Why did net income decline despite higher revenue?

Net revenues grew $210.3 million, but gross margin gains were offset by a 13.8% rise in SG&A to $1.03 billion, which the filing attributes to Lauren start-up expenses, higher selling salaries tied to retail growth, and currency effects. Income from operations fell $14.6 million, and net income declined to $171.0 million from $174.2 million.

How large is the risk from the Jones Apparel Group lawsuit?

Jones is seeking compensatory damages of $550.0 million plus punitive damages. The court has granted Jones summary judgment on the Lauren license termination, the company has appealed and sought reconsideration, and the filing states an adverse result could have a material adverse effect on results of operations and financial condition. The company says it intends to defend the case vigorously.

What are the royalty losses from the Jones license termination?

Royalties from the Lauren and Ralph licenses were approximately $23.0 million and $3.9 million in Fiscal 2004, compared with $37.4 million and $5.3 million in Fiscal 2003. Royalties from Jones, including Polo Jeans, represented 17.2% of licensing revenue in Fiscal 2004 versus 27.2% in Fiscal 2003. The company expects Lauren product income to at least replace the lost royalties in Fiscal 2005.

What is the significance of the childrenswear acquisition?

On May 25, 2004, the company agreed to acquire certain assets and assume certain liabilities of RL Childrenswear Company, LLC, its childrenswear licensee for the United States, Canada and Mexico, for $232.1 million in cash at closing plus up to $20 million in deferred and contingent payments. The licensee has agreed to indemnify pre-closing liabilities and not compete for three years. Closing is anticipated in late June 2004, subject to third-party consents and HSR clearance.

How is the company funding its obligations?

The company ended Fiscal 2004 with $343.5 million in cash and $277.3 million of debt, which consists of long-term Euro notes. It had no balance outstanding under its $300.0 million revolving credit facility and had $35.3 million of letters of credit outstanding. The filing says the childrenswear purchase price will be funded from cash on hand and credit lines, and that cash from operations and the facility will be sufficient for the next twelve months.

RL 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed June 7, 2004. Cited figures are marked; the original filing is the authoritative source.

Polo Ralph Lauren Corporation reported Fiscal 2004, a 53-week year ended April 3, 2004, with net revenues of $2.65 billion^a, up $210.3 million or 8.6% from $2.44 billion in Fiscal 2003.

Growth came mainly from retail, where net sales rose 16.8% to $1.17 billion^b on higher comparable store sales and store expansion, and from the introduction of the Lauren line in wholesale. Net income declined to $171.0 million from $174.2 million, and diluted EPS fell to $1.69 from $1.76. Income from operations fell 5.1% to $273.8 million, held back by lower wholesale operating income, restructuring charges of $19.6 million, the loss of Lauren and Ralph royalties from Jones Apparel Group, and start-up costs for the Lauren line.

The filing states the 53rd week contributed an estimated $39.5 million^c of the sales increase. The most significant risk disclosed is the litigation with Jones Apparel Group, which terminated the Lauren and Ralph licenses effective December 31, 2003. Jones is seeking compensatory damages of $550.0 million, and the filing says an adverse outcome could have a material adverse effect on results and financial condition.

The company intends to defend the case vigorously. Licensing concentration is also high: Jones, WestPoint Stevens and Impact 21 accounted for 17.2%^d, 14.7% and 11.3% of licensing revenue, and WestPoint filed for Chapter 11 in June 2003 before an amended license was approved in December 2003.

The balance sheet remains solid, with cash of $343.5 million, debt of $277.3 million, and stockholders' equity of $1.42 billion. Management also disclosed a definitive agreement signed May 25, 2004 to acquire assets of its North American childrenswear licensee, RL Childrenswear Company, LLC, for $232.1 million in cash plus up to $20 million in deferred and contingent payments, with closing expected in late June 2004.

02—Key points

Key Highlights

Net revenues rose 8.6% to $2.65 billion, driven mainly by retail sales growth of 16.8% to $1.17 billion.
Net income fell to $171.0 million from $174.2 million, and diluted EPS declined to $1.69 from $1.76.
Income from operations decreased 5.1% to $273.8 million, reflecting lower wholesale profit, restructuring charges of $19.6 million, and Lauren start-up costs.
Jones Apparel Group litigation: Jones seeks $550.0 million in compensatory damages after the Lauren and Ralph licenses terminated December 31, 2003.
Licensing concentration: Jones, WestPoint Stevens and Impact 21 accounted for 17.2%, 14.7% and 11.3% of licensing revenue in Fiscal 2004.
Pending acquisition of RL Childrenswear's North American business for $232.1 million in cash plus up to $20 million in deferred and contingent payments, expected to close in late June 2004.
Year-end cash of $343.5 million against debt of $277.3 million; the company declared a quarterly dividend of $0.05 per share beginning May 2003.

03—Questions

Frequently Asked Questions

Why did net income decline despite higher revenue?
Net revenues grew $210.3 million, but gross margin gains were offset by a 13.8% rise in SG&A to $1.03 billion, which the filing attributes to Lauren start-up expenses, higher selling salaries tied to retail growth, and currency effects. Income from operations fell $14.6 million, and net income declined to $171.0 million from $174.2 million.
How large is the risk from the Jones Apparel Group lawsuit?
Jones is seeking compensatory damages of $550.0 million plus punitive damages. The court has granted Jones summary judgment on the Lauren license termination, the company has appealed and sought reconsideration, and the filing states an adverse result could have a material adverse effect on results of operations and financial condition. The company says it intends to defend the case vigorously.
What are the royalty losses from the Jones license termination?
Royalties from the Lauren and Ralph licenses were approximately $23.0 million and $3.9 million in Fiscal 2004, compared with $37.4 million and $5.3 million in Fiscal 2003. Royalties from Jones, including Polo Jeans, represented 17.2% of licensing revenue in Fiscal 2004 versus 27.2% in Fiscal 2003. The company expects Lauren product income to at least replace the lost royalties in Fiscal 2005.
What is the significance of the childrenswear acquisition?
On May 25, 2004, the company agreed to acquire certain assets and assume certain liabilities of RL Childrenswear Company, LLC, its childrenswear licensee for the United States, Canada and Mexico, for $232.1 million in cash at closing plus up to $20 million in deferred and contingent payments. The licensee has agreed to indemnify pre-closing liabilities and not compete for three years. Closing is anticipated in late June 2004, subject to third-party consents and HSR clearance.
How is the company funding its obligations?
The company ended Fiscal 2004 with $343.5 million in cash and $277.3 million of debt, which consists of long-term Euro notes. It had no balance outstanding under its $300.0 million revolving credit facility and had $35.3 million of letters of credit outstanding. The filing says the childrenswear purchase price will be funded from cash on hand and credit lines, and that cash from operations and the facility will be sufficient for the next twelve months.

04—Continue

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