Singing a Happy Tune: Tommy Back on Track As Profits, Sales Soar

Tommy's talking turnaround again — and still, an initial public offering.

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Tommy’s talking turnaround again — and still, an initial public offering.

This story first appeared in the June 23, 2008 issue of WWD.  Subscribe Today.

Two years after Apax Partners acquired Tommy Hilfiger for $1.6 billion, Fred Gehring, the company’s chief executive officer, today will unveil financial results for the year ended March 31 that trumpet a 23.9 percent surge in earnings before interest, taxes, depreciation and amortization to 268 million euros, or $377 million at average exchange, on sales that grew 14.4 percent to 1.34 billion euros, or $1.88 billion.

The Amsterdam-based privately held company partly attributed the rise in sales to Hilfiger’s strong retail and wholesale business in Europe — sales in the region grew 22.8 percent to 707 million euros, or $996 million, during the year.

However, an upbeat Gehring said he saw the highlight of the results as the company’s growth in the U.S., which he called the firm’s “shining star.” Sales there rose 3.8 percent to 454 million euros, or $640 million, during the period. Sales in North America as a whole, for the U.S. and Canada, rose 2.5 percent to 590 million euros, or $836 million, during the period.

“Where we were facing a challenge to really do some things differently was in the States,” said Gehring, referring to the brand’s position in the U.S. when Apax acquired Tommy Hilfiger in May 2006. “We’ve focused on fewer product divisions…and product of a higher quality at a higher price point level. We of course realized there was a risk that the American consumer may not buy Tommy Hilfiger at substantially higher price points than they’ve been used to, but we found that they did.”

There’s no question, the last few years have been challenging for Hilfiger’s firm as it underwent a catharsis of sorts. While the European business delivered consistent growth at a premium position for many years, the U.S. wholesale business floundered after being oversaturated in the market. After Apax acquired the brand, Gehring, formerly head of Tommy Hilfiger’s successful European operations, was appointed ceo of Hilfiger. He set about radically slimming down the business, cutting jobs and bringing some of Hilfiger’s licensed businesses in-house. Gehring has tried to reenergize the company and extend the brand to the premium positioning it enjoys in Asia and Eastern Europe.

Gehring, with Hilfiger on board as the designer and public face of the brand, set out to open a series of Hilfiger stores across Europe’s toniest shopping streets. The company unveiled a store on Paris’ Rue Saint-Honoré in 2006, swiftly followed by a wood-paneled flagship on London’s Regent Street, which stands alongside brands including Aquascutum, Burberry and Brooks Brothers on the shopping thoroughfare. Similar Tommy Hilfiger units are slated to open in the U.S., too, with a 22,000-square-foot flagship set to make its debut on Fifth Avenue in New York in November and a Miami store scheduled to open this summer. But its biggest gamble in the U.S. was striking an exclusive deal with Macy’s for women’s, men’s and children’s sportswear, which will be rolled out to 550 Macy’s units this fall.

Sales at Tommy Hilfiger 206 retail stores in the U.S. (more than 150 of which are outlet stores) rose 6.7 percent on a comparable-store basis during the year, and the brand saw double-digit sales growth with its business at Macy’s, the company said. That growth was mitigated by an 11.4 percent decline in wholesale net revenue in the U.S., as the company discontinued orders and product lines in preparation for selling Tommy Hilfiger sportswear exclusively at Macy’s this fall. The company’s results also were boosted by bringing its Japanese license and European footwear license in-house.

Presently, the U.S. accounts for 35 percent of the business; Europe is 50 percent, and the remainder is other international business.

“[Going private] has benefited the organization in that…there was a level of reorganization that is very, very hard to do in the public domain, where every quarter you have to report,” said Gehring. “Now that we are behind that, I don’t think from a brand perspective there’s any advantage of being private…it may be more effective to be public as you have more of a transparency, which is great when you’re doing well. That in itself is kind of advertising.”

Gehring said that, after the brand postponed its IPO at the beginning of the year, because of volatility in the financial markets, the company had “shelved” plans to float, pending market conditions.

“We do not expect the markets are all of a sudden going to find magic stability in the short term, so it’s back to business, and there’s no pressure from Apax in whatsoever manner,” said Gehring. “Normally we would think by the fall of 2009 the market will have had a chance to recover and that’s a good time, but if it has to take longer, that’s fine. If we see magic and in the next six to nine months the market picks up momentum, then we may go earlier. It is really completely not our agenda at the moment. We need to see a really stable market over a longer term.”

Gehring added that an IPO was “the most logical scenario” for the company’s future.

In the meantime, he said the company was weathering the storms of the tough economic conditions in both the U.S. and Europe, thanks to a higher-end, premium product offer now matching up with consumers’ recognition of the brand. “In Europe, 75 to 80 percent of our business is wholesale, toward stores that buy many brands. Those people that are multibrand based in tough economic times want to take risk out of their business. And [that] often means not experimenting too much with brands, and instead allying strongly with the household names,” said Gehring. “In tougher economic times, if it’s a shorter period of time, then it can be an opportunity for major brands to take further market share.”

In the U.S., meanwhile, Gehring said consumers had been waiting for the brand’s product to return “back to its roots.”

“It’s a return to the authentic customer of Tommy Hilfiger, when it lived in its first life,” he said. “Through an evolution in the U.S….there was a period when overdistribution ended up giving a negative effect on the positioning of the brand. Now it’s returning to what it always stood for anyway, and that consumer is still out there in America in very, very large groups, and you know, so far what we’re seeing is that they’re responding immediately.”

The company’s revamped stores, of which it opened 140 during the year, are also performing well, Gehring said. He added that the company’s Regent Street store, which sells the women’s and men’s collections, had experienced “substantial double-digit growth” during the year, and that the stores in New York “are on fire.” The company has 796 retail stores, 50 percent of which are owned and 50 percent franchised.

“Overall, all our retail stores make money…[but] quite frankly, with Regent Street we would have been prepared to break even…because [the store] is there to do business and it’s there to support our image. But it has outperformed those plans, so we do have the benefit of having a great image anchor, but at the same time, a great money maker,” he said. Gehring added that the brand’s Paris store, on the Rue Saint-Honoré, “is not making a whole lot of money,” but attributed that to a combination of a lack of heavy retail traffic on the street and the competition from a raft of local brands.

And even with strong sales growth in Europe, Gehring sees room for further opportunity for the brand there. He cited Scandinavia, Italy, France and Eastern Europe as possible growth areas, along with Japan, China, India and South America. In terms of the U.S., the company plans to avoid the danger of oversaturating the market — a situation it faced in the early 2000s — with a controlled rollout of stores. In November, on Black Friday, a 20,000-square-foot Hilfiger flagship will open on Fifth Avenue where Fortunoff formerly was, while a store on Collins Avenue in Miami Beach is slated for this summer. Gehring said over the next three to five years he sees “30 to 50 more stores” in the region. Gehring called customers’ response to the brand’s Hilfiger Denim store on Broadway “phenomenal.”

“It blows our budgets out every day,” he said, though he added that tourist spend in New York likely would contribute to that store’s performance.

Among the U.S. stores that have opened in the last year are ones on Bleecker Street in New York and in Georgetown in Washington, both of which are reporting strong sales. The SoHo boutique is running 90 percent ahead of plan, Bleecker Street is 60 percent ahead of plan and the Hilfiger Denim store on Broadway in SoHo is up 40 percent. Hilfiger also intends to open freestanding children’s wear stores in the U.S., beginning in Las Vegas.

Meanwhile, Gehring said the deal that Hilfiger signed with Macy’s to exclusively distribute the brand’s sportswear through its stores would have “some impact” on sales in the next financial year. “The American [retail] landscape over the past 10 years has become so consolidated, the opportunity that Macy’s represents with their 800 doors, with one organization, [is] just too incredible to pass up,” he said.

Gehring added that the line sold in Macy’s would be “100 percent” created by the company’s design teams in Amsterdam and New York, and said that there wasn’t a danger customers would confuse the Macy’s offer with the merchandise in Hilfiger’s own stores. “There is certainly an element of crossover [between the brand’s retail customers and Macy’s customers]…[but] I have absolutely zero doubt that everybody will understand that this is part of the same brand,” said Gehring. “The [Tommy Hilfiger] product sold in Macy’s also sits on the floor in our own stores — it’s just that we have a much greater bandwidth of offer. In Macy’s, we do a lifestyle story, but there are substantial volume drivers, which is the nature of the game of the department store business.”

But the ceo said he still regards the brand’s venture with Macy’s as a work in progress. “The alignment gives us a very important national stage, [but] we have to perform,” he said.

Meantime, Tommy Hilfiger himself appears to be enjoying the turnaround and some positive company news, for a change.

“I am so happy that the repositioning and the turnaround have been successful,” said the designer in a separate interview. “We’ve been right-sizing the business, reorganizing and cleaning up the wholesale distribution.”

He said he’s excited about the Macy’s deal, the rollout of company-owned and franchised stores, and the success of Hilfiger Denim, a premium collection that rivals Diesel, Guess, G-Star and Replay.

“The line in Europe is really influencing the line in the States now. It’s more upscale, sophisticated and expensive,” said Hilfiger. He said the Macy’s line reflects an elevated style: “The cloth is different and the buttons are different, the prices are slightly up and the quality is substantially up.”

Hilfiger said some of the products that are carried in Macy’s also will be sold in his freestanding stores, but the majority of the merchandise at his own units will be higher-priced, such as the runway collection, called Tommy Hilfiger “Special Edition”; Hilfiger Denim, and the European sportswear line. He said Macy’s products are mostly core classics as well as trendier products “that fit in with Macy’s strategy of cool American classics.”

The collections are sourced through Li & Fung, which acquired Hilfiger’s global sourcing operations last year for $247.8 million in cash.

At Macy’s, Hilfiger is placing his bets on the misses’ customer, rather than the fickle junior customer. The women’s sportswear is geared to the 25- to 45-year-old consumer. “The whole brand has grown up. It’s men’s sportswear and women’s sportswear,” said Hilfiger. Hilfiger Denim, however, will reach a younger 18- to 25-year-old customer and retails from $95 to $125.

With his business on the upswing in the U.S., how does Hilfiger feel about tying it all up with Macy’s?

“Macy’s was the best thing we could possibly do in the U.S. We’re important to Macy’s now. We’re rebuilding all the shops. The business has grown dramatically at Macy’s, and it’s showing great increases,” said Hilfiger.

At Macy’s, it’s the number-one-performing brand in the misses’ department, said Hilfiger. In fact, his women’s business is running 40 percent ahead of last year. According to Hilfiger, the average unit retail price has increased, markdowns have decreased and full-price sell-throughs have increased, resulting in a more profitable business. In Herald Square, the Hilfiger women’s wear business is running an average of more than 70 percent above a year ago.

“We expect this will be a significant business for us,” said Janet Grove, vice chairman of Macy’s Inc. and chairman of Macy’s Merchandising Group, who has been heading the Hilfiger initiative.

“Tommy Hilfiger merchandise will have a significant presence in prime locations in every store. This will include a shop environment supported by custom-designed visual presentation and graphics to support the Tommy Hilfiger brand image,” said Grove. She noted that the size of the in-store shops will vary by door and product category, and the collections will be supported by a multiplatform advertising program.

“We are developing a very robust multimedia marketing program that will be launched in September to support the Hilfiger lines at Macy’s,” said Grove. She noted that it was too early to provide specifics, but it will include “aggressive Macy’s advertising, direct mail, in-store signage and big events.”

Grove said the spring merchandise is performing “exceptionally well” and that she expects continued growth this fall when the exclusive deal begins.

She also noted that Hilfiger will make a series of in-store appearances around the country. Although most of the dates haven’t been set yet, Hilfiger plans to design and light the Great Tree at Macy’s on State Street in Chicago on Nov. 8. “This is a significant event,” said Grove, noting that last year, Martha Stewart designed and lit the Chicago tree.

Asked how the new Hilfiger lines compare with previous incarnations, Grove responded: “In both men’s and women’s, the Tommy product is a more modern interpretation of the classics. This includes key items that will be identified as ‘my favorites.'” Bloomingdale’s, which has a Hilfiger men’s wear department, will exit that business in the fall.

The Hilfiger merchandise at Macy’s is designed and produced by Hilfiger as an exclusive to Macy’s, not as a Macy’s private brand. “It’s a most-wanted brand that is exclusive to Macy’s, much like Martha Stewart Collection, Donald Trump men’s wear, T Tahari better sportswear and a number of others across the store,” said Grove.

Describing his role at the company, Hilfiger said he’s “involved with the image of the brand, the advertising-marketing, putting my personal stamp on the brand and the creative process.”

To that end, advertising will play a major role this fall, as the company plans a three-pronged strategy. The first is a global brand campaign shot in Lake Tahoe by Dewey Nicks that will include print, online and outdoor ads. The second is co-op advertising with Macy’s for the exclusive lines and the third is a campaign to support the opening of the Fifth Avenue store in November that will include print and outdoor ads and guerilla marketing.

After his August wedding to Dee Ocleppo, Hilfiger is revving up to visit stores. “I’m going to be a busy guy this fall,” said the designer, noting that he plans to make between 12 and 14 different appearances at Macy’s around the country, promoting not only the sportswear, but a new men’s fragrance, as well.

“It’s a dream come true to come full circle, to be excited again and feel the momentum again and the energy,” said Hilfiger. “Fred Gehring has done an amazing job. His tenacity and vision have pulled all the businesses together. It took about a year. I expected it to take five years.”

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