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So what happened to one of the hottest initial public offerings of last year, that of Polo/Ralph Lauren?

The stock has fallen below its offering price of $26, closing yesterday at $25.375, up 18.75 cents, hardly what investors, who tripped over themselves for shares last June, had hoped. Anyone who bought at the end of the first day of trading has lost about 20 percent, even as the rest of the market has swelled and as many retail and apparel stocks have outperformed the broad market.

Investors are understandably nervous about any public security whose performance depends on a line of clothing. Stocks in fashion companies, after all, have proved to be quite volatile: in recent months, Tommy Hilfiger, Gucci and others have all taken hits.

In this case, though, Wall Street may not have given the stock its due. Polo/Ralph Lauren has been rolling out new growth plans and impressive earnings estimates while many major American companies have begun ringing warning bells about earnings and sales growth. If Polo/Ralph Lauren can withstand the Asia problem and continue to grow, its stock will almost certainly gain favor.

After years of stagnation in its women’s business, it introduced a moderately priced line, Lauren, in the fall of 1996, to great retail fanfare. It also added a Polo jeans collection, and is beginning to open stores devoted to that line. Combined, Lauren and Polo jeans will add $400 million to the top line for the fiscal year that ends in March.

The company’s performance has been remarkably consistent. Over the last five years, earnings growth has averaged 24 percent annually. Revenues rose 24 percent last year to $1.2 billion. It has significant free cash flow and no debt to speak of.

The men’s clothing lines, the backbone of the company, grew 10 percent last year, not bad for a 30 year old business, and a level Polo/Ralph Lauren expects to sustain this year.

Its other growth plans are especially ambitious.

First, the company has been aggressive at licensing its name for new products. It has big footwear plans with Reebok and Rockport that are meant to gel in 1999, and will add another children’s clothing line by that year, too.

License agreements, when carefully managed, can enrich a fashion company’s top line. Typically, Ralph Lauren receives 5 to 25 percent of net sales on products that use its name in addition to a hefty up front fee.

Ralph Lauren’s home products division, which contributed $340 million in 1997 sales, is being broadened to include furniture, table top items, wall coverings and the like and will be sold abroad.

There are other line extensions and store openings planned worldwide for everything from jeans to perfume to golf apparel. The company will add 200,000 square feet of retail space over the next two years.

”Sit here and look at the extensions and segmentation of this brand,” said Michael J. Newman, the company’s chief operating officer, in an interview at the company’s headquarters on Madison Avenue. ”That is what is sustaining the growth.”

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earnings for the first half of the company’s fiscal year grew 38 percent from the period a year earlier, and Mr. Newman said he expected the company to earn $1.18 a share this year, up from its original target of $1.10. Such rising expectations are notable at a time when many large corporations from Sears, Roebuck Company to the technology concern Sybase have warned Wall Street to rein in 1998 earnings estimates.

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”The concept here is relatively simple,” said Ron Baron, a fund manager whose investment company, Baron Capital Inc., has acquired four million shares since Ralph Lauren’s offering and is one of the company’s largest shareholders. ”Ralph Lauren gets 12 percent of revenues from license fees, which are very profitable. And, in the United States, sales of women’s clothing is twice as big as men’s, but at Ralph, women’s is only half as big as men’s. So you can double your margins there, too. The deal’s pricing was aggressive, especially since other offerings by fashion houses, like Donna Karan and Mossimo, had recently blown up in investors’ faces.

On the first day of trading, Goldman sold 2.2 million of its 24.9 million Polo shares for $57.2 million, cashing out on the stake it bought for $135 million in 1994.

”If the stock had come out at $18, it would have been a different story,” said one portfolio manager who holds shares of Ralph Lauren and spoke on the condition that her name not be used.

Tom Tuft, co head of global equity capital markets at Goldman, said: ”I think the stock was priced correctly for the market at that time and given the enthusiasm for the offering. You had a pretty tough market the second half of last year.”

There is no escaping the fact that shoppers can turn away from the company’s products with one grand style shift, though Mr. Newman says the company is immune to fashion trends. ”There are people out there who associate us with fashion, and because of that, associate us with fluctuation in performance,” he said. ”I think long term we should be looked at like a Coca Cola.”

This reasoning has been floated often at large fashion houses these days. But Coca Cola has few competitors worldwide, as do most truly global consumer product companies. What is more, few shoppers wake up and decide one morning that their antiperspirant or soda is no longer hip. But they may declare a clothing style or even a living room chair passe in a heartbeat.

”There is the argument that established consumer branded companies, whether they make beverages or clothing or autos, should trade similarly,” said Susan Silverstein, an analyst for Montgomery Securities in New York. ”Ralph could be among those. But the fashion element is a variable in the formula.”

Unlike beverage company executives, fashion designers are always concerned with the artistic merits of their products as well as the financial performance of their companies. It took several quarters of severe losses before Donna Karan cut her fabric and fashion show budgets.

John Galliano, the designer for Christian Dior, which is owned by LVMH Moet Hennessy Louis Vuitton, replied icily when asked recently how he liked working for the public French company: ”I am the designer for the house of Christian Dior. I do not work for LVMH.”

Ralph Lauren’s plans are not without downsides. Adding retail stores can bolster its top line, but can also depress sales at older ones and can tarnish the brand’s exclusivity.

If the company misses earnings, even once, the punishment is sure to be severe and long lasting. Wall Street abhors earnings disappointments in any industry with apparel stocks,
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it almost loses its mind.

But several institutional investors said that Ralph Lauren stood out among apparel companies and that they expected a good long term return. Perhaps Mr. Baron put it best: ”Ralph is doing things better than anyone else right now. People even buy paint with his name on it.”