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Beware the naked man who offers you his shirt. -- Harvey MacKay

Designer IPO's
by Tom Gardner (TomGardner)

ALEXANDRIA, VA, (June 12, 1997) /FOOLWIRE/ -- Ralph Lauren, a simple collection of men's ties back in 1967, has grown into a world-class retailing and fashion brand. Now, thirty years after its incorporation, the company offered 29.5 million shares to the public. Valued at an initial price of $26 per share, the deal raised $767 million of public funds today. The IPO was underwritten by Goldman Sachs, Merrill Lynch and Morgan Stanley.

Of late, the typical Paintbrush Valuation has been at play in chatter about the IPO, as the investing community muses about comparisons between Polo Ralph Lauren (NYSE: RL), Gucci (NYSE: GUC), and Donna Karan (NYSE: DK). While Gucci has been on an absolute tear since its IPO in October, 1995 (and on Tuesday rose another $4 1/2 to $72 7/8), Donna Karan has wrinkled down to $12 from its high of $30 per share in June, 1996.

So does Ralph Lauren step out from behind curtain number one or number two?

Well, it is certainly more like Gucci than DK, but is also a good bit of neither. Donna Karan has performed poorly in part because it has a very different licensing structure than that of companies like Gucci and Ralph Lauren. It's a deal structure which favors DK management over public shareholders. And today it has Donna Karan sporting profit margins under 1%. Conversely, Gucci has gross margins of 65%, net margins of 19%, and is showing healthy global growth.

If you haven't gotten a glimpse of just the very basics from Ralph Lauren's income statement, consider the following numbers:

                       1996       1995
Revenues          $1.2 billion    $847 million
Income            $117 million    $80 million
Profit Margins    9.8%            9.4%

This is a very different company than Donna Karan. Ralph Lauren is financially sturdy, well-branded, and posted healthy sales growth of nearly 16% last year. Don't expect RL stock to triple in eighteen months, as did Gucci (NYSE:GUC). But I don't think the numbers suggest we have another halving in the offing, a la Donna Karan.

Priced dearly today, Ralph Lauren is certainly one for retail-stock aficionados to follow closely in the years ahead. See you in the Polo Ralph Lauren folder.

Tom Gardner, Fool

Next Article: How is Polo in comparison?

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