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NEW YORK — Slowing sales of Tommy Hilfiger’s men’s and women’s sportswear businesses led Wachovia Securities on Monday to downgrade shares of Tommy from “strong buy” to “buy.”
Analyst Joseph Teklits wrote that the previous rating was based on an upturn in Tommy’s men’s business this fall. Lackluster sales and the current difficulties in the retail environment were reasons for the downgrade.
“Not only does the men’s sportswear business continue to be sluggish for the industry and Tommy, but we now are getting indications that the women’s sportswear and junior jeans categories — which have been among the few bright spots for department stores — are slowing as well. This may be creating new issues for Tommy, which has benefited from a particularly strong women’s business over the past 12 months,” Teklits wrote.
The analyst noted additionally that Tom’s full-price retail stores received their exclusive fall collections about a month late in mid-September, which potentially could pressure margins for the rest of the year.
Teklits wasn’t totally down on Tommy, however. He noted that the company’s marketing and product efforts for men and women continue to improve, especially for men’s sportswear, and wrote that the evolution toward more contemporary looks by Nautica and higher prices for Polo may open up a niche for Hilfiger. Teklits added that while men’s sales continue to be down, full-price selling and older customers in their 30s and 40s are “becoming part of the business again.”
The analyst, who wrote that the company’s prospects are fairly bright once apparel trends improve, nevertheless concluded a downgrade was warranted, given the faded earnings visibility for Tommy under the current retail environment.
Shares of Tommy closed down 46 cents, or 4.4 percent, at $10 even in New York Stock Exchange trading Monday.
David Lamer at Ferris, Baker Watts, said Monday he is maintaining a “buy” rating, his firm’s highest, on Tommy’s stock.
“The business is under pressure, especially women’s and juniors’ now. However, I think the brand fundamentally is in very strong shape. The company has $400 million in cash, generates $200 million in cash a year, trades at 50 percent of sales and trades at only 6 times forward earnings. All of that makes shares of Tommy an incredibly undervalued stock. Others in its peer group are trading at 9 times forward earnings,” Lamer said.
Lamer explained that the current volatility on Wall Street puts Tommy in the same boat as other public firms. He views Tommy as a very strong long-term opportunity. “You have to put a lot of the current macro conditions aside because you can’t control it. The macro conditions make it very difficult to try to play the stock market. The volatility, I believe, will continue for the next six to eight months, but I would stay with a stock like Tommy because it has strong fundamentals,” Lamer said.
For now, Lamer expects holiday sales to be spotty, with smaller ticket items, such as apparel, to be key gift-giving items.
“You’ll see that most businesses such as Tommy will continue to be cautious and that the cautiousness, which was extended through spring and summer, will continue into fall. What that means for fashion is that apparel firms will be focusing on what I call wearable product. I don’t expect anyone to push the envelope in terms of design to try to catch the next fashion wave,” Lamer predicted.