NEW YORK — Although it seems inevitable that Jones Apparel Group will lose the Lauren by Ralph Lauren and Ralph licenses, it’s not a fait accompli yet.
A published report Friday in the New York Post said Polo and Jones had split, but the reality is they’re still in discussions and haven’t reached any conclusions. As reported in these columns for two months, it is generally believed the licenses are headed back to Polo, when the Ralph license expires in December 2003.
Anita Britt, executive vice president of finance for Jones, said, “We have no further update on the licensing dispute. As soon as we do have further information, we’ll be out with a press release to Wall Street.”
A spokeswoman for Polo Ralph Lauren said, “We don’t comment on ongoing business discussions.”
Should the two companies part ways, Jones will still be making the Lauren by Ralph Lauren and Ralph lines for the short term. The spring 2004 lines would likely be part of the so-called transition 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 organization. Her noncompete agreement expires in June 2004, and sources said she may be headed to Polo to run the Lauren businesses.
As reported, the present dispute between Jones and Polo stems from the weak sales of the Ralph licensed line. For 2002, the contracted minimum for the Ralph line was $100 million, but Jones’ revenues from the Ralph license were just $37 million.
According to sources, Polo claims the Ralph license is linked to the Lauren by Ralph Lauren license, which is a much more successful line and did $548 million in net sales last year. Although the Ralph license expires Dec. 31 of this year, and the Lauren license runs until Dec. 31, 2006, sources close to Polo said the two contracts are linked, and once Jones defaults on one, it automatically defaults on the other. Sources said Polo’s view that the deals are linked together gives it leverage if things were to go wrong with one deal.
However, Jones has contended that this is an improper interpretation, and the expiration of the Ralph license does not cause the Lauren license to end. The long-term Polo Jeans contract is not part of the dispute.
The Polo Jeans license with Jones expires on Dec. 31, 2005. According to a Securities and Exchange Commission filing in April 2001, the license may be renewed by Jones in five-year increments for up to 25 additional years if certain targets are met. Renewal of the Polo Jeans license after 2010, however, requires a one-time payment by Jones of $25 million or, at Jones’ option, a transfer of a 20 percent interest in its Polo Jeans business to Polo Ralph Lauren, with no fees required for subsequent renewals. Polo also has the option, exercisable on or before June 1, 2010, to purchase the Polo Jeans Co. business at the end of 2010, subject to certain conditions.
Sources believe Lauren wants to have that business under its wing as well, although if Polo wants to buy back the Polo Jeans business, it would have to pay a substantial amount. All three businesses generate about $1 billion in sales, and by regaining them, Polo would gain more top-line growth.
As reported, Roger Farah, president and chief operating officer, said during a conference call with Wall Street analysts last week that Polo is in ongoing discussions with Jones regarding the Lauren by Ralph Lauren license. “We are continuing to work for what we hope will be the right solution for the customers and the brand.”
While not mentioning the licenses held by Jones, Farah told analysts the company believes in the “direct ownership of those businesses whose expertise falls within the scope of our core competence….A continued focus on acquiring those licenses that make sense to our business will be an important part of our company’s future growth strategy.”
Dennis Rosenberg, analyst at Credit Suisse First Boston, in a research note update, wrote last week, “We believe that discussions may be centered on buying back the Polo Jeans license as a part of a comprehensive resolution.”