Ralph Lauren: A Bronx Cowboy In Europe?

ANTONIO CALANNI/AP
Ralph Lauren acknowledges the audience on the runway in Milan

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Lauren is not shy about voicing his frustrations with Wall Street. Despite a few quarterly snags, the company has almost doubled earnings per share since going public. Yet the stock price won't budge. Securities analysts are worried that Lauren relies too heavily on sales in U.S. department stores, which are losing market share. The analysts see Ralph Lauren and Polo as mature brands, incapable of the growth Wall Street had got used to in the late 1990s. They complain that Lauren, the ceo, won't communicate directly with them, leaving that to the company's financial officers. Roger Farah, Polo Ralph Lauren's president, responds that Lauren's time is better spent working in the design studio.

To be sure, Lauren can talk eloquently about how he built his company slowly, to last. He can talk convincingly about what Ralph Lauren, the brand, has meant to America. But still, in the back of his brain is the question he tried to brush aside: "What do you have left?"

What Lauren has left is Europe. In fiscal 2002, which ended March 31, only 9.8% of Polo Ralph Lauren's wholesale revenues came from Europe. He also has Japan, which contributed just 10.5%. Come to think of it, his women's business is still smaller than his menswear, even though women spend twice as much on clothes. So he has that left. And Polo gets only 9.4% of its sales from accessories (Gucci earns 60%), so that's left to improve too.

But first, Europe. In 1998 the company spent $200 million buying back its key licensee, Poloco SAS of Paris, which had been managing to increase sales in only the single digits, compared with double-digit growth in the U.S. And last summer Polo Ralph Lauren spent another $22 million buying out its Italian partner, PRL Fashions of Europe. A key Polo lieutenant, Lance Isham, moved from the company's New York City headquarters to London to oversee the company's international development, and an Italian, Gian Luigi Longinotti-Buitoni, who had most recently been ceo of Ferrari North America, was hired to manage day-to-day operations in Europe.

Two years ago, Lauren signed Spanish actress Penelope Cruz to be the worldwide face of the all-American brand, and in March he took the dramatic step of moving his men's fashion show from New York City to Milan. That show, for fall clothing, and the one for spring 2003 that followed last month, were well received by the local press. with ralph lauren man is elegant again, gushed a headline in the Milan daily Corriere della Sera. The international press played up the competition between Lauren and the European king of menswear, Giorgio Armani. Again a compliment: no such comparison was made when Calvin Klein staged his first men's shows in Italy. Lauren's moves have begun to pay off. European sales in fiscal 2002 grew more than 30% compared with 2001, a trend that has continued, according to Isham, though from a very small base.

Wowing the fashion press, with its natural affinity for anything new, may be the easy part. Convincing Continental shoppers particularly the conservative European male, weaned on a diet of Italian cashmere and French tailoring may be more difficult. "Some Europeans know me very well," Lauren says. "But they know me for sport. Having the classy clothes is new to them." Lauren is encouraged by the reviews and by what he sees as the nature of the European shopper. "It's a culture that understands quality and taste," he says. "They understand my clothes more than Americans. They're hungry for it. Armani and Zegna? They don't look like me." For fall, Armani looked east with kimono shirts and Mao jackets; for spring, Lauren went Gatsby with pleated trousers and waistcoats.

"Sometimes Europeans are bored with European brands," says Jacques-Franck Dossin, a Goldman Sachs luxury-goods analyst based in London. "Ralph Lauren is cooler. It's different. It's from the U.S." Carol Pope Murray, an analyst at Salomon Smith Barney in New York City, more or less agrees. "Yes, I think there is a consumer in Europe who will buy the product," she says. "But the issue is and has always been, Can they do it and make a profit?"

The business of selling clothes in Europe, from manufacturing to marketing to distribution, is at odds with what Lauren has done in the U.S. While European designers love centralization, Lauren is more willing to give important roles to others. Take manufacturing. In the past 12 months, Gucci Group has announced it will open a state-of-the-art factory for shoemaker Sergio Rossi by the end of the year. Armani has announced a joint venture with four shoemakers. And Marzotto, the new owner of Valentino, has promised that Val will get his own accessories plant too. All this activity in the name of corporate control, and made in italy on the label. Polo doesn't own a factory, doesn't make a single shirt or dress itself. "Owning a factory is a two-edged sword," says ceo Farah. "It works great on the way up. No one yet understands how it works on the way down." In other words, although Farah says Polo Ralph Lauren plans to move some of its production from Asia to independent European factories, why take the risk of hiring lots of workers, who are more expensive in Europe and hard to lay off? Says Farah: "It's not at the core of how we want to operate."