LAUREN SEEKS CONTROL OF EUROPEAN BUSINESS BY ACQUIRING LICENSES
Byline: Anne D’Innocenzio / Thomas Cunningham
NEW YORK — Ralph Lauren is going Continental.
In what his company is calling its biggest growth initiative since pulling its women’s wear license from Bidermann Industries USA in 1995, Polo Ralph Lauren now wants to take direct control of its European operations.
The company revealed Wednesday that it has reached an agreement in principle to acquire Paris-based Poloco SA and certain affiliates that hold the licenses to men’s and boy’s Polo apparel, the men’s and women’s Polo Jeans business and certain accessories, including socks.
Included in the acquisition is a Polo store in Paris and a total of six outlet stores in France, the U.K. and Austria.
The purchase, valued at $230 million including approximately $30 million of debt, should add 5 cents to Polo’s earnings in fiscal 2001, the company told Wall Street analysts in a morning conference call. Lauren’s stock, traded on the New York Stock Exchange, closed at 18 15/16 Wednesday, off 7/16.
The acquisition is expected to close in January.
“This is a major strategic move. It’s a whole new beginning for us and adds a whole new layer of business,” said Michael J. Newman, vice chairman and chief operating officer at Polo Ralph Lauren. He said, “On an international scale, it is Europe that has the largest growth opportunity.”
He described that market as the same size as the U.S. in terms of consumption.
Polo Ralph Lauren’s European business generated approximately $180 million in revenues for 1998, but Newman believes that it could achieve an annual growth rate of 18 percent through a multipronged strategy. Currently, the European business has achieved increases in the low to mid teens.
Newman declined to comment on specific sales projections, but said the growth strategy includes expanding its wholesale operations as well as further developing freestanding retail stores, some of which will be strategically owned while others will be store operated.
Polo Ralph Lauren faces the same sort of big opportunities as when it embarked on its plan to buy back its women’s business in the U.S. four years ago, Newman said. At that time, retail volume was $200 million; for the fiscal year ending March 31, its women’s business rang up retail sales of $1.4 billion, according to sources.
“Back then, we had a very small penetration of the women’s wear market, but four years later, the women’s wear business is close to the size of men’s,” Newman noted. Currently, Europe accounts for less than 10 percent of Polo Ralph Lauren’s worldwide business, but Newman believes that could be dramatically increased.
As one example of European growth potential, he pointed out that Polo products generate about $4.3 billion at retail in the U.S. and only $500 million in Europe.
Newman said he sees doubling the number of department store doors that carry Polo men’s wear to 250 within the near future. In the U.S., Polo men’s has about 13 percent market penetration in the better area, compared to 2.7 percent in Europe.
As for Polo men’s and women’s jeans, which were launched in the U.K., Germany and Spain a year ago, the company plans to roll out the line to Italy as well as France and Eastern Europe. He declined to offer more specifics.
Taking control of its European operations will also help Polo Ralph Lauren develop a foothold in Europe for the company’s other licensed products, including lingerie and Ralph Lauren Collection accessories, both of which were launched overseas this year.
Newman added that there is also potential in Europe for Ralph and Lauren by Ralph Lauren, which is licensed to Jones Apparel and not yet sold abroad. “We are looking at every opportunity,” Newman said. “The way we manage the licensed business here in the U.S., we can mirror that in Europe.”
He added, however, the company will have to pay attention to the different consumer tastes from one country to another.
Newman emphasized that the timing is right for such a move, given Europe’s big appetite for American designer labels.
Polo Ralph Lauren’s seven-story London flagship at 1 New Bond Street, which opened to much fanfare in May, has so far been a success. As reported, the 45,000-square-foot building houses the women’s and men’s collections, as well as administrative offices and showrooms for Polo Ralph Lauren.
In addition, Polo Ralph Lauren has a licensed Polo store in both Brussels and The Hague, as well as three in Germany — in Frankfurt, Hamburg and Munich. There are also stores in Athens and Istanbul.
Newman said the company plans to continue its office in Paris, and plans to hire more people. He declined to be specific.
“We have a strong team there, but we plan to add more people to help us handle the new growth,” he said.
Asked whether Polo Ralph Lauren had been dragging its feet when it came to expanding in Europe, Newman responded: “Our licensees have done an incredible job in building the brand. Now, it is time to take it to the next step.”
Wall Street analysts applauded the company’s latest initiative, though some had reservations.
“It really allows the company to control its destiny and better manage all the Polo brands in Europe,” said Jennifer Black of Black & Co., in Portland, Ore.
“There’s a lot of growth potential over there,” said Brenda Gall, an analyst at Merrill Lynch. “It’s an underdeveloped market and they have the financial resources to accelerate the growth.
“Poloco has done a good job,but it’s in less than one thousand doors,” said Gall. “They can double the doors over time, and there are a lot of brands that aren’t over there, so they’re going to look at that.”
During the conference call with analysts, Polo executives said that operating margins have been higher in its European business than in the U.S., even after accounting for Poloco’s license-fee payment to Polo. The better profitability is a result of higher price points, Gall said.
However, speaking off the record, some analysts said there are risks to the plan, including a concern that Polo might not have enough sophisticated managers on hand to manage a rapid European expansion.
Analysts also cautioned that it can be harder to achieve rapid sales growth in the fragmented European retail market than in the U.S., where a handful of national retailers account for a substantial portion of sales.
The Poloco deal is Polo’s second major international acquisition this year. In May, it closed its $81.5 million purchase of Canada’s Club Monaco chain.
When it announced details of that deal in March, Polo said it wanted to build Club Monaco into a significant brand internationally, as well as in the U.S. The Toronto-based company now has 69 North American stores, mainly in Canada, and 79 franchised stores in Asia.
For its first quarter ended July 3, Polo’s earnings rose 13.7 percent to $24.1 million, or 24 cents a share, from $21.2 million, or 21 cents, a year ago. Excluding a $4 million charge related to a change in accounting methods, earnings jumped 32 percent to $28.1 million, or 28 cents, ahead of analysts’ estimates.
Net revenues climbed 16.2 percent to $434.4 million from $373.9 million as the wholesale, retail and licensing operations turned in solid revenue gains.
At the time, analysts said Polo had done a good job of trimming its inventory and Polo said its men’s and women’s retail business was particularly strong in the quarter.