NEW YORK — Moody’s Investors Service downgraded its ratings on the corporate family and senior debt load of Tommy Hilfiger USA Inc. while also keeping the “ratings on review for possible further downgrade.”
Moody’s lowered its ratings on Tommy Hilfiger’s debt loads to “Ba2/(P)Ba2” from “Ba1/(P)Ba1.”
In the report on the fashion company, the ratings service said the downgrades “reflect the company’s weakening operating performance and debt metrics as derived from preliminary reports issued during 2005, which indicate that revenues and operating margin trends have been negative relative to prior periods.”
The ratings firm said the decline in operating margin could be a challenge for Tommy Hilfiger to reverse. Still, the ratings firm described Tommy Hilfiger’s liquidity as “satisfactory” and said the company is able to finance its working capital needs, which include money owed from Tommy Hilfiger’s U.S. tax liabilities settlements. Tommy Hilfiger USA is a subsidiary of Tommy Hilfiger Corp.
Late last month, Tommy Hilfiger said results for its fiscal year ended in March would come in softer than planned. Last week, the company said it was laying off 135 workers in response to declining U.S. wholesale sales. Moody’s noted in its report that following the downsizing, Tommy Hilfiger didn’t revise its earnings guidance, “indicating that onetime costs are expected to be offset by savings during the period.”
The rating firm said it estimates Tommy Hilfiger’s operating income to be flat in fiscal 2006, “after adjusting for estimated onetime costs included in operating income.”
The flat operating income “suggest that the [Tommy Hilfiger USA Inc.]’s U.S. retail strategy and European growth effort is not yet overcoming the loss of U.S. wholesale volume,” Moody’s said in its report.
To satisfy the ratings firm, Tommy Hilfiger would need to show that its growth in Europe is sustainable, and that its profitability can rise over 8 percent in the short term. The fashion firm would also need to redo its long-term financing agreements to get a better deal.
Shares of Tommy Hilfiger closed Monday up 0.23 percent to $17.80.