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.

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."
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