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Polo’s New Focus: Retail Division Grabs Majority of Business

Polo Ralph Lauren squashed speculation that its Club Monaco division was for sale, while reporting a drop in net income and revenues for the quarter.

According to Roger Farah, Club Monaco is not on the block.

According to Roger Farah, Club Monaco is not on the block.

WWD Staff

NEW YORK — Ralph Lauren, specialty retailer.

Specialty retail has become the major part of Polo Ralph Lauren Corp.’s business, for the first time generating more than half of the company’s revenues in the first quarter ended June 28. Also for the first time in the company’s history, the U.S. Ralph Lauren stores hit a high of 17 percent for same-store sales gains.

Further indicating Polo’s focus on specialty retailing, executives insisted Wednesday that the group has no intentions of selling Club Monaco. Instead, it’s preparing it for a growth spurt.

Roger Farah, Polo Ralph Lauren’s president and chief operating officer, stated plainly in an interview Wednesday, “We are not selling Club Monaco.”

Polo operates 62 Club Monaco stores and plans to open five or six in fiscal 2005, although none are planned for the current year.

Farah’s comment followed a conference call discussing first-quarter results that met Wall Street’s expectations even though net income fell by 21.7 percent because of expenses related to improvements at Polo’s overseas operations and a drop in wholesale revenues of more than $25 million.

Investors were pleased with the results and Polo’s maintenance of earnings guidance for the future, and they sent shares up $2.46, or 9.8 percent, to close Wednesday at $27.52 on volume of 2.5 million shares, more than six times their average on the New York Stock Exchange. At one point, the stock rose as high as $27.73, within $1 of its 52-week high of $28.71, which was reached on July 16.

Virginia Genereux of Merrill Lynch wrote in a research note that the stock “has reacted more positively, we think, due to larger investors’ sense of relief that the preliminary fiscal 2005 outlook for Lauren was okay.”

Farah told Wall Street the company expects its upcoming Lauren by Ralph Lauren collection to do $400 million during its first full year of operation ending in March 2005. The line is expected to make its way into 850 doors, a slight retreat from the estimated 1,000 doors occupied under Jones’ reign with the Lauren license, and about 450 special-size doors. The influence of designs from the company’s Black Label and Collection will enable Polo to inject more fashion into the brand, including more career offerings, while at the same time keeping the same fit and price points as before, said Farah.

Ralph Lauren, chairman and chief executive officer, said in a statement, “We’re excited about the opportunities that the Lauren women’s business brings to us. This is a major brand we designed and created eight years ago and built into the most successful better women’s wear line introduced in the past decade. We are on track with the Lauren spring 2004 line. We have met with many of our key retail accounts and the initial reaction has been extremely positive.”

The designer noted the company continues to expand Polo Ralph Lauren’s brands into new markets, countries and shopping environments.

For the three months ended June 28, income was $5.1 million, or 5 cents a diluted share, compared with income of $6.5 million, or 7 cents, a year ago. Revenues gained 2.3 percent to $477.7 million, from $467 million last year.

Polo said it expects fiscal 2004 earnings per share on an adjusted basis, excluding foreign-currency gains and losses, of between $1.95 and $2.05.

Analysts breathed a sigh of relief about the 2004 forecast and perhaps were even more impressed by the strength of Club Monaco, which delivered double-digit same-store sales for the three months ended June 28.

While Club Monaco’s numbers for the quarter weren’t divulged, it contributed to a 12 percent jump in the group’s retail sales during the quarter, to $254.5 million from $227.1 million, and exceeded the group’s 8.3 percent same-store sales increase overall in its retail division. Comps were dragged down by weakness in the European stores.

Polo, targeting four new stores during the current fiscal year, will open a Bleecker Street site next month in the West Village selling only the women’s Collection, vintage accessories and Blue Label. The next site set to open, in November, will be in New Canaan, Conn., featuring a sportswear mix of Black and Blue Labels.

The group’s wholesale volume dropped 13.4 percent to $161.6 million from $186.7 million, due primarily to softness in European markets, while licensing revenue rose 16 percent to $61.6 million.

Farah told analysts, “Clearly, Club Monaco’s quarter was beyond expectations.” He described the climb at the chain as “fantastic,” despite the impact in the Canadian stores of SARS, and said that one big departure this spring from the past was the move to 50 percent color from a mostly black-and-white palette.

“The customer responded very well to color and [we will] continue the trend for fall,” Farah said.

He explained that the delivery of the right product to the Club Monaco stores has resulted in “flow-throughs in a very important way to the bottom line. [We are] on the cusp of a very exciting period and don’t see the first quarter as a flash in the pan. Starting with next year, we do plan on seeing expansion of that chain. We’ve got the customer, the right real estate strategy. You will see us beginning to grow that business.”

Farah added, “When you spend so much time and money getting it right, once it is done you feel as if you can go to town with it.”

While he didn’t rule out another retail acquisition at some point down the road, Farah emphatically pointed out that, with so many projects currently under way, acquisitions aren’t exactly at the top of the company’s agenda.

Between the Lauren by Ralph Lauren startup and the continued expansion in Europe and Japan, Farah said, “We have our plates full. Unlike the strategy of others and the point in our life at where we are, our focus is not about acquiring other brands but executing what we have.”

As reported, the company is in the final stages of planning for the first showing of the Lauren by Ralph Lauren during the September market. The company got back the license when Jones Apparel Group exited the business in June. The two apparel firms are locked in a legal battle over alleged royalty payments that Jones said it is owed by Polo.

As for the status of Ralph by Ralph Lauren, the $40 million business that reverts to Polo from Jones at yearend, Farah said: “Right now, all of our focus is on the Lauren line. We will sit quietly on the Ralph line for now. That doesn’t mean we won’t introduce it from within [the company] in the future, just not right now.”

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