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Tommy’s Big Move: Hilfiger Said Buying Karl Lagerfeld Brands

Karl Lagerfeld is expected to announce today that he has sold his signature trademarks to Tommy Hilfiger Corp. for an undisclosed amount of cash.

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New York — Karl Lagerfeld has a surprising new parent — and it’s none other than Tommy Hilfiger.

Fresh off his wildly successful collaboration with H&M and a trip to Tokyo where he inaugurated the opening of the largest Chanel store in the world, Lagerfeld is turning the spotlight on his own brands. He is expected to announce today that he has sold the Karl Lagerfeld trademarks to Tommy Hilfiger Corp., the $1.88 billion apparel firm, for an undisclosed amount of cash.

 The deal will allow Hilfiger’s firm to globally expand Lagerfeld Gallery, the women’s luxury ready-to-wear collection that encompasses the Karl Lagerfeld trademark, and the Lagerfeld brand women’s, men’s and accessories lines, which are licensed; add apparel and accessories categories, and open retail stores worldwide, according to sources close to the company. The transaction also includes the two Lagerfeld Gallery stores in Paris and Monaco.

 WWD has learned that Hilfiger has signed a five-year contract with Lagerfeld, who will design and provide creative direction for his brands. It reportedly includes automatic three-year renewals.

Neither Lagerfeld nor Hilfiger executives were available for comment Sunday.

Hilfiger intends to open a New York showroom for the Lagerfeld business, which will continue to be based in Paris and will operate as a separate company under the Hilfiger umbrella. The Lagerfeld business will reportedly be run by Hilfiger’s president of new business development. The acquisition fulfills Hilfiger’s desire to create a multibrand company with multichannel distribution, a strategy that has been set forth by David Dyer, chief executive officer of Hilfiger.

Hilfiger has been on the acquisition hunt for several years, having looked at Calvin Klein, Marc Ecko Enterprises and Rocawear. But the Lagerfeld deal comes at a difficult time for the company, which is being investigated by the U.S. Attorney’s office for its commission policies. The probe is still in its investigative stage and, while criminal in nature, no indictments have been issued against any individual or entity. Analysts have predicted Hilfiger could end up with more than $100 million in tax liability. Approximately 10 lawsuits have been filed against the firm and former and current employees have received grand jury subpoenas.

The investigation is not expected to impinge on the Lagerfeld deal, which is slated to close within in the next 30 days, said sources.

 Arguably one of the most prolific and talented designers in the world, Lagerfeld designs eight collections a year for Chanel, Fendi and his own Lagerfeld Gallery, and how he does it remains one of fashion’s biggest mysteries. The Hilfiger deal is unrelated to Lagerfeld’s contacts with Chanel and Fendi. Lagerfeld’s employment contract with Chanel — where he’s been designing for 22 years — is said to be indefinite and for millions of dollars a year. Chanel’s fashions and fragrances are believed to generate revenues of more than $2 billion a year.

Because of his commitments in fashion and photography, Lagerfeld hasn’t devoted as much time as he might have liked to building his own trademarks, and equally important, developing the kind of lucrative licensees critical to building a megabrand.

Despite the fact that he doesn’t have a thriving global business under his own nameplate, two events this fall gave testament to Lagerfeld’s worldwide popularity. His designs for H&M were a hit and initial deliveries virtually sold out on the first day at many of the 500 doors that carried the line. And during his visit to Tokyo to open Chanel’s largest store in the world a little over a week ago, Lagerfeld was treated like a rock star and was mobbed with fans — many of whom waited for 10 hours to see him. “I don’t know how they are so well-informed. What is quite flattering for a man my age, the public is quite young,” Lagerfeld said of the Tokyo mayhem.

In recent years, Lagerfeld has sharpened his Lagerfeld Gallery line, which he launched in 1999, infusing it with a clear identity and a more personal sensibility, rather than jumping on fickle trends. While its volume remains small, the line has received good reviews from the press and stores such as Neiman Marcus and Jeffreys.

Reviewing the spring 2005 Lagerfeld Gallery show, WWD called it “a smart sassy collection” and referred to the A-line wrap skirts flapping over fluffy underskirts as “fresh looking tailoring, and it turns out, a sensible take on the volume that’s amping up all over Paris.” WWD referred to his spring 2003 collection as “feminine, but not overtly. It’s a little stark, but hardly bleak. And it converts sex appeal into wearable clothes.”

Just last week, Lagerfeld said he’d like to stage a fashion show during New York’s Fashion Week in February for Lagerfeld Gallery.

Lagerfeld already has women’s, men’s and accessories lines under the Lagerfeld name, but those licensees couldn’t be learned at press time. They will become part of the acquisition, said sources.

Lagerfeld opened his first Lagerfeld Gallery store in Paris on Rue de Seine in 1998, which he financed with earnings from licenses. “I have my Chanel and Fendi incomes to live off, but I can play with my royalties,” said Lagerfeld in 1998. In 2001, Lagerfeld opened a 1,000-square-foot Lagerfeld Gallery store in Monaco, which carries Lagerfeld Gallery women’s rtw and accessories as well as Lagerfeld’s women’s and men’s fragrances. (It couldn’t be learned at press time whether Lagerfeld fragrances are part of the deal.)  The shops also stock magazines and books from his 7L publishing venture.

Over the years, Lagerfeld has made numerous attempts at developing a less expensive rtw line, but with little success. He had a licensing deal with Bidermann Industries U.S.A. for Karl Lagerfeld women’s wear and KL by Karl Lagerfeld sportswear in the Eighties, which never really took off and ended in January 1987. That same year, he signed with the West German apparel firm Klaus Steilmann GmbH & Co. to manufacture his KL by Karl Lagerfeld sportswear collection, and that deal lasted eight years. In 1995, Lagerfeld signed a five-year agreement with Italy’s Selene SpA for a signature collection, but there were problems with production and delivery. The agreement was discontinued in 1997, the year Lagerfeld bought his name and company back from the former Vendome division of Compagnie Financière Richemont SA for a symbolic franc. He then signed a line with an undisclosed Italian company — which many believed to be the firm that produced Fendi rtw — for a signature business, Lagerfeld, for spring 2001.

Despite the small size of Lagerfeld’s businesses, they would appear to perfectly fit the type of acquisition for which Hilfiger has been searching. Among them would be that the purchase would be able “to generate free cash flow within a reasonable period of time,” said Joseph Scirocco, chief financial officer of Hilfiger, during a presentation to analysts in September. According to Scirocco, the company was setting its sights on businesses where it could “roll the brands out” through licensing opportunities at the international level, as well as at retail. The company has also been interested in brands that have the potential for diffusion lines and generating e-commerce sales, he said.

 As of Sept. 30, Hilfiger had cash and cash equivalents totaling $364 million, versus $250.7 million a year ago.

 Because of the U.S. Attorney probe, Hilfiger’s market capitalization has dropped by $300 million, and undoubtedly it has been a distraction for the company as it tries to restore its fortunes. The firm, which has been cooperating with the investigation, has hired former Manhattan U.S. Attorney Mary Jo White as legal counsel. She is currently a partner at the law firm, Debevoise & Plimpton. The company has also had some major executive reshuffling in recent months. Following the departure of Joel Newman, executive vice president for finance and operations, came the appointment of Bob Rosenblatt as chief operating officer, as well as group president and chief operating officer of the Hilfiger USA subsidiary. The company also promoted Lynn Shanahan to the new post of group president of its U.S. subsidiary’s wholesale business. In addition, last week, James P. Reilly, vice president and corporate controller, resigned.

 Hilfiger has been in the midst of trying to turn around its struggling women’s and men’s sportswear business for several years. In the most recent quarter ended Sept. 30, Hilfiger’s revenues slid 2.2 percent to $536.1 million, compared with $547.9 million in the year-ago quarter. The company earned pretax income of $69.3 million, down 14.4 percent from $81 million a year ago. It attributed its sales decline to lackluster back-to-school and early fall seasons, as well as continued economic weakness. However, the European business continued to be a bright spot, where net revenue increased by 28.3 percent to $195.6 million, compared with $152.5 million a year ago.

The company has said it believes the turnaround of the U.S. wholesale business will be delayed beyond fiscal 2005. It expects fiscal 2005 revenues to decline in the high single digit percentage range as compared with fiscal 2004. Within the wholesale segment, Hilfiger anticipates declines in the men’s wear, women’s wear (including U.S. junior jeans) and children’s wear divisions.

Lagerfeld had a golden opportunity to dabble in the mass market this year with the H&M collaboration and played it to the hilt, using his likeness in the clothing’s graphics and photographing the ad campaign, in which he also appeared. While enormously successful, Lagerfeld was disappointed that the small quantities of wearable basics that H&M produced meant racks went bare within minutes, leaving some customers frustrated and empty-handed. He told WWD last month he would not extend his deal with H&M, as it was conceived as a one-time event — and he prefers to move on to the next thing.

But the success of that collaboration has reportedly convinced the Hilfiger executives that a lower-priced Lagerfeld line could be enormously popular, and that may be one of the strategies it takes with the Lagerfeld trademark.

Lagerfeld spoke recently about his penchant for designing clothes with mass appeal. In an interview in September, he said he applied his full-strength design sensibility to the H&M project and based his 30-piece collection for women and men on his Lagerfeld Gallery concept and his personal penchant for sleek tailoring, white shirts and touches of hardware. “The work process is the same for expensive clothes or inexpensive clothes,” he said in a WWD interview. “I thought it should be a strong graphic statement. There’s hardly any color. They’re very simple, basic items, but ones I think are right for modern life.”

Priced from $19.90 for a T-shirt up to $149 for a wool-cashmere coat, the Lagerfeld for H&M line ranged from women’s and men’s wear to fragrance and accessories. Lagerfeld’s chic jersey skirts, narrow-sleeved jackets and tuxedo shirts were sold in only about half the company’s 1,000 doors, to give the line a more exclusive cachet.

“[H&M] is a fashion phenomenon and I like to be a part of those things,” said Lagerfeld in an earlier interview. “It’s part of my job. It’s the modern thing to do. Also, I like the idea of my name being used on a broad scale.”

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