NEW YORK — The maneuvering begins.
As the fashion industry digested the news Wednesday of the bitter legal battle between Polo Ralph Lauren and the Jones Apparel Group, questions abounded about the future strategies of both companies and their retail partners. What is going to happen to all that Lauren by Ralph Lauren real estate in department stores? Can Polo Ralph Lauren quickly ramp up to produce a major better-price sportswear collection to introduce to stores in September, or will Jones try to move into that valuable space with its newly announced Jones New York lifestyle brand?
Meanwhile, Wall Street investors voted with their shares — and gave the edge, for now, to Ralph Lauren. Jones’ stock price fell 64 cents to close Wednesday at $29.61 in trading on the New York Stock Exchange, on a volume of nearly 2.8 million shares. The typical average daily volume is 1.1 million. Polo’s shares, which also trade on the Big Board, rose 83 cents to close at $26.83 on volume of nearly 1.6 million. Its daily volume average is just 372,454.
The credit ratings firm Standard & Poor’s, meanwhile, took a downbeat outlook on both companies in updating the debt ratings of both Jones and Polo.
Jones was put on CreditWatch with negative implications. The firm had about $1 billion in debt outstanding as of April 5. Affected were the “BBB” long-term corporate credit and senior unsecured debt ratings of Jones.
As for Polo, S&P affirmed its “BBB” long-term corporate credit and senior unsecured debt ratings. The outlook was revised to negative. Polo had $340 million in debt outstanding as of Dec. 31, 2002.
Susan Ding, analyst at S&P, wrote Wednesday that the outlook revision on Polo reflected concern that Polo will be “challenged in its ability to execute a spring line in the relatively brief time period. Furthermore, the Lauren line is a different business from Polo’s traditional women’s lines, and the company will require incremental infrastructure investments as well as additional expenses to create a comprehensive new product line.”
A key question facing both companies — and the retailers they deal with — is who is going to get all that valuable square footage in department stores taken up now by the Lauren line. According to an industry source, under the licensing contract, Polo owns the Lauren by Ralph Lauren samples, sketches and patterns, which Jones will need to transfer to the Polo organization. Jones said Tuesday it will develop a Jones New York lifestyle line for the better area that will be priced less than Lauren’s collection, but sources believe it is unlikely that stores would be willing to give up the valuable Lauren by Ralph Lauren collection and its real estate so fast.
“There’s not a prayer that they [Jones] will get any of the Lauren space,” said one industry source. He noted that stores knew this was coming and had already geared back the space somewhat.
As reported, Jones gave up the Lauren by Ralph Lauren license Tuesday and filed a breach of contract lawsuit against Polo and Jackwyn Nemerov, former president of Jones, seeking $550 million in lost profits and punitive damages. Polo shot back with its own lawsuit.
According to sources close to the negotiations, Polo was caught by surprise since it was in a meeting Tuesday morning negotiating a deal with Jones whereby it would pay in excess of $300 million to get back the Polo Jeans business, as well as the Lauren and Ralph licenses. It was during that meeting that Peter Boneparth, Jones’ chief executive officer, informed Polo president and chief operating officer Roger Farah and his team that a lawsuit had been filed.
Despite what is believed will be some initial start-up problems at Polo, observers are convinced there’s huge brand loyalty to the Lauren name that holds a lot of sway with consumers. In addition, there’s the clout that Ralph Lauren, the designer, has with department stores.
Allan Ellinger, managing director of Marketing Management Group, a management consulting firm here, said, “It’s too early to tell [about the Lauren space]. I don’t know how premediated it was. It all comes down to execution at this point. The Lauren organization has very extensive resources.” He said it will depend on fabric availability.
“Will there be enough new fabric to sample and weave and bring to market in time? The logistics are overwhelming at this point. The Lauren organization has extensive resources that they can pull together. The question is whether or not, from a design perspective, they can produce new woven and knit fabrics.”
“Both [Boneparth and Lauren] are very smart guys. This isn’t about transferring a license. It’s transferring a very large business. If they could find a way of cooperating in transferring the license, they’ll minimize the financial exposure to both companies,” said Ellinger.
“I would assume that Jones would want to move into that space,” said R. Fulton McDonald, president of International Business Development Corp., a consulting firm in New York. “It’s prime real estate. Jones is a quality company. My guess is they’re going to move to get every asset gain they could get. Jones is pretty aggressive.”
“I think it’s a battle of egos,” said Kurt Barnard, president of Barnard’s Retail Consulting Group. “It’s a brouhaha that pits one well-known good name against another.”
Some industry watchers were amazed Wednesday with Boneparth’s chutzpah and felt he filed the lawsuit and announced a new better sportswear collection just to save face.
“I think it’s incredible, it’s brilliant in its pomposity,” said one industry observer. “The interesting thing now is, who did Jones call to indemnify their space?
“He worked both sides against the middle. He ramped up in case the deal blew up,” said the source. He conjectured that Boneparth must have gone to Sidney Kimmel, chairman of Jones, with his plan to negotiate with Polo in good faith, and then have a plan to deliver and cover the Lauren volume for spring 2004 if he lost the license. “He had a plan and he executed it, obviously from the day he heard about it. He became very proactive,” said the source.
“It’s a classic battle of the titans on every level. At the end of the day, the stores will make the two companies happy,” he said. “With a smooth transition, Polo could have picked up the $548 million in volume. Now they’ll have to fight for their space, and they’ll be lucky to pick up $200 million to $300 million.”
As reported, the addition of a Jones New York casual career collection is expected to boost the overall Jones New York volume to $1 billion in 2004, up from $730 million in 2003. Currently, the Jones New York umbrella consists of Jones New York Career Collection, Jones New York Sport, Dress and Suits. Last year, the Lauren by Ralph Lauren collection at Jones generated $548 million in sales.
Although Jones ceded the Lauren license upon filing its lawsuit, the next order of business could involve more litigation, this time with the Polo Jeans license.
Boneparth said in a conference call with analysts on Tuesday that the Polo Jeans business is not affected by the dispute and he is committed to it. He added that not having the Lauren license frees the company to pursue opportunities it otherwise could not. Boneparth said a key difference between the Lauren license restrictions and those in the Polo Jeans license was a matter of specified names in the former and “classification” in the latter.
According to a Securities and Exchange Commission filing in May 1998 by Sun Apparel — the firm which held the Polo Jeans license before it was bought by Jones — the Polo Jeans license has provisions that prevent Jones from “selling, advertising or promoting the sale of any items which are comparable and/or competitive with the Polo Jeans products and which bear the name of any fashion apparel designer…subject to certain limited exceptions.”
Dennis Rosenberg, an analyst at Credit Suisse First Boston, noted in a research report Wednesday that the “noncompete provisions of the [Polo Jeans] license may limit its ability to acquire or license other designer brands.”
According to Rosenberg’s report, Jones produces jeans, T-shirts, khakis, shorts, blouses and skirts under the Polo Jeans label. “We therefore believe there is the potential for another dispute should Jones produce any of those classifications under a competing designer brand.”
While there could be some leeway to those restrictions, that’s usually only if the executives at Polo grant their consent to a potentially competing line.
Sources close to Polo said that Jones’ purchase of the Gloria Vanderbilt business, while a designer brand, was completed prior to the current Lauren dispute. Also, Vanderbilt’s business doesn’t directly compete with Polo Jeans. One solution would have been for Jones to sell Polo Jeans back to Polo.
Jennifer Black, analyst at Wells Fargo, wrote in her note Wednesday that the Polo Jeans license “may also be in jeopardy” and that the potential for Jones losing the business is “mounting.” She also raised some concerns about the current Jones management team’s ability to manage its business. She lowered her rating on Jones from “hold” to “sell.”
According to Black, “We would not be surprised to see Jones purchase another company or sign an agreement that would lead to the dissolution of the Polo Jeans licensing agreement. Also our channel checks have indicated that the Polo Jeans division may be pending a mass exodus, as many team members appear to be seeking employment elsewhere.”
Black wasn’t too upbeat about the new Jones New York label. “We are not convinced that the new Jones New York lifestyle brand will work to replace the loss of Lauren….It appears that the company is stretching to capture new revenue streams as it faces the deficit brought on by the loss of Lauren.”
Moreover, Black observed, “In our opinion, Jones has its hands full with its current businesses and it may have difficulty managing more divisions. We are not only seeing the company struggle with its licensed businesses, we have seen the company lose its grip on its core Jones businesses. Additionally we are seeing the Nine West brand appear in distribution channels, which may be subjecting the brand to degradation.”
Not everyone in the financial community was as negative on Jones.
Virginia Genereux of Merrill Lynch observed Wednesday that the new launch should be “incrementally positive” for Jones. In addition, she expects Jones to “further boost its income statement with financial engineering, [spending] $150 million on share repurchase in 2004, which generates another 10 cents in earnings per share growth.”
On a negative side for Polo, Genereux noted that Tuesday’s legal developments were “incrementally negative” for Polo since Jones is going to go after Lauren’s space in the department stores “pretty aggressively.”