FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarterly Period Ended December 31, 2005 |
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or |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-13057
Polo Ralph Lauren Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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13-2622036 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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650 Madison Avenue,
New York, New York
(Address of principal executive offices) |
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10022
(Zip Code) |
Registrants telephone number, including area code
212-318-7000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrants
were required to file such reports) and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ |
Accelerated filer o |
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
At January 28, 2006, 61,647,345 shares of the
registrants Class A Common Stock, $.01 par
value, were outstanding and 43,280,021 shares of the
registrants Class B Common Stock, $.01 par
value, were outstanding.
POLO RALPH LAUREN CORPORATION
INDEX TO
FORM 10-Q
2
POLO RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE SHEETS
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December 31, | |
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April 2, | |
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2005 | |
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2005 | |
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(In thousands, except shares | |
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and per share data) | |
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(Unaudited) | |
ASSETS |
Current assets:
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Cash and cash equivalents
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$ |
643,874 |
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$ |
350,485 |
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Accounts receivable, net of allowances of $97,578 and $111,042
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356,677 |
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455,682 |
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Inventories
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443,267 |
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430,082 |
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Deferred tax assets
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70,392 |
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74,821 |
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Prepaid expenses and other
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79,295 |
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102,693 |
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Total current assets
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1,593,505 |
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1,413,763 |
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Property and equipment, net
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517,860 |
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487,894 |
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Deferred tax assets
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32,932 |
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35,973 |
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Goodwill
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568,435 |
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558,858 |
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Intangible assets, net
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103,653 |
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46,991 |
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Other assets
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201,074 |
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183,190 |
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Total assets
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$ |
3,017,459 |
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$ |
2,726,669 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
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Accounts payable
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158,795 |
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184,394 |
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Income tax payable
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55,374 |
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72,148 |
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Accrued expenses and other
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397,216 |
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365,868 |
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Current maturities of long-term debt
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260,778 |
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Total current liabilities
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872,163 |
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622,410 |
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Long-term debt
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290,960 |
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Other non-current liabilities
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169,899 |
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137,591 |
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Total liabilities
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1,042,062 |
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1,050,961 |
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Stockholders equity:
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Common stock
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Class A, par value $.01 per share;
500,000,000 shares authorized; 65,889,575 and
64,016,034 shares issued and outstanding
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659 |
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640 |
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Class B, par value $.01 per share;
100,000,000 shares authorized; 43,280,021 shares
issued and outstanding
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433 |
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433 |
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Additional paid-in-capital
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761,737 |
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664,291 |
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Retained earnings
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1,317,457 |
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1,090,310 |
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Treasury stock, Class A, at cost (4,249,230 and
4,177,600 shares)
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(83,280 |
) |
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(80,027 |
) |
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Accumulated other comprehensive income
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24,593 |
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29,973 |
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Unearned compensation
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(46,202 |
) |
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(29,912 |
) |
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Total stockholders equity
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1,975,397 |
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1,675,708 |
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Total liabilities and stockholders equity
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$ |
3,017,459 |
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$ |
2,726,669 |
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See accompanying notes.
3
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended | |
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Nine Months Ended | |
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December 31, | |
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January 1, | |
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December 31, | |
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January 1, | |
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2005 | |
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2005 | |
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2005 | |
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2005 | |
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(As restated, | |
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(As restated, | |
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see Note 4) | |
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see Note 4) | |
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(In thousands, except per share data) | |
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(Unaudited) | |
Net sales
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$ |
933,182 |
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$ |
843,639 |
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$ |
2,592,533 |
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$ |
2,226,178 |
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Licensing revenue
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62,300 |
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57,935 |
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182,275 |
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177,016 |
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Net revenues
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995,482 |
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901,574 |
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2,774,808 |
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2,403,194 |
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Cost of goods sold(a)
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(464,017 |
) |
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(455,498 |
) |
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(1,277,370 |
) |
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(1,195,556 |
) |
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Gross profit
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531,465 |
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446,076 |
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1,497,438 |
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1,207,638 |
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Other costs and expenses:
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Selling, general and administrative expenses(a)
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(381,615 |
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(329,047 |
) |
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(1,082,892 |
) |
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(945,117 |
) |
Amortization of intangible assets
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(1,765 |
) |
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(621 |
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(4,342 |
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(1,863 |
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Impairments of retail assets
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(4,443 |
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(9,358 |
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(599 |
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Restructuring charges
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(218 |
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(1,846 |
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Total other costs and expenses
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(387,823 |
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(329,886 |
) |
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(1,096,592 |
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(949,425 |
) |
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Operating income
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143,642 |
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116,190 |
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400,846 |
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258,213 |
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Foreign currency gains (losses)
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(577 |
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400 |
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(6,561 |
) |
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3,334 |
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Interest expense
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(3,312 |
) |
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(2,958 |
) |
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(8,612 |
) |
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(8,166 |
) |
Interest income
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3,772 |
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|
969 |
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9,620 |
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2,508 |
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Income before provision for income taxes and other income
(expense), net
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143,525 |
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114,601 |
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395,293 |
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255,889 |
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Provision for income taxes
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(52,368 |
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(40,280 |
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(146,992 |
) |
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(89,987 |
) |
Other income (expense), net
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(484 |
) |
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715 |
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(2,716 |
) |
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1,127 |
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Net income
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$ |
90,673 |
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$ |
75,036 |
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$ |
245,585 |
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$ |
167,029 |
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Net income per share Basic
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$ |
0.87 |
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$ |
0.74 |
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$ |
2.36 |
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$ |
1.65 |
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Net income per share Diluted
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$ |
0.84 |
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$ |
0.72 |
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$ |
2.30 |
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$ |
1.61 |
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Weighted-average common shares outstanding Basic
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104,688 |
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101,896 |
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103,976 |
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101,190 |
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Weighted-average common shares outstanding Diluted
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107,780 |
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104,325 |
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106,893 |
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103,566 |
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Dividends declared per share
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$ |
0.05 |
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$ |
0.05 |
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$ |
0.15 |
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$ |
0.15 |
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(a) Includes total depreciation expense of:
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$ |
(34,564 |
) |
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$ |
(26,377 |
) |
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$ |
(90,219 |
) |
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$ |
(72,056 |
) |
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See accompanying notes.
4
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine Months Ended | |
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| |
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December 31, | |
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January 1, | |
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2005 | |
|
2005 | |
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(As restated, | |
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see Note 4) | |
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(In thousands) | |
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(Unaudited) | |
Cash flows from operating activities:
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Net income
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$ |
245,585 |
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$ |
167,029 |
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation and amortization expense
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|
94,561 |
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|
73,919 |
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Deferred income taxes
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(16,318 |
) |
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(3,127 |
) |
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Minority interest expense
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|
7,270 |
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|
4,656 |
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Equity in the income of equity-method investees
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(4,554 |
) |
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(5,783 |
) |
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Non-cash stock compensation expense
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21,131 |
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|
9,350 |
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Non-cash impairments of retail assets
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9,358 |
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|
599 |
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Provision for losses on accounts receivable
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|
918 |
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|
4,242 |
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Loss on disposal of property and equipment
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|
1,574 |
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|
3,927 |
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Foreign currency losses (gains)
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|
3,811 |
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(3,334 |
) |
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Changes in operating assets and liabilities:
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Accounts receivable
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|
107,807 |
|
|
|
107,737 |
|
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|
Inventories
|
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|
4,459 |
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|
(27,576 |
) |
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Accounts payable and accrued liabilities
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|
(7,380 |
) |
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|
(6,110 |
) |
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Other balance sheet changes
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|
25,388 |
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|
34,381 |
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Net cash provided by operating activities
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|
493,610 |
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|
359,910 |
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Cash flows from investing activities:
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|
|
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|
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|
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Acquisitions, net of cash acquired
|
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|
(113,965 |
) |
|
|
(243,834 |
) |
|
Capital expenditures
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|
|
(97,625 |
) |
|
|
(126,126 |
) |
|
|
|
|
|
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Net cash used in investing activities
|
|
|
(211,590 |
) |
|
|
(369,960 |
) |
|
|
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|
|
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Cash flows from financing activities:
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|
|
|
|
|
|
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|
Payments of capital lease obligations
|
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|
(983 |
) |
|
|
(973 |
) |
|
Payments of deferred financing costs
|
|
|
|
|
|
|
(1,106 |
) |
|
Payments of dividends
|
|
|
(15,662 |
) |
|
|
(15,137 |
) |
|
Repurchases of common stock
|
|
|
(3,253 |
) |
|
|
(1,052 |
) |
|
Proceeds from exercise of stock options
|
|
|
44,859 |
|
|
|
42,228 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
24,961 |
|
|
|
23,960 |
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(13,592 |
) |
|
|
3,278 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
293,389 |
|
|
|
17,188 |
|
Cash and cash equivalents at beginning of period
|
|
|
350,485 |
|
|
|
352,335 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
643,874 |
|
|
$ |
369,523 |
|
|
|
|
|
|
|
|
See accompanying notes.
5
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and where otherwise
indicated)
(Unaudited)
|
|
1. |
Description of Business |
Polo Ralph Lauren Corporation (PRLC) is a leader in
the design, marketing and distribution of premium lifestyle
products. PRLCs long-standing reputation and distinctive
image have been consistently developed across an expanding
number of products, brands and international markets.
PRLCs brand names include Polo, Polo by Ralph Lauren,
Ralph Lauren Purple Label, Ralph Lauren Black Label, Polo Sport,
Ralph Lauren, Blue Label, Lauren, Polo Jeans, RL, Rugby, Chaps
and Club Monaco, among others. PRLC and its
subsidiaries are collectively referred to herein as the
Company, we, us,
our and ourselves, unless the context
indicates otherwise.
We classify our interests into three business segments:
wholesale, retail and licensing. Through those interests, we
design, license, contract for the manufacture of, market and
distribute mens, womens and childrens apparel,
accessories, fragrances and home furnishings. Our wholesale
sales are principally to major department and specialty stores
located throughout the United States and Europe. We also sell
directly to consumers through full-price and factory retail
stores located throughout the United States, Canada, Europe,
South America and Asia, and through our jointly owned retail
internet site located at www.polo.com. In addition, we
often license the right to third parties to use our various
trademarks in connection with the manufacture and sale of
designated products, such as eyewear and fragrances, in
specified geographic areas.
The accompanying consolidated financial statements present the
financial position, results of operations and cash flows of the
Company and all entities in which the Company has a controlling
voting interest. The consolidated financial statements also
include the accounts of any variable interest entities in which
the Company is considered to be the primary beneficiary and such
entities are required to be consolidated in accordance with
accounting principles generally accepted in the United States
(US GAAP). In particular, pursuant to the provisions
of Financial Accounting Standards Board (FASB)
Interpretation 46R (FIN 46R), the Company
consolidates its 50% interest in Ralph Lauren Media, LLC
(RL Media), a joint venture with National
Broadcasting Company, Inc. (now known as NBC Universal, Inc.)
and an affiliated company (collectively, NBC). RL
Media conducts the Companys
e-commerce initiatives.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Our fiscal year ends on the Saturday closest to March 31.
As such, all references to Fiscal 2006 represent the
52-week fiscal year
ending April 1, 2006 and references to Fiscal
2005 represent the
52-week fiscal year
ended April 2, 2005.
The financial position and operating results of RL Media are
reported on a three-month lag. Similarly, the financial position
and operating results of our consolidated 50% interest in Polo
Ralph Lauren Japan Corporation (formerly known as New Polo
Japan, Inc.) are reported on a one-month lag.
|
|
|
Interim Financial Statements |
The accompanying consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities
and Exchange Commission (the SEC). The accompanying
consolidated financial statements are unaudited. But, in the
opinion of management, such consolidated financial statements
contain all normal and recurring adjustments necessary to
present fairly the consolidated financial condition,
6
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
results of operations and changes in cash flows of the Company
for the interim periods presented. In addition, certain
information and footnote disclosure normally included in
financial statements prepared in accordance with US GAAP have
been condensed or omitted from this report as is permitted by
the SECs rules and regulations. However, we believe that
the disclosures herein are adequate to make the information
presented not misleading.
The consolidated balance sheet data as of April 2, 2005 is
derived from the audited financial statements included in our
Annual Report on
Form 10-K filed
with the SEC for the year ended April 2, 2005 (the
Fiscal
2005 10-K),
which should be read in conjunction with these financial
statements. Reference is made to the Fiscal
2005 10-K for a
complete set of financial statements.
Our business is affected by seasonal trends, with higher levels
of wholesale sales in our second and fourth quarters and higher
retail sales in our second and third quarters. These trends
result primarily from the timing of seasonal wholesale shipments
and key vacation travel and holiday periods in the retail
segment. Accordingly, our operating results and cash flows for
the three and nine-month periods ended December 31, 2005
are not necessarily indicative of the results that may be
expected for Fiscal 2006 as a whole.
|
|
|
Restatements and Reclassifications |
As previously disclosed in our Quarterly Report on
Form 10-Q for the
three months ended July 2, 2005 (the First Quarter
2006 10-Q),
we had to restate certain quarterly financial information for
our Fiscal 2005 quarterly periods. These restatements and
related reconciliations from previously filed financial
statements are described in further detail in Note 4 to the
accompanying consolidated financial statements. In addition,
certain reclassifications have been made to the prior
periods financial information in order to conform to the
current periods presentation.
|
|
3. |
Summary of Significant Accounting Policies |
Revenue within our wholesale segment is recognized at the time
title passes and risk of loss is transferred to customers.
Wholesale revenue is recorded net of returns, discounts,
end-of-season markdown
allowances and operational chargebacks. Returns and allowances
require pre-approval from management and discounts are based on
trade terms. Estimates for
end-of-season markdown
allowances are based on historic trends, seasonal results, an
evaluation of current economic and market conditions, and
retailer performance. The Company reviews and refines these
estimates on a quarterly basis. The Companys historical
estimates of these costs have not differed materially from
actual results.
Retail store revenue is recognized net of estimated returns at
the time of sale to consumers. Licensing revenue is initially
recorded based upon contractually guaranteed minimum levels and
adjusted as actual sales data is received from licensees. During
the three and nine months ended December 31, 2005 and
January 1,
7
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2005, the Company reduced revenues and credited customer
accounts for customer allowances, discounts, operational
chargebacks and returns as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
December 31, | |
|
January 1, | |
|
December 31, | |
|
January 1, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Beginning reserve balance
|
|
$ |
89,687 |
|
|
$ |
76,474 |
|
|
$ |
100,001 |
|
|
$ |
90,269 |
|
Provision taken to increase reserve
|
|
|
66,571 |
|
|
|
74,612 |
|
|
|
200,377 |
|
|
|
183,576 |
|
Amount credited against customer accounts
|
|
|
(65,943 |
) |
|
|
(71,745 |
) |
|
|
(208,980 |
) |
|
|
(194,893 |
) |
Foreign currency translation
|
|
|
(218 |
) |
|
|
1,691 |
|
|
|
(1,301 |
) |
|
|
2,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending reserve balance
|
|
$ |
90,097 |
|
|
$ |
81,032 |
|
|
$ |
90,097 |
|
|
$ |
81,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the normal course of business, the Company extends credit to
customers that satisfy defined credit criteria. Accounts
receivable, net, as shown in our consolidated balance sheet, is
net of the following allowances and reserves.
An allowance for doubtful accounts is determined through
analysis of periodic aging of accounts receivable, assessments
of collectibility based on an evaluation of historic and
anticipated trends, the financial condition of the
Companys customers, and an evaluation of the impact of
economic conditions. Expenses of $0.8 million were recorded
as an allowance for uncollectible accounts during the nine
months ended December 31, 2005. The amounts written off
against customer accounts during the nine months ended
December 31, 2005 and January 1, 2005 totaled
$3.8 million and $1.0 million, respectively, and the
balance in this reserve was $7.5 million as of
December 31, 2005.
A reserve for trade discounts is determined based on open
invoices where trade discounts have been extended to customers
and is treated as a reduction of sales.
Estimated end-of-season
markdown allowances are included as a reduction of sales. As
described above, these provisions are based on retail sales
performance, seasonal negotiations with our customers,
historical deduction trends and an evaluation of current market
conditions.
A reserve for operational chargebacks represents various
deductions by customers relating to individual shipments. This
reserve, net of expected recoveries, is included as a reduction
of sales. The reserve is based on chargebacks received as of the
date of the financial statements and past experience. Costs
associated with potential returns of products also are included
as a reduction of sales. These return reserves are based on
current information regarding retail performance, historical
experience and an evaluation of current market conditions. The
Companys historical estimates of these operational
chargeback and return costs have not differed materially from
actual results.
We currently use the intrinsic value method to account for
stock-based compensation in accordance with Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees,
(APB 25) and have adopted the disclosure-only
provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, as amended by FASB Statement
No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure
(FAS 123). Accordingly, no compensation cost
has been recognized for fixed stock option grants. Had
compensation costs for the Companys stock option grants
been
8
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
determined based on the fair value at the grant dates of such
awards in accordance with FAS 123, the Companys net
income and earnings per share would have been reduced to the pro
forma amounts as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
For the Nine | |
|
|
Months Ended | |
|
Months Ended | |
|
|
| |
|
| |
|
|
December 31, | |
|
January 1, | |
|
December 31, | |
|
January 1, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(In thousands, except | |
|
|
|
|
|
|
per share amounts) | |
|
|
Net income as reported
|
|
$ |
90,673 |
|
|
$ |
75,036 |
|
|
$ |
245,585 |
|
|
$ |
167,029 |
|
Add: stock-based employee compensation expense included in
reported net income, net of tax
|
|
|
6,265 |
|
|
|
2,903 |
|
|
|
13,186 |
|
|
|
6,018 |
|
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards, net of
tax
|
|
|
9,569 |
|
|
|
6,368 |
|
|
|
23,074 |
|
|
|
16,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
87,369 |
|
|
$ |
71,571 |
|
|
$ |
235,697 |
|
|
$ |
156,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share as reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.87 |
|
|
$ |
0.74 |
|
|
$ |
2.36 |
|
|
$ |
1.65 |
|
|
Diluted
|
|
$ |
0.84 |
|
|
$ |
0.72 |
|
|
$ |
2.30 |
|
|
$ |
1.61 |
|
Pro forma net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.83 |
|
|
$ |
0.70 |
|
|
$ |
2.27 |
|
|
$ |
1.55 |
|
|
Diluted
|
|
$ |
0.81 |
|
|
$ |
0.69 |
|
|
$ |
2.20 |
|
|
$ |
1.51 |
|
For this purpose, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions used for grants in Fiscal 2006 and Fiscal 2005,
respectively: risk-free interest rates of 3.66% and 3.63%; a
dividend of $0.20 per annum; expected volatility of 29.1%
and 35.0%, and expected lives of 5.2 years for both periods.
As noted below under New Accounting Pronouncements,
we will begin recognizing compensation cost for fixed stock
option awards effective April 2, 2006, pursuant to our
adoption of FASB Statement No. 123R, Share-Based
Payments (FAS 123R).
|
|
|
New Accounting Pronouncements |
In May 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections
(FAS 154). FAS 154 generally requires that
accounting changes and errors be applied retrospectively.
FAS 154 is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15,
2005. The Company does not expect FAS 154 to have a
material impact on its financial statements.
In March 2005, the FASB issued Statement of Financial Accounting
Standards Interpretation Number 47, Accounting for
Conditional Asset Retirement Obligations
(FIN 47). FIN 47 provides clarification
regarding the meaning of the term conditional asset
retirement obligation as used in FASB Statement
No. 143, Accounting for Asset Retirement
Obligations. FIN 47 is effective for fiscal years
beginning after December 15, 2005. The Company is currently
evaluating the impact of FIN 47 on its financial statements.
In December 2004, the FASB issued FSP No. 109-2,
Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004 (FSP
No. 109-2).
FSP No. 109-2 provides guidance under FASB Statement
No. 109, Accounting for Income
9
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Taxes, (FAS 109) with respect to
recording the potential impact of the repatriation provisions of
the American Jobs Creation Act of 2004 (the Jobs
Act) on enterprises income tax expense and deferred
tax liability. FSP No. 109-2 states that an enterprise
is allowed time beyond the financial reporting period of
enactment to evaluate the effect of the Jobs Act on its plan for
reinvestment or repatriation of foreign earnings for purposes of
applying FAS No. 109. The Company is currently
evaluating the impact of FSP No. 109-2 on its consolidated
financial statements.
In December 2004, the FASB issued FAS 123R. Under this
standard, all forms of share-based payment to employees,
including stock options, would be treated as compensation and
recognized in the statement of operations. This standard will be
effective for awards granted, modified or settled in fiscal
years beginning after June 15, 2005. The Company currently
accounts for stock options under APB No. 25. The pro forma
impact of expensing options, valued using the Black Scholes
valuation model, has been disclosed previously in this Note. The
Company is currently researching the appropriate valuation model
to use for stock options. In connection with the issuance of
FAS 123R, the SEC issued Staff Accounting
Bulletin No. 107 (SAB 107) in March
of 2005. SAB 107 provides implementation guidance for
companies to use in their adoption of FAS 123R. The Company
is currently evaluating the effect of FAS 123R and
SAB 107 on its financial statements and will implement
FAS 123R on April 2, 2006.
In November 2004, the FASB issued Statement No. 151,
Inventory Costs (FAS 151).
FAS 151 clarifies standards for the treatment of abnormal
amounts of idle facility expense, freight, handling costs and
spoilage. FAS 151 is effective for fiscal years beginning
after June 15, 2005. The Company is currently evaluating
the impact of FAS 151 on its financial statements, but it
is not expected to have a material effect.
|
|
4. |
Restatement of Previously Issued Financial Statements |
As previously disclosed in its First Quarter
2006 10-Q, the
Company has concluded that the restatements described herein are
necessary to its financial statements for the three and nine
months ended January 1, 2005. No restatement of the
Companys financial statements for full Fiscal 2005 is
necessary as a result of the matters discussed below.
As a result of the clarifications contained in the
February 7, 2005 letter from the Office of the Chief
Accountant of the SEC to the Center for Public Company Audit
Firms of the American Institute of Certified Public Accountants
regarding specific lease accounting issues, the Company
initiated a review of its lease accounting practices. Management
and the Audit Committee of the Companys Board of Directors
determined that the Companys accounting practices were
incorrect with respect to rent holiday periods and the
classification of landlord incentives and the related
amortization. The Company has made all appropriate adjustments
to correct those errors.
In particular, in periods prior to the fourth quarter of Fiscal
2005, the Company recorded straight-line rent expense for store
operating leases over the related stores lease term
beginning with the commencement date of store operations. Rent
expense was not recognized during any build-out period. To
correct this practice, the Company adopted a policy in which
rent expense is recognized on a straight-line basis over the
stores lease term commencing with the build-out period
(the effective lease-commencement date). In addition, prior to
the fourth quarter of Fiscal 2005, the Company incorrectly
classified tenant allowances (amounts received from a landlord
to fund leasehold improvements) as a reduction of property and
equipment, rather than as a deferred lease incentive liability.
The amortization of these landlord incentives was originally
recorded as a reduction in depreciation expense rather than as a
reduction in rent expense. Similarly, the Companys
statement of cash flows had originally reflected these
incentives as a reduction of capital expenditures within cash
flows from investing activities, rather than as cash flows from
operating activities. These corrections resulted in an increase
to net property and equipment of $10.0 million and deferred
lease incentive liabilities of $22.6 million at
January 1, 2005. Additionally, the reclassification of the
amortization of deferred lease incentives resulted in a decrease
to rent expense of
10
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$0.9 million for the three months ended January 1,
2005, an increase to rent expense of $2.5 million for the
nine months ended January 1, 2005, and an increase to
depreciation expense of $0.7 million and $2.1 million
for the three-month and nine-month periods ended January 1,
2005, respectively.
In January 2000, RL Media, a joint venture with NBC, was formed.
Prior to the end of Fiscal 2005, the Company used the equity
method of accounting for this investment. On December 24,
2003, the FASB issued FIN 46R. At that time, the Company
considered the provisions of FIN 46R for its financial
statements and concluded that RL Media was a variable interest
entity (VIE) under FIN 46R. However, the
Company determined that it was not the primary beneficiary under
FIN 46R and, therefore, should not consolidate the results
of RL Media. Upon subsequent review at the end of Fiscal 2005,
the Company concluded that its previous determination was
incorrect and that consolidation of RL Media into the
Companys financial statements was required. Accordingly,
effective with the fourth quarter of Fiscal 2005, the Company
restated all prior periods to reflect the consolidation of RL
Media, including the first three quarters of Fiscal 2005. The
effects from such restatement are presented below.
There were also various balance sheet and cash flow
classification errors that were detected subsequent to the
issuance of certain of the Companys Fiscal 2005 quarterly
financial statements, which had an impact on the presentation of
cash flows for such previously filed quarterly periods. In
particular, the statement of cash flows for the nine months
ended January 1, 2005 has been restated to reflect a
$1.0 million increase in cash provided by operations,
consisting of the reclassification of certain capital lease
payments from operating activities to financing activities.
A summary of the impact of the restatement to properly account
for leases and to consolidate RL Media on the consolidated
income statements for the three and nine months ended
January 1, 2005 is as follows (in thousands, except for per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 1, 2005 | |
|
|
| |
|
|
|
|
Lease | |
|
|
|
|
As Previously | |
|
Accounting | |
|
RL Media | |
|
|
|
|
Reported | |
|
Adjustments | |
|
Consolidation | |
|
As Restated | |
|
|
| |
|
| |
|
| |
|
| |
Consolidated Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
830,058 |
|
|
$ |
|
|
|
$ |
13,581 |
|
|
$ |
843,639 |
|
Net revenues
|
|
|
887,993 |
|
|
|
|
|
|
|
13,581 |
|
|
|
901,574 |
|
Cost of goods sold
|
|
|
(449,960 |
) |
|
|
|
|
|
|
(5,538 |
) |
|
|
(455,498 |
) |
Gross profit
|
|
|
438,033 |
|
|
|
|
|
|
|
8,043 |
|
|
|
446,076 |
|
Selling, general and administrative expenses
|
|
|
(322,360 |
) |
|
|
198 |
|
|
|
(6,885 |
) |
|
|
(329,047 |
) |
Amortization of intangible assets
|
|
|
(621 |
) |
|
|
|
|
|
|
|
|
|
|
(621 |
) |
Impairments of retail assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
(218 |
) |
|
|
|
|
|
|
|
|
|
|
(218 |
) |
Operating income
|
|
|
114,834 |
|
|
|
198 |
|
|
|
1,158 |
|
|
|
116,190 |
|
Interest expense, net
|
|
|
(1,996 |
) |
|
|
|
|
|
|
7 |
|
|
|
(1,989 |
) |
Income before provision for income taxes and other income
(expense), net
|
|
|
113,238 |
|
|
|
198 |
|
|
|
1,165 |
|
|
|
114,601 |
|
Provision for income taxes
|
|
|
(40,199 |
) |
|
|
(81 |
) |
|
|
|
|
|
|
(40,280 |
) |
Other income (expense), net
|
|
|
1,803 |
|
|
|
|
|
|
|
(1,088 |
) |
|
|
715 |
|
Net income
|
|
|
74,842 |
|
|
|
117 |
|
|
|
77 |
|
|
|
75,036 |
|
Net income per share Basic
|
|
|
0.73 |
|
|
|
0.01 |
|
|
|
|
|
|
|
0.74 |
|
Net income per share Diluted
|
|
|
0.72 |
|
|
|
|
|
|
|
|
|
|
|
0.72 |
|
11
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended January 1, 2005 | |
|
|
| |
|
|
|
|
Lease | |
|
|
|
|
As Previously | |
|
Accounting | |
|
RL Media | |
|
|
|
|
Reported | |
|
Adjustments | |
|
Consolidation | |
|
As Restated | |
|
|
| |
|
| |
|
| |
|
| |
Consolidated Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
2,187,407 |
|
|
$ |
|
|
|
$ |
38,771 |
|
|
$ |
2,226,178 |
|
Net revenues
|
|
|
2,364,423 |
|
|
|
|
|
|
|
38,771 |
|
|
|
2,403,194 |
|
Cost of goods sold
|
|
|
(1,181,535 |
) |
|
|
|
|
|
|
(14,021 |
) |
|
|
(1,195,556 |
) |
Gross profit
|
|
|
1,182,888 |
|
|
|
|
|
|
|
24,750 |
|
|
|
1,207,638 |
|
Selling, general and administrative expenses
|
|
|
(919,469 |
) |
|
|
(4,613 |
) |
|
|
(21,035 |
) |
|
|
(945,117 |
) |
Amortization of intangible assets
|
|
|
(1,863 |
) |
|
|
|
|
|
|
|
|
|
|
(1,863 |
) |
Impairments of retail assets
|
|
|
(599 |
) |
|
|
|
|
|
|
|
|
|
|
(599 |
) |
Restructuring charges
|
|
|
(1,846 |
) |
|
|
|
|
|
|
|
|
|
|
(1,846 |
) |
Operating income
|
|
|
259,111 |
|
|
|
(4,613 |
) |
|
|
3,715 |
|
|
|
258,213 |
|
Interest expense, net
|
|
|
(5,671 |
) |
|
|
|
|
|
|
13 |
|
|
|
(5,658 |
) |
Income before provision for income taxes and other income
(expense), net
|
|
|
256,774 |
|
|
|
(4,613 |
) |
|
|
3,728 |
|
|
|
255,889 |
|
Provision for income taxes
|
|
|
(91,342 |
) |
|
|
1,874 |
|
|
|
(519 |
) |
|
|
(89,987 |
) |
Other income (expense), net
|
|
|
3,220 |
|
|
|
|
|
|
|
(2,093 |
) |
|
|
1,127 |
|
Net income
|
|
|
168,652 |
|
|
|
(2,739 |
) |
|
|
1,116 |
|
|
|
167,029 |
|
Net income per share Basic
|
|
|
1.67 |
|
|
|
(0.03 |
) |
|
|
0.01 |
|
|
|
1.65 |
|
Net income per share Diluted
|
|
|
1.63 |
|
|
|
(0.03 |
) |
|
|
0.01 |
|
|
|
1.61 |
|
A summary of the impact of the corrections to the statement of
cash flows is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease | |
|
|
|
Other | |
|
|
|
|
As Previously | |
|
Accounting | |
|
RL Media | |
|
Cash Flow | |
|
|
|
|
Reported | |
|
Adjustments | |
|
Consolidation | |
|
Adjustment | |
|
As Restated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended January 1, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$ |
359,984 |
|
|
$ |
1,219 |
|
|
$ |
(2,266 |
) |
|
$ |
973 |
|
|
$ |
359,910 |
|
Net cash provided by (used in) investing activities
|
|
|
(368,741 |
) |
|
|
(1,219 |
) |
|
|
|
|
|
|
|
|
|
|
(369,960 |
) |
Net cash provided by (used in) financing activities
|
|
|
24,933 |
|
|
|
|
|
|
|
|
|
|
|
(973 |
) |
|
|
23,960 |
|
Net (decrease) increase in cash and cash equivalents
|
|
$ |
19,454 |
|
|
$ |
|
|
|
$ |
(2,266 |
) |
|
$ |
|
|
|
$ |
17,188 |
|
|
|
|
Acquisition of Polo Jeans Business |
On February 3, 2006, subsequent to the end of the third
quarter of Fiscal 2006, we acquired from Jones Apparel Group,
Inc. and subsidiaries (Jones) all of the issued and
outstanding shares of capital stock of Sun Apparel, Inc., our
licensee for mens and womens casual apparel and
sportswear in the United States and Canada (the Polo Jeans
Business). The acquisition cost was approximately
$260 million, including $5 million of transaction
costs. The purchase price is subject to certain post-closing
adjustments. In addition, as part of the transaction, we settled
all claims under our litigation with Jones for a cost of
$100 million (see Note 14).
12
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The results of operations for the Polo Jeans Business will be
consolidated in our results of operations beginning in February
2006. In addition, the purchase price is expected to be
allocated on a preliminary basis to inventory and intangible
assets, including the re-acquired license, customer
relationships, order backlog and goodwill. Other than inventory,
Jones retained the right to all working capital balances at the
date of closing.
We have also entered into a transition services agreement with
Jones to provide a variety of operational, financial and
information systems services over a period of six to twelve
months.
|
|
|
Acquisition of Footwear Business |
On July 15, 2005, we acquired from Reebok International,
Ltd. (Reebok) all of the issued and outstanding
shares of capital stock of Ralph Lauren Footwear Co., Inc., our
global licensee for mens, womens and childrens
footwear, as well as certain foreign assets owned by affiliates
of Reebok (collectively, the Footwear Business). The
acquisition cost was approximately $112.5 million in cash,
including $2 million of transaction costs. The purchase
price is subject to certain post-closing adjustments. In
addition, Reebok and certain of its affiliates have entered into
a transition services agreement with the Company to provide a
variety of operational, financial and information systems
services over a period of twelve to eighteen months. The
accompanying consolidated financial statements include the
following preliminary allocation of the acquisition cost to the
net assets acquired based on their respective estimated fair
values: trade receivables of $17.3 million; inventory of
$25.7 million; finite-lived intangible assets of
$62.2 million (the footwear license at $37.8 million,
customer relationships at $23.2 million and order backlog
at $1.2 million); goodwill of $21.0 million; other
assets of $1.1 million; and liabilities of
$14.8 million. The results of operations for the Footwear
Business for the period are included in the consolidated results
of operations commencing July 16, 2005.
The Company is in the process of completing its assessment of
the fair value of assets acquired and liabilities assumed. As a
result, the purchase price allocation is subject to change.
|
|
|
Acquisition of Childrenswear Business |
On July 2, 2004, we acquired certain assets and assumed
certain liabilities of RL Childrenswear Company, LLC, our
licensee holding the exclusive licenses to design, manufacture,
merchandise and sell newborn, infant, toddler and girls and boys
clothing in the United States, Canada and Mexico (the
Childrenswear Business). The purchase price was
approximately $263.5 million, including transaction costs
and deferred payments of $15.0 million over the three years
after the acquisition date. Additionally, we agreed to pay up to
$5.0 million in contingent payments if certain sales
targets were attained. During Fiscal 2005, we recorded a
$5.0 million liability for this contingent purchase payment
because we believed it was probable that the sales targets will
be achieved. This amount was recorded as an increase in
goodwill. The accompanying consolidated financial statements
include the following allocation of the acquisition cost to the
net assets acquired based on their respective fair values:
inventory of $26.6 million, property and equipment of
$7.5 million, intangible assets, consisting of non-compete
agreements of $2.5 million and customer relationships of
$29.9 million, other assets of $1.0 million, goodwill
of $208.3 million and liabilities of $12.3 million.
The results of operations for the Childrenswear Business for the
period are included in our consolidated results of operations
commencing July 2, 2004.
13
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories are valued at the lower of cost or market and are
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
April 2, | |
|
|
2005 | |
|
2005 | |
|
|
| |
|
| |
Raw materials
|
|
$ |
5,530 |
|
|
$ |
5,276 |
|
Work-in-process
|
|
|
18,045 |
|
|
|
8,283 |
|
Finished goods
|
|
|
419,692 |
|
|
|
416,523 |
|
|
|
|
|
|
|
|
|
|
$ |
443,267 |
|
|
$ |
430,082 |
|
|
|
|
|
|
|
|
|
|
7. |
Impairment of Retail Assets |
The recoverability of the carrying values of all long-lived
assets with finite lives, such as fixed assets and intangible
assets, is reevaluated when changes in circumstances indicate
that the assets values may be impaired. In evaluating an
asset for recoverability, the Company estimates the future
undiscounted cash flows expected to result from the use of the
asset and eventual disposition. If the sum of the expected
future undiscounted cash flows is less than the carrying amount
of the asset, an impairment loss, equal to the excess of the
carrying amount over the fair value of the asset, is recognized.
In determining the future cash flows, the Company takes various
factors into account, including changes in merchandising
strategy, the impact of more experienced store managers, the
impact of increased local advertising and the emphasis on store
cost controls.
During the third quarter of Fiscal 2006, the Company recorded a
$4.4 million charge to reduce the carrying value of fixed
assets relating to its Club Monaco retail business, including
its Caban Concept and Factory Outlet stores. After considering
the holiday season operating performance, management determined
that such assets were no longer fully recoverable based on
estimates of related, future undiscounted cash flows. In
measuring the amount of impairment, fair value was determined
based on discounted, expected cash flows. The Company recorded a
similar $4.9 million impairment charge during the second
quarter of Fiscal 2006. A $0.6 million impairment charge
also was recognized in the prior year for the nine months ended
January 1, 2005.
During the fourth quarter of Fiscal 2006, management committed
to a plan to restructure its Club Monaco business. In
particular, this plan includes the closure of all five Club
Monaco outlet stores and the intention to dispose of all eight
of Club Monacos Caban Concept stores. In connection with
this plan, we expect to incur restructuring-related charges of
up to $10 million during the fourth quarter of Fiscal 2006.
|
|
8. |
Goodwill and Other Intangible Assets, Net |
As required by FASB Statement No. 142, Goodwill and
Other Intangible Assets, we completed our annual
impairment test as of the first day of the second quarter of
Fiscal 2006. No impairment was recognized as a result of this
test. The carrying value of goodwill as of December 31,
2005 and April 2, 2005 by operating segment is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale | |
|
Retail | |
|
Licensing | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Balance at April 2, 2005
|
|
$ |
367.9 |
|
|
$ |
74.5 |
|
|
$ |
116.5 |
|
|
$ |
558.9 |
|
Acquisitions, principally the Footwear Business acquisition
|
|
|
21.0 |
|
|
|
1.3 |
|
|
|
|
|
|
|
22.3 |
|
Effect of foreign exchange and other adjustments
|
|
|
(12.3 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
(12.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$ |
376.6 |
|
|
$ |
75.3 |
|
|
$ |
116.5 |
|
|
$ |
568.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The carrying values of indefinite-lived intangible assets are
not amortized and consisted of a purchased trademark in the
amount of $1.5 million at December 31, 2005.
Finite-lived intangible assets are subject to amortization and
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
April 2, 2005 | |
|
|
| |
|
| |
|
|
Gross | |
|
|
|
Gross | |
|
|
|
|
Carrying | |
|
Accum. | |
|
|
|
Carrying | |
|
Accum. | |
|
|
|
Estimated | |
|
|
Amount | |
|
Amort. | |
|
Net | |
|
Amount | |
|
Amort. | |
|
Net | |
|
Lives | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Licensed trademarks
|
|
$ |
55,200 |
|
|
$ |
(5,296 |
) |
|
$ |
49,904 |
|
|
$ |
17,400 |
|
|
$ |
(3,125 |
) |
|
$ |
14,275 |
|
|
|
10-20 years |
|
Non-compete agreements
|
|
|
2,500 |
|
|
|
(1,253 |
) |
|
|
1,247 |
|
|
|
2,500 |
|
|
|
(625 |
) |
|
|
1,875 |
|
|
|
3 years |
|
Customer relationships
|
|
|
53,100 |
|
|
|
(2,422 |
) |
|
|
50,678 |
|
|
|
29,900 |
|
|
|
(900 |
) |
|
|
29,000 |
|
|
|
5-25 years |
|
Other
|
|
|
353 |
|
|
|
(29 |
) |
|
|
324 |
|
|
|
353 |
|
|
|
(12 |
) |
|
|
341 |
|
|
|
15 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
111,153 |
|
|
$ |
(9,000 |
) |
|
$ |
102,153 |
|
|
$ |
50,153 |
|
|
$ |
(4,662 |
) |
|
$ |
45,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of Fiscal 2003, we completed a
strategic review of our European business and formalized our
plans to centralize and more efficiently consolidate its
business operations. In connection with the implementation of
this plan, the Company recorded restructuring charges of
approximately $24.4 million in prior fiscal years for
severance and contract termination costs. The components of the
remaining liability and related activity for the nine months
ended December 31, 2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease and Other | |
|
|
|
|
Severance and | |
|
Contract | |
|
|
|
|
Termination | |
|
Termination | |
|
|
|
|
Benefits | |
|
Costs | |
|
Total | |
|
|
| |
|
| |
|
| |
Balance at April 2, 2005
|
|
$ |
141 |
|
|
$ |
891 |
|
|
$ |
1,032 |
|
Fiscal 2006 payments
|
|
|
(60 |
) |
|
|
(772 |
) |
|
|
(832 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$ |
81 |
|
|
$ |
119 |
|
|
$ |
200 |
|
|
|
|
|
|
|
|
|
|
|
Total severance and termination benefits as a result of this
restructuring related to approximately 160 employees. As of
December 31, 2005, total cash outlays related to this plan
since inception were approximately $24.1 million. It is
expected that the remaining liabilities will be paid during
Fiscal 2006.
In connection with the implementation of our operational plan in
2001, we recorded pre-tax restructuring charges of
$144.6 million in prior periods. The components of the
remaining liability and related activity for the nine months
ended December 31, 2005 were as follows (in thousands):
|
|
|
|
|
|
|
Lease and | |
|
|
Contract | |
|
|
Termination | |
|
|
Costs | |
|
|
| |
Balance at April 2, 2005
|
|
$ |
4,066 |
|
Fiscal 2006 payments
|
|
|
(1,266 |
) |
|
|
|
|
Balance at December 31, 2005
|
|
$ |
2,800 |
|
|
|
|
|
15
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total cash outlays related to the 2001 restructuring plan are
expected to be approximately $51.2 million,
$48.3 million of which have been paid through
December 31, 2005. We expect the remaining liabilities to
be paid in accordance with their underlying contractual terms by
Fiscal 2011.
|
|
10. |
Derivative Financial Instruments |
|
|
|
Foreign Currency Risk Management |
We enter into forward foreign exchange contracts as hedges
relating to identifiable currency positions to reduce our risk
from exchange rate fluctuations on inventory purchases and
intercompany royalty payments. Gains and losses on these
contracts are deferred and recognized as adjustments to either
the basis of those assets or foreign exchange gains/losses, as
applicable. At December 31, 2005, we had the following
foreign exchange contracts outstanding: (i) to deliver
22.5 million
in exchange for $29.8 million through Fiscal 2006 and
(ii) to deliver ¥8,626 million in exchange for
$75.5 million through Fiscal 2008. At December 31,
2005, the fair value of these contracts resulted in unrealized
pre-tax gains of $3.1 million and unrealized pre-tax losses
of $0.7 million for the Euro forward contracts and Japanese
Yen forward contracts, respectively.
In addition, we have outstanding approximately
227.0 million
principal amount of 6.125% notes (the Euro
Debt) that are due in November 2006. The entire principal
amount of the Euro Debt has been designated as a fair-value
hedge of our net investment in certain of our European
subsidiaries in accordance with FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as Amended and Interpreted
(FAS 133). As required by FAS 133, the
changes in fair value of a derivative instrument that is
designated as, and is effective as, an economic hedge of the net
investment in a foreign operation are reported in the same
manner as a translation adjustment under FASB statement
No. 52, Foreign currency translation, to the extent it is
effective as a hedge. As such, changes in the fair value of the
Euro Debt resulting from changes in the Euro exchange rate are
reported net of income taxes in stockholders equity as a
component of accumulated other comprehensive income. Such
unrealized gains or losses will be recognized upon repayment of
the Euro Debt.
|
|
|
Interest Rate Risk Management |
As of December 31, 2005, we had interest rate swap
agreements in the amount of approximately
205.0 million
notional amount of indebtedness. Such interest rate swap
agreements have been designated as hedges against changes in the
fair value of our Euro Debt resulting from changes in the
underlying EURIBOR rates. The interest rate swap agreements
effectively convert fixed-interest rate payments on our Euro
Debt to a floating-rate basis. The interest rate swap agreements
have been designated as fair value hedges in accordance with
FAS 133. Hedge ineffectiveness, as measured by the
difference between the respective gains or losses from the
changes in the fair value of the interest rate swap agreements
and the Euro Debt resulting from changes in the benchmark
interest rate, was insignificant for the nine months ended
December 31, 2005.
16
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11. |
Other Comprehensive Income |
For the three and nine months ended December 31, 2005 and
January 1, 2005, other comprehensive income was as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
December 31, | |
|
January 1, | |
|
December 31, | |
|
January 1, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Net income
|
|
$ |
90,673 |
|
|
$ |
75,036 |
|
|
$ |
245,585 |
|
|
$ |
167,029 |
|
Other comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments(a)
|
|
|
(6,570 |
) |
|
|
34,673 |
|
|
|
(31,599 |
) |
|
|
38,546 |
|
|
Unrealized gains (losses) on cash flow and foreign currency
hedges, net(b)
|
|
|
4,015 |
|
|
|
(22,985 |
) |
|
|
26,219 |
|
|
|
(23,946 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
88,118 |
|
|
$ |
86,724 |
|
|
$ |
240,205 |
|
|
$ |
181,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Net of income-tax benefits (provisions) of
$0.1 million, $ (2.2) million, $3.9 million and $
(3.1) million, respectively. |
|
|
|
(b) |
|
Net of income-tax benefits (provisions) of
$(3.9) million, $11.9 million, $(12.2) million
and $14.0 million, respectively. |
The Company has several hedges in place at December 31,
2005 primarily relating to inventory purchases, royalty payments
and net investment in foreign subsidiaries. All of the hedges
are considered highly effective and, as a result, the changes in
the fair market value of each hedge are recorded in unrealized
gains and losses on hedging derivatives, a component of
Accumulated other comprehensive income, until the hedged
transaction is realized in results of operations. The following
table details the changes in the unrealized losses on hedging
derivatives for the nine months ended December 31, 2005.
Unrealized losses on hedging derivatives are comprised of the
following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized | |
|
|
Unrealized | |
|
|
|
|
|
Gains (Losses) | |
|
|
Gains (Losses) | |
|
Changes in Fair | |
|
Unrealized Gains | |
|
on Hedging | |
|
|
on Hedging | |
|
Value During the | |
|
(Losses) on Hedges | |
|
Derivatives as of | |
|
|
Derivatives as of | |
|
Nine Months Ended | |
|
Reclassified into | |
|
December 31, | |
|
|
April 2, 2005 | |
|
December 31, 2005 | |
|
Earnings | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Derivatives designated as hedges of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory purchases
|
|
$ |
1.9 |
|
|
$ |
3.2 |
|
|
$ |
(2.0 |
) |
|
$ |
3.1 |
|
|
Intercompany royalty payments
|
|
|
(13.8 |
) |
|
|
12.3 |
|
|
|
0.8 |
|
|
|
(0.7 |
) |
|
Net investment in foreign subsidiaries
|
|
|
(77.4 |
) |
|
|
25.1 |
|
|
|
|
|
|
|
(52.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before-tax totals
|
|
$ |
(89.3 |
) |
|
|
40.6 |
|
|
|
(1.2 |
) |
|
|
(49.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax totals
|
|
$ |
(55.1 |
) |
|
$ |
27.6 |
|
|
$ |
(1.4 |
) |
|
$ |
(28.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share (EPS) is based on income
available to common shareholders and the weighted-average number
of shares outstanding during the reported period. Diluted EPS
includes additional dilution from the shares of common stock
issuable pursuant to outstanding stock options, restricted stock
and restricted stock units, and is calculated under the treasury
stock method. The weighted-average number of
17
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
common shares outstanding used to calculate Basic EPS is
reconciled to those shares used in calculating Diluted EPS as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
December 31, | |
|
January 1, | |
|
December 31, | |
|
January 1, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Basic
|
|
|
104,688 |
|
|
|
101,896 |
|
|
|
103,976 |
|
|
|
101,190 |
|
Dilutive effect of stock options, restricted stock and
restricted stock units
|
|
|
3,092 |
|
|
|
2,429 |
|
|
|
2,917 |
|
|
|
2,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
107,780 |
|
|
|
104,325 |
|
|
|
106,893 |
|
|
|
103,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase shares of common stock at an exercise price
greater than the average market price of the common stock are
anti-dilutive and therefore not included in the computation of
Diluted EPS. In addition, the Company has outstanding
performance-based restricted stock units that are issuable only
upon the satisfaction of certain performance goals. Such units
only are included in the computation of diluted shares to the
extent the underlying performance conditions are satisfied prior
to the end of the reporting period. As of December 31,
2005, there was an aggregate of 758,675 additional shares
issuable upon the exercise of anti-dilutive options and the
vesting of performance-based restricted stock units that were
excluded from the diluted share calculation.
During the nine months ended December 31, 2005, the Company
granted certain stock-based compensation awards to various
executives, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Stock | |
|
Restricted | |
Description |
|
Options | |
|
Stock Units | |
|
|
| |
|
| |
|
|
(Number of | |
|
|
options or units) | |
Service-based awards(a)(b)
|
|
|
1,344,330 |
|
|
|
100,000 |
|
Performance-based awards(c)
|
|
|
|
|
|
|
461,575 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,344,330 |
|
|
|
561,575 |
|
|
|
|
|
|
|
|
|
|
(a) |
Service-based stock option awards were granted with a
weighted-average exercise price of $43.40, equal to the fair
market value of the Companys Class A Common Stock at
the date of grant and are exercisable into shares of
Class A Common Stock. These awards vest in three equal
installments on the first three anniversaries of the grant date. |
|
|
|
(b) |
|
Service-based restricted stock units were granted at a
weighted-average fair value of $43.04 per unit and are
payable in shares of Class A Common Stock. These units vest
on the fifth anniversary of the grant date, subject to
acceleration in certain circumstances. |
|
(c) |
|
Performance-based restricted stock units were granted at a
weighted-average fair value of $50.25 per unit and are
payable in shares of Class A Common Stock. These units vest
at the end of Fiscal 2008, subject to the Companys
satisfaction of certain performance goals. |
Holders of certain restricted stock units are entitled to
receive dividend equivalents in the form of additional
restricted stock units in consideration of the payment of
dividends on the Companys Class A Common Stock. The
Company is committed, pursuant to certain employment agreements,
to issue in two equal, annual installments (i) an aggregate
of 200,000 service-based restricted stock units and (ii) an
aggregate of 375,000 performance-based restricted stock units
over the next two years.
18
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total stock compensation expense recorded for the three and nine
months ended December 31, 2005 was $10.1 million and
$21.1 million, respectively, compared to $4.5 million
and $9.4 million, respectively, for the three and nine
months ended January 1, 2005.
On May 20, 2003 the Board of Directors initiated a regular
quarterly cash dividend program of $0.05 per share, or
$0.20 per share on an annual basis, on our common stock.
The third quarter Fiscal 2006 dividend of $0.05 per share
was declared on December 19, 2005, payable to shareholders
of record at the close of business on December 30, 2005,
and was paid on January 13, 2006. During the nine months
ended December 31, 2005, approximately $15.7 million
was recorded as a reduction to retained earnings in connection
with this dividend.
|
|
14. |
Commitments and Contingencies |
As more fully described in our Fiscal
2005 10-K, we have
been involved with certain litigation with Jones. In February
2006, in connection with the transaction to acquire the Polo
Jeans Business from Jones, we settled all claims under the
litigation at a negotiated cost of $100 million. The
settlement amount equaled the reserve initially established by
us during the fourth quarter of Fiscal 2005. Accordingly, the
settlement is expected to have no effect on our operating
results for Fiscal 2006.
We are indirectly subject to various claims relating to
allegations of a security breach in 2004 of our retail point of
sale system, including fraudulent credit card charges, the cost
of replacing cards and related monitoring expenses and other
related claims. These claims have been made by various banks in
respect of credit cards issued by them pursuant to the rules of
Visa®
and
MasterCard®
credit card associations. We recorded an initial charge of
$6.2 million to establish a reserve for this matter in the
fourth quarter of Fiscal 2005, representing managements
best estimate at the time of the probable loss incurred.
However, in September 2005, we were notified by our agent bank
that the aggregate amount of claims had increased to
$12 million, with an estimated $1 million of
additional claims yet to be asserted. Accordingly, we recorded
an additional $6.8 million charge during the second quarter
of Fiscal 2006 to increase our reserve against this revised
estimate of total exposure. Such charge has been classified as a
component of selling, general and administrative expenses in our
accompanying statement of operations.
The ultimate outcome of this matter could differ materially from
the amounts recorded and could be material to the results of
operations for any affected period. However, management does not
expect that the ultimate resolution of this matter will have a
material adverse effect on the Companys liquidity or
financial position.
|
|
|
Wathne Imports Litigation |
On August 19, 2005, Wathne Imports, Ltd., our domestic
licensee for luggage and handbags (Wathne), filed a
complaint in the U.S. District Court in the Southern
District of New York against us and Ralph Lauren, our Chairman
and Chief Executive Officer, asserting, among other things,
Federal trademark law violations, breach of contract, breach of
obligations of good faith and fair dealing, fraud and negligent
misrepresentation. The complaint sought, among other relief,
injunctive relief, compensatory damages in excess of
$250 million and punitive damages of not less than
$750 million. On September 13, 2005, Wathne withdrew
this complaint from the U.S. District Court and filed a
complaint in the Supreme Court of the State of New York, New
York County, making substantially the same allegations and
claims (excluding the Federal trademark claims), and seeking
similar relief. On February 1, 2006, the court granted our
motion to dismiss all
19
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of the causes of action, including the cause of action against
Mr. Lauren, except for the breach of contract claims, and
denied Wathnes motion for a preliminary injunction against
our production and sale of womens and childrens
handbags. We believe this suit to be without merit and intend to
continue to contest it vigorously.
|
|
|
Polo Trademark Litigation |
On October 1, 1999, we filed a lawsuit against the United
States Polo Association Inc., Jordache, Ltd. and certain other
entities affiliated with them, alleging that the defendants were
infringing on our famous trademarks. In connection with this
lawsuit, on July 19, 2001, the United States Polo
Association and Jordache filed a lawsuit against us in the
United States District Court for the Southern District of New
York. This suit, which was effectively a counterclaim by them in
connection with the original trademark action, asserted claims
related to our actions in connection with our pursuit of claims
against the United States Polo Association and Jordache for
trademark infringement and other unlawful conduct. Their claims
stemmed from our contacts with the United States Polo
Associations and Jordaches retailers in which we
informed these retailers of our position in the original
trademark action. All claims and counterclaims, except for our
claims that the defendants violated the Companys trademark
rights, were settled in September 2003. We did not pay any
damages in this settlement. On July 30, 2004, the Court
denied all motions for summary judgement, and trial began on
October 3, 2005 with respect to four double
horseman symbols that the defendants sought to use. On
October 20, 2005, the jury rendered a verdict, finding that
one of the defendants marks violated our world famous Polo
Player Symbol trademark and enjoining its further use, but
allowing the defendants to use the remaining three marks. On
November 16, 2005, we filed a motion before the trial court
to overturn the jurys decision and hold a new trial with
respect to the three marks that the jury found not to be
infringing. The USPA and Jordache have opposed our motion, but
have not moved to overturn the jurys decision that the
fourth double horseman logo did infringe on our trademarks.
Pending the judges ruling on our motion, which is expected
within the next few weeks, the USPA and Jordache cannot produce
or sell products bearing any of the double horseman marks. We
have preserved our rights to appeal if our motion is denied.
On December 5, 2003, United States Polo Association, USPA
Properties, Inc., Global Licensing Sverige and Atlas Design AB
(collectively, USPA) filed a Demand for Arbitration
against the Company in Sweden under the auspices of the
International Centre for Dispute Resolution seeking a
declaratory judgement that USPAs so-called Horseman symbol
does not infringe on Polo Ralph Laurens trademark and
other rights. No claim for damages was stated. On
February 19, 2004, we answered the Demand for Arbitration,
contesting the arbitrability of USPAs claim for
declaratory relief. We also asserted our own counterclaim,
seeking a judgement that the USPAs Horseman symbol
infringes on our trademark and other rights. We also sought
injunctive relief and damages in an unspecified amount. On
November 1, 2004, the arbitral panel of the International
Centre for Dispute Resolution hearing the arbitration rendered a
decision rejecting the relief sought by USPA and holding that
their so-called Horseman symbol infringes on our trademark and
other rights. The arbitral tribunal awarded us damages in excess
of 3.5 million Swedish Krona, or $0.4 million at that
time, and ordered USPA to discontinue the sale of, and destroy
all remaining stock of, clothing bearing its Horseman symbol in
Sweden. This amount has not yet been recorded.
On October 29, 2004, we filed a Demand for arbitration
against the United States Polo Association and United States
Polo Association Polo Properties, Inc. in the United Kingdom
under the auspices of the International Centre for Dispute
Resolution seeking a judgement that the Horseman symbol
infringes on our trademark and other rights, as well as
injunctive relief. Subsequently, the United States Polo
Association and United States Polo Association Properties, Inc.
agreed not to distribute products bearing the Horseman symbol in
the United Kingdom or any other member nation of the European
Community. Consequently, we withdrew our arbitration demand on
December 7, 2004.
20
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
California Labor Law Litigation |
On September 18, 2002, an employee at one of our stores
filed a lawsuit against the Company and our Polo Retail, LLC
subsidiary in the United States District Court for the District
of Northern California alleging violations of California
antitrust and labor laws. The plaintiff purports to represent a
class of employees who have allegedly been injured by a
requirement that certain retail employees purchase and wear
Company apparel as a condition of their employment. The
complaint, as amended, seeks an unspecified amount of actual and
punitive damages, disgorgement of profits and injunctive and
declaratory relief. The Company answered the amended complaint
on November 4, 2002. A hearing on cross motions for summary
judgment on the issue of whether the Companys policies
violated California law took place on August 14, 2003. The
Court granted partial summary judgment with respect to certain
of the plaintiffs claims, but concluded that more
discovery was necessary before it could decide the key issue as
to whether the Company had maintained for a period of time a
dress code policy that violated California law. On
January 12, 2006, a proposed settlement of the purported
class action was submitted to the court for approval. A hearing
on the settlement has been scheduled for April 6, 2006. The
proposed settlement cost of $1.5 million does not exceed
the reserve for this matter that we established in Fiscal 2005.
The proposed settlement would also result in the dismissal of
the similar purported class action filed in San Francisco
Superior Court as described below.
On April 14, 2003, a second putative class action was filed
in the San Francisco Superior Court. This suit, brought by
the same attorneys, alleges near identical claims to these in
the federal class action. The class representatives consist of
former employees and the plaintiff in the federal court action.
Defendants in this class action include us and our Polo Retail,
LLC, Fashions Outlet of America, Inc., Polo Retail, Inc. and
San Francisco Polo, Ltd. subsidiaries as well as a
non-affiliated corporate defendant and two current managers. As
in the federal action, the complaint seeks an unspecified amount
of action and punitive restitution of monies spent, and
declaratory relief. The state court class action has been stayed
pending resolution of the federal class action.
We are otherwise involved from time to time in legal claims
involving trademark and intellectual property, licensing,
employee relations and other matters incidental to our business.
We believe that the resolution of these other matters currently
pending will not individually or in the aggregate have a
material adverse effect on our financial condition or results of
operations.
We have three reportable segments: Wholesale, Retail and
Licensing. Such segments offer a variety of products and
services through different channels of distribution. Our
Wholesale segment consists of womens, mens and
childrens apparel, accessories and related products which
are sold to major department stores, specialty stores and our
owned and licensed retail stores in the United States and
overseas. Our retail segment consists of the Companys
worldwide retail operations, which sell our products through our
full price and factory stores, as well as Polo.com, our
50%-owned e-commerce
website. The stores and the website sell products purchased from
our licensees, our suppliers and our wholesale segment. Our
Licensing segment generates revenues from royalties earned on
the sale of our home and other products internationally and
domestically through our licensing alliances. The licensing
agreements grant the licensees rights to use our various
trademarks in connection with the manufacture and sale of
designated products in specified geographical areas.
The accounting policies of our segments are consistent with
those described in Note 3. Sales and transfers between
segments are recorded at cost and treated as transfers of
inventory. All intercompany revenues are eliminated in
consolidation and we do not review these sales when evaluating
segment performance. We evaluate each segments performance
based upon operating income before restructuring charges and
one-time
21
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
items, such as legal charges. In conjunction with an evaluation
of our overall segment reporting in the fourth quarter of 2005,
we changed our method of allocating corporate expenses to each
segment to more appropriately reflect those corporate expenses
directly related to segments. Accordingly, Corporate overhead
expenses (exclusive of expenses for senior management, overall
branding-related expenses and certain other corporate-related
expenses) are allocated to the segments based upon specific
usage or other allocation methods. As a result of this change,
comparative segment results for the three and nine-month periods
ended January 1, 2005 have been restated to reflect the
current allocation method, as well as for the restatement items
discussed in Note 4.
Our net revenues and operating income for the three and nine
months ended December 31, 2005 and January 1, 2005 for
each segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
December 31, | |
|
January 1, | |
|
December 31, | |
|
January 1, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$ |
454,008 |
|
|
$ |
427,445 |
|
|
$ |
1,368,768 |
|
|
$ |
1,169,032 |
|
|
Retail
|
|
|
479,174 |
|
|
|
416,194 |
|
|
|
1,223,765 |
|
|
|
1,057,146 |
|
|
Licensing
|
|
|
62,300 |
|
|
|
57,935 |
|
|
|
182,275 |
|
|
|
177,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
995,482 |
|
|
$ |
901,574 |
|
|
$ |
2,774,808 |
|
|
$ |
2,403,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$ |
82,227 |
|
|
$ |
61,741 |
|
|
$ |
271,615 |
|
|
$ |
158,982 |
|
|
Retail
|
|
|
63,855 |
|
|
|
49,175 |
|
|
|
138,846 |
|
|
|
92,870 |
|
|
Licensing
|
|
|
38,125 |
|
|
|
37,079 |
|
|
|
113,592 |
|
|
|
111,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184,207 |
|
|
|
147,995 |
|
|
|
524,053 |
|
|
|
363,415 |
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses
|
|
|
(40,565 |
) |
|
|
(31,587 |
) |
|
|
(123,207 |
) |
|
|
(103,356 |
) |
|
|
Unallocated restructuring charges(a)
|
|
|
|
|
|
|
(218 |
) |
|
|
|
|
|
|
(1,846 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
143,642 |
|
|
$ |
116,190 |
|
|
$ |
400,846 |
|
|
$ |
258,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Restructuring charges of $0.2 million and $1.8 million
for the three and nine months ended January 1, 2005,
respectively, related entirely to the wholesale segment. |
Our depreciation and amortization expense for the three and nine
months ended December 31, 2005 and January 1, 2005 for
each segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
December 31, | |
|
January 1, | |
|
December 31, | |
|
January 1, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$ |
11,048 |
|
|
$ |
7,592 |
|
|
$ |
29,354 |
|
|
$ |
18,794 |
|
|
Retail
|
|
|
16,935 |
|
|
|
11,620 |
|
|
|
40,404 |
|
|
|
33,690 |
|
|
Licensing
|
|
|
1,540 |
|
|
|
1,315 |
|
|
|
4,509 |
|
|
|
4,604 |
|
|
Unallocated corporate expenses
|
|
|
6,806 |
|
|
|
6,471 |
|
|
|
20,294 |
|
|
|
16,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
36,329 |
|
|
$ |
26,998 |
|
|
$ |
94,561 |
|
|
$ |
73,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
POLO RALPH LAUREN
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our net revenues for the three and nine months ended
December 31, 2005 and January 1, 2005, by geographic
location of the reporting subsidiaries, were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
December 31, | |
|
January 1, | |
|
December 31, | |
|
January 1, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
845,064 |
|
|
$ |
740,261 |
|
|
$ |
2,270,455 |
|
|
$ |
1,930,163 |
|
|
Europe
|
|
|
137,619 |
|
|
|
118,430 |
|
|
|
441,296 |
|
|
|
385,176 |
|
|
Other Regions
|
|
|
12,799 |
|
|
|
42,883 |
|
|
|
63,057 |
|
|
|
87,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
995,482 |
|
|
$ |
901,574 |
|
|
$ |
2,774,808 |
|
|
$ |
2,403,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. |
Additional Financial Information |
The Company made interest payments of approximately
$10.1 million during the nine months ended
December 31, 2005 and approximately $13.4 million
during the nine months ended January 1, 2005.
The Company paid income taxes of approximately
$146.7 million during the nine months ended
December 31, 2005 and approximately $69.5 million
during the nine months ended January 1, 2005.
Significant non-cash investing activities during the nine months
ended December 31, 2005 included the non-cash allocation of
the fair value of the assets acquired and liabilities assumed in
the acquisition of the Footwear Business. Significant non-cash
investing activities during the nine months ended
January 1, 2005 included the non-cash allocation of the
fair value of the assets acquired and liabilities assumed in the
acquisition of the Childrenswear Business. Such transactions are
more fully described in Note 5.
Other than the capitalization in fiscal 2006 of approximately
$40 million of fixed assets and recognition of related
obligations principally relating to certain leasing
arrangements, there were no other significant non-cash financing
and investing activities during the nine-month periods ended
December 31, 2005 and January 1, 2005.
23
POLO RALPH LAUREN CORPORATION
|
|
Item 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations. |
The following discussion and analysis is a summary and should
be read together with our consolidated financial statements and
the notes included elsewhere in
this 10-Q. We
utilize a 52-53 week fiscal year ending on the Saturday
nearest March 31. Fiscal 2006 will end on April 1,
2006 (Fiscal 2006) and reflects a
52-week period. Fiscal
2005 ended April 2, 2005 (Fiscal 2005) and was
a 52-week period. In
turn, the third quarter for Fiscal 2006 ended December 31,
2005 and was a 13-week
period. The third quarter for Fiscal 2005 ended January 1,
2005 and was a 13-week
period as well.
Various statements in this
Form 10-Q, in
future filings with the Securities and Exchange Commission, in
our press releases and in oral statements made by or with the
approval of authorized personnel constitute
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations
about our future operations, results or financial condition and
are generally indicated by words or phrases such as
anticipate, estimate,
expect, project, we believe,
is or remains optimistic, currently
envisions and similar words or phrases and involve known
and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements to be
materially different from any future results, performance or
achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following:
risks associated with a general economic downturn and other
events leading to a reduction in discretionary consumer
spending; risks associated with implementing our plans to
enhance our worldwide luxury retail business, inventory
management and operating efficiencies; risks associated with
changes in the competitive marketplace, including the
introduction of new products or pricing changes by our
competitors; changes in global economic or political conditions;
risks associated with our dependence on sales to a limited
number of large department store customers, including risks
related to mergers and acquisitions and the extending of credit;
risks associated with our dependence on our licensing partners
for a substantial portion of our net income and our lack of
operational and financial control over licensed businesses;
risks associated with financial condition of licensees,
including the impact on our net income and business of one or
more licensees reorganization; risks associated with
consolidations, restructurings and other ownership changes in
the department store industry; risks associated with competition
in the segments of the fashion and consumer product industries
in which we operate, including our ability to shape, stimulate
and respond to changing consumer tastes and demands by producing
attractive products, brands and marketing and our ability to
remain competitive in the areas of quality and price;
uncertainties relating to our ability to implement our growth
strategies or successfully integrate acquired businesses; risks
associated with our entry into new markets, either through
internal development activities or through acquisitions; risks
associated with changes in import quotas, other restrictions or
tariffs affecting our ability to source products; risks
associated with the possible adverse impact of our unaffiliated
manufacturers inability to manufacture products in a
timely manner, to meet quality standards or to use acceptable
labor practices; risks associated with changes in social,
political, economic and other conditions affecting foreign
operations or sourcing, including foreign currency fluctuations;
risks related to current or future litigation or our ability to
establish and protect our trademarks and other proprietary
rights; risks related to fluctuations in foreign currency
affecting our foreign subsidiaries and foreign
licensees results of operations, the relative prices at
which we and our foreign competitors sell products in the same
market, and our operating and manufacturing costs outside the
United States; and risks associated with our control by Lauren
family members, the anti-takeover effect of our two classes of
common stock and the potential impact of stock repurchases. We
undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise.
Our Annual Report on
Form 10-K for the
fiscal year ended April 2, 2005 contains a detailed
discussion of these risk factors, and amendments and updates to
such risk factors are set forth in Part II, Item IA,
Risk Factors, of this Quarterly Report on
Form 10-Q.
24
INTRODUCTION
Managements discussion and analysis of results of
operations and financial condition (MD&A) is
provided as a supplement to the unaudited interim financial
statements and footnotes included elsewhere herein to help
provide an understanding of our financial condition, changes in
financial condition and results of our operations. MD&A is
organized as follows:
|
|
|
|
|
Overview. This section provides a general description of
our business, as well as recent developments that we believe are
important in understanding our results of operations and
financial condition and in anticipating future trends. |
|
|
|
Results of operations. This section provides an analysis
of our results of operations for the three-month and nine-month
periods ended December 31, 2005 and January 1, 2005. |
|
|
|
Financial condition and liquidity. This section provides
an analysis of our cash flows for the nine-month periods ended
December 31, 2005 and January 1, 2005, as well as a
discussion of our financial condition and liquidity as of
December 31, 2005. The discussion of our financial
condition and liquidity includes (i) our available
financial capacity under our credit facility and (ii) a
summary of our key debt compliance measures. |
OVERVIEW
Our Company is a leader in the design, marketing and
distribution of premium lifestyle products. Our long-standing
reputation and distinctive image have been consistently
developed across an expanding number of products, brands and
international markets. PRLCs brand names include Polo,
Polo by Ralph Lauren, Ralph Lauren Purple Label, Ralph Lauren
Black Label, Polo Sport, Ralph Lauren, Blue Label, Lauren, Polo
Jeans, RL, Rugby, Chaps and Club Monaco, among others.
We classify our interests into three business segments:
wholesale, retail and licensing. Through those interests, we
design, license, contract for the manufacture of, market and
distribute mens, womens and childrens apparel,
accessories, fragrances and home furnishings. Our wholesale
business consists of wholesale-channel sales principally to
major department and specialty stores located throughout the
United States and Europe. Our retail business consists of
retail-channel sales directly to consumers through wholly owned,
full-price and factory retail stores located throughout the
United States, Canada, Europe, South America and Asia, and
through our jointly owned retail internet site located at
www.polo.com. In addition, our licensing business
consists of royalty-based arrangements under which we license
the right to third parties to use our various trademarks in
connection with the manufacture and sale of designated products,
such as eyewear and fragrances, in specified geographic areas.
Our business is affected by seasonal trends, with higher levels
of wholesale sales in our second and fourth quarters and higher
retail sales in our second and third quarters. These trends
result primarily from the timing of seasonal wholesale shipments
and key vacation travel and holiday periods in the retail
segment. Accordingly, our operating results and cash flows for
the three and nine-month periods ended December 31, 2005
are not necessarily indicative of the results that may be
expected for Fiscal 2006 as a whole.
|
|
|
Restatement of Previously Issued Financial
Statements |
As previously discussed in our Quarterly Report on
Form 10-Q for the
three-month period ended July 2, 2005 (the First
Quarter
2006 10-Q),
we had to restate certain quarterly financial information for
our Fiscal 2005 quarterly periods. Such restatements principally
related to corrections over (i) our lease accounting
pursuant to new interpretive guidance issued by the SEC in
February 2005, (ii) the consolidation of Ralph Lauren
Media, LLC (RL Media), a jointly owned variable
interest entity that conducts our
e-commerce initiatives,
and (iii) certain reclassifications to our statement of
cash flows. No restatement of our financial statements for full
Fiscal 2005 as a whole was necessary. Information regarding
these restatements, including reconciliations from previously
filed financial statements, is set forth in Note 4 to our
accompanying consolidated financial statements.
25
|
|
|
Acquisition of Polo Jeans Business |
On February 3, 2006, subsequent to the end of our third
quarter of Fiscal 2006, we acquired from Jones Apparel Group,
Inc. and subsidiaries (Jones) all of the issued and
outstanding shares of capital stock of Sun Apparel, Inc., our
licensee for mens and womens casual apparel and
sportswear in the United States and Canada (the Polo Jeans
Business). The acquisition cost was approximately
$260 million, including $5 million of transaction
costs. The purchase price is subject to certain post-closing
adjustments.
The results of operations for the Polo Jeans Business will be
consolidated in our results of operations beginning in February
2006. In addition, as part of the transaction, we settled all
claims under our litigation with Jones for a cost of
$100 million (see Note 14).
|
|
|
Acquisition of Footwear Business |
On July 15, 2005, the Company acquired from Reebok
International, Ltd (Reebok) all of the issued and
outstanding shares of capital stock of Ralph Lauren Footwear
Co., Inc., our global licensee for mens, womens and
childrens footwear, as well as certain foreign assets
owned by affiliates of Reebok (collectively, the Footwear
Business). The acquisition cost was approximately
$112.5 million in cash, including $2 million of
transaction costs. The purchase price is subject to certain
post-closing adjustments. The results of operations for the
Footwear Business are included in our consolidated results of
operations commencing July 16, 2005.
|
|
|
Polo Trademark Litigation |
Since 1999, we have been involved in litigation with the United
States Polo Association, Inc., Jordache, Ltd. and certain other
entities affiliated with them (collectively, the USPA
Group) in the United States District Court for the
Southern District of New York over alleged infringements of our
trademark rights. On October 20, 2005, a jury found that
one of the four double horsemen logos that the USPA
Group sought to use infringed on our world famous Polo Player
Symbol trademark and enjoined its use, but did allow the use of
the other three trademarks. It is premature to assess the
potential impact on our business resulting from this adverse
ruling. However, we believe that the quality of our premium
lifestyle products and brands will continue to drive growth in
our operating and financial performance notwithstanding this
ruling. On November 16, 2005, we filed a motion before the
trial court to overturn the jurys decision and hold a new
trial with respect to the three marks that the jury found not to
be infringing. The USPA and Jordache have opposed our motion,
but have not moved to overturn the jurys decision that the
fourth double horseman logo did infringe on our trademarks.
Pending the judges ruling on our motion, which is expected
within the next few weeks, the USPA and Jordache cannot produce
or sell products bearing any of the double horseman marks. We
have preserved our rights to appeal if our motion is denied.
26
RESULTS OF OPERATIONS
|
|
|
Three Months Ended December 31, 2005 Compared to
Three Months Ended January 1, 2005 |
The following table sets forth the amounts (dollars in millions)
and the percentage relationship to net revenues of certain items
in our consolidated statements of operations for the three
months ended December 31, 2005 and January 1, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Three Months Ended | |
|
|
| |
|
| |
|
|
December 31, | |
|
January 1, | |
|
December 31, | |
|
January 1, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Net revenues
|
|
$ |
995.5 |
|
|
$ |
901.6 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold(a)
|
|
|
(464.0 |
) |
|
|
(455.5 |
) |
|
|
(46.6 |
) |
|
|
(50.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
531.5 |
|
|
|
446.1 |
|
|
|
53.4 |
|
|
|
49.5 |
|
Selling, general and administrative expenses(a)
|
|
|
(381.7 |
) |
|
|
(329.1 |
) |
|
|
(38.3 |
) |
|
|
(36.5 |
) |
Amortization of intangible assets
|
|
|
(1.8 |
) |
|
|
(0.6 |
) |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
Impairments of retail assets
|
|
|
(4.4 |
) |
|
|
|
|
|
|
(0.5 |
) |
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
143.6 |
|
|
|
116.2 |
|
|
|
14.4 |
|
|
|
12.9 |
|
Foreign currency gains (losses)
|
|
|
(0.6 |
) |
|
|
0.4 |
|
|
|
(0.1 |
) |
|
|
|
|
Interest expense
|
|
|
(3.3 |
) |
|
|
(3.0 |
) |
|
|
(0.3 |
) |
|
|
(0.3 |
) |
Interest income
|
|
|
3.8 |
|
|
|
1.0 |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes and other income
(expense), net
|
|
|
143.5 |
|
|
|
114.6 |
|
|
|
14.4 |
|
|
|
12.7 |
|
Provision for income taxes
|
|
|
(52.3 |
) |
|
|
(40.3 |
) |
|
|
(5.2 |
) |
|
|
(4.5 |
) |
Other income (expense), net
|
|
|
(0.5 |
) |
|
|
0.7 |
|
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
90.7 |
|
|
$ |
75.0 |
|
|
|
9.1 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Basic
|
|
$ |
0.87 |
|
|
$ |
0.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Diluted
|
|
$ |
0.84 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes depreciation expense of $34.6 million and
$26.4 million for the three-month periods ended
December 31, 2005 and January 1, 2005, respectively. |
Net revenues. Net revenues for the third quarter of
Fiscal 2006 were $995.5 million, an increase of
$93.9 million over net revenues for the third quarter of
Fiscal 2005. Net revenues by business segment were as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
December 31, | |
|
January 1, | |
|
Increase/ | |
|
|
|
|
2005 | |
|
2005 | |
|
(Decrease) | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$ |
454,008 |
|
|
$ |
427,445 |
|
|
$ |
26,563 |
|
|
|
6.2 |
% |
|
Retail
|
|
|
479,174 |
|
|
|
416,194 |
|
|
|
62,980 |
|
|
|
15.1 |
% |
|
Licensing
|
|
|
62,300 |
|
|
|
57,935 |
|
|
|
4,365 |
|
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
995,482 |
|
|
$ |
901,574 |
|
|
$ |
93,908 |
|
|
|
10.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Net Sales increased by $26.6 million, or
6.2%, primarily due to the following:
|
|
|
|
|
the inclusion of $18.3 million of revenues from the
footwear product line acquired on July 15, 2005; and |
|
|
|
increases in revenues in the amount of $4.8 million from
our domestic Childrenswear product line, $11.9 million from
our European product line and $13.6 million from our
domestic Lauren product |
27
|
|
|
|
|
line, which primarily benefited from a reduction in reserves for
customer allowances associated with better full price sell
through performance; partially offset by |
|
|
|
a decrease of $23.9 million in revenues from our domestic
menswear product line. |
Retail Net Sales increased by $63.0 million, or
15.1%, primarily as a result of:
|
|
|
|
|
a 9.3% increase in comparable, full-price store sales and a 6.3%
increase in comparable, factory store sales. Excluding the
effect of foreign currency exchange rate fluctuations,
comparable store sales increased 10.0% for full-price stores and
6.9% for factory stores; and |
|
|
|
a net 19-store increase in the number of stores open. |
Licensing Revenue increased by $4.4 million, or
7.5%, primarily due to the following:
|
|
|
|
|
the growth in our domestic Chaps for men lines and
international licensing businesses, partially offset by |
|
|
|
the loss of licensing revenues from our footwear product line
which was acquired on July 15, 2005. |
Foreign exchange rate fluctuations in the value of the Euro
reduced recorded wholesale sales by $2.9 million and retail
sales by $2.3 million.
Cost of Goods Sold. Cost of goods sold was
$464.0 million for the three months ended December 31,
2005, compared to $455.5 million for the three months ended
January 1, 2005. Expressed as a percentage of net revenues,
cost of goods sold was 46.6% for the three months ended
December 31, 2005, compared to 50.5% for the three months
ended January 1, 2005. The reduction in cost of goods sold
as a percentage of net revenues reflected a continued focus on
inventory management, sourcing efficiencies and reduced markdown
activity as a result of better sell through on our products.
Gross Profit. Gross profit increased $85.4 million,
or 19.1%, for the three months ended December 31, 2005 over
the three months ended January 1, 2005. This increase
reflected higher net sales, improved merchandise margins and
sourcing efficiencies generally across our wholesale and retail
businesses.
Gross profit as a percentage of net revenues increased from
49.5% in the comparable period of the prior year to 53.4% due to
the reductions in cost of goods sold as a percentage of net
revenues discussed above and a shift in mix from off-price to
more full-price wholesale merchandising.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses (SG&A)
increased $52.6 million, or 16.0%, to $381.7 million
for the three months ended December 31, 2005 from
$329.1 million for the three months ended January 1,
2005. SG&A as a percentage of net revenues increased to
38.3% from 36.5%. The increase in SG&A was driven by:
|
|
|
|
|
higher selling salaries and related costs in connection with new
store openings and the increase in retail sales; |
|
|
|
the expenses of the footwear product line acquired on
July 15, 2005; and |
|
|
|
an increase in incentive compensation associated with the
Companys strong performance and the increase in the
Companys stock price. |
The remainder of the increase in SG&A results from a number
of factors, including higher distribution costs as a result of
volume increases.
Amortization of Intangible Assets. Amortization of
intangible assets increased from $0.6 million during the
three months ended January 1, 2005 to $1.8 million
during the three months ended December 31, 2005 as a result
of amortization of intangible assets as part of the Footwear
Business acquired in July 2005.
Impairments of Retail Assets. During the third quarter of
Fiscal 2006, the Company recorded a $4.4 million charge to
reduce the carrying value of fixed assets relating to its Club
Monaco retail business, including its Caban Concept and Factory
Outlet stores. After considering the holiday season operating
performance, management determined that such assets were no
longer fully recoverable based on estimates of
28
related, future undiscounted cash flows. In measuring the amount
of impairment, fair value was determined based on discounted,
expected cash flows.
During the fourth quarter of Fiscal 2006, management committed
to a plan to restructure its Club Monaco business. In
particular, this plan includes the closure of all five Club
Monaco outlet stores and the intention to dispose of all eight
of Club Monacos Caban Concept stores. In connection with
this plan, we expect to incur restructuring-related charges of
up to $10 million during the fourth quarter of Fiscal 2006.
Operating Income. Operating income increased
$27.4 million, or 23.6%, for the three months ended
December 31, 2005 over the three months ended
January 1, 2005. Operating income for our three business
segments is provided below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
December 31, | |
|
January 1, | |
|
Increase/ | |
|
|
|
|
2005 | |
|
2005 | |
|
(Decrease) | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$ |
82,227 |
|
|
$ |
61,741 |
|
|
$ |
20,486 |
|
|
|
33.2 |
% |
|
Retail
|
|
|
63,855 |
|
|
|
49,175 |
|
|
|
14,680 |
|
|
|
29.9 |
% |
|
Licensing
|
|
|
38,125 |
|
|
|
37,079 |
|
|
|
1,046 |
|
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184,207 |
|
|
|
147,995 |
|
|
|
36,212 |
|
|
|
24.5 |
% |
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses
|
|
|
(40,565 |
) |
|
|
(31,587 |
) |
|
|
(8,978 |
) |
|
|
(28.4 |
)% |
|
|
Unallocated restructuring charges
|
|
|
|
|
|
|
(218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
143,642 |
|
|
$ |
116,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in the wholesale operating results was primarily
the result of the increase in sales and improvements in the
gross margin rates described above. |
|
|
|
The increase in retail operating results was driven by increased
net sales and improved gross margin rate, partially offset by
the higher selling salaries and related costs incurred in
connection with the increase in retail sales and new store
openings. |
|
|
|
The increase in licensing operating results was primarily due to
improvements in our international licensing business and
domestic Chaps for men lines, partially offset by the
loss of royalties from the footwear license that was acquired in
July 2005. |
Foreign Currency Gains (Losses). The effect of foreign
currency exchange rate fluctuations resulted in a loss of
$0.6 million for the three months ended December 31,
2005, compared to a $0.4 million gain for the three months
ended January 1, 2005, primarily as a result of shifts in
the value of the Euro relative to the dollar and its impact on
inventory purchases in our European operations.
Interest Expense. Interest expense was $3.3 million
for the three months ended December 31, 2005, compared to
$3.0 million for the three months ended January 1,
2005. There were no significant fluctuations in interest expense
incurred by us.
Interest Income. Interest income increased to
$3.8 million for the three months ended December 31,
2005 from $1.0 million for the three months ended
January 1, 2005. The increase was the result of a higher
level of excess cash reinvestment and higher interest rates on
our investments.
Provision for Income Taxes. The effective tax rate was
36.5% for the three months ended December 31, 2005,
compared to 35.1% for the three months ended January 1,
2005. The increase in the effective tax rate was due primarily
to a greater portion of our income being generated in higher tax
jurisdictions.
Other Income (Expense), Net. Other income (expense), net,
was a net expense of $0.5 million for the three months
ended December 31, 2005, compared to a net income of
$0.7 million for the three months ended
29
January 1, 2005. The increased losses principally related
to higher minority interest expense allocated to our partners in
our jointly owned RL Media venture as a result of its improved
operating performance.
Net Income. Net income increased to $90.7 million
for the three months ended December 31, 2005, compared to
$75.0 million for the three months ended January 1,
2005. The $15.7 million increase in net income principally
related to our $27.4 million increase in operating income
discussed above, partially offset by an increase in our tax
provision associated with both a higher level of income and a
higher effective tax rate.
Net Income Per Share. Diluted net income per share
increased to $0.84 per share for the three months ended
December 31, 2005, compared $0.72 per share for the
three months ended January 1, 2005. The higher per-share
performance resulted from an increase in net income, partially
offset by an increase in weighted average shares outstanding due
to stock option exercises and the issuance of restricted stock
units.
|
|
|
Nine Months Ended December 31, 2005 Compared to Nine
Months Ended January 1, 2005 |
The following table sets forth the amounts (dollars in millions)
and the percentage relationship to net revenues of certain items
in our consolidated statements of operations for the nine months
ended December 31, 2005 and January 1, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
December 31, | |
|
January 1, | |
|
December 31, | |
|
January 1, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Net revenues
|
|
$ |
2,774.8 |
|
|
$ |
2,403.2 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold(a)
|
|
|
(1,277.4 |
) |
|
|
(1,195.6 |
) |
|
|
46.0 |
|
|
|
49.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,497.4 |
|
|
|
1,207.6 |
|
|
|
54.0 |
|
|
|
50.2 |
|
Selling, general and administrative expenses(a)
|
|
|
(1,082.9 |
) |
|
|
(945.1 |
) |
|
|
(39.0 |
) |
|
|
(39.3 |
) |
Amortization of intangible assets
|
|
|
(4.3 |
) |
|
|
(1.9 |
) |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
Impairments of retail assets
|
|
|
(9.4 |
) |
|
|
(0.6 |
) |
|
|
(0.3 |
) |
|
|
|
|
Restructuring charge
|
|
|
|
|
|
|
(1.8 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
400.8 |
|
|
|
258.2 |
|
|
|
14.5 |
|
|
|
10.7 |
|
Foreign currency gains (losses)
|
|
|
(6.5 |
) |
|
|
3.3 |
|
|
|
(0.2 |
) |
|
|
0.1 |
|
Interest expense
|
|
|
(8.6 |
) |
|
|
(8.1 |
) |
|
|
(0.3 |
) |
|
|
(0.3 |
) |
Interest income
|
|
|
9.6 |
|
|
|
2.5 |
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes and other income
(expense), net
|
|
|
395.3 |
|
|
|
255.9 |
|
|
|
14.3 |
|
|
|
10.6 |
|
Provision for income taxes
|
|
|
(147.0 |
) |
|
|
(90.0 |
) |
|
|
(5.3 |
) |
|
|
(3.7 |
) |
Other income (expense), net
|
|
|
(2.7 |
) |
|
|
1.1 |
|
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
245.6 |
|
|
$ |
167.0 |
|
|
|
8.9 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Basic
|
|
$ |
2.36 |
|
|
$ |
1.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Diluted
|
|
$ |
2.30 |
|
|
$ |
1.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes depreciation expense of $90.2 million and
$72.1 million for the nine-month periods ended
December 31, 2005 and January 1, 2005, respectively. |
30
Net revenues. Net revenues for the nine months ended
December 31, 2005 were $2,774.8 million, an increase
of $371.6 million over net revenues for the nine months
ended January 1, 2005. Net revenues by business segment
were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
December 31, | |
|
January 1, | |
|
Increase/ | |
|
|
|
|
2005 | |
|
2005 | |
|
(Decrease) | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$ |
1,368,768 |
|
|
$ |
1,169,032 |
|
|
$ |
199,736 |
|
|
|
17.1 |
% |
|
Retail
|
|
|
1,223,765 |
|
|
|
1,057,146 |
|
|
|
166,619 |
|
|
|
15.8 |
% |
|
Licensing
|
|
|
182,275 |
|
|
|
177,016 |
|
|
|
5,259 |
|
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,774,808 |
|
|
$ |
2,403,194 |
|
|
$ |
371,614 |
|
|
|
15.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Net Sales increased by $199.7 million, or
17.1%, primarily due to the following:
|
|
|
|
|
the inclusion of $37.6 million of revenues from the
footwear product line acquired on July 15, 2005; |
|
|
|
the inclusion of $58.6 million of revenues from the
childrenswear product line acquired on July 2, 2004 for the
first quarter of Fiscal 2006, as well as a 15.8% increase in
childrenswear sales for the second and third quarters; |
|
|
|
a $36.6 million increase in revenues from our domestic
menswear product line and $16.0 million from our domestic
womenswear product line; and |
|
|
|
a $30.7 million increase in revenues from our product sales
in Europe. |
Retail Net Sales increased by $166.6 million, or
15.8%, primarily as a result of:
|
|
|
|
|
a 7.4% increase in comparable, full-price store sales and a 6.8%
increase in comparable factory store sales. Excluding the effect
of foreign currency exchange rate fluctuations, comparable store
sales increased 7.4% for full-price stores and 6.8% for factory
stores; and |
|
|
|
a net 19-store increase in the number of stores open. |
Licensing Revenue increased by $5.3 million, or
3.0%, primarily due to the following:
|
|
|
|
|
the growth in our international licensing business and domestic
Chaps for men lines; partially offset by |
|
|
|
the loss of licensing revenues from our footwear product line
which was acquired on July 15, 2005. |
Foreign exchange rate fluctuations in the value of the Euro
increased recorded wholesale sales by $0.2 million and
retail sales by $0.2 million.
Cost of Goods Sold. Cost of goods sold was
$1.277 billion for the nine months ended December 31,
2005, compared to $1.196 billion for the nine months ended
January 1, 2005. Expressed as a percentage of net revenues,
cost of goods sold was 46.0% for the nine months ended
December 31, 2005, compared to 49.8% for the nine months
ended January 1, 2005. The reduction in cost of goods sold
as a percentage of net revenues reflected a continued focus on
inventory management and sourcing efficiencies and reduced
markdown activity as a result of better sell through on our
products.
Gross Profit. Gross profit increased $289.8 million,
or 24.0%, for the nine months ended December 31, 2005 over
the nine months ended January 1, 2005. This increase
reflected higher net sales, improved merchandise margins and
sourcing efficiencies generally across our wholesale and retail
businesses.
Gross profit as a percentage of net revenues increased from
50.2% in the comparable period of the prior year to 54.0% as a
result of the decrease in cost of goods sold as a percentage of
net revenues discussed above and a shift in mix from off-price
to more full-price wholesale merchandising.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses (SG&A)
increased $137.8 million, or 14.6%, to
$1,082.9 million for the nine months ended
December 31, 2005 from
31
$945.1 million for the nine months ended January 1,
2005. SG&A as a percentage of net revenues decreased to
39.0% from 39.3%. The increase in SG&A was driven by:
|
|
|
|
|
higher selling salaries and related costs in connection with new
store openings and the increase in retail sales; |
|
|
|
the expenses of the footwear product line acquired on
July 15, 2005; |
|
|
|
an increase in incentive compensation associated with the
Companys strong performance and the increase in the
Companys stock price: and |
|
|
|
a $6.8 million charge during the nine months ended
December 31, 2005 to increase our reserve against the
financial exposure associated with the credit card matters
discussed in Note 14 to the accompanying consolidated
financial statements. |
The remainder of the increase in SG&A results from a number
of factors, including higher distribution costs as a result of
volume increases. Approximately $1.0 million of the
increase in the nine months was due to the impact of foreign
currency exchange rate fluctuations, primarily due to the
strengthening of the Euro.
Amortization of Intangible Assets. Amortization of
intangible assets increased from $1.9 million during the
nine months ended January 1, 2005 to $4.3 million
during the nine months ended December 31, 2005 as a result
of amortization of intangible assets resulting from the
acquisition of the Childrenswear Business acquired in July 2004
and the Footwear Business acquired in July 2005.
Impairments of Retail Assets. During the nine months
ended December 31, 2005, the Company recorded a
$9.4 million charge to reduce the carrying value of fixed
assets largely relating to its Club Monaco retail business,
including its Caban Concept and Factory Outlet stores. After
considering the second and third quarter operating performance,
management determined that such assets were no longer fully
recoverable based on estimates of related, future undiscounted
cash flows. In measuring the amount of impairment, fair value
was determined based on discounted, expected cash flows. A
$0.6 million impairment charge also was recognized in the
prior year for the nine months ended January 1, 2005.
During the fourth quarter of Fiscal 2006, management committed
to a plan to restructure its Club Monaco business. In
particular, this plan includes the closure of all five Club
Monaco outlet stores and the intention to dispose of all eight
of Club Monacos Caban Concept stores. In connection with
this plan, we expect to incur restructuring-related charges of
up to $10 million during the fourth quarter of Fiscal 2006.
Operating Income. Operating income increased
$142.6 million, or 55.2%, for the nine months ended
December 31, 2005 over the nine months ended
January 1, 2005. Operating income for our three business
segments is provided below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
December 31, | |
|
January 1, | |
|
Increase/ | |
|
|
|
|
2005 | |
|
2005 | |
|
(Decrease) | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$ |
271,615 |
|
|
$ |
158,982 |
|
|
$ |
112,633 |
|
|
|
70.8 |
% |
|
Retail
|
|
|
138,846 |
|
|
|
92,870 |
|
|
|
45,976 |
|
|
|
49.5 |
% |
|
Licensing
|
|
|
113,592 |
|
|
|
111,563 |
|
|
|
2,029 |
|
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
524,053 |
|
|
|
363,415 |
|
|
|
160,638 |
|
|
|
44.2 |
% |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses
|
|
|
(123,207 |
) |
|
|
(103,356 |
) |
|
|
(19,851 |
) |
|
|
(19.2 |
)% |
|
|
Unallocated restructuring charges
|
|
|
|
|
|
|
(1,846 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
400,846 |
|
|
$ |
258,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
The increase in the wholesale operating results was primarily
the result of the increase in sales and improvements in the
gross margin rates described above. |
|
|
|
The increase in retail operating results was driven by increased
net sales and improved gross margin rate, partially offset by
the higher selling salaries and related costs incurred in
connection with the increase in retail sales and new store
openings. |
|
|
|
The increase in licensing operating results was primarily due to
improvements in our international licensing business and
domestic Chaps for men lines, largely offset by the loss
of royalties from the footwear license that was acquired in July
2005. |
|
|
|
The increase in unallocated corporate expense principally
relates to a $6.8 million charge to increase our reserve
against the financial exposure associated with the credit card
matters discussed in Note 14 to the accompanying
consolidated financial statements. |
Foreign Currency Gains (Losses). The effect of foreign
currency exchange rate fluctuations resulted in a loss of
$6.5 million for the nine months ended December 31,
2005, compared to a $3.3 million gain for the nine months
ended January 1, 2005. The increased losses in Fiscal 2006
principally related to unfavorable foreign exchange movements
associated with intercompany receivables and payables that were
not of a long-term investment nature and were settled by our
international subsidiaries.
Interest Expense. Interest expense was $8.6 million
for the nine months ended December 31, 2005 and
$8.1 million for the nine months ended January 1,
2005. There were no significant fluctuations in interest expense
incurred by us.
Interest Income. Interest income increased to
$9.6 million for the nine months ended December 31,
2005 from $2.5 million for the nine months ended
January 1, 2005. The increase was the result of a higher
level of excess cash reinvestment and higher interest rates on
our investments.
Provision for Income Taxes. The effective tax rate was
37.2% for the nine months ended December 31, 2005, compared
to 35.2% for the nine months ended January 1, 2005. The
increase in the effective tax rate was due primarily to a
greater portion of our income being generated in higher tax
jurisdictions.
Other Income (Expense), Net. Other income (expense), net,
was a net expense of $2.7 million for the nine months ended
December 31, 2005, compared to net income of
$1.1 million for the nine months ended January 1,
2005. The increased losses principally related to higher
minority interest expense allocated to our partners in our
jointly owned RL Media venture as a result of its improved
operating performance.
Net Income. Net income increased to $245.6 million
for nine months ended December 31, 2005, compared to
$167.0 million for the nine months ended January 1,
2005. The $78.6 million increase in net income principally
related to our $142.6 million increase in operating income
discussed above, offset in part by higher foreign currency
losses and an increase in our tax provision associated with both
a higher level of income and a higher effective tax rate.
Net Income Per Share. Diluted net income per share
increased to $2.30 per share, compared to $1.61 per
share for the nine months ended January 1, 2005. The higher
per-share performance resulted from an increase in net income,
partially offset by an increase in weighted average shares
outstanding due to stock option exercises and the issuance of
restricted stock units.
FINANCIAL CONDITION AND LIQUIDITY
At December 31, 2005, we had $643.9 million of cash
and cash equivalents, $260.8 million of debt (net cash of
$383.1 million, defined as total cash and cash equivalents
less total debt) and $1.975 billion of stockholders
equity. This compares to $350.5 million of cash and cash
equivalents, $291.0 million of debt (net cash of
$59.5 million) and $1.676 billion of
stockholders equity at April 2, 2005.
33
The increase in our net cash position principally relates to our
strong growth in operating cash flows, offset in part by the use
of approximately $110 million of available cash on hand to
fund the acquisition of the Footwear Business. On
February 3, 2006, we used $355 million of our
available cash on hand to fund the purchase of the Polo Jeans
business and settle all outstanding litigation with Jones. The
increase in stockholders equity principally relates to our
strong earnings growth in Fiscal 2006.
Net Cash Provided by Operating Activities. Net cash
provided by operating activities increased to
$493.6 million during the nine-month period ended
December 31, 2005, compared to $359.9 million for the
nine-month period ended January 1, 2005. This
$133.7 million increase in cash flow was driven primarily
by changes in working capital and the increase in net income.
Net Cash Used in Investing Activities. Net cash used in
investing activities was $211.6 million for the nine months
ended December 31, 2005, as compared to $370.0 million
for the nine months ended January 1, 2005. For the nine
months ended December 31, 2005, net cash used in investing
activities included $114.0 million principally relating to
the acquisition of the footwear product line. For the nine
months ended January 1, 2005, net cash used in investing
activities reflected $243.8 million for the acquisition of
certain assets of RL Childrenswear, LLC. For both periods, net
cash used in investing activities reflected capital expenditures
of $97.6 million for the nine months ended
December 31, 2005, as compared to $126.1 million for
the nine months ended January 1, 2005.
Net Cash Provided by Financing Activities. Net cash
provided by financing activities was $25.0 million for the
nine months ended December 31, 2005, compared to
$24.0 million in the nine months ended January 1,
2005. The increase in cash provided by financing activities
during the nine months ended December 31, 2005 principally
related to $44.9 million received from the exercise of
stock options, as compared to $42.2 million for the nine
months ended January 1, 2005.
Our primary sources of liquidity are the cash flow generated
from our operations, $450 million of availability under our
credit facility, available cash and equivalents and other
potential sources of financial capacity relating to our
under-leveraged capital structure. These sources of liquidity
are needed to fund our ongoing cash requirements, including
working capital requirements, retail store expansion,
construction and renovation of shop-within-shops, investment in
technological infrastructure, acquisitions, dividends, debt
repayment, stock repurchases and other corporate activities. We
believe that our existing sources of cash will be sufficient to
support our operating and capital requirements for the
foreseeable future.
As discussed below under the section entitled Debt and
Covenant Compliance, we had no borrowings under our credit
facility as of December 31, 2005. However, in the event of
a material acquisition, settlement of a material contingency or
a material adverse business development, we may need to draw on
our credit facility or other potential sources of financing.
On February 1, 2005, our Board of Directors approved a
stock repurchase plan which allows for the purchase of up to an
additional $100 million in our stock, in addition to the
approximately $22.5 million of authorized repurchases
remaining under our original stock repurchase plan which expires
in 2006. The new repurchase plan does not have a termination
date. We have not repurchased any shares of our stock pursuant
to these plans during Fiscal 2006.
We intend to continue to pay regular quarterly dividends on our
outstanding common stock. However, any decision to declare and
pay dividends in the future will be made at the discretion of
our Board of Directors
34
and will depend on, among other things, our results of
operations, cash requirements, financial condition and other
factors our Board of Directors may deem relevant.
We declared a quarterly dividend of $0.05 per outstanding
share in each quarter of Fiscal 2006 and Fiscal 2005. The
aggregate amount of dividend payments was $15.6 million in
the nine-month period ended December 31, 2005, compared to
$15.2 million in the nine-month period ended
January 1, 2005.
|
|
|
Debt and Covenant Compliance |
We have outstanding approximately
227.0 million
principal amount of 6.125% notes (the Euro
Debt) that are due in November 2006. The carrying value of
the Euro Debt changes as a result of changes in Euro exchange
rates. As of December 31, 2005, the carrying value of the
Euro Debt was $260.8 million, compared to
$291.0 million at April 2, 2005.
In addition, we have a credit facility that currently provides
for a $450 million revolving line of credit, which can be
increased up to $525 million. The credit facility expires
on October 6, 2009. This credit facility also is used to
support the issuance of letters of credit. As of
December 31, 2005, we had no borrowings outstanding under
the credit facility, but were contingently liable for
$52.0 million of outstanding letters of credit (primarily
relating to inventory purchase commitments).
Our credit facility requires us to maintain certain financial
covenants, consisting of (i) a minimum ratio of Earnings
Before Interest, Taxes, Depreciation, Amortization and Rent
(EBITDAR) to Consolidated Interest Expense and
(ii) a maximum ratio of Adjusted Debt to EBITDAR, as such
terms are defined in the credit facility.
Our credit facility also contains covenants that, subject to
specified exceptions, restrict our ability to:
|
|
|
|
|
incur additional debt; |
|
|
|
incur liens and contingent liabilities; |
|
|
|
sell or dispose of assets, including equity interests; |
|
|
|
merge with or acquire other companies, liquidate or dissolve; |
|
|
|
engage in businesses that are not a related line of business; |
|
|
|
make loans, advances or guarantees; |
|
|
|
engage in transactions with affiliates; and |
|
|
|
make investments. |
Upon the occurrence of an event of default under the credit
facility, the lenders may cease making loans, terminate the
credit facility, and declare all amounts outstanding to be
immediately due and payable. The credit facility specifies a
number of events of default (many of which are subject to
applicable grace periods), including, among others, the failure
to make timely principal and interest payments or to satisfy the
covenants, including the financial covenants described above.
Additionally, the credit facility provides that an event of
default will occur if Mr. Ralph Lauren and related entities
fail to maintain a specified minimum percentage of the voting
power of our common stock.
As of December 31, 2005, we were in compliance with all
covenants under the credit facility.
|
|
Item 3. |
Quantitative and Qualitative Disclosures About Market
Risk. |
As discussed in Note 13 to our audited consolidated
financial statements included in our Annual Report on
Form 10-K for
Fiscal 2005 and Note 10 to the accompanying unaudited
consolidated financial statements, we are exposed to market risk
arising from changes in market rates and prices, particularly
movements in foreign currency exchange rates and interest rates.
We manage these exposures through operating and financing
activities and, when appropriate, through the use of derivative
financial instruments, consisting of interest rate swap
agreements and foreign exchange forward contracts.
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As of December 31, 2005, there have been no significant
changes in our interest rate and foreign currency exposures,
changes in the types of derivative instruments used to hedge
those exposures, or significant changes in underlying market
conditions since April 2, 2005.
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Item 4. |
Controls and Procedures. |
The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed
in the reports that the Company files or submits under the
Securities and Exchange Act is recorded, processed, summarized,
and reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and
communicated to the Companys management, including its
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosures.
As of December 31, 2005, we carried out an evaluation,
under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to
the Securities and Exchange Act
Rule 13(a)-15(b).
Our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were not effective as of December 31, 2005 due
to the material weakness in our internal control over financial
reporting with respect to income taxes identified during the
Companys assessment of internal control over financial
reporting as of April 2, 2005 and reported in our Fiscal
2005 Annual Report on
Form 10-K, and the
additional material weakness relating to inadequacies in the
controls over the period-end financial closing and reporting
process reported in our Quarterly Report on
Form 10-Q for the
fiscal quarter ended July 1, 2005. Although we have begun
the implementation of our plans to remediate these material
weaknesses, such implementation will continue during the
remainder of Fiscal 2006 and these material weaknesses are not
yet remediated. No material weaknesses will be considered
remediated until the remediated procedures have operated for an
appropriate period, have been tested, and management has
concluded that they are operating effectively.
To compensate for these material weaknesses, the Company
performed additional analysis and other procedures and utilized
temporary resources in order to prepare the unaudited quarterly
consolidated financial statements in accordance with generally
accepted accounting principles in the United States of America.
Accordingly, management believes that the consolidated financial
statements included in this Quarterly Report on
Form 10-Q fairly
present, in all material respects, our financial condition,
results of operations and cash flows for the periods presented.
Primary focuses of the remediation plans include the
augmentation of technical expertise across all principal
accounting areas, improved internal training and development,
and heightened monthly and quarterly review procedures. In
connection with these plans, we hired a new Vice President,
Controller on September 19, 2005. Except for our
preliminary remediation efforts, there were no changes during
the quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
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Item 1. |
Legal Proceedings. |
Reference is made to the information disclosed under
Item 3 LEGAL PROCEEDINGS in our
Annual Report on
Form 10-K for the
fiscal year ended April 2, 2005, as updated by the
information disclosed under Part II,
Item 1 LEGAL PROCEEDINGS in our
Quarterly Report on
Form 10-Q for the
fiscal quarter ended October 1, 2005, for a description of
certain litigation and other proceedings to which we are
subject. The following is a summary of recent litigation
developments.
On January 23, 2006 we entered into a definitive agreements
with Jones Apparel Group, Inc. (together with its subsidiaries,
Jones) to purchase the licensed Polo Jeans Company
business from Jones and to settle all outstanding litigation
between the Company, Jones and Jackwyn Nemerov relating to the
former Lauren
36
license agreements. Pursuant to the settlement agreement, we
agreed to pay $100 million to Jones to settle litigation.
The acquisition of the Polo Jeans Business and the settlement
were both effected on February 3, 2006, pursuant to the
settlement, the outstanding actions before the New York State
courts and the related arbitration between Jones and
Ms. Nemerov were dismissed with prejudice and the parties
exchanged releases. As we had recorded a litigation charge of
$100 million in fiscal 2005 in connection with this matter,
the settlement payment will not affect our income in Fiscal 2006.
As reported in our Quarterly Report on
Form 10-Q for the
fiscal quarter ended October 1, 2005, on October 20,
2005, the jury in our litigation against the United States Polo
Association (the USPA), Jordache, Ltd. and certain
affiliated entities in the United States District Court for the
Southern District of New York found that one of the four
double horsemen logos that the defendants sought to
use infringed on our world famous Polo Player Symbol trademarks
and enjoined its use. The jury found that the other three marks
were not confusingly similar to ours and, consequently, could be
used by the USPA and Jordache. On November 16, 2005, we
filed a motion before the trial court to overturn the
jurys decision and hold a new trial with respect to the
three marks that the jury found not to be infringing. The USPA
and Jordache have opposed our motion, but have not moved to
overturn the jurys decision that the fourth double
horseman logo did infringe on our trademarks. Pending the
judges ruling on our motion, which is expected within the
next few weeks, the USPA and Jordache cannot produce or sell
products bearing any of the double horseman marks. We have
preserved our rights to appeal if our motion is denied.
On January 12, 2006, a proposed settlement of the purported
class action brought on behalf of certain employees in the
United States District Court for the District of Northern
California was submitted to the court for approval. A hearing on
the settlement has been scheduled for April 6, 2006. The
proposed settlement cost of $1.5 million does not exceed
the reserve for this matter that we established in Fiscal 2005.
The proposed settlement would also result in the dismissal of
the similar purported class action filed in San Francisco
Superior Court, which has been stayed pending resolution of the
federal action.
With respect to the litigation filed by Wathne Imports, Ltd.,
our domestic licensee for luggage and handbags
(Wathne) in the Supreme Court of the State of New
York, New York County, described in our Quarterly Report on
Form 10-Q for the
fiscal quarter ended October 1, 2005; on February 1,
2006, the court granted our motion and dismissed all of
Wathnes causes of action except its breach of contract
claim against the Company and denied Wathnes motion for a
preliminary injunction against our production and sale of
womens and childrens handbags.
Item 1A. Risk
Factors.
Our Annual Report on
Form 10-K for the
fiscal year ended April 2, 2005 contains a detailed
discussion of certain risk factors that could materially
adversely affect our business, our operating results, or our
financial condition. The following information amends, updates
and should be read in conjunction with the risk factors and
information disclosed in the Annual Report on
Form 10-K.
We cannot assure the successful integration of the Polo Jeans
Company Business.
As part of our growth strategy, we seek to extend our brands,
expand our geographic coverage, increase direct management of
our brands by opening more of our own stores, strategically
acquiring select licensees and enhancing our operations. On
February 3, 2006, we acquired the Polo Jeans Business by
acquiring the stock of Sun Apparel, Inc. a subsidiary of Jones
Apparel Group, Inc., for approximately $255 million,
subject to post-closing adjustment. We may not be able to retain
qualified individuals to operate the Polo Jeans Company Business
or otherwise successfully integrate the Polo Jeans Company
Business into our existing wholesale businesses or achieve any
expected cost savings or synergies from such integration.
A substantial portion of our net sales and gross profit is
derived from a small number of department store customers.
Several of our department store customers, including chains
under common ownership, account for significant portions of our
wholesale net sales. We believe that a substantial portion of
sales of our licensed
37
products by our domestic licensees, including sales made by our
sales force of Ralph Lauren Home products, are also made to our
largest department store customers. Our three most significant
department store customers accounted for 51.1% of our wholesale
net sales during Fiscal 2005, and our ten largest customers
accounted for approximately 64.6% of our wholesale net sales.
The department store sector is undergoing consolidation. Two of
our largest wholesale customers, Federated Department Stores,
Inc. (Federated) and The May Department Stores
Company merged on August 30, 2005, and the surviving
entity, Federated, has announced that it intends to close
approximately 80 stores and continues to review its store
portfolio. On January 12, 2006, Federated announced that it
intends to divest its Lord & Taylor division, which had
been part of the May Department Stores Company. According to
Federated, the Lord & Taylor division operates
55 stores and had sales of approximately $1.56 billion
in 2004.
We do not enter into long-term agreements with any of our
customers. Instead, we enter into a number of purchase order
commitments with our customers for each of our lines every
season. A decision by the controlling owner of a group of stores
or any other significant customer, whether motivated by
competitive conditions, financial difficulties or otherwise, to
decrease the amount of merchandise purchased from us or our
licensing partners or to change their manner of doing business
with us or our licensing partners could have a material adverse
effect on our financial condition and results of operations.
Our business could be negatively impacted by any financial
instability of our customers.
We sell our wholesale merchandise primarily to major department
stores across the United States and Europe and extend credit
based on an evaluation of each customers financial
condition, usually without requiring collateral. However, the
financial difficulties of a customer could cause us to curtail
business with that customer. We may also assume more credit risk
relating to that customers receivables. Three of our
customers, Dillard Department Stores, Inc., Federated Department
Stores, Inc. and The May Department Stores Company, in aggregate
constituted 44.9% of trade accounts receivable outstanding at
April 2, 2005, the end of our most recent fiscal year. As
noted above, Federated and The May Department Stores Company
have merged. Our inability to collect on our trade accounts
receivable from any one of these customers could have a material
adverse effect on our business or financial condition.
We are dependent upon the revenue generated by our licensing
alliances.
Approximately 53.2% of our income from operations for Fiscal
2005 was derived from licensing revenue received from our
licensing partners. Approximately 33.5% of our licensing revenue
for Fiscal 2005 was derived from three licensing partners.
WestPoint Home, Inc., Impact 21 and Jones Apparel Group,
Inc. (Jones) accounted for 14.2%, 12.1% and 7.2%,
respectively. On February 3, 2006, we closed the
acquisition of the Polo Jeans Company business from Jones,
thereby ending our licensing relationship with Jones. The
interruption of the business of any one of our material
licensing partners due to any of the factors discussed
immediately below could also adversely affect our licensing
revenues and net income.
The risks associated with our own products also apply to our
licensed products in addition to any number of possible risks
specific to a licensing partners business, including, for
example, risks associated with a particular licensing
partners ability to:
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obtain capital; |
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manage its labor relations; |
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maintain relationships with its suppliers; |
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manage its credit risk effectively; and |
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maintain relationships with its customers. |
Although some of our license agreements prohibit licensing
partners from entering into licensing arrangements with our
competitors, our licensing partners generally are not precluded
from offering, under other brands, the types of products covered
by their license agreements with us. A substantial portion of
sales of our products by our domestic licensing partners are
also made to our largest customers. While we have
38
significant control over our licensing partners products
and advertising, we rely on our licensing partners for, among
other things, operational and financial control over their
businesses.
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Item 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds. |
We did not repurchase any shares of our common stock during the
fiscal quarter ended December 31, 2005.
In March 1998, we announced a $100 million Class A
Common Stock repurchase plan. Approximately $22.5 million
in share repurchases remain available under this plan. On
February 2, 2005, we announced a second stock repurchase
plan under which up to an additional $100 million of
Class A Common Stock may be purchased. No shares have been
repurchased under this plan, which does not have a termination
date.
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3.1
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Amended and restated Certificate of Incorporation of Polo Ralph
Lauren Corporation (filed as exhibit 3.1 to the Polo Ralph
Lauren Registration Statement on Form S-1 (file no.
333-24733) (the S-1)). |
3.2
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Amended and Restated By-Laws of Polo Ralph Lauren Corporation
(filed as exhibit 3.2 to the S-1). |
10.1
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Amended and Restated Polo Ralph Lauren Supplemental Executive
Retirement Plan. |
31.1
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Certification of Ralph Lauren, Chairman and Chief Executive
Officer, pursuant to 17 CFR 240.13a-14(a). |
31.2
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Certification of Tracey T. Travis, Senior Vice President and
Chief Financial Officer, pursuant to 17 CFR 24013a-14(a). |
32.1
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Certification of Ralph Lauren, Chairman and Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
32.2
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Certification of Tracey T. Travis, Senior Vice President and
Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
Exhibits 32.1 and 32.2 shall not be deemed
filed for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the
liability of that Section. Such exhibits shall not be deemed
incorporated by reference into any filing under the Securities
Act of 1933 or Securities Exchange Act of 1934.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
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POLO RALPH LAUREN CORPORATION |
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Tracey T. Travis |
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Senior Vice President and |
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Chief Financial Officer |
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(Principal Financial and |
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Accounting Officer) |
Date: February 9, 2006
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