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NEW YORK — The potential loss of some of its Polo Ralph Lauren licenses continued to command center stage, despite a 72.3 percent leap in Jones Apparel Group’s first-quarter earnings.
This story first appeared in the April 30, 2003 issue of WWD. Subscribe Today.
For the three months ended April 5, income skyrocketed to $121.8 million, or 90 cents a diluted share, from $70.7 million, or 53 cents, a year ago. Excluding special charges in the year-ago period, earnings would have risen a more modest 17.2 percent. Revenues rose 9.5 percent to $1.23 billion from $1.13 billion, which included a 9.5 percent gain in sales to $1.23 billion from $1.12 billion and a 13.6 percent spike in licensing income to $7.5 million from $6.6 million.
On a conference call with Wall Street analysts, Jones chief executive officer Peter Boneparth lauded the “resurgence” of the career business, as seen in the performance of Jones Career, Rena Rowan and in dress shoes, but the overhang from the uncertainty surrounding Jones’ Polo licenses was evident throughout the conference call, with analysts seeking some hint regarding a possible resolution.
Investors cast uncertainty aside and sent the firm’s shares up 49 cents, or 1.7 percent, to close at $28.75 in New York Stock Exchange trading on Tuesday.
The Polo licensed brands, with combined volume of $1 billion, didn’t fare well in the quarter. Not even Polo Jeans was spared, although the jeans license is not part of the Lauren and Ralph license dispute. As reported, the Lauren brand posted $548 million in sales last year, while Ralph, a much smaller business being developed, was in the $37 million range. Polo Jeans, under a license set to expire in 2030, does between $400 million and $450 million a year. Because certain minimums in the Ralph agreement weren’t met, Polo has the option of taking back that license at the end of this year and has indicated that Lauren would be pulled at the same time. Jones has disputed Polo’s interpretation of the status of the Lauren license.
The Lauren business, the ceo said on the call, was difficult early in the quarter during the January selling period, but has since shown improvement. He added that Ralph “continues to be what I would characterize as a hit-and-miss opportunity. One delivery’s good, one’s not so good.”
More noteworthy was the ceo’s disclosure that Polo Jeans “had a challenging quarter.” Boneparth attributed the problem as stemming from the status denim business in department stores, but added that Polo Jeans did “no better or worse than the competition in that zone. That’s clearly where [we’re] going to have to do some reinvention on product, obviously trying to stay consistent with the brand, but obviously creating an impulse or reason to buy for the ultimate consumer.”
In February, when fourth-quarter results were disclosed, Boneparth said that Polo Jeans had a very difficult back half of the year. On Tuesday, he told Wall Street that while the company has considered all contingencies, the rule at Jones has been “business as usual.” Jones even has had discussions with Polo regarding spring 2004 production, he added.
Of course, should some of the licenses revert to Polo, the spring 2004 line would likely be part of the so-called transitional period and coincide with the expiration of Jackwyn Nemerov’s noncompete agreement. Nemerov, former president of Jones, was instrumental in the development of the Lauren brand and is considered to be highly thought of within the Polo camp.
Lazard Frères analyst Todd Slater said in a research report: “In our view, a resolution is likely by June.”
The options are numerous, and the pressures palpable for Jones. Any business lost will need to be replaced, and that won’t be an easy task. Of course, as reported, with all Polo licenses out of the Jones stable, the firm would be free to pursue either the Calvin Klein women’s sportswear license with Phillips-Van Heusen or something it may covet even more: ownership of Tommy Hilfiger Corp.
Assuming the loss of the $1 billion Polo licensed brands, it would be Tommy that would provide Jones with the greatest “bang for the buck, in terms of making up the volume and cash flow shortfall,” one financial expert said. An equity analyst noted that Tommy would help provide some “balance to Jones’ other brands at the department store level.”
Jennifer Black of Wells Fargo Securities said, “Jones had a good quarter, but we question the quality of the earnings. The growth came from acquisitions, which we believe tended to be lower-margin businesses.” She also noted that a $20 million shift in shipments to the first quarter from the second quarter made sales look better. “We will be scaling a couple of pennies from earnings per share for the next quarter,” said Black.
Margaret Mager of Goldman, Sachs, in her Jones research report, expressed concern about the performance of the moderate segment in light of price compression from better brands and product-quality improvements at the mass level.
Jones widened its guidance for full-year EPS to between $2.90 and $3.10. Boneparth told Wall Street that widening the gap on the downside was a prudent measure because of the current retail environment.