What drove the increase in revenue for Fiscal 2005?

The filing attributes the $655.8 million increase primarily to the Lauren line being present for a full year, the Childrenswear acquisition, and retail growth, including a $21.2 million, or 5.5%, increase in comparable full-price store sales. These gains were partly offset by planned reductions in off-price men's wholesale sales and the loss of Lauren and Ralph royalties from Jones.

How significant is the Jones Apparel Group litigation?

Jones seeks compensatory damages of $550.0 million plus punitive damages. The company recorded a $100.0 million reserve in Fiscal 2005, and management said the reserve represents its best estimate of the loss incurred. The Appellate Division denied reargument but granted leave to appeal to the New York Court of Appeals. If the appeal is not reversed, the case returns to the lower court for a damages trial, and no discovery has been held.

What is the company's customer concentration risk?

Three department store customers accounted for 51.1% of wholesale net sales in Fiscal 2005, and the ten largest accounted for approximately 64.6%. Federated Department Stores and The May Department Stores Company have agreed to merge, which the filing says would significantly increase the company's credit exposure to a single customer.

What internal control issue did the company disclose?

Management concluded that internal control over financial reporting was not effective as of April 2, 2005 because of a material weakness in accounting for income taxes. The company lacked adequate tax expertise, leading to material adjustments to the tax provision, taxes payable, deferred taxes and tax footnote disclosures before the audit was completed. Deloitte & Touche issued an adverse opinion on internal control. The company said it hired a new Vice President of Tax and will add tax accounting staff.

What is the pending Footwear Business acquisition?

On May 23, 2005, the company agreed to acquire Ralph Lauren Footwear Co., Inc., its global footwear licensee, and certain foreign assets from Reebok International for approximately $110 million in cash, funded from cash on hand and credit lines. Closing is subject to customary conditions and Hart-Scott-Rodino clearance and is anticipated in July 2005.

RL 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed July 1, 2005. Cited figures are marked; the original filing is the authoritative source.

Polo Ralph Lauren Corporation reported net revenues of $3.31 billion^a for Fiscal 2005 (52 weeks ended April 2, 2005), up $655.8 million, or 24.7%, from $2.65 billion in Fiscal 2004.

Growth was driven by the Lauren line's first full year, the July 2004 acquisition of RL Childrenswear, and retail expansion, partly offset by lower licensing revenue, which fell $24.1 million^b, or 9.0%. Net income rose to $190.4 million ($1.83 diluted EPS) from $169.2 million, and income from operations was $299.7 million after a $100.0 million reserve for the Jones Apparel Group litigation. Gross margin improved to 51.0% from 49.9%.

The company disclosed a material weakness in internal control over financial reporting related to income tax accounting, and management concluded that disclosure controls were not effective. Prior-year financial statements were restated for lease accounting, and consolidation of Ralph Lauren Media. Cash and cash equivalents were $350.5 million^c against $291.0 million of Euro-denominated long-term debt, and cash flow from operations was $382.0 million.

Looking ahead, the company agreed on May 23, 2005 to acquire the Footwear Business from Reebok International for approximately $110 million^d in cash, with closing anticipated in July 2005. Investors should also note customer concentration, with three department store customers representing 51.1% of wholesale net sales, and the pending Jones Court of Appeals review, in which Jones seeks $550.0 million in damages.

02—Key points

Key Highlights

Net revenues of $3.31 billion, up $655.8 million (24.7%) from Fiscal 2004, led by wholesale sales growth of 41.4% and retail sales growth of 15.2%.
Net income of $190.4 million, or $1.83 diluted EPS, compared with $169.2 million, or $1.68, in Fiscal 2004.
Income from operations of $299.7 million includes a $100.0 million reserve for the Jones Apparel Group litigation and a $6.2 million reserve for a retail point-of-sale security breach.
Gross profit rate rose to 51.0% from 49.9%, reflecting reduced markdowns and inventory management.
Material weakness in internal control over financial reporting related to income tax accounting; disclosure controls were concluded not effective.
Agreed to acquire Ralph Lauren Footwear Co. from Reebok International for approximately $110 million in cash, anticipated to close in July 2005.
Cash and cash equivalents of $350.5 million; cash flow from operations of $382.0 million; quarterly dividend of $0.05 per share.

03—Questions

Frequently Asked Questions

What drove the increase in revenue for Fiscal 2005?
The filing attributes the $655.8 million increase primarily to the Lauren line being present for a full year, the Childrenswear acquisition, and retail growth, including a $21.2 million, or 5.5%, increase in comparable full-price store sales. These gains were partly offset by planned reductions in off-price men's wholesale sales and the loss of Lauren and Ralph royalties from Jones.
How significant is the Jones Apparel Group litigation?
Jones seeks compensatory damages of $550.0 million plus punitive damages. The company recorded a $100.0 million reserve in Fiscal 2005, and management said the reserve represents its best estimate of the loss incurred. The Appellate Division denied reargument but granted leave to appeal to the New York Court of Appeals. If the appeal is not reversed, the case returns to the lower court for a damages trial, and no discovery has been held.
What is the company's customer concentration risk?
Three department store customers accounted for 51.1% of wholesale net sales in Fiscal 2005, and the ten largest accounted for approximately 64.6%. Federated Department Stores and The May Department Stores Company have agreed to merge, which the filing says would significantly increase the company's credit exposure to a single customer.
What internal control issue did the company disclose?
Management concluded that internal control over financial reporting was not effective as of April 2, 2005 because of a material weakness in accounting for income taxes. The company lacked adequate tax expertise, leading to material adjustments to the tax provision, taxes payable, deferred taxes and tax footnote disclosures before the audit was completed. Deloitte & Touche issued an adverse opinion on internal control. The company said it hired a new Vice President of Tax and will add tax accounting staff.
What is the pending Footwear Business acquisition?
On May 23, 2005, the company agreed to acquire Ralph Lauren Footwear Co., Inc., its global footwear licensee, and certain foreign assets from Reebok International for approximately $110 million in cash, funded from cash on hand and credit lines. Closing is subject to customary conditions and Hart-Scott-Rodino clearance and is anticipated in July 2005.

04—Continue

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