Edgar Filing: RALPH LAUREN CORP

Six Months Ended

September 28,
2013

September 29,
2012

Expected term (years)

Expected volatility

RL-2013.09.28-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 28, 2013



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-13057

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 (Zip Code)
(Address of principal executive offices)

(212) 318-7000

(Registrant’s telephone number, including area code)

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 registrant was 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	þ	Accelerated filer	o
Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

At November 1, 2013, 60,459,130 shares of the registrant’s Class A common stock, $.01 par value, and 29,881,276 shares of the registrant’s Class B common stock, $.01 par value, were outstanding.

RALPH LAUREN CORPORATION

INDEX



		Page

PART I. FINANCIAL INFORMATION (Unaudited)
Item 1.	Financial Statements:
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	54
Item 4.	Controls and Procedures	54

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 6.	Exhibits	57
Signatures		58

EX-12.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101	INSTANCE DOCUMENT
EX-101	SCHEMA DOCUMENT
EX-101	CALCULATION LINKBASE DOCUMENT
EX-101	LABELS LINKBASE DOCUMENT
EX-101	PRESENTATION LINKBASE DOCUMENT
EX-101	DEFINITION LINKBASE DOCUMENT

RALPH LAUREN CORPORATION

CONSOLIDATED BALANCE SHEETS



	September 28, 2013			March 30, 2013
	(millions) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	839		$	974
Short-term investments	572			325
Accounts receivable, net of allowances of $285 million and $245 million	577			458
Inventories	1,215			896
Income tax receivable	34			29
Deferred tax assets	119			120
Prepaid expenses and other current assets	202			161
Total current assets	3,558			2,963
Non-current investments	7			81
Property and equipment, net	1,280			932
Deferred tax assets	22			22
Goodwill	967			968
Intangible assets, net	318			328
Other non-current assets	114			124
Total assets	$	6,266		$	5,418
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	283		$	267
Accounts payable	219			147
Income tax payable	22			43
Accrued expenses and other current liabilities	694			664
Total current liabilities	1,218			1,121
Long-term debt	300			—
Non-current liability for unrecognized tax benefits	155			150
Other non-current liabilities	602			362
Commitments and contingencies (Note 14)
Total liabilities	2,275			1,633
Equity:
Class A common stock, par value $.01 per share; 94.5 million and 93.6 million shares issued; 60.5 million and 61.0 million shares outstanding	1			1
Class B common stock, par value $.01 per share; 29.9 million shares issued and outstanding	—			—
Additional paid-in-capital	1,884			1,752
Retained earnings	4,961			4,647
Treasury stock, Class A, at cost; 34.0 million and 32.6 million shares	(2,969		)	(2,709		)
Accumulated other comprehensive income	114			94
Total equity	3,991			3,785
Total liabilities and equity	$	6,266		$	5,418

See accompanying notes.

RALPH LAUREN CORPORATION

CONSOLIDATED STATEMENTS OF INCOME



	Three Months Ended						Six Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
	(millions, except per share data) (unaudited)
Net sales	$	1,872		$	1,816		$	3,486		$	3,367
Licensing revenue	43			46			82			88
Net revenues	1,915			1,862			3,568			3,455
Cost of goods sold^(a)	(831		)	(767		)	(1,480		)	(1,368		)
Gross profit	1,084			1,095			2,088			2,087
Selling, general, and administrative expenses^(a)	(779		)	(741		)	(1,514		)	(1,434		)
Amortization of intangible assets	(10		)	(6		)	(19		)	(13		)
Gain on acquisition of Chaps	—			—			16			—
Total other operating expenses, net	(789		)	(747		)	(1,517		)	(1,447		)
Operating income	295			348			571			640
Foreign currency gains (losses)	1			—			(5		)	(3		)
Interest expense	(7		)	(6		)	(12		)	(11		)
Interest and other income, net	2			2			4			3
Equity in losses of equity-method investees	(3		)	(2		)	(5		)	(3		)
Income before provision for income taxes	288			342			553			626
Provision for income taxes	(83		)	(128		)	(167		)	(219		)
Net income	$	205		$	214		$	386		$	407
Net income per common share:
Basic	$	2.28		$	2.34		$	4.27		$	4.44
Diluted	$	2.23		$	2.29		$	4.17		$	4.32
Weighted average common shares outstanding:
Basic	90.4			91.3			90.6			91.7
Diluted	92.2			93.4			92.6			94.2
Dividends declared per common share	$	0.40		$	0.40		$	0.80		$	0.80
^(a) Includes total depreciation expense of:	$	(56	)	$	(51	)	$	(107	)	$	(100	)

See accompanying notes.

RALPH LAUREN CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Three Months Ended						Six Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
	(millions) (unaudited)
Net income	$	205		$	214		$	386		$	407
Other comprehensive income, net of tax:
Foreign currency translation adjustments	50			42			48			1
Net losses on derivative financial instruments	(18		)	(9		)	(23		)	(3		)
Net gains (losses) on available-for-sale investments	—			3			(5		)	3
Other comprehensive income, net of tax	32			36			20			1
Total comprehensive income	$	237		$	250		$	406		$	408

See accompanying notes.

RALPH LAUREN CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Six Months Ended
	September 28, 2013			September 29, 2012
	(millions) (unaudited)
Cash flows from operating activities:
Net income	$	386		$	407
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	126			113
Deferred income tax expense (benefit)	(16		)	5
Equity in losses of equity-method investees	5			3
Non-cash stock-based compensation expense	43			43
Gain on acquisition of Chaps	(16		)	—
Excess tax benefits from stock-based compensation arrangements	(20		)	(26		)
Other non-cash benefits, net	—			(1		)
Changes in operating assets and liabilities:
Accounts receivable	(93		)	(56		)
Inventories	(271		)	(216		)
Accounts payable and accrued liabilities	61			37
Income tax receivables and payables	(12		)	(10		)
Deferred income	(11		)	(16		)
Other balance sheet changes, net	38			24
Net cash provided by operating activities	220			307
Cash flows from investing activities:
Acquisitions and ventures, net of cash acquired and purchase price settlements	(36		)	(10		)
Purchases of investments	(644		)	(609		)
Proceeds from sales and maturities of investments	492			647
Capital expenditures	(214		)	(117		)
Change in restricted cash deposits	(6		)	7
Net cash used in investing activities	(408		)	(82		)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	300			—
Payments of capital lease obligations	(5		)	(4		)
Payments of dividends	(73		)	(55		)
Repurchases of common stock, including shares surrendered for tax withholdings	(210		)	(347		)
Proceeds from exercise of stock options	19			26
Excess tax benefits from stock-based compensation arrangements	20			26
Net cash provided by (used in) financing activities	51			(354		)
Effect of exchange rate changes on cash and cash equivalents	2			1
Net decrease in cash and cash equivalents	(135		)	(128		)
Cash and cash equivalents at beginning of period	974			672
Cash and cash equivalents at end of period	$	839		$	544

See accompanying notes.

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share data and where otherwise indicated)

(Unaudited)


1.	Description of Business

Ralph Lauren Corporation (“RLC”) is a global leader in the design, marketing, and distribution of premium lifestyle products, including men’s, women’s, and children’s apparel, accessories, fragrances, and home furnishings. RLC’s long-standing reputation and distinctive image have been consistently developed across an expanding number of products, brands, and international markets. RLC’s brand names include Ralph Lauren Women’s Collection, Purple Label, Black Label, Blue Label, Polo Ralph Lauren, RRL, Ralph Lauren Childrenswear, Lauren by Ralph Lauren, RLX Ralph Lauren, Denim & Supply Ralph Lauren, Ralph Lauren, Chaps, and Club Monaco, among others. RLC 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 Company’s wholesale sales are made principally to major department stores and specialty stores located mainly throughout North America, Europe, Asia, and Latin America. The Company also sells directly to consumers through its integrated retail channel, which includes retail stores located throughout North America, Europe, Asia, Australia, and New Zealand; concession-based shop-within-shops located in Asia, Australia, New Zealand, and Europe; and its retail e-commerce operations in North America, Europe, and Asia. The Company also licenses the right to unrelated third parties to operate retail stores and to use its various trademarks in connection with the manufacture and sale of designated products, such as apparel, eyewear, and fragrances, in specified geographic areas for specified periods.


2.	Basis of Presentation

Interim Financial Statements

These interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and are unaudited. In the opinion of management, such consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the consolidated financial position, income, comprehensive income, and 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 accounting principles generally accepted in the U.S. (“U.S. GAAP”) have been condensed or omitted from this report as is permitted by the SEC’s rules and regulations. However, the Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading.

This report should be read in conjunction with the Company's Annual Report on Form 10-K filed with the SEC for the fiscal year ended March 30, 2013 (the “Fiscal 2013 10-K”).

Basis of Consolidation

The unaudited interim consolidated financial statements present the financial position, income, comprehensive income, and cash flows of the Company, including all entities in which the Company has a controlling financial interest and is determined to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.

Fiscal Year

The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to March 31. As such, fiscal year 2014 will end on March 29, 2014 and will be a 52-week period (“Fiscal 2014”). Fiscal year 2013 ended on March 30, 2013 and was also a 52-week period (“Fiscal 2013”). The second quarter of Fiscal 2014 ended on September 28, 2013 and was a 13-week period. The second quarter of Fiscal 2013 ended on September 29, 2012 and was also a 13-week period.

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Use of Estimates

The preparation of financial statements in conformity with U.S. 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 consolidated financial statements include reserves for bad debt, customer returns, discounts, end-of-season markdowns, and operational chargebacks; the realizability of inventory; reserves for litigation and other contingencies; useful lives and impairments of long-lived tangible and intangible assets; accounting for income taxes and related uncertain tax positions; the valuation of stock-based compensation and related expected forfeiture rates; reserves for restructuring; and accounting for business combinations, among others.

Reclassifications

Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation.

Seasonality of Business

The Company’s business is typically 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 shopping periods in the Retail segment. In addition, fluctuations in sales, operating income, and cash flows in any fiscal quarter may be affected by other events affecting retail sales, such as changes in weather patterns. Accordingly, the Company’s operating results and cash flows for the six months ended September 28, 2013 are not necessarily indicative of the operating results and cash flows that may be expected for the full Fiscal 2014.


3.	Summary of Significant Accounting Policies

Revenue Recognition

Revenue is recognized across all segments of the business when there is persuasive evidence of an arrangement, delivery has occurred, price has been fixed or is determinable, and collectability is reasonably assured.

Revenue within the Company’s 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, operational chargebacks, and certain cooperative advertising allowances. Returns and allowances require pre-approval from management and discounts are based on trade terms. Estimates for end-of-season markdown reserves are based on historical trends, actual and forecasted seasonal results, an evaluation of current economic and market conditions, retailer performance, and, in certain cases, contractual terms. Estimates for operational chargebacks are based on actual notifications of order fulfillment discrepancies and historical trends. The Company reviews and refines these estimates on at least a quarterly basis. The Company’s historical estimates of these costs have not differed materially from actual results.

Retail store and concession-based shop-within-shop revenue is recognized net of estimated returns at the time of sale to customers. E-commerce revenue from sales of products ordered through the Company’s retail Internet sites is recognized upon delivery and receipt of the shipment by its customers. Such revenue is also reduced by an estimate of returns.

Gift cards issued by the Company are recorded as a liability until they are redeemed, at which point revenue is recognized. The Company recognizes income for unredeemed gift cards when the likelihood of a gift card being redeemed by a customer is remote and the Company determines that it does not have a legal obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property.

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revenue from licensing arrangements is recognized when earned in accordance with the terms of the underlying agreements, generally based upon the higher of (i) contractually guaranteed minimum royalty levels or (ii) actual sales and royalty data, or estimates thereof, received from the Company’s licensees.

The Company accounts for sales taxes and other related taxes on a net basis, excluding such taxes from revenue.

Shipping and Handling Costs

The costs associated with shipping goods to customers are reflected as a component of selling, general, and administrative (“SG&A”) expenses in the unaudited interim consolidated statements of income. Shipping costs were $9 million during each of the three-month periods ended September 28, 2013 and September 29, 2012, and $17 million during each of the six-month periods ended September 28, 2013 and September 29, 2012. The costs of preparing merchandise for sale, such as picking, packing, warehousing, and order charges (“handling costs”) are also included in SG&A expenses. Handling costs were $52 million and $91 million during the three-month and six-month periods ended September 28, 2013, respectively, and $38 million and $74 million during the three-month and six-month periods ended September 29, 2012, respectively. Shipping and handling costs billed to customers are included in revenue.

Net Income per Common Share

Basic net income per common share is computed by dividing net income applicable to common shares by the weighted-average number of common shares outstanding during the period. Weighted-average common shares include shares of the Company’s 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 ("RSUs"), and any other potentially dilutive financial instruments, only in the periods in which such effects are 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 shares used to calculate diluted net income per common share as follows:



	Three Months Ended		Six Months Ended
	September 28, 2013	September 29, 2012	September 28, 2013	September 29, 2012
	(millions)
Basic shares	90.4	91.3	90.6	91.7
Dilutive effect of stock options, restricted stock and RSUs	1.8	2.1	2.0	2.5
Diluted shares	92.2	93.4	92.6	94.2

All earnings per share amounts have been calculated based on unrounded numbers. Options to purchase shares of the Company's common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive and therefore not included in the computation of diluted net income per common share. In addition, the Company has outstanding RSUs that are issuable only upon the achievement of certain service and/or performance goals. Performance-based restricted stock units are included in the computation of diluted shares only to the extent that the underlying performance conditions (and any applicable market condition modifiers) (i) are satisfied as of the end of the reporting period or (ii) would be satisfied if the end of the reporting period were the end of the related contingency period and the result would be dilutive under the treasury stock method. As of September 28, 2013 and September 29, 2012, there were approximately 1.2 million and 1.3 million, respectively, additional shares issuable upon exercise of anti-dilutive options and contingent vesting of performance-based RSUs which were excluded from the diluted share calculations.

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accounts Receivable

In the normal course of business, the Company extends credit to wholesale customers that satisfy defined credit criteria. Accounts receivable, net is recorded at carrying value, which approximates fair value, and is presented in the Company's consolidated balance sheets net of certain reserves and allowances. These reserves and allowances consist of (i) reserves for returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances (see Revenue Recognition for further discussion of related accounting policies) and (ii) allowances for doubtful accounts.

A rollforward of the activity in the Company’s reserves for returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances is presented below:



	Three Months Ended						Six Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
	(millions)
Beginning reserve balance	$	245		$	228		$	230		$	247
Amount charged against revenue to increase reserve	219			191			379			329
Amount credited against customer accounts to decrease reserve	(196		)	(172		)	(343		)	(323		)
Foreign currency translation	2			4			4			(2		)
Ending reserve balance	$	270		$	251		$	270		$	251

An allowance for doubtful accounts is determined through analysis of periodic aging of accounts receivable, assessments of collectability based on an evaluation of historical and anticipated trends, the financial condition of the Company’s customers, and an evaluation of the impact of economic conditions, among other factors. The Company’s allowance for doubtful accounts was $15 million as of both September 28, 2013 and March 30, 2013. The changes in the allowance for doubtful accounts were not material during the three-month and six-month periods ended September 28, 2013 and September 29, 2012.

Concentration of Credit Risk

The Company sells its wholesale merchandise primarily to major department and specialty stores located mainly throughout North America, Europe, Asia, and Latin America, and extends credit based on an evaluation of each customer’s financial capacity and condition, usually without requiring collateral. In the Company’s wholesale business, concentration of credit risk is relatively limited due to the large number of customers and their dispersion across many geographic areas. However, the Company has three key wholesale customers that generate significant sales volume. During Fiscal 2013, the Company's sales to its largest wholesale customer, Macy's, Inc. ("Macy's"), accounted for approximately 12% of its total net revenues. Further, the Company's sales to its three key wholesale customers, including Macy's, represented approximately 20% of total net revenues during Fiscal 2013. As of September 28, 2013, these three key wholesale customers represented approximately 35% of gross accounts receivable.

Derivative Financial Instruments

The Company records all derivative financial instruments on its consolidated balance sheets at fair value. For derivative instruments that qualify for hedge accounting, the effective portion of changes in their fair value is either (i) offset against the changes in fair value of the hedged assets, liabilities, or firm commitments through earnings or (ii) recognized in equity as a component of accumulated other comprehensive income ("AOCI") until the hedged item is recognized in earnings, depending on whether the derivative is being used to hedge changes in fair value or cash flows, respectively.

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Each derivative instrument entered into by the Company that qualifies for hedge accounting is expected to be highly effective at reducing the risk associated with the exposure being hedged. For each derivative instrument that is designated as a hedge, the Company formally documents the related risk management objective and strategy, including identification of the hedging instrument, the hedged item, and the risk exposure, as well as how hedge effectiveness will be assessed prospectively and retrospectively over the term of the instrument. To assess the effectiveness of derivative instruments that are designated as hedges, the Company uses regression analysis, a statistical method, to compare the change in the fair value of the derivative instrument to the change in the fair value or cash flows of the related hedged item. The extent to which a hedging instrument has been and is expected to continue to be highly effective in achieving offsetting changes in fair value or cash flows is assessed and documented by the Company on at least a quarterly basis.

To the extent that a derivative instrument designated as a cash flow hedge is not considered to be effective, any change in its fair value relating to such ineffectiveness is immediately recognized in earnings within foreign currency gains (losses). If it is determined that a derivative instrument has not been highly effective, and will continue not to be highly effective in hedging the designated exposure, hedge accounting is discontinued and further gains (losses) are recognized in earnings within foreign currency gains (losses). Upon discontinuance of hedge accounting, the cumulative change in fair value of the derivative instrument previously recorded in AOCI is recognized in earnings when the related hedged item affects earnings, consistent with the original hedging strategy, unless the forecasted transaction is no longer probable of occurring, in which case the accumulated amount is immediately recognized in earnings within foreign currency gains (losses).

As a result of the use of derivative instruments, the Company is exposed to the risk that the counterparties to such contracts will fail to meet their contractual obligations. To mitigate this counterparty credit risk, the Company has a policy of only entering into contracts with carefully selected financial institutions based upon an evaluation of their credit ratings and certain other financial factors, adhering to established limits for credit exposure. The Company’s established policies and procedures for mitigating credit risk from derivative transactions include ongoing review and assessment of the creditworthiness of counterparties. The Company also enters into master netting arrangements with counterparties, when possible, to mitigate credit risk associated with its derivative instruments. In the event of default or termination (as such terms are defined within the respective master netting arrangement), these arrangements allow the Company to net-settle amounts payable and receivable related to multiple derivative transactions with the same counterparty. The master netting arrangements specify a number of events of default and termination, including, among others, the failure to make timely payments.

The fair values of the Company’s derivative instruments are recorded on its consolidated balance sheets on a gross basis. For cash flow reporting purposes, the Company classifies proceeds received or amounts paid upon the settlement of a derivative instrument in the same manner as the related item being hedged.

Forward Foreign Currency Exchange Contracts

The Company primarily enters into forward foreign currency exchange contracts as hedges to reduce its risks related to exchange rate fluctuations on inventory purchases, intercompany royalty payments made by certain of its international operations, intercompany contributions made to fund certain marketing efforts of its international operations, and other foreign currency-denominated operational cash flows. To the extent forward foreign currency exchange contracts designated as cash flow hedges are highly effective in offsetting changes in the value of the hedged items, the related gains (losses) are initially deferred in equity as a component of AOCI and subsequently recognized in the consolidated statements of income as follows:


•	Forecasted Inventory Purchases — Recognized as part of the cost of the inventory purchases being hedged within cost of goods sold when the related inventory is sold.


•	Intercompany Royalty Payments and Marketing Contributions — Recognized within foreign currency gains (losses) generally in the period in which the related payments or contributions being hedged are received or paid.

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Hedge of a Net Investment in a Foreign Operation

Changes in the fair value of a derivative instrument or a non-derivative financial instrument (such as debt) that is designated as a hedge of a net investment in a foreign operation are reported in the same manner as a translation adjustment, to the extent it is effective as a hedge. In assessing the effectiveness of a non-derivative financial instrument that is designated as a hedge of a net investment, the Company uses the spot rate method of accounting to remeasure the impact of foreign currency exchange rate changes on both its foreign subsidiaries and the financial instrument. If the notional amount of the financial instrument designated as a hedge of a net investment is greater than the portion of the net investment being hedged, hedge ineffectiveness is recognized immediately in earnings within foreign currency gains (losses). To the extent the financial instrument remains effective, changes in its value are recorded in equity as foreign currency translation gains (losses), a component of AOCI, until the sale or liquidation of the hedged net investment.

Undesignated Hedges

All of the Company’s undesignated hedges are entered into to hedge specific economic risks, such as foreign currency exchange rate risk. Changes in the fair value of undesignated derivative instruments are immediately recognized in earnings within foreign currency gains (losses).

See Note 13 for further discussion of the Company’s derivative financial instruments.

Refer to Note 3 in the Fiscal 2013 10-K for a summary of all of the Company’s significant accounting policies.


4.	Recently Issued Accounting Standards

Disclosure of Offsetting Assets and Liabilities

In December 2011, the FASB issued new, expanded disclosure requirements for financial instruments surrounding an entity’s rights of offset and related counterparty arrangements as ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). ASU 2011-11 requires disclosure of both “gross” and “net” information for recognized financial instruments (including derivatives) that are (i) eligible for offset and presented “net” in the balance sheet or (ii) subject to enforceable master netting agreements, irrespective of whether an entity actually offsets and “net presents” such instruments in the balance sheet. ASU 2011-11 also requires disclosure of any collateral received or posted in connection with master netting agreements or similar arrangements. In January 2013, the FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” which limited the scope of ASU 2011-11 to derivatives accounted for in accordance with ASC topic 815, “Derivatives and Hedging,” and securities borrowing and lending transactions. The Company adopted the provisions of ASU 2011-11 as of the beginning of the first quarter of Fiscal 2014, which resulted in expanded financial instrument disclosures (see Note 13) but did not have an impact on the Company's unaudited interim consolidated financial statements.

Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). ASU 2013-02 requires disclosure of significant amounts reclassified out of AOCI by component. If the amounts are required to be reclassified from AOCI to net income in their entirety in the same reporting period, the effect of such reclassifications on the relevant line items of net income must be presented either on the face of the financial statements or in the notes. For amounts that are not required to be reclassified to net income in their entirety in the same reporting period, cross-references to other disclosures that provide additional details about such reclassifications are required. ASU 2013-02 did not change the requirements for determining or reporting net income or OCI. The Company adopted the provisions of ASU 2013-02 as of the beginning of the first quarter of Fiscal 2014, which resulted in expanded OCI-related disclosures (see Note 16), but did not have an impact on the Company's unaudited interim consolidated financial statements.

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Proposed Amendments to Current Accounting Standards

The FASB is currently working on amendments to existing accounting standards governing a number of areas including, but not limited to, accounting for leases. In May 2013, the FASB issued a new exposure draft, “Leases” (the “Exposure Draft”), which would replace the existing guidance in ASC topic 840, “Leases.” Under the Exposure Draft, among other changes in practice, a lessee's rights and obligations under most leases, including existing and new arrangements, would be recognized as assets and liabilities, respectively, on the balance sheet. Other significant provisions of the Exposure Draft include (i) defining the “lease term” to include the noncancellable period together with periods for which there is a significant economic incentive for the lessee to extend or not terminate the lease; (ii) requiring that the initial lease liability to be recorded on the balance sheet contemplates only those variable lease payments that depend on an index or that are in substance “fixed”; and (iii) a dual approach for determining whether lease expense is recognized on a straight-line or accelerated basis, depending on whether the lessee is expected to consume more than an insignificant portion of the leased asset's economic benefits. The comment period for the Exposure Draft ended on September 13, 2013. The FASB is considering the feedback received and plans to redeliberate all significant issues to determine the next steps. If and when effective, this proposed standard will likely have a significant impact on the Company's consolidated financial statements. However, as the standard-setting process is still ongoing, the Company is unable at this time to determine the impact this proposed change in accounting would have on its consolidated financial statements.


5.	Acquisitions

Australia and New Zealand Licensed Operations Acquisition

On July 1, 2013, in connection with the transition of the Ralph Lauren-branded apparel and accessories business in Australia and New Zealand from a licensed to a wholly-owned operation, the Company acquired certain net assets from Oroton Group/PRL Australia ("Oroton") in exchange for an aggregate payment of approximately $15 million (the "Australia and New Zealand Licensed Operations Acquisition"). Oroton was the Company's licensee for Ralph Lauren-branded apparel and accessories in Australia and New Zealand. The Company funded the Australia and New Zealand Licensed Operations Acquisition with available cash on-hand.

The Company accounted for the Australia and New Zealand Licensed Operations Acquisition as a business combination during the second quarter of Fiscal 2014, with the operating results consolidated into the Company's operating results beginning on July 1, 2013. The acquisition cost of $15 million was allocated to the assets acquired and liabilities assumed based on the preliminary purchase price assessment of their respective fair values, as follows (in millions):



Inventory	$	9
Fixed assets	4
Customer relationship intangible asset	3
Other assets	2
Other liabilities	(3		)
Fair value of net assets acquired	$	15

The customer relationship intangible asset was valued using the excess earnings method, which discounts the estimated after-tax cash flows associated with the existing base of customers as of the acquisition date, factoring in expected attrition of the existing customer base. The customer relationship intangible asset is being amortized over an estimated useful life of nine years.

Chaps Menswear License Acquisition

On April 10, 2013, in connection with the transition of the North American Chaps-branded men's sportswear business ("Chaps Menswear Business") from a licensed to a wholly-owned operation, the Company entered into an agreement with The Warnaco Group, Inc. (“Warnaco”), a subsidiary of PVH Corp. (“PVH”), to acquire certain net assets in exchange for an aggregate payment of approximately $18 million (the "Chaps Menswear License Acquisition"). Warnaco was the Company's licensee for the Chaps Menswear Business. The Company funded the Chaps Menswear License Acquisition during the first quarter of Fiscal 2014 with available cash on-hand.

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company accounted for the Chaps Menswear License Acquisition as a business combination during the first quarter of Fiscal 2014. The acquisition cost was allocated to the assets acquired and liabilities assumed based on the purchase price assessment of their respective fair values, as follows (in millions):



Assets acquired:
Inventory	$	30
Accounts receivable	19
Licensed trademark intangible asset	9
Total assets acquired	58
Liabilities assumed:
Accounts payable	(22		)
Other net liabilities	(2		)
Total net liabilities assumed	(24		)
Fair value of net assets acquired	34
Consideration paid	18
Gain on acquisition^(a)	$	16

^(a) The gain on acquisition represents the difference between the acquisition date fair value of net assets acquired and the contractually-defined purchase price under the Company's license agreement with Warnaco, which granted the Company the right to early-terminate the license upon PVH's acquisition of Warnaco in February 2013.

The licensed trademark intangible asset was valued using the excess earnings method, discounting the estimated after-tax cash flows associated with the Chaps men's sportswear licensed trademark as of the acquisition date, factoring in market participant-based operating and cash flow assumptions. The reacquired licensed trademark intangible asset is being amortized over a nine-month period through December 31, 2013, representing the remaining term of the prior license agreement that was terminated in connection with this acquisition.

Transaction costs of $3 million were expensed as incurred and classified within SG&A expenses in the unaudited interim consolidated statement of income for the six months ended September 28, 2013. The operating results of the Chaps Menswear Business have been consolidated into the Company's operating results beginning on April 10, 2013.


6.	Inventories

Inventories consist of the following:



	September 28, 2013		March 30, 2013		September 29, 2012
	(millions)
Raw materials	$	2	$	5	$	5
Work-in-process	1		1		1
Finished goods	1,212		890		1,054
Total inventories	$	1,215	$	896	$	1,060

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


7.	Property and Equipment

Property and equipment, net consists of the following:



	September 28, 2013			March 30, 2013
	(millions)
Land and improvements	$	13		$	10
Buildings and improvements	176			130
Furniture and fixtures	639			601
Machinery and equipment	208			189
Capitalized software	331			252
Leasehold improvements	1,006			934
Construction in progress	331			137
	2,704			2,253
Less: accumulated depreciation	(1,424		)	(1,321		)
Property and equipment, net	$	1,280		$	932


8.	Other Assets and Liabilities

Prepaid expenses and other current assets consist of the following:



	September 28, 2013		March 30, 2013
	(millions)
Other taxes receivable	$	40	$	31
Prepaid rent expense	30		28
Deferred rent receivable	23		17
Derivative financial instruments	20		15
Prepaid samples	17		14
Other prepaid expenses and current assets	72		56
Total prepaid expenses and other current assets	$	202	$	161



Q2 FY14 Form 10-Q - AC Draft	15

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accrued expenses and other current liabilities consist of the following:



	September 28, 2013		March 30, 2013
	(millions)
Accrued operating expenses	$	177	$	172
Accrued inventory	160		93
Accrued payroll and benefits	134		199
Other taxes payable	60		51
Accrued capital expenditures	56		53
Deferred income	40		40
Dividends payable	36		36
Other accrued expenses and current liabilities	31		20
Total accrued expenses and other current liabilities	$	694	$	664

Other non-current liabilities consist of the following:



	September 28, 2013		March 30, 2013
	(millions)
Capital lease obligations	$	263	$	38
Deferred rent obligations	208		189
Deferred income	48		58
Deferred tax liabilities	28		30
Other non-current liabilities	55		47
Total other non-current liabilities	$	602	$	362


9.	Restructuring

The Company has recorded restructuring liabilities relating to various business growth and cost-savings initiatives. A description of the nature of significant restructuring activity and related costs is summarized below.

Rugby Closure Plan

In October 2012, the Company approved a plan to wind-down its Rugby brand retail operations (the “Rugby Closure Plan”). This decision was primarily based on the results of an analysis of the brand concept, as well as an opportunity for the Company to reallocate its resources related to these operations to support other high-growth business opportunities and initiatives. In connection with the Rugby Closure Plan, all of the Company's 14 global freestanding Rugby stores (certain of which have been converted to other Ralph Lauren brand concepts) and its related domestic e-commerce site located at Rugby.com have been closed as of September 28, 2013. The Rugby Closure Plan also resulted in a reduction in workforce of approximately 160 employees.

In connection with the Rugby Closure Plan, the Company recorded $7 million in restructuring charges during Fiscal 2013, $4 million of which remained payable as of March 30, 2013. There were no additional restructuring charges recognized by the Company in connection with the Rugby Closure Plan during the six months ended September 28, 2013. During the six months ended September 28, 2013, the Company paid $2 million under this plan, which reduced the remaining restructuring liability at September 28, 2013 to $2 million, which is expected to be settled during the second half of Fiscal 2014.

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


10.	Income Taxes

Tax Rate Reconciliation

The differences between income taxes expected at the U.S. federal statutory income tax rate of 35% and income taxes provided are set forth below:



	Three Months Ended						Six Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
	(millions)
Provision for income taxes at the U.S. federal statutory rate	$	101		$	120		$	194		$	219
Increase (decrease) due to:
State and local income taxes, net of federal benefit	8			8			14			15
Foreign income taxed at different rates, net of U.S. foreign tax	(28		)	(19		)	(44		)	(35		)
Unrecognized tax benefits and settlements of tax examinations	2			18			3			18
Other	—			1			—			2
Total provision for income taxes	$	83		$	128		$	167		$	219

The Company's effective tax rate was lower than the statutory rate during the three-month and six-month periods ended September 28, 2013, principally as a result of the proportion of earnings generated in lower taxed foreign jurisdictions versus the U.S., as well as an income tax benefit resulting from the restructuring of certain of the Company's foreign operations in Fiscal 2014.

Uncertain Income Tax Benefits

A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, for the three-month and six-month periods ended September 28, 2013 and September 29, 2012 is presented below:



	Three Months Ended						Six Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
	(millions)
Unrecognized tax benefits beginning balance	$	101		$	126		$	100		$	129
Additions related to current period tax positions	1			1			2			2
Additions related to prior period tax positions	—			2			1			2
Reductions related to prior period tax positions	—			(1		)	(2		)	(2		)
Reductions related to settlements with taxing authorities	(1		)	—			(1		)	—
Changes related to foreign currency translation	1			2			2			(1		)
Unrecognized tax benefits ending balance	$	102		$	130		$	102		$	130

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company classifies interest and penalties related to unrecognized tax benefits as part of its provision for income taxes. A reconciliation of the beginning and ending amounts of accrued interest and penalties related to unrecognized tax benefits for the three-month and six-month periods ended September 28, 2013 and September 29, 2012 is presented below:



	Three Months Ended					Six Months Ended
	September 28, 2013		September 29, 2012			September 28, 2013			September 29, 2012
	(millions)
Accrued interest and penalties beginning balance	$	50	$	38		$	50		$	39
Net additions charged to expense	2		19		^(a)	3			20			^(a)
Reductions related to prior period tax positions	—		—			(1		)	(2		)
Changes related to foreign currency translation	1		—			1			—
Accrued interest and penalties ending balance	$	53	$	57		$	53		$	57

^(a) Includes a reserve of $17 million for an interest assessment on a prior year withholding tax. No underlying tax exposure exists. The interest assessed was not material to the Company's consolidated financial statements in any period.

The total amount of unrecognized tax benefits, including interest and penalties, was $155 million and $150 million as of September 28, 2013 and March 30, 2013, respectively, and is included within non-current liability for unrecognized tax benefits in the consolidated balance sheets. The total amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate was $121 million and $115 million as of September 28, 2013 and March 30, 2013, respectively.

Future Changes in Unrecognized Tax Benefits

The total amount of unrecognized tax benefits relating to the Company’s tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. The Company is currently in discussions with certain tax jurisdictions with regard to specific ongoing tax audits. The successful resolution of such audits could cause the Company's balance of gross unrecognized tax benefits, excluding interest and penalties, to change significantly during the next twelve months. However, the resolution and potential outcome of these ongoing tax audits is highly uncertain, and as such, an estimate of the range of the reasonably possible change cannot be made at this time.

The Company files tax returns in the U.S. federal and various state, local, and foreign jurisdictions. With a few exceptions, the Company is no longer subject to examinations by the relevant tax authorities for years prior to Fiscal 2004.


11.	Debt

Debt consists of the following:



	September 28, 2013		March 30, 2013
	(millions)
2.125% Senior Notes due September 26, 2018	$	300	$	—
4.5% Euro-denominated notes due October 4, 2013^(a)	283		267
Total debt	583		267
Less: current maturities of debt^(a)	283		267
Total long-term debt	$	300	$	—

^(a) Principal amount was repaid upon maturity subsequent to the end of the second quarter of Fiscal 2014.

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Senior Notes

In September 2013, the Company completed a public offering and issued $300 million aggregate principal amount of unsecured senior notes due September 26, 2018 (the "Senior Notes") at a price equal to 99.896% of their principal amount. The Senior Notes bear interest at a fixed rate of 2.125%, payable semi-annually. The proceeds from this offering will be used for general corporate purposes, including the repayment of the Company's €209 million principal amount outstanding of the 4.5% Euro-denominated notes (the "Euro Debt"), which matured on October 4, 2013.

The Company has the option to redeem the Senior Notes, in whole or in part, at any time at a price equal to accrued but unpaid interest on, but not including, the redemption date, plus the greater of (i) 100% of the principal amount of Senior Notes to be redeemed or (ii) the sum of the present value of Remaining Scheduled Payments, as defined in the indenture governing the Senior Notes (the "Indenture"). The Indenture contains certain covenants that restrict the Company's ability, subject to specified exceptions, to incur certain liens; enter into sale and leaseback transactions; consolidate or merge with another party; or sell, lease, or convey all or substantially all of the Company's property or assets to another party. However, the Indenture does not contain any financial covenants.

Revolving Credit Facilities

Global Credit Facility

The Company has a credit facility that provides for a $500 million senior unsecured revolving line of credit through March 2016, and is also used to support the issuance of letters of credit (the “Global Credit Facility”). Borrowings under the Global Credit Facility may be denominated in U.S. Dollars and other currencies, including Euros, Hong Kong Dollars, and Japanese Yen. The Company has the ability to expand its borrowing availability to $750 million, subject to the agreement of one or more new or existing lenders under the facility to increase their commitments. There are no mandatory reductions in borrowing ability throughout the term of the Global Credit Facility. As of September 28, 2013, there were no borrowings outstanding under the Global Credit Facility and the Company was contingently liable for $9 million of outstanding letters of credit.

The Global Credit Facility contains a number of covenants that, among other things, restrict the Company’s ability, subject to specified exceptions, to incur additional debt; incur liens; sell or dispose of assets; 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. The Global Credit Facility also requires the Company to maintain a maximum ratio of Adjusted Debt to Consolidated EBITDAR (the “leverage ratio”) of no greater than 3.75 as of the date of measurement for the four most recent consecutive fiscal quarters. Adjusted Debt is defined generally as consolidated debt outstanding plus eight times consolidated rent expense for the last four consecutive fiscal quarters. Consolidated EBITDAR is defined generally as consolidated net income plus (i) income tax expense, (ii) net interest expense, (iii) depreciation and amortization expense, and (iv) consolidated rent expense. As of September 28, 2013, no Event of Default (as such term is defined pursuant to the Global Credit Facility) has occurred under the Company’s Global Credit Facility.

Pan-Asia Credit Facilities

Certain of the Company's subsidiaries in Asia have uncommitted credit facilities with regional branches of JPMorgan Chase (the “Banks”) in China, Malaysia, South Korea, and Taiwan (the “Pan-Asia Credit Facilities”). These credit facilities are subject to annual renewal and may be used to fund general working capital and corporate needs of the Company's operations in the respective regions. Borrowings under the Pan-Asia Credit Facilities are guaranteed by the Company and are granted at the sole discretion of the Banks, subject to availability of the Banks' funds and satisfaction of certain regulatory requirements. The Pan-Asia Credit Facilities do not contain any financial covenants. The Company's Pan-Asia Credit Facilities by country are as follows:


•	Chinese Credit Facility — provides Ralph Lauren Trading (Shanghai) Co., Ltd. with a revolving line of credit of up to 100 million Chinese Renminbi (approximately $16 million) through April 9, 2014, and may also be used to support bank guarantees.


•	Malaysia Credit Facility — provides Ralph Lauren (Malaysia) Sdn Bhd with a revolving line of credit of up to 16 million Malaysian Ringgit (approximately $5 million) through September 17, 2014.

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


•	South Korea Credit Facility — provides Ralph Lauren (Korea) Ltd. with a revolving line of credit of up to 11 billion South Korean Won (approximately $10 million) through October 31, 2014.


•	Taiwan Credit Facility — provides Ralph Lauren (Hong Kong) Retail Company Ltd., Taiwan Branch with a revolving line of credit of up to 59 million New Taiwan Dollars (approximately $2 million) through October 15, 2014.

As of September 28, 2013, there were no borrowings outstanding under any of the Pan-Asia Credit Facilities.

Refer to Note 14 of the Fiscal 2013 10-K for additional disclosure of the terms and conditions of the Company’s debt and credit facilities.


12.	Fair Value Measurements

U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy for a particular asset or liability depends on the inputs used in its valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally-derived (unobservable). A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:


•	Level 1 — inputs to the valuation methodology based on quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2 — inputs to the valuation methodology based on quoted prices for similar assets and liabilities in active markets for substantially the full term of the financial instrument; quoted prices for identical or similar instruments in markets that are not active for substantially the full term of the financial instrument; and model-derived valuations whose inputs or significant value drivers are observable.


•	Level 3 — inputs to the valuation methodology based on unobservable prices or valuation techniques that are significant to the fair value measurement.

The following table summarizes the Company’s financial assets and liabilities that are measured and recorded at fair value on a recurring basis:



	September 28, 2013		March 30, 2013
	(millions)
Financial assets recorded at fair value^(a):
Government bonds — U.S.	$	32	$	29
Government bonds — non-U.S.	—		92
Corporate bonds — non-U.S.	—		82
Variable rate municipal securities — U.S.	—		17
Auction rate securities	2		2
Derivative financial instruments	24		15
Total	$	58	$	237
Financial liabilities recorded at fair value^(b):
Derivative financial instruments	$	7	$	5
Total	$	7	$	5


^(a)	Based on Level 1 measurements, except for auction rate securities and derivative financial instruments, which are based on Level 2 measurements.


^(b)	Based on Level 2 measurements.

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

To the extent the Company invests in government bonds, corporate bonds, or variable rate municipal securities, such investments are classified as available-for-sale securities and are recorded at fair value in its consolidated balance sheets based upon quoted prices in active markets.

The Company’s auction rate securities are classified as available-for-sale securities and are recorded at fair value in its consolidated balance sheets. Third-party pricing institutions may value auction rate securities at par, which may not necessarily reflect prices that would be obtained if sold in the current market. When quoted market prices are unobservable, fair value is estimated based on a number of known factors and external pricing data, including known maturity dates, the coupon rate based upon the most recent reset market clearing rate, the price/yield representing the average rate of recent successfully traded securities, and the total principal balance of each security.

The Company’s derivative financial instruments are recorded at fair value in its consolidated balance sheets and are valued using a pricing model, which is primarily based on market observable external inputs, including forward and spot exchange rates for foreign currencies, and considers the impact of the Company’s own credit risk, if any. Changes in counterparty credit risk are also considered in the valuation of derivative financial instruments.

The Company’s cash and cash equivalents, restricted cash, and time deposits are recorded at carrying value, which approximates fair value based on Level 1 measurements.

The Company’s debt obligations are recorded at their carrying values in its consolidated balance sheets, which may differ from their fair values. The carrying value of the Euro Debt is adjusted for any foreign currency fluctuations, any unamortized discount, and the unamortized fair value adjustment associated with the early termination of an interest rate swap that was designated as a fair value hedge. The carrying value of the Senior Notes is adjusted for any unamortized discount. The fair values of the Company's debt obligations are estimated based on external pricing data, including available quoted market prices of these debt instruments, and of comparable debt instruments with similar interest rates, credit ratings, and trading frequency, among other factors. The following table summarizes the carrying values and the estimated fair values of the Company’s debt obligations:



	September 28, 2013				March 30, 2013
	Carrying Value		Fair Value^(a)		Carrying Value		Fair Value^(a)
	(millions)
2.125% Senior Notes	$	300	$	302	N/A		N/A
Euro Debt	$	283	$	282	$	267	$	272


^(a)	Based on Level 2 measurements.

Unrealized gains or losses on the Company’s debt instruments do not result in the realization or expenditure of cash, unless the debt is retired prior to maturity.

Non-financial Assets and Liabilities

The Company’s non-financial assets, which primarily consist of goodwill, other intangible assets, and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial assets are assessed for impairment and, if applicable, written-down to and recorded at fair value, considering external market participant assumptions.

No goodwill impairment charges were recorded during either of the six-month periods ended September 28, 2013 or September 29, 2012. The Company performed its annual goodwill impairment assessment using a qualitative approach as of the beginning of the second quarter of Fiscal 2014. In performing the assessment, the Company identified and considered the significance of relevant key factors, events, and circumstances that affected the fair values and/or carrying amounts of its reporting units. These factors included external factors such as macroeconomic, industry, and market conditions, as well as entity-specific

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

factors, such as the Company's actual and planned financial performance. Additionally, the results of the Company's most recent quantitative goodwill impairment test were also considered, which indicated that the fair values of its reporting units significantly exceeded their respective carrying values. Based on the results its qualitative goodwill impairment assessment, the Company concluded that it is not more likely than not that the fair values of its reporting units are less than their respective carrying values, and there are no reporting units at risk of impairment.


13.	Financial Instruments

Derivative Financial Instruments

The Company is exposed to changes in foreign currency exchange rates relating to certain anticipated cash flows from its international operations and potential changes in the value of reported net assets of certain of its foreign operations. Consequently, the Company periodically uses derivative financial instruments to manage such risks. The Company does not enter into derivative transactions for speculative or trading purposes.

The following table summarizes the Company’s outstanding derivative instruments on a gross basis as recorded in the consolidated balance sheets as of September 28, 2013 and March 30, 2013:



	Notional Amounts				Derivative Assets						Derivative Liabilities
Derivative Instrument^(a)	September 28, 2013		March 30, 2013		September 28, 2013			March 30, 2013			September 28, 2013				March 30, 2013
					Balance Sheet Line^(b)	Fair Value		Balance Sheet Line^(b)	Fair Value		Balance Sheet Line^(b)	Fair Value			Balance Sheet Line^(b)	Fair Value
	(millions)
Designated Hedges:
FC — Inventory purchases	$	339	$	366	PP	$	2	PP	$	14	^(c)	$	(4	)	AE	$	(2	)
FC — Other^(d)	147		25		PP	1		—	—		AE	(2		)	AE	(1		)
NI — Euro Debt	—		140		—	^(e)		—	^(e)		—	^(e)			—	^(e)
Total Designated Hedges	$	486	$	531		$	3		$	14		$	(6	)		$	(3	)
Undesignated Hedges:
FC — Other^(f)	$	446	$	270	^(g)	$	21	PP	$	1	AE	$	(1	)	AE	$	(2	)
Total Hedges	$	932	$	801		$	24		$	15		$	(7	)		$	(5	)


^(a)	FC = Forward foreign currency exchange contracts; NI = Net Investment Hedge; Euro Debt = Euro-denominated 4.5% notes due October 4, 2013.


^(b)	PP = Prepaid expenses and other current assets; AE = Accrued expenses and other current liabilities; ONCL = Other non-current liabilities; ONCA = Other non-current assets.


^(c)	$3 million included within AE and $1 million included within ONCL.


^(d)	Primarily related to designated hedges of foreign currency-denominated intercompany royalty payments and marketing contributions, and other net operational exposures.


^(e)	As of March 30, 2013, a portion of the Euro Debt's principal amount was designated as a net investment hedge, and the entire principal amount has been de-designated as of September 28, 2013. See Note 12 for a summary of the carrying values and the estimated fair values of the Euro Debt as of September 28, 2013 and March 30, 2013.


^(f)	Primarily related to undesignated hedges of foreign currency-denominated intercompany loans, third-party debt obligations, and other net operational exposures.


^(g)	$17 million included within PP and $4 million included within ONCA.

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company records and presents the fair values of all of its derivative assets and liabilities in the consolidated balance sheets on a gross basis, even though they are subject to master netting arrangements. However, if the Company were to offset and record the asset and liability balances of all of its forward foreign currency exchange contracts on a net basis in accordance with the terms of each of its master netting arrangements, as spread across eight separate counterparties, the amounts presented in the consolidated balance sheets as of September 28, 2013 and March 30, 2013 would be adjusted from the current gross presentation as detailed in the following table:



	September 28, 2013									March 30, 2013
Derivative Instrument	Gross Amounts Presented in the Consolidated Balance Sheet			Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Master Netting Agreements			Net Amount			Gross Amounts Presented in the Consolidated Balance Sheet			Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Master Netting Agreements			Net Amount
	(millions)
FC — Derivative assets	$	24		$	(2	)	$	22		$	15		$	(3	)	$	12
FC — Derivative liabilities	$	(7	)	$	2		$	(5	)	$	(5	)	$	3		$	(2	)

The Company's master netting arrangements do not require cash collateral to be pledged by the Company or its counterparties. Refer to Note 3 for further discussion of the Company’s master netting arrangements.

The following tables summarize the gross impact of the effective portion of gains and losses from the Company's derivative instruments on its unaudited interim consolidated financial statements for the three-month and six-month periods ended September 28, 2013 and September 29, 2012:



	Gains (Losses) Recognized in OCI
	Three Months Ended						Six Months Ended
Derivative Instrument	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
				(millions)
Designated Cash Flow Hedges:
FC — Inventory purchases	$	(7	)	$	(1	)	$	(8	)	$	8
FC — Other	(1		)	(1		)	(1		)	(4		)
	$	(8	)	$	(2	)	$	(9	)	$	4
Designated Hedge of Net Investment:^(a)
Euro Debt	$	1		$	(4	)	$	—		$	10
Total Designated Hedges	$	(7	)	$	(6	)	$	(9	)	$	14



	Gains (Losses) Reclassified from AOCI to Earnings										Location of Gains (Losses) Reclassified from AOCI to Earnings
	Three Months Ended					Six Months Ended
Derivative Instrument	September 28, 2013			September 29, 2012		September 28, 2013			September 29, 2012
				(millions)
Designated Cash Flow Hedges:
FC — Inventory purchases	$	1		$	8	$	6		$	11	Cost of goods sold
FC — Other	(1		)	—		(1		)	2		Foreign currency gains (losses)
	$	—		$	8	$	5		$	13


^(a)	Amounts would be recognized as a gain (loss) on the sale or liquidation of the hedged net investment.

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

During the six months ended September 28, 2013, the Company also recorded a foreign currency gain of $2 million associated with the discontinuance of certain cash flow hedges, as the related forecasted transactions were no longer probable of occurring.

Over the next twelve months, it is expected that approximately $2 million of net gains deferred in AOCI related to derivative financial instruments as of September 28, 2013 will be recognized in earnings. No material gains or losses relating to ineffective hedges were recognized during any of the fiscal periods presented.

The following table summarizes the impact of gains and losses from the Company's undesignated hedge contracts on its unaudited interim consolidated statements of income for the three-month and six-month periods ended September 28, 2013 and September 29, 2012:



	Gains (Losses) Recognized in Earnings										Location of Gains (Losses) Recognized in Earnings
	Three Months Ended					Six Months Ended
Derivative Instrument	September 28, 2013		September 29, 2012			September 28, 2013		September 29, 2012
	(millions)
Undesignated Hedges:
FC — Other	$	10	$	(3	)	$	18	$	(5	)	Foreign currency gains (losses)
Total Undesignated Hedges	$	10	$	(3	)	$	18	$	(5	)

The following is a summary of the Company’s risk management strategies and the effect of those strategies on its unaudited interim consolidated financial statements.

Foreign Currency Risk Management

Forward Foreign Currency Exchange Contracts

The Company primarily enters into forward foreign currency exchange contracts as hedges to reduce its risk from exchange rate fluctuations on inventory purchases made in an entity's non-functional currency, intercompany royalty payments made by certain of its international operations, intercompany contributions to fund certain marketing efforts of its international operations, interest payments made in connection with outstanding debt, and other foreign currency-denominated operational cash flows. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, primarily to changes in the value of the Euro, the Japanese Yen, the Hong Kong Dollar, the South Korean Won, the British Pound Sterling, the Australian Dollar, and the Vietnamese Dong, the Company hedges a portion of its foreign currency exposures anticipated over a two-year period. In doing so, the Company uses foreign currency exchange forward contracts that generally have maturities of three months to two years to provide continuing coverage throughout the hedging period.

Hedge of Net Investment in Certain European Subsidiaries

Historically, the Company designated the entire €209 million principal amount outstanding of its Euro Debt as a hedge of its net investment in certain of its European subsidiaries. Accordingly, changes in the Euro Debt's carrying value resulting from fluctuations in the Euro exchange rate have historically been reported in equity as a component of AOCI, as the debt has been a highly effective hedge. As of September 28, 2013, in connection with the execution of undesignated hedge contracts during Fiscal 2013 and Fiscal 2014 to fully hedge the repayment of the Euro Debt, the entire principal amount of this hedge has been de-designated. Upon de-designation, changes in the Euro Debt's carrying value resulting from fluctuations in the Euro exchange rate were recorded in earnings within foreign currency gains (losses), and were largely offset by changes in the fair values of the related undesignated forward foreign currency exchange contracts.

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Investments

The following table summarizes the Company’s short-term and non-current investments recorded in its consolidated balance sheets as of September 28, 2013 and March 30, 2013:



	September 28, 2013						March 30, 2013
Type of Investment	Short-term < 1 year		Non-current 1 - 3 years		Total		Short-term < 1 year		Non-current 1 - 3 years		Total
					(millions)
Available-for-Sale:
Government bonds — U.S.	$	27	$	5	$	32	$	21	$	8	$	29
Government bonds — non-U.S.	—		—		—		67		25		92
Corporate bonds — non-U.S.	—		—		—		36		46		82
Variable rate municipal securities — U.S.	—		—		—		17		—		17
Auction rate securities^(a)	—		2		2		—		2		2
Total available-for-sale investments	$	27	$	7	$	34	$	141	$	81	$	222
Other:
Time deposits	$	545	$	—	$	545	$	184	$	—	$	184
Total Investments	$	572	$	7	$	579	$	325	$	81	$	406


^(a)	Auction rate securities have characteristics similar to short-term investments. However, the Company has classified these securities as non-current investments in its consolidated balance sheets as current market conditions call into question its ability to redeem these investments for cash within the next twelve months.

No significant realized or unrealized gains or losses on available-for-sale investments or other-than-temporary impairment charges were recorded in any of the fiscal periods presented. Refer to Note 16 for further detail.

See Note 3 to the Fiscal 2013 10-K for further discussion of the Company’s accounting policies relating to its investments.


14.	Commitments and Contingencies

Lease Obligations

During the first quarter of Fiscal 2014, the Company entered into a build-to-suit lease agreement for a new flagship store on Fifth Avenue in New York City, which will feature a full assortment of Polo-branded apparel and accessories. The total commitment related to this lease is $235 million, with minimum lease payments of $25 million due each year from Fiscal 2015 through Fiscal 2019, and aggregate minimum lease payments of $110 million for Fiscal 2020 through Fiscal 2023. On July 1, 2013, the Company took possession of this property and recorded a $230 million asset as construction in progress within property and equipment and a corresponding capital lease obligation within its unaudited interim consolidated balance sheet.

Debt Obligations

In September 2013, the Company completed a $300 million public offering of 2.125% Senior Notes due September 26, 2018 (see Note 11). The Company's aggregate interest obligation related to this debt is $32 million, with interest payable semi-annually.

Wathne Imports Litigation

On August 19, 2005, Wathne Imports, Ltd. (“Wathne”), the Company's then domestic licensee for luggage and handbags, filed a complaint in the U.S. District Court in the Southern District of New York against the Company and Mr. Ralph Lauren, its

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 originally 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 the Company's motion to dismiss all of the causes of action, including the cause of action against Mr. Lauren, except for breach of contract related claims, and denied Wathne's motion for a preliminary injunction. Following some discovery, the Company moved for summary judgment on the remaining claims and Wathne cross-moved for partial summary judgment. In an April 11, 2008 Decision and Order, the Court granted the Company's summary judgment motion to dismiss most of the claims against the Company, and denied Wathne's cross-motion for summary judgment. Wathne appealed the dismissal of its claims to the Appellate Division of the Supreme Court. Following a hearing on May 19, 2009, the Appellate Division issued a Decision and Order on June 9, 2009 which, in large part, affirmed the lower Court's ruling.

The Company subsequently made a motion to exclude Wathne's proposed expert's damages report and, on January 23, 2012, the Court granted its motion. Wathne then appealed the ruling to the Appellate Division and, on October 18, 2012, the Appellate Division reversed the order of the lower Court. At this time, the trial date has not yet been scheduled and the Company intends to continue to contest the remaining claims and dispute any alleged damages in this lawsuit vigorously. Management does not expect that the ultimate resolution of this matter will have a material adverse effect on the Company's consolidated financial statements.

Other Matters

The Company is otherwise involved, from time to time, in litigation, other legal claims, and proceedings involving matters associated with or incidental to its business, including, among other things, matters involving credit card fraud, trademark and other intellectual property, licensing, and employee relations. The Company believes that the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect on its financial statements. However, the Company’s assessment of the current litigation or other legal claims could change in light of the discovery of facts not presently known or determinations by judges, juries, or other finders of fact which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or claims.

In the normal course of business, the Company enters into agreements that provide general indemnifications. The Company has not made any significant indemnification payments under such agreements in the past, and believes that the likelihood of incurring such obligations in the future is remote.


15.	Equity

Summary of Changes in Equity



	Six Months Ended
	September 28, 2013			September 29, 2012
	(millions)
Balance at beginning of period	$	3,785		$	3,653
Comprehensive income	406			408
Dividends declared	(72		)	(73		)
Repurchases of common stock	(210		)	(347		)
Stock-based compensation	43			43
Shares issued and tax benefits recognized pursuant to stock-based compensation plans	39			52
Balance at end of period	$	3,991		$	3,736

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Common Stock Repurchase Program

During the six months ended September 28, 2013, 1.1 million shares of Class A common stock were repurchased by the Company at a total cost of $200 million under its common stock repurchase program. The total cost of repurchased shares included two separate $50 million prepayments made in March 2013 and June 2013 pursuant to share repurchase programs with third-party financial institutions, which resulted in the delivery of 0.6 million shares during the six months ended September 28, 2013, based on the volume-weighted average market price of the Company's Class A common stock over the programs' respective 93-day repurchase terms, less a per share discount. The remaining availability under the Company’s common stock repurchase program was approximately $427 million as of September 28, 2013.

In addition, during the six months ended September 28, 2013, 0.4 million shares of Class A common stock at a cost of $60 million were surrendered to, or withheld by, the Company in satisfaction of withholding taxes in connection with the vesting of awards under the Company’s 1997 Long-Term Stock Incentive Plan, as amended (the “1997 Incentive Plan”), and its 2010 Long-Term Stock Incentive Plan, as amended (the “2010 Incentive Plan”).

During the six months ended September 29, 2012, 2.0 million shares of Class A common stock were repurchased by the Company at a cost of $300 million under its common stock repurchase program. In addition, 0.4 million shares of Class A common stock at a cost of $47 million were surrendered to, or withheld by, the Company in satisfaction of withholding taxes in connection with the vesting of awards under the 1997 Incentive Plan and the 2010 Incentive Plan.

Repurchased and surrendered shares are accounted for as treasury stock at cost and held in treasury for future use.

Dividends

Since 2003, the Company has maintained a regular quarterly cash dividend program on its common stock. On May 21, 2012, the Company's Board of Directors approved an increase to the Company's quarterly cash dividend on its common stock from $0.20 per share to $0.40 per share. The second quarter Fiscal 2014 dividend of $0.40 per share was declared on September 11, 2013, was payable to stockholders of record at the close of business on September 27, 2013, and was paid on October 11, 2013. Dividends paid amounted to $73 million and $55 million during the six months ended September 28, 2013 and September 29, 2012, respectively.

On November 5, 2013, the Company's Board of Directors approved an additional increase to the Company's quarterly cash dividend on its common stock from $0.40 to $0.45 per share.


16.	Accumulated Other Comprehensive Income

The following tables present the components of other comprehensive income (loss), net of tax, accumulated in equity:



	Three months ended September 28, 2013
	Foreign Currency Translation Gains (Losses)		Net Unrealized Gains (Losses) on Derivative Financial Instruments			Net Unrealized Gains (Losses) on Defined Benefit Plans			Total Accumulated Other Comprehensive Income (Loss)
	(millions)
Balance at June 29, 2013	$	71	$	18		$	(7	)	$	82
Other comprehensive income (loss), net of tax:
Other comprehensive income (loss) before reclassifications^(a)	50		(18		)	—			32
Amounts reclassified from AOCI to earnings	—		—			—			—
Other comprehensive income (loss), net of tax	50		(18		)	—			32
Balance at September 28, 2013	$	121	$	—		$	(7	)	$	114

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Six months ended September 28, 2013
	Foreign Currency Translation Gains (Losses)		Net Unrealized Gains (Losses) on Derivative Financial Instruments			Net Unrealized Gains (Losses) on Available-for-Sale Investments			Net Unrealized Gains (Losses) on Defined Benefit Plans			Total Accumulated Other Comprehensive Income (Loss)
	(millions)
Balance at March 30, 2013	$	73	$	23		$	5		$	(7	)	$	94
Other comprehensive income (loss), net of tax:
Other comprehensive income (loss) before reclassifications^(a)	48		(19		)	(4		)	—			25
Amounts reclassified from AOCI to earnings	—		(4		)	(1		)	—			(5		)
Other comprehensive income (loss), net of tax	48		(23		)	(5		)	—			20
Balance at September 28, 2013	$	121	$	—		$	—		$	(7	)	$	114


^(a)	Amounts are net of taxes, which are immaterial for all periods presented.

The following tables present reclassifications from AOCI to earnings, by component:



	Three Months Ended September 28, 2013			Six Months Ended September 28, 2013			Location of Gains (Losses) Reclassified from AOCIto Earnings
	(millions)
Gains (losses) on derivative financial instruments^(a):
FC — Inventory purchases	$	1		$	6		Cost of goods sold
FC — Other	(1		)	(1		)	Foreign currency gains (losses)
Tax effect	—			(1		)	Provision for income taxes
Net of tax	$	—		$	4

Gains on available-for-sale securities:
Sales of available-for-sale securities	$	—		$	1		Interest and other income, net
Tax effect	—			—			Provision for income taxes
Net of tax	$	—		$	1


^(a)	FC = Forward foreign currency exchange contracts.


17.	Stock-based Compensation

On August 5, 2010, the Company's stockholders approved the 2010 Incentive Plan, which replaced the Company's 1997 Incentive Plan. Any new grants are being issued under the 2010 Incentive Plan. However, awards that were outstanding as of August 5, 2010 remain subject to the terms of the 1997 Incentive Plan. On September 24, 2013, the Company registered with the Securities and Exchange Commission an additional 1.7 million shares of its Class A common stock for issuance pursuant to its 2010 Incentive Plan.

Refer to Note 20 in the Fiscal 2013 10-K for a detailed description of the Company's stock-based compensation awards, including information related to the vesting terms, service and performance conditions, and payout percentages.

Impact on Results

A summary of the total compensation expense recorded within SG&A expenses and the associated income tax benefits recognized related to stock-based compensation arrangements is as follows:



	Three Months Ended						Six Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
	(millions)
Compensation expense	$	21		$	21		$	43		$	43
Income tax benefit	$	(8	)	$	(7	)	$	(16	)	$	(14	)

The Company issues its annual grants of stock-based compensation awards in the first half of the fiscal year. Due to the timing of the annual grants, stock-based compensation expense recognized during the three-month and six-month periods ended September 28, 2013 is not indicative of the level of compensation expense expected to be incurred for the full Fiscal 2014.

RALPH LAUREN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock Options

Stock options are granted to employees and non-employee directors with exercise prices equal to the fair market value of the Company’s Class A common stock on the date of grant. Generally, options become exercisable ratably (graded-vesting schedule) over a three-year vesting period. Stock options generally expire seven 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 both subjective and objective assumptions. The Company develops its assumptions by analyzing the historical exercise behavior of employees and nonemployee directors. The Company’s weighted average assumptions used to estimate the fair value of stock options granted during the six months ended September 28, 2013 and September 29, 2012 were as follows: