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H Hilfiger to Leave Dept. Stores

Tommy Hilfiger Corp. reported a 58.6 percent drop in third-quarter pretax earnings, citing promotional sales and legal fees from a government probe.

NEW YORK — After launching with much fanfare, including fashion shows and ads featuring David Bowie and Iman, H Hilfiger is retreating from department stores.

Tommy Hilfiger Corp. said Wednesday it would stop delivering the better line to department stores for fall and move the collection into a new specialty store concept the firm is developing that could be tested as early as October.

“This will allow us to have greater control over product and presentation,” said David Dyer, president and chief executive officer, on a conference call Wednesday morning, noting the line has performed better in the company’s own stores.

To help fill the void left by H in department stores, the firm will reintroduce its Tommy Hilfiger Crest collections for women and men.

The Hong Kong-based firm also reported a 58.6 percent drop in third-quarter pretax earnings due to higher-than-anticipated promotional sales, legal fees related to a government investigation into the firm’s commission policies and the closure of a Secaucus, N.J., facility.

Other vendors, such as Jones Apparel Group and Kellwood Co., also said higher-than-anticipated holiday promotions hurt their businesses.

Hilfiger’s pretax income for the third quarter ended Dec. 31 fell to $12.6 million from $30.4 million a year ago. Exclusive of special items in both quarters, pretax income dropped 40.8 percent to $19.9 million from $33.6 million.

Revenues for the three months dipped 5 percent to $427.9 million from $450.6 million.

As with the second quarter, Hilfiger did not report net income pending an investigation by the firm’s board into its commission policies and related tax matters. The issue first came to light in September, when the company said it was under investigation by the U.S. Attorney’s Office in Manhattan. Subpoenas were issued to former and current executives and the company seeking documents from as far back as 1990. A slate of shareholder lawsuits seeking class-action status was filed against the firm shortly thereafter.

Charges for legal and advisory fees related to the investigation reduced the quarter’s pretax income by $6.6 million.

H, which is sold in about 120 department stores and two of Hilfiger’s own stores, will be tested with a new specialty store concept. The brand was initially developed for Hilfiger’s own stores, but was launched into the department store channel last spring exclusively at Federated Department Stores. As the brand was being unfurled, Tommy Hilfiger personally led a traveling fashion show that made stops at six Federated stores across the country to raise brand awareness as part of a $10 million marketing campaign.

“The plan is, over the next year, to test somewhere between five and 10 stores in multiple concepts,” said Dyer on Wednesday. “H is one of the concepts that we will test.” The concepts include mall-based stores as well as street and strip center locations.

While developing stores, Dyer said he would avoid the pitfalls the company fell into prior to his arrival 18 months ago. In the company’s previous efforts, too much was spent on building stores, while the real estate chosen wasn’t very good and the product wasn’t differentiated from what was being sold in the department stores, said Dyer.

“We are going to be very passionate about not only being in the right mall, but the right space in the mall, and if it is not available, we won’t go into it,” he said.

H launched into the department store world last spring along with a slate of other new and relaunched names, including Lauren by Ralph Lauren and Jones New York Signature.

The setback for H comes at a difficult time for Hilfiger’s troubled wholesale business.

“Our number-one strategic priority remains the improvement of the U.S. wholesale business, beginning, of course, with the improvement in our product assortment,” said Dyer.

During the quarter, wholesale sales fell 19 percent to $242.7 million. European wholesale sales increased by 33.2 percent to $61 million, an advance that was offset by a 30.8 percent drop in the U.S. to $165.3 million.

Wholesale women’s sales fell 15.5 percent to $107.5 million, while men’s sales slid 14.8 percent to $100.6 million and children’s dropped 36.4 percent to $34.6 million.

To help implement the turnaround of the wholesale business, the company reorganized so that the women’s, men’s and children’s divisions each would have dedicated staffs to cover areas such as production, sales and marketing. The divisional presidents report to Lynn Shanahan, who was named group president of U.S. wholesale and licensing in December.

Shanahan, who Dyer described as “100 percent responsible” for the U.S. department store business, said the brand’s offerings would go back to their roots for fall after having too much fashion-forward product.

“The fashion that is offered this fall is much more understandable and easily mixed with the core and core plus [offerings],” she said.

Hilfiger’s retail segment, which consists of 198 stores worldwide — 158 outlet and 40 specialty locations — managed to hit a positive note for the quarter. Revenues increased 21.8 percent to $165.6 million while the store count increased by 28 compared with a year ago.

Licensing revenue also rose 31.3 percent to $19.7 million.

For the full year, Hilfiger expects to register pretax special charges of $40 million for legal and advisory fees related to the investigation; the transition of H; the closure of the U.S. young men’s division; the restructuring of the U.S. wholesale division, which eliminated 200 positions, and the consolidation of the company’s facilities.