RALPH EYES SPRING IPO
Byline: Sidney Rutberg / With contributions from Valerie Seckler / Lisa Lockwood / Janet Ozzard
NEW YORK — After months of flirtation, rumors and speculation, now it can be told.
Ralph Lauren is getting ready to go public.
WWD has learned that an underwriting group led by Goldman Sachs & Co. is being assembled for an initial public offering. Goldman invested $135 million in Lauren’s company in August 1994 for a 28 percent stake.
If Lauren doesn’t get cold feet, the IPO will probably hit the market this spring. Sources pointed to April as a likely target.
Although the underwriting group is not completed, it reportedly will include Merrill Lynch & Co. and Donaldson, Lufkin & Jenrette. Neither Goldman nor the other underwriters named could be reached for comment.
Lauren — who over the last year has expressed ambivalence about an IPO — said recently that he could have gone public at the time of the Goldman investment, but preferred to stay private. The designer, who could not be reached for comment at presstime, appears to have changed his mind.
Back in 1994, Goldman said it had not decided on an “exit strategy” with Lauren — Wall Street lingo for selling out at a big profit. However, it was generally understood by the investment community that Goldman was not interested in a long-term investment in an apparel company. Now, it appears, a public offering has emerged as Goldman’s exit strategy of choice.
Lauren, who started his business in 1967 with a $50,000 loan, concentrated on men’s wear early in his career. His women’s wear business was licensed for many years to Bidermann Industries, which wound up in bankruptcy. Last year, Lauren realized a long-term goal by buying his women’s license back and is now handling the business in-house.
The sale at retail of Lauren products, both licensed and in-house, has been estimated to exceed $4 billion.
Although fashion stocks have been a mixed bag on Wall Street recently with some cratering while others have shot up to the stratosphere, a Ralph Lauren issue is sure to create excitement on the Street. His name is a top franchise in the industry, and while figures have not been disclosed, Goldman would not have put in $135 million unless the business was highly profitable.
At the time of the $135 million investment, the Lauren enterprise was valued at $480 million.
Peter J. Solomon, of the investment banking firm bearing his name, said that a Ralph Lauren IPO “will be a very successful offering.” He added that soft goods companies are either “internationally recognized brands or simply fashion companies. Ralph Lauren is an internationally recognized brand and will command a hefty multiple in the public market. I think Goldman’s going to make a lot of money on this deal.”
The experience of fashion firms on the market has ranged from live skyrockets to duds. Among the duds: Donna Karan, which went public to much excitement and fanfare in June 1996 at $24 a share, immediately traded at a premium but began to fade early. Its earnings were disappointing, largely reflecting expenses that were too high and heavy losses in its fragrance operation. Just this week, it announced that problems had developed with its jeanswear license with Designer Holdings, putting further pressure on the stock of both companies. Donna Karan closed Wednesday at 13, up 3/8 on the New York Stock Exchange.
Designer Holdings was another disappointment. Its stock came out at $18 a share in May of 1996 and shot up to 34 before hitting an air pocket and falling below its offering price. On Wednesday it closed at 12 5/8, unchanged.
The Mossimo offering also crashed: after coming out about a year ago at $18, it had a good upward run at the start, hitting a high of 50 1/8. However, a series of disappointing earnings reports indicating that the company was spending too much on design and was wracked with inefficiencies hit the stock hard. It closed Wednesday at 8 3/8, down 1/2.
On the other side of the coin, companies like Jones Apparel Group, St. John Knits, Tommy Hilfiger and Nautica have been among the best gainers on the New York Stock Exchange. All have been supported by strong and consistent earnings increases.
The Gucci Group, which came out initially in October of 1995, was another highflier. Gucci’s original public offering was at $22 a share. It came out with a secondary offering at 48 at the end of March last year and traded as high as 80 1/2. It closed Wednesday at 65 3/4, down 1/4, on the NYSE. Gucci’s sales and earnings have been climbing exponentially.
Estee Lauder Cos. was another winner. Lauder’s IPO was priced at $26 a share in November 1995 and immediately traded at a premium, running up as high as 53 1/2. Earlier this week it sold a secondary issue at $47 a share. The stock closed Wednesday at 46 7/8 on the NYSE. Lauder’s earnings have also been growing quarter by quarter.
Thus the market reaction to name fashion stocks has been positive at first, but in the end, if the earnings don’t hold up, neither will the price of the stock.
In light of the particular success of Gucci and Hilfiger, speculators have wondered just how long it would take Lauren and Calvin Klein to join the public ranks.
While Klein has no concrete plans for an IPO, observers see Lauren’s timing as solid.
Over the past year, Lauren’s company has become even stronger and more dominant in its many markets. Lauren’s retrieval of his women’s license from Bidermann served as a springboard into a relatively untapped market.
In the last year, Lauren also has introduced lines with multimillion-dollar projections, such as Polo Jeans, which hit stores in fall with a $20 million ad budget and a wholesale volume projected to hit $300 million in its first few years.
His license with Jones New York for the better-price Lauren by Ralph Lauren line projected sales of $100 million through this year. It sold out in the first season, boosting Jones’ earnings, and along with Hilfiger’s Tommy line, heated up the entire better market.
At the same time that he launched those two lines — with sparkling new showrooms and a full staff — Lauren inked a deal for women’s intimate apparel with Sara Lee. Shortly after that, he initiated wholesale distribution of the activewear label Polo Sport, which had only been sold through his own stores. In addition to a wholesale sales projection for that line of $100 million in the first 18 months, Lauren said that, based on the success of the Polo Sport store here — which does about $16 million in annual sales — he plans to open more freestanding Polo Sport stores in the U.S. and internationally.
Lauren signed a lease on a 45,000-square-foot building in London that will serve as his European headquarters and recently won his fourth Council of Fashion Designers of America award, this one for his new Purple Label line of made-to-measure men’s wear.
In addition to apparel and home furnishings, Lauren also licenses a lucrative fragrance operation to L’oreal, which is in the process of rolling the business out worldwide.
And there’s still room for growth. While he’s fairly well-established in Japan, Lauren has barely touched other hot Asian communities such as Indonesia and Korea.
Rumors that Lauren is flirting with an IPO have been heating up on Wall Street for two weeks, according to financial sources.
“I’ve heard the talk continuously over the last month,” said an investment banker, who requested anonymity. “There’s definitely something in the works, but I don’t know how imminent it would be.
“It’s a question of how much of his privacy Ralph wants to give up, how much he’s being pressured by Goldman, and how much liquidity he himself needs,” the banker added.
Another financial source said, “Over the past couple of weeks, I’ve heard from investment bankers that they’re thinking about it, but I think Ralph Lauren goes back and forth on this one due to the privacy issue.
“At some point he’ll have to do it to ‘pay back’ Goldman, and he’ll have to do it when the company still has strong growth potential,” the source noted.
Analysts concurred that Lauren’s business has being firing on nearly all cylinders lately, which could be spurring the designer to consider a near-term IPO. Sources said the men’s collection business is selling strongly; the better women’s line, Lauren by Ralph Lauren, is continuing to “go gangbusters,” and Lauren’s fragrances have continued to do well at retail.
In addition, they cited Polo jeans, historically a troubled spot, for having a good holiday season and noted international business is another plus.
“Ralph Lauren has built a phenomenal business and his brand is unique,” said Gilbert Harrison, chairman of Financo Inc., the New York-based investment banker that’s done numerous apparel deals. “The timetable of any proposed IPO would depend on a number of factors. The most important one would be Ralph’s personal desires, with an emphasis on his views about privacy, which has always been an issue.”
Despite all the reasons a near-term offering by Lauren makes sense “on paper,” at least one analyst, Carole A. Pope, a vice president who tracks apparel firms at J.P. Morgan Securities, said: “My question is why would he do it now, rather than last year? His should have been the first [fashion] offering out in the market last year, given that their are some pretty ugly IPO charts out there.
“Given the performance of [some] IPO’s, the Lauren business would have to be extraordinary to overcome the disappointment of those deals,” Pope said. “At the same time, Ralph’s name has quite a bit of cache and the demand for his product is favorable.”
Another source close to Lauren said, “It’s something [Lauren] has looked at many different times. He doesn’t need the money. But it could be construed as an ‘exit’ strategy for him. Not that he’d ever stop working, he loves it so much.
“He’s institutionalized that business the last 20 years. Ralph’s company has demonstrated growth for years, and it’s also a global company. He has an earnings stream. He’s got every area covered and has income streams coming in from many areas. He doesn’t need any money to live on.
“He’s been hesitant on going public,” the source continued. “He doesn’t have to. He’s leaning more toward a reason to do it.” But, he cautioned, “Nothing happens ’til it happens. He could change his mind at the last minute.”
Lauren has vacillated on the IPO subject in the past.
In March 1996, he told WWD: “I can’t see why people want to go public. I know people who’ve said they think my stock would come out high. But I can’t ever see wanting to do that.”
But come July, his opinion softened: “It’s not my ultimate goal. The [stock] market is very exciting and it’s something to consider, but it’s not an ultimate goal for me. My ultimate goal is to keep building my business so we get stronger and stronger.
“[Going public] is something I don’t have to do. Rather, it’s, ‘Do I want to do it?”‘
Apparently, yes.
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