Polo Ralph Lauren Corp. (RL) LONG TERM ATTRACTIVE – $21 11/16

Transcription

CONSUMER PRODUCTS:
INITIATING COVERAGE
EQUITY RESEARCH
November 14, 2000
LONG TERM
ATTRACTIVE –
$21 11/16
Polo Ralph Lauren Corp. (RL)
12-MONTH PRICE
TARGET: $24
INITIATING COVERAGE WITH A LONG TERM ATTRACTIVE RATING AND $24 PRICE
TARGET …
• Polo Ralph Lauren’s status as a premier lifestyle brand supports higher product margins,
product extensions, and consumer loyalty.
Darren E. Barker
(213) 688-4526
•
We expect long-term annual revenue growth of 20% to 30% in Europe as Polo expands
distribution and introduces additional labels in under-penetrated markets.
•
Recent restructuring initiatives and anticipated retail improvements should drive operating
margins expansion, resulting in 14% EPS growth over the next several years.
•
We are establishing a $24 price target based on 5.5x our $4.47 EBITDA per share forecast
for FY 2002.
[email protected]
STOCK DATA
EARNINGS PER SHARE
$12.75 - $23.19
FYE Mar
2000A
2001E
97.0
Q1 Jun
0.28A
$0.25A
2,110
Q2 Sep
0.56A
0.50A
Insider Ownership
69%
Q3 Dec
0.33A
0.50E
Public Float (mil)
30.0
Q4 Mar
0.32A
0.42E
$1.49A
$1.67E
19%
12%
16%
14.6x
13.0x
11.2x
52 Week Price Range
Shares Outstanding (mil)
Market Capitalization ($ mil)
Total
BENCHMARKS
Y/Y Change
2000A
2001E
Price/Sales
1.1x
0.9x
P/E
Price/Book Value
2.8x
2.6x
Est. 3 YR. Growth
Price/EBITDA
6.4x
5.6x
Debt/Capital (Q2 FY 2001)
14%
FYE Mar
2000A
2001E
Q1 Jun
434.4A
487.3A
38.2%
Q2 Sep
543.9A
586.2A
Return on Avg. Equity Q2 FY 2001
3.5%
Q3 Dec
510.3A
621.7E
Book Value/Share (Q2 FY 2001)
$7.47
Q4 Mar
466.9A
550.7E
$1,956A
$2,246E
EV/EBITDA (LTM)
7.2x
$1.94E
REVENUE ($ mil)
449.0
VALUATION
Total Debt ($ mil)
2002E
Total
2002E
$2,388E
USD
22
20
One Year Price Chart
Avg. Daily Volume: 108,668 (1 mos.); 155,826 (1 yr.)
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Thousands
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455
Dec
Jan
Feb
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Jun
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Aug
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Polo Ralph Lauren Corp. is a leader in the design,
marketing, and distribution of premium lifestyle
products. The Company’s brand names, including
Polo, Polo Sport, Ralph Lauren Sport, RLX, Polo Golf,
Ralph Lauren Collection/Black Label, Ralph
Lauren/Purple Label Collection. The Company operates
242 stores.
Source: FactSet
The information herein is based on sources which we consider reliable, but its accuracy is not guaranteed. The information contained herein is not a representation by this corporation, nor is any recommendation made herein based on any privileged
information. This information is not intended to be nor should it be relied upon as a complete record or analysis; neither is it an offer nor a solicitation of an offer to sell or buy any security mentioned herein. This firm, Wedbush Morgan Securities, its
officers, employees, and members of their families, or any one or more of them, and its discretionary and advisory accounts, may have a position in any security discussed herein or in related securities and may make, from time to time, purchases or
sales thereof in the open market or otherwise. The information and expressions of opinion contained herein are subject to change without further notice. The herein mentioned securities may be sold to or bought from customers on a principal basis by
this firm. Additional information with respect to the information contained herein may be obtained upon request.
INVESTMENT THESIS
We are initiating coverage of Polo Ralph Lauren with a LONG TERM ATTRACTIVE
rating and a twelve-month price target of $24. We believe Polo Ralph Lauren is one of the
premier consumer lifestyle brands with considerable brand equity. Profitability fluctuated in
recent years due to operational issues and underperforming retail operations. We believe less
than solid execution prevented Polo from translating its premier brand equity into above
average profitability and premium share valuation. Polo has made considerable management
changes and implemented a restructuring plan to improve operations. While we view the
restructuring positively, we are cautious regarding the extent and execution given the number
of managerial changes.
Until profitability and operational improvement materialize, we believe Polo’s shares should
be valued inline with its peer group of branded apparel manufacturers. Accordingly, we are
establishing a twelve-month price target of $24 based on 5.5x our FY 2002 EBITDA forecast
of $4.47 per share, representing 14% upside from the current price. Should profitability
improvements exceed our expectations, we believe Polo’s shares should trade at a premium to
its peer group. We expect restructuring initiatives to modestly impact FY 2001 results and
forecast revenue and EPS growth of 15% and 12%, respectively. We forecast a more
meaningful impact on FY 2002, and expect margin expansion to accelerate 6% revenue
growth into a 16% increase in EPS.
BASIS OF RECOMMENDATION
STRONG BRAND EQUITY
Strong brand equity
supports in consumer
loyalty, higher
margins, and
expanded profitability
We believe Polo Ralph Lauren is one of the premier consumer lifestyle brands with
considerable consumer awareness and brand equity. The Company has capitalized on its
strong fashion design and effective marketing to build a premier lifestyle brand with global
revenue exceeding an estimated $5 billion, including licensees. In our opinion, Polo/Ralph
Lauren is one of the few brands capable of developing a portfolio of products and brands
ranging from the moderately priced Chaps by Ralph Lauren to the luxury priced Purple and
Black Labels. We believe strong brand equity sustains high consumer loyalty, reduces price
sensitivity, supports higher gross margins, and expands profitability. Polo is leveraging its
strong lifestyle brand to expand into additional product categories, roll out new concept
stores, and expand into media through its Ralph Lauren Media joint venture.
EUROPEAN EXPANSION
Polo is underpenetrated in
Europe, providing a
considerable longterm growth
opportunity.
2 Polo Ralph Lauren, Corp.
Polo acquired its European licensee, Poloco S.A.S (“Poloco”), in Q4 FY 2000. Prior to the
acquisition, Poloco’s sales were less than $190 million and distribution was relatively narrow,
indicating to us that the licensee was not realizing the brand’s full potential in the region.
Europe represents a potential consumer market similar in size with the U.S., yet Polo sales in
the region were less than 15% of the U.S. business. We believe European sales at Poloco
could expand 30% to 40% to over $270 million in FY 2002 and drive FY 2002 wholesale
revenue to $1.1 billion. We expect European revenue growth to come from product
introductions, additional door penetration, and introduction of Polo’s various brand
derivatives, including Warnaco’s Chaps by Ralph Lauren, Jones Apparel Group’s Polo Jeans
Co., Ralph by Ralph Lauren, and Lauren by Ralph Lauren. Polo is introducing Jones’ Ralph
and Lauren lines for women in spring 2001. We also expect Polo to expand the number of
Polo stores in Europe from the current nine. The acquisition could facilitate margin expansion
Darren E. Barker (213) 688-4526
Rafay Khalid (213) 688-4514
as the Company leverages Poloco’s sourcing with Polo’s U.S. operation; however, we have
excluded any meaningful impact from our FY 2002 forecast.
RETAIL INITIATIVES
We expect retail
improvements to
result in consolidated
operating margin
expansion.
Polo’s company-owned stores have restrained consolidated profitability growth in recent
years as the segment’s operating margin declined from 10.8% in FY 1998 to 3.1% in FY
2000 at a time when sales increased from $571 million to $834 million. The Company
recently announced a $73 million after-tax restructuring charge during Q2 FY 2001 to
improve retail profitability, the second restructuring attempt since FY 1999. Polo is closing
underperforming locations, testing new concept stores, rolling out Club Monaco locations,
and increasing the luxury accessories component in its Polo stores, all of which should boost
margins. We believe the critical difference with this restructuring compared to FY 1999’s
attempt is the considerable managerial changes over the past 12 to 18 months, including a
new COO with over 25 years retail experience and a new CEO for Club Monaco. We
estimate Polo’s retail operating margin will expand at least 390 basis points from 3.1% in FY
2000 to 7.0% in FY 2002, primarily due to closing underperforming stores. Additionally,
Polo is testing new retail concepts and rolling out additional Club Monaco and Polo Sport
locations, which should drive high-single digit to low-double digit revenue growth over the
next few years. In our opinion, Club Monaco has the potential to grow to approximately 200
stores from the current 70 stores.
ACCELERATED PROFIT GROWTH
Accelerated profit
growth from margin
expansion and share
repurchases should
drive sustainable EPS
growth of 14%.
Polo is implementing multiple initiatives to improve operating profitability. During Q2 FY
2001, the Company posted a $112 million after-tax charge associated with planned store
closures ($73 million), inventory valuation adjustments ($23 million), and reserves for SG&A
reductions ($16 million). Initially, we expect a 170 basis point reduction in operating margins
during the second half of FY 2001; however, the anticipated improvement will be more than
offset by lower profitability during the first half of FY 2001. We estimate these improvements
could reduce FY 2002 SG&A expenses by more than 90 basis points to 35.5% of sales,
providing operating margin expansion of 14.1% from an estimated 13.1% in FY 2001. We
expect expanded profitability to accelerate a modest 6% revenue increase during FY 2002
into a 16% EPS growth. We believe additional FY 2002 EPS growth could come from equity
shrink as Polo buys back shares under the remaining $32 million repurchase authorization.
Nevertheless, we excluded share repurchases from our forecast.
CAUTIOUSLY OPTIMISTIC
We are cautiously
optimistic Polo can
simultaneously
improve operations
while executing
growth initiatives.
Polo has articulated a four-pronged growth strategy including Europe, additional Polo
locations, Club Monaco store openings, and Ralph Lauren Media. Additionally, Polo has
implemented a considerable number of management changes over the past 12 to 18 months.
While we view the announced restructuring initiatives positively, we are cautious regarding
the extent and execution given the change in management. This is Polo’s second attempt at an
operational improvement in three years. We advise prudence until initial signs of operational
improvements materialize. Until improvements translate into expanded profitability and EPS
growth, we believe shares should be valued inline with other branded apparel manufacturers,
suggesting shares are appropriately valued at the current level.
VALUATION
Polo’s valuation has been negatively impacted by a difficult retail environment (throughout
calendar 2000), along with other branded apparel companies. The stock rebounded recently
Polo Ralph Lauren, Corp.
3
with the announcement of the recent restructuring, rising 11% to the current $21.00. The
stock’s valuation is inline with the average for its peer group of branded apparel
manufacturers on most metrics including P/E, price/EBITDA, price/sales, etc. (Refer to
Exhibit I on page 16). Polo trades at a discount relative to luxury goods companies such as
Movado, Tiffany, and Gucci.
Establishing a $24
price target based
on 5.5x our FY
2002 EBITDA
forecast
Near term, we are cautious regarding the upcoming holiday 2000 selling season. Additionally,
we are guarded in our turnaround expectations for Polo until signs of sustainable
improvements materialize, which could be as early as spring/summer 2001. As Polo grows its
luxury business, expands profitability, and demonstrates sustained improvements, we believe
Polo’s valuation multiples could expand to reflect a blend of branded apparel makers and pure
luxury goods companies. We are cautiously optimistic that Polo can execute on these issues,
but we are choosing to sit on the sidelines until we see sufficient signs of sustained
improvements. Until then, we believe enough uncertainties exist to warrant caution, and value
the stock inline with our universe of branded apparel manufacturers. We are establishing a
$24 price target based a 5.5x our FY 2002 EBITDA forecast of $4.47 per share, representing
a 15% appreciation from the current share price of $21.00.
INVESTMENT CONSIDERATIONS
FASHION/APPAREL INDUSTRY
Unpredictable consumer buying patterns due to changes in the economy or consumer
confidence could affect apparel industry sales. If the Company misjudges the market for its
products, it could have significant excess inventories that would need to be cleared, typically
at lower than expected gross margins. Accordingly, Polo’s sales and profitability could be at
risk if consumer tastes shift quickly and management fails to anticipate and react
appropriately. In our view, Polo’s strong brand equity and emphasis on classic styling should
partially mitigate fashion risk.
CONSUMER SPENDING
Polo operates in a cyclical industry. Given interest rate uncertainty, stock market volatility,
and fluctuating consumer confidence, consumer spending could decelerate. If consumer
spending decreases, it will negatively impact sales and earnings. Accordingly, Polo’s shares
could experience downward pressure due to negative sentiment surrounding apparel and
footwear stocks. However, we believe the brand’s position as a luxury brand targeting a
consumer base with higher than average net income, partially insulates sales and earnings as
these consumers tend to be less sensitive to economic cycles.
DEPENDENCE ON RALPH LAUREN
Ralph Lauren remains a driving force behind Polo’s lifestyle image and strong brand equity
and is the largest shareholder at approximately 44%. His leadership is an important factor in
the Company’s success; the unexpected loss of which could have an adverse affect on the
Company. In addition, any negative market or industry perception due to the loss of Mr.
Lauren’s services could unfavorably affect the brand’s image and stock price.
CUSTOMER CONCENTRATION
Department stores are Polo’s largest customer group. Approximately 65% of FY 2000
wholesale net sales were concentrated among three accounts – Dillard Department Stores,
Inc. (23%), Federated Department Stores (22%), and The May Department Stores Company
(20%). This concentration reflects the consolidation trend among department store retailers.
However, these three department stores generated 29% of FY 2000 consolidated sales. The
planned retail expansion should reduce this concentration further.
COMPANY OVERVIEW
Polo is a leading designer, marketer, and distributor of premium lifestyle products. In 1967,
Ralph Lauren introduced the first Polo neckwear collection. For more than 30 years, Polo’s
reputation and distinctive image has grown and now spans many products, brands, and
markets. Polo generated net revenues of $2 billion in FY 2000, increasing 13% from the
previous year. The business consists of three integrated operations including wholesale, retail,
and licensing. The wholesale and retail segments provided 45% and 43%, respectively, of FY
2000 net revenues. Licensing revenue contributed 12% of net revenues in FY 2000.
Polo Ralph Lauren is a premier global luxury brand built around the image of the classic
American lifestyle. The Company markets its products primarily through print media;
however, it is expanding into broadcast as part of its joint venture with NBC. Polo sells its
products through multiple distribution channels including golf/pro shops, department,
specialty, outlet, and Polo stores. The Company combines its consumer insight and design,
marketing, and brand equity to offer broad lifestyle product collections under multiple labels
and in product categories including apparel, home, accessories, and fragrance. Apparel
products include extensive collections of menswear, womenswear, and children’s clothing.
The Ralph Lauren Home Collection offers coordinated products for the home, including
bedding and bath products, interior décor, furniture and tabletop, and gift items. Accessories
encompass a broad range of products such as footwear, eyewear, jewelry, and leather goods
(including handbags and luggage). Polo sells fragrance and skin care products under the
Company’s Polo, Lauren, Romance, Safari, Polo Sport, and Club Monaco Cosmetics brands.
5
FIGURE I
POLO RALPH LAUREN – REVENUE SEGMENTS
$2,500
$2,000
$1,500
$1,000
$500
Amount in
$ millions
$0
Licensing
Retail
Wholesale
FY97A
FY98A
FY99A
FY00A
FY01E
FY02E
$137
$380
$671
$167
$570
$742
$208
$659
$860
$236
$834
$885
$245
$967
$1,054
$260
$1,045
$1,095
Source: Company Documents, WMS estimates
POLO RALPH LAUREN BRANDS
Polo’s brands are divided into two groups, Polo Brands and Ralph Lauren Collection Brands.
Each group conceives, develops, and merchandises its product group to convey a variety of
different design concepts. The Polo Brands Group includes Polo by Ralph Lauren, Polo
Sport, Ralph Lauren Sport, RLX, and Polo Golf. Polo Brands span prices from moderate to
better and sell primarily through department and specialty stores. The Collection Brands
Group consists of luxury products (at designer and above price points) under the Ralph
Lauren Collection, Ralph Lauren Black Label, and the Purple Label Collection. Polo’s
Collection Brands generally garner luxury prices and designer margins. While these brands
are more profitable, their distribution is limited to only higher-end department stores and
specialty stores.
FIGURE II
POLO RALPH LAUREN BRAND TABLE
Brands
Men’s
Collection
•
Purple Label
•
•
•
Polo by Ralph Lauren
Polo Sport
RLX
•
Polo Golf
•
Chaps‡
•
Polo Jeans Co. †
•
Polo Ralph Lauren Underwear #
Polo
Licensed
Women’s
• Ralph Lauren Collection
• Ralph Lauren Black Label
• Ralph Lauren Sport
• RLX
• Polo Golf
•
•
•
•
•
RALPH by Ralph Lauren†
Lauren by Ralph Lauren†
Polo Jeans Co. †
Ralph Lauren Swimwear‡
Ralph Lauren Underwear and Intimates #
† Licensed by Jones Apparel Group
‡ Warnaco, Inc.
# Division of Sara Lee
Source: Company Documents
•
Polo by Ralph Lauren. The Polo by Ralph Lauren menswear collection is a complete
men’s wardrobe consisting of products related by theme, style, color, and fabric. The
Company prices Polo by Ralph Lauren at a range of price points within the men’s
premium ready-to-wear apparel market. Polo sells this collection through
approximately 2,200 department stores, specialty stores, and Polo stores in the U.S.
•
Polo Sport. The Company designed the Polo Sport collection of men’s active wear
and sportswear for the active lifestyle. Polo offers Polo Sport at a range of price
points within the men’s premium ready-to-wear apparel market. This collection sells
through approximately 2,200 department stores, specialty stores, and Polo stores in
the U.S.
•
Ralph Lauren Sport. The Ralph Lauren Sport collection for women includes active
wear and weekend sportswear. Polo prices Ralph Lauren Sport at a wide range of
bridge prices.
•
RLX. Introduced in spring 1999, the RLX collection of menswear and womenswear
consists of sport and outdoor apparel with an emphasis on technical features and
functions. RLX is competitively priced against other authentic sports apparel
companies.
•
Polo Golf. The Company targets the Polo Golf collection of men’s and women’s golf
apparel at the golf and resort markets. Polo markets this collection at price points
within the men’s premium ready-to-wear market. This collection sells through
approximately 2,150 golf/pro shops, resorts, department stores, specialty stores, and
Polo stores.
7
•
Ralph Lauren Collection and Ralph Lauren Black Label. The Ralph Lauren
Collection expresses Polo’s current fashion for women, while the Ralph Lauren
Black Label includes classic styles. The Ralph Lauren Collection and the Ralph
Lauren Black Label sell at price points at the upper-end or luxury ranges. The
Company distributes the Ralph Lauren Collection and Ralph Lauren Black Label
through approximately 95 U.S. stores and 245 international stores.
•
Ralph Lauren/Purple Label Collection. In fall 1995, Polo introduced its Purple
Collection of men’s tailored clothing. The Company expanded the line in fall 1997 to
include sportswear. The Ralph Lauren Collection and the Ralph Lauren Purple Label
sell at price points at the upper-end or luxury ranges in premier retailers. The
Company distributes this collection in less than 100 U.S. and international stores.
WHOLESALE
Polo distributes wholesale products through approximately 5,000 stores in the United States,
including department stores, golf/pro shops, specialty stores, and company-owned stores.
Wholesale revenues accounted for $878 million or 45% of FY 2000 net sales, a $33 million
increase over FY 1999. Wholesale revenue declined as a percentage of net sales from 49% in
FY 1999 to 45% in FY 2000, due to an increase in net revenues at Polo’s stores. The
wholesale segment’s operating margins expanded 220 basis points from 7.0% in FY 1999 to
9.2% in FY 2000, accounting for almost one-third of operating profits. Improved sourcing
and a shifting merchandise mix favoring higher margin products have boosted the wholesale
operating profit 270 basis points since FY 1997. The three largest department store customers
(Dillard Department Stores, Inc., Federated Department Stores, Inc., and The May
Department Stores Company) accounted for $567 million or 65% of FY 2000 wholesale net
revenues.
Shop-within-shops are a critical element of Polo’s wholesale distribution strategy. These
shop-within-shops enhance brand recognition, secure valuable selling floor space, and permit
more complete merchandising of the Company’s lines. As of October 2000, department stores
in the U.S. installed over 2,300 shop-within-shops dedicated to the Company’s products
(representing more than 2.0 million square feet) and over 2,300 shop-within-shops dedicated
to Polo’s licensed products. We believe Polo has practically saturated department stores with
shop-within-shops and expect only modest installations going forward.
RETAIL
Polo currently operates 242 stores, including 70 Club Monaco stores, 125 outlet stores, and
35 full-price stores, representing approximately 1.8 million square feet Additionally, the
Company granted licenses to independent parties to operate 4 stores in the U.S. and 111
stores internationally. Polo sells products (included in wholesale net revenues) to these
licensed stores, receives royalties (included in licensing revenue) from its licensing partners
who sell to these stores, and a percentage of retail sales from these locations.
Retail accounts
for 43% of sales.
Retail revenues accounted for $834 million or 43% of FY 2000 net sales, increasing $175
million from the previous year. The increase was due to opening approximately 14 new Polo
stores in FY 2000 and the Club Monaco acquisition during Q1 FY 2000. In FY 2000, retail
operating margins declined 170 basis points to 3.1%. This continues the retail segment’s
downward trend in operating margins from 10.8% in FY 1998 to 3.1% in FY 2000. In Q4 FY
1999, the Company restructured its retail operations to reduce its overall costs, improve sales,
and increase profitability. However, meaningful improvements did not materialize and Polo
announced a second retail overhaul in Q2 FY 2001. Under the plan, Polo booked a $73
million after-tax charge during Q2 FY 2001 related to the closure of all 12 full-price Polo
Jeans Co. stores and 11 older, under-performing Club Monaco stores. We believe Polo Jean
Co. stores were marginally profitable because of the higher cost structure associated with
buying products from licensees (i.e. Jones Apparel Group) and a difficult specialty store
environment. The underperforming Club Monaco stores are located in rural, less fashion
conscious locations within Canada. While we are optimistic that Polo’s revamped
management can revive retail profitability through better execution, we are adopting a
cautious stance given previous initiatives.
Polo Full-Price Stores. Polo utilizes its full-price stores to generate revenue, test products,
and reinforce the brand. There are approximately 35 full-price Polo stores, including 29 Polo
brand and 6 Polo concept stores (e.g. Children’s), excluding the 12 Polo Jean Co. stores slated
for closure. The Polo Ralph Lauren stores feature Polo’s luxury line with an increasing focus
on accessories, which have considerably higher gross margins. The non-flagship stores are
generally located in upscale regional malls and major high street locations in large urban
markets. Polo is testing new retail concepts (e.g. Children’s) in an effort to find new growth
vehicles. Polo Sport stores are also showing promise.
Outlet Stores. Polo extends its reach to additional consumer groups through approximately
125 company-owned outlet stores. There are 91 Polo Ralph Lauren Factory, 26 Polo Jeans
Co. Factory, and 8 European Factory Stores. Polo Ralph Lauren Factory Stores offer
selections of the Company’s menswear, womenswear, children’s apparel, accessories, home
furnishings, and fragrances. Polo sells select current season merchandise through its outlets,
in addition to clearing prior season products.
Club Monaco is key
to Polo’s retail
growth.
Club Monaco. In Q1 FY 2000, Polo acquired Club Monaco Corp. for $87 million in cash and
assumed debt, valuing the transaction at 1.0x FY 1999 sales of about $90 million. Founded in
1985, Club Monaco is an international vertically integrated, specialty retailer of casual
apparel and other accessories for men, women, and children under the “Club Monaco” brand
name. Club Monaco is a unique, fashionable concept attracting fashion forward consumers.
Polo operates Club Monaco’s 70 stores as a separate subsidiary. Eleven of the Club Monaco
stores, located in smaller markets throughout Canada, are closing under the Q2 FY 2001
restructuring plan. We believe this acquisition is a key growth driver for the Company’s retail
segment and expect Polo to increase Club Monaco’s market penetration in key cities, such as
Los Angeles, New York, and South Miami Beach. We believe Polo can expand the Club
Monaco concept from the current 70 stores to over 200 stores. Additionally, we are
encouraged by the recent announcement of John Mehas as President and CEO of Club
Monaco, replacing the previous management team that resigned in August 2000.
LICENSING
Licensing accounts
for 12% of
revenues, but 63%
of operating profit.
We believe Polo’s brands have considerable brand equity. Polo was ranked the number one
designer brand, according to Women’s Wear Daily’s annual ranking of the 100 most
recognizable brand names. The Company leverages its strong brand equity by licensing
product categories outside of its core competencies. Licensing revenue accounted for $236
million or 12% of FY 2000 net revenues, increasing $28 million from the previous year. This
increase is primarily attributable to an increase in sales of existing licensed products,
specifically Lauren, Polo Jeans Co., and Home Collection. The licensing segment is highly
9
profitable. Operating margins of the licensing business segment increased 450 basis points,
from 58.9% in FY 1999 to 63.4% in FY 2000 due to revenue growth and SG&A leverage.
We believe the licensing segment will expand operating margins in conjunction with
licensing revenue growth.
The Company’s licensing partners are often leaders in their respective markets. The licensing
partners generally contribute the majority of product development costs and provide the
operational infrastructure required to support the business and own the inventory, while Polo
controls the designs. Each licensing partner generally pays 5%-8% royalties and allocates
between 2%-4% of wholesale sales to advertising. The licensing arrangement for Ralph
Lauren Home brands is structured differently (15%-20% royalties) due to the broader range
of services Polo provides. Polo designs, merchandises, and develops the various products as a
complete home furnishing collection. Polo then markets and sells the products to domestic
customers and certain international accounts. The Company’s Home product licensing
partners’ manufacture, inventory, and ship the products. Polo has 20 licensees for apparel,
footwear, and personal accessories and 10 international licensing partners. The Company’s
largest licensing partners by licensing revenue include Jones Apparel Group, Inc., WestPoint
Stevens, Inc., and Seibu Department Stores Ltd., which accounted for 28%, 11%, and 11%,
respectively, of licensing revenue in FY 2000. Jones Apparel Group, Inc. licenses the Ralph
by Ralph Lauren, Lauren by Ralph Lauren, and Polo Jean Co. label, generating over $1
billion in wholesale revenue.
EUROPE
We expect 20%-50%
revenue growth in
Europe over the
next few years.
During Q4 FY 2000, Polo acquired Poloco S.A.S. (“Poloco”) for $220 million in cash and
assumed debt. The purchase price valued Poloco at 1.1x FY 1999 sales of $188 million.
Poloco sells men’s and boys’ Polo apparel, men’s and women’s Polo Jeans apparel, and
certain Polo accessories in Europe. In addition to the wholesale business, Polo acquired one
flagship store in Paris and six outlet stores located in France, the United Kingdom, and
Austria. The European market represents a potential consumer market similar in size with the
U.S., yet Polo sales in the region were less than 15% of the U.S. wholesale business. Before
the acquisition, less than half of Polo’s products were available in Europe. We expect this
acquisition to facilitate expanded European distribution and product introductions throughout
Europe, resulting in more than 30% sales growth in FY 2002, the first full year under Polo’s
control. In addition, the acquisition will allow Polo to leverage sourcing, distribution, and
marketing throughout Europe.
RALPH LAUREN MEDIA LLC
In Q4 FY 2000, Polo Ralph Lauren, NBC, and its affiliates (ValueVision International, NBC
Internet Inc., and CNBC.com) announced a joint venture creating Ralph Lauren Media. This
joint venture is designed to leverage Polo’s strong brand equity over multiple media
platforms, including the Internet, broadcast, cable, and print. Under the 30-year Ralph Lauren
Media joint venture, Polo owns 50%, NBC owns 25%, ValueVision owns 12.5%, NBCi owns
10%, and CNBC.com owns 2.5%. Initially, Polo’s financial exposure will be minimal as the
Company is shielded from any losses up to the first $50 million. Nonetheless, Polo will
proportionately share in the net income or loss thereafter. In addition, Polo will receive
royalties (0%-15%) based on Polo.com’s net sales. We are intrigued by the initiative. We
believe it has the potential to leverage Polo’s brands into new revenue sources with minimal
initial expenditures and financial exposure. The road to leveraging branding into multimedia
is well paved by the likes of Martha Stewart’s television programs, magazines, catalogs, and
line of home goods. While we are cautiously optimistic, we are adopting a wait and see
position, given the current e-commerce environment.
The first initiative out of the joint venture is Polo.com, a destination site dedicated to Polo
Ralph Lauren’s lifestyle including original content, e-commerce, and a community
component. Polo.com launched in Q3 FY 2001 and includes an assortment of men’s,
women’s, and children’s products across the Ralph Lauren family of brands. Polo will market
Polo.com through print advertising, supply Polo products, and provide customer service
through its retail stores in the U.S. Polo.com is an anchor-shopping tenant on NBCi’s portal
service. NBC and its affiliates will provide approximately $150 million in television and
online advertising, while ValueVision will handle fulfillment, customer service, and
contribute up to $50 million in cash.
The new Polo.com web site is the first part of the Company’s initiative to leverage its solid
brand beyond apparel, footwear, and accessories. The web site goes beyond e-commerce and
includes content, wardrobe advice, music, travel, and more. We believe it is well constructed,
laid out nicely, and easily navigable. In our opinion, this is an encouraging first effort,
particularly at showcasing the Polo Ralph Lauren lifestyle. However, we have reservations
about how effectively the site can reach Polo’s core consumer, particularly with luxury items.
MANAGEMENT
We believe Mr. Lauren’s strong direction and guidance has been key to building a solid
brand. In our opinion, execution has lagged behind design and brand building. Polo made
considerable management additions and changes over the past 12 to 18 months to improve its
execution. We are highlighting select key personnel who we believe are crucial to future
success in the areas of retail, logistics, and finance. We are encouraged by the extent and
depth of management changes, believing Polo has assembled a strong team that may
differentiate the current improvement initiatives from those announced in FY 1999.
Ralph Lauren is Chairman and Chief Executive Officer, the creative force behind the
Company, and a 44% owner. In 1967, he introduced the first Polo neckwear collection. Mr.
Lauren created the Polo brand based on the American lifestyle through natural elegance and
an enduring style. His vision and influence spreads beyond the fashion world and into
advertising, interior design, and retailing. We believe his continued leadership in design and
marketing is a critical element of the Company’s success.
F. Lance Isham is Vice Chairman and a Director of the Board. Mr. Isham joined Polo in
1982 and held a variety of sales positions in the Company including Executive Vice President
of Sales and Merchandising. Most recently, Mr. Isham was President of the Company from
November 1998 to April 2000. We believe Mr. Isham, with almost 20 years experience at
Polo, is an integral part of the Company’s continued success.
Roger Farah, President and Chief Operating Officer, joined Polo in April 2000 with 25 years
of retailing experience. Mr. Farah began his retailing career at Saks Fifth Avenue in 1975 and
was the youngest president of Rich’s, a Southern department store chain, at age 34. In 1991,
he was Chairman and CEO of Federated Merchandising Services. Prior to joining Polo, Mr.
11
Farah was Chairman and CEO of Venator Corporation. We believe Mr. Farah is a key
member in developing and executing the Company’s new retail concepts and operational
improvements.
Doug Williams was appointed Group President of Global Business Development in April
2000. His career spans 12 years with the Company. He has held various sales and
merchandising positions including Vice President of Men’s Sales from 1993 to 1997,
Divisional President of Product Licensing, and President of Global Licensing and New
Business Development. We believe Mr. Williams is instrumental in increasing Polo’s
presence in European markets to maximize the return on the Poloco acquisition.
Gerald M. Chaney was appointed Senior Vice President and Chief Financial Officer,
effective November 2000. Mr. Chaney has over 15 years experience, most recently as CFO of
Kellwood Company. Mr. Chaney held various positions with Petrie Retail, Inc., Canadians
Corporation, and Crystal Brands, Inc.
John Mehas was appointed President and Chief Executive Officer of Club Monaco in
November 2000. Mr. Mehas was a senior merchandising executive and held various
merchandising positions at The Gap, Inc. Prior to that time, Mr. Mehas was responsible for
men’s and women’s merchandising at Bloomingdale’s. Mr. Mehas replaces the Club Monaco
management team that resigned in August 2000, shortly after Mr. Farah’s arrival.
FINANCIALS
OVERVIEW
Fundamentally, Polo’s financials are solid. The Company’s current ratio is 2.0x, with $146
million in cash ($1.50 per share), and debt-to-total capital of 38%, which we expect to decline
to approximately 30% at the end of FY 2001. Polo’s approximately $450 million of debt is
primarily related to the Club Monaco and Poloco acquisitions. The Company funded the
Poloco acquisition with a November 1999 €275 million Eurobond offering of 6.125% notes
due in 2006. As with other branded apparel companies, Polo generates considerable operating
cash flow, which we estimate to exceed $200 million or $2.00 per share in FY 2001,
excluding the $112 million after-tax charge. We forecast cash from operations to increase to
$330 million or $3.39 per share in FY 2002. We believe that Polo’s EBITDA/interest ratio
(14x) is more than sufficient. In our opinion, continued share repurchases are a more effective
use of free cash flow than debt reduction. Since the initial $100 million authorization in April
1998, Polo has repurchased approximately 3.6 million shares with $32 million remaining.
Surprisingly, Polo’s strong brand equity has not fully translated into a significantly higher net
margin relative to other branded apparel manufacturers. The Company’s net margin over the
past twelve months was 6.7% versus a peer group average of 6.8%. Gross margin is above
average for branded apparel companies. However, declining operating margin in its retail
business and a higher than average cost structure restrained Polo’s profitability. Polo’s retail
operating margin has declined 770 basis points over the past three years to 3.1% in FY 2000,
despite a 30% CAGR in retail sales, including acquisitions. Conversely, wholesale and
licensing operating margins have steadily improved over the past three years (Figure III).
Wholesale operating margins grew due to the growing luxury component of the merchandise
product mix and licensing margin benefited from leveraging the 20% CAGR in licensing
revenue. Going forward, we believe improving retail operations, closing underperforming
retail locations, and opening new stores in attractive markets (Polo and Club Monaco) will
expand retail’s profitability and drive consolidated profit expansion. We expect a modest 120
basis point operating margin improvement in the second half of FY 2001 and another 100
basis point expansion to 14.1% in FY 2002.
FIGURE III
POLO RALPH LAUREN – OPERATING MARGINS
70%
60%
50%
40%
30%
20%
10%
0%
FY97A*
FY98A*
FY99A^
FY00A^
FY01E^
FY02E
Wholesale
6.5%
6.6%
7.0%
9.2%
9.0%
9.0%
Retail
10.8%
10.8%
4.8%
3.1%
4.8%
7.0%
Licensing
53.0%
53.4%
58.9%
63.4%
62.5%
63.0%
* Pro Forma
^ Excluding Non-recurring items
Polo has three classes of common stock, comprising approximately 96.8 million basic shares
outstanding. There are approximately 30.8 million tradable class A shares, 43.3 million class
B shares controlled by Mr. Lauren, and 22.7 million class C shares held by Goldman Sachs.
Each class B and C share is convertible into one Class A share upon change of ownership.
Mr. Lauren is the largest individual shareholder with 43 million class A and B shares,
representing 44% of the Company and Goldman Sachs owns 22.7 million class B shares,
representing 23% of the Company.
RECENT RESULTS
Second quarter net revenue increased 8% to $586 million from the previous year. Wholesale
revenue increased 6% year-over-year to $261 million due to increased sales from European
operations. Retail revenue increased 14% over last year to $256 million, driven by 33 net new
stores over the last twelve months, which offset a consolidated 5% decrease in same store
sales. The outlet stores’ negative high-single digit and Club Monaco’s flat same store sales
more than offset the Polo stores’ high-single digit comps. The Polo stores registered highsingle digit comps driven by sales of both men’s and women’s Collection Brands. The Club
Monaco stores’ flat comps were due to the U.S. stores’ high-single digit comps offsetting the
13
high-single digit negative comps for Canadian stores. The outlet stores posted high-single
digit negative comps due to the promotion environment in department stores and less traffic
in outlet centers. During the second quarter, Polo opened two net new stores, increasing its
store count to 242. In addition, Polo is closing all 12 Polo Jeans Co. stores and 11 underperforming Club Monaco stores. Licensing revenue decreased 5% to $68 million due to the
timing of domestic licensing payments, transitioning the European business from a licensee to
a wholly owned subsidiary, and softness in the Pacific Rim.
EPS (excluding restructuring charges) declined 11% to $0.50 versus $0.56 the previous year.
The planned reduction in year-over-year EPS comparisons was due to the three-month lag in
recognizing Polo’s European operating results and a partial shift of shipments to Q3 as
department stores delay product receipt until closer to the selling season. Net income (before
restructuring charges) declined 12% to $49 million versus $55 million last year. Polo booked
a $112 million after-tax charge for Polo’s second restructuring, which included the writedown of the store assets to fair value, the closures of under-performing stores, the write-down
of aged inventory, the consolidation of overseas sourcing operations, and employee-related
costs. Gross margin decreased 40 basis points to 49.1% from 49.5% the previous year.
FY 2001 OUTLOOK
We expect FY 2001
sales and recurring
EPS to increase
14.8% and 12.1%,
respectively.
For FY 2001, we forecast a 15% net revenue increase to $2.2 billion. We expect wholesale
revenue to increase 19% to just over $1 billion, primarily due to the timing of the Poloco
acquisition in Q4 FY 2000. We estimate Polo’s retail revenue to increase low double-digits as
additional sales from new store openings partially offset lost sales from closing
underperforming locations. We believe a shifting product mix favoring higher margin luxury
goods and improved inventory management will provide an 80 basis point gross margin
increase to 49.5%. However, we forecast Polo’s FY 2001 operating margin to decline 40
basis points to 13.1%, as higher SG&A expenses related to Poloco’s inclusion offsets the
anticipated gross margin expansion. We do not expect the restructuring initiatives to fully
impact full year results until FY 2002. We have excluded additional share repurchases from
our forecast, although $32 million remains under the current authorization.
FIGURE IV
$ in millions
Wholesale
Retail
Licensing
Other
Total Revenue
POLO RALPH LAUREN – FY 2001 REVENUE FORECASTS
Yr/Yr
2000
2001
Change
% of Growth
$878
$1,042
19%
46%
834
956
15%
43%
236
243
3%
11%
7
5
-29%
0%
$1,956
$2,246
15%
100%
Totals may not add due to rounding
FY 2002 OUTLOOK
For FY 2002, we
expect operating
margin expansion
to accelerate a
modest 6% revenue
increase into a 16%
EPS growth.
Our FY 2002 forecast includes a modest 6% revenue growth to $2.4 billion. We expect
wholesale and retail revenue to increase 4% and 8%, respectively. Our wholesale growth
expectations are primarily due to European sales growth as Polo is fairly well distributed
throughout the U.S. Our retail sales forecast assumes Polo opens at least 15 to 20 retail
locations during FY 2002 and a modest 2% same store sales increase.
FIGURE V
$ in millions
Wholesale
Retail
Licensing
Other
Total Revenue
POLO RALPH LAUREN – FY 2002 REVENUE FORECASTS
Yr/Yr
2001
2002 Change
% of Growth
$1,42
$1,084
4%
45%
956
1,037
8%
43%
243
263
8%
11%
5
5
0%
0%
$2,246
$2,388
6%
100%
Totals may not add due to rounding
We believe the impact from the announced restructuring and operational improvements will
materialize during FY 2002 with a 100 basis point operating margin increase to 14.1%. Our
conservative model assumes only a slight gross margin increase to 49.6% in FY 2002. We
believe our gross margin assumption may prove conservative as Polo increases its
merchandise mix in favor of higher margin luxury goods, particularly accessories at its Polo
stores. We expect most of the operating margin expansion to result from cost reductions and
improved operations. We have excluded from our forecast any meaningful savings from
consolidating Poloco’s and Polo U.S.’ sourcing, as well as additional share repurchases.
Darren E. Barker
Research Analyst
(213) 688-4526
[email protected]
Rafay Khalid
Research Associate
(213) 688-4514
[email protected]
Additional information is available upon request. WMS may or may not have a position in the stock at any given time. RL may not be exempt from Blue Sky
regulations in Guam. Please contact your state’s securities commission prior to purchasing. Priced as of close on November 14, 2000.
Companies Mentioned in this Report:
Sara Lee Corp.
WestPoint Stevens, Inc.
Warnaco Group, Inc.
Jones Apparel Group, Inc.
May Departm ent Stores Company
Federated Department Stores
Dillard’s Inc.
Movado Group, Inc.
Martha Stewart Living Omnimedia, Inc.
Tiffany & Company
Gucci Group N.V.
(Not Rated)
(Not Rated)
(Not Rated)
(BUY)
(Not Rated)
(Not Rated)
(Not Rated)
(Not Rated)
(Not Rated)
(LTA)
(Not Rated)
SLE
WXS
WAC
JNY
MAY
FD
DDS
MOVA
MSO
TIF
GUC
$ 21.75
$ 7.56
$ 3.38
$ 29.94
$ 28.63
$ 33.13
$ 10.88
$ 13.00
$ 26.19
$ 35.25
$101.00
15
EXHIBIT I
Company Name
PEER GROUP ANALYSIS
Donna
Karan
DK
Not Rated
December
Gucci
Group
GUC
Not Rated
January
Price Data
Closing Price 11/13/00
52-Week High
52-Week Low
$6.13
$9.38
$5.13
$97.01
$121.50
$72.94
$5.63
$33.00
$4.25
$29.19
$32.56
$20.13
$41.81
$48.31
$30.94
$13.81
$14.75
$8.38
$21.00
$23.19
$12.75
$12.38
$27.25
$6.31
$3.25
$15.44
$1.88
Sales Information^
LTM Net Sales (mill)
Yr./Yr. % Change
$667.4
11.3%
$1,732.8
59.6%
$778.0
44.9%
$4,095.0
50.0%
$3,027.3
10.5%
$636.7
15.3%
$2,050.0
6.8%
$1,930.0
3.5%
$2,388.9
18.2%
$1,922.9
24.5%
Margin Analysis (LTM)^
Net Sales
COGS
Gross Margin
SG&A
Operating Income
Net Income*
100.0%
67.9%
32.1%
28.9%
3.2%
1.8%
100.0%
31.7%
68.3%
52.1%
16.2%
18.5%
100.0%
58.4%
41.6%
28.7%
12.9%
6.8%
100.0%
58.9%
41.1%
25.9%
15.2%
8.0%
100.0%
60.4%
39.6%
29.2%
10.4%
6.3%
100.0%
54.7%
45.3%
37.5%
7.8%
4.8%
100.0%
50.9%
49.1%
36.9%
12.2%
6.7%
100.0%
58.4%
41.6%
29.8%
11.8%
7.7%
100.0%
68.8%
31.2%
22.6%
8.6%
0.6%
100.0%
56.7%
43.3%
32.4%
10.9%
6.8%
Valuation Analysis
Calendar 1999A
Calendar 2000E
Calendar 2001E
$0.40
$0.65
$0.95
$3.48
$3.21
$3.76
$1.19
$0.85
$0.99
$2.02
$2.50
$3.00
$3.12
$3.59
$4.05
$1.45
$1.26
$1.39
$1.44
$1.57
$1.89
$2.30
$1.42
$1.48
$1.90
($0.33)
$0.24
-------------
P/E - 1999 EPS
P/E - 2000 EPS
P/E - 2001 EPS
15.3x
9.4x
6.4x
27.9x
30.2x
25.8x
4.7x
6.6x
5.7x
14.4x
11.7x
9.7x
13.4x
11.6x
10.3x
9.5x
11.0x
9.9x
14.6x
13.4x
11.1x
5.4x
8.7x
8.4x
1.7x
n/m
13.5x
11.9x
12.8x
11.2x
Price/Sales (LTM)
Price/Book
Price/EBITDA (LTM)
EV/EBITDA (LTM)
0.2x
0.9x
6.0x
6.5x
5.7x
10.3x
30.5x
6.0x
0.3x
1.3x
1.8x
2.9x
0.9x
2.5x
5.6x
7.6x
0.7x
2.6x
5.7x
6.2x
0.7x
1.7x
5.8x
5.4x
1.0x
2.8x
6.3x
7.2x
0.6x
0.9x
4.4x
5.8x
0.1x
0.5x
0.6x
5.1x
1.1x
2.6x
7.4x
5.9x
EPS Growth Rate
CAGR
P/E to CAGR - 2001
16.0%
40.3%
15.5%
166.4%
15.0%
37.8%
18.0%
54.0%
14.0%
73.8%
14.0%
71.0%
14.0%
79.4%
14.0%
59.7%
13.0%
104.2%
14.8%
76.3%
9.6%
4.3%
14.2%
12.0%
32.8%
13.5%
25.2%
10.5%
21.0%
11.5%
12.2%
8.7%
18.8%
9.6%
11.8%
6.3%
-27.8%
-5.1%
13.1%
7.9%
Ticker Symbol
Rating
Fiscal Year End
Profitability Analysis (LTM)
Return on Avg Equity*
Return on Avg Assets*
Guess
GES
Hold
December
Jones
Apparel
JNY
Buy
December
Liz
Claiborne
LIZ
Buy
December
Nautica
Ent.
NAUT
LTA
February
Polo/Ralph
Lauren
RL
LTA
March
Tommy
Hilfiger
TOM
Buy
March
Warnaco
WAC
Not Rated
December
Average
^As of 9/30/2000, except DK (6/30/2000), GUC (8/30/2000), WAC (6/30/2000)
* Excluding Non-Recurring items
Source: Company Reports, First Call, FactSet and Wedbush Morgan Securities estimates
Polo/Ralph Lauren Income Statement
$ Millions
Jun-98 Sep-98 Dec-98 Mar-99
1Q99
2Q99
3Q99
4Q99
FY 1999
Jun-99 Sep-99 Dec-99 Mar-00
Jun-00 Sep-00 Dec-00
1Q00
2Q00
3Q00
4Q00 FY 2000A 1Q01a 2Q01a 3Q01e
1-Mar
4Q01e FY 2001E
Net Revenues
$358.8
$474.8
$447.5
$445.7
$1,726.9
$434.4
$543.9
$510.3
$466.9
$1,955.5
$487.3
$586.2
$621.7
$550.7
176.2
241.1
240.7
246.7
904.6
217.4
274.5
$270.7
$239.8
1,002.4
234.8
298.2
322.1
279.2
1,134.3
182.6
233.7
206.9
199.1
822.3
217.0
269.4
239.6
227.2
953.1
252.5
288.0
299.7
271.5
1,111.62
145.0
148.8
163.0
151.4
608.1
167.1
172.3
181.7
168.1
689.2
206.4
200.5
212.6
198.0
817.5
37.7
85.0
43.9
47.7
214.2
49.9
97.1
57.9
59.0
263.9
46.1
87.4
87.0
73.5
294.1
Cost of Sales
Gross Profit
Selling, General and Admin Expenses
Operating Income
$2,245.9
Non-operating Income/(Expense)
Interest Income (Expense), net
0.7
(0.7)
(1.1)
(1.7)
(2.8)
(2.5)
(3.7)
(3.4)
(5.4)
(15.0)
(6.5)
(6.8)
(7.0)
(6.0)
(26.3)
38.3
84.3
42.8
46.0
211.4
47.4
93.4
54.5
53.6
248.9
39.6
80.7
80.0
67.5
267.8
15.6
34.3
17.4
18.8
86.1
19.3
38.1
22.2
21.8
101.4
15.7
31.9
31.6
26.6
105.8
Net Income, excl. Non-Recurring items
$22.7
$49.9
$25.4
$27.3
$125.3
$28.1
$55.3
$32.3
$31.8
$147.5
$23.9
$48.8
$48.5
$40.9
$162.0
Diluted EPS, excl. Non-Recurring items
$0.23
$0.50
$0.25
$0.27
$1.25
$0.28
$0.56
$0.33
$0.32
$1.49
$0.25
$0.50
$0.50
$0.42
$1.67
(34.7)
(34.7)
(4.0)
Net Income (as reported)
$22.7
$49.9
$25.4
($7.4)
$90.6
$24.1
$55.3
$32.3
$31.8
$143.5
$23.9
($62.9)
$48.5
$40.9
$50.4
Diluted EPS, as reported
$0.23
$0.50
$0.25
($0.07)
$0.91
$0.24
$0.56
$0.33
$0.32
$1.45
$0.25
($0.65)
$0.50
$0.42
$0.52
Diluted Shares
100.6
99.9
99.7
99.6
100.0
99.7
99.3
98.9
98.3
99.0
97.4
97.3
97.3
97.3
97.3
50.9%
49.2%
46.2%
44.7%
47.6%
49.9%
49.5%
46.9%
48.7%
48.7%
51.8%
49.1%
48.2%
49.3%
49.5%
40.4%
31.3%
36.4%
34.0%
35.2%
38.5%
31.7%
35.6%
36.0%
35.2%
42.4%
34.2%
34.2%
36.0%
36.4%
10.5%
17.9%
9.8%
10.7%
12.4%
11.5%
17.9%
11.3%
12.6%
13.5%
9.5%
14.9%
14.0%
13.4%
13.1%
0.2%
-0.1%
-0.2%
-0.4%
-0.2%
-0.6%
-0.7%
-0.7%
-1.2%
-0.8%
-1.3%
-1.2%
-1.1%
-1.1%
-1.2%
6.3%
10.5%
5.7%
6.1%
7.3%
6.5%
10.2%
6.3%
6.8%
7.5%
4.9%
8.3%
7.8%
7.4%
7.2%
Net Revenues
23.9%
12.1%
9.6%
24.1%
16.6%
21.1%
14.6%
14.0%
4.8%
13.2%
12.2%
7.8%
21.8%
17.9%
14.8%
Gross Profit
24.5%
12.2%
7.2%
15.3%
14.1%
18.8%
15.3%
15.8%
14.1%
15.9%
16.4%
6.9%
25.1%
19.5%
16.6%
Operating Income
30.7%
11.9%
-10.9%
3.9%
7.2%
32.5%
14.3%
32.0%
23.8%
23.2%
-7.6%
-9.9%
50.4%
24.5%
11.4%
61.1%
11.0%
-13.5%
-14.5%
4.2%
23.5%
10.7%
27.3%
16.8%
17.7%
-14.9%
-11.8%
50.1%
28.4%
9.9%
64.3%
11.1%
-13.8%
-15.6%
4.2%
21.7%
12.0%
32.0%
18.5%
19.2%
-10.7%
-10.7%
51.5%
31.3%
12.1%
Pretax Income
Total Income Tax
Unusual Item, after tax
(4.0)
(111.6)
(111.6)
Margin Analysis
Gross Profit, % of revenue
Operating Income
Period/Period Change
1 - Pro forma to include fully taxed rate (40.8%) and reduced interest expense dut ot debt reduction from the use of IPO proceeds
17
Polo/Ralph Lauren Income Statement
$ Millions
1
1
Net Revenues
$1,019.9
$1,180.4
Cost of Sales
586.3
433.6
Gross Profit
Operating Income
Non-operating Income/(Expense)
1
Pro Forma Pro Forma Pro Forma
FY 1998
FY 1996P FY 1997P
FY 1999 FY 2000A FY 2001E FY 2002E
$1,480.6
$1,726.9
$1,955.5
$2,245.9
$2,388.3
652.0
760.0
904.6
1,002.4
1,134.3
1,203.7
528.4
720.60
822.3
953.1
1,111.62
1,184.59
312.7
378.9
520.8
608.1
689.2
817.5
847.8
120.9
149.6
199.8
214.2
263.9
294.1
336.7
(1.1)
(3.6)
(16.3)
(13.7)
3.1
(15.0)
(26.3)
(25.0)
103.5
132.3
202.9
211.4
248.9
267.8
311.7
41.4
52.9
82.6
86.1
101.4
105.8
123.1
$62.1
$79.4
$120.3
$125.3
$147.5
$162.0
$188.6
$0.62
$0.79
$1.20
$1.25
$1.49
$1.67
$1.94
(4.0)
(111.6)
0.0
Net Income (as reported)
$62.1
$79.4
$120.3
$90.6
$143.5
$50.4
$188.6
Diluted EPS, as reported
$0.62
$0.79
$1.20
$0.91
$1.45
$0.52
$1.94
Diluted Shares
100.0
100.0
100.0
100.0
99.0
97.3
97.3
42.5%
44.8%
48.7%
47.6%
48.7%
49.5%
49.6%
30.7%
32.1%
35.2%
35.2%
35.2%
36.4%
35.5%
11.9%
12.7%
13.5%
12.4%
13.5%
13.1%
14.1%
-1.6%
-1.2%
0.2%
-0.2%
-0.8%
-1.2%
-1.0%
6.1%
6.7%
8.1%
7.3%
7.5%
7.2%
7.9%
Net Revenues
20.5%
15.7%
25.4%
16.6%
13.2%
14.8%
6.3%
Gross Profit
16.7%
21.9%
36.4%
14.1%
15.9%
16.6%
6.6%
9.8%
23.7%
33.6%
7.2%
23.2%
11.4%
14.5%
10.8%
27.8%
51.5%
4.2%
17.7%
9.9%
16.4%
10.7%
27.4%
51.9%
4.2%
19.2%
12.1%
16.2%
$131
$163
$199
$261
$330
$376
$435
12.8%
13.8%
13.5%
15.1%
16.9%
16.7%
18.2%
8.8%
25.0%
22.0%
30.8%
26.7%
13.8%
15.7%
120.9
149.6
199.8
214.2
263.9
294.1
336.7
(41.4)
(52.9)
(82.6)
(86.1)
(101.4)
(105.8)
(123.1)
+ Depreciation & Amortization
9.7
13.8
27.4
46.4
66.3
81.8
+ Non-recurring
0.0
0.0
0.0
34.7
4.0
111.6
0.0
89.2
110.4
144.6
209.2
232.7
381.7
311.6
11.9%
17.0%
Pretax Income
Total Income Tax
Unusual Item, after tax
(2.8)
(34.7)
Margin Analysis
Gross Profit, % of revenue
Operating Income
Period/Period Change
Operating Income
EBITDA Analysis
LTM EBITDA
EBITDA Margin
Yr/Yr % Change
NOPAT Calculation
Operating Income
- Tax Provision
NOPAT
Nopat Margin
8.8%
9.4%
9.8%
12.1%
98.0
13.0%
1 - Pro forma to include fully taxed rate (40.8%) and reduced interest expense dut ot debt reduction from the use of IPO proceeds
Polo/Ralph Lauren Balance Sheet
$ Millions
FY 1996P FY 1997P
FY 1998
FY 1999 FY 2000A FY 2001E FY 2002E
Assets
Cash
$14
$30
$59
$44
$165
$155
$264
Accounts Receivables
145
144
149
157
204
236
234
Inventories
269
222
298
377
391
437
439
32
40
50
101
93
90
90
460
436
556
679
853
917
1,028
49
83
175
262
373
350
410
224
Other Current Assets
Total Current Assets
Net Property, Plant and Equipment
Goodwill, Net
27
278
252
55
57
93
136
117
125
125
$564
$577
$825
$1,105
$1,621
$1,644
$1,787
$74
$27
$0
$116
$86
$101
$0
Current Portion of Long-Term Debt
12
42
-
-
-
-
Accounts Payable
74
89
100
89
151
136
181
Other LT Assets
Total Assets
-
-
-
Liabilities and Shareholders' Equity
Short-term borrowings
Accrued expenses and Other Current Liabilities
-
37
66
102
144
169
164
164
197
224
202
348
406
402
345
Long-Term Debt
114
72
44
343
323
323
Other Liabilities
15
20
39
53
99
100
100
326
316
241
446
848
825
768
Total Current Liabilities
Total Liabilities
Total Shareholders' Equity
-
238
261
584
659
772
819
1,019
$564
$577
$825
$1,105
$1,621
$1,644
$1,787
Return on Capital, NOPAT/(Capital - Cash)
42.1%
27.8%
32.2%
21.5%
24.8%
14.9%
28.8%
Return on Average Assets
11.0%
13.9%
17.2%
9.4%
10.5%
3.1%
11.0%
Return on Average Equity
26.6%
33.3%
28.5%
14.6%
20.1%
6.3%
20.5%
Total Liabilities and Shareholders' Equity
Profitability Analysis
EBIT/Total Sales
11.9%
12.7%
13.5%
12.4%
13.5%
13.1%
14.1%
Total Sales/Avg. Assets
180.9%
207.0%
211.2%
179.0%
143.5%
137.6%
139.2%
Avg. Assets/Avg. Equity
237.2%
228.9%
165.9%
155.2%
190.4%
205.1%
186.7%
Pre-Tax Income/EBIT
85.6%
88.5%
101.6%
98.7%
94.3%
91.1%
92.6%
Net Income/Pre-Tax Income
60.0%
60.0%
59.3%
42.9%
57.7%
18.8%
60.5%
Ratio Analysis
Receivables Turnover
n/a
8.2
10.1
11.3
10.8
10.2
10.2
Days Sales Outstanding
n/a
44.7
36.2
32.4
33.8
35.8
35.9
Inventory Turnover
n/a
2.7
2.9
2.7
2.6
2.7
2.7
Days COGS in Inventory
n/a
137.5
125.0
136.2
139.8
133.2
132.8
Days Payables in COGS
n/a
45.8
45.5
38.1
43.7
46.2
48.0
Net Working Capital
262.9
212.4
354.2
331.5
446.7
515.3
682.8
Working Capital per Share
$2.63
$2.12
$3.54
$3.31
$4.51
$5.30
$7.02
Current Ratio
2.3
1.9
Total Debt/Total Capital
45.7%
35.1%
Book Value per Share
$2.38
$2.61
2.8
2.0
2.1
0.0%
19.5%
35.7%
34.1%
$6.59
$7.80
$8.42
$5.84
2.3
3.0
24.1%
$10.47
19
Polo/Ralph Lauren Statement of Cash Flows
$ Millions
FY 1996P FY 1997P
FY 1998
FY 1999 FY 2000A FY 2001E FY 2002E
Cash Flow from Operations
Net Income
$98.8
$117.3
13.8
$147.6
$90.6
$143.5
$50.5
$188.6
27.4
46.4
66.3
81.8
98.0
(28.0)
(25.8)
-
-
-
111.6
-
(1.6)
14.6
10.8
-
12.0
(84.3)
Depreciation/Amortization
9.7
Deferred Taxes
-
-
Provision for Special Charges
-
-
Other
(0.4)
4.4
13.9
(29.5)
33.0
(74.2)
(120.6)
12.7
35.1
9.5
30.5
91.3
203.6
96.2
38.5
(Increase)/Decrease in Assets
Increase/(Decrease) in Liabilities
Net Cash from Operations
-
19.0
6.8
(0.5)
242.7
(0.9)
4.1
44.4
174.5
330.2
Cash Flow from Investing
Acquisition of businesses, net of cash
(39.7)
Purchases of property and equipment
(5.6)
(35.3)
Other
(3.7)
(3.2)
(49.0)
Consolidated Debt, net
12.4
Proceeds from equity issuance
10.0
Net Cash Used by Investing
-
(8.6)
(7.0)
(235.1)
(21.6)
-
(63.1)
(141.7)
(122.0)
(134.3)
(130.0)
2.6
(47.6)
38.8
(38.6)
(74.9)
(196.2)
(318.3)
(58.7)
(161.9)
159.4
242.9
(1.1)
-
(157.1)
(130.0)
(5.5)
(101.2)
Cash Flow from Financing
Repurchase of common stock
Other
Net Cash Provided (Used) by Financing
-
-
268.8
0.1
-
-
(16.1)
(41.3)
(56.3)
(90.3)
(99.1)
-
-
(33.9)
(149.0)
7.8
143.4
201.6
-
-
(5.8)
(11.0)
(16.5)
-
(101.2)
Effect of exchange rates on cash
-
Net Increase (Decrease) in Cash
8.4
16.0
29.2
(14.3)
120.1
0.9
98.9
Beginning Cash
5.1
13.6
29.6
58.8
44.5
164.6
165.5
$13.6
$29.6
$58.8
$44.5
$164.6
$165.5
$264.4
Ending Cash
-
-
-
FREE CASH FLOW
Net Income
Depreciation/Amortization
Change in Working Capital, ex cash
$98.8
$117.3
$147.6
$90.6
$143.5
$50.5
$188.6
9.7
13.8
27.4
46.4
66.3
81.8
98.0
(112.7)
(31.1)
66.5
Operating Cash Flow
77.5
197.6
Capital Expenditures
(5.6)
Free Cash Flow
Free cash flow margin
$71.9
7.0%
(35.3)
$162.2
13.7%
8.4
4.9
62.3
145.4
214.7
53.7
228.9
(63.1)
(141.7)
(122.0)
(134.3)
(130.0)
($0.8)
$3.7
$92.7
($80.7)
$98.9
-0.1%
0.2%
4.7%
(78.6)
-3.6%
(57.7)
4.1%
Per Share Information
Sales
$10.20
$11.80
$14.81
$17.27
$19.75
$23.08
$24.55
Earnings
$0.62
$0.79
$1.20
$1.25
$1.49
$1.67
$1.94
Cash Earnings (Net income + Dep/Amort)
$0.72
$0.93
$1.48
$1.72
$2.16
$2.51
$2.95
EBITDA
$1.31
$1.63
$1.99
$2.61
$3.34
$3.86
$4.47
Cash From Operations
$0.91
$2.04
$0.96
$0.39
$2.45
$1.79
$3.39
Free Cash Flow
$0.72
$1.62
($0.01)
$0.04
$0.94
($0.83)
$1.02
Book Value
$2.38
$2.61
$5.84
$6.59
$7.80
$8.42
$10.47
(This page intentionally left blank.)
21
23
WEDBUSH MORGAN SECURITIES
MANAGING DIRECTOR OF CAPITAL MARKETS
Michael G. Gardner, CFA (213) 688-4551
RESEARCH DEPARTMENT
(866) 855-4529 toll free
DIRECTOR OF RESEARCH
Michael Pachter (213) 688-4474
CONSUMER PRODUCTS AND SERVICES
NEW MEDIA ENTERTAINMENT
Branded Apparel and Footwear
Darren E. Barker …………...……. (213) 688-4526
Rafay Khalid ……………………… (213) 688-4514
Interactive Entertainment
Miguel Iribarren, CFA ………….... (213) 688-4558
Philip A. Saunders …….……….... (213) 688-4427
Specialty Retail: Hardlines
Joan L. Bogucki-Storms, CFA …. (213) 688-4537
Spurgeon F. Johnson III……..….. (213) 688-4523
Specialty Retail: Softlines
Elizabeth O. Pierce, CFA ……..... (213) 688-4504
Nadine Francis …………………… (213) 688-4538
Marsha Jong ……………………... (213) 688-4459
Niche Broadcasting/Internet Content
Anne E. Thompson …………...…. (213) 688-4518
Daniel S. Kim ……………...…….. (213) 688-4371
FINANCIAL SERVICES
Specialty Finance/Banks
Derek S. Derman, CFA …...…….. (213) 688-4524
Lis Jayaputra ………………..…… (213) 688-4529
LIFE SCIENCES
Biotechnology
Holly E. Hartman, Ph.D. …...……. (213) 688-4382
Medical Devices
Keay T. Nakae ………………….... (213) 688-4344
F. Tucker Oakley IV…………….... (213) 688-4370
TECHNOLOGY
Alternative Energy Technology
Gary J. Holdsworth, CFA ….……. (213) 688-4519
Internet B2B eCommerce
George Santana, CFA ………….. (213) 688-4505
Nathan S. Schneiderman ……….. (213) 688-4501
Internet Enabling
Technologies/Communications
Scott P. Sutherland, CFA ……….. (213) 688-4522
Tim S. Leehealey….…....…..……. (213) 688-4539
Internet Infrastructure
Adam J. Holiber, CFA ………..….. (213) 688-4521
Edmund H. Gee ………………….. (213) 688-4507
Stephen F. Franklin ……………… (213) 688-4427
RESEARCH PUBLICATIONS
Vincent J. Moy (213) 688-4528
Kyung H. Kim (213) 688-4428
INSTITUTIONAL SALES
INSTITUTIONAL SALES TRADING
Los Angeles (213) 688-4470 / (800) 444-8076
Los Angeles (213) 688-4470 / (800) 421-0178
CORPORATE HEADQUARTERS
1000 Wilshire Blvd., Los Angeles, CA 90017-2465
Mailing Address: PO Box 30014, Los Angeles, CA 90030-0014
Tel: (213) 688-8000
Fax: (213) 688-6629
www.wedbush.com
Member New York Stock Exchange
RETAIL OFFICES
ALASKA
Anchorage ………………………………………………………. (907) 273-2300
Fairbanks ………………………………………………………...(907) 452-2101
ARIZONA
Phoenix …………………………………………………………. (602) 956-9470
CALIFORNIA
Gilroy ……………………………………………………………..(408) 847-8263
Los Angeles …………………………………………………….. (213) 688-8031
Menlo Park ……………………………………………………… (650) 323-5173
Newport Beach …………………………………………………. (949) 719-3200
San Diego ………………………………………………………..(619) 233-9600
San Francisco …………………………………………………...(415) 273-7300
San Jose …………………………………………………………(408) 559-3771
COLORADO
Denver …………………………………………………… (303) 571-4949
HAWAII
Honolulu …………………………………………………. (808) 536-4579
NEVADA
Las Vegas ……………………………………………….. (702) 732-4571
OREGON
Eugene ……………………………………………………(541) 485-0202
Portland ………………………………………………….. (503) 224-0480
Salem …………………………………………………….. (503) 316-0880
WASHINGTON
Aberdeen ………………………………………………… (360) 537-9200
Seattle ………………………………………….………… (206) 623-3040

Polo Ralph Lauren Corp. (RL) LONG TERM ATTRACTIVE – $21 11/16

Transcription

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