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As Jones Talks Drag, Odds Increase Polo Will Reclaim Licenses

Jones Apparel Group doesn’t appear to be making much progress in its talks with Polo Ralph Lauren to retain the Ralph and Lauren licenses.

NEW YORK — Things don’t look too promising for Jones Apparel Group’s attempts to retain its highly lucrative Ralph Lauren businesses.

Sources say Jones and Polo Ralph Lauren continue to be far apart in their discussions, which have become very contentious, and it looks increasingly likely that Polo Ralph Lauren Corp. will get back the Lauren by Ralph Lauren and Ralph licenses and set the businesses up in-house. Polo is also negotiating to acquire the long-term Polo Jeans license from Jones, said sources. Of course, legal action on Jones’ part is still a possibility.

As written in these columns, Jones has reportedly held preliminary discussions about acquiring Tommy Hilfiger Corp. and is talking to Phillips-Van Heusen about licensing the CK Calvin Klein name for women’s better-price sportswear, but sources say any new developments can’t occur until the Lauren situation is resolved.

Sources said Polo is determined to get these businesses back and run them independently, and it’s not a question of Jones raising the royalty payments to Polo. Jones pays a 7 percent royalty rate to Polo on each of its three Lauren businesses. Polo reportedly rejected an increase to 12 percent, and sources said Peter Boneparth, president and chief executive officer of Jones, presented a proposition to his board of directors to increase the royalty rate to 15 percent, which the board turned down.

The present dispute between Jones and Polo stems from the weak sales of the Ralph licensed line. For 2002, the contracted minimum for the Ralph line was $100 million, but Jones’ revenues from the Ralph license were just $37 million.

According to sources, Polo claims the Ralph license is linked to the Lauren by Ralph Lauren license, which is a much more successful line and did $548 million in net sales last year. Although the Ralph license expires Dec. 31 of this year, and the Lauren license runs until Dec. 31, 2006, sources said the two contracts are linked, and once Jones defaults on one, it automatically defaults on the other. Sources said Polo’s view that the deals are linked together gives it leverage if things were to go wrong with one deal.

However, Jones has contended that this is an improper interpretation, and that the expiration of the Ralph license does not cause the Lauren license to end. The long-term Polo Jeans contract is not part of the dispute.
The Polo Jeans license with Jones expires on Dec. 31, 2005. According to an Securities and Exchange Commission filing in April 2001, the license may be renewed by Jones in five-year increments for up to 25 additional years if certain targets are met. Renewal of the Polo Jeans license after 2010, however, requires a one-time payment by Jones of $25 million or, at Jones’ option, a transfer of a 20 percent interest in its Polo Jeans business to Polo Ralph Lauren, with no fees required for subsequent renewals. Polo also has the option, exercisable on or before June 1, 2010, to purchase the Polo Jeans Co. business at the end of 2010, subject to certain conditions.

The problem for the $4.3 billion Jones is that, even if it gives back the Lauren and Ralph licenses but retains its Polo Jeans business, it is unable to negotiate any other sportswear deals with a competing designer, as per Lauren’s contract. The Polo Jeans business does about $400 million to $450 million.

"They can’t do a Calvin Klein deal unless they get a waiver from Ralph Lauren, and they can’t buy Tommy unless they get a waiver from Ralph. Peter’s hands are tied," said one source.

In fact, another source said the Hilfiger discussions are "on hold" until there’s a Lauren resolution.

In addition, the disappearance of these three Lauren businesses at Jones, which account for about $1 billion in sales, would mean that Jones would lose a lot of its leverage in the stores. The Lauren lines not only garner prime real estate and high visibility, but benefit from Ralph Lauren’s clout at retail. "It puts them in serious jeopardy if they lose those businesses," said one observer.

In February, Jones issued a statement that said if the Lauren license were to end at the end of 2003, "there would be a material adverse impact on Jones’ results of operations after 2003. However, it would not materially adversely impact Jones Apparel Group’s liquidity, and Jones would continue to have a strong financial position in the event the Lauren license were to end. The expiration of the Ralph license would not be material to Jones Apparel Group in any respect."
As written in these columns, Polo has reportedly taken three additional floors at 550 Seventh Avenue to set up these businesses in-house. Sources said Polo will have to pay heavily to get the Polo Jeans business back under its wing, but the Lauren and Ralph licenses, which reportedly would be in default, would revert back to Polo.

Polo, the $2.3 billion company, said in its annual report for the year ended March 30, 2002, that its various licenses with Jones, including jeanswear, were responsible for about $65 million in royalties, about 26.9 percent of its corporate licensing revenue.

"We don’t comment on any ongoing business discussions," said a Polo spokeswoman. Wesley R. Card, chief operating and financial officer of Jones, said, "We don’t comment on any aspect of the transaction." He said there was no deadline to resolve the problem. "We have no comment on how the discussions are going," said Card.

Bruce Klatsky, chairman of Phillips-Van Heusen, which is talking to several companies about doing a CK Calvin Klein better sportswear line, said no deal has been reached yet, and he’s still in discussions with various companies. "It’s starting to come together and we’re happy with where we are."