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NEW YORK — Jones Apparel Group on Wednesday licked the wounds of its simmering dispute with Polo Ralph Lauren and came back to report a 64.9 percent increase in fourth-quarter net income.
Observers of the licensor and licensee were still struggling to digest the meaning and likely outcome of the battle between Jones and Polo, first disclosed on Tuesday, in which Polo has said it wants the Lauren license, which accounts for about 12.5 percent of Jones’ overall revenues, or about $548 million in 2002.
As reported, Jones’ Ralph license, which expires at the end of this year, has failed to meet required performance levels. Jones maintains that it has the right to keep the Lauren license through the end of 2006 and has said it will take the necessary steps to keep the brand, which it describes as maturing. However, Polo asserts that the Lauren license will effectively expire as the Ralph agreement does. While the controversy hasn’t yet resulted in legal action by either party, it left market watchers salivating about the prospects of a Clash of the Clothing Titans.
While all of this hung in the balance, Jones reported it met fourth-quarter expectations and produced solid results despite a ornery macroeconomic environment.
Net income for the period increased to $51.6 million, or 39 cents a diluted share, for the period ended Dec. 31. This compared with year-ago profits of $31.3 million, or 25 cents.
Operating profits, adjusted to exclude certain charges, increased to 50 cents a share from 36 cents a year earlier and were in line with Wall Street’s expectations. The adjustments include pretax charges in the most recent quarter of $6.9 million, or 3 cents a share, to close some Sun Apparel manufacturing, production and warehousing facilities and $18.6 million, or 8 cents, for an accounting change. The year-ago results included an 11-cent adjustment related to the accounting change for comparison purposes.
Investors traded down shares of the firm 20 cents, or 0.7 percent, to close Wednesday at $29.30 on the New York Stock Exchange. The proceeding day, shares of Jones lost 8 percent of their value after discord between the firm and Polo Ralph Lauren came to light. Polo’s shares sank 39 cents, or 1.9 percent, to end the day at $20.70.
Jones’ revenues for the three months expanded by 7.8 percent to $964.5 million from $894.8 million a year ago.
The Gloria Vanderbilt and LEI acquisitions contributed $111 million to the quarter’s sales and contributed to operating margin improvement. Without these two businesses, revenues declined 5 percent.
Chief executive officer Peter Boneparth, on a conference call, attributed the results to the firm’s diversified operating model and executional excellence.
Wholesale sales of the firm’s better apparel sank 6.5 percent during the quarter to $328.4 million, while the segment’s income shot up 40.2 percent to $41.5 million. Jones’ wholesale revenues in moderate apparel jumped 79.6 percent to $273 million, while income nearly doubled, rising 98.2 percent to $22.4 million.
Footwear and accessories produced a 10.8 percent drop in sales, at wholesale, to $197.8 million, while income dipped 4.7 percent to $24.6 million.
Wesley Card, chief financial officer and chief operating officer, added: “The strategy, we think, of planning conservatively and prudently managing the inventory really helped us meet expectations in a very difficult retail climate.”
Taking out the Gloria Vanderbilt and LEI acquisitions, the firm’s inventories chimed in at $457 million at the end of the quarter, 20 percent lower than a year ago.
William Blair & Co. equity analyst Ellen Schlossberg said: “It was a really strong quarter for them that, in light of the tough environment, stands out even more.”
The outlook in 2003 — calling for earnings of $3.05 a share — is also pretty much as expected, she said. “They didn’t really leave room for any additional expense savings and margin upside from sourcing or anything, so there is a chance we could see some upside from that,” said Schlossberg.
Next year, though, is more of a “wild card,” she noted, given the uncertainty surrounding the Lauren license.
Boneparth, on the call, noted: “The Lauren business continues to be the backbone of the better apparel business. There’s no question that that customer understands what we’ve done with that product, understands the price/value relationship and is clearly a repeat customer.”
While stressing the importance of the brand, and Jones’ desire to hold on to it until 2006, the ceo maintained: “It’s a mature business that will continue to grow on the margin, where we have opportunities to capture some special size opportunities.” He also described the last two quarters as “good” for the brand, which performed better than other names in the space.
Boneparth reassured Wall Street that Jones’ Polo Jeans license was not in any danger. “From a contractual standpoint, there is zero risk,” he said. “It has never been raised by Polo [Ralph Lauren] Corp. that a risk that the Polo Jeans agreement was in any way the subject of any kind of dispute.”
The two companies make up “a marriage that has clearly worked,” said Boneparth. “While we are currently going through a dispute…we are eager to try to resolve this dispute on a basis that makes sense for both parties.”
He also added that “in exchange for a longer-term relationship, we are prepared to pay a higher royalty than we previously had paid.” While average licensing royalties are 5 to 6 percent, Jones reportedly offered Polo double that with 10 to 12 percent.
It’s also no easy task to produce the Lauren line successfully, he said. “What the trick in the Lauren business, given its size at this point in its maturation, is obviously, you’re always trying to move the brand forward, you’re trying to provide [the customer with] something she doesn’t have in her closet, but stay true to the heritage of the brand. It’s a very delicate balance.”
He also noted that it is imperative that the line be delivered on time, so it can be presented as a lifestyle collection — a daunting feat for many vendors.
However, Boneparth noted, “We’re very much up to it.”
For the year, net profits advanced 34.8 percent to $318.5 million, or $2.36 a dilute share, from $236.2 million, or $1.82, a year ago. Excluding certain items in both periods, earnings ascended to $2.84 a share from $2.71 a year earlier.
Revenues for the 12 months rose 5.9 percent to $4.34 billion from $4.1 billion in 2001.
“Expanded marketing programs are allowing us to remain in touch with the consumer’s needs and are assisting us in focusing our product development resources,” said the ceo.