|TMF Style on
RALPH LAUREN (NYSE: RL) RISES SHARPLY FROM ITS INITIAL PUBLIC OFFERING
PRICE -- And now, out on the catwalk, might it turn around and return
behind the curtain? Or will investors just keep on clapping?
by Risa Kaplan (TMF Style)
Retail Industry Area
SAN FRANCISCO, CA, (June 11, 1997) /FOOLWIRE/ -- The name "Ralph Lauren"
has been a symbol of investment-caliber apparel and accessories for many
years. The classic Polo and other Lauren collections are considered timeless,
and are regarded as beautifully crafted, with superior fabrics and designs.
Today -- like a finely-tuned production -- the fashion empire behind the
styles, POLO RALPH LAUREN (NYSE: RL), walked the catwalk to the New
York Stock Exchange trading floor. Whether or not Ralph Lauren will stand
the test of time and become a true investment-quality stock has Wall Street
in a bit of a quandary, as investors hope that this won't become another
fickle fashion initial public offering (IPO).
RETAIL IPO MANIA
Many investors are weary of retail IPO's, since several of these issues have
initially flown up into the stratosphere, only to come toppling back down
like the price of tangerine orange jeans.
Apparel firms that went public last year faltered dramatically after poor
quarterly performances, productions ills and bloated costs. Companies like
GUESS (NYSE: GUS), MOSSIMO (NYSE: MGX), and DONNA KARAN
(NYSE: DK) were marked down, down, down, by investors and are now trading
below their initial price offerings.
However, even the critics of fashion stocks know that designer and businessman,
Ralph Lauren, age 57, has owned his company since 1968 and that he brings
a colorful fabric of business wit to the table, the likes of which most fashion
leaders don't command. Mr. Lauren has experienced nearly all of the major
retailing mistakes by now, and is arguably too much of a seasoned veteran
of Seventh Avenue to mis-step like many of his younger fashion counterparts.
Mr. Lauren and family will be controlling 90% of the voting stock, even after
the initial public offering.
WHY GO PUBLIC NOW?
IPO's are created in order to raise as much money as realistically possible.
Ralph Lauren and his major investment partner, Goldman Sachs, wanted to raise
as much capital as possible while diluting ownership in the company as little
In 1994, Goldman Sachs (lead underwriter of the IPO) bought a 28% stake in
the company and is now selling about 2%. The Ralph Lauren family is selling
about 17.9 million shares, which is nearly 66% of the 29.5 million shares
being sold. Smart investment houses strategically plan and wait to go public
at the "right" time. In this case, we heard for weeks that Lauren was going
public this summer with no definite date. This past Friday was a major bull
run and voila!, the company announced that it would go public this week.
The initial public offering price was set between $22 and $25, but finally
ended up being $26. The stock rose immediately and first traded above $31.
For those interested in the proceeds of this sale, the S-1 states that the
company will not receive any of the proceeds from the sale of the shares
being sold by the "Selling Shareholders" (Lauren family). Guess we don't
have to worry about any restricted shares being dumped in order for the Lauren
family to cash out and buy that new house later on. They're doing all their
selling today, and they'll be even more "set for life" with the money they've
made. Meanwhile, the company itself is only selling 9.4 million shares --
though that does raise a hefty $244 million for Ralph Lauren the company,
POLO - THE COMPANY
Lauren has a ready-to-wear line in both mens and womens' clothing. Through
licensing he has evolved into cosmetics, jewelry, handbags, luggage, home
furnishing, and skin care. Most of these lines have been around for over
10 years and are profitable.
In terms of numbers, over the past five years the company has seen pretax
profits surge 156% to $109.7 million. The company's worldwide wholesale revenues,
including sales from licensing, was $1.1 billion in the most recent fiscal
year, ended March, as sales rose 15.7%. In that fiscal year, Ralph Lauren's
operating earnings rose 28%. However, since 1994, the earnings growth has
apparently slowed, from up 50% in 1995, to up only 18% in 1996. But these
are strong numbers -- well above the average growth rate of 8 to 12% on the
average Dow stock.
There is a tremendous amount of hype and hoopla that surrounds this initial
public offering based on the name recognition (what Wall Street guy isn't
wearing a Polo on the weekends out in the Hamptons?). Many have compared
this IPO to the most successful in the past two years, which was GUCCI
(NYSE: GUC). To do this without understanding the difference is a little
The day Gucci first traded it opened at $23 and barely moved. Only a few
fashion people even knew who Gucci or the new director Tom Ford was when
the IPO hit the exchange floor. Over time, revenues and high margins equaled
good earnings, and expectation grew and therefore the stock price followed.
The price of the stock barely dipped until it hit a high of $86. It now trades
Here, as previously mentioned, not only the Street but the general public
was excited about Ralph Lauren's stock. Expectations are very high and if
one believes that the IPO is fairly-valued at the intial price of $26, then
what about after a major run up?
Notwithstanding the glamour of this offering, and whether increased earnings
rates can be sustained, whether or not the stock price can remain proportionately
more expensive to the earnings growth rate is the issue. The P/E ratio may
arguably be or become unbalanced due to momentum and expectations arising
from overenthusiastic and speculative players. What will happen when the
first set of pro forma earnings come out if they only equal expectations?
The risk is there.
Meanwhile, an issue that has been raised is that of Lauren's future tax liability
as it relates to earnings. In the past, due to a partnership structure, the
company had tax advantages that will no longer apply.
For fiscal year 1997, the tax bill, according to SEC documents, would have
been $57 million, instead of $22 million. Therefore the private Polo Ralph
Lauren had earnings $117 million, but a public company would have had only
$79 million. This latter figure is, according to the IPO documents, used
to calculate the reported pro forma earnings of $0.87 per share.
At a $22-$25 price the stock would trade about 27 times earnings, which is
higher than TOMMY HILFIGER (NYSE: TOM), which trades now at about
21 time earnings, while Gucci which carries a multiple of 25. As a group,
the average P/E of clothing retailers is around 16.
At the opening price just above $31, the stock of Polo Ralph Lauren trades
at 35 times trailing earnings -- quite a premium to the industry at nearly
twice the industry average. But the premium placed on the Ralph Lauren company
may be very warranted.
WHERE IS POLO HEADED?
Ralph Lauren had licensing revenues of $110 million for the past year. What
this licensing revenue means, in part, is that companies like Ralph Lauren
have become "brand management" firms. The main focus is to run the business
in order to sustain the brand. If they make money from their own operations,
super -- but they can profit very well from licensing income alone, ideally.
In terms of merchandise and the appeal of Ralph Lauren clothes and accessories:
It has not dwindled, even as competition has evolved. There is arguably a
style and class in his lines that are not found anywhere else, only poor
Some analysts were concerned that the plan is to only open five new stores
in the near future. But beyond that, and perhaps diluting that concern, is
the fact that Ralph Lauren is the quintessential American style, and has
lasted this long because not only does Mr. Lauren have an appeal that is
timeless, but part of the allure is that his high-priced items are still
not within everyone's reach. A keen investor should hope that it remains
this way, as a name never diluted always is in demand.
For those interested in this area of retail, other stocks worth looking at
are ST JOHN KNITS (NYSE: SJK) , and JONES APPAREL GROUP (NYSE: JNY). Both are higher-scale apparel companies.
Next Article: Tom Gardner
on Ralph Lauren