RALPH LAUREN CORPORATION
The following management's discussion and analysis of financial condition and
results of operations ("MD&A") should be read together with our audited
consolidated financial statements and notes thereto, which are included in this
Annual Report on Form 10-K. We utilize a 52-53 week fiscal year ending on the
Saturday closest to March 31 . As such, Fiscal 2020 ended on March 28, 2020 and
was a 52-week period; Fiscal 2019 ended on March 30, 2019 and was a 52-week
period; Fiscal 2018 ended on March 31, 2018 and was a 52-week period; and Fiscal
2021 will end on March 27, 2021 and will be a 52-week period.
INTRODUCTION
MD&A is provided as a supplement to the accompanying consolidated financial
statements and notes thereto to help provide an understanding of our results of
operations, financial condition, and liquidity. MD&A is organized as follows:
• Overview. This section provides a general description of our business,
global economic conditions and industry trends, and a summary of our
financial performance for Fiscal 2020. In addition, this section
includes a discussion of recent developments and transactions affecting
comparability that we believe are important in understanding our
results of operations and financial condition, and in anticipating
future trends.
• Results of operations. This section provides an analysis of our
results of operations for Fiscal 2020 and Fiscal 2019 as compared to
the respective prior fiscal year.
• Financial condition and liquidity. This section provides a discussion
of our financial condition and liquidity as of March 28, 2020 , which
includes (i) an analysis of our financial condition as compared to the
prior fiscal year-end; (ii) an analysis of changes in our cash flows
for Fiscal 2020 and Fiscal 2019 as compared to the respective prior
fiscal year; (iii) an analysis of our liquidity, including the
availability under our commercial paper borrowing program and credit
facilities, common stock repurchases, payments of dividends, and our
outstanding debt and covenant compliance; and (iv) a summary of our
contractual and other obligations as of March 28, 2020 .
• Market risk management. This section discusses how we manage our risk
exposures related to foreign currency exchange rates, interest rates,
and our investments as of March 28, 2020 .
• Critical accounting policies. This section discusses accounting
policies considered to be important to our results of operations and
financial condition, which typically require significant judgment andestimation on the part of management in their application. In addition,
all of our significant accounting policies, including our critical
accounting policies, are summarized in Note 3 to the accompanying
consolidated financial statements.
• Recently issued accounting standards. This section discusses thepotential impact on our reported results of operations and financial
condition of certain accounting standards that have been recently
issued.
OVERVIEW
Our Business
Our Company is a global leader in the design, marketing, and distribution of
premium lifestyle products, including apparel, footwear, accessories, home
furnishings, fragrances, and hospitality. Our long-standing reputation and
distinctive image have been developed across an expanding number of products,
brands, sales channels, and international markets. Our brand names include Ralph
Lauren , Ralph Lauren Collection, Ralph Lauren Purple Label , Polo Ralph Lauren ,
Double RL, Lauren Ralph Lauren , Polo Ralph Lauren Children, Chaps, and Club
Monaco , among others.
We diversify our business by geography (North America , Europe , and Asia , among
other regions) and channel of distribution (retail, wholesale, and licensing).
This allows us to maintain a dynamic balance as our operating results do not
depend solely on the performance of any single geographic area or channel of
distribution. We sell directly to consumers through our integrated retail
channel, which includes our retail stores, concession-based shop-within-shops,
and digital commerce operations around the world. Our wholesale sales are made
principally to major department stores, specialty stores, and third-party
digital partners around the world, as well as to certain third-party-owned
stores to which we have licensed the right to operate in defined geographic
territories using our trademarks. In addition, we license to third parties for
specified periods the right to access our various trademarks in connection with
the licensees' manufacture and sale of designated products, such as certain
apparel, eyewear, fragrances, and home furnishings.
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We organize our business into the following three reportable segments:
•
51% of our Fiscal 2020 net revenues, primarily consists of sales of our
businesses in the U.S. and Canada , excluding Club Monaco. In North
America , our retail business is comprised of our Ralph Lauren stores,our factory stores, and our digital commerce site, www.RalphLauren.com.
Our wholesale business in North America is comprised primarily of sales
to department stores, and to a lesser extent, specialty stores.
• Europe - Our Europe segment, representing approximately 26% of our
Fiscal 2020 net revenues, primarily consists of sales of our Ralph
Lauren branded products made through our retail and wholesale
businesses in
Club Monaco . In Europe , our retail business is comprised of our Ralph
Lauren stores, our factory stores, our concession-based
shop-within-shops, and our various digital commerce sites. Our
wholesale business in
both department stores and specialty stores, depending on the country,
as well as to various third-party digital partners.
•
2020 net revenues, primarily consists of sales of our
branded products made through our retail and wholesale businesses in
primarily comprised of our
concession-based shop-within-shops, and our digital commerce site,
www.RalphLauren.cn, which launched in
sell our products online through various third-party digital partner
commerce sites. In
of sales to department stores, with related products distributed
through shop-within-shops.
No operating segments were aggregated to form our reportable segments. In addition to these reportable segments, we also have other non-reportable segments, representing approximately 6% of our Fiscal 2020 net revenues, which primarily consist of (i) sales of Club Monaco branded products made through our retail and wholesale businesses in theU.S. ,Canada , andEurope , and our licensing alliances inEurope andAsia , and (ii) royalty revenues earned through our global licensing alliances, excluding Club Monaco. Effective beginning in the first quarter of Fiscal 2020, operating results related to our business inLatin America are included within ourEurope segment due to a change in how we manage this business. Previously, such results were included within our other non-reportable segments. All prior period segment information has been recast to reflect this change on a comparative basis. Approximately 46% of our Fiscal 2020 net revenues were earned outside of theU.S. See Note 20 to the accompanying consolidated financial statements for further discussion of our segment reporting structure. Our business is typically affected by seasonal trends, with higher levels of retail sales in our second and third fiscal quarters and higher wholesale sales in our second and fourth fiscal quarters. These trends result primarily from the timing of key vacation travel, back-to-school, and holiday shopping periods impacting our retail business and the timing of seasonal wholesale shipments. Recent Developments COVID-19 Pandemic A novel strain of coronavirus commonly referred to as COVID-19 has spread rapidly across the globe in recent months, including throughout all major geographies in which we operate (North America ,Europe , andAsia ), resulting in adverse economic conditions and business disruptions, as well as significant volatility in global financial markets. Governments worldwide have imposed varying degrees of preventative and protective actions, such as temporary travel bans, forced business closures, and stay-at-home orders, all in an effort to reduce the spread of the virus. Such factors, among others, have resulted in a significant decline in retail traffic, tourism, and consumer spending on discretionary items. Additionally, during this period of uncertainty, companies across a wide array of industries have implemented various initiatives to reduce operating expenses and preserve cash balances, including work furloughs and reduced pay, which could lower consumers' disposable income levels or willingness to purchase discretionary items. Further, even after such government restrictions and company initiatives are lifted, consumer behavior, spending levels, and/or shopping preferences, such as their willingness to congregate in shopping centers or other populated locations, could be adversely affected. In connection with the COVID-19 pandemic, we have experienced varying degrees of business disruptions and periods of closure of our stores, distribution centers, and corporate facilities, as have our wholesale customers, licensing partners, suppliers, and vendors. For example, a significant number of our stores in parts ofAsia were closed for a substantial portion of our fourth
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quarter of Fiscal 2020. Although our stores inAsia were largely reopened by the end of our Fiscal 2020, certain countries, includingJapan , began imposing new restrictions during our first quarter of Fiscal 2021. Retail traffic also continues to be challenging in those regions in which our stores are open. Additionally, our stores inNorth America and the majority inEurope closed mid-March or earlier, and although certain stores have since reopened, a large number remain closed and we are uncertain when they will reopen. Our wholesale business has also been adversely affected, particularly inNorth America andEurope , as a result of department store closures and lower traffic and consumer demand. In response to the COVID-19 pandemic, we have taken preemptive actions to preserve cash and strengthen our liquidity, including: • drawing down$475 million from our Global Credit Facility to bolster cash
balances;
• entering into a new credit facility with the same lenders that are parties
to the Global Credit Facility, which provides for an additional
million senior unsecured revolving line of credit that matures on
2021, or earlier in the event we are able to obtain other additional
financing, as described in Note 11 to the accompanying consolidated
financial statements;
• temporarily suspending our common stock repurchase program and our
quarterly cash dividend;
• temporarily reducing the base compensation of our executives and senior
management team, as well as our Board of Directors;
• carefully managing our expense structure across all key areas of spend,
including aligning inventory levels with anticipated demand and postponing
non-critical capital build-out and other investments and activities; and
• temporarily furloughing or reducing work hours for a significant portionof our employees who nevertheless remain eligible for employee benefits
during such period.
The COVID-19 pandemic remains highly volatile and continues to evolve on a daily basis. Accordingly, we cannot predict for how long and to what extent this crisis will impact our business operations or the global economy as a whole. We will continue to assess our operations location-by-location, taking into account the guidance of local governments and global health organizations to determine when our operations can begin returning to normal course of business. See Item 1A - "Risk Factors - Infectious disease outbreaks, such as the recent COVID-19 pandemic, could have a material adverse effect on our business" for additional discussion regarding risks to our business associated with the COVID-19 pandemic. Swiss Tax Reform InMay 2019 , a public referendum was held inSwitzerland that approved the Federal Act on Tax Reform and AHV Financing (the "Swiss Tax Act"), which became effectiveJanuary 1, 2020 . The Swiss Tax Act eliminates certain preferential tax items at both the federal and cantonal levels for multinational companies and provides the cantons with parameters for establishing local tax rates and regulations. The Swiss Tax Act also provides transitional provisions, one of which allows eligible companies to increase the tax basis of certain assets based on the value generated by their business in previous years, and to amortize such adjustment as a tax deduction over a transitional period. In connection with this transitional provision, we recorded a one-time income tax benefit and corresponding deferred tax asset of$122.9 million during Fiscal 2020, which decreased our effective tax rate by 3,760 basis points. See Note 10 to the accompanying consolidated financial statements for additional discussion regarding the Swiss Tax Act. Fiscal 2019 Restructuring Plan OnJune 4, 2018 , our Board of Directors approved a restructuring plan associated with our strategic objective of operating with discipline to drive sustainable growth (the "Fiscal 2019 Restructuring Plan"). The Fiscal 2019 Restructuring Plan includes the following restructuring-related activities: (i) rightsizing and consolidation of our global distribution network and corporate offices; (ii) targeted severance-related actions; and (iii) closure of certain of our stores and shop-within-shops. Actions associated with the Fiscal 2019 Restructuring Plan are expected to result in gross annualized expense savings of approximately$60 million to$80 million . In connection with the Fiscal 2019 Restructuring Plan, we have recorded cumulative charges of$145.8 million since its inception, of which$48.5 million and$97.3 million were recorded during Fiscal 2020 and Fiscal 2019, respectively. Actions 43
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associated with the Fiscal 2019 Restructuring Plan are complete and no additional charges are expected to be incurred in connection with this plan. See Note 9 to our accompanying consolidated financial statements for additional discussion regarding charges recorded in connection with the Fiscal 2019 Restructuring Plan.U.S. Tax Reform OnDecember 22, 2017 ,President Trump signed into law new tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"), which became effectiveJanuary 1, 2018 . The TCJA significantly revisedU.S. tax law by, among other provisions, lowering theU.S. federal statutory income tax rate from 35% to 21%, creating a territorial tax system that includes a one-time mandatory transition tax on previously deferred foreign earnings, and eliminating or reducing certain income tax deductions. During Fiscal 2018, we recorded net charges of$221.4 million within our income tax provision in connection with the TCJA, which increased our effective tax rate by 4,520 basis points. Subsequently, during Fiscal 2019, we recorded net measurement period adjustments of$27.6 million as permitted bySEC Staff Accounting Bulletin No. 118 ("SAB 118"). These measurement period adjustments increased our effective tax rate by 470 basis points during Fiscal 2019. See Note 10 to the accompanying consolidated financial statements for additional discussion regarding the TCJA. Global Economic Conditions and Industry Trends The global economy and retail industry are impacted by many different factors. The recent outbreak of COVID-19 has resulted in heightened uncertainty surrounding the future state of the global economy, as well as significant volatility in global financial markets. As discussed in "Recent Developments," governments worldwide have imposed varying degrees of preventative and protective actions, such as temporary travel bans, forced business closures, and stay-at-home orders, all in an effort to reduce the spread of the virus. Such actions, together with changes in consumers' willingness to congregate in populated areas and lower levels of disposal income due to rising unemployment rates, have resulted in significant business disruptions across a wide array of industries and an overall decline of the global economy. The global economy has also been impacted by the domestic and international political environment, including volatile international trade relations and political unrest. Although trade relations between theU.S. andChina have begun to ease, both countries have imposed new tariffs on each other related to the importation of certain product categories. Concerns also exist regarding theUnited Kingdom's recent withdrawal from theEuropean Union , commonly referred to as "Brexit." TheUnited Kingdom ceased to be a member of theEuropean Union , effectiveJanuary 31, 2020 , and has entered a "transition period" during which its existing trading relationship with theEuropean Union will remain in place and it will continue to follow theEuropean Union's rules. Negotiations during the transition period to determine theUnited Kingdom's future relationship with theEuropean Union , including terms of trade, are expected to be complex. It is not clear at this time what, if any, agreements will be reached by the currentDecember 31, 2020 transition period deadline and the resulting impact on consumer sentiment. Additionally, certain other worldwide events, including political protests such as those that recently took place inHong Kong , acts of terrorism, taxation or monetary policy changes, fluctuations in commodity prices, and rising healthcare costs, also increase volatility in the global economy. The retail landscape in which we operate has been significantly disrupted by the COVID-19 pandemic, including widespread temporary closures of stores and distribution centers and declines in retail traffic, tourism, and consumer spending on discretionary items. Prior to the COVID-19 pandemic, consumers had been increasingly shifting their shopping preference from physical stores to online. This shift in preference could potentially be amplified in the future as a byproduct of the COVID-19 pandemic, as consumers may prefer to avoid populated locations, such as shopping centers, in fear of exposing themselves to infectious diseases. Even before the COVID-19 pandemic, many retailers, including certain of our large wholesale customers, have been highly promotional and have aggressively marked down their merchandise on a periodic basis in an attempt to offset declines in physical store traffic. The retail industry, particularly in theU.S. , has also experienced numerous bankruptcies, restructurings, and ownership changes in recent years. The COVID-19 pandemic could exacerbate these trends if companies do not have adequate financial resources and/or access to additional capital to withstand prolonged periods of adverse economic conditions. The continuation of these industry trends could further impact consumer spending and consumption behavior in our industry, which could have a material adverse effect on our business or operating results. We have implemented various strategies globally to help address many of these current challenges and continue to build a foundation for long-term profitable growth centered around strengthening our consumer-facing areas of product, stores, and 44
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marketing across channels and driving a more efficient operating model. In response to the COVID-19 pandemic, we have taken preemptive actions to preserve cash and strengthen our liquidity, as described in "Recent Developments." Investing in our digital ecosystem remains a primary focus and is a key component of our integrated global omni-channel strategy, particularly in light of the current COVID-19 pandemic, which could reshape consumer shopping preferences. We also continue to take deliberate actions to ensure promotional consistency across channels and to enhance the overall brand and shopping experience, including better aligning shipments and inventory levels with underlying demand. We also remain committed to optimizing our wholesale distribution channel and enhancing our department store consumer experience. Further, in response to the recent trade developments between theU.S. andChina , we have taken steps to mitigate our exposure to the resulting tariffs, including diverting production to and sourcing from other countries, driving productivity within our existing supplier base, and taking pricing actions. As a result of these efforts, the tariffs enacted to date are not expected to have a material impact on our consolidated financial statements. We are also closely monitoring the latest Brexit developments and are assessing risks and opportunities and developing strategies to mitigate our exposure once the transition period expires, including evaluating scenarios in which the transition period ends without trade agreements in place. We will continue to monitor these conditions and trends and will evaluate and adjust our operating strategies and foreign currency and cost management opportunities to help mitigate the related impacts on our results of operations, while remaining focused on the long-term growth of our business and protecting and elevating the value of our brand. For a detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations, see Part I, Item 1A - "Risk Factors" included in this Annual Report on Form 10-K. Summary of Financial Performance Operating Results In Fiscal 2020, we reported net revenues of$6.160 billion , net income of$384.3 million , and net income per diluted share of$4.98 , as compared to net revenues of$6.313 billion , net income of$430.9 million , and net income per diluted share of$5.27 in Fiscal 2019. The comparability of our operating results has been affected by adverse impacts related to COVID-19 andHong Kong protest business disruptions, as well as restructuring-related charges, impairment of assets, and certain other charges. Our operating results have also been affected by international and domestic tax reform. Our operating performance for Fiscal 2020 reflected revenue declines of 2.4% on a reported basis and 1.2% on a constant currency basis, as defined within "Transactions and Trends Affecting Comparability of Results of Operations and Financial Condition" below, reflecting adverse impacts related to COVID-19 andHong Kong protest business disruptions. Our gross profit as a percentage of net revenues decreased by 230 basis points to 59.3% during Fiscal 2020, primarily driven by inventory charges recorded in connection with COVID-19 business disruptions, partially offset by favorable geographic, channel, and product mix, improved pricing, and lower levels of promotional activity. Selling, general, and administrative ("SG&A") expenses as a percentage of net revenues increased by 240 basis points to 52.6% during Fiscal 2020, primarily driven by operating deleverage on lower net revenues and higher bad debt expense, both largely attributable to COVID-19 business disruptions, as well as the unfavorable impact attributable to geographic and channel mix. Net income decreased by$46.6 million to$384.3 million in Fiscal 2020 as compared to Fiscal 2019, primarily due to a$244.8 million decrease in operating income reflecting adverse impacts related to COVID-19 andHong Kong protest business disruptions, partially offset by a$209.5 million decrease in our income tax provision largely driven by the combined impact of international and domestic tax reform. Net income per diluted share decreased by$0.29 to$4.98 per share in Fiscal 2020 as compared to Fiscal 2019, due to lower net income, partially offset by lower weighted-average diluted shares outstanding during Fiscal 2020. Net income during Fiscal 2020 reflected a one-time income tax benefit of$122.9 million , or$1.59 per diluted share, recorded in connection with the Swiss Tax Act and and net income during Fiscal 2019 reflected TCJA enactment-related charges of$27.6 million , or$0.34 per diluted share. Our operating results during Fiscal 2020 and Fiscal 2019 were also negatively impacted by restructuring-related charges, impairment of assets (including an equity method investment), and certain other charges (including those related to COVID-19 business disruptions) totaling$321.8 million and$163.1 million , respectively, which had an after-tax effect of reducing net income by$244.8 million , or$3.17 per diluted share, and$129.0 million , or$1.58 per diluted share, respectively. 45
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Financial Condition and Liquidity We ended Fiscal 2020 in a net cash and investments position (cash and cash equivalents plus short-term and non-current investments, less total debt) of$945.3 million , compared to$1.343 billion as of the end of Fiscal 2019. The decrease in our net cash and investments position was primarily due to our use of cash to support Class A common stock repurchases of$694.8 million , including withholdings in satisfaction of tax obligations for stock-based compensation awards, to invest in our business through$270.3 million in capital expenditures, and to make dividend payments of$203.9 million , partially offset by our operating cash flows of$754.6 million . We generated$754.6 million of cash from operations during Fiscal 2020, compared to$783.8 million during Fiscal 2019. The decline in cash provided by operating activities was due to a decrease in net income before non-cash charges, partially offset by a net favorable change related to our operating assets and liabilities, including our working capital, as compared to the prior fiscal year period. Our equity decreased to$2.693 billion as ofMarch 28, 2020 , compared to$3.287 billion as ofMarch 30, 2019 , primarily due to our share repurchase activity, dividends declared, and cumulative adjustments from our adoption of new accounting standards, partially offset by our comprehensive income and the impact of stock-based compensation arrangements during Fiscal 2020. Transactions and Trends Affecting Comparability of Results of Operations and Financial Condition The comparability of our operating results for the three fiscal years presented herein has been affected by certain events, including: • pretax charges incurred in connection with our restructuring plans, as
well as certain other asset impairments and other charges, including
those related to COVID-19 business disruptions, as summarized below
(references to "Notes" are to the notes to the accompanying
consolidated financial statements):
Fiscal Years Ended
March 28, March 30, March 31,
2020 2019 2018
(millions)
Non-routine inventory charges(a) $ (159.5 ) $ (7.2 ) $ (7.6 )
Restructuring and other charges (see Note 9) (67.2 ) (130.1 ) (108.0 )
COVID-19-related bad debt expense(b) (56.4 ) - -
Impairment of assets (see Note 8)(c) (38.7 ) (25.8 ) (50.0 ) Total charges$ (321.8 ) $ (163.1 ) $ (165.6 )
(a) Non-routine inventory charges are recorded within cost of goods sold
in the consolidated statements of operations. Fiscal 2020 includes
non-routine inventory charges of $157.3 million related to adverse
impacts associated with COVID-19 business disruptions. All other
non-routine inventory charges related to our restructuring plans
(see Note 9).
(b) COVID-19-related bad debt expense is recorded within SG&A expenses
in the consolidated statements of operations.
(c) Fiscal 2020 includes a $7.1 million impairment of an equity method
investment recorded within other income (expense), net in the
consolidated statements of operations. All other impairment charges
were recorded within impairment of assets in the consolidated
statements of operations.
• adverse impacts related to COVID-19 and Hong Kong protest business
disruptions, including, but not limited to, incremental inventorycharges and bad debt expense recorded during Fiscal 2020, as summarized
in the table above;
• a one-time benefit of $122.9 million recorded within our income tax
provision in the consolidated statements of operations during Fiscal
2020 in connection with the Swiss Tax Act, which decreased our
effective tax rate by 3,760 basis points. See Note 10 to theaccompanying consolidated financial statements for further discussion;
and
• TCJA enactment-related charges of $27.6 million and $221.4 million recorded within the income tax provision in the consolidated statements
of operations during Fiscal 2019 and Fiscal 2018, respectively, which
increased our effective tax rate by 470 basis points and 4,520 basispoints, respectively. See Note 10 to the accompanying consolidated
financial statements for further discussion.
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Since we are a global company, the comparability of our operating results reported inU.S. Dollars is also affected by foreign currency exchange rate fluctuations because the underlying currencies in which we transact change in value over time compared to theU.S. Dollar. Such fluctuations can have a significant effect on our reported results. As such, in addition to financial measures prepared in accordance with accounting principles generally accepted in theU.S. ("U.S. GAAP"), our discussions often contain references to constant currency measures, which are calculated by translating current-year and prior-year reported amounts into comparable amounts using a single foreign exchange rate for each currency. We present constant currency financial information, which is a non-U.S. GAAP financial measure, as a supplement to our reported operating results. We use constant currency information to provide a framework for assessing how our businesses performed excluding the effects of foreign currency exchange rate fluctuations. We believe this information is useful to investors for facilitating comparisons of operating results and better identifying trends in our businesses. The constant currency performance measures should be viewed in addition to, and not in lieu of or superior to, our operating performance measures calculated in accordance withU.S. GAAP. Reconciliations between this non-U.S. GAAP financial measure and the most directly comparableU.S. GAAP measure are included in the "Results of Operations" section where applicable. Our discussion also includes reference to comparable store sales. Comparable store sales refer to the change in sales of our stores that have been open for at least 13 full fiscal months. Sales from our digital commerce sites are also included within comparable sales for those geographies that have been serviced by the related site for at least 13 full fiscal months. Sales for stores or digital commerce sites that are closed or shut down during the year are excluded from the calculation of comparable store sales. Sales for stores that are either relocated, enlarged (as defined by gross square footage expansion of 25% or greater), or generally closed for 30 or more consecutive days for renovation are also excluded from the calculation of comparable store sales until such stores have been operating in their new location or in their newly renovated state for at least 13 full fiscal months. All comparable store sales metrics are calculated on a constant currency basis. Our "Results of Operations" discussion that follows includes the significant changes in operating results arising from these items affecting comparability. However, unusual items or transactions may occur in any period. Accordingly, investors and other financial statement users should consider the types of events and transactions that have affected operating trends.
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RESULTS OF OPERATIONS
Fiscal 2020 Compared to Fiscal 2019
The following table summarizes our results of operations and expresses the
percentage relationship to net revenues of certain financial statement captions.
All percentages shown in the below table and the discussion that follows have
been calculated using unrounded numbers.
Fiscal Years Ended
March 28, March 30, $ % / bps
2020 2019 Change Change
(millions, except per share data)
Net revenues $ 6,159.8 $ 6,313.0 $ (153.2 ) (2.4 %)
Cost of goods sold (2,506.5 ) (2,427.0 ) (79.5 ) 3.3 %
Gross profit 3,653.3 3,886.0 (232.7 ) (6.0 %)
Gross profit as % of net revenues 59.3 % 61.6 % (230 bps)
Selling, general, and administrative
expenses (3,237.5 ) (3,168.3 ) (69.2 ) 2.2 %
SG&A expenses as % of net revenues 52.6 % 50.2 % 240 bps
Impairment of assets (31.6 ) (25.8 ) (5.8 ) 22.8 %
Restructuring and other charges (67.2 ) (130.1 ) 62.9 (48.4 %)
Operating income 317.0 561.8 (244.8 ) (43.6 %)
Operating income as % of net revenues 5.1 % 8.9 % (380 bps)
Interest expense (17.6 ) (20.7 ) 3.1 (14.8 %)
Interest income 34.4 40.8 (6.4 ) (15.8 %)
Other income (expense), net (7.4 ) 0.6 (8.0 ) NM
Income before income taxes 326.4 582.5 (256.1 ) (44.0 %)
Income tax benefit (provision) 57.9 (151.6 ) 209.5 NM
Effective tax rate(a) (17.7 %) 26.0 % (4,370 bps)
Net income $ 384.3 $ 430.9 $ (46.6 ) (10.8 %)
Net income per common share:
Basic $ 5.07 $ 5.35 $ (0.28 ) (5.2 %)
Diluted $ 4.98 $ 5.27 $ (0.29 ) (5.5 %)
(a) Effective tax rate is calculated by dividing the income tax benefit
(provision) by income before income taxes.
NM Not meaningful.
Net Revenues. Net revenues decreased by $153.2 million , or 2.4%, to $6.160
billion in Fiscal 2020 as compared to Fiscal 2019, including net unfavorable
foreign currency effects of $77.1 million . On a constant currency basis, net
revenues decreased by $76.1 million , or 1.2%, reflecting adverse impacts related
to COVID-19 and Hong Kong protest business disruptions.
The following table summarizes the percentage change in our Fiscal 2020
consolidated comparable store sales as compared to the prior fiscal year,
inclusive of adverse impacts related to COVID-19 and Hong Kong protest business
disruptions:
% Change
Digital commerce comparable store sales 3 %
Comparable store sales excluding digital commerce (3 %) Total comparable store sales
(2 %)
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Our global average store count increased by 43 stores and concession shops
during Fiscal 2020 compared with the prior fiscal year, largely driven by new
openings in
March 28, March 30,
2020 2019
Freestanding Stores:
North America 230 224
Europe 94 87
Asia 132 115
Other non-reportable segments 74 75
Total freestanding stores 530 501
Concession Shops:
North America 2 2
Europe 29 29
Asia 619 622
Other non-reportable segments 4 5
Total concession shops 654 658
Total stores 1,184 1,159
In addition to our stores, we sell products online in North America and Europe
through our various digital commerce sites, which include www.RalphLauren.com
and www.ClubMonaco.com, among others, as well as through our Polo mobile app in
North America and the United Kingdom . In Asia , we sell products online through
our digital commerce site, www.RalphLauren.cn, which launched in September 2018 ,
as well as through various third-party digital partner commerce sites.
Net revenues for our segments, as well as a discussion of the changes in each
reportable segment's net revenues from the prior fiscal year, are provided
below:
Fiscal Years Ended $ Change $ Change % Change
March 28, March 30, As Foreign Exchange As Constant
2020 2019 Reported Impact Constant Currency Reported Currency
(millions)
Net Revenues:
North America $ 3,140.5 $ 3,202.9 $ (62.4 ) $ (1.4 ) $ (61.0 ) (2.0 %) (1.9 %)
Europe 1,632.2 1,683.0 (50.8 ) (63.6 ) 12.8 (3.0 %) 0.8 %
Asia 1,017.2 1,041.0 (23.8 ) (11.6 ) (12.2 ) (2.3 %) (1.2 %)
Other non-reportable
segments 369.9 386.1 (16.2 ) (0.5 ) (15.7 ) (4.2 %) (4.1 %)
Total net revenues $ 6,159.8 $ 6,313.0 $ (153.2 ) $ (77.1 ) $ (76.1 ) (2.4 %) (1.2 %)
North America net revenues - Net revenues decreased by $62.4 million , or 2.0%,
during Fiscal 2020 as compared to Fiscal 2019, including net unfavorable foreign
currency effects of $1.4 million . On a constant currency basis, net revenues
decreased by $61.0 million , or 1.9%, reflecting adverse impacts related to
COVID-19 business disruptions.
The $62.4 million net decline in North America net revenues was driven by:
• a $101.2 million net decrease related to our North America wholesale
business, largely driven by weaker demand and challenging department
store traffic trends, as well as COVID-19 business disruptions.
This decrease was partially offset by: • an increase of$38.8 million related to ourNorth America retail business, inclusive of net unfavorable foreign currency effects of$0.7 million and the adverse impact of COVID-19 business disruptions. On a constant currency basis, net revenues increased by$39.5 million driven by an increase of$47.1 million in non-comparable store sales, partially offset by a decrease of$7.6 million in comparable store sales. The following table summarizes the percentage change 49
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in comparable store sales related to our
% Change
Digital commerce comparable store sales 1 %
Comparable store sales excluding digital commerce (1 %) Total comparable store sales
- %
Europe net revenues - Net revenues decreased by $50.8 million , or 3.0%, during
Fiscal 2020 as compared to Fiscal 2019, including net unfavorable foreign
currency effects of $63.6 million . On a constant currency basis, net revenues
increased by $12.8 million , or 0.8%, despite adverse impacts related to COVID-19
business disruptions.
The $50.8 million net decline in Europe net revenues was driven by:
• a $44.3 million net decrease related to our Europe wholesale business
driven by net unfavorable foreign currency effects of
COVID-19 business disruptions, partially offset by stronger demand
prior to the COVID-19 pandemic; and
• a
inclusive of net unfavorable foreign currency effects of
and the adverse impact of COVID-19 business disruptions. On a constant
currency basis, net revenues increased by
increase of
offset by a decrease of $7.6 million in comparable store sales. The
following table summarizes the percentage change in comparable store
sales related to our Europe retail business, inclusive of adverse
impacts related to COVID-19 business disruptions:
% Change
Digital commerce comparable store sales 11 %
Comparable store sales excluding digital commerce (2 %) Total comparable store sales
(1 %)
Asia net revenues - Net revenues decreased by $23.8 million , or 2.3%, during
Fiscal 2020 as compared to Fiscal 2019, including net unfavorable foreign
currency effects of $11.6 million . On a constant currency basis, net revenues
decreased by $12.2 million , or 1.2%, reflecting estimated adverse impacts
related to COVID-19 and Hong Kong protest business disruptions.
The $23.8 million net decline in Asia net revenues was driven by:
• a $21.9 million net decrease related to our Asia retail business,
inclusive of net unfavorable foreign currency effects of
and the adverse impacts of COVID-19 and
disruptions. On a constant currency basis, net revenues decreased by
store sales, partially offset by an increase of $25.2 million in
non-comparable store sales. The following table summarizes the
percentage change in comparable store sales related to our Asia retail
business, inclusive of adverse impacts related to COVID-19 and Hong
Kong protest business disruptions:
% Change
Digital commerce comparable store sales 22 %
Comparable store sales excluding digital commerce (5 %) Total comparable store sales
(4 %)
• a
inclusive of net unfavorable foreign currency effects of $0.9 million
and the adverse impact of COVID-19 business disruptions.
Gross Profit. Gross profit decreased by $232.7 million , or 6.0%, to $3.653
billion in Fiscal 2020, including net unfavorable foreign currency effects of
$53.7 million . The decline in gross profit reflects adverse impacts related to
COVID-19 and Hong Kong protest business disruptions, including incremental
inventory charges of $157.3 million . Gross profit during Fiscal 2020 and Fiscal
2019 also reflected inventory charges of $2.2 million and $7.2 million ,
respectively, recorded in connection with our restructuring plans. Gross profit
as a percentage of net revenues decreased to 59.3% in Fiscal 2020 from 61.6% in
Fiscal 2019.
50
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The 230 basis point decline was primarily driven by higher inventory charges and deleverage on lower net revenues, partially offset by favorable geographic, channel, and product mix, improved pricing, and lower levels of promotional activity. Gross profit as a percentage of net revenues is dependent upon a variety of factors, including changes in the relative sales mix among distribution channels, changes in the mix of products sold, the timing and level of promotional activities, foreign currency exchange rates, and fluctuations in material costs. These factors, among others, may cause gross profit as a percentage of net revenues to fluctuate from year to year. Selling, General, and Administrative Expenses. SG&A expenses include compensation and benefits, advertising and marketing, rent and occupancy, distribution, information technology, legal, depreciation and amortization, bad debt, and other selling and administrative costs. SG&A expenses increased by$69.2 million , or 2.2%, to$3.238 billion in Fiscal 2020, including net favorable foreign currency effect of$35.5 million . The increase in SG&A expenses reflects net adverse impacts related to COVID-19 andHong Kong protest business disruptions, including incremental bad debt expense of$56.4 million . SG&A expenses as a percentage of net revenues increased to 52.6% in Fiscal 2020 from 50.2% in Fiscal 2019. The 240 basis point increase was primarily due to operating deleverage on lower net revenues and higher bad debt expense, both primarily attributable to the COVID-19 pandemic, as well as the unfavorable impact attributable to geographic and channel mix, as a greater portion of our revenue was generated by our retail businesses (which typically carry higher operating expense margins). The$69.2 million net increase in SG&A expenses was driven by: Fiscal 2020 Compared to Fiscal 2019 (millions) SG&A expense category: Bad debt expense$ 58.3 Compensation-related expenses 29.4 Marketing and advertising expenses 5.2 Staff-related expenses (21.4 ) Rent and occupancy expenses (14.3 ) Other 12.0
Total net increase in SG&A expenses
In response to the COVID-19 pandemic, we are carefully managing our expense structure across all areas of spend, including temporarily postponing non-critical capital build-out and other investments and activities. However, we remain committed to spending on key strategic initiatives including marketing, digital, expanding and renovating our global retail stores and concession shops, and investing in productivity-enhancing infrastructure. We expect to make these investments while continuing to manage our cost base with discipline. Impairment of Assets. During Fiscal 2020 and Fiscal 2019, we recorded non-cash impairment charges of$31.6 million and$21.2 million , respectively, to write-down certain long-lived assets in connection with our restructuring plans and identification of underperforming stores. Additionally, as a result of our decision to sell our corporate jet in connection with our cost savings initiative, we recorded a non-cash impairment charge of$4.6 million during Fiscal 2019 to reduce the carrying value of the asset held-for-sale to its estimated fair value, less costs to sell. See Note 8 to the accompanying consolidated financial statements. Restructuring and Other Charges. During Fiscal 2020 and Fiscal 2019, we recorded restructuring charges of$37.6 million and$93.6 million , respectively, in connection with our restructuring plans, primarily consisting of severance and benefits costs, as well as a loss on sale of property during the prior fiscal year period. Additionally, during Fiscal 2020, we recorded other charges of$29.6 million primarily related to the charitable donation of the net cash proceeds received from the sale of our corporate jet, and rent and occupancy costs associated with certain previously exited real estate locations for which the related lease agreements have not yet expired. During Fiscal 2019, we recorded other charges of$36.5 million primarily related to our sabbatical leave program initiated during the fourth quarter of Fiscal 2019, depreciation expense associated with our former Polo store at711 Fifth Avenue inNew York City , and a customs audit. See Note 9 to the accompanying consolidated financial statements. 51
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Operating Income. Operating income decreased by$244.8 million , or 43.6%, to$317.0 million in Fiscal 2020, including net unfavorable foreign currency effect of$18.2 million . The decline in operating income reflects net adverse impacts related to COVID-19 andHong Kong protest business disruptions, including total incremental inventory charges and bad debt expense of$213.7 million , as previously discussed. Our operating results during Fiscal 2020 and Fiscal 2019 were also negatively impacted by restructuring-related charges, impairment of assets, and certain other charges totaling$101.0 million and$163.1 million , respectively, as previously discussed. Operating income as a percentage of net revenues decreased to 5.1% in Fiscal 2020 from 8.9% in Fiscal 2019. The 380 basis point decline was primarily driven by the decline in our gross margin and the increase in SG&A expenses as a percentage of net revenues, partially offset by lower restructuring-related charges recorded during Fiscal 2020 as compared to the prior fiscal year, all as previously discussed. Operating income and margin for our segments, as well as a discussion of the changes in each reportable segment's operating margin from the prior fiscal year, are provided below: Fiscal Years Ended March 28, 2020 March 30, 2019 Operating Operating Operating Operating $ Margin Income Margin Income Margin Change Change (millions) (millions) (millions) Segment: North America$ 486.6 15.5%$ 682.8 21.3%$ (196.2 ) (580 bps) Europe 336.3 20.6% 392.8 23.3% (56.5 ) (270 bps) Asia 124.8 12.3% 161.0 15.5% (36.2 ) (320 bps) Other non-reportable segments 85.2 23.0% 118.7 30.7% (33.5 ) (770 bps) 1,032.9 1,355.3 (322.4 ) Unallocated corporate expenses (648.7 ) (663.4 ) 14.7 Unallocated restructuring and other charges (67.2 ) (130.1 ) 62.9 Total operating income$ 317.0 5.1%$ 561.8 8.9%$ (244.8 ) (380 bps)North America operating margin declined by 580 basis points, primarily due to the unfavorable impact of 440 basis points related to incremental inventory charges and bad debt expense recorded in connection with COVID-19 business disruptions. The remaining 140 basis point decline largely related to adverse market conditions driven by the COVID-19 pandemic.Europe operating margin declined by 270 basis points, primarily due to the net unfavorable impact of 210 basis points related to incremental inventory charges and bad debt expense recorded in connection with COVID-19 business disruptions, partially offset by lower non-cash charges recorded in connection with our restructuring plans during Fiscal 2020 as compared to the prior fiscal year. The decline in operating margin also reflected a 40 basis point decline largely related to adverse market conditions driven by the COVID-19 pandemic, as well as a 20 basis point decline related unfavorable foreign currency.Asia operating margin declined by 320 basis points, primarily due to the unfavorable impact of 160 basis points related to incremental inventory charges and bad debt expense recorded in connection with COVID-19 business disruptions. The remaining 160 basis point decline largely related to adverse market conditions driven by the COVID-19 pandemic andHong Kong protests. Unallocated corporate expenses decreased by$14.7 million to$648.7 million in Fiscal 2020. The decline in unallocated corporate expenses was due to lower compensation-related expenses of$11.5 million , lower staff-related expenses of$8.8 million , lower consulting fees of$6.7 million , and lower marketing and advertising expenses of$5.9 million , partially offset by lower intercompany sourcing commission income of$10.2 million (which is offset at the segment level and eliminates in consolidation) and higher other expenses of$8.0 million . Unallocated restructuring and other charges decreased by$62.9 million to$67.2 million in Fiscal 2020, as previously discussed above and in Note 9 to the accompanying consolidated financial statements.
52
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Non-operating Income (Expense), Net. Non-operating income (expense), net is comprised of interest expense, interest income, and other income (expense), net, which includes foreign currency gains (losses), equity in income (losses) from our equity-method investees, and other non-operating expenses. During Fiscal 2020, we reported non-operating income, net, of$9.4 million , as compared to$20.7 million in Fiscal 2019. The$11.3 million decline was primarily driven by: • an$8.0 million increase in other expense, net, driven by a$7.1 million impairment of an equity method investment. See Note 8 to the accompanying consolidated financial statements; and • a$6.4 million decrease in interest income driven by the lower balance of our investment portfolio, as well as lower interest rates in financial markets during Fiscal 2020 as compared to the prior fiscal year. Income Tax Benefit (Provision). The income tax benefit (provision) represents federal, foreign, state and local income taxes. We reported an income tax benefit and effective tax rate of$57.9 million and (17.7%), respectively, in Fiscal 2020, as compared to an income tax provision and effective tax rate of$151.6 million and 26.0%, respectively, in Fiscal 2019. The$209.5 million decline in the income tax provision was largely driven by lower pretax income primarily due to the adverse impacts of COVID-19 andHong Kong protest business disruptions. The decline in our income provision also reflected a one-time benefit of$122.9 million recorded in Fiscal 2020 in connection with the Swiss Tax Act, which lowered our effective tax rate by 3,760 basis points, as well as the absence of a$27.6 million TCJA enactment-related charge recorded in the prior fiscal year, which negatively impacted our prior fiscal year effective tax rate by 470 basis points. In addition to this combined 4,230 basis point improvement related to tax reform impacts, the decline in our effective tax rate also reflected the net favorable impact of 140 basis points primarily attributable to other factors, including the tax impacts of earnings in lower taxed foreign jurisdictions versus theU.S. and favorable provision to tax return adjustments, partially offset by the unfavorable impact of additional income tax reserves associated with certain income tax audits. Our effective tax rate will change from period to period based on various factors including, but not limited to, the geographic mix of earnings, the timing and amount of foreign dividends, enacted tax legislation, state and local taxes, tax audit findings and settlements, and the interaction of various global tax strategies. See Note 10 to the accompanying consolidated financial statements for discussion regarding the Swiss Tax Act and TCJA. Net Income. Net income decreased to$384.3 million in Fiscal 2020, from$430.9 million in Fiscal 2019. The$46.6 million decline in net income was primarily due to the decrease in our operating income, partially offset by the decrease in our income tax provision, both as previously discussed. Net income during Fiscal 2020 and Fiscal 2019 reflected a one-time income tax benefit of$122.9 million recorded in connection with Swiss tax reform and TCJA enactment-related charges of$27.6 million , respectively, both as previously discussed. Our operating results during Fiscal 2020 and Fiscal 2019 were also negatively impacted by restructuring-related charges, impairment of assets (including an equity method investment), and certain other charges (including those related to COVID-19 business disruptions) totaling$321.8 million and$163.1 million , respectively, which had an after-tax effect of reducing net income by$244.8 million and$129.0 million , respectively. Net Income per Diluted Share. Net income per diluted share decreased to$4.98 in Fiscal 2020, from$5.27 in Fiscal 2019. The$0.29 per share decline was due to the lower level of net income, as previously discussed, partially offset by lower weighted-average diluted shares outstanding during Fiscal 2020 driven by our share repurchases during the last twelve months. Net income per diluted share in Fiscal 2020 and Fiscal 2019 were favorably impacted by$1.59 per share as a result of a one-time income tax benefit recorded in connection with the Swiss Tax Act and negatively impacted by$0.34 per share as a result of TCJA enactment-related charges, respectively, both as previously discussed. Net income per diluted share in Fiscal 2020 and Fiscal 2019 were also negatively impacted by$3.17 per share and$1.58 per share, respectively, as a result of restructuring-related charges, impairment of assets (including an equity method investment), and certain other charges (including those related to COVID-19 business disruptions), as previously discussed.
53
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Fiscal 2019 Compared to Fiscal 2018
The following table summarizes our results of operations and expresses the
percentage relationship to net revenues of certain financial statement captions.
All percentages shown in the below table and the discussion that follows have
been calculated using unrounded numbers.
Fiscal Years Ended
March 30, March 31, $ % / bps
2019 2018 Change Change
(millions, except per share data)
Net revenues $ 6,313.0 $ 6,182.3 $ 130.7 2.1 %
Cost of goods sold (2,427.0 ) (2,430.6 ) 3.6 (0.1 %)
Gross profit 3,886.0 3,751.7 134.3 3.6 %
Gross profit as % of net revenues 61.6 % 60.7 % 90 bps
Selling, general, and administrative
expenses (3,168.3 ) (3,095.5 ) (72.8 ) 2.4 %
SG&A expenses as % of net revenues 50.2 % 50.1 % 10 bps
Impairment of assets (25.8 ) (50.0 ) 24.2 (48.5 %)
Restructuring and other charges (130.1 ) (108.0 ) (22.1 ) 20.6 %
Operating income 561.8 498.2 63.6 12.8 %
Operating income as % of net revenues 8.9 % 8.1 % 80 bps
Interest expense (20.7 ) (18.2 ) (2.5 ) 13.6 %
Interest income 40.8 12.3 28.5 231.3 %
Other income (expense), net 0.6 (3.1 ) 3.7 NM
Income before income taxes 582.5 489.2 93.3 19.1 %
Income tax provision (151.6 ) (326.4 ) 174.8 (53.5 %)
Effective tax rate(a) 26.0 % 66.7 % (4,070 bps)
Net income $ 430.9 $ 162.8 $ 268.1 164.6 %
Net income per common share:
Basic $ 5.35 $ 1.99 $ 3.36 168.8 %
Diluted $ 5.27 $ 1.97 $ 3.30 167.5 %
(a) Effective tax rate is calculated by dividing the income tax provision
by income before income taxes.
NM Not meaningful. Net Revenues. Net revenues increased by$130.7 million , or 2.1%, to$6.313 billion in Fiscal 2019 as compared to Fiscal 2018, including net unfavorable foreign currency effects of$42.0 million . On a constant currency basis, net revenues increased by$172.7 million , or 2.8%. The following table summarizes the percentage change in our Fiscal 2019 consolidated comparable store sales as compared to the prior fiscal year: % Change Digital commerce comparable store sales 9 %
Comparable store sales excluding digital commerce - % Total comparable store sales
1 %
54
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Our global average store count increased by 34 stores and concession shops
during Fiscal 2019 compared with the prior fiscal year, largely driven by new
openings in
March 30, March 31,
2019 2018
Freestanding Stores:
North America 224 215
Europe 87 81
Asia 115 105
Other non-reportable segments 75 71
Total freestanding stores 501 472
Concession Shops:
North America 2 2
Europe 29 25
Asia 622 603
Other non-reportable segments 5 2
Total concession shops 658 632
Total stores 1,159 1,104
In addition to our stores, we sold products online in North America and Europe
through our various digital commerce sites, which include www.RalphLauren.com
and www.ClubMonaco.com, among others. In Asia , we sold products online through
our digital commerce site, www.RalphLauren.cn, which launched in September 2018 ,
as well as through various third-party digital partner commerce sites.
Net revenues for our segments, as well as a discussion of the changes in each
reportable segment's net revenues from the prior fiscal year, are provided
below:
Fiscal Years Ended $ Change $ Change % Change
March 30, March 31, As Foreign Exchange As Constant
2019 2018 Reported Impact Constant Currency Reported Currency
(millions)
Net Revenues:
North America $ 3,202.9 $ 3,231.0 $ (28.1 ) $ (3.3 ) $ (24.8 ) (0.9 %) (0.8 %)
Europe 1,683.0 1,608.3 74.7 (27.7 ) 102.4 4.6 % 6.4 %
Asia 1,041.0 933.7 107.3 (10.9 ) 118.2 11.5 % 12.7 %
Other non-reportable
segments 386.1 409.3 (23.2 ) (0.1 ) (23.1 ) (5.7 %) (5.7 %)
Total net revenues $ 6,313.0 $ 6,182.3 $ 130.7 $ (42.0 ) $ 172.7 2.1 % 2.8 %
North America net revenues - Net revenues decreased by $28.1 million , or 0.9%,
during Fiscal 2019 as compared to Fiscal 2018, including net unfavorable foreign
currency effects of $3.3 million . On a constant currency basis, net revenues
decreased by $24.8 million , or 0.8%.
The $28.1 million net decline in North America net revenues was driven by a
$57.0 million net decrease related to our North America wholesale business,
largely driven by a strategic reduction of shipments (including within the
off-price channel) and points of distribution in connection with our long-term
growth strategy.
This decline was partially offset by:
• a $28.9 million net increase related to our North America retail
business, inclusive of net unfavorable foreign currency effects of $1.8
million . On a constant currency basis, net revenues increased by $30.7
million driven by an increase of $30.3 million in non-comparable store
sales. The following table summarizes the percentage change in
comparable store sales related to our
55
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% Change
Digital commerce comparable store sales 10 %
Comparable store sales excluding digital commerce (2 %) Total comparable store sales
- %
Europe net revenues - Net revenues increased by $74.7 million , or 4.6%, during
Fiscal 2019 as compared to Fiscal 2018, including net unfavorable foreign
currency effects of $27.7 million . On a constant currency basis, net revenues
increased by $102.4 million , or 6.4%.
The $74.7 million net increase in Europe net revenues was driven by:
• a $51.5 million net increase related to our Europe wholesale business
largely driven by stronger demand, partially offset by net unfavorable
foreign currency effects of
• a
inclusive of net unfavorable foreign currency effects of
On a constant currency basis, net revenues increased by
driven by an increase of
partially offset by a decrease of
sales. The following table summarizes the percentage change in
comparable store sales related to our Europe retail business:
% Change
Digital commerce comparable store sales 6 %
Comparable store sales excluding digital commerce (1 %) Total comparable store sales
(1 %)
Asia net revenues - Net revenues increased by $107.3 million , or 11.5%, during
Fiscal 2019 as compared to Fiscal 2018, including net unfavorable foreign
currency effects of $10.9 million . On a constant currency basis, net revenues
increased by $118.2 million , or 12.7%.
The $107.3 million net increase in Asia net revenues was driven by:
• a $95.6 million net increase related to our Asia retail business,
inclusive of net unfavorable foreign currency effects of
On a constant currency basis, net revenues increased by
reflecting increases of
the percentage change in comparable store sales related to our Asia
retail business:
% Change
Digital commerce comparable store sales 51 %
Comparable store sales excluding digital commerce 4 % Total comparable store sales
5 %
• an
primarily driven by our expansion in
Gross Profit. Gross profit increased by$134.3 million , or 3.6%, to$3.886 billion in Fiscal 2019. Gross profit during Fiscal 2019 and Fiscal 2018 reflected inventory charges of$7.2 million and$7.6 million , respectively, recorded in connection with our restructuring plans. The increase in gross profit also included a net unfavorable foreign currency effect of$15.2 million . Gross profit as a percentage of net revenues increased to 61.6% in Fiscal 2019 from 60.7% in Fiscal 2018. The 90 basis point increase was primarily driven by improved pricing and lower levels of promotional activity in connection with our long-term growth strategy, and favorable product and geographic mix, partially offset by higher inventory reserves. Selling, General, and Administrative Expenses. SG&A expenses increased by$72.8 million , or 2.4%, to$3.168 billion in Fiscal 2019. This increase included a net favorable foreign currency effect of$17.4 million . SG&A expenses as a percentage of net revenues increased slightly to 50.2% in Fiscal 2019 from 50.1% in Fiscal 2018. The 10 basis point increase was primarily due to our increased marketing investment, new store expansion, and the unfavorable impact attributable to geographic and channel mix, as a greater portion of our revenue was generated by our retail businesses (which typically carry higher operating expense margins). These increases were partially offset by our operational discipline. 56
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The
Fiscal 2019
Compared to
Fiscal 2018
(millions)
SG&A expense category:
Marketing and advertising expenses
22.8
Selling-related expenses 20.0
Rent and occupancy expenses 15.0
Depreciation and amortization expense (13.7 ) Other
(3.0 )
Total net increase in SG&A expenses
Impairment of Assets. During Fiscal 2019 and Fiscal 2018, we recorded non-cash impairment charges of$21.2 million and$41.2 million , respectively, to write-down certain long-lived assets related to our restructuring plans and identification of underperforming stores. Additionally, as a result of our decision to sell our corporate jet, we recorded a non-cash impairment charge of$4.6 million during Fiscal 2019 to reduce the carrying value of the asset held-for-sale to its estimated fair value, less costs to sell. During Fiscal 2018, we also recorded a non-cash impairment charge of$8.8 million to reduce the carrying value of a certain intangible asset to its estimated fair value as a result of a change in the planned usage of the asset. See Note 8 to the accompanying consolidated financial statements. Restructuring and Other Charges. During Fiscal 2019 and Fiscal 2018, we recorded restructuring charges of$93.6 million and$79.2 million , respectively, in connection with our restructuring plans, primarily consisting of severance and benefits costs, and lease termination and store closure costs. In addition, during Fiscal 2019, we recorded other charges of$36.5 million primarily related to our sabbatical leave program initiated during the fourth quarter of Fiscal 2019, depreciation expense associated with our former Polo store at711 Fifth Avenue inNew York City , and a customs audit. During Fiscal 2018, we recorded other net charges of$28.8 million primarily related to depreciation expense associated with our former Polo store at711 Fifth Avenue inNew York City , a customs audit, the departure of Mr.Stefan Larsson , and the reversal of reserves associated with the settlement of certain non-income tax issues. See Note 9 to the accompanying consolidated financial statements. Operating Income. Operating income increased by$63.6 million , or 12.8%, to$561.8 million in Fiscal 2019. Our operating results during Fiscal 2019 and Fiscal 2018 were negatively impacted by restructuring-related charges, impairment of assets, and certain other charges totaling$163.1 million and$165.6 million , respectively, as previously discussed. Foreign currency effects did not have a meaningful impact on operating income during Fiscal 2019. Operating income as a percentage of net revenues increased to 8.9% in Fiscal 2019 from 8.1% in Fiscal 2018. The 80 basis point increase was primarily driven by the increase in our gross profit margin, partially offset by the slight increase in SG&A expenses as a percentage of net revenues, all as previously discussed. 57
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Operating income and margin for our segments, as well as a discussion of the
changes in each reportable segment's operating margin from the prior fiscal
year, are provided below:
Fiscal Years Ended
March 30, 2019 March 31, 2018
Operating Operating Operating Operating $ Margin
Income Margin Income Margin Change Change
(millions) (millions) (millions)
Segment:
North America $ 682.8 21.3% $ 677.6 21.0% $ 5.2 30 bps
Europe 392.8 23.3% 361.0 22.4% 31.8 90 bps
Asia 161.0 15.5% 137.2 14.7% 23.8 80 bps
Other non-reportable segments 118.7 30.7% 103.2 25.2% 15.5 550 bps
1,355.3 1,279.0 76.3
Unallocated corporate expenses (663.4 ) (672.8 ) 9.4
Unallocated restructuring and
other charges (130.1 ) (108.0 ) (22.1 )
Total operating income $ 561.8 8.9% $ 498.2 8.1% $ 63.6 80 bps
North America operating margin improved by 30 basis points, primarily due to the
favorable impact of 50 basis points related to our wholesale business, largely
driven by a decline in SG&A expenses as a percentage of net revenues and an
increase in our gross profit margin. Partially offsetting this increase was 20
basis points attributable to unfavorable channel mix.
Europe operating margin improved by 90 basis points, primarily due to the
favorable impacts of 80 basis points related to foreign currency effects and 60
basis points related to our retail business, largely driven by an increase in
our gross profit margin. The increase in operating margin also reflected a
favorable impact of 10 basis points related to channel mix. Partially offsetting
these increases in our operating margin was a 40 basis point unfavorable impact
related to higher non-cash charges recorded in connection with our restructuring
plans during Fiscal 2019 as compared to the prior fiscal year, as well as a 20
basis point decline related to our wholesale business, largely driven by a
decrease in our gross profit margin, partially offset by a decline in SG&A
expenses as a percentage of net revenues.
Asia operating margin improved by 80 basis points, primarily due to the
favorable impacts of 50 basis points related to our wholesale business and 30
basis points related to our retail business, both largely driven by a decline in
SG&A expenses as a percentage of net revenues, partially offset by a decrease in
our gross profit margin.
Unallocated corporate expenses decreased by $9.4 million to $663.4 million in
Fiscal 2019, primarily due to lower impairment of asset charges of $14.8 million
and lower compensation-related expenses of $8.4 million , partially offset by
higher consulting fees of $6.1 million , higher marketing and advertising
expenses of $5.1 million , and higher other expenses of $2.6 million .
Unallocated restructuring and other charges increased by $22.1 million to $130.1
million in Fiscal 2019, as previously discussed above and in Note 9 to the
accompanying consolidated financial statements.
Non-operating Income (Expense), Net. During Fiscal 2019, we reported
non-operating income, net, of $20.7 million , as compared to non-operating
expense, net, of $9.0 million in Fiscal 2018. The $29.7 million improvement was
primarily driven by higher interest income of $28.5 million due to the increased
balance of our investment portfolio, as well as a favorable shift to higher
interest rate environments attributable to cash repatriations from our foreign
subsidiaries.
Income Tax Provision. The income tax provision and effective tax rate in Fiscal
2019 were $151.6 million and 26.0%, respectively, as compared to $326.4 million
and 66.7%, respectively, in Fiscal 2018. The $174.8 million decline in the
income tax provision was primarily due to lower TCJA enactment-related charges
recorded during Fiscal 2019 as compared to the prior fiscal year, partially
offset by the increase in pretax income. During Fiscal 2019 and Fiscal 2018, we
recorded TCJA enactment-related charges of $27.6 million and $221.4 million ,
respectively, which increased our effective tax rates by 470 basis points and
4,520 basis points, respectively. In addition to this 4,050 basis point
improvement attributable to lower TCJA enactment-related charges recorded, the
decline in our effective tax rate also reflected the net favorable impact of 20
basis points due to other factors, including a net favorable change related to
compensation-related adjustments, partially offset by the tax impact of the
change in geographic
58
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mix of our worldwide earnings. See Note 10 to the accompanying consolidated financial statements for discussion regarding the TCJA. Net Income. Net income increased to$430.9 million in Fiscal 2019, from$162.8 million in Fiscal 2018. The$268.1 million increase in net income was primarily due to the decrease in our income tax provision and the increases in operating income and interest income, all as previously discussed. Net income during Fiscal 2019 and Fiscal 2018 reflected TCJA enactment-related charges of$27.6 million and$221.4 million , respectively, as previously discussed. Our operating results during Fiscal 2019 and Fiscal 2018 were also negatively impacted by restructuring-related charges, impairment of assets, and certain other charges totaling$163.1 million and$165.6 million , respectively, which had an after-tax effect of reducing net income by$129.0 million and$113.3 million , respectively. Net Income per Diluted Share. Net income per diluted share increased to$5.27 in Fiscal 2019, from$1.97 in Fiscal 2018. The$3.30 per share increase was due to the higher level of net income, as previously discussed, and lower weighted-average diluted shares outstanding during Fiscal 2019 driven by our share repurchases during the last twelve months. Net income per diluted share in Fiscal 2019 and Fiscal 2018 were negatively impacted by$0.34 per share and$2.68 per share, respectively, as a result of TCJA enactment-related charges. Net income per diluted share in Fiscal 2019 and Fiscal 2018 were also negatively impacted by$1.58 per share and$1.38 per share, respectively, as a result of restructuring-related charges, impairment of assets, and certain other charges, as previously discussed. FINANCIAL CONDITION AND LIQUIDITY Financial Condition The following table presents our financial condition as ofMarch 28, 2020 andMarch 30, 2019 . March 28, March 30, $ 2020 2019 Change (millions) Cash and cash equivalents$ 1,620.4 $ 584.1 $ 1,036.3 Short-term investments 495.9 1,403.4 (907.5 ) Non-current investments(a) - 44.9 (44.9 ) Short-term debt(b) (475.0 ) - (475.0 ) Current portion of long-term debt(b) (299.6 ) - (299.6 ) Long-term debt(b) (396.4 ) (689.1 )
292.7
Net cash and investments(c)$ 945.3 $ 1,343.3 $ (398.0 ) Equity$ 2,693.1 $ 3,287.2 $ (594.1 )
(a) Recorded within other non-current assets in our consolidated balance
sheets.
(b) See Note 11 to the accompanying consolidated financial statements for
discussion of the carrying values of our debt.
(c) "Net cash and investments" is defined as cash and cash equivalents, plus
short-term and non-current investments, less total debt.
The decrease in our net cash and investments position at March 28, 2020 as
compared to March 30, 2019 was primarily due to our use of cash to support Class
A common stock repurchases of $694.8 million , including withholdings in
satisfaction of tax obligations for stock-based compensation awards, to invest
in our business through $270.3 million in capital expenditures, and to make
dividend payments of $203.9 million , partially offset by our operating cash
flows of $754.6 million .
The decrease in equity was primarily attributable to our share repurchase
activity, dividends declared, and cumulative adjustments from our adoption of
new accounting standards, partially offset by our comprehensive income and the
impact of stock-based compensation arrangements during Fiscal 2020.
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Cash Flows
Fiscal 2020 Compared to Fiscal 2019
Fiscal Years Ended
March 28, March 30, $
2020 2019 Change
(millions)
Net cash provided by operating activities $ 754.6 $ 783.8 $ (29.2 )
Net cash provided by (used in) investing activities 702.1 (879.3 ) 1,581.4
Net cash used in financing activities (438.2 ) (605.7 ) 167.5
Effect of exchange rate changes on cash, cash
equivalents, and restricted cash (15.2 ) (27.8 ) 12.6 Net increase (decrease) in cash, cash equivalents, and restricted cash
$ 1,003.3 $
(729.0 )
Net Cash Provided by Operating Activities. Net cash provided by operating activities decreased to$754.6 million during Fiscal 2020, from$783.8 million during Fiscal 2019. The$29.2 million net decline in cash provided by operating activities was due to a decrease in net income before non-cash charges, partially offset by a net favorable change related to our operating assets and liabilities, including our working capital, as compared to the prior fiscal year. The net favorable change related to our operating assets and liabilities, including our working capital, was primarily driven by: • a favorable change related to our inventories, largely driven by higher inventory charges primarily related to adverse impacts associated with COVID-19 business disruptions; • a favorable change related to our prepaid expenses and other current assets, largely driven by the timing of cash payments; and • a favorable change related to our accounts receivable, largely driven by lower wholesale sales during the fourth quarter of Fiscal 2020 as compared to the prior fiscal year driven by COVID-19 business disruptions, as well as the timing of cash receipts. These increases related to our operating assets and liabilities were partially offset by: • an unfavorable change related to our income tax receivables and
payables, largely as a result of the absence of charges recorded during
the prior fiscal year in connection with the TCJA's mandatory
transition tax; and
• an unfavorable change related to our accrued liabilities driven by
larger decreases in our bonus accrual and restructuring reserves as
compared to the prior fiscal year, as well as the timing of cash
payments.
Net Cash Provided by (Used in) Investing Activities. Net cash provided by
investing activities was $702.1 million during Fiscal 2020, as compared to net
cash used in investing activities of $879.3 million during Fiscal 2019. The
$1.581 billion net increase in cash provided by investing activities was
primarily driven by:
• a $1.624 billion increase in proceeds from sales and maturities of
investments, less purchases of investments. During Fiscal 2020, we
received net proceeds from sales and maturities of investments of
$950.7 million , as compared to making net investment purchases of
$673.3 million during Fiscal 2019; and
• a
These increases in cash provided by investing activities were partially offset by: • a$72.6 million increase in capital expenditures. During Fiscal 2020, we spent$270.3 million on capital expenditures, as compared to$197.7
million during Fiscal 2019. Our capital expenditures during Fiscal 2020
primarily related to new store openings, retail and department store
renovations, enhancements to our information technology systems, and
the consolidation of our corporate office footprint.
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In response to the COVID-19 pandemic, we are temporarily postponing non-critical capital expenditures as a preemptive action to preserve cash and strengthen our liquidity. However, we remain committed to expanding and renovating our global store fleet and investing in our digital ecosystem.Net Cash Used in Financing Activities. Net cash used in financing activities was$438.2 million during Fiscal 2020, as compared to$605.7 million during Fiscal 2019. The$167.5 million net decrease in cash used in financing activities was primarily driven by: • a$386.8 million increase in cash proceeds from the issuance of debt,
less debt repayments. During Fiscal 2020, we borrowed
under the Global Credit Facility as a preemptive action to preserve
cash and strengthen our liquidity in response to the COVID-19 pandemic.
During Fiscal 2019, we received
issuance of 3.750% unsecured senior notes in
which was used to repay $300.0 million of our 2.125% unsecured senior
notes that matured in September 2018 . Additionally, during Fiscal 2019
we repaid approximately $10 million that had been borrowed under our
credit facilities during Fiscal 2018.
This decrease in cash used in financing activities was partially offset by:
• a $192.2 million increase in cash used to repurchase shares of our
Class A common stock. During Fiscal 2020, we used $650.3 million to
repurchase shares of Class A common stock pursuant to our common stock
repurchase program, and an additional $44.5 million in shares of
Class A common stock were surrendered or withheld in satisfaction of
withholding taxes in connection with the vesting of awards under our
long-term stock incentive plans. On a comparative basis, during Fiscal
2019,
and
withheld for taxes;
• a$21.8 million decrease in proceeds from exercise of stock options; and • a$13.2 million increase in payments of dividends, driven by an increase to the quarterly cash dividend per share (as discussed within "Dividends" below). Dividends paid amounted to$203.9 million and$190.7 million during Fiscal 2020 and Fiscal 2019, respectively.
Fiscal 2019 Compared to Fiscal 2018
Fiscal Years Ended
March 30, March 31, $
2019 2018 Change
(millions)
Net cash provided by operating activities $ 783.8 $ 975.1 $ (191.3 )
Net cash used in investing activities (879.3 ) (189.1 ) (690.2 )
Net cash used in financing activities (605.7 ) (197.5 ) (408.2 )
Effect of exchange rate changes on cash, cash
equivalents, and restricted cash (27.8 ) 55.2 (83.0 ) Net increase (decrease) in cash, cash equivalents, and restricted cash
$ (729.0 ) $
643.7
Net Cash Provided by Operating Activities. Net cash provided by operating activities decreased to$783.8 million during Fiscal 2019, from$975.1 million during Fiscal 2018. The$191.3 million net decline in cash provided by operating activities was due to a net unfavorable change related to our operating assets and liabilities, including our working capital, as compared to the prior fiscal year, partially offset by an increase in net income before non-cash charges. The net unfavorable change related to our operating assets and liabilities, including our working capital, was primarily driven by: • a year-over-year increase in our inventory levels largely to support revenue growth, as well as the timing of inventory receipts;
• an unfavorable change related to our income tax payable, largely a
result of the decrease in charges recorded in connection with the
TCJA's mandatory transition tax as compared to the prior fiscal year;
• an unfavorable change related to accrued expenses and other current
liabilities largely driven by fluctuations associated with our
derivative instruments; and
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• unfavorable changes related to our accounts receivable and prepaid
expenses and other current assets, largely driven by the timing of cash
receipts and payments, respectively.
Net Cash Used in Investing Activities. Net cash used in investing activities was$879.3 million during Fiscal 2019, as compared to$189.1 million during Fiscal 2018. The$690.2 million net increase in cash used in investing activities was primarily driven by: • a$650.4 million increase in purchases of investments, less proceeds from sales and maturities of investments. During Fiscal 2019, we made net investment purchases of$673.3 million , as compared to$22.9 million during Fiscal 2018; • a$36.1 million increase in capital expenditures. During Fiscal 2019, we spent$197.7 million on capital expenditures, as compared to$161.6
million during Fiscal 2018. Our capital expenditures during Fiscal 2019
primarily related to new store openings, retail and department store
renovations, and enhancements to our information technology systems;
and
• a
These increases in cash used in investing activities were partially offset by cash proceeds of$20.0 million from the sale of one of our distribution centers inNorth America during Fiscal 2019.Net Cash Used in Financing Activities. Net cash used in financing activities was$605.7 million during Fiscal 2019, as compared to$197.5 million during Fiscal 2018. The$408.2 million net increase in cash used in financing activities was primarily driven by: • a$485.5 million increase in cash used to repurchase shares of our Class A common stock. During Fiscal 2019, we used$470.0 million to repurchase shares of Class A common stock pursuant to our common stock repurchase program, and an additional$32.6 million in shares of Class A common stock were surrendered or withheld in satisfaction of withholding taxes in connection with the vesting of awards under our long-term stock incentive plans. On a comparative basis, during Fiscal 2018, no shares of Class A common stock were repurchased and$17.1 million in shares of Class A common stock were surrendered or withheld for taxes; and • a$28.3 million increase in payments of dividends, driven by an increase to the quarterly cash dividend per share. Dividends paid amounted to$190.7 million and$162.4 million during Fiscal 2019 and Fiscal 2018, respectively.
These increases in cash used in financing activities were partially offset by:
• a
less debt repayments. During Fiscal 2019, we received
proceeds from our issuance of 3.750% unsecured senior notes in August
2018 , a portion of which was used to repay $300.0 million of our 2.125%
unsecured senior notes that matured in
during Fiscal 2019 we repaid approximately $10 million that had been
borrowed under our credit facilities during Fiscal 2018; and
• a
Sources of Liquidity Our primary sources of liquidity are the cash flows generated from our operations, our available cash and cash equivalents and short-term investments, availability under our credit facilities and commercial paper program, and other available financing options. During Fiscal 2020, we generated$754.6 million of net cash flows from our operations. As ofMarch 28, 2020 , we had$2.116 billion in cash, cash equivalents, and short-term investments, of which$587.9 million were held by our subsidiaries domiciled outside theU.S. We are not dependent on foreign cash to fund our domestic operations. Undistributed foreign earnings that were subject to the TCJA's one-time mandatory transition tax as ofDecember 31, 2017 are not considered to be permanently reinvested and may be repatriated to theU.S. in the future with minimal or no additionalU.S. taxation. We intend to permanently reinvest undistributed foreign earnings generated afterDecember 31, 2017 that were not subject to the one-time mandatory transition tax. However, if our plans change and we choose to repatriate post-2017 earnings to theU.S. in the future, we would be subject to applicableU.S. and foreign taxes.
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The following table presents our total availability, borrowings outstanding, and remaining availability under our credit facilities and Commercial Paper Program as ofMarch 28, 2020 : March 28, 2020 Total Borrowings Remaining Description(a) Availability Outstanding Availability (millions) Global Credit Facility and Commercial Paper Program(b) $ 500 $ 484 (c) $ 16 Pan-Asia Credit Facilities 32 - 32 (a) As defined in Note 11 to the accompanying consolidated financial statements. (b) Borrowings under the Commercial Paper Program are supported by the Global Credit Facility. Accordingly, we do not expect combined borrowings outstanding under the Commercial Paper Program and the Global Credit Facility to exceed$500 million . (c) Includes $9.0 million of outstanding letters of credit for which we were contingently liable under the Global Credit Facility as ofMarch 28, 2020 . We believe that the Global Credit Facility is adequately diversified with no undue concentration in any one financial institution. In particular, as ofMarch 28, 2020 , there were eight financial institutions participating in the Global Credit Facility, with no one participant maintaining a maximum commitment percentage in excess of 20%. In accordance with the terms of the agreement, we have the ability to expand our borrowing availability under the Global Credit Facility to$1 billion through the full term of the facility, subject to the agreement of one or more new or existing lenders under the facility to increase their commitments. Further, inMay 2020 , we entered into a new credit facility with the same lenders that are parties to the Global Credit Facility, which provides for an additional$500 million senior unsecured revolving line of credit and matures onMay 25, 2021 , or earlier in the event we are able to obtain other additional financing, as described in Note 11 to the accompanying consolidated financial statements. Borrowings under the Pan-Asia Credit Facilities are guaranteed by the parent company and are granted at the sole discretion of the participating regional branches of JPMorgan Chase (the "Banks"), subject to availability of the Banks' funds and satisfaction of certain regulatory requirements. We have no reason to believe that the participating institutions will be unable to fulfill their obligations to provide financing in accordance with the terms of the Global Credit Facility and the Pan-Asia Credit Facilities in the event of our election to draw additional funds in the foreseeable future. Our sources of liquidity are used to fund our ongoing cash requirements, including working capital requirements, global retail store and digital commerce expansion, construction and renovation of shop-within-shops, investment in infrastructure, including technology, acquisitions, joint ventures, payment of dividends, debt repayments, Class A common stock repurchases, settlement of contingent liabilities (including uncertain tax positions), and other corporate activities, including our restructuring actions. We believe that our existing sources of cash, the availability under our credit facilities, and our ability to access capital markets will be sufficient to support our operating, capital, and debt service requirements for the foreseeable future, the ongoing development of our businesses, and our plans for further business expansion. However, prolonged periods of adverse economic conditions or business disruptions in any of our key regions, or a combination thereof, such as our recent temporary store closures due to the COVID-19 pandemic, could impede our ability to pay our obligations as they become due or return value to our shareholders, as well as delay previously planned expenditures related to our operations. See Note 11 to the accompanying consolidated financial statements for additional information relating to our credit facilities. Debt and Covenant Compliance InAugust 2015 , we completed a registered public debt offering and issued$300 million aggregate principal amount of unsecured senior notes dueAugust 18, 2020 , which bear interest at a fixed rate of 2.625%, payable semi-annually (the "2.625% Senior Notes"). InAugust 2018 , we completed another registered public debt offering and issued an additional$400 million aggregate principal amount of unsecured senior notes dueSeptember 15, 2025 , which bear interest at a fixed rate of 3.750%, payable semi-annually (the "3.750% Senior Notes").
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The indenture and supplemental indentures governing the 2.625% Senior Notes and 3.750% Senior Notes (as supplemented, the "Indenture") contain certain covenants that restrict our ability, subject to specified exceptions, to incur certain liens; enter into sale and leaseback transactions; consolidate or merge with another party; or sell, lease, or convey all or substantially all of our property or assets to another party. However, the Indenture does not contain any financial covenants. We have a credit facility that provides for a$500 million senior unsecured revolving line of credit throughAugust 12, 2024 , also used to support the issuance of letters of credit and the maintenance of the Commercial Paper Program (the "Global Credit Facility"). Borrowings under the Global Credit Facility may be denominated inU.S. Dollars and other currencies, including Euros, Hong Kong Dollars, and Japanese Yen. We have the ability to expand the borrowing availability under the Global Credit Facility to$1 billion , subject to the agreement of one or more new or existing lenders under the facility to increase their commitments. Further, inMay 2020 , we entered into a new credit facility with the same lenders that are parties to the Global Credit Facility, which provides for an additional$500 million senior unsecured revolving line of credit that matures onMay 25, 2021 , or earlier in the event we are able to obtain other additional financing, as described in Note 11 to the accompanying consolidated financial statements. There are no mandatory reductions in borrowing ability throughout the term of the Global Credit Facility. InMarch 2020 , we borrowed$475.0 million under the Global Credit Facility as a preemptive action to preserve cash and strengthen our liquidity in response to the COVID-19 pandemic. These borrowings have been classified as short-term debt in our consolidated balance sheet as ofMarch 28, 2020 . We were also contingently liable for$9.0 million of outstanding letters of credit, resulting in remaining availability under the Global Credit Facility of$16.0 million as ofMarch 28, 2020 . The Global Credit Facility contains a number of covenants, as described in Note 11 to the accompanying consolidated financial statements. As ofMarch 28, 2020 , no Event of Default (as such term is defined pursuant to the Global Credit Facility) has occurred under our Global Credit Facility. The Pan-Asia Credit Facilities do not contain any financial covenants. See Note 11 to the accompanying consolidated financial statements for additional information relating to our debt and covenant compliance. Common Stock Repurchase Program OnMay 13, 2019 , our Board of Directors approved an expansion of our existing common stock repurchase program that allowed us to repurchase up to an additional$600 million of Class A common stock. As ofMarch 28, 2020 , the remaining availability under our Class A common stock repurchase program was approximately$580 million . Repurchases of shares of Class A common stock are subject to overall business and market conditions. Accordingly, as a result of current business disruptions related to the COVID-19 pandemic, we have temporarily suspended our common stock repurchase program as a preemptive action to preserve cash and strengthen our liquidity. See Note 16 to the accompanying consolidated financial statements for additional information relating to our Class A common stock repurchase program. Dividends Since 2003, we have maintained a regular quarterly cash dividend program on our common stock. OnMay 13, 2019 , our Board of Directors approved an increase to the quarterly cash dividend on our common stock from$0.625 to$0.6875 per share. As a result of current business disruptions related to the COVID-19 pandemic, we have temporarily suspended our quarterly cash dividend program as a preemptive action to preserve cash and strengthen our liquidity. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on our results of operations, cash requirements, financial condition, and other factors that the Board of Directors may deem relevant, including economic and market conditions. See Note 16 to the accompanying consolidated financial statements for additional information relating to our quarterly cash dividend program.
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Contractual and Other Obligations Firm Commitments The following table summarizes certain of our aggregate contractual obligations as ofMarch 28, 2020 , and the estimated timing and effect that such obligations are expected to have on our liquidity and cash flows in future periods. We expect to fund these firm commitments with operating cash flows generated in the normal course of business and, if necessary, through availability under our credit facilities or other accessible sources of financing. Fiscal Fiscal Fiscal Fiscal 2026 and 2021 2022-2023 2024-2025 Thereafter Total (millions) Senior Notes$ 300.0 $ - $ -$ 400.0 $ 700.0 Borrowings under credit facilities 475.0 - - - 475.0 Interest payments on debt 23.1 30.0 30.0 7.5 90.6 Operating leases 323.6 618.0 466.0 615.7 2,023.3 Finance leases 16.0 44.9 44.6 153.8 259.3 Other lease commitments 5.3 21.4 26.2 66.4 119.3 Inventory purchase commitments 534.9 - - - 534.9 Mandatory transition tax payments 14.0 28.0 61.1 43.6 146.7 Other commitments 28.0 3.1 - - 31.1 Total$ 1,719.9 $ 745.4 $ 627.9 $ 1,287.0 $ 4,380.2 The following is a description of our material, firmly committed obligations as ofMarch 28, 2020 : • Senior Notes represent the principal amount of our outstanding 2.625%
Senior Notes and 3.750% Senior Notes. Amounts do not include any fair
value adjustments, call premiums, unamortized debt issuance costs, or
interest payments (see below);
• Borrowings under credit facilities represents the principal amount
outstanding under our Global Credit Facility. Amounts do not include
any fair value adjustments, call premiums, unamortized debt issuance
costs, or interest payments (see below);
• Interest payments on debt represent the semi-annual contractualinterest payments due on our 2.625% Senior Notes and 3.750% Senior
Notes and the interest payments due on the borrowings under our Global
Credit Facility. Amounts do not include the impact of potential cash
flows underlying our related swap contracts (see Note 13 to the
accompanying consolidated financial statements for discussion of our
swap contracts);
• Lease obligations represent fixed payments due over the lease term of
our noncancelable leases of real estate and operating equipment,
including rent, real estate taxes, insurance, common area maintenance
fees, and/or certain other costs. For lease terms that have commenced,
information has been presented separately for operating and finance
leases. Other lease commitments relate to executed lease agreements for
which the related lease terms have not yet commenced;
• Inventory purchase commitments represent our legally-binding agreements
to purchase fixed or minimum quantities of goods at determinable
prices;
• Mandatory transition tax payments represent our remaining tax
obligation incurred in connection with the deemed repatriation of
previously deferred foreign earnings pursuant to the TCJA (see Note 10to the accompanying consolidated financial statements for discussion of
the TCJA); and
• Other commitments primarily represent our legally-binding obligations
under sponsorship, licensing, and other marketing and advertising
agreements; information technology-related service agreements; and
pension-related obligations.
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Excluded from the above contractual obligations table is the non-current liability for unrecognized tax benefits of$88.9 million as ofMarch 28, 2020 , as we cannot make a reliable estimate of the period in which the liability will be settled, if ever. The above table also excludes the following: (i) other than lease obligations and mandatory transition tax payments, amounts recorded in current liabilities in our consolidated balance sheet as ofMarch 28, 2020 , which will be paid within one year; and (ii) non-current liabilities that have no cash outflows associated with them (e.g., deferred income), or the cash outflows associated with them are uncertain or do not represent a "purchase obligation" as the term is used herein (e.g., deferred taxes, derivative financial instruments, and other miscellaneous items). We also have certain contractual arrangements that would require us to make payments if certain events or circumstances occur. See Note 15 to the accompanying consolidated financial statements for a description of our contingent commitments not included in the above table. Off-Balance Sheet Arrangements In addition to the commitments included in the above table, our other off-balance sheet firm commitments relating to our outstanding letters of credit amounted to$9.0 million as ofMarch 28, 2020 . We do not maintain any other off-balance sheet arrangements, transactions, obligations, or other relationships with unconsolidated entities that would be expected to have a material current or future effect on our consolidated financial statements. MARKET RISK MANAGEMENT As discussed in Note 13 to the accompanying consolidated financial statements, we are exposed to a variety of risks, including the impact of changes in currency exchange rates on foreign currency-denominated balances, certain anticipated cash flows of our international operations, and the value of reported net assets of our foreign operations, as well as changes in the fair value of our fixed-rate debt obligations relating to fluctuations in benchmark interest rates. Accordingly, in the normal course of business, we employ established policies and procedures to manage such risks, including the use of derivative financial instruments. We do not use derivatives for speculative or trading purposes. Given our use of derivative instruments, we are exposed to the risk that the counterparties to such contracts will fail to meet their contractual obligations. To mitigate such counterparty credit risk, it is our policy to only enter into contracts with carefully selected financial institutions based upon an evaluation of their credit ratings and certain other factors, adhering to established limits for credit exposure. Our established policies and procedures for mitigating credit risk include ongoing review and assessment of the creditworthiness of our counterparties. We also enter into master netting arrangements with counterparties, when possible, to further mitigate credit risk. As a result of the above considerations, we do not believe that we are exposed to undue concentration of counterparty risk with respect to our derivative contracts as ofMarch 28, 2020 . However, we do have in aggregate$56.6 million of derivative instruments in net asset positions with seven creditworthy financial institutions. Foreign Currency Risk Management We manage our exposure to changes in foreign currency exchange rates using forward foreign currency exchange and cross-currency swap contracts. Refer to Note 13 to the accompanying consolidated financial statements for a summary of the notional amounts and fair values of our outstanding forward foreign currency exchange and cross-currency swap contracts, as well as the impact on earnings and other comprehensive income of such instruments for the fiscal periods presented. Forward Foreign Currency Exchange Contracts We enter into forward foreign currency exchange contracts to mitigate risk related to exchange rate fluctuations on inventory transactions made in an entity's non-functional currency, the settlement of foreign currency-denominated balances, and the translation of certain foreign operations' net assets intoU.S. Dollars. As part of our overall strategy for managing the level of exposure to such exchange rate risk, relating primarily to the Euro, the Japanese Yen, the South Korean Won, the Australian Dollar, the Canadian Dollar, the British Pound Sterling, the Swiss Franc, and the Chinese Renminbi, we generally hedge a portion of our related exposures anticipated over the next twelve months using forward foreign currency exchange contracts with maturities of two months to one year to provide continuing coverage over the period of the respective exposure. Our foreign exchange risk management activities are governed by established policies and procedures. These policies and procedures provide a framework that allows for the management of currency exposures while ensuring the activities are conducted within our established guidelines. Our policies include guidelines for the organizational structure of our risk management function and for internal controls over foreign exchange risk management activities, including, but not limited to, authorization levels,
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transaction limits, and credit quality controls, as well as various measurements
for monitoring compliance. We monitor foreign exchange risk using different
techniques, including periodic review of market values and performance of
sensitivity analyses.
Our forward foreign currency exchange contracts are recorded at fair value in
our consolidated balance sheets. To the extent such contracts are designated as
qualifying cash flow hedges of inventory transactions, related gains or losses
are initially deferred in equity as a component of accumulated other
comprehensive income ("AOCI") and are subsequently recognized within cost of
goods sold in our consolidated statements of operations when the related
inventory is sold.
Cross-Currency Swap Contracts
During our fiscal year ended April 2, 2016 ("Fiscal 2016"), we entered into two
pay-floating rate, receive-floating rate cross-currency swaps with notional
amounts of €280 million and €274 million which we designated as hedges of our
net investment in certain of our European subsidiaries. The €280 million
notional cross-currency swap, which was settled during the second quarter of
Fiscal 2019, swapped the U.S. Dollar-denominated variable interest rate payments
based on the 3-month London Interbank Offered Rate ("LIBOR") plus a fixed spread
(as paid under the 2.125% Interest Rate Swap discussed below) for
Euro-denominated variable interest rate payments based on the 3-month Euro
Interbank Offered Rate ("EURIBOR") plus a fixed spread, which, in combination
with the 2.125% Interest Rate Swap, economically converted our
previously-outstanding $300 million fixed-rate 2.125% Senior Notes obligation to
a €280 million floating-rate Euro-denominated obligation. Similarly, the €274
million notional cross-currency swap, which matures on August 18, 2020 , swaps
the U.S. Dollar-denominated variable interest rate payments based on the 3-month
LIBOR plus a fixed spread (as paid under the 2.625% Interest Rate Swap discussed
below) for Euro-denominated variable interest rate payments based on the 3-month
EURIBOR plus a fixed spread, which, in combination with the 2.625% Interest Rate
Swap, economically converts our $300 million fixed-rate 2.625% Senior Notes
obligation to a €274 million floating-rate Euro-denominated obligation.
Additionally, in August 2018 , we entered into pay-fixed rate, receive-fixed rate
cross-currency swap contracts with an aggregate notional amount of €346 million
which we designated as hedges of our net investment in certain of our European
subsidiaries. These contracts, which mature on September 15, 2025 , swap the U.S.
Dollar-denominated fixed interest rate payments on our 3.750% Senior Notes for
Euro-denominated 1.29% fixed interest rate payments, thereby economically
converting our $400 million fixed-rate 3.750% Senior Notes obligation to a €346
million fixed-rate 1.29% Euro-denominated obligation.
Sensitivity
We perform a sensitivity analysis to determine the effects that market risk
exposures may have on the fair values of our forward foreign currency exchange
and cross-currency swap contracts. In doing so, we assess the risk of loss in
the fair values of these contracts that would result from hypothetical changes
in foreign currency exchange rates. This analysis assumes a like movement by the
foreign currencies in our hedge portfolio against the U.S. Dollar. As of
March 28, 2020 , a 10% appreciation or depreciation of the U.S. Dollar against
the foreign currencies under contract would result in a net increase or
decrease, respectively, in the fair value of our derivative portfolio of
approximately $123 million . This hypothetical net change in fair value should
ultimately be largely offset by the net change in fair values of the underlying
hedged items.
Interest Rate Risk Management
During Fiscal 2016, we entered into two pay-floating rate, receive-fixed rate
interest rate swap contracts which we designated as hedges against changes in
the respective fair values of our previously-outstanding fixed-rate 2.125%
Senior Notes and our fixed-rate 2.625% Senior Notes attributed to changes in a
benchmark interest rate. The interest rate swap related to the 2.125% Senior
Notes (the "2.125% Interest Rate Swap"), which matured on September 26, 2018
concurrent with the maturity of the related debt, had a notional amount of $300
million and swapped the fixed interest rate on the 2.125% Senior Notes for a
variable interest rate based on 3-month LIBOR plus a fixed spread. The interest
rate swap related to the 2.625% Senior Notes (the "2.625% Interest Rate Swap"),
which matures on August 18, 2020 and also has a notional amount of $300 million ,
swaps the fixed interest rate on the 2.625% Senior Notes for a variable interest
rate based on 3-month LIBOR plus a fixed spread.
Sensitivity
As of March 28, 2020 , we had no variable-rate debt outstanding. As such, our
exposure to changes in interest rates primarily relates to changes in the fair
values of our fixed-rate Senior Notes. As of March 28, 2020 , the aggregate fair
values of our Senior Notes were $714.9 million . A 25-basis point increase or
decrease in interest rates would decrease or increase, respectively, the
aggregate fair values of our Senior Notes by approximately $5 million based on
certain simplifying assumptions, including an immediate across-the-board
increase or decrease in the level of interest rates with no other subsequent
changes for the remainder
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of the period. Such potential increases or decreases in the fair value of our debt would only be realized if we were to retire all or a portion of the debt prior to its maturity. Investment Risk Management As ofMarch 28, 2020 , we had cash and cash equivalents on-hand of$1.620 billion , consisting of deposits in interest bearing accounts, investments in money market deposit accounts, and investments in time deposits with original maturities of 90 days or less. Our other significant investments included$495.9 million of short-term investments, consisting of investments in time deposits and commercial paper with original maturities greater than 90 days; and$9.4 million of restricted cash held in escrow with certain banks as collateral, primarily to secure guarantees in connection with certain international tax matters and real estate leases. We actively monitor our exposure to changes in the fair value of our global investment portfolio in accordance with our established policies and procedures, which include monitoring both general and issuer-specific economic conditions, as discussed in Note 3 to the accompanying consolidated financial statements. Our investment objectives include capital preservation, maintaining adequate liquidity, diversification to minimize liquidity and credit risk, and achievement of maximum returns within the guidelines set forth in our investment policy. See Note 13 to the accompanying consolidated financial statements for further detail of the composition of our investment portfolio as ofMarch 28, 2020 . CRITICAL ACCOUNTING POLICIES An accounting policy is considered to be critical if it is important to our results of operations, financial condition, and cash flows, and requires significant judgment and estimates on the part of management in its application. Our estimates are often based on complex judgments, assessments of probability, and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. It is also possible that other professionals, applying reasonable judgment to the same set of facts and circumstances, could develop and support a range of alternative estimated amounts. We believe that the following list represents our critical accounting policies. For a discussion of all of our significant accounting policies, including our critical accounting policies, see Note 3 to the accompanying consolidated financial statements. Sales Reserves and Uncollectible Accounts A significant area of judgment affecting reported revenue and net income involves estimating sales reserves, which represent the portion of gross revenues not expected to be realized. In particular, revenue related to our wholesale business is reduced by estimates of returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances. Revenue related to our retail business, including digital commerce sales, is also reduced by an estimate of returns. In determining estimates of returns, discounts, end-of-season markdowns, operational chargebacks, and cooperative advertising allowances, we analyze historical trends, actual and forecasted seasonal results, current economic and market conditions, retailer performance, and, in certain cases, contractual terms. Estimates for operational chargebacks are based on actual customer notifications of order fulfillment discrepancies and historical trends. We review and refine these estimates on a quarterly basis. Our historical estimates of these costs have not differed materially from actual results. However, unforeseen adverse future economic and market conditions, such as those resulting from disease pandemics and other catastrophic events, could result in our actual results differing materially from our estimates. A hypothetical 1% increase in our reserves for returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances as ofMarch 28, 2020 would have decreased our Fiscal 2020 net revenues by approximately$2 million . Similarly, we evaluate our accounts receivable balances to determine if they will ultimately be collected. Significant judgments and estimates are involved in this evaluation, including an analysis of specific risks on a customer-by-customer basis for larger accounts (including consideration of their financial condition and ability to withstand prolonged periods of adverse economic conditions), a receivables aging analysis that determines the percentage of receivables that has historically been uncollected by aged category, and current economic and market conditions. Based on this information, we provide a reserve for the estimated amounts believed to be uncollectible. Although we believe that we have adequately provided for those risks as part of our bad debt reserve, a severe and prolonged adverse impact on our major customers' business operations, such as those resulting from business disruptions caused by disease pandemics and other catastrophic events, could have a corresponding material adverse effect on our net sales, cash flows, and/or financial condition. A hypothetical 1% increase in the level of our allowance for doubtful accounts as ofMarch 28, 2020 would have increased our Fiscal 2020 SG&A expenses by approximately$1 million . See "Accounts Receivable" in Note 3 to the accompanying consolidated financial statements for an analysis of the activity in our sales reserves and allowance for doubtful accounts for each of the three fiscal years presented.
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Inventories
We hold inventory that is sold through wholesale distribution channels to major department stores and specialty retail stores. We also hold retail inventory that is sold in our own stores and digital commerce sites directly to consumers. Substantially all of our inventories are comprised of finished goods, which are stated at the lower of cost or estimated realizable value, with cost determined on a weighted-average cost basis. The estimated net realizable value of inventory is determined based on an analysis of historical sales trends of our individual product lines, the impact of market trends and economic conditions, and a forecast of future demand, giving consideration to the value of current orders in-house for future sales of inventory, as well as plans to sell inventory through our factory stores, among other liquidation channels. Actual results may differ from estimates due to the quantity, quality, and mix of products in inventory, consumer and retailer preferences, and economic and market conditions. Reserves for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts. Our historical estimates of these costs and the related provisions have not differed materially from actual results. However, unforeseen adverse future economic and market conditions, such as those resulting from disease pandemics and other catastrophic events, could result in our actual results differing materially from our estimates. A hypothetical 1% increase in the level of our inventory reserves as ofMarch 28, 2020 would have decreased our Fiscal 2020 gross profit by approximately$3 million . Impairment ofGoodwill and Other Intangible AssetsGoodwill and certain other intangible assets deemed to have indefinite useful lives are not amortized. Rather, goodwill and indefinite-lived intangible assets are assessed for impairment at least annually. Finite-lived intangible assets are amortized over their respective estimated useful lives and, along with other long-lived assets, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their carrying values may not be fully recoverable. We generally perform our annual goodwill impairment assessment using a qualitative approach to determine whether it is more likely than not that the fair value of a reporting unit is less than its respective carrying value. However, in order to reassess the fair values of our reporting units, we periodically perform a quantitative impairment analysis in lieu of using the qualitative approach. Performance of the qualitative goodwill impairment assessment requires judgment in identifying and considering the significance of relevant key factors, events, and circumstances that affect the fair values of our reporting units. This requires consideration and assessment of external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as our actual and planned financial performance. We also give consideration to the difference between each reporting unit's fair value and carrying value as of the most recent date that a fair value measurement was performed. If the results of the qualitative assessment conclude that it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, additional quantitative impairment testing is performed. The quantitative goodwill impairment test involves comparing the fair value of a reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, the reporting unit's goodwill is considered not to be impaired. However, if the carrying value of a reporting unit exceeds its fair value, an impairment loss is recorded in an amount equal to that excess. Any impairment charge recognized is limited to the amount of the respective reporting unit's allocated goodwill. Determining the fair value of a reporting unit under the quantitative goodwill impairment test requires judgment and often involves the use of significant estimates and assumptions, including an assessment of external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as actual and planned financial performance. Similarly, estimates and assumptions are used when determining the fair values of other indefinite-lived intangible assets. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the magnitude of any such charge. To assist management in the process of determining any potential goodwill impairment, we may review and consider appraisals from accredited independent valuation firms. Estimates of fair value are primarily determined using discounted cash flows, market comparisons, and recent transactions. These approaches involve significant estimates and assumptions, including projected future cash flows (including timing), discount rates reflecting the risks inherent in those future cash flows, perpetual growth rates, and selection of appropriate market comparable metrics and transactions. 69
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We performed our annual goodwill impairment assessment as of the beginning of the second quarter of Fiscal 2020 using the qualitative approach discussed above, while giving consideration to our then-most recent quantitative goodwill impairment test (the results of which indicated that the fair values of our reporting units with allocated goodwill significantly exceeded their respective carrying values). Based on the results of the qualitative impairment assessment performed, we concluded that it is more likely than not that the fair values of these reporting units significantly exceeded their respective carrying values and there were no reporting units at risk of impairment. Subsequent to performing our Fiscal 2020 annual goodwill impairment assessment, we determined that indicators of impairment were present during the fourth quarter of Fiscal 2020 as a result of adverse business disruptions related to the COVID-19 pandemic, including the temporary closure of our stores inNorth America ,Europe , andAsia . As a result, we performed an interim assessment of the recoverability of goodwill assigned to our reporting units using a quantitative approach as ofMarch 28, 2020 . The estimated fair values of our reporting units were determined with the assistance of an independent third-party valuation firm using discounted cash flows and market comparisons. Based on the results of the quantitative impairment assessment, we concluded that the fair values of our reporting units significantly exceeded their respective carrying values and were not at risk of impairment. No goodwill impairment charges were recorded during any of the fiscal years presented. See Note 12 to the accompanying consolidated financial statements for further discussion. In evaluating finite-lived intangible assets for recoverability, we use our best estimate of future cash flows expected to result from the use of the asset and its eventual disposition where probable. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than its carrying value, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value, considering external market participant assumptions. During Fiscal 2018, we recorded a non-cash impairment charge of$8.8 million as a result of a change in the planned usage of a certain intangible asset to reduce the value of the intangible asset to its estimated fair value. There were no other finite-lived intangible asset impairment charges recorded during any of the fiscal periods presented. See Note 8 to the accompanying consolidated financial statements for further discussion. It is possible that our conclusions regarding impairment or recoverability of goodwill or other intangible assets could change in future periods if, for example, (i) our businesses do not perform as projected, (ii) overall economic conditions in future years vary from current assumptions, (iii) business conditions or strategies change from our current assumptions, or (iv) the identification of our reporting units change, among other factors. Such changes could result in a future impairment charge of goodwill or other intangible assets, which could have a material adverse effect on our consolidated financial position or results of operations. Impairment of Other Long-Lived Assets Property and equipment and lease-related right-of-use ("ROU") assets, along with other long-lived assets, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying values may not be fully recoverable. In evaluating long-lived assets for recoverability, we use our best estimate of future cash flows expected to result from the use of the asset (including any potential sublease income for lease-related ROU assets) and its eventual disposition, where applicable. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than its carrying value, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value, considering external market participant assumptions. Assets to be disposed of and for which there is a committed plan of disposal (commonly referred to as assets held-for-sale) are reported at the lower of carrying value or fair value, less costs to sell. In determining future cash flows, we take various factors into account, including changes in merchandising strategy, the emphasis on retail store cost controls, the effects of macroeconomic trends such as consumer spending, and the impacts of more experienced retail store managers and increased local advertising. Since the determination of future cash flows is an estimate of future performance, future impairments may arise in the event that future cash flows do not meet expectations. For example, unforeseen adverse future economic and market conditions, such as those resulting from disease pandemics and other catastrophic events, could negatively impact consumer behavior, spending levels, and/or shopping preferences and result in actual results differing from our estimates. Additionally, we may review and consider appraisals from accredited independent valuation firms to determine the fair value of long-lived assets, where applicable. During Fiscal 2020, Fiscal 2019, and Fiscal 2018, we recorded non-cash impairment charges of$38.7 million ,$21.2 million , and$41.2 million , respectively, to write-down the carrying values of certain long-lived assets based upon their assumed fair values. Additionally, during Fiscal 2019, we recorded a non-cash charge of$4.6 million to reduce the carrying value of a certain asset held-for-sale to its estimated fair value, less costs to sell. See Note 8 to the accompanying consolidated financial statements for further discussion. 70
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Income Taxes
In determining our income tax provision for financial reporting purposes, we
establish a reserve for uncertain tax positions. If we consider that a tax
position is more likely than not of being sustained upon audit, based solely on
the technical merits of the position, we recognize the tax benefit. We measure
the tax benefit by determining the largest amount that is greater than 50%
likely of being realized upon settlement, presuming that the tax position is
examined by the appropriate taxing authority that has full knowledge of all
relevant information. These assessments can be complex and require significant
judgment, and we often obtain assistance from external advisors. To the extent
that our estimates change or the final tax outcome of these matters is different
from the amounts recorded, such differences will impact the income tax provision
in the period in which such determinations are made. If the initial assessment
of a position fails to result in the recognition of a tax benefit, we will
recognize the tax benefit if (i) there are changes in tax law or analogous case
law that sufficiently raise the likelihood of prevailing on the technical merits
of the position to more likely than not; (ii) the statute of limitations
expires; or (iii) there is a completion of an audit resulting in a settlement of
that tax year with the appropriate agency.
Deferred income taxes reflect the tax effect of certain net operating losses,
capital losses, 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. 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 valuation allowances are analyzed periodically by
assessing the adequacy of future expected taxable income, which typically
involves the use of significant estimates. Such allowances are adjusted as
events occur, or circumstances change, that warrant adjustments to those
balances.
See Note 10 to the accompanying consolidated financial statements for further
discussion of income taxes.
Contingencies
We are periodically exposed to various contingencies in the ordinary course of
conducting our business, including certain litigation, alleged information
system security breaches, contractual disputes, employee relation matters,
various tax or other governmental audits, and trademark and intellectual
property matters and disputes. We record a liability for such contingencies to
the extent that we conclude their occurrence is probable and the related losses
are estimable. In addition, if it is reasonably possible that an unfavorable
settlement of a contingency could exceed the established liability, we disclose
the estimated impact on our liquidity, financial condition, and results of
operations, if practicable. Management considers many factors in making these
assessments. As the ultimate resolution of contingencies is inherently
unpredictable, these assessments can involve a series of complex judgments about
future events including, but not limited to, court rulings, negotiations between
affected parties, and governmental actions. As a result, the accounting for loss
contingencies relies heavily on management's judgment in developing the related
estimates and assumptions.
Stock-Based Compensation
We expense all stock-based compensation awarded to employees and non-employee
directors based on the grant date fair value of the awards over the requisite
service period, adjusted for forfeitures which are estimated based on an
analysis of historical experience and expected future trends.
Restricted Stock and Restricted Stock Units ("RSUs")
We have granted restricted shares of our Class A common stock to our
non-employee directors and grant service-based RSUs to certain of our senior
executives and other employees, as well as to our non-employee directors. In
addition, we grant RSUs with performance-based and market-based vesting
conditions to such senior executives and other key employees.
The fair values of our restricted stock, service-based RSU, and
performance-based RSU awards are measured based on the fair value of our Class A
common stock on the date of grant, adjusted to reflect the absence of dividends
for any awards for which dividend equivalent amounts do not accrue while
outstanding and unvested. Related compensation expense for performance-based
RSUs is recognized over the employees' requisite service period, to the extent
that our attainment of performance goals (upon which vesting is dependent) is
deemed probable, and involves judgment as to expectations surrounding our
achievement of certain defined operating performance metrics.
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The fair value of our market-based RSU awards, for which vesting is dependent
upon total shareholder return ("TSR") of our Class A common stock over a
three-year performance period relative to that of a pre-established peer group,
is measured on the grant date based on estimated projections of our relative TSR
over the performance period. These estimates are made using a Monte Carlo
simulation, which models multiple stock price paths of our Class A common stock
and that of the peer group to evaluate and determine our ultimate expected
relative TSR performance ranking. Related compensation expense, net of estimated
forfeitures, is recorded regardless of whether, and the extent to which, the
market condition is ultimately satisfied. See Note 18 to the accompanying
consolidated financial statements for further discussion.
Stock Options
Stock options have been granted to employees and non-employee directors with
exercise prices equal to the fair market value of our Class A common stock on
the date of grant. We use the Black-Scholes option-pricing model to estimate the
grant date fair value of stock options, which requires the use of both
subjective and objective assumptions. Certain key assumptions involve estimating
future uncertain events. The key factors influencing the estimation process
include the expected term of the option, expected volatility of our stock price,
our expected dividend yield, and the risk-free interest rate, among others.
Generally, once stock option values are determined, accounting practices do not
permit them to be changed, even if the estimates used are different from actual
results.
No stock options were granted during any of the fiscal years presented. See Note
18 to the accompanying consolidated financial statements for further discussion.
Sensitivity
The assumptions used in calculating the grant date fair values of our
stock-based compensation awards represent our best estimates. In addition,
projecting the achievement level of certain performance-based awards, as well as
estimating the number of awards expected to be forfeited, requires judgment. If
actual results or forfeitures differ significantly from our estimates and
assumptions, or if assumptions used to estimate the grant date fair value of
future stock-based award grants are significantly changed, stock-based
compensation expense and, therefore, our results of operations could be
materially impacted. A hypothetical 10% change in our Fiscal 2020 stock-based
compensation expense would have affected net income by approximately $9 million .
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 4 to the accompanying consolidated financial statements for a
description of certain recently issued accounting standards which have impacted
our consolidated financial statements, or may impact our consolidated financial
statements in future reporting periods.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
For a discussion of our exposure to market risk, see "Market Risk Management" in Item 7 included elsewhere in this Annual Report on Form 10-K. Item 8. Financial Statements and Supplementary Data.
See the "Index to Consolidated Financial Statements" appearing at the end of
this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
Not applicable.
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