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Ralph Lauren Reports First Quarter Fiscal 2013 Results

Ralph Lauren Corporation (NYSE: RL) today reported net income of $193 million, or $2.03 per diluted share, for the first quarter of Fiscal 2013, compared to net income of $184 million, or $1.90 per diluted share, for the first quarter of Fiscal 2012.

“The growing global appeal of the World of Ralph Lauren is supported by our continued reinvestment in the business,” said Ralph Lauren, Chairman and Chief Executive Officer. “Our products are the lifeblood of our success and we are building on our leadership position in apparel to create exciting new avenues of growth with handbags, footwear, watches and jewelry. At the same time, we are expanding our presence in the world’s most dynamic markets, particularly in China and online. Our luxury lifestyle positioning is a tremendous asset as we execute on our long-term goals and the passion and dedication of our teams around the world is incredibly invigorating.”

“Our better-than-expected first quarter earnings demonstrate the operational discipline of our organization,” said Roger Farah, President and Chief Operating Officer. “Our performance was achieved on top of exceptionally robust expansion in the preceding two years and despite our decision to wind down certain North American and Asian operations. Balanced revenue gains across all channels of distribution highlight the diversity of our business model. The resilience of our profit margins is particularly noteworthy as we continue to navigate through raw materials cost inflation and a high level of investment in our key growth objectives. While we are proud of our strong start to Fiscal 2013, the outlook for consumer spending and global economic growth remains challenging and we are planning our business accordingly.”

First Quarter Fiscal 2013 Highlights

Net Revenues . Net revenues for the first quarter of Fiscal 2013 increased 4% to $1.6 billion from $1.5 billion in the comparable period last year. The growth in net revenues reflects balanced expansion across the Company’s wholesale, retail and licensing segments. Strategic decisions to terminate certain North American and Asian operations, in addition to the net negative impact from foreign currency translation, suppressed consolidated sales growth by approximately 5% in the first quarter.

  • Wholesale Sales. Wholesale segment sales rose 3% to $694 million from $673 million in the first quarter of Fiscal 2012. Double-digit growth in North America was supported by continued momentum in core apparel categories and incremental revenues from new operations that was partially offset by the discontinuation of certain other operations. European wholesale revenues declined at a double-digit rate, primarily due to lower shipments to specialty stores, a shift in the timing of certain seasonal merchandise shipments and the net negative impact from foreign currency translation. The transition of certain Japanese wholesale distribution to directly operated concession shops and the elimination of certain distribution in Greater China also mitigated wholesale revenue growth in the first quarter of Fiscal 2013.
  • Retail Sales. Retail segment sales increased 5% to $857 million from $814 million in the prior year period, supported by the contribution from new stores, incremental e-commerce operations and comparable store sales growth that was partially offset by store closures associated with the Company’s Greater China network repositioning efforts. Consolidated comparable store sales rose 1% on a reported basis during the first quarter and increased 3% in constant currency. Beginning in the first quarter of Fiscal 2013, consolidated comparable store sales growth will be reported as a singular metric. The Company believes the consolidated measure is better aligned with the integrated, multi-channel approach that is used to manage its retail operations on a global basis.
  • Licensing. First quarter licensing revenues were $42 million, 5% greater than the prior year period. The growth in licensing revenue is primarily attributable to higher apparel and fragrance royalties that were partially offset by a decline in home licensing revenues due to the transition of certain formerly licensed operations to directly controlled operations.

Gross Profit. Gross profit for the first quarter of Fiscal 2013 increased 3% to $992 million from $962 million in the first quarter of Fiscal 2012. Gross profit rate declined 70 basis points to 62.3% from the record level achieved in the prior year period. The decline in gross profit rate primarily reflects the sustained impact of raw materials cost inflation on the Company’s retail operations, in addition to overall geographic and wholesale customer mix.

Operating Expenses. Operating expenses increased 3% in the first quarter of Fiscal 2013 to $700 million from $679 million in the first quarter of Fiscal 2012. The higher operating expenses primarily reflect overall business expansion, including retail segment growth and continued investment in the Company’s strategic growth initiatives and infrastructure. Operating expense margin was 43.9%, 60 basis points below the comparable prior year period. The improvement in operating expense margin was primarily a result of disciplined operational management, including a shift in timing of certain expenses out of the first quarter and into the balance of Fiscal 2013.

Operating Income. Operating income for the first quarter of Fiscal 2013 rose 4% to $292 million from $282 million in the first quarter last year, reflecting higher sales across all channels of distribution. Operating income as a percentage of sales declined approximately 20 basis points to 18.3%. The modest decline in operating margin rate is primarily attributable to the impact of the lower gross profit rate that was largely offset by the operating expense leverage discussed above.

  • Wholesale Operating Income. Wholesale operating income rose 3% to $156 million from $151 million in the first quarter of Fiscal 2012 and the wholesale operating margin was 22.4%, ten basis points below the 22.5% achieved in the prior year period. Improved profitability in North America was more than offset by a decline in Europe as a result of lower sales and overall customer mix.
  • Retail Operating Income. Retail operating income was $180 million, 4% greater than the $173 million achieved in the first quarter of Fiscal 2012, and retail operating margin was 21.0% compared to 21.3% in the prior year period. The growth in retail operating income reflects strength in international markets and for e-commerce worldwide. The decline in retail segment operating margin primarily reflects gross margin pressure from the continued net negative impact from raw materials cost inflation that was partially offset by disciplined operational management.
  • Licensing Operating Income. Licensing operating income rose 6% to $27 million from $25 million in the first quarter of Fiscal 2012. The growth in licensing operating income is primarily related to higher apparel and fragrance royalties.

Net Income and Diluted EPS. Net income for the first quarter of Fiscal 2013 increased 5% to $193 million from $184 million in the first quarter of Fiscal 2012, and net income per diluted share increased 7% to $2.03 per share from $1.90 in the prior year period. The growth in net income and net income per diluted share principally relates to the higher operating income discussed above, in addition to a lower effective tax rate. Increased net income per diluted share was also supported by lower weighted average shares outstanding during the first quarter of Fiscal 2013.

First Quarter Fiscal 2013 Balance Sheet Review

The Company ended the first quarter with $1.1 billion in cash and investments, or $853 million in cash and investments net of debt (“net cash”), compared to $981 million in cash and investments and $677 million of net cash at the end of the first quarter of Fiscal 2012. The first quarter ended with inventory up 8% to $964 million from $896 million in the first quarter of Fiscal 2012.

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