By and  on October 26, 2007

Changing the landscape of big brands and department stores, Macy's Inc. will be the exclusive retailer of Tommy Hilfiger sportswear in the U.S. beginning next fall.

The firms disclosed Thursday that all Macy's store divisions across the country will sell Hilfiger with the exception of Bloomingdale's, which sells only Hilfiger men's wear in a leased department of its 59th Street flagship in Manhattan.

Macy's stores already sell Hilfiger men's, women's, accessories and home products, but the new arrangement means Hilfiger will phase out its sportswear distribution to other department stores during the next several months as Macy's builds up its Hilfiger assortments and works with the designer on brand extensions and improvements of in-store presentations, including rebuilding and relocating shops to high-traffic spots.

Tommy Hilfiger will continue to operate its own freestanding stores and sell online at tommy.com. All product distributed through Hilfiger's licensees, including home, footwear, accessories, watches and fragrances, will continue to be sold on a nonexclusive basis to Macy's and other retailers.

The exclusive agreement could solve strategic problems for both companies, potentially revving up sales at Macy's, which recently have been tepid, and strengthening the Hilfiger brand. The label has experienced greater acceptance in Europe, where Hilfiger offers more upscale products, and the company is eager to rebuild in the U.S., where stores have cut back on the brand. It is possible that the new Macy's agenda will bring to the U.S. some higher-grade product, comparable with what Hilfiger sells in Europe.

The strategy reflects Macy's drive for exclusives or products with limited distribution, which Terry Lundgren, Macy's chairman, chief executive officer and president, said has grown to represent about one-third of the $27 billion in revenues Macy's generated last year.

Lundgren said other designers have come forward with similar proposals, but he is reluctant to move forward with them. None are as big as Hilfiger. "This is a gigantic business for us," he said.

Asked if Macy's is targeting a percentage of revenues for exclusives, Lundgren said: "We don't have a specific number. We always let the customer decide."

Market sources said Hilfiger does about $250 million in sales at Macy's. Lundgren would not comment on the volume, but he said Hilfiger could become the retailer's largest exclusive brand, with the possible exception of the Martha Stewart Collection, which he said is growing at a rapid pace. "This is a great example of trying to expand the uniqueness of the Macy's offering and put it in overdrive with Tommy."Although Hilfiger has had its ups and downs, particularly in women's, Lundgren said the brand is getting back on track. "It's been quietly gaining traction while we have been talking to each other," he said. "Men's has always been solid. Women's has been soft for awhile, but with the last three deliveries the brand has been coming on strong. We feel great about the timing and we are fired up and ready to make this another big unique brand success. I think they have been working really hard at product and we are really looking to reinvent the sportswear space in our stores."

Asked if there will be a trading up of Hilfiger with higher prices, Lundgren said: "We want to make sure we are still focused on the core Macy's customers, and while we are absolutely positive that the brand could command higher price points and higher quality and more detail in the products, we also want this to be a very big brand, and a great value to the customers....It has the potential to become a significant lifestyle brand inside our company. We got a lot of feedback from our commercial," which includes an appearance by Hilfiger.

"I don't think we could have done this deal without the May Co. acquisition,'' Lundgren said. "Now we are big enough to make this worthwhile for Tommy and Macy's. It wouldn't have been possible without the scale of Macy's."

The $17 billion acquisition of May Co. was completed in August 2005. Integration difficulties have forced Macy's to cut its outlook for the second half and full year.

Hilfiger said he was "very excited'' by the deal.

"I'd rather be in one store group in a very successful, powerful way than in a number of stores without the strength, position and support that Macy's is providing," he said.

Hilfiger, the firm's principal designer, said the company will end relationships with its current roster of sportswear accounts, which include Dillard's, Belk, Bon-Ton and Carson Pirie Scott.

"For 20 years, Macy's has been our largest account,'' he explained. "We have built homes in most Macy's doors in men's, women's and children's. They've been home to all our licensed products. When Macy's took over May Co., we did big business with May Co., as well. Our business, which had been soft for a few years, started coming back with Macy's, and they've been very supportive. I believe strongly in Terry's vision and believe he's masterminding a great philosophy."Hilfiger added that Macy's will continue to develop in-store shops for women's, men's, children's and jeans. Children's wear, which had been halted in the U.S. at Hilfiger, will start up again, using some of the more upscale European children's line, he said.

The Macy's-Hilfiger deal also calls for a major ad campaign, marketing initiatives and the development of new products exclusively for Macy's.

Hilfiger is owned by the private equity firm Apax Partners, which is said to be mulling an initial public offering of Hilfiger that could value the company at as much as $3 billion. Hilfiger declined to comment on whether the Macy's move signals that the company is shoring up its U.S. business for an eventual IPO. "I have no comment on the IPO rumors," he said.

Apax Partners has retained Credit Suisse and Citigroup to study a European float of the business, possibly in London.

Private equity firms typically seek to sell or float a company within three to five years of buying it. Apax bought Hilfiger in May 2006. While a Hilfiger IPO could happen, investors stressed that even though Apax might be asking banks to bid for the business, that doesn't mean an offering is imminent.

London-based investors have said a listing could not realistically take place before six months, as time was needed to evaluate pitches, fix bankers' fees and prepare potential investors for a listing.

This is Macy's second go at an exclusive with Hilfiger. In spring 2004, Hilfiger launched H Hilfiger and sold it only to Macy's and Bloomingdale's. There was a huge, flashy marketing campaign featuring David Bowie and Iman, and the line was merchandised at 120 doors. But customers didn't take to it and H was pulled in February 2005. H Hilfiger was then planned for a freestanding specialty store concept, which never took off and was shut down in July 2006. Another failed attempt at restoring consumer credibility came in 2005 with a reality TV show, "The Cut,'' that starred Hilfiger. The program lasted one season on CBS.

Macy's continues to trumpet its exclusive and celebrity-branded merchandise, including the Martha Stewart Collection in home and Donald Trump's men's wear and fragrance, and is determined to further build the products it calls its very own. But the race for exclusives has been heating up throughout retailing, with J.C. Penney, Hennes & Mauritz, Kohl's, Lord & Taylor, Target and Macy's among the most aggressive. For spring 2008, Hilfiger succeeded in instilling a refined and clearer message on his women's collection.Hilfiger is also among the celebrities who appear in Macy's fall and holiday ads. The new holiday spot, created in collaboration with JWT New York, will be online at macys.com/star beginning Sunday, and will break on national television on Nov. 4. The spots include Sean "Diddy" Combs, Jessica Simpson, Martha Stewart, Usher, Donald Trump, Kenneth Cole, Marc Ecko, Kimora Lee Simmons and Russell Simmons as well as Hilfiger.

— With contributions from Julee Greenberg

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