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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 27, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13057
POLO RALPH LAUREN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2622036
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
650 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
Registrant's 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 [X] No [ ]
At August 6, 1998, 33,972,042 shares of the registrant's Class A Common Stock,
$.01 par value, were outstanding, 43,280,021 shares of the registrant's Class B
Common Stock, $.01 par value, were outstanding and 22,720,979 shares of the
registrant's Class C Common Stock, $.01 par value were outstanding.
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<PAGE>
POLO RALPH LAUREN CORPORATION
INDEX TO FORM 10-Q
PART 1. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of June 27, 1998 (Unaudited)
and March 28, 1998............................................ 3
Consolidated Statements of Income for the three months ended
June 27, 1998 and June 28, 1997 (Unaudited)................... 4
Consolidated Statements of Cash Flows for the three months ended
June 27, 1998 and June 28, 1997 (Unaudited)................... 5-6
Notes to Consolidated Financial Statements...................... 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 11-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 17
Item 5. Other Information............................................... 17
Item 6. Exhibits and Reports on Form 8-K................................ 18
2
<PAGE>
POLO RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 27, MARCH 28,
1998 1998
------------------- -------------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $35,173 $58,755
Accounts receivable, net of allowances of $10,904 and $12,447, respectively 111,824 149,120
Inventories 357,710 298,485
Deferred tax assets 24,448 24,448
Prepaid expenses and other 29,794 25,656
------------------- -------------------
TOTAL CURRENT ASSETS 558,949 556,464
Property and equipment, net 185,332 175,348
Deferred tax assets 14,213 14,213
Other assets, net 83,962 79,105
------------------- -------------------
$842,456 $825,130
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
Current liabilities
Notes and acceptances payable - banks $ 3,000 --
Accounts payable 92,513 $100,126
Income taxes payable 12,572 2,554
Accrued expenses and other 93,476 99,578
------------------- -------------------
TOTAL CURRENT LIABILITIES 201,561 202,258
Other noncurrent liabilities 41,088 38,546
Stockholders' equity and partners' capital
Common Stock
Class A, par value $.01 per share; 500,000,000 shares
authorized; 34,273,428 and 34,272,726 shares issued and outstanding, respectively 343 343
Class B, par value $.01 per share; 100,000,000 shares
authorized; 43,280,021 shares issued and outstanding 433 433
Class C, par value $.01 per share; 70,000,000 shares
authorized; 22,720,979 shares issued and outstanding 227 227
Additional paid-in-capital 447,936 447,918
Retained earnings and partners' capital 159,449 136,738
Treasury Stock, Class A, at cost (256,900 shares) (7,248) --
Unearned compensation (1,333) (1,333)
------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL 599,807 584,326
------------------------------------------
$842,456 $825,130
=================== ===================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
JUNE 27, JUNE 28,
1998 1997
------------ ------------
<S> <C> <C>
Net sales $311,155 $255,412
Licensing revenue 43,283 32,532
Other income 4,338 1,706
------------ ------------
Net revenues 358,776 289,650
Cost of goods sold 176,162 142,998
------------ ------------
Gross profit 182,614 146,652
Selling, general and administrative expenses 144,963 117,908
------------ ------------
Income from operations 37,651 28,744
Interest income (expense) 680 (2,762)
------------ ------------
Income before income taxes 38,331 25,982
Provision (benefit) for income taxes 15,620 (18,656)
------------ ------------
Net income $22,711 $44,638
============ ============
PRO FORMA (NOTE 2) - (UNAUDITED)
Historical income before income taxes $25,982
Pro forma adjustments other than income taxes 3,163
------------
Pro forma income before income taxes 29,145
Pro forma provision for income taxes 11,949
------------
Pro forma net income $17,196
============
Historical and pro forma net income per share - Basic and Diluted $ 0.23 $ 0.17
============ ============
Historical and pro forma common shares outstanding - Basic 100,195,134 100,222,444
============ ============
Historical and pro forma common shares outstanding - Diluted 100,570,710 100,222,444
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
JUNE 27, JUNE 28,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $22,711 $44,638
Adjustments to reconcile net income to net
cash provided by operating activities
Benefit from deferred income taxes - (21,746)
Depreciation and amortization 10,759 5,878
Provision for losses on accounts receivable 188 281
Changes in deferred liabilities (423) 2,416
Other 1,515 (702)
Changes in assets and liabilities, net of acquisition
Accounts receivable 37,108 55,376
Inventories (59,225) (42,228)
Prepaid expenses and other (4,139) (928)
Other assets, net (2,814) (769)
Accounts payable (7,613) (23,998)
Income taxes payable and accrued expenses and other 5,365 (1,202)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,432 17,016
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, net (21,550) (10,301)
Acquisition, net of cash acquired - (8,551)
Investments in joint ventures - (5,000)
Cash surrender value - officers' life insurance, net (1,060) (655)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (22,610) (24,507)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net 18 268,797
Repurchases of common stock (7,248) -
Proceeds from (repayments of) short-term borrowings, net 3,000 (17,257)
Repayments of borrowings against officers' life insurance policies - (4,901)
Repayments of long-term debt and subordinated notes (174) (134,599)
Payment of dividend and Reorganization notes - (43,024)
Distributions paid to partners - (44,855)
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (4,404) 24,161
----------- -----------
Net (decrease) increase in cash and cash equivalents (23,582) 16,670
Cash and cash equivalents at beginning of period 58,755 29,599
----------- -----------
Cash and cash equivalents at end of period $35,173 $46,269
=========== ===========
</TABLE>
5
<PAGE>
POLO RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
JUNE 27, JUNE 28,
1998 1997
----------- -----------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $631 $2,802
=========== ===========
Cash paid for income taxes $5,922 $1,880
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Foreign tax credits distributed to partners $509
===========
Capital obligations for completed shop-within-shops - $5,823
=========== ===========
Fair value of assets acquired, excluding cash $69,537
Less:
Cash paid 8,551
Fair market value of common stock issued for acquisition 697
-----------
Liabilities assumed $60,289
===========
Fair market value of restricted stock grants $667
===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
POLO RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 27, 1998 AND JUNE 28, 1997 IS UNAUDITED)
1 BASIS OF PRESENTATION
(A) UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and in a manner consistent with that used in
the preparation of the March 28, 1998 audited consolidated financial
statements of Polo Ralph Lauren Corporation and subsidiaries ("Polo"). In the
opinion of management, the accompanying consolidated financial statements
reflect all adjustments, consisting only of normal and recurring adjustments,
necessary for a fair presentation of the financial position and results of
operations and cash flows for the periods presented.
Operating results for the three months ended June 27, 1998 and June 28,
1997 are not necessarily indicative of the results that may be expected for a
full year. In addition, the unaudited interim consolidated financial
statements do not include all information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles. These consolidated financial statements
should be read in conjunction with the Company's fiscal 1998 audited
consolidated financial statements.
(B) BASIS OF PRESENTATION
Polo Ralph Lauren Corporation ("PRLC") was incorporated in Delaware in
March 1997. On June 9, 1997, the partners and certain of their affiliates
contributed to PRLC all of the outstanding stock of, and partnership
interests in, the entities which comprise the predecessor group of companies
in exchange for common stock and cash (the "Reorganization"). The
accompanying consolidated financial statements for the three months ended
June 28, 1997 include the combined results of operations of Polo Ralph Lauren
Enterprises, L.P., Polo Ralph Lauren, L.P. and subsidiaries and The Ralph
Lauren Womenswear Company, L.P. and subsidiaries (collectively, the
"Predecessor Company") through June 9, 1997 and the consolidated results of
operations of Polo thereafter (Polo, together with the Predecessor Company,
is referred to herein as the "Company"). The controlling interests of the
Predecessor Company were held by Mr. Ralph Lauren, with a 28.5% interest held
by certain investment funds affiliated with The Goldman Sachs Group, L.P.
(collectively, the "GS Group"). The financial statements of PRLC have not
been included prior to its acquisition of the Predecessor Company because
PRLC was a shell company with no business operations.
The accompanying consolidated financial statements as of and for the
three months ended June 27, 1998 include the results of operations of Polo.
7
<PAGE>
The financial statements of the Predecessor Company are being presented
on a combined basis because of their common ownership. The combined financial
statements have been prepared as if the entities had operated as a single
consolidated group since their respective dates of organization.
All significant intercompany balances and transactions have been
eliminated.
(C) INITIAL PUBLIC OFFERING
On June 17, 1997, the Company completed the sale of 11,170,000 shares of
its Class A Common Stock at $26.00 per share in connection with the its
initial public offering. The net proceeds from the initial public offering,
after deducting underwriting discounts and commissions and offering expenses,
aggregated $268.8 million.
2 SIGNIFICANT ACCOUNTING POLICIES
(A) PRO FORMA ADJUSTMENTS (UNAUDITED)
The pro forma statement of income data for the three months ended June
28, 1997 presents the effects on the historical financial statements of
certain transactions as if they had occurred at March 31, 1996. The pro forma
statement of income data reflects adjustments for: (i) income taxes based
upon pro forma pre-tax income as if the Company had been subject to
additional Federal, state and local income taxes, calculated using a pro
forma effective tax rate of approximately 41.0%; and (ii) the reduction of
interest expense resulting from the application of a portion of the net
proceeds from the initial public offering to outstanding indebtedness.
(B) NET INCOME PER SHARE (UNAUDITED)
Basic net income per share was calculated by dividing net income by the
weighted average number of shares outstanding during the period and excluded
any potential dilution. Diluted net income per share was calculated similarly
but included potential dilution from the exercise of stock options and
awards. The weighted average number of shares outstanding in the three months
ended June 27, 1998 represent the actual number of shares outstanding during
such period. For comparison purposes only, the weighted average number of
shares outstanding immediately following the completion of the initial public
offering were considered to be outstanding in the three months ended June 28,
1997.
(C) RECLASSIFICATIONS
For comparative purposes, certain prior period amounts have been
reclassified to conform to the current year's presentation.
8
<PAGE>
(D) COMPREHENSIVE INCOME
Effective March 29, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE
INCOME. This Statement establishes standards for reporting of comprehensive
income and its components in the financial statements. For the three months
ended June 27, 1998 and June 28, 1997, comprehensive income was equal to net
income.
(E) RECENTLY ISSUED PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. This Statement establishes standards for reporting selected
financial data and descriptive information about an enterprise's reportable
operating segments (as defined). This Statement also requires the
reconciliation of total segment information presented to the corresponding
amounts in the general purpose financial statements. Additionally, SFAS No.
131 establishes standards for related disclosures about products and
services, geographic areas and major customers. The required disclosures, if
any, will be presented in the Company's Annual Report on Form 10-K for the
fiscal year ending April 3, 1999.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This Statement establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires the recognition of all derivatives as either assets or liabilities
in the statement of financial position and measurement of those instruments
at fair value. The accounting for changes in the fair value of a derivative
is dependent upon the intended use of the derivative. SFAS No. 133 is
effective for the Company's first quarter of fiscal year ending April 1, 2000
and retroactive application is not permitted. The Company has not yet
determined whether the application of SFAS No. 133 will have a material
impact on the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") Accounting Standards Executive Committee issued Statement of
Position No. 98-5 ("SOP 98- 5"), REPORTING ON THE COSTS OF START-UP
ACTIVITIES. SOP 98-5 requires that costs of start-up activities, including
organization costs and retail store openings, be expensed as incurred. SOP
98-5 is effective for the Company's fiscal year ending April 1, 2000. The
Company has not yet determined whether the application of SOP 98-5 will have
a material impact on the Company's financial position or results of
operations.
9
<PAGE>
3 INVENTORIES
JUNE 27, MARCH 28,
1998 1998
Raw materials $ 22,070 $ 26,364
Work-in-process 11,479 12,406
Finished goods 324,161 259,715
------- -------
$357,710 $298,485
======== ========
Merchandise inventories of $170.8 million and $130.9 million at June 27,
1998 and March 28, 1998, respectively, were valued utilizing the retail
method and are included in finished goods.
10
<PAGE>
POLO RALPH LAUREN CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO
WHICH ARE INCLUDED HEREIN. THE COMPANY UTILIZES A 52-53 WEEK FISCAL YEAR
ENDING ON THE SATURDAY NEAREST MARCH 31. ACCORDINGLY, FISCAL YEARS 1999 AND
1998 END ON APRIL 3, 1999 AND MARCH 28, 1998, RESPECTIVELY. DUE TO THE
COLLABORATIVE AND ONGOING NATURE OF THE COMPANY'S RELATIONSHIPS WITH ITS
LICENSEES, SUCH LICENSEES ARE REFERRED TO HEREIN AS "LICENSING PARTNERS" AND
THE RELATIONSHIPS BETWEEN THE COMPANY AND SUCH LICENSEES ARE REFERRED TO
HEREIN AS "LICENSING ALLIANCES." NOTWITHSTANDING THESE REFERENCES, HOWEVER,
THE LEGAL RELATIONSHIP BETWEEN THE COMPANY AND ITS LICENSEES IS ONE OF
LICENSOR AND LICENSEE, AND NOT ONE OF PARTNERSHIP.
CERTAIN STATEMENTS CONTAINED IN THIS REPORT CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995 (THE "REFORM ACT"). SEE PART II. OTHER INFORMATION. ITEM 5. -
"STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE."
OVERVIEW
The Company began operations in 1968 as a designer and marketer of
premium quality men's clothing and sportswear. Since inception, the Company,
through internal operations and in conjunction with its licensing partners,
has grown through increased sales of existing product lines, the introduction
of new brands and products, expansion into international markets and
development of its retail operations. The Company's net revenues are
generated from its three integrated operations: wholesale, retail and
licensing alliances. Licensing revenue includes royalties received from home
collection licensing partners.
RESULTS OF OPERATIONS
The following discussion provides information and analysis of the
Company's results of operations for the three months ended June 27, 1998
compared to June 28, 1997. As a result of the Company's initial public
offering completed on June 17, 1997 and the use of a portion of the net
proceeds therefrom to reduce outstanding indebtedness, historical interest
expense is not discussed below because such information is not meaningful.
The effect of income taxes is also not discussed below because the historic
taxation of the operations of the Company is not meaningful with respect to
periods following the Reorganization.
11
<PAGE>
The table below sets forth the percentage relationship to net revenues of
certain items in the Company's statements of income for the three months
ended June 27, 1998 and June 28, 1997:
JUNE 27, JUNE 28,
1998 1997
---- ----
Net sales........................................... 86.7% 88.2%
Licensing revenue................................... 12.1 11.2
Other income........................................ 1.2 0.6
----- -----
Net revenues........................................ 100.0 100.0
----- -----
Gross profit........................................ 50.9 50.6
Selling, general and administrative expenses........ 40.4 40.7
----- -----
Income from operations.............................. 10.5% 9.9%
===== =====
THREE MONTHS ENDED JUNE 27, 1998 COMPARED TO THREE MONTHS ENDED JUNE 28, 1997
NET SALES. Net sales increased 21.8% to $311.2 million in the three
months ended June 27, 1998 from $255.4 million in the three months ended June
28, 1997. Wholesale net sales increased 30.6% to $170.0 million in the three
months ended June 27, 1998 from $130.2 million in the corresponding period of
fiscal 1998. Wholesale growth primarily reflects increased menswear sales
resulting from the timing of shipments to retailers for the summer season and
volume-driven sales increases in existing menswear and womenswear brands.
Retail sales increased by 12.8% to $141.2 million in the three months ended
June 27, 1998 from $125.2 million in the corresponding period in fiscal 1998.
This increase is primarily attributable to the benefit of three months of
operations for three new Polo stores and ten new outlet stores opened in
fiscal 1998 aggregating $15.8 million. At June 27, 1998, the Company operated
28 Polo stores and 75 outlet stores.
LICENSING REVENUE. Licensing revenue increased 33.1% to $43.3 million in
the three months ended June 27, 1998 from $32.5 million in the corresponding
period of fiscal 1998. This increase is primarily attributable to an overall
increase in sales of existing licensed products, particularly Chaps, Lauren
and Polo Jeans, and the Company's continued expansion into international
markets.
GROSS PROFIT. Gross profit as a percentage of net revenues increased to
50.9% in the three months ended June 27, 1998 from 50.6% in the corresponding
period of fiscal 1998. This increase was primarily attributable to
improvements in the Company's retail gross margins which increased slightly
due to an improved initial markup. Additionally, licensing revenue, which has
no associated cost of goods sold, increased as a percentage of net revenues
to 12.1% in the three months ended June 27, 1998 from 11.2% in the
corresponding period in fiscal 1998.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased to $145.0 million or 40.4% of net
revenues in the three months ended June 27, 1998 from $117.9 million or 40.7%
of net revenues in the corresponding period of fiscal 1998. This improvement
in SG&A expenses as a percentage of net revenues was due to expense
leveraging achieved with the Company's revenue growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements primarily derive from working capital
needs, construction and renovation of shop-within-shops, retail expansion and
other corporate activities. The Company's main sources of liquidity are cash
flows from operations and credit facilities.
Net cash provided by operating activities decreased to $3.4 million in
the three months ended June 27, 1998 from $17.0 million in the comparable
period in fiscal 1998. This reduction was driven by changes in accounts
receivable and inventories primarily due to seasonality, timing (i.e.,
shipments and customer remittances) and the overall growth of the business.
These factors were offset by changes in trade accounts payable and other
liabilities as a result of timing of payments. Net cash used for investing
activities decreased to $22.6 million in the three months ended June 27, 1998
from $24.5 million in the comparable period in fiscal 1998. This decrease
principally reflects an increase in capital expenditures offset by the use of
$8.6 million to acquire the operations of Polo Retail Corporation and a $5.0
million investment in a joint venture with a nonaffiliated partner, both of
which investments were made in the quarter ended June 28, 1997. Net cash used
in financing activities increased to $4.4 million in the three months ended
June 27, 1998 from net cash provided by financing activities of $24.2 million
in the comparable period in fiscal 1998. This increase in net cash used
primarily reflects the repurchase of common stock in the three months ended
June 27, 1998 and, in the comparable period in fiscal 1998, net proceeds
received from the initial public offering, offset by the application of a
portion of the net proceeds to repay outstanding indebtedness, scheduled debt
repayments and partner distributions.
On June 9, 1997, the Company entered into a credit facility with a
syndicate of banks which consists of a $225.0 million revolving line of
credit available for the issuance of letters of credit, acceptances and
direct borrowings and matures on December 31, 2002 (the "Credit Facility").
Borrowings under the Credit Facility bear interest, at the Company's option,
at a Base Rate equal to the higher of (i) the Federal Funds Rate, as
published by the Federal Reserve Bank of New York, plus 1/2 of one percent,
and (ii) the prime commercial lending rate of The Chase Manhattan Bank in
effect from time to time, or at the London Interbank Offered Rate plus an
interest margin. The agreement contains customary representations,
warranties, covenants and events of default, including covenants regarding
maintenance of net worth and leverage ratios, limitations on indebtedness and
incurrences of liens, and restrictions on sales of assets and transactions
with affiliates. Additionally, the agreement provides that an event of
default will occur if Mr. Lauren and related entities fail to maintain a
specified minimum percentage of the voting power of the Company's common
stock. As of June 27, 1998, the Company had $3.0 million outstanding in
direct borrowings and was contingently liable for $38.8 million in
outstanding letters of credit under the Credit Facility.
13
<PAGE>
Capital expenditures were $21.6 million and $10.3 million in the three
months ended June 27, 1998 and June 28, 1997, respectively. The increase in
capital expenditures in the three months ended June 27, 1998 represents
primarily expenditures associated with the Company's shop-within-shops
development program which includes new shops, renovations and expansions, as
well as expenditures incurred in connection with the expansion of the
Company's retail operations. The Company plans to invest approximately $120.0
million, net of landlord incentives, over the current fiscal year in its
retail stores, including flagship stores and expansion of its distribution
facility, the shop-within-shops development program and other capital
projects. See Part II. Other Information. Item 5. - "Statement Regarding
Forward-Looking Disclosure."
In March 1998, the Board of Directors authorized the repurchase, subject
to market conditions, of up to $100.0 million of the Company's Class A Common
Stock. Share repurchases under this plan will be made from time to time in
the open market over a two-year period which commenced April 1, 1998. Shares
acquired under the repurchase program will be used for stock option programs
and for other corporate purposes. As of June 27, 1998, the Company had
repurchased 256,900 shares of its Class A Common Stock at an aggregate cost
of $7.2 million.
Management believes that cash from ongoing operations and funds available
under the Credit Facility will be sufficient to satisfy the Company's current
level of operations, capital requirements, stock repurchase program and other
corporate activities for the next twelve months. Additionally, the Company
does not intend to pay dividends on its Common Stock in the next twelve
months. See Part II. Other Information. Item 5. - "Statement Regarding
Forward-Looking Disclosure."
SEASONALITY OF BUSINESS
The Company's 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 to retail customers and key vacation
travel and holiday shopping periods in the retail segment. As a result of the
growth in the Company's retail operations and licensing revenue, historical
quarterly operating trends and working capital requirements may not
accurately reflect future performances. In addition, fluctuations in sales
and operating income in any fiscal quarter may be affected by the timing of
seasonal wholesale shipments and other events affecting retail.
EXCHANGE RATES
Inventory purchases from contract manufacturers in the Far East are
primarily denominated in United States dollars; however, purchase prices for
the Company's products may be affected by fluctuations in the exchange rate
between the United States dollar and the local currencies of the contract
manufacturers, which may have the effect of increasing the Company's cost of
goods sold in the future. During the last two years, exchange rate
fluctuations have not had a material impact on the Company's inventory cost.
Additionally, certain international licensing revenue could be materially
affected by currency fluctuations. From time to time, the Company hedges
certain exposures to foreign currency exchange rate changes arising in the
ordinary course of business.
14
<PAGE>
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. This Statement establishes standards
for reporting selected financial data and descriptive information about an
enterprises' reportable operating segments (as defined). This Statement also
requires the reconciliation of total segment information presented to the
corresponding amounts in the general purpose financial statements.
Additionally, SFAS No. 131 establishes standards for related disclosures
about products and services, geographic areas and major customers. The
required disclosures, if any, will be presented in the Company's Annual
Report on Form 10-K for the fiscal year ending April 3, 1999.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This Statement establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires the recognition of all derivatives as either assets or liabilities
in the statement of financial position and measurement of those instruments
at fair value. The accounting for changes in the fair value of a derivative
is dependent upon the intended use of the derivative. SFAS No. 133 is
effective for the Company's first quarter of fiscal year ending April 1, 2000
and retroactive application is not permitted. The Company has not yet
determined whether the application of SFAS No. 133 will have a material
impact on the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") Accounting Standards Executive Committee issued Statement of
Position No. 98-5 ("SOP 98-5"), REPORTING ON THE COSTS OF START-UP
ACTIVITIES. SOP 98-5 requires that costs of start-up activities, including
organization costs and retail store openings, be expensed as incurred. SOP
98-5 is effective for the Company's fiscal year ending April 1, 2000. The
Company has not yet determined whether the application of SOP 98-5 will have
a material impact on the Company's financial position or results of
operations.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Certain of
the Company's computer programs have date-sensitive software which may
recognize a date using "00" as the year 1900 rather than the year 2000. This
situation could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
15
<PAGE>
Based on an internal assessment, the Company determined that it will be
required to modify or replace portions of its software applications so that
its computer systems will properly utilize dates beyond December 31, 1999.
The Company presently believes that with modifications to existing software
and conversions to new software, the Year 2000 Issue can be mitigated.
However, if such modifications and conversions are not made or are not timely
completed, the Year 2000 Issue could have a material impact on the operations
of the Company.
The Company has initiated formal communications with its significant
suppliers, licensees, transportation carriers, general service providers and
large customers to determine the extent to which the Company is vulnerable to
those third parties' failure to remediate their own Year 2000 Issue. In
addition, third party vendors of hardware and packaged software have been
contacted about their products' compliance status. There can be no guarantee
that the systems of other companies on which the Company's systems rely will
be timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company.
The Company will utilize both internal and external resources to
reprogram, replace and test the software for Year 2000 modifications. The
Company plans to complete the major initiatives of its Year 2000 project
within the current fiscal year. To date, the Company has incurred expenses of
approximately $1.9 million related to the assessment of, and preliminary
efforts in connection with, its Year 2000 project and the development of a
remediation plan. The total remaining cost of the Year 2000 project is
estimated at $4.0 to $5.0 million and is being funded through operating cash
flows. Of the total project cost, approximately $0.5 million is attributable
to the purchase of new software which will be capitalized. The remainder will
be expensed as incurred.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ materially
from those plans.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved from time to time in various legal proceedings
arising in the ordinary course of business. In the opinion of the Company's
management, the resolution of any matter currently pending will not have a
material effect on the financial condition or results of operations of the
Company.
ITEM 5. OTHER INFORMATION.
SHAREHOLDER PROPOSALS
Any shareholder proposal submitted with respect to the Company's 1999
Annual Meeting of Shareholders, which proposal is submitted outside the
requirements of Rule 14a-8 under the Securities Exchange Act of 1934, will be
considered untimely for purposes of Rules 14a-4 and 14a-5 if notice thereof
is received by the Company after June 14, 1999.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
Certain statements in this Form 10-Q and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases,
and in oral statements made by or with the approval of an authorized
executive officer constitute "forward-looking statements" within the meaning
of the Reform Act. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors, which may cause the actual results,
performance or achievements of the Company to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the
following: risks associated with changes in the competitive marketplace,
including the introduction of new products or pricing changes by the
Company's competitors; changes in global economic conditions; risks
associated with the Company's dependence on sales to a limited number of
large department store customers and risks related to extending credit to
customers; risks associated with the Company's dependence on its licensing
partners for a substantial portion of its net income and risks associated
with a lack of operational and financial control over licensed businesses;
risks associated with consolidations, restructurings and other ownership
changes in the retail industry; uncertainties relating to the Company's
ability to implement its growth strategy; risks associated with the possible
adverse impact of the inability of the Company's unaffiliated manufacturers
to manufacture in a timely manner, to meet quality standards or to use
acceptable labor practices; risks associated with changes in social,
political, economic and other conditions affecting foreign operations and
sourcing; and, the possible adverse impact of changes in import restrictions.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits--
27.1 Financial Data Schedule
(b) Reports on Form 8-K--
No reports on Form 8-K were filed by the Company in the quarter ended
June 27, 1998.
18
<PAGE>
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
Date: August 11, 1998 By: /s/ Nancy A. Platoni Poli
-----------------------------
Nancy A. Platoni Poli
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
19
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