How did Polo Ralph Lauren perform financially in fiscal 2007?

Net revenues grew 14.7% to $4.295 billion, operating income rose 26.3% to $652.6 million, and net income increased 30.2% to $400.9 million. Diluted EPS was $3.73, versus $2.87 in fiscal 2006. Gross profit margin expanded to 54.4% of net revenues.

What drove revenue growth, and which segments contributed most?

Wholesale contributed most of the increase, with revenue up $373.4 million, including $190 million from the newly acquired Footwear and Polo Jeans businesses. Retail revenue rose $184.6 million on improved comparable store sales, new stores and Polo.com growth. Licensing declined $8.9 million, mainly due to lost royalties from the acquired businesses and the eyewear transition.

What are the main Japanese acquisitions and how will they affect results?

On May 29, 2007, the company acquired about 77% of Impact 21 (raising its stake from about 20% to 97%) and the remaining 50% of Polo Ralph Lauren Japan. The Impact 21 cost is expected to be about $340 million in total, funded with cash and a roughly $170 million yen loan. The company does not expect these acquisitions to contribute to profitability until Fiscal 2009, due to non-cash purchase accounting costs.

How strong is the balance sheet and what are the capital return plans?

The company ended the year with $563.9 million of cash, $398.8 million of Euro notes, and a net cash position of $165.1 million. Stockholders' equity was $2.335 billion. It repurchased $231.3 million of stock in fiscal 2007, leaving $368.3 million available under its program, and it continues to pay a $0.05 quarterly dividend.

What key risks and legal matters does the filing highlight?

Key risks include dependence on a few large department store customers, reliance on Ralph Lauren personally, sourcing from more than 350 foreign manufacturers, currency exposure, and competition. Legal matters include the Wathne Imports breach-of-contract lawsuit, the Polo trademark appeal, California wage-and-hour class actions, credit card data security claims, and a French tax audit with a potential exposure above reserves of up to about $30 million.

RL 10-K FY2007 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed May 30, 2007. Cited figures are marked; the original filing is the authoritative source.

Polo Ralph Lauren Corporation reported fiscal 2007 (year ended March 31, 2007) net revenues of $4.295 billion^a, up from $3.746 billion in fiscal 2006, with net income of $400.9 million and diluted earnings per share of $3.73, compared with $308.0 million and $2.87 a year earlier.

Operating income rose to $652.6 million^b, or 15.2% of net revenues, from $516.6 million. Growth was led by the Wholesale segment ($2.316 billion in revenue, up $373.4 million, largely from the newly acquired Polo Jeans and Footwear businesses) and the Retail segment ($1.743 billion, up $184.6 million). Licensing revenue declined to $236.3 million.

Gross margin improved to 54.4% of net revenues. Stock-based compensation under FAS 123R reduced diluted EPS by $0.24^c. The company ended the year with a net cash position of $165.1 million, cash from operations of $796.1 million (including about $180 million of prepaid royalties from the Luxottica eyewear agreement), and stockholders' equity of $2.335 billion.

It repurchased 3.5 million Class A shares for $231.3 million^d and has $368.3 million remaining under its repurchase program. Post year-end, the company completed the Japanese Business Acquisitions on May 29, 2007, acquiring a controlling interest in Impact 21 and the remaining 50% of Polo Ralph Lauren Japan for a total expected cost of about $340 million, plus $175 million for the RL Media minority interest.

The filing notes that the Japanese transactions are not expected to contribute to profitability until Fiscal 2009, and that FIN 48 adoption could result in a cumulative charge of up to $85 million to retained earnings. Key risks disclosed include customer concentration (Federated and Dillard's represented 29% and 14% of wholesale net sales), reliance on Mr. Ralph Lauren, dependence on over 350 foreign manufacturers with more than 99% of products produced outside the U.S., currency exposure, and ongoing litigation, including the Wathne breach-of-contract suit and the Polo Trademark appeal.

02—Key points

Key Highlights

Net revenues rose 14.7% to $4.295 billion; operating income rose 26.3% to $652.6 million (15.2% of revenues).
Diluted EPS increased to $3.73 from $2.87; net income was $400.9 million, up from $308.0 million.
Wholesale revenue grew 19.2% to $2.316 billion, aided by the Polo Jeans and Footwear acquisitions; Retail revenue grew 11.8% to $1.743 billion.
Retail operating income increased 60.1% to $224.2 million, while Licensing revenue declined 3.6% to $236.3 million.
Net cash position of $165.1 million at year-end, with $796.1 million of operating cash flow including about $180 million of Luxottica prepayment.
Completed Japanese Business Acquisitions on May 29, 2007 (Impact 21 and PRL Japan) for an expected total cost of about $340 million, funded partly by a $170 million yen term loan.
Concentrated customer base: Federated (29%) and Dillard's (14%) of wholesale net sales; ten largest customers about 67%.

03—Questions

Frequently Asked Questions

How did Polo Ralph Lauren perform financially in fiscal 2007?
Net revenues grew 14.7% to $4.295 billion, operating income rose 26.3% to $652.6 million, and net income increased 30.2% to $400.9 million. Diluted EPS was $3.73, versus $2.87 in fiscal 2006. Gross profit margin expanded to 54.4% of net revenues.
What drove revenue growth, and which segments contributed most?
Wholesale contributed most of the increase, with revenue up $373.4 million, including $190 million from the newly acquired Footwear and Polo Jeans businesses. Retail revenue rose $184.6 million on improved comparable store sales, new stores and Polo.com growth. Licensing declined $8.9 million, mainly due to lost royalties from the acquired businesses and the eyewear transition.
What are the main Japanese acquisitions and how will they affect results?
On May 29, 2007, the company acquired about 77% of Impact 21 (raising its stake from about 20% to 97%) and the remaining 50% of Polo Ralph Lauren Japan. The Impact 21 cost is expected to be about $340 million in total, funded with cash and a roughly $170 million yen loan. The company does not expect these acquisitions to contribute to profitability until Fiscal 2009, due to non-cash purchase accounting costs.
How strong is the balance sheet and what are the capital return plans?
The company ended the year with $563.9 million of cash, $398.8 million of Euro notes, and a net cash position of $165.1 million. Stockholders' equity was $2.335 billion. It repurchased $231.3 million of stock in fiscal 2007, leaving $368.3 million available under its program, and it continues to pay a $0.05 quarterly dividend.
What key risks and legal matters does the filing highlight?
Key risks include dependence on a few large department store customers, reliance on Ralph Lauren personally, sourcing from more than 350 foreign manufacturers, currency exposure, and competition. Legal matters include the Wathne Imports breach-of-contract lawsuit, the Polo trademark appeal, California wage-and-hour class actions, credit card data security claims, and a French tax audit with a potential exposure above reserves of up to about $30 million.

04—Continue

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