polo elite socks Ralph Lauren Learns Wall St
When Polo Ralph Lauren offered its shares to the public, institutional investors behaved a bit like high school students who covet the company’s jeans they had to have them, and anyone who got left out would just not be cool.
The offering, on June 12, was priced at $26, but in the first day of trading, the price zoomed to close at $31.50, leaving investors bragging about getting on board. But now that the dust has settled, it seems that Ralph Lauren is just like any other apparel or retail stock it has to prove itself mightily before Wall Street is willing to give it the grade.
It is not that investors have fallen out of love with the name, plastered on the collars of preppies everywhere. Rather, they are cautious about the industry it represents.
”People called their brokers and had to have Ralph Lauren,” said Linda Killian, a principal at the Renaissance Capital Corporation, a firm that does research on initial public offerings. ”But then investors stood back and are now saying, ‘Gee, this is an apparel stock and guess what, it is expensive.’ ”
And it is perhaps a bit rich for those who have taken their licks with apparel stocks in the past. Indeed, Ralph Lauren has declined 12 percent since that first day of trading, while the Standard Poor’s retail index has gained 11 percent and the S. P. apparel index has risen 12 percent.
The company’s shares rose $1 yesterday. That was before the company announced its profits for the first fiscal quarter, saying that earnings rose 39 percent, to $17.2 million, or 17 cents a share. That was up from $12.3 million, or 12 cents a share, a year earlier, pro forma. It was also above First Call’s estimate of 15 cents a share for the quarter, which ended on June 28.
While the strength of those results may help the stock,
analysts had expected it to have a better run.
The fact that the shares have not done as well as expected underscores how carefully Wall Street approaches apparel companies. Donna Karan, Designer Holdings, Guess Inc., Mossimo Inc. and Donnkenny Inc. have all left investors fuming over losses during the last 18 months, giving companies that emerge from Seventh Avenue a bad name.
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The end result is that Wall Street will hear an apparel retailer cough and assume that it has diphtheria. Tommy Hilfiger, for example, recently announced impressive earnings but hinted about a slowdown in one area of sales, and Wall Street responded by hammering its shares.
Apparel companies must worry about being dragged down not only by the performance of their peers but also by that of the retail industry. For example, in recent months, several retailers have told Wall Street to be on guard for higher inventory levels for the fall, and have also taken markdowns on goods they could not sell. An area of particular concern has been women’s bridge apparel the lower priced lines of high end designers which performed abysmally this spring.
Further, the Japanese yen’s weakening against the dollar this year and some speed bumps hit by other luxury good stocks have caused some strong players to suffer. Add it all up, and Ralph Lauren is vulnerable to the fortunes of everyone from J. C. Penney to Gucci to Neiman Marcus.
”I think that the company did catch a downdraft from problems with other retailers,” said Larry Tashjian, managing director of Provident Investment Counsel Inc., an investment firm in Pasadena, Calif., that owns about 5 percent of Ralph Lauren. ”Put that together and a hot market for tech stocks, and people thought there were other places for people to make money.”
That is why there were many investors like Bruce Bartlett, who manages Oppenheimer’s Total Return fund. and then sold it all when the shares got to $33.50. Bartlett pointed out that in an apparel stock with such a high valuation, it could often be the only sure way to win. Mr. Bartlett said he would like to see a price earnings ratio closer to 20 for Ralph Lauren along with sustained strong earnings before he jumps in again.
Mr. Tashjian said he had expected a better stock performance from a hot name like Ralph Lauren. ”We look at this like any other branded franchise company,” he said yesterday. ”Looking at the models at the time we bought the stock, we thought it would go to the mid $30’s based on the momentum with their licensing business. Obviously, we are disappointed. But I would expect that today’s numbers will help.”
Is the Street too tough on retailers and apparel makers? ”History has really caused this type of discipline,” Mr. Bartlett said, ”because these types of stocks can disappoint quickly without great forewarning. Sustainability is the key issue.”