Monday, Mar. 15, 1999
Ralph's Rough Ride
By Karl Taro Greenfeld
In his antique-laden Madison Avenue office, Ralph Lauren, 59, the most successful fashion designer in American history and CEO of Polo Ralph Lauren, leans forward on a worn leather armchair to tell how much it hurts--the negative reviews of his fall collections and the articles in the business press detailing his company's disappointing earnings and questioning whether Lauren has lost his touch. "I'm the guy who built this company with my bare hands. I've been a big hero in this industry, and I like being a big hero. When the stock goes down, I take it personally."
Lauren points to the Persian rug covering the floor, but what he is really doing is indicating the building, the company, the whole brand. "People are asking, Where's Polo going? Are they out of steam? Are they yesterday's news? Let me tell you something: this company is a great company, not was a great company, is."
And he's right. Polo Ralph Lauren remains perhaps the strongest combination of business and brand in all fashiondom. Lauren, born Ralph Lifshitz in the Bronx, conceived a vision of Waspy splendor and preppie elegance and then had the all-American gumption to go out and live that dream and project it in sepia tones around the world. He once sold his wares store to store in a bomber jacket and jeans, and leveraged a line of wide neckties into a wider life-style empire with annual revenues of $1.47 billion and profits of $120 million. Until this year, Polo/RL sported growth rates a technology firm would envy.
He has succeeded in part because consumers identify the man with the brand. His appearance in his own advertisements, his Manhattan duplex, his Colorado ranch, the vintage-car collection, the private jet are all as much an exercise in brand building as they are in high living. This approach has allowed him to expand his vision to market everything from suits to suitcases, sofas to soccer balls. This year he is even marketing extreme sportswear to the Gen X and Gen Y crowd, and older folk who want to feel that young. The Lauren reach includes 26 licensees who sell $4 billion in everything from tableware to towels (Polo/RL gets a cut), plus 224 retail stores and outlet centers.
Wall Street couldn't wait for Lauren to take his company public, but at some level he must resent it. Since Polo/RL's initial public stock offering in June 1997, he has learned the hard way that the only trend that matters on the Street is the direction your earnings are going. And Polo's haven't been going in the preferred direction. Polo's net income has been down two of the past three quarters, and this year earnings growth is projected at an anemic 4.2%, well below 1998's sizzling 35%. The stock has had its price taken in, from the high of $33 to last week's $21, during which time the market has increased 35%. That has cost Lauren some $500 million in net worth; he still owns 43% of the company
Indeed, the intersection of Seventh Avenue and Wall Street has been the scene of some ugly collisions. Fashion companies--and Lauren has been an exception--tend to have lousy managers. The list of fashion victims includes Donna Karan, Liz Claiborne, Guess?, Mossimo and Nautica. The only hot fashion stock is, ironically, Ralph-licate designer Tommy Hilfiger, which is projecting earnings growth of 58% this year, taking the stock up 100%, to $70.
CEO Lauren says his difficulties are onetime events caused by a new inventory system and delays in opening some new flagship stores. The company's inventory bloated 36% last year because it lost track of sales. As a result, Polo/RL had to take huge markdowns that will be a drag on profits into this year. The company says its wholesale business--the amount of goods shipped--is still up 14% and that department-store sales are strong.
Analysts don't seem to want to hear about it. They look at Polo/RL as a high-cost operator, a dandy living beyond its means. The company's seven flagship stores--the latest, a 37,000-sq.-ft. monument to fantasy and finery on Chicago's Michigan Avenue--are money pits. Lauren says the analysts miss the point: the flagships succeed as marketing beacons. Nevertheless, sacrifices had to be made to the Street. Last month Polo/RL announced a restructuring, laying off 5% of the work force and shutting nine outlet stores. Is that enough of a (suede calfskin) belt tightening to get costs back in line with competitors Hilfiger and Nautica? "Even with the restructuring, you are still looking at a number of years before you get even closer to where their competitors are," complains analyst Christine Kilton-Augustine of ING Barings.
As if to appease the Street's insatiable demand for growth, Polo last week bought Club Monaco for $81.5 million. What it got was a Canadian-based retailer that sold $90 million of designer-style (did somebody say Prada knock-off?) wear last year and has clout with the coveted youth market. And with only 13 stores in the U.S., Club Monaco has room to expand. Fashion insiders see Club Monaco as eventually becoming Ralph's stylish answer to the Gap and Banana Republic. What the purchase was not, Lauren insists, "is a mass-market answer to feed a starving stock."
Lauren has always had the ability to move with his mostly boomer customers, and that skill is now getting a crucial test. When sportswear exploded, he created Polo Sport. Designer jeans? Ralph was big. When value was king, he offered the lower-priced Chaps line. His recent custom-made Purple Label commands some $2,500 for a man's suit. (Now there's something Wall Streeters should warm to.) "My job is to feel the changing times," he says.
This kudzu-like spreading of the brand, however, does carry some risk of diluting the Ralphness of it all. For yesterday's would-be Wasp, the Ralph Lauren brand signified something very clear. What is today's consumer to make of a brand comprising everything from silverware to biking gear? "His clothes are losing their historic reference points," says David Wolfe, creative director of the Doneger Group, a retail consultant. "He's not building a myth anymore."
Lauren plans to test his mythic chic with several new lines targeted directly at Generations X and Y, that $250 billion demographic of teens and twentysomethings who are increasingly driving the fashion marketplace. There Polo/RL has to fight with Hilfiger, Abercrombie & Fitch and a host of upstart brands. It's a battle in full swing. "Polo's kind of peaked," says Robert Tucker, 21, a bike messenger in New York City; "the thing right now is Pelle Pelle," an urban street-wear label. "Polo's not yesterday's brand at all," counters Nicole DeMers, 15, of Incline Village, Nev. "Certain groups wear it--the more preppie groups." For the latter, Lauren is launching Ralph, a women's line (jackets priced at about $150) aimed at 15- to 25-year-olds.
Far more ambitious is RLX, an extreme-sportswear brand for mountain bikers, runners and snowboarders. The brightly colored technical gear is a departure from the subtle tweeds and twills of Polo's yore. Lauren has taken great pains to establish RLX's credibility. The running shoes are made by Reebok; he's sponsoring a mountain-biking team, and has signed prominent snowboarders Ross Powers and Andy Hetzler. It's smart marketing, but he won't necessarily be able to buy credibility in the world of alternative sports, where shunning the Establishment is at least half the point. "Lame," critiques snowboarder Dave Solomon at the University of California, Berkeley.
Lauren has heard that kind of smug remark before, three or four Bugattis and a couple of hundred million dollars ago. The company has strengths galore: fine products, solid licensing revenue, a strong share in established markets. And it has something nobody else does: a visionary, driven CEO with his name on the door, who takes the declining share price as a personal affront. "I was 6 ft. 6 in. when this started," he jokes, stretching his 5-ft. 6-in. frame out of the chair. "I've led this company, and I've done it my own way for years and years. I've built something here, and I've got a lot more to build. I bet on myself, I bet on this company." Give him this much: so far, that's been a pretty good wager.
--With reporting by Andrew Keith/Chicago and Elaine Marshall/Incline Village
With reporting by Andrew Keith/Chicago and Elaine Marshall/Incline Village