RL-2014.06.28-10Q



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 June 28, 2014
or
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 August 1, 2014, 61,064,929 shares of the registrant's Class A common stock, $.01 par value, and 26,881,276 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:
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
PART II. OTHER INFORMATION
Item 1.
Item 1A.    
Item 2.
Item 6.
 
 
 
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
 



2


RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE SHEETS
 
 
 
June 28,
2014
 
March 29,
2014
 
 
(millions)
(unaudited)
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
711

 
$
797

Short-term investments
 
658

 
488

Accounts receivable, net of allowances of $261 million and $270 million
 
357

 
588

Inventories
 
1,180

 
1,020

Income tax receivable
 
61

 
62

Deferred tax assets
 
152

 
150

Prepaid expenses and other current assets
 
202

 
224

Total current assets
 
3,321

 
3,329

Property and equipment, net
 
1,363

 
1,322

Deferred tax assets
 
39

 
39

Goodwill
 
963

 
964

Intangible assets, net
 
293

 
299

Other non-current assets
 
151

 
137

Total assets
 
$
6,130

 
$
6,090

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
Accounts payable
 
$
260

 
$
203

Income tax payable
 
96

 
77

Accrued expenses and other current liabilities
 
705

 
690

Total current liabilities
 
1,061

 
970

Long-term debt
 
300

 
300

Non-current liability for unrecognized tax benefits
 
136

 
132

Other non-current liabilities
 
661

 
654

Commitments and contingencies (Note 14)
 

 

Total liabilities
 
2,158

 
2,056

Equity:
 
 
 
 
Class A common stock, par value $.01 per share; 98.6 million and 98.0 million shares issued; 61.1 million and 61.8 million shares outstanding
 
1

 
1

Class B common stock, par value $.01 per share; 26.9 million shares issued and outstanding
 

 

Additional paid-in-capital
 
2,017

 
1,979

Retained earnings
 
5,369

 
5,257

Treasury stock, Class A, at cost; 37.5 million and 36.2 million shares
 
(3,528
)
 
(3,317
)
Accumulated other comprehensive income
 
113

 
114

Total equity
 
3,972

 
4,034

Total liabilities and equity
 
$
6,130

 
$
6,090

See accompanying notes.


3


RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
 
(millions, except per share data)
(unaudited)
Net sales
 
$
1,668

 
$
1,614

Licensing revenue
 
40

 
39

Net revenues
 
1,708

 
1,653

Cost of goods sold(a) 
 
(665
)
 
(649
)
Gross profit
 
1,043

 
1,004

Selling, general, and administrative expenses(a) 
 
(789
)
 
(735
)
Amortization of intangible assets
 
(6
)
 
(9
)
Gain on acquisition of Chaps
 

 
16

Restructuring and other charges
 
(4
)
 

Total other operating expenses, net
 
(799
)
 
(728
)
Operating income
 
244

 
276

Foreign currency losses
 
(3
)
 
(6
)
Interest expense
 
(4
)
 
(5
)
Interest and other income, net
 
1

 
2

Equity in losses of equity-method investees
 
(3
)
 
(2
)
Income before provision for income taxes
 
235

 
265

Provision for income taxes
 
(73
)
 
(84
)
Net income
 
$
162

 
$
181

Net income per common share:
 
 
 
 
Basic
 
$
1.82

 
$
1.99

Diluted
 
$
1.80

 
$
1.94

Weighted average common shares outstanding:
 
 
 
 
Basic
 
88.9

 
90.8

Diluted
 
90.2

 
93.1

Dividends declared per share
 
$
0.45

 
$
0.40

(a) Includes total depreciation expense of:
 
$
(63
)
 
$
(51
)

See accompanying notes.



4


RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
 
Three Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
 
(millions)
(unaudited)
Net income
 
$
162

 
$
181

Other comprehensive income (loss), net of tax:
 
 
 
 
Foreign currency translation adjustments
 
(3
)
 
(2
)
Net realized and unrealized gains (losses) on derivatives
 
2

 
(5
)
Net realized and unrealized losses on available-for-sale investments
 

 
(5
)
Other comprehensive loss, net of tax
 
(1
)
 
(12
)
Total comprehensive income
 
$
161

 
$
169


See accompanying notes.



5


RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Three Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
 
(millions)
(unaudited)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
162

 
$
181

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization expense
 
69

 
60

Deferred income tax benefit
 
(3
)
 
(8
)
Equity in losses of equity-method investees
 
3

 
2

Non-cash stock-based compensation expense
 
23

 
22

Gain on acquisition of Chaps
 

 
(16
)
Excess tax benefits from stock-based compensation arrangements
 
(4
)
 
(17
)
Other non-cash charges, net
 
6

 
1

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
230

 
131

Inventories
 
(158
)
 
(129
)
Prepaid expenses and other current assets
 
5

 
(12
)
Accounts payable and accrued liabilities
 
79

 
4

Income tax receivables and payables
 
27

 
42

Deferred income
 
(4
)
 
(6
)
Other balance sheet changes, net
 
(20
)
 
40

Net cash provided by operating activities
 
415

 
295

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(85
)
 
(66
)
Purchases of investments
 
(411
)
 
(305
)
Proceeds from sales and maturities of investments
 
236

 
298

Acquisitions and ventures
 
(4
)
 
(32
)
Change in restricted cash deposits
 

 
(2
)
Net cash used in investing activities
 
(264
)
 
(107
)
Cash flows from financing activities:
 
 
 
 
Payments of capital lease obligations
 
(5
)
 
(2
)
Payments of dividends
 
(40
)
 
(36
)
Repurchases of common stock, including shares surrendered for tax withholdings
 
(211
)
 
(151
)
Prepayments of common stock repurchases
 

 
(50
)
Proceeds from exercises of stock options
 
14

 
5

Excess tax benefits from stock-based compensation arrangements
 
4

 
17

Net cash used in financing activities
 
(238
)
 
(217
)
Effect of exchange rate changes on cash and cash equivalents
 
1

 
(5
)
Net decrease in cash and cash equivalents
 
(86
)
 
(34
)
Cash and cash equivalents at beginning of period
 
797

 
974

Cash and cash equivalents at end of period
 
$
711

 
$
940

See accompanying notes.


6


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 brands have been consistently developed across an expanding number of products, brands, sales channels, and international markets. RLC's brand names include Ralph Lauren, Ralph Lauren Collection, Purple Label, Black Label, Polo, Polo Ralph Lauren, Blue Label, RRL, RLX Ralph Lauren, Lauren Ralph Lauren, Ralph Lauren Childrenswear, Denim & Supply Ralph Lauren, Chaps, Club Monaco, and American Living, 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 around the world. The Company also sells directly to consumers through its integrated retail channel, which includes retail stores around the world; concession-based shop-within-shops located in Asia, Australia, New Zealand, and Europe; and retail e-commerce operations in North America, Europe, and Asia. The Company also licenses to unrelated third parties for specified periods the right 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.
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 29, 2014 (the "Fiscal 2014 10-K").
Basis of Consolidation
These unaudited interim consolidated financial statements present the consolidated 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 Periods
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to March 31. As such, fiscal year 2015 will end on March 28, 2015 and will be a 52-week period ("Fiscal 2015"). Fiscal year 2014 ended on March 29, 2014 and was also a 52-week period ("Fiscal 2014"). The first quarter of Fiscal 2015 ended on June 28, 2014 and was a 13-week period. The first quarter of Fiscal 2014 ended on June 29, 2013 and was also a 13-week period.
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.


7


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 awards and related estimated forfeiture rates; reserves for restructuring; and accounting for business combinations, among others.
Reclassifications
Certain reclassifications have been made to the prior period's financial information in order to conform to the current period's presentation, including a change in the manner in which the Company allocates certain costs to its reportable segments, as described in Note 22 to the Company's Fiscal 2014 Form 10-K.
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 three-month period ended June 28, 2014 are not necessarily indicative of the operating results and cash flows that may be expected for the full Fiscal 2015.
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, the 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 reserves, 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 consumers. E-commerce revenue from sales of products ordered through the Company's e-commerce sites is recognized upon delivery of the shipment to 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 redemption 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.
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.


8


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 approximately $9 million and $8 million during the three-month periods ended June 28, 2014 and June 29, 2013, respectively. 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 approximately $42 million and $39 million during the three-month periods ended June 28, 2014 and June 29, 2013, 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 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
 
 
June 28,
2014
 
June 29,
2013
 
 
(millions)
Basic shares
 
88.9

 
90.8

Dilutive effect of stock options, restricted stock, and RSUs
 
1.3

 
2.3

Diluted shares
 
90.2

 
93.1

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 RSUs 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 considered 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 June 28, 2014 and June 29, 2013, there were approximately 1.2 million and 0.5 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.
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 section above for further discussion of related accounting policies) and (ii) allowances for doubtful accounts.


9


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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
 
 
June 28,
2014
 
June 29,
2013
 
 
(millions)
Beginning reserve balance
 
$
254

 
$
230

Amount charged against revenue to increase reserve
 
157

 
153

Amount credited against customer accounts to decrease reserve
 
(165
)
 
(140
)
Foreign currency translation
 
(1
)
 
2

Ending reserve balance
 
$
245

 
$
245

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 $16 million as of both June 28, 2014 and March 29, 2014. The change in the allowance for doubtful accounts was not material during either of the three-month periods ended June 28, 2014 and June 29, 2013.
Concentration of Credit Risk
The Company sells its wholesale merchandise primarily to major department and specialty stores around the world, 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 2014, the Company's sales to its largest wholesale customer, Macy's, Inc. ("Macy's"), accounted for approximately 12% of its total net revenues, and the Company's sales to its three largest wholesale customers (including Macy's) represented approximately 25% of total net revenues during Fiscal 2014. As of June 28, 2014, these three key wholesale customers represented approximately 30% 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 cash flow hedge accounting, the effective portion of changes in the fair value of these instruments is recognized in equity as a component of accumulated other comprehensive income ("AOCI") until the hedged item is recognized in earnings.
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 cash flows of the related hedged item. The extent to which a hedging instrument has been and is expected to remain highly effective in achieving offsetting changes in 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


10


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 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, primarily within cash from operating activities.
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 to a third party.
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.
Undesignated Hedges
All of the Company's undesignated hedges are entered into to hedge specific economic risks, particularly 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 2014 10-K for a summary of all of the Company's significant accounting policies.
4.
Recently Issued Accounting Standards
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 provides a single, comprehensive accounting model for revenues arising from contracts with customers that supersedes most of the existing revenue recognition guidance, including industry-specific guidance. Under this model, revenue is recognized at an amount that an entity expects to be entitled to upon transferring control of goods or services to a customer, as opposed to when risks and rewards transfer to a customer under existing revenue recognition guidance.


11


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

ASU 2014-09 is effective for the Company beginning in its fiscal year 2018, and may be applied retrospectively to all prior periods presented or through a cumulative adjustment to the opening retained earnings balance in the year of adoption. The Company is currently in the process of evaluating the impact of ASU 2014-09 on its consolidated financial statements.
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 an 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 on the consolidated balance sheet. The comment period for the Exposure Draft ended in September 2013. The FASB is currently redeliberating certain portions of the proposal to determine 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
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.
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 an 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)
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.


12


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The licensed trademark intangible asset was valued using the excess earnings method, discounting the estimated after-tax cash flows associated with the Chaps-branded 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 was 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.
The operating results of the Chaps Menswear Business have been consolidated into the Company's operating results beginning on April 10, 2013. Transaction costs of $3 million were expensed as incurred and classified within SG&A expenses in the consolidated statement of income during the three months ended June 29, 2013.
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 (the "Australia and New Zealand Business") 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 Company funded this acquisition with available cash on-hand and accounted for it as a business combination during the second quarter of Fiscal 2014, with the operating results of the Australia and New Zealand Business consolidated into the Company's operating results beginning on July 1, 2013. See Note 5 to the Company's Fiscal 2014 Form 10-K for the allocation of the purchase price and other information related to this acquisition.

6.
Inventories
Inventories consist of the following:
 
 
June 28,
2014
 
March 29,
2014
 
June 29,
2013
 
 
(millions)
Raw materials
 
$
3

 
$
3

 
$
5

Work-in-process
 
2

 
2

 
2

Finished goods
 
1,175

 
1,015

 
1,046

Total inventories
 
$
1,180

 
$
1,020

 
$
1,053

7.
Property and Equipment
Property and equipment, net consists of the following:
 
 
June 28,
2014
 
March 29,
2014
 
 
(millions)
Land and improvements
 
$
17

 
$
17

Buildings and improvements
 
185

 
183

Furniture and fixtures
 
676

 
661

Machinery and equipment
 
293

 
245

Capitalized software
 
372

 
366

Leasehold improvements
 
1,078

 
1,064

Construction in progress
 
326

 
312

 
 
2,947

 
2,848

Less: accumulated depreciation
 
(1,584
)
 
(1,526
)
Property and equipment, net
 
$
1,363

 
$
1,322



13


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.
Other Current and Non-Current Liabilities
Accrued expenses and other current liabilities consist of the following:
 
 
June 28,
2014
 
March 29,
2014
 
 
(millions)
Accrued operating expenses
 
$
182

 
$
183

Accrued inventory
 
155

 
84

Accrued payroll and benefits
 
127

 
190

Other taxes payable
 
87

 
76

Deferred income
 
42

 
41

Dividends payable
 
39

 
40

Accrued capital expenditures
 
38

 
45

Capital lease obligations
 
18

 
16

Other accrued expenses and current liabilities
 
17

 
15

Total accrued expenses and other current liabilities
 
$
705

 
$
690

Other non-current liabilities consist of the following:
 
 
June 28,
2014
 
March 29,
2014
 
 
(millions)
Capital lease obligations
 
$
256

 
$
255

Deferred rent obligations
 
224

 
224

Deferred tax liabilities
 
78

 
81

Deferred compensation
 
43

 
29

Deferred income
 
35

 
39

Other non-current liabilities
 
25

 
26

Total other non-current liabilities
 
$
661

 
$
654

9.
Restructuring and Other Charges
A description of significant restructuring and other activities and related costs is included below.

Fiscal 2015
During the three months ended June 28, 2014, the Company recorded $4 million in restructuring charges, primarily related to severance and benefit costs associated with the Company's retail and wholesale operations. The related restructuring liability is expected to be paid by the end of fiscal year 2016.

Fiscal 2014
During Fiscal 2014, the Company recorded approximately $8 million in restructuring charges, primarily related to severance and benefit costs associated with restructuring of its corporate operations, $6 million of which remained payable as of March 29, 2014. As of June 28, 2014, the remaining restructuring liability related to these charges was $4 million, which is expected to be paid by the end of fiscal year 2015.



14


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.
Income Taxes
Effective Tax Rate
The Company's effective tax rate, which is calculated by dividing the provision for income taxes by pretax income, was 31.1% and 31.7% during the three-month periods ended June 28, 2014 and June 29, 2013, respectively. The Company's effective tax rate differs from the statutory rate due to the effect of state and local taxes, tax rates in foreign jurisdictions, and certain nondeductible expenses. The effective tax rate in both periods was lower than the U.S. federal statutory income tax rate of 35% principally as a result of the effect of earnings generated in lower taxed foreign jurisdictions. In addition, the effective tax rate for the three months ended June 28, 2014 was favorably impacted by an income tax benefit resulting from the legal entity restructuring of certain of the Company's foreign operations during Fiscal 2015, partially offset by additional tax reserves associated with the conclusion of tax examinations.
Uncertain Income Tax Benefits
Reconciliations of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, for the three-month periods ended June 28, 2014 and June 29, 2013 are presented below:
 
 
Three Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
 
(millions)
Unrecognized tax benefits beginning balance
 
$
83

 
$
100

Additions related to current period tax positions
 
1

 
1

Additions related to prior period tax positions
 
4

 
1

Reductions related to prior period tax positions
 
(1
)
 
(2
)
Reductions related to settlements with taxing authorities
 
(1
)
 

Changes related to foreign currency translation
 

 
1

Unrecognized tax benefits ending balance
 
$
86

 
$
101

The Company classifies interest and penalties related to unrecognized tax benefits as part of its provision for income taxes. Reconciliations of the beginning and ending amounts of accrued interest and penalties related to unrecognized tax benefits for the three-month periods ended June 28, 2014 and June 29, 2013 are presented below:
 
 
Three Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
 
(millions)
Accrued interest and penalties beginning balance
 
$
49

  
$
50

Net additions charged to expense
 
2

 
1

Reductions related to prior period tax positions
 
(1
)
 
(1
)
Accrued interest and penalties ending balance
 
$
50

  
$
50

The total amount of unrecognized tax benefits, including interest and penalties, was $136 million and $132 million as of June 28, 2014 and March 29, 2014, 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 $89 million and $86 million as of June 28, 2014 and March 29, 2014, respectively.


15


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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. Although the outcomes and timing of such events are highly uncertain, the Company does not anticipate that the balance of gross unrecognized tax benefits, excluding interest and penalties, will change significantly during the next twelve months. However, changes in the occurrence, expected outcomes, and timing of such events could cause the Company's current estimate to change materially in the future.
The Company files a consolidated U.S. federal income tax return, as well as tax returns in various state, local, and foreign jurisdictions. The Company is generally no longer subject to examinations by the relevant tax authorities for years prior to fiscal year 2006.
11.
Debt
Senior Notes
In September 2013, the Company completed a registered public debt 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 were used for general corporate purposes, including the repayment of the Company's €209 million principal amount previously outstanding of 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 interest on 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.
Commercial Paper
In May 2014, the Company initiated a commercial paper borrowing program (the "Commercial Paper Program") that allows it to issue up to $300 million of unsecured commercial paper notes through private placement using third-party broker-dealers. Borrowings under the Commercial Paper Program are supported by the Global Credit Facility, as defined below, and may be used for the Company's general working capital and corporate needs. Maturities of commercial paper notes will vary depending upon needs, but cannot exceed 397 days from the date of issuance. Commercial paper issued under the Commercial Paper Program will rank equally with the Company's other unsecured indebtedness. As of June 28, 2014, there were no borrowings under the Company's Commercial Paper Program.
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, which may also be used to support the issuance of letters of credit and the maintenance of the Commercial Paper Program (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 under the Global Credit Facility 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 June 28, 2014, there were no borrowings outstanding under the Global Credit Facility and the Company was contingently liable for $9 million of outstanding letters of credit.


16


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 certain 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 June 28, 2014, 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 countries. Borrowings under the Pan-Asia Credit Facilities are guaranteed by the parent 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:
China 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 8, 2015, and may also be used to support bank guarantees. As of June 28, 2014, bank guarantees of 12 million Chinese Renminbi (approximately $2 million) were supported by this facility.
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.
South Korea Credit Facility — provides Ralph Lauren (Korea) Ltd. with a revolving line of credit of up to 11 billion South Korean Won (approximately $11 million) through October 31, 2014.
Taiwan Credit Facility provides Ralph Lauren (Hong Kong) Retail Company Limited, 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 June 28, 2014, there were no borrowings outstanding under any of the Pan-Asia Credit Facilities.
Refer to Note 14 of the Fiscal 2014 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


17


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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:
 
 
June 28,
2014
 
March 29,
2014
 
 
(millions)
Financial assets recorded at fair value:
 
 
 
 
Government bonds(a)
 
$

 
$
1

Auction rate securities(b)
 
2

 
2

Derivative financial instruments(b)
 
7

 
8

Total
 
$
9

 
$
11

Financial liabilities recorded at fair value:
 
 
 
 
Derivative financial instruments(b)
 
$
8

 
$
7

Total
 
$
8

 
$
7

 
(a) 
Based on Level 1 measurements.
(b) 
Based on Level 2 measurements.
To the extent the Company invests in bonds, such investments are classified as available-for-sale and 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 and recorded at fair value within other non-current assets 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 on a gross basis 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 is recorded at carrying value in its consolidated balance sheets, which may differ from its fair value. The carrying value of the Senior Notes is adjusted for any unamortized discount, which is not material. The fair value of the Senior Notes is estimated based on external pricing data, including available quoted market prices, and of comparable debt instruments with similar interest rates, credit ratings, and trading frequency, among other factors.


18


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes the carrying values and the estimated fair values of the Company's Senior Notes:
 
 
June 28, 2014
 
March 29, 2014
 
 
Carrying
Value
 
Fair
Value(a)
 
Carrying
Value
 
Fair
Value(a)
 
 
(millions)
2.125% Senior Notes
 
$
300

 
$
303

 
$
300

 
$
300

 
 
(a) 
Based on Level 2 measurements.
Unrealized gains or losses on the Company's debt do not result in the realization or expenditure of cash, unless the debt is retired prior to its 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 or 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 instruments are assessed for impairment and, if applicable, written-down to and recorded at fair value, considering external market participant assumptions. There were no material impairment charges recorded during either of the three-month periods ended June 28, 2014 and June 29, 2013.
13.
Financial Instruments
Derivative Financial Instruments
The Company is exposed to changes in foreign currency exchange rates, primarily relating to certain anticipated cash flows of its international operations. Consequently, the Company 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 June 28, 2014 and March 29, 2014:
 
 
Notional Amounts
 
Derivative Assets
 
Derivative Liabilities
Derivative Instrument(a)
 
June 28,
2014
 
March 29,
2014
 
June 28,
2014
 
March 29,
2014
 
June 28,
2014
 
March 29,
2014
 
 
 
 
 
 
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
 
$
501

 
$
476

 
(c) 
 
$
4

 
(d) 
 
$
2

 
AE
 
$
4

 
AE
 
$
5

FC — Other(e)
 
210

 
223

 
 

 
 

 
AE
 
3

 
AE
 
2

Total Designated Hedges
 
$
711

 
$
699

 
 
 
$
4

 
 
 
$
2

 
 
 
$
7

 
 
 
$
7

Undesignated Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FC — Other(f)
 
$
274

 
$
280

 
PP
 
$
3

 
(g) 
 
$
6

 
ONCL
 
$
1

 
 
$

Total Hedges
 
$
985

 
$
979

 
 
 
$
7

 
 
 
$
8

 
 
 
$
8

 
 
 
$
7

 
(a) 
FC = Forward foreign currency exchange contracts.
(b) 
PP = Prepaid expenses and other current assets; AE = Accrued expenses and other current liabilities; ONCL = Other non-current liabilities.


19


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(c) 
$2 million included within prepaid expenses and other current assets and $2 million included within other non-current assets.
(d) 
$1 million included within prepaid expenses and other current assets and $1 million included within other non-current assets.
(e) 
Primarily designated hedges of foreign currency-denominated intercompany royalty payments, marketing contributions, and other net operational exposures.
(f) 
Primarily undesignated hedges of foreign currency-denominated intercompany loans.
(g) 
$2 million included within prepaid expenses and other current assets and $4 million included within other non-current assets.
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, spread across eight separate counterparties, the amounts presented in the consolidated balance sheets as of June 28, 2014 and March 29, 2014 would be adjusted from the current gross presentation as detailed in the following table:
 
 
June 28, 2014
 
March 29, 2014
Derivative Instrument
 
Gross Amounts Presented in the Consolidated Balance Sheet
 
Gross Amounts not Offset in the Balance Sheet that are Subject to Master Netting Agreements
 
Net
Amount
 
Gross Amounts Presented in the Consolidated Balance Sheet
 
Gross Amounts not Offset in the Balance Sheet that are Subject to Master Netting Agreements
 
Net
Amount
 
 
(millions)
FC — Derivative assets
 
$
7

 
$
(2
)
 
$
5

 
$
8

 
$
(1
)
 
$
7

FC — Derivative liabilities
 
$
8

 
$
(2
)
 
$
6

 
$
7

 
$
(1
)
 
$
6

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 table summarizes the pretax 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 periods ended June 28, 2014 and June 29, 2013:
 
 
Gains (Losses)
Recognized in OCI
 
Gains (Losses) Reclassified from AOCI to Earnings
 
Location of Gains (Losses) Reclassified from
AOCI to Earnings
 
 
Three Months Ended
 
Three Months Ended
 
Derivative Instrument
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
 
 
 
 
 
(millions)
 
 
 
 
Designated Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
FC — Inventory purchases
 
$
1

 
$
(1
)
 
$
(1
)
 
$
5

 
Cost of goods sold
FC — Other
 
(2
)
 

 
(2
)
 

 
Foreign currency gains (losses)
 
 
$
(1
)
 
$
(1
)
 
$
(3
)
 
$
5

 
 
Designated Hedge of Net Investment:
 
 
 
 
 
 
 
 
 
 
Euro Debt(a)
 
$

 
$
(1
)
 
$

 
$

 
 
Total Designated Hedges
 
$
(1
)
 
$
(2
)
 
$
(3
)
 
$
5

 
 
 
(a) 
Amount recognized in OCI relates to remeasurement of the Euro Debt, which was repaid in October 2013, and would be recognized in earnings only upon the sale or liquidation of the hedged net investment.
During the three months ended June 29, 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.


20


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of June 28, 2014, it is expected that approximately $4 million of net losses deferred in AOCI related to derivative financial instruments will be recognized in earnings over the next twelve months. 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 financial statements for the three-month periods ended June 28, 2014 and June 29, 2013:
 
 
Gains (Losses)
Recognized in Earnings
 
Location of Gains (Losses)
Recognized in Earnings
 
 
Three Months Ended
 
Derivative Instrument
 
June 28,
2014
 
June 29,
2013
 
 
 
(millions)
 
 
Undesignated Hedges:
 
 
 
 
 
 
FC — Other
 
$
(2
)
 
$
8

 
Foreign currency gains (losses)
Total Undesignated Hedges
 
$
(2
)
 
$
8

 
 
Risk Management Strategies
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, 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 South Korean Won, the Australian Dollar, the Canadian Dollar, and the Hong Kong Dollar, 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 two months to two years to provide continuing coverage throughout the hedging period.
See Note 3 for further discussion of the Company's accounting policies relating to its derivative financial instruments.
Investments
The following table summarizes the Company's short-term and non-current investments recorded in the consolidated balance sheets as of June 28, 2014 and March 29, 2014:
 
 
June 28, 2014
 
March 29, 2014
Type of Investment
 
Short-term
 
Non-current
 
Total
 
Short-term
 
Non-current
 
Total
 
 
 
 
 
 
(millions)
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
 
Government bonds
 
$

 
$

 
$

 
$
1

 
$

 
$
1

Auction rate securities(a)
 

 
2

 
2

 

 
2

 
2

Total available-for-sale investments
 
$

 
$
2

 
$
2

 
$
1

 
$
2

 
$
3

Other:
 
 
 
 
 
 
 
 
 
 
 
 
Time deposits
 
$
658

 
$

 
$
658

 
$
487

 
$

 
$
487

Total Investments
 
$
658

 
$
2

 
$
660

 
$
488

 
$
2

 
$
490

 
(a) 
Auction rate securities have characteristics similar to short-term investments. However, the Company has recorded these securities within other non-current assets 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.


21


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

No significant realized or unrealized gains or losses on available-for-sale investments or other-than-temporary impairment charges were recorded during either of the three-month periods ended June 28, 2014 and June 29, 2013. Refer to Note 16 for further detail.
See Note 3 to the Fiscal 2014 10-K for further discussion of the Company's accounting policies relating to its investments.
14.
Commitments and Contingencies
Lease Obligations
During the three months ended June 28, 2014, the Company entered into a lease for a new domestic distribution facility in North Carolina to support its future business growth. The initial lease term is approximately 15 years, with optional renewal periods and a purchase option. The Company's total commitment relating to this lease is approximately $56 million, with minimum lease payments of approximately $2 million due in fiscal year 2016, $3 million due each year from fiscal year 2017 through 2019, and aggregate minimum lease payments of $45 million for fiscal years 2020 through 2031. The Company expects to take possession of this property in the second quarter of fiscal year 2016.
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 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. Since then, Wathne has made various attempts to expand the scope of its claim and the damages sought by making various motions and pursuing several intermediate appeals.
At this time, Wathne's principle remaining claim is that the Company required that Wathne discontinue the use of the Polo Sport brand on handbags in violation of its contract. A trial date has not 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, importation and exportation of its products, and employee relations. The Company believes at present that the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect on its consolidated financial statements. However, the Company's assessment of the current litigation or other legal claims could potentially 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.


22


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 does not currently anticipate incurring any material indemnification payments.
15.
Equity
Summary of Changes in Equity
A reconciliation of the beginning and ending amounts of equity is presented below:
 
 
Three Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
 
(millions)
Balance at beginning of period
 
$
4,034

 
$
3,785

Comprehensive income
 
161

 
169

Dividends declared
 
(39
)
 
(36
)
Repurchases of common stock, including shares surrendered for tax withholdings
 
(211
)
 
(201
)
Stock-based compensation
 
23

 
22

Shares issued and tax benefits recognized pursuant to stock-based compensation arrangements
 
18

 
22

Conversion of stock-based compensation awards
 
(14
)
 

Balance at end of period
 
$
3,972

 
$
3,761

Common Stock Repurchase Program
A summary of the Company's repurchases of Class A common stock under its common stock repurchase program is presented below:
 
 
Three Months Ended
 
 
 
June 28,
2014
 
June 29,
2013
 
 
 
(millions)
 
Cost of shares repurchased
 
$
180

 
$
150

(a) 
Number of shares repurchased
 
1.2

 
0.9

(a) 
 
(a) 
Includes a $50 million payment made in March 2013 under a share repurchase program with a third-party financial institution, in exchange for the right to receive shares of the Company's Class A common stock at the conclusion of the 93-day repurchase term. The related 0.3 million shares were delivered to the Company during the three months ended June 29, 2013, based on the volume-weighted average market price of the Company's Class A common stock over the 93-day repurchase term, less a discount. Further, in June 2013, the Company prepaid an additional $50 million under a separate share repurchase program with a third-party financial institution, in exchange for the right to receive shares of its Class A common stock at the conclusion of a repurchase term of up to 93 days based on the volume-weighted average market price of its Class A common stock over such term, less a discount. Such prepayment has not been included in the table above.
As of June 28, 2014, the remaining availability under the Company's Class A common stock repurchase program was approximately $400 million. Repurchases of shares of Class A common stock are subject to overall business and market conditions.


23


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In addition, during the three-month periods ended June 28, 2014 and June 29, 2013, 0.2 million and 0.3 million shares of Class A common stock, respectively, at a cost of $31 million and $51 million, respectively, 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 Amended and Restated 2010 Long-Term Stock Incentive Plan (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 November 5, 2013, the Company's Board of Directors approved an increase to the Company's quarterly cash dividend on its common stock from $0.40 per share to $0.45 per share. The first quarter Fiscal 2015 dividend of $0.45 per share was declared on June 12, 2014, was payable to stockholders of record at the close of business on June 27, 2014, and was paid on July 11, 2014. Dividends paid amounted to $40 million and $36 million during the three-month periods ended June 28, 2014 and June 29, 2013, respectively.
Conversion of Stock-based Compensation Awards
During the three months ended June 28, 2014, the Company converted certain fully-vested and expensed stock-based compensation awards to a cash contribution into a deferred compensation account. The Company recorded the excess of these awards' then current redemption value over their original grant-date fair value to retained earnings, with a corresponding increase to other non-current liabilities in the consolidated balance sheet.
16.
Accumulated Other Comprehensive Income
The following table presents the components of other comprehensive income (loss), net of tax, accumulated in equity:
 
 
Foreign Currency Translation Gains (Losses)
 
Net Unrealized Gains (Losses) on Derivative Financial Instruments
 
Net Unrealized Gains (Losses) on Available-for-Sale Investments
 
Net Unrealized Losses on Defined Benefit Plans
 
Total Accumulated Other Comprehensive Income (Loss)
 
 
(millions)
Balance at March 30, 2013
 
$
73

 
$
23

 
$
5

 
$
(7
)
 
$
94

Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
 
 
OCI before reclassifications(a)
 
(2
)
 
(1
)
 
(4
)
 

 
(7
)
Amounts reclassified from AOCI to earnings
 

 
(4
)
 
(1
)
 

 
(5
)
Other comprehensive loss, net of tax
 
(2
)
 
(5
)
 
(5
)
 

 
(12
)
Balance at June 29, 2013
 
$
71

 
$
18

 
$

 
$
(7
)
 
$
82

 
 
 
 
 
 
 
 
 
 
 
Balance at March 29, 2014
 
$
125

 
$
(4
)
 
$

 
$
(7
)
 
$
114

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
OCI before reclassifications(a)
 
(3
)
 

 

 

 
(3
)
Amounts reclassified from AOCI to earnings
 

 
2

 

 

 
2

Other comprehensive income (loss), net of tax
 
(3
)
 
2

 

 

 
(1
)
Balance at June 28, 2014
 
$
122

 
$
(2
)
 
$

 
$
(7
)
 
$
113


(a)
Amounts are net of taxes, which are immaterial.


24


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents reclassifications from AOCI to earnings, by component:
 
 
Three Months Ended
 
 
 
 
June 28,
2014
 
June 29,
2013
 
Location of Gains (Losses)
Reclassified from AOCI to Earnings
 
 
(millions)
 
 
Gains (losses) on derivative financial instruments(a):
 
 
 
 
 
 
    FC  Inventory purchases
 
$
(1
)
 
$
5

 
Cost of goods sold
    FC  Other
 
(2
)
 

 
Foreign currency losses
    Tax effect
 
1

 
(1
)
 
Provision for income taxes
        Net of tax
 
$
(2
)
 
$
4

 
 
 
(a) 
FC = Forward foreign currency exchange contracts.
17.
Stock-based Compensation
The Company's stock-based compensation awards are currently issued under the 2010 Incentive Plan, which was approved by its stockholders on August 5, 2010. However, any prior awards granted under the 1997 Incentive Plan remain subject to the terms of that plan. Any awards that expire, are forfeited, or are surrendered to the Company in satisfaction of taxes are available for issuance under the 2010 Incentive Plan.
Refer to Note 20 in the Fiscal 2014 10-K for a detailed description of the Company's stock-based compensation awards, including information related to 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
 
 
June 28,
2014
 
June 29,
2013
 
 
(millions)
Compensation expense
 
$
23

 
$
22

Income tax benefit
 
$
(8
)
 
$
(8
)
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 and other factors, stock-based compensation expense recognized during the three-month period ended June 28, 2014 is not indicative of the level of compensation expense expected to be incurred for the full Fiscal 2015.


25


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock Options
A summary of stock option activity under all plans for the three months ended June 28, 2014 is as follows:
 
 
Number of Options
 
 
(thousands)
Options outstanding at March 29, 2014
 
3,026

Granted
 
15

Exercised
 
(164
)
Cancelled/Forfeited
 
(19
)
Options outstanding at June 28, 2014
 
2,858

Service-based RSUs and Restricted Stock Awards
The fair values of restricted stock awards granted to non-employee directors are determined based on the fair value of the Company's Class A common stock on the date of grant. The weighted-average grant date fair values of restricted stock awards granted, which entitle holders to receive cash dividends in connection with the payments of dividends on the Company's Class A common stock, were $162.36 and $164.76 per share during the three-month periods ended June 28, 2014 and June 29, 2013, respectively.
A summary of restricted stock and service-based RSU activity during the three months ended June 28, 2014 is as follows:
 
 
Number of Shares
 
 
Restricted Stock
 
Service-based RSUs
 
 
(thousands)
Nonvested at March 29, 2014
 
5

 
7

Granted
 
3

 
12

Vested
 
(3
)
 

Nonvested at June 28, 2014
 
5

 
19

Performance-based RSUs
The fair value of the Company's performance-based RSUs that are not subject to a market condition in the form of a total shareholder return ("TSR") modifier is based on the fair value of the Company's Class A common stock on the date of grant, adjusted to reflect the absence of dividends for those securities that are not entitled to dividend equivalents. The fair value of the Company's performance-based RSUs with a TSR modifier is determined on the date of grant using a Monte Carlo simulation valuation model. This pricing model uses multiple simulations to evaluate the probability of the Company achieving various stock price levels to determine its expected TSR performance ranking. The weighted average assumptions used to estimate the fair value of performance-based RSUs with a TSR modifier granted during the three-month periods ended June 28, 2014 and June 29, 2013 were as follows:
 
 
Three Months Ended
 
 
June 28,
2014
 
June 29,
2013
Expected term (years)
 
3.0

 
3.0

Expected volatility
 
29.8
%
 
33.1
%
Expected dividend yield
 
1.09
%
 
0.96
%
Risk-free interest rate
 
0.9
%
 
0.4
%
Weighted-average grant date fair value per share
 
$169.47

 
$171.07



26


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The weighted-average grant date fair values of performance-based RSUs that do not contain a TSR modifier granted during the three-month periods ended June 28, 2014 and June 29, 2013 were $158.00 and $164.49 per share, respectively.
A summary of performance-based RSU activity during the three months ended June 28, 2014 is as follows:
 
 
Number of Shares
 
 
Performance-based
RSUs — without
TSR Modifier
 
Performance-based
RSUs — with
TSR Modifier
 
 
(thousands)
Nonvested at March 29, 2014
 
798

 
145

Granted
 
138

 
79

Change due to performance/market condition achievement
 
83

 

Vested
 
(422
)
 

Forfeited
 
(14
)
 
(8
)
Nonvested at June 28, 2014
 
583

 
216

18.
Segment Information
The Company has three reportable segments based on its business activities and organization: Wholesale, Retail, and Licensing. These segments offer a variety of products through different channels of distribution. The Wholesale segment consists of women's, men's, and children's apparel, accessories, home furnishings, and related products which are sold to major department stores, specialty stores, golf and pro shops, and the Company's owned, licensed, and franchised retail stores in the U.S. and overseas. The Retail segment consists of the Company's integrated worldwide retail operations, which sell products through its retail stores, its concession-based shop-within-shops, and its e-commerce sites, which are purchased from the Company's licensees, suppliers, and Wholesale segment. The Licensing segment generates revenues from royalties earned on the sale of the Company's apparel, home, and other products internationally and domestically through licensing alliances. The licensing agreements grant the licensees rights to use the Company's various trademarks in connection with the manufacture and sale of designated products in specified geographical areas for specified periods.
The accounting policies of the Company's segments are consistent with those described in Notes 2 and 3 to the Company's consolidated financial statements included in the Fiscal 2014 10-K. Sales and transfers between segments are generally recorded at cost and treated as transfers of inventory. All intercompany revenues, including such sales between segments, are eliminated in consolidation and are not reviewed when evaluating segment performance. Each segment's performance is evaluated based upon operating income before restructuring charges and certain other one-time items, such as legal charges, if any. Certain corporate overhead expenses related to global functions (including expenses for senior management, overall brand-related expenses, and certain other corporate-related expenses) remain at corporate, while others are allocated to the segments based upon specific usage or other allocation methods, as appropriate.
During the fourth quarter of Fiscal 2014, the Company changed the manner in which it allocates certain costs to its reportable segments. All prior period segment information has been recast and is presented below on a comparable basis. See Note 22 to the Company's Fiscal 2014 Form 10-K for further discussion.


27


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Net revenues and operating income for each of the Company's reportable segments are as follows:
 
 
Three Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
 
(millions)
Net revenues:
 
 
 
 
Wholesale
 
$
708

 
$
735

Retail
 
960

 
879

Licensing
 
40

 
39

Total net revenues
 
$
1,708

 
$
1,653


 
 
Three Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
 
(millions)
Operating income:
 
 
 
 
Wholesale
 
$
180

 
$
207

Retail
 
168

 
165

Licensing
 
36

 
35

 
 
384

 
407

Unallocated corporate expenses
 
(136
)
 
(147
)
Gain on acquisition of Chaps(a)
 

 
16

Unallocated restructuring and other charges(b)
 
(4
)
 

Total operating income
 
$
244

 
$
276

 
(a) 
See Note 5 for further discussion of the gain on acquisition of Chaps.
(b) 
The three-month period ended June 28, 2014 included certain unallocated restructuring charges, $2 million of which related to the Company's wholesale operations and $2 million to its retail operations (see Note 9).
Depreciation and amortization expense for the Company's segments is as follows:
 
 
Three Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
 
(millions)
Depreciation and amortization:
 
 
 
 
Wholesale
 
$
17

 
$
16

Retail
 
34

 
29

Unallocated corporate expenses
 
18

 
15

Total depreciation and amortization
 
$
69

 
$
60



28


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Net revenues by geographic location of the reporting subsidiary are as follows:
 
 
Three Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
 
(millions)
Net revenues(a):
 
 
 
 
The Americas(b)
 
$
1,139

 
$
1,154

Europe
 
360

 
310

  Asia(c)
 
209

 
189

Total net revenues
 
$
1,708

 
$
1,653

 
(a) 
Net revenues for certain of the Company's licensed operations are included within the geographic location of the reporting subsidiary which holds the respective license.
(b) 
Includes the U.S., Canada, and Latin America. Net revenues earned in the U.S. during the three-month periods ended June 28, 2014 and June 29, 2013 were $1.084 billion and $1.105 billion, respectively.
(c) 
Also includes Australia and New Zealand.
19.
Additional Financial Information
Cash Interest and Taxes
 
 
Three Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
 
(millions)
Cash paid for interest
 
$
2

 
$
1

Cash paid for income taxes
 
$
50

 
$
36

Non-cash Transactions
Significant non-cash investing activities included the capitalization of fixed assets and recognition of related obligations in the net amount of $38 million and $48 million for the three months ended June 28, 2014 and June 29, 2013, respectively. In addition, non-cash investing activities for the three months ended June 28, 2014 included the capitalization of a fixed asset, for which a $19 million non-binding advance payment was made during Fiscal 2014 and recorded within prepaid expenses and other current assets as of March 29, 2014.
Significant non-cash activities during the three months ended June 29, 2013 also included the $16 million gain recorded in connection with the Chaps Menswear License Acquisition in April 2013 (See Note 5).
There were no other significant non-cash investing or financing activities for the periods presented.


29


Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Special Note Regarding Forward-Looking Statements
Various statements in this Form 10-Q, or incorporated by reference into this Form 10-Q, in future filings by us with the Securities and Exchange Commission (the "SEC"), in our press releases, and in oral statements made from time to time by us or on our behalf constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as "anticipate," "estimate," "expect," "project," "we believe," "is or remains optimistic," "currently envisions," and similar words or phrases and involve known and unknown risks, uncertainties, and other factors which may cause actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed in or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others:
the loss of key personnel, including Mr. Ralph Lauren;
our ability to successfully implement our anticipated growth strategies and to capitalize on our repositioning initiatives in certain regions and merchandise categories;
our ability to secure our facilities and systems and those of our third-party service providers from, among other things, cybersecurity breaches, acts of vandalism, computer viruses, or similar Internet or email events;
our ability to continue to maintain our brand image and reputation and protect our trademarks;
the impact of global economic conditions on us, our customers, our suppliers, and our vendors and on our ability and their ability to access sources of liquidity;
the impact of the volatile state of the global economy or consumer preferences on purchases of premium lifestyle products that we offer for sale and our ability to forecast consumer demand, which could result in a build-up of inventory;
changes in the competitive marketplace, including the introduction of new products or pricing changes by our competitors, and consolidations, liquidations, restructurings, and other ownership changes in the retail industry;
a variety of legal, regulatory, tax, political, and economic risks, including risks related to the importation and exportation of products, tariffs, and other trade barriers which our international operations are subject to and other risks associated with our international operations, such as compliance with the Foreign Corrupt Practices Act or violations of other anti-bribery and corruption laws prohibiting improper payments, and the burdens of complying with a variety of foreign laws and regulations, including tax laws, trade and labor restrictions, and related laws that may reduce the flexibility of our business;
our ability to continue to expand or grow our business internationally and the impact of related changes in our customer, channel, and geographic sales mix as a result;
our exposure to currency exchange rate fluctuations and risks associated with increases in the costs of raw materials, transportation, and labor;
changes to our effective tax rates;
changes in our relationships with department store customers and licensing partners;
our efforts to improve the efficiency of our distribution system and to continue to enhance and upgrade our global information technology systems;
our intention to introduce new products or enter into or renew alliances and exclusive relationships;
our ability to access sources of liquidity to provide for our cash needs, including our debt obligations, payment of dividends, capital expenditures, and potential repurchase of our Class A common stock;


30


our ability to open new retail stores, concession shops, and e-commerce sites in an effort to expand our direct-to-consumer presence;
our ability to make certain strategic acquisitions and successfully integrate the acquired businesses into our existing operations;
our ability to maintain our credit profile and ratings within the financial community;
the potential impact on our operations and on our customers resulting from natural or man-made disasters; and
the impact to our business of events of unrest and instability that are currently taking place in certain parts of the world, as well as from any terrorist action, retaliation, and the threat of further action or retaliation.
These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. A detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations is included in our Annual Report on Form 10-K for the fiscal year ended March 29, 2014 (the "Fiscal 2014 10-K"). There are no material changes to such risk factors, nor are there any identifiable previously undisclosed risks as set forth in Part II, Item 1A — "Risk Factors" of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
In this Form 10-Q, references to "Ralph Lauren," "ourselves," "we," "our," "us," and the "Company" refer to Ralph Lauren Corporation and its subsidiaries, unless the context indicates otherwise. We utilize a 52-53 week fiscal year ending on the Saturday closest to March 31. As such, fiscal year 2015 will end on March 28, 2015 and will be a 52-week period ("Fiscal 2015"). Fiscal year 2014 ended on March 29, 2014 and was also a 52-week period ("Fiscal 2014"). The first quarter of Fiscal 2015 ended on June 28, 2014 and was a 13-week period. The first quarter of Fiscal 2014 ended on June 29, 2013 and was also a 13-week period.
INTRODUCTION
Management's discussion and analysis of financial condition and results of operations ("MD&A") is provided as a supplement to the accompanying unaudited interim consolidated financial statements and footnotes to help provide an understanding of our results of operations, financial condition, and liquidity. MD&A is organized as follows:
Overview.    This section provides a general description of our business, current trends and outlook, and a summary of our financial performance for the three-month period ended June 28, 2014. In addition, this section includes a discussion of recent developments and transactions affecting comparability that we believe are important in understanding our results of operations and financial condition, and in anticipating future trends.
Results of operations.    This section provides an analysis of our results of operations for the three-month period ended June 28, 2014 compared to the three-month period ended June 29, 2013.
Financial condition and liquidity.    This section provides a discussion of our financial condition and liquidity as of June 28, 2014, which includes (i) an analysis of our financial condition compared to the prior fiscal year-end; (ii) an analysis of changes in our cash flows for the three-month period ended June 28, 2014 compared to the three-month period ended June 29, 2013; (iii) an analysis of our liquidity, including common stock repurchases, payments of dividends, our outstanding debt and covenant compliance, and the availability under our credit facilities and our commercial paper program; and (iv) any material changes in our contractual and other obligations since March 29, 2014.
Market risk management.    This section discusses any significant changes in our risk exposures related to foreign currency exchange rates and our investments since March 29, 2014.


31


Critical accounting policies.    This section discusses any significant changes in our critical accounting policies since March 29, 2014. Critical accounting policies typically require significant judgment and estimation on the part of management in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 3 to our audited consolidated financial statements included in our Fiscal 2014 10-K.
Recently issued accounting standards.    This section discusses the potential impact on our reported results of operations and financial condition of certain accounting standards that have been recently issued or proposed.
OVERVIEW
Our Business
Our Company 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. Our long-standing reputation and distinctive image have been consistently developed across an expanding number of products, brands, sales channels, and international markets. Our brand names include Ralph Lauren, Ralph Lauren Collection, Purple Label, Black Label, Polo, Polo Ralph Lauren, Blue Label, RRL, RLX Ralph Lauren, Lauren Ralph Lauren, Ralph Lauren Childrenswear, Denim & Supply Ralph Lauren, Chaps, Club Monaco, and American Living, among others.
We classify our businesses into three segments: Wholesale, Retail, and Licensing. Our Wholesale business, which represented approximately 47% of our Fiscal 2014 net revenues, consists of sales made principally to major department stores and specialty stores around the world. Our Retail business, which represented approximately 51% of our Fiscal 2014 net revenues, consists of sales made directly to consumers through our integrated retail channel, which includes our retail stores around the world; concession-based shop-within-shops located in Asia, Australia, and Europe; and our retail e-commerce sites in North America, Europe, and Asia. Our Licensing business, which represented approximately 2% of our Fiscal 2014 net revenues, consists of royalty-based arrangements under which we license to unrelated third parties for specified periods the right to operate retail stores and to use our 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. Approximately 36% of our Fiscal 2014 net revenues were earned outside of the U.S.
Our business is typically affected by seasonal trends, with higher levels of wholesale sales in our second and fourth quarters and higher retail sales in our second and third quarters. These trends result primarily from the timing of seasonal wholesale shipments and key vacation travel, back-to-school, and holiday shopping periods in our Retail segment. In addition, fluctuations in net 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, our operating results and cash flows for the three-month period ended June 28, 2014 are not necessarily indicative of the operating results and cash flows that may be expected for the full Fiscal 2015.
Current Trends and Outlook
Although the global economy has shown signs of a modest recovery, future expectations of growth reflect sustained uncertainty. The current global geopolitical environment has contributed to this uncertainty and is negatively impacting consumer travel, which affects global retail sales. While consumer confidence has been slowly improving, the level of spending on discretionary items remains constrained due to continued uncertainty. Additionally, adverse weather conditions in certain parts of the world, including the U.S., have resulted in a challenging Spring/Summer selling season for many retailers. As a result of these factors, consumer retail traffic remains relatively weak and inconsistent, which has led to a more promotional environment due to increased competition and a desire to offset traffic declines with increased levels of conversion. North American department stores have been especially promotional as they were contending with lower traffic and the late start to Spring, in addition to weaker than expected Easter and Father's Day holiday sales. Certain of our operations have experienced and have been impacted by these dynamics, with variations across the geographic regions and businesses in which we operate. Despite these challenges, we remain optimistic about our future growth prospects and continue to invest in our longer-term growth objectives, while continually monitoring macroeconomic risks and remaining focused on disciplined expense management. Although we continue to expect that the investments that we are making in our business will outpace our sales growth in the near-term, we expect that these initiatives will create longer-term shareholder value.


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If the economic uncertainty and challenging industry trends continue or worsen, the constrained level of worldwide consumer spending and modified consumption behavior may continue to have a negative effect on our sales, inventory levels, and operating margin for the remainder of Fiscal 2015. We will continue to monitor these risks and evaluate and adjust our operating strategies and cost management opportunities to mitigate the related impact on our results of operations, while remaining focused on the long-term growth of our business and protecting the value of our brand.
For a detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations, see Part I, Item 1A — "Risk Factors" in our Fiscal 2014 10-K.
Summary of Financial Performance
Operating Results
During the three months ended June 28, 2014, we reported net revenues of $1.708 billion, net income of $162 million, and net income per diluted share of $1.80. This compares to net revenues of $1.653 billion, net income of $181 million, and net income per diluted share of $1.94 during the three months ended June 29, 2013.
Our operating performance for the three months ended June 28, 2014 reflected revenue growth of 3.4% on a reported basis and 2.4% on a constant currency basis, as increased revenues from our retail businesses across all of our major geographies and net favorable foreign currency effects were partially offset by lower revenues from our domestic wholesale business, largely attributable to a shift in timing of certain wholesale shipments. Our revenue growth also reflected the inclusion of revenues from the previously licensed Australia and New Zealand Business acquired in July 2013 (see "Recent Developments" for further discussion). Our gross margin percentage increased by 30 basis points to 61.0% during the three months ended June 28, 2014, primarily attributable to favorable channel and geographic mix, partially offset by the unfavorable impact of certain foreign exchange rates on our derivative contracts. Selling, general, and administrative ("SG&A") expenses increased due to increased investments in our stores, facilities, and infrastructure consistent with our longer-term objectives, as well as operating expenses attributable to our recent acquisitions. In addition, during the three months ended June 29, 2013, we recognized a $16 million gain relating to our acquisition of the Chaps Menswear Business, as discussed within "Results of Operations" below.
Net income declined by $19 million during the three months ended June 28, 2014, as compared to the three months ended June 29, 2013, primarily due to a $32 million decrease in operating income, partially offset by an $11 million decline in our provision for income taxes, which was driven by lower pretax income and a decline in our reported effective tax rate of 60 basis points. Net income per diluted share declined due to lower net income, partially offset by lower weighted-average diluted shares outstanding, driven by our share repurchases over the last twelve months.
Financial Condition and Liquidity
We ended the first quarter of Fiscal 2015 in a net cash and investments position (cash and cash equivalents plus short-term and non-current investments, less total debt) of $1.071 billion, compared to $987 million as of the end of Fiscal 2014. The increase in our net cash and investments position was primarily due to our operating cash flows of $415 million, partially offset by our use of cash to support Class A common stock repurchases of $211 million, including withholdings in satisfaction of tax obligations for stock-based compensation awards, capital expenditures of $85 million, and dividend payments of $40 million during the three months ended June 28, 2014.
We generated $415 million of cash from operations during the three months ended June 28, 2014, compared to $295 million during the three months ended June 29, 2013. The increase in operating cash flows primarily relates to net favorable changes related to our operating assets and liabilities, including working capital, as well as an increase in our net income before non-cash items during the three months ended June 28, 2014 compared to the prior fiscal year period.
Our equity declined to $3.972 billion as of June 28, 2014 compared to $4.034 billion as of March 29, 2014, primarily due to our repurchases of common stock and dividends declared, largely offset by our net income and the net impact of stock-based compensation arrangements during the three months ended June 28, 2014.


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Recent Developments
Australia and New Zealand Licensed Operations Acquisition
In July 2013, in connection with the transition of the Ralph Lauren-branded apparel and accessories business in Australia and New Zealand (the "Australia and New Zealand Business") from a licensed to a wholly-owned operation, we 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 our licensee for the Australia and New Zealand Business. The operating results of the acquired business have been consolidated in our operating results beginning on July 1, 2013.
Chaps Menswear License Acquisition
In April 2013, in connection with the transition of the North American Chaps-branded men's sportswear business (the "Chaps Menswear Business") from a licensed to a wholly-owned operation, we 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 our licensee for the Chaps Menswear Business. The operating results of the Chaps Menswear Business have been consolidated in our operating results beginning on April 10, 2013.
Transactions Affecting Comparability of Results of Operations and Financial Condition
The comparability of our operating results for the three-month periods ended June 28, 2014 and June 29, 2013 has been affected by certain events, including:
pretax restructuring and other charges of $4 million recorded during the three-month period ended June 28, 2014 (see Note 9 to the accompanying unaudited interim consolidated financial statements); and
our acquisitions of previously licensed businesses, including the Chaps Menswear License Acquisition in April 2013, which resulted in a $16 million gain recorded during the first quarter of Fiscal 2014, and the Australia and New Zealand Licensed Operations Acquisition in July 2013 (see Note 5 to the accompanying unaudited interim consolidated financial statements).
Our "Results of Operations" discussion that follows includes the significant changes in operating results arising from these items affecting comparability. However, unusual items or transactions may occur in any period. Accordingly, investors and other financial statement users should consider the types of events and transactions that have affected operating trends.




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RESULTS OF OPERATIONS
Three Months Ended June 28, 2014 Compared to Three Months Ended June 29, 2013
The following table summarizes our results of operations and expresses the percentage relationship to net revenues of certain financial statement captions. All percentages shown in the below table and the discussion that follows have been calculated using unrounded numbers.
 
 
Three Months Ended
 
 
 
 
 
 
June 28,
2014
 
June 29,
2013
 
$
Change
 
% / bps
Change
 
 
(millions, except per share data)
 
 
Net revenues
 
$
1,708

 
$
1,653

 
$
55

 
3.4
%
Cost of goods sold(a) 
 
(665
)
 
(649
)
 
(16
)
 
2.6
%
Gross profit
 
1,043

 
1,004

 
39

 
3.9
%
Gross profit as % of net revenues
 
61.0
%
 
60.7
%
 
 
 
30 bps

Selling, general, and administrative expenses(a) 
 
(789
)
 
(735
)
 
(54
)
 
7.2
%
SG&A expenses as % of net revenues
 
46.1
%
 
44.5
%
 
 
 
160 bps

Amortization of intangible assets
 
(6
)
 
(9
)
 
3

 
(30.9
%)
Gain on acquisition of Chaps
 

 
16

 
(16
)
 
NM

Restructuring and other charges
 
(4
)
 

 
(4
)
 
NM

Operating income
 
244

 
276

 
(32
)
 
(11.6
%)
Operating income as % of net revenues
 
14.3
%
 
16.7
%
 
 
 
(240 bps)

Foreign currency losses
 
(3
)
 
(6
)
 
3

 
(44.0
%)
Interest expense
 
(4
)
 
(5
)
 
1

 
(21.1
%)
Interest and other income, net
 
1

 
2

 
(1
)
 
(13.0
%)
Equity in losses of equity-method investees
 
(3
)
 
(2
)
 
(1
)
 
27.7
%
Income before provision for income taxes
 
235

 
265</