FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549-1004
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
April 1, 2006
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number:
001-13057
POLO RALPH LAUREN
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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13-2622036
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(State or other jurisdiction
of
incorporation or organization)
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(IRS Employer
Identification No.)
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650 Madison Avenue, New York,
New York
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10022
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(212) 318-7000
(Address of principal
executive offices)
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(Zip
Code)
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Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each
Class
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Name of Each Exchange on
Which Registered
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Class A Common Stock,
$.01 par value
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New York Stock
Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a
well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act
of
1934. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as described in
Rule 12b-2
of the Exchange
Act). Yes þ No 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
The aggregate market value of the registrants voting stock
held by nonaffiliates of the registrant was approximately
$3,075,164,089 as of September 30, 2005, the last business
day of the registrants most recently completed second
fiscal quarter.
At June 13, 2006, 62,271,831 shares of the
registrants Class A Common Stock, $.01 par value
and 43,280,021 shares of the registrants Class B
Common Stock, $.01 par value were outstanding.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Various statements in this
Form 10-K
or incorporated by reference into this
Form 10-K,
in future filings by us with the SEC, in our press releases and
in oral statements made by or with the approval of authorized
personnel constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. Forward-looking statements are based on current
expectations and are indicated by words or phrases such as
anticipate, estimate,
expect, project, we believe,
is or remains optimistic, currently
envisions and similar words or phrases and involve known
and unknown risks, uncertainties and other factors which may
cause actual results, performance or achievements to be
materially different from the future results, performance or
achievements expressed in or implied by such forward-looking
statements. Forward-looking statements include statements
regarding, among other items:
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our anticipated growth strategies;
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our plans to expand internationally;
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our plans to open new retail stores;
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our ability to make strategic acquisitions of selected licensees;
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our intention to introduce new products or enter into new
licensing alliances;
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anticipated effective tax rates in future years;
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future expenditures for capital projects;
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our ability to continue to maintain our brand image and
reputation;
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our ability to continue to initiate cost cutting efforts and
improve profitability;
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our efforts to improve the efficiency of our distribution
system; and
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our ability to refinance our Euro debt on favorable terms by
November 2006.
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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 beyond our control.
Significant factors that cause our actual results to differ
materially from our expectations are described in this
Form 10-K
under the heading of Risk Factors. We undertake no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise.
WEBSITE
ACCESS TO COMPANY REPORTS
Our investor website is http://investor.polo.com. Our Annual
Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to those reports filed or furnished to the
Securities and Exchange Commission (the SEC)
pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 are available on our investor
website under the caption SEC Filings promptly after
we electronically file such materials with, or furnish such
materials to, the Securities and Exchange Commission.
Information relating to corporate governance at Polo, including
our Corporate Governance Policies, our Code of Business Conduct
and Ethics for all directors, officers, and employees, our Code
of Ethics for Principal Executive Officers and Senior Financial
Officers, and information concerning our directors, Committees
of the Board, including Committee charters, and transactions in
Polo securities by directors and executive officers, is
available at our website under the captions Corporate
Governance and SEC Filings. Paper copies of
these filings and corporate governance documents are available
to stockholders without charge by written request to Investor
Relations, Polo Ralph Lauren Corporation, 650 Madison Avenue,
New York, New York 10022.
1
In this
Form 10-K,
references to Polo, ourselves,
we, our, us and the
Company refer to Polo Ralph Lauren Corporation and
its subsidiaries, unless the context requires otherwise. Due to
the collaborative and ongoing nature of our relationships with
our licensees, such licensees are sometimes referred to in this
Form 10-K
as licensing alliances. Our fiscal year ends on the
Saturday nearest to March 31. All references to
Fiscal 2006 represent the
52-week
fiscal year ended April 1, 2006. All references to
Fiscal 2005 represent the
52-week
fiscal year ended April 2, 2005. All references to
Fiscal 2004 represent the
53-week year
ended April 3, 2004.
PART I
General
Polo Ralph Lauren Corporation is a global leader in the design,
marketing and distribution of premium lifestyle products. We
believe that our global reach, breadth of product and
multi-channel distribution is unique among luxury and apparel
companies. We operate in three distinct but integrated segments:
wholesale, retail and licensing. During the past five years, we
have continued to develop our business model, expand our
vertically integrated retail segment, reposition our wholesale
segment, and maintain a strong licensing segment despite the
acquisition of several of our key licensed businesses. The
following tables show our net revenues and operating profit
(excluding unallocated corporate expenses, legal and
restructuring charges) by segment for the last three fiscal
years:
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Fiscal Years Ended
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April 1,
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April 2,
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April 3,
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2006
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2005
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2004
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(millions)
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Net revenues:
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Wholesale
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$
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1,942.5
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$
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1,712.1
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$
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1,210.4
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Retail
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1,558.6
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1,348.6
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1,170.5
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Licensing
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245.2
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244.7
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268.8
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$
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3,746.3
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$
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3,305.4
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$
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2,649.7
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Fiscal Years Ended
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April 1,
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April 2,
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April 3,
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2006
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2005
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2004
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(millions)
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Operating Income:
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Wholesale
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$
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398.3
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$
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299.7
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$
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143.7
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Retail
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140.0
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82.8
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55.7
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Licensing
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153.5
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159.5
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191.6
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691.8
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542.0
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390.4
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Less:
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Unallocated corporate expenses
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(159.1
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(133.8
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(99.9
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Unallocated legal and
restructuring charges
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(16.1
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(108.3
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(19.6
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$
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516.6
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$
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299.7
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$
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270.9
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Our net revenues by geographic region for the last three years
are shown in the tables below. Note 20 to our Consolidated
Financial Statements included in this Annual Report on
Form 10-K
contains additional segment and geographic area information.
2
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Fiscal Year Ended
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April 1,
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April 2,
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April 3,
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Net revenues by geographic
area
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2006
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2005
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2004
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(millions)
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United States and Canada
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$
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3,032.3
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$
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2,587.2
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$
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2,073.5
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Europe
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627.7
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579.2
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464.1
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Other regions
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86.3
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139.0
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112.1
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Net revenues
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$
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3,746.3
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$
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3,305.4
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$
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2,649.7
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We continue to invest in our business. In the past five years,
we have invested approximately $1.4 billion for the
acquisition of several key licensed businesses and capital
improvements, all fundamentally through strong operating cash
flow. We intend to continue to execute our long-term strategy of
expanding our accessories and other product offerings, growing
our specialty retail store base, and expanding our presence
internationally.
Seasonality
of Business
Our business is affected by seasonal trends, with greater
wholesale segment sales in our second and fourth quarters and
greater retail segment sales in our second and third quarters.
These trends result primarily from the timing of seasonal
wholesale shipments and key vacation travel and holiday shopping
periods in the retail segment. As a result of the growth in our
retail operations and other changes in our business, historical
quarterly operating trends and working capital requirements may
not be indicative of future performances. In addition,
fluctuations in sales and operating income in any fiscal quarter
may be affected by, among other things, the timing of seasonal
wholesale shipments and other events affecting retail sales.
Recent
Developments
On March 30, 2006 we opened a wholly-owned Ralph Lauren
flagship store in the Omotesando shopping district in Tokyo. The
Omotesando store is expected to raise our luxury image in Japan,
where our products are also sold in five licensee owned
specialty stores and over 300 department store
shops-within-shops.
On February 27, 2006, we signed a ten year license
agreement with Luxottica Group, S.p.A., (Luxottica)
effective January 1, 2007, for the design, production and
worldwide distribution of prescription frames and sunglasses
under the Polo Ralph Lauren brand. The agreement provides for
Luxotticas payment of approximately $200 million on
the effective date, representing the discounted net present
value of the guaranteed minimum royalties and design service
payments over the life of the agreement. The approximate
$200 million prepayment is nonrefundable, except with
respect to certain breaches of the agreement by the company, in
which case only the unearned portion of the prepayment would be
required to be prepaid. The agreement will replace our current
eyewear license with Safilo S.p.A., which expires on
December 31, 2006.
In Fiscal 2006, we acquired several businesses that source and
sell products bearing our trademarks under license in order to
control key product categories and realize the benefits of
vertical integration. On February 3, 2006, we acquired all
of the issued and outstanding shares of capital stock of Sun
Apparel, Inc., our licensee for mens and womens
casual apparel and sportswear in the United States and Canada
(the Polo Jeans Business), from Jones Apparel Group,
Inc. and certain of its subsidiaries (Jones). The
acquisition cost was approximately $260 million in cash,
including $5 million of transaction costs, and the purchase
price is subject to certain post-closing adjustments.
Note 5 to our consolidated financial statements sets forth
how the purchase price has been preliminary allocated among the
acquired assets. In addition, simultaneous with the transaction,
we settled all claims under our litigation with Jones relating
to the termination on December 31, 2003 of the United
States and Canadian license and design agreements for the sale
of products under the Lauren trademark for a cost of
$100 million. Other than inventory, Jones retained the
right to all working capital balances at the date of closing. We
have entered into a transition services agreement with Jones to
provide a variety of operational, financial and information
systems services over a period of six to twelve months. We
intend to expand our denim and casual sportswear business by
introducing new product offerings under our Lauren brand for
women and Polo brand for men while continuing to distribute Polo
Jeans branded products internationally.
3
On July 15, 2005, we acquired from Reebok International
Ltd. (Reebok) all of the issued and outstanding
shares of capital stock of Ralph Lauren Footwear Co., Inc., our
global licensee for mens, womens and childrens
footwear, together with certain foreign assets owned by
affiliates of Reebok (collectively, the Footwear
Business). The acquisition cost was approximately $112
million in cash, including $2 million of transaction costs,
and is subject to certain post-closing adjustments. The purchase
price was allocated as described in Note 5 of our
consolidated financial statements. In addition, Reebok and
certain of its affiliates entered into a transition services
agreement with the Company to provide a variety of operational,
financial and information systems services over a period of
twelve to eighteen months.
In March 2006, we announced a five year arrangement as the first
exclusive outfitter for all on-court officials at Wimbledon
through 2010. This follows our four-year arrangement to be the
official outfitter of all on-court officials at the
U.S. Open tennis tournament, which began in 2005.
Our
Brands and Products
Since 1967, our distinctive brand image has been consistently
developed across an expanding number of products, price tiers
and markets. Our Polo, Polo by Ralph Lauren, Ralph Lauren
Purple Label, Ralph Lauren Black Label, RLX, Ralph Lauren, Blue
Label, Lauren, RL, Rugby, Chaps and Club Monaco,
brand names are one of the worlds most widely recognized
families of consumer brands. We have been an innovator in
aspirational lifestyle branding and believe that, under the
direction of Ralph Lauren, the internationally renowned
designer, we have influenced the manner in which people dress
and live in contemporary society, reflecting an American
perspective and lifestyle uniquely associated with Polo and
Ralph Lauren. We combine our consumer insight and design,
marketing and imaging skills to offer, along with our licensing
alliances, broad lifestyle product collections with a unified
vision:
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Apparel Products include extensive
collections of mens, womens and childrens
clothing;
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Accessories Accessories encompass a
broad range of products such as footwear, eyewear, jewelry and
leather goods, including handbags and luggage;
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Home Coordinated products for the home
include bedding and bath products, furniture, fabric and
wallpaper, paints, broadloom, tabletop and giftware; and
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Fragrance Fragrance and skin care
products are sold under our Glamorous, Romance, Polo, Lauren,
Safari, Blue Label and Black Label brands, among others.
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Domestically our Rugby, Blue Label for women and Black Label for
men brands are sold only in our own retail specialty stores. Our
lifestyle brand image is reinforced by our Polo.com internet
site, which averaged 1.8 million unique visitors to the
site each month during Fiscal 2006 and 820,000 customers during
Fiscal 2006.
Polo by Ralph Lauren. Our Polo by Ralph
Lauren menswear collection is a complete mens wardrobe
consisting of products related by theme, style, color and
fabric. Polo by Ralph Lauren menswear is generally priced at a
range of price points within the mens premium
ready-to-wear
apparel market. We currently sell this collection through
department stores, specialty stores and our Ralph Lauren and
outlet stores in the United States and abroad.
Blue Label. Our Blue Label collection
of womenswear reflects a modern interpretation of classic Ralph
Lauren styles with a strong weekend focus. Blue Label collection
is generally priced at a range of price points within the
premium
ready-to-wear
apparel market. We currently sell the Blue Label collection
domestically and internationally through Ralph Lauren stores and
selected wholesale accounts in Europe and Asia. In Japan, our
Blue Label line is sold under the Ralph Lauren brand name.
Polo Golf. Our Polo Golf collection of
mens and womens apparel is targeted at the golf and
resort markets. Price points are similar to those charged for
products in the Polo by Ralph Lauren line. We sell the Polo Golf
collection in the United States and Canada through leading golf
clubs, pro shops and resorts, as well as department stores,
specialty stores and Ralph Lauren stores.
RLX. Our RLX collection of menswear and
womenswear consists of functional sport and outdoor apparel for
running, cross-training, skiing, snowboarding and cycling. We
sell RLX in our Ralph Lauren stores.
4
Ralph Lauren Childrenswear. We offer a
comprehensive collection of both Boys and Girls apparel and
accessories that are sold to better specialty and department
stores. The line ranges from newborn up to size 16 in Girls and
size 20 in Boys.
Lauren by Ralph Lauren. Our Lauren by
Ralph Lauren womens collection is a complete womens
lifestyle brand consisting of products related by theme, style,
color and fabric. Lauren by Ralph Lauren is generally priced at
a range of price points within the womens better
ready-to-wear
apparel market. We currently sell this collection through
department stores in the United States.
Womens Ralph Lauren Collection and Black
Label. Our Ralph Lauren Collection expresses
our
up-to-the-moment
fashion vision for women. Ralph Lauren Black Label includes
timeless versions of our most successful Collection styles as
well as newly-designed classic signature styles. Collection and
Black Label are offered through our Ralph Lauren stores and
limited distribution to premier fashion retailers. Price points
are at the upper end of the luxury range.
Mens Purple Label Collection. Our
Purple Label collection of mens tailored clothing and
sportswear brings true luxury and quality to American menswear.
We sell the Purple Label collection through our Ralph Lauren
stores and a limited number of premier fashion retailers at
price points at the upper end of the luxury range.
Mens Black Label. Our Ralph
Lauren Black Label for men is a new, sophisticated collection,
featuring razor sharp tailoring and dramatically lean
silhouettes, which is at once modern and timeless. Classic
suiting and sportswear is infused with a savvier attitude. We
sell the Mens Black Label collection through our Ralph
Lauren stores and a limited number of premier fashion retailers
at price points at the upper end of the luxury range.
Rugby. Rugby is a full lifestyle
collection with a hipper, more youthful fit. Rugby is sold in a
limited number of our Rugby stores. Rugby is designed for 18 to
25 year olds, and is an opportunity to better serve this
demographic.
Our
Wholesale Segment
Our wholesale segment sells our products primarily to leading
upscale department stores, specialty stores and golf and pro
shops, both domestically and internationally. We have focused on
elevating our brand and improving productivity by reducing the
number of unproductive doors within department stores in which
our products are sold, improving in-store product assortment and
presentation, and improving full price sell-throughs to
consumers. As of April 1, 2006, the end of Fiscal 2006, our
products were sold in approximately 1,950 domestic
department stores, and during Fiscal 2006 we invested
approximately $26 million in shops-within-shops dedicated
to our products in domestic department stores. We have also
effected selective price increases on basic products and
introduced new fashion offerings at higher price points.
Department stores are our major wholesale customers in North
America and Japan. In Europe, our wholesale sales are a varying
mix of sales to both department stores and specialty shops,
depending on the country. Our collection
brands Womens Ralph Lauren Collection and
Black Label and mens Purple Label Collection and Black
Label are distributed through a limited number
of premier fashion retailers. In addition, we sell excess and
out-of-season
products through secondary distribution channels.
Worldwide
Distribution Channels
The following table presents the approximate number of doors
(excluding our own specialty stores), by channel, in which
products distributed by our wholesale segment, excluding Chaps,
were sold to consumers worldwide as of April 1, 2006. In
addition, during fiscal 2006 our Wholesale Segment launched
Chaps for women and boys product lines in approximately
750 department stores.
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Approximate Number of
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Doors as of April 1,
2006
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Polo
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Collection
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Brands
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Brands
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Lauren
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Department Stores
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4,130
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150
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1,002
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Specialty Stores
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5,411
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195
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Golf and Pro Shops
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2,470
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5
The following department store chains were the only wholesale
customers whose purchases represented more than ten percent of
our worldwide wholesale net sales for the year ended
April 1, 2006. Although Federated Department Stores, Inc.
and The May Department Stores Company are shown separately,
Federated Department Stores acquired The May Department Stores
by merger on August 30, 2005. Combined, Federated and May
accounted for approximately 33% of our wholesale net sales in
Fiscal 2006.
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Federated Department Stores, Inc., which represented
approximately 18%,
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Dillard Department Stores, Inc., which represented 17%, and
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The May Department Stores Company, which represented 15%.
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Federated has announced plans to close or divest itself of more
than 79 of the combined companies stores in calendar 2006
and to divest itself of the approximately 50 store
Lord & Taylor division, and is converting the remaining
stores formerly owned by The May Department Stores to the
Macys name plate. We do not believe that this merger and
restructuring will have a material adverse effect on our
business.
Our product brands are sold primarily through their own sales
forces. Our Wholesale Segment maintain their primary showrooms
in New York City. In addition, we maintain regional showrooms in
Atlanta, Chicago, Dallas, Los Angeles, Milan, Paris, London,
Munich, Madrid and Stockholm.
Shop-within-Shops. As a critical
element of our distribution to department stores, we and our
licensing partners utilize shop-within-shops to enhance brand
recognition, to permit more complete merchandising of our lines
by the department stores and to differentiate the presentation
of products. Shop-within-shops fixed assets primarily include
items such as customized freestanding fixtures, moveable wall
cases and components, decorative items and flooring.
At April 1, 2006, we had approximately 9,100
shop-within-shops dedicated to our wholesale products worldwide
and our licensing partners had more than 775 shop-within-shops.
During Fiscal 2006, we added approximately 1,654
shop-within-shops. Excluding significantly larger
shop-within-shops in key department store locations, the size of
our shop-within-shops typically ranges from approximately 100 to
4,800 square feet for Polo products, from approximately 240
to 4,000 square feet for Lauren by Ralph Lauren, from
approximately 100 to 600 square feet for our Collection
Brands, and from approximately 300 to 900 square feet for
Home Furnishings. We share in the cost of these
shops-within-shops.
Basic Stock Replenishment
Program. Basic products such as knit shirts,
chino pants and oxford cloth shirts can be ordered at any time
through our basic stock replenishment programs. We generally
ship these products within one to five days of order receipt.
These products accounted for approximately 7.4% of our wholesale
net sales in Fiscal 2006. We have also implemented a seasonal
quick response program to allow replenishment of products which
can be ordered only during a portion of the year.
Our
Retail Segment
Our retail segment consists of 137 full-price retail stores and
145 outlet stores worldwide, excluding our seven remaining Caban
home stores, of which we are in the process of disposing by sale
or closure. The expansion of our full-price retail store base is
a primary long-term strategic goal. We opened 11 new full-price
stores in Fiscal 2006, net of store closings, including the
flagship store in Tokyo, and currently anticipate opening
between 10 and 15 full-price stores in Fiscal 2007. Our retail
operating profit rate increased from 3.0% of net sales in Fiscal
2001 to 9.0% of net sales in Fiscal 2006, reflecting
improvements in productivity, gross margins, and full-margin
sell-through rates. Our full price retail stores reinforce the
luxury image and distinct sensibility of our brands and feature
exclusive
6
lines that are not sold in domestic department stores: Blue
Label for Women, Black Label for Men and Ralph Lauren Home. We
operated the following full price stores as of April 1,
2006:
Full-Price
Retail Stores
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Location
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Ralph Lauren
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Club Monaco
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Rugby
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Total
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United States and Canada
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50
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64
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*
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5
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119
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Europe
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13
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|
|
|
|
|
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|
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13
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Other
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5
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|
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|
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|
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5
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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68
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|
|
|
64
|
|
|
|
5
|
|
|
|
137
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|
|
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* |
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Excludes the seven Caban Stores |
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Ralph Lauren stores feature the full-breadth of the Ralph
Lauren apparel, accessory and home product assortments in an
atmosphere reflecting the distinctive attitude and luxury
positioning of the Ralph Lauren brand. Our seven flagship Ralph
Lauren stores showcase our upper-end luxury styles and products
and demonstrate our most refined merchandising techniques.
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Club Monaco stores feature updated fashion apparel and
accessories for both men and women. The brands clean and
updated classic signature style forms the foundation of a modern
wardrobe.
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Rugby, the newest brand in the Ralph Lauren family, is a
vertical retail format featuring an aspirational lifestyle
collection of apparel and accessories for men and women. The
brand is characterized by a youthful, preppy attitude which
resonates throughout the line and the store experience.
|
In addition to generating sales of our products, our worldwide
full-price stores set, reinforce and capitalize on the image of
our brands. Our stores range in size from approximately 1,000 to
over 37,600 square feet. These full-price stores are
situated in upscale regional malls and major upscale street
locations, generally in large urban markets. We generally lease
our stores for initial periods ranging from 5 to 10 years
with renewal options.
We extend our reach to additional consumer groups through our
123 domestic Polo Ralph Lauren outlet stores and 21 European
outlet stores. During Fiscal 2006, we added 1 new Polo Ralph
Lauren outlet store, net, and closed four of five Club Monaco
outlet stores. We will close the remaining Club Monaco outlet
store in Fiscal 2007. Our outlet stores are generally located in
outlet malls.
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Polo Ralph Lauren outlet stores offer selections of our
menswear, womenswear, childrens apparel, accessories, home
furnishings and fragrances. Ranging in size from 3,000 to
20,000 square feet, with an average of approximately
9,400 square feet, these stores are principally located in
major outlet centers in 36 states and Puerto Rico.
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Polo Jeans outlet stores carry all classifications within
the Polo Jeans line, including denim, knit and woven tops,
sweaters, outerwear, casual bottoms and accessories. Ranging in
size from 3,200 to 5,000 square feet, with an average of
4,200 square feet, these stores are located in
7 states, principally in major outlet centers.
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European outlet stores offer selections of our menswear,
womenswear, childrens apparel, accessories, home
furnishings and fragrances. Ranging in size from 2,400 to
13,200 square feet, with an average of approximately
6,400 square feet, these stores are located in 6 countries,
principally in major outlet centers.
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Outlet stores obtain products directly from us, including our
retail stores, our product licensing partners and our suppliers.
Polo.com
In addition to our stores, our retail segment sells Ralph Lauren
products on-line through our
e-commerce
website, Polo.com (http://www.polo.com). Polo.com offers our
customers access to the full breadth of Ralph Lauren apparel,
accessories and home product, and allows us to reach retail
customers on a multi-channel basis and reinforces the luxury
image of our brands. In Fiscal 2006, Polo.com averaged
1.8 million unique visitors a month
7
and had 820,000 customers. Polo.com is owned and operated by
Ralph Lauren Media, LLC, our consolidated 50% owned joint
venture with NBC Universal and ValueVision Media, Inc., which
operates ShopNBC.
Our
Licensing Segment
Through licensing alliances, we combine our consumer insight,
design, and marketing skills with the specific product or
geographic competencies of our licensing partners to create and
build new businesses. We generally seek out licensing partners
who:
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are leaders in their respective markets,
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contribute the majority of the product development costs,
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provide the operational infrastructure required to support the
business, and
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own the inventory.
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We grant our product licensees the right to manufacture and sell
at wholesale specified categories of products under one or more
of our trademarks. We grant our international geographic area
licensing partners exclusive rights to distribute certain brands
or classes of our products and operate retail stores in specific
international territories. These geographic area licensees
source products from us, our product licensing partners and
independent sources. Each licensing partner pays us royalties
based upon its sales of our products, subject, generally, to a
minimum royalty requirement. Other than our Ralph Lauren Home
collection licenses, which are discussed below, these payments
generally range up to 14.0% of the licensing partners
sales of the licensed products. In addition, licensing partners
may be required to allocate a portion of their sales revenues to
advertise our products and share in the creative costs
associated with these products. Larger allocations are required
in connection with launches of new products or in new
territories. Our licenses generally have 3 to 5 year terms
and may grant the licensee conditional renewal options.
We work closely with our licensing partners to ensure that their
products are developed, marketed and distributed so as to reach
the intended market opportunity and to present consistently to
consumers worldwide the distinctive perspective and lifestyle
associated with our brands. Virtually all aspects of the design,
production quality, packaging, merchandising, distribution,
advertising and promotion of Polo Ralph Lauren products are
subject to our prior approval and continuing oversight. The
result is a consistent identity for Polo Ralph Lauren products
across product categories and international markets.
Approximately 26% of our licensing revenue for Fiscal 2006 was
derived from two product licensing partners: Impact21, one of
the sublicensees for Japan, and WestPoint Home, Inc, accounted
for 14% and 12%, respectively, of our licensing revenue in
Fiscal 2006.
8
Product
Licenses
The following table lists our principal product licensing
agreements for mens and womens sportswear,
mens tailored clothing, personal wear, accessories and
fragrances as of April 1, 2006. The products offered by
these licensing partners are listed below. Except as noted in
the table, these product licenses cover the United States or
North America only.
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Licensing Partner
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Licensed Product
Category
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LOreal S.A./Cosmair, Inc.
(global)
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Mens and Womens
Fragrances and Skin Care Products
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Carole Hochman Design
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Womens Sleepwear,
Loungewear, Robes and Daywear
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Corneliani S.P.A. (includes Europe)
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Mens Polo Tailored Clothing
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Peerless, Inc
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Mens, Chaps and Lauren
Tailored Clothing
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Sara Lee Corporation
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Mens Polo Ralph Lauren and
Chaps Personal Wear Apparel and Chaps Hosiery for Mens and Boys
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Wathne Imports, Ltd.
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Handbags and Luggage
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Hot Sox, Inc.
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Mens and Boys Polo
Ralph Lauren and Womens Ralph Lauren and Lauren, and
Boys Hosiery
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New Campaign, Inc.
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Chaps, Ralph Lauren and Lauren
Belts and Other Small Leather Goods
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Echo Scarves, Inc.
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Mens Polo Ralph Lauren and
Polo Jeans Company and Womens Ralph Lauren and Lauren
Scarves and Gloves
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Retail Brand Alliance, Inc.
(successor to Carolee, Inc.)
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Lauren Womens Jewelry
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Safilo USA, Inc.* (global)
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Eyewear
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The Warnaco Group, Inc.
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Mens Chaps Sportswear
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Apparel Ventures, Inc.
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Womens Swimwear
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Philips Van-Heusen Corporation
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Mens Chaps Dress Shirts
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Randa Corp
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Mens Chaps Ties
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Bandanco Enterprise, Inc.
(Champlain)
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Mens Chaps Luggage
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* |
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Effective January 1, 2007, Luxottica Group, S.p.A. will be
our eyewear licensee |
As described above under the caption Recent
Developments, we acquired our licensed Polo Jeans Business
in February 2006 and our licensed global mens,
womens and childrens footwear business in July 2005.
International
Licenses
We believe that international markets offer additional
opportunities for our quintessential American designs and
lifestyle image. We work with our international licensing
partners to facilitate international expansion. International
expansion opportunities may include:
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the roll out of new products and brands following their launch
in the U.S.,
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the introduction of additional product lines,
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the entrance into new international markets, and
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the addition of Ralph Lauren or Polo Ralph Lauren stores in
these markets.
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9
The following table identifies our largest international area
licensing partners (excluding Ralph Lauren Home licensees):
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Licensing Partner
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Territory
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Oroton Group/PRL Australia
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Australia and New Zealand
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Doosan Corporation
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Korea
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P.R.L. Enterprises, S.A.
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Panama, Aruba, Curacao, The Cayman
Islands, Costa Rica, Nicaragua, Honduras, El Salvador,
Guatemala, Belize, Colombia, Ecuador, Bolivia, Peru, Antigua,
Barbados, Bonaire, Dominican Republic, St. Lucia, Trinidad and
Tobago
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Dickson Concepts/PRL Hong Kong
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Hong Kong, China, Philippines,
Malaysia, Singapore, Taiwan and Thailand
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Polo Ralph Lauren Japan
Corporation*
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Japan
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Commercial Madison/PRL Chile
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Chile
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* |
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Polo Ralph Lauren Japan is our consolidated 50% owned joint
venture with Onward Kashiyama Co., Ltd. Polo Ralph Lauren Japan
operates principally through sublicensees, including Impact21
Co., Ltd., mens and womens apparel and accessories
and Polo Jeans, Naigai, childrens and golf apparel and hosiery,
and Hitomi casual wear. |
Our international licensing partners acquire the right to
source, produce, market
and/or sell
various categories of our products in a given geographic area.
These rights may include the right to own and operate retail
stores. The economic arrangements are similar to those of our
product licensing partners. We design licensed products either
alone or in collaboration with our domestic licensing partners.
Our product licensees whose territories do not include the
international geographic area licensees territories
generally provide our international licensing partners with
product or patterns, piece goods, manufacturing locations and
other information and assistance necessary to achieve product
uniformity, for which they are often compensated.
As of April 1, 2006, our international licensing partners
operated 13 Ralph Lauren stores, 29 Polo Ralph Lauren stores, 28
Polo Jeans stores, 2 Childrens stores and 4 Polo outlet
stores.
Ralph
Lauren Home
Together with our licensing partners, we offer an extensive
collection of home products that draw upon and further the
design themes of our other product lines, contributing to our
complete lifestyle concept. Products are sold under the Ralph
Lauren Home and Lauren Ralph Lauren brands in three primary
categories: bedding and bath, home décor and home
improvement. As of April 1, 2006, we had agreements with
eight domestic and two international home product licensing
partners.
We perform a broader range of services for our Ralph Lauren Home
licensing partners than we do for our other licensing partners.
These services include design, operating showrooms, marketing,
advertising and, in some cases, sales. As a result, we receive a
higher average royalty rate from our Ralph Lauren Home
collection licensing partners, typically ranging from 15.0% to
20.0%. In general, the licensing partners manufacture, own the
inventory and ship the products. Our Ralph Lauren Home licensing
alliances generally have 3 to 5 year terms and may grant
the licensee conditional renewal options.
Ralph Lauren Home products are positioned at the upper tiers of
their respective markets and are offered at a range of price
levels. These products are generally distributed through several
channels of distribution, including department stores, specialty
home furnishings stores, interior design showrooms, customer
direct mail catalogs, home centers and the Internet as well as
our own stores. As with our other products, the use of
shop-within-shops is central to our department store
distribution strategy.
10
The Ralph Lauren Home and Lauren Ralph Lauren home products
offered by us and our product licensing partners are:
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Category
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Product
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Licensing Partner
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Bedding and Bath
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Sheets, bedding accessories,
towels and shower curtains, blankets, down comforters, other
decorative bedding and accessories
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WestPoint Home, Inc.
Fremaux-Delorme Ichida
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Bath rugs
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Lacey Mills
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Home Décor
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Fabric and wallpaper
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P. Kaufmann, Inc.
Designers Guild Ltd.
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Furniture
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Henredon Furniture
Industries, Inc.
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Tabletop and giftware
Table linens, placemats, tablecloths and napkins
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Mikasa, Inc.
Brownstone
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Home Improvement
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Interior paints and stains
Broadloom carpets and area rugs
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ICI/Glidden Company Karastan, a
division of Mohawk Carpet Corporation
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WestPoint Home, Inc. offers a basic stock replenishment program
that includes bath and bedding products and accounted for
approximately 81% of their net sales of Ralph Lauren Home
products in Fiscal 2006. WestPoint Home, Inc. accounted for
approximately 58% of total Ralph Lauren Home licensing revenue
in Fiscal 2006.
Product
Design
Our products reflect a timeless and innovative American style
associated with and defined by Ralph Lauren and our design team.
Our consistent emphasis on innovative and distinctive design has
been an important contributor to the prominence, strength and
reputation of the Ralph Lauren brands.
All Ralph Lauren products are designed by, or under the
direction of, Ralph Lauren and our design staff, which is
divided into seven departments: Menswear, Womenswear, Lauren,
Childrens, Accessories, Home and Club Monaco. We form
design teams around our brands and product categories to develop
concepts, themes and products for each brand and category. These
teams support all three segments of our
business wholesale, retail and
licensing through close collaboration with
merchandising, sales and production staff and licensing partners
in order to gain market and other input.
Marketing
Our marketing program communicates the themes and images of our
brands and is an integral feature of our product offering.
Worldwide marketing is managed on a centralized basis through
our advertising and public relations departments in order to
ensure consistency of presentation.
We create distinctive image advertising for all our products,
conveying the particular message of each brand within the
context of our core themes. Advertisements generally portray a
lifestyle rather than a specific item and often include a
variety of products offered by both ourselves and our licensing
partners. Our primary advertising medium is print, with multiple
page advertisements appearing regularly in a range of fashion,
lifestyle and general interest magazines. Major print
advertising campaigns are conducted during the fall and spring
retail seasons, with additions throughout the year to coincide
with product deliveries. In addition to print, some product
categories have utilized television and outdoor media in their
marketing programs for certain product categories. Our Polo.com
e-commerce
website presents the Ralph Lauren lifestyle on the internet
while offering the full breadth of our apparel, accessories and
home products.
If our domestic licensing partners are required to spend an
amount equal to a percent of their licensed product sales on
advertising, we coordinate the advertising placement on their
behalf.
11
We also conduct a variety of public relations activities. Each
of our spring and fall womenswear collections are presented at
major fashion shows in New York City, which typically generate
extensive domestic and international media coverage. We
introduce each of the spring and fall menswear collections at
major fashion shows in cities such as New York or Milan, Italy.
In addition, we organize in-store appearances by our models and
sponsors, professional golfers, snowboarders and triathletes. In
March 2006, we announced a five year arrangement as the first
exclusive outfitter for all on-court officials at Wimbledon
through 2010. This follows our four-year arrangement to be the
official outfitter of all on-court officials at the
U.S. Open tennis tournament, which began in 2005.
Sourcing,
Production and Quality
We contract for the manufacture of our products and do not own
or operate any production facilities. Over 350 different
manufacturers worldwide produce our apparel products. We source
both finished products and raw materials. Raw materials include
fabric, buttons and other trim and are sourced primarily with
respect to our collection brands. Finished products consist of
manufactured and fully assembled products ready for shipment to
our customers. As part of our efforts to reduce costs and
enhance the efficiency of our sourcing process, we have shifted
a substantial portion of our sourcing to foreign suppliers. In
Fiscal 2006, less than 1%, by dollar volume, of our products
were produced in the United States, and over 99%, by dollar
volume, were produced outside the U.S., primarily in Asia,
Europe and South America. See Import Restrictions and
other Government Regulations and Risk
Factors Risks Related to Our
Business Our business is subject to government
regulations and other risks associated with importing
products.
Two manufacturers engaged by us accounted for approximately 15%
and 10% of our total production during Fiscal 2006,
respectively. The primary production facilities of these two
manufacturers are located in China, Hong Kong, Indonesia, Macau,
Philippines, Saipain, Singapore and Sri Lanka.
Our wholesale segment must commit to manufacture the majority of
our garments before we receive customer orders. We also must
commit to purchase fabric from mills well in advance of our
sales. If we overestimate our primary customers demand for
a particular product, we may sell the excess in our outlet
stores or sell the product through secondary distribution
channels. If we overestimate the need for a particular fabric or
yarn, that fabric or yarn may be used in garments made for
subsequent seasons or made into past seasons styles for
distribution in our outlet stores.
We have been working closely with suppliers in recent years to
reduce the lead times for fulfillment (e.g., shipment) of
orders and to permit re-orders of successful programs. In
particular, we have increased the number of deliveries within
certain brands each season so that merchandise is kept fresh at
the retail level.
Suppliers operate under the close supervision of our global
manufacturing division and buying agents headquartered in Asia,
South America and Europe. All garments are produced according to
our specifications. Production and quality control staff in the
United States, South America, Asia and Europe monitor
manufacturing at supplier facilities in order to correct
problems prior to shipment of the final product. Procedures have
been implemented under our vendor certification and compliance
programs, so that quality assurance is focused upon as early as
possible in the production process, allowing merchandise to be
received at the distribution facilities and shipped to customers
with minimal interruption.
Competition
Competition is very strong in the segments of the fashion and
consumer product industries in which we operate. We compete with
numerous designers and manufacturers of apparel and accessories,
fragrances and home furnishing products, domestic and foreign.
Some of our competitors may be significantly larger and have
substantially greater resources than us. We compete primarily on
the basis of fashion, quality and service, which depend on our
ability to:
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anticipate and respond to changing consumer demands in a timely
manner;
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maintain favorable brand recognition;
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develop and produce high quality products that appeal to
consumers;
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12
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appropriately price our products;
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provide strong and effective marketing support;
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ensure product availability; and
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obtain sufficient retail floor space and effectively present our
products at retail.
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See Risk Factors Risks Relating to the
Industry in Which we Compete We face intense
competition in the worldwide apparel industry.
Distribution
To facilitate distribution domestically, Ralph Lauren mens
and womens products are shipped from manufacturers
primarily to our distribution center in Greensboro, North
Carolina for inspection, sorting, packing and shipment to retail
customers. Ralph Lauren Childrenswear product is shipped from
our manufacturers to a leased distribution center in
Martinsburg, West Virginia. In addition, we utilize third party
logistics providers to manage selected programs for specific
customers. These facilities are designed to allow for high
density cube storage and utilize bar code technology to provide
inventory management and carton controls. Product traffic
management is also coordinated from these facilities. European
distribution and warehousing has been largely consolidated into
one third party facility located in Parma, Italy.
Our full-price store and outlet store distribution and
warehousing are principally handled through the Greensboro
distribution center. Club Monaco products are distributed from
facilities in Ontario, Canada, New Jersey and California.
ValueVision Media, which operates ShopNBC, currently performs
warehousing, order fulfillment and call center functions for
Ralph Lauren Media, LLC, which operates our Polo.com
e-commerce
website. ValueVision Media and NBC Universal are our partners in
Ralph Lauren Media, LLC. Ralph Lauren Media, LLC anticipates
bringing warehouse, order fulfillment and call center functions
in-house in Fiscal 2008.
Management
Information Systems
Our management information systems make the marketing,
manufacturing, importing and distribution of our products more
efficient by providing, among other things:
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comprehensive order processing;
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production information;
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accounting information; and
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an enterprise view of information for our marketing,
manufacturing, importing and distribution functions.
|
The
point-of-sale
registers in our stores enable us to track inventory from store
receipt to final sale on a real-time basis. We believe our
merchandising and financial systems, coupled with our
point-of-sale
registers and software programs, allow for rapid stock
replenishment, concise merchandise planning and real-time
inventory accounting.
We also utilize a sophisticated automated replenishment system
to facilitate the processing of basic replenishment orders from
our wholesale customers, the movement of goods through
distribution channels, and the collection of information for
planning and forecasting. We have a collaborative relationship
with many of our suppliers that enables the Company to reduce
cash to cash cycles in the management of our inventory. In
Fiscal 2006, we began implementing a new, global enterprise
resource management system for our wholesale segment. We
anticipate completing the implementation of this system across
all of our wholesale divisions by the end of fiscal 2008.
13
Wholesale
Credit Control
We manage our own credit function. We sell our merchandise
primarily to major department stores and extend credit based on
an evaluation of the customers financial condition,
usually without requiring collateral. We monitor credit levels
and the financial condition of our customers on a continuing
basis to minimize credit risk. We do not factor our accounts
receivables or maintain credit insurance to manage the risks of
bad debts. Our bad debt write-offs were $4.3 million in
Fiscal 2006, representing less than one percent of net revenues.
See Risk Factors Risks Related to Our
Business Our business could be negatively
impacted by any financial instability of our customers.
Wholesale
Backlog
We generally receive wholesale orders for apparel products
approximately three to five months prior to the time the
products are delivered to stores. Such orders are generally
subject to broad cancellation rights. As of April 1, 2006,
our summer and fall backlog was $291 million and
$746 million, respectively, compared to $252 million
and $525 million, respectively, at April 2, 2005. Our
backlog depends upon a number of factors, including the timing
of the market weeks for our particular lines, during which a
significant percentage of our orders are received, and the
timing of shipments. As a consequence, a comparison of backlog
from period to period is not necessarily meaningful and may not
be indicative of eventual shipments.
Trademarks
We own the Polo, Ralph Lauren and the
famous polo player astride a horse trademarks in the United
States. Other trademarks we own include:
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Lauren/Ralph Lauren
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RRL
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Club Monaco
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Rugby
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RLX
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Chaps
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Various trademarks pertaining to fragrances and cosmetics
|
Ralph Lauren has the royalty-free right to use as trademarks
Ralph Lauren, Double RL and
RRL in perpetuity in connection with, among
other things, beef and living animals. The trademarks
Double RL and RRL are
currently used by the Double RL Company, an entity wholly owned
by Mr. Lauren. In addition, Mr. Lauren has the right
to engage in personal projects involving film or theatrical
productions (not including or relating to our business) through
RRL Productions, Inc., a company wholly owned by
Mr. Lauren. Any activity by these companies has no impact
on the Company.
Our trademarks are the subjects of registrations and pending
applications throughout the world for use on a variety of items
of apparel, apparel-related products, home furnishings and
beauty products, as well as in connection with retail services,
and we continue to expand our worldwide usage and registration
of related trademarks. In general, trademarks remain valid and
enforceable as long as the marks are used in connection with the
products and services and the required registration renewals are
filed. We regard the license to use the trademarks and our other
proprietary rights in and to the trademarks as extremely
valuable assets in marketing our products and, on a worldwide
basis, vigorously seek to protect them against infringement. See
Item 3 Legal Proceedings. As a
result of the appeal of our trademarks, our products have been
the object of counterfeiting. We have a broad enforcement
program which has been generally effective in controlling the
sale of counterfeit products in the United States and in major
markets abroad.
In markets outside of the United States, our rights to some or
all of our trademarks may not be clearly established. In the
course of our international expansion, we have experienced
conflicts with various third parties
14
who have acquired ownership rights in certain trademarks,
including Polo and/or a representation of a
polo player astride a horse, which would impede our use and
registration of our principal trademarks. While such conflicts
are common and may arise again from time to time as we continue
our international expansion, we have generally successfully
resolved such conflicts in the past through both legal action
and negotiated settlements with third-party owners of the
conflicting marks. See Risk Factors Risks
Related to Our Business Our trademarks and
other intellectual property rights may not be adequately
protected outside the United States and
Item 3 Legal Proceedings.
Although we have not in the past suffered any material
restraints or restrictions on doing business in desirable
markets in the past, we cannot assure that significant
impediments will not arise in the future as we expand product
offerings and additional trademarks to new markets.
We currently have an agreement with a third party which owned
conflicting registrations of the trademarks Polo
and a polo player astride a horse in the United Kingdom,
Hong Kong and South Africa. Under the agreement, the third party
retains the right to use the Polo and polo player
symbol marks in South Africa and all other countries that
comprise
Sub-Saharan
Africa, and we agreed to restrict use of those Polo marks in
those countries to fragrances and cosmetics solely as part of
the composite trademark Ralph Lauren and the
polo player symbol, as to which our use is unlimited, and to the
use of the polo player symbol mark on womens and
girls apparel and accessories and womens and
girls handkerchiefs. By agreeing to those restrictions, we
secured the unlimited right to use our trademarks in the United
Kingdom and Hong Kong without payment of any kind, and the third
party is prohibited from distributing products under those
trademarks in those countries.
Import
Restrictions and Other Government Regulations
Virtually all of our merchandise imported into the United
States, Canada, and Europe is subject to duties. Until
January 1, 2005, our apparel merchandise was also subject
to quotas. Quotas represent the right, pursuant to bilateral or
other international trade arrangements, to export amounts of
certain categories of merchandise into a country or territory
pursuant to a visa or license. Pursuant to the Agreement on
Textiles and Clothing, quotas on textile and apparel products
were eliminated for World Trade Organization (the
WTO) member countries, including the United States,
Canada and European countries, on January 1, 2005.
Notwithstanding quota elimination, Chinas accession
agreement for membership in the WTO provides that WTO member
countries (including the United States, Canada and European
countries) may re-impose quotas on specific categories of
products in the event it is determined that imports from China
have surged and are threatening to create a market disruption
for such categories of products (so called safeguard quota
provisions). In response to surging imports, in November
2005 the United States and China agreed to a new quota
arrangement which will impose quotas on certain textile products
through the end of 2008. In addition, the European Union also
agreed with China on a new textile arrangement which imposed
quotas through the end of 2007. The United States and other
countries may also unilaterally impose additional duties in
response to a particular product being imported (from China or
other countries) in such increased quantities as to cause (or
threaten) serious damage to the relevant domestic industry
(generally known as anti-dumping actions). The
European Union has imposed anti-dumping duties on imports from
China and Vietnam in certain footwear categories. In addition,
China has imposed an export tax on all textile products
manufactured in China. Although there can be no assurance, we do
not believe this tax will have a material impact on our business.
We are also subject to other international trade agreements and
regulations, such as the North American Free Trade Agreement,
the Central American Free Trade Agreement and the Caribbean
Basin Initiative. In addition, each of the countries in which
our products are sold has laws and regulations covering imports.
Because the United States and the other countries in which our
products are manufactured and sold may, from time to time,
impose new duties, tariffs, surcharges or other import controls
or restrictions, including the imposition of safeguard
quota, or adjust presently prevailing duty or tariff rates
or levels, we maintain a program of intensive monitoring of
import restrictions and opportunities. We seek to minimize our
potential exposure to import related risks through, among other
measures, adjustments in product design and fabrication, shifts
of production among countries and manufacturers, as well as
through geographical diversification of our sources of supply.
As almost all our products are manufactured by foreign
suppliers, the enactment of new legislation or the
administration of current international trade regulations,
executive action affecting textile agreements, or changes in
sourcing patterns resulting from the elimination of quota could
adversely affect our operations. Although we
15
generally expect that the recent elimination of quotas will
result, over the long term, in an overall reduction in the cost
of apparel produced abroad, the implementation of any
safeguard quota provisions or any
anti-dumping actions may result, over the near term,
in cost increases for certain categories of products and in
disruption of the supply chain for certain products categories.
See Item 1A Risk Factors below.
Apparel and other products sold by Polo are also be subject to
regulation in the United States and other countries by other
governmental agencies, including, in the United States, the
Federal Trade Commission, United States Fish and Wildlife
Service and the Consumer Products Safety Commission. These
regulations relate principally to product labeling, licensing
requirements and flammability testing. We believe that we are in
substantial compliance with those regulations as well as
applicable federal, state, local, and foreign rules and
regulations governing the discharge of materials hazardous to
the environment. We do not estimate any significant capital
expenditures for environmental control matters either in the
current year or in the near future. Our licensed products and
licensing partners are also subject to regulation. Our
agreements require our licensing partners to operate in
compliance with all laws and regulations, and we are not aware
of any violations which could reasonably be expected to have a
material adverse effect on our business.
Although we have not suffered any material inhibition from doing
business in desirable markets in the past, we cannot assure that
significant impediments will not arise in the future as we
expand product offerings and additional trademarks to new
markets.
Employees
As of April 1, 2006, we had approximately 12,800 employees,
consisting of approximately 10,000 in the United States and
approximately 2,800 in foreign countries. Approximately 38 of
our United States production and distribution employees in the
womenswear business are members of the Union of Needletrades,
Industrial & Textile Employees under an industry
association collective bargaining agreement, which our
womenswear subsidiary has adopted. We consider our relations
with both our union and non-union employees to be good.
Executive
Officers
The following are our current executive officers and their
principal business experience for the past five years.
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Ralph Lauren
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Age 66
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Mr. Lauren has been Chairman,
Chief Executive Officer and a director of the Company since
prior to the Companys initial public offering in 1997, and
was a member of the Advisory Board of the Board of Directors of
the Companys predecessors since their organization. He
founded Polo in 1967 and has provided leadership in the design,
marketing, advertising and operational areas since such time.
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Roger N. Farah
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Age 53
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Mr. Farah has been President,
Chief Operating Officer and a director of the Company since
April 2000. He was Chairman of the Board of Venator Group, Inc.
from December 1994 to April 2000, and was Chief Executive
Officer of Venator Group, Inc. from December 1994 to August 1999.
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Jackwyn Nemerov
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Age 54
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Ms. Nemerov has been Executive
Vice President of the Company since September 2004. From 1998 to
2002, she was President and Chief Operating Officer of Jones
Apparel Group, Inc.
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Tracey T. Travis
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Age 43
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Ms. Travis has been Senior Vice
President of Finance and Chief Financial Officer of the Company
since January 2005. Ms. Travis served as Senior Vice
President, Finance at Limited Brands, Inc., an apparel and
personal care products retailer, from April 2002 until August
2004, and Chief Financial Officer of Intimate Brands, Inc., a
womens intimate apparel and personal care products
retailer, from April 2001 to April 2002. Prior to that time,
Ms. Travis was Chief Financial Officer of the Beverage Can
Americas group at American National Can, a manufacturer of
beverage cans, from 1999 to 2001, and held various finance and
operations positions at Pepsi Bottling Group from 1989-1999.
Ms. Travis is a member of the boards of directors of Jo-Ann
Stores, Inc., a specialty retailer of fabrics and crafts, and
the Lincoln Center Theater.
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Mitchell A. Kosh
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Age 56
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Mr. Kosh has served as Senior Vice
President of Human Resources and Legal since July 2000. He was
Senior Vice President of Human Resources of Conseco, Inc., from
February 2000 to July 2000. Prior to that, Mr. Kosh held
executive human resource positions with the Venator Group, Inc.
starting in 1996.
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The following risk factors should be read carefully in
connection with evaluating our business and the forward-looking
statements contained in this
Form 10-K.
Any of the following risks could materially adversely affect our
business, our operating results, our financial condition and the
actual outcome of matters as to which forward-looking statements
are made in this report.
Risks
Related to Our Business
The loss
of the services of Mr. Ralph Lauren or other key personnel
could have a material adverse effect on our business.
Mr. Ralph Laurens leadership in the design, marketing
and operational areas of our business has been a critical
element of our success. The death or disability of
Mr. Lauren or other extended or permanent loss of his
services, or any negative market or industry perception with
respect to him or arising from his loss, could have a material
adverse effect on our business. Our other executive officers and
other members of senior management have substantial experience
and expertise in our business and have made significant
contributions to our growth and success. The unexpected loss of
services of one or more of these individuals could also
adversely affect us. We are not protected by a material amount
of key-man or similar life insurance covering Mr. Lauren,
our other executive officers and certain other members of senior
management. We have entered into employment agreements with
Mr. Lauren and our other executive officers.
We cannot
assure the successful implementation of our growth
strategy.
As part of our growth strategy, we seek to extend our brands,
expand our geographic coverage and increase direct management of
our brands by opening more of our own stores, strategically
acquiring select licensees and
17
enhancing our operations. Implementation of our strategy
involves the continued expansion of our business in Europe, Asia
and other international areas. As discussed elsewhere in this
Annual Report on
Form 10-K,
we acquired our previously licensed Polo Jeans and Footwear
licenses in Fiscal 2006. We may have difficulty integrating
acquired businesses into our operations, hiring and retaining
qualified key employees, or otherwise successfully managing such
expansion. In addition, Europe, as a whole, lacks the large
wholesale distribution channels found in the United States, and
we may have difficulty developing successful distribution
strategies and alliances in each of the major European countries.
Implementation of our strategy also involves the continued
expansion of our network of retail stores, both in the United
States and abroad. We may not be able to purchase or lease
desirable store locations or renew existing store leases on
acceptable terms. Furthermore, we may not be able to
successfully integrate the business of any licensee that we
acquire into our own business or achieve any expected cost
savings or synergies from such integration.
Our
business could suffer as a result of consolidations,
restructurings and other ownership changes in the retail
industry.
Several of our department store customers, including some under
common ownership, account for significant portions of our
wholesale net sales. We believe that a substantial portion of
sales of our licensed products by our domestic licensing
partners, including sales made by our sales force of Ralph
Lauren Home products, are also made to our largest department
store customers. In Fiscal 2006, sales to Federated Department
Stores, Inc. represented 18% of our wholesale net sales, sales
to Dillard Department Stores, Inc. represented 17%, and sales to
The May Department Stores Company represented 15%. Federated
Department Stores and The May Department Stores merged in August
2005. Federated has announced plans to close more than 79 of the
combined companies stores in calendar 2006 and to divest
itself of the 55 store Lord & Taylor division and is
converting the remaining stores formerly owned by The May
Department Stores to the Macys name plate. In the
aggregate, our ten largest customers accounted for approximately
72% of our wholesale net sales during Fiscal 2006. There can be
no assurance that consolidations in the department store sector
will not have a material adverse effect on our wholesale
business.
We do not enter into long-term agreements with any of our
customers. Instead, we enter into a number of purchase order
commitments with our customers for each of our lines every
season. A decision by the controlling owner of a group of stores
or any other significant customer, whether motivated by
competitive conditions, financial difficulties or otherwise, to
decrease the amount of merchandise purchased from us or our
licensing partners or to change their manner of doing business
with us or our licensing partners, could have a material adverse
effect on our business or financial condition. See
BUSINESS Operations Customers
and Service.
Our
business could be negatively impacted by any financial
instability of our customers.
We sell our wholesale merchandise primarily to major department
stores across the United States and Europe and extend credit
based on an evaluation of each customers financial
condition, usually without requiring collateral. However, the
financial difficulties of a customer could cause us to curtail
business with that customer. We may also assume more credit risk
relating to that customers receivables. Three of our
customers, Dillard Department Stores, Inc., Federated Department
Stores, Inc. and The May Department Stores Company, in the
aggregate constituted 45% of trade accounts receivable
outstanding at April 1, 2006. As noted above, Federated
Stores, Inc. and The May Department Stores Company merged in
August 2005. Our inability to collect on our trade accounts
receivable from any one of these customers could have a material
adverse effect on our business or financial condition. See
BUSINESS Credit Control.
Our
business could suffer as a result of a manufacturers
inability to produce our goods on time and to our
specifications.
We do not own or operate any manufacturing facilities and depend
exclusively on independent third parties for the manufacture of
all of our products. Our products are manufactured to our
specifications primarily by international manufacturers. During
Fiscal 2006, less than 1%, by dollar value, of our mens
and womens
18
products were manufactured in the United States and over 99%, by
dollar value, of these products were manufactured in Asia and
other countries. Two of the manufacturers engaged by us
accounted for approximately 15% and 10% of our total production
during Fiscal 2006. The primary production facilities of these
two manufacturers are located in Asia. The inability of a
manufacturer to ship orders of our products in a timely manner
or to meet our quality standards could cause us to miss the
delivery date requirements of our customers for those items,
which could result in cancellation of orders, refusal to accept
deliveries or a substantial reduction in purchase prices, any of
which could have a material adverse effect on our financial
condition and results of operations.
Our
business could suffer if we need to replace
manufacturers.
We compete with other companies for the production capacity of
our manufacturers and import quota capacity. Some of these
competitors have greater financial and other resources than we
have, and thus may have an advantage in the competition for
production and import quota capacity. If we experience a
significant increase in demand, or if an existing manufacturer
of ours must be replaced, we may have to expand our third-party
manufacturing capacity. We cannot guarantee that this additional
capacity will be available when required on terms that are
acceptable to us. See BUSINESS Sourcing,
Production and Quality. We enter into a number of purchase
order commitments each season specifying a time for delivery,
method of payment, design and quality specifications and other
standard industry provisions, but do not have long-term
contracts with any manufacturer. None of the manufacturers we
use produce our products exclusively.
Our
business could suffer if one of our manufacturers fails to use
acceptable labor practices.
We require our licensing partners and independent manufacturers
to operate in compliance with applicable laws and regulations.
While our internal and vendor operating guidelines promote
ethical business practices and our staff periodically visits and
monitors the operations of our independent manufacturers, we do
not control these manufacturers or their labor practices. The
violation of labor or other laws by an independent manufacturer
used by us or one of our licensing partners, or the divergence
of an independent manufacturers or licensing
partners labor practices from those generally accepted as
ethical in the United States, could interrupt, or otherwise
disrupt the shipment of finished products to us or damage our
reputation. Any of these, in turn, could have a material adverse
effect on our financial condition and results of operations.
Our
business is subject to risks associated with importing
products.
As of April 1, 2006, we source a significant portion of our
products outside the United States through arrangements with
over 350 foreign vendors in various countries. In Fiscal 2006,
over 99%, by dollar value, of our products were produced outside
the U.S., primarily in Asia, Europe and South America. Risks
inherent in importing our products include:
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quotas imposed by bilateral textile agreements with China and
non-WTO countries. These agreements limit the amount and type of
goods that may be imported annually from these countries;
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changes in social, political and economic conditions or
terrorist acts that could result in the disruption of trade from
the countries in which our manufacturers or suppliers are
located;
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the imposition of additional regulations relating to imports or
exports;
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the imposition of additional duties, taxes and other charges on
imports or exports;
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significant fluctuations of the cost of raw materials;
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significant delays in the delivery of cargo due to security
considerations;
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the imposition of antidumping or countervailing duty proceedings
resulting in the potential assessment of special antidumping or
countervailing duties; and
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the imposition of sanctions in the form of additional duties
either by the United States or its trading partners to remedy
perceived illegal actions by national governments.
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19
Any one of these factors could have a material adverse effect on
our financial condition and results of operations.
We are
dependent upon the revenue generated by our licensing
alliances.
Approximately 30% of our income from operations for Fiscal 2006
was derived from licensing revenue received from our licensing
partners. Approximately 26% of our licensing revenue for Fiscal
2006 was derived from two licensing partners: Impact21, 14%, and
WestPoint Home, Inc., 12%. We had no other licensing partner
which accounted for more than 10% of our licensing revenue in
Fiscal 2006. The interruption of the business of any one of our
material licensing partners due to any of the factors discussed
immediately below could also adversely affect our licensing
revenues and net income.
We rely
on our licensing partners to preserve the value of our
licenses.
The risks associated with our own products also apply to our
licensed products in addition to any number of possible risks
specific to a licensing partners business, including, for
example, risks associated with a particular licensing
partners ability to:
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obtain capital;
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manage its labor relations;
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maintain relationships with its suppliers;
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manage its credit risk effectively; and
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maintain relationships with its customers.
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Although some of our license agreements prohibit licensing
partners from entering into licensing arrangements with our
competitors, our licensing partners generally are not precluded
from offering, under other brands, the types of products covered
by their license agreements with us. A substantial portion of
sales of our products by our domestic licensing partners are
also made to our largest customers. While we have significant
control over our licensing partners products and
advertising, we rely on our licensing partners for, among other
things, operational and financial control over their businesses.
Failure
to maintain licensing partners could harm our
business.
Although we believe in most circumstances we could replace
existing licensing partners if necessary, our inability to do so
for any period of time could adversely affect our revenues, both
directly from reduced licensing revenue received and indirectly
from reduced sales of our other products. See
Operations Our Licensing Alliances.
Our
trademarks and other intellectual property rights may not be
adequately protected outside the United States.
We believe that our trademarks and other proprietary rights are
extremely important to our success and our competitive position.
We devote substantial resources to the establishment and
protection of our trademarks and anti-counterfeiting activities
worldwide. Significant counterfeiting of our products continues,
however, and in the course of our international expansion we
have experienced conflicts with various third parties that have
acquired or claimed ownership rights in some trademarks that
include Polo
and/or a
representation of a polo player astride a horse, or otherwise
have contested our rights to our trademarks. We have in the past
resolved certain of these conflicts through both legal action
and negotiated settlements, none of which, we believe, has had a
material impact on our financial condition and results of
operations. We cannot guarantee that the actions we have taken
to establish and protect our trademarks and other proprietary
rights will be adequate to prevent counterfeiting or a material
20
adverse effect on our business or brands arising from imitation
of our products by others or to prevent others from seeking to
block sales of our products as a violation of the trademarks and
proprietary rights of others. Also, there can be no assurance
that others will not assert rights in, or ownership of,
trademarks and other proprietary rights of ours or that we will
be able to successfully resolve these types of conflicts to our
satisfaction or at all. In addition, the laws of certain foreign
countries do not protect proprietary rights to the same extent
as do the laws of the United States. See Trademarks,
and Item 3 LEGAL PROCEEDINGS.
Our
business is exposed to domestic and foreign currency
fluctuations.
We generally purchase our products in U.S. dollars.
However, we source most of our products overseas. As a result,
the cost of these products may be affected by changes in the
value of the relevant currencies. Changes in currency exchange
rates may also affect the U.S. dollar value of the foreign
currency denominated prices at which our international
businesses sell products. Furthermore, our international sales
and licensing revenue generally is derived from sales in foreign
currencies. These foreign currencies include the Japanese Yen,
the Euro and the Pound Sterling, and this revenue could be
materially affected by currency fluctuations. Although we hedge
some exposures to changes in foreign currency exchange rates
arising in the ordinary course of business, we cannot assure you
that foreign currency fluctuations will not have a material
adverse impact on our financial condition and results of
operations. See Item 7 MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS Liquidity and Capital
Resources.
Our
ability to conduct business in international markets may be
affected by legal, regulatory, political and economic
risks.
Our ability to capitalize on growth in new international markets
and to maintain the current level of operations in our existing
international markets is subject to risks associated with
international operations. These include:
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the burdens of complying with a variety of foreign laws and
regulations;
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unexpected changes in regulatory requirements; and
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new tariffs or other barriers to some international markets.
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We are also subject to general political and economic risks in
connection with our international operations, including:
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political instability and terrorist attacks;
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changes in diplomatic and trade relationships; and
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general economic fluctuations in specific countries or markets.
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We cannot predict whether quotas, duties, taxes, or other
similar restrictions will be imposed by the United States, the
European Union, Japan, or other countries upon the import or
export of our products in the future, or what effect any of
these actions would have on our business, financial condition or
results of operations. Changes in regulatory, geopolitical,
social or economic policies and other factors may have a
material adverse effect on our business in the future or may
require us to modify our current business practices.
Risks
Relating to the Industry in Which We Compete
We face
intense competition in the worldwide apparel industry.
We face a variety of intense competitive challenges from other
domestic and foreign fashion-oriented apparel and casual apparel
producers, some of which may be significantly larger and more
diversified and have greater financial and marketing resources
than we have. We compete with these companies primarily on the
basis of:
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anticipating and responding to changing consumer demands in a
timely manner;
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maintaining favorable brand recognition;
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developing innovative, high-quality products in sizes, colors
and styles that appeal to consumers;
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appropriately pricing products;
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providing strong and effective marketing support;
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creating an acceptable value proposition for retail customers;
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ensuring product availability and optimizing supply chain
efficiencies with manufacturers and retailers; and
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obtaining sufficient retail floor space and effective
presentation of our products at retail.
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We also face increasing competition from companies selling
apparel and home products through the Internet. Although our
Ralph Lauren Media, LLC joint venture sells our products through
the internet, increased competition in the worldwide apparel,
accessories and home product industries from Internet-based
competitors could reduce our sales, prices and margins and
adversely affect our results of operations.
The
success of our business depends on our ability to respond to
constantly changing fashion trends and consumer
demands.
Our success depends in large part on our ability to originate
and define fashion product and home product trends, as well as
to anticipate, gauge and react to changing consumer demands in a
timely manner. Our products must appeal to a broad range of
consumers whose preferences cannot be predicted with certainty
and are subject to rapid change. We cannot assure you that we
will be able to continue to develop appealing styles or
successfully meet constantly changing consumer demands in the
future. In addition, we cannot assure you that any new products
or brands that we introduce will be successfully received by
consumers. Any failure on our part to anticipate, identify and
respond effectively to changing consumer demands and fashion
trends could adversely affect retail and consumer acceptance of
our products and leave us with a substantial amount of unsold
inventory or missed opportunities. If that occurs, we may be
forced to rely on markdowns or promotional sales to dispose of
excess, slow-moving inventory, which may harm our business. At
the same time, our focus on tight management of inventory may
result, from time to time, in our not having an adequate supply
of products to meet consumer demand and cause us to lose sales.
See BUSINESS Sourcing, Production and
Quality.
A
downturn in the economy may affect consumer purchases of
discretionary items and luxury retail products, which could
adversely affect our sales.
The industries in which we operate are cyclical. Many factors
affect the level of consumer spending in the apparel, cosmetic,
fragrance and home products industries, including, among others:
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general business conditions;
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interest rates;
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the availability of consumer credit;
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taxation; and
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consumer confidence in future economic conditions.
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Consumer purchases of discretionary items and luxury retail
products, including our products, may decline during
recessionary periods and at other times when disposable income
is lower. A downturn in the economies in which we, or our
licensing partners, sell our products may adversely affect our
revenues and profits materially.
We lease space for our retail and outlet showrooms, and
warehouse and office space in various domestic and international
locations. We do not own any real property except for our
distribution facility in Greensboro, North Carolina and a parcel
of land adjacent to the facility, and retail stores in
Southampton, New York and Nantucket, Massachusetts. ValueVision
Media, Inc., performs all warehousing, order fulfillment and
call center functions for
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Ralph Lauren Media. ValueVision Media, which operates ShopNBC,
and the National Broadcasting Company are our joint venture
partners in Ralph Lauren Media.
We believe that our existing facilities are well maintained, in
good operating condition and are adequate for our present level
of operations. The following table sets forth information with
respect to our key properties:
The following table sets forth information with respect to our
key properties:
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Approximate
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Current Lease Term
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Location
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Use
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Sq. Ft.
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Expiration
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Greensboro, N.C.
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Distribution Facility
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1,500,000
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Owned
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Martinsburg, W.V.
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Distribution Facility
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187,000
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December 31, 2010
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650 Madison Avenue, NYC
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Executive, corporate office and
design studio, Polo Brand showrooms
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207,000
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December 31, 2009
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Lyndhurst, N.J.
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Corporate and retail
administrative offices
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162,000
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December 31, 2019
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550 7th Avenue, NYC
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Corporate office, design studio
and Womens showrooms
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81,000
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December 31, 2018
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625 Madison Avenue, NYC
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Corporate offices
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190,000
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December 31, 2019
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Geneva, Switzerland
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European corporate offices
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50,000
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March 31, 2013
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867 Madison Avenue, NYC
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Flagship Store
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27,700
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December 31, 2013
|
Beverly Hills, CA
|
|
Flagship Store
|
|
|
21,600
|
|
|
September 30, 2023
|
Chicago, IL
|
|
Flagship Store
|
|
|
37,600
|
|
|
November 14, 2017
|
Milan, Italy
|
|
Flagship Store
|
|
|
18,000
|
|
|
June 30, 2015
|
Tokyo, Japan
|
|
Flagship Store
|
|
|
25,000
|
|
|
December 31, 2020
|
We paid aggregate rent in Fiscal 2006 of approximately
$38 million for our non-retail facilities. We anticipate
that we will be able to extend those leases which expire in the
near future on terms satisfactory to us or relocate to
facilities timely and on acceptable terms.
As of April 1 2006, the Company operated 289 retail stores,
totaling 2.3 million square feet. Aggregate annual rentals
for retail space in Fiscal 2006 totaled approximately
$99 million. We anticipate that we will be able to extend
those leases which expire in the near future on satisfactory
terms or relocate to desirable locations.
|
|
Item 3.
|
Legal
Proceedings
|
Since June 2003, we had been involved in litigation with Jones
Apparel Group, Inc. (Jones), primarily relating to
certain alleged breaches of the terms of the Lauren license
agreements between the parties. Among other things, Jones sought
compensatory damages of $550 million and punitive damages.
In February 2006, simultaneous with our acquisition of the Polo
Jeans Business from Jones, we settled all claims regarding the
litigation at a negotiated cost of $100 million. The
settlement amount equaled the reserve initially established by
the Company during the fourth quarter of Fiscal 2005.
Accordingly, the settlement had no effect on the Companys
consolidated operating results for Fiscal 2006.
We are indirectly subject to various claims relating to an
alleged security breach in 2004 of our retail point of sale
system, including fraudulent credit card charges, the cost of
replacing cards and related monitoring expenses and other
related claims. These claims have been made by various banks
with respect to credit cards issued by them pursuant to the
rules of
Visa®
and
MasterCard®
credit card associations. We recorded an initial charge of
$6.2 million to establish a reserve for this matter in the
fourth quarter of Fiscal 2005, representing managements
best estimate at the time of the probable loss incurred. In
September 2005, we were notified by our agent bank that the
aggregate amount of claims had increased to $12 million,
with an estimated $1 million of additional claims yet to be
asserted. Accordingly, we recorded an additional
$6.8 million charge during the second quarter of Fiscal
2006. The ultimate outcome of this matter could differ
materially from the amounts recorded and could be material to
the
23
results of operations for any affected period. However,
management does not expect that the ultimate resolution will
have a material adverse effect on the Companys liquidity
or financial position.
On August 19, 2005, Wathne Imports, Ltd., our domestic
licensee for luggage and handbags (Wathne), filed a
complaint in the U.S. District Court for the Southern
District of New York against us and Ralph Lauren, our Chairman
and Chief Executive Officer, asserting, among other things,
Federal trademark law violations, breach of contract, breach of
obligations of good faith and fair dealing, fraud and negligent
misrepresentation. The complaint sought, among other relief,
injunctive relief, compensatory damages in excess of
$250 million and punitive damages of not less than
$750 million. On September 13, 2005, Wathne withdrew
this complaint from the U.S. District Court and filed a
complaint in the Supreme Court of the State of New York, New
York County, making substantially the same allegations and
claims (excluding the Federal trademark claims), and seeking
similar relief. On February 1, 2006, the Court granted our
motion to dismiss all of the causes of action, including the
cause of action against Mr. Lauren, except for the breach
of contract claims, and denied Wathnes motion for a
preliminary injunction against our production and sale of
mens and womens handbags. On May 16, 2006, a
discovery schedule running through November 2006 was established
for this case. We believe this suit to be without merit and will
continue to contest it vigorously.
On October 1, 1999, we filed a lawsuit against the United
States Polo Association Inc., Jordache, Ltd. and certain other
entities affiliated with them, alleging that the defendants were
infringing on our trademarks. In connection with this lawsuit,
on July 19, 2001, the United States Polo Association and
Jordache filed a lawsuit against us in the United States
District Court for the Southern District of New York. This suit,
which was effectively a counterclaim by them in connection with
the original trademark action, asserted claims related to our
actions in our pursuit of claims against the United States Polo
Association and Jordache for trademark infringement and other
unlawful conduct. Their claims stemmed from our contacts with
the United States Polo Associations and Jordaches
retailers in which we informed these retailers of our position
in the original trademark action. All claims and counterclaims,
except for our claims that the defendants violated the
Companys trademark rights, were settled in September 2003.
We did not pay any damages in this settlement.
On July 30, 2004, the Court denied all motions for summary
judgment, and trial began on October 3, 2005 with respect
to four double horseman symbols that the defendants
sought to use. On October 20, 2005, the jury rendered a
verdict, finding that one of the defendants marks violated
our world famous Polo Player Symbol trademark and enjoining its
further use, but allowing the defendants to use the remaining
three marks. On November 16, 2005, we filed a motion before
the trial court to overturn the jurys decision and hold a
new trial with respect to the three marks that the jury found
not to be infringing. The USPA and Jordache have opposed our
motion, but have not moved to overturn the jurys decision
that the fourth double horseman logo did infringe on our
trademarks. Pending the judges ruling on our motion, it is
our belief that the USPA and Jordache cannot produce or sell
products bearing any of the double horseman marks. We have
preserved our rights to appeal if our motion is denied.
On September 18, 2002, an employee at one of the
Companys stores filed a lawsuit against us in the United
States District Court for the District of Northern California
alleging violations of California antitrust and labor laws. The
plaintiff purported to represent a class of employees who had
allegedly been injured by a requirement that certain retail
employees purchase and wear Company apparel as a condition of
their employment. The complaint, as amended, seeks an
unspecified amount of actual and punitive damages, disgorgement
of profits and injunctive and declaratory relief. The Company
answered the amended complaint on November 4, 2002. A
hearing on cross motions for summary judgment on the issue of
whether the Companys policies violated California law
occurred on August 14, 2003. The Court granted partial
summary judgment with respect to certain of the plaintiffs
claims, but concluded that more discovery was necessary before
it could decide the key issue as to whether the Company had
maintained for a period of time a dress code policy that
violated California law. On January 12, 2006, a proposed
settlement of the purported class action was submitted to the
court for approval. A hearing on the settlement has been
scheduled for June 29, 2006. The proposed settlement cost
of $1.5 million does not exceed the reserve for this matter
that we established in Fiscal 2005. The proposed settlement
would also result in the dismissal of the similar purported
class action filed in San Francisco Superior Court as
described below.
24
On April 14, 2003, a second punitive class action was filed
in the San Francisco Superior Court. This suit, brought by
the same attorneys, alleges near identical claims to those in
the federal class action. The class representatives consist of
former employees and the plaintiff in the federal court action.
Defendants in this class action include us and our Polo Retail,
LLC, Fashions Outlet of America, Inc., Polo Retail, Inc. and
San Francisco Polo, Ltd. as well as a non-affiliated
corporate defendant and two current managers. As in the federal
action, the complaint seeks an unspecified amount of actual and
punitive restitution of monies spent, and declaratory relief. If
the judge in the federal class action accepts the proposed
settlement, the state court class action would subsequently be
dismissed.
On March 2, 2006, a former employee at our Club Monaco
store in Los Angeles, California filed a lawsuit against us in
the San Francisco Superior Court alleging violations of
California wage and hour laws. The plaintiff purports to
represent a class of Club Monaco store employees who allegedly
have been injured by being improperly classified as exempt
employees and thereby not receiving compensation for overtime
and not receiving meal and rest breaks. The complaint seeks an
unspecified amount of compensatory damages, disgorgement of
profits, attorneys fees and injunctive relief. We believe
this suit is without merit and intend to contest it vigorously.
On June 2, 2006, a second punitive class action was filed
by different attorneys on behalf of a former employee of our
Club Monaco store in Cabazon, California against us in the Los
Angeles Superior Court alleging virtually identical claims as to
the San Francisco action and consisting of the same class
members. As in the San Francisco action, the complaint
seeks an unspecified amount of compensatory damages,
disgorgement of profits, attorneys fees and injunctive
relief. We believe this suit is without merit and intend to
contest it vigorously.
On May 30, 2006, four former employees of our Ralph Lauren
stores in Palo Alto and San Francisco, California filed a
lawsuit in San Francisco Superior Court alleging violations
of California wage and hour laws. The plaintiffs purport to
represent a class of employees who allegedly have been injured
by not properly being paid commission earnings, not being paid
overtime, not receiving rest breaks, and being forced to work
off the clock while waiting to enter or leave the store and
being falsely imprisoned while waiting to leave the store. The
complaint seeks an unspecified amount of compensatory damages,
damages for emotional distress, disgorgement of profits,
punitive damages, attorneys fees and injunctive and
declaratory relief. We believe this suit is without merit and
intend to contest it vigorously.
We are otherwise involved from time to time in legal claims
involving trademark and intellectual property, licensing,
employee relations and other matters incidental to our business.
We believe that the resolution of these other matters currently
pending will not individually or in aggregate have a material
adverse effect on our financial condition or results of
operations.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended April 1, 2006.
25
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity and Related Stockholders
Matters
|
Our Class A common stock is traded on the New York Stock
Exchange under the symbol RL. The following table
sets forth the high and low closing prices per share of the
Class A common stock for each quarterly period in our two
most recent fiscal years, as reported on the NYSE Composite Tape.
|
|
|
|
|
|
|
|
|
|
|
Market Price
|
|
|
|
of Class A
|
|
|
|
Common Stock
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2006:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
44.70
|
|
|
$
|
34.19
|
|
Second Quarter
|
|
|
53.25
|
|
|
|
43.29
|
|
Third Quarter
|
|
|
56.84
|
|
|
|
47.83
|
|
Fourth Quarter
|
|
|
61.74
|
|
|
|
52.91
|
|
Fiscal 2005:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
37.05
|
|
|
$
|
31.23
|
|
Second Quarter
|
|
|
38.57
|
|
|
|
31.01
|
|
Third Quarter
|
|
|
42.83
|
|
|
|
33.75
|
|
Fourth Quarter
|
|
|
42.59
|
|
|
|
37.40
|
|
On May 20, 2003 our Board of Directors initiated a regular
quarterly cash dividend program of $0.05 per share, or
$0.20 per share on an annual basis, on our Class A
common stock. Approximately $21 million was recorded as a
reduction to retained earnings during Fiscal 2006 in connection
with these dividends.
As of June 7, 2006, there were 1,486 holders of record of
our Class A common stock and 12 holders of record of our
Class B common stock. All of our outstanding shares of
Class B common stock are owned by Mr. Ralph Lauren and
related entities and are convertible at any time into shares of
Class A common stock on a
one-for-one
basis shares of Class A Common Stock that are transferred
to anyone other than affiliates of Mr. Lauren.
The following table sets forth the repurchases of our common
stock during the Fiscal quarter ended April 1, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
|
|
|
(or Approximate
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Dollar Value) of
|
|
|
|
Total Number
|
|
|
|
|
|
Shares (or Units)
|
|
|
Shares (or Units)
|
|
|
|
of Shares
|
|
|
|
|
|
Purchased as Part of
|
|
|
That May Yet be
|
|
|
|
(or Units)
|
|
|
Average Price
|
|
|
Publicly Announced
|
|
|
Purchased Under the
|
|
Period
|
|
Purchased
|
|
|
Paid Per Share
|
|
|
Plans or Programs
|
|
|
Plans or Programs(1)
|
|
|
January 1, 2006 to
January 28, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 29, 2006 to
February 25, 2006
|
|
|
69,300
|
|
|
$
|
55.00
|
|
|
|
69,300
|
|
|
|
|
|
February 26, 2006 to
April 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
69,300
|
|
|
$
|
55.00
|
|
|
|
69,300
|
|
|
|
|
|
|
|
|
(1) |
|
The Companys initial Class A stock repurchase plan
was first publicly announced in March 1998, and expired on
April 1, 2006. An aggregate of approximately
$81.3 million in share repurchases were made under this
plan during its term. The Companys existing repurchase
plan was first publicly announced on February 2, 2005, and
provides for the repurchase of up to $100 million of
Class A Common stock. As of April 1, 2006, no
repurchases had been made under this plan, which does not have a
termination date. |
26
|
|
Item 6.
|
Selected
Financial Data
|
See the Index to Consolidated Financial Statements and
Supplementary Information appearing at the end of this
report on
Form 10-K.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis of financial condition and
results of operations should be read together with our audited
financial statements and the accompanying notes, which are
included elsewhere in this Annual Report on
Form 10-K.
We use a 52-53 week fiscal year ending on the Saturday
nearest March 31. As such, references to Fiscal
2006 represent the
52-week
fiscal year ended April 1, 2006; references to Fiscal
2005 represent the
52-week
fiscal year ended April 2, 2005; and references to
Fiscal 2004 represent the
53-week
fiscal year ended April 3, 2004.
INTRODUCTION
Managements discussion and analysis of financial condition
and results of operations (MD&A) is provided as
a supplement to the audited financial statements and notes
included elsewhere herein to help provide an understanding of
our financial condition, changes in financial condition and
results of operations. MD&A is organized as follows:
|
|
|
|
|
Overview. This section provides a general
description of our business, as well as recent developments that
we believe are important in understanding our results of
operations, financial condition and in anticipating future
trends.
|
|
|
|
Results of operations. This section provides
an analysis of our results of operations for Fiscal 2006, Fiscal
2005 and Fiscal 2004.
|
|
|
|
Financial condition and liquidity. This
section provides an analysis of our cash flows for Fiscal 2006,
Fiscal 2005 and Fiscal 2004, as well as a discussion of our
financial condition and liquidity as of April 1, 2006. The
discussion of our financial condition and liquidity includes
(i) our available financial capacity under our credit
facility, (ii) a summary of our key debt compliance
measures and (iii) a summary of our outstanding debt and
commitments that existed as of April 1, 2006.
|
|
|
|
Market risk management. This section discusses
how we manage exposure to potential losses arising from adverse
changes in interest rates, foreign currency exchange rates and
the market value of financial instruments.
|
|
|
|
Critical accounting policies. This section
discusses accounting policies considered to be important to our
financial condition and results of operations, and which require
significant judgment and estimates on the part of management in
their application. In addition, all of our significant
accounting policies, including our critical accounting policies,
are summarized in Notes 3 and 4 to our audited financial
statements included elsewhere herein.
|
OVERVIEW
Our Company is a leader in the design, marketing and
distribution of premium lifestyle products. Our long-standing
reputation and distinctive image have been consistently
developed across an expanding number of products, brands and
international markets. Our brand names include Polo,
Polo by Ralph Lauren, Ralph Lauren Purple Label, Ralph Lauren
Black Label, RLX, Ralph Lauren, Blue Label, Lauren, RL, Rugby,
Chaps, and Club Monaco, among others.
We classify our interests into three business segments:
Wholesale, Retail and Licensing. Through those interests, we
design, license, contract for the manufacture of, market and
distribute mens, womens and childrens apparel,
accessories, fragrances and home furnishings. Our wholesale
business consists of wholesale-channel sales principally to
major department and specialty stores located throughout the
United States and Europe. Our retail business consists of
retail-channel sales directly to consumers through wholly owned,
full-price and factory retail stores located throughout the
United States, Canada, Europe, South America and Asia, and
through our jointly
27
owned retail internet site located at www.polo.com. In
addition, our licensing business consists of royalty-based
arrangements under which we license the right to third parties
to use our various trademarks in connection with the manufacture
and sale of designated products, such as eyewear and fragrances,
in specified geographic areas.
Our business is affected by seasonal trends, with higher levels
of wholesale sales in our second and fourth quarters and higher
retail sales in our second and third quarters. These trends
result primarily from the timing of seasonal wholesale shipments
and key vacation travel and holiday periods in the retail
segment.
During Fiscal 2006, we reported revenues of $3.746 billion,
net income of $308 million and net income per diluted share
of $2.87. This compares to revenues of $3.305 billion, net
income of $190.4 million and net income per diluted share
of $1.83 in Fiscal 2005. Fiscal 2005 operating results include a
pretax charge of $100 million associated with a litigation
with one of our former licensees, which has now been settled.
Recent
Developments
Acquisition
of Polo Jeans Business
On February 3, 2006, the Company acquired from Jones
Apparel Group, Inc. and subsidiaries (Jones) all of
the issued and outstanding shares of capital stock of Sun
Apparel, Inc., the Companys licensee for mens and
womens casual apparel and sportswear in the United States
and Canada (the Polo Jeans Business). The
acquisition cost was approximately $260 million, including
$5 million of transaction costs. The purchase price is
subject to certain post-closing adjustments. In addition,
simultaneous with the transaction, the Company settled all
claims under its litigation with Jones for a cost of
$100 million (the Jones-Related Litigation).
The purchase of the Polo Jeans Business will allow the Company
to reposition and expand its denim and casual sportswear
business. In particular, in May 2006, the Company announced that
it will expand its denim and casual sportswear business by
introducing new product offerings under the strength of its
Lauren brand for women and its Polo brand for men. The Company
will continue to distribute Polo Jeans-branded products
internationally. The results of operations for the Polo Jeans
Business have been consolidated in the Companys results of
operations commencing February 4, 2006.
Acquisition
of Footwear Business
On July 15, 2005, the Company acquired from Reebok
International, Ltd. (Reebok) all of the issued and
outstanding shares of capital stock of Ralph Lauren Footwear
Co., Inc., the Companys global licensee for mens,
womens and childrens footwear, as well as certain
foreign assets owned by affiliates of Reebok (collectively, the
Footwear Business). The acquisition cost was
approximately $112 million in cash, including
$2 million of transaction costs. The results of operations
for the Footwear Business have been consolidated in the
Companys results of operations commencing July 16,
2005.
Polo
Trademark Litigation
Since 1999, the Company has been involved in litigation with the
United States Polo Association, Inc., Jordache, Ltd. and certain
other entities affiliated with them (collectively, the
USPA Group) in the United States District Court for
the Southern District of New York over alleged infringements of
its trademark rights. On October 20, 2005, a jury found
that one of the four double horsemen logos that the
USPA Group sought to use infringed on the Companys world
famous Polo Player Symbol trademark and enjoined its use, but
did allow the use of the other three trademarks. In November
2005, the Company filed a motion before the trial court to
overturn the jurys decision and hold a new trial with
respect to the three marks that the jury found not to be
infringing. The USPA and Jordache have opposed this motion, but
have not moved to overturn the jurys decision that the
fourth double horseman logo did infringe on the Companys
trademarks. Pending the judges ruling on this motion, it
is the Companys position that, the USPA and Jordache
cannot produce or sell products bearing any of the double
horseman marks. The Company has preserved its right to appeal if
the motion is denied. The Company believes that it is premature
to assess the potential impact on its business resulting from
the initial adverse ruling. However, the Company believes that
the quality of its premium lifestyle products and brands will
continue to drive growth in its operating and financial
performance notwithstanding the outcome of this matter.
28
Club
Monaco Restructuring Plan
During Fiscal 2006, the Company recorded approximately
$10.8 million of impairment charges to reduce the carrying
value of fixed assets, primarily relating to its Club Monaco
retail business, including its Caban Concept and Factory Outlet
stores. These impairment charges primarily related to
lower-than-expected
store performance.
During the fourth quarter of Fiscal 2006, the Company committed
to a plan to restructure the Companys Club Monaco retail
business. In particular, this plan consisted of the closure of
all five Club Monaco factory outlet stores and the intention to
dispose of by sale or closure all eight of Club Monacos
Caban Concept stores (collectively, the Club Monaco
Restructuring Plan). In connection with this plan, an
aggregate restructuring-related charge of $12 million was
recognized in Fiscal 2006. This charge consisted of (a) a
$3 million writedown of inventory to estimated net
realizable value, which has been classified as a component of
cost of goods sold in the Companys consolidated statement
of operations, (b) a $5 million writedown of fixed and
other net assets, which has been classified as a component of
restructuring charges in the Companys consolidated
statement of operations and (c) the recognition of a
$4 million liability relating to lease termination costs,
which has been classified as a component of restructuring
charges in the Companys consolidated statement of
operations. The lease termination costs are expected to be paid
by the end of 2007.
In addition, the Company expects to recognize an additional
$2 million restructuring charge during its first quarter of
Fiscal 2007 relating to Club Monacos Caban Concept stores.
Such costs will be incurred pursuant to the Club Monaco
Restructuring Plan, but are not recognizable until Fiscal 2007
in accordance with accounting principles generally accepted in
the United States (US GAAP) because the leased space
was still being used at the end of Fiscal 2006.
See Note 11 to the audited financial statements included
elsewhere herein for further reference.
Eyewear
Licensing Agreement
In February 2006, the Company announced that it had entered into
a new, ten-year exclusive licensing agreement with Luxottica
Group, S.p.A. and affiliates (Luxottica) for the
design, production and distribution of prescription frames and
sunglasses under the Polo Ralph Lauren brand (the Eyewear
Licensing Agreement). Luxottica is a global leader in the
premium and luxury eyewear sector, with over 5,000 optical and
sun retail stores across the world.
The Eyewear Licensing Agreement is effective on January 1,
2007 after the Companys existing licensing agreement with
another licensee expires. The Company is entitled to receive
annual minimum royalty and design services payments over the
life of the contract (the Minimum Guaranteed
Payments). Upon the effective date of the contract, the
Company will receive a prepayment of approximately
$200 million in consideration of the Minimum Guaranteed
Payments to be made by Luxottica. The approximate
$200 million prepayment is non-refundable, except with
respect to certain breaches of the agreement by the Company in
which case only the unearned portion of the prepayment would be
required to be repaid.
29
RESULTS
OF OPERATIONS
Fiscal
2006 Compared to Fiscal 2005
The following table summarizes our results of operations and
expresses the percentage relationship to net revenues of our
financial statements captions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
April 1,
|
|
|
April 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,746.3
|
|
|
$
|
3,305.4
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold(a)
|
|
|
(1,723.9
|
)
|
|
|
(1,620.9
|
)
|
|
|
(46.0
|
)
|
|
|
(49.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,022.4
|
|
|
|
1,684.5
|
|
|
|
54.0
|
|
|
|
51.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses(a)
|
|
|
(1,476.9
|
)
|
|
|
(1,377.6
|
)
|
|
|
(39.5
|
)
|
|
|
(41.7
|
)
|
Amortization of intangible assets
|
|
|
(9.1
|
)
|
|
|
(3.4
|
)
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
Impairments of retail assets
|
|
|
(10.8
|
)
|
|
|
(1.5
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
Restructuring charges
|
|
|
(9.0
|
)
|
|
|
(2.3
|
)
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
516.6
|
|
|
|
299.7
|
|
|
|
13.8
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency gains (losses)
|
|
|
(5.7
|
)
|
|
|
6.1
|
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
Interest expense
|
|
|
(12.5
|
)
|
|
|
(11.0
|
)
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
Interest income
|
|
|
13.7
|
|
|
|
4.6
|
|
|
|
0.3
|
|
|
|
0.1
|
|
Equity in income of equity-method
investees
|
|
|
4.3
|
|
|
|
6.4
|
|
|
|
0.1
|
|
|
|
0.2
|
|
Minority interest expense
|
|
|
(13.5
|
)
|
|
|
(8.0
|
)
|
|
|
(0.4
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income
taxes
|
|
|
502.9
|
|
|
|
297.8
|
|
|
|
13.4
|
|
|
|
9.0
|
|
Provision for income taxes
|
|
|
(194.9
|
)
|
|
|
(107.4
|
)
|
|
|
(5.2
|
)
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
308.0
|
|
|
$
|
190.4
|
|
|
|
8.2
|
%
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share Basic
|
|
$
|
2.96
|
|
|
$
|
1.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share Diluted
|
|
$
|
2.87
|
|
|
$
|
1.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes total depreciation expense of $117.9 million and
$98.7 million for Fiscal 2006 and Fiscal 2005, respectively. |
Net Revenues. Net revenues for Fiscal 2006
were $3,746.3 million, an increase of $440.9 million,
compared to net revenues of $3,305.4 million for Fiscal
2005. Wholesale revenues increased by $230.4 million
primarily as a result of the sale of newly acquired Footwear and
Polo Jeans products, the inclusion of a full year of sales by
our childrenswear business, which was acquired in July 2004 (the
Childrenswear Business), the successful launch of a
Chaps for women and boys product line and, increased sales in
our global menswear and womenswear product lines. The increase
in net revenues also was caused by a $210.0 million revenue
increase in our retail segment as a result of improved
comparable retail store sales, continued store expansion and
growth in Polo.com sales. Net revenues for our business segments
are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
|
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
Increase
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
% Change
|
|
|
|
(millions)
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
1,942.5
|
|
|
$
|
1,712.1
|
|
|
$
|
230.4
|
|
|
|
13.5
|
%
|
Retail
|
|
|
1,558.6
|
|
|
|
1,348.6
|
|
|
|
210.0
|
|
|
|
15.6
|
|
Licensing
|
|
|
245.2
|
|
|
|
244.7
|
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
3,746.3
|
|
|
$
|
3,305.4
|
|
|
$
|
440.9
|
|
|
|
13.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Wholesale net sales the net increase
primarily reflects:
|
|
|
|
|
the inclusion of $58 million of revenue from the newly
acquired Footwear Business;
|
|
|
|
the inclusion of $35 million of revenues from the newly
acquired Polo Jeans Business;
|
|
|
|
a $74 million increase in revenues from our childrenswear
product line that was acquired in July 2004, including the
effects from the successful launch of our Chaps for boys product
line and a one-time benefit of $59 million due to the
inclusion of a full year of sales;
|
|
|
|
a $73 million aggregate constant-dollar increase in our
global menswear and womenswear businesses, primarily driven by
strong growth in our Lauren product line and the effects from
the successful domestic launch of our Chaps for women product
line; and
|
|
|
|
a $14 million decrease in revenues due to an unfavorable
foreign currency effect relating to the strengthening of the
U.S. dollar in comparison to the Euro during Fiscal 2006.
|
Retail net sales For purposes of the
discussion of retail operating performance below, we refer to
the measure comparable store sales. Comparable store
sales refers to the growth of sales in stores that are open for
at least one full fiscal year. Sales for stores that are closing
during a fiscal year are excluded from the calculation of
comparable store sales. Sales for stores that are either
relocated or enlarged are also excluded from the calculation of
comparable store sales until stores have been in their location
for at least a full fiscal year. Comparable store sales
information includes both Ralph Lauren stores and Club Monaco
stores.
The increase in retail net sales primarily reflects:
|
|
|
|
|
an aggregate $74 million increase in comparable full-price
and outlet store sales. This increase was driven by a 6.5%
increase in comparable full-price store sales and a 6.3%
increase in comparable outlet store sales. Excluding an
unfavorable $4 million effect on revenues from foreign
currency exchange rates, comparable full-price store sales
increased 7.0% and comparable outlet store sales increased 6.6%.
|
|
|
|
a net increase in store count of eleven stores, to a total of
289 stores, as several new openings (including our new Rugby
store chain) were offset by the closure of certain Club Monaco
stores in the fourth quarter of Fiscal 2006; and
|
|
|
|
a $29 million increase in sales at Polo.com.
|
Licensing revenues Licensing revenues
were essentially flat, as increased revenue from our
international licensing business, and the domestic launch of the
Chaps brand extensions for menswear and accessories offset the
decreases in product licensing revenue resulting from our Fiscal
2006 purchase of the Footwear and Polo Jeans Businesses (now
included as part of the Wholesale segment).
Cost of Goods Sold. Cost of goods sold was
$1,723.9 million for Fiscal 2006, compared to
$1,620.9 million for Fiscal 2005. Expressed as a percentage
of net revenues, cost of goods sold was 46.0% for Fiscal 2006,
compared to 49.0% for Fiscal 2005. The reduction in cost of
goods sold as a percentage of net revenues reflected a continued
focus on sourcing efficiencies and reduced markdown activity as
a result of better full-price sell-through of our products.
Gross Profit. Gross profit was
$2,022.4 million for Fiscal 2006, an increase of
$337.9 million or 20% compared to $1,684.5 for Fiscal 2005.
This increase reflected higher net sales, improved merchandise
margins and sourcing efficiencies generally across our wholesale
and retail businesses.
Gross profit as a percentage of net revenues increased to 54.0%
in Fiscal 2006 compared to 51.0% in Fiscal 2005. This
300 basis point increase resulted primarily from the
factors discussed above and a shift in mix from off-price to
more full-price sales in our wholesale segment. While we expect
to continue to realize margin expansion in the future, we expect
the rate of expansion will be less in Fiscal 2007.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses (SG&A) were $1,476.9 million for
Fiscal 2006, an increase of $99.3 million or 7.2% compared
to $1,377.6 million in Fiscal 2005.
31
SG&A expenses in Fiscal 2005 included a $100 million
charge in connection with the Jones-Related Litigation. On a
reported basis, SG&A as a percent of net revenues decreased
to 39.5% from 41.7%. However, excluding the effect from the
Fiscal 2005 Jones-Related Litigation charge, SG&A as a
percentage of net revenues increased to 39.5% from 38.7%.
Excluding the Fiscal 2005 Jones-Related Litigation charge, the
$199 million increase in SG&A was primarily driven by:
|
|
|
|
|
higher payroll-related expenses of approximately
$89 million principally relating to increased selling costs
associated with higher retail sales and our worldwide retail
store expansion, higher stock-based compensation charges
associated with our strong operating performance and increasing
stock price, and higher investment in infrastructure to support
the ongoing growth of our businesses;
|
|
|
|
higher brand-related marketing and facilities costs to support
the ongoing growth of our businesses;
|
|
|
|
higher depreciation costs of approximately $19 million in
connection with our capital expenditures and global
expansion; and
|
|
|
|
the inclusion of SG&A costs for our newly acquired Footwear
and Polo Jeans Businesses, as well as the costs for the
Childrenswear Business for a full year.
|
Amortization of Intangible
Assets. Amortization of intangible assets
increased to $9.1 million in Fiscal 2006, compared to
$3.4 million in Fiscal 2005. The increase related to higher
amortization of intangible assets as part of the Childrenswear
Business acquired in July 2004, the Footwear Business acquired
in July 2005 and the Polo Jeans Business acquired in February
2006.
Impairments of Retail Assets. Non-cash
impairment charges of $10.8 million were recognized during
Fiscal 2006 to reduce the carrying value of fixed assets used in
certain of our retail stores, largely relating to our Club
Monaco retail business that includes our Caban Concept and Club
Monaco Factory Outlet stores. This impairment charge primarily
related to
lower-than-expected
store performance and preceded the implementation in February
2006 of a plan to restructure these operations. A
$1.5 million impairment charge also was recognized in
Fiscal 2005 relating to Club Monaco retail stores.
Restructuring Charges. Restructuring charges
of $9.0 million were recognized in Fiscal 2006, compared to
$2.3 million in Fiscal 2005. The Fiscal 2006 restructuring
charge relates to the Club Monaco retail business and includes
the intended closure of all five Club Monaco outlet stores and
the intended disposal of all eight of Club Monacos Caban
Concept stores. The Fiscal 2005 restructuring charge principally
related to severance obligations incurred in connection with a
consolidation of our European operations.
We expect to recognize an additional $2 million
restructuring charge during the first quarter of Fiscal 2007
relating to Club Monacos Caban Concept stores. Such costs
will be incurred pursuant to the Club Monaco Restructuring Plan,
but are not recognizable until Fiscal 2007 in accordance with US
GAAP because the leased space was still being used at the end of
Fiscal 2006.
32
Operating Income. Operating income increased
$216.9 million to $516.6 million in Fiscal 2006,
compared to $299.7 million in Fiscal 2005. Operating income
for Fiscal 2005 was reduced by the $100 million
Jones-Related Litigation charge. Operating income for our three
business segments is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
|
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
Increase/
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
% Change
|
|
|
|
(millions)
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
398.3
|
|
|
$
|
299.7
|
|
|
$
|
98.6
|
|
|
|
32.9
|
%
|
Retail
|
|
|
140.0
|
|
|
|
82.8
|
|
|
|
57.2
|
|
|
|
69.1
|
|
Licensing
|
|
|
153.5
|
|
|
|
159.5
|
|
|
|
(6.0
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
691.8
|
|
|
|
542.0
|
|
|
|
149.8
|
|
|
|
27.6
|
|
Less: Unallocated corporate expense
|
|
|
(159.1
|
)
|
|
|
(133.8
|
)
|
|
|
(25.3
|
)
|
|
|
18.9
|
|
Unallocated legal and
restructuring charges
|
|
|
(16.1
|
)
|
|
|
(108.5
|
)
|
|
|
92.4
|
|
|
|
(85.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
516.6
|
|
|
$
|
299.7
|
|
|
$
|
216.9
|
|
|
|
72.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale operating income increased by
$98.6 million primarily as a result of higher sales and
improved gross margin rates, partially offset by increases in
SG&A expenses and higher amortization expenses associated
with intangible assets recognized in acquisitions.
Retail operating income increased by $57.2 million
primarily as a result of increased net sales and improved gross
margin rates. These increases were partially offset by an
increase in selling salaries and related costs in connection
with the increase in retail sales and worldwide store expansion,
along with higher retail store impairment charges.
Licensing operating income decreased by $6.0 million
primarily due to the loss of royalty income formerly collected
in connection with the Footwear, Polo Jeans, and Childrenswear
Businesses, which have now been acquired. This decrease was
partially offset by improvements in our international licensing
business.
Unallocated Corporate Expenses increased by
$25.3 million primarily as a result of increases in
brand-related marketing, payroll-related and facilities costs to
support the ongoing growth of our businesses.
Unallocated Legal and Restructuring
Charges. Unallocated legal and restructuring
charges decreased by $92.4 million in Fiscal 2006. The
decrease primarily related to the absence in Fiscal 2006 of the
$100 million Jones-Related Litigation charge recognized in
Fiscal 2005, offset in part by higher restructuring charges of
$6.7 million in Fiscal 2006 relating to the Club Monaco
Restructuring Plan.
Foreign Currency Gains (Losses). The effect of
foreign currency exchange rate fluctuations resulted in a loss
of $5.7 million during Fiscal 2006, compared to a
$6.1 million gain during Fiscal 2005. The increased losses
in Fiscal 2006 primarily related to unfavorable foreign exchange
movements associated with intercompany receivables and payables
that were not of a long-term investment nature and were settled
by our international subsidiaries. These gains and losses are
unrelated to the impact of changes in the value of the
U.S. dollar when operating results of our foreign
subsidiaries are translated to U.S. dollars.
Interest Expense. Interest expense increased
to $12.5 million in Fiscal 2006, compared to
$11.0 million in Fiscal 2005. This increase was principally
related to higher variable rates of interest paid during the
year under our interest rate swap agreements that were
subsequently terminated.
Interest Income. Interest income increased to
$13.7 million in Fiscal 2006, compared to $4.6 million
in Fiscal 2005. This increase principally related to a higher
level of excess cash reinvestment and higher interest rates on
our investments during Fiscal 2006.
Equity in Income of Equity-Method
Investees. Equity in the income of equity-method
investees decreased to $4.3 million in Fiscal 2006,
compared to $6.4 million in Fiscal 2005. The decrease
principally related to higher amortization in Fiscal 2006 of a
basis difference associated with our 20% investment in Impact21,
a company that holds the sublicenses for our mens,
womens and jeans business in Japan.
33
Minority Interest Expense. Minority interest
expense increased to $13.5 million in Fiscal 2006, compared
to $8.0 million in Fiscal 2005. The increase principally
related to a higher allocation of income to the partners in our
jointly owned RL Media venture as a result of its improved
operating performance.
Provision for Income Taxes. The provision for
income taxes increased to $194.9 million in Fiscal 2006,
compared to $107.4 million in Fiscal 2005. This is a result
of an increase in our effective tax rate to 38.8% in Fiscal 2006
from 36.1% in Fiscal 2005 as well as the increase in pretax
income. The increase in our effective tax rate principally
resulted from the continued growth of our domestic wholesale and
retail businesses, which led to a higher state tax impact.
Net Income. Net income increased to
$308.0 million in Fiscal 2006, compared to
$190.4 million in Fiscal 2005. The $117.6 million
increase in net income principally related to the
$216.9 million increase in operating income previously
discussed, including the effect of the $100 million
Jones-Related Litigation charge recognized in Fiscal 2005. These
benefits were offset in part by $11.8 million of higher
foreign currency losses and higher taxes of $87.5 million.
Net Income Per Share. Net income per diluted
share increased to $2.87 in Fiscal 2006, compared to $1.83 in
Fiscal 2005. Net income per basic share increased to $2.96 in
Fiscal 2006, compared to $1.88 in Fiscal 2005. The improvement
in per share results was due to the higher level of net income
associated with our underlying operating performance and the
absence of the $100 million Jones-Related Litigation charge
recognized in Fiscal 2005, offset in part by higher dilution
associated with higher average shares outstanding.
Fiscal
2005 Compared to Fiscal 2004
The following table summarizes our historical results of
operations and expresses the percentage relationship to net
revenues of our financial statement captions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
April 2,
|
|
|
April 3,
|
|
|
April 2,
|
|
|
April 3,
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
(millions)
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,305.4
|
|
|
$
|
2,649.7
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold(a)
|
|
|
(1,620.9
|
)
|
|
|
(1,326.4
|
)
|
|
|
(49.0
|
)
|
|
|
(50.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,684.5
|
|
|
|
1,323.3
|
|
|
|
51.0
|
|
|
|
49.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses(a)
|
|
|
(1,377.6
|
)
|
|
|
(1,031.5
|
)
|
|
|
(41.7
|
)
|
|
|
(39.0
|
)
|
Amortization of intangible assets
|
|
|
(3.4
|
)
|
|
|
(1.3
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
Impairments of retail assets
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
(2.3
|
)
|
|
|
(19.6
|
)
|
|
|
(0.1
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
299.7
|
|
|
|
270.9
|
|
|
|
9.1
|
|
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency gains (losses)
|
|
|
6.1
|
|
|
|
(1.9
|
)
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
Interest expense
|
|
|
(11.0
|
)
|
|
|
(12.7
|
)
|
|
|
(0.3
|
)
|
|
|
(0.5
|
)
|
Interest income
|
|
|
4.6
|
|
|
|
2.7
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Equity in income of equity-method
investees
|
|
|
6.4
|
|
|
|
5.5
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Minority interest expense
|
|
|
(8.0
|
)
|
|
|
(1.4
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income
taxes
|
|
|
297.8
|
|
|
|
263.1
|
|
|
|
9.0
|
|
|
|
9.9
|
|
Provision for income taxes
|
|
|
(107.4
|
)
|
|
|
(93.9
|
)
|
|
|
(3.2
|
)
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
190.4
|
|
|
$
|
169.2
|
|
|
|
5.8
|
%
|
|
|
6.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share Basic
|
|
$
|
1.88
|
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share Diluted
|
|
$
|
1.83
|
|
|
$
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes total depreciation expense of $98.7 million and
$84.3 million for Fiscal 2005 and Fiscal 2004, respectively. |
34
Net Revenues. Net revenues for Fiscal 2005
were $3,305.4 million, an increase of $655.7 million,
compared to net revenues of $2,649.7 million for Fiscal
2004. Wholesale revenues increased by $501.7 million
primarily as a result of the sale of Lauren and newly acquired
Childrenswear products. The increase in net revenues was also
caused by a $178.1 million increase in our retail segment
as a result of our improved comparable retail store sales,
continued store expansion and the favorable impact of the
strengthening Euro. These increases were partially offset by
decreased sales elsewhere in our wholesale business primarily
driven by planned reductions in off-price sales in our global
menswear and womenswear businesses. In addition, the increase in
revenues was offset in part by lower licensing revenues due to
the loss of Lauren and Ralph royalties from Jones. Net revenues
for our business segments are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
|
|
|
|
|
April 2,
|
|
|
April 3,
|
|
|
Increase
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
(Decrease)
|
|
|
% Change
|
|
|
|
(millions)
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
1,712.1
|
|
|
$
|
1,210.4
|
|
|
$
|
501.7
|
|
|
|
41.4
|
%
|
Retail
|
|
|
1,348.6
|
|
|
|
1,170.5
|
|
|
|
178.1
|
|
|
|
15.2
|
|
Licensing
|
|
|
244.7
|
|
|
|
268.8
|
|
|
|
(24.1
|
)
|
|
|
(9.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
3,305.4
|
|
|
$
|
2,649.7
|
|
|
$
|
655.7
|
|
|
|
24.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale net sales the net increase
primarily reflects:
|
|
|
|
|
an incremental increase from the Lauren line of
$280.5 million in the current year due to the inclusion of
a full years sales versus one quarters sales in the
prior year associated with the shift in the Lauren line from a
licensed business to a consolidated wholesale business;
|
|
|
|
the inclusion of sales from the newly acquired Childrenswear
line of $180.2 million commencing July 2, 2004;
|
|
|
|
a $51.2 million decrease in the domestic mens
wholesale business, which resulted from a planned reduction in
off-price sales and a reduction in spring sales due to a planned
reduction of sales to lower margin customers; and
|
|
|
|
increases in the European wholesale business of approximately
$37.4 million on a constant-dollar basis, as well as a
$28.4 million favorable impact due to a stronger Euro in
the current period.
|
Retail net sales the increase primarily
reflects:
|
|
|
|
|
an aggregate $48.7 million increase in comparable
full-price and outlet store sales. This increase was driven by a
5.5% increase in comparable full-price store sales and a 3.9%
increase in comparable outlet store sales. Excluding a favorable
$10.8 million effect on revenues from foreign currency
exchange rates and an extra week in Fiscal 2004, comparable
full-price store sales increased 6.1% and comparable outlet
store sales increased 4.9%.
|
|
|
|
the inclusion of $60.6 million of sales as a result of the
consolidation of RL Media;
|
|
|
|
worldwide store expansion. During Fiscal 2005, the Company added
30 stores and closed 13 stores. Our total store count at
April 2, 2005 was 278 stores, compared to 261 stores at
April 3, 2004; and
|
|
|
|
the stronger Euro during Fiscal 2005, which accounted for
approximately $14.7 million of the increase in net sales.
|
Licensing revenue the net decrease
primarily reflects:
|
|
|
|
|
the elimination of $34.6 million of royalties from our
domestic licensing business due to the acquisition of the
Childrenswear Business and a full year without royalties from
the Lauren licensee; and
|
|
|
|
a $13 million increase in international licensing.
|
35
Cost of Goods Sold. Cost of goods sold was
$1,620.9 million for Fiscal 2005, compared to
$1,326.4 million for Fiscal 2004. Expressed as a percentage
of net revenues, cost of goods sold was 49.0% for Fiscal 2005,
compared to 50.1% for Fiscal 2004. The reduction in cost of
goods sold as a percentage of net revenues reflected our
inventory management initiatives and reduced markdown activity.
Gross Profit. Gross profit was
$1,684.5 million for Fiscal 2005, an increase of
$361.2 million or 27.3% compared to $1,323.3 million for
Fiscal 2004. Gross profit as a percentage of net revenues
increased to 51.0% from 49.9% primarily as a result of improved
margins in our wholesale and retail businesses driven by reduced
markdowns and our inventory management initiatives. Partially
offsetting these improvements is the loss of licensing revenues
from the Lauren and Childrenswear lines.
Selling, General and Administrative
Expenses. SG&A increased $346.1 million,
or 33.6%, to $1,377.6 million during Fiscal 2005 from
$1,031.5 million in Fiscal 2004. SG&A as a percent of
net revenues increased to 41.7% from 39.0%. The increase in
SG&A was primarily driven by:
|
|
|
|
|
legal charges of $100 million recorded in connection with
Jones-Related Litigation and a charge of $6 million
recorded in connection with a credit card matter.
|
|
|
|
higher selling salaries and related costs of $85 million,
on a constant dollar basis, in connection with the increase in
retail sales and worldwide store expansion.
|
|
|
|
approximately $20 million of the increase in SG&A was
due to the impact of foreign currency exchange rate
fluctuations, primarily as a result of the strengthening of the
Euro during Fiscal 2005.
|
|
|
|
expenses of $30 million as a result of the consolidation of
Ralph Lauren Media.
|
|
|
|
incremental expenses of $22 million associated with a full
years activity in the Lauren wholesale business, exclusive
of additional corporate and overhead expenses incurred and
reduced royalty revenues received.
|
|
|
|
expenses of $38 million associated with the newly acquired
Childrenswear Business.
|
Amortization of Intangible
Assets. Amortization of intangible assets
increased to $3.4 million during Fiscal 2005, compared to
$1.3 million during Fiscal 2005. The increase resulted from
amortization of intangible assets as part of the Childrenswear
Business acquired in July 2004.
Impairments of Retail Assets. A non-cash
impairment charge of $1.5 million was recognized during
Fiscal 2005 to reduce the carrying value of fixed assets used in
certain of our retail stores, largely relating to our Club
Monaco brand. The impairment charge primarily related to
lower-than-expected
store performance.
Restructuring Charges. We recorded
restructuring charges of $2.3 million during Fiscal 2005,
compared to restructuring charges of $19.6 million during
Fiscal 2004. The Fiscal 2005 restructuring charge is primarily
comprised of additional contract termination and severance costs
related to the consolidation of our European business
operations. The Fiscal 2004 restructuring charges related to a
restructuring of our European operations, a restructuring of our
retail operations and the closing of certain RRL retail stores.
36
Operating Income. Operating income increased
$28.8 million, or 10.6%, to $299.7 million in Fiscal
2005, compared to $270.9 million in Fiscal 2004. Operating
income for Fiscal 2005 was reduced by the $100 million
Jones-Related Litigation charge and a $6 million legal
charge in connection with a credit card matter. Operating income
for our three business segments is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
|
|
|
|
|
April 2,
|
|
|
April 3,
|
|
|
Increase
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
(Decrease)
|
|
|
% Change
|
|
|
|
(millions)
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
299.7
|
|
|
$
|
143.1
|
|
|
$
|
156.6
|
|
|
|
109.4
|
%
|
Retail
|
|
|
82.8
|
|
|
|
55.7
|
|
|
|
27.1
|
|
|
|
48.7
|
|
Licensing
|
|
|
159.5
|
|
|
|
191.6
|
|
|
|
(32.1
|
)
|
|
|
(16.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
542.0
|
|
|
|
390.4
|
|
|
|
151.6
|
|
|
|
38.8
|
|
Less: Unallocated Corporate expense
|
|
|
(133.8
|
)
|
|
|
(99.9
|
)
|
|
|
(33.9
|
)
|
|
|
(33.9
|
)
|
Unallocated
legal and restructuring charges
|
|
|
(108.5
|
)
|
|
|
(19.6
|
)
|
|
|
(88.9
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
299.7
|
|
|
$
|
270.9
|
|
|
|
28.8
|
|
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale operating income increased primarily as a
result of incremental net sales in our newly acquired
Childrenswear Business and a full year of activity in the Lauren
business.
Retail operating income increased primarily as a result
of increased net sales and improved gross profits as a
percentage of net revenues. These increases were partially
offset by the increase in selling salaries and related costs in
connection with the increase in retail sales and worldwide store
expansion.
Licensing income decreased primarily due to the loss of
the Lauren and Childrenswear royalties. This decrease was
partially offset by improvements in our international licensing
business.
Unallocated Corporate Expenses increased primarily as a
result of increased stock compensation expense and increased
bonus accruals resulting from our increased operating
performance.
Unallocated Legal and Restructuring
Charges. Unallocated legal and restructuring
charges increased by $88.9 million in Fiscal 2005. The
increase primarily related to the $100 million
Jones-Related Litigation charge and $6 million credit card
charge recognized in Fiscal 2005, offset in part by lower
restructuring charges of $17.3 million in Fiscal 2005.
Foreign Currency (Gains) Losses. The effect of
foreign currency exchange rate fluctuations resulted in a gain
of $6.1 million during Fiscal 2005, compared to a
$1.9 million loss during Fiscal 2004. These gains are
unrelated to the impact of changes in the value of the dollar
when operating results of our foreign subsidiaries are
translated to U.S. dollars.
Interest Expense. Interest expense decreased
to $11.0 million in Fiscal 2005, compared to
$12.7 million for Fiscal 2004. This decrease was due to the
repayment of approximately $101 million of short-term
borrowings during Fiscal 2004, as well as lower interest rates.
Interest Income. Interest income increased to
$4.6 million in Fiscal 2005, compared to $2.7 million
in Fiscal 2004 primarily due to higher average balances of
invested cash.
Equity in income of equity-method
investees. Equity in the income of equity-method
investees increased to $6.4 million in Fiscal 2005,
compared to $5.5 million in Fiscal 2004. The increase
principally related to the improved operating performance of our
20% investment in Impact21, a company that holds the sublicenses
for our mens, womens and jeans business in Japan.
Minority interest expense. Minority interest
expense increased to $8.0 million in Fiscal 2005, compared
to $1.4 million in Fiscal 2004. The increase principally
related to the allocation of income to the partners in our
jointly owned RL Media venture, which was consolidated effective
as of the end of Fiscal 2004.
37
Provision for Income Taxes. The provision for
income taxes increased to $107.4 million in Fiscal 2005,
compared to $93.9 million in Fiscal 2004. This increase
related to an increase in our effective tax rate to 36.1% in
Fiscal 2005 from 35.7% in Fiscal 2004. The increase in our
effective tax rate principally resulted from the continued
growth of our domestic wholesale and retail businesses, which
led to a higher state tax impact.
Net Income. Net income increased to
$190.4 million in Fiscal 2005, compared to
$169.2 million in Fiscal 2004. The $21.2 million
increase in net income principally related to the increase in
operating income previously discussed, which was reduced by
approximately $106 million of litigation-related charges.
Net Income Per Share. Net income per diluted
share increased to $1.83 in Fiscal 2005, compared to $1.68 in
Fiscal 2004. Net income per basic share increased to $1.88 in
Fiscal 2005, compared to $1.71 in Fiscal 2004. The improvement
in per share results was due to the higher level of net income
associated with our underlying operating performance, offset in
part by higher dilution associated with higher average shares
outstanding.
FINANCIAL
CONDITION AND LIQUIDITY
Financial
Condition
At April 1, 2006, the Company had $285.7 million of
cash and cash equivalents, $280.4 million of debt (net cash
of $5.3 million, defined as total cash and cash equivalents
less total debt) and $2,049.6 million of stockholders
equity. This compares to $350.5 million of cash and cash
equivalents, $291.0 million of debt (net cash of
$59.5 million) and $1,675.7 million of
stockholders equity at April 2, 2005.
The decrease in our net cash position principally related to the
use of approximately $159 million in cash to fund capital
expenditures and approximately $480 million of cash
primarily to fund the Polo Jeans and Footwear transactions.
These funding requirements more than offset the strong growth in
the Companys operating cash flow. The increase in
stockholders equity principally related to the
Companys strong earnings growth in Fiscal 2006.
Cash
Flows
Fiscal
2006 Compared to Fiscal 2005
Net Cash Provided by Operating Activities. Net
cash provided by operating activities increased to approximately
$449 million during Fiscal 2006, compared to
$382 million in Fiscal 2005. This $67 million increase
in cash flow was driven primarily by an increase in net income
and lower working capital requirements, offset, in part, by a
$100 million payment to settle the Jones-Related Litigation.
Net Cash Used in Investing Activities. Net
cash used in investing activities was approximately
$539 million in Fiscal 2006, compared to approximately
$417 million in Fiscal 2005. The increase in cash used in
investing activities principally related to acquisition-related
activities. In Fiscal 2006, the Company used approximately
$380 million primarily to fund the acquisition of the Polo
Jeans Business and Footwear Business, whereas in Fiscal 2005,
the Company used approximately $243 million principally to
fund the acquisition of the Childrenswear Business. In addition,
net cash used in investing activities included capital
expenditures of $159 million in Fiscal 2006, compared to
$174 million in Fiscal 2005.
Net Cash Provided by Financing Activities. Net
cash provided by financing activities was approximately
$34 million in Fiscal 2006, compared to approximately
$32 million in Fiscal 2005. The $2 million increase in
cash provided by financing activities was primarily related to
the settlement of an interest rate swap agreement and an
increase in proceeds received from the exercise of stock
options, partially offset by the cost associated with
repurchases of common stock. The Company repurchased common
stock under its common stock repurchase program at an aggregate
cost of approximately $4 million in Fiscal 2006. The
Company did not repurchase common stock under its common stock
repurchase program in Fiscal 2005. Proceeds received from the
exercise of stock options were $55 million in Fiscal 2006,
compared to $53 million in Fiscal 2005. Cash dividends paid
were $21 million in Fiscal 2006, compared to
$22 million in Fiscal 2005.
38
Fiscal
2005 Compared to Fiscal 2004
Net Cash Provided by Operating Activities. Net
cash provided by operating activities increased to
$382 million during Fiscal 2005, compared to approximately
$214 million in Fiscal 2004. This $168 million
increase in cash flow was driven by an increase in net income
before the $100 million non-cash, Jones-Related Litigation
charge and $102 million of non-cash, depreciation and
amortization expense, offset in part by higher working capital
requirements.
Net Cash Used in Investing Activities. Net
cash used in investing activities was approximately
$417 million in Fiscal 2005, compared to approximately
$135 million in Fiscal 2004. The increase of cash used in
investing activities principally related to acquisition-related
spending of $243 million in Fiscal 2005, which was
substantially utilized in connection with the purchase of the
Childrenswear Business. In addition, capital expenditures
increased to $174 million in Fiscal 2005, compared to
$126 million in Fiscal 2004.
Net Cash Provided by Financing Activities. Net
cash provided by financing activities was approximately
$32 million in Fiscal 2005, compared to approximately
$76 million of cash used in Fiscal 2004. Cash provided by
financing activities during Fiscal 2005, consisted of the
payment of $22 million in dividends, offset by proceeds of
$53 million from the exercise of stock options. Cash used
by financing activities during Fiscal 2004 primarily consisted
of the net repayment of short-term borrowings of approximately
$101 million and the payment of $15 million in
dividends, partially offset by $39 million of proceeds from
the exercise of stock options.
Liquidity
The Companys primary sources of liquidity are the cash
flow generated from its operations, which includes the
approximate $200 million to be received in January 2007
under its new Eyewear Licensing Agreement, $450 million of
availability under its credit facility, available cash and
equivalents and other potential sources of financial capacity
relating to its under-leveraged capital structure. These sources
of liquidity are needed to fund the Companys ongoing cash
requirements, including working capital requirements, retail
store expansion, construction and renovation of
shop-within-shops, investment in technological infrastructure,
acquisitions, dividends, debt repayment, stock repurchases and
other corporate activities. Management believes that the
Companys existing resources of cash will be sufficient to
support its operating and capital requirements for the
foreseeable future.
As discussed below under the section entitled Debt and
Covenant Compliance, the Company had no borrowings under
its credit facility as of April 1, 2006. However, in the
event of a material acquisition, settlement of a material
contingency or a material adverse business development, the
Company may need to draw on its credit facility or other
potential sources of financing. Also, as discussed below, the
Company currently intends to refinance its Euro debt obligations
that mature in November 2006 during the first half of Fiscal
2007, subject to prevailing market conditions and its ability to
refinance such debt obligations on acceptable terms.
Common
Stock Repurchase Program
The Company currently has a common stock repurchase program that
allows it to repurchase, from time to time, up to
$100 million of Class A common stock. Share
repurchases are subject to overall business and market
conditions. The Company also had a pre-existing common stock
repurchase program that expired at the end of Fiscal 2006. Under
that pre-existing program, the Company repurchased 69.3 thousand
shares of Class A common stock in Fiscal 2006 at a cost of
approximately $4 million. No shares of Class A common
stock were repurchased in Fiscal 2005 and Fiscal 2004.
Dividends
The Company intends to continue to pay regular quarterly
dividends on its outstanding common stock. However, any decision
to declare and pay dividends in the future will be made at the
discretion of the Companys Board of Directors and will
depend on, among other things, the Companys results of
operations, cash requirements, financial condition and other
factors that the Board of Directors may deem relevant.
39
The Company declared a quarterly dividend of $0.05 per
outstanding share in each quarter of Fiscal 2006 and Fiscal
2005. The aggregate amount of dividend payments was
$21 million in Fiscal 2006, $22 million in Fiscal 2005
and $15 million in Fiscal 2004.
Debt
and Covenant Compliance
Euro
Debt
The Company has outstanding approximately 227 million
principal amount of 6.125% notes that are due in November
2006 (the Euro Debt). The carrying value of the Euro
Debt changes as a result of changes in Euro exchange rates and
changes in its fair value associated with an interest-rate swap
agreement that had been used until its termination in March 2006
as an effective hedge against changes in the fair value of the
Euro Debt.
As of April 2, 2006, the carrying value of the Euro Debt
was $280.4 million, compared to $291.0 million at
April 2, 2005. The Company has the option to redeem the
Euro Debt at any time prior to its scheduled maturity. The
Company currently intends to refinance the Euro Debt during the
first half of Fiscal 2007, subject to prevailing market
conditions and its ability to refinance such debt obligations on
acceptable terms.
Revolving
Credit Facility
The Company has a credit facility (the Credit
Facility) that currently provides for a $450 million
revolving line of credit, which can be increased to up to
$525 million if one or more new or existing lenders under
the facility agree to increase their commitments. The credit
facility also is used to support the issuance of letters of
credit. As of April 1, 2006, there were no borrowings
outstanding under the Credit Facility, but the Company was
contingently liable for $46 million of outstanding letters
of credit (primarily relating to inventory purchase commitments).
The Credit Facility expires on October 6, 2009. There are
no mandatory reductions in borrowing availability throughout its
term.
Borrowings under the Credit Facility bear interest at a rate
equal to an applicable margin plus, at the Companys
option, either (a) a base rate determined by reference to
the higher of (i) the prime commercial lending rate of
JPMorgan Chase Bank in effect from time to time and
(ii) the weighted-average overnight Federal funds rate (as
published by the Federal Reserve Bank of New York) plus 50 basis
points or (b) a LIBOR rate in effect from time to time, as
adjusted for the Federal Reserve Boards Euro currency
liabilities maximum reserve percentage. The applicable margin
was 62.5 basis points as of the end of Fiscal 2006 and is
subject to adjustment based on the Companys credit ratings
at the time of any borrowings.
In addition to paying interest on any outstanding borrowings
under the Credit Facility, the Company is required to pay a
commitment fee to the lenders under the Credit Facility in
respect of the unutilized commitments. The commitment fee rate
was 15 basis points as of the end of Fiscal 2006, and is
subject to adjustment based on the Companys credit ratings.
The Credit Facility contains a number of covenants that, among
other things, restrict the Companys ability, subject to
specified exemptions, to incur additional debt; incur liens and
contingent liabilities; sell or dispose of assets, including
equity interests; merge with or acquire other companies;
liquidate or dissolve itself; engage in businesses that are not
in a related line of business; make loans, advances or
guarantees; engage in transactions with affiliates; and make
investments. In addition, the Credit Facility requires the
Company to maintain certain financial covenants, consisting of
(i) a minimum ratio of Earnings Before Interest, Taxes,
Depreciation, Amortization and Rent (EBITDAR) to the
sum of Consolidated Interest Expense and Consolidated Lease
Expense and (ii) a maximum ratio of Adjusted Debt to
EBITDAR, as such terms are defined in the Credit Facility. As of
April 1, 2006, the Company was in compliance with all
covenants under the Credit Facility.
Upon the occurrence of an event of default under the Credit
Facility, the lenders may cease making loans, terminate the
Credit Facility, and declare all amounts outstanding to be
immediately due and payable. The Credit Facility specifies a
number of events of default (many of which are subject to
applicable grace periods), including, among others, the failure
to make timely principal and interest payments or to satisfy the
covenants, including the financial covenants described above.
Additionally, the Credit Facility provides that an event of
default will occur if
40
Mr. Ralph Lauren, the Companys Chairman and Chief
Executive Officer, and related entities fail to maintain a
specified minimum percentage of the voting power of the
Companys common stock.
Contractual
and Other Obligations
Firm
Commitments
The following table summarizes certain of the Companys
aggregate contractual obligations at April 1, 2006, and the
estimated timing and effect that such obligations are expected
to have on the Companys liquidity and cash flow in future
periods. The Company expects to fund the firm commitments with
operating cash flow generated in the normal course of business
and, if necessary, availability under its $450 million
credit facility or other potential sources of financing.
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Fiscal
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008-2009
|
|
|
2010-2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(millions)
|
|
|
Euro debt
|
|
$
|
280.4
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
280.4
|
|
Inventory purchase commitments
|
|
|
466.0
|
|
|
|
26.4
|
|
|
|
|
|
|
|
|
|
|
|
492.4
|
|
Capital leases
|
|
|
3.6
|
|
|
|
7.1
|
|
|
|
7.1
|
|
|
|
34.5
|
|
|
|
52.3
|
|
Operating leases
|
|
|
143.3
|
|
|
|
258.1
|
|
|
|
198.4
|
|
|
|
528.0
|
|
|
|
1,127.8
|
|
Deferred purchase price payments
|
|
|
3.4
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
896.7
|
|
|
$
|
294.9
|
|
|
$
|
205.5
|
|
|
$
|
562.5
|
|
|
$
|
1,959.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a description of the Companys material,
firmly committed contractual obligations as of April 1,
2006:
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|
|
|
|
Euro Debt represents the principal
amount due at maturity of the Euro Debt on a
U.S. dollar-equivalent basis. Amounts do not include any
fair value adjustments, call premiums or interest payments.
|
|
|
|
Inventory Purchase
Commitments represents the Companys
legally binding agreements to purchase fixed or minimum
quantities of goods at determinable prices
|
|
|
|
Lease Obligations represents the minimum
lease rental payments under noncancelable leases for the
Companys real estate and operating equipment in various
locations around the world. A significant portion of these lease
obligations relate to the Companys retail operations.
Information has been presented separately for operating and
capital leases. In addition to such amounts, the Company is
normally required to pay taxes, insurance and occupancy costs
relating to its leased real estate properties.
|
Refer to Note 15 to the audited financial statements
included elsewhere herein for a description of the
Companys contingent commitments, primarily letters of
credit, not included in the above table.
MARKET
RISK MANAGEMENT
The Company has exposure to changes in foreign currency exchange
rates relating to both the cash flows generated by its
international operations and the fair value of its international
operations, as well as exposure to changes in the fair value of
its fixed-rate debt relating to changes in interest rates.
Consequently, the Company uses derivative financial instruments
to manage such risks. The Company does not enter into derivative
transactions for speculative purposes. The following is a
summary of the Companys risk management strategies and the
effect of those strategies on the Companys financial
statements.
Foreign
Currency Risk Management
Foreign
Currency Exchange Contracts
The Company enters into forward foreign exchange contracts as
hedges relating to identifiable currency positions to reduce its
risk from exchange rate fluctuations on inventory purchases and
intercompany royalty payments. As part of its overall strategy
to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, primarily exposure to changes in the
value of the Euro and Yen, the Company hedges a portion of its
41
foreign currency exposures anticipated over the ensuing
twelve-month to two year period. In doing so, the Company uses
foreign exchange contracts that generally have maturities of
three months to two years to provide continuing coverage
throughout the hedging period.
At April 1, 2006, the Company had contracts for the sale of
$90 million of foreign currencies at fixed rates. Of these
$90 million of sales contracts, $22 million were for
the sale of Euros and $68 million were for the sale of
Japanese Yen. The fair value of the forward contracts was an
unrealized loss of $2 million. At April 2, 2005, the
Company had contracts for the sale of $224 million of
foreign currencies at fixed rates. Of these $224 million of
sales contracts, $124 million were for the sale of Euros
and $100 million were for the sale of Japanese Yen. The
fair value of the forward contracts was an unrealized loss of
$7 million.
The Company records foreign currency exchange contracts at fair
value in its balance sheets and designated these derivative
instruments as cash flow hedges in accordance with FASB
Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, and subsequent
amendments (FAS 133). As such, the related
gains or losses on these contracts are deferred in
stockholders equity as a component of accumulated other
comprehensive income. These deferred gains and losses are then
either recognized in income in the period in which the related
royalties being hedged are received, or in the case of inventory
purchases, recognized as part of the cost of the inventory being
hedged when sold. However, to the extent that any of these
foreign currency exchange contracts are not considered to be
100% effective in offsetting the change in the value of the
royalties or inventory purchases being hedged, any changes in
fair value relating to the ineffective portion of these
contracts is immediately recognized in income. No significant
gains or losses relating to ineffective hedges were recognized
in any period.
The Company had deferred net losses on foreign currency exchange
contracts in the amount of approximately $1 million at the
end of Fiscal 2006, less than half of which is expected to be
recognized in earnings in Fiscal 2007. Net losses on foreign
currency exchange contracts in the amount of approximately
$6 million were deferred at the end of Fiscal 2005. The
Company recognized net losses on foreign currency exchange
contracts in earnings of $5 million for Fiscal 2006 and
$11 million for Fiscal 2005.
Based on the foreign currency exchange contracts outstanding at
April 1, 2006, a 10% devaluation of the U.S. dollar as
compared to the level of foreign currency exchange rates for
currencies under contract at April 1, 2006 would result in
approximately $9 million of net unrealized losses.
Conversely, a 10% appreciation of the U.S. dollar would
result in approximately $9 million of net unrealized gains.
Because the foreign currency exchange contracts are designated
as cash flow hedges of forecasted transactions, the unrealized
loss or gain as a result of a 10% devaluation or appreciation
would be largely offset by changes in the underlying hedged
items.
Hedge of
a Net Investment in Certain European Subsidiaries
The Company has outstanding approximately
227.0 million principal amount of Euro Debt. The
entire principal amount of the Euro Debt has been designated as
a fair-value hedge of the Companys net investment in
certain of its European subsidiaries in accordance with
FAS 133. As required by FAS 133, the changes in fair
value of a derivative instrument that is designated as, and is
effective as, an economic hedge of the net investment in a
foreign operation are reported in the same manner as a
translation adjustment under FASB Statement No. 52,
Foreign Currency Translation, to the extent it is
effective as a hedge. As such, changes in the fair value of the
Euro Debt resulting from changes in the Euro exchange rate are
reported in stockholders equity as a component of
accumulated other comprehensive income. The Company recorded
gains (losses) in stockholders equity on the translation
of the Euro Debt to U.S. dollars in the amount of
approximately $4 million for Fiscal 2006, $(18) million for
Fiscal 2005 and $(31) million for Fiscal 2004.
Interest
Rate Risk Management
Historically, the Company has used floating-rate interest rate
swap agreements to hedge changes in the fair value of its
fixed-rate Euro Debt. These interest rate swap agreements, which
effectively converted fixed interest rate payments on the
Companys Euro Debt to a floating-rate basis, were
designated as a fair value hedge in accordance with
FAS 133. The Company had interest rate swap agreements on
the amount of approximately
42
205 million notional amount of indebtness as of the
end of Fiscal 2005, but all of such swap agreements were
terminated in March 2006. No other interest rate swap agreements
were held as of the end of Fiscal 2006.
As a fair value hedge, the Company records interest rate swap
agreements at fair value in its balance sheet. Changes in fair
value of the interest rate swap agreements are offset in
earnings against changes in the fair value of the underlying
portion of the Euro Debt being hedged. In accordance with
FAS 133, the Company has assumed no hedge ineffectiveness
as the terms of the interest rate swaps mirrored the terms of
the Euro debt.
In connection with the termination of these interest rate swap
agreements in Fiscal 2006, the Company received a net settlement
of approximately $5 million. Such amount has been reflected
as an increase in the carrying value of the Euro Debt and will
be recognized as an adjustment to interest expense (similar to
the accounting for a debt premium) over the remaining maturity
of the Euro Debt.
At April 1, 2006, the Company had no variable-rate debt
outstanding. As such, the Companys exposure to changes in
interest rates primarily related to its fixed-rate Euro Debt. At
April 1, 2006, the carrying value of the Euro Debt was
$280.4 million and the fair value was $279.9 million.
A 25 basis point increase or decrease in the level of
interest rates would, respectively, decrease or increase the
fair value of the Euro Debt by approximately $0.4 million.
Such potential increases or decreases are based on certain
simplifying assumptions, including no changes in euro currency
exchange rates and an immediate
across-the-board
increase or decrease in the level of interest rates with no
other subsequent changes for the remainder of the period.
CRITICAL
ACCOUNTING POLICIES
The SECs Financial Reporting Release No. 60,
Cautionary Advice Regarding Disclosure About Critical
Accounting Policies (FRR 60), suggests
companies provide additional disclosure and commentary on those
accounting policies considered most critical. FRR 60 considers
an accounting policy to be critical if it is important to the
Companys financial condition and results, and requires
significant judgment and estimates on the part of management in
its application. The Company believes that the following list
represents its critical accounting policies as contemplated by
FRR 60. For a summary of all of the Companys significant
accounting policies, see Notes 3 and 4 to the audited
financial statements included elsewhere herein.
Sales
Allowances and Uncollectible Accounts
A significant area of judgment affecting reported revenue and
net income is estimating the portion of revenues and related
receivables that are not realizable. In particular, wholesale
revenue is reduced by estimates of returns, discounts,
end-of-season
markdown allowances and operational chargebacks. Retail revenue,
including
e-commerce
sales, also is reduced by estimates of returns.
In determining estimates of returns, discounts,
end-of-season
markdown allowances and operational chargebacks, management
analyzes historical trends, seasonal results, current economic
and market conditions and retailer performance. The Company
reviews and refines these estimates on a quarterly basis. The
Companys historical estimates of these costs have not
differed materially from actual results.
Similarly, management evaluates accounts receivables to
determine if they will ultimately be collected. In performing
this evaluation, significant judgments and estimates are
included, including an analysis of specific risks on a
customer-by-customer
basis for larger accounts and customers, and a receivables aging
analysis that determines the percentage of receivables that has
historically been uncollected by aged category. Based on this
information, management provides a reserve for the estimated
amounts believed to be uncollectible.
See Accounts Receivable under Note 3 to the
audited financial statements included elsewhere herein for an
analysis of the activity in the Companys reserves for
sales allowances and uncollectible accounts for each of the
three fiscal years ended April 1, 2006.
Inventories
The Company holds inventory that is sold through wholesale
distribution channels to major department stores and specialty
retail stores, including its own retail stores. The Company also
holds retail inventory that is sold in its
43
own stores directly to consumers. Wholesale and retail
inventories are stated at lower of cost or estimated realizable
value. Cost for wholesale inventories is determined using the
first-in,
first-out (FIFO) method and cost for retail
inventories is determined on a moving-average cost basis.
The Company continually evaluates the composition of its
inventories assessing slow-turning, ongoing product, as well as
all fashion product. Estimated realizable value of distressed
inventory is determined based on historical sales trends for
this category of inventory of the Companys individual
product lines, the impact of market trends and economic
conditions, and the value of current orders in-house relating to
the future sales of this type of inventory. Estimates may differ
from actual results due to quantity, quality and mix of products
in inventory, consumer and retailer preferences and market
conditions. The Companys historical estimates of these
costs and its provisions have not differed materially from
actual results.
Income
Taxes
Income taxes are provided using the asset and liability method
prescribed by FASB Statement No. 109, Accounting for
Income Taxes (FAS 109). Under this
method, income taxes (i.e., deferred tax assets, deferred tax
liabilities, taxes currently payable/ refunds receivable and tax
expense) are recorded based on amounts refundable or payable in
the current year and include the results of any difference
between U.S. GAAP and tax reporting. Deferred income taxes
reflect the tax effect of any net operating loss, capital loss
and general business credit carryforwards and the net tax
effects of temporary differences between the carrying amount of
assets and liabilities for financial statement and income tax
purposes, as determined under enacted tax laws and rates. The
financial effect of changes in tax laws or rates is accounted
for in the period of enactment.
Significant judgment is required in determining the worldwide
provision for income taxes. That is, in the ordinary course of a
global business, there are many transactions for which the
ultimate tax outcome is uncertain. It is the Companys
policy to establish reserves for taxes that may become payable
in future years as a result of an examination by tax
authorities. The Company establishes those reserves based upon
managements assessment of the exposure associated with
permanent tax differences and tax credits. In addition,
valuation allowances are established when management determines
that it is more likely than not that some portion or all of a
deferred tax asset will not be realized. Tax reserves and
valuation allowances are analyzed periodically and adjusted as
events occur, or circumstances change, that warrant adjustments
to those balances.
Purchase
Accounting
The Company accounts for its business acquisitions under the
purchase method of accounting. As such, the total cost of
acquisitions is allocated to the underlying net assets based on
their respective estimated fair values. The excess of the
purchase price over the estimated fair values of the net assets
acquired is recorded as goodwill. Determining the fair value of
assets acquired and liabilities assumed requires
managements judgment and often involves the use of
significant estimates and assumptions, including assumptions
with respect to future cash inflows and outflows, discount
rates, asset lives and market multiples, among other items.
In addition, in connection with its recent business
acquisitions, the Company has settled certain pre-existing
relationships. These pre-existing relationships include
licensing agreements and litigation in the case of the
acquisition of the Polo Jeans Business. In accordance with
EITF 04-1,
Accounting for Pre-existing Relationships between the
Parties to a Business Combination, the Company is required
to allocate the aggregate consideration exchanged in these
transactions between the value of the business acquired and the
value of the settlement of the pre-existing relationship in
proportion to estimates of their respective fair values. If the
terms of the pre-existing relationship were determined to not be
reflective of market, a settlement gain or loss would be
recognized in earnings. Accordingly, significant judgment is
required to determine the respective fair values of the business
acquired and the value of the settlement of the pre-existing
relationship. The Company has historically utilized independent
valuation firms to assist in the determination of fair value.
Impairment
of Goodwill and Other Intangible Assets
Goodwill and other intangible assets are accounted for in
accordance with the provisions of FASB Statement No. 142,
Goodwill and Other Intangible Assets,
(FAS 142). Under FAS 142, goodwill,
including any goodwill
44
included in the carrying value of investments accounted for
using the equity method of accounting, and certain other
intangible assets deemed to have indefinite useful lives are not
amortized. Rather, goodwill and such indefinite-lived intangible
assets are assessed for impairment at least annually based on
comparisons of their respective fair values to their carrying
values. Finite-lived intangible assets are amortized over their
respective useful lives and, along with other long-lived assets
are evaluated for impairment periodically whenever events or
changes in circumstances indicate that their related carrying
amounts may not be recoverable in accordance with FASB Statement
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (FAS 144).
In accordance with FAS 142, goodwill impairment is
determined using a two-step process. The first step of the
goodwill impairment test is used to identify potential
impairment by comparing the fair value of a reporting unit with
its net book value (or carrying amount), including goodwill. If
the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is considered not to be impaired
and the second step of the impairment test is unnecessary. If
the carrying amount of a reporting unit exceeds its fair value,
the second step of the goodwill impairment test is performed to
measure the amount of impairment loss, if any. The second step
of the goodwill impairment test compares the implied fair value
of the reporting units goodwill with the carrying amount
of that goodwill. If the carrying amount of the reporting
units goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to
that excess. The implied fair value of goodwill is determined in
the same manner as the amount of goodwill recognized in a
business combination. That is, the fair value of the reporting
unit is allocated to all of the assets and liabilities of that
unit (including any unrecognized intangible assets) as if the
reporting unit had been acquired in a business combination and
the fair value of the reporting unit was the purchase price paid
to acquire the reporting unit.
Determining the fair value of a reporting unit under the first
step of the goodwill impairment test and determining the fair
value of individual assets and liabilities of a reporting unit
(including unrecognized intangible assets) under the second step
of the goodwill impairment test is judgmental in nature and
often involves the use of significant estimates and assumptions.
Similarly, estimates and assumptions are used in determining the
fair value of other intangible assets. These estimates and
assumptions could have a significant impact on whether or not an
impairment charge is recognized and also the magnitude of any
such charge. To assist in the process of determining goodwill
impairment, the Company obtains appraisals from independent
valuation firms. Estimates of fair value are primarily
determined using discounted cash flows, market comparisons and
recent transactions. These approaches use significant estimates
and assumptions, including projected future cash flows
(including timing), discount rates reflecting the risks inherent
in future cash flows, perpetual growth rates and determination
of appropriate market comparables.
The impairment test for other indefinite-lived intangible assets
consists of a comparison of the fair value of the intangible
asset with its carrying value. If the carrying value of the
indefinite-lived intangible asset exceeds its fair value, an
impairment loss is recognized in an amount equal to the excess.
In addition, in evaluating finite-lived intangible assets for
recoverability, the Company uses its best estimate of future
cash flows expected to result from the use of the asset and
eventual disposition in accordance with FAS 144. To the
extent the estimated future, undiscounted cash inflows
attributable to the asset, less estimated future, undiscounted
cash outflows, are less than the carrying amount, an impairment
loss is recognized in an amount equal to the difference between
the carrying value of such asset and its fair value.
There have been no impairment losses recorded in connection with
the assessment of the recoverability of goodwill and other
intangible assets during any of the three fiscal years ended
April 1, 2006.
Impairment
of Other Long-Lived Assets
In accordance with FAS 144, the recoverability of the
carrying values of other long-lived assets, such as property and
equipment, is evaluated whenever events or changes in
circumstances indicate that such values may be impaired. In
evaluating a long-lived asset for recoverability, the Company
uses its best estimate of future cash flows expected to result
from the use of the asset and its eventual disposition. To the
extent that estimated future, undiscounted cash inflows
attributable to the asset, less estimated future, undiscounted
cash outflows, are less than the carrying amount, an impairment
loss is recognized in an amount equal to the difference between
the carrying
45
value of such asset and its fair value. Assets to be disposed of
and for which there is a committed plan of disposal, whether
through sale or abandonment, are reported at the lower of
carrying value or fair value less costs to sell.
In determining future cash flows, the Company takes various
factors into account, including changes in merchandising
strategy, the impact of more experienced retail store managers,
the impact of increased local advertising and the emphasis on
retail store cost controls. Since the determination of future
cash flows is an estimate of future performance, there may be
future impairments in the event that future cash flows do not
meet expectations.
The Company recognized impairment charges on retail fixed assets
in the amounts of approximately $11 million for Fiscal 2006
and $2 million for Fiscal 2005. No impairment charges were
recognized in Fiscal 2004.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
For a discussion of the Companys exposure to market risk,
see Market Risk Management in MD&A presented
elsewhere herein.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
See the Index to Consolidated Financial Statements
appearing at the end of this report on
Form 10-K.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures
|
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are the controls and other
procedures of an issuer that are designed to provide reasonable
assurance that information required to be disclosed by the
issuer in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time period specified in the
Securities and Exchange Commissions rules and forms.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it
files or submits under the Act is accumulated and communicated
to the issuers management, including its principal
executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
We have evaluated, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures, as defined in
Rules 13a-15(e)
and
15d-15(e) of
the Securities Exchange Act of 1934, as of the end of the fiscal
year covered by this annual report. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer have
concluded that the Companys disclosure controls and
procedures were not effective as of the fiscal year end covered
by this annual report due to the tax-related material weakness
in the Companys internal control over financial reporting
described below in managements report on internal control
over financial reporting.
(b) Managements Report of Internal Control Over
Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in Securities Exchange Act
Rule 13a-15(f).
Internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and preparation of financial statements for external
purposes in accordance with U.S. Generally Accepted
Accounting Principles.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the design and
effectiveness of our internal control over financial reporting
as of the end of the fiscal year covered by this report based on
the framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on this
evaluation, management concluded that, as of April 1, 2006,
the Company did not maintain effective internal control over
financial reporting as there was more than a remote likelihood
that a
46
material misstatement of the Companys annual or interim
financial statements with respect to income taxes would not be
prevented or detected, on a timely basis, by Company employees
in the normal course of performing their assigned functions.
This control deficiency, which management first determined to be
a material weakness under the Public Company Accounting
Oversight Boards Auditing Standard No. 2 in its
Annual Report on
Form 10-K
for the fiscal year ended April 2, 2005, largely related to
inadequate internal tax resources for a sufficient period of
time, lack of formal training for tax personnel and inadequate
controls and procedures over the tax accounting process to
complete a comprehensive and timely review of the income tax
accounts and required tax footnote disclosures. Because this
material weakness was not fully remediated as of the end of
Fiscal 2006, our management believes that, as of April 1,
2006, we did not maintain effective internal control over
financial reporting based on the COSO criteria.
The Companys assessment of its internal control over
financial reporting did not include an evaluation of the
internal controls of its Footwear Business and Polo Jeans
Business, which were acquired during Fiscal 2006. Accordingly,
the Companys conclusion regarding the effectiveness of its
internal controls over financial reporting does not extend to
the internal controls of such businesses. In the aggregate, the
Footwear Business and Polo Jeans Business represented 14.7% of
the total consolidated assets, 2.6% of total consolidated
revenues and 1.5% of total consolidated operating income of the
Company as of and for the fiscal year ended April 1, 2006.
Managements assessment of the effectiveness of internal
control over financial reporting as of April 1, 2006 was
audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report,
which is included in this Annual Report on
Form 10-K.
(c) Changes in internal controls over financial
reporting
Financial
Closing and Reporting Process
In the Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended July 1, 2005, management
reported that it had identified a material weakness in its
financial closing and reporting process. This material weakness
was attributable to an inadequate number of accounting personnel
with sufficient training. The accounting resource issue
contributed to (i) an inadequate review and analysis of
select account balances and (ii) the lack of resolution of
unusual or reconciling items in a timely manner.
Since that time, the Company has taken steps to remediate the
material weakness noted in its financial closing and reporting
process. These steps included, but were not limited to,
(i) the hiring of a new Vice President and Corporate
Controller in September 2005, (ii) the upgrade and
expansion of technical accounting resources in the Corporate
financial closing and reporting group, along with its divisions,
(iii) improved internal training, development and
communication of accounting standards across the Company and
(iv) improved quarterly review procedures. Accordingly,
since these controls were in place for a sufficient period of
time and the operating effectiveness of internal controls over
the financial closing and reporting process was tested during
the fourth quarter of Fiscal 2006, management believes that the
material weakness in the financial closing and reporting process
identified earlier in the year was remediated as of
April 1, 2006.
Income
Tax Accounting Process
In its assessment of internal control over financial reporting
included in the Companys Annual Report on
Form 10-K
for the fiscal year ended April 2, 2005, management
reported that it had identified a material weakness in its
income tax accounting process in accordance with the Public
Company Accounting Oversight Boards Auditing Standard
No. 2. Managements remediation plan, which was
implemented in Fiscal 2006, included (i) the upgrade and
expansion of internal tax staff with appropriate qualifications
and training in accounting for income taxes,
(ii) instituting formal training of tax personnel,
(iii) reviewing income tax accounting processes and
implementing changes, including technology enhancements, in
order to strengthen the design and operation in internal
controls and (iv) developing and implementing policies to
ensure that all significant tax accounts are properly reconciled
on a timely basis and that all tax calculations supporting the
amounts reflected in our financial statements are accurate.
47
During Fiscal 2006, the Company made progress in its remediation
efforts. In particular, the Company hired a new Vice President
of Taxes in the first quarter of Fiscal 2006 and reorganized the
tax department later in the year. The reorganization led to the
addition of seven new tax professionals, substantially all of
whom joined the Company during the fourth quarter of Fiscal
2006. With the new tax team assembled, the Company conducted a
review of its income tax accounting processes and identified
additional areas for process improvement and strengthening of
controls.
Although certain improvements and controls were implemented, the
delay in upgrading tax resources related to competitive market
conditions for the recruitment of tax accounting talent impeded
the Companys efforts to fully execute its tax remediation
plan. As such, management concluded that its planned improved
controls over tax accounting either had not been completely
implemented or had not been operating effectively for a
sufficient period of time in order to reduce the likelihood to
remote that a material misstatement in its income tax accounts
would occur. The Company intends to continue to implement
process and system improvements, policies and stronger controls
over tax accounting in Fiscal 2007 in accordance with its
remediation plan.
Except for the matters described above, there were no changes
during the fourth quarter of Fiscal 2006 that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
Information relating to our directors will be set forth under
the captions (Proposal 1) ELECTION OF
DIRECTORS, CORPORATE
GOVERNANCE Independent Committees of the
Board and SECTION 16(A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE in the Companys proxy statement
for its 2006 annual meeting of stockholders to be filed
within 120 days after April 1, 2006 (the Proxy
Statement) and is incorporated by reference herein.
Information relating to our executive officers is set forth in
Item I of this report on
Form 10-K
under the caption Executive Officers.
The Company has a Code of Ethics for Principal Executive
Officers and Senior Financial Officers that applies to our
principal executive officer, our principal operating officer,
our principal financial officer, our controller, and our
principal accounting officer. You can find our Code of Ethics
for Principal Executive Officers and Senior Financial Officers
on our internet site, http://investor.polo.com. We will post any
amendments to the Code of Ethics for Principal Executive
Officers and Senior Financial Officers and any waivers that are
required to be disclosed by the rules of either the SEC or the
NYSE on our internet site.
|
|
Item 11.
|
Executive
Compensation
|
Information relating to executive and director compensation will
be set forth under the captions EXECUTIVE
COMPENSATION, CORPORATE
GOVERNANCE Compensation of Directors and
STOCK PERFORMANCE CHART in the Proxy Statement and
such information is incorporated by reference herein.
48
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and
Management
|
Equity
Compensation Plan Information at April 1,
2006.
The following table sets forth information as of April 1,
2006 regarding compensation plans under which the Companys
equity securities are authorized for issuance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
Numbers of
|
|
|
|
|
|
Number of Securities
|
|
|
|
Securities
|
|
|
|
|
|
Remaining Available for
|
|
|
|
to be Issued upon
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
Exercise of
|
|
|
|
|
|
Equity Compensation
|
|
|
|
Outstanding
|
|
|
Weighted-Average
|
|
|
Plans (Excluding
|
|
|
|
Options, Warrants
|
|
|
Exercise Price of
|
|
|
Securities Reflected in
|
|
Plan Category
|
|
and Rights
|
|
|
Outstanding Options
($)
|
|
|
Column (a))
|
|
|
Equity compensation plans approved
by security holders
|
|
|
9,809,555
|
(1)
|
|
$
|
28.68
|
(2)
|
|
|
7,534,766
|
(3)
|
Equity compensation plans not
approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,809,555
|
|
|
$
|
28.68
|
|
|
|
7,534,766
|
|
|
|
|
(1) |
|
Consists of 8,266,268 options to purchase shares of our
Class A Common Stock and 1,363,287 restricted stock units
that are payable solely in shares of Class A Common Stock.
Does not include 180,000 outstanding restricted shares that are
subject to forfeiture. |
|
(2) |
|
Represents the weighted average exercise price of the
outstanding stock options. No exercise price is payable with
respect to the outstanding restricted stock units. |
|
(3) |
|
All of the securities remaining available for future issuance
set forth in column (c) may be in the form of options,
stock appreciation rights, restricted stock, restricted stock
units, performance awards or other stock-based awards under the
Companys Amended and Restated 1997 Long-Term Stock
Incentive Plan or 1997 stock option plan for non-employee
directors. An additional 180,000 outstanding shares of
restricted stock granted under the Companys Amended and
Restated 1997 Long-Term Stock Incentive Plan that remain subject
to forfeiture are not reflected in column (c). |
Other information relating to security ownership of certain
beneficial owners and management will be set forth under the
caption SECURITY OWNERSHIP OF CERTAIN OWNERS AND
MANAGEMENT in the Proxy Statement and such information is
incorporated by reference herein.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required to be included by Item 13 of
Form 10-K
will be included under the caption CERTAIN RELATIONSHIPS
AND TRANSACTIONS in the proxy statement and such
information is incorporated by reference herein.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required to be included by Item 14 of
Form 10-K
will be included under the caption
(Proposal 2) RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITORS Independent Auditor
Fees in the Proxy Statement and such information is
incorporated by reference herein.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
|
|
|
|
(a) 1.,
|
2. Financial Statements and Schedules. See index on
Page F-1.
|
3. Exhibits
49
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate
of Incorporation of the Company (filed as Exhibit 3.1 to
the Companys Registration Statement on
Form S-1
(File
No. 333-24733)
(the
S-1))*
|
|
3
|
.2
|
|
Amended and Restated By-laws of
the Company (filed as Exhibit 3.2 to the
S-1)*
|
|
10
|
.1
|
|
Polo Ralph Lauren Corporation 1997
Stock Option Plan for Non-Employee Directors (filed as
Exhibit 10.2 to the
S-1)*
|
|
10
|
.2
|
|
Registration Rights Agreement
dated as of June 9, 1997 by and among Ralph Lauren, GS
Capital Partners, L.P., GS Capital Partner PRL Holding I,
L.P., GS Capital Partners PRL Holding II, L.P., Stone
Street Fund 1994, L.P., Stone Street 1994 Subsidiary Corp.,
Bridge Street Fund 1994, L.P., and Polo Ralph Lauren
Corporation (filed as Exhibit 10.3 to the
S-1)*
|
|
10
|
.3
|
|
U.S.A. Design and Consulting
Agreement, dated January 1, 1985, between Ralph Lauren,
individually and d/b/a Ralph Lauren Design Studio, and Cosmair,
Inc., and letter Agreement related thereto dated January 1,
1985** (filed as Exhibit 10.4 to the
S-1)*
|
|
10
|
.4
|
|
Restated U.S.A. License Agreement,
dated January 1, 1985, between Ricky Lauren and Mark N.
Kaplan, as Licensor, and Cosmair, Inc., as Licensee, and letter
Agreement related thereto dated January 1, 1985** (filed as
Exhibit 10.5 to the
S-1)*
|
|
10
|
.5
|
|
Foreign Design and Consulting
Agreement, dated January 1, 1985, between Ralph Lauren,
individually and d/b/a Ralph Lauren Design Studio, as Licensor,
and LOreal S.A., as Licensee, and letter Agreements
related thereto dated January 1, 1985, September 16,
1994 and October 25, 1994** (filed as Exhibit 10.6 to
the S-1)*
|
|
10
|
.6
|
|
Restated Foreign License
Agreement, dated January 1, 1985, between The Polo/ Lauren
Company, as Licensor, and LOreal S.A., as Licensee, Letter
Agreement related thereto dated January 1, 1985, and
Supplementary Agreement thereto, dated October 1, 1991**
(filed as Exhibit 10.7 to the
S-1)*
|
|
10
|
.7
|
|
Amendment, dated November 27,
1992, to Foreign Design and Consulting Agreement and Restated
Foreign License Agreement** (filed as Exhibit 10.8 to the
S-1)*
|
|
10
|
.8
|
|
Fiscal and Paying Agency Agreement
dated November 22, 1999, among Polo Ralph Lauren
Corporation, its subsidiary guarantors and The Bank of New York,
as fiscal and principal paying agent (filed as Exhibit 10.1
to the
Form 10-Q
for the quarterly period ended January 1, 2000)*
|
|
10
|
.9
|
|
Form of Indemnification Agreement
between Polo Ralph Lauren Corporation and its Directors and
Executive Officers (filed as Exhibit 10.26 to the
S-1)*
|
|
10
|
.10
|
|
Amended and Restated Employment
Agreement, effective as of July 23, 2002, between Polo
Ralph Lauren Corporation and Roger N. Farah (filed as
Exhibit 10.1 to the
Form 10-Q
for the quarterly period ended June 29, 2002)*
|
|
10
|
.11
|
|
Amended and Restated Employment
Agreement, dated as of June 17, 2003, between Polo Ralph
Lauren Corporation and Ralph Lauren (filed as Exhibit 10.1
to the
Form 10-Q
for the quarterly period ended June 28, 2003)*
|
|
10
|
.12
|
|
Non-Qualified Stock Option
Agreement, dated as of June 8, 2004, between Polo Ralph
Lauren Corporation and Ralph Lauren (filed as Exhibit 10.14
to the Companys Annual Report on
Form 10-K
for the fiscal year ended April 2, 2005 (the Fiscal
2005
10-K))*
|
|
10
|
.13
|
|
Restricted Stock Unit Award
Agreement, dated as of June 8, 2004, between Polo Ralph
Lauren Corporation and Ralph Lauren (filed as Exhibit 10.15
to the Fiscal 2005
10-K)*
|
|
10
|
.14
|
|
Polo Ralph Lauren Corporation
Executive Officer Annual Incentive Plan as Amended as of
August 14, 2003 (filed as Exhibit 10.1 to the
Form 10-Q
for the quarterly period ended September 27, 2003)*
|
|
10
|
.15
|
|
Amendment No. 1, dated
July 1, 2004, to the Amended and Restated Employment
Agreement between Polo Ralph Lauren Corporation and Roger N.
Farah (filed as Exhibit 10.1 to the
Form 10-Q
for the quarterly period ended October 2, 2004)*
|
|
10
|
.16
|
|
Restricted Stock Unit Award
Agreement, dated as of July 1, 2004, between Polo Ralph
Lauren Corporation and Roger N. Farah (filed as
Exhibit 10.18 to the Fiscal 2005
10-K)*
|
|
10
|
.17
|
|
Restricted Stock Award Agreement,
dated as of July 23, 2002, between Polo Ralph Lauren
Corporation and Roger N. Farah (filed as Exhibit 10.19 to
the Fiscal 2005
10-K)*
|
|
10
|
.18
|
|
Non-Qualified Stock Option
Agreement, dated as of July 23, 2002, between Polo Ralph
Lauren Corporation and Roger N. Farah (filed as
Exhibit 10.20 to the Fiscal 2005
10-K)*
|
|
10
|
.19
|
|
Deferred Compensation Agreement,
dated as of September 19, 2002, between Polo Ralph Lauren
Corporation and Roger N. Farah (filed as Exhibit 10.21 to
the Fiscal 2005
10-K)*
|
50
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.20
|
|
Asset Purchase Agreement by and
among Polo Ralph Lauren Corporation, RL Childrenswear Company,
LLC and The Seller Affiliate Group (as defined therein) dated
March 25, 2004 (filed as Exhibit 10.1 to the
Form 10-Q
for the quarterly period ended July 3, 2004)*
|
|
10
|
.21
|
|
Amendment No. 1, dated as of
July 2, 2004, to Asset Purchase Agreement by and among Polo
Ralph Lauren Corporation, RL Childrenswear Company, LLC and The
Seller Affiliate Group (as defined therein) (filed as
Exhibit 10.2 to the
Form 10-Q
for the quarterly period ended July 3, 2004)*
|
|
10
|
.22
|
|
Polo Ralph Lauren Corporation 1997
Long-Term Stock Incentive Plan, as Amended and Restated as of
August 12, 2004 (the Stock Incentive Plan)
(filed as Exhibit 99.1 to the
Form 8-K
dated August 12, 2004)*
|
|
10
|
.23
|
|
Restricted Performance Share Unit
Award Overview containing the standard terms of restricted
performance share awards under the Stock Incentive Plan (filed
as Exhibit 10.25 to the Fiscal 2005
10-K)*
|
|
10
|
.24
|
|
Stock Option Award
Overview U.S. containing the standard
terms of stock option award under the Stock Incentive Plan
(filed as Exhibit 10.26 to the Fiscal 2005
10-K)*
|
|
10
|
.25
|
|
Credit Agreement, dated as of
October 6, 2004, by and among the Company, JP Morgan Chase
Bank, as Administrative Agent, The Bank of New York, Fleet
National Bank, SunTrust Bank and Wachovia Bank National
Association, as Syndication Agents, J.P.Morgan Securities Inc.,
as Sole Bookrunner and Sole Lead Arranger, and a Syndicate of
Lending Banks (filed as Exhibit 99.1 to the Companys
Form 8-K
dated October 6, 2004)*
|
|
10
|
.26
|
|
Employment Agreement, dated as of
September 4, 2004, between Polo Ralph Lauren Corporation
and Jackwyn Nemerov (filed as Exhibit 10.3 to the
Form 10-Q
for the quarterly period ended October 2, 2004)*
|
|
10
|
.27
|
|
Employment Agreement, dated
January 3, 2005, between Polo Ralph Lauren Corporation and
Tracey T. Travis (filed as Exhibit 10.1 to the
Companys
10-Q for the
quarter ended January 1, 2005))*
|
|
10
|
.28
|
|
Employment Agreement, effective as
of April 3, 2005, between Polo Ralph Lauren Corporation and
Mitchell A. Kosh (filed as Exhibit 10.1 to the
Companys
Form 10-Q
for the quarterly period ended July 2, 2005)*
|
|
10
|
.29
|
|
Consulting Agreement, dated as of
March 25, 2002, between Polo Ralph Lauren Corporation and
Arnold H. Aronson (filed as Exhibit 10.34 to the Fiscal
2002
10-K)*
|
|
10
|
.30
|
|
Cross Default and Term Extension
Agreement, dated May 11, 1998, among PRL USA, Inc., The
Polo/Lauren Company, L.P., Polo Ralph Lauren Corporation, Jones
Apparel Group, Inc. and Jones Investment Co., Inc. (filed as
Exhibit 10.1 to the
Form 10-Q
for the quarterly period ended December 28, 2002)*
|
|
10
|
.31
|
|
Amended and Restated Polo Ralph
Lauren Supplemental Executive Retirement Plan (filed as
Exhibit 10.1 to the Companys
Form 10-Q
for the quarterly period ended December 31, 2005)*
|
|
14
|
.1
|
|
Code of Ethics for Principal
Executive Officers and Senior Financial Officers (filed as
Exhibit 14.1 to the Fiscal 2003
Form 10-K)*
|
|
21
|
.1
|
|
List of Significant Subsidiaries
of the Company
|
|
23
|
.1
|
|
Consent of Deloitte &
Touche LLP
|
|
31
|
.1
|
|
Certification of Ralph Lauren
required by 17 CFR
240.13a-14(a)
|
|
31
|
.2
|
|
Certification of Tracey T. Travis
required by 17 CFR
240.13a-14(a)
|
|
32
|
.1
|
|
Certification of Ralph Lauren
Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
Certification of Tracey T. Travis
Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
Exhibits 32.1 and 32.2 shall not be deemed
filed for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the
liability of that Section. Such exhibits shall not be deemed
incorporated by reference into any filing under the Securities
Act of 1933 or Securities Exchange Act of 1934.
|
|
|
* |
|
Incorporated herein by reference. |
|
|
|
Management contract or compensatory plan or arrangement. |
|
** |
|
Portions of
Exhibits 10.3-10.9
have been omitted pursuant to a request for confidential
treatment and have been filed separately with the Securities and
Exchange Commission. |
51
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d)
Securities Exchange Act of 1934, the registrant has caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized, on June 14, 2006.
POLO RALPH LAUREN CORPORATION
Tracey T. Travis
Senior Vice President of Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following
persons in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ RALPH
LAUREN
Ralph
Lauren
|
|
Chairman of the Board, Chief
Executive Officer and Director
(Principal Executive Officer)
|
|
June 14, 2006
|
|
|
|
|
|
/s/ ROGER
N. FARAH
Roger
N. Farah
|
|
President, Chief Operating
Officer
and Director
|
|
June 14, 2006
|
|
|
|
|
|
/s/ TRACEY
T. TRAVIS
Tracey
T. Travis
|
|
Senior Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
|
|
June 14, 2006
|
|
|
|
|
|
/s/ ARNOLD
H. ARONSON
Arnold
H. Aronson
|
|
Director
|
|
June 14, 2006
|
|
|
|
|
|
/s/ FRANK
A. BENNACK, JR.
Frank
A. Bennack, Jr.
|
|
Director
|
|
June 14, 2006
|
|
|
|
|
|
/s/ DR.
JOYCE F. BROWN
Dr.
Joyce F. Brown
|
|
Director
|
|
June 14, 2006
|
|
|
|
|
|
/s/ JOEL
L. FLEISHMAN
Joel
L. Fleishman
|
|
Director
|
|
June 14, 2006
|
|
|
|
|
|
/s/ JUDITH
A. MCHALE
Judith
A. McHale
|
|
Director
|
|
June 14, 2006
|
|
|
|
|
|
/s/ STEVEN
P. MURPHY
Steven
P. Murphy
|
|
Director
|
|
June 14, 2006
|
|
|
|
|
|
/s/ TERRY
S. SEMEL
Terry
S. Semel
|
|
Director
|
|
June 14, 2006
|
52
POLO
RALPH LAUREN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
INFORMATION
|
|
|
|
|
|
|
Page
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-39
|
|
|
|
|
F-40
|
|
Supplementary Information:
|
|
|
|
|
|
|
|
F-43
|
|
|
|
|
F-45
|
|
|
|
|
|
|
All schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial
statements or notes thereto.
F-1
POLO
RALPH LAUREN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
285.7
|
|
|
$
|
350.5
|
|
Accounts receivable, net of
allowances of $115.0 and $111.0 million
|
|
|
484.2
|
|
|
|
455.7
|
|
Inventories
|
|
|
485.5
|
|
|
|
430.1
|
|
Deferred tax assets
|
|
|
32.4
|
|
|
|
74.8
|
|
Prepaid expenses and other
|
|
|
90.7
|
|
|
|
102.7
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,378.5
|
|
|
|
1,413.8
|
|
Property and equipment, net
|
|
|
548.8
|
|
|
|
487.9
|
|
Deferred tax assets
|
|
|
|
|
|
|
36.0
|
|
Goodwill
|
|
|
699.7
|
|
|
|
558.9
|
|
Intangible assets, net
|
|
|
258.5
|
|
|
|
47.0
|
|
Other assets
|
|
|
203.2
|
|
|
|
183.1
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,088.7
|
|
|
$
|
2,726.7
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
202.2
|
|
|
$
|
184.4
|
|
Income tax payable
|
|
|
46.6
|
|
|
|
72.1
|
|
Accrued expenses and other
|
|
|
314.3
|
|
|
|
365.9
|
|
Current maturities of debt
|
|
|
280.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
843.5
|
|
|
|
622.4
|
|
Long-term debt
|
|
|
|
|
|
|
291.0
|
|
Deferred tax liabilities
|
|
|
20.8
|
|
|
|
|
|
Other non-current liabilities
|
|
|
174.8
|
|
|
|
137.6
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,039.1
|
|
|
|
1,051.0
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 15)
|
|
|
|
|
|
|
|
|
Stockholders
equity:
|
|
|
|
|
|
|
|
|
Class A common stock, par
value $0.01 per share; 66.4 and 64.0 million shares
issued; 62.1 and 59.8 million shares outstanding
|
|
|
0.7
|
|
|
|
0.7
|
|
Class B common stock, par
value $0.01 per share; 43.3 million shares issued and
outstanding
|
|
|
0.4
|
|
|
|
0.4
|
|
Additional
paid-in-capital
|
|
|
783.6
|
|
|
|
664.3
|
|
Retained earnings
|
|
|
1,379.2
|
|
|
|
1,090.3
|
|
Treasury stock, Class A, at
cost (4.3 and 4.2 million shares)
|
|
|
(87.1
|
)
|
|
|
(80.0
|
)
|
Accumulated other comprehensive
income
|
|
|
15.5
|
|
|
|
29.9
|
|
Unearned compensation
|
|
|
(42.7
|
)
|
|
|
(29.9
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders
equity
|
|
|
2,049.6
|
|
|
|
1,675.7
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
3,088.7
|
|
|
$
|
2,726.7
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-2
POLO
RALPH LAUREN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
April 3,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(millions, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,501.1
|
|
|
$
|
3,060.7
|
|
|
$
|
2,380.9
|
|
Licensing revenue
|
|
|
245.2
|
|
|
|
244.7
|
|
|
|
268.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
3,746.3
|
|
|
|
3,305.4
|
|
|
|
2,649.7
|
|
Cost of goods
sold(a)
|
|
|
(1,723.9
|
)
|
|
|
(1,620.9
|
)
|
|
|
(1,326.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,022.4
|
|
|
|
1,684.5
|
|
|
|
1,323.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative
expenses(a)
|
|
|
(1,476.9
|
)
|
|
|
(1,377.6
|
)
|
|
|
(1,031.5
|
)
|
Amortization of intangible assets
|
|
|
(9.1
|
)
|
|
|
(3.4
|
)
|
|
|
(1.3
|
)
|
Impairments of retail assets
|
|
|
(10.8
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
Restructuring charges
|
|
|
(9.0
|
)
|
|
|
(2.3
|
)
|
|
|
(19.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other costs and
expenses
|
|
|
(1,505.8
|
)
|
|
|
(1,384.8
|
)
|
|
|
(1,052.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
516.6
|
|
|
|
299.7
|
|
|
|
270.9
|
|
Foreign currency gains (losses)
|
|
|
(5.7
|
)
|
|
|
6.1
|
|
|
|
(1.9
|
)
|
Interest expense
|
|
|
(12.5
|
)
|
|
|
(11.0
|
)
|
|
|
(12.7
|
)
|
Interest income
|
|
|
13.7
|
|
|
|
4.6
|
|
|
|
2.7
|
|
Equity in income of equity-method
investees
|
|
|
4.3
|
|
|
|
6.4
|
|
|
|
5.5
|
|
Minority interest expense
|
|
|
(13.5
|
)
|
|
|
(8.0
|
)
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for
income taxes
|
|
|
502.9
|
|
|
|
297.8
|
|
|
|
263.1
|
|
Provision for income taxes
|
|
|
(194.9
|
)
|
|
|
(107.4
|
)
|
|
|
(93.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
308.0
|
|
|
$
|
190.4
|
|
|
$
|
169.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.96
|
|
|
$
|
1.88
|
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.87
|
|
|
$
|
1.83
|
|
|
$
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
104.2
|
|
|
|
101.5
|
|
|
|
99.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
107.2
|
|
|
|
104.1
|
|
|
|
101.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Includes total depreciation expense of:
|
|
$
|
(117.9
|
)
|
|
$
|
(98.7
|
)
|
|
$
|
(84.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
POLO
RALPH LAUREN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
April 3,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(millions)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
308.0
|
|
|
$
|
190.4
|
|
|
$
|
169.2
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
expense
|
|
|
127.0
|
|
|
|
102.1
|
|
|
|
85.6
|
|
Deferred income tax expense
(benefit)
|
|
|
35.5
|
|
|
|
10.1
|
|
|
|
(5.1
|
)
|
Minority interest expense
|
|
|
13.5
|
|
|
|
8.0
|
|
|
|
1.4
|
|
Equity in the income of
equity-method investees
|
|
|
(4.3
|
)
|
|
|
(6.4
|
)
|
|
|
(5.5
|
)
|
Non-cash stock compensation expense
|
|
|
26.6
|
|
|
|
12.9
|
|
|
|
4.1
|
|
Non-cash impairments of retail
assets
|
|
|
10.8
|
|
|
|
1.5
|
|
|
|
|
|
Non-cash Jones-Related Litigation
charge
|
|
|
|
|
|
|
100.0
|
|
|
|
|
|
Non-cash provision for bad debt
expense
|
|
|
1.2
|
|
|
|
6.0
|
|
|
|
2.6
|
|
Loss on disposal of property and
equipment
|
|
|
5.7
|
|
|
|
7.7
|
|
|
|
7.4
|
|
Non-cash foreign currency losses
(gains)
|
|
|
5.3
|
|
|
|
(11.6
|
)
|
|
|
(4.4
|
)
|
Non-cash restructuring charges
|
|
|
4.5
|
|
|
|
|
|
|
|
19.6
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(19.2
|
)
|
|
|
(16.1
|
)
|
|
|
(56.6
|
)
|
Inventories
|
|
|
3.8
|
|
|
|
(23.5
|
)
|
|
|
14.1
|
|
Accounts payable and accrued
liabilities
|
|
|
39.1
|
|
|
|
(44.5
|
)
|
|
|
47.1
|
|
Settlement of
Jones Related Litigation
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
Other balance sheet changes
|
|
|
(8.4
|
)
|
|
|
45.4
|
|
|
|
(65.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
449.1
|
|
|
|
382.0
|
|
|
|
213.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(380.6
|
)
|
|
|
(243.3
|
)
|
|
|
(17.1
|
)
|
Consolidation of RL Media cash
|
|
|
|
|
|
|
|
|
|
|
8.9
|
|
Capital expenditures
|
|
|
(158.6
|
)
|
|
|
(174.1
|
)
|
|
|
(126.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(539.2
|
)
|
|
|
(417.4
|
)
|
|
|
(134.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of capital lease
obligations
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
Payments of debt
|
|
|
|
|
|
|
|
|
|
|
(101.0
|
)
|
Payments of dividends
|
|
|
(20.8
|
)
|
|
|
(21.7
|
)
|
|
|
(14.8
|
)
|
Repurchases of common stock
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
55.2
|
|
|
|
53.2
|
|
|
|
39.4
|
|
Termination of interest rate swap
agreement
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
33.5
|
|
|
|
31.5
|
|
|
|
(76.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
(8.2
|
)
|
|
|
2.1
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
(64.8
|
)
|
|
|
(1.8
|
)
|
|
|
8.7
|
|
Cash and cash equivalents at
beginning of period
|
|
|
350.5
|
|
|
|
352.3
|
|
|
|
343.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
285.7
|
|
|
$
|
350.5
|
|
|
$
|
352.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
POLO
RALPH LAUREN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Treasury Stock,
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
at cost
|
|
|
Comprehensive
|
|
|
Unearned
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Compensation
|
|
|
Total
|
|
|
|
(millions)
|
|
|
Balance at March 29,
2003
|
|
|
102.8
|
|
|
$
|
1.0
|
|
|
$
|
504.7
|
|
|
$
|
772.3
|
|
|
|
4.1
|
|
|
$
|
(77.9
|
)
|
|
$
|
11.7
|
|
|
$
|
(6.2
|
)
|
|
$
|
1,205.6
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43.8
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized losses
on derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32.4
|
)
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180.6
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.9
|
)
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.1
|
)
|
Shares issued and equity grants
made pursuant to stock compensation
plans(a)
|
|
|
2.0
|
|
|
|
0.1
|
|
|
|
58.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.6
|
)
|
|
|
50.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 3,
2004
|
|
|
104.8
|
|
|
$
|
1.1
|
|
|
$
|
563.5
|
|
|
$
|
921.6
|
|
|
|
4.2
|
|
|
$
|
(79.0
|
)
|
|
$
|
23.1
|
|
|
$
|
(14.8
|
)
|
|
$
|
1,415.5
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized losses
on derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.5
|
)
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197.2
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21.7
|
)
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.0
|
)
|
Shares issued and equity grants
made pursuant to stock compensation
plans(a)
|
|
|
2.5
|
|
|
|
|
|
|
|
100.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15.1
|
)
|
|
|
85.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 2,
2005
|
|
|
107.3
|
|
|
$
|
1.1
|
|
|
$
|
664.3
|
|
|
$
|
1,090.3
|
|
|
|
4.2
|
|
|
$
|
(80.0
|
)
|
|
$
|
29.9
|
|
|
$
|
(29.9
|
)
|
|
$
|
1,675.7
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
308.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24.1
|
)
|
|
|
|
|
|
|
|
|
Net realized and unrealized losses
on derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
293.6
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.6
|
)
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
(7.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(7.1
|
)
|
Shares issued and equity grants
made pursuant to stock compensation
plans(a)
|
|
|
2.4
|
|
|
|
|
|
|
|
119.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12.8
|
)
|
|
|
106.5
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1,
2006
|
|
|
109.7
|
|
|
$
|
1.1
|
|
|
$
|
783.6
|
|
|
$
|
1,379.2
|
|
|
|
4.3
|
|
|
$
|
(87.1
|
)
|
|
$
|
15.5
|
|
|
$
|
(42.7
|
)
|
|
$
|
2,049.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes income tax benefits
relating to the exercise of employee stock options of
approximately $6 million in Fiscal 2004, $19 million
in Fiscal 2005 and $22 million in Fiscal 2006.
|
See accompanying notes.
F-5
POLO
RALPH LAUREN CORPORATION
|
|
1.
|
Description
of Business
|
Polo Ralph Lauren Corporation (PRLC) is a global
leader in the design, marketing and distribution of premium
lifestyle products. PRLCs long-standing reputation and
distinctive image have been consistently developed across an
expanding number of products, brands and international markets.
PRLCs brand names include Polo, Polo by Ralph Lauren,
Ralph Lauren Purple Label, Ralph Lauren Black Label, RLX, Ralph
Lauren, Blue Label, Lauren, RL, Rugby, Chaps and Club
Monaco, among others. PRLC and its subsidiaries are
collectively referred to herein as the Company,
we, us, our and
ourselves, unless the context indicates otherwise.
The Company classifies its interests into three business
segments: Wholesale, Retail and Licensing. Through those
interests, the Company designs, licenses, contracts for the
manufacture of, markets and distributes mens, womens
and childrens apparel, accessories, fragrances and home
furnishings. The Companys wholesale sales are principally
to major department and specialty stores located throughout the
United States and Europe. The Company also sells directly to
consumers through full-price and factory retail stores located
throughout the United States, Canada, Europe, South America and
Asia, and through its jointly owned retail internet site located
at www.polo.com. In addition, the Company often licenses the
right to third parties to use its various trademarks in
connection with the manufacture and sale of designated products,
such as eyewear and fragrances, in specified geographic areas.
Basis
of Consolidation
The accompanying consolidated financial statements present the
financial position, results of operations and cash flows of the
Company and all entities in which the Company has a controlling
voting interest. The consolidated financial statements also
include the accounts of any variable interest entities in which
the Company is considered to be the primary beneficiary and such
entities are required to be consolidated in accordance with
accounting principles generally accepted in the United States
(US GAAP). In particular, pursuant to the provisions
of Financial Accounting Standards Board (FASB)
Interpretation No. 46R (FIN 46R), the
Company consolidates (a) Polo Ralph Lauren Japan
Corporation (PRL Japan, formerly known as New Polo
Japan, Inc.), a 50% -owned venture, and (b) Ralph Lauren
Media, LLC (RL Media), a 50%-owned venture with NBC
Universal, Inc. and an affiliated company (collectively,
NBC). RL Media conducts the Companys
e-commerce
initiatives through a jointly owned internet site known as
Polo.com.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Fiscal
Year
The Companys fiscal year ends on the Saturday closest to
March 31. As such, all references to Fiscal
2006 represent the
52-week
fiscal year ending April 1, 2006, references to
Fiscal 2005 represent the
52-week
fiscal year ended April 2, 2005 and references to
Fiscal 2004 represent the
53-week
fiscal year ended April 3, 2004.
The financial position and operating results of the
Companys consolidated 50% interest in PRL Japan are
reported on a one-month lag. Similarly, prior to the fourth
quarter of Fiscal 2006, the financial position and operating
results of RL Media were reported on a three-month lag. During
the fourth quarter of Fiscal 2006, RL Media changed its fiscal
year, which was formerly on a calendar-year basis, to conform
with the Companys fiscal-year basis. In connection with
this change, the three-month reporting lag for RL Media was
eliminated. Accordingly, the Companys operating results
for Fiscal 2006 include the operating results of RL Media for
the 52-week
consecutive period ended April 1, 2006. The net effect from
this change in RL Medias fiscal year was not material and
has been reflected in retained earnings as a component of
stockholders equity.
F-6
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Use of
Estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ materially from
those estimates.
Significant estimates inherent in the preparation of the
accompanying consolidated financial statements include reserves
for customer returns, discounts,
end-of-season
markdown allowances and operational chargebacks; reserves for
the realizability of inventory; reserves for litigation matters;
impairments of long-lived tangible and intangible assets; useful
lives to determine depreciation and amortization expense;
accounting for income taxes; the valuation of stock-based
compensation; and accounting for business combinations under the
purchase method of accounting.
Reclassifications
Certain reclassifications have been made to the prior
periods financial information in order to conform to the
current periods presentation.
|
|
3.
|
Summary
of Significant Accounting Policies
|
Revenue
Recognition
Revenue within the Companys wholesale segment is
recognized at the time title passes and risk of loss is
transferred to customers. Wholesale revenue is recorded net of
estimates of returns, discounts,
end-of-season
markdown allowances and operational chargebacks. Returns and
allowances require pre-approval from management and discounts
are based on trade terms. Estimates for
end-of-season
markdown allowances are based on historical trends, seasonal
results, an evaluation of current economic and market
conditions, and retailer performance. The Company reviews and
refines these estimates on a quarterly basis. The Companys
historical estimates of these costs have not differed materially
from actual results.
Retail store revenue is recognized net of estimated returns at
the time of sale to consumers.
E-commerce
revenue from sales of products ordered through the
Companys jointly owned retail internet site known as
Polo.com is recognized upon delivery and receipt of the shipment
by our customers. Such revenue also is reduced by an estimate of
returns.
Licensing revenue is initially recognized based upon the higher
of (a) contractually guaranteed minimum royalty levels and
(b) estimates of actual sales and royalty data received
from our licensees.
Cost
of Goods Sold and Selling Expenses
Cost of goods sold includes the expenses incurred to acquire and
produce inventory for sale, including product costs, freight-in,
import costs, as well as reserves for shrinkage and inventory
obsolescence. The costs of selling merchandise, including
preparing the merchandise for sale, such as picking, packing,
warehousing and order charges, are included in selling, general
and administrative expenses (SG&A).
Shipping
and Handling Costs
The costs associated with shipping goods to customers are
reflected as a component of SG&A expenses in the
accompanying consolidated statements of operations. Shipping and
handling costs incurred approximated $91 million,
$70 million and $61 million in Fiscal 2006, Fiscal
2005 and Fiscal 2004, respectively. Shipping and handling
charges billed to customers are included in revenues.
F-7
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Advertising
Costs
In accordance with American Institute of Certified Public
Accountants (AICPA) Statement of Position
(SOP)
No. 93-7,
Reporting on Advertising Costs, advertising costs,
including the costs to produce advertising, are expensed upon
the first time that the advertisement is exhibited. Costs of
out-of-store
advertising paid to wholesale customers under cooperative
advertising programs are expensed as an advertising cost if both
the identified advertising benefit is sufficiently separable
from the purchase of the Companys products by customers
and the fair value of such benefit is measurable. Costs of
in-store advertising paid to wholesale customers under
cooperative advertising programs are not included in advertising
costs, but are reflected as a reduction of revenues since the
benefits are not sufficiently separable from the purchases of
the Companys products by customers.
Advertising expense amounted to approximately $166 million
for Fiscal 2006, $127 million for Fiscal 2005 and
$112 million for Fiscal 2004. Deferred advertising costs,
which principally relate to advertisements that have not yet
been exhibited or services that have not yet been received, were
approximately $4 million and $5 million at the end of
Fiscal 2006 and Fiscal 2005, respectively.
Foreign
Currency Translation and Transactions
The financial position and operating results of foreign
operations are primarily consolidated using the local currency
as the functional currency. Local currency assets and
liabilities are translated at the rates of exchange on the
balance sheet date, and local currency revenue and expenses are
translated at average rates of exchange during the period.
Resulting translation gains or loses are included in the
accompanying consolidated statement of stockholders equity
as a component of accumulated other comprehensive income (loss).
Gains and losses on translation of intercompany loans with
foreign subsidiaries of a long-term investment nature also are
included in this component of stockholders equity.
The Company also recognizes gains and losses on foreign currency
transactions that are denominated in a currency other than the
foreign entitys functional currency. Foreign currency
transaction gains and losses also include amounts realized on
the settlement of intercompany loans with foreign subsidiaries
that are either short term or were previously of a long-term
investment nature and deferred as a component of
stockholders equity. Foreign currency transaction gains
and losses are recognized in earnings and are separately
disclosed in the accompanying consolidated statements of
operations.
Comprehensive
Income (Loss)
Comprehensive income (loss), which is reported in the
accompanying consolidated statement of stockholders
equity, consists of net income (loss) and other gains and losses
affecting equity that, under US GAAP, are excluded from net
income (loss). The components of other comprehensive income
(loss) for the Company primarily consist of foreign currency
translation gains and losses and deferred gains and losses on
hedging instruments, such as foreign currency exchange contracts
and changes in the fair value of the Companys
Euro-denominated debt issuance that is designated as a hedge of
the fair value of the Companys net investment in certain
of its European subsidiaries.
Net
Income Per Common Share
Net income per common share is determined in accordance with
FASB Statement No. 128, Earnings per Share
(FAS 128). Under the provisions of
FAS 128, basic net income per common share is computed by
dividing the net income applicable to common shares after
preferred dividend requirements, if any, by the weighted average
of common shares outstanding during the period. Weighted-average
common shares include shares of the Companys Class A
and Class B Common Stock. Diluted net income per common
share adjusts basic net income per common share for the effects
of outstanding stock options, restricted stock, restricted stock
units and any other
F-8
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
potentially dilutive financial instruments, only in the periods
in which such effect is dilutive under the treasury stock method.
The weighted-average number of common shares outstanding used to
calculate basic net income per common share is reconciled to
those shares used in calculating diluted net income per common
share as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
April 3,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(millions)
|
|
|
Basic shares
|
|
|
104.2
|
|
|
|
101.5
|
|
|
|
99.0
|
|
Dilutive effect of stock options,
restricted stock and restricted stock units
|
|
|
3.0
|
|
|
|
2.6
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
107.2
|
|
|
|
104.1
|
|
|
|
101.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase shares of common stock at an exercise price
greater than the average market price of the common stock are
anti-dilutive and, therefore, not included in the computation of
diluted net income per common share. In addition, the Company
has outstanding performance-based restricted stock units that
are issuable only upon the satisfaction of certain performance
goals. Such units only are included in the computation of
diluted shares to the extent the underlying performance
conditions are satisfied prior to the end of the reporting
period. As of April 1, 2006, there was an aggregate of 765
thousand additional shares issuable upon the exercise of
anti-dilutive options and the vesting of performance-based
restricted stock units that were excluded from the diluted share
calculation.
Stock-Based
Compensation
Through the end of Fiscal 2006, the Company used the intrinsic
value method to account for stock-based compensation in
accordance with Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to
Employees, (APB 25) and had adopted the
disclosure-only provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, as amended
by FASB Statement No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure
(FAS 123). Accordingly, no compensation cost
has been recognized for fixed stock option grants. Had
compensation costs for the Companys stock option grants
been determined
F-9
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
based on the fair value at the grant dates of such awards in
accordance with FAS 123, the Companys net income and
earnings per share would have been reduced to the pro forma
amounts as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
April 3,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(millions, except per share
data)
|
|
|
Net income as reported
|
|
$
|
308.0
|
|
|
$
|
190.4
|
|
|
$
|
169.2
|
|
Add: Stock-based compensation
expense included in net income, net of tax
|
|
|
16.2
|
|
|
|
8.2
|
|
|
|
2.6
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value based method
for all awards, net of tax
|
|
|
(29.3
|
)
|
|
|
(21.8
|
)
|
|
|
(19.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
294.9
|
|
|
$
|
176.8
|
|
|
$
|
152.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share as
reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.96
|
|
|
$
|
1.88
|
|
|
$
|
1.71
|
|
Diluted
|
|
$
|
2.87
|
|
|
$
|
1.83
|
|
|
$
|
1.68
|
|
Pro forma net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.83
|
|
|
$
|
1.74
|
|
|
$
|
1.54
|
|
Diluted
|
|
$
|
2.76
|
|
|
$
|
1.70
|
|
|
$
|
1.51
|
|
See Note 18 for a description of the assumptions used in
determining the fair value of stock-based compensation awards
under the Black-Scholes valuation model. In addition, see
Note 4 for a discussion of the adoption of FASB Statement
No. 123R, Share-Based Payment,
(FAS 123R), effective in Fiscal 2007, which
requires compensation cost to be recognized for all stock-based
compensation awards granted, modified or settled on or after
April 2, 2006.
Cash
and Cash Equivalents
Cash and cash equivalents include all highly liquid investments
with original maturities of three months or less, including
investments in debt securities. Investments in debt securities
are diversified among high-credit quality securities in
accordance with our risk-management policies, and primarily
include commercial paper and money market funds.
Accounts
Receivable
In the normal course of business, the Company extends credit to
customers that satisfy defined credit criteria. Accounts
receivable, net, as shown in the Companys consolidated
balance sheets, is net of certain reserves and allowances. These
reserves and allowances consist of (a) reserves for
returns, discounts,
end-of-season
markdown allowances and operational chargebacks and
(b) allowances for doubtful accounts. These reserves and
allowances are discussed in further detail below.
A reserve for trade discounts is determined based on open
invoices where trade discounts have been extended to customers,
and is treated as a reduction of revenue.
Estimated
end-of-season
markdown allowances are included as a reduction of revenue.
These provisions are based on retail sales performance, seasonal
negotiations with customers, historical deduction trends and an
evaluation of current market conditions.
A reserve for operational chargebacks represents various
deductions by customers relating to individual shipments. This
reserve, net of expected recoveries, is included as a reduction
of revenue. The reserve is based on chargebacks received as of
the date of the financial statements and past experience. Costs
associated with potential returns of products also are included
as a reduction of revenues. These return reserves are based on
current
F-10
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
information regarding retail performance, historical experience
and an evaluation of current market conditions. The
Companys historical estimates of these operational
chargeback and return costs have not differed materially from
actual results.
A rollforward of the activity for each of the three fiscal years
ended April 1, 2006 in the Companys reserves for
returns, discounts,
end-of-season
markdown allowances and operational chargebacks is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
April 3,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(millions)
|
|
|
Beginning reserve balance
|
|
$
|
100.0
|
|
|
$
|
90.3
|
|
|
$
|
48.4
|
|
Amounts charged against revenue to
increase reserve
|
|
|
302.6
|
|
|
|
265.3
|
|
|
|
213.7
|
|
Amounts credited against customer
accounts to decrease reserve
|
|
|
(294.1
|
)
|
|
|
(256.7
|
)
|
|
|
(171.8
|
)
|
Foreign currency translation
|
|
|
(1.0
|
)
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending reserve balance
|
|
$
|
107.5
|
|
|
$
|
100.0
|
|
|
$
|
90.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
An allowance for doubtful accounts is determined through
analysis of periodic aging of accounts receivable, assessments
of collectibility based on an evaluation of historic and
anticipated trends, the financial condition of the
Companys customers, and an evaluation of the impact of
economic conditions. A rollforward of the activity for each of
the three fiscal years ended April 1, 2006 in the
Companys allowances for doubtful accounts is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
April 3,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(millions)
|
|
|
Beginning reserve balance
|
|
$
|
11.0
|
|
|
$
|
7.0
|
|
|
$
|
6.4
|
|
Amount charged to expense to
increase reserve
|
|
|
1.2
|
|
|
|
6.0
|
|
|
|
2.6
|
|
Amount written off against
customer accounts to decrease reserve
|
|
|
(4.3
|
)
|
|
|
(2.1
|
)
|
|
|
(2.0
|
)
|
Foreign currency translation
|
|
|
(0.4
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending reserve balance
|
|
$
|
7.5
|
|
|
$
|
11.0
|
|
|
$
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentration
of Credit Risk
In the wholesale business, the Company has three key
department-store customers that generate significant sales
volume. For Fiscal 2006, each of these customers contributed a
range of 15% to 18% of all wholesale revenues, and approximately
50% in the aggregate.
Inventories
The Company holds inventory that is sold through wholesale
distribution channels to major department stores and specialty
retail stores, including its own retail stores. The Company also
holds retail inventory that is sold in its own stores directly
to consumers. Wholesale and retail inventories are stated at
lower of cost or estimated realizable value. Cost for wholesale
inventories is determined using the
first-in,
first-out (FIFO) method and cost for retail
inventories is determined on a moving-average cost basis.
The Company continually evaluates the composition of its
inventories assessing slow-turning, ongoing (specially made for
Retail) product, as well as all fashion product. Estimated
realizable value of distressed inventory is determined based on
historical sales trends for this category of inventory of the
Companys individual product lines, the impact of market
trends and economic conditions, and the value of current orders
in-house relating to the future sales of this type of inventory.
Estimates may differ from actual results due to quantity,
quality
F-11
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and mix of products in inventory, consumer and retailer
preferences and market conditions. The Companys historical
estimates of these costs and its provisions have not differed
materially from actual results.
Investments
Investments in companies in which the Company has significant
influence, but less than a controlling voting interest, are
accounted for using the equity method. This is generally
presumed to exist when the Company owns between 20% and 50% of
the investee. However, as a matter of policy, if the Company had
a greater than 50% ownership interest in an investee and the
minority shareholders held certain rights that allowed them to
participate in the
day-to-day
operations of the business, the Company would also use the
equity method of accounting.
Under the equity method, only the Companys investment in
and amounts due to and from the equity investee are included in
the consolidated balance sheet; only the Companys share of
the investees earnings (losses) is included in the
consolidated operating results; and only the dividends, cash
distributions, loans or other cash received from the investee,
additional cash investments, loan repayments or other cash paid
to the investee are included in the consolidated cash flows.
Investments in companies in which the Company does not have a
controlling interest, or is unable to exert significant
influence, are accounted for at market value if the investments
are publicly traded and there are no resale restrictions greater
than one year
(available-for-sale
investments). If there are resale restrictions greater
than one year, or if the investment is not publicly traded, then
the investment is accounted for at cost.
The Companys only significant investment is a 20% equity
interest in Impact21 Co., Ltd. (Impact21). Impact21
is a public company and holds the sublicenses for the
Companys mens, womens and jeans businesses in
Japan. The Company accounts for its interest in Impact21 using
the equity method of accounting, which is included in other
assets in the accompanying consolidated balance sheets.
Property
and Equipment, Net
Property and equipment, net, is stated at cost less accumulated
depreciation. Depreciation is calculated using the straight-line
method based upon the estimated useful lives of depreciable
assets. As of the end of Fiscal 2006, estimated useful lives
were periods of up to seven years for furniture, fixtures,
computer systems and equipment; periods for up to ten years for
machinery and equipment; and periods of up to forty years for
buildings and building improvements. Leasehold improvements are
depreciated over periods equal to the shorter of the estimated
useful lives of the assets and the life of the lease.
Goodwill
and Other Intangible Assets
Goodwill and other intangible assets are accounted for in
accordance with the provisions of FASB Statement No. 142,
Goodwill and Other Intangible Assets,
(FAS 142). Under FAS 142, goodwill,
including any goodwill included in the carrying value of
investments accounted for using the equity method of accounting,
and certain other intangible assets deemed to have indefinite
useful lives are not amortized. Rather, goodwill and such
indefinite-lived intangible assets are assessed for impairment
at least annually based on comparisons of their respective fair
values to their carrying values. Finite-lived intangible assets
are amortized over their respective useful lives and, along with
other long-lived assets, are evaluated for impairment
periodically whenever events or changes in circumstances
indicate that their related carrying amounts may not be
recoverable in accordance with FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (FAS 144).
In evaluating long-lived assets for recoverability, including
finite-lived intangibles and property and equipment, the Company
uses its best estimate of future cash flows expected to result
from the use of the asset and eventual disposition in accordance
with FAS 144. To the extent that estimated future,
undiscounted cash inflows attributable to the asset, less
estimated future, undiscounted cash outflows, are less than the
carrying amount, an impairment loss is recognized in an amount
equal to the difference between the carrying value of such asset
and its
F-12
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fair value. Assets to be disposed of and for which there is a
committed plan of disposal, whether through sale or abandonment,
are reported at the lower of carrying value or fair value less
costs to sell.
Officers
Life Insurance
The Company maintains several whole-life and a few split-dollar
life insurance policies for its senior executives. Whole life
policies are recorded at their cash-surrender value in the
accompanying consolidated balance sheet. Split-dollar policies
are recorded at the lesser of their cash-surrender value or
premiums paid to date. As of the end of Fiscal 2006 and Fiscal
2005, amounts classified in other assets in the accompanying
consolidated balance sheets relating to officers life
insurance policies were $52 million and $51 million,
respectively.
Income
Taxes
Income taxes are provided using the asset and liability method
prescribed by FASB Statement No. 109, Accounting for
Income Taxes (FAS 109). Under this
method, income taxes (i.e., deferred tax assets, deferred tax
liabilities, taxes currently payable/ refunds receivable and tax
expense) are recorded based on amounts refundable or payable in
the current year and include the results of any difference
between US GAAP and tax reporting. Deferred income taxes reflect
the tax effect of certain net operating loss, capital loss and
general business credit carryforwards and the net tax effects of
temporary differences between the carrying amount of assets and
liabilities for financial statement and income tax purposes, as
determined under enacted tax laws and rates. The financial
effect of changes in tax laws or rates is accounted for in the
period of enactment.
Significant judgment is required in determining the worldwide
provision for income taxes. That is, in the ordinary course of a
global business, there are many transactions for which the
ultimate tax outcome is uncertain. It is the Companys
policy to establish reserves for taxes that may become payable
in future years as a result of an examination by tax
authorities. The Company establishes those reserves based upon
managements assessment of the exposure associated with
permanent tax differences and tax credits. In addition,
valuation allowances are established when management determines
that it is more likely than not that some portion or all of a
deferred tax asset will not be realized. Tax reserves and
valuation allowances are analyzed periodically and adjusted as
events occur or circumstances change that warrant adjustments to
those balances.
Deferred
Rent Obligations
Rent expense under noncancelable operating leases with scheduled
rent increases and landlord incentives are accounted for on a
straight-line basis over the lease term beginning with the
effective lease commencement date. The excess of straight-line
rent expense over scheduled payment amounts and landlord
incentives is recorded as a deferred liability. As of the end of
Fiscal 2006 and Fiscal 2005, unamortized deferred rent
obligations classified in other non-current liabilities in the
accompanying consolidated balance sheets were approximately
$85 million and $74 million, respectively.
Derivatives
and Financial Instruments
The Company accounts for derivative instruments in accordance
with FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, and
subsequent amendments (collectively, FAS 133).
FAS 133 requires that all derivative instruments be
recognized on the balance sheet at fair value. In addition,
FAS 133 provides that, for derivative instruments that
qualify for hedge accounting, changes in the fair value are
either (a) offset against the changes in fair value of the
hedged assets, liabilities, or firm commitments through earnings
or (b) recognized in stockholders equity until the
hedged item is recognized in earnings, depending on whether the
derivative is being used to hedge changes in fair value or cash
flows. The ineffective portion of a derivatives change in
fair value is immediately recognized in earnings.
F-13
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The carrying value of the Companys financial instruments
approximates fair value, except for certain differences relating
to fixed-rate debt, investments in other entities accounted for
using the equity method of accounting and other financial
instruments. However, other than differences in the fair value
of fixed-rate debt as disclosed in Note 13, these
differences were not significant at April 1, 2006 and
April 2, 2005. The fair value of financial instruments
generally is determined by reference to market values resulting
from trading on a national securities exchange or an
over-the-counter
market. In cases where quoted market prices are not available,
fair value is based on estimates using present value or other
valuation techniques.
For cash flow reporting purposes, the Company classifies
proceeds received or paid upon the settlement of a derivative
financial instrument in the same manner as the item being hedged.
|
|
4.
|
Recently
Issued Accounting Standards
|
Stock-Based
Compensation
In December 2004, the FASB issued FAS 123R and, in March
2005, the SEC issued Staff Accounting Bulletin No. 107
(SAB 107). SAB 107 provides implementation
guidance for companies to use in their adoption of
FAS 123R. FAS 123R supersedes both APB 25, which
permitted the use of the intrinsic-value method in accounting
for stock-based compensation, and FAS 123, which allowed
companies applying APB 25 to just disclose in their
financial statements the pro forma effect on net income from
applying the fair-value method of accounting for stock-based
compensation.
Under FAS 123R, all forms of share-based payments to
employees, including stock options, would be treated as
compensation and recognized in the statement of operations based
on their fair value at the date of grant for awards that
actually vest. This standard is effective for awards granted,
modified or settled by the Company beginning on April 2,
2006. The Company has historically accounted for stock-based
compensation under APB 25 and has adopted FAS 123R
effective as of Fiscal 2007 under the modified prospective
transition method.
The adoption of FAS 123R is expected to have a significant
future impact on the Companys reported net income and
earnings per share. See Stock-Based Compensation
under Note 3 for the pro forma impact of applying the
fair-value method of accounting for all stock-based compensation
awards in accordance with the provisions of FAS 123.
Other
Recently Issued Accounting Standards
In May 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections
(FAS 154). FAS 154 generally requires that
accounting changes and errors be applied retrospectively.
FAS 154 is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15,
2005. The Company does not expect FAS 154 to have a
material impact on its financial statements.
In March 2005, the FASB issued Statement of Financial Accounting
Standards Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations
(FIN 47). FIN 47 provides clarification
regarding the timing of liability recognition for legal
obligations associated with the retirement of a tangible
long-lived asset when the timing
and/or
method of settlement are conditioned on a future event. The
Company adopted the provisions of FIN 47 during Fiscal
2006. The application of FIN 47 did not have a material
effect on the Companys financial statements.
In November 2004, the FASB issued Statement No. 151,
Inventory Costs (FAS 151).
FAS 151 clarifies standards for the treatment of abnormal
amounts of idle facility expense, freight, handling costs and
spoilage. FAS 151 is effective for fiscal years beginning
after June 15, 2005. The Company does not expect
FAS 151 to have a material effect on its financial
statements.
F-14
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Acquisition
of Polo Jeans Business
On February 3, 2006, the Company acquired from Jones
Apparel Group, Inc. and subsidiaries (Jones) all of
the issued and outstanding shares of capital stock of Sun
Apparel, Inc., the Companys licensee for mens and
womens casual apparel and sportswear in the United States
and Canada (the Polo Jeans Business). The
acquisition cost was approximately $260 million, including
$5 million of transaction costs. The purchase price is
subject to certain post-closing adjustments. In addition,
simultaneous with the transaction, the Company settled all
claims under its litigation with Jones for $100 million
(see Note 15).
The Company determined that the terms of the pre-existing
licensing relationship were reflective of market. However,
because the Company simultaneously purchased a business and
settled all pre-existing litigation, the aggregate consideration
exchanged was required to be allocated for accounting purposes
in proportion to the underlying fair values of the legal
settlement and the Polo Jeans Business acquired. Based on the
arms-length negotiation with Jones, the Company determined
that the fair value of the legal settlement was
$100 million, which equaled the amount of a litigation
reserve initially established by the Company during Fiscal 2005.
The remaining $255 million of consideration exchanged was
allocated to the Polo Jeans Business based on valuation analyses
prepared by an independent valuation firm.
The results of operations for the Polo Jeans Business have been
consolidated in the Companys results of operations
commencing February 4, 2006. In addition, the purchase
price has been allocated on a preliminary basis as follows:
inventory of $36 million; finite-lived intangible assets of
$159 million (consisting of the re-acquired license of
$97 million, customer relationships of $57 million and
order backlog of $5 million); goodwill of
$129 million; and deferred tax and other liabilities, net,
of $64 million. Other than inventory, Jones retained the
right to all working capital balances on the date of closing.
The Company is in the process of completing its assessment of
the underlying fair value of assets acquired and liabilities
assumed. As a result, the purchase price allocation to the
underlying net assets is subject to change. The Company has
entered into a transition services agreement with Jones to
provide a variety of operational, financial and information
systems services over a period of six to twelve months.
Acquisition
of Footwear Business
On July 15, 2005, the Company acquired from Reebok
International, Ltd. (Reebok) all of the issued and
outstanding shares of capital stock of Ralph Lauren Footwear
Co., Inc., the Companys global licensee for mens,
womens and childrens footwear, as well as certain
foreign assets owned by affiliates of Reebok (collectively, the
Footwear Business). The acquisition cost was
approximately $112 million in cash, including
$2 million of transaction costs. In addition, Reebok and
certain of its affiliates entered into a transition services
agreement with the Company to provide a variety of operational,
financial and information systems services over a period of
twelve to eighteen months.
The Company determined that the terms of the pre-existing
licensing relationship were reflective of market. As such, based
on valuation analyses prepared by an independent valuation firm,
the Company allocated all of the consideration exchanged to the
purchase of the Footwear Business and no settlement gain or loss
was recognized in connection with the transaction.
The results of operations for the Footwear Business for the
period are included in the consolidated results of operations
commencing July 16, 2005. In addition, the accompanying
consolidated financial statements include the following
preliminary allocation of the acquisition cost to the net assets
acquired based on their respective estimated fair values: trade
receivables of $17 million; inventory of $26 million;
finite-lived intangible assets of $62 million (consisting
of the footwear license at $38 million, customer
relationships at $23 million and order backlog at
$1 million); goodwill of $20 million; other assets of
$1 million; and liabilities of $14 million.
F-15
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company is in the process of completing its assessment of
the underlying fair value of assets acquired and liabilities
assumed. As a result, the purchase price allocation to the
underlying net assets is subject to change.
Acquisition
of Childrenswear Business
On July 2, 2004, the Company acquired certain assets and
assumed certain liabilities of RL Childrenswear Company, LLC,
the Companys licensee holding the exclusive licenses to
design, manufacture, merchandise and sell newborn, infant,
toddler, girls and boys clothing in the United States, Canada
and Mexico (the Childrenswear Business). The
purchase price was approximately $264 million, including
transaction costs, deferred payments of $15 million payable
over the three years after the acquisition date and
$5 million of contingent payments. The contingent payments
were conditional on certain sales targets being attained and,
during Fiscal 2005, the Company recognized the obligation with a
corresponding increase in goodwill because it became probable
that the sales targets would be attained. As of the end of
Fiscal 2006, $13 million of the deferred and conditional
payments were made and the remaining portion of approximately
$7 million of deferred and conditional payments were
classified as a component of current liabilities
($4 million) and other non-current liabilities
($3 million) in the accompanying consolidated balance
sheets.
The results of operations for the Childrenswear Business for the
period are included in the Companys consolidated results
of operations commencing July 2, 2004. In addition, the
accompanying consolidated financial statements include the
following allocation of the acquisition cost to the net assets
acquired based on their respective fair values: inventory of
$27 million; property and equipment of $8 million;
finite-lived intangible assets, of $32 million (consisting
of non-compete agreements of $2 million and customer
relationships of $30 million); other assets of
$1 million; goodwill of $208 million and liabilities
of $12 million.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Raw materials
|
|
$
|
6.0
|
|
|
$
|
5.3
|
|
Work-in-process
|
|
|
22.0
|
|
|
|
8.3
|
|
Finished goods
|
|
|
457.5
|
|
|
|
416.5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
485.5
|
|
|
$
|
430.1
|
|
|
|
|
|
|
|
|
|
|
F-16
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Property
and Equipment
|
Property and equipment, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Land and improvements
|
|
$
|
9.9
|
|
|
$
|
9.9
|
|
Buildings
|
|
|
41.4
|
|
|
|
19.0
|
|
Furniture and fixtures
|
|
|
408.4
|
|
|
|
373.3
|
|
Machinery and equipment
|
|
|
320.3
|
|
|
|
245.9
|
|
Leasehold improvements
|
|
|
493.1
|
|
|
|
451.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,273.1
|
|
|
|
1,099.4
|
|
Less accumulated depreciation
|
|
|
(724.3
|
)
|
|
|
(611.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
548.8
|
|
|
$
|
487.9
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 3, the Company periodically evaluates
the recoverability of the carrying value of fixed assets
whenever events or changes in circumstances indicate that the
assets values may be impaired. During Fiscal 2006, the
Company recorded impairment charges of approximately
$10.8 million to reduce the carrying value of fixed assets,
primarily relating to its Club Monaco retail business, including
its Caban Concept and Factory Outlet stores. This impairment
charge primarily related to
lower-than-expected
store performance and preceded the Companys implementation
in February 2006 of a plan to restructure these operations. In
measuring the amount of the impairment, fair value was
determined based on discounted expected cash flows. See
Note 11 for a discussion of the Club Monaco restructuring
plan and related charges.
The Company recorded a similar $1.5 million retail store
impairment charge during Fiscal 2005.
|
|
8.
|
Goodwill
and Other Intangible Assets
|
As discussed in Note 3, the Company accounts for goodwill
and other intangible assets in accordance with FAS 142.
Under FAS 142, goodwill and certain other intangible assets
deemed to have indefinite useful lives are not amortized.
Rather, goodwill and such indefinite-lived intangible assets are
subject to annual impairment testing. Finite-lived intangible
assets continue to be amortized over their respective useful
lives. Based on the Companys annual impairment testing of
goodwill and indefinite-lived intangible assets in each of
Fiscal 2006, Fiscal 2005 and Fiscal 2004, no impairment charges
were deemed necessary.
F-17
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill
The following analysis details the changes in goodwill for each
reportable segment during Fiscal 2006 and Fiscal 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Licensing
|
|
|
Total
|
|
|
|
(millions)
|
|
|
Balance at April 3,
2004
|
|
$
|
151.1
|
|
|
$
|
74.0
|
|
|
$
|
116.5
|
|
|
$
|
341.6
|
|
Acquisition-related
activity(a)
|
|
|
209.6
|
|
|
|
|
|
|
|
|
|
|
|
209.6
|
|
Other
adjustments(b)
|
|
|
7.2
|
|
|
|
0.5
|
|
|
|
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 2,
2005
|
|
$
|
367.9
|
|
|
$
|
74.5
|
|
|
$
|
116.5
|
|
|
$
|
558.9
|
|
Acquisition-related
activity(a)
|
|
|
149.0
|
|
|
|
1.2
|
|
|
|
|
|
|
|
150.2
|
|
Other
adjustments(b)
|
|
|
(9.1
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
(9.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1,
2006
|
|
$
|
507.8
|
|
|
$
|
75.4
|
|
|
$
|
116.5
|
|
|
$
|
699.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Acquisition-related activity
primarily includes the acquisition of the Childrenswear Business
in Fiscal 2005, and the acquisitions of the Footwear Business
and Polo Jeans Business in Fiscal 2006.
|
|
(b) |
|
Other adjustments principally
include changes in foreign currency exchange rates.
|
Other
Intangible Assets
Other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 2006
|
|
|
April 2, 2005
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accum.
|
|
|
|
|
|
Carrying
|
|
|
Accum.
|
|
|
|
|
|
|
Amount
|
|
|
Amort.
|
|
|
Net
|
|
|
Amount
|
|
|
Amort.
|
|
|
Net
|
|
|
|
(millions)
|
|
|
Intangible assets subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Re-acquired licensed trademarks
|
|
$
|
144.5
|
|
|
$
|
(5.0
|
)
|
|
$
|
139.5
|
|
|
$
|
17.4
|
|
|
$
|
(3.1
|
)
|
|
$
|
14.3
|
|
Non-compete agreements
|
|
|
2.5
|
|
|
|
(1.5
|
)
|
|
|
1.0
|
|
|
|
2.5
|
|
|
|
(0.6
|
)
|
|
|
1.9
|
|
Customer relationships
|
|
|
110.2
|
|
|
|
(3.4
|
)
|
|
|
106.8
|
|
|
|
29.9
|
|
|
|
(0.9
|
)
|
|
|
29.0
|
|
Other
|
|
|
4.9
|
|
|
|
(1.6
|
)
|
|
|
3.3
|
|
|
|
0.4
|
|
|
|
(0.1
|
)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets subject to
amortization
|
|
|
262.1
|
|
|
|
(11.5
|
)
|
|
|
250.6
|
|
|
|
50.2
|
|
|
|
(4.7
|
)
|
|
$
|
45.5
|
|
Intangible assets not subject
to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and brands
|
|
|
7.9
|
|
|
|
|
|
|
|
7.9
|
|
|
|
1.5
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
$
|
270.0
|
|
|
$
|
(11.5
|
)
|
|
$
|
258.5
|
|
|
$
|
51.7
|
|
|
$
|
(4.7
|
)
|
|
$
|
47.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization
Based on the amount of intangible assets subject to amortization
at April 1, 2006, the expected amortization for each
of the next five fiscal years and thereafter is as follows:
|
|
|
|
|
|
|
Amortization
|
|
|
|
Expense
|
|
|
|
(millions)
|
|
|
Fiscal 2007
|
|
$
|
15.5
|
|
Fiscal 2008
|
|
|
11.9
|
|
Fiscal 2009
|
|
|
11.7
|
|
Fiscal 2010
|
|
|
11.7
|
|
Fiscal 2011
|
|
|
11.5
|
|
Thereafter
|
|
|
188.3
|
|
|
|
|
|
|
|
|
$
|
250.6
|
|
|
|
|
|
|
The expected amortization expense above reflects estimated
useful lives assigned to the Companys finite-lived
intangible assets as follows: re-acquired licensed trademarks of
10 to 25 years; non-compete agreements of 3 years; and
customer relationships of 5 to 25 years.
|
|
9.
|
Other
Non-Current Assets
|
Other non-current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Equity-method investments
|
|
$
|
63.6
|
|
|
$
|
62.0
|
|
Officers life insurance
|
|
|
51.8
|
|
|
|
51.2
|
|
Other non-current assets
|
|
|
87.8
|
|
|
|
69.9
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
203.2
|
|
|
$
|
183.1
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Other
Current and Non-Current Liabilities
|
Accrued expenses and other current liabilities consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Accrued operating expenses
|
|
$
|
238.3
|
|
|
$
|
192.2
|
|
Accrued litigation and claims
reserves
|
|
|
0.3
|
|
|
|
106.2
|
|
Accrued payroll and benefits
|
|
|
71.8
|
|
|
|
61.7
|
|
Accrued restructuring charges
|
|
|
3.9
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
314.3
|
|
|
$
|
365.9
|
|
|
|
|
|
|
|
|
|
|
F-19
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other non-current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(millions)
|
|
|
Capital lease obligations
|
|
$
|
24.2
|
|
|
$
|
1.9
|
|
Deferred rent obligations
|
|
|
84.7
|
|
|
|
74.1
|
|
Minority interest
|
|
|
17.9
|
|
|
|
9.4
|
|
Other
|
|
|
48.0
|
|
|
|
52.2
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
174.8
|
|
|
$
|
137.6
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Restructuring
Liabilities
|
The Company has recorded restructuring liabilities over the past
few years relating to various cost-savings initiatives, as well
as certain of its acquisitions. In accordance with US GAAP,
restructuring costs incurred in connection with an acquisition
are capitalized as part of the purchase accounting for the
transaction. Such acquisition-related restructuring costs were
not material in any period. However, all costs for
non-acquisition related restructuring initiatives are required
to be expensed either in the period they were incurred or
committed to, in accordance with US GAAP. A description of the
nature of significant non-acquisition related restructuring
activities and related costs is presented below.
Fiscal
2006 Restructuring
During the fourth quarter of Fiscal 2006, the Company committed
to a plan to restructure the Companys Club Monaco retail
business. In particular, this plan consisted of the closure of
all five Club Monaco factory outlet stores and the intention to
dispose of by sale or closure all eight of Club Monacos
Caban Concept Stores (collectively, the Club Monaco
Restructuring Plan). In connection with this plan, an
aggregate restructuring-related charge of $12 million was
recognized in Fiscal 2006. This charge consisted of (a) a
$3 million writedown of inventory to estimated net
realizable value, which has been classified as a component of
cost of goods sold in the accompanying consolidated statements
of operations, (b) a $5 million writedown of fixed and
other net assets, which has been classified as a component of
restructuring charges in the accompanying consolidated
statements of operations and (c) the recognition of a
$4 million liability relating to lease termination costs,
which has been classified as a component of restructuring
charges in the accompanying consolidated statements of
operations. The lease termination costs are expected to be paid
by the end of Fiscal 2007.
In addition, during its first quarter of Fiscal 2007, the
Company expects to recognize an additional $2 million
restructuring charge relating to Club Monacos Caban
Concept stores. Such costs will be incurred pursuant to the Club
Monaco Restructuring Plan, but are not recognizable until Fiscal
2007 in accordance with US GAAP because the leased space was
still being used at the end of Fiscal 2006.
Fiscal
2005 Restructurings
During Fiscal 2005, the Company incurred approximately
$2 million of restructuring costs, principally relating to
severance obligations in connection with its European
operations. Such obligations were substantially paid by the end
of Fiscal 2006, and the charge was classified as a component of
restructuring charges in the accompanying consolidated
statements of operations.
Fiscal
2004 Restructurings
During Fiscal 2004, the Company incurred approximately
$19 million of restructuring costs. These restructuring
costs consisted of (a) approximately $8 million of
mostly severance-related costs associated with a European
restructuring, (b) approximately $10 million of
lease-related costs associated with a retail restructuring and
F-20
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(c) approximately $1 million of lease-related costs
associated with the closing of certain RRL retail stores. Such
amounts were substantially paid by the end of Fiscal 2006, and
the charge was classified as a component of restructuring
charges in the accompanying consolidated statements of
operations.
Domestic and foreign pretax income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
April 3,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(millions)
|
|
|
Domestic
|
|
$
|
396.9
|
|
|
$
|
154.8
|
|
|
$
|
201.5
|
|
Foreign
|
|
|
106.0
|
|
|
|
143.0
|
|
|
|
61.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
502.9
|
|
|
$
|
297.8
|
|
|
$
|
263.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current and deferred income taxes (tax benefits) provided are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
April 3,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(millions)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal(a)
|
|
$
|
118.0
|
|
|
$
|
102.0
|
|
|
$
|
81.8
|
|
State and
local(a)
|
|
|
14.9
|
|
|
|
17.3
|
|
|
|
4.1
|
|
Foreign
|
|
|
26.4
|
|
|
|
16.1
|
|
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159.3
|
|
|
|
135.4
|
|
|
|
96.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
24.3
|
|
|
|
(33.6
|
)
|
|
|
(5.4
|
)
|
State and local
|
|
|
11.8
|
|
|
|
2.4
|
|
|
|
(1.0
|
)
|
Foreign
|
|
|
(0.5
|
)
|
|
|
3.2
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35.6
|
|
|
|
(28.0
|
)
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax provision
|
|
$
|
194.9
|
|
|
$
|
107.4
|
|
|
$
|
93.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Excludes federal, state and local
tax benefits of $22 million in Fiscal 2006,
$19 million in Fiscal 2005 and $6 million in Fiscal
2004 resulting from the exercise of employee stock options. Such
amounts were credited to additional
paid-in-capital
as a component of stockholders equity.
|
F-21
POLO
RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The differences between income taxes expected at the
U.S. federal statutory income tax rate of 35% and income
taxes provided are as set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
April 1,
|
|
|
April 2,
|
|
|
April 3,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(millions)
|
|
|
Provision for income taxes at the
U.S. federal statutory rate
|
|
$
|
176.0
|
|
|
$
|
104.2
|
|
|
$
|
92.1
|
|
Increase (decrease) due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local income taxes, net
of federal benefit
|
|
|
17.4
|
|
|
|
12.8
|
|
|
|
2.0
|
|
Foreign income taxed at different
rates, net of U.S. foreign tax credits
|
|
|
(5.6
|
)
|
|
|
(12.0
|
)
|
|
|