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Business Valuation of Polo Ralph Lauren Corporation NYSE-RL

As of April 1 of 2005

Ralph Lauren Chairman and Chief Executive Officer Polo Ralph Lauren Gerald M. Chaney Senior Vice President of Finance and Chief Financial Officer Polo Ralph Lauren Mark Moore Financial Statement Analysis Instructor Texas Tech University

Prepared By: Team America

Stephen H. Johnston Stephen23john@aol.com

Tara Watkins

Tara.c.watkins@ttu.edu

Colby Wright Colbygwright@hotmail.com

_____________________________________________________________________

The information contained herein is of a confidential nature and is intended for the exclusive use of the persons or firm for who it was prepared. Reproduction, publication, or dissemination of

all or portions hereof may not be made without prior approval from Team America.

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______________________Table of Contents______________________

Executive Summary 3-4 Assumptions and Limiting Conditions Industry Overview and Analysis 5 Company Identification 5 Nature and History of the Company 5 Business Summary 6 Products and Services 7 Competitors 8 SWOT Analysis Strengths 9 Weaknesses 10 Opportunities 10 Threats 11 Five Forces Model Rivalry among Firms 12 Threat of New Entrants 12 Threat of Substitute Products 12 Bargaining Powers of Buyers 13 Bargaining Powers of Suppliers 13 Accounting Analysis of Firm and Industry Key Accounting Policies 14 Ratio Analysis 22

Analysis of Competitors 24 Financial Statement Forecasting Methodology 26 Equity Valuations 29 References 37 Appendix 38

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Executive Summary

The objective of this report is to Estimate Polo Ralph Laurens’ Fair Market Value of Common Stock as of the first quarter of 2005. The purpose of this report is to deicide if Polo Ralph Lauren would be a good financial investment and where the company’s future looks like. To come to a conclusion with the future of Polo RL we proceeded to:

• Collect relevant historical statements. • Analyzed these statements and placed them into ratio form for basis to compare to

the industry. • We used the historical information and information from the company’s website,

located at www.Polo.com, and at www.marketguide.com, to prepare a 3 year projection of the income statement, balance sheet, retained earning statement, and the cash flow statement

• We also collected information on the industry that Polo Ralph Lauren operates in and collected information on the competition of the retail/apparel industry.

Used information available to me to establish a method to value the company Recommendation- Market Performer, slightly overvalued We have initiated coverage on Polo Ralph Lauren (RL) with a recommendation to buy. With the performance of the stock in the last five years, the recent growth overseas as well as the stronghold they continue to maintain in the United States this stock is a strong steady investment with growth opportunities. The apparel / accessory industry has been quite competitive in the past with Polo the leader in the higher end quality merchandise. Polo has a strong market share in the U.S. industry, and expects to continue the steady growth that it has maintained in the past. Polo sees large profits coming from its recently expanded with its Internet sales, and the sales of overseas department stores. Industry Demand Drivers The drivers for new growth will continue with sales overseas, internet sales, and the reduction in cost due to production in China, and other overseas manufactures. In addition the increase in sales due to the increase in market share, and new demand for the quality product that Polo has maintained year in and year out. Polo is well positioned

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With Polo entering new markets such as home decor like bedding, bath products, furniture, fabric, and wall paper, they continue to contain the strength that they have shown in the past, and began to grasp these new markets with the strong brand name and quality product. Polo also is ahead of the industry in their production and manufacturing being done overseas and in various places around the globe. They currently have several manufacturing plants located in China which is an advantage over the competitors as the regulating laws will soon be changing. Margin Expansion Polo has maintained steady growth, and could see some margin expansion due to the strength of the sales overseas in the Europe and Chinese markets. Healthy Financials Polo has maintained the growth in the company as net income has increased every year except in 2001, when they proceeded to pay off their total debt which was their 1997 line of credit worth $225 million as well as their 1999 which was $300 million but was increased to $375 million. Polo has very little debt on their balance sheet, and have available credit if needed. Valuation Based on our valuation models, Polo Ralph Lauren’s stock price is very comparable to several of our valuation models; it is slightly overvalued that is still outperforming the market. The actual market price was $38.41, our best valuation is our Abnormal Earnings Growth model that valued the company at $38.11 which considering Polo does not pay very high dividends if the pay them at all this would be the best model to use. Most of our valuation models were within the 52 week range of prices, except for our discounted dividend model which would be obviously be undervalued considering Polo has only paid a dividend in the last 6 quarters. Looking Good on Other Criteria Polo is a well established company with a strong steady growth, its corporate structure is very strong with little to no debt, and has a constant growth in its stock value, that has outperformed the market. It showed little to no dip or slowed growth due to the tragedy of 9/11 as well as the economic downfall that followed that of 9/11. Risks The greatest risk that Polo RL posses right now is the law suit that they are currently involved in with Jones New York concerning a breach of licensing agreement. If Jones New York does potentially win this lawsuit then it could cost Polo RL $343 million in cash, which would potentially hurt the net income of next years earnings, but could be financed with the two revolving lines of credit that they have available. Also they have the seasonal department store challenges, with both competitors Tommy Hilfiger and Liz Clabourne introducing new styles and lines of clothes

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Industry Overview and Analysis.

Company Identification

Polo Ralph Lauren Corporation (NYSE:RL) is located at 650 Madison Avenue

New York, NY 10022, and was incorporated in New York as well.

Nature and History of the Company

What started with a tie 35 years ago has grown into an entire world that has

redefined the “American Style”. Polo has always been about selling quality products by

introducing style and inviting customers to follow. Polo was the first to create lifestyle

advertisements that told a story. Polo was the first to create stores that enabled their

customers to interact with a Lifestyle. They continue to lead the industry today as they

have expended world wide with the opportunities of Polo.com where across the world

you can read about adventure, style and culture. Polo Ralph Lauren was established in

1967 as Ralph Lauren created the Polo label with an instantly successful line of ties. The

1970s open with the introduction of Ralph Lauren women’s wear. Lauren creates a daring

line of men’s tailored shirts for women—reinventing a classic men’s look for women’s

style. The women’s line also brings the birth of the polo player emblem. The early 70’s

also brought the first polo store. The 1980’s followed just as strong as a New York Times

architecture critic Paul Goldberger states that the true design symbol of the 1980s was not

Philip Johnson or Robert Stern—but Ralph Lauren. The growth still increased as the

1990’s passed. In 2000 the internet brought a great increase in sales.

Business Summary:

Polo Ralph Lauren Corporation is a leader in the design, marketing and

distribution of premium lifestyle brands of clothing and accessories, home furnishings,

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and fragrances. For more than 35 years, Polo’s reputation and distinctive image have

been consistently developed across an expanding number of products, brands and

international markets. The company’s brand names constitute one of the world’s most

widely recognized families of consumer brands.

Located in prime retail areas, the Company's 110 full-price stores operate under

the names Polo Ralph Lauren, Club Monaco and Club Monaco Caban. Polo Ralph

Lauren stores feature the full-breadth of the Ralph Lauren apparel, accessory and home

product assortments in an atmosphere consistent with the distinctive attitude and luxury

positioning of the Ralph Lauren brand. The Company grants product and international

licensing partners the right to manufacture and sell at wholesale specified products under

one or more of its trademarks. Its international licensing partners produce and source

products independently, as well as in conjunction with Polo and its product licensing

partners.

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Products and Services:

Polo Ralph Lauren designs, markets and distributes luxury products domestically

and globally. The company’s brand names include Polo by Ralph Lauren, Ralph Lauren

Purple Label, Ralph Lauren, Black Label, Blue Label, Lauren by Ralph Lauren, Polo

Jeans Co., RRL, RLX, Rugby, RL Children’s wear, Chaps and Club Monaco. The

company offers, along with its licensing partners, broad lifestyle product collections in

four categories: apparel, which includes collections of men's, women's and children's

clothing; home, which includes coordinated products for the home, such as bedding and

bath products, furniture, fabric and wallpaper, paints, broadloom, tabletop and giftware;

accessories, which encompass products such as footwear, eyewear, jewelry and leather

goods, including handbags and luggage, and fragrance and skin care, of which products

are sold under the Glamorous, Romance, Polo, Lauren, Safari and Polo Sport brands. The

Company operates in three integrated business segments: wholesale, retail and licensing.

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Distribution is accomplished at a domestic and international level with methods including

retail, wholesale, online, and in stores.

Competitors:

Tommy Hilfiger Corporation (THC), through its subsidiaries, designs, sources and

markets men's and women's sportswear, jeans wear and children’s wear under the

Tommy Hilfiger trademarks. Through a range of strategic licensing agreements, the

Company also offers related apparel, accessories, footwear, fragrance and home

furnishings. Its products can be found in department and specialty stores throughout the

United States, Canada, Europe, Mexico, Central and South America, Japan, Hong Kong,

Australia and other countries in the Far East, as well as the Company's own network of

specialty and outlet stores in the United States, Canada and Europe. The Company

positions its apparel collections under three primary labels: H Hilfiger, Tommy Hilfiger

and Tommy. THC is engaged in three segments: Wholesale, Retail and Licensing.

Liz Claiborne Inc. (LIZ) designs and markets branded women's and men's apparel,

accessories and fragrance products. The Company operates in three business segments,

such as Wholesale Apparel, Wholesale Non-Apparel and Retail. Its portfolio of brands

includes most apparel and non-apparel categories, reaching consumers of various age,

gender, size, attitude, shopping or value preference. These products range from classic

and traditional apparel to modern and contemporary wear. The Liz Claiborne's brands are

available at over 30,000 different retail locations throughout the world, including the

Company's own specialty retail and outlet stores, and on its e-commerce sites. During

2004, the international sales represented 24.4% of the Company's total sales.

The Gap, Inc. (GPS) is a global specialty retailer selling casual apparel, accessories and

personal care products for men, women and children under a variety of brand names,

including Gap, Banana Republic and Old Navy. The Company's markets consist of the

United States, Canada, Europe and Japan. Gap sells its products through both traditional

retail stores and online stores. During the fiscal year ended January 31, 2004, the

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Company-operated a total of 3,022 store locations. Its stores offer a shopper friendly

environment with an assortment of casual apparel and accessories that emphasize style,

quality and good value. The Company's stores are open seven days per week and on most

holidays. All sales are tendered for cash, personal checks, debit cards or credit cards,

including Gap, Banana Republic and Old Navy private-label credit cards that are issued

by a third party.

SWOT Analysis

Strengths:

Polo Ralph Lauren’s strengths lie in its brand equity, infrastructure

improvements, its history, and it’s financial strength.

High Brand Recognition: Ralph Lauren’s brand name and Polo’s logo are both

recognizable and highly regarded in the fashion world. Polo Ralph Lauren’s classic style

has allowed the company to expand its product portfolio into markets beyond clothing,

and into apparel, scents, and home furnishings. High customer loyalty allows for a larger

profit margin than most other companies in its industry. The powerful brand equity

responsible for such a strong consumer following reduces the price sensitivity for retail

sales, which was a strong factor in maintaining good performance during the recent

recession.

Infrastructure Improvement: Polo Ralph Lauren has been finding new ways to reduce

costs through changes in its infrastructure, primarily in Europe. Sales in Europe have

shown little growth, but several distribution centers have been consolidated to increase

efficiency and growth. New cross-stocking merchandise methods at the North American

distribution center in North Carolina have reduced costs for American distribution.

Respectable History and Future: By consistently setting the fashion standard for three

decades, Polo Ralph Lauren’s products remains in high demand and new fashion lines are

anticipated among customers.

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Debt Ratio: Polo Ralph Lauren has a low debt to capital ratio that provides financial

strength, which allows for future growth. Polo recently in 2002 paid off their revolving

line of credit of 3 million dollars to become clear of any type of bank loans or loan able

funds.

Weaknesses:

Polo’s weaknesses are in its dependence on department store sales and

manufacturing.

Dependence on Department Stores: Sales from department stores make up for almost one

third of Polo Ralph Lauren’s revenues. Sales in department stores can be uncertain due to

shared housing with competitors and the financial stability of these stores.

Dependence on Manufacturing: Competition for quotas and capacity from other clothing

manufacturers has resulted in limitations with manufacturing for situations of high

demand. Product quality is also a factor hindered by manufacturing, due to the high

standards of the Polo fashions. Polo’s designs sometimes create new methods for quality

with manufacturing, which hinder future growth.

Opportunities:

Polo’s opportunities for growth include brand extension, specialty retail, and

international expansion.

Building and Extending the Brand: Polo Ralph Lauren is one of the world's premier

brands, universally recognized and associated with distinct design, luxury and quality.

Polo’s integrated approach to advertising and marketing uniquely showcases the world of

Ralph Lauren. Retail stores continue to be an important physical extension of its global

brand. Success with its specialty retail business has given Ralph Lauren the confidence to

apply its expertise to wholesale business, including merchandise mix, visual presentation

and excellent customer service. There is more to come as Polo expands and extends the

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Ralph Lauren lifestyle through new products, in new categories and in new parts of the

world.

Specialty Retail: Polo’s retail strategy starts with product and Ralph Lauren continues to

design the best and most sought-after products in the marketplace. Polo continues to

increase the amount of exclusive or limited-distribution product in its Ralph Lauren

stores. By adding experience and strength to the leadership of the specialty retail group

and coupling it with the right merchandise and marketing support, Polo is making

significant advances in how it operates its retail stores. Polo has also developed a strong

real estate and store strategy including the opening of 50 to 60 stores over the next five

years in the United States and 20 to 25 stores in Europe.

Expanding International Presence: International expansion presents a wealth of

opportunity for Polo Ralph Lauren. Their approach to each world region is specific to its

business climate and structure, while the common goal is to broaden their reach through

increasing direct brand ownership and control with new specialty retail store openings.

The strong, flexible infrastructure allows Polo to capitalize on opportunities and grow

businesses around the world.

Threats:

Two threats facing Polo Ralph Lauren are the seasonal competition of department

stores and the Jones New York lawsuit.

Department Store Competition: Women’s wear competition is increasing for the spring

and summer seasons for department store sales. Polo will have to compete with Liz

Claiborne’s Realities and Tommy Hilfiger’s new H women’s apparel lines. Jones New

York has also launched the Signature clothing line, which is modeled after Ralph

Lauren’s clothing line.

Current Lawsuit: Jones New York filed a lawsuit against Polo Ralph Lauren worth $550

million for a breach of a licensing agreement. Polo invoked their agreement with Jones

New York and dropped the company as a licensor of Ralph and Lauren fashion lines, due

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to Jones New York’s inability to meet the $100 million required at the end of 2002. If

Jones New York wins the lawsuit, it will materially impact the value of the company,

especially with $343 million in cash.

Five Forces Model

Rivalry Among Existing Firms:

The fashion retail industry is constantly growing with several competitors,

including Tommy Hilfiger, The Gap, Liz Claiborne, Lacoste, and Express. Polo Ralph

Lauren has managed to retain a large portion of the market with a competitive edge by

introducing popular designs and branching into new markets such as interior decorating.

The company is expanding and increasing sales overseas by acquiring smaller retail and

manufacturing companies around the world. The popularity of the internet has brought

more sales opportunities, which has led to an increased development of online marketing.

While entry barriers for matching Polo Ralph Lauren’s large scale operations are very

high, the cost of entering new markets is not so high in its position. This is why home

furnishings, interior decorations, and fragrances have been added to its product mix.

Licensing, opening new stores, and maintaining a global infrastructure are also key for

future growth.

Threat of New Entrants:

There will always be a threat of new entrants in the fashion retail industry, but it

is incredibly difficult and expensive to match the scale economy of Polo Ralph Lauren.

The company has dominated the market by creating and selling popular designs, and by

creating global operations of manufacturing, licensing, and retail.

Threat of Substitute Products:

Substitution plays a large role in the scope of Polo’s marketing strategy. Some of

its direct competitors attempt to introduce new styles to increase demand, while other

companies try to mimic the designs created by Polo. In order to compete, Polo Ralph

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Lauren must remain a respected innovator of quality fashions and expand into other

markets. The Polo Ralph Lauren brand name is part of the appeal of its products and is

essential to its profitability.

Bargaining Power of Buyers:

Polo Ralph Lauren’s customers understand that when purchasing its products,

they are buying quality merchandise and a much respected brand name at a fair cost.

Sales at retail locations attract customers with less spending power, but customers are

generally willing to pay the prices assigned to Polo’s products.

Bargaining Power of Suppliers:

The overwhelming volume of supplies needed for Polo Ralph Lauren’s

operations makes it a hot customer for providers of materials such as fabrics and

packaging. Several possible providers of cotton and other fabrics result in competition

among suppliers and reasonable costs for resources.

Accounting Analysis

Polo Ralph Lauren is a very large company with various operations in various parts of the

world. They use several different accounting policies to combine or shorten their

accounting information. The first one that they use is “Principal of Consolidation” which

basically says that all intercompany balances and transactions have been eliminated.

Polo also uses what is called the “Use of Estimates” which could distort the numbers

going on the financial statements. To derive the quantitative measures which consist of

screening ratios which are used to asses the reliability of Polo’s financial disclosures.

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Qualitative measures must be taken into account to fully evaluate the past accounting

performances and successes of Polo Ralph Lauren. These qualitative measures include

key accounting policies, potential accounting flexibility, strategy analysis, quality of

disclosures, potential red flags, and undue accounting distortions.

Key Accounting Policies

In order to measure the key success factors and risks pertained to Polo Ralph Lauren,

it is necessary to evaluate the policies and estimates the firm uses. Critical accounting

policies are those that are most important to the portrayal of the Company’s financial

condition and the results of operations and require management’s most difficult,

subjective and complex judgments. The Company’s most critical accounting policies

pertain to the following:

Revenue Recognition Revenue within the Company’s wholesale operations is recognized at the time title

passes and risk of loss is transferred to customers. Wholesale revenue is recorded net of

returns, discounts, allowances and operational chargeback’s. Discounts are based on trade

terms. Estimates for end-of-season allowances are based on historic trends, seasonal

results, an evaluation of current economic conditions and retailer performance.

Income Taxes Income taxes are accounted for under Statement of Financial Accounting Standards

(“SFAS”) No. 109, “Accounting for Income Taxes.” In accordance with SFAS No. 109,

deferred tax assets and liabilities are recognized for the future tax consequences

attributable to differences between the financial statement carrying amounts of existing

assets and liabilities and their respective tax bases.

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Net Accounts Receivable A reserve for trade discounts is established based on open invoices where trade

discounts have been extended to customers and is treated as a reduction of sales.

Estimated customer end of season allowances (also referred to as customer markdowns)

are included as a reduction of sales. Costs associated with potential returns of products

are included as a reduction of sales. These reserves are based on current information

regarding retail performance, historical experience and an evaluation of current market

conditions.

Net Inventories Inventories, net are stated at lower of cost (using the first-in-first-out method,

“FIFO”) or market. The Company continually evaluates the composition of its

inventories assessing slow-turning, ongoing product as well as all fashion product.

Net Goodwill and other Intangibles SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill and

intangible assets with indefinite lives no longer be amortized, but rather be tested, at least

annually, for impairment.

Accrued Expenses Accrued expenses for employee insurance, workers’ compensation, contracted

advertising, professional fees, and other outstanding Company obligations are assessed

based on claims experience and statistical trends, open contractual obligations, and

estimates based on projections and current requirements.

Derivatives SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as

amended and interpreted, requires that each derivative instrument (including certain

derivative instruments embedded in other contracts) be recorded in the balance sheet as

either an asset or liability and measured at its fair value. The statement also requires that

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changes in the derivative’s fair value be recognized currently in earnings in either income

(loss) from continuing operations or accumulated other comprehensive income (loss),

depending on whether the derivative qualifies for hedge accounting treatment.

Cash and Cash Equivalents All highly liquid investments with original maturity of three months or less at the date

of purchase are classified as cash equivalents.

Net Property and Equipment Property and Equipment is stated at cost less accumulated depreciation and

amortization. Buildings and building improvements are depreciated using the straight-line

method over 37.5 years. Machinery and equipment, and furniture and fixtures are

depreciated using the straight-line method over their estimated useful lives of three to ten

years.

Cost of Goods Sold Cost of goods sold includes the expenses incurred to acquire and produce inventory

for sale, including product costs, freight-in, import costs and provisions for shrinkage.

Shipping and Handling Costs Shipping and handling costs are included as a component of selling, general &

administrative expenses in the Consolidated Statements of Operations.

Stock Options They use the intrinsic value method to account for stock-based compensation in

accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for

Stock Issued to Employees.”

These accounting policies are not equally as important. Revenue Recognition is an

important factor, along with Inventory accounts. Polo Ralph Lauren is more focused on

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Inventory management as they are a retail company. Where as goodwill and intangibles

are not large factors in their financial statements.

Degree of Potential Accounting Flexibility There are ways for Polo Ralph Lauren to be Flexible in the Accounting Methods. But,

by using the FIFO method to account for Inventory, it is hard to manipulate. Net

Property and Equipment is made to be flexible because they use straight line

depreciation, as opposed to the Double Declining method. Net Goodwill and intangibles

is an area that is very flexible. There is no way to account for this asset, and they are not

amortized, but only tested for impairment maybe annually.

Quantitative Measures Sales Manipulation Diagnostics:

2004 2003 2002 2001 2000 Net Sales/Cash from Sales

15.49 14 13.70 37.53 13.63

Net Sales/Net A/R

5.72 6.23 6.36 8.27 9.57

Net Sales/Inventory

7.29 6.71 6.76 5.23 5.0

Core Expense Manipulation Diagnostics:

2004 2003 2002 2001 2000 Sales/Assets

1.17 1.2 1.35 1.37 1.21

CFFO/OI

0.77 0.93 1.00 .86 .92

CFFO/NOA

343.5 343.6 238.8 102.2 164.6

Retail operating income increased primarily as a result of increased net sales and

improved gross profits as a percentage of net revenues. These increases were partially

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offset by the increase in selling salaries and related costs in connection with the increase

in retail sales and worldwide store expansion.

Licensing income decreased primarily due to the loss of the Lauren and Ralph

royalties from Jones. This decrease was partially offset by improvements in the footwear

business and by the inclusion of the operations of the Japanese Master License.

The following chart shows the strength of Polo Ralph Laurens Company as

compared to the S&P 500. This shows the strength of Polo Ralph Lauren, and how it

shapes up to the other strong companies.

The Management Discussion and Analysis summarizes factors affecting the company,

it also explains the reasons behind their performance changes. They explain the operating

results of the company stating its outstanding performance in the year 2004, delivering

9.6% increase in gross profits, due to the increases explained above in Retail sales.

Management also disclosed negative information about the company in several areas in

2004 such as two retail properties that did not perform the way they were originally

expected to. They also explain how other areas of Polo Ralph Lauren helped offset the

negative revenues, such as the loss of $15 million in Royalties that was explained above

from Jones by the increase in Licensing.

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Polo Ralph Lauren provides adequate and quality information to its shareholders and

the public. They do this by creating valuable and factual information that is released to

everyone. The explanations were finely broken down to identify the key gains and losses

that showed the growth of the company.

Identification of Potential “Red Flags” Polo Ralph Lauren has a section in there 10k annual reports called “Changes in and

Disagreements with Accountants on Accounting and Financial Disclosure”. The

explanation in this section by the company was “Not applicable”. So therefore there

were no changes. When we looked at the company’s financial statements there were not

any unusual large changes in the numbers from the last five years. Considering Polo

Ralph Lauren is a well established company and they pride their selves with their critical

accounting principals their have not been any recent changes or cause for concern or Red

Flags. Their have been increases in accounts payable, that is due to the payoff of short

and long term debt. The other increases are all minimal increases and follow the growth

of the company.

Undo Accounting Distortions After reviewing all pertinent financial data of Polo Ralph Lauren, we have concluded

that the financial reports display transparency in the quality of disclosure. The company

does a very good job the extensive explanation of the increases and decreases that offset

each other. There was no indication of misleading activity within the financial reports.

The statement of cash flows was concurrent with the disclosures in the footnotes. The

Critical accounting policies were apparent in the financial statements of Polo Ralph

Lauren, and there was no distortion to enhance the true performance of the company. All

methods of accounting were clearly explained in the footnotes to the financial statements.

Considering no accounting distortions were revealed, there is no need for any

adjustments or corrections to the financial statements.

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Evaluation of the Quality of Disclosure Critical accounting policies are those that are most important to the portrayal of the

Polo Ralph Laurens Company’s financial condition and the results of operations, and

require management’s most difficult, subjective and complex judgments as a result of the

need to make estimates about the effect of matters that are inherently uncertain.

In the letter to the shareholders and their annual 10 K report, Polo Ralph Lauren

reports most of the information, but does not present detailed information on their

corporate structure such as their exact liabilities and their cost of those liabilities at all, as

well as their current assets. Polo does do a good job at disclosing the information about

their return over past years relative to the S&P 500 index. They also briefly explain the

companies break down, Polo Ralph Lauren operates in three integrated business

operation segments: wholesale, retail and licensing. Wholesale consists of women’s and

men’s apparel designed and marketed worldwide, which are divided primarily into three

groups: Polo Brands, Lauren and Collection Brands. Retail consists of their worldwide

Ralph Lauren retail operations that sell the product through full-price and outlet stores

and Club Monaco full-price and outlet stores. Licensing consists of product, international

and home licensing alliances, each of which pay royalties based upon sales of our

product, and are generally subject to minimum royalty payments.

The Management gave brief explanations on all three of the business Segments that

make up Polo Ralph Lauren. Wholesale operating income decreased primarily as a result

of decreased net sales in our domestic men’s business and European wholesale

operations. The incremental effect of Lauren sales in the fourth quarter on the wholesale

business income from operations was largely offset by start up and ordinary operating

expenses associated with the Lauren wholesale business.

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Stock Classes and Ownership

Total Common Shares outstanding- 104.78 mil.

Preferred stock- 0

100% stock in Common shares

Top Institutional Holders

Institution Name Shares Held

Position Value (000)

% Shs. Out.

Portfolio Date

FIDELITY MANAGEMENT & RESEARCH CO 6,471,398 $186,376.26 6.47% 12/31/2004

FRANKLIN ADVISERS 2,348,500 $67,636.80 2.35% 12/31/2004

ROYCE & ASSOCIATES 2,087,300 $60,114.24 2.09% 12/31/2004

JENNISON ASSOCIATES 1,826,290 $52,597.15 1.83% 12/31/2004

BAMCO (BARON CAPITAL) 1,665,604 $47,969.40 1.67% 12/31/2004

APEX CAPITAL 1,538,000 $44,294.40 1.54% 12/31/2004

LAZARD FRERES ASSET MGMT 1,458,306 $41,999.21 1.46% 12/31/2004

BUCKINGHAM CAPITAL MANAGEMENT 1,058,203 $30,476.25 1.06% 12/31/2004

PEREGRINE CAPITAL MGMT 1,022,600 $29,450.88 1.02% 12/31/2004

AMERICAN EXPRESS FINANCIAL 859,888 $24,764.77 0.86% 12/31/2004

BARCLAYS GLOBAL INVESTORS INTL 801,429 $23,081.16 0.80% 12/31/2004

VANGUARD GROUP 660,412 $22,222.86 0.66% 3/31/2004

BOSTON COMPANY 680,130 $19,587.74 0.68% 12/31/2004

WALL STREET ASSOCIATES 586,800 $16,899.84 0.59% 12/31/2004

CANTILLON CAPITAL MANAGEMENT LLC 534,500 $15,393.60 0.53% 12/31/2004

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Ratio Analysis of Polo Ralph Lauren Corporation

Trend Analysis

The Purpose of this section is to look at the past 5 years of financial records for

Polo Ralph Lauren, and analyze its numbers to be able to forecast these numbers

properly. We will also look at other competitors and the entire industry to look at their

trends to better forecast our financial numbers over the next 5 years. These ratios will

help to accurately convey the future of Polo Ralph Lauren.

4/3/2004 3/29/03 03/30/02 03/31/01 04/01/00Liquidity Analysis Current ratios 2.54 2.32 2.57 2.05 2.10 Quick asset ratio 3.13 2.88 3.02 1.69 1.82 Operating Efficiency Ratios A/R turnover 6.0 6.49 6.68 8.27 9.57 Days supply of receivables 60.8 56.2 54.6 44.1 38.1 Inventory turnover 3.65 3.39 3.48 2.73 2.56 Days supply of inventory 100 107.67 104.89 133.7 142.6 Working capital turnover 3.44 3.68 3.84 4.82 4.4 Profitability Analysis Gross profit margin 49.9% 49.5% 48.5% 47.8% 48.7% Operating expense ratio 89.7% 88.2% 87.6% 94.7% 86.5% Net Profit Margin 6.5% 7.1% 7.3% 2.7% 7.3% Asset turnover 1.17 1.2 1.35 1.37 1.2 ROA 7.53% 8.54% 9.86% 3.65% 8.85% ROE 12% 14.4% 17.3% 7.3% 18.6% Capital Structure Analysis Debt to Equity Ratio 0.6 0.69 0.75 1.01 1.10 Times Interest Earned 2.74 2.14 1.54 0.47 1.76 Debt Service Margin N/A 2.67 9.08 1.16 2.82 Other Ratios Plant, Property, and Equipment Turnover

6.67 6.87 6.88 6.4 5.24

Sustainable Growth Rate 11% 14.4% 17.3% 7.3% 18.6%

23

Analysis of Polo Ralph Lauren’s Ratios

The Current Ratio of Polo Ralph Lauren from 2000-2004 has been steadily

increasing which has a positive impact on the company. They had a dramatic increase

from 2001-2002 due to a decrease in current liabilities. The Quick Asset Ratio has also

been increasing from 2000, with a large increase from 2001-2002, which is also caused

by the decrease in current liabilities, and the quick assets are almost equivalent to 60% of

the total current assets. Overall, the Liquidity Ratios are doing well, and are increasing

steadily due to the growth of the company. The Accounts Receivable Turnover has

been steadily decreasing from 2000. This is due to the increasing of A/R over the 5

years. The Inventory Turnover has slightly been increasing over the past 5 years,

because of the decreasing of total inventory, due to the fact of their increasing revenues.

This leads to the days supply of inventory ratio to decrease over the years. Working

Capital Turnover has slightly decreased since 2000. This decrease has a positive impact

on the company. The Gross Profit Margin has remained steady and is a good indicator

fro the company. It slightly increased from 2001-2002 due to the growth of the company

which led to a more efficient cost of revenue, so they were able to increase their gross

profit. The Operating Expense Ratio is extremely high in percentage due to the fact

that operating expenses were not that much lower than Sales. This percentage has been

steady over the past 5 years. The Net Profit Margin dramatically decreased in 2001 due

to extremely low net income because of an unusual expense. Other than that, it has

remained steady. Asset Turnover has remained steady over the past 5 years because the

amount of assets has been increasing along with sales of the company. Return on Assets

has not remained steady due to low net income of 2001 because of the high unusual

expense, but overall, it has slightly decreased, but doesn’t have a large negative effect.

The Return on Equity has slightly decreased over the past 5 years, with a dramatic

decrease in 2001. Again, this decrease occurred because of the unusual expense incurred

that year. This decrease is caused by the increasing total equity of the company. The

Debt to Equity Ratio has slightly decreased, but has remained between 0.5-1.5. This

decrease has indicated that debt is not a large part of their financing, and this is positive

24

for the company. The Times Interest Earned has slightly increased from 2002. This

indicates that the income from operations has become more efficient to cover the regular

interest expenses. The interest expense for 2001 was higher than usual, which indicates

the low ratio for that year. The Debt Service Margin has not been steady over the past 5

years. In 2001 it decreased to 1.16 because of the many changes in working capital and

the large amount of deferred taxes, which led to extremely low cash from operating

activities. And then in 2004, this ratio is not available due to the fact that there was no

current notes payable. The Plant, Property, and Equipment Turnover (PP&E) is

important to factor in because its the most important long term asset in a firms balance

sheet. This ratio shows the efficiency in which the PP&E is used and also measures this

efficiency. It has remained steady over the past 4 years. But, it does show an increase

from 2000-2001 because of the small revenue due to cost inefficiency of the year 2000.

The Sustainable Growth Rate (SGR) for Polo Ralph Lauren is volatile because there

were no cash dividends paid from the years 2000-2003. So the SGR for those years is the

return on equity ratios.

These 16 ratios will help forecast Polo Ralph Lauren’s next five years. The

forecasts will be made for all of their financial statements. By looking at their past

performances and analyzing their trends, Polo will be able to predict future numbers more

accurately.

Analysis of Competition:

Polo Ralph Lauren is very similar to the other companies in its industry; we compared

Polo RL to its top 3 competitors in apparel industry. We calculated the ratios for years

2000 to 2004, and then compared them to each other.

Polo’s current ratio is very close with the other 4 competitors it is slightly lower then

Liz Cleburne’s and Gap’s. Tommy Hilfiger’s is just a bit higher. Polo has a current ratio

of 2.54, which means that Polo must be able to convert each dollar of current assets to

almost .40 dollars (1/2.54) of cash to meet short-term obligations. Polo’s’ competitors are

also have to meet that obligation as they are right there together.

25

Polo has a quick ratio of 1.63, which shows that polo’s’ current assets are equal to

163% of the current liabilities.

Polo’s’ days to receivables ratio is 60.8 days, which compares some what favorably

with Tommy Hilfiger’s, and Liz Cleburne’s. Gap does not have one due to they do all

their selling themselves, they do not have smaller buyers buying their product it is all sold

at retail.

Polo’s Gross Profit margin is quite a bit higher then these other three competitors

which are good, showing that polo’s profit is greater then the other three. Polo’s

Accounts receivable turnover is sitting well at 6, Tommy Hilfiger has a little stronger at

4.5, but Polo is quite a bit better than Liz Claiborne at 10.72. This is saying that Polo

collects on its accounts receivable in about 61 days or 2 months, which is better then

most companies who have a 90 day or three mo. turnover.

Polo’s Sustainable Growth rate is good, as they plan on keeping growing at a 11%

increase, which Liz Claiborne is the only competitor that is higher. Tommy Hilfiger’s

could not be figured to the loss that they had in 2003. The debt to equity is .6 and

compared to the rest of the competitors that is much better then them, Tommy Hilfiger

has a .75 ratio, Liz Claiborne is slightly better then Tommy at .672, and Gap is very high

at 1.1. It is good for polo to be the best in this category, because debt is a lot cheaper the

equity.

Financial Statement Forecasting Methodology

Forecasting future numbers for Polo Ralph Lauren requires an assumption that

current trends will persist into the future. By starting with the sales trends of the past few

years, future sales growth can be predicted, which has a profound effect on the rest of the

items to be forecast. The average growth in sales since 2000 has been 7.95%, and the

current trend for sales growth is increasing. An assumption of a sales increase of 8% is

practical in this case. Sales growth is likely to continue at this rate, with a slight decrease

to 7% over time due to growth limitations. The profit margin has been steady over the

past five years and is likely to maintain its position, so the five-year average of 48.88% is

applied to predict future profits. Due to the steady operating expense ratio trend, the

26

average of this ratio, with the exception of 2001 because of its unusual expense, will be

applied to determine upcoming operating costs. Operating income for 2005 is determined

using the average of previous values of operating income, which have been steady

besides in 2001. This value however is likely to rise due to increased operating

efficiency. With a tax expense of 40% and negligible extraneous expenses, this value is

taken out of operating income to determine net income for the future.

To begin balance sheet forecasting, future asset figures will be figured with the

application of the average of the past asset turnover ratios. Accounts receivable turnover

has been decreasing over the past five years, but is probably going to level off around 6.5

times. Increases in inventory turnover hint at slow inventory growth over the future.

Forecasted costs will be used with the inventory turnover ratio to determine upcoming

inventories. Accounts payable has been increasing at a rate of about 3% over the past five

years, and the trend should continue. The decreasing debt to equity ratio should not

decrease too much further beyond .5. With half as much debt as equity, future liabilities

and equity values can be predicted to remain between 0.5 and 0.7. An average current

asset growth of 10.6% will be applied to current assets over the next year and should

decline to 7-8%. Total current liabilities for the upcoming years will be determined by

applying the average current ratio of the past two years to the current assets. Long term

debt has been decreasing and could continue to decrease over the next few years. The

notes payable account will be difficult to forecast, but will remain low due to Polo’s

current rate of debt payoff.

The cash flow statement for Polo Ralph Lauren features several inconsistent and

highly volatile items. These unpredictable numbers make forecasting for the cash flow

statement difficult. Cash from operating has been consistent with net income values as a

percentage. The average of 55% is applied to the net income of the forecasted years to

determine cash from operations for the future. Cash from investing is determined by

applying the differences between non-current asset values throughout the years. The net

change in cash is determined by the balance sheet cash value forecasts. The cash flow

from financing will make up for any differences in cash flows.

Previous data of the past five years has helped to predict the direction that Polo

Ralph Lauren is going, but this information has not determined where the company is

27

really going. Past behaviors do not dictate future events for a company. There are several

unknown factors within and outside the organization that could have an impact on future

numbers. As time progresses over the forecast, the numbers are more likely to deviate

from the actual results because of the introduction of new factors and the inaccuracies of

human error. However, many of the major items have involved a detectable pattern from

2000-2004. These items should be well forecasted for the next few years, but lose

credibility over time.

Polo Ralph Lauren is likely to mature over the years to come as a healthy retail

company. Forecasts based on values and ratios of the past five years indicate that if Ralph

Lauren continues to operate in the manner they are, increased sales and profits are in the

near future. The company is in a good, safe position and is likely to maintain its financial

hold on itself.

Forecasts (In millions of dollars)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Revenue 1955.5 2225.8 2363.7 2439.3 2649.7 2874.9 3104.9 3353.3 3604.8 3875.2 4165.8 4457.4 4769.4 5103.3 5460.5Cost 1002.4 1162.8 1216.9 1231.7 1326.4 1469.7 1587.2 1714.2 1842.8 1981.0 2129.6 2278.6 2438.1 2608.8 2791.4Profit 953.1 1063.0 1146.8 1207.6 1323.3 1405.3 1517.7 1639.1 1762.0 1894.2 2036.2 2178.8 2331.3 2494.5 2669.1Operating Expenses 1961.6 2108.6 2070.5 2150.9 2375.9 2529.9 2732.3 2950.9 3172.2 3410.2 3665.9 3922.5 4197.1 4490.9 4805.3Operating Income 263.9 117.2 293.2 288.4 273.8 279.8 288.2 296.9 305.8 314.9 324.4 334.1 344.1 354.5 365.1Tax and Extra. Items 120.4 57.9 120.7 114.2 102.8 111.9 115.3 118.7 122.3 126.0 129.8 133.7 137.7 141.8 146.0Net Income 143.5 59.3 172.5 174.2 171.0 167.9 172.9 178.1 183.5 189.0 194.6 200.5 206.5 212.7 219.1

Annual Income Statement Forecast Income Statement

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Cost 51.3% 52.2% 51.5% 50.5% 50.1% 51.1% 51.1% 51.1% 51.1% 51.1% 51.1% 51.1% 51.1% 51.1% 51.1%Profit 48.7% 47.8% 48.5% 49.5% 49.9% 48.9% 48.9% 48.9% 48.9% 48.9% 48.9% 48.9% 48.9% 48.9% 48.9%Operating Expenses 100.3% 94.7% 87.6% 88.2% 89.7% 88.0% 88.0% 88.0% 88.0% 88.0% 88.0% 88.0% 88.0% 88.0% 88.0%Operating Income 13.5% 5.3% 12.4% 11.8% 10.3% 9.7% 9.3% 8.9% 8.5% 8.1% 7.8% 7.5% 7.2% 6.9% 6.7%Tax and Extra. Items 6.2% 2.6% 5.1% 4.7% 3.9% 3.9% 3.7% 3.5% 3.4% 3.3% 3.1% 3.0% 2.9% 2.8% 2.7%Net Income 7.3% 2.7% 7.3% 7.1% 6.5% 5.8% 5.6% 5.3% 5.1% 4.9% 4.7% 4.5% 4.3% 4.2% 4.0%

Pro Forma Income Statement Forecast Pro Forma Income Statement

Growth continuation is clearly visible in the forecast income statements. The percentages

in the pro forma income statement are relatively unchanged

28

(In millions of dollars)2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Cash 164.60 102.20 238.80 343.60 343.50 487.65 540.40 613.01 697.92 791.14 893.40 991.99 1099.28 1215.98 1342.84Accounts Receivable 204.40 269.00 353.60 375.80 441.70 442.30 477.68 515.89 554.59 596.18 640.89 685.76 733.76 785.12 840.08Inventory 391.00 425.60 349.80 363.80 363.70 367.42 396.81 428.55 460.69 495.25 532.39 569.66 609.53 652.20 697.86Total Current Assets 852.90 901.70 1008.10 1162.60 1271.30 1373.00 1469.11 1557.26 1635.12 1716.88 1802.72 1892.86 1987.50 2086.88 2191.22PP&E net of Depr. 373.00 347.80 343.80 355.00 397.30 424.66 458.63 495.32 532.47 572.40 615.33 658.41 704.50 753.81 806.58Total Non-Current Assets 767.70 724.40 741.40 876.20 998.90 912.31 999.02 1108.33 1230.38 1363.54 1508.73 1650.39 1803.78 1969.79 2149.42Total Assets 1620.60 1626.10 1749.50 2038.80 2270.20 2285.31 2468.14 2665.59 2865.51 3080.42 3311.45 3543.26 3791.28 4056.67 4340.64Accounts Payable 151.30 178.30 177.50 181.40 187.40 193.02 198.81 204.78 210.92 217.25 223.77 230.48 237.39 244.51 251.85Accrued Expenses 168.80 175.20 128.50 162.50 234.20 361.35 394.37 424.00 449.29 475.97 504.12 533.80 565.10 598.10 632.90Notes Payable 86.10 86.10 33.00 100.90 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Total Current Liabilities 406.20 439.60 391.80 503.00 501.10 554.38 593.18 628.77 660.21 693.22 727.88 764.28 802.49 842.62 884.75Long Term Debt 342.70 297.00 285.40 248.50 277.30 230.00 215.00 200.00 205.00 210.00 220.00 220.00 230.00 230.00 235.00Total LT Liabilities 441.90 377.20 359.50 327.10 347.10 302.62 332.37 437.46 457.34 477.34 497.35 511.29 524.46 577.22 634.48Total Liabilities 848.10 816.80 751.30 830.10 848.20 856.99 925.55 1066.24 1117.55 1170.56 1225.24 1275.57 1326.95 1419.84 1519.22Common Stock 97.43 97.18 98.23 98.72 100.63 101.64 102.65 103.68 104.72 105.76 106.82 107.89 108.97 110.06 111.16Retained Earnings 370.80 430.00 602.10 776.40 927.40 993.66 1063.94 1138.38 1217.13 1300.33 1388.15 1480.73 1578.25 1680.88 1788.79Total Equity 772.40 809.30 998.20 1208.80 1422.10 1428.32 1542.59 1599.35 1747.96 1909.86 2086.22 2267.68 2464.33 2636.84 2821.42Total Liabilities & Shareholders' Equity 1620.60 1626.10 1749.50 2038.80 2270.20 2285.31 2468.14 2665.59 2865.51 3080.42 3311.45 3543.26 3791.28 4056.67 4340.64

Annual Balance Sheet Forecast Balance Sheet

2000 2001 2002 2003 2004 2005 2006 2008 2009 2010 2011 2012 2013 2014Cash 10.16% 6.28% 13.65% 16.85% 15.13% 21.34% 21.89% 23.00% 24.36% 25.68% 26.98% 28.00% 29.00% 29.97%Accounts Receivable 12.61% 16.54% 20.21% 18.43% 19.46% 19.35% 19.35% 19.35% 19.35% 19.35% 19.35% 19.35% 19.35% 19.35%Inventory 24.13% 26.17% 19.99% 17.84% 16.02% 16.08% 16.08% 16.08% 16.08% 16.08% 16.08% 16.08% 16.08% 16.08%Total Current Assets 52.63% 55.45% 57.62% 57.02% 56.00% 60.08% 59.52% 58.42% 57.06% 55.74% 54.44% 53.42% 52.42% 51.44%PP&E net of Depr. 23.02% 21.39% 19.65% 17.41% 17.50% 18.58% 18.58% 18.58% 18.58% 18.58% 18.58% 18.58% 18.58% 18.58%Total Non-Current Assets 47.37% 44.55% 42.38% 42.98% 44.00% 39.92% 40.48% 41.58% 42.94% 44.26% 45.56% 46.58% 47.58% 48.56%Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Accounts Payable 17.84% 21.83% 23.63% 21.85% 22.09% 22.52% 21.48% 19.21% 18.87% 18.56% 18.26% 18.07% 17.89% 17.22%Accrued Expenses 19.90% 21.45% 17.10% 19.58% 27.61% 42.17% 42.61% 39.77% 40.20% 40.66% 41.14% 41.85% 42.59% 42.12%Notes Payable 10.15% 10.54% 4.39% 12.16% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total Current Liabilities 47.90% 53.82% 52.15% 60.60% 59.08% 64.69% 64.09% 58.97% 59.08% 59.22% 59.41% 59.92% 60.48% 59.35%Long Term Debt 40.41% 36.36% 37.99% 29.94% 32.69% 26.84% 23.23% 18.76% 18.34% 17.94% 17.96% 17.25% 17.33% 16.20%Total LT Liabilities 52.10% 46.18% 47.85% 39.40% 40.92% 35.31% 35.91% 41.03% 40.92% 40.78% 40.59% 40.08% 39.52% 40.65%Total Liabilities 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Common Stock 12.61% 12.01% 9.84% 8.17% 7.08% 7.12% 6.65% 6.48% 5.99% 5.54% 5.12% 4.76% 4.42% 4.17%Retained Earnings 48.01% 53.13% 60.32% 64.23% 65.21% 69.57% 68.97% 71.18% 69.63% 68.09% 66.54% 65.30% 64.04% 63.75%Total Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Liabilities/Assets 0.52 0.50 0.43 0.41 0.37 0.38 0.38 0.40 0.39 0.38 0.37 0.36 0.35 0.35

Pro Forma Balance Sheet Forecast ProForma Balance Sheet

Balance sheet forecasts support more evidence of company growth. As Polo Ralph

Lauren continues to grow, debt becomes less of a factor for its finances. Long term assets

seem to increase over time as a share of assets. Long term liabilities initially decrease as a

percentage of liabilities due to the current payoff of long term debt, but show an increase

in future years.

(In millions of dollars)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Net Income 143.5 59.3 172.5 174.2 171.0 167.9 172.9 178.1 183.5 189.0 194.6 200.5 206.5 212.7 219.1Cash From Operating 242.7 100.3 299.7 269.0 210.6 260.2 268.0 276.1 284.4 292.9 301.7 310.7 320.1 329.7 339.6Cash From Investing (318.3) (131.3) (116.0) (166.3) (132.7) 86.6 (86.7) (109.3) (122.1) (133.2) (145.2) (141.7) (153.4) (166.0) (179.6)Cash From Financing 201.6 (25.9) (40.3) (16.7) (76.4) (370.6) (301.5) (272.3) (260.9) (255.5) (248.9) (271.0) (265.9) (259.6) (252.1)Foreign Exch. Effects (5.8) (5.5) (0.9) 12.8 (1.6)Net Change in Cash 120.1 (62.4) 142.5 98.9 (0.1) 144.2 52.7 72.6 84.9 93.2 102.3 98.6 107.3 116.7 126.9

Annual Cash Flow Statement Forecast Cash Flow Statement

29

Cash flow forecasts show heavy losses from financing, but this is primarily due to the use

of financing cash flows as filler after determining other values. Net income after 2005 is

steadily on the rise, which is good news for the company.

Equity Valuations

Introduction

From our valuations, and the information that we had available for use in deriving

their capital structure, the Abnormal earnings growth model was the best valuation for

Polo Ralph Lauren due to the continued growth of the firm and the steady growth of the

earnings. We feel that with these valuations Polo Ralph Lauren is a fairly valued firm.

Despite the fact that it failed to supply us with the accounting data that we needed to

properly value their capital structure.

Method of Comparable Valuation

Forward P/E Ratio Competitor Price Per Share EPS Forward P/E Ratio Gap 21.51 $1.21 17.78 Liz Clairborne 40.02 2.86 13.99 Tommy Hilfiger 11.24 1.18 9.53 Average of Competitors: 13.77

Industry Fwd. P/E Ratio Forward EPS Expected Share Price

Polo Ralph Lauren 13.77 $1.61 $22.17 Forward P/E Ratio = (Price per Share)/(Forward EPS) Polo Expected Price = (Competitors Avg. P/E)*(Estimated Polo EPS)

30

Based on the Comparable forward P/E, the implied stock valuation is well below

the Actual Current Value of $38.41. There were three main competitors used for this

valuation, and were based on the average of their forward P/E ratios. The Benchmark

group used has a large spread in their Price Per Shares which makes their P/E ratios

widely dispersed. This causes the comparable P/E ratio to have a lower quality since the

competitors used have such varying ratios.

The implied stock valuation of PEG resulted fairly the same as the Actual Current

Value of $38.41. The current earnings come close to the Forward PEG Valuation results,

and should reflect the Future earnings. The Forward PEG valuation uses the three

competitor’s averages of the Forward P/E ratios divided by the 5 year Growth Rate. The

Industry Forward PEG valuation is more narrowed and more precise than the Forward

P/E Valuation results.

Forward PEG Ratio Competitor Forward P/E 5 Yr. Growth Rate Fwd. PEG Gap 17.78 6.93 2.57 Liz Clairborne 13.99 10.54 1.33 Tommy Hilfiger 9.53 2.76 3.45 Average of Competitors: 2.45

Industry Fwd. PEG Average Fwd. EPS

5 Yr. Growth Rate

Expected Price

Polo Ralph Lauren 2.45 1.61 8.94 $35.24 Forward PEG = (Forward P/E)/(5 Yr Growth Rate) Polo Expected Price = (Competitors Fwd. PEG Avg)*(Fwd. EPS of Polo)*(5 Yr. Growth Rate of Polo)

31

Price to Sales Ratio Competitor Price Per Share Sales/Share P/S Ratio Gap 21.51 16.55 1.30 Liz Clairborne 40.02 42.16 0.95 Tommy Hilfiger 11.24 20.05 0.56 Average of Competitors: 0.94

Industry P/S Ratio Sales/Share Expected Share Price

Polo Ralph Lauren 0.94 25.48 $23.95 P/S Ratio = (Price per Share)/(Sales per Share) Polo Expected Price = (Competitors Avg P/S Ratio)*(Sales per Share of Polo)

The P/S Valuation results are significantly lower than that of the Actual Current

Value of $38.41. The reasons for these poor results lie with in the Different and

Scattered Prices of the Competitors in the industry. The price per share ranges from

$11.24-$40.02. This would account for the Price to Sales ratio to be significantly lower

than the large industry averages.

Market to Book Valuation Competitor Book Value Price M/B Ratio Gap 5.74 21.51 3.75 Liz Clairborne 16.66 40.02 2.40 Tommy Hilfiger 13.3 11.24 0.85 Average of Competitors: 2.33

Expected Share Price

Polo Ralph Lauren 13.11 $30.57*all BV and Prices relate to the Most Recent Quarter (MRQ) found at http://finance.yahoo.com M/B Ratio = (Price per Share)/(Book Value per Share) Polo Expected Price = (Competitors Avg M/B Ratio)*(BV per Share of Polo)

By using the Market to Book Valuation, the estimated value produced is not

substantially lower than the Actual Current Value of the Stock. Tommy Hilfiger resulted

in a very low M/B ratio compared to the other competitors. This might have thrown off

the results because of the considerable differences in numbers of Tommy Hilfiger. This

32

occurred because their Book Value and Price were so closely related. (Note: The Book

Values and Prices relate to the Most recent quarter, with results found in

http://finance.yahoo.com.

Intrinsic Valuation Methods In order to perform the following valuations, we must first calculate the Weighted

Average Cost of Capital (WACC), where we will find our cost of capital (Ke) and cost of

debt (Kd). The cost of capital was found by first calculating the beta. We used the

Firm’s Return and the Market Risk Premium from the last two years. By using the slope

of these two we calculated the beta to be 0.742. To take into consideration, the 5 year

beta is 0.469, and the 3 year beta is 0.483. We decided to use the 2 year beta to calculate

the cost of capital. Then from the CAPM data, we calculated the Average risk free rate to

be 3.22%. Then, to determine the cost of capital, we multiplied the historical beta of 0.03

and the beta estimated of 0.742, then we added these results to the average risk free rate

of 3.22%. The cost of capital determined is 5.44% for 2 years, 4.66% for 3 years, and

4.62% for 5 years. We decided to use the cost of capital for 2 years, of 5.44%. The cost

of debt was calculated using the table shown below.

Short Term Liabilities

(in millions) Principal Rate Weight

Value Weighted

Rate Accounts Payable $187,355 2.82% 16.42% 0.46%Income Tax Payable $77,736 0.00% 6.81% 0.00%Deferred Income Taxes $1,821 0.00% 0.16% 0.00% Euro commercial paper $292,600 2.82% 25.65% 0.72%Accrued Expenses and Other $234,218 2.82% 20.53% 0.58%

Total Current Liabilities $793,730 69.58% 1.77%

Long Term Debt 277,345 6.125% 24.31% 1.489% Other (retirement Plans) 69,693 7.000% 6.11% 0.428%

Total Debt 1,140,768 100.00% 3.68% Weighted Avg Kd 3.68%

33

By using the value weighted rate, we added total current liabilities, long term debt, and

other debts, to get the cost of debt of 3.68%. Now, with the components of WACC, we

calculated it as follows:

WACC = (TL/TA)*(Kd) + (SE/TA)*(Ke)

WACC = (848,168/2,270,241)*(3.68%) + (1,422,073/2,270,241)*(5.44%)

WACC = 4.78%

Discounted Dividends

Derived Value as of April 1, 2005= $13.64

Sensitivity Analysis g 0.01 0.02 0.03 0.04 0.05

Ke 0.04 $12.91 $18.18 $33.99 0.05 $9.49 $11.91 $13.64 $31.25 0.06 $7.45 $8.78 $11.00 $15.44 $28.76 0.07 $6.09 $6.91 $8.13 $10.17 $14.25 0.08 $5.13 $5.66 $6.41 $7.54 $9.41

The discounted dividends model was performed by using a Ke = 5.44%. We found the

Ke to be 5.44% by the WACC formula and with the numbers taken from our discounted

free cash flows model. This discounted dividends model gave us a price of the firm to be

$13.64 which was the lowest valuation model that we found. This model has moderate

sensitivity to changes in our Ke and growth rate. The reason that this model show the

company being so overvalued is because Polo does has not paid dividends in several

years, and just started to in

Residual Income

Derived Value as of April 1, 2005= $31.32

34

Sensitivity Analysis g 0 0.02 0.03 0.04 0.05

Ke 0.04 $44.78 $64.15 $101.90 0.05 $31.32 $41.88 $51.00 $78.36 0.06 $27.89 $30.37 $33.74 $39.60 $57.17 0.07 $23.20 $23.84 $25.16 $26.24 $29.75 0.08 $19.75 $19.92 $20.05 $20.25 $20.58

The Residual Income model was performed by using a Ke of 5.44%. Our

analysis estimated the price of $31.32 per share compared to the actual price of $38.41

per share. From this valuation method, we conclude that the firm is overvalued,

because the actual price is more than the estimated price by $7.09. From our

sensitivity analysis, it shows that the estimated price per share is more

vulnerable to changes in cost of equity than to the changes in the growth rate.

Abnormal Earnings Growth Valuation

Derived Value as of April 1, 2005= $38.11

Sensitivity Analysis g 0.01 0.02 0.03 0.04 0.05

0.04 $37.64 $37.64 $37.64 $37.64 $37.64 0.05 $37.61 $37.61 $37.61 $37.61 $37.61 0.06 $37.60 $37.60 $37.60 $37.60 $37.60 0.07 $37.57 $37.57 $37.57 $37.57 $37.57 0.08 $37.54 $37.54 $37.54 $37.54 $37.54

Our Abnormal Earnings Growth valuation of Polo Ralph Lauren was very close to

the markets current price of $38.39. Polo has just recently started to pay a small

dividends per share, and continually has had strong and steady earnings witch the have

been reinvesting back into the company. Polo has not offered many dividends since 2000

due to the increase in amount of money that they have spent for the increase in internet

sales, as well as the increase in foreign markets, such as Europe, and Japan.

35

This analysis is a good valuation of this company because it does not just focus on

the dividends or the cash flows, and takes into measure how the steady growth of Polo. It

also does not have a perpetuity, so it does not distort the future earnings or blow the

future value of the firm up.

The calculations that we used to valuate Polo Ralph Lauren Corp. were estimated

with an annual growth of 3% per year, as well as a cost of equity of 5.44%. Polo just

recently here in 2003 began to start paying dividend, and we expect RL will continue the

distribution of earnings as the strengths of internet sales and overseas foreign markets

continue to grow. Polo’s stock also is primarily purchased not for the quarterly dividend

payments but more for the increase in value of the stock and company. The cost of equity

was hard to calculate due to the poor accounting used by Polo in that they did not have

their financial statements consolidated in a way to value the annual percentage rates on

their bank borrowings, and other liabilities.

The Market Value of Polo in April of 2005 was $38.39, so very closely valuated

Free Cash Flow Valuation Model

Derived Value on April 1 2005=$26.44

The Free Cash Flow Valuation came out undervalued from what the market has

Polo at currently. So the stock is overvalued compared to the analysis of the cash flow

streams. In figuring out the Free Cash Flow valuation we had to calculate WACC, which

once again was hard due to the un-detailed accounting practices used on the financial

statements by Polo RL. The valuation that we derived is between the book value and

market value.

This valuation for the company was a good valuation and could have even been a

little stronger with the added information of their specific debts and current rates they pay

36

on those obligations. This valuation also does not factor in the growth rate of the

corporation which has been a steady 3% per year.

The Book Value of this firm is $13.67, and the market price of the firm is $38.39.

Long Run Average Residual Income Perpetuity

Derived Value as of April 1, 2005= $44.82

Po= BVEo+ (BVEo(ROE-Ke))/(Ke-g)

Po= 13.67+ 0.760052 0.0244

Po= 13.67 31.14967

Po= 44.81967

The Long Run Average RI Perpetuity model shows the estimated value of the

company being $44.82 per share. According to the actual value of $38.41, the

firm is undervalued by $6.41. With our Ke being 5.44% and our growth of 3%,

this increases the estimated value per share. With a book value of 13.67, and

ROE of 11%, this concludes how the valuation is estimated.

Conclusion to Valuation Methods From our valuations, and the information that we had available for use in deriving

their capital structure, the Abnormal earnings growth model was the best valuation for

Polo Ralph Lauren due to the continued growth of the firm and the steady growth of the

earnings. We feel that with these valuations Polo Ralph Lauren is a fairly valued firm.

Despite the fact that it failed to supply us with the accounting data that we needed to

properly value their capital structure.

37

References

• http://www.finance.yahoo.com/q?s=rl

• http://www.marketguide.com

• http://www.polo.com/investorrelations

• Polo Ralph Lauren Co. 2004 10K filing

38

Appendix

Cross Sectional (Benchmark) Analysis

Comparison between Polo and Competitors:

Companies, and Industry

Polo Ralph Lauren

Tommy Hilfiger

Liz Clabourne Gap

4/3/2004 4/3/2004 4/3/2004 4/3/2004

Liquidity Analysis

Current ratios 2.54 3.86 2.56 2.68Quick asset ratio 1.63 2.51 1.4 3.75Operating Efficiency Ratios

A/R turnover 6 4.5 10.72 N/A Days supply of receivables 60.8 81.09 34.04 N/A Inventory turnover 3.65 4.91 4.85 5.8Days supply of inventory 100 196.95 79.31 66.88Working capital turnover 3.44 3.21 2.84 2.12Profitability Analysis

Gross profit margin 55.58% 46.04% 44.56% 37.64%Operating expense ratio 89.70% 89.46% 89.15% 88.58%Net Profit Margin 7.18% 7.05% 6.59% 6.5%Asset turnover 1.17 0.94 1.37 1.2ROA 7.53% 4.42% 10.73% 9.96%ROE 12% 6.44% 17.73% 21.53%P/E Ratio (TTM) 17 9.25 17.27 17Capital Structure Analysis

Debt to Equity Ratio 0.6 0.75 0.672 1.1Times Interest Earned 2.74 1.54 1.76 1.76Debt Service Margin N/A 9.08 1.16 2.82Other Ratios Plant, Property, and Equipment Turnover

6.67 6.88 6.4 5.24

Sustainable Growth Rate 11% N/A 14.10% 9.70%

39

0

10

20

30

40

50

60

%

2004 2003 2002 2001 2000Years

Gross Profit Margin

Polo Rl Tommy HilfigerLiz ClabourneGap

Gross Profit Margin 4/3/2004 3/29/2003 3/30/2002 3/31/2001 4/1/2000Polo Rl 55.58 55.16 54.04 53.62 55.66Tommy Hilfiger 46.04 43.94 42.82 40.65 44.18Liz Clabourne 44.56 43.57 41.39 39.75 39.11Gap 37.64 33.99 29.92 37.11 41.77

40

-30-25-20-15-10-505

10

%

2004 2003 2002 2001 2000Years

Net Profit Margin

Polo Rl Tommy HilfigerLiz ClabourneGap

Net Profit Margin 4/3/2004 3/29/2003 3/30/2002 3/31/2001 4/1/2000Polo Rl 7.18 7.96 8.13 2.99 8.38Tommy Hilfiger 7.05 -27.2 7.17 6.96 8.72Liz Clabourne 6.59 6.22 5.57 5.95 6.86Gap 6.5 3.3 -0.06 6.42 9.69

41

-5

0

5

10

15

20

25

%

2004 2003 2002 2001 2000Years

Return on Assets ROA

Polo Rl Tommy HilfigerLiz ClabourneGap

Return on Assets (ROA) 4/3/2004 3/29/2003 3/30/2002 3/31/2001 4/1/2000Polo Rl 7.53 8.55 9.86 3.64 8.85

Tommy Hilfiger 4.42 4.46 3.45 3.89 3.97

Liz Clabourne 10.73 10.07 9.84 12.21 13.63

Gap 9.96 4.82 -0.1 12.51 21.72

42

-30-20-10

0102030405060

%

2004 2003 2002 2001 2000Years

Return on Equity

Polo Rl Tommy HilfigerLiz ClabourneGap

Return on Equity (ROE) 4/3/2004 3/29/2003 3/30/2002 3/31/2001 4/1/2000Polo Rl 12.02 14.41 17.28 7.32 18.58Tommy Hilfiger 6.44 -25.32 5.19 5.59 7.24Liz Clabourne 17.72 17.97 18.18 22.13 21.33Gap 21.53 13.05 -0.026 29.97 50.47

43

0

1

2

3

4

5

6

2004 2003 2002 2001 2000Years

Inventory Turnover

Polo Rl Tommy HilfigerLiz ClabourneGap

Inventory Turnover 4/3/2004 3/29/2003 3/30/2002 3/31/2001 4/1/2000Polo Rl 3.647 3.386 3.479 2.732 2.564Tommy Hilfiger 4.91 4.61 5.8 5.43 5.04Liz Clabourne 4.85 4.55 4.14 3.9 4.09Gap 5.8 4.66 5.79 4.52 4.63

44

0

0.5

1

1.5

2

2.5

3

3.5

4

2004 2003 2002 2001 2000Years

Quick Ratio

Polo Rl Tommy HilfigerLiz ClabourneGap

Quick Ratio 4/3/2004 3/29/2003 3/30/2002 3/31/2001 4/1/2000Polo Rl 1.63 1.47 1.55 0.87 0.95

Tommy Hilfiger 2.51 1.47 2.02 2.14 1.68

Liz Clabourne 1.4 1.09 1.17 0.9 0.96

Gap 3.75 1.24 0.5 0.15 0.26

45

0

0.5

1

1.5

2

2.5

3

3.5

4

2004 2003 2002 2001 2000Years

Current Ratio

Polo Rl Tommy HilfigerLiz ClabourneGap

Current Ratio 4/3/2004 3/29/2003 3/30/2002 3/31/2001 4/1/2000Polo Rl 2.54 2.33 2.57 2.05 2.1Tommy Hilfiger 3.86 2.22 2.95 3.27 2.71Liz Clabourne 2.56 2.04 2.47 2.54 2.44Gap 2.68 2.11 1.48 0.95 1.25

46

Discounted Dividends (Amounts in millions of dollars except per share data) Years from valuation date 1 2 3 4 5 6 7 8 9 10 Terminal 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Dividends per share $0.20 $0.20 $0.25 $0.25 $0.30 $0.30 $0.35 $0.35 $0.40 $0.40 $0.45 Present Value Factor 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463 Present Value of Future Dividends $0.19 $0.17 $0.20 $0.18 $0.20 $0.19 $0.20 $0.19 $0.20 $0.19 Total Present Value of Forecast Future Dividends $1.91 Continuing (Terminal) Value (assume no growth) $15.00 Present Value of Continuing (Terminal) Value $7.50 Estimated Value per Share $9.41 Earnings Per Share $1.61 $1.66 $1.71 $1.76 $1.82 $1.87 $1.93 $1.99 $2.05 $ 2.11 Dividends per share $0.20 $0.20 $0.25 $0.25 $0.30 $0.30 $0.35 $0.35 $0.40 $0.40 Book Value Per Share 13.67 13.73 14.83 15.38 16.81 18.36 20.06 21.80 23.70 25.35 27.13 Actual Price per share Cost of Equity Estimated 0.08 growth rate 0.05

47

Abnormal Earnings Growth 1 2 3 4 5 6 7 8 9 Perp

Forecast Years 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 EPS $1.61 $1.66 $1.71 $1.76 $1.82 $1.87 $1.93 $1.99 $2.05 $2.11 DPS $0.20 $0.20 $0.25 $0.25 $0.30 $0.30 $0.35 $0.35 $0.40 $0.40 DPS invested at 5.44% $0.02 $0.02 $0.02 $0.02 $0.02 $0.02 $0.03 $0.03 $0.03 Cum-Dividend Earnings $1.68 $1.73 $1.78 $1.84 $1.90 $1.95 $2.01 $2.07 $2.14 Normal Earnings $1.61 $1.66 $1.71 $1.76 $1.82 $1.87 $1.93 $1.99 $2.05 Abnormal Earning Growth (AEG) $0.06 $0.07 $0.07 $0.07 $0.08 $0.08 $0.09 $0.09 $0.09 $0.00 PV Factor 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 PV of AEG $0.06 $0.06 $0.06 $0.05 $0.05 $0.05 $0.05 $0.05 Core EPS $1.61 Total PV of AEG $0.43

Continuing (Terminal) Value FV of Perp. $0.00

PV of Terminal Value $0.00 Total PV of AEG $0.43 Average Perpetuity $2.04 Capitalization Rate (perpetuity) $0.054 Value Per Share pv $37.54 1-Apr-04 $38.04 fv $38.27 1-Apr-05 $38.78

Ke 0.08 g 0.03

48

Residual Income 1 2 3 4 5 6 7 8 9 10 perp

Forecast Years

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Beginning BE (per share) $13.67 $13.73 $14.83 $15.38 $16.81 $18.36 $20.06 $21.80 $23.70 $25.35 Earnings Per Share $1.61 $1.66 $1.71 $1.76 $1.82 $1.87 $1.93 $1.99 $2.05 $2.11 Dividends per share $0.20 $0.20 $0.25 $0.25 $0.30 $0.30 $0.35 $0.35 $0.40 $0.40 Ending BE (per share) 15.09 15.20 16.30 16.89 18.32 19.94 21.64 23.44 25.34 27.06 Ke 0.0544 "Normal" Income 0.74 0.75 0.81 0.84 0.91 1.00 1.09 1.19 1.29 1.38 Residual Income (RI) 0.87 0.92 0.91 0.93 0.90 0.87 0.84 0.80 0.76 0.73 0.73 Present Value of RI 0.83 0.82 0.77 0.75 0.69 0.63 0.58 0.52 0.47 0.43 BV Equity (per share) 2004 16.11 Total PV of RI (end 2004) 6.50 Continuation (Terminal) Value 13.37 PV of Terminal Value (end 2004) 8.30 Estimated Value (2004) $30.91 Estimate April 1, 2005 Value $31.32 Actual Price per share Growth 0

49

50

Free Cash Flows (Amounts in millions of dollars except per share data)

2004 2005 2006 2007 2008 2009 2010 2011 2012 Cash Flow from Operations 260.2 268.0 276.1 284.4 292.9 301.7 310.7 320.1 Cash Provided (Used) by Investing Activities 86.6 (86.7) (109.3) (122.1) (133.2) (145.2) (141.7) (153.4) Free Cash Flow (to firm) 347 181 167 162 160 156 169 167 discount rate (4.78% WACC) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Present Value of Free Cash Flows -0.076 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Total Present Value of Annual Cash Flows -$0.08 Continuing (Terminal) Value (assume no growth) Present Value of Continuing (Terminal) Value $0.00 Value of the Firm (end of 2004) -$0.08 Book Value of Debt and Preferred Stock $848.00 Value of Equity (end of 2004) -$848.08 Estimated Value per Share at end 2004 -$8.15 Estimated Value per Share on April 1 -$8.26

Earnings Per Share 1.614 1.663 1.713 1.764 1.817 1.872 1.928 1.985 Dividends per share $0.20 $0.20 $0.25 $0.25 $0.30 $0.30 $0.35 $0.35 Book Value Per Share $13.67

Actual Price per share $38.39

Kd= 3.68% ke= 5.44% total assets $2,270,241.00 CL $501,130.00 SE $1,422,073.00 LTL $277,345.00

(Amounts in millions of dollars except per share data)

2004 -1134.467041 -1363.6 -1391.7 -1406.6188 -1419.2 -1433 -1425.975102 -1439.2 Cash Flow from Operations (2093.7) (2410.0) (2449.9) (2471.6) (2490.3) (2510.6) (2502.3) (2521.9)

= -4543.53437 WACC = -454353.44%

51

Polo Ralph Lauren Corp. As Reported Annual Balance Sheet 4/3/2004 3/29/2003 3/30/2002 3/31/2001 4/1/2000Currency USD USD USD USD USD

Auditor Status Not Qualified

Not Qualified

Not Qualified

Not Qualified

Not Qualified

Consolidated Yes Yes Yes Yes Yes Scale Thousands Thousands Thousands Thousands Thousands Cash & cash equivalents 343,477 343,606 238,774 51,498 164,571Marketable securities - - - 50,721 - Accounts receivable, gross 472,260 393,454 366,783 281,100 221,078Allowances 30,536 17,631 13,175 12,090 16,631Accounts receivable, net 441,724 375,823 353,608 269,010 204,447Raw materials 5,516 4,214 3,874 7,024 13,649Work-in-process 4,669 4,536 5,469 6,251 6,337Finished goods 353,506 355,021 340,475 412,319 370,967Inventories 363,691 363,771 349,818 425,594 390,953Deferred tax assets 21,565 15,735 17,897 31,244 40,378Prepaid expenses & other current assets 100,862 67,072 47,960 73,654 52,542Total current assets 1,271,319 1,166,007 1,008,057 901,721 852,891Land & improvements 3,725 3,725 3,720 3,408 3,108Buildings 18,540 18,490 17,250 10,178 10,178Furniture & fixtures 345,668 308,300 258,816 229,824 192,444Machinery & equipment 180,138 133,835 105,136 56,833 49,807Leasehold improvements 329,186 298,449 318,734 304,681 350,367Gross property & equipment 877,257 762,799 703,656 604,924 605,904Less accumulated depreciation & amortization 479,929 407,803 359,820 275,995 232,927Property & equipment, net 397,328 354,996 343,836 328,929 372,977Deferred tax assets 61,579 54,386 58,127 61,056 11,068Goodwill, gross - - 297,048 263,291 - Less: Accumulated amortization - goodwill - - 23,700 13,900 - Goodwill, net 341,603 315,559 273,348 249,391 277,822Intangibles, net 17,640 11,400 - - - Equity interest investment 57,766 47,631 - - - Officers' life insurance 50,250 48,826 - - - Other long-term assets 72,756 40,017 - - - Other assets 180,772 136,474 - - - Other assets - - 66,129 84,996 105,804Total assets 2,270,241 2,038,822 1,749,497 1,626,093 1,620,562Short-term bank borrowings - 100,943 32,988 86,112 86,131Accounts payable 187,355 181,392 177,472 178,293 151,281Income taxes payable 77,736 55,501 52,819 - - Deferred tax liabilities 1,821 - - - - Accrued operating expenses 174,574 103,670 74,537 108,441 90,467Accrued payroll & benefits 38,217 33,630 25,124 37,760 26,621Accrued restructuring charge 12,835 15,817 17,644 13,886 12,283Deferred rent obligation 8,592 9,394 - - - Accrued acquisition obligation - - - - 21,637Accrued shop-within-shops - - 11,187 15,085 17,808Accrued expenses & other current liabilities 234,218 162,511 128,492 175,172 168,816

52

Polo Ralph Lauren Corp. As Reported Annual Income Statement 4/3/2004 3/29/2003 3/30/2002 3/31/2001 4/1/2000Currency USD USD USD USD USD

Auditor Status Not Qualified

Not Qualified

Not Qualified

Not Qualified Not Qualified

Consolidated Yes Yes Yes Yes Yes Scale Thousands Thousands Thousands Thousands Thousands Net sales 2,380,844 2,189,321 2,122,333 1,982,419 1,712,375Licensing revenue 268,810 250,019 241,374 243,355 236,302Other income - - - - 6,851Net revenues 2,649,654 2,439,340 2,363,707 2,225,774 1,955,528Cost of goods sold 1,326,335 1,231,739 1,216,904 1,162,727 1,002,390Gross profit (loss) 1,323,319 1,207,601 1,146,803 1,063,047 953,138Selling, general & administrative expenses 1,029,957 904,741 837,591 822,272 689,227Restructuring charge 19,566 14,443 16,000 123,554 - Total expenses 1,049,523 919,184 853,591 945,826 - Income (loss) from operations 273,796 288,417 293,212 117,221 263,911Foreign currency gains (losses) -1,864 -529 1,820 5,846 - Interest expense 10,000 13,502 19,033 25,113 15,025Income before income taxes - Domestic 198,957 190,167 287,291 127,071 215,270Income before income taxes - Foreign 62,975 84,219 -11,292 -29,117 33,616Income (loss) before provision for income tax - 274,386 275,999 97,954 248,886Income (loss) before provision for income tax 261,932 - - - - Current provision for income taxes-federal 81,781 77,299 58,529 27,984 71,565Current prov for income taxes-state & local 4,135 6,550 6,457 21,605 17,398Current provision for income taxes-foreign 10,450 7,401 17,297 12,533 5,698Total current provision for income taxes 96,366 91,250 82,283 62,122 94,661Dfd income tax provisions (credits)-federal -4,421 9,039 15,835 -11,689 4,527Dfd income tax provs (credits)-state & local -831 -2,045 4,672 -11,741 2,234Deferred provision for income taxes-foreign 3,941 1,907 709 - - Total dfd income tax provisions (credits) -1,311 8,901 21,216 -23,430 6,761Provision for income taxes 95,055 100,151 103,499 38,692 101,422Other income (expense), net 4,077 - - - -

Total current liabilities 501,130 500,347 391,771 439,577 406,228Long-term debt 277,345 248,494 285,414 296,988 342,707Other noncurrent liabilities 69,693 81,214 74,117 80,219 99,190Class A common stock 620 489 361 349 344Class B common stock 433 433 433 433 433Class C common stock - 106 227 227 227Additional paid-in-capital 563,457 504,700 490,337 463,001 450,030Retained earnings (accumulated deficit) 927,390 776,359 602,124 430,047 370,785Treasury stock, class A, at cost 78,975 77,928 73,246 71,179 57,346Accumulated other comprehensive income (loss) 23,942 10,787 -19,799 -10,529 9,655Unearned compensation 14,794 6,179 2,242 3,040 1,691Total stockholders' equity (deficit) 1,422,073 1,208,767 998,195 809,309 772,437

53

Income (loss) bef cumul eff of chng in acctg - - - 59,262 147,464Cumulative eff of chng in accounting princ - - - - -3,967Net income (loss) 170,954 174,235 172,500 59,262 143,497Weighted average shares outstanding-basic 98,977 98,330.63 97,470.34 96,773.28 99,035.78Weighted average shares outstanding-diluted 100,960 99,263.05 98,522.72 97,446.48 98,926.99Year end shares outstanding 100,632.40 98,722.19 98,227.93 97,177.92 97,529.98Income (loss) per share-cont operations-basic - - - 0.61 1.49Income (loss) per share-acctg change-basic - - - - 0.04Net income (loss) per share-basic 1.73 1.77 1.77 0.61 1.45Income (loss) per share-cont opers-diluted - - - 0.61 1.49Income (loss) per share-acctg change-diluted - - - - 0.04Net income (loss) per share-diluted 1.69 1.76 1.75 0.61 1.45Total number of employees 13,000 10,800 10,100 10,400 9,500Number of class A common stockholders 1,174 1,320 1,270 1,226 1,237Number of class B common stockholders 4 5 5 4 4Number of class C common stockholders - 5 5 5 5Depreciation & amortization - - 83,919 78,599 66,280

54

Polo Ralph Lauren Corp. As Reported Annual Cash Flow 4/3/2004 3/29/2003 3/30/2002 3/31/2001 4/1/2000Currency USD USD USD USD USD

Auditor Status Not Qualified

Not Qualified

Not Qualified

Not Qualified

Not Qualified

Consolidated Yes Yes Yes Yes Yes Scale Thousands Thousands Thousands Thousands Thousands Net income (loss) 170,954 174,235 172,500 59,262 143,497Provision for (benefit from) dfd income taxes -4,233 8,901 21,216 -23,430 6,761Depreciation & amortization 83,189 78,645 83,919 78,599 66,280Cumulative effect of chng in acctg principle - - - - 3,967Provision for losses on accounts receivable 2,623 1,760 2,920 547 2,734Changes in other non-current liabilities -18,930 3,087 -15,628 -27,989 3,155Provision for restructuring 19,566 14,443 16,000 98,836 - Foreign currency (gains) losses 1,864 529 -1,820 -5,846 - Other adjs to reconcile net income (loss) 5,565 -1,152 9,173 -9,885 4,770Accounts receivable -55,032 -7,798 -92,314 -68,968 -32,746Inventories 17,227 6,365 82,721 -44,626 53,325Prepaid expenses & other current assets -32,439 -19,149 24,143 -22,967 1,216Other assets -37,163 2,868 6,142 8,042 -9,801Accounts payable -2,296 -5,080 -11,001 30,683 31,281Income taxes payable 27,658 - - - - Accrued expenses & other current liabilities 32,053 11,320 -4,213 28,028 -31,750Net cash flows from operating activiites 210,606 268,974 293,758 100,286 242,689Purchases of property & equipment, net -123,026 -98,664 -88,008 -105,170 -122,010Investments in marketable securities - - - -50,721 - Acquisitions, net of cash acquired -5,019 -30,326 -23,702 -20,929 -235,144Proceeds from restricted cash for Clb Mnc - - - - 44,217Equity interest investments -4,548 -47,631 - - - Purchase of trademark -7,500 - - - - Disposal of property & equipment 7,391 13,452 - - - Cash surrender value-officers' life insurance - -3,100 -4,242 -5,152 -5,385Net cash flows from investing activities -132,702 -166,269 -115,952 -181,972 -318,322Payment of dividends -14,847 - - - - Repurchases of common stock -1,047 -4,682 -2,067 -13,833 -41,262Proceeds from issuance of common stock, net - - - 10,297 - Proceeds from exercise of stock options 40,414 7,718 24,486 - - Procs fr (repayments of) sht-tm borrows, net - 68,000 -52,166 2,939 -39,400Repayments of long term debt - -7,700 -10,576 -25,289 -37,358Net payments of short-term debt -100,943 -80,000 - - -

55

Proceeds from long term debt - - - - 319,610Net cash flows from financing activities -76,423 -16,664 -40,323 -25,886 201,590Effect of exchange rate changes on cash -1,610 12,832 -928 -5,501 -5,844Net incr (decr) in cash & cash equivalents -129 98,873 136,555 -113,073 120,113Cash & cash equivalents, beginning of period 343,606 244,733 102,219 164,571 44,458Cash & cash equivalents at end of period 343,477 343,606 238,774 51,498 164,571Cash paid for interest 9,396 19,654 20,193 25,318 7,713Cash paid for income taxes 60,810 65,163 58,328 72,599 112,202Cap obligs for completed shop-within-shops - - - - 2,463Liabilities assumed - 8,506 15,229 - 141,956