Liz and Jones vs. Tommy and Ralph

Shares of women's clothiers Liz Claiborne and Jones Apparel may have more appeal now that Hilfiger and Lauren have run up so high

Amy Tsao

The coming of the new millennium will be remembered as a rough time for traditional department stores. Newer rivals like Kohl's (KSS ) and Target (TGT ) ate into their market share. That led to falling sales for department-store brands such as Polo Ralph Lauren (RL ) and Tommy Hilfiger (TOM ), although some experts also blamed the labels for failing to freshen up their appeal.

Over the past year, however, designer clothing makers have enjoyed a mini-renaissance of sorts, with the economy rebounding and department stores' fortunes back on the rise (see BW Online, 11/3/03, "Federated's Focus: Fashionable Females"). Investors seem to be betting that apparel makers, too, will be able to reinvigorate their iconic brands for the 21st century. In the past 12 months, Ralph Lauren shares have jumped 55%, to around $30, while Tommy Hilfiger has soared 130%, to $15.


  While the news is positive for the sector overall, the party may already be over for these two most resurgent fashion stocks. Standard & Poor's analyst Marie Driscoll rates both Hilfiger and Lauren hold. "My best thinking says let's see what happens. There's time to get into these names." (Driscoll doesn't own the stocks, and S&P doesn't perform investment banking.)

The best bets now, analysts say, are probably not Tommy or Ralph but Jones and Liz -- Jones Apparel Group (JNY ) and Liz Claiborne (LIZ ). Both run broad portfolios of department-store brands, mainly in women's wear. (Hilfiger and Lauren are primarily mens'-wear makers, but they also sell womens' clothing.) And "a way to avoid the risk of hitting or missing a trend is to own something well diversified," says Nancy Aversa, equity research analyst at Victory Capital Management. "It's very difficult season after season to hit the fashion trend." (Her firm owns shares in Jones.)

What's to like? Neither stock has seen the run-ups yet that the men's apparel makers have enjoyed. Jones saw its income actually decline to $41.8 million, a 19% drop, in the fourth quarter, after losing licensing rights to a key brand. Yet, Wall Street doesn't seemed too concerned. The stock price has slid a mere 3% since its earnings report was released on Feb. 18. It closed at $35.80 on Feb. 20.


  Analysts think better days are yet to come. "Jones and Liz are the best at executing," says Eric Jemetz, senior equity analyst at New Amsterdam Partners, who's a fan of the diversified strategy. "When one of their brands is in, others may not be, but overall the portfolio does O.K.," he says. (Jemetz doesn't own shares in any of the apparel makers, and neither does his firm currently.)

Liz Claiborne, says Driscoll, is perhaps best poised to do well in 2004, with its lineup of hip, high-end brands like Enyce, Juicy Couture, and Lucky. "That's where the excitement is right now," she says. The stock, which trades at around $37, provides a modest discount compared to peers and a 25% discount to the S&P 500-stock index. "We believe it should gain market share in the next few years," says S&P's Driscoll, with help from recent acquisitions and line extensions on many of its 32 brands. She has an accumulate rating on the stock and a 12-month target price of $43.

What about Tommy and Ralph? Both are reducing distribution channels to focus on more affluent stores and introducing brand extensions for both their mens' and womens' fashions. Ralph Lauren has been aggressively buying back licenses so that less of its brand makes it to lower-end retailers. Tommy Hilfiger is pulling back on its retail stores and plans to make acquisitions to diversify into other brands. In both cases, the idea is to take hits to revenues now in return for stronger brand loyalty and better sales and profit margins later.


  The outfits' latest earnings updates haven't been knockouts. On Feb. 4, both reported results for the fiscal third quarter ending December. Tommy Hilfiger reported net income before charges of $23.6 million, up from a $22.1 million loss a year ago, on total sales that were down 5.6%, to $450.6 million. Revenues declined, but it wasn't as steep as the previously forecast 15%. In the same period, Ralph Lauren's net income fell 17%, with special charges, to $34.5 million, while total sales inched up just 1%, to $645.4 million.

All these companies will face stiffer competition this spring in women's clothes, says Victory Capital's Aversa. "There seems to be more interest and demand for department-store brands. That's a relatively recent phenomenon." Liz Claiborne has a new brand called Realities, while Jones is launching its so-called Signature line. These will go up against with Tommy Hilfiger's 'H' line and new offerings from Marc Jacobs and Kenneth Cole (KCP ). The influx of fresh looks will be good for mall traffic and department stores, says Aversa. But all these new lines will be competing for the same customers. "There's a designer frenzy to capture market share," notes Driscoll.

Then there's the struggling men's market -- the cornerstone for Tommy Hilfiger and Ralph Lauren. Demand remains weak and shows little sign of picking up. Bright spots are in youthful, urban styles that are sleek and dressier -- but short of traditional suiting. As a result, offerings from Banana Republic, a division of Gap (GAP ), Kenneth Cole, and Liz Claiborne for men seem more popular, while Tommy Hilfiger, Ralph Lauren, and Nautica (VF ), with more classic, preppy looks, are getting less of the male customer's dollar, says S&P's Driscoll.

Tommy Hilfiger and Ralph Lauren have been the big movers over the past year, but a lot of the good news is already built in their stocks. Now it may be the ladies' turn. Jones and Liz may be more likely to turn the heads of investors who want relatively steady investments in the hypercompetitive and volatile world of department-store fashion.

Tsao covers the markets for BusinessWeek Online and writes for the Street Wise column

Edited by Beth Belton

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