain of our senior notes for Euro-denominated variablefixed interest rate payments, based on the 3-month Euro Interbank Offered Rate plusthereby economically converting a fixed spread. As a result, the Cross-Currency Swaps, in conjunction with the Interest Rate Swaps (as defined below), economically convertportion of our $300 million fixed-rate 2.125% and $300 million fixed-rate 2.625%U.S. Dollar-denominated senior note obligations to €280 million and €274 million floating-ratefixed rate Euro-denominated liabilities, respectively.obligations.
See Note 3 to the accompanying consolidated financial statements for further discussion of our foreign currency exposures and the types of derivative instruments used to hedge those exposures.
Interest Rate Risk ManagementDuring Fiscal 2016, we entered into two pay-floating rate, receive-fixed rate interest rate swap contracts which we designated as hedges against changes in the respective fair values of our fixed-rate 2.125% Senior Notes and our fixed-rate 2.625% Senior Notes attributed to changes in the benchmark interest rate (the "Interest Rate Swaps"). The Interest Rate Swaps, which mature on September 26, 2018 and August 18, 2020, respectively, both have notional amounts of $300 million and swap the fixed interest rates on our 2.125% Senior Notes and 2.625% Senior Notes for variable interest rates based on 3-month LIBOR plus a fixed spread.
Investment Risk Management
As of December 30, 2017,June 26, 2021, we had cash and cash equivalents on-hand of $1.176$2.596 billion, consisting of deposits in interest bearing accounts, investments in money market deposit accounts, and investments in time deposits and commercial paper with original maturities of 90 days or less. Our other significant investments included $862.3$368.0 million of short-term investments, consisting of investments in time deposits and commercial paper with original maturities greater than 90 days; $47.5and $8.8 million of restricted cash placedheld in escrow with certain banks as collateral, primarily to secure guarantees in connection with certain international tax matters;matters and $83.3 million of investments with maturities greater than one year, consisting of time deposits.real estate leases.
We actively monitor our exposure to changes in the fair value of our global investment portfolio in accordance with our established policies and procedures, which include monitoring both general and issuer-specific economic conditions, as discussed further below.in Note 3 to the accompanying consolidated financial statements. Our investment objectives include capital preservation, maintaining adequate liquidity, diversification to minimize liquidity and credit risk, and achievement of maximum returns within the guidelines set forth in our investment policy. See Note 12 to the accompanying consolidated financial statements for further detail of the composition of our investment portfolio as of December 30, 2017.June 26, 2021.
We evaluate investments held in unrealized loss positions, if any, for other-than-temporary impairment on a quarterly basis. This evaluation involves a variety of considerations, including assessments of risks and uncertainties associated with general economic conditions and distinct conditions affecting specific issuers. We consider the following factors: (i) the length of time and the extent to which the fair value has been below cost, (ii) the financial condition, credit worthiness, and near-term prospects of the issuer, (iii) the length of time to maturity, (iv) anticipated future economic conditions and market forecasts, (v) our intent and ability to retain our investment for a period of time sufficient to allow for recovery of market value, and (vi) an assessment of whether it is more likely than not that we will be required to sell our investment before recovery of market value. No material realized or unrealized gains or losses on available-for-sale investments or other-than-temporary impairment charges were recorded in any of the fiscal periods presented.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 3 of the Fiscal 20172021 10-K. Our estimates are often based on complex judgments, assessments of probability, and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. It is also possible that other professionals, applying reasonable judgment to the same set of facts and circumstances, could develop and support a range of alternative estimated amounts. For a complete discussion of our critical accounting policies, seerefer to the "Critical Accounting Policies" section of the MD&A in our Fiscal 20172021 10-K.
There have been no significant changes in the application of our critical accounting policies since April 1, 2017.March 27, 2021.
Goodwill Impairment Assessment
We performed our annual goodwill impairment assessment using a qualitative approach as of the beginning of the second quarter of Fiscal 2018. In performing the assessment, we identified and considered the significance of relevant key factors, events, and circumstances that affected the fair values and/or carrying amounts of our reporting units with allocated goodwill. These factors included external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as our actual and expected financial performance. Additionally, the results of our most recent quantitative goodwill impairment test indicated that the fair values of these reporting units significantly exceeded their respective carrying values. Based on the results of our qualitative goodwill impairment assessment, we concluded that it is not more likely than not that the fair values of our reporting units are less than their respective carrying values, and there were no reporting units at risk of impairment.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 4 to the accompanying consolidated financial statements for a description of certain recently issued or proposed accounting standards which have impacted our consolidated financial statements, or may impact our consolidated financial statements in future reporting periods.
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
For a discussion of the Company's exposure to market risk, see "Market Risk Management" presented in Part I, Item 2 — MD&A of this Form 10-Q and incorporated herein by reference.
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Item 4. | Controls and Procedures. |
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.
We carried out an evaluation based on criteria established in the Internal Control -— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) under the supervision and with the participation of management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934. Based on that evaluation, our principal executive and principal financial officers have concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of December 30, 2017. Except as discussed below, thereJune 26, 2021. There has been no change in the Company's internal control over financial reporting during the fiscal quarter ended December 30, 2017June 26, 2021 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
OperatingAlthough there have been no material changes in the Company's internal control over financial reporting, we continue to experience varying degrees of business disruptions related to the COVID-19 pandemic, including periods of closure of our stores, distribution centers, and Financial Reporting System Implementationcorporate facilities, as described within "Recent Developments," with a significant portion of our corporate employees continuing to work remotely. Additionally, in connection with our Fiscal 2021 Strategic Realignment Plan, as described within "Recent Developments," we made a significant reduction to our global workforce during the second
half of Fiscal 2018, we completed the migration of our European operations to an operating and financial reporting information technology system, SAP, as part of a multi-year plan to integrate and upgrade our global systems and processes.
As a result of the implementation of this system,2021. Despite such cumulative actions, we have not experienced certain changes to our processes and procedures which, in turn, resulted inany material changes to our internal controlcontrols over financial reporting. While we expect SAP to strengthen our internal financial controls by automating certain manual processes and standardizing business processes and reporting across our organization, managementWe will continue to evaluate and monitor the impact of the COVID-19 pandemic and our restructuring activities on our internal controls as processes and procedures in each of the affected areas evolve. For a discussion of risks related to the implementation of new systems, seecontrols. See Item 1A — "Risk Factors — Risks and uncertaintiesFactors" in the Fiscal 2021 10-K for additional discussion regarding risks to our business associated with the implementation of information systems may negatively impactCOVID-19 pandemic and our business" in the Fiscal 2017 10-K.restructuring plans.
PART II. OTHER INFORMATION
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Item 1. | Legal Proceedings. |
Item 1. Legal Proceedings.
Reference is made to the information disclosed under Item 3 — "Legal Proceedings" in the Fiscal 20172021 10-K.
Item 1A. Risk Factors.
Reference is made to the information disclosed under Part I, Item 1A — "Risk Factors" in the Fiscal 20172021 10-K, which contains a detailed discussion of certain risk factors that could materially adversely affect the Company's business, operating results, and/or financial condition. The following information amends, updates, and should be read in conjunction withThere are no material changes to the risk factors and informationpreviously disclosed, innor has the Fiscal 2017 10-K.
The impact to ourCompany identified any previously undisclosed risks that could materially adversely affect the Company's business, of recently enacted U.S. tax legislation could differ materially from our current estimates.
On December 22, 2017, President Trump signed into law new tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"), which became effective January 1, 2018. The TCJA is complex and widely considered to be the most significant overhaul to the U.S. federal tax code since 1986.
Although we expect the TCJA will ultimately benefit ouroperating results, of operations and financial condition in future periods, primarily due to it reducing the U.S. federal statutory income tax rate from 35% to 21%, its enactment resulted in the recognition of one-time charges of $231.3 million within our income tax provision during the third quarter of Fiscal 2018. These charges were recorded on a provisional basis, as permitted by SEC Staff Accounting Bulletin No. 118 ("SAB 118"), based on our present interpretations of the TCJA and current available information, including assumptions and expectations about future events, such as our projected financial performance. Although we believe these provisional amounts represent a reasonable estimate of the ultimate enactment-related impact the TCJA will have on our consolidated financial statements, the amounts could be adjusted materially as additional information becomes available (including our actual full Fiscal 2018 results of operations and financial condition, which were projected for purposes of calculating the provisional amounts) and further analyses are completed. The impact of the TCJA to our business in future periods is also subject to a variety of factors beyond our control including, but not limited to, (i) potential amendments to the TCJA; (ii) potential changes to state, local, and foreign tax laws in response to the TCJA; and (iii) potential new or interpretative guidance issued by the Financial Accounting Standards Board or the Internal Revenue Service and other tax agencies. Any of these factors could cause our actual results to differ materiality from our current expectations and/or investors' expectationsfinancial condition.
Item 2. Unregistered Sales of Equity Securities and there can be no assurance that the TCJA will ultimately benefit our resultsUse of operations and financial condition in future periods.Proceeds.
For further discussion(a)Sales of risks related to the potential imposition of additional regulations and laws and changes to our tax obligations and effective tax rate, refer to Part I, Item 1A — "Risk Factors — Our ability to conduct business globally may be affected by a variety of legal, regulatory, political, and economic risks" and "Risk Factors — Fluctuations in our tax obligations and effective tax rate may result in volatility of our operating results" in the Fiscal 2017 10-K.Unregistered Securities
See Note 9 to the accompanying consolidated financial statements for further discussion of the TCJA.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
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(a) | Sales of Unregistered Securities |
Shares of the Company's Class B Common Stock may be converted immediately into Class A Common Stock on a one-for-one basis by the holder. There is no cash or other consideration paid by the holder converting the shares and, accordingly, there is no cash or other consideration received by the Company. The shares of Class A Common Stock issued by the Company in such conversions are exempt from registration pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended.
No shares of the Company's Class B common stock were converted into Class A common stock during the three months ended December 30, 2017.June 26, 2021.
(b) Not Applicable
(c)Stock Repurchases
The following table sets forth the repurchases of shares of the Company's Class A common stock during the three months ended December 30, 2017:June 26, 2021:
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| | | | | | | | | | | | | |
| | Total Number of Shares Purchased(a) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs(b) |
| | | | | | | | (millions) |
| October 1, 2017 to October 28, 2017 | 11,257 |
| | $ | 88.92 |
| | — |
| | $ | 100 |
|
| October 29, 2017 to December 2, 2017 | — |
| | — |
| | — |
| | 100 |
|
| December 3, 2017 to December 30, 2017 | 3,238 |
|
| 101.38 |
| | — |
| | 100 |
|
| | 14,495 |
| | | | — |
| | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of Shares Purchased(a) | | Average
Price
Paid per
Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs(b) |
| | | | | | | | (millions) |
| March 28, 2021 to April 24, 2021 | 2,947 | | | $ | 122.61 | | | — | | | $ | 580 | |
| April 25, 2021 to May 22, 2021 | 118,807 | | | 134.28 | | | — | | | 580 | |
| May 23, 2021 to June 26, 2021 | 105,646 | |
| 120.49 | | | — | | | 580 | |
| 227,400 | | | | | — | | | |
| |
(a)
| Represents shares surrendered to or withheld by the Company in satisfaction of withholding taxes in connection with the vesting of awards issued under its long-term stock incentive plans. |
| |
(b)
| Repurchases of shares of Class A common stock are subject to overall business and market conditions. |
(a)Represents shares surrendered to or withheld by the Company in satisfaction of withholding taxes in connection with the vesting of awards issued under its long-term stock incentive plans.
(b)Repurchases of shares of Class A common stock are subject to certain restrictions under the Company's Global Credit Facility and, more generally, overall business and market conditions. Accordingly, in response to business disruptions related to the COVID-19 pandemic, we have temporarily suspended our common stock repurchase program as a preemptive action to preserve cash and strengthen our liquidity position.
Item 6. Exhibits.
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| |
| 3.1 | |
| 3.2 | |
| 3.3 | |
12.1*10.1* | |
31.1*10.2* | |
| 31.1* | |
| 31.2* | |
| 32.1* | |
| 32.2* | |
101*101.INS* | XBRL Instance Document - the instance document does not appear in the Interactive data files pursuant to Rule 405 of Regulation S-T: (i)Data File because its XBRL tags are embedded within the Consolidated Balance Sheets at December 30, 2017 and April 1, 2017, (ii) the Consolidated Statements of Operations for the three-month and nine-month periods ended December 30, 2017 and December 31, 2016, (iii) the Consolidated Statements of Comprehensive Income (Loss) for the three-month and nine-month periods ended December 30, 2017 and December 31, 2016, (iv) the Consolidated Statements of Cash Flows for the nine-month periods ended December 30, 2017 and December 31, 2016, and (v) the Notes to the Consolidated Financial Statements.Inline XBRL document |
| 101.SCH* | XBRL Taxonomy Extension Schema Document |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
Exhibits 32.1 and 32.2 shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibits shall not be deemed incorporated by reference into any filing under the Securities Act of 1933 or Securities Exchange Act of 1934.
| | | | | |
| * | Filed herewith. |
| † | Management contract or compensatory plan or arrangement. |
* Filed herewith.
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.
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| RALPH LAUREN CORPORATION |
| | |
| By: | | RALPH LAUREN CORPORATION |
| | |
| By: | /S/ JANE HAMILTON NIELSEN |
| | Jane Hamilton Nielsen |
| | Chief Operating Officer and Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
| | |
Date: February 8, 2018August 3, 2021 | | |