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Wall Street Weighs In on Ralph, Jones

Jones Apparel's stock jumped and Polo Ralph Lauren's fell as investors anticipated a big payout in the breach of contract suit between the firms.

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NEW YORK — Investors pumped up Jones Apparel Group’s stock and pushed down Polo Ralph Lauren Corp.’s on Monday, as Wall Street surveyed the possibility of a big payout from Polo in the breach-of-contract suit between the two companies.

Analysts also said that Jones’ core Jones New York businesses appear to be picking up, while Polo’s growth tear might slow some.

Shares of Jones advanced $1.32, or 4.2 percent, to $33.08, while Polo’s stock declined $1.26, or 3.2 percent, to $38.77. Both issues trade on the Big Board.

Last week, in a decision that lawyers said strengthened Jones’ case, a New York State appeals court unanimously upheld a lower court’s summary judgment on the suit in Jones’ favor.

“In other words, the court said that Jones had been wronged, and a trial will begin shortly to determine monetary damages,” wrote Prudential Equity Group analyst Lizabeth Dunn in a research note.

Jones asked for damages of $550 million in the suit.

In addition to possibly taking a tidy sum from Polo’s coffers and adding it to Jones’, the suit marks the continuation of one of fashion’s juiciest spats — one that pitted the fashion icon Ralph Lauren against Jones’ chief executive officer Peter Boneparth, who had been at the helm for just over a year when the suit was filed in June 2003.

The initial dispute centered around the license for the much smaller Ralph by Ralph Lauren line, which had failed to meet its targets. Polo said the Ralph license and much larger Lauren by Ralph Lauren license were linked in such a way that it could also take back the Lauren business. The Lauren license produced annual sales of $548 million.

Jones eventually returned control of the contested Lauren license to Polo, filed the breach-of-contract suit and launched a new better line, Jones New York Signature. Polo could appeal the case again, wait until after a trial and appeal that decision or allow the judgment to stand.

Dunn downgraded her rating on Polo to “neutral weight” from “overweight,” noting the company’s growth spurt over the last year might be waning as retail has become trickier with consolidation.

The analyst placed the monetary damages that Polo might have to pay at $250 million, assuming Jones had kept the Lauren business for three more years and that it delivered an operating margin of 20 percent.

“Ralph Lauren’s balance sheet appears to be in great shape, with cash of $363 million as of the last quarter and only $308 million of debt,” wrote Dunn. “Even if they had to pay the entire $550 million, we don’t think it would cause any liquidity issues.”

The firm’s financial results have been strong, with a sales boost from the Lauren relaunch. For the nine months ended Jan. 1, Polo’s income shot up 78.6 percent to $168.7 million on a 29.1 percent jump in revenues to $2.36 billion.

Still, the company is not without its challenges.

Polo derives about 15 percent of its business from May and Federated, which are set to merge later this year. This will impact other vendors even more, however. At Jones, for instance, Federated and May made up 26 percent of sales last year.

A large payout would be a particular boost for Jones, which just wrapped up a trying year as heavy holiday promotions and some difficulties keeping the Signature collection on trend cut earnings by 8.2 percent to $301.8 million. Revenues for the 12 months ended Dec. 1 rose 6.3 percent to $4.65 billion.

Lazard Frères analyst Todd Slater boosted his rating on Jones’ stock to “buy” from “hold,” on the strength of his research that showed improving sales in Signature and the more career-orientated Jones New York Collection businesses.

“Although the Jones New York labels represent only about 16 percent of Jones’ total revenue — and one must be careful about reading too much into trends too early — the company’s namesake businesses tend to be good proxies for the rest of the apparel complex,” he said.

Slater described the favorable development in Jones’ suit against Polo as “an added bonus.”

“In the end, a positive outcome regarding damages could, in essence, pay for Jones’ Barneys acquisition,” he said. The company paid $397.3 million for the retailer in December.

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