By  on December 6, 2005

Tommy Hilfiger probably never expected his 20th year in business to be so tumultuous.

After completing a deal to buy Karl Lagerfeld's business late last year, Hilfiger's $1.8 billion company went through arguably the most challenging year in its history.

The year was marked by the settlement of an 11-month U.S. Attorney's office investigation over commission prices; the continued deterioration of its U.S. wholesale business; J.P. Morgan being hired to find a buyer for the firm; a reality TV show called "The Cut" starring Tommy Hilfiger; an aggressive march on Europe; new Manhattan headquarters on West 26th Street, a mega-20th anniversary fashion show featuring more than 100 models and a lively video, and even overtures from Wal-Mart to buy the entire company.

The government investigation weighed heavily on the company. But once that headache was settled in August — with Hilfiger required to pay additional federal income taxes and interest of $18.1 million — the company could move forward. "Everyone's feeling very positive, and we're happy that it's over. It was a terrible distraction," said Hilfiger at the time.

But as soon as things calmed down, they quickly heated up when it was reported a week later that Hilfiger's company was for sale and that J. P. Morgan, working with Goldman Sachs, had been quietly shopping the firm around. And they were seeking a hefty price.

Sources said the asking price was at least $1.82 billion, but could go as high as $2.16 billion. About a month later, Wal-Mart Stores Inc. shockingly emerged as a potential suitor. Apparently, Wal-Mart initiated the idea and began due diligence. But Wal-Mart never submitted a bid, and Apax Partners, the investment firm that financed Phillips-Van Heusen's purchase of Calvin Klein Inc., emerged in the lead. Apax had teamed up with PVH and Gehring to buy the company, and sources indicated that the Apax-PVH-Gehring deal would bring in as much as $20 to $22 a share.

One thorny issue has always been Hilfiger's employment contract. Sources said it would most likely be bought out for $150 million. It's unclear whether Hilfiger would have a role in the acquired firm, or just collect a percentage on sales of Hilfiger merchandise, as per the terms of his current deal. That contract pays him between $14 million and $18 million a year.With his company in play, Hilfiger stressed his desire to stay on and keep designing. "I need excitement in my life. I thrive on it. I like change. I like doing something new and I like to have the opportunity to be creative. A lot of companies come and go," said Hilfiger in September. He insisted there's still a lot of steam left in the brand, which built its reputation on classics with a twist and a strong alliance with the music world. He said the brand "is alive and breathing and growing and it needs certain nurturing. It needs certain momentum."

Throughout the year, the U.S. wholesale business continued to remain the most challenged part of the Hilfiger operation. Wholesale volume, which was approximately $700 million last year, is half of what it was in 1999. Hilfiger restructured its design and production operations and its women's, men's and children's divisions, and closed its young men's division, resulting in a cost savings of $40 million and the loss of 200 jobs. In the fall, the company laid off an additional 135 U.S. employees as part of an initiative to align the cost structure of its wholesale business. U.S. wholesale volume is expected to decline 35 percent next year "from approximately $680 million in fiscal 2005," according to the company.

Despite problems on the domestic front, the international wholesale business continued to flourish. Hilfiger Europe, which has sales of about $532 million, expanded its wholesale business and opened stores in several cities, including Zurich, Vienna and Milan. Several dozen European stores are planned for 2006 in cities such as Paris and Florence. The brand opened a sprawling 16,145-square-foot retail and corporate complex in Milan in September, and plans 10 to 15 freestanding stores in Italy over the next five years.

The Far East also represents a huge opportunity and the Hilfiger group has been expanding aggressively in mainland China, opening 40 stores in 22 cities since 2002, along with 12 in Hong Kong since 1999. The stores are run in cooperation with Hong Kong's Dickson Group, which also manages Hilfiger's stores in Taiwan, Singapore and Malaysia. Hilfiger plans to increase its number of Beijing stores to 10 from the current two before the 2008 Olympics, and to double its Shanghai stores to 16 in time for the 2010 World Expo.Another development this year was changing the focus of H Hilfiger, which was pulled from 120 Federated Department Stores. The company decided to reformat the line as an upscale lifestyle collection exclusively for its own stores. The company plans to open 10 to 12 H Hilfiger stores by the end of 2006. The goal is 20 stores in three years, and down the road, a total of 200 globally.

Despite the turmoil at his company, Hilfiger was busy in the world of reality TV, as his show, "The Cut," aired weekly throughout the summer. Patterned after Donald Trump's "The Apprentice," the show got lukewarm reviews and wasn't renewed.

Lagerfeld, meanwhile, remained a bright spot. A capsule collection will be shipped to Neiman Marcus and Bergdorf Goodman in March, and the company plans to show a complete fall collection on the New York runways in February. The Karl Lagerfeld women's and men's lifestyle collection will be geared to contemporary departments and expects broader distribution for fall.

Looking ahead, Hilfiger said owning stores is the best way to showcase the brand. Should a new owner come in, he said, the additional capital will allow the company to open more freestanding stores and bring in new creative talent.

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