What drove revenue growth in Fiscal 2006?

Wholesale revenues increased $230.4 million, driven by newly acquired Footwear and Polo Jeans products, a full year of childrenswear sales, the Chaps launch, and higher menswear and womenswear sales. Retail revenues increased $210.0 million on a 6.5% rise in comparable full-price store sales and store expansion. Licensing revenues were essentially flat at $245.2 million.

How much cash and debt does the company have?

At April 1, 2006, the company had $285.7 million of cash and cash equivalents and $280.4 million of debt, a net cash position of $5.3 million, compared with a net cash position of $59.5 million a year earlier. The debt is approximately €227 million of 6.125% Euro notes due November 2006, which management intends to refinance in the first half of Fiscal 2007. The company had no borrowings under its $450 million credit facility.

What is the status of the internal control issues?

Management concluded that internal control over financial reporting was not effective as of April 1, 2006, because of a material weakness in income tax accounting. The company said it remediated a previously reported weakness in financial closing and reporting. The tax weakness remained open, and the company intends to continue implementing tax controls in Fiscal 2007.

What major legal matters are pending?

The Jones Apparel litigation was settled for $100 million in February 2006, alongside the Polo Jeans acquisition. Pending matters include the Wathne Imports breach of contract suit, which seeks compensatory damages above $250 million and punitive damages of at least $750 million, and the ongoing trademark dispute with the United States Polo Association and Jordache. Several California wage and hour class actions are also pending. Management believes none will have a material adverse effect on the financial position.

What is the Luxottica eyewear agreement?

On February 27, 2006, the company signed a ten-year exclusive license with Luxottica Group for prescription frames and sunglasses under the Polo Ralph Lauren brand, effective January 1, 2007. Luxottica will pay an approximately $200 million prepayment on the effective date, which is non-refundable except for certain company breaches. The agreement replaces the existing Safilo eyewear license, which expires December 31, 2006.

RL 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed June 15, 2006. Cited figures are marked; the original filing is the authoritative source.

Polo Ralph Lauren Corporation reported Fiscal 2006 (52 weeks ended April 1, 2006) net revenues of $3,746.3 million^a, up $440.9 million, or 13.3%, from $3,305.4 million in Fiscal 2005.

Operating income rose $216.9 million to $516.6 million^b, and net income increased to $308.0 million from $190.4 million, with diluted EPS of $2.87 versus $1.83. Fiscal 2005 results had been reduced by a $100 million Jones-Related Litigation charge, which was absent in Fiscal 2006. Growth was led by the wholesale segment (revenues up 13.5% to $1,942.5 million, operating income up 32.9% to $398.3 million) and the retail segment (revenues up 15.6% to $1,558.6 million, operating income up 69.1% to $140.0 million).

Licensing revenue was essentially flat at $245.2 million^c, and gross margin improved to 54.0% from 51.0%. The company acquired the Polo Jeans Business for about $260 million and the Footwear Business for about $112 million, and it agreed to a ten-year eyewear license with Luxottica expected to bring an approximately $200 million prepayment in January 2007.

Balance sheet metrics were a net cash position of $5.3 million^d, with $285.7 million of cash against $280.4 million of Euro-denominated debt due November 2006. Investors should note that management concluded internal control over financial reporting was not effective as of April 1, 2006, due to a material weakness in income tax accounting, and that the company faces several pending litigation matters, including the Wathne Imports suit.

02—Key points

Key Highlights

Net revenues of $3,746.3 million, up 13.3% from $3,305.4 million in Fiscal 2005
Operating income of $516.6 million, up $216.9 million from $299.7 million, with the prior year reduced by a $100 million litigation charge
Net income of $308.0 million ($2.87 diluted EPS) versus $190.4 million ($1.83) in Fiscal 2005
Gross profit margin rose to 54.0% from 51.0%, reflecting sourcing efficiencies and better full-price sell-through
Retail operating income rose 69.1% to $140.0 million and wholesale operating income rose 32.9% to $398.3 million
Acquired Polo Jeans Business (about $260 million) and Footwear Business (about $112 million); signed ten-year Luxottica eyewear license with about $200 million prepayment due January 2007
Management reported a material weakness in income tax accounting, so internal control over financial reporting was not effective as of April 1, 2006

03—Questions

Frequently Asked Questions

What drove revenue growth in Fiscal 2006?
Wholesale revenues increased $230.4 million, driven by newly acquired Footwear and Polo Jeans products, a full year of childrenswear sales, the Chaps launch, and higher menswear and womenswear sales. Retail revenues increased $210.0 million on a 6.5% rise in comparable full-price store sales and store expansion. Licensing revenues were essentially flat at $245.2 million.
How much cash and debt does the company have?
At April 1, 2006, the company had $285.7 million of cash and cash equivalents and $280.4 million of debt, a net cash position of $5.3 million, compared with a net cash position of $59.5 million a year earlier. The debt is approximately €227 million of 6.125% Euro notes due November 2006, which management intends to refinance in the first half of Fiscal 2007. The company had no borrowings under its $450 million credit facility.
What is the status of the internal control issues?
Management concluded that internal control over financial reporting was not effective as of April 1, 2006, because of a material weakness in income tax accounting. The company said it remediated a previously reported weakness in financial closing and reporting. The tax weakness remained open, and the company intends to continue implementing tax controls in Fiscal 2007.
What major legal matters are pending?
The Jones Apparel litigation was settled for $100 million in February 2006, alongside the Polo Jeans acquisition. Pending matters include the Wathne Imports breach of contract suit, which seeks compensatory damages above $250 million and punitive damages of at least $750 million, and the ongoing trademark dispute with the United States Polo Association and Jordache. Several California wage and hour class actions are also pending. Management believes none will have a material adverse effect on the financial position.
What is the Luxottica eyewear agreement?
On February 27, 2006, the company signed a ten-year exclusive license with Luxottica Group for prescription frames and sunglasses under the Polo Ralph Lauren brand, effective January 1, 2007. Luxottica will pay an approximately $200 million prepayment on the effective date, which is non-refundable except for certain company breaches. The agreement replaces the existing Safilo eyewear license, which expires December 31, 2006.

04—Continue

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