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After the Probe: Hilfiger Touts Growth in Europe

After being cleared by federal investigators, Tommy Hilfiger executives trumpeted some bright spots, namely Europe business and Karl Lagerfeld.

NEW YORK — It’s back to business at Tommy Hilfiger Corp.

A day after revealing the U.S. Attorney’s Office has ceased investigating its commission rates, and that it will pay additional federal income taxes and interest of $18.1 million, Hilfiger trumpeted some of its brighter spots, namely the European business and Karl Lagerfeld. The company also explained the steps it’s taking to try to turn around its struggling wholesale business.

Wall Street reacted favorably to the news, sending shares of Hilfiger’s stock up $1.43, or 10.5 percent, to close at $15.01 Thursday on the New York Stock Exchange.

On a conference call with analysts Thursday morning, David Dyer, president and chief executive officer of Hilfiger, said the European business continues to represent a huge opportunity.

“Europe is just a terrific business,” said Dyer, noting the two countries where Hilfiger performs best are Germany and Spain. “Business there continues to be very, very strong. In Spain, it is perhaps the only place that we have a major department store in Europe. Mostly, European distribution is through 3,500 specialty store doors.”

In Germany, Hilfiger has done well with both its wholesale accounts and company-owned, full-price specialty stores, and the firm plans to continue to roll out specialty stores there, he said.

Since acquiring its Italian distributor, Hilfiger has opened a facility in Milan that serves as a showroom, office and retail space. But the firm still has a long way to go to catch up to its competitor, Ralph Lauren.

“One of the things that we know from what we have seen comparing ourselves to Ralph Lauren, while we are stronger in many countries, Italy is one that we are not. We’re probably about a third of their [Polo] business in Italy, and we think that it gives us the feeling that there’s great growth opportunity,” said Dyer.

He said Hilfiger is just beginning to enter Eastern Europe, and hasn’t touched Scandinavia at all.

Turning to its struggling wholesale business in the U.S., where first-quarter wholesale revenue dropped 29.4 percent to $115 million from $163 million, Dyer attributed $12 million of the reduction to exiting the young men’s jeans and H Hilfiger wholesale business during 2005. Still, he said, the company continues to reduce door count.

“It’s not so much about the absolute number of doors, it is the productivity of the doors that we’re in. And I would like to go into the ones that we’re really successful in and fight for more space and put the expense against it to really maximize the sales.

“I’m really not into door count,” he added. “I’d just like to see the business start growing and becoming more profitable, whether that is 800 doors or 500 doors.”

Dyer said the key is to have a better balance between what he calls “pinnacle,” or leading-edge fashion (which in recent seasons, it’s had too much of), and key item-drivers. Furthermore, he said it’s imperative for the company to have a better balance among its wholesale, vertical retail and outlet store operations. “If we can get all three of those working successfully, then … we can get the U.S. moving in the direction it needs to be going,” said Dyer.

Historically, Dyer said, Hilfiger’s own stores weren’t successful because they weren’t in the best positions or they were in the wrong malls. In addition, the cost of developing the stores prevented them from making money. The company is planning to roll out H stores, beginning this spring, and has already begun negotiating new store leases.

As for the Karl Lagerfeld business, which Hilfiger acquired early this year, Dyer said it is “totally incremental; totally, totally new.”

“I mean, basically, the Karl Lagerfeld brand that we acquired was a terrific designer that was passionate about his brand and business, but a very, very small business….This was a start-up…the brand was certainly much less than $10 million in revenue when we acquired it, so we have nowhere to go with this but up, and we believe that there is quite a ways to go up with the Lagerfeld brand.”

The plan is to distribute Lagerfeld Gallery to better specialty stores, and the Karl Lagerfeld line — which will have a capsule collection for spring and be fully introduced for fall 2006 — to better department stores and specialty stores in the U.S.

“But we do think that it has global potential and that type of department store, be it Barneys, Fred Segal, Neiman’s, Bergdorf, Saks … Bloomingdale’s; that type of customer is who we would want to appeal to. We don’t see it being mass distribution at this point.”