filings.toolsItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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 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; Fiscal 2017 ended on April 1, 2017 and was a 52-week period; and Fiscal 2020 will end on March 28, 2020 and will be a 52-week period.
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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 2019. 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 2019 and Fiscal 2018 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 30, 2019, 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 2019 and Fiscal 2018 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 30, 2019. |
| • | 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 30, 2019. |
| • | 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 and estimation on the part of management in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 3 to the accompanying consolidated financial statements. |
| • | Recently issued accounting standards. This section discusses the potential impact on our reported results of operations and financial condition of certain accounting standards that have been recently issued. |
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, and other licensed product categories. 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 (wholesale, retail, 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. Our wholesale sales are made principally to major department stores and specialty stores 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. We also 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. 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.
We organize our business into the following three reportable segments:
| • | North America — Our North America segment, representing approximately 51% of our Fiscal 2019 net revenues, primarily consists of sales of our Ralph Lauren branded products made through our wholesale and retail businesses in the U.S. and Canada, excluding Club Monaco. In North America, our wholesale business is comprised primarily of sales to department stores, and to a lesser extent, specialty stores. Our retail business in North America is comprised of our Ralph Lauren stores, our factory stores, and our digital commerce site, www.RalphLauren.com. |
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| • | Europe — Our Europe segment, representing approximately 26% of our Fiscal 2019 net revenues, primarily consists of sales of our Ralph Lauren branded products made through our wholesale and retail businesses in Europe and the Middle East, excluding Club Monaco. In Europe, our wholesale business is comprised of a varying mix of sales to both department stores and specialty stores, depending on the country. Our retail business in Europe is comprised of our Ralph Lauren stores, our factory stores, our concession-based shop-within-shops, and our various digital commerce sites. |
| • | Asia — Our Asia segment, representing approximately 17% of our Fiscal 2019 net revenues, primarily consists of sales of our Ralph Lauren branded products made through our wholesale and retail businesses in Asia, Australia, and New Zealand. Our retail business in Asia is comprised of our Ralph Lauren stores, our factory stores, our concession-based shop-within-shops, and our digital commerce site, www.RalphLauren.cn, which launched in September 2018. In addition, we sell our products online through various third-party digital partner commerce sites. In Asia, our wholesale business is comprised primarily of sales to department stores, with related products distributed through shop-within-shops. |
In addition to these reportable segments, we also have other non-reportable segments, representing approximately 6% of our Fiscal 2019 net revenues, which primarily consist of (i) sales of Club Monaco branded products made through our retail businesses in the U.S., Canada, and Europe, and our licensing alliances in Europe and Asia, (ii) sales of Ralph Lauren branded products made through our wholesale business in Latin America, and (iii) royalty revenues earned through our global licensing alliances, excluding Club Monaco.
Approximately 46% of our Fiscal 2019 net revenues were earned outside of the U.S. See Note 19 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 wholesale sales in our second and fourth fiscal quarters and higher retail sales in our second and third fiscal quarters. These trends result primarily from the timing of seasonal wholesale shipments and key vacation travel, back-to-school, and holiday shopping periods impacting our retail business.
Global Economic Conditions and Industry Trends
The global economy and our industry are impacted by many different influences. The current domestic and international political environment has resulted in uncertainty surrounding the future state of the global economy, including international trade relations. Most recently, the U.S. and China have imposed significant new tariffs on each other related to the importation of certain product categories, and additional tariffs have been proposed. There are also growing concerns regarding the terms and conditions of the United Kingdom's withdrawal from the European Union, commonly referred to as "Brexit." Negotiations to determine the United Kingdom's future relationship with the European Union, including terms of trade and movement of people, have been complex. In January 2019, British Parliament rejected Prime Minister Theresa May's proposed withdrawal agreement, and it is not clear at this time what, if any, agreements will be reached by the current October 31, 2019 deadline. As our international business continues to grow and because the majority of our products are produced outside of the U.S., major changes in global trade and diplomatic relations as well as any resulting anti-American sentiment could have a material adverse effect on our business or operating results. Certain other worldwide events, including political unrest, acts of terrorism, taxation or monetary policy changes, fluctuations in commodity prices, and rising healthcare costs, also increase volatility in the global economy. In addition, our results have been, and are expected to continue to be, impacted by foreign exchange rate fluctuations.
The retail landscape in which we operate is also evolving, with consumers continuing to diversify the channels in which they transact and shifting their shopping preference from physical stores to online. This along with other factors has resulted in many retailers, including certain of our large wholesale customers, becoming highly promotional and aggressively marking down their merchandise in an attempt to offset declines in physical store traffic. The retail industry, particularly in the U.S., has also experienced numerous bankruptcies, restructurings, and ownership changes in recent years. Certain of our operations, including our North America wholesale business, have been negatively impacted by these dynamics. 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. Additionally, changes in economic conditions, including a recession or the fear of a recession, may further impact consumer discretionary income levels and spending.
We have implemented various operating 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 marketing across channels and driving a more efficient operating model. In connection with these strategies, we are taking deliberate actions to ensure promotional consistency across channels and enhance the overall brand and shopping experience, including better aligning shipments and inventory levels with underlying demand. Investing in our digital ecosystem remains a
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primary focus and is a key component of our integrated global omni-channel strategy. In June 2018, we shifted our European digital commerce operations to the third-party cloud-based platform used by our North America operations, which is delivering a more brand-enhancing and consistent customer experience across our global digital ecosystem. In addition, in September 2018, we launched our digital flagship in China, featuring our signature online shopping experience. We also remain committed to optimizing our wholesale distribution channel and enhancing our department store consumer experience. Although the investments that we are making in our business and our quality of sales initiatives may create operating profit pressure in the near-term, we expect that these initiatives will create longer-term shareholder value. Further, in response to the recent trade developments between the U.S. and China, we are actively reviewing options to mitigate our exposure in the event any resulting tariffs impact our product categories, including diverting production to and sourcing from other countries, driving productivity within our existing supplier base, and taking pricing actions. We are also closely monitoring the latest developments regarding Brexit and are assessing risks and opportunities and developing strategies to mitigate our exposure in the event of a "hard" Brexit (e.g., if the United Kingdom exits the European Union without having a final withdrawal agreement in place).
We will continue to monitor these conditions and trends and evaluate and adjust our operating strategies and foreign currency and cost management opportunities to help mitigate the related impact 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 2019, we reported net revenues of $6.313 billion, net income of $430.9 million, and net income per diluted share of $5.27, as compared to net revenues of $6.182 billion, net income of $162.8 million, and net income per diluted share of $1.97 in Fiscal 2018. The comparability of our operating results has been affected by TCJA enactment-related charges, as well as restructuring-related charges, impairment of assets, and certain other charges, as discussed further below.
Our operating performance for Fiscal 2019 reflected revenue growth of 2.1% on a reported basis and 2.8% on a constant currency basis, as defined within "Transactions and Trends Affecting Comparability of Results of Operations and Financial Condition" below. The increase in reported net revenues during Fiscal 2019 was driven by our international businesses.
Our gross profit as a percentage of net revenues increased by 90 basis points to 61.6% during Fiscal 2019, 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 ("SG&A") expenses as a percentage of net revenues increased slightly by 10 basis points to 50.2% during Fiscal 2019, primarily due to our increased marketing investment, new store expansion, and the unfavorable impact attributable to geographic and channel mix, partially offset by our operational discipline.
Net income increased by $268.1 million to $430.9 million in Fiscal 2019 as compared to Fiscal 2018, primarily due to a $174.8 million decrease in our income tax provision largely driven by lower TCJA enactment-related charges, a $63.6 million increase in operating income, and a $28.5 million increase in interest income. Net income per diluted share increased by $3.30 to $5.27 per share in Fiscal 2019 as compared to Fiscal 2018, due to higher net income and lower weighted-average diluted shares outstanding during Fiscal 2019.
Net income during Fiscal 2019 and Fiscal 2018 reflected TCJA enactment-related charges of $27.6 million, or $0.34 per diluted share, and $221.4 million, or $2.68 per diluted share, respectively. 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, or $1.58 per diluted share, and $113.3 million, or $1.38 per diluted share, respectively.
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Financial Condition and Liquidity
We ended Fiscal 2019 in a net cash and investments position (cash and cash equivalents plus short-term and non-current investments, less total debt) of $1.343 billion, compared to $1.494 billion as of the end of Fiscal 2018. 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 $502.6 million, including withholdings in satisfaction of tax obligations for stock-based compensation awards, to invest in our business through $197.7 million in capital expenditures, and to make dividend payments of $190.7 million, as well as the unfavorable effect of exchange rate changes on our cash and cash equivalents of $23.9 million, partially offset by our operating cash flows of $783.8 million.
We generated $783.8 million of cash from operations during Fiscal 2019, compared to $975.1 million during Fiscal 2018. The 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 period, partially offset by an increase in net income before non-cash charges.
Our equity decreased to $3.287 billion as of March 30, 2019, compared to $3.457 billion as of March 31, 2018, primarily due to our share repurchase activity and dividends declared, partially offset by our comprehensive income and the impact of stock-based compensation arrangements during Fiscal 2019.
Recent Developments
Fiscal 2019 Restructuring Plan
On June 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 were largely completed during Fiscal 2019, with certain activities shifting into Fiscal 2020. Total 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 expect to incur total estimated charges of approximately $125 million to $150 million, comprised of cash-related charges of approximately $90 million to $110 million and non-cash charges of approximately $35 million to $40 million. Cumulative charges incurred since inception were $97.3 million.
See Note 9 to our accompanying consolidated financial statements for detailed discussions of the charges recorded in connection with the Fiscal 2019 Restructuring Plan.
U.S. Tax Reform
On December 22, 2017, President Trump signed into law new tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"), which became effective January 1, 2018. The TCJA significantly revised U.S. tax law by, among other provisions, lowering the U.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 by SEC Staff Accounting Bulletin No. 118 ("SAB 118"). These measurement period adjustments increased our effective tax rate by 470 basis points during Fiscal 2019.
Additionally, during the fourth quarter of Fiscal 2018 we reevaluated our permanent reinvestment assertion and determined that undistributed foreign earnings that were subject to the one-time mandatory transition tax were no longer considered to be permanently reinvested, effective December 31, 2017. In connection with this decision, we repatriated $252 million of cash to the U.S. from certain of our foreign subsidiaries during the fourth quarter of Fiscal 2018, and we repatriated an additional $875 million during Fiscal 2019.
See Note 10 to the accompanying consolidated financial statements for additional discussion regarding the TCJA.
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Way Forward Plan
On June 2, 2016, our Board of Directors approved a restructuring plan with the objective of delivering sustainable, profitable sales growth and long-term value creation for shareholders (the "Way Forward Plan"). We are refocusing on our core brands and evolving our product, marketing, and shopping experience to increase desirability and relevance. We are also evolving our operating model to enable sustainable, profitable sales growth by significantly improving quality of sales, reducing supply chain lead times, improving our sourcing, and executing a disciplined multi-channel distribution and expansion strategy. As part of the Way Forward Plan, we are rightsizing our cost structure and implementing a return on investment-driven financial model to free up resources to invest in the brand and drive high-quality sales. The Way Forward Plan includes strengthening our leadership team and creating a more nimble organization by moving from an average of nine to six layers of management. The Way Forward Plan also includes the discontinuance of our Denim & Supply brand and the integration of our denim product offerings into our Polo Ralph Lauren brand. Collectively, these actions, which were substantially completed during Fiscal 2017, resulted in a reduction in workforce and the closure of certain stores and shop-within-shops, as well as gross annualized expense savings of approximately $200 million.
On March 30, 2017, our Board of Directors approved the following additional restructuring-related activities associated with the Way Forward Plan: (i) the restructuring of our in-house global digital commerce platform which was in development and shifting to a more cost-effective, flexible platform through a new agreement with Salesforce's Commerce Cloud, formerly known as Demandware; (ii) the closure of our Polo store at 711 Fifth Avenue in New York City; and (iii) the further streamlining of the organization and the execution of other key corporate actions in line with the Way Forward Plan. These actions are an important part of our efforts to achieve our stated objective to return to sustainable, profitable growth and invest in the future. These additional restructuring-related activities were largely completed during Fiscal 2018 and resulted in a further reduction in workforce and the closure of certain corporate office and store locations, as well as gross annualized expense savings of approximately $140 million.
In connection with the Way Forward Plan, we have incurred total cumulative charges of $838.6 million, including $155.2 million recorded during Fiscal 2017 associated with the destruction of inventory. Additionally, as we did not legally assign a certain lease agreement for which the Company has been deemed the owner of the leased asset for accounting purposes prior to the end of Fiscal 2019, an impairment of approximately $170 million to $190 million is expected to be recorded as an adjustment to reduce our opening retained earnings balance as of the beginning of Fiscal 2020 in connection with our adoption of ASU 2016-02 (see Note 4 to our accompanying consolidated financial statements). Accordingly, actions associated with the Way Forward Plan are now 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 detailed discussions of the charges recorded in connection with the Way Forward Plan.
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, as summarized below (references to "Notes" are to the notes to the accompanying consolidated financial statements): |
| Fiscal Years Ended | ||||||||||||
| March 30, 2019 | March 31, 2018 | April 1, 2017 | ||||||||||
| (millions) | ||||||||||||
| Impairment of assets (see Note 8) | $ | (25.8 | ) | $ | (50.0 | ) | $ | (253.8 | ) | |||
| Restructuring and other charges (see Note 9) | (130.1 | ) | (108.0 | ) | (318.6 | ) | ||||||
| Restructuring-related inventory charges (see Note 9)(a) | (7.2 | ) | (7.6 | ) | (197.9 | ) | ||||||
| Total charges | $ | (163.1 | ) | $ | (165.6 | ) | $ | (770.3 | ) |
| (a) | Non-cash restructuring-related inventory charges are recorded within cost of goods sold in the consolidated statements of operations. |
| • | 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 basis points, respectively; and |
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| • | the reversal of an income tax reserve resulting from a change in tax law that impacted an interest assessment on a prior year withholding tax, which favorably impacted our income tax benefit by $15.9 million during Fiscal 2017. |
Since we are a global company, the comparability of our operating results reported in U.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 the U.S. Dollar. These rate 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 the U.S. ("U.S. GAAP"), our discussions often contain references to constant currency measures, which are calculated by translating the 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 with U.S. GAAP. Reconciliations between this non-U.S. GAAP financial measure and the most directly comparable U.S. GAAP measure are included in the "Results of Operations" section where applicable.
Our discussion also includes reference to comparable store sales. Effective beginning the first quarter of our Fiscal 2019, we changed our definition of comparable store sales to provide a more relevant measure of performance and align with general retail industry practice. Under the new definition, 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 previous definition of comparable store sales required a store or digital commerce site to be operational for one full fiscal year to be considered comparable and included in the calculation. All prior period comparable store sales metrics have been recast to conform with the Company's new definition.
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 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, 2019 | March 31, 2018 | $ Change | % / bps 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 | % |
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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 Asia. The following table details our retail store presence by segment as of the periods presented:
| March 30, 2019 | March 31, 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 | 24 | 25 | ||||
| Asia | 622 | 603 | ||||
| Other non-reportable segments | 5 | 2 | ||||
| Total concession shops | 653 | 632 | ||||
| Total stores | 1,154 | 1,104 |
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. 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 | Foreign Exchange Impact | $ Change | % Change | ||||||||||||||||||||||
| March 30, 2019 | March 31, 2018 | As Reported | Constant Currency | As Reported | Constant Currency | |||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||
| Net Revenues: | ||||||||||||||||||||||||||
| North America | $ | 3,202.9 | $ | 3,231.0 | $ | (28.1 | ) | $ | (3.3 | ) | $ | (24.8 | ) | (0.9 | %) | (0.8 | %) | |||||||||
| Europe | 1,659.9 | 1,585.0 | 74.9 | (27.5 | ) | 102.4 | 4.7 | % | 6.5 | % | ||||||||||||||||
| Asia | 1,041.0 | 933.7 | 107.3 | (10.9 | ) | 118.2 | 11.5 | % | 12.7 | % | ||||||||||||||||
| Other non-reportable segments | 409.2 | 432.6 | (23.4 | ) | (0.3 | ) | (23.1 | ) | (5.4 | %) | (5.4 | %) | ||||||||||||||
| 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 North America retail business: |
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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 $74.9 million, or 4.7%, during Fiscal 2019 as compared to Fiscal 2018, including net unfavorable foreign currency effects of $27.5 million. On a constant currency basis, net revenues increased by $102.4 million, or 6.5%.
The $74.9 million net increase in Europe net revenues was driven by:
| • | a $51.7 million net increase related to our Europe wholesale business largely driven by stronger demand, partially offset by net unfavorable foreign currency effects of $18.0 million; and |
| • | a $23.2 million net increase related to our Europe retail business, inclusive of net unfavorable foreign currency effects of $9.5 million. On a constant currency basis, net revenues increased by $32.7 million driven by an increase of $38.6 million in non-comparable store sales, partially offset by a decrease of $5.9 million in comparable store 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 $9.1 million. On a constant currency basis, net revenues increased by $104.7 million, reflecting increases of $65.3 million in non-comparable store sales driven by new store openings and $39.4 million in comparable store sales. The following table summarizes 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 $11.7 million net increase related to our Asia wholesale business, primarily driven by our expansion in Japan, South Korea, and Southeast Asia. |
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 non-cash inventory-related 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.
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.
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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 $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.
The $72.8 million net increase in SG&A expenses was driven by:
| Fiscal 2019 Compared to Fiscal 2018 | ||||
| (millions) | ||||
| SG&A expense category: | ||||
| Marketing and advertising expenses | $ | 31.7 | ||
| Compensation-related 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 | $ | 72.8 |
In Fiscal 2020, 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, including the consolidation of our corporate office footprint.
Impairment of Assets. During Fiscal 2019, we recorded non-cash impairment charges of $21.2 million to write off certain fixed assets related to our domestic and international stores, shop-within-shops, and corporate offices. Additionally, as a result of our decision to sell a certain corporate fixed asset, we recorded a non-cash impairment charge of $4.6 million to reduce the carrying value of the asset held-for-sale to its estimated fair value, less costs to sell. During Fiscal 2018, we recorded non-cash impairment charges of $41.2 million to write off certain fixed assets related to our domestic and international stores, shop-within-shops, and corporate offices. Additionally, as a result of a change in the planned usage of a certain intangible asset, we recorded a non-cash impairment charge of $8.8 million to reduce the carrying value of the intangible asset to its estimated fair value. 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 net 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 at 711 Fifth Avenue in New York City, and our 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 at 711 Fifth Avenue in New York City, our 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 in operating income as a percentage of net revenues 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.
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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 Income | Operating Margin | Operating Income | Operating Margin | $ Change | Margin Change | |||||||||||||
| (millions) | (millions) | (millions) | ||||||||||||||||
| Segment: | ||||||||||||||||||
| North America | $ | 682.8 | 21.3% | $ | 677.6 | 21.0% | $ | 5.2 | 30 bps | |||||||||
| Europe | 389.9 | 23.5% | 356.7 | 22.5% | 33.2 | 100 bps | ||||||||||||
| Asia | 161.0 | 15.5% | 137.2 | 14.7% | 23.8 | 80 bps | ||||||||||||
| Other non-reportable segments | 121.6 | 29.7% | 107.5 | 24.9% | 14.1 | 480 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 100 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. Partially offsetting these increases in our operating margin was a 40 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 Expense, Net. Non-operating expense, net is comprised of interest expense, interest income, and other income (expense), net, which includes foreign currency gains (losses), equity in losses from our equity-method investees, and other non-operating expenses. 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 recent cash repatriations from our foreign subsidiaries.
Income Tax Provision. The income tax provision represents federal, foreign, state and local income taxes. 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 mix of our worldwide earnings. Our effective tax rate will change from period to period based on various factors including, but not limited to, the geographic mix
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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.
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 in 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.
Fiscal 2018 Compared to Fiscal 2017
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 31, 2018 | April 1, 2017 | $ Change | % / bps Change | ||||||||||||
| (millions, except per share data) | |||||||||||||||
| Net revenues | $ | 6,182.3 | $ | 6,652.8 | $ | (470.5 | ) | (7.1 | %) | ||||||
| Cost of goods sold | (2,430.6 | ) | (3,001.7 | ) | 571.1 | (19.0 | %) | ||||||||
| Gross profit | 3,751.7 | 3,651.1 | 100.6 | 2.8 | % | ||||||||||
| Gross profit as % of net revenues | 60.7 | % | 54.9 | % | 580 bps | ||||||||||
| Selling, general, and administrative expenses | (3,095.5 | ) | (3,171.0 | ) | 75.5 | (2.4 | %) | ||||||||
| SG&A expenses as % of net revenues | 50.1 | % | 47.7 | % | 240 bps | ||||||||||
| Impairment of assets | (50.0 | ) | (253.8 | ) | 203.8 | (80.3 | %) | ||||||||
| Restructuring and other charges | (108.0 | ) | (318.6 | ) | 210.6 | (66.1 | %) | ||||||||
| Operating income (loss) | 498.2 | (92.3 | ) | 590.5 | NM | ||||||||||
| Operating income (loss) as % of net revenues | 8.1 | % | (1.4 | %) | 950 bps | ||||||||||
| Interest expense | (18.2 | ) | (12.4 | ) | (5.8 | ) | 46.8 | % | |||||||
| Interest income | 12.3 | 7.3 | 5.0 | 69.0 | % | ||||||||||
| Other expense, net | (3.1 | ) | (7.5 | ) | 4.4 | (57.9 | %) | ||||||||
| Income (loss) before income taxes | 489.2 | (104.9 | ) | 594.1 | NM | ||||||||||
| Income tax benefit (provision) | (326.4 | ) | 5.6 | (332.0 | ) | NM | |||||||||
| Effective tax rate(a) | 66.7 | % | 5.3 | % | 6,140 bps | ||||||||||
| Net income (loss) | $ | 162.8 | $ | (99.3 | ) | $ | 262.1 | NM | |||||||
| Net income (loss) per common share: | |||||||||||||||
| Basic | $ | 1.99 | $ | (1.20 | ) | $ | 3.19 | NM | |||||||
| Diluted | $ | 1.97 | $ | (1.20 | ) | $ | 3.17 | NM |
| (a) | Effective tax rate is calculated by dividing the income tax benefit (provision) by income (loss) before income taxes. |
NM Not meaningful.
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Net Revenues. Net revenues decreased by $470.5 million, or 7.1%, to $6.182 billion in Fiscal 2018 as compared to Fiscal 2017, including net favorable foreign currency effects of $86.5 million. On a constant currency basis, net revenues decreased by $557.0 million, or 8.4%.
The following table summarizes the percentage change in our Fiscal 2018 consolidated comparable store sales as compared to the prior fiscal year:
| % Change | |||
| Digital commerce comparable store sales | (16 | %) | |
| Comparable store sales excluding digital commerce | (3 | %) | |
| Total comparable store sales | (5 | %) |
Our global average store count increased by two stores and concession shops during Fiscal 2018 compared with the prior fiscal year, primarily due to new openings in Asia, largely offset by global closures primarily associated with the Way Forward Plan. The following table details our retail store presence by segment as of the periods presented:
| March 31, 2018 | April 1, 2017 | |||||
| Freestanding Stores: | ||||||
| North America | 215 | 216 | ||||
| Europe | 81 | 82 | ||||
| Asia | 105 | 89 | ||||
| Other non-reportable segments | 71 | 79 | ||||
| Total freestanding stores | 472 | 466 | ||||
| Concession Shops: | ||||||
| North America | 2 | 1 | ||||
| Europe | 25 | 31 | ||||
| Asia | 603 | 586 | ||||
| Other non-reportable segments | 2 | 2 | ||||
| Total concession shops | 632 | 620 | ||||
| Total stores | 1,104 | 1,086 |
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 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 | Foreign Exchange Impact | $ Change | % Change | ||||||||||||||||||||||
| March 31, 2018 | April 1, 2017 | As Reported | Constant Currency | As Reported | Constant Currency | |||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||
| Net Revenues: | ||||||||||||||||||||||||||
| North America | $ | 3,231.0 | $ | 3,783.0 | $ | (552.0 | ) | $ | 3.0 | $ | (555.0 | ) | (14.6 | %) | (14.7 | %) | ||||||||||
| Europe | 1,585.0 | 1,543.4 | 41.6 | 81.2 | (39.6 | ) | 2.7 | % | (2.6 | %) | ||||||||||||||||
| Asia | 933.7 | 882.5 | 51.2 | 1.9 | 49.3 | 5.8 | % | 5.6 | % | |||||||||||||||||
| Other non-reportable segments | 432.6 | 443.9 | (11.3 | ) | 0.4 | (11.7 | ) | (2.5 | %) | (2.6 | %) | |||||||||||||||
| Total net revenues | $ | 6,182.3 | $ | 6,652.8 | $ | (470.5 | ) | $ | 86.5 | $ | (557.0 | ) | (7.1 | %) | (8.4 | %) |
North America net revenues — Net revenues decreased by $552.0 million, or 14.6%, during Fiscal 2018 as compared to Fiscal 2017, including net favorable foreign currency effects of $3.0 million. On a constant currency basis, net revenues decreased by $555.0 million, or 14.7%.
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The $552.0 million net decline in North America net revenues was driven by:
| • | a $435.0 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, the impact of brand discontinuances, and the continued challenging department store traffic trends; |
| • | a $117.0 million net decrease related to our North America retail business, inclusive of net favorable foreign currency effects of $1.2 million. On a constant currency basis, net revenues decreased by $118.2 million driven by a decline of $118.1 million in comparable store sales. The following table summarizes the percentage change in comparable store sales related to our North America retail business: |
| % Change | |||
| Digital commerce comparable store sales | (22 | %) | |
| Comparable store sales excluding digital commerce | (3 | %) | |
| Total comparable store sales | (7 | %) |
Europe net revenues — Net revenues increased by $41.6 million, or 2.7%, during Fiscal 2018 as compared to Fiscal 2017, including net favorable foreign currency effects of $81.2 million. On a constant currency basis, net revenues decreased by $39.6 million, or 2.6%.
The $41.6 million net increase in Europe net revenues was driven by:
| • | a $26.4 million net increase related to our Europe retail business, inclusive of net favorable foreign currency effects of $36.1 million. On a constant currency basis, net revenues decreased by $9.7 million driven by a decline of $51.5 million in comparable store sales, partially offset by an increase of $41.8 million in non-comparable store sales, primarily driven by new store openings. The following table summarizes the percentage change in comparable store sales related to our Europe retail business: |
| % Change | |||
| Digital commerce comparable store sales | (3 | %) | |
| Comparable store sales excluding digital commerce | (8 | %) | |
| Total comparable store sales | (7 | %) |
| • | a $15.2 million net increase related to our Europe wholesale business, largely driven by net favorable foreign currency effects of $45.1 million, partially offset by the impact of brand discontinuances and a strategic reduction of shipments within the off-price channel in connection with our long-term growth strategy. |
Asia net revenues — Net revenues increased by $51.2 million, or 5.8%, during Fiscal 2018 as compared to Fiscal 2017, including net favorable foreign currency effects of $1.9 million. On a constant currency basis, net revenues increased by $49.3 million, or 5.6%.
The $51.2 million net increase in Asia net revenues was driven by:
| • | a $39.7 million net increase related to our Asia retail business, inclusive of net favorable foreign currency effects of $1.3 million. On a constant currency basis, net revenues increased by $38.4 million, reflecting increases of $20.8 million in non-comparable store sales driven by new store openings and $17.6 million in comparable store sales. The following table summarizes the percentage change in comparable store sales related to our Asia retail business: |
| % Change | |||
| Total comparable store sales(a) | 2 | % |
| (a) | Comparable store sales for our Asia segment were comprised primarily of sales made through our stores and concession shops. |
| • | an $11.5 million net increase related to our Asia wholesale business, largely driven by our expansion in Japan. |
Gross Profit. Gross profit increased by $100.6 million, or 2.8%, to $3.752 billion in Fiscal 2018. Gross profit during Fiscal 2018 and Fiscal 2017 reflected non-cash inventory-related charges of $7.6 million and $197.9 million, respectively, recorded in connection with the Way Forward Plan. The increase in gross profit also included a net favorable foreign currency effect of $64.2
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million. Gross profit as a percentage of net revenues increased to 60.7% in Fiscal 2018 from 54.9% in Fiscal 2017. The 580 basis point increase was primarily driven by the lower non-cash inventory-related charges recorded in connection with the Way Forward Plan during Fiscal 2018 as compared to Fiscal 2017, lower levels of promotional activity in connection with our long-term growth strategy, favorable geographic and channel mix, and lower sourcing costs.
Selling, General, and Administrative Expenses. SG&A expenses decreased by $75.5 million, or 2.4%, to $3.096 billion in Fiscal 2018. This decrease included a net unfavorable foreign currency effect of $31.8 million. SG&A expenses as a percentage of net revenues increased to 50.1% in Fiscal 2018 from 47.7% in Fiscal 2017. The 240 basis point increase was primarily due to operating deleverage on lower net revenues, as previously discussed, 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 and cost savings associated with our restructuring activities.
The $75.5 million net decline in SG&A expenses was driven by:
| Fiscal 2018 Compared to Fiscal 2017 | ||||
| (millions) | ||||
| SG&A expense category: | ||||
| Depreciation and amortization expense | $ | (26.1 | ) | |
| Shipping and handling costs | (18.4 | ) | ||
| Compensation-related expenses | (16.4 | ) | ||
| Non-income tax related expenses | (9.4 | ) | ||
| Selling-related expenses | (8.3 | ) | ||
| Rent and occupancy expenses | (6.9 | ) | ||
| Marketing and advertising expenses | 21.3 | |||
| Other | (11.3 | ) | ||
| Total net decline in SG&A expenses | $ | (75.5 | ) |
Impairment of Assets. During Fiscal 2018, we recorded non-cash impairment charges of $41.2 million to write off certain fixed assets related to our domestic and international stores, shop-within-shops, and corporate offices. Additionally, as a result of a change in the planned usage of a certain intangible asset, we recorded a non-cash impairment charge of $8.8 million during Fiscal 2018 to reduce the value of the intangible asset to its estimated fair value. During Fiscal 2017, we recorded non-cash impairment charges of $248.6 million to write off certain fixed assets related to our domestic and international stores, shop-within-shops, and corporate offices, as well as our in-house global digital commerce platform which was in development. Additionally, as a result of the realignment of our segment reporting structure, we recorded a non-cash goodwill impairment charge of $5.2 million during Fiscal 2017. See Note 8 to the accompanying consolidated financial statements.
Restructuring and Other Charges. During Fiscal 2018 and Fiscal 2017, we recorded restructuring charges of $79.2 million and $294.0 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 2018, we recorded net other charges of $28.8 million primarily related to depreciation expense associated with our former Polo store at 711 Fifth Avenue in New York City, our customs audit, the departure of Mr. Stefan Larsson, and the reversal of reserves associated with the settlement of certain non-income tax issues. During Fiscal 2017, we recorded other charges of $24.6 million related to the anticipated settlement of certain non-income tax issues and the departure of Mr. Stefan Larsson. See Note 9 to the accompanying consolidated financial statements.
Operating Income (Loss). During Fiscal 2018, we reported operating income of $498.2 million, as compared to an operating loss of $92.3 million during Fiscal 2017. Our operating results during Fiscal 2018 and Fiscal 2017 were negatively impacted by restructuring-related charges, impairment of assets, and certain other charges totaling $165.6 million and $770.3 million, respectively, as previously discussed. The $590.5 million increase in operating income also included a net favorable foreign currency effect of $32.4 million. Operating income as a percentage of net revenues was 8.1% during Fiscal 2018, reflecting a 950 basis point increase from the prior fiscal year. The overall increase in operating income as a percentage of net revenues was primarily driven by the net decline in restructuring-related charges, impairment of assets, and certain other charges and the increase in our gross profit margin, partially offset by the increase in SG&A expenses as a percentage of net revenues, all as previously discussed.
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Operating income (loss) 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 31, 2018 | April 1, 2017 | |||||||||||||||||
| Operating Income (Loss) | Operating Margin | Operating Income (Loss) | Operating Margin | $ Change | Margin Change | |||||||||||||
| (millions) | (millions) | (millions) | ||||||||||||||||
| Segment: | ||||||||||||||||||
| North America | $ | 677.6 | 21.0% | $ | 666.8 | 17.6% | $ | 10.8 | 340 bps | |||||||||
| Europe | 356.7 | 22.5% | 305.2 | 19.8% | 51.5 | 270 bps | ||||||||||||
| Asia | 137.2 | 14.7% | (86.3 | ) | (9.8%) | 223.5 | 2,450 bps | |||||||||||
| Other non-reportable segments | 107.5 | 24.9% | 81.0 | 18.2% | 26.5 | 670 bps | ||||||||||||
| 1,279.0 | 966.7 | 312.3 | ||||||||||||||||
| Unallocated corporate expenses | (672.8 | ) | (740.4 | ) | 67.6 | |||||||||||||
| Unallocated restructuring and other charges | (108.0 | ) | (318.6 | ) | 210.6 | |||||||||||||
| Total operating income (loss) | $ | 498.2 | 8.1% | $ | (92.3 | ) | (1.4%) | $ | 590.5 | 950 bps |
North America operating margin improved by 340 basis points, primarily due to the favorable impact of 100 basis points related to our retail business, largely driven by the increase in our gross profit margin. The increase also reflected the favorable impact of 240 basis points related to lower non-cash charges recorded in connection with the Way Forward Plan during Fiscal 2018 as compared to the prior fiscal year. Our wholesale business did not have a meaningful impact on the change in our North America operating margin, as the improved gross margin was offset by operating expense deleverage on lower net revenues.
Europe operating margin improved by 270 basis points, primarily due to the favorable impact of 130 basis points related to lower non-cash charges recorded in connection with the Way Forward Plan during Fiscal 2018 as compared to the prior fiscal year, as well as the favorable impact of 120 basis points related to our retail business, largely driven by the increase in our gross profit margin, partially offset by an increase in SG&A expenses as a percentage of net revenues. The increase also reflected favorable foreign currency effects of 20 basis points. Our wholesale business did not have a meaningful impact on the change in our Europe operating margin.
Asia operating margin improved by 2,450 basis points, primarily due to the favorable impact of 2,000 basis points related to lower non-cash charges recorded in connection with the Way Forward Plan during Fiscal 2018 as compared to the prior fiscal year. The increase also reflected the favorable impact of 350 basis points related to our retail business, largely driven by the increase in our gross profit margin and a decline in SG&A expenses as a percentage of net revenues. The improvement also reflected favorable foreign currency effects of 140 basis points. These increases in operating margin were partially offset by a 40 basis point decline related to our wholesale business.
Unallocated corporate expenses decreased by $67.6 million to $672.8 million in Fiscal 2018, primarily due to lower impairment of asset charges of $96.3 million, lower non-income tax related expenses of $9.4 million, and lower other expenses of $10.7 million, partially offset by lower intercompany sourcing commission income of $31.9 million (which is offset at the segment level and eliminates in consolidation), higher consulting fees of $8.7 million, and higher compensation-related expenses of $8.2 million.
Unallocated restructuring and other charges decreased by $210.6 million to $108.0 million in Fiscal 2018, as previously discussed above and in Note 9 to the accompanying consolidated financial statements.
Non-operating Expense, Net. Non-operating expense, net, decreased by $3.6 million to $9.0 million in Fiscal 2018 from $12.6 million in Fiscal 2017. The decline in non-operating expense, net, was driven by:
| • | a $5.0 million increase in interest income driven by the increase in our cash, cash equivalents, and investments as compared to the prior fiscal year; and |
| • | a $3.4 million increase in foreign currency gains, largely related to the net favorable revaluation and settlement of foreign currency-denominated intercompany receivables and payables, inclusive of the impact of forward foreign |
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currency exchange contracts, as compared to the prior fiscal year (foreign currency gains (losses) do not result from the translation of the operating results of our foreign subsidiaries to U.S. Dollars).
These declines in non-operating expense were partially offset by:
| • | a $5.8 million increase in interest expense driven by the less favorable impact of our swap contracts during Fiscal 2018 as compared to the prior fiscal year. See Note 13 to the accompanying consolidated financial statements for further discussion of our swap contracts. |
Income Tax Benefit (Provision). During Fiscal 2018, we reported an income tax provision of $326.4 million and an effective tax rate of 66.7%, as compared to an income tax benefit of $5.6 million and an effective tax rate of 5.3% during Fiscal 2017. The $332.0 million increase in the income tax provision was primarily due to enactment-related charges of $221.4 million recorded during Fiscal 2018 in connection with the TCJA, which negatively impacted our effective tax rate by 4,520 basis points, as well as the increase in pretax income. The 66.7% effective tax rate for Fiscal 2018 was higher than our blended statutory tax rate of 31.5% primarily due to TCJA enactment-related charges, the adoption of Accounting Standards Update No. 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"), and the unfavorable impact of additional income tax reserves associated with certain income tax audits, partially offset by the tax impacts of earnings in lower taxed foreign jurisdictions versus the U.S. and tax benefits associated with adjustments recorded on deferred tax assets and provision to tax return adjustments. The 5.3% effective tax rate for Fiscal 2017 was lower than the statutory tax rate of 35.0% primarily due to the tax impact of earnings in lower taxed foreign jurisdictions versus the U.S., valuation allowances and adjustments recorded on deferred tax assets, and income tax reserves largely associated with an income tax settlement and certain income tax audits, partially offset by the reversal of an income tax reserve resulting from a change in tax law that impacted an interest assessment on a prior year withholding tax.
Net Income (Loss). During Fiscal 2018, we reported net income of $162.8 million, as compared to a net loss of $99.3 million during Fiscal 2017. The $262.1 million increase in net income was primarily due to the $590.5 million increase in operating income, partially offset by the $332.0 million increase in our income tax provision, as previously discussed. Net income in Fiscal 2018 reflected TCJA enactment-related charges of $221.4 million. Our operating results during Fiscal 2018 and Fiscal 2017 were also negatively impacted by restructuring-related charges, impairment of assets, and certain other charges totaling $165.6 million and $770.3 million, respectively, which had an after-tax effect of reducing net income by $113.3 million and $592.1 million, respectively. In addition, our net loss during Fiscal 2017 reflected the favorable impact of $15.9 million related to the reversal of an income tax reserve resulting from a change in tax law that impacted an interest assessment on a prior year withholding tax.
Net Income (Loss) per Diluted Share. During Fiscal 2018, we reported net income per diluted share of $1.97, as compared to a net loss per diluted share of $1.20 during Fiscal 2017. The $3.17 per share increase was due to the higher level of net income, as previously discussed, and lower weighted-average diluted shares outstanding during Fiscal 2018, driven by the weighted-average impact of our share repurchases during Fiscal 2017. Net income per diluted share during Fiscal 2018 was negatively impacted by $2.68 per share as a result of TCJA enactment-related charges. Net income (loss) per diluted share during Fiscal 2018 and Fiscal 2017 were also negatively impacted by $1.38 per share and $7.10 per share, respectively, as a result of restructuring-related charges, impairment of assets, and certain other charges. In addition, our net loss per diluted share during Fiscal 2017 reflected the favorable impact of $0.19 per share related to the reversal of an income tax reserve resulting from a change in tax law that impacted an interest assessment on a prior year withholding tax.
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FINANCIAL CONDITION AND LIQUIDITY
Financial Condition
The following table presents our financial condition as of March 30, 2019 and March 31, 2018.
| March 30, 2019 | March 31, 2018 | $ Change | ||||||||||
| (millions) | ||||||||||||
| Cash and cash equivalents | $ | 584.1 | $ | 1,304.6 | $ | (720.5 | ) | |||||
| Short-term investments | 1,403.4 | 699.4 | 704.0 | |||||||||
| Non-current investments(a) | 44.9 | 86.2 | (41.3 | ) | ||||||||
| Short-term debt(b) | — | (10.1 | ) | 10.1 | ||||||||
| Current portion of long-term debt(b) | — | (298.1 | ) | 298.1 | ||||||||
| Long-term debt(b) | (689.1 | ) | (288.0 | ) | (401.1 | ) | ||||||
| Net cash and investments(c) | $ | 1,343.3 | $ | 1,494.0 | $ | (150.7 | ) | |||||
| Equity | $ | 3,287.2 | $ | 3,457.4 | $ | (170.2 | ) |
| (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 30, 2019 as compared to March 31, 2018 was primarily due to our use of cash to support Class A common stock repurchases of $502.6 million, including withholdings in satisfaction of tax obligations for stock-based compensation awards, to invest in our business through $197.7 million in capital expenditures, and to make dividend payments of $190.7 million, as well as the unfavorable effect of exchange rate changes on our cash and cash equivalents of $23.9 million, partially offset by our operating cash flows of $783.8 million.
The decrease in equity was primarily attributable to our share repurchase activity and dividends declared, partially offset by our comprehensive income and the impact of stock-based compensation arrangements during Fiscal 2019.
Cash Flows
Fiscal 2019 Compared to Fiscal 2018
| Fiscal Years Ended | ||||||||||||
| March 30, 2019 | March 31, 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 | $ | (1,372.7 | ) |
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; |
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| • | 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 |
| • | 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 $23.8 million increase in payments to settle net investment hedges. |
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 in North America during Fiscal 2019.
In Fiscal 2020, we expect to spend approximately $300 million in capital expenditures, continuing our global store fleet expansion and renovations with demonstrated rates of return, investing in our digital ecosystem and other consumer-facing initiatives, and consolidating our corporate office footprint.
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 (as discussed within "Dividends" below). 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 $78.1 million increase in cash proceeds from the issuance of debt, less debt repayments. During Fiscal 2019, we received $398.1 million in 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 September 2018. Additionally, during Fiscal 2019 we repaid approximately $10 million that had been borrowed under our credit facilities during Fiscal 2018; and |
| • | a $21.7 million increase in proceeds from exercise of stock options. |
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Fiscal 2018 Compared to Fiscal 2017
| Fiscal Years Ended | ||||||||||||
| March 31, 2018 | April 1, 2017 | $ Change | ||||||||||
| (millions) | ||||||||||||
| Net cash provided by operating activities | $ | 975.1 | $ | 952.6 | $ | 22.5 | ||||||
| Net cash used in investing activities | (189.1 | ) | (208.1 | ) | 19.0 | |||||||
| Net cash used in financing activities | (197.5 | ) | (518.4 | ) | 320.9 | |||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 55.2 | (16.4 | ) | 71.6 | ||||||||
| Net increase in cash, cash equivalents, and restricted cash | $ | 643.7 | $ | 209.7 | $ | 434.0 |
Net Cash Provided by Operating Activities. Net cash provided by operating activities increased to $975.1 million during Fiscal 2018, from $952.6 million during Fiscal 2017. The $22.5 million net increase in cash provided by operating activities was due to a net favorable change related to our operating assets and liabilities, including our working capital, as compared to the prior fiscal year, partially offset by a decline in net income before non-cash charges. The decline in net income before non-cash charges reflected a net charge of $209.3 million recorded during Fiscal 2018 in connection with the TCJA's one-time mandatory transition tax. This charge, which is expected to be paid over an eight-year period net of foreign tax credits and other federal income tax activity, did not impact our cash flows from operating activities during Fiscal 2018 as reflected in the offsetting net favorable change in our income taxes payable and deferred taxes. Excluding the impact of this enactment-related charge, the net increase related to our operating assets and liabilities, including working capital, was primarily due to:
| • | favorable changes in our (i) other income tax receivables and payables (excluding the impact of the one-time mandatory transition tax) and (ii) deferred income, both largely driven by the timing of cash collections and payments. |
These increases related to our operating assets and liabilities were partially offset by:
| • | a less favorable change related to our inventory in Fiscal 2018 as compared to Fiscal 2017, largely driven by the timing of our inventory management initiatives and the timing of inventory receipts; and |
| • | unfavorable changes in our (i) accounts payable and accrued liabilities and (ii) accounts receivable, largely driven by the timing of cash payments and collections, respectively. |
Net Cash Used in Investing Activities. Net cash used in investing activities was $189.1 million during Fiscal 2018, as compared to $208.1 million during Fiscal 2017. The $19.0 million net decrease in cash used in investing activities was primarily driven by:
| • | a $122.4 million decline in capital expenditures. During Fiscal 2018, we spent $161.6 million on capital expenditures, as compared to $284.0 million during Fiscal 2017. Our capital expenditures during Fiscal 2018 primarily related to our global retail and department store renovations, new store openings, and the continued enhancements to our global information technology systems. |
This decrease in cash used in investing activities was partially offset by:
| • | a $104.9 million increase in purchases of investments, less proceeds from sales and maturities of investments. During Fiscal 2018, we made net investment purchases of $22.9 million, as compared to receiving net proceeds from sales and maturities of investments of $82.0 million during Fiscal 2017. |
Net Cash Used in Financing Activities. Net cash used in financing activities was $197.5 million during Fiscal 2018, as compared to $518.4 million during Fiscal 2017. The $320.9 million net decrease in cash used in financing activities was primarily driven by:
| • | a $198.1 million decline in cash used to repurchase shares of our Class A common stock. During Fiscal 2018, $17.1 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 2017, we used $200.0 million to repurchase shares of Class A common stock pursuant to our common stock |
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repurchase program, and an additional $15.2 million in shares of Class A common stock were surrendered or withheld for taxes; and
| • | a $126.2 million decline in cash used to repay debt, less proceeds from debt issuances. During Fiscal 2018, we received $10.1 million in borrowings under our credit facilities. During Fiscal 2017, we made $90.0 million in net repayments related to our commercial paper note issuances and repayments and repaid $26.1 million of borrowings previously outstanding under our credit facilities. |
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 2019, we generated $783.8 million of net cash flows from our operations. As of March 30, 2019, we had $1.987 billion in cash, cash equivalents, and short-term investments, of which $607.4 million were held by our subsidiaries domiciled outside the U.S. We are not dependent on foreign cash to fund our domestic operations. Given recent changes to the taxation of undistributed foreign earnings in connection with the TCJA (as discussed within "Recent Developments"), during the fourth quarter of Fiscal 2018 we reevaluated our permanent reinvestment assertion and determined that undistributed foreign earnings that were subject to the TCJA's one-time mandatory transition tax were no longer considered to be permanently reinvested, effective December 31, 2017. In connection with this decision, we repatriated $252 million of cash to the U.S. from certain of our foreign subsidiaries during the fourth quarter of Fiscal 2018, and we repatriated an additional $875 million during Fiscal 2019, all of which relate to earnings previously taxed under the TCJA. The mandatory transition tax does not apply to undistributed foreign earnings generated after December 31, 2017, and therefore we intend to permanently reinvest any such earnings. However, if our plans change and we choose to repatriate post-2017 earnings to the U.S. in the future, we would be subject to applicable U.S. and foreign taxes.
The following table presents our total availability, borrowings outstanding, and remaining availability under our credit facilities and Commercial Paper Program as of March 30, 2019:
| March 30, 2019 | ||||||||||||
| Description(a) | Total Availability | Borrowings Outstanding | Remaining Availability | |||||||||
| (millions) | ||||||||||||
| Global Credit Facility and Commercial Paper Program(b) | $ | 500 | $ | 10 | (c) | $ | 490 | |||||
| Pan-Asia Credit Facilities | 33 | — | 33 |
| (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) | Represents outstanding letters of credit for which we were contingently liable under the Global Credit Facility as of March 30, 2019. |
We believe that the Global Credit Facility is adequately diversified with no undue concentration in any one financial institution. In particular, as of March 30, 2019, there were nine financial institutions participating in the Global Credit Facility, with no one participant maintaining a maximum commitment percentage in excess of 20%. 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 funds in the foreseeable future.
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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.
See Note 11 to the accompanying consolidated financial statements for additional information relating to our credit facilities.
Common Stock Repurchase Program
As of March 30, 2019, the remaining availability under our Class A common stock repurchase program was approximately $630 million, reflecting the June 4, 2018 approval by our Board of Directors to expand the program by up to an additional $1.000 billion of Class A common stock repurchases. On May 13, 2019, our Board of Directors approved a further expansion of the common stock repurchase program that allows us to repurchase up to an additional $600 million of Class A common stock. Repurchases of shares of Class A common stock are subject to overall business and market conditions.
See Note 15 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. On June 4, 2018, our Board of Directors approved an increase to the quarterly cash dividend on our common stock from $0.50 to $0.625 per share. On May 13, 2019, our Board of Directors approved a further increase to the quarterly cash dividend on our common stock from $0.625 to $0.6875 per share.
We intend to continue to pay regular quarterly dividends on our outstanding common stock. However, 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.
See Note 15 to the accompanying consolidated financial statements for additional information relating to our quarterly cash dividend program.
Debt and Covenant Compliance
In August 2015, we completed a registered public debt offering and issued $300 million aggregate principal amount of unsecured senior notes due August 18, 2020, which bear interest at a fixed rate of 2.625%, payable semi-annually (the "2.625% Senior Notes"). In August 2018, we completed another registered public debt offering and issued an additional $400 million aggregate principal amount of unsecured senior notes due September 15, 2025, which bear interest at a fixed rate of 3.750%, payable semi-annually (the "3.750% Senior Notes").
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.
The Global Credit Facility contains a number of covenants, as described in Note 11 to the accompanying consolidated financial statements. As of March 30, 2019, 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.
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Contractual and Other Obligations
Firm Commitments
The following table summarizes certain of our aggregate contractual obligations as of March 30, 2019, 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 2020 | Fiscal 2021-2022 | Fiscal 2023-2024 | Fiscal 2025 and Thereafter | Total | ||||||||||||||||
| (millions) | ||||||||||||||||||||
| Senior Notes | $ | — | $ | 300.0 | $ | — | $ | 400.0 | $ | 700.0 | ||||||||||
| Interest payments on Senior Notes | 22.9 | 33.9 | 30.0 | 22.5 | 109.3 | |||||||||||||||
| Operating leases | 339.0 | 587.4 | 470.6 | 650.5 | 2,047.5 | |||||||||||||||
| Capital leases | 31.8 | 69.0 | 53.4 | 159.4 | 313.6 | |||||||||||||||
| Inventory purchase commitments | 747.8 | — | — | — | 747.8 | |||||||||||||||
| Mandatory transition tax payments | 14.0 | 28.0 | 40.2 | 78.5 | 160.7 | |||||||||||||||
| Other commitments | 30.0 | 7.3 | — | — | 37.3 | |||||||||||||||
| Total | $ | 1,185.5 | $ | 1,025.6 | $ | 594.2 | $ | 1,310.9 | $ | 4,116.2 |
The following is a description of our material, firmly committed obligations as of March 30, 2019:
| • | 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); |
| • | Interest payments on Senior Notes represent the semi-annual contractual interest payments due on our 2.625% Senior Notes and 3.750% Senior Notes. 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 the fixed minimum rental payments due under noncancelable leases of our real estate and operating equipment. We are also normally required to pay taxes, insurance, and certain occupancy costs relating to our leased real estate properties, which are included in the table above to the extent such amounts are fixed and determinable. Approximately 68% of these lease obligations relate to our retail operations. Information has been presented separately for operating and capital leases; |
| • | 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 tax obligation incurred in connection with the deemed repatriation of previously deferred foreign earnings pursuant to the TCJA (see Note 10 to 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; distribution-related agreements; information technology-related service agreements; and pension-related obligations. |
Excluded from the above contractual obligations table is the non-current liability for unrecognized tax benefits of $78.8 million as of March 30, 2019, 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 capital lease obligations and mandatory transition tax payments, amounts recorded in current liabilities in our consolidated balance sheet as of March 30, 2019, which will be paid within one year; and (ii) non-current liabilities that have no cash outflows associated with them (e.g., deferred revenue), 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).
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We also have certain contractual arrangements that would require us to make payments if certain events or circumstances occur. See Note 14 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 $11.5 million as of March 30, 2019. 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 changes in foreign currency exchange rates relating to foreign currency-denominated balances, certain anticipated cash flows from our international operations, and possible declines in 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 changes in interest rates. Consequently, at times, in the normal course of business, we employ established policies and procedures, including the use of derivative financial instruments, to manage such risks. We do not enter into derivative transactions for speculative or trading purposes.
As a result of the use of derivative instruments, we are exposed to the risk that counterparties to our contracts will fail to meet their contractual obligations. To mitigate this counterparty credit risk, we have a policy of only entering into contracts with carefully selected financial institutions based upon an evaluation of their credit ratings and certain other factors, adhering to established limits for credit exposure. Our established policies and procedures for mitigating credit risk from derivative transactions include ongoing review and assessment of the creditworthiness of our counterparties. We also enter into master netting arrangements with counterparties, when possible, to mitigate credit risk associated with our derivative instruments. As a result of the above considerations, we do not believe that we are exposed to any undue concentration of counterparty risk with respect to our derivative contracts as of March 30, 2019. However, we do have in aggregate $27.6 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 through the use of 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 forward foreign currency exchange and cross-currency swap contracts outstanding as of March 30, 2019.
Forward Foreign Currency Exchange Contracts
We enter into forward foreign currency exchange contracts as hedges to reduce our 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 into U.S. Dollars. As part of our overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, primarily to changes in the value of the Euro, the Japanese Yen, the South Korean Won, the Australian Dollar, the Canadian Dollar, the British Pound Sterling, the Swiss Franc, the Swedish Krona, the Chinese Renminbi, the New Taiwan Dollar, and the Hong Kong Dollar, we hedge a portion of our foreign currency exposures anticipated over a two-year period. In doing so, we use forward foreign currency exchange contracts that generally have maturities of two months to two years to provide continuing coverage throughout the hedging period of the respective exposure.
Our foreign exchange risk management activities are governed by our Company's 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, transaction limits, and credit quality controls, as well as various measurements for monitoring compliance. We monitor foreign exchange risk using different techniques, including a periodic review of market values and sensitivity analyses.
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We record our forward foreign currency exchange contracts at fair value in our consolidated balance sheets. To the extent forward foreign currency exchange contracts are designated as qualifying cash flow hedges, the related gains or losses are initially deferred in equity as a component of accumulated other comprehensive income ("AOCI") and are subsequently recognized in our consolidated statements of operations as follows:
| • | Forecasted Inventory Transactions — recognized as part of the cost of the inventory being hedged within cost of goods sold when the related inventory is sold to a third party. |
| • | Settlement of Foreign Currency Balances — recognized within other income (expense), net, during the period that the hedged balance is remeasured through earnings, generally through its settlement when the related payment occurs. |
We recognized in earnings net gains on forward foreign currency exchange contracts of $9.8 million during Fiscal 2019, and net losses of $8.7 million and $2.6 million during Fiscal 2018 and Fiscal 2017, respectively.
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 conjunction 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 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 3-month EURIBOR plus a fixed spread, which, in conjunction 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. To perform the analysis, we assess the risk of loss in these contracts' fair values 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 30, 2019, a 10% appreciation or depreciation of the U.S. Dollar against the exchange rates for foreign currencies under contract would result in a net increase or decrease, respectively, in the fair value of our derivative portfolio of approximately $138 million. This hypothetical net change in fair value should ultimately be largely offset by the net change in the 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 the 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 in conjunction 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.
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Sensitivity
As of March 30, 2019, notwithstanding the aforementioned 2.625% Interest Rate Swap, we had no variable-rate debt outstanding. As such, our exposure to changes in interest rates primarily relates to a change in the fair value of our fixed-rate Senior Notes. As of March 30, 2019, the fair values of our Senior Notes were $709.1 million. A 25 basis point increase or decrease in the level of interest rates would decrease or increase, respectively, the aggregate fair value of our Senior Notes by approximately $7 million. Such potential increases or decreases in the fair value of our debt would only be relevant if we were to retire all or a portion of the debt prior to its maturity, and are 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 of the period.
Investment Risk Management
As of March 30, 2019, we had cash and cash equivalents on-hand of $584.1 million, consisting of deposits in interest bearing accounts, investments in money market deposit accounts, and investments in time deposits and commercial paper with original maturities of 90 days or less. Our other significant investments included $1.403 billion of short-term investments, consisting of investments in time deposits and commercial paper with original maturities greater than 90 days; $42.4 million of restricted cash placed in escrow with certain banks as collateral, primarily to secure guarantees in connection with certain international tax matters and real estate leases; and $44.9 million of investments with maturities greater than one year, consisting of time deposits.
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 further below. 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 of March 30, 2019.
We evaluate investments held in unrealized loss positions, if any, for other-than-temporary impairment on a quarterly basis. This evaluation involves a variety of considerations, including assessments of risks and uncertainties associated with general economic conditions and distinct conditions affecting specific issuers. We consider the following factors: (i) the length of time and the extent to which the fair value has been below cost, (ii) the financial condition, credit worthiness, and near-term prospects of the issuer, (iii) the length of time to maturity, (iv) anticipated future economic conditions and market forecasts, (v) our intent and ability to retain our investment for a period of time sufficient to allow for recovery of market value, and (vi) an assessment of whether it is more likely than not that we will be required to sell our investment before recovery of market value. No material realized or unrealized gains or losses on available-for-sale investments or other-than-temporary impairment charges were recorded in any of the fiscal years presented.
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. A hypothetical 1% increase in our reserves
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for returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances as of March 30, 2019 would have decreased our Fiscal 2019 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 and customers, and a receivables aging analysis that determines the percentage of receivables that has historically been uncollected by aged category. Based on this information, 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 could have a corresponding material adverse effect on our net sales, cash flows, and/or financial condition.
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.
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 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.
A hypothetical 1% increase in the level of our inventory reserves as of March 30, 2019 would have decreased our Fiscal 2019 gross profit by approximately $1 million.
Impairment of Goodwill and Other Intangible Assets
Goodwill 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.
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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. 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 use significant estimates and assumptions, including projected future cash flows (including timing), discount rates reflecting the risks inherent in future cash flows, perpetual growth rates, and determination of appropriate market comparables.
We performed our annual goodwill impairment assessment as of the beginning of the second quarter of Fiscal 2019 using the qualitative approach discussed above, while giving consideration to our 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. Additionally, no goodwill impairment charges were recorded during any of the three fiscal years presented in connection with the Company's annual goodwill impairment assessments.
Subsequent to our Fiscal 2017 annual goodwill impairment assessment, we realigned our segment reporting structure during the fourth quarter of Fiscal 2017 as a result of significant organizational changes implemented in connection with the Way Forward Plan. As a result of the realignment of our segment reporting structure, we reallocated the carrying amount of goodwill to our new reporting units based upon each reporting unit's relative fair value as of the first day of our fourth quarter of Fiscal 2017. In connection with this reallocation, we performed an interim assessment of the recoverability of goodwill assigned to our new reporting units using the quantitative approach described above. Based on the results of the quantitative impairment assessment performed, we concluded that the fair value of one of our new reporting units was less than its carrying value. As a result, a goodwill impairment charge of $5.2 million was recorded during the fourth quarter of Fiscal 2017 to fully write off the carrying value of the reporting unit's reallocated goodwill. The fair values of the remaining new reporting units significantly exceeded their respective carrying values and were not at risk of impairment.
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, 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 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.
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During Fiscal 2019, Fiscal 2018, and Fiscal 2017, we recorded non-cash impairment charges of $21.2 million, $41.2 million, and $248.6 million, respectively, to fully write off the carrying values of certain long-lived assets based upon their assumed fair values of zero. 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.
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.
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.
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No stock options were granted during any of the three fiscal years presented. See Note 17 to the accompanying consolidated financial statements for further discussion.
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.
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 17 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, estimating the number of awards expected to be forfeited requires judgment. If actual results 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 2019 stock-based compensation expense would have affected net income by approximately $8 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.
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