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Ralph Lauren Reports Better-Than-Expected First Quarter Fiscal 2014 Results

Ralph Lauren Corporation (NYSE:RL) today reported net income of $181 million, or $1.94 per diluted share, for the first quarter of Fiscal 2014, compared to net income of $193 million, or $2.03 per diluted share, for the first quarter of Fiscal 2013.

"We made important progress on several key initiatives during the first quarter," said Ralph Lauren, Chairman and Chief Executive Officer. "We opened a spectacular men’s luxury flagship store in Hong Kong, our first Polo store in East Hampton and several additional, high profile projects around the world are developing nicely. We’ve got exciting new product initiatives planned for Fall, particularly with accessories, and we intend to support them with innovative merchandising strategies and compelling advertising and marketing campaigns. I am confident that the investments we are making today can support profitable, sustainable growth for us over the long term."

"Once again, our first quarter results demonstrate the resilient margin structure of our diversified operating model," said Roger Farah, President and Chief Operating Officer. "Despite an uneven global operating environment, we planned the business prudently and achieved sales and profit levels that exceeded our expectations, even as we make important investments in our long-term growth objectives and in the infrastructure to support them. We expect that our more recent investments in new stores, e-commerce operations and international expansion will contribute to accelerated sales and profit momentum in the second half of the year."

First Quarter Fiscal 2014 Income Statement Review

Net Revenues. Net revenues for the first quarter of Fiscal 2014 rose 4% to $1.7 billion. Excluding the net negative impact from foreign currency translation and discontinued businesses, net revenues increased approximately 6% in the first quarter.
  • Wholesale Sales. Wholesale segment sales grew 6% to $735 million in the first quarter of Fiscal 2014. Wholesale revenue growth was primarily a result of the contribution from the newly transitioned Chaps men’s sportswear operations and continued growth for certain core North American merchandise categories. A planned reduction in shipments to certain European customers and the transition of certain Japanese wholesale distribution to directly operated concession shops partially mitigated wholesale revenue growth during the quarter.
  • Retail Sales. Retail sales rose 3% to $879 million from $857 million in the first quarter last year, reflecting the incremental contribution from new stores and strong growth for e-commerce operations worldwide that was partially offset by the net negative impact of foreign currency translation. Excluding the impacts of discontinued businesses and foreign currency effects, retail sales increased 6% from the prior year period. Consolidated comparable store sales declined 1% on a reported basis and were up 1% in constant currency during the first quarter. The shift in the timing of Easter is estimated to have mitigated comparable store sales growth by approximately 2% in the first quarter of Fiscal 2014.
  • Licensing. Licensing revenues of $39 million in the first quarter were 8% below the prior year period, as lower Chaps-related licensing revenues offset higher apparel and fragrance royalties for Ralph Lauren products.

Gross Profit. Gross profit for the first quarter of Fiscal 2014 increased 1% to $1 billion. Gross profit margin of 60.7% was 160 basis points below the prior year period, due to the integration of the Chaps men’s sportswear operations and unfavorable foreign currency dynamics.

Operating Expenses. Operating expenses of $728 million in the first quarter were 4% greater than the prior year period. The higher operating expenses primarily reflect overall business expansion, costs associated with newly transitioned operations and continued investment in the Company’s strategic growth initiatives and infrastructure that was partially offset by disciplined operational management. A $16 million gain on the acquisition of the Chaps men’s sportswear license was included in the Company’s first quarter and full year outlook and will mostly be amortized in subsequent quarters. Operating expense rate of 44.0% was 10 basis points above the first quarter of Fiscal 2013.

Operating Income. Operating income for the first quarter of Fiscal 2014 was $276 million, 5% below the prior year. Operating margin was 16.7% of sales, 160 basis points below the first quarter of Fiscal 2013, primarily as a result of the lower gross profit margin discussed above. Operating margin was better than the outlook that was provided in May due to stronger than expected productivity gains in certain operations.
  • Wholesale Operating Income. Wholesale operating income of $154 million in the first quarter of Fiscal 2014 was in line with the prior year period. Wholesale operating margin declined 120 basis points to 21.0%, as improved profitability in core North American operations was more than offset by lower international profits and transition costs associated with Chaps.
  • Retail Operating Income. Retail operating income of $160 million was 11% below the prior year period. Retail operating margin declined 270 basis points to 18.2%, principally a result of negative foreign currency effects, costs associated with the Company’s global store and e-commerce development efforts and geographic mix.
  • Licensing Operating Income. Licensing operating income of $29 million was in line with the prior year period.

Net Income and Diluted EPS. Net income for the first quarter of Fiscal 2014 was $181 million, 7% below the $193 million achieved in the comparable period of Fiscal 2013, and net income per diluted share declined 4% to $1.94 from $2.03 for the same time period. The contractions in net income and net income per diluted share were principally the result of the decline in operating income discussed above.

First Quarter Fiscal 2014 Balance Sheet and Cash Flow Review

The Company ended the first quarter with $1.4 billion in cash and investments, or $1.1 billion in cash and investments net of debt ("net cash"), compared to $1.1 billion in cash and investments and $853 million in net cash at the end of the first quarter of Fiscal 2013. The first quarter ended with inventory up 9% to $1.1 billion from $964 million in the first quarter of last year.

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