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
September 30, 2006
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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
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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
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(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
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10022
(Zip Code)
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(Address of principal executive
offices)
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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
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Accelerated filer
o
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Non-accelerated filer
o
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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 November 2, 2006, 60,691,079 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, $.01 par value, were outstanding.
POLO
RALPH LAUREN CORPORATION
INDEX TO
FORM 10-Q
POLO
RALPH LAUREN CORPORATION
CONSOLIDATED
BALANCE SHEETS
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September 30,
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April 1,
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2006
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2006
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(millions)
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(unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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321.0
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$
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285.7
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Accounts receivable, net of
allowances of $122.6 and $115.0 million
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524.8
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484.2
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Inventories
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586.4
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485.5
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Deferred tax assets
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32.4
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32.4
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Prepaid expenses and other
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69.0
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90.7
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Total current assets
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1,533.6
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1,378.5
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Property and equipment, net
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549.1
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548.8
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Deferred tax assets
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13.8
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Goodwill
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705.5
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699.7
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Intangible assets, net
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249.2
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258.5
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Other assets
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268.9
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203.2
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Total assets
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$
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3,320.1
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$
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3,088.7
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LIABILITIES AND
STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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240.8
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$
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202.2
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Income tax payable
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70.9
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46.6
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Accrued expenses and other
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311.8
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314.3
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Current maturities of debt
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289.1
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280.4
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Total current
liabilities
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912.6
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843.5
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Deferred tax liabilities
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20.1
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20.8
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Other non-current liabilities
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188.5
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174.8
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Commitments and contingencies
(Note 12)
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Total liabilities
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1,121.2
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1,039.1
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Stockholders
equity:
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Class A common stock, par
value $.01 per share; 67.6 million and
66.4 million shares issued; 61.0 million and
62.1 million shares outstanding
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0.7
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0.7
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Class B common stock, par
value $.01 per share; 43.3 million shares issued and
outstanding
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0.4
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0.4
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Additional
paid-in-capital
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801.2
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783.6
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Retained earnings
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1,586.0
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1,379.2
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Treasury stock, Class A, at
cost (6.6 million and 4.3 million shares)
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(219.3
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)
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(87.1
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)
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Accumulated other comprehensive
income
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29.9
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15.5
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Unearned compensation
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(42.7
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)
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Total stockholders
equity
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2,198.9
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2,049.6
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Total liabilities and
stockholders equity
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$
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3,320.1
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$
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3,088.7
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See accompanying notes.
2
POLO
RALPH LAUREN CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
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Three Months Ended
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Six Months Ended
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September 30,
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October 1,
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September 30,
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October 1,
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2006
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2005
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2006
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2005
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(millions, except per share data)
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(unaudited)
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Net sales
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$
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1,104.5
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$
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964.7
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$
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2,007.8
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$
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1,659.3
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Licensing revenue
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62.3
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62.7
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112.6
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120.0
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Net revenues
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1,166.8
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1,027.4
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2,120.4
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1,779.3
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Cost of goods
sold(a)
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(534.2
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)
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(475.9
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)
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(956.3
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)
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(813.4
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)
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Gross profit
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632.6
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551.5
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1,164.1
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965.9
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Other costs and
expenses:
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Selling, general and
administrative
expenses(a)
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(412.1
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)
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(368.0
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)
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(802.4
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)
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(701.2
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)
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Amortization of intangible assets
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(3.8
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)
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(1.6
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)
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(9.4
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)
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(2.6
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)
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Impairment of retail assets
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(4.9
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)
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(4.9
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)
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Restructuring charges
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(1.8
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)
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(4.0
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)
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Total other costs and
expenses
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(417.7
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)
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(374.5
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)
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(815.8
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)
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(708.7
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)
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Operating income
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214.9
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177.0
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348.3
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257.2
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Foreign currency gains (losses)
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1.2
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(6.0
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)
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0.1
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(6.0
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)
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Interest expense
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(4.5
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)
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(2.8
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)
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(8.9
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)
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(5.3
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)
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Interest income
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4.7
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2.9
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8.5
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5.8
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|
Equity in income of equity-method
investees
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|
0.9
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1.3
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1.7
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3.1
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|
Minority interest expense
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(3.6
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)
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(3.9
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)
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(7.6
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)
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(5.3
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)
|
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Income before provision for
income taxes
|
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|
213.6
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168.5
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|
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342.1
|
|
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249.5
|
|
Provision for income taxes
|
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|
(76.6
|
)
|
|
|
(64.3
|
)
|
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|
(124.9
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)
|
|
|
(94.6
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income
|
|
$
|
137.0
|
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|
$
|
104.2
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$
|
217.2
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$
|
154.9
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Net income per common
share:
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Basic
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|
$
|
1.31
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|
|
$
|
1.00
|
|
|
$
|
2.07
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|
$
|
1.50
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Diluted
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|
$
|
1.28
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|
$
|
0.97
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|
$
|
2.02
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|
$
|
1.46
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Weighted average common shares
outstanding:
|
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Basic
|
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|
104.5
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|
|
|
104.2
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|
104.8
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|
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|
103.6
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|
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|
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Diluted
|
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|
107.3
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107.4
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107.7
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|
106.4
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Dividends declared per share
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|
$
|
0.05
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|
$
|
0.05
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|
$
|
0.10
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|
|
$
|
0.10
|
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|
|
|
|
|
|
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(a)Includes
total depreciation expense of:
|
|
$
|
(29.8
|
)
|
|
$
|
(28.0
|
)
|
|
$
|
(62.0
|
)
|
|
$
|
(55.7
|
)
|
|
|
|
|
|
|
|
|
|
|
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|
See accompanying notes.
3
POLO
RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
|
(unaudited)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
217.2
|
|
|
$
|
154.9
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
expense
|
|
|
71.4
|
|
|
|
58.3
|
|
Deferred income tax expense
(benefit)
|
|
|
(7.0
|
)
|
|
|
(5.8
|
)
|
Minority interest expense
|
|
|
7.6
|
|
|
|
5.3
|
|
Equity in the income of
equity-method investees, net of dividends received
|
|
|
(0.5
|
)
|
|
|
(3.1
|
)
|
Non-cash stock compensation expense
|
|
|
19.3
|
|
|
|
11.0
|
|
Non-cash impairment of retail
assets
|
|
|
|
|
|
|
4.9
|
|
Non-cash provision for bad debt
expense
|
|
|
1.0
|
|
|
|
0.7
|
|
Loss on disposal of property and
equipment
|
|
|
2.1
|
|
|
|
1.1
|
|
Non-cash foreign currency losses
(gains)
|
|
|
(0.1
|
)
|
|
|
3.6
|
|
Non-cash restructuring charges
|
|
|
2.5
|
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(35.6
|
)
|
|
|
5.2
|
|
Inventories
|
|
|
(96.4
|
)
|
|
|
(64.5
|
)
|
Accounts payable and accrued
liabilities
|
|
|
54.6
|
|
|
|
9.1
|
|
Other balance sheet changes
|
|
|
20.5
|
|
|
|
17.4
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
256.6
|
|
|
|
198.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
and purchase price settlements
|
|
|
(1.3
|
)
|
|
|
(114.0
|
)
|
Capital expenditures
|
|
|
(63.6
|
)
|
|
|
(74.5
|
)
|
Cash deposits restricted in
connection with taxes (Note 12)
|
|
|
(52.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(117.3
|
)
|
|
|
(188.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Payments of capital lease
obligations
|
|
|
(2.5
|
)
|
|
|
(1.0
|
)
|
Payments of dividends
|
|
|
(10.5
|
)
|
|
|
(10.4
|
)
|
Distributions to minority interest
holders
|
|
|
(4.5
|
)
|
|
|
|
|
Repurchases of common stock
|
|
|
(129.6
|
)
|
|
|
(3.2
|
)
|
Proceeds from exercise of stock
options
|
|
|
25.5
|
|
|
|
42.4
|
|
Excess tax benefits from
stock-based compensation arrangements
|
|
|
12.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
(108.7
|
)
|
|
|
27.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
4.7
|
|
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
35.3
|
|
|
|
32.7
|
|
Cash and cash equivalents at
beginning of period
|
|
|
285.7
|
|
|
|
350.5
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
321.0
|
|
|
$
|
383.2
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and where otherwise
indicated)
(Unaudited)
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
1.
|
Description
of Business
|
Polo Ralph Lauren Corporation (PRLC) is a global
leader in the design, marketing and distribution of premium
lifestyle products including mens, womens and
childrens apparel, accessories, fragrances and home
furnishings. 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, RLX, Ralph
Lauren, Blue Label, Lauren, 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.
The Company classifies its businesses into three segments:
Wholesale, Retail and Licensing. The Companys wholesale
sales are made principally to major department and specialty
stores located throughout the United States and Europe. The
Company also sells directly to consumers through full-price and
factory retail stores located throughout the United States,
Canada, Europe, South America and Asia, and through its jointly
owned retail internet site located at www.Polo.com. In addition,
the Company often licenses the right to third parties to use its
various trademarks in connection with the manufacture and sale
of designated products, such as apparel, eyewear and fragrances,
in specified geographical areas for specified periods.
Basis
of Consolidation
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 No. 46R (FIN 46R), the
Company consolidates (a) Polo Ralph Lauren Japan
Corporation (PRL Japan, formerly known as New Polo
Japan, Inc.), a 50%-owned venture with Onward Kashiyama Co. Ltd
(45%) and The Seibu Department Stores, Ltd (5%), and
(b) Ralph Lauren Media, LLC (RL Media), a
50%-owned venture with NBC Universal, Inc. and an affiliated
company (collectively, NBC). RL Media conducts the
Companys
e-commerce
initiatives through a jointly owned internet site known as
Polo.com.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Fiscal
Year
The Companys fiscal year ends on the Saturday closest to
March 31. As such, all references to Fiscal
2007 represent the
52-week
fiscal year ending March 31, 2007 and references to
Fiscal 2006 represent the
52-week
fiscal year ending April 1, 2006.
The financial position and operating results of the
Companys consolidated 50% interest in PRL Japan are
reported on a one-month lag. Similarly, prior to the fourth
quarter of Fiscal 2006, the financial position and operating
results of RL Media were reported on a three-month lag. During
the fourth quarter of Fiscal 2006, RL Media changed its fiscal
year, which was formerly on a calendar-year basis, to conform
with the Companys fiscal-year basis. In connection with
this change, the three-month reporting lag for RL Media was
eliminated. Accordingly, the Companys operating results
included in this
Form 10-Q
for the second quarter of Fiscal 2007 include the operating
results of RL Media for the three-month and six-month periods
ended September 30, 2006, whereas the second quarter of
Fiscal 2006 include the operating results of RL Media for the
three-month and six-month periods ended June 30, 2005. The
net effect from this change in RL Medias fiscal year was
not material.
5
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. In the opinion
of management, however, such consolidated financial statements
contain all normal and recurring adjustments necessary to
present fairly the consolidated financial condition, results of
operations and changes in cash flows of the Company for the
interim periods presented. In addition, certain information and
footnote disclosures 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, the Company believes that the
disclosures herein are adequate to make the information
presented not misleading.
The consolidated balance sheet data as of April 1, 2006 is
derived from the audited financial statements included in the
Companys Annual Report on
Form 10-K
filed with the SEC for the year ended April 1, 2006 (the
Fiscal 2006
10-K),
which should be read in conjunction with these financial
statements. Reference is made to the Fiscal 2006
10-K for a
complete set of financial statements.
Use of
Estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ materially from
those estimates.
Significant estimates inherent in the preparation of the
accompanying consolidated financial statements include reserves
for customer returns, discounts,
end-of-season
markdown allowances and operational chargebacks; reserves for
the realizability of inventory; reserves for litigation matters;
impairments of long-lived tangible and intangible assets;
depreciation and amortization expense; accounting for income
taxes; the valuation of stock-based compensation and related
forfeiture rates; and accounting for business combinations under
the purchase method of accounting.
Seasonality
of Business
The Companys business is affected by seasonal trends, with
higher levels of wholesale sales in its second and fourth
quarters and higher retail sales in its second and third
quarters. These trends result primarily from the timing of
seasonal wholesale shipments and key vacation travel,
back-to-school
and holiday periods in the retail segment. Accordingly, the
Companys operating results and cash flows for the
three-month and six-month periods ended September 30, 2006
are not necessarily indicative of the results that may be
expected for Fiscal 2007 as a whole.
Reclassifications
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
Recognition
Revenue within the Companys wholesale segment is
recognized at the time title passes and risk of loss is
transferred to customers. Wholesale revenue is recorded net of
estimates of returns, discounts,
end-of-season
markdown allowances, certain cooperative advertising allowances
and operational chargebacks. Returns and
6
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
allowances require pre-approval from management and discounts
are based on trade terms. Estimates for
end-of-season
markdown allowances are based on historical 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.
E-commerce
revenue from sales of products ordered through the
Companys jointly owned retail internet site known as
Polo.com is recognized upon delivery and receipt of the shipment
by its customers. Such revenue also is reduced by an estimate of
returns.
Licensing revenue is initially recognized based upon the higher
of (a) contractually guaranteed minimum royalty levels and
(b) estimates of actual sales and royalty data received
from the Companys licensees.
Accounts
Receivable
In the normal course of business, the Company extends credit to
customers that satisfy defined credit criteria. Accounts
receivable, net, as shown in the Companys consolidated
balance sheet, is net of certain reserves and allowances. These
reserves and allowances consist of (a) reserves for
returns, discounts,
end-of-season
markdown allowances and operational chargebacks and
(b) allowances for doubtful accounts. These reserves and
allowances are discussed in further detail below.
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 revenue.
Estimated
end-of-season
markdown allowances are included as a reduction of revenue.
These provisions are based on retail sales performance, seasonal
negotiations with 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 revenue. 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 revenues. 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.
A rollforward of the activity for the three and six-month
periods ended September 30, 2006 and October 1, 2005,
respectively, in the Companys reserves for returns,
discounts,
end-of-season
markdown allowances and operational chargebacks is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Beginning reserve balance
|
|
$
|
95.3
|
|
|
$
|
76.9
|
|
|
$
|
107.5
|
|
|
$
|
100.0
|
|
Amounts charged against revenue to
increase reserve
|
|
|
63.3
|
|
|
|
78.8
|
|
|
|
131.1
|
|
|
|
133.8
|
|
Amounts credited against customer
accounts to decrease reserve
|
|
|
(44.2
|
)
|
|
|
(66.1
|
)
|
|
|
(125.5
|
)
|
|
|
(143.0
|
)
|
Foreign currency translation
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
|
1.2
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending reserve balance
|
|
$
|
114.3
|
|
|
$
|
89.7
|
|
|
$
|
114.3
|
|
|
$
|
89.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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. A rollforward of the activity for the three
and six-month periods ended September 30, 2006 and
October 1, 2005, respectively, in the Companys
allowances for doubtful accounts is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Beginning reserve balance
|
|
$
|
8.3
|
|
|
$
|
9.6
|
|
|
$
|
7.5
|
|
|
$
|
11.0
|
|
Amount charged to expense to
increase reserve
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
1.0
|
|
|
|
0.7
|
|
Amount written off against
customer accounts to decrease reserve
|
|
|
(0.1
|
)
|
|
|
(1.9
|
)
|
|
|
(0.4
|
)
|
|
|
(3.1
|
)
|
Foreign currency translation
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending reserve balance
|
|
$
|
8.3
|
|
|
$
|
8.3
|
|
|
$
|
8.3
|
|
|
$
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Per Common Share
Net income per common share is determined in accordance with
Statement of Financial Accounting Standards No. 128,
Earnings per Share (FAS 128). Under
the provisions of FAS 128, basic net income per common
share is computed by dividing the net income applicable to
common shares after preferred dividend requirements, if any, by
the weighted average of common shares outstanding during the
period. Weighted-average common shares include shares of the
Companys Class A and Class B Common Stock.
Diluted net income per common share adjusts basic net income per
common share for the effects of outstanding stock options,
restricted stock, restricted stock units and any other
potentially dilutive financial instruments, only in the periods
in which such effect is dilutive under the treasury stock method.
The weighted-average number of common shares outstanding used to
calculate basic net income per common share is reconciled to
those shares used in calculating diluted net income per common
share as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
Basic
|
|
|
104.5
|
|
|
|
104.2
|
|
|
|
104.8
|
|
|
|
103.6
|
|
Dilutive effect of stock options,
restricted stock and restricted stock units
|
|
|
2.8
|
|
|
|
3.2
|
|
|
|
2.9
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
107.3
|
|
|
|
107.4
|
|
|
|
107.7
|
|
|
|
106.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 net income per common share. 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 September 30, 2006, there was an aggregate of
2.2 million 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
calculations.
8
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
4.
|
Recently
Issued Accounting Standards
|
Stock-Based
Compensation
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. FAS 123R, Share-Based
Payments (FAS 123R) and, in March 2005,
the SEC issued Staff Accounting Bulletin No. 107
(SAB 107). SAB 107 provides implementation
guidance for companies to use in their adoption of
FAS 123R. FAS 123R supersedes both Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25), which permitted the use of the
intrinsic-value method in accounting for stock-based
compensation, and Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based
Compensation, as amended by Statement of Financial
Accounting Standards No. 148, Accounting for
Stock-Based Compensation Transition and
Disclosure (FAS 123), which allowed
companies applying APB 25 to just disclose in their
financial statements the pro forma effect on net income from
applying the fair-value method of accounting for stock-based
compensation. The Company adopted FAS 123R as of
April 2, 2006 (see Note 11).
Financial
Statement Misstatements
In September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB 108). SAB 108 provides guidance on
the process of quantifying financial statement misstatements,
advising companies to use both a balance sheet (iron
curtain) and an income statement (rollover)
approach when quantifying and evaluating the materiality of a
misstatement. The iron curtain approach quantifies a
misstatement based on the effects of correcting the misstatement
existing in the balance sheet at the end of the reporting
period. The rollover approach quantifies a misstatement based on
the amount of the error originating in the current period income
statement, including the reversing effect of prior year
misstatements. The use of this method can lead to the
accumulation of misstatements in the balance sheet. PRLC has
historically used the rollover method for quantifying identified
financial statement misstatements.
Under the guidance of SAB 108, companies will be required
to adjust their financial statements if either the iron curtain
or rollover approach results in the quantification of a material
misstatement. Previously filed reports would not be amended, but
would be corrected the next time the company files prior year
financial statements. Companies are allowed to record a one-time
cumulative effect adjustment to correct errors in prior years
that previously had been considered immaterial based on their
previous approach. SAB 108 is effective for the Company
upon issuance of its Fiscal 2007 annual financial statements.
However, early application of SAB 108 is permitted for
interim periods prior to the issuance of the annual financial
statements. The Company currently is evaluating the effect of
SAB 108 on its financial statements.
Accounting
for Uncertainty in Income Taxes
In July 2006, the FASB issued Financial Accounting Standards
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes An Interpretation of FASB Statement
No. 109 (FIN 48). FIN 48
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The
evaluation of a tax position in accordance with FIN 48 is a
two-step process. The Company first will be required to
determine whether it is more-likely-than-not that a tax position
will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical
merits of the position. A tax position that meets the
more-likely-than-not recognition threshold will then
be measured to determine the amount of benefit to recognize in
the financial statements based upon the largest amount of
benefit that is greater than 50 percent likely of being
realized upon ultimate settlement. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company
currently is evaluating the effect of FIN 48 on its
financial statements.
9
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Other
Recently Issued Accounting Standards
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 158, Employers Accounting
for Defined Benefit Pension and other Postretirement
Plans an amendment of FASB Statements No. 87,
88, 106 and 132R (FAS 158). FAS 158
requires an employer that is a business entity and sponsors one
or more single-employer defined benefit plans to recognize the
funded status of a benefit plan measured as the
difference between plan assets at fair value (with limited
exceptions) and the benefit obligation in its
statement of financial position. For a pension plan, the benefit
obligation is the projected benefit obligation; for any other
postretirement benefit plan, such as a retiree health care plan,
the benefit obligation is the accumulated postretirement benefit
obligation. FAS 158 is effective for fiscal years ending
after December 15, 2006. Because the Company does not
currently maintain any defined benefit plans, the application of
FAS 158 is not expected to have an effect on the
Companys financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (FAS 157). FAS 157
defines fair value, establishes a framework for measuring fair
value in US GAAP and expands disclosures about fair value
measurements. FAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The application
of FAS 157 is not expected to have a material effect on the
Companys financial statements.
In May 2005, the FASB issued Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error
Corrections (FAS 154). FAS 154
generally requires that accounting changes and errors be applied
retrospectively. Effective April 2, 2006, the Company
adopted the provisions of FAS 154. The application of
FAS 154 did not have an effect on the Companys
financial statements.
In November 2004, the FASB issued Statement of Financial
Accounting Standards 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. Effective April 2,
2006, the Company adopted the provisions of FAS 151. The
application of FAS 151 did not have a material effect on
the Companys financial statements.
Acquisition
of Polo Jeans Business
On February 3, 2006, the Company acquired from Jones
Apparel Group, Inc. and subsidiaries (Jones) all of
the issued and outstanding shares of capital stock of Sun
Apparel, Inc., the Companys 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. In addition, simultaneous
with the transaction, the Company settled all claims under its
litigation with Jones for a cost of $100 million.
The results of operations for the Polo Jeans Business have been
consolidated in the Companys results of operations
commencing February 4, 2006. In addition, the purchase
price has been allocated on a preliminary basis as follows:
inventory of $36 million; finite-lived intangible assets of
$159 million (consisting of the re-acquired license of
$97 million, customer relationships of $57 million and
order backlog of $5 million); goodwill of
$127 million; and deferred tax and other liabilities, net,
of $62 million. Other than inventory, Jones retained the
right to all working capital balances on the date of closing.
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.
Also, the Company has 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 from the date of the acquisition of the Polo
Jeans Business.
10
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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., the Companys 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 million in cash, including
$2 million of transaction costs. In addition, Reebok and
certain of its affiliates 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 from the date of the acquisition of
the Footwear Business.
The results of operations for the Footwear Business for the
period are included in the consolidated results of operations
commencing July 16, 2005. In addition, the accompanying
consolidated financial statements include the following
allocation of the acquisition cost to the net assets acquired
based on their respective fair values: trade receivables of
$17 million; inventory of $26 million; finite-lived
intangible assets of $62 million (consisting of the
footwear license at $38 million, customer relationships at
$23 million and order backlog at $1 million); goodwill
of $20 million; other assets of $1 million; and
liabilities of $14 million.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
April 1,
|
|
|
|
2006
|
|
|
2006
|
|
|
|
(millions)
|
|
|
Raw materials
|
|
$
|
8.2
|
|
|
$
|
6.0
|
|
Work-in-process
|
|
|
5.7
|
|
|
|
22.0
|
|
Finished goods
|
|
|
572.5
|
|
|
|
457.5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
586.4
|
|
|
$
|
485.5
|
|
|
|
|
|
|
|
|
|
|
The Company has recorded restructuring liabilities over the past
few years relating to various cost-savings initiatives, as well
as certain of its acquisitions. In accordance with US GAAP,
restructuring costs incurred in connection with an acquisition
are capitalized as part of the purchase accounting for the
transaction. Such acquisition-related restructuring costs were
not material in any period. However, all costs for
non-acquisition-related restructuring initiatives are required
to be expensed either in the period they were incurred or
committed to, in accordance with US GAAP. A description of the
nature of significant non-acquisition-related restructuring
activities and related costs is presented below.
Fiscal
2006 Restructuring
During the fourth quarter of Fiscal 2006, the Company committed
to a plan to restructure its Club Monaco retail business. In
particular, this plan consisted of the closure of all five Club
Monaco factory outlet stores and the intention to dispose of by
sale or closure all eight of Club Monacos Caban Concept
Stores (the Caban Stores and, collectively, the
Club Monaco Restructuring Plan). In connection with
this plan, an aggregate restructuring-related charge of
$12 million was recognized in Fiscal 2006.
During the first quarter of Fiscal 2007, the Company ultimately
decided to close all Caban Stores and recognized an additional
$2.2 million of restructuring charges, primarily relating
to lease termination costs. During the second quarter of Fiscal
2007, the Company incurred additional restructuring charges of
approximately
11
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
$1.8 million, principally relating to additional Caban
store lease termination costs for space that was still being
used at the end of the first quarter of Fiscal 2007.
A summary of the activity in Fiscal 2007 in the Club Monaco
Restructuring Plan liability is as follows:
|
|
|
|
|
|
|
Lease and
|
|
|
|
Contract
|
|
|
|
Termination
|
|
|
|
Costs
|
|
|
|
(millions)
|
|
|
Balance at April 1, 2006
|
|
$
|
1.2
|
|
Additions charged to expense
|
|
|
4.0
|
|
Cash payments charged against
reserve
|
|
|
(2.3
|
)
|
|
|
|
|
|
Balance at September 30, 2006
|
|
$
|
2.9
|
|
|
|
|
|
|
Euro
Debt
The Company has outstanding approximately 227 million
principal amount of 6.125% notes that are due on
November 22, 2006, originally issued in 1999 (the
1999 Euro Debt). As of September 30, 2006, the
carrying value of the 1999 Euro Debt was $289.1 million,
compared to $280.4 million at April 1, 2006.
In October 2006, the Company completed the issuance of
300 million principal amount of 4.50% notes due
October 4, 2013 (the 2006 Euro Debt). The
Company intends to use the net proceeds from the financing of
approximately $380 million (based on the exchange rate in
effect upon issuance) to repay the 1999 Euro Debt in November
2006 and for general corporate and working capital purposes. The
Company has the option to redeem all of the 2006 Euro Debt at
any time at a redemption price equal to the principal amount
plus a premium. The Company also has the option to redeem all of
the 2006 Euro Debt at any time at par plus accrued interest, in
the event of certain developments involving United States tax
law. Partial redemption of the 2006 Euro Debt is not permitted
in either instance. In the event of a change of control of the
Company, each holder of the 2006 Euro Debt has the option to
require the Company to redeem the 2006 Euro Debt at its
principal amount together with accrued interest.
|
|
9.
|
Derivative
Financial Instruments
|
The Company has exposure to changes in foreign currency exchange
rates relating to both the cash flows generated by its
international operations and the fair value of its foreign
operations, as well as exposure to changes in the fair value of
its fixed-rate debt relating to changes in interest rates.
Consequently, the Company uses derivative financial instruments
to manage such risks. The Company does not enter into derivative
transactions for speculative purposes. The following is a
summary of the Companys risk management strategies and the
effect of those strategies on the Companys financial
statements.
Foreign
Currency Risk Management
Foreign
Currency Exchange Contracts
The Company enters into forward foreign exchange contracts as
hedges relating to identifiable currency positions to reduce its
risk from exchange rate fluctuations on inventory purchases and
intercompany royalty payments. As part of its overall strategy
to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, primarily exposure to changes in the
value of the Euro and the Japanese Yen, the Company hedges a
portion of its foreign currency exposures anticipated over the
ensuing twelve-month to two-year period. In doing so,
12
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the Company uses foreign exchange contracts that generally have
maturities of three months to two years to provide continuing
coverage throughout the hedging period.
At September 30, 2006, the Company had contracts for the
sale of $134.3 million of foreign currencies at fixed
rates. Of these $134.3 million of sales contracts,
$83.5 million were for the sale of Euros and
$50.8 million were for the sale of Japanese Yen. The fair
value of the forward contracts was an unrealized gain of
$0.9 million.
The Company records foreign currency exchange contracts at fair
value in its balance sheet and designates these derivative
instruments as cash flow hedges in accordance with FASB
Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging
Activities, and subsequent amendments (collectively,
FAS 133). As such, the related gains or losses
on these contracts are deferred in stockholders equity as
a component of accumulated other comprehensive income. These
deferred gains and losses are then either recognized in income
in the period in which the related royalties being hedged are
received, or in the case of inventory purchases, recognized as
part of the cost of the inventory being hedged when sold.
However, to the extent that any of these foreign currency
exchange contracts are not considered to be perfectly effective
in offsetting the change in the value of the royalties or
inventory purchases being hedged, any changes in fair value
relating to the ineffective portion of these contracts are
immediately recognized in earnings. No significant gains or
losses relating to ineffective hedges were recognized in either
period.
Hedge of
a Net Investment in Certain European Subsidiaries
The entire principal amount of the 1999 Euro Debt has been
designated as a fair-value hedge of the Companys net
investment in certain of its European subsidiaries in accordance
with 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 of Financial
Accounting Standards No. 52, Foreign Currency
Translation, to the extent it is effective as a hedge. As
such, changes in the fair value of the 1999 Euro Debt resulting
from changes in the Euro exchange rate are reported in
stockholders equity as a component of accumulated other
comprehensive income.
Interest
Rate Risk Management
Interest
Rate Swaps
Historically, the Company has used floating-rate interest rate
swap agreements to hedge changes in the fair value of its
fixed-rate 1999 Euro Debt. These interest rate swap agreements,
which effectively converted fixed interest rate payments on the
Companys 1999 Euro Debt to a floating-rate basis, were
designated as a fair value hedge in accordance with
FAS 133. All interest rate swap agreements were terminated
in late Fiscal 2006 and there were no outstanding agreements at
the end of Fiscal 2006.
During the first six months of Fiscal 2007, the Company entered
into three forward-starting interest rate swap contracts
aggregating 200 million notional amount of
indebtedness in anticipation of the Companys proposed
refinancing of the 1999 Euro Debt which was completed in October
2006. The Company designated these agreements as a cash flow
hedge of a forecasted transaction to issue new debt in
connection with the planned refinancing of its 1999 Euro Debt.
The interest rate swaps hedged a total of
200.0 million, a portion of the underlying interest
rate exposure on the anticipated refinancing. Under the terms of
the three interest swap contracts, the Company paid a
weighted-average fixed rate of interest of 4.1% and received
variable interest based upon six-month EURIBOR. The Company
terminated the swaps on September 28, 2006, which was the
date the interest rate for the Euro Debt issued in October 2006
was determined. As a result, the Company made a payment of
approximately 3.5 million ($4.4 million based on
the exchange rate in effect on that date) in settlement of the
swaps. $0.2 million was recognized as a loss for the three
months ending September 30, 2006 due to the partial
ineffectiveness of the cash flow hedge as a result of the
forecasted transaction closing on October 5, 2006 instead
of
13
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
November 22, 2006 (the maturity date of the 1999 Euro
Debt). The remaining loss of $4.2 million has been deferred
as a component of comprehensive income within stockholders
equity and will be recognized in income as an adjustment to
interest expense over the seven-year term of the 2006 Euro Debt.
Summary
of Changes in Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Balance at beginning of period
|
|
$
|
2,049.6
|
|
|
$
|
1,675.7
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
Net income
|
|
|
217.2
|
|
|
|
154.9
|
|
Foreign currency translation gains
(losses)
|
|
|
22.8
|
|
|
|
(25.0
|
)
|
Net realized and unrealized
derivative financial instrument gains (losses)
|
|
|
(8.3
|
)
|
|
|
22.2
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
231.7
|
|
|
|
152.1
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
|
(10.4
|
)
|
|
|
(13.2
|
)
|
Repurchases of common stock
|
|
|
(129.6
|
)
|
|
|
(3.2
|
)
|
Other, primarily shares issued and
equity grants made pursuant to stock compensation plans
|
|
|
57.6
|
|
|
|
67.5
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
2,198.9
|
|
|
$
|
1,878.9
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Repurchase Program
In August 2006, the Companys Board of Directors approved
an expansion of the Companys common stock repurchase
program that allows it to repurchase, from time to time, up to
an additional $250 million of Class A common stock.
Share repurchases are subject to overall business and market
conditions. Share repurchases under both this expanded program
and the pre-existing program for the six months ended
September 30, 2006 amounted to 2.2 million shares of
Class A common stock at a cost of $129.6 million. The
remaining availability under the current common stock repurchase
program was $220 million as of September 30, 2006.
Repurchased shares are accounted for as treasury stock at cost
and will be held in treasury for future use.
Dividends
Since 2003, the Company has had a regular quarterly cash
dividend program of $0.05 per share, or $0.20 per
share on an annual basis, on its common stock. The second
quarter Fiscal 2007 dividend of $0.05 per share was
declared on September 18, 2006, payable to shareholders of
record at the close of business on September 29, 2006, and
was paid on October 13, 2006. Dividends paid amounted to
$10.5 million during the six months ended
September 30, 2006 and $10.4 million during the six
months ended October 1, 2005.
|
|
11.
|
Stock-Based
Compensation
|
Effective April 2, 2006, the Company adopted FAS 123R
using the modified prospective application transition method.
Under this transition method, the compensation expense
recognized in the consolidated statement of operations beginning
April 2, 2006 includes compensation expense for
(a) all stock-based payments granted prior to, but not yet
vested as of, April 1, 2006, based on the grant-date fair
value estimated in accordance with the original
14
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
provisions of FAS 123, and (b) all stock-based
payments granted subsequent to April 1, 2006, based on the
grant-date fair value estimated in accordance with the
provisions of FAS 123R.
Impact
on Results
Due to the timing of grants of stock-based compensation awards
primarily late in the first quarter of Fiscal 2007, stock-based
compensation costs recognized during the six-month period ended
September 30, 2006 are not indicative of the level of
compensation costs expected to be incurred for Fiscal 2007 as a
whole. A summary of the total compensation expense and
associated income tax benefits recognized related to stock-based
compensation arrangements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2006
|
|
|
2005(a)
|
|
|
2006
|
|
|
2005(a)
|
|
|
|
(millions)
|
|
|
Compensation expense
|
|
$
|
(11.8
|
)
|
|
$
|
(6.1
|
)
|
|
$
|
(19.3
|
)
|
|
$
|
(11.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
4.5
|
|
|
$
|
2.2
|
|
|
$
|
7.4
|
|
|
$
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the incremental impact of adopting FAS 123R is
as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
|
(millions, except per share data)
|
|
|
Income before provision for income
taxes
|
|
|
(5.7
|
)
|
|
|
(8.3
|
)
|
Income tax benefit
|
|
|
2.3
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
(3.4
|
)
|
|
|
(5.0
|
)
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
Diluted net income per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from operating
activities(b)
|
|
|
|
|
|
$
|
(12.9
|
)
|
Cash flows from financing
activities
|
|
|
|
|
|
$
|
12.9
|
|
|
|
|
|
|
|
|
|
|
Unearned
compensation(c)
|
|
|
|
|
|
$
|
43.0
|
|
Additional paid-in capital
|
|
|
|
|
|
$
|
(43.0
|
)
|
|
|
|
(a) |
|
Prior to the adoption of FAS 123R and in accordance with
existing accounting principles, the Company recognized
stock-based compensation expense in connection with both
service-based and performance-based restricted stock units, as
well as for shares of restricted stock. |
|
(b) |
|
Prior to the adoption of FAS 123R, benefits of tax
deductions in excess of recognized compensation costs were
reported as operating cash flows. FAS 123R requires excess
tax benefits to be reported as a financing cash inflow rather
than a reduction of taxes paid. |
|
(c) |
|
Unearned compensation was eliminated against additional paid-in
capital as part of the adoption of FAS 123R as of
April 2, 2006. |
Transition
Information
Prior to April 2, 2006, the Company accounted for
stock-based compensation plans under the intrinsic value method
in accordance with APB 25 and adopted the disclosure-only
provisions of FAS 123. Under this standard, the Company did
not recognize compensation expense for the issuance of stock
options with an exercise price equal to
15
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
or greater than the market price at the date of grant. However,
as required, the Company disclosed, in the notes to the
consolidated financial statements, the pro forma expense impact
of the stock option grants as if the
fair-value-based
recognition provisions of FAS 123 were applied.
Compensation expense was previously recognized for restricted
stock and restricted stock units. The effect of forfeitures on
restricted stock and restricted stock units was recognized when
such forfeitures occurred.
In accordance with the modified prospective application
transition method, prior period financial statements have not
been restated to reflect the effects of implementing
FAS 123R. The following table presents the Companys
pro forma net income and net income per share if compensation
expense for fixed stock option grants had been determined based
on the fair value at the grant dates of such awards as defined
by FAS 123 for the three and six-month periods ended
October 1, 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
October 1,
|
|
|
October 1,
|
|
|
|
2005
|
|
|
2005
|
|
|
|
(millions, except per share data)
|
|
|
Net income as reported
|
|
$
|
104.2
|
|
|
$
|
154.9
|
|
Add: stock-based employee
compensation expense included in reported net income, net of tax
|
|
|
3.9
|
|
|
|
6.9
|
|
Deduct: total stock-based employee
compensation expense determined under fair value based method
for all awards, net of tax
|
|
|
(6.8
|
)
|
|
|
(13.5
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
101.3
|
|
|
$
|
148.3
|
|
|
|
|
|
|
|
|
|
|
Net income per share as
reported
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.00
|
|
|
$
|
1.50
|
|
Diluted
|
|
$
|
0.97
|
|
|
$
|
1.46
|
|
Pro forma net income per
share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.97
|
|
|
$
|
1.43
|
|
Diluted
|
|
$
|
0.94
|
|
|
$
|
1.39
|
|
Long-term
Stock Incentive Plan
The Companys 1997 Long-Term Stock Incentive Plan (as
amended) (the 1997 Plan) authorizes the grant of
awards to participants with respect to a maximum of
26.0 million shares of the Companys Class A
Common Stock; however, there are limits as to the number of
shares available for certain awards and to any one participant.
Equity awards that may be made under the 1997 Plan include
(a) stock options, (b) restricted stock, and
(c) restricted stock units.
Stock
Options
Stock options have been granted to employees and non-employee
directors with exercise prices equal to fair market value at the
date of grant. Generally, the options become exercisable ratably
(a graded-vesting schedule), over a three-year vesting period
for employees or over a two-year vesting period for non-employee
directors. Employee stock options generally expire either seven
or ten years from the date of grant. The Company recognizes
compensation expense for share-based awards that have graded
vesting and no performance conditions on an accelerated basis.
The Company uses the Black-Scholes option-pricing model to
estimate the fair value of stock options granted, which requires
the input of subjective assumptions. The Company developed its
assumptions by analyzing the
16
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
historical exercise behavior of employees and non-employee
directors. The Companys assumptions used for the three and
six-month periods ended September 30, 2006 were as follows:
Expected Term The estimate of expected term
is based on the historical exercise behavior of employees and
non-employee directors, as well as the contractual life of the
option grants.
Expected Volatility The expected volatility
factor is based on the historical volatility of the
Companys common stock for a period equal to the stock
options expected term.
Expected Dividend Yield The expected dividend
yield is based on the regular quarterly cash dividend of
$0.05 per share.
Risk-free Interest Rate The risk-free
interest rate is determined using the implied yield for a traded
zero-coupon U.S. Treasury bond with a term equal to the
options expected term.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Expected term (years)
|
|
|
4.0
|
|
|
|
5.2
|
|
|
|
4.5
|
|
|
|
5.2
|
|
Expected volatility
|
|
|
31.1
|
%
|
|
|
29.1
|
%
|
|
|
33.3
|
%
|
|
|
29.1
|
%
|
Expected dividend yield
|
|
|
0.39
|
%
|
|
|
0.53
|
%
|
|
|
0.39
|
%
|
|
|
0.53
|
%
|
Risk-free interest rate
|
|
|
4.5
|
%
|
|
|
3.7
|
%
|
|
|
4.9
|
%
|
|
|
3.7
|
%
|
Weighted-average option grant date
fair value
|
|
$
|
19.65
|
|
|
$
|
16.65
|
|
|
$
|
19.20
|
|
|
$
|
14.36
|
|
A summary of the stock option activity under all plans during
the six months ended September 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic Value
|
|
|
|
(thousands)
|
|
|
|
|
|
(in years)
|
|
|
(millions)
|
|
|
Options outstanding at
April 2, 2006
|
|
|
8,268
|
|
|
$
|
28.69
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
838
|
|
|
|
55.63
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,058
|
)
|
|
|
26.56
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
(94
|
)
|
|
|
39.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
September 30, 2006
|
|
|
7,954
|
|
|
|
31.68
|
|
|
|
6.1
|
|
|
$
|
263.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to
vest at September 30, 2006
|
|
|
7,610
|
|
|
$
|
31.11
|
|
|
|
6.1
|
|
|
$
|
256.1
|
|
Options exercisable at
September 30, 2006
|
|
|
5,496
|
|
|
|
25.89
|
|
|
|
5.3
|
|
|
|
213.7
|
|
The aggregate intrinsic value of stock options exercised during
the six months ended September 30, 2006 and October 1,
2005 was $33.1 million for both periods. As of
September 30, 2006, there was $16.1 million of total
unrecognized compensation expense related to nonvested stock
options granted and the unrecognized compensation expense is
expected to be recognized over a weighted-average period of
1.2 years. Cash received from the exercise of stock options
during the six months ended September 30, 2006 and
October 1, 2005 was $25.5 million and
$42.4 million, respectively, and the related tax benefits
realized were $12.9 million and $14.1 million,
respectively.
17
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Restricted
Stock and Restricted Stock Units
(RSUs)
The Company grants a combination of (a) restricted shares
of Class A common stock, (b) service-based restricted
stock units and (c) performance-based restricted stock
units to its key executives, certain of its employees and
non-employee directors.
Restricted shares of Class A common stock, which entitle
the holder to receive a specified number of shares of
Class A common stock at the end of a vesting period, are
accounted for at fair value at the date of grant. Generally,
restricted stock grants vest over a five-year period of time,
subject to the executives continuing employment.
Restricted stock units entitle the grantee to receive shares of
Class A common stock at the end of a vesting period.
Service-based restricted stock units are payable in shares of
Class A common stock and generally vest over a five-year
period of time, subject to the executives continuing
employment. Performance-based restricted stock units also are
payable in shares of Class A common stock and may vest over
(1) a three-year period of time (cliff vesting), subject to
the employees continuing employment and the Companys
satisfaction of certain performance goals over the three-year
period; or (2) ratably over a three-year period of time
(graded vesting), subject to the employees continuing
employment during the applicable vesting period and the
achievement by the Company of separate annual performance goals.
In addition, holders of certain restricted stock units are
entitled to receive dividend equivalents in the form of
additional restricted stock units in connection with the payment
of dividends on the Companys Class A common stock.
Restricted stock units, including shares resulting from dividend
equivalents paid on such units, are accounted for at fair value
at the date of grant. The fair value of a restricted security is
based on the fair value of unrestricted Class A common
stock, as adjusted to reflect the absence of dividends for those
restricted securities that are not entitled to dividend
equivalents. Compensation expense for performance-based
restricted stock units is recognized over the service period
when attainment of the performance goals is probable.
A summary of the restricted stock and restricted stock unit
activity during the six months ended September 30, 2006 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
Service-Based RSUs
|
|
|
Performance-Based RSUs
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
(thousands)
|
|
|
|
|
|
(thousands)
|
|
|
|
|
|
(thousands)
|
|
|
|
|
|
Nonvested at April 2, 2006
|
|
|
180
|
|
|
$
|
24.47
|
|
|
|
550
|
|
|
$
|
34.46
|
|
|
|
806
|
|
|
$
|
39.38
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
55.43
|
|
|
|
564
|
|
|
|
54.96
|
|
Vested
|
|
|
(60
|
)
|
|
|
18.22
|
|
|
|
|
|
|
|
|
|
|
|
(63
|
)
|
|
|
34.23
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
49.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30,
2006
|
|
|
120
|
|
|
|
27.60
|
|
|
|
650
|
|
|
|
37.69
|
|
|
|
1,296
|
|
|
|
46.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
Service-Based RSUs
|
|
|
Performance-Based RSUs
|
|
|
Total unrecognized compensation at
September 30, 2006 (millions)
|
|
$
|
2.6
|
|
|
$
|
14.4
|
|
|
$
|
38.8
|
|
Weighted-average years expected to
be recognized over (in years)
|
|
|
2.2
|
|
|
|
2.2
|
|
|
|
2.0
|
|
There were no restricted stock awards granted during the six
months ended October 1, 2005. The total fair value of
restricted stock awards vested during the six months ended
September 30, 2006 and October 1, 2005 was
$3.2 million and $4.9 million, respectively. The
weighted-average grant date fair value of service-based
restricted stock units granted during the six months ended
October 1, 2005 was $43.20. No service-based restricted
stock units vested during the six months ended
September 30, 2006 or October 1, 2005. The
weighted-average grant date fair
18
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
value of performance-based restricted stock units granted during
the six months ended October 1, 2005 was $43.14. The total
fair value of performance-based restricted stock units vested
during the six months ended September 30, 2006 and
October 1, 2005 was $3.4 million and
$2.7 million, respectively.
|
|
12.
|
Commitments
and Contingencies
|
Credit
Card Matters
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 credit 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. 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.
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 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
mens and womens handbags. On May 16, 2006, a
discovery schedule was established for this case running through
November 2006. Depositions commenced in this case in October
2006 and are expected to take place through January 2007. On
October 31, 2006, the court denied Wathnes motion for
a preliminary injunction, which sought to bar the Companys
Rugby stores from selling certain bags and to prevent the
Company from using certain gift bags that were furnished to
customers who made purchases at the Companys United States
Tennis Open temporary store. We believe this suit to be without
merit and intend to continue to contest it vigorously.
Accordingly, management does not expect that the ultimate
resolution of this matter will have a material adverse effect on
the Companys liquidity or financial position.
Polo
Trademark Litigation
On October 1, 1999, we filed a lawsuit against the United
States Polo Association Inc. (USPA), Jordache, Ltd.
and certain other entities affiliated with them, alleging that
the defendants were infringing on our trademarks. In connection
with this lawsuit, on July 19, 2001, the USPA 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
USPA and Jordache for trademark infringement and other unlawful
conduct. Their
19
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 the 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 opposed our motion, but did
not move to overturn the jurys decision that the fourth
double horseman logo did infringe on our trademarks. On
July 7, 2006, the judge denied our motion to overturn the
jurys decision. On August 4, 2006, the Company filed
an appeal of the judges decision to deny the
Companys motion for a new trial to the United States Court
of Appeals for the Second Circuit.
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 purported to represent a
class of employees who had 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, sought 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 was held before the Court on June 29,
2006. On October 26, 2006, the Court granted preliminary
approval of the settlement and will begin the process of sending
out claim forms to members of the class. 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 actual and punitive restitution of monies spent, and
declaratory relief. If the judge in the federal class action
accepts the proposed $1.5 million settlement, the state
court class action would subsequently be dismissed. As noted
above, on October 26, 2006, the Court granted preliminary
approval of the settlement.
On March 2, 2006, a former employee at our Club Monaco
store in Los Angeles, California filed a lawsuit against us in
the San Francisco Superior Court alleging violations of
California wage and hour laws. The plaintiff purports to
represent a class of Club Monaco store employees who allegedly
have been injured by being improperly classified as exempt
employees and thereby not receiving compensation for overtime
and not receiving meal and rest breaks. The complaint seeks an
unspecified amount of compensatory damages, disgorgement of
profits, attorneys fees and injunctive relief. We believe
this suit is without merit and intend to contest it vigorously.
20
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Accordingly, management does not expect that the ultimate
resolution of this matter will have a material adverse effect on
the Companys liquidity or financial position.
On June 2, 2006, a second putative class action was filed
by different attorneys by a former employee of our Club Monaco
store in Cabazon, California against us in the Los Angeles
Superior Court alleging virtually identical claims as the
San Francisco action and consisting of the same class
members. As in the San Francisco action, the complaint
sought an unspecified amount of compensatory damages,
disgorgement of profits, attorneys fees and injunctive
relief. On August 21, 2006, the plaintiff voluntarily
withdrew his lawsuit.
On May 30, 2006, four former employees of our Ralph Lauren
stores in Palo Alto and San Francisco, California filed a
lawsuit in San Francisco Superior Court alleging violations
of California wage and hour laws. The plaintiffs purport to
represent a class of employees who allegedly have been injured
by not properly being paid commission earnings, not being paid
overtime, not receiving rest breaks, being forced to work off of
the clock while waiting to enter or leave the store and being
falsely imprisoned while waiting to leave the store. The
complaint seeks an unspecified amount of compensatory damages,
damages for emotional distress, disgorgement of profits,
punitive damages, attorneys fees and injunctive and
declaratory relief. We believe this suit is without merit and
intend to contest it vigorously. Accordingly, management does
not expect that the ultimate resolution of this matter will have
a material adverse effect on the Companys liquidity or
financial position.
French
Income Tax Audit
The French tax authorities are in the process of auditing one of
the Companys French subsidiaries for the taxable years
2000 through 2005. Among other matters still under review, the
French tax authorities have asserted that certain intercompany
royalty payments made by the Companys French subsidiary to
a related U.S. subsidiary were excessive and that a portion
should be disallowed as a deduction under French tax law.
The Company disagrees with the position of the French tax
authorities. It is expected that the matter ultimately will be
resolved under the competent authority procedures of the
US-France Income Tax Treaty in order to avoid the double
taxation of such income.
Under French tax law, the Company is required to provide bank
guarantees for the payment of the asserted tax assessment prior
to resolution under the competent authority procedures.
Accordingly, the Company has arranged for certain banks to
guarantee payment to the French tax authorities on behalf of the
Company in the amount of 41.3 million
($52.4 million equivalent as of September 30, 2006).
In order to secure these guarantees, primarily in Fiscal 2007,
the Company placed a corresponding amount of cash in escrow with
the banks as collateral for the guarantees. Such cash has been
classified as restricted cash and classified as a
component of other assets in the Companys
consolidated balance sheet.
Management does not expect that the ultimate resolution of the
excess royalties matter will have a material adverse effect on
the Companys financial condition or results of operations.
However, the French tax audit is ongoing and it is possible that
other matters that may be identified by the French tax
authorities could result in settlements in excess of established
tax reserves.
Other
Matters
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.
21
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company has three reportable segments: Wholesale, Retail and
Licensing. Such segments offer a variety of products 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 outlet 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 apparel, 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 for
specified periods.
The accounting policies of our segments are consistent with
those described in Notes 2 and 3 to the Companys
consolidated financial statements included in the Fiscal 2006
10-K. Sales
and transfers between segments are recorded at cost and treated
as transfers of inventory. All intercompany revenues are
eliminated in consolidation and are not reviewed when evaluating
segment performance. Each segments performance is
evaluated based upon operating income before restructuring
charges and one-time items, such as legal charges. 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.
22
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Net revenues and operating income for each segment are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
659.9
|
|
|
$
|
577.5
|
|
|
$
|
1,151.1
|
|
|
$
|
914.7
|
|
Retail
|
|
|
444.6
|
|
|
|
387.2
|
|
|
|
856.7
|
|
|
|
744.6
|
|
Licensing
|
|
|
62.3
|
|
|
|
62.7
|
|
|
|
112.6
|
|
|
|
120.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,166.8
|
|
|
$
|
1,027.4
|
|
|
$
|
2,120.4
|
|
|
$
|
1,779.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
157.3
|
|
|
$
|
143.1
|
|
|
$
|
247.6
|
|
|
$
|
189.4
|
|
Retail
|
|
|
66.8
|
|
|
|
39.4
|
|
|
|
131.4
|
|
|
|
75.0
|
|
Licensing
|
|
|
37.5
|
|
|
|
40.2
|
|
|
|
63.9
|
|
|
|
75.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261.6
|
|
|
|
222.7
|
|
|
|
442.9
|
|
|
|
339.8
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses
|
|
|
(44.9
|
)
|
|
|
(45.7
|
)
|
|
|
(90.6
|
)
|
|
|
(82.6
|
)
|
Unallocated restructuring
charges(a)
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
214.9
|
|
|
$
|
177.0
|
|
|
$
|
348.3
|
|
|
$
|
257.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Consists of restructuring charges relating to the Retail
segment. See Note 7. |
Depreciation and amortization expense for each segment is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Depreciation and
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
10.0
|
|
|
$
|
9.8
|
|
|
$
|
23.2
|
|
|
$
|
18.0
|
|
Retail
|
|
|
13.5
|
|
|
|
11.4
|
|
|
|
28.9
|
|
|
|
23.8
|
|
Licensing
|
|
|
1.1
|
|
|
|
1.6
|
|
|
|
2.3
|
|
|
|
3.0
|
|
Unallocated corporate expenses
|
|
|
9.0
|
|
|
|
6.8
|
|
|
|
17.0
|
|
|
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33.6
|
|
|
$
|
29.6
|
|
|
$
|
71.4
|
|
|
$
|
58.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
14.
|
Additional
Financial Information
|
Cash
Interest and Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Cash paid for interest
|
|
$
|
0.8
|
|
|
$
|
0.1
|
|
|
$
|
1.6
|
|
|
$
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
82.7
|
|
|
$
|
67.5
|
|
|
$
|
89.2
|
|
|
$
|
109.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions
Significant non-cash investing activities during the first half
of Fiscal 2007 included the capitalization of fixed assets and
recognition of related obligations in the amount of
$21.7 million. There were no other significant non-cash
financing and investing activities for the six months ended
September 30, 2006. Significant non-cash investing
activities during the six months ended October 1, 2005
included the non-cash allocation of the fair value of the assets
acquired and liabilities assumed in the acquisition of the
Footwear Business as more fully described in Note 5.
24
POLO
RALPH LAUREN CORPORATION
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Special
Note Regarding Forward-Looking Statements
Various statements in this
Form 10-Q
or incorporated by reference into this
Form 10-Q,
in future filings by us with the Securities and Exchange
Commission (the SEC), 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. Forward-looking statements are based on current
expectations and are 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 which may
cause actual results, performance or achievements to be
materially different from the future results, performance or
achievements expressed in or implied by such forward-looking
statements. Forward-looking statements include statements
regarding, among other items:
|
|
|
|
|
our anticipated growth strategies;
|
|
|
|
our plans to expand internationally;
|
|
|
|
our plans to open new retail stores;
|
|
|
|
our ability to make strategic acquisitions of certain selected
licensees;
|
|
|
|
our intention to introduce new products or enter into new
alliances;
|
|
|
|
anticipated effective tax rates in future years;
|
|
|
|
future expenditures for capital projects;
|
|
|
|
our ability to continue to maintain our brand image and
reputation;
|
|
|
|
our ability to continue to initiate cost cutting efforts and
improve profitability; and
|
|
|
|
our efforts to improve the efficiency of our distribution system.
|
These forward-looking statements are based largely on our
expectations and judgments and are subject to a number of risks
and uncertainties, many of which are unforeseeable and beyond
our control. Significant factors that have the potential to
cause our actual results to differ materially from our
expectations are described in this
Form 10-Q
under the heading of Risk Factors. Our Annual Report
on
Form 10-K
for the fiscal year ended April 1, 2006 contains a detailed
discussion of these risk factors. There are no material changes
to such risk factors nor are there any identifiable previously
undisclosed risks as set forth in Part II, Item IA,
Risk Factors, of this Quarterly Report on
Form 10-Q.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise.
In this
Form 10-Q,
references to Polo, ourselves,
we, our, us and the
Company refer to Polo Ralph Lauren Corporation and
its subsidiaries, unless the context requires otherwise. Due to
the collaborative and ongoing nature of our relationships with
our licensees, such licensees are sometimes referred to in this
Form 10-Q
as licensing alliances. We utilize a 52-53 week
fiscal year ending on the Saturday nearest March 31. Fiscal
2007 will end on March 31, 2007 and will be a
52-week
period (Fiscal 2007). Fiscal 2006 ended on
April 1, 2006 (Fiscal 2006) and reflected a
52-week
period. In turn, the second quarter for Fiscal 2007 ended
September 30, 2006 and was a
13-week
period. The second quarter for Fiscal 2006 ended October 1,
2005 and was a
13-week
period as well.
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
25
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, a summary of financial performance
for the three-month and six-month periods ended
September 30, 2006 and October 1, 2005, as well as a
discussion of transactions affecting comparability 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
six-month periods ended September 30, 2006 and
October 1, 2005.
|
|
|
|
Financial condition and liquidity. This
section provides an analysis of our cash flows for the six-month
periods ended September 30, 2006 and October 1, 2005,
as well as a discussion of our financial condition and liquidity
as of September 30, 2006. The discussion of our financial
condition and liquidity includes (i) our available
financial capacity under our credit facility, (ii) a
summary of our key debt compliance measures and (iii) any
material changes in financial condition and certain contractual
obligations since April 1, 2006.
|
|
|
|
Market risk management. This section discusses
any significant changes since the end of Fiscal 2006 in our
interest rate and foreign currency exposures, the types of
derivative instruments used to hedge those exposures, or in
underlying market conditions.
|
|
|
|
Critical accounting policies. This section
discusses any significant changes since the end of Fiscal 2006
in our accounting policies considered to be important to our
financial condition and results of operations and which require
significant judgment and estimates on the part of management in
their application. In addition, all of our significant
accounting policies, including our critical accounting policies,
are summarized in Notes 3 and 4 to our audited financial
statements included in our Fiscal 2006 Annual Report on
Form 10-K.
|
OVERVIEW
Our Company is a global leader in the design, marketing and
distribution of premium lifestyle products including mens,
womens and childrens apparel, accessories,
fragrances and home furnishings. Our long-standing reputation
and distinctive image have been consistently developed across an
expanding number of products, brands and international markets.
Our brand names include Polo, Polo by Ralph Lauren,
Ralph Lauren Purple Label, Ralph Lauren Black Label, RLX, Ralph
Lauren, Blue Label, Lauren, RL, Rugby, Chaps, and Club
Monaco, among others.
We classify our businesses into three segments: Wholesale,
Retail and Licensing. Our wholesale business consists of
wholesale-channel sales made 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 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 apparel, eyewear and fragrances, in
specified geographical areas for specified periods.
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,
back-to-school
and holiday periods in the retail segment. Accordingly, our
operating results and cash flows for the three-month and
six-month periods ended September 30, 2006 are not
necessarily indicative of the results and cash flows that may be
expected for Fiscal 2007 as a whole.
26
Summary
of Financial Performance
Three
Months Ended September 30, 2006 Compared to Three Months
Ended October 1, 2005
During the three-month period ended September 30, 2006, we
reported revenues of $1.167 billion, net income of
$137.0 million and net income per diluted share of $1.28.
This compares to revenues of $1.027 billion, net income of
$104.2 million and net income per diluted share of $0.97
during the three-month period ended October 1, 2005. Our
strong operating performance for the fiscal second quarter was
primarily driven by 13.6% revenue growth led by our Wholesale
and Retail segments (including the effect of certain
acquisitions that occurred in Fiscal 2006) and gross profit
percentage expansion of 50 basis points to 54.2%. Operating
results for Fiscal 2007 reflect a change in accounting for
stock-based compensation relating to the Companys adoption
of Statement of Financial Accounting Standards No. 123R,
Share-Based Payments, (FAS 123R) as
of April 2, 2006. Total stock-based compensation costs were
$11.8 million on a pretax basis ($7.3 million
after-tax) in the second quarter of Fiscal 2007, compared to
$6.1 million on a pretax basis ($3.9 million
after-tax) in the second quarter of Fiscal 2006. In turn, net
income per diluted share was reduced by stock compensation costs
in the amount of $0.07 per share in the second quarter of
Fiscal 2007, compared to $0.04 per share in the second
quarter of 2006. Offsetting the higher stock-based compensation
costs and contributing to the growth in net income and net
income per diluted share in the second quarter was a net
reduction in Fiscal 2007 as compared to Fiscal 2006 of
approximately $9.9 million of pretax charges related to
restructurings, asset impairment and credit card contingencies.
See Transactions Affecting Comparability of Results of
Operations and Financial Condition described below.
Six
Months Ended September 30, 2006 Compared to Six Months
Ended October 1, 2005
During the six-month period ended September 30, 2006, we
reported revenues of $2.120 billion, net income of
$217.2 million and net income per diluted share of $2.02.
This compares to revenues of $1.779 billion, net income of
$154.9 million and net income per diluted share of $1.46
during the six-month period ended October 1, 2005. Our
strong operating performance for the first half of the fiscal
year was primarily driven by 19.2% revenue growth led by our
Wholesale and Retail segments (including the effect of certain
acquisitions that occurred in Fiscal 2006) and gross profit
percentage expansion of 60 basis points to 54.9%. Total
stock-based compensation costs reflecting the adoption of
FAS 123R were $19.3 million on a pretax basis
($11.9 million after-tax) in the six-month period ending
September 30, 2006, compared to $11.0 million on a
pretax basis ($6.9 million after-tax) in the six-month
period ending October 1, 2005. In turn, net income per
diluted share was reduced by stock-based compensation costs in
the amount of $0.11 per share during the six-month period
ending September 30, 2006, compared to $0.06 per share
during the six-month period ended October 1, 2005.
Offsetting the higher stock-based compensation costs and
contributing to the growth in net income and net income per
diluted share during the six-month period ended
September 30, 2006 was a net reduction in Fiscal 2007 as
compared to Fiscal 2006 of approximately $7.7 million of
pretax charges related to restructurings, asset impairment and
credit card contingencies. See Transactions Affecting
Comparability of Results of Operations and Financial
Condition described below.
See Note 11 to the unaudited consolidated financial
statements included elsewhere herein for further reference on
the impact of adopting FAS 123R.
Financial
Condition and Liquidity
Our financial position continues to be strong. We ended the
first half of Fiscal 2007 with a net cash position (total cash
and cash equivalents less total debt) of $31.9 million,
compared to $5.3 million at April 1, 2006. In
addition, at September 30, 2006, our stockholders
equity increased to $2.199 billion, compared to
$2.050 billion at the end of Fiscal 2006. Subsequent to the
end of the second quarter of Fiscal 2007, we successfully
completed the issuance of 300 million principal
amount of 4.50% notes due October 4, 2013. We intend
to use the net proceeds from this issuance to settle our
227 million principal amount of Euro debt obligations
that mature in November 2006 and for general corporate and
working capital purposes. We generated 256.6 million of
cash from operations during the six months ended
September 30, 2006, compared to $198.1 million in the
comparable prior period. Our overall financial performance
resulted in an expansion of our existing stock repurchase
program to an additional $250 million of authorized
repurchases as announced during the second quarter of Fiscal
2007 (see Note 10 to the unaudited consolidated financial
statements included elsewhere herein for further reference).
27
Transactions
Affecting Comparability of Results of Operations and Financial
Condition
The comparability of the Companys operating results has
been affected by certain acquisitions that occurred in Fiscal
2006. In particular, the Company acquired the Polo Jeans
Business on February 3, 2006 and the Footwear Business on
July 15, 2005 (each as defined in Note 5 to the
unaudited consolidated financial statements included elsewhere
herein). In addition, as noted above, the comparability of the
Companys operating results also has been affected by the
change in accounting for stock-based compensation effective as
of the beginning of Fiscal 2007 and by certain pretax charges
related to restructurings, asset impairment and credit card
contingencies. A summary of the effect of these items on pretax
income for each period is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Stock-based compensation costs
(see Note 11)
|
|
$
|
(11.8
|
)
|
|
$
|
(6.1
|
)
|
|
$
|
(19.3
|
)
|
|
$
|
(11.0
|
)
|
Restructuring charges (see
Note 7)
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
(4.0
|
)
|
|
|
|
|
Impairment of retail assets
|
|
|
|
|
|
|
(4.9
|
)
|
|
|
|
|
|
|
(4.9
|
)
|
Credit card contingency charge
(see Note 12)
|
|
|
|
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(13.6
|
)
|
|
$
|
(17.8
|
)
|
|
$
|
(23.3
|
)
|
|
$
|
(22.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following discussion of results of operations highlights, as
necessary, the significant changes in operating results arising
from these items and transactions. However, unusual items or
transactions may occur in any period. Accordingly, investors and
other financial statement users individually should consider the
types of events and transactions that have affected operating
trends.
28
RESULTS
OF OPERATIONS
Three
Months Ended September 30, 2006 Compared to Three Months
Ended October 1, 2005
The following table sets forth the amounts and the percentage
relationship to net revenues of certain items in our
consolidated statements of operations for the three months ended
September 30, 2006 and October 1, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,166.8
|
|
|
$
|
1,027.4
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods
sold(a)
|
|
|
(534.2
|
)
|
|
|
(475.9
|
)
|
|
|
(45.8
|
)%
|
|
|
(46.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
632.6
|
|
|
|
551.5
|
|
|
|
54.2
|
%
|
|
|
53.7
|
%
|
Selling, general and
administrative
expenses(a)
|
|
|
(412.1
|
)
|
|
|
(368.0
|
)
|
|
|
(35.3
|
)%
|
|
|
(35.8
|
)%
|
Amortization of intangible assets
|
|
|
(3.8
|
)
|
|
|
(1.6
|
)
|
|
|
(0.3
|
)%
|
|
|
(0.2
|
)%
|
Impairment of retail assets
|
|
|
|
|
|
|
(4.9
|
)
|
|
|
0.0
|
%
|
|
|
(0.5
|
)%
|
Restructuring charges
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
(0.2
|
)%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
214.9
|
|
|
|
177.0
|
|
|
|
18.4
|
%
|
|
|
17.2
|
%
|
Foreign currency gains (losses)
|
|
|
1.2
|
|
|
|
(6.0
|
)
|
|
|
0.1
|
%
|
|
|
(0.6
|
)%
|
Interest expense
|
|
|
(4.5
|
)
|
|
|
(2.8
|
)
|
|
|
(0.4
|
)%
|
|
|
(0.3
|
)%
|
Interest income
|
|
|
4.7
|
|
|
|
2.9
|
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
Equity in income of equity-method
investees
|
|
|
0.9
|
|
|
|
1.3
|
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Minority interest expense
|
|
|
(3.6
|
)
|
|
|
(3.9
|
)
|
|
|
(0.3
|
)%
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for
income taxes
|
|
|
213.6
|
|
|
|
168.5
|
|
|
|
18.3
|
%
|
|
|
16.4
|
%
|
Provision for income taxes
|
|
|
(76.6
|
)
|
|
|
(64.3
|
)
|
|
|
(6.6
|
)%
|
|
|
(6.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
137.0
|
|
|
$
|
104.2
|
|
|
|
11.7
|
%
|
|
|
10.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
share Basic
|
|
$
|
1.31
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
share Diluted
|
|
$
|
1.28
|
|
|
$
|
0.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes depreciation expense of $29.8 million and
$28.0 million for the three-month periods ended
September 30, 2006 and October 1, 2005, respectively. |
Net Revenues. Net revenues for the second
quarter of Fiscal 2007 were $1.167 billion, an increase of
$139.4 million over net revenues for the second quarter of
Fiscal 2006 due to a combination of organic growth and
acquisitions. Wholesale revenues increased by $82.4 million
primarily as a result of revenues from the newly acquired Polo
Jeans Business, increased global sales in our menswear and
womenswear product lines and the continued success of the Chaps
for women and boys product lines launched during the first
quarter. The increase in net revenues also was driven by a
$57.4 million revenue increase in our retail segment as a
result of improved comparable retail store sales, continued
store expansion (including our new Tokyo flagship store) and
growth in Polo.com sales. Licensing revenue was essentially flat
with the comparable prior period. Net revenues by business
segment were as follows:
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
Increase/
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
% Change
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
659.9
|
|
|
$
|
577.5
|
|
|
$
|
82.4
|
|
|
|
14.3
|
%
|
Retail
|
|
|
444.6
|
|
|
|
387.2
|
|
|
|
57.4
|
|
|
|
14.8
|
%
|
Licensing
|
|
|
62.3
|
|
|
|
62.7
|
|
|
|
(0.4
|
)
|
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,166.8
|
|
|
$
|
1,027.4
|
|
|
$
|
139.4
|
|
|
|
13.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale net sales the net increase
primarily reflects:
|
|
|
|
|
the inclusion of $50 million of revenue from the newly
acquired Polo Jeans Business;
|
|
|
|
a $24 million aggregate net increase in our global
menswear, womenswear and childrenswear businesses, primarily
driven by strong growth in our Lauren product line, and the
continued success from the domestic launch of our Chaps for
women and boys product lines; and
|
|
|
|
an $8 million increase in revenues as a result of a
favorable foreign currency effect due to a stronger Euro in the
current period.
|
Retail net sales For purposes of the
discussion of retail operating performance below, we refer to
the measure comparable store sales. Comparable store
sales refers to the growth of sales in stores that are open for
at least one full fiscal year. Sales for stores that are closing
during a fiscal year are excluded from the calculation of
comparable store sales. Sales for stores that are either
relocated or enlarged are also excluded from the calculation of
comparable store sales until stores have been in their location
for at least a full fiscal year. Comparable store sales
information includes both Ralph Lauren stores and Club Monaco
stores.
The increase in retail net sales primarily reflects:
|
|
|
|
|
an aggregate $31 million increase in comparable full-price
and outlet store sales. This increase was driven by an 11.0%
increase in comparable full-price store sales and an 8.4%
increase in comparable outlet store sales. Excluding a favorable
$2 million effect on revenues from foreign currency
exchange rates, comparable full-price store sales increased
10.4% and comparable outlet store sales increased 7.7%;
|
|
|
|
a net increase in store count of 1 store compared to the prior
period, to a total of 295 stores, as several new openings were
offset by the closure of certain Club Monaco stores in the
fourth quarter of Fiscal 2006 and the second quarter of Fiscal
2007; and
|
|
|
|
a $5 million increase in sales at Polo.com.
|
Licensing revenues the essentially flat
revenue reflects:
|
|
|
|
|
the loss of licensing revenues from our Polo Jeans Business now
included as part of the Wholesale segment; and
|
|
|
|
an increase in international licensing royalties, which more
than offset a decline in Home licensing royalties.
|
Cost of Goods Sold. Cost of goods sold was
$534.2 million for the three months ended
September 30, 2006, compared to $475.9 million for the
three months ended October 1, 2005. Expressed as a
percentage of net revenues, cost of goods sold was 45.8% for the
three months ended September 30, 2006, compared to 46.3%
for the three months ended October 1, 2005. The reduction
in cost of goods sold as a percentage of net revenues reflects
the ongoing focus on inventory management and reduced markdown
activity as a result of better full-price sell-through of our
products.
30
Gross Profit. Gross profit was
$632.6 million for the three months ended
September 30, 2006, an increase of $81.1 million, or
14.7%, compared to $551.5 million for the three months
ended October 1, 2005. Gross profit as a percentage of net
revenues increased to 54.2% in the second quarter of Fiscal
2007, compared to 53.7% in the second quarter of Fiscal 2006.
The increase in gross profit reflected higher net sales and
improved merchandise margins generally across our wholesale and
retail businesses.
Selling, General and Administrative
Expenses. SG&A expenses were
$412.1 million for the three months ended
September 30, 2006, an increase of $44.1 million, or
12.0%, compared to $368.0 million for the three months
ended October 1, 2005. SG&A expenses as a percent of
net revenues decreased to 35.3% from 35.8%. The
$44.1 million net increase in SG&A expenses was
primarily driven by:
|
|
|
|
|
higher payroll-related expenses (excluding stock-based
compensation) of approximately $20.5 million principally
relating to increased selling costs associated with higher
retail sales and our worldwide retail store expansion, and
higher investment in infrastructure to support the ongoing
growth of our businesses;
|
|
|
|
the inclusion of SG&A costs for our newly acquired Polo
Jeans Business;
|
|
|
|
higher brand-related marketing and facilities costs to support
the ongoing growth of our businesses;
|
|
|
|
incremental stock-based compensation expense of
$5.7 million as a result of the adoption of FAS 123R
as of April 2, 2006 (refer to Note 11 to the unaudited
consolidated financial statements contained elsewhere
herein); and
|
|
|
|
a reduction in costs of $6.8 million due to the absence of
the charge recognized in Fiscal 2006 related to the credit card
contingency.
|
Amortization of Intangible
Assets. Amortization of intangible assets
increased to $3.8 million during the three months ended
September 30, 2006 from $1.6 million during the three
months ended October 1, 2005 primarily as a result of
amortization of intangible assets as part of the Polo Jeans
Business acquired in February 2006.
Impairment of Retail Assets. A non-cash
impairment charge of $4.9 million was recognized during the
three months ended October 1, 2005 to reduce the carrying
value of fixed assets used in certain of our retail stores,
largely relating to our Club Monaco brand. No impairment charges
were recognized in Fiscal 2007.
Restructuring Charges. Restructuring charges
of $1.8 million were recognized during the three months
ended September 30, 2006, principally due to additional
costs associated with the Club Monaco Restructuring Plan. No
restructuring charges were recognized during the comparable
period in Fiscal 2006.
Operating Income. Operating income increased
$37.9 million, or 21.4%, for the three months ended
September 30, 2006 over the three months ended
October 1, 2005. Operating income for our three business
segments is provided below:
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
Increase/
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
% Change
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
157.3
|
|
|
$
|
143.1
|
|
|
$
|
14.2
|
|
|
|
9.9
|
%
|
Retail
|
|
|
66.8
|
|
|
|
39.4
|
|
|
|
27.4
|
|
|
|
69.5
|
%
|
Licensing
|
|
|
37.5
|
|
|
|
40.2
|
|
|
|
(2.7
|
)
|
|
|
(6.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261.6
|
|
|
|
222.7
|
|
|
|
38.9
|
|
|
|
17.5
|
%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses
|
|
|
(44.9
|
)
|
|
|
(45.7
|
)
|
|
|
0.8
|
|
|
|
(1.8
|
)%
|
Unallocated restructuring charges
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
(1.8
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
214.9
|
|
|
$
|
177.0
|
|
|
$
|
37.9
|
|
|
|
21.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM - Not Meaningful
Wholesale operating income increased by
$14.2 million primarily as a result of higher sales and
improved gross margin rates, partially offset by increases in
SG&A expenses and higher amortization expenses associated
with intangible assets recognized in acquisitions.
Retail operating income increased by $27.4 million
primarily as a result of increased net sales and improved gross
margin rates, as well as the absence of a non-cash impairment
charge of $4.9 million recognized in Fiscal 2006. These
increases were partially offset by an increase in selling
salaries and related costs in connection with the increase in
retail sales and worldwide store expansion, including the new
Tokyo flagship store.
Licensing operating income decreased by $2.7 million
primarily due to the loss of royalty income formerly collected
in connection with the Polo Jeans Business, which has now been
acquired. The decline in Home licensing royalties also
contributed to the decrease, partially offset by an increase in
international licensing royalties.
Unallocated Corporate Expenses decreased by
$0.8 million as the absence of a $6.8 million charge
recognized in Fiscal 2006 to increase our reserve against the
financial exposure associated with certain credit card matters
offset increases in brand-related marketing, payroll-related and
facilities costs to support the ongoing growth of our
businesses. The increase in payroll-related costs included
higher stock-based compensation expenses due to the adoption of
FAS 123R.
Unallocated Restructuring Charges. Unallocated
restructuring charges were $1.8 million during the three
months ended September 30, 2006 principally as a result of
additional costs associated with the Club Monaco Restructuring
Plan (as defined in Note 7 to the unaudited consolidated
financial statements included elsewhere herein). There were no
restructuring charges recognized in the comparable period of
Fiscal 2006.
Foreign Currency Gains (Losses). The effect of
foreign currency exchange rate fluctuations resulted in a gain
of $1.2 million during the three months ended
September 30, 2006, compared to a loss of $6.0 million
in the comparable prior period. Foreign currency losses for
Fiscal 2006 included amounts associated with intercompany
receivables and payables that were not of a long-term investment
nature and were settled by our international subsidiaries.
Foreign currency gains and losses are unrelated to the impact of
changes in the value of the U.S. dollar when operating
results of our foreign subsidiaries are translated to
U.S. dollars.
Interest Expense. Interest expense increased
to $4.5 million during the three months ended
September 30, 2006, compared to $2.8 million in the
comparable prior period. The increase is primarily due to
interest on additional capitalized lease obligations compared to
the prior period.
Interest Income. Interest income increased to
$4.7 million during the three months ended
September 30, 2006, compared to $2.9 million in the
comparable prior period. This increase is due largely to higher
interest rates on our invested excess cash balances.
32
Equity in Income of Equity-Method
Investees. Equity in the income of equity-method
investees was $0.9 million during the three months ended
September 30, 2006, compared to $1.3 million in the
comparable prior period. The decrease related to lower income
from our 20% investment in Impact 21, a company that holds
the sublicenses for our mens, womens and jeans
businesses in Japan (Impact 21).
Minority Interest Expense. Minority interest
expense decreased to $3.6 million during the three months
ended September 30, 2006, compared to $3.9 million in
the comparable prior period. There were no significant
fluctuations in minority interest expense.
Provision for Income Taxes. The provision for
income taxes increased to $76.6 million during the three
months ended September 30, 2006, compared to
$64.3 million in the comparable prior period. This is a
result of the increase in pretax income partially offset by a
decrease in our effective tax rate to 35.9% during the second
quarter of Fiscal 2007 from 38.2% during the comparable prior
period. The change in the effective tax rate for the three
months ended September 30, 2006 compared to the comparable
prior period is principally due to the reversal of valuation
allowances on net operating losses in certain foreign
jurisdictions which are no longer necessary due to the improved
profitability of such jurisdictions. In addition, in accordance
with APB No. 28, Interim Financial Reporting,
the rate differential for the quarter also resulted from the
required changes to the quarterly tax provision associated with
the Companys ongoing refinement of its best estimate of
the effective tax rate expected for the full fiscal year.
Net Income. Net income increased to
$137.0 million during the three months ended
September 30, 2006, compared to $104.2 million during
the three months ended October 1, 2005. The
$32.8 million increase in net income principally related to
the $37.9 million increase in operating income previously
discussed and $7.2 million of higher foreign currency
gains, offset in part by higher income taxes of
$12.3 million.
Net Income Per Diluted Share. Net income per
diluted share increased to $1.28 during the three months ended
September 30, 2006, compared to $0.97 during the three
months ended October 1, 2005. The increase in diluted per
share results was primarily due to the higher level of net
income associated with our underlying operating performance.
33
Six
Months Ended September 30, 2006 Compared to Six Months
Ended October 1, 2005
The following table sets forth the amounts and the percentage
relationship to net revenues of certain items in our
consolidated statements of operations for the six months ended
September 30, 2006 and October 1, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
2,120.4
|
|
|
$
|
1,779.3
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods
sold(a)
|
|
|
(956.3
|
)
|
|
|
(813.4
|
)
|
|
|
(45.1
|
)%
|
|
|
(45.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,164.1
|
|
|
|
965.9
|
|
|
|
54.9
|
%
|
|
|
54.3
|
%
|
Selling, general and
administrative
expenses(a)
|
|
|
(802.4
|
)
|
|
|
(701.2
|
)
|
|
|
(37.8
|
)%
|
|
|
(39.4
|
)%
|
Amortization of intangible assets
|
|
|
(9.4
|
)
|
|
|
(2.6
|
)
|
|
|
(0.4
|
)%
|
|
|
(0.1
|
)%
|
Impairment of retail assets
|
|
|
|
|
|
|
(4.9
|
)
|
|
|
0.0
|
%
|
|
|
(0.3
|
)%
|
Restructuring charges
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
(0.2
|
)%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
348.3
|
|
|
|
257.2
|
|
|
|
16.4
|
%
|
|
|
14.5
|
%
|
Foreign currency gains (losses)
|
|
|
0.1
|
|
|
|
(6.0
|
)
|
|
|
0.0
|
%
|
|
|
(0.3
|
)%
|
Interest expense
|
|
|
(8.9
|
)
|
|
|
(5.3
|
)
|
|
|
(0.4
|
)%
|
|
|
(0.3
|
)%
|
Interest income
|
|
|
8.5
|
|
|
|
5.8
|
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
Equity in income of equity-method
investees
|
|
|
1.7
|
|
|
|
3.1
|
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
Minority interest expense
|
|
|
(7.6
|
)
|
|
|
(5.3
|
)
|
|
|
(0.4
|
)%
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for
income taxes
|
|
|
342.1
|
|
|
|
249.5
|
|
|
|
16.1
|
%
|
|
|
14.0
|
%
|
Provision for income taxes
|
|
|
(124.9
|
)
|
|
|
(94.6
|
)
|
|
|
(5.9
|
)%
|
|
|
(5.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
217.2
|
|
|
$
|
154.9
|
|
|
|
10.2
|
%
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
share Basic
|
|
$
|
2.07
|
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
share Diluted
|
|
$
|
2.02
|
|
|
$
|
1.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes depreciation expense of $62.0 million and
$55.7 million for the six-month periods ended
September 30, 2006 and October 1, 2005, respectively. |
Net revenues. Net revenues for the six months
ended September 30, 2006 were $2.120 billion, an
increase of $341.1 million over net revenues for the six
months ended October 1, 2005 due to a combination of
organic growth and acquisitions. Wholesale revenues increased by
$236.4 million primarily as a result of revenues from the
newly acquired Polo Jeans and Footwear Businesses, the
successful launch of the Chaps for women and boys product lines,
and increased sales in our global menswear and womenswear
product lines. The increase in net revenues also was driven by a
$112.1 million revenue increase in our retail segment as a
result of improved comparable retail store sales, continued
store expansion (including our new Tokyo flagship store) and
growth in Polo.com sales. Licensing revenue decreased by
$7.4 million as the loss of Polo Jeans and Footwear
Business product licensing revenue (now included as part of the
Wholesale segment) was partially offset by an increase in
international royalties. Net revenues by business segment were
as follows:
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
Increase/
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
% Change
|
|
|
|
(millions)
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
1,151.1
|
|
|
$
|
914.7
|
|
|
$
|
236.4
|
|
|
|
25.8
|
%
|
Retail
|
|
|
856.7
|
|
|
|
744.6
|
|
|
|
112.1
|
|
|
|
15.1
|
%
|
Licensing
|
|
|
112.6
|
|
|
|
120.0
|
|
|
|
(7.4
|
)
|
|
|
(6.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,120.4
|
|
|
$
|
1,779.3
|
|
|
$
|
341.1
|
|
|
|
19.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Net Sales the net increase
primarily reflects:
|
|
|
|
|
the inclusion of $117 million of revenues from our newly
acquired Footwear and Polo Jeans Businesses;
|
|
|
|
a $112 million aggregate net increase in our global
menswear, womenswear and childrenswear businesses, primarily
driven by strong growth in our Lauren product line, and the
effects from the successful domestic launch of our Chaps for
women and boys product lines; and
|
|
|
|
a $7 million increase in revenues due to a favorable
foreign currency effect, primarily relating to the weakening of
the U.S. dollar in comparison to the Euro in Fiscal 2007.
|
Retail Net Sales the net increase primarily
reflects:
|
|
|
|
|
an aggregate $54.3 million increase in comparable
full-price and outlet store sales. This increase was driven by a
8.2% increase in comparable full-price store sales and an 8.4%
increase in comparable outlet store sales. Excluding a net
favorable $0.4 million effect on revenues from foreign
currency exchange rates, comparable full-price and outlet store
sales increased 8.3%;
|
|
|
|
an average net increase in store count of 7 stores compared to
the prior period, to a total of 295 stores, as several new
openings were offset by the closure of certain Club Monaco
stores in the fourth quarter of Fiscal 2006 and the second
quarter of Fiscal 2007; and
|
|
|
|
a $16 million increase in sales at Polo.com.
|
Licensing Revenue the net decrease primarily
reflects:
|
|
|
|
|
the loss of licensing revenues from our Polo Jeans Business and
Footwear Business now included as part of the Wholesale
segment; and
|
|
|
|
a decline in Home licensing royalties, partially offset by an
increase in international licensing royalties.
|
Cost of Goods Sold. Cost of goods sold was
$956.3 million for the six months ended September 30,
2006, compared to $813.4 million for the six months ended
October 1, 2005. Expressed as a percentage of net revenues,
cost of goods sold was 45.1% for the six months ended
September 30, 2006, compared to 45.7% for the six months
ended October 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 full-price sell-through of our
products.
Gross Profit. Gross profit was
$1.164 billion for the six months ended September 30,
2006, an increase of approximately $198.0 million, or
20.5,% compared to $965.9 million for the six months ended
October 1, 2005. Gross profit as a percentage of net
revenues increased from 54.3% in the comparable period of the
prior year to 54.9%. This increase reflected higher net sales,
improved merchandise margins and sourcing efficiencies generally
across our wholesale and retail businesses.
Selling, General and Administrative
Expenses. SG&A expenses were
$802.4 million for the six months ended September 30,
2006, an increase of $101.2 million, or 14.4%, compared to
$701.2 million for the six months
35
ended October 1, 2005. SG&A expenses as a percent of
net revenues decreased to 37.8% from 39.4%. The
$101.2 million net increase in SG&A expenses was
primarily driven by:
|
|
|
|
|
higher payroll-related expenses (excluding stock-based
compensation) of approximately $39.4 million principally
relating to increased selling costs associated with higher
retail sales and our worldwide retail store expansion, and
higher investment in infrastructure to support the ongoing
growth of our businesses;
|
|
|
|
the inclusion of SG&A costs for our newly acquired Footwear
and Polo Jeans Businesses;
|
|
|
|
higher brand-related marketing and facilities costs to support
the ongoing growth of our businesses;
|
|
|
|
higher depreciation costs of $6.3 million in connection
with our capital expenditures and global expansion;
|
|
|
|
incremental stock-based compensation expense of
$8.3 million as a result of the adoption of FAS 123R
as of April 2, 2006 (refer to Note 11 to the unaudited
consolidated financial statements contained elsewhere
herein); and
|
|
|
|
a reduction in costs of $6.8 million due to the absence of
the charge recognized in Fiscal 2006 related to the credit card
contingency.
|
Amortization of Intangible
Assets. Amortization of intangible assets
increased to $9.4 million during the six months ended
September 30, 2006 from $2.6 million during the six
months ended October 1, 2005 as a result of amortization of
intangible assets as part of the Polo Jeans Business acquired in
February 2006 and the Footwear Business acquired in July 2005.
Impairment of Retail Assets. A non-cash
impairment charge of $4.9 million was recognized during the
six months ended October 1, 2005 to reduce the carrying
value of fixed assets used in certain of our retail stores,
largely relating to our Club Monaco brand. No impairment charges
were recognized in Fiscal 2007.
Restructuring Charges. Restructuring charges
of $4.0 million were recognized during the six months ended
September 30, 2006, principally due to costs associated
with the Club Monaco Restructuring Plan. No restructuring
charges were recognized during the comparable period in Fiscal
2006.
Operating Income. Operating income increased
$91.1 million, or 35.4%, for the six months ended
September 30, 2006 over the six months ended
October 1, 2005. Operating income for our three business
segments is provided below:
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
Increase/
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
% Change
|
|
|
|
(millions)
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
247.6
|
|
|
$
|
189.4
|
|
|
$
|
58.2
|
|
|
|
30.7
|
%
|
Retail
|
|
|
131.4
|
|
|
|
75.0
|
|
|
|
56.4
|
|
|
|
75.2
|
%
|
Licensing
|
|
|
63.9
|
|
|
|
75.4
|
|
|
|
(11.5
|
)
|
|
|
(15.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
442.9
|
|
|
|
339.8
|
|
|
|
103.1
|
|
|
|
30.3
|
%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses
|
|
|
(90.6
|
)
|
|
|
(82.6
|
)
|
|
|
(8.0
|
)
|
|
|
9.7
|
%
|
Unallocated restructuring charges
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
(4.0
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
348.3
|
|
|
$
|
257.2
|
|
|
$
|
91.1
|
|
|
|
35.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM- Not Meaningful
Wholesale operating income increased by
$58.2 million primarily as a result of higher sales and
improved gross margin rates, partially offset by increases in
SG&A expenses and higher amortization expenses associated
with intangible assets recognized in acquisitions.
Retail operating income increased by $56.4 million
primarily as a result of increased net sales and improved gross
margin rates, as well as the absence of a non-cash impairment
charge of $4.9 million recognized in Fiscal 2006. These
increases were partially offset by an increase in selling
salaries and related costs in connection with the increase in
retail sales and worldwide store expansion, including the new
Tokyo flagship store.
Licensing operating income decreased by
$11.5 million primarily due to the loss of royalty income
formerly collected in connection with the Footwear and Polo
Jeans Businesses, which have now been acquired. The decline in
Home licensing royalties also contributed to the decrease,
partially offset by an increase in international royalties.
Unallocated Corporate Expenses increased by
$8.0 million primarily as a result of increases in
brand-related marketing, payroll-related and facilities costs to
support the ongoing growth of our businesses. The increase in
payroll-related costs includes higher stock-based compensation
expense due to the adoption of FAS 123R. Such increases
were partially offset by the absence of a $6.8 million
charge recognized in Fiscal 2006 to increase our reserve against
the financial exposure associated with the credit card
contingency.
Unallocated Restructuring Charges. Unallocated
restructuring charges were $4.0 million during the six
months ended September 30, 2006 primarily as a result of
costs associated with the Club Monaco Restructuring Plan (as
defined in Note 7 to the unaudited consolidated financial
statements included elsewhere herein). There were no
restructuring charges recognized in the comparable period of
Fiscal 2006.
Foreign Currency Gains (Losses). The effect of
foreign currency exchange rate fluctuations resulted in a gain
of $0.1 million during the six months ended
September 30, 2006 compared to a loss of $6.0 million
in the comparable prior period. Foreign currency losses for
Fiscal 2006 included amounts associated with intercompany
receivables and payables that were not of a long-term investment
nature and were settled by our international subsidiaries.
Foreign currency gains and losses are unrelated to the impact of
changes in the value of the U.S. dollar when operating
results of our foreign subsidiaries are translated to
U.S. dollars.
Interest Expense. Interest expense increased
to $8.9 million during the six months ended
September 30, 2006, compared to $5.3 million in the
comparable prior period. The increase is primarily due to
interest on additional capitalized lease obligations compared to
the prior period and higher effective interest rates.
Interest Income. Interest income increased to
$8.5 million during the six months ended September 30,
2006, compared to $5.8 million in the comparable prior
period. This increase is due largely to higher interest rates on
our invested excess cash balances.
37
Equity in Income of Equity-Method
Investees. Equity in the income of equity-method
investees was $1.7 million during the six months ended
September 30, 2006, compared to $3.1 million in the
comparable prior period. The decrease related to lower income
from our 20% investment in Impact 21.
Minority Interest Expense. Minority interest
expense increased to $7.6 million during the six months
ended September 30, 2006, compared to $5.3 million in
the comparable prior period. The increase related to a higher
allocation of income to the partners in our jointly owned RL
Media venture as a result of an increase in operating income
compared to the prior period.
Provision for Income Taxes. The provision for
income taxes increased to $124.9 million during the six
months ended September 30, 2006, compared to
$94.6 million in the comparable prior period. This is a
result of the increase in pretax income partially offset by a
decrease in our effective tax rate to 36.5% during the second
quarter of Fiscal 2007 from 37.9% during the comparable prior
period. The change in the effective tax rate for the six months
ended September 30, 2006 compared to the comparable prior
period is principally due to the reversal of valuation
allowances on net operating losses in certain foreign
jurisdictions which are no longer necessary due to the improved
profitability of such jurisdictions.
Net Income. Net income increased to
$217.2 million for six months ended September 30,
2006, compared to $154.9 million for the six months ended
October 1, 2005. The $62.3 million increase in net
income principally related to our $91.1 million increase in
operating income previously discussed and $6.1 million of
higher foreign currency gains, offset in part by higher income
taxes of $30.3 million.
Net Income Per Diluted Share. Diluted net
income per share increased to $2.02 per share, compared to
$1.46 per share for the six months ended October 1,
2005. The increase in diluted per share results was primarily
due to the higher level of net income associated with our
underlying operating performance, partially offset by higher
weighted-average diluted shares outstanding.
FINANCIAL
CONDITION AND LIQUIDITY
Financial
Condition
At September 30, 2006, we had $321.0 million of cash
and cash equivalents, $289.1 million of debt (net cash of
$31.9 million, defined as total cash and cash equivalents
less total debt) and $2.199 billion of stockholders
equity. This compares to $285.7 million of cash and cash
equivalents, $280.4 million of debt (net cash of
$5.3 million) and $2.050 billion of stockholders
equity at April 1, 2006.
The increase in our net cash position principally relates to our
growth in operating cash flows, partially offset by the use of
cash to repurchase shares of common stock in connection with the
Companys common stock repurchase program. The increase in
stockholders equity principally relates to the
Companys strong earnings growth during the first half of
Fiscal 2007, offset in part by the effects from its common stock
repurchase program.
Cash
Flows
Net Cash Provided by Operating Activities. Net
cash provided by operating activities increased to
256.6 million during the six-month period ended
September 30, 2006, compared to $198.1 million for the
six-month period ended October 1, 2005. This
$58.5 million increase in operating cash flow was driven
primarily by the increase in net income, partially offset by
increases in working capital. On a comparative basis, operating
cash flows were reduced by approximately $13 million as a
result of a change in the reporting of excess tax benefits from
stock-based compensation arrangements. That is, prior to the
adoption of FAS 123R, benefits of tax deductions in excess
of recognized compensation costs were reported as operating cash
flows. FAS 123R requires excess tax benefits to be reported
as a financing cash inflow rather than in operating cash flows
as a reduction of taxes paid.
Net Cash Used in Investing Activities. Net
cash used in investing activities was 117.3 million for the
six months ended September 30, 2006, as compared to
$188.5 million for the six months ended October 1,
2005. Acquisition spending decreased by $112.7 million
primarily as a result of the acquisition of the Footwear
Business which closed in Fiscal 2006. Net cash used in investing
activities for Fiscal 2007 included $52.4 million of
restricted cash placed in escrow in connection with the French
income tax audit matter described in Note 12 to the
38
accompanying unaudited consolidated financial statements. Net
cash used in investing activities also included
$63.6 million relating to capital expenditures, as compared
to $74.5 million in the comparable period in Fiscal 2006.
Net Cash Used in/Provided by Financing
Activities. Net cash used in financing activities
was $108.7 million for the six months ended
September 30, 2006, compared to net cash provided by
financing activities of $27.8 million in the six months
ended October 1, 2005. The decrease in cash provided by
financing activities during the six months ended
September 30, 2006 principally related to the repurchase of
approximately 2.2 million shares of Class A common
stock pursuant to the Companys common stock repurchase
program at a cost of $129.6 million. The receipt of
$25.5 million from the exercise of stock options, as
compared to $42.4 million for the six months ended
October 1, 2005, also contributed to the decrease. The
change in the reporting of excess tax benefits from stock-based
compensation arrangements discussed above partially offset those
decreases by approximately $13 million.
Liquidity
The Companys primary sources of liquidity are the cash
flow generated from its operations, which includes the
approximate $200 million to be received in January 2007
under a new eyewear licensing agreement with Luxottica Group,
S.p.A. and affiliates, $450 million of availability under
its credit facility, available cash and equivalents and other
potential sources of financial capacity relating to its
under-leveraged capital structure. These sources of liquidity
are needed to fund the Companys 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.
Management believes that the Companys existing resources
of cash will be sufficient to support its operating and capital
requirements for the foreseeable future.
As discussed below under the section entitled Debt and
Covenant Compliance, the Company had no borrowings under
its credit facility as of September 30, 2006. However, in
the event of a material acquisition, settlement of a material
contingency or a material adverse business development, the
Company may need to draw on its credit facility or other
potential sources of financing. Also, as discussed below, in
October 2006, the Company completed the issuance of
300 million principal amount of 4.50% notes due
October 4, 2013. The Company intends to use the net
proceeds from the financing to settle its 227 principal
amount of Euro debt obligations that mature in November 2006 and
for general corporate and working capital purposes. The Company
is seeking to amend its Credit Facility in November 2006, which
should extend the term to 2011, as a result of recent upgrades
in the Companys credit ratings from Standard &
Poors (to BBB+) and Moodys (to Baa1). See Revolving
Credit Facility described below.
Common
Stock Repurchase Program
In August 2006, the Companys Board of Directors approved
an expansion of the Companys common stock repurchase
program that allows it to repurchase, from time to time, up to
an additional $250 million of Class A common stock.
Share repurchases are subject to overall business and market
conditions. Share repurchases under both this expanded program
and the pre-existing program for the six months ended
September 30, 2006 amounted to 2.2 million shares of
Class A common stock at a cost of $129.6 million. The
remaining availability under the current common stock repurchase
program was $220 million as of September 30, 2006.
Dividends
The Company intends to continue to pay regular quarterly
dividends on its outstanding common stock. However, any decision
to declare and pay dividends in the future will be made at the
discretion of the Companys Board of Directors and will
depend on, among other things, the Companys results of
operations, cash requirements, financial condition and other
factors that the Board of Directors may deem relevant.
The Company declared a quarterly dividend of $0.05 per
outstanding share in the second quarter of both Fiscal 2007 and
Fiscal 2006. The aggregate amount of dividend payments was
$10.5 million in the six-month period ended
September 30, 2006, compared to $10.4 million in the
six-month period ended October 1, 2005.
39
Debt
and Covenant Compliance
Euro
Debt
The Company has outstanding approximately 227 million
principal amount of 6.125% notes that are due on
November 22, 2006, originally issued in 1999 (the
1999 Euro Debt). As of September 30, 2006, the
carrying value of the 1999 Euro Debt was $289.1 million,
compared to $280.4 million at April 1, 2006.
In October 2006, the Company completed the issuance of
300 million principal amount of 4.50% notes due
October 4, 2013 (the 2006 Euro Debt). The
Company intends to use the net proceeds from the financing of
approximately $380 million, based on the exchange rate in
effect upon issuance, to repay the 1999 Euro Debt in November
2006 and for general corporate and working capital purposes. The
Company has the option to redeem all of the 2006 Euro Debt at
any time at a redemption price equal to the principal amount
plus a premium. The Company also has the option to redeem all of
the 2006 Euro Debt at any time at par plus accrued interest, in
the event of certain developments involving United States tax
law. Partial redemption of the 2006 Euro Debt is not permitted
in either instance. In the event of a change of control of the
Company, each holder of the 2006 Euro Debt has the option to
require the Company to redeem the 2006 Euro Debt at its
principal amount together with accrued interest.
Revolving
Credit Facility
The Company has a credit facility (the Credit
Facility) that provides for a $450 million unsecured
revolving line of credit. The Credit Facility also is used to
support the issuance of letters of credit. As of
September 30, 2006, there were no borrowings outstanding
under the Credit Facility, but the Company was contingently
liable for $53.2 million of outstanding letters of credit
(primarily relating to inventory purchase commitments).
The Company is seeking to amend certain terms of its Credit
Facility (the Amended Credit Facility) in November
2006 as a result of recent upgrades in the Companys credit
ratings from Standard & Poors and Moodys. Key
changes under the anticipated amendment include:
|
|
|
|
|
An increase in the ability of the Company to expand its
additional borrowing availability by $150 million to
$600 million, compared to an additional expansion feature
of $75 million under the current agreement (subject to the
agreement of one or more new or existing lenders under the
facility to increase their commitments);
|
|
|
|
An extension of the term of the Credit Facility to November 2011
from October 2009;
|
|
|
|
A reduction in the margin over LIBOR paid by the Company on
amounts drawn under the Amended Credit Facility to 35 basis
points from 50 basis points;
|
|
|
|
A reduction in the commitment fee for the unutilized portion of
the Amended Credit Facility to 8 basis points from
12.5 basis points; and
|
|
|
|
The elimination of the coverage ratio financial covenant, as
described more fully below.
|
As currently contemplated, the Amended Credit Facility would
continue to provide for a $450 million unsecured revolving
line of credit. There will be no mandatory reductions in
borrowing availability throughout its term.
Borrowings under the Amended Credit Facility are expected to
bear interest, at the Companys option, either at
(a) a base rate determined by reference to the higher of
(i) the prime commercial lending rate of JP Morgan Chase
Bank in effect from time to time and (ii) the
weighted-average overnight Federal funds rate (as published by
the Federal Reserve Bank of New York) plus 50 basis points
or (b) a LIBOR rate in effect from time to time, as
adjusted for the Federal Reserve Boards Euro currency
liabilities maximum reserve percentage plus a margin defined in
the Credit Facility (the applicable margin). The
applicable margin of 35 basis points is subject to
adjustment based on the Companys credit ratings.
In addition to paying interest on any outstanding borrowings
under the Amended Credit Facility, the Company will be required
to pay a commitment fee to the lenders under the Amended Credit
Facility in respect of the
40
unutilized commitments. The expected commitment fee rate of
8 basis points under the terms of the Amended Credit
Facility will also be subject to adjustment based on the
Companys credit ratings.
The Amended Credit Facility is expected to contain a number of
covenants that, among other things, restricts the Companys
ability, subject to specified exemptions, 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 itself; engage in businesses
that are not in a related line of business; make loans, advances
or guarantees; engage in transactions with affiliates; and make
investments. In addition, the original Credit Facility required
the Company to maintain certain financial covenants, consisting
of (i) a minimum ratio of Earnings Before Interest, Taxes,
Depreciation, Amortization, Rent and certain non-recurring
non-cash expenses (such as impairment of assets)
(EBITDAR) to the sum of Consolidated Interest
Expense and Consolidated Lease Expense (the coverage
ratio) and (ii) a maximum ratio of Adjusted Debt to
EBITDAR (the leverage ratio), as such terms are
defined in the Credit Facility. As of September 30, 2006,
the Company was in compliance with all covenants under the
original Credit Facility. Under the terms of the Amended Credit
Facility, the Company expects to no longer be required to
maintain the minimum coverage ratio, but expects to continue to
be subject to the maximum leverage ratio.
Upon the occurrence of an event of default under the Amended
Credit Facility, the lenders may cease making loans, terminate
the Amended 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 Amended Credit Facility is expected to provide
that an event of default will occur if Mr. Ralph Lauren,
the Companys Chairman and Chief Executive Officer, and
related entities fail to maintain a specified minimum percentage
of the voting power of the Companys common stock.
MARKET
RISK MANAGEMENT
As discussed in Note 14 to our audited consolidated
financial statements included in our Annual Report on
Form 10-K
for Fiscal 2006 and Note 9 to the accompanying unaudited
consolidated financial statements contained elsewhere herein,
the Company is exposed to market risk arising from changes in
market rates and prices, particularly movements in foreign
currency exchange rates and interest rates. The Company manages
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.
During the first six months of Fiscal 2007, the Company entered
into three forward-starting interest rate swap contracts
aggregating 200 million notional amount of
indebtedness in anticipation of the Companys proposed
refinancing of the 1999 Euro Debt which was completed in October
2006. The Company designated these agreements as a cash flow
hedge of a forecasted transaction to issue new debt in
connection with the planned refinancing of its 1999 Euro Debt.
The interest rate swaps hedged a total of
200.0 million, a portion of the underlying interest
rate exposure on the anticipated refinancing. Under the terms of
the three interest swap contracts, the Company paid a
weighted-average fixed rate of interest of 4.1% and received
variable interest based upon six-month EURIBOR. The Company
terminated the swaps on September 28, 2006 which was the
date the interest rate for the Euro Debt issued in October 2006
was determined. As a result, the Company made a payment of
approximately 3.5 million ($4.4 million based on
the exchange rate in effect on that date) in settlement of the
swaps. $0.2 million was recognized as a loss for the three
months ending September 30, 2006 due to the partial
ineffectiveness of the cash flow hedge as a result of the
forecasted transaction closing on October 5, 2006 instead
of November 22, 2006 (the maturity date of the 1999 Euro
Debt). The remaining loss of $4.2 million has been deferred
as a component of comprehensive income within stockholders
equity and will be recognized in income as an adjustment to
interest expense over the seven-year term of the 2006 Euro Debt.
As of September 30, 2006, other than the aforementioned
forward-starting interest rate swap contracts, there have been
no other 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 the end of Fiscal
2006.
41
CRITICAL
ACCOUNTING POLICIES
Our significant accounting policies are described in
Notes 3 and 4 to our audited consolidated financial
statements included in our Annual Report on
Form 10-K
for Fiscal 2006. The SECs Financial Reporting Release
No. 60, Cautionary Advice Regarding Disclosure About
Critical Accounting Policies (FRR 60),
suggests companies provide additional disclosure and commentary
on those accounting policies considered most critical. FRR 60
considers an accounting policy to be critical if it is important
to the Companys financial condition and results of
operations and requires significant judgment and estimates on
the part of management in its application. For a complete
discussion of the Companys critical accounting policies,
see page 43 in the Companys Annual Report on
Form 10-K
for Fiscal 2006. The following discussion only is intended to
update the Companys critical accounting policies for any
changes in policy implemented during Fiscal 2007.
Effective April 2, 2006, the Company adopted Statement of
Financial Accounting Standards No. FAS 123R,
Share-Based Payments (FAS 123R),
using the modified prospective application transition method.
Under this transition method, the compensation expense
recognized in the consolidated statement of operations beginning
April 2, 2006 includes compensation expense for
(a) all stock-based payments granted prior to, but not yet
vested as of April 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, as amended
by Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure (FAS 123), and
(b) all stock-based payments granted subsequent to
April 1, 2006 based on the grant-date fair value estimated
in accordance with the provisions of FAS 123R.
Prior to April 2, 2006, the Company accounted for
stock-based compensation plans under the intrinsic value method
in accordance with Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to
Employees, (APB 25), and adopted the
disclosure-only provisions of FAS 123. Under this standard,
the Company did not recognize compensation expense for the
issuance of stock options with an exercise price equal to or
greater than the market price at the date of grant. However, as
required, the Company disclosed, in the notes to the
consolidated financial statements, the pro forma expense impact
of the stock option grants as if the
fair-value-based
recognition provisions of FAS 123 were applied.
Compensation expense was previously recognized for restricted
stock and restricted stock units. The effect of forfeitures on
restricted stock and restricted stock units was recognized when
such forfeitures occurred.
The Company uses the Black-Scholes option-pricing model to
estimate the fair value of stock options granted, which requires
the input of subjective assumptions. The fair values of shares
of restricted stock and restricted stock units are based on the
fair value of unrestricted Class A common stock, as
adjusted to reflect the absence of dividends for those
restricted securities that are not entitled to dividend
equivalents. Compensation expense for performance-based
restricted stock units is recognized over the service period
when attainment of the performance goals is probable.
Determining the fair value of stock-based compensation at the
date of grant requires judgment, including estimates of the
expected term, expected volatility and dividend yield. In
addition, judgment is also required in estimating the number of
stock-based awards that are expected to be forfeited. If actual
results differ significantly from these estimates, stock-based
compensation expense and the Companys results of
operations could be materially impacted.
Other than the accounting for stock-based compensation, there
have been no other significant changes in the application of
critical accounting policies since April 1, 2006.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
For a discussion of the Companys exposure to market risk,
see Market Risk Management in MD&A presented
elsewhere herein.
|
|
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
42
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 September 30, 2006, 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 September 30, 2006 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 1, 2006 and reported in our Fiscal 2006 Annual Report
on
Form 10-K.
We continue our efforts to remediate this material weakness
through ongoing process improvements and the implementation of
enhanced policies and controls over tax accounting in Fiscal
2007, and such remediation will continue during the better part
of Fiscal 2007. Accordingly, this material weakness is not yet
remediated. No material weaknesses will be considered remediated
until the remediated procedures have operated for an appropriate
period and have been tested, and management has concluded that
they are operating effectively.
To compensate for this material weaknesses, the Company
performed additional analysis and other procedures 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 unaudited 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.
Except for our ongoing remediation efforts over income tax
accounting, there were no changes during the quarter that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
43
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 1, 2006, as updated by the
information disclosed under Part II,
Item I Legal Proceedings in our
Quarterly Report on
Form 10-Q
for the fiscal quarter ended July 1, 2006. The following is
a summary of recent litigation developments.
On August 19, 2005, Wathne Imports, Ltd., our domestic
licensee for luggage and handbags (Wathne), filed a
complaint in the U.S. District Court for 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 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
mens and womens handbags. On May 16, 2006, a
discovery schedule running through November 2006 was established
for this case. Depositions commenced in this case in October
2006 and are expected to take place through January 2007. On
October 31, 2006, the court denied Wathnes motion for
a preliminary injunction, which sought to bar the Companys
Rugby stores from selling certain bags and to prevent the
Company from using certain gift bags that were furnished to
customers who made purchases at the Companys United States
Tennis Open temporary store. We believe this suit to be without
merit and will continue to contest it vigorously.
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 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 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
judgment, 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 opposed our motion,
but did not move to overturn the jurys decision that the
fourth double horseman logo did infringe on our trademarks. On
July 7, 2006, the judge denied our motion to overturn the
jurys decision. On August 4, 2006, the Company filed
an appeal of the judges decision to deny the
Companys motion for a new trial to the United States Court
of Appeals for the Second Circuit.
On September 18, 2002, an employee at one of the
Companys stores filed a lawsuit against us in the United
States District Court for the District of Northern California
alleging violations of California antitrust and labor laws. The
plaintiff purported to represent a class of employees who had
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
44
motions for summary judgment on the issue of whether the
Companys policies violated California law occurred 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 was held before the Court
on June 29, 2006. On October 26, 2006, the Court
granted preliminary approval of the settlement and will begin
the process of sending out claim forms to members of the class.
The proposed settlement cost of $1.5 million does not
exceed the reserve for this matter that we established in Fiscal
2005.
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 aggregate have a material
adverse effect on our financial condition or results of
operations.
Our Annual Report on
Form 10-K
for the fiscal year ended April 1, 2006 contains a detailed
discussion of certain risk factors that could materially
adversely affect our business, our operating results, or our
financial condition. There are no material changes to the risk
factors previously disclosed nor have we identified any
previously undisclosed risks that could materially adversely
affect our business, our operating results, or our financial
condition.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
Items 2(a) and (b) are not applicable.
The following table sets forth the repurchases of shares of our
Class A common stock during the fiscal quarter ended
September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
(or Approximate Dollar Value)
|
|
|
|
|
|
|
|
|
|
as Part of Publicly
|
|
|
of Shares That May Yet be
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Announced Plans
|
|
|
Purchased Under the Plans
|
|
|
|
Shares
Purchased(1)
|
|
|
Paid per Share
|
|
|
or Programs
|
|
|
or Programs (millions)
|
|
|
July 2, 2006 to July 29,
2006
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
32.4
|
|
July 30, 2006 to
August 26, 2006
|
|
|
384,600
|
|
|
|
57.05
|
|
|
|
384,600
|
|
|
|
250
|
|
August 27, 2006 to
September 30, 2006
|
|
|
667,697
|
(2)
|
|
|
61.91
|
|
|
|
641,417
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,052,297
|
|
|
|
|
|
|
|
1,026,017
|
|
|
|
|
|
|
|
|
(1) |
|
Except as noted below, these purchases were made on the open
market under the Companys Class A Common Stock
repurchase program. In August 2006, the Companys Board of
Directors approved an expansion of the Companys common
stock repurchase program that allows it to repurchase, from time
to time, up to an additional $250 million of Class A
common stock. This program does not have a fixed termination
date. |
|
(2) |
|
Includes 26,280 shares surrendered to, or withheld by, the
Company in satisfaction of withholding taxes in connection with
the vesting of an award under the Companys 1997 Long-Term
Stock Incentive Plan. |
45
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
The Annual Meeting of Stockholders of the Company was held on
August 10, 2006. The following directors, constituting the
entire Board of Directors of the Company, were elected at the
Annual Meeting of Stockholders to serve until the 2007 Annual
Meeting and their respective successors are duly elected and
qualified.
Class A
Directors
Frank A. Bennack, Jr.
Joel L. Fleishman
Class B
Directors
Ralph Lauren
Roger N. Farah
Arnold H. Aronson
Dr. Joyce F. Brown
Judith A. McHale
Steven P. Murphy
Terry S. Semel
Each person elected as a director received the number of votes
indicated beside his or her name. Class A directors are
elected by the holders of Class A Common Stock and
Class B directors are elected by the holders of
Class B Common Stock. Shares of Class A Common Stock
are entitled to one vote per share and shares of Class B
Common Stock are entitled to ten votes per share.
|
|
|
|
|
|
|
|
|
|
|
Number of Votes
|
|
|
Number of Votes
|
|
|
|
For
|
|
|
Withheld
|
|
|
Class A
Directors:
|
|
|
|
|
|
|
|
|
Frank A. Bennack, Jr.
|
|
|
55,216,932
|
|
|
|
1,803,278
|
|
Joel L. Fleishman
|
|
|
55,217,128
|
|
|
|
1,803,132
|
|
|
|
|
|
|
|
|
|
|
Class B
Directors:
|
|
|
|
|
|
|
|
|
Ralph Lauren
|
|
|
432,800,210
|
|
|
|
- 0 -
|
|
Roger N. Farah
|
|
|
432,800,210
|
|
|
|
- 0 -
|
|
Arnold H. Aronson
|
|
|
432,800,210
|
|
|
|
- 0 -
|
|
Dr. Joyce F. Brown
|
|
|
432,800,210
|
|
|
|
- 0 -
|
|
Judith A. McHale
|
|
|
432,800,210
|
|
|
|
- 0 -
|
|
Steven P. Murphy
|
|
|
432,800,210
|
|
|
|
- 0 -
|
|
Terry S. Semel
|
|
|
432,800,210
|
|
|
|
- 0 -
|
|
99,390,658 votes were cast for, and 897,217 votes were cast
against the ratification of the selection of Deloitte &
Touche LLP as the independent auditors of the Company for the
year ending March 31, 2007. There were 12,406 abstentions
and no broker non-votes.
|
|
|
31.1
|
|
Certification of Ralph Lauren,
Chairman and Chief Executive Officer, pursuant to 17 CFR
240.13a-14(a).
|
31.2
|
|
Certification of Tracey T. Travis,
Senior Vice President and Chief Financial Officer, pursuant to
17 CFR
240.13a-14(a).
|
32.1
|
|
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
|
|
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.
|
46
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.
47
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.
POLO RALPH LAUREN CORPORATION
Tracey T. Travis
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 9, 2006
48