Document
false--03-28Q2202000010370381922000002111000000.0220.01344.2584700000530000038000000.010.010.010.011029000002590000010480000024900000522000002590000049700000249000000.00750.0050.010.210.210.2100000The Global Credit Facility contains a number of covenants that, among other things, restrict the Company's ability, subject to specified exceptions, to incur additional debt; incur liens; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve itself; engage in businesses that are not in a related line of business; make loans, advances, or guarantees; engage in transactions with affiliates; and make certain investments. The Global Credit Facility also requires the Company to maintain a maximum ratio of Adjusted Debt to Consolidated EBITDAR (the "leverage ratio") of no greater than 4.25 as of the date of measurement for the four most recent consecutive fiscal quarters. Adjusted Debt is defined generally as consolidated debt outstanding, including finance lease obligations, plus all operating lease obligations. Consolidated EBITDAR is defined generally as consolidated net income plus (i) income tax expense, (ii) net interest expense, (iii) depreciation and amortization expense, (iv) operating lease cost, (v) restructuring and other non-recurring expenses, and (vi) acquisition-related costs.0.0006505070000055100000


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-13057
Ralph Lauren Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
13-2622036
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
650 Madison Avenue,
 
10022
New York,
New York
 
(Zip Code)
(Address of principal executive offices)
 
 
(212318-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on which Registered
Class A Common Stock, $.01 par value
RL
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
At November 1, 2019, 49,735,136 shares of the registrant's Class A common stock, $.01 par value, and 24,881,276 shares of the registrant's Class B common stock, $.01 par value, were outstanding.





 
 


RALPH LAUREN CORPORATION
INDEX
 
 
Page
 
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1.
Financial Statements:
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
PART II. OTHER INFORMATION
Item 1.
Item 1A.    
Item 2.
Item 5.
Item 6.
 
 
 
 
 
 




1
 


RALPH LAUREN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
September 28,
2019
 
March 30,
2019
 
 
(millions)
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
548.1

 
$
584.1

Short-term investments
 
1,041.4

 
1,403.4

Accounts receivable, net of allowances of $211.1 million and $192.2 million
 
483.2

 
398.1

Inventories
 
1,012.5

 
817.8

Income tax receivable
 
33.6

 
32.1

Prepaid expenses and other current assets
 
267.9

 
359.3

Total current assets
 
3,386.7

 
3,594.8

Property and equipment, net
 
1,011.0

 
1,039.2

Operating lease right-of-use assets
 
1,567.1

 

Deferred tax assets
 
97.6

 
67.0

Goodwill
 
913.8

 
919.6

Intangible assets, net
 
152.3

 
163.7

Other non-current assets
 
100.0

 
158.5

Total assets
 
$
7,228.5

 
$
5,942.8

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
Current portion of long-term debt
 
$
297.3

 
$

Accounts payable
 
350.3

 
202.3

Income tax payable
 
60.1

 
29.4

Current operating lease liabilities
 
273.2

 

Accrued expenses and other current liabilities
 
755.1

 
968.4

Total current liabilities
 
1,736.0

 
1,200.1

Long-term debt
 
396.1

 
689.1

Long-term operating lease liabilities
 
1,651.3

 

Income tax payable
 
132.7

 
146.7

Non-current liability for unrecognized tax benefits
 
79.7

 
78.8

Other non-current liabilities
 
319.1

 
540.9

Commitments and contingencies (Note 14)
 

 

Total liabilities
 
4,314.9

 
2,655.6

Equity:
 
 
 
 
Class A common stock, par value $.01 per share; 104.8 million and 102.9 million shares issued; 49.7 million and 52.2 million shares outstanding
 
1.0

 
1.0

Class B common stock, par value $.01 per share; 24.9 million issued and outstanding; 25.9 million shares issued and outstanding
 
0.3

 
0.3

Additional paid-in-capital
 
2,544.6

 
2,493.8

Retained earnings
 
6,009.4

 
5,979.1

Treasury stock, Class A, at cost; 55.1 million and 50.7 million shares
 
(5,526.3
)
 
(5,083.6
)
Accumulated other comprehensive loss
 
(115.4
)
 
(103.4
)
Total equity
 
2,913.6

 
3,287.2

Total liabilities and equity
 
$
7,228.5

 
$
5,942.8

See accompanying notes.



2
 


RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
 
 
(millions, except per share data)
Net revenues
 
$
1,706.2

 
$
1,690.9

 
$
3,135.0

 
$
3,081.5

Cost of goods sold
 
(657.2
)
 
(661.6
)
 
(1,165.2
)
 
(1,156.5
)
Gross profit
 
1,049.0

 
1,029.3

 
1,969.8

 
1,925.0

Selling, general, and administrative expenses
 
(795.3
)
 
(793.6
)
 
(1,542.0
)
 
(1,535.5
)
Impairment of assets
 
(6.1
)
 
(9.8
)
 
(7.3
)
 
(11.1
)
Restructuring and other charges
 
(14.5
)
 
(15.9
)
 
(44.1
)
 
(38.3
)
Total other operating expenses, net
 
(815.9
)
 
(819.3
)
 
(1,593.4
)
 
(1,584.9
)
Operating income
 
233.1

 
210.0

 
376.4

 
340.1

Interest expense
 
(4.4
)
 
(6.0
)
 
(8.6
)
 
(10.4
)
Interest income
 
9.6

 
10.4

 
21.2

 
19.6

Other income (expense), net
 
(1.7
)
 
0.4

 
(5.8
)
 
(1.6
)
Income before income taxes
 
236.6

 
214.8

 
383.2

 
347.7

Income tax provision
 
(54.5
)
 
(44.5
)
 
(84.0
)
 
(68.4
)
Net income
 
$
182.1

 
$
170.3

 
$
299.2

 
$
279.3

Net income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
2.37

 
$
2.09

 
$
3.86

 
$
3.42

Diluted
 
$
2.34

 
$
2.07

 
$
3.79

 
$
3.37

Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
76.7

 
81.3

 
77.4

 
81.6

Diluted
 
77.9

 
82.3

 
78.9

 
82.8

Dividends declared per share
 
$
0.6875

 
$
0.625

 
$
1.375

 
$
1.25

See accompanying notes.




3
 


RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
 
 
(millions)
Net income
 
$
182.1

 
$
170.3

 
$
299.2

 
$
279.3

Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation losses
 
(19.9
)
 
(6.2
)
 
(15.9
)
 
(36.9
)
Net gains (losses) on cash flow hedges
 
13.6

 
(0.2
)
 
3.9

 
27.5

Net gains on defined benefit plans
 
0.1

 

 

 
0.1

Other comprehensive loss, net of tax
 
(6.2
)
 
(6.4
)
 
(12.0
)
 
(9.3
)
Total comprehensive income
 
$
175.9

 
$
163.9

 
$
287.2

 
$
270.0

See accompanying notes.



4
 


RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended
 
 
September 28,
2019
 
September 29,
2018
 
 
(millions)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
299.2

 
$
279.3

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization expense
 
132.8

 
140.0

Deferred income tax expense (benefit)
 
(15.4
)
 
11.2

Non-cash stock-based compensation expense
 
50.8

 
42.8

Non-cash impairment of assets
 
7.3

 
11.1

Non-cash restructuring-related inventory charges
 
1.0

 

Other non-cash charges
 
3.1

 
6.2

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(91.0
)
 
(18.7
)
Inventories
 
(203.3
)
 
(251.8
)
Prepaid expenses and other current assets
 
(47.1
)
 
(49.8
)
Accounts payable and accrued liabilities
 
47.3

 
3.4

Income tax receivables and payables
 
17.1

 
29.5

Deferred income
 
0.9

 
(11.6
)
Other balance sheet changes
 
1.4

 
21.4

Net cash provided by operating activities
 
204.1

 
213.0

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(130.6
)
 
(93.1
)
Purchases of investments
 
(571.6
)
 
(1,822.8
)
Proceeds from sales and maturities of investments
 
976.1

 
1,211.4

Acquisitions and ventures
 
0.9

 
(4.5
)
Proceeds from sale of property
 
20.8

 

Settlement of net investment hedges
 

 
(23.8
)
Net cash provided by (used in) investing activities
 
295.6

 
(732.8
)
Cash flows from financing activities:
 
 
 
 
Repayments of short-term debt
 

 
(9.9
)
Proceeds from the issuance of long-term debt
 

 
398.1

Repayments of long-term debt
 

 
(300.0
)
Payments of finance lease obligations
 
(7.7
)
 
(10.5
)
Payments of dividends
 
(101.9
)
 
(91.3
)
Repurchases of common stock, including shares surrendered for tax withholdings
 
(442.7
)
 
(223.9
)
Proceeds from exercise of stock options
 

 
21.8

Other financing activities
 
(0.7
)
 
(2.8
)
Net cash used in financing activities
 
(553.0
)
 
(218.5
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
 
(9.9
)
 
(20.7
)
Net decrease in cash, cash equivalents, and restricted cash
 
(63.2
)
 
(759.0
)
Cash, cash equivalents, and restricted cash at beginning of period
 
626.5

 
1,355.5

Cash, cash equivalents, and restricted cash at end of period
 
$
563.3

 
$
596.5

See accompanying notes.



5
 


RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
 
 
Three Months Ended September 28, 2019
 
 
Common Stock(a)
 
Additional
Paid-in
Capital
 
 
 
Treasury Stock
at Cost
 
 
 
 
 
 
 
 
Retained
Earnings
 
 
 
 
Total
Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
AOCI(b)
 
 
 
(millions)
Balance at June 29, 2019
 
129.6

 
$
1.3

 
$
2,516.8

 
$
5,878.6

 
52.4

 
$
(5,274.7
)
 
$
(109.2
)
 
$
3,012.8

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
182.1

 
 
 
 
 
 
 
 
Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(6.2
)
 
 
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
175.9

Dividends declared
 
 
 
 
 
 
 
(51.3
)
 
 
 
 
 
 
 
(51.3
)
Repurchases of common stock
 
 
 
 
 
 
 
 
 
2.7

 
(251.6
)
 
 
 
(251.6
)
Stock-based compensation
 
 
 
 
 
27.8

 
 
 
 
 
 
 
 
 
27.8

Shares issued pursuant to stock-based
compensation plans
 
0.1

 

 

 
 
 
 
 
 
 
 
 

Balance at September 28, 2019
 
129.7

 
$
1.3

 
$
2,544.6

 
$
6,009.4

 
55.1

 
$
(5,526.3
)
 
$
(115.4
)
 
$
2,913.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 29, 2018
 
 
Common Stock(a)
 
Additional
Paid-in
Capital
 
 
 
Treasury Stock
at Cost
 
 
 
 
 
 
 
 
Retained
Earnings
 
 
 
 
Total
Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
AOCI(b)
 
 
 
(millions)
Balance at June 30, 2018
 
128.7

 
$
1.3

 
$
2,426.7

 
$
5,805.4

 
47.5

 
$
(4,711.0
)
 
$
(101.4
)
 
$
3,421.0

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
170.3

 
 
 
 
 
 
 
 
Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(6.4
)
 
 
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
163.9

Dividends declared
 
 
 
 
 
 
 
(50.3
)
 
 
 
 
 
 
 
(50.3
)
Repurchases of common stock
 
 
 
 
 
 
 
 
 
0.8

 
(93.9
)
 
 
 
(93.9
)
Stock-based compensation
 
 
 
 
 
21.3

 
 
 
 
 
 
 
 
 
21.3

Shares issued pursuant to stock-based
compensation plans
 
0.1

 

 

 
 
 
 
 
 
 
 
 

Balance at September 29, 2018
 
128.8

 
$
1.3

 
$
2,448.0

 
$
5,925.4

 
48.3

 
$
(4,804.9
)
 
$
(107.8
)
 
$
3,462.0

 
(a) 
Includes Class A and Class B common stock. During the three months ended September 28, 2019, 0.5 million shares of Class B common stock were converted into an equal number of shares of Class A common stock pursuant to the terms of the Class B common stock (see Note 15).
(b) 
Accumulated other comprehensive income (loss).




6
 


RALPH LAUREN CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (Continued)
(Unaudited)
 
 
Six Months Ended September 28, 2019
 
 
Common Stock(a)
 
Additional
Paid-in
Capital
 
 
 
Treasury Stock
at Cost
 
 
 
 
 
 
 
 
Retained
Earnings
 
 
 
 
Total
Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
AOCI(b)
 
 
 
(millions)
Balance at March 30, 2019
 
128.8

 
$
1.3

 
$
2,493.8

 
$
5,979.1

 
50.7

 
$
(5,083.6
)
 
$
(103.4
)
 
$
3,287.2

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
299.2

 
 
 
 
 
 
 
 
Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(12.0
)
 
 
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
287.2

Dividends declared
 
 
 
 
 
 
 
(104.4
)
 
 
 
 
 
 
 
(104.4
)
Repurchases of common stock
 
 
 
 
 
 
 
 
 
4.4

 
(442.7
)
 
 
 
(442.7
)
Stock-based compensation
 
 
 
 
 
50.8

 
 
 
 
 
 
 
 
 
50.8

Shares issued pursuant to stock-based
compensation plans
 
0.9

 

 

 
 
 
 
 
 
 
 
 

Cumulative adjustments from adoption of new accounting standards (see Note 4)
 
 
 
 
 
 
 
(164.5
)
 
 
 
 
 
 
 
(164.5
)
Balance at September 28, 2019
 
129.7

 
$
1.3

 
$
2,544.6

 
$
6,009.4

 
55.1

 
$
(5,526.3
)
 
$
(115.4
)
 
$
2,913.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended September 29, 2018
 
 
Common Stock(a)
 
Additional
Paid-in
Capital
 
 
 
Treasury Stock
at Cost
 
 
 
 
 
 
 
 
Retained
Earnings
 
 
 
 
Total
Equity
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
AOCI(b)
 
 
 
(millions)
Balance at March 31, 2018
 
127.9

 
$
1.3

 
$
2,383.4

 
$
5,752.2

 
46.6

 
$
(4,581.0
)
 
$
(98.5
)
 
$
3,457.4

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
279.3

 
 
 
 
 
 
 
 
Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(9.3
)
 
 
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
270.0

Dividends declared
 
 
 
 
 
 
 
(101.0
)
 
 
 
 
 
 
 
(101.0
)
Repurchases of common stock
 
 
 
 
 
 
 
 
 
1.7

 
(223.9
)
 
 
 
(223.9
)
Stock-based compensation
 
 
 
 
 
42.8

 
 
 
 
 
 
 
 
 
42.8

Shares issued pursuant to stock-based
compensation plans
 
0.9

 

 
21.8

 
 
 
 
 
 
 
 
 
21.8

Cumulative adjustments from adoption of new accounting standards
 
 
 
 
 
 
 
(5.1
)
 
 
 
 
 
 
 
(5.1
)
Balance at September 29, 2018
 
128.8

 
$
1.3

 
$
2,448.0

 
$
5,925.4

 
48.3

 
$
(4,804.9
)
 
$
(107.8
)
 
$
3,462.0

 
(a) 
Includes Class A and Class B common stock. During the six months ended September 28, 2019, 1.0 million shares of Class B common stock were converted into an equal number of shares of Class A common stock pursuant to the terms of the Class B common stock (see Note 15).
(b) 
Accumulated other comprehensive income (loss).
See accompanying notes.



7
 


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data and where otherwise indicated)
(Unaudited)
1.
Description of Business
Ralph Lauren Corporation ("RLC") is a global leader in the design, marketing, and distribution of premium lifestyle products, including apparel, footwear, accessories, home furnishings, fragrances, and hospitality. RLC's long-standing reputation and distinctive image have been developed across an expanding number of products, brands, sales channels, and international markets. RLC's 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. RLC and its subsidiaries are collectively referred to herein as the "Company," "we," "us," "our," and "ourselves," unless the context indicates otherwise.
The Company diversifies its business by geography (North America, Europe, and Asia, among other regions) and channel of distribution (retail, wholesale, and licensing). This allows the Company to maintain a dynamic balance as its operating results do not depend solely on the performance of any single geographic area or channel of distribution. The Company sells directly to consumers through its integrated retail channel, which includes its retail stores, concession-based shop-within-shops, and digital commerce operations around the world. The Company's 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 the Company has licensed the right to operate in defined geographic territories using its trademarks. In addition, the Company licenses to third parties for specified periods the right to access its various trademarks in connection with the licensees' manufacture and sale of designated products, such as certain apparel, eyewear, fragrances, and home furnishings.
The Company organizes its business into the following three reportable segments: North America, Europe, and Asia. In addition to these reportable segments, the Company also has other non-reportable segments. See Note 18 for further discussion of the Company's segment reporting structure.
2.
Basis of Presentation
Interim Financial Statements
These interim consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC") and are unaudited. In the opinion of management, these consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the consolidated financial position, income, comprehensive income, and cash flows of the Company for the interim periods presented. In addition, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") and the notes thereto have been condensed or omitted from this report as is permitted by the SEC's rules and regulations. However, the Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading.
This report should be read in conjunction with the Company's Annual Report on Form 10-K filed with the SEC for the fiscal year ended March 30, 2019 (the "Fiscal 2019 10-K").
Basis of Consolidation
These unaudited interim consolidated financial statements present the consolidated financial position, income, comprehensive income, and cash flows of the Company, including all entities in which the Company has a controlling financial interest and is determined to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Fiscal Periods
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to March 31. As such, fiscal year 2020 will end on March 28, 2020 and will be a 52-week period ("Fiscal 2020"). Fiscal year 2019 ended on March 30, 2019 and was also a



8
 


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

52-week period ("Fiscal 2019"). The second quarter of Fiscal 2020 ended on September 28, 2019 and was a 13-week period. The second quarter of Fiscal 2019 ended on September 29, 2018 and was also a 13-week period.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and notes thereto. Actual results could differ materially from those estimates.
Significant estimates inherent in the preparation of the consolidated financial statements include reserves for bad debt, customer returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances; the realizability of inventory; reserves for litigation and other contingencies; useful lives and impairments of long-lived tangible and intangible assets; fair value measurements; accounting for income taxes and related uncertain tax positions; valuation of stock-based compensation awards and related pre-vesting forfeiture rates; reserves for restructuring activity; and accounting for business combinations, among others.
Reclassifications
Certain reclassifications have been made to prior period financial information in order to conform to the current period's presentation, including a change to the Company's segment reporting structure as further described in Note 18.
Seasonality of Business
The Company's business is typically affected by seasonal trends, with higher levels of retail sales in its second and third fiscal quarters and higher wholesale sales in its second and fourth fiscal quarters. These trends result primarily from the timing of key vacation travel, back-to-school, and holiday shopping periods impacting its retail business and the timing of seasonal wholesale shipments. As a result of changes in its business, consumer spending patterns, and the macroeconomic environment, historical quarterly operating trends and working capital requirements may not be indicative of the Company's future performance. In addition, fluctuations in sales, operating income, and cash flows in any fiscal quarter may be affected by other events affecting retail sales, such as changes in weather patterns. Accordingly, the Company's operating results and cash flows for the three-month and six-month periods ended September 28, 2019 are not necessarily indicative of the operating results and cash flows that may be expected for the full Fiscal 2020.
3.
Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue across all channels of the business when it satisfies its performance obligations by transferring control of promised products or services to its customers, which occurs either at a point in time or over time, depending on when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized considers terms of sale that create variability in the amount of consideration that the Company ultimately expects to be entitled to in exchange for the products or services, and is subject to an overall constraint that a significant revenue reversal will not occur in future periods. Sales and other related taxes collected from customers and remitted to government authorities are excluded from revenue.
Revenue from the Company's retail business is recognized when the customer takes physical possession of the products, which occurs either at the point of sale for merchandise purchased at the Company's retail stores and concession-based shop-within-shops, or upon receipt of shipment for merchandise ordered through direct-to-consumer digital commerce sites. Such revenues are recorded net of estimated returns based on historical trends. Payment is due at the point of sale.
Gift cards issued to customers by the Company are recorded as a liability until they are redeemed, at which point revenue is recognized. The Company also estimates and recognizes revenue for gift card balances not expected to ever be redeemed (referred to as "breakage") to the extent that it does not have a legal obligation to remit the value of such unredeemed gift cards to the relevant jurisdiction as unclaimed or abandoned property. Such estimates are based upon historical redemption trends, with breakage income recognized in proportion to the pattern of actual customer redemptions.



9
 


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revenue from the Company's wholesale business is generally recognized upon shipment of products, at which point title passes and risk of loss is transferred to the customer. In certain arrangements where the Company retains the risk of loss during shipment, revenue is recognized upon receipt of products by the customer. Wholesale revenue is recorded net of estimates of returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances. Returns and allowances require pre-approval from management and discounts are based on trade terms. Estimates for end-of-season markdown reserves are based on historical trends, actual and forecasted seasonal results, an evaluation of current economic and market conditions, retailer performance, and, in certain cases, contractual terms. Estimates for operational chargebacks are based on actual customer notifications of order fulfillment discrepancies and historical trends. The Company reviews and refines these estimates on at least a quarterly basis. The Company's historical estimates of these amounts have not differed materially from actual results.
Revenue from the Company's licensing arrangements is recognized over time during the period that licensees are provided access to the Company's trademarks (i.e., symbolic intellectual property) and benefit from such access through their sales of licensed products. These arrangements require licensees to pay a sales-based royalty, which for most arrangements may be subject to a contractually-guaranteed minimum royalty amount. Payments are generally due quarterly and, depending on time of receipt, may be recorded as a liability until recognized as revenue. The Company recognizes revenue for sales-based royalty arrangements (including those for which the royalty exceeds any contractually-guaranteed minimum royalty amount) as licensed products are sold by the licensee. If a sales-based royalty is not ultimately expected to exceed a contractually-guaranteed minimum royalty amount, the minimum is recognized as revenue ratably over the contractual period. This sales-based output measure of progress and pattern of recognition best represents the value transferred to the licensee over the term of the arrangement, as well as the amount of consideration that the Company is entitled to receive in exchange for providing access to its trademarks. As of September 28, 2019, contractually-guaranteed minimum royalty amounts expected to be recognized as revenue during future periods were as follows:
 
 
Contractually-Guaranteed
Minimum Royalties(a)
 
 
(millions)
Remainder of Fiscal 2020
 
$
57.0

Fiscal 2021
 
116.5

Fiscal 2022
 
78.4

Fiscal 2023
 
42.8

Fiscal 2024 and thereafter
 
25.6

Total
 
$
320.3


 
(a) 
Amounts presented do not contemplate anticipated contract renewals or royalties earned in excess of contractually guaranteed minimums.
Disaggregated Net Revenues
The following tables disaggregate the Company's net revenues into categories that depict how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors for the fiscal periods presented:
 
 
Three Months Ended
 
 
September 28, 2019
 
September 29, 2018
 
 
North America
 
Europe
 
Asia
 
Other
 
Total
 
North America
 
Europe
 
Asia
 
Other
 
Total
 
 
(millions)
Sales Channel(a):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
$
457.9

 
$
238.6

 
$
233.3

 
$
45.4

 
$
975.2

 
$
435.4

 
$
227.6

 
$
222.5

 
$
47.4

 
$
932.9

Wholesale
 
423.3

 
241.6

 
22.0

 
1.9

 
688.8

 
452.8

 
237.1

 
22.2

 
1.5

 
713.6

Licensing
 

 

 

 
42.2

 
42.2

 

 

 

 
44.4

 
44.4

Total
 
$
881.2

 
$
480.2

 
$
255.3

 
$
89.5

 
$
1,706.2

 
$
888.2

 
$
464.7

 
$
244.7

 
$
93.3

 
$
1,690.9




10
 


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
 
Six Months Ended
 
 
September 28, 2019
 
September 29, 2018
 
 
North America
 
Europe
 
Asia
 
Other
 
Total
 
North America
 
Europe
 
Asia
 
Other
 
Total
 
 
(millions)
Sales Channel(a):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
$
861.0

 
$
457.1

 
$
479.8

 
$
94.9

 
$
1,892.8

 
$
822.9

 
$
440.2

 
$
457.9

 
$
97.3

 
$
1,818.3

Wholesale
 
739.6

 
383.9

 
34.1

 
3.7

 
1,161.3

 
762.9

 
379.8

 
34.8

 
2.3

 
1,179.8

Licensing
 

 

 

 
80.9

 
80.9

 

 

 

 
83.4

 
83.4

Total
 
$
1,600.6

 
$
841.0

 
$
513.9

 
$
179.5

 
$
3,135.0

 
$
1,585.8

 
$
820.0

 
$
492.7

 
$
183.0

 
$
3,081.5

 
(a) 
Net revenues from the Company's retail and wholesale businesses are recognized at a point in time. Net revenues from the Company's licensing business are recognized over time.
Deferred Income
Deferred income represents cash payments received in advance of the Company's transfer of control of products or services to its customers and is generally comprised of unredeemed gift cards, net of breakage, and advance royalty payments from licensees. The Company's deferred income balances were $15.5 million and $14.8 million as of September 28, 2019 and March 30, 2019, respectively, and were primarily recorded within accrued expenses and other current liabilities within the consolidated balance sheets. During the three-month and six-month periods ended September 28, 2019, the Company recognized $1.5 million and $7.2 million, respectively, of net revenues from amounts recorded as deferred income as of March 30, 2019. The majority of the deferred income balance as of September 28, 2019 is expected to be recognized as revenue within the next twelve months.
Shipping and Handling Costs
Costs associated with shipping goods to the Company's customers are accounted for as fulfillment activities and reflected as a component of selling, general, and administrative ("SG&A") expenses in the consolidated statements of operations. Costs of preparing merchandise for sale, such as picking, packing, warehousing, and order charges ("handling costs"), are also included in SG&A expenses. Shipping and handling costs billed to customers are included in revenue.
A summary of shipping and handling costs for the fiscal periods presented is as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
 
 
(millions)
Shipping costs
 
$
12.5

 
$
10.9

 
$
22.4

 
$
19.6

Handling costs
 
39.5

 
39.0

 
75.7

 
74.7


Net Income per Common Share
Basic net income per common share is computed by dividing net income attributable to common shares by the weighted-average number of common shares outstanding during the period. Weighted-average common shares include shares of the Company's Class A and Class B common stock. Diluted net income per common share adjusts basic net income per common share for the dilutive effects of outstanding stock options, restricted stock units ("RSUs"), and any other potentially dilutive instruments, only in the periods in which such effects are dilutive.



11
 


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The weighted-average number of common shares outstanding used to calculate basic net income per common share is reconciled to shares used to calculate diluted net income per common share as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
 
 
(millions)
Basic shares
 
76.7

 
81.3

 
77.4

 
81.6

Dilutive effect of stock options and RSUs
 
1.2

 
1.0

 
1.5

 
1.2

Diluted shares
 
77.9

 
82.3

 
78.9

 
82.8


All earnings per share amounts have been calculated using unrounded numbers. Options to purchase shares of the Company's Class A common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive and therefore not included in the computation of diluted net income per common share. In addition, the Company has outstanding performance-based and market-based RSUs, which are included in the computation of diluted shares only to the extent that the underlying performance or market conditions (i) have been satisfied as of the end of the reporting period or (ii) would be considered satisfied if the end of the reporting period were the end of the related contingency period and the result would be dilutive. As of September 28, 2019 and September 29, 2018, there were 1.1 million and 1.5 million, respectively, of additional shares issuable upon exercise of anti-dilutive options and contingent vesting of performance-based RSUs that were excluded from the diluted shares calculations.
Accounts Receivable
In the normal course of business, the Company extends credit to wholesale customers that satisfy defined credit criteria. Payment is generally due within 30 to 120 days and does not include a significant financing component. Accounts receivable is recorded at carrying value, which approximates fair value, and is presented in the Company's consolidated balance sheets net of certain reserves and allowances. These reserves and allowances consist of (i) reserves for returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances (see the "Revenue Recognition" section above for further discussion of related accounting policies) and (ii) allowances for doubtful accounts.
A rollforward of the activity in the Company's reserves for returns, discounts, end-of-season markdowns, operational chargebacks, and certain cooperative advertising allowances is presented below:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
 
 
(millions)
Beginning reserve balance
 
$
165.5

 
$
167.2

 
$
176.5

 
$
202.5

Amount charged against revenue to increase reserve
 
168.6

 
150.5

 
282.5

 
250.2

Amount credited against customer accounts to decrease reserve
 
(135.8
)
 
(119.2
)
 
(261.7
)
 
(249.3
)
Foreign currency translation
 
(2.8
)
 
0.2

 
(1.8
)
 
(4.7
)
Ending reserve balance
 
$
195.5

 
$
198.7

 
$
195.5

 
$
198.7


An allowance for doubtful accounts is determined through an analysis of accounts receivable aging, assessments of collectability based on evaluation of historical and anticipated trends, the financial condition of the Company's customers, and evaluation of the impact of economic conditions, among other factors.



12
 


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A rollforward of the activity in the Company's allowance for doubtful accounts is presented below:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
 
 
(millions)
Beginning reserve balance
 
$
15.0

 
$
18.7

 
$
15.7

 
$
19.7

Amount recorded to expense to increase (decrease) reserve(a)
 
1.4

 
(0.5
)
 
1.5

 
(0.5
)
Amount written-off against customer accounts to decrease reserve
 
(0.4
)
 
(1.0
)
 
(1.4
)
 
(1.4
)
Foreign currency translation
 
(0.4
)
 

 
(0.2
)
 
(0.6
)
Ending reserve balance
 
$
15.6

 
$
17.2

 
$
15.6

 
$
17.2

 
(a) 
Amounts recorded to bad debt expense are included within SG&A expenses in the consolidated statements of operations.
Concentration of Credit Risk
The Company sells its wholesale merchandise primarily to major department and specialty stores around the world, and extends credit based on an evaluation of each customer's financial capacity and condition, usually without requiring collateral. In the Company's wholesale business, concentration of credit risk is relatively limited due to the large number of customers and their dispersion across many geographic areas. However, the Company has three key wholesale customers that generate significant sales volume. During Fiscal 2019, the Company's sales to its three largest wholesale customers accounted for approximately 19% of total net revenues. Substantially all of the Company's sales to its three largest wholesale customers related to its North America segment. As of September 28, 2019, these three key wholesale customers constituted approximately 27% of total gross accounts receivable.
Inventories
The Company holds inventory that is sold in its retail stores and digital commerce sites directly to consumers. The Company also holds inventory that is sold through wholesale distribution channels to major department stores and specialty retail stores. Substantially all of the Company's 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. Inventory held by the Company totaled $1.013 billion, $817.8 million, and $994.6 million as of September 28, 2019, March 30, 2019, and September 29, 2018, respectively.
Leases
As discussed in Note 4, the Company adopted a new lease accounting standard as of the beginning of Fiscal 2020.
The Company's lease arrangements primarily relate to real estate, including its retail stores, concession-based shop-within-shops, corporate offices, and warehouse facilities, and to a lesser extent, certain equipment and other assets. The Company's leases generally have initial terms ranging from 3 to 15 years and may include renewal or early-termination options, rent escalation clauses, and/or lease incentives in the form of construction allowances and rent abatements. Renewal rent payment terms generally reflect market rates prevailing at the time of renewal. The Company is typically required to make fixed minimum rent payments, variable rent payments based on performance (e.g., percentage-of-sales-based payments), or a combination thereof, directly related to its right to use an underlying leased asset. The Company is also often required to pay for certain other costs that do not relate specifically to its right to use an underlying leased asset, but that are associated with the asset, including real estate taxes, insurance, common area maintenance fees, and/or certain other costs (referred to collectively herein as "non-lease components"), which may be fixed or variable in amount, depending on the terms of the respective lease agreement. The Company's leases do not contain significant residual value guarantees or restrictive covenants.
The Company determines whether an arrangement contains a lease at the arrangement's inception. If a lease is determined to exist, its related term is assessed at lease commencement, once the underlying asset is made available by the lessor for the Company's use. The Company's assessment of the lease term reflects the non-cancellable period of the lease, inclusive of any rent-free periods and/or periods covered by early-termination options for which the Company is reasonably certain of not exercising,



13
 


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

as well as periods covered by renewal options for which it is reasonably certain of exercising. The Company also determines lease classification as either operating or finance (formerly referred to as "capital") at lease commencement, which governs the pattern of expense recognition and the presentation thereof reflected in the consolidated statements of operations over the lease term.
For leases with a lease term exceeding 12 months, a lease liability is recorded on the Company's consolidated balance sheet at lease commencement reflecting the present value of its fixed payment obligations over the lease term. A corresponding right-of-use ("ROU") asset equal to the initial lease liability is also recorded, increased by any prepaid rent and/or initial direct costs incurred in connection with execution of the lease, and reduced by any lease incentives received. The Company includes fixed payment obligations related to non-lease components in the measurement of ROU assets and lease liabilities, as it elects to account for lease and non-lease components together as a single lease component. Variable lease payments are not included in the measurement of ROU assets and lease liabilities. ROU assets associated with finance leases are presented separate from those associated with operating leases, and are included within property and equipment, net on the Company's consolidated balance sheet. For purposes of measuring the present value of its fixed payment obligations for a given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in its leasing arrangements are not readily determinable. The Company's incremental borrowing rate reflects the rate it would pay to borrow on a secured basis, and incorporates the term and economic environment of the lease.
For operating leases, fixed lease payments are recognized as operating lease cost on a straight-line basis over the lease term. For finance leases, the initial ROU asset is depreciated on a straight-line basis over the lease term, along with recognition of interest expense associated with accretion of the lease liability, which is ultimately reduced by the related fixed payments as they are made. For leases with a lease term of 12 months or less (referred to as a "short-term lease"), any fixed lease payments are recognized on a straight-line basis over such term, and are not recognized on the consolidated balance sheet. Variable lease cost, if any, is recognized as incurred for all leases.
ROU assets, along with any other related long-lived assets, are periodically evaluated for impairment (see Note 11). To the extent that an ROU asset and any related long-lived assets are determined to be impaired, they are written down accordingly on a relative carrying amount basis, with the ROU asset written down to an amount no lower than its estimated fair value. Subsequent to the recognition of any such impairment, total remaining lease cost is recognized on a front-loaded basis over the remaining lease term.
See Note 13 for further discussion of the Company's leases.
Derivative Financial Instruments
The Company records all derivative financial instruments on its consolidated balance sheets at fair value. Changes in the fair value of derivative instruments that qualify for hedge accounting are either (i) offset against the changes in fair value of the related hedged assets, liabilities, or firm commitments through earnings or (ii) recognized in equity as a component of accumulated other comprehensive income (loss) ("AOCI") until the hedged item is recognized in earnings, depending on whether the derivative is being used to hedge against changes in fair value or cash flows and net investments, respectively.
Each derivative instrument that qualifies for hedge accounting is expected to be highly effective in reducing and offsetting the risk associated with the related exposure being hedged. For each derivative instrument that is designated as a hedge, the Company formally documents the related risk management objective and strategy, including identification of the hedging instrument, the hedged item, and the risk exposure, as well as how hedge effectiveness will be assessed over the instrument's term. To assess hedge effectiveness at the inception of a hedging relationship, the Company generally uses regression analysis, a statistical method, to compare changes in the fair value of the derivative instrument to changes in the fair value or cash flows of the related hedged item. The extent to which a hedging instrument has been and is expected to remain highly effective in achieving offsetting changes in fair value or cash flows is assessed by the Company on at least a quarterly basis.
As a result of its use of derivative instruments, the Company is exposed to the risk that counterparties to such contracts will fail to meet their contractual obligations. To mitigate this counterparty credit risk, the Company has a policy of only entering into contracts with carefully selected financial institutions based upon an evaluation of their credit ratings and certain other factors, adhering to established limits for credit exposure. The Company's established policies and procedures for mitigating credit risk from derivative transactions include ongoing review and assessment of its counterparties' creditworthiness. The Company also enters into master netting arrangements with counterparties, when possible, to further mitigate credit risk. In the event of default or termination (as such terms are defined within the respective master netting arrangement), these arrangements allow the Company



14
 


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

to net-settle amounts payable and receivable related to multiple derivative transactions with the same counterparty. The master netting arrangements specify a number of events of default and termination, including, among others, the failure to make timely payments.
The fair values of the Company's derivative instruments are recorded on its consolidated balance sheets on a gross basis. For cash flow reporting purposes, proceeds received or amounts paid upon the settlement of a derivative instrument are classified in the same manner as the related item being hedged, primarily within cash flows from operating activities.
Cash Flow Hedges
The Company uses forward foreign currency exchange contracts to mitigate its risk related to exchange rate fluctuations on inventory transactions made in an entity's non-functional currency and the settlement of foreign currency-denominated balances. 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 AOCI and are subsequently recognized in the 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 ultimate settlement when the related payment occurs.
If it is determined that a derivative instrument has not been highly effective, and will continue not to be highly effective in hedging the designated exposure, hedge accounting is discontinued and further gains (losses) are immediately recognized in earnings within other income (expense), net. Upon discontinuance of hedge accounting, the cumulative change in fair value of the derivative instrument previously recorded in AOCI is recognized in earnings when the related hedged item affects earnings, consistent with the originally-documented hedging strategy, unless the forecasted transaction is no longer probable of occurring, in which case the accumulated amount is immediately recognized in earnings within other income (expense), net.
Hedges of Net Investments in Foreign Operations
The Company periodically uses cross-currency swap contracts and forward foreign currency exchange contracts to reduce risk associated with exchange rate fluctuations on certain of its net investments in foreign subsidiaries. Changes in the fair values of such derivative instruments that are designated as qualifying hedges of net investments in foreign operations are recorded in equity as a component of AOCI in the same manner as foreign currency translation adjustments. In assessing the effectiveness of such hedges, the Company uses a method based on changes in spot rates to measure the impact of foreign currency exchange rate fluctuations on both its foreign subsidiary net investment and the related derivative hedging instrument. Under this method, changes in the fair value of the hedging instrument other than those due to changes in the spot rate are initially recorded in AOCI as a translation adjustment, and are amortized into earnings as interest expense using a systematic and rational method over the instrument's term. Changes in fair value associated with the effective portion (i.e., those due to changes in the spot rate) are recorded in AOCI as a translation adjustment and are released and recognized in earnings only upon the sale or liquidation of the hedged net investment.
Fair Value Hedges
Changes in the fair value of a derivative instrument that is designated as a fair value hedge, along with offsetting changes in the fair value of the related hedged item attributable to the hedged risk, are recorded in earnings. To the extent that the change in the fair value of the hedged item does not fully offset the change in the fair value of the hedging instrument, the resulting net impact is reflected in earnings within the income statement line item associated with the hedged item.
Undesignated Hedges
All of the Company's undesignated hedges are entered into to hedge specific economic risks, particularly foreign currency exchange rate risk related to foreign currency-denominated balances. Changes in the fair value of undesignated derivative instruments are immediately recognized in earnings within other income (expense), net.



15
 


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

See Note 12 for further discussion of the Company's derivative financial instruments.
Refer to Note 3 of the Fiscal 2019 10-K for a summary of all of the Company's significant accounting policies.
4.
Recently Issued Accounting Standards
Implementation Costs in Cloud Computing Arrangements
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" ("ASU 2018-15"). ASU 2018-15 addresses diversity in practice surrounding the accounting for costs incurred to implement a cloud computing hosting arrangement that is a service contract by establishing a model for capitalizing or expensing such costs, depending on their nature and the stage of the implementation project during which they are incurred. Any capitalized costs are to be amortized over the reasonably certain term of the hosting arrangement and presented in the same line within the statement of operations as the related service arrangement's fees. ASU 2018-15 also requires enhanced qualitative and quantitative disclosures surrounding hosting arrangements that are service contracts. ASU 2018-15 is effective for the Company beginning in its fiscal year ending March 27, 2021 ("Fiscal 2021"), with early adoption permitted, and may be adopted on either a retrospective or prospective basis. Although the impact of adopting ASU 2018-15 will depend on the composition of its cloud computing arrangements in place at that time, other than the new disclosure requirements, the Company does not currently expect that it will have a material impact on its consolidated financial statements.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"). Existing accounting guidance requires the remeasurement of deferred tax assets and liabilities resulting from a change in tax laws and rates to be presented within net income, including deferred taxes related to items recorded within AOCI. ASU 2018-02 provides an entity with the option to adjust AOCI for the "stranded" tax effect of such remeasurements resulting from the reduction in the U.S. federal statutory income tax rate under the 2017 Tax Cuts and Jobs Act (the "TCJA") through a reclassification to retained earnings.
The Company adopted ASU 2018-02 as of the beginning of the first quarter of Fiscal 2020 and elected to reclassify the income tax effect stranded in AOCI related to the TCJA, inclusive of state income tax-related effects, resulting in a $4.9 million increase to its opening retained earnings balance. The Company generally releases income tax effects from AOCI when the corresponding pretax AOCI items are reclassified to earnings.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). ASU 2016-13, which was further updated and clarified by the FASB through issuance of additional related ASUs, amends the guidance surrounding measurement and recognition of credit losses on financial assets measured at amortized cost, including trade receivables and investments in debt securities, by requiring recognition of an allowance for credit losses expected to be incurred over an asset's lifetime based on relevant information about past events, current conditions, and supportable forecasts impacting its ultimate collectibility. This "expected loss" model will result in earlier recognition of credit losses than the current "as incurred" model, under which losses are recognized only upon an occurrence of an event that gives rise to the incurrence of a probable loss. ASU 2016-13 is effective for the Company beginning in its Fiscal 2021, with early adoption permitted, and is to be adopted on a modified retrospective basis. The Company is currently evaluating the impact that ASU 2016-13 will have on its consolidated financial statements, if any.



16
 


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases." ASU No. 2016-02, along with certain other ASUs that were subsequently issued to clarify and modify certain of its provisions (collectively "ASU 2016-02"), supersedes historical lease accounting guidance and requires that, among its provisions, a lessee's rights and fixed payment obligations under most leases be recognized as ROU assets and lease liabilities on its balance sheet, initially measured based on the present value of its fixed payment obligations over the lease term. Under historical guidance, only those leases classified as capital were recognized on a lessee's balance sheet; operating leases were not recognized on the balance sheet. ASU 2016-02 retains a dual model for classifying leases as either finance (formerly referred to as "capital") or operating, consistent with historical guidance, which governs the pattern of expense recognition reflected in the statement of operations over the lease term. Accordingly, recognition of lease expense in the statement of operations will not significantly change. Additionally, variable lease payments based on performance, such as percentage-of-sales-based payments, are not included in the measurement of ROU assets and lease liabilities and, consistent with historical practice, are recognized as an expense in the period incurred. The standard also requires enhanced quantitative and qualitative lease-related disclosures.
The Company adopted ASU 2016-02 as of the beginning of the first quarter of Fiscal 2020 using a modified retrospective approach under which the cumulative effect of initially applying the standard was recognized as an adjustment to its opening retained earnings (discussed further below), with no restatement of prior year amounts. In connection therewith, the Company applied an optional package of practical expedients intended to ease transition to the standard for existing leases by, among its provisions, carrying forward its original lease classification conclusions without reassessment. Upon adoption of ASU 2016-02, the Company recognized initial ROU asset and lease liability balances of approximately $1.60 billion and $1.75 billion, respectively, on its consolidated balance sheet.
Additionally, in connection with its adoption of ASU 2016-02, the Company recorded an adjustment to reduce its opening retained earnings balance by $131.6 million, net of related income tax benefits, reflecting the impairment of an ROU asset for a certain real estate lease of which, under historical accounting guidance, the Company was previously deemed the owner for accounting purposes (commonly referred to as a "build-to-suit" lease arrangement). Specifically, although the Company no longer generates revenue or other cash flows from its rights underlying the leased asset given it no longer actively uses the space for commercial purposes, the asset was previously not considered impaired under historical accounting guidance as its fair value, assessed from an ownership perspective (and not from that of a lessee), exceeded its carrying value. However, in accordance with and upon transitioning to ASU 2016-02, the Company derecognized the remaining asset and liability balances previously recognized solely as a result of the arrangement's build-to-suit designation, as the related construction activities that originally gave rise to such designation have since ended, and established initial ROU asset and lease liability balances measured based on the Company's remaining fixed payment obligations under the lease. The initial ROU asset was then assessed for impairment based on the aggregate estimated cash flows that could be generated by transferring the lease to a market participant sublessee for the remainder of its term, which were lower than the aggregate remaining lease payments underlying the measurement of the initial ROU asset. Accordingly, the Company impaired the initial ROU asset by $175.4 million to its estimated fair value which was recorded as a reduction to its opening retained earnings balance, net of related income tax benefits of $43.8 million, upon adoption of ASU 2016-02, as previously noted.
The Company also recorded other initial ROU asset impairment adjustments to reduce its opening retained earnings balance upon adoption of the standard related to leases of certain underperforming retail locations for which the carrying value of the respective store's initial operating lease ROU asset exceeded its fair value. These impairments totaled $49.7 million and were recorded as adjustments to reduce the Company's opening retained earnings balance by $37.8 million, net of related income tax effects. Leasehold improvements related to these underperforming retail locations were previously fully-impaired prior to the adoption of ASU 2016-02.
See Notes 3 and 13 for further discussion of the Company's lease accounting policy and other related disclosures.



17
 


RALPH LAUREN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.
Property and Equipment
Property and equipment, net consists of the following:
 
 
September 28,
2019
 
March 30,
2019
 
 
(millions)
Land and improvements
 
$
15.3

 
$
15.3

Buildings and improvements
 
312.6

 
387.8

Furniture and fixtures
 
629.9

 
626.4

Machinery and equipment
 
359.2

 
350.4

Capitalized software
 
549.5

 
534.0

Leasehold improvements
 
1,182.7

 
1,169.4

Construction in progress
 
110.8

 
58.7

 
 
3,160.0

 
3,142.0

Less: accumulated depreciation
 
(2,149.0
)
 
(2,102.8
)
Property and equipment, net
 
$
1,011.0

 
$
1,039.2