NEW YORK — Having bought another designer, Tommy Hilfiger is now sorting out his own house.
In a move aimed at speeding up product to market and turning around its ailing wholesale business, Tommy Hilfiger Corp. — which last month bought the rights to the Karl Lagerfeld name — has restructured its own design and production operations and its women’s, men’s and children’s divisions, and closed its young men’s division. The changes will result in cost savings of $40 million and the loss of 200 positions, according to David Dyer, president and chief executive officer of Tommy Hilfiger Corp.
But more changes could be on the way: Dyer indicated that the future of the company’s H Hilfiger line, which was introduced with much fanfare last spring exclusively at Federated Department Stores and at Hilfiger’s own shops, remains up in the air after a disappointing performance.
“We’re still taking a look at it. We haven’t made a decision yet,” said Dyer. He said Federated still has the exclusive, and Hilfiger has sold some specialty stores, including Parisian. “The whole segment of the better contemporary business, which includes Calvin Klein, Michael Michael Kors and H, hasn’t performed very well. We’re reevaluating how to go forward,” said Dyer.
Last month, H’s designer, Ginny Hilfiger (Hilfiger’s younger sister), left the company to spend more time with her family. Her successor hasn’t been named. Some market observers noted that perhaps Hilfiger would try and convert its prime H space at Federated Department Stores into Karl Lagerfeld shops.
“A lot of our emphasis will be on Karl Lagerfeld, and we’ll continue with Lagerfeld Gallery,” said Dyer. “It will be 2006 before we get a different [Lagerfeld] line out for the U.S.” He noted the company is currently strategizing whether to launch Lagerfeld handbags and accessories first, another Lagerfeld apparel line or even a Lagerfeld line initially in Europe and Asia. “We want to do it right, and we’re looking at many things,” he said.
Hilfiger’s wholesale business last year accounted for approximately $700 million in revenues out of the company’s total $1.88 billion. Wholesale sales are half of what they were in 1999.The restructuring is the latest in a string of moves by Hilfiger in the last few months, both personally and professionally. In addition to buying Lagerfeld, the designer is taping his own fashion reality show, “The Cut,” for CBS and is still dealing with an investigation by the U.S. Attorney’s office over his company’s commission policies.
The new setup will allow him to focus on those bigger-picture activities. According to Dyer, each of the women’s, men’s and children’s divisions now will have dedicated staffs that will handle design, production, merchandising, sales and marketing and will report to a division president. Previously, production and marketing were centralized. The division presidents will report to Lynn Shanahan, who in December was named group president of U.S. wholesale and licensing.
As a result, Hilfiger will no longer need to approve everything that goes into each line, and designers now will report to their respective division presidents. Previously, the design team reported to Hilfiger. This will enable products to get to market up to two months faster, said Dyer.
“Tommy will set the tone for the brand, and the division president will have accountability for design,” said Dyer, adding that “the actual editing of the line” will be the sole responsibility of the division president and the team. Peter Connolly will remain president of worldwide marketing and communications at Hilfiger, reporting to Shanahan, but each of the divisions will have dedicated brand marketing personnel.
While the women’s business appears to be making strides, the men’s and children’s business has struggled this year. In the second quarter ended Sept. 30, the company’s wholesale segment declined 7.1 percent to $387.4 million from $417.1 million. While women’s revenues rose 7.6 percent to $172.1 million, men’s sportswear was off 12.6 percent to $160.7 million, and children’s declined 25.6 percent to $54.6 million.
Despite the weakness in its wholesale business this year, Hilfiger has seen double-digit increases in its European business, as well as increases in its Canadian, licensing and outlet divisions. “Because of the growth in all our other areas, our top line has been relatively stable, even as our wholesale business fell,” said Dyer. “Lynn’s job is to get the U.S. wholesale business stable, profitable and growing again.”Commenting on the reorganization, Shanahan said: “Essentially, we’re creating teams that will operate more efficiently. Now we can meet the market demands and be quicker to market. We want to reinvest in the core business for long-term growth and profitability.”
“That’s one of the things that’s been deficient the last few years,” added Dyer. The new reorganization is expected to give division presidents “full accountability” for design, merchandising, sales and brand business development.
Shanahan has “100 percent responsibility for department stores,” said Dyer. “The whole goal is to address the department store business and to be more in tune with the ultimate consumer. Our product has been off. It isn’t where it needs to be,” he admitted.
Two years ago, Dillard’s was Hilfiger’s biggest customer, accounting for 10 percent of the business, followed by Federated Department Stores, at 9 percent, and May Co., at 8 percent, said a Hilfiger spokeswoman. Once Dillard’s dropped the Hilfiger line last year, Federated became its biggest account, followed by May Co.
One of the problems Hilfiger has faced is that the company has been working a year out, and therefore can’t turn as quickly on a hot trend. With the new setup, the firm will be able to speed up the process, said Dyer. For example, under the previous centralized production system, a garment would be sent to Asia, would come back to New York and be changed and then would be sent back to Asia. Now, the company will send merchandising and design personnel to Asia to see the garment, make the change there and put it right back into production, saving critical time.
The division presidents are Patricia Stensrud, who was named president of women’s and special sizes last week, and Allan Zwerner, president of men’s and children’s wear. Juniors’ will be headed temporarily by Dyer, until someone is named.
Another aspect of the reorganization is that the young men’s jeans business — which has fallen from a peak of $300 million in revenues in 1999 to $60 million this year — will be folded into men’s sportswear. Men’s sportswear will now be presented as an integrated collection composed of casual sportswear, denim under the Tommy Hilfiger Flag label and a newly launched dress-casual collection under the Tommy Hilfiger Crest label.In connection with these moves, Hilfiger expects to record charges of between $10 million and $14 million in fiscal 2005, primarily related to severance and costs to close the young men’s division.
Dyer noted that the expense reductions were necessary in order to get infrastructure costs more in line with the current volume of the various businesses. The $40 million in annual cost savings will occur in the next fiscal year that ends March 31, 2006, and will come from the following areas of the company:
Approximately $14 million in cost savings in divisional and corporate expenditures, including freight, traffic and warehouse efficiency.
A $12 million savings will result from the elimination of 200 positions, in areas such as sales, merchandising, design and warehouse operations. Dyer noted that while 200 positions have been eliminated, the layoffs only will affect 100 employees, since over the past four months, the company hasn’t filled positions when employees left. Dyer said employees have been given “generous severance packages, counseling and out-placement” services. The cuts follow the elimination of 50 to 60 jobs at Hilfiger last year.
A cut of $6 million in advertising and media expenses.
Some $8 million will be eliminated from media production and agency fees.
Globally, Hilfiger spent $75 million on total media, advertising and production expenditures in the past year, said Connolly. The reduced budget isn’t likely to please magazine publishers. Ads, which had been more image-driven, will become more product-focused, similar to the way Gap homed in on its khakis a few years ago, said Dyer. The company also expects a huge bang from the designer’s upcoming reality TV show, which will appear on CBS sometime in the spring or summer. The additional hype and publicity could help Hilfiger’s apparel lines, much the same way Donald Trump’s “The Apprentice” led to brisk sales of his fragrance and other categories in department stores. Martha Stewart is already seeing a spike in her stock with the preemptive news that she’ll have her own TV show once she’s out of jail.
In March, Hilfiger will move to new headquarters in the Starrett-Lehigh Building at 601 West 26th Street here, which will house design, production, merchandising and marketing functions. The showroom and sales will remain at 25 West 39th Street.
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