Polo Ralph Lauren Corporation today reported net income of $23.4 million, or $0.22 per diluted share, for the fourth quarter of Fiscal 2005 compared to net income of $76.4 million, or $0.75 per diluted share, for the fourth quarter of Fiscal 2004. For Fiscal Year 2005, net income was $190.4 million, or $1.83 per diluted share, compared to net income of $169.2 million, or $1.68 per diluted share, for Fiscal Year 2004. The Fiscal Year 2004 results presented above have been restated to reflect the accounting for leases as discussed below in greater detail.
Adjusted net income was $85.1 million, or $0.81 per diluted share, for the fourth quarter of Fiscal 2005 compared to $80.4 million, or $0.79 per diluted share, for the fourth quarter of Fiscal 2004. Adjusted net income was $257.2 million, or $2.47 per diluted share, for Fiscal Year 2005 compared to $184.7 million, or $1.83 per diluted share, for Fiscal Year 2004. Adjusted results exclude a litigation reserve, a reserve associated with alleged breach of the company's retail computer systems, the foreign currency effect of certain transactions involving our European operations, an adjustment in accounting for leases, the results of Ralph Lauren Media, and restructuring charges.
The Company reports all financial results in accordance with U.S. Generally Accepted Accounting Principles (GAAP), but management believes that the supplemental presentation of results adjusted to exclude these items provides investors with useful information regarding the Company's core business results. The Company does not suggest that investors should consider adjusted results in isolation from or as a substitute for financial information prepared in accordance with GAAP. For a full analysis of the adjustments, please refer to the reconciliation tables of GAAP results to adjusted results.
“Our results for Fiscal Year 2005 underscore the strength of our unique business, which continues to deliver strong growth and profitability,” said Ralph Lauren, Chairman and Chief Executive Officer. “We are successful because we remain consistent to our vision. Our company has never been stronger and we continue to be a leader across all products, regions and customer segments.”
“We executed well strategically and financially this year,” said Roger Farah, President and Chief Operating Officer. “Our company focus continues to be on generating strong operating cash flow by being in control of the growth of our brands and by fine tuning our global operations.”
Fourth Quarter and Full Year Fiscal 2005 Income Statement Review
Net revenues for the fourth quarter increased 10.2% to $902.2 million compared to $818.8 million in the fourth quarter last year. Our wholesale revenues were $543.0 million, up 10.0% over last year, driven by the inclusion of childrenswear in our wholesale segment and increases in Europe and our womenswear brands. Wholesale revenues also reflect a decrease in our menswear as we continue to strategically reposition the Polo brand into more appropriate distribution channels and reduce sales into the secondary market. Based on a 13-week fourth quarter in Fiscal 2005, reported retail sales grew 12.2% to $291.5 million compared to $259.9 million in the 14-week fourth quarter last year, with comparable store sales down 4.2%. We believe it is more relevant to discuss comparable store sales excluding last year's 14th week and on that basis comparable store sales increased 4.1% in the quarter. Licensing revenues increased 3.5% reflecting the positive performance of our men's Chaps line domestically and strength in our international licensing, which more than offset the absence of royalty income associated with the previously licensed childrenswear line.
Net revenues for the full year increased 24.7% to $3.305 billion compared to $2.650 billion last year. Our wholesale revenues were $1.712 billion, up 41.4% over last year, driven by our womenswear brands, childrenswear and increases in Europe. Wholesale revenues also reflect a decrease in our menswear as we continue to strategically reposition the Polo brand into more appropriate distribution channels and reduce sales into the secondary market. Based on a 52-week year in Fiscal 2005, reported retail sales grew 15.2% to $1.349 billion compared to $1.170 billion in the 53-week year last year, with comparable store sales up 4.4%. We believe it is more relevant to discuss comparable store sales excluding last year's additional week and on that basis comparable store sales increased 6.3% in Fiscal 2005. Licensing revenues decreased 9.0% reflecting the absence of the Lauren and childrenswear lines, partially offset by the positive performance of our Chaps for men line in the United States and strength in our international licensing.
For the fourth quarter of Fiscal 2005, gross profit was $476.9 million, an increase of 22%, compared to $391.0 million in the fourth quarter of Fiscal 2004. The increased gross profit was generated primarily by the addition of childrenswear and the inclusion of Ralph Lauren Media, as well as strong increases in Europe. Gross profit also reflects improved performance in our Ralph Lauren retail stores, both in the U.S. and Europe. Gross margin improved 510 basis points in the fourth quarter to 52.9% of revenues compared to 47.8% last year, reflecting improvements in both our wholesale and retail segments.
For the full year Fiscal 2005, gross profit was $1.685 billion, an increase of 27.3%, compared to $1.323 billion in Fiscal 2004. The increased gross profit was generated primarily by our wholesale segment, reflecting the addition of Lauren, childrenswear and Ralph Lauren Media, as well as increases in Europe. Gross profit also reflects improved performance in our retail segment partially offset by a decrease in our licensing royalty. Gross margin improved 110 basis points to 51% of net revenues compared to 49.9% last year, reflecting improvements in both our wholesale and retail segments.
In the fourth quarter, operating expenses were $435.4 million and included the following:
– a charge of $100 million associated with the Jones Apparel litigation following the Appellate Division's March 24, 2005 decision.
– a charge of $6.2 million associated with alleged breach of the company's retail computer systems including penalties, monitoring expenses and credit card re issuance costs and other related claims. Although we have taken a charge we plan to vigorously contest both the appropriateness and amount of these penalties and claims and to continue to explore possible claims against others.
– expense of $1.3 million related to an adjustment in accounting for leases in the fourth quarter of Fiscal 2005 and $0.1 million in the fourth quarter of Fiscal 2004. This adjustment to our accounting for leases requires restatement of prior periods reflecting a change in the timing of rent expense recognition at lease inception from current practice of recording rent expense beginning at the opening date of a location. Additionally, the restatement will include an adjustment to our accounting for tenant allowances.
– a restructuring charge of $0.5 million in the fourth quarter of Fiscal 2005 and $3.6 million in the fourth quarter of Fiscal 2004 related to operational consolidation efforts in Europe.
Excluding these items, operating expenses in the fourth quarter were $327.4 million compared to $262.6 million in the fourth quarter last year. The increase in operating expenses was driven primarily by the inclusion of expenses for childrenswear and Ralph Lauren Media, as well as increased spending in Europe to grow our wholesale and retail businesses there, increased spending in the United States associated with the expansion of our specialty retail stores, including Rugby, and costs associated with the newly required implementation of Sarbanes Oxley.
For the full year fiscal 2005, operating expenses were $1.385 billion and included the following:
– a charge of $100 million associated with the Jones Apparel litigation
– a charge of $6.2 million associated with the alleged breach of the company's retail computer systems.
– expense of $5.8 million related to adjustments in accounting for leases in Fiscal 2005 and $2.9 million in Fiscal 2004.
– a restructuring charge of $2.3 million in Fiscal 2005 and $19.6 million in Fiscal 2004 related to operational consolidation efforts in Europe.
Excluding these items, operating expenses were $1.270 billion compared to $1.029 billion last year. The increase in operating expenses was driven primarily by the inclusion of expenses for childrenswear, Lauren, and Ralph Lauren Media, as well as higher spending in Europe to grow our wholesale and retail businesses there and increased spending in the United States associated with the expansion of our specialty retail stores.
Operating income for the fourth quarter decreased 66.7% to $41.5 million compared to $124.7 million in the fourth quarter last year. Operating income, excluding the $108.0 million of above listed items, was $149.5 million, compared to $128.4 million, excluding the $3.7 million of the above listed items last year, representing a gain of 16%.
Operating income for the full year increased 10.6% to $299.7 million compared to $270.9 million last year. Operating income, excluding the $114.3 million of above listed items, was $414.0 million, compared to $293.4 million, excluding the $22.5 million of above listed items last year, which represents a 42% increase.
Consolidation of Ralph Lauren Media
In February 2000 we announced the formation of Ralph Lauren Media, a joint venture with National Broadcasting Company, Inc. and certain affiliated companies (“NBC”) to bring the Ralph Lauren lifestyle to consumers via multiple media platforms, including the Internet (primarily Polo.com). Under this 30-year joint venture agreement, Ralph Lauren Media is owned 50% by us and 50% by NBC. The Company has used the equity method of accounting for this investment since inception. At the end of the fourth quarter of Fiscal 2005 the Company determined that under FASB Interpretation 46R, consolidation of Ralph Lauren Media into its financial statements was required as of April 3, 2004. The presented balance sheet data as of April 3, 2004, has been restated to include the assets and liabilities of Ralph Lauren Media. There was no effect on prior years' reported earnings.
– In the fourth quarter comparable retail store sales, based on a 13-week fourth quarter in Fiscal 2005 and Fiscal 2004, increased 4.1% overall. Comparable retail store sales increased 3.1% at Ralph Lauren stores and 5.6% in our outlet stores and decreased 1.9% at Club Monaco stores. Comparable retail store sales increased 6.3% overall for the full fiscal year, with Ralph Lauren stores increasing 8.2%, outlet stores increasing 5.7% and Club Monaco stores increasing 5.2%.
– Our strategic store expansion plan continues on track with the opening of twenty stores globally during the fiscal year. In the fourth quarter we continued the roll-out of our Rugby stores, a new concept store with a full lifestyle collection targeting 18 to 25 year old men and women customers, by opening stores in Chapel Hill, NC, and Charlottesville, VA, bringing the total to three Rugby stores opened this year.
– We continued to expand our executive talent with the addition of Scott Bowman as President, International Business Development, with responsibility for our owned and licensed businesses in Japan, Far East Asia, Australia and South and Central America and the promotion of Susie McCabe to President, Factory Stores, with global responsibility for the operations of our factory outlet stores in the United States and internationally.
– As part of our development of a global luxury accessories business, we signed a definitive agreement to acquire Ralph Lauren Footwear Co., Inc., our global licensee for footwear for men, women and children, for $110 million in cash. We expect the transaction to close later this month.
– Building on the positive customer response to our expanded lifestyle Chaps for men line, we plan to design, develop, produce and deliver Chaps for women, a new classic sportswear look for Missy sizes, and Chaps for boys, sizes four to 20. In addition, we have entered into a one-year exclusive arrangement with Kohl's to sell Chaps for women and Chaps for boys in all of their locations beginning in the spring of 2006.
Fiscal 2005 Form 10-K
The Company will restate its financial statements for Fiscal 2001 through Fiscal 2004 and the first three quarters of Fiscal 2005 to reflect the adjustments to its accounting for leases and Ralph Lauren Media. As a result, these financial statements and the independent auditor reports should no longer be relied upon. The Company intends to defer its Form 10-K filing to July 1, 2005.
At the end of the fourth quarter, we operated 278 stores, with 2.2 million square feet, compared to 261 stores, with 2.0 million square feet, at the end of the fourth quarter last year. Our retail group consisted of 58 Ralph Lauren stores, three Rugby stores, 69 Club Monaco stores, 124 Polo factory outlet stores, 19 Polo Jeans Co. factory outlet stores, and five Club Monaco outlet stores. During the fourth quarter we opened five stores and closed five.
Fiscal 2006 Outlook
The company reiterated that for Fiscal Year 2006 earnings per share are expected to be in the range of $2.75 to $2.85. These projected results include the expected dilution from the acquisition of Ralph Lauren Footwear, the negative effect of the adjustment in accounting for leases and the contribution of Ralph Lauren Media. The Company projects mid-single digit percent consolidated revenue growth, reflecting approximately low single digit growth in wholesale sales, high single digit growth in retail sales and flat licensing royalty. Gross Profit is expected to expand significantly while S, G & A is expected to increase due to the inclusion of footwear in the wholesale segment. Operating margins are expected to improve approximately 100 basis points. The consolidated tax rate is expected to be 35.5% and the Company expects to have approximately 106 million shares outstanding.
The Company expects the earnings results of the first half of Fiscal 2006 to exceed the first half of Fiscal 2005 and the second half of Fiscal 2006 to exceed the second half of Fiscal 2005. As a percentage of annual profits, the first quarter of the year, or the June-end quarter, is the smallest quarter due to less wholesale shipments for the summer compared to other seasons. The Company expects the profits in the second quarter to be the largest in the year.
For the first quarter of Fiscal 2006, the Company expects consolidated revenues to increase more than 20%, reflecting more than 25% growth in wholesale sales, 10% growth in retail sales including Ralph Lauren Media and a slight decrease in licensing royalty. Operating income is expected to increase significantly with operating margin almost doubling last year's. The Company expects the tax rate to be 35.5% and shares outstanding to be between 105 million and 106 million shares.
Change in Segment Reporting
The Company operates in three integrated business segments – wholesale, retail and licensing – and has historically fully allocated corporate overhead expenses to each segment. The Company is changing its corporate overhead allocations to reflect how management presently views its business. The Company is finalizing the allocations for its Fiscal 2005 segment reporting and will include such information in its 10-K to be filed by July 1, 2005. The Company also will report the previous years in a comparable manner.