HILFIGER BEATS ESTIMATES, BUT STOCK SLIPS
Byline: Catherine Curan / Thomas J. Ryan
NEW YORK — Powered by fatter royalty income from women’s and fragrances lines, robust children’s wear sales and tight cost controls, Tommy Hilfiger Corp. bested Wall Street forecasts again, with a 22.9 percent earnings gain in the fourth quarter.
Despite the solid report, shares of Hilfiger fell 4 1/6 to 64 1/4 Friday on the New York Stock Exchange, apparently due to worries over weak backlogs in its core men’s wear lines. There also appeared to be concern over lower gross margins and higher inventories and receivables.
In the quarter ended March 31, Hilfiger’s earnings jumped to $27.4 million, or 73 cents a share, from $22.3 million, or 59 cents, last year, and were well ahead of Wall Street’s average estimate of 68 cents. Revenues climbed 18.9 percent to $202.7 million from $170.5 million.
Discussing the stock hit, Josie Esquivel, at Morgan Stanley Dean Witter, attributed the weakness to what she called a “somewhat nebulous” conference call conducted by management early Friday with the Wall Street community. Many analysts expressed frustration over Hilfiger management’s lack of clear-cut answers to the problems considered responsible for the stock decline, but most reaffirmed their faith in Hilfiger’s growth prospects.
“We strongly believe the fundamentals for the overall business remains very strong,” said Esquivel.
Smith Barney’s Faye Landes said, “There is no doubt that men’s is clearly a fairly mature business and the deceleration in growth rate there has been pretty sharp, but I think this company has managed to build a global brand and has proved an ability to expand into other areas.”
Most analysts pointed to huge growth potential in jeans and women’s, as well as licensed lines such as fragrances.
The concern, however, appears to be the core men’s wear collection, where sales gained 6.5 percent to $113.2 million in the quarter.
Children’s wear sales vaulted 59.7 percent to $38 million in the period, and sales at company-owned stores advanced 19.6 percent to $34.1 million.
Royalty income from licenses jumped 41.7 percent to $17 million, led by strength in Tommy Jeans and its women’s lines, and continued growth in fragrances and international stores.
As reported, Hilfiger on May 8 acquired Pepe Jeans, which makes Tommy Jeans and women’s lines, as well as Tommy Hilfiger Canada, its Canadian distribution arm, for $756 million in cash and 9 million shares of Hilfiger. The quarter included only licensing income from Pepe and the Canadian business, both of which were owned by the four founding partners of Hilfiger, including the designer.
Total wholesale backlog, which includes men’s wear and the newer children’s wear lines, was up only 7.1 percent to $303.1 million, and many analysts suspected that since children’s wear is on fire, men’s wear backlog was running down.
Esquivel said she believes men’s wear backlog is flat, and pointed out that the area was expected to start showing slower growth, considering that the line is in 2,000-plus department stores, in 1,200 in-store shops with 1.2 million square feet of selling space. “It stands to reason that growth must come from new businesses,” Esquivel said.
Allison Malkin, at SBC Warburg Dillon Read, said she heard Tommy’s core men’s business had improved, and was up 6 percent at retail in the current quarter, driven by better sell-throughs. However, she also noted it’s more mature business.
“I don’t think Tommy’s men’s business will be all that great this year. What will move the stock is the acquisition of Pepe Jeans and the women’s business, the entry into juniors and girls’ wear, and the licensed areas,” Malkin said. “There’s nothing wrong with the brand.”
However, Margaret M. Mager, at Goldman Sachs, said the success of Tommy Jeans could be cannibalizing sales of the core Hilfiger lines, noting both lines appeal to a young customer.
By comparison, she said Polo Ralph Lauren’s core men’s wear lines appear to be feeling less impact from the expansion of Polo Jeans, and she suspects this is because Polo’s core men’s line appeals to an older customer.
Malkin said Hilfiger’s management indicated core men’s wear sales would be flat in the first half of the fiscal year, but she believes the growth potential in Tommy Jeans and its women’s lines will more than make up for any softness in men’s wear.
“In reality, you have a very strong company that’s acquired some really great businesses, and you actually have a really strong outlook,” Malkin said.
Malkin expects Pepe will add $150 million to Hilfiger’s sales in the current quarter and $600 million in the full year.
The bottom line in the quarter particularly benefited from a reduction in selling, general and administrative expenses to 26.7 percent of sales from 29.2 percent, thanks to expense controls.
That more than offset an erosion in gross margins to 45.8 percent of sales from 47.8 percent, reflecting markdown pressures on the core men’s wear merchandise, which management said has abated.
Inventories at the end of the quarter were up 21.9 percent to $150.9 million from $123.8 million a year ago, but analysts said this partly reflected the early receipt of summer goods.
In the full year, earnings moved ahead 31 percent to $113.2 million, or $2.99 a share, from $86.4 million, or $2.28. Revenues rose 28 percent to $847.1 million from $661.7 million.
Men’s wear sales gained 13 percent to $455.1 million; children’s wear vaulted 79 percent to $132.8 million; retail sales added 31 percent to $196.1 million, and licensing income grew 87 percent to $63.1 million.
Joel J. Horowitz, chief executive officer, said in a statement that the acquisitions of Pepe and the Canadian operation “provides new avenues to accelerate revenue and earnings growth rates.”
Horowitz said the company employed several growth initiatives during the year, including separating its core men’s sportswear business into two segments — Flag and Crest — to build on its trademarked logos. The firm also last year launched Hilfiger Athletics in 260 department stores, and an infants’ and toddlers’ line in 550 doors. Tommy Athletic fragrance, produced under license with Estee Lauder’s Aramis division, bowed in the current quarter.
Horowitz called the opening of the company’s first flagship store on Rodeo Drive in Beverly Hills a “milestone,” noting it will be used primarily to heighten awareness of the brand.
The outlet store program, driven by store openings and increased real estate, continued to drive growth in the retail division, he said. Nine outlets were added this year to bring the total to 56. He noted that some outlets began carrying women’s casualwear.
Hilfiger also opened a store in London on Sloane Street, featuring the men’s sportswear collection. A new London flagship on New Bond Street is slated to open in the current fiscal year.
Men’s sportswear was launched in Europe through a licensing agreement with Pepe Jeans London and the Asia-Pacific region through a licensing agreement with KSDP International. The licensed women’s fragrance Tommy Girl made its debut in more than 30 countries.