Tommy Bounces Into Black

Tommy Hilfiger Corp. posted a first-quarter profit, helped in part by an $11 million legal settlement, giving its stock an uptick.

NEW YORK — Tommy Hilfiger Corp. on Tuesday posted a first-quarter profit compared with a loss in last year’s quarter, helped in part by an $11 million legal settlement, but warned that future orders from retailers may slow unless consumer spending picks up during holiday.

This story first appeared in the August 6, 2003 issue of WWD.  Subscribe Today.

Despite the warning, Wall Street loved Tommy. Shares closed Tuesday at $11.01, up 76 cents, or 7.4 percent, in trading on the New York Stock Exchange Tuesday, as the Dow Jones Industrial Average plunged 149.72 points, or 1.6 percent, to end the day at 9,036.32. Tommy’s volume was surprisingly heavy, trading at 4.41 million shares compared with a daily average of just 736,318 shares.

Income for the three months ended June 30 was $17 million, or 19 cents a diluted share, versus a loss of $438.8 million, or $4.88, in the year-ago quarter. The period included an $11 million pretax, or $7.2 million after-tax, gain it received from Goody’s Family Clothing Inc. as settlement of a trademark counterfeiting and infringement lawsuit filed by Tommy. Excluding the gain and last year’s special items from a change in accounting for goodwill and intangible assets, income was $9.8 million, or 11 cents, versus $2.6 million, or 3 cents, last year.

Revenues were essentially flat, rising just 0.2 percent to $367.2 million from $366.3 million. In the wholesale segment, the men’s component increased 1.4 percent to $102.2 million while the women’s business rose 2.4 percent to $109.6 million, both mostly due to growth in the European business. The children’s business dropped 11.2 percent to $52.2 million. Retail revenues rose 3.1 percent to $89.4 million, while licensing revenues rose 5.6 percent to $13.8 million.

Joel Horowitz, chairman, said during a conference call, “With holiday 2003 market behind us, we now have somewhat greater visibility on the balance of the year. While we are encouraged by the recent improvements at retail, we do not expect these trends to result in increased retailer orders until significant signs of improved consumer apparel spending are evident.”

Despite the cautious outlook, the company was pleased with the quarter’s results. Horowitz said the company was “encouraged by continued improvements in retail selling of men’s sportswear and jeans and misses’ sportswear, which we have been experiencing since mid-April. We believe these trends are a direct result of our recent product initiatives. In addition, our retail stores registered stronger same-store sales results for the quarter, aided by improved performance in our U.S. outlet division.”

The former chief executive told analysts that he would be joined by newly named ceo David Dyer for the second quarter’s conference call. As reported, Dyer was named to the post on Monday.

Horowitz said Dyer’s “immediate focus will be understanding the landscape of the Tommy Hilfiger business and simultaneously looking at new opportunities for the company.”

He confirmed to analysts the roles that the individuals will have at the firm: “Tommy’s role does not change. He remains honorary chairman, chief head designer and the personality behind the brands. Tommy continues to spend time behind the designer room [and] makes sure the message is translated to the consumer. David and I initially will work side by side to get David acclimated to the organization.”

He noted he will continue as non-executive chairman beyond the March 2004 expiration of his contract, provided the board elects him to that post.

The company also provided more details about the new H Hilfiger label. Currently in its own specialty stores, it will launch at Federated Department Stores in spring 2004. According to Horowitz, the H line adds a dressier element to the Tommy Hilfiger lifestyle brand portfolio. The company expects a launch of between 80 and 100 doors, with new in-store shops for the women’s business and the men’s business incorporated in existing men’s in-store shops. The company is expanding the collection to include footwear, accessories and neckwear.

The company’s own retail stores will continue to have an “advance” on the product line and will serve as “in-house laboratories,” while the department store merchandise might have slightly lower price points, Horowitz said.

Dennis Rosenberg, analyst at Credit Suisse First Boston, wrote in a research note that the company expects the H line’s sales to reach between $75 million and $100 million in a few years. For the fiscal 2004 outlook, however, he projected company sales to decline 6 percent to $1.77 billion from $1.88 billion, with wholesale sales falling 11 percent including a 5 percent decrease in men’s and a 12 percent drop in women’s.

The analyst observed the company’s first-quarter earnings per share of 11 cents exceeded his estimate of 4 cents because “Tommy provided less-than-expected markdown support for spring and summer. While that resulted in a better-than-expected gross margin, it also caused retailers to cancel orders. Tommy’s rationale for providing less margin support was that future orders will be a function of retail sell-throughs, not markdown allowances.” The analyst wrote that he doesn’t expect the company to further reduce markdown support.

Robert Drbul, analyst at Lehman Brothers, noted that Tommy Europe generated $276 million in revenue in fiscal 2003, and possibly could exceed the $330 million mark in fiscal 2004. “The division continues to perform solidly in the quarter, with revenues of $36.8 million, compared to $19.6 million [in the same quarter a year ago],” Drbul wrote in a research note. He added that he expects Tommy Europe to “grow its top line by more than 20 percent in fiscal 2004 and to remain a strong long-term growth opportunity for the company.”

Horowitz also said the company, which has been trying to get supply and demand back into balance in its U.S. operations, should have inventory back in line by the end of the second quarter. The company will clear product through its normal channels, such as TJX Cos. and Ross Stores.

The company expects net revenue for fiscal 2004 to be lower than that of fiscal 2003, and said it was “comfortable” with consensus estimates of EPS of $1.07 for the remaining three quarters of the year. Second-quarter EPS is expected to range between 55 and 59 cents, third quarter between 10 and 14 cents and fourth quarter between 35 and 39 cents.