LAUREN HOT IN COOL IPO SCENE
Byline: Jennifer L. Brady
NEW YORK — The market for fashion issues has cooled quite a bit, but the heat is nevertheless turned up high for the initial public offering proposed last week by The Polo Ralph Lauren Co.
“Despite the fact that the IPO market is less robust than last year, there is still an opportunity for quality companies to go public,” said Elizabeth M. Eveillard, managing director at PaineWebber, specializing in apparel and related issues.
Since the start of 1997, the stock market has given a mixed reception to six new apparel issues, including two catalog firms. In 1996, 22 apparel firms tapped the public market. Of those, 15 are now trading below their offering prices, with some less than half their original price.
David Menlow, at IPO Financial Network, agreed: “I would view the opportunity for this sector of the market to be severely diminished and to be successful it will require that firms be of the highest echelon financially as well as recognition-wise.”
“There are many private profitable apparel companies left; however, they are one-dimensional, and the market may not accept them readily,” added Gilbert Harrison, chairman of Financo Inc.
Lauren, though, is hardly one-dimensional. With $2.5 billion in worldwide wholesale sales, including sales of licensees, Polo Ralph Lauren is the latest apparel giant to file for an initial public offering in the current bumpy market, and the offering, which could raise as much as $600 million, has been long-awaited and eagerly anticipated.
Peter J. Solomon, head of the investment banking firm bearing his name, said that the most successful apparel firms have evolved into “brand management firms.” He noted that they run their businesses “in order to sustain their brands. If the companies make money from their own operations, that’s great. But if not, they can still profit handsomely from their licensing income.”
He cited Polo Ralph Lauren as a good example of brand management.
The Lauren prospectus filed last week showed that licensing revenue of the company in its last fiscal year came to $110 million, just about equal to the total profits for the year.
Solomon said the issue should get a hearty welcome with the strength of the Lauren brands, even if the overall stock market softens. “Goldman is going to make a lot of money on this deal,” Solomon added, referring to Goldman, Sachs & Co., which invested $135 million in the Lauren business in 1994 in exchange for a 28 percent interest. It is the lead underwriter for the Lauren offering.
IPO Financial Network’s Menlow agreed that the Lauren stock will be “in incredible demand,” adding that it is a “very high-quality name.”
Indeed, the polo player on Ralph Lauren collections is a trademark of consistency as well as style. Over the past five years, Ralph Lauren has seen pretax profits surge 156 percent to $109.7 million from $42.9 million, on a sales gain of 50 percent.
John E. Fitzgibbon Jr., editor of Lynch Jones & Ryan’s IPO Aftermarket newsletter, said, “The hot stock pickers seem to look favorably on the stock, and it’s got the ingredients: a household name, large in size and a great underwriting team.”
“I think Ralph Lauren is in a class by itself,” said Ryan Jacobs, at the IPO Value Monitor. “I think [the IPO] will be successful, but we have to look at the performance of other fashion companies. Fashion-related IPOs in 1996 have been a big disappointment.” Nevertheless, some high-quality fashion firms continue to shine brightly on the big board. One knockout example is Gucci Group NV, which remains at the top of the charts. It has grown nearly 3.3 times its IPO price of $22 a share in October 1995.
Other successful new issues include Saks Holdings Inc., Estee Lauder Co. and Revlon Inc. The market has also responded favorably to other branded veterans: Tommy Hilfiger Corp. and Nautica Enterprises.
But a slew of apparel firms that went public last year have faltered dramatically after poor quarterly performances, production ills and bloated costs. The list includes well-known names such as Donna Karan International; Designer Holdings Inc., which holds the jeanswear license for Calvin Klein; Guess Inc., and Mossimo Inc.
“I don’t know if we can say that Ralph Lauren is the catalyst for other fashion stocks,” Jacobs added. “Institutions have to have a certain degree of confidence to invest in these stocks, and I don’t think they have it right now.”
Fitzgibbon agreed. “Fashion stocks had a great run while the sun was shining, and now some clouds have come in.
“When squalls come through the corner of Broad and Wall, everything gets wet,” Fitzgibbon said. For the lesser-known and smaller apparel names, market observers said it is best to wait until the market improves to attempt a public offering.
“The less-well-known names will not survive in this market,” Menlow said, although he added that he expects the market to begin to see some “firming up” in May.
Despite a favorable initial response from Wall Street last June, Donna Karan, closing Friday at 11 1/2, is at less than half of its offering price. After the demise of a huge licensing deal with Designer Holdings and a fourth-quarter loss of $1.7 million, the stock sank as low as 8 7/8. The stock once had been traded as high as 30 1/8. For 1996, Donna’s earnings tumbled 31.7 percent to $12.6 million.
Designer Holdings has fallen 52 percent to 8 5/8 from its offering price of $18, while Mossimo Inc. has dropped 55 percent to 8. Guess Inc. has tumbled 40 percent to 10 3/4, and Tag Heuer, 28 percent from 19 1/2.
Despite strong fourth-quarter results, Abercrombie & Fitch, spun off from The Limited Inc. in September, remains depressed at 14, below its offering price of $16. Abercrombie had reached a 52-week high of 27. Intimate Brands, also spun off from Limited, is trading slightly above its offering price of $17, at 18 1/8.
Gargoyles, a maker of performance and sports sunglasses which went public at $16 a share in September, has sunk to 7 5/8 in the wake of losses and lower-than-expected sales at Sunglass Hut, its largest customer.
After posting a loss of $4.9 million in 1996, Garden Botanika, retailer of botanically based cosmetics and personal care products, has lost more than 72 percent of its stock price to close at 5 1/2. Last May, the shares were priced at $20 a share.
Nevertheless, the experts agreed that company performance is rewarded in the market. As Eveillard said: “There are some companies that have performed dismally, and their stocks show it, but there are others that have performed well, and their stocks show it, too.”
Fueled by continued demand both here and abroad, Gucci continues to post impressive results, as 1996 net income more than doubled to $168.4 million on a 76.1 percent gain in sales. Several investment firms, including Morgan Stanley and CS First Boston, rate the stock a “strong buy.”
Saks Holdings, like Gucci, has benefited from demand for high-end apparel and accessories and has reported solid earnings and sales gains in 1996. Saks’ stock is up 22.5 percent from its offering price of $25 last May.
Another winner, Estee Lauder, priced at $26 a share in November 1995, has also had a stellar run in the public market, reaching a high of 53 1/2. It is currently at 45 3/4. Revlon has also taken off since its February 1996 offering, up 42.2 percent to 34 1/8. Revlon went public at $24 a share.
With well-recognized names and strong financials, Gucci, Saks and Lauder all completed successful secondary offerings, well above their respective initial offering prices. Gadzooks Inc., a retailer of casualwear for teenagers aged 13 to 19, reached the market at $14 a share in October 1995 and has soared to 33 1/4. In the year ended Feb. 1, 1996, the 183-unit, mall-based chain saw profits surge 96 percent to $8 million.
California-based retailer, Hot Topic, also targets teenagers with music-licensed apparel and has moved ahead 37.5 percent from its offering price of $18. The company’s fourth-quarter results doubled to $2 million.
Other apparel names that are going strong:
Stage Stores Inc., which operates family apparel stores in central U.S., has grown 43.2 percent from its offering price.
The North Face Inc., outwear maker, has increased 22.4 percent.
K&G Men’s Center, men’s wear retailer, ahead 57.5 percent.
Among the newest apparel issues is Brylane Inc., an off-price catalog firm spun off from The Limited Inc. in 1993. Brylane, which operates the Chadwick’s of Boston, Lerner and Lane Bryant catalogs, went public raising $96 million before costs in February. Its offering of four million shares were priced at $24. The shares are now up to 26 1/8.
Delia’s Inc., a catalog operation specifically targeting juniors and young women, has performed well. Its shares have moved up to 17 1/2 from its February offering price of $11 a share.
Coldwater Creek Inc., a women’s and men’s apparel, jewelry and gift catalog firm, went public at $15 a share and is now at 14 3/4.
Fleece and jersey manufacturer Pluma Inc. has only moved up to 12 3/8 from its IPO price of $12 a share. Pluma raised $37.2 million through the sale of 3.1 million shares.