It's Ralph world
American Living will feel familiar to a customer of the Ralph Lauren Home Collection. Imagine a version of a cashmere throw reworked in cotton, and you get an idea of how the two will relate to each other. The deal for American Living came to life when Myron E. Ullman III left Polo's board to become Penney's CEO in 2004. At the time, Lauren and Ullman began discussing how the department store landscape was changing - or as Ullman puts it, "Recently there's been a proliferation of specialty stores, so at Penney's our growth initiatives are all about being differentiated."
The Penney deal is the first product of an incubator group within Polo Ralph Lauren called Global Brand Concepts, whose mission is to create unique new businesses that can leverage the company's expertise as designers and marketers without diluting the flagship brand.
"What's fascinating about the J.C. Penney deal is that many companies create growth by going out and buying businesses. But Polo is creating growth by creating new brands," says Marvin Traub, the former CEO of Bloomingdale's, who now runs his own consulting firm. "And I'm sure American Living will be a multibillion-dollar business."
Lauren hates it when his vision is misunderstood. And when he first took his company public, he felt Wall Street didn't get his story. On June 12, 1997, when he arrived at the New York Stock Exchange to ring the opening bell for his IPO, he seemed uncomfortable. He would become even more so as the stock dropped from $33 per share to $16 by Christmas, after the company missed some earnings estimates. Even though his investment bankers at Goldman Sachs (which had earlier bought 28.5% of the firm for $135 million) were telling him to just execute his vision and ignore the stock price, he felt helpless. Debt was mounting.
In 1998, Polo tried to expand by buying Club Monaco, a 100-store chain that sold designer-inspired clothing, for $52 million in cash. As part of the transaction, Polo also assumed roughly $35 million of the company's debt. (Polo Ralph Lauren still owns Club Monaco; Goldman sold the majority of its stake in Polo Ralph Lauren through a secondary offering in 2004.)
By 2000, with the stock still in the teens, Lauren knew he had to make some changes if he wanted to build a lasting, stable business. "For 30 years I had run a very successful private company. We went public at a very high number; then the market changed. And I was in a new game. It was in a world I didn't know," he says. "I could control everything else I did. I could work hard. I could run the company, and I had a good team, but they weren't Wall Street savvy."
His anxiety even got him thinking that the banker boys who snapped up his Purple Label suits would soon move on. "You know how these guys think: 'I heard Ralph Lauren's stock is down. I don't need that guy's suit.' "
That year he hired Roger Farah as his president and COO. Farah, whom Lauren would later call his "arms and legs," had been chairman of Venator Group (the company that eventually became Footlocker). There he oversaw a difficult restructuring that involved shutting down Woolworth. "Back then, Ralph had fantastic products, but what the company lacked was the operating infrastructure and the disciplines that were necessary to really develop the global vision," says Farah. Distribution, supply-chain strategies, and technology were some of the unglamorous but necessary areas of the business that Farah first set about upgrading.
Together, the two men came up with a plan to wean the company from its dependence on licenses for its core apparel brands and grow its retail business. Licenses are a devil's bargain for most fashion designers. When companies are young, they are an almost magical way to expand the reach of a brand while generating revenue. In a traditional licensing deal, a designer will assign the use of his trademark to a third party that will manufacture and sell the designer's product and then pay him a royalty. A license can cover a category, like eyewear, or a geographic territory.
The downside of licenses is that the designer gives up a degree of quality control. (Last spring Polo bought back its main Japanese apparel license for a net purchase price of $155 million.) With Farah onboard, the company also pulled back the Ralph Lauren name to make it more valuable - for example, removing his name from the Chaps brand and placing Polo Ralph Lauren's upscale labels in fewer but more profitable department stores.
Even the Polo pony got a makeover. In 2005, when Lauren became the official apparel sponsor for the U.S. Open tennis tournament, he unveiled the Big Pony, an oversize version of his traditional polo player logo. The genesis of the design was practical: He wanted it to be visible to TV viewers as they watched ball boys in action, but he also was unsure how it would play as a fashion statement, joking to colleagues that it might end up being called the Big Mistake.
However, the limited- edition shirt sold out and brought some luster back to the small-pony polo shirts, whose sales enjoyed an uptick. Overall, Lauren's changes to his business model have been working. Since 2002 the company's net income has grown from $172.5 million to $400.9 million (for fiscal 2007). And during that time licensing went from generating 46% of Polo's operating income down to 17%. Meanwhile, the company grew its retail business from 4% to 26% of its operating income, in part by opening costly owned-and operated stores around the world, in cities including London, Paris, and Milan.
The strategy for long-term growth, however, has not been without some short-term hiccups. The company recently missed its earnings estimates for the first quarter of fiscal 2008. Still, the stock remains a buy in most analysts' estimation.
Perhaps that's because his quiet relentlessness has become part of the legend. ("If he'd been a bigger guy, he could have played quarterback for the New York Giants," says Ron Frasch, president and chief merchandising officer of Saks Fifth Avenue.) Other fashion executives agree. When Dawn Mello was president of Bergdorf Goodman in 1985, she recalls that the third floor of the store was divided among Calvin Klein, Donna Karan, and the fur department.
At that point, Lauren's merchandise was in Siberia: on the second floor, beneath the down escalator, and subdivided by an aisle. "I was sitting in my office, and my assistant said, 'Ralph Lauren is outside, and he wants to see you.' So he came in and sat down, and in a soft-spoken voice he said, 'Ms. Mello, have you walked through my space?' He asked me that question four different times and four different ways, and then, never directly asking that I change his boutique, he finished our conversation by saying, 'Thank you for agreeing to walk through my space.' "