As if things weren’t bumpy enough in 2004 for Tommy Hilfiger Corp., the situation got dicier in September, when the company disclosed that its commission policies were under investigation by the U.S. Attorney’s Office in Manhattan.

It’s too early to predict an outcome, or even when the probe will be completed, but analysts said that the company could end up with more than $100 million in tax liability. Should the investigation be expanded or get drawn out, there could also be some risk to the Hilfiger brand, said analysts. Roughly 10 shareholder lawsuits have been filed against the firm.

Already the investigation has led to a nearly $300 million drop in the firm’s market capitalization and proved to be a distraction to top management, in the midst of turning around the business that was a fashion and Wall Street darling in the Nineties, but has seen a slowdown in recent years.

In a November statement, the company said the investigation “is focused on the appropriateness of the commission rate paid by the company’s subsidiaries to Tommy Hilfiger (Eastern Hemisphere) Ltd. as well as other related tax matters, although there can be no assurance that the scope of the investigation will not be expanded.”

These commissions cover such services as product development, sourcing and quality control and are commonplace in the industry.

Usually the fees represent about 5 to 8 percent of the cost of the unit sold by the factory. Legal experts said that inflating the commission could help keep more money in lower-tax jurisdictions and boost the bottom line.

Managing tax exposure is an important part of Hilfiger’s business. As the firm noted in its annual report filed with the Securities and Exchange Commission in June, “The company’s effective tax rate has been and is expected to continue to be a major factor in the determination of the company’s profitability and cash flow.”

Last year, the firm’s tax rate stood at 22.1 percent, much lower than those of competitors like Polo Ralph Lauren, Jones Apparel Group and Liz Claiborne, which have tax rates of 36 to 37 percent.

Former and current executives received grand jury subpoenas, and the company was subpoenaed to produce documents from as far back as 1990.It is not known which executives were subpoenaed, but Hilfiger, honorary chairman and principal designer, as well as Joel Horowitz, current chairman, and former co-chairmen Silas Chou and Lawrence Stroll are all named targets in some of the shareholder lawsuits.

The firm, which said it is cooperating with the investigation, has responded by bringing in some star power, namely former Manhattan U.S. Attorney Mary Jo White, as legal counsel. She is now a partner at the law firm of Debevoise & Plimpton and known for her pursuit of organized crime and liability cases while a U.S. Attorney from 1993 to 2002.

The company also formed a special committee of independent directors, consisting of Clinton Silver, Mario Baeza and Jerri DeVard, to conduct an internal inquiry. Auditor PricewaterhouseCoopers cannot complete its review of the firm’s second-quarter results until it sees the special committee’s review.

FTI Consulating Inc. has also been retained to review the firm’s buying office commission rates.
— Evan Clark

On the Plus Side

Tommy Hilfiger Corp. might have hit a rough patch this year, but the firm also has marked some significant changes as it works toward a turnaround.

Last month, the company appointed Bob Rosenblatt as chief operating officer as well as group president and chief operating officer of its Tommy Hilfiger U.S.A. Inc. subsidiary.

Rosenblatt, who hails from Home Shopping Network and Bloomingdale’s, took over responsibilities from longtime Hilfiger executive Joel Newman, who had been executive vice president for finance and operations.

Further solidifying the management of the key U.S. subsidiary, the firm promoted Lynn Shanahan to the new position of group president of the U.S. subsidiary’s wholesale business a few weeks later. Shanahan oversees the U.S. licensed businesses, sales, merchandising, marketing, design, production and strategy.

H Hilfiger also was introduced to the department store channel this year exclusively through Federated Department Stores Inc.’s stores such as Macy’s. The brand was placed prominently in many stores and was backed by advertising featuring David Bowie and his supermodel wife, Iman. For spring, the brand also will be sold in some specialty stores.In addition to the use of rock stars and other well-known faces, Hilfiger is bolstering its brand exposure with “The Cut,” a fashion reality show scheduled to bow on CBS next year. The show will feature 16 hopeful designers who battle it out for the opportunity to put together their own line under the Tommy Hilfiger label.

The firm also is working on some new retail concepts it plans to test in the U.S. next year.

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