Ralph Lauren Corp
RL
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RALPH LAUREN : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

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05/18/2017 | 10:13 pm


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 footnotes, 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 2017 ended on April 1, 2017 and
was a 52-week period; Fiscal 2016 ended on April 2, 2016 and was a 53-week
period; Fiscal 2015 ended on March 28, 2015 and was a 52-week period; and Fiscal
2018 will end on March 31, 2018 and will be a 52-week period.
INTRODUCTION
MD&A is provided as a supplement to the accompanying consolidated financial
statements and footnotes to help provide an understanding of our results of
operations, financial condition, and liquidity. MD&A is organized as follows:
• Overview. This section provides a general description of our business,
global economic developments, and a summary of our financial
performance for Fiscal 2017. 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 2017 and Fiscal 2016 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 April 1, 2017, which
includes (i) an analysis of our financial condition compared to the
prior fiscal year-end; (ii) an analysis of changes in our cash flows
for Fiscal 2017 and Fiscal 2016 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 April 1, 2017.


• 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 April 1, 2017.



• 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 or proposed.



OVERVIEW



Our Business
Our Company is a global leader in the design, marketing, and distribution of
premium lifestyle products, including apparel, 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 have diversified our business by geography (North America, Europe, and Asia,
among other regions) and channels 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. We also sell directly
to consumers through our integrated retail channel, which includes our retail
stores, concession-based shop-within-shops, and e-commerce operations around the
world. In addition, we license to unrelated third parties for specified periods
the right to operate retail stores and/or to use our various trademarks in
connection with the manufacture and sale of designated products, such as certain
apparel, eyewear, fragrances, and home furnishings.


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Effective beginning in the fourth quarter of Fiscal 2017, we organize our
business into the following three reportable segments:
North America - Our North America segment, representing approximately



57% of our Fiscal 2017 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.


Europe - Our Europe segment, representing approximately 23% of our
Fiscal 2017 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.


Asia - Our Asia segment, representing approximately 13% of our Fiscal
2017 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.


In addition to these reportable segments, we also have other non-reportable
segments, representing approximately 7% of our Fiscal 2017 net revenues, which
primarily consist of (i) sales of our Club Monaco branded products made through
our retail businesses in the U.S., Canada, and Europe, (ii) sales of our Ralph
Lauren branded products made through our wholesale business in Latin America,
and (iii) royalty revenues earned through our global licensing alliances.
Approximately 40% of our Fiscal 2017 net revenues were earned outside of the
U.S. See Note 20 to the accompanying consolidated financial statements for
further discussion of our segment reporting structure.
Our business is typically affected by seasonal trends, with higher levels of
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 Developments
Although the global economy has shown signs of modest improvement in certain
geographic areas, global consumer retail traffic remains relatively weak and
inconsistent. Certain worldwide events, including political unrest, acts of
terrorism, monetary policy changes, and currency and commodity price changes,
increase volatility in the global economy. In addition, the current domestic and
international political environment, including potential changes to U.S.
policies related to global trade, taxation, immigration, and healthcare, as well
as the United Kingdom's decision to exit the European Union, have also resulted
in greater uncertainty surrounding the future state of the global economy. As
the majority of our products are produced outside of the U.S., major changes in
tax policies or trade relations could have a material adverse effect on our
business or operating results.
While certain geographic regions are withstanding these pressures better than
others, the level of consumer travel and spending on discretionary items remains
constrained in certain markets, with trends likely to continue throughout
calendar 2017 and potentially beyond. As a result of these collective factors,
among others, many retailers, including certain of our large wholesale
customers, have been highly promotional and have aggressively marked down their
merchandise in an attempt to offset traffic declines with increased levels of
conversion. The retail industry has also experienced numerous consolidations,
restructurings, reorganizations, and other ownership changes in recent years,
and we expect such changes will continue as a result of current economic
conditions. Certain of our operations have experienced, and have been impacted
by, these dynamics, with variations across the geographic regions and businesses
in which we operate.
If challenging economic conditions and industry trends continue or worsen,
consumer spending and consumption behavior could be negatively impacted, which
could have a material adverse effect on our business or operating results.
Furthermore, our results have been, and are expected to continue to be, impacted
by foreign exchange rate fluctuations. We have implemented various operating
strategies to mitigate these challenges, and continue to build a foundation for
long-term profitable growth. Accordingly, we are strengthening our consumer
facing areas of product, stores, and marketing and driving a more efficient
operating model, including our restructuring activities, as described within
"Recent Developments" below, while continually monitoring macroeconomic risks.
Although we continue to expect that the dilutive effects of investments that we
are making in our business and our quality of sales initiatives will create
operating profit pressure in the near-term, we expect that these initiatives
will create longer-term shareholder value. We will continue to monitor these
risks and evaluate and adjust our operating strategies and foreign currency and
cost management opportunities to mitigate the related impact on our results of
operations, while remaining focused on the long-term growth of our business and
protecting the value of our brand.


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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 2017, we reported net revenues of $6.653 billion, a net loss of $99.3
million
, and net loss per diluted share of $1.20, as compared to net revenues of
$7.405 billion, net income of $396.4 million, and net income per diluted share
of $4.62 in Fiscal 2016. The comparability of our operating results has been
affected by restructuring-related charges, impairment of assets, and certain
other charges, as well as the 53rd week in Fiscal 2016 and unfavorable foreign
currency effects, all as discussed further below.
During Fiscal 2017, net revenues declined 10.2% on a reported basis and 9.9% on
a constant currency basis, as defined within "Transactions and Trends Affecting
Comparability of Results of Operations and Financial Condition" below. The
decline in reported net revenues during Fiscal 2017 reflected lower net revenues
from our North America, Europe, and Asia segments, and also reflected the
absence of the 53rd week, which resulted in incremental net revenues of $72.2
million
during Fiscal 2016.
Our gross profit as a percentage of net revenues declined by 160 basis points to
54.9% during Fiscal 2017, primarily driven by higher non-cash inventory-related
charges recorded in connection with our restructuring plans and net unfavorable
foreign currency effects, partially offset by increased profitability driven by
favorable geographic and channel mix and our quality of sales initiatives,
including lower levels of promotional activity within our international
businesses.
Selling, general, and administrative ("SG&A") expenses as a percentage of net
revenues increased by 150 basis points to 47.3% during Fiscal 2017, primarily
due to operating deleverage on lower net revenues and continued investments in
our stores and concession shops, facilities, and infrastructure consistent with
our longer-term initiatives, partially offset by our operational discipline and
cost savings associated with our restructuring activities.
Net income declined by $495.7 million to a loss of $99.3 million in Fiscal 2017
as compared to Fiscal 2016, primarily due to a $676.7 million decrease in
operating income, partially offset by a $161.0 million decline in our income tax
provision. Net income per diluted share declined by $5.82 to a loss of $1.20 per
share in Fiscal 2017 as compared to Fiscal 2016, due to lower net income and
lower weighted-average diluted shares outstanding during Fiscal 2017.
Our operating results during Fiscal 2017 and Fiscal 2016 were negatively
impacted by restructuring-related charges, impairment of assets, and certain
other charges totaling $770.3 million and $211.8 million, respectively, which
had an after-tax effect of reducing net income by $592.1 million and $150.1
million
, respectively, or $7.10 per diluted share and $1.74 per diluted share,
respectively. In addition, our net loss during Fiscal 2017 reflected unfavorable
foreign currency impacts of $63.6 million, or $0.77 per diluted share, partially
offset by the favorable impact of $15.9 million, or $0.19 per diluted 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. Net
income during Fiscal 2016 reflected the favorable impact of the inclusion of the
53rd week, which increased net income by $8.3 million, or $0.10 per diluted
share.
Financial Condition and Liquidity
We ended Fiscal 2017 in a net cash and investments position (cash and cash
equivalents plus short-term and non-current investments, less total debt) of
$786.2 million, compared to $559.2 million as of the end of Fiscal 2016. The
increase in our net cash and investments position was primarily due to our
operating cash flows of $952.3 million, partially offset by our use of cash to
invest in our business through $284.0 million in capital expenditures, to
support Class A common stock repurchases of $215.2 million, including
withholdings in satisfaction of tax obligations for stock-based compensation
awards, and to make cash dividend payments of $164.8 million.
We generated $952.3 million of cash from operations during Fiscal 2017, compared
to $1.007 billion during Fiscal 2016. The decrease in our operating cash flows
was primarily due to a decline in net income before non-cash charges, partially
offset by a net favorable change related to our operating assets and
liabilities, including our working capital.
Our equity declined to $3.300 billion as of April 1, 2017, compared to $3.744
billion
as of April 2, 2016, primarily due to our Class A common stock
repurchases, dividends declared, and comprehensive loss, partially offset by the
net impact of stock-based compensation arrangements during Fiscal 2017.


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Recent Developments
Change in Chief Executive Officer
Consistent with our announcement on February 2, 2017, Mr. Stefan Larsson
departed as the Company's President and CEO and as a member of our Board of
Directors, effective as of May 1, 2017. Subsequently, on May 17, 2017, we
announced that Mr. Patrice Louvet will be appointed as the Company's new
President and CEO and as a member of our Board of Directors, effective as of
July 10, 2017 or such date as may be mutually agreed upon by the parties. See
Note 22 to our accompanying consolidated financial statements for further
discussion regarding the appointment of Mr. Louvet.
In connection with Mr. Larsson's departure, we recorded other charges of $11.4
million
during Fiscal 2017 and expect to incur additional charges of
approximately $6 million during Fiscal 2018. See Note 10 to our accompanying
consolidated financial statements for further discussion regarding Mr. Larsson's
departure.
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 plan to refocus on our
core brands and evolve our product, marketing, and shopping experience to
increase desirability and relevance. We also intend to evolve 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 plan to rightsize our cost structure and
implement 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 resulted in a reduction in workforce and the closure of certain
stores and shop-within-shops during Fiscal 2017, and are expected to result in
gross annualized expense savings of approximately $180 million to $220 million.
On March 30, 2017, our Board of Directors approved the following additional
restructuring-related activities associated with our Way Forward Plan: (i) the
restructuring of our in-house global e-commerce platform which was in
development and shift to a more cost-effective, flexible e-commerce 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 our Way Forward Plan. These actions,
which are expected to be completed by the end of Fiscal 2018, 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 will result in a further reduction in workforce
and the closure of certain corporate office and store locations, and are
expected to result in additional gross annualized expense savings of
approximately $140 million.
In connection with the Way Forward Plan, we currently expect to incur total
estimated charges of approximately $770 million, comprised of cash-related
restructuring charges of approximately $450 million and non-cash charges of
approximately $320 million. Cumulative cash and non-cash charges incurred during
Fiscal 2017 were $289.1 million and $277.3 million, respectively. In addition to
these charges, we also incurred an additional non-cash charge of $155.2 million
during Fiscal 2017 associated with the destruction of inventory out of current
liquidation channels in line with our Way Forward Plan. See Notes 9 and 10 to
our accompanying consolidated financial statements for detailed discussions of
the charges recorded in connection with the Way Forward Plan.


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Global Reorganization Plan
On May 12, 2015, our Board of Directors approved a reorganization and
restructuring plan comprised of the following major actions: (i) the
reorganization of the Company's operating structure in order to streamline our
business processes to better align our cost structure with our long-term growth
strategy; (ii) a strategic store and shop-within-shop performance review
conducted by region and brand; (iii) a targeted corporate functional area
review; and (iv) the consolidation of certain of our luxury lines (collectively,
the "Global Reorganization Plan"). The Global Reorganization Plan has resulted
in a reduction in workforce and the closure of certain stores and
shop-within-shops. Actions associated with the Global Reorganization Plan were
substantially completed during Fiscal 2016 and are expected to result in
improved operational efficiencies by reducing annual operating expenses by
approximately $125 million.
Since its inception, we have recorded total cumulative charges of $147.4 million
in connection with the Global Reorganization Plan, of which $4.9 million was
recorded during Fiscal 2017. Actions associated with the Global Reorganization
Plan are now complete and no additional charges are expected to be incurred in
relation to this plan. See Notes 9 and 10 to our accompanying consolidated
financial statements for detailed discussions of the charges recorded in
connection with the Global Reorganization 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:
• 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
April 1, April 2, March 28,
2017 2016 2015
(millions)
Impairments of assets (see Note 9)(a) $ (253.8 ) $ (48.8 ) $ (6.9 )
Restructuring and other charges (see Note
10) (318.6 ) (142.6 ) (10.1 )
Restructuring-related inventory charges (see
Note 10)(b) (197.9 ) (20.4 ) -
Total charges $ (770.3 ) $ (211.8 ) $ (17.0 )







(a) Fiscal 2017 and Fiscal 2016 included non-cash impairment charges of



$234.6 million and $27.2 million, respectively, recorded in
connection with our restructuring plans.


(b) Non-cash restructuring-related inventory charges are recorded within
cost of goods sold in the consolidated statements of



operations.



• 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,
or $0.19 per diluted share, during Fiscal 2017.


• the inclusion of the 53rd week in Fiscal 2016, which resulted in
incremental net revenues of $72.2 million and net income of $8.3
million
, or $0.10 per diluted share.



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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 to assess how our businesses performed excluding the effects of
foreign currency exchange rate fluctuations. We believe this information is
useful to investors to facilitate comparisons of operating results and better
identify 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. Comparable
store sales refer to the growth of sales in stores that are open for at least
one full fiscal year. Sales for stores that are closed during a fiscal 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 in their new location or in their newly renovated
state for at least one full fiscal year. Sales from our e-commerce sites are
included within comparable store sales for those geographies that have been
serviced by the related site for at least one full fiscal year. Sales for
e-commerce sites that are shut down during a fiscal year are excluded from the
calculation of comparable store sales. We use an integrated omni-channel
strategy to operate our retail business, in which our e-commerce operations are
interdependent with our physical stores. All comparable store sales metrics were
calculated on a 52-week basis.
Our "Results of Operations" discussion that follows includes the significant
changes in operating results arising from these items affecting comparability.
However, unusual items or transactions may occur in any period. Accordingly,
investors and other financial statement users should consider the types of
events and transactions that have affected operating trends.


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RESULTS OF OPERATIONS
Fiscal 2017 Compared to Fiscal 2016
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
April 1, April 2, $ % / bps
2017 2016 Change Change
(millions, except per share data)
Net revenues $ 6,652.8 $ 7,405.2 $ (752.4 ) (10.2 %)
Cost of goods sold(a) (3,001.7 ) (3,218.5 ) 216.8 (6.7 %)
Gross profit 3,651.1 4,186.7 (535.6 ) (12.8 %)
Gross profit as % of net revenues 54.9 % 56.5 % (160 bps)
Selling, general, and administrative
expenses(a) (3,149.4 ) (3,389.7 ) 240.3 (7.1 %)
SG&A expenses as % of net revenues 47.3 % 45.8 % 150 bps
Amortization of intangible assets (24.1 ) (23.7 ) (0.4 ) 2.0 %
Impairment of assets (253.8 ) (48.8 ) (205.0 ) NM
Restructuring and other charges (318.6 ) (142.6 ) (176.0 ) 123.4 %
Operating income (loss) (94.8 ) 581.9 (676.7 ) (116.3 %)
Operating income (loss) as % of net
revenues (1.4 %) 7.9 % (930 bps)
Foreign currency gains (losses) 1.1 (3.8 ) 4.9 (128.8 %)
Interest expense (12.4 ) (21.0 ) 8.6 (41.0 %)
Interest and other income, net 6.4 5.6 0.8 14.3 %
Equity in losses of equity-method
investees (5.2 ) (10.9 ) 5.7 (52.5 %)
Income (loss) before income taxes (104.9 ) 551.8 (656.7 ) (119.0 %)
Income tax benefit (provision) 5.6 (155.4 ) 161.0 (103.6 %)
Effective tax rate(b) 5.3 % 28.2 % (2,290 bps)
Net income (loss) $ (99.3 ) $ 396.4 $ (495.7 ) (125.1 %)
Net income (loss) per common share:
Basic $ (1.20 ) $ 4.65 $ (5.85 ) (125.8 %)
Diluted $ (1.20 ) $ 4.62 $ (5.82 ) (126.0 %)





(a) Includes total depreciation expense of $283.4 million and $285.7
million
for Fiscal 2017 and Fiscal 2016, respectively.


(b) Effective tax rate is calculated by dividing the income tax benefit
(provision) by income (loss) before income taxes.


NM Not meaningful.
Net Revenues. Net revenues decreased by $752.4 million, or 10.2%, to $6.653
billion
in Fiscal 2017. This decrease reflected net unfavorable foreign currency
effects of $21.2 million, as well as the absence of the 53rd week, which
resulted in incremental net revenues of $72.2 million during the prior fiscal
year. On a constant currency basis, net revenues decreased by $731.2 million, or
9.9%.
The following table summarizes the percentage change in our Fiscal 2017
consolidated comparable store sales as compared to the prior fiscal year on both
a reported and constant currency basis:
As Constant
Reported Currency
E-commerce comparable store sales (10 %) (10 %)


Comparable store sales excluding e-commerce (7 %) (7 %)
Total comparable store sales


(7 %) (7 %)



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Our global average store count increased by 44 stores and concession shops
during Fiscal 2017 compared with the prior fiscal year, due to new global store
openings, primarily in Asia, partially offset by store closures, primarily
associated with our Way Forward Plan. The following table details our retail
store presence by segment as of the periods presented:
April 1, April 2,
2017 2016
Freestanding Stores:
North America 216 224
Europe 82 87
Asia 89 105
Other non-reportable segments 79 77
Total freestanding stores 466 493

Concession Shops:
North America - 2
Europe 31 34
Asia 586 545
Other non-reportable segments 2 2
Total concession shops 619 583
Total stores 1,085 1,076


In addition to our stores, we sell products online in North America and Europe
through our various e-commerce sites, which include www.RalphLauren.com and
www.ClubMonaco.com, among others. In Asia, we sell products online through
e-commerce sites of various third-party digital partners.
Net revenues for our segments, as well as a discussion of the changes in each
reportable segment's net revenues from the prior fiscal year, are provided
below:
Fiscal Years Ended $ Change $ Change % Change
April 1, April 2, As Foreign Exchange Constant As Constant
2017 2016 Reported Impact Currency Reported Currency
(millions)
Net Revenues:
North America $ 3,795.0 $ 4,493.9 $ (698.9 ) $ (0.4 ) $ (698.5 ) (15.6 %) (15.5 %)
Europe 1,543.4 1,561.8 (18.4 ) (64.3 ) 45.9 (1.2 %) 2.9 %
Asia 882.9 893.5 (10.6 ) 43.6 (54.2 ) (1.2 %) (6.1 %)
Other non-reportable
segments 431.5 456.0 (24.5 ) (0.1 ) (24.4 ) (5.4 %) (5.3 %)


Total net revenues $ 6,652.8 $ 7,405.2 $ (752.4 ) $ (21.2 ) $ (731.2 ) (10.2 %) (9.9 %)





North America net revenues - Net revenues decreased by $698.9 million, or 15.6%,
during Fiscal 2017 as compared to Fiscal 2016. This decrease reflected net
unfavorable foreign currency effects of $0.4 million, as well as the absence of
the 53rd week, which resulted in incremental net revenues of $38.2 million
during the prior fiscal year. On a constant currency basis, net revenues
decreased by $698.5 million, or 15.5%.
The $698.9 million net decline in North America net revenues was driven by:
• a $511.4 million net decrease related to our North America wholesale
business, reflecting lower sales across all of our major apparel and
accessories businesses, due in part to a strategic reduction of
shipments in connection with our Way Forward Plan and a decline in
department store traffic, which contributed to a more competitive
retail environment. This decrease also reflected the absence of the
53rd week, which resulted in incremental net revenues of $10.0 million
during the prior fiscal year;



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• a $165.5 million net decrease in comparable store sales, primarily



driven by lower sales from certain of our retail stores and Ralph
Lauren e-commerce operations due in part to a decline in traffic. The
following table summarizes our comparable store sales percentages on
both a reported and constant currency basis related to our North
America
retail business:


As Constant
Reported Currency
E-commerce comparable store sales (15 %) (15 %)


Comparable store sales excluding e-commerce (8 %) (8 %)
Total comparable store sales


(10 %) (10 %)



• a $22.0 million net decrease in non-comparable store sales, primarily



driven by the absence of the 53rd week, which resulted in incremental



net revenues of $28.2 million during the prior fiscal year, partially



offset by new store openings during Fiscal 2017.





Europe net revenues - Net revenues decreased by $18.4 million, or 1.2%, during
Fiscal 2017 as compared to Fiscal 2016. This decrease reflected net unfavorable
foreign currency effects of $64.3 million, as well as the absence of the 53rd
week, which resulted in incremental net revenues of $14.3 million during the
prior fiscal year. On a constant currency basis, net revenues increased by $45.9
million
, or 2.9%.
The $18.4 million net decline in Europe net revenues was driven by:
• a $57.1 million net decrease in comparable store sales, including net


unfavorable foreign currency effects of $26.9 million. Our comparable



store sales decreased by $30.2 million on a constant currency basis,
primarily driven by lower sales from certain retail stores due in part
to a decline in traffic, as well as lower levels of promotional



activity in connection with our Way Forward Plan, partially offset by



higher sales from our Ralph Lauren e-commerce operations. The following



table summarizes our comparable store sales percentages on both a
reported and constant currency basis related to our Europe retail
business:


As Constant
Reported Currency
E-commerce comparable store sales 7 % 11 %


Comparable store sales excluding e-commerce (10 %) (6 %)
Total comparable store sales


(8 %) (4 %)



This decline was partially offset by:
• a $25.4 million net increase related to our Europe wholesale business,



reflecting increased sales across all of our major apparel and
accessories businesses. This increase is net of unfavorable foreign
currency effects of $23.0 million; and



• a $13.3 million net increase in non-comparable store sales, primarily



driven by new store openings during Fiscal 2017, partially offset by



net unfavorable foreign currency effects of $14.4 million and the



absence of the 53rd week, which resulted in incremental net revenues of



$14.3 million during the prior fiscal year.





Asia net revenues - Net revenues decreased by $10.6 million, or 1.2%, during
Fiscal 2017 as compared to Fiscal 2016, reflecting the absence of the 53rd week,
which resulted in incremental net revenues of $15.4 million during the prior
fiscal year. This decrease is inclusive of net favorable foreign currency
effects of $43.6 million. On a constant currency basis, net revenues decreased
by $54.2 million, or 6.1%.
The $10.6 million net decline in Asia net revenues was driven by:
• a $17.4 million net decrease in non-comparable store sales, primarily


driven by the absence of the 53rd week, which resulted in incremental



net revenues of $15.4 million during the prior fiscal year, as well as
lower sales from certain of our stores and concession shops due in part
to a decline in traffic, lower levels of promotional activity in
connection with our Way Forward Plan, and the strategic closure of
certain of our locations, partially offset by net favorable foreign
currency effects of $11.1 million and new store openings during Fiscal
2017; and



46



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• a $5.5 million net decrease related to our Asia wholesale business,



primarily driven by lower sales in Greater China and Southeast Asia,
partially offset by net favorable foreign currency effects of $3.4
million
.



These declines were partially offset by:
• a $12.3 million net increase in comparable store sales, including net



favorable foreign currency effects of $29.1 million. Our comparable



store sales decreased by $16.8 million on a constant currency basis,
primarily driven by lower sales from certain of our stores and
concession shops due in part to a decline in traffic, and lower levels
of promotional activity in connection with our Way Forward Plan. The
following table summarizes our comparable store sales percentage on
both a reported and constant currency basis related to our Asia retail
business:


As Constant
Reported Currency



Total comparable store sales(a) 2 % (3 %)








(a) Comparable store sales for our Asia segment was comprised solely of
sales made through our stores and concession shops.


Gross Profit. Gross profit decreased by $535.6 million, or 12.8%, to $3.651
billion
in Fiscal 2017. Gross profit during Fiscal 2017 and Fiscal 2016
reflected non-cash inventory-related charges of $197.9 million and $20.4
million
, respectively, recorded in connection with our restructuring plans.
Gross profit as a percentage of net revenues declined by 160 basis points to
54.9% in Fiscal 2017 from 56.5% in Fiscal 2016. This decline was primarily
driven by the higher non-cash inventory-related charges recorded in connection
with our restructuring plans during Fiscal 2017 as compared to the comparable
prior year period and net unfavorable foreign currency effects, partially offset
by increased profitability driven by favorable geographic and channel mix and
our quality of sales initiatives, including lower levels of promotional activity
within our international businesses.
Gross profit as a percentage of net revenues is dependent upon a variety of
factors, including changes in the relative sales mix among distribution
channels, changes in the mix of products sold, the timing and level of
promotional activities, foreign currency exchange rates, and fluctuations in
material costs. These factors, among others, may cause gross profit as a
percentage of net revenues to fluctuate from year to year.
Selling, General, and Administrative Expenses. SG&A expenses primarily include
compensation and benefits, advertising and marketing, distribution, bad debt,
information technology, facilities, legal, and other costs associated with
finance and administration. SG&A expenses decreased by $240.3 million, or 7.1%,
to $3.149 billion in Fiscal 2017. This decrease included a net unfavorable
foreign currency effect of $5.3 million. SG&A expenses as a percentage of net
revenues increased by 150 basis points to 47.3% in Fiscal 2017 from 45.8% in
Fiscal 2016. This increase was primarily due to operating deleverage on lower
net revenues, as previously discussed, and the continued investment in, and
expansion of, our retail businesses (which typically carry higher operating
expense margins) through new store and concession shop openings (as previously
discussed); investments in our facilities and infrastructure; and investments in
new business initiatives. These increases were partially offset by our
operational discipline and cost savings associated with our restructuring
activities.
The $240.3 million decline in SG&A expenses was driven by:
Fiscal 2017
Compared to
Fiscal 2016
(millions)



SG&A expense category:
Compensation-related expenses $ (107.2 )
Marketing and advertising expenses (60.1 )
Consulting fees


(23.0 )
Rent and occupancy expenses (19.3 )
Shipping and handling costs (12.9 )
Other (17.8 )


Total decline in SG&A expenses $ (240.3 )






47



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During Fiscal 2018, we continue to expect a certain amount of operating expense
deleverage driven by an anticipated decline in sales associated with our quality
of sale initiatives and unfavorable foreign currency effects, which are
affecting operating expenses at a lower rate than sales. In addition, we will
continue to invest in our long-term strategic initiatives, including expansion
and renovations of our retail stores and concession shops, which will partially
offset anticipated cost savings related to our restructuring activities (see
"Recent Developments").
Amortization of Intangible Assets. Amortization of intangible assets increased
slightly by $0.4 million, or 2.0%, to $24.1 million in Fiscal 2017, due to net
unfavorable foreign currency effects.
Impairment of Assets. 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 e-commerce platform previously under construction,
of which $234.6 million was recorded in connection with the Way Forward Plan and
$14.0 million was recorded in connection with underperforming stores subject to
potential future closure. 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. During Fiscal 2016, we recognized non-cash
impairment charges of $48.8 million, primarily to write off certain fixed assets
related to our domestic and international retail stores and shop-within-shops,
of which $27.2 million was recorded in connection with the Global Reorganization
Plan and $21.6 million was recorded in connection with underperforming stores
that were subject to potential future closure. See Note 9 to the accompanying
consolidated financial statements.
Restructuring and Other Charges. During Fiscal 2017 and Fiscal 2016, we
recorded restructuring charges of $294.0 million and $94.9 million,
respectively, in connection with our restructuring plans, consisting of
severance and benefits costs, lease termination and store closure costs, and
other cash charges, as well as non-cash accelerated stock-based compensation
expense. In addition, 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. During Fiscal 2016, we recorded other
charges of $47.7 million primarily related to a pending customs audit and the
settlement of certain litigation claims. See Note 10 to the accompanying
consolidated financial statements.
Operating Income (Loss). During Fiscal 2017, we reported an operating loss of
$94.8 million, as compared to operating income of $581.9 million during Fiscal
2016. Our operating results during Fiscal 2017 and Fiscal 2016 were negatively
impacted by restructuring-related charges, impairment of assets, and certain
other charges totaling $770.3 million and $211.8 million, respectively, as
previously discussed. The $676.7 million decline in operating income also
included a net unfavorable foreign currency effect of $67.4 million. Operating
loss as a percentage of net revenues was 1.4% during Fiscal 2017, reflecting a
930 basis point decline from the prior fiscal year. The overall decline in
operating income as a percentage of net revenues was primarily driven by the
decline in our gross profit margin and the increase in restructuring-related
charges, impairment of assets, and certain other charges, as well as the
increase in SG&A expenses as a percentage of net revenues, all as previously
discussed.
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
April 1, 2017 April 2, 2016
Operating Operating
Income Operating Income Operating $ Margin
(Loss) Margin (Loss) Margin Change Change
(millions) (millions) (millions)
Segment:
North America $ 674.7 17.8% $ 951.6 21.2% $ (276.9 ) (340 bps)
Europe 302.6 19.6% 280.1 17.9% 22.5 170 bps
Asia (85.8 ) (9.7%) (0.1 ) -% (85.7 ) (970 bps)
Other non-reportable segments 68.7 15.9% 103.9 22.8% (35.2 ) (690 bps)
960.2 1,335.5 (375.3 )
Unallocated corporate expenses (736.4 ) (611.0 ) (125.4 )
Unallocated restructuring and
other charges (318.6 ) (142.6 ) (176.0 )


Total operating income (loss) $ (94.8 ) (1.4%) $ 581.9



7.9% $ (676.7 ) (930 bps)



48



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North America operating margin declined by 340 basis points, primarily due to
the unfavorable impact of 190 basis points related to higher non-cash charges
recorded in connection with our restructuring plans during Fiscal 2017 as
compared to the prior fiscal year and a 170 basis point decline related to
decreased profitability in our core wholesale business, largely driven by the
impact of a more competitive retail environment. These declines in operating
margin were partially offset by a 20 basis point increase related to improved
profitability in our core retail business.
Europe operating margin increased by 170 basis points, primarily due to the
favorable impact of 390 basis points and 200 basis points related to improved
profitability of our core wholesale and retail businesses, respectively, largely
driven by a decline in SG&A expenses as a percentage of net revenues and lower
levels of promotional activity in connection with our Way Forward Plan. These
increases in operating margin were partially offset by unfavorable foreign
currency effects of 340 basis points, as well as an 80 basis point decline
attributable to higher non-cash charges recorded in connection with our
restructuring plans during Fiscal 2017 as compared to the prior fiscal year.
Asia operating margin declined by 970 basis points, primarily due to the
unfavorable impact of 1,710 basis points related to higher non-cash charges
recorded in connection with our restructuring plans during Fiscal 2017 as
compared to the prior fiscal year. This decline in operating margin was
partially offset by the favorable impact of 740 basis points primarily related
to improved profitability of our core retail business, largely driven by a
decline in SG&A expenses as a percentage of net revenues, lower levels of
promotional activity in connection with our Way Forward Plan, and the strategic
closure of certain of our locations.
Unallocated corporate expenses increased by $125.4 million, primarily due to
higher non-cash impairment charges of $117.0 million, higher depreciation and
amortization expense of $13.5 million, higher non-income tax related charges of
$9.3 million, and higher other operating expenses of $37.4 million. These
increases were partially offset by a decline in compensation-related expenses of
$33.4 million and a decline in consulting fees of $18.4 million.
Unallocated restructuring and other charges increased by $176.0 million to
$318.6 million in Fiscal 2017, as previously discussed above and in Note 10 to
the accompanying consolidated financial statements.
Non-operating Expense, Net. Non-operating expense, net is comprised of net
foreign currency gains (losses), interest expense, interest and other income,
net, and equity in losses from our equity-method investees. Non-operating
expense, net decreased by $20.0 million to $10.1 million in Fiscal 2017 from
$30.1 million in Fiscal 2016. The decline in non-operating expense was driven
by:
• an $8.6 million decrease in interest expense driven by the net
favorable impact of our swap contracts entered into during Fiscal 2016,
partially offset by the inclusion of twelve months of interest expense
during the current fiscal year related to the 2.625% unsecured senior
notes issued in August 2015, as compared to approximately seven months
of interest expense during the prior year period. See Note 14 to the



accompanying consolidated financial statements for further discussion



of our swap contracts;



• a $5.7 million decrease in equity in losses of equity-method investees,



primarily related to our share in losses from our joint venture, the
Ralph Lauren Watch and Jewelry Company Sárl, which is accounted for
under the equity method of accounting; and



• a $4.9 million decrease in foreign currency losses, largely related to



the net favorable revaluation and settlement of foreign



currency-denominated intercompany receivables and payables, inclusive



of the impact of forward foreign currency exchange contracts, as



compared to the prior fiscal year period (foreign currency gains



(losses) do not result from the translation of the operating results of



our foreign subsidiaries to U.S. Dollars).



49



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Income Tax Benefit (Provision). The income tax benefit (provision) represents
federal, foreign, state and local income taxes. During Fiscal 2017, we reported
an income tax benefit of $5.6 million, as compared to an income tax provision of
$155.4 million during Fiscal 2016. The $161.0 million decrease in the income tax
provision was largely driven by lower pretax income resulting in a pretax loss
in Fiscal 2017. The 5.3% effective tax rate for Fiscal 2017 is lower than the
statutory tax rate primarily due to the tax impact of earnings in foreign
jurisdictions, 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. The 28.2% effective tax rate for Fiscal 2016
was lower than the statutory tax rate primarily due to the tax impact of
earnings in foreign jurisdictions and a change to the assessment period
associated with certain tax liabilities, partially offset by the reversal of
certain deferred tax assets that were determined to not be realizable. Our
effective tax rate will change from period to period based on various factors
including, but not limited to, the geographic mix of earnings, the timing and
amount of foreign dividends, enacted tax legislation, state and local taxes, tax
audit findings and settlements, and the interaction of various global tax
strategies.
Net Income (Loss). During Fiscal 2017, we reported a net loss of $99.3 million,
as compared to net income of $396.4 million during Fiscal 2016. The $495.7
million
decrease in net income was primarily due to the decline in operating
income, partially offset by the reduction in our income tax provision, as
previously discussed. Our operating results during Fiscal 2017 and Fiscal 2016
were negatively impacted by restructuring-related charges, impairment of assets,
and certain other charges totaling $770.3 million and $211.8 million,
respectively, which had an after-tax effect of reducing net income by $592.1
million
and $150.1 million, respectively. In addition, our net loss during
Fiscal 2017 reflected unfavorable foreign currency impacts of $63.6 million,
partially offset by 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, as previously
discussed. Our net income during Fiscal 2016 reflected the favorable impact of
the inclusion of the 53rd week, which increased net income by $8.3 million.
Net Income (Loss) per Diluted Share. During Fiscal 2017, we reported a net loss
per diluted share of $1.20, as compared to net income per diluted share of $4.62
during Fiscal 2016. The $5.82 per share decline was due to lower net income, as
previously discussed, and lower weighted-average diluted shares outstanding
during Fiscal 2017, driven by our share repurchases over the last twelve months.
Net income (loss) per diluted share during Fiscal 2017 and Fiscal 2016 was
negatively impacted by $7.10 per share and $1.74 per share, respectively, as a
result of restructuring-related charges, impairment of assets, and certain other
charges, as previously discussed. In addition, our net loss per diluted share
during Fiscal 2017 reflected unfavorable foreign currency impacts of $0.77 per
share, partially offset by 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, as previously
discussed. Net income per diluted share during Fiscal 2016 reflected the
favorable impact of the inclusion of the 53rd week, which increased net income
per diluted share by $0.10 per share.


50



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Fiscal 2016 Compared to Fiscal 2015
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
April 2, March 28, $ % / bps
2016 2015 Change Change
(millions, except per share data)
Net revenues $ 7,405.2 $ 7,620.3 $ (215.1 ) (2.8 %)
Cost of goods sold(a) (3,218.5 ) (3,242.4 ) 23.9 (0.7 %)
Gross profit 4,186.7 4,377.9 (191.2 ) (4.4 %)
Gross profit as % of net revenues 56.5 % 57.5 % (100 bps)
Selling, general, and administrative
expenses(a) (3,389.7 ) (3,300.3 ) (89.4 ) 2.7 %
SG&A expenses as % of net revenues 45.8 % 43.3 % 250 bps
Amortization of intangible assets (23.7 ) (25.2 ) 1.5 (6.2 %)
Impairment of assets (48.8 ) (6.9 ) (41.9 ) NM
Restructuring and other charges (142.6 ) (10.1 ) (132.5 ) NM
Operating income 581.9 1,035.4 (453.5 ) (43.8 %)
Operating income as % of net revenues 7.9 % 13.6 % (570 bps)
Foreign currency losses (3.8 ) (25.9 ) 22.1 (85.2 %)
Interest expense (21.0 ) (16.7 ) (4.3 ) 25.7 %
Interest and other income, net 5.6 6.1 (0.5 ) (7.9 %)
Equity in losses of equity-method
investees (10.9 ) (11.5 ) 0.6 (5.3 %)
Income before income taxes 551.8 987.4 (435.6 ) (44.1 %)
Income tax provision (155.4 ) (285.2 ) 129.8 (45.5 %)
Effective tax rate(b) 28.2 % 28.9 % (70 bps)
Net income $ 396.4 $ 702.2 $ (305.8 ) (43.6 %)
Net income per common share:
Basic $ 4.65 $ 7.96 $ (3.31 ) (41.6 %)
Diluted $ 4.62 $ 7.88 $ (3.26 ) (41.4 %)





(a) Includes total depreciation expense of $285.7 million and $269.2
million
for Fiscal 2016 and Fiscal 2015, respectively.



(b) Effective tax rate is calculated by dividing the income tax provision



by income before income taxes.



NM Not meaningful.





Net Revenues. Net revenues decreased by $215.1 million, or 2.8%, to $7.405
billion
during Fiscal 2016. This decrease included the favorable impact of the
53rd week in Fiscal 2016, which resulted in incremental net revenues of $72.2
million
. On a constant currency basis, net revenues increased by $59.8 million,
or 0.8%.
The following table summarizes the percentage change in our Fiscal 2016
consolidated comparable store sales as compared to the prior fiscal year on both
a reported and constant currency basis:
As Constant
Reported Currency
E-commerce comparable store sales 2 % 3 %


Comparable store sales excluding e-commerce (8 %) (4 %)
Total comparable store sales


(7 %) (3 %)



51



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Our global average store count increased by 91 stores and concession shops
during Fiscal 2016 compared with the prior fiscal year, due to new global store
openings, primarily in Asia, partially offset by store closures. The following
table details our retail store presence by reportable segment as of the periods
presented:
April 2, March 28,
2016 2015
Freestanding Stores:
North America 224 223
Europe 87 81
Asia 105 98
Other non-reportable segments 77 64
Total freestanding stores 493 466

Concession Shops:
North America 2 2
Europe 34 24
Asia 545 508
Other non-reportable segments 2 2
Total concession shops 583 536
Total stores 1,076 1,002


In addition to our stores, we sold products online in North America, Europe, and
Asia through our various e-commerce sites, which include www.RalphLauren.com and
www.ClubMonaco.com, among others.
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 $ Change % Change
April 2, March 28, As Exchange Constant As Constant
2016 2015 Reported Impact Currency Reported Currency
(millions)
Net Revenues:
North America $ 4,493.9 $ 4,645.7 $ (151.8 ) $ (17.8 ) $ (134.0 ) (3.3 %) (2.9 %)
Europe 1,561.8 1,620.0 (58.2 ) (177.4 ) 119.2 (3.6 %) 7.4 %
Asia 893.5 915.5 (22.0 ) (66.4 ) 44.4 (2.4 %) 4.9 %
Other non-reportable
segments 456.0 439.1 16.9 (13.3 ) 30.2 3.8 % 6.9 %


Total net revenues $ 7,405.2 $ 7,620.3 $ (215.1 ) $ (274.9 ) $ 59.8 (2.8 %) 0.8 %





North America net revenues - Net revenues decreased by $151.8 million, or 3.3%,
during Fiscal 2016 as compared to Fiscal 2015, inclusive of the favorable impact
of the 53rd week in Fiscal 2016, which resulted in incremental net revenues of
$38.2 million. The decrease also included net unfavorable foreign currency
effects of $17.8 million. On a constant currency basis, net revenues decreased
by $134.0 million, or 2.9%.
The $151.8 million net decline in North America net revenues was driven by:
• a $152.1 million net decrease related to our North America wholesale


business, reflecting lower sales across all of our major apparel and



accessories businesses, due in part to a decline in foreign tourist



traffic in major metropolitan locations, which contributed to a more



competitive retail environment. This decrease also reflected net



unfavorable foreign currency effects of $14.3 million, and was net of



the favorable impact of the 53rd week in Fiscal 2016, which resulted in



incremental net revenues of $10.0 million; and



52



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• an $80.8 million net decrease in comparable store sales, primarily



driven by lower sales from certain of our retail stores. The following



table summarizes our comparable store sales percentages on both a
reported and constant currency basis related to our North America
retail business:


As Constant
Reported Currency
E-commerce comparable store sales - % - %


Comparable store sales excluding e-commerce (6 %) (6 %)
Total comparable store sales


(5 %) (5 %)


These declines in North America net revenues were partially offset by an $81.1
million
net increase in non-comparable store sales, primarily driven by the
favorable impact of the 53rd week in Fiscal 2016, which resulted in incremental
net revenues of $28.2 million, and new store openings during Fiscal 2016.
Europe net revenues - Net revenues decreased by $58.2 million, or 3.6%, during
Fiscal 2016 as compared to Fiscal 2015, inclusive of the favorable impact of the
53rd week in Fiscal 2016, which resulted in incremental net revenues of $14.3
million
. The decrease also included net unfavorable foreign currency effects of
$177.4 million. On a constant currency basis, net revenues increased by $119.2
million
, or 7.4%.
The $58.2 million net decline in Europe net revenues was driven by:
• a $59.9 million net decrease in comparable store sales, including net


unfavorable foreign currency effects of $76.2 million. Our comparable



store sales increased by $16.3 million on a constant currency basis,
primarily driven by an increase from our Ralph Lauren e-commerce
operations. The following table summarizes our comparable store sales



percentages on both a reported and constant currency basis related to



our Europe retail business:


As Constant
Reported Currency
E-commerce comparable store sales 13 % 30 %


Comparable store sales excluding e-commerce (10 %) - %
Total comparable store sales


(8 %) 3 %



• a $33.2 million net decrease related to our Europe wholesale business,



reflecting net unfavorable foreign currency effects of $85.8 million,



partially offset by increased sales across all of our major apparel and



accessories businesses.





These declines in Europe net revenues were partially offset by a $34.9 million
net increase in non-comparable store sales, primarily driven by the favorable
impact of the 53rd week in Fiscal 2016, which resulted in incremental net
revenues of $14.3 million, and new store openings during Fiscal 2016. The
increase was net of unfavorable foreign currency effects of $15.4 million.
Asia net revenues - Net revenues decreased by $22.0 million, or 2.4%, during
Fiscal 2016 as compared to Fiscal 2015, inclusive of the favorable impact of the
53rd week in Fiscal 2016, which resulted in incremental net revenues of $15.4
million
. The decrease included net unfavorable foreign currency effects of $66.4
million
. On a constant currency basis, net revenues increased by $44.4 million,
or 4.9%.
The $22.0 million net decline in Asia net revenues was driven by:
• a $72.9 million net decrease in comparable store sales, including net


unfavorable foreign currency effects of $45.1 million. Our comparable



store sales decreased by $27.8 million on a constant currency basis,
primarily driven by lower sales from certain retail stores and
concession shops. The following table summarizes our comparable store
sales percentages on both a reported and constant currency basis
related to our Asia retail business:


As Constant
Reported Currency
E-commerce comparable store sales (24 %) (17 %)


Comparable store sales excluding e-commerce (11 %) (4 %)
Total comparable store sales


(12 %) (5 %)



53



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• an $8.0 million net decrease related to our Asia wholesale business,



primarily driven by net unfavorable foreign currency effects of $4.7
million
and lower sales in Japan.


These declines in Asia net revenues were partially offset by a $58.9 million net
increase in non-comparable store sales, primarily driven by the favorable impact
of the 53rd week in Fiscal 2016, which resulted in incremental net revenues of
$15.4 million, and new store openings during Fiscal 2016. The increase also
included net unfavorable foreign currency effects of $16.6 million.
Gross Profit. Gross profit decreased by $191.2 million, or 4.4%, to $4.187
billion
in Fiscal 2016. Gross profit as a percentage of net revenues declined by
100 basis points to 56.5% in Fiscal 2016 from 57.5% in Fiscal 2015. This decline
was primarily driven by unfavorable foreign currency effects and certain
non-cash charges recorded in connection with the Global Reorganization Plan,
partially offset by increased profitability largely attributable to favorable
channel mix.
Selling, General, and Administrative Expenses. SG&A expenses increased by $89.4
million
, or 2.7%, to $3.390 billion in Fiscal 2016. This increase included a net
favorable foreign currency effect of $109.5 million. SG&A expenses as a
percentage of net revenues increased to 45.8% in Fiscal 2016 from 43.3% in
Fiscal 2015. The 250 basis point increase was primarily due to operating
deleverage on lower net revenues due in part to unfavorable foreign currency
effects, as previously discussed, and an increase in operating expenses in
support of the continued investment in, and expansion of, our retail businesses
(which typically carry higher operating expense margins) through new store and
concession shop openings (as previously discussed); increased investments in our
facilities and infrastructure; increased advertising and marketing costs; and
investments in new business initiatives. These increases were partially offset
by our operational discipline and savings associated with our restructuring
activities.
The $89.4 million increase in SG&A expenses was driven by:
Fiscal 2016
Compared to
Fiscal 2015
(millions)
SG&A expense category:
Consulting fees $ 26.0
Depreciation expense 17.3
Rent and occupancy expenses 16.0
Compensation-related expenses 7.3
Marketing and advertising expenses 5.4
Other 17.4


Total increase in SG&A expenses $ 89.4





Amortization of Intangible Assets. Amortization of intangible assets decreased
by $1.5 million, or 6.2%, to $23.7 million in Fiscal 2016. This decrease
reflected the absence of expense in Fiscal 2016 for certain customer
relationship intangible assets that were fully amortized as of the end of Fiscal
2015.
Impairment of Assets. During Fiscal 2016, we recorded non-cash impairment
charges of $48.8 million, primarily to write off certain fixed assets related to
our domestic and international retail stores and shop-within-shops, of which
$27.2 million was recorded in connection with the Global Reorganization Plan and
$21.6 million was recorded in connection with underperforming stores that were
subject to potential future closure. During Fiscal 2015, we recognized non-cash
impairment charges of $6.9 million, primarily to write off certain fixed assets
related to our domestic and international retail stores. See Note 9 to the
accompanying consolidated financial statements.
Restructuring and Other Charges. During Fiscal 2016, we recorded restructuring
charges of $94.9 million in connection with the Global Reorganization Plan,
consisting of severance and benefits costs, lease termination and store closure
costs, other cash charges, and non-cash accelerated stock-based compensation
expense. In addition, during Fiscal 2016, we recorded other charges of $47.7
million
primarily related to a pending customs audit and the settlement of
certain litigation claims. During Fiscal 2015, we recorded restructuring charges
of $10.1 million, primarily related to severance and benefits costs associated
with certain of our retail and wholesale businesses and corporate operations.
See Note 10 to the accompanying consolidated financial statements).


54



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Operating Income. Operating income decreased by $453.5 million, or 43.8%, to
$581.9 million in Fiscal 2016. This decrease included $142.5 million of charges
recorded in connection with the Global Reorganization Plan, $47.7 million of
other charges primarily related to a pending customs audit and the settlement of
certain litigation claims, and $21.6 million of other non-cash impairment
charges related to underperforming stores that were subject to potential future
closure, all as previously discussed. This decrease also included a net
unfavorable foreign currency effect of $112.5 million. Operating income as a
percentage of net revenues decreased 570 basis points, to 7.9% in Fiscal 2016
from 13.6% in Fiscal 2015. The overall decline in operating income as a
percentage of net revenues was primarily driven by the decrease in our gross
profit margin and the increase in SG&A expenses as a percentage of net revenues,
both of which are inclusive of unfavorable foreign currency effects, as well as
the increase in restructuring and other charges and impairment of assets, all as
previously discussed.
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
April 2, 2016 March 28, 2015
Operating Operating
Income Operating Income Operating $ Margin
(Loss) Margin (Loss) Margin Change Change
(millions) (millions) (millions)
Segment:
North America $ 951.6 21.2% $ 1,183.3 25.5% $ (231.7 ) (430 bps)
Europe 280.1 17.9% 306.7 18.9% (26.6 ) (100 bps)
Asia (0.1 ) -% 8.5 0.9% (8.6 ) (90 bps)
Other non-reportable segments 103.9 22.8% 124.6 28.4% (20.7 ) (560 bps)
1,335.5 1,623.1 (287.6 )
Unallocated corporate expenses (611.0 ) (577.6 ) (33.4 )
Unallocated restructuring and
other charges (142.6 ) (10.1 ) (132.5 )
Total operating income $ 581.9 7.9% $ 1,035.4 13.6% $ (453.5 ) (570 bps)


North America operating margin declined by 430 basis points, primarily due to
the unfavorable impact of 240 basis points and 130 basis points related to
decreased profitability in our core wholesale and retail businesses,
respectively, largely driven by the impact of a more competitive retail
environment and an increase in SG&A expenses as a percentage of net revenues.
The remaining 60 basis point decline in operating margin was attributable to
non-cash charges recorded in connection with the Global Reorganization Plan.
Europe operating margin declined by 100 basis points, primarily due to
unfavorable foreign currency effects of 250 basis points, a 70 basis point
decline attributable to non-cash charges recorded in connection with the Global
Reorganization Plan, and a 40 basis point decline related to decreased
profitability in our core retail business. These declines in operating margin
were partially offset by a 260 basis point increase related to improved
profitability in our core wholesale business, largely driven by a decline in
SG&A expenses as a percentage of net revenues and lower levels of promotional
activity.
Asia operating margin declined by 90 basis points, primarily due to a 320 basis
point decline attributable to non-cash charges recorded in connection with the
Global Reorganization Plan and unfavorable foreign currency effects of 190 basis
points. These declines in operating margin were partially offset by the
favorable impact of 340 basis points and 80 basis points related to improved
profitability in our core retail and wholesale businesses, respectively, largely
driven by our pricing actions and lower levels of promotional activity, as well
as a decline in SG&A expenses as a percentage of net revenues.
Unallocated corporate expenses increased by $33.4 million, primarily due to
higher compensation-related costs of $33.1 million, due in part to the
introduction of new vesting provisions for certain stock-based compensation
awards granted to retirement-eligible employees beginning in Fiscal 2016 (see
Note 18 to the accompanying consolidated financial statements), and higher
consulting fees of $26.6 million. These increases were partially offset by a
decline in other operating expenses of $26.3 million due in part to operational
discipline.

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Unallocated restructuring and other charges increased by $132.5 million to
$142.6 million in Fiscal 2016, as previously discussed above and in Note 10 to
the accompanying consolidated financial statements.
Non-operating Expense, Net. Non-operating expense, net decreased by $17.9
million
to $30.1 million in Fiscal 2016. The decline in non-operating expense,
net was primarily attributable to lower foreign currency losses of $22.1
million
, largely related to the net favorable revaluation and settlement of
foreign currency-denominated intercompany receivables and payables, inclusive of
the impact of forward foreign 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). This decrease was partially offset by higher interest expense of $4.3
million
, primarily attributable to the 2.625% unsecured senior notes issued in
August 2015.
Income Tax Provision. The income tax provision decreased by $129.8 million, or
45.5%, to $155.4 million in Fiscal 2016. The decrease in the income tax
provision was primarily due to the decline in pretax income, coupled with a
decrease in our reported effective tax rate of 70 basis points to 28.2% in
Fiscal 2016 from 28.9% in Fiscal 2015. The lower effective tax rate for Fiscal
2016 was primarily due to income tax benefits resulting from the expiration of
statutes of limitations, a change to the assessment period associated with
certain tax liabilities, and provision to tax return adjustments, partially
offset by the reversal of certain deferred tax assets that were determined to
not be realizable and the absence of tax benefits derived from the legal entity
restructuring of certain of our foreign operations during Fiscal 2015.
Net Income. Net income declined by $305.8 million, or 43.6%, to $396.4 million
in Fiscal 2016. The decline in net income was primarily due to the $453.5
million
decline in operating income, partially offset by the $129.8 million
reduction in our income tax provision, as previously discussed. Our operating
results during Fiscal 2016 were negatively impacted by $142.5 million of pretax
charges recorded in connection with the Global Reorganization Plan, $47.7
million
of other charges primarily related to a pending customs audit and the
settlement of certain litigation claims, and $21.6 million of other non-cash
impairment charges related to underperforming stores that were subject to
potential future closure, which together had an after-tax effect of reducing net
income by $150.1 million. Partially offsetting these charges was the favorable
impact of the 53rd week in Fiscal 2016, which increased net income by $8.3
million
. Net income also included unfavorable foreign currency impacts of $93.6
million
during Fiscal 2016.
Net Income per Diluted Share. Net income per diluted share declined by $3.26,
or 41.4%, to $4.62 per share in Fiscal 2016. The decline was due to lower net
income, as previously discussed, partially offset by lower weighted-average
diluted shares outstanding during Fiscal 2016, driven by our share repurchases
during Fiscal 2016. Net income per diluted share for Fiscal 2016 was negatively
impacted by $1.74 per share as a result of charges recorded in connection with
the Global Reorganization Plan, other charges primarily related to a pending
customs audit and the settlement of certain litigation claims, and other
non-cash impairment charges related to underperforming stores that were subject
to potential future closure, and favorably impacted by $0.10 per share as a
result of the 53rd week in Fiscal 2016, all as previously discussed. Net income
per diluted share also included unfavorable foreign currency impacts of $1.10
per share during Fiscal 2016.

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FINANCIAL CONDITION AND LIQUIDITY
Financial Condition
The following table presents our financial condition as of April 1, 2017 and
April 2, 2016.
April 1, April 2, $
2017 2016 Change
(millions)



Cash and cash equivalents $ 668.3 $ 456.3 $ 212.0
Short-term investments


684.7 629.4 55.3


Non-current investments(a) 21.4 186.6 (165.2 )
Short-term debt


- (116.1 ) 116.1
Long-term debt(b) (588.2 ) (597.0 ) 8.8
Net cash and investments(c) $ 786.2 $ 559.2 $ 227.0
Equity $ 3,299.6 $ 3,743.5 $ (443.9 )






(a) Recorded within other non-current assets in our consolidated balance



sheets.


(b) See Note 12 to the accompanying consolidated financial statements for
discussion of the carrying values of our long-term debt.


(c) "Net cash and investments" is defined as cash and cash equivalents, plus
short-term and non-current investments, less total debt.


The increase in our net cash and investments position at April 1, 2017 as
compared to April 2, 2016 was primarily due to our operating cash flows of
$952.3 million, partially offset by our use of cash to invest in our business
through $284.0 million in capital expenditures, to support Class A common stock
repurchases of $215.2 million, including withholdings in satisfaction of tax
obligations for stock-based compensation awards, and to make cash dividend
payments of $164.8 million.
The decline in equity was attributable to our share repurchase activity,
dividends declared, and comprehensive loss, partially offset by the net impact
of stock-based compensation arrangements during Fiscal 2017.
Cash Flows
Fiscal 2017 Compared to Fiscal 2016

Fiscal Years Ended
April 1, April 2, $
2017 2016 Change
(millions)



Net cash provided by operating activities $ 952.3 $ 1,006.5


$ (54.2 )
Net cash used in investing activities (207.8 ) (582.3 ) 374.5
Net cash used in financing activities (518.1 ) (472.8 ) (45.3 )
Effect of exchange rate changes on cash
and cash equivalents (14.4 ) 5.2 (19.6 )
Net increase (decrease) in cash and cash
equivalents $ 212.0 $ (43.4 ) $ 255.4



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Net Cash Provided by Operating Activities. Net cash provided by operating
activities decreased to $952.3 million during Fiscal 2017, from $1.007 billion
during Fiscal 2016. The $54.2 million net decrease in cash provided by operating
activities was due to a decline in net income before non-cash charges, partially
offset by a net favorable change related to our operating assets and
liabilities, including our working capital. The net increase related to our
working capital was primarily driven by:
• a decline in our inventory levels, largely driven by our inventory


management initiatives, lower sourcing costs, and the timing of



inventory receipts.



This increase related to our working capital was partially offset by:
• an unfavorable change in our accounts receivable, largely driven by the



timing of cash collections; and



• an unfavorable change in our prepaid expenses and other current assets,



largely driven by the timing of payments.





Net Cash Used in Investing Activities. Net cash used in investing activities
was $207.8 million during Fiscal 2017, as compared to $582.3 million during
Fiscal 2016. The $374.5 million net decrease in cash used in investing
activities was primarily driven by:
• a $224.3 million increase in proceeds from sales and maturities of net
investments, less cash used to purchase investments. During Fiscal
2017, we made net investment sales of $82.0 million, as compared to net
investment purchases of $142.3 million during Fiscal 2016; and


• a $133.7 million decline in capital expenditures. During Fiscal 2017,
we spent $284.0 million on capital expenditures, as compared to $417.7



million during Fiscal 2016. Our capital expenditures during Fiscal 2017



primarily related to our global retail store openings, department store



renovations, enhancements to our global information technology systems,



and further development of our infrastructure.





In Fiscal 2018, we expect to spend approximately $300 million to $320 million in
capital expenditures, primarily to support our global retail store and
concession shop expansion and renovations, as well as the further development of
our infrastructure and systems.
Net Cash Used in Financing Activities. Net cash used in financing activities
was $518.1 million during Fiscal 2017, as compared to $472.8 million during
Fiscal 2016. The $45.3 million net increase in cash used in financing activities
was primarily driven by:
• a $296.8 million increase in cash used to repay debt, less proceeds
from debt issuances. 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. During Fiscal 2016, we
received net proceeds of $299.4 million from the issuance of our 2.625%
unsecured senior notes and $26.1 million in borrowings under our credit
facilities, which were partially offset by net repayments of $144.8



million related to our commercial paper note issuances and repayments;



and



• a $28.2 million decline in proceeds from the exercise of stock option.





These increases in cash used in financing activities were partially offset by:
• a $285.2 million decrease in cash used to repurchase shares of our
Class A common stock. During Fiscal 2017, we used $200.0 million to
repurchase shares of Class A common stock pursuant to our common stock
repurchase program, and an additional $15.2 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
2016, we used $479.9 million to repurchase shares of Class A common
stock pursuant to our common stock repurchase program, and an
additional $20.5 million in shares of Class A common stock were
surrendered or withheld for taxes.



58



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Fiscal 2016 Compared to Fiscal 2015



Fiscal Years Ended
April 2, March 28, $
2016 2015 Change
(millions)



Net cash provided by operating activities $ 1,006.5 $ 893.3


$ 113.2
Net cash used in investing activities (582.3 ) (688.7 ) 106.4
Net cash used in financing activities (472.8 ) (420.6 ) (52.2 )
Effect of exchange rate changes on cash
and cash equivalents 5.2 (81.7 ) 86.9


Net decrease in cash and cash equivalents $ (43.4 ) $ (297.7 ) $ 254.3





Net Cash Provided by Operating Activities. Net cash provided by operating
activities increased to $1.007 billion during Fiscal 2016, from $893.3 million
during Fiscal 2015. The $113.2 million net increase in cash provided by
operating activities was primarily due to a net favorable change related to our
operating assets and liabilities, including our working capital, partially
offset by a decline in net income before non-cash charges. The net favorable
change related to our working capital was primarily driven by:
• a favorable change in our accounts receivable balance, largely driven
by lower net revenues at the end of Fiscal 2016 and the timing of cash
collections; and



• favorable changes in our (i) prepaid expenses and other current assets



and (ii) accounts payable and accrued liabilities balances, both



largely driven by the timing of payments.





Net Cash Used in Investing Activities. Net cash used in investing activities
was $582.3 million during Fiscal 2016, as compared to $688.7 million during
Fiscal 2015. The $106.4 million net decrease in cash used in investing
activities was primarily driven by a $142.6 million decline in cash used to
purchase investments, less proceeds from sales and maturities of investments.
During Fiscal 2016, we made net investment purchases of $142.3 million, as
compared to net investment purchases of $284.9 million during Fiscal 2015.
The above decrease in cash used in investing activities was partially offset by
a $26.5 million increase in capital expenditures. During Fiscal 2016, we spent
$417.7 million on capital expenditures, as compared to $391.2 million during
Fiscal 2015. Our capital expenditures during Fiscal 2016 primarily related to
our global retail store expansion, department store renovations, enhancements to
our global information technology systems, and further development of our
infrastructure, including the build-out of a new distribution center in High
Point, North Carolina
.
Net Cash Used in Financing Activities. Net cash used in financing activities
was $472.8 million during Fiscal 2016, as compared to $420.6 million during
Fiscal 2015. The $52.2 million increase in cash used in financing activities was
primarily driven by:
• a $53.2 million decrease in proceeds from debt issuances, less cash
used to repay debt. During Fiscal 2016, we received net proceeds of
$299.4 million from the issuance of our 2.625% unsecured senior notes



and $26.1 million in borrowings under our credit facilities, which were



partially offset by net repayments of $144.8 million related to our



commercial paper note issuances and repayments. During Fiscal 2015, we



received net proceeds of $233.9 million related to our commercial paper
note issuances and repayments; and



• a $12.1 million increase in cash used to pay dividends, primarily due



to an increase in the quarterly cash dividend on our common stock from



$0.45 per share to $0.50 per share effective beginning in the fourth



quarter of Fiscal 2015. During Fiscal 2016, we used $170.3 million to



pay dividends, as compared to $158.2 million during Fiscal 2015.



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These increases in cash used in financing activities were partially offset by:
• a $31.2 million decrease in cash used to repurchase shares of our
Class A common stock. During Fiscal 2016, we used $479.9 million to
repurchase shares of Class A common stock pursuant to our common stock
repurchase program, and an additional $20.5 million in shares of
Class A common stock were surrendered or withheld in satisfaction of
withholding taxes in connection with the vesting of awards under our
long-term stock incentive plans. On a comparative basis, during Fiscal
2015, we used $499.9 million to repurchase shares of Class A common
stock pursuant to our common stock repurchase program, and an
additional $31.7 million in shares of Class A common stock were
surrendered or withheld for taxes.


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, our issuances of commercial paper
notes, and other available financing options.
During Fiscal 2017, we generated $952.3 million of net cash flows from our
operations. As of April 1, 2017, we had $1.353 billion in cash, cash
equivalents, and short-term investments, of which $1.118 billion were held by
our subsidiaries domiciled outside the U.S. We are not dependent on foreign cash
to fund our domestic operations and do not expect to repatriate these balances
to meet our domestic cash needs. However, if our plans change and we choose to
repatriate any funds 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 April 1, 2017:
April 1, 2017
Total Borrowings Remaining



Description(a) Availability



Outstanding Availability



(millions)



Global Credit Facility and Commercial Paper
Program(b) $ 500 $ 8 (c) $ 492
Pan-Asia Credit Facilities(d) 57 - 57





(a) As defined in Note 12 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 April 1, 2017.



(d) During the first quarter of Fiscal 2018, we renewed the China Credit



Facility with a reduced borrowing capacity of up to 50 million Chinese



Renminbi (approximately $7 million). Accordingly, our total availability



under the Pan-Asia Credit Facilities was reduced to approximately $49
million
during the first quarter of Fiscal 2018. See Note 12 to the
accompanying consolidated financial statements.


We believe that the Global Credit Facility is adequately diversified with no
undue concentration in any one financial institution. In particular, as of
April 1, 2017, 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 e-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 12 to the accompanying consolidated financial statements for additional
information relating to our credit facilities.
Common Stock Repurchase Program
As of April 1, 2017, the remaining availability under our Class A common stock
repurchase program was approximately $100 million, reflecting the May 11, 2016
approval by our Board of Directors to expand the program by up to an additional
$200 million of Class A common stock repurchases. Repurchases of shares of
Class A common stock are subject to overall business and market conditions. Due
to the heightened level of uncertainty surrounding potential changes to U.S.
taxation policies, we currently do not expect to repurchase shares under our
Class A common stock repurchase program during Fiscal 2018.
See Note 16 to the accompanying consolidated financial statements for additional
information relating to our Class A common stock repurchase program.
Dividends
Since 2003, we have maintained, and intend to continue to maintain, a regular
quarterly cash dividend program on our 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 16 to the accompanying consolidated financial statements for additional
information relating to our quarterly cash dividend program.
Debt and Covenant Compliance
In September 2013, we completed a registered public debt offering and issued
$300 million aggregate principal amount of unsecured senior notes due September
26, 2018
, which bear interest at a fixed rate of 2.125%, payable semi-annually
(the "2.125% Senior Notes"). In August 2015, we completed a second registered
public debt offering and issued an additional $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").
The indenture and supplemental indentures governing the 2.125% Senior Notes and
2.625% 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
12 to the accompanying consolidated financial statements. As of April 1, 2017,
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 12 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 April 1, 2017, and the estimated timing and effect that such obligations
are expected to have on our liquidity and cash flows in future periods. We
expect to fund these firm commitments with operating cash flows generated in the
normal course of business and, if necessary, through availability under our
credit facilities or other accessible sources of financing.
Fiscal
Fiscal Fiscal Fiscal 2023 and
2018 2019-2020 2021-2022 Thereafter Total
(millions)
Senior Notes $ - $ 300.0 $ 300.0 $ - $ 600.0
Interest payments on Senior
Notes 14.3 18.9 3.9 - 37.1
Capital leases 29.8 58.8 53.2 81.2 223.0
Operating leases 318.1 596.1 421.4 533.4 1,869.0
Inventory purchase
commitments 674.6 0.2 - - 674.8
Other commitments 40.1 66.4 26.7 - 133.2
Total $ 1,076.9 $ 1,040.4 $ 805.2 $ 614.6 $ 3,537.1


The following is a description of our material, firmly committed obligations as
of April 1, 2017:
• Senior Notes represents the principal amount of our outstanding 2.125%


Senior Notes and 2.625% 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 2.125% Senior Notes and 2.625% Senior



Notes. Amounts do not include the impact of potential cash flows



underlying our swap contracts entered into during Fiscal 2016 (see Note



14 to the accompanying consolidated financial statements for discussion



of our swap contracts);



• Lease obligations represent the minimum lease rental payments due under



noncancelable leases for our real estate and operating equipment. In
addition to such amounts, we are normally required to pay taxes,
insurance, and certain occupancy costs relating to our leased real
estate properties, which are not included in the table above.
Approximately 70% of these lease obligations relate to our retail
operations. Information has been presented separately for capital and
operating leases;



• Inventory purchase commitments represent our legally-binding agreements



to purchase fixed or minimum quantities of goods at determinable
prices; 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 $62.7 million as of April 1, 2017, 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) amounts
recorded in current liabilities in our consolidated balance sheet as of April 1,
2017
; 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).
We also have certain contractual arrangements that would require us to make
payments if certain events or circumstances occur. See Note 15 to the
accompanying consolidated financial statements for a description of our
contingent commitments not included in the above table.


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Off-Balance Sheet Arrangements
In addition to the commitments included in the above table, our other
off-balance sheet firm commitments relating to our outstanding letters of credit
amounted to $9.7 million as of April 1, 2017. 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 14 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 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 April 1, 2017. However, we do have in aggregate $15.0 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 14 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 April 1, 2017.
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, intercompany royalty payments made by
certain of our international operations, and the settlement of foreign
currency-denominated balances. 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, 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 cash flow hedges and are highly effective in
offsetting changes in the value of the hedged items, 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.


• Intercompany Royalties/Settlement of Foreign Currency



Balances - recognized within foreign currency gains (losses) during the



period that the hedged balance is remeasured through earnings,



generally through its settlement when the related payment occurs.





We recognized in earnings a net loss on forward foreign currency exchange
contracts of $2.6 million during Fiscal 2017, and net gains of $32.4 million and
$35.5 million during Fiscal 2016 and Fiscal 2015, respectively.
Cross-Currency Swap Contracts
During 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 "Cross-Currency Swaps"). The Cross-Currency Swaps, which
mature on September 26, 2018 and August 18, 2020, respectively, swap the U.S.
Dollar-denominated variable interest rate payments based on the 3-month London
Interbank Offered Rate ("LIBOR") plus a fixed spread for Euro-denominated
variable interest rate payments based on the 3-month Euro Interbank Offered Rate
plus a fixed spread. As a result, the Cross-Currency Swaps, in conjunction with
the Interest Rate Swaps (as defined below), economically convert our $300
million
fixed-rate 2.125% and $300 million fixed-rate 2.625% obligations to €280
million and €274 million floating-rate Euro-denominated liabilities,
respectively.
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 sensitivity analysis, we
assess the risk of loss in fair values from the effect of 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
April 1, 2017, 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 $119 million. As our outstanding forward foreign
currency exchange contracts are primarily designated as cash flow hedges of
forecasted transactions, and as our cross-currency swap contracts are designated
as hedges of our net investment in certain of our European subsidiaries, this
hypothetical net change in fair value would 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 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 Swaps"). The Interest Rate Swaps, which mature on
September 26, 2018 and August 18, 2020, respectively, both have notional amounts
of $300 million and swap the fixed interest rates on our 2.125% Senior Notes and
2.625% Senior Notes for variable interest rates based on 3-month LIBOR plus a
fixed spread.
Sensitivity
As of April 1, 2017, notwithstanding the aforementioned Interest Rate Swaps, 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 April 1, 2017, the fair values of our Senior Notes were
$605.0 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 $4 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.

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Investment Risk Management
As of April 1, 2017, we had cash and cash equivalents on-hand of $668.3 million,
consisting of deposits in interest bearing accounts and investments in money
market funds and time deposits with original maturities of 90 days or less. Our
other significant investments included $684.7 million of short-term investments,
consisting of time deposits with original maturities greater than 90 days; $43.5
million
of restricted cash placed in escrow with certain banks as collateral,
primarily to secure guarantees in connection with certain international tax
matters; and $21.4 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 14 to the accompanying
consolidated financial statements for further detail of the composition of our
investment portfolio as of April 1, 2017.
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, and operational chargebacks. Revenue related to our retail business,
including e-commerce sales, is also reduced by an estimate of returns.
In determining estimates of returns, discounts, end-of-season markdowns, and
operational chargebacks, we analyze historical trends, seasonal results, current
economic and market conditions, and retailer performance. 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 for returns, discounts, end-of-season markdowns, and operational
chargebacks as of April 1, 2017 would have decreased our Fiscal 2017 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.


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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 e-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 primarily
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 April 1,
2017
would have decreased our Fiscal 2017 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 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 is a two-step process. The first step
is to identify the existence of potential impairment by 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 and performance of the second step of
the quantitative goodwill impairment test is unnecessary. However, if the
carrying value of a reporting unit exceeds its fair value, the second step of
the quantitative goodwill impairment test is performed to measure the amount of
impairment loss to be recorded, if any. The second step of the quantitative
goodwill impairment test compares the implied fair value of the reporting unit's
goodwill with the carrying value of that goodwill. If the carrying value of the
reporting unit's goodwill exceeds its implied fair value, an impairment loss is
recognized in an amount equal to that excess.
Determining the fair value of a reporting unit under the first step of the
quantitative goodwill impairment test and determining the fair values of
individual assets and liabilities of a reporting unit (including any
unrecognized intangible assets) under the second step of 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


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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 2017 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 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 our reporting units
significantly exceeded their respective carrying values and there were no
reporting units at risk of impairment.
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 (see Note 20 to the accompanying consolidated
financial statements). 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. No goodwill impairment charges were recorded
during Fiscal 2016 or Fiscal 2015. See Note 13 to the accompanying consolidated
financial statements for further discussion.
In evaluating finite-lived intangible assets for recoverability, we use our best
estimate of future cash flows expected to result from the use of the asset and
its eventual disposition where probable. To the extent that estimated future
undiscounted net cash flows attributable to the asset are less than its carrying
value, an impairment loss is recognized equal to the difference between the
carrying value of such asset and its fair value, considering external market
participant assumptions.
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 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.
During Fiscal 2017, Fiscal 2016, and Fiscal 2015, we recorded non-cash
impairment charges of $248.6 million, $48.8 million, and $6.9 million,
respectively, to reduce the net carrying value of certain long-lived assets to
their estimated fair values. See Note 9 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

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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 11 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 estimated forfeitures.
Stock Options
Stock options have been granted to employees and non-employee directors with
exercise prices equal to the fair market value of our Class A common stock on
the date of grant. We use the Black-Scholes option-pricing model to estimate the
grant date fair value of stock options, which requires the use of both
subjective and objective assumptions. Certain key assumptions involve estimating
future uncertain events. The key factors influencing the estimation process
include the expected term of the option, expected volatility of our stock price,
our expected dividend yield, and the risk-free interest rate, among others.
Generally, once stock option values are determined, accounting practices do not
permit them to be changed, even if the estimates used are different from actual
results.
No stock options were granted during Fiscal 2017 or Fiscal 2016. See Note 18 to
the accompanying consolidated financial statements for further discussion.
Restricted Stock and Restricted Stock Units ("RSUs")
We grant restricted shares of our Class A common stock to our non-employee
directors, and service-based RSUs to certain of our senior executives, as well
as certain of our other employees. In addition, we grant performance-based RSUs
to such senior executives and other key executives, as well as certain of our
other employees. The fair values of restricted stock shares and RSUs are based
on the fair value of our Class A common stock on the date of grant, adjusted to
reflect the absence of any awards not entitled to accrue dividend equivalents
while outstanding. Compensation expense for performance-based RSUs is recognized
over the employees' requisite service period when attainment of the performance
goals is deemed probable, which involves judgment as to achievement of certain
performance metrics.

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Our performance-based RSU awards with a market condition in the form of a total
shareholder return ("TSR") modifier are valued based on the expected attainment
of performance at the end of a three-year performance period and TSR achieved
relative to the S&P 500 index over the performance period. The fair value of
these awards is estimated using a Monte Carlo simulation valuation model
prepared by an independent third party. This pricing model utilizes multiple
input variables that determine the probability of satisfying each market
condition stipulated in the terms of the award to estimate its grant date fair
value. Compensation expense, net of forfeitures, is updated for the Company's
expected net income performance level against the related goal at the end of
each reporting period. No performance-based RSUs with a TSR modifier were
granted during Fiscal 2017 or Fiscal 2016. See Note 18 to the accompanying
consolidated financial statements for further discussion.
Sensitivity
The assumptions used in calculating the grant date fair values of stock-based
compensation awards represent our best estimates. In addition, judgment is
required in estimating the number of stock-based awards that are expected to be
forfeited. If actual results differ significantly from our estimates and
assumptions, if we change the assumptions used to estimate the grant date fair
value for future stock-based award grants, or if there are changes in market
conditions, stock-based compensation expense and, therefore, our results of
operations could be materially impacted. A hypothetical 10% change in our
stock-based compensation expense would have affected our Fiscal 2017 net loss by
approximately $4 million.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 4 to the accompanying consolidated financial statements for a
description of certain recently issued accounting standards which may impact our
consolidated financial statements in future reporting periods.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.



For a discussion of our exposure to market risk, see "Market Risk Management" in
Item 7 included elsewhere in this Annual Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data.





See the "Index to Consolidated Financial Statements" appearing at the end of
this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.


Not applicable.

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