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An Upbeat Ralph Plots Growth With Cosmetics and Denim

Ralph Lauren has his eye on two big product developments in the next year — reentering cosmetics and introducing a premium denim product.

NEW YORK — Ralph Lauren has his eye on two big product developments in the next year — reentering the cosmetics world and introducing a premium denim product.

Lauren revealed the plans in response to questions from shareholders at the Polo Ralph Lauren annual meeting on Thursday at the St. Regis hotel, where the designer playfully handled a volley of queries by investors who asked him to consider a Grandparents’ Day promotion, to apply pockets to his signature Polo shirts and to give up his annual bonus in exchange for the company’s 5 cent-per-share quarterly dividend.

“This company is flying in terms of freely going where I thought we should go,” Lauren said. “We are in charge of our own destiny.”

Having faced such questions from the same shareholders before, Lauren, who is chairman and chief executive officer of the company, was prepared with his responses and remained upbeat throughout the 45-minute meeting.

During his remarks, Lauren — clad in a black suit, white shirt with French cuffs and a Lance Armstrong “Live Strong” yellow plastic bracelet — outlined several areas of strong performance for the company, noting its retail business of 346 stores is profitable, citing volume figures for specific products and reiterating that they were hitting their targets. The women’s Lauren by Ralph Lauren sportswear business, which the company took over following a dispute with its licensee, Jones Apparel Group, is on track to do $400 million in sales this year, and the company’s business in Europe — bought back from its licensees — will hit $500 million, and “that business is going to be a $1 billion business,” he said.

Polo began fiscal 2005 on a solid footing, as first-quarter results for the three months ended July 3 skyrocketed 165.1 percent to $13.4 million on a 24.1 percent revenue gain to $592.8 million, versus income of $5.1 million on revenues of $477.7 million in the year-ago quarter. For fiscal 2004 ended April 3, income dipped slightly by 1.9 percent to $171 million, while revenues rose 8.6 percent to $2.65 billion, as reported.

After the meeting, Lauren said the positive numbers indicate “the beginning of a lot of other interesting things for the company.”

“We’re doing really well and we’ve got a lot of room for growth,” he said.

He also returned the many compliments that have been thrown his way by Sean “P. Diddy” Combs, who said this week that he had hired Lauren’s former vice president of design, Max Wilson, to head a women’s collection at Sean John.

“It’s 37 years of business and I’m glad he’s patterning his business after mine,” Lauren said. “I like Sean.”

During the meeting, however, he did concede a loss on one front — sales of the licensed collection of Ralph Lauren Paint that had dropped to $61 million from $66 million. In response to Harry Korba, a shareholder from Yonkers, N.Y., who is a fixture at Polo annual meetings, Lauren attributed the decrease to management changes that led his product to be positioned differently at retail and carried next to paints bearing the Walt Disney logo.

Lauren also was challenged by Korba on the $8 million bonus he received in fiscal 2004, on top of a $1 million salary, noting the designer is the company’s largest shareholder and was eligible for its dividend.

Polo gives its shareholders a dividend of 5 cents a share, or 20 cents a share on an annual basis. The designer owns 43.3 million shares of the company’s stock through RL Family LP, a family partnership of which Ralph Lauren is the sole general partner, according to the company’s proxy statement. Based on the current payout rate, Lauren nets $8.66 million in dividends annually.

“I work night and day for this company,” Lauren said in response. “We have an experienced team of board members. When they gave me a raise, it took six months to figure that out. Everything that goes on here is of the highest level and has the same level of quality that our products do. I’m a shareholder and, like everyone else, I’m entitled to [a dividend].”

The shareholders’ questions tended to focus on their individual Ralph Lauren wish lists: a store closer to home, a more feminine perfume bottle, a bridal collection, Polo shirts with pockets and, as one said: “People like a pocket, it’s handy, you can put something in it.” Yet they also reflected the same general question that Wall Street continually asks of the company, which is where it will continue to find growth. This year, Lauren hinted at some possibilities.

When asked about the possibility of entering the premium jeans market, Lauren said, “We work with Jones in their jeans company. They are introducing a premium jeans product now and it’s going to be promoted.”

Estelle Cohen, a shareholder and Polo customer, asked the designer why he does not currently produce cosmetics and received a tantalizing answer: “Ask me again next year,” Lauren said. “We’re working on that.”

After the meeting, Lauren said he was not making an announcement about returning to the cosmetics business, but noted the subject is in discussions with the company’s beauty licensee, L’Oréal USA. The firm also is developing a new fragrance for men and women, he said.

“It’s in the planning stages, but we’re not that far along,” he said, deferring questions to executives at L’Oréal, who later declined to comment.

Lauren had previously sold a makeup collection through Warner Cosmetics, its original fragrance licensee. The cosmetics were launched in 1981 and were discontinued in 1985. Warner was later acquired by L’Oréal.

Polo’s performance resulted in its most upbeat annual meeting since it went public in 1997, with the designer greeting several shareholders by name. Polo’s stock has been trading at around $34 a share and has a 52-week high of $37.05 and low of $25.94, which Lauren took as an indication the company has shaken Wall Street’s fear that it was a “mature” brand when it went public. Shares closed on Thursday at $33.91, down 85 cents, on the New York Stock Exchange.

Jennifer Black of Jennifer Black & Associates, said, “We think the stock is cheap. I estimate earnings per share for fiscal 2006 to be $2.78. Compared to other apparel companies, Polo should easily be able to get to $44 or $45 a share. It is becoming a hybrid between an apparel firm and a luxury brand. It should trade at a premium. The company’s operating-margin opportunity is substantial because it is just now starting to reap the benefits from the infrastructure and merchandising initiatives from the last few years.”

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