TOMMY HILFIGER STOCK CONTINUES ITS DECLINE

Byline: Vicki M. Young

NEW YORK — Shares of Tommy Hilfiger Corp. have dropped 32 percent from their high of $17.25 earlier this year, and there are indications that the firm may encounter increased business pressures in the months ahead.
According to analysts, the risks are fashion content, a rapid store opening pace and limited growth in department stores, as well as the potential for further trimming in open-to-buy dollars.
While there may be some challenges on the horizon, the women’s sector is perceived by many analysts to be building momentum.
Jeffrey Edelman, apparel analyst at UBS Warburg, initiated coverage of Hilfiger last month with a “hold” rating. He wrote in a research note at the time: “This was one of the better success stories of the 1990s as the company was in the right place at the right time and leveraged its brand popularity.” However, Hilfiger’s three largest retail customers accounted for 56 percent of sales, with Dillard’s number one at 22 percent. He concluded: “In retrospect, it was overkill. The market was saturated.” Moreover, while the product line became overassorted as Hilfiger tried to meet demand for new merchandise, the “consumer was losing interest.”
Edelman observed that as the company shifts from fashion toward more classic and basic, there is potential risk that the “product offerings could look more similar and less differentiated” from other brands that are moving in the same direction.
As reported first in these columns on March 26, Hilfiger’s men’s wear was an early casualty of a reconfiguration of Bloomingdale’s brand strategy. Men’s jeanswear and sportswear will be out of all Bloomingdale’s stores except the 59th Street location, which will continue to stock Hilfiger’s sportswear for men. The women’s and children’s lines will remain in all Bloomingdale’s locations.
According to another source, the men’s wear business “is not turning around. The penetration of Tommy Jeans for men has dropped to 28 percent from 34 percent in one of Hilfiger’s key department-store customers in the Middle Atlantic region, which operates multiple units under different trade names.”
The source also was cautious about the junior business, noting that, in one store, it’s up in the mid-single digits but operating off less inventory, “which is good for the retailer but not good for Hilfiger’s wholesale business. The junior business looks as if it’s getting better, but a comparison with 2000 numbers is not a good one to make.”
Citing observance of a quiet period prior to its next earnings report, executives at Hilfiger declined comment. Hilfiger will release fourth-quarter and fiscal-year earnings results on May 24.
As for the retail expansion, Christine Kilton-Augustine of ING Barings pointed out: “There’s potentially a bigger strain on management at a time in their process of turning around the wholesale business. I agree with them philosophically. They need to diversify away from the department stores, but there’s definitely some risk ahead.”
Hilfiger’s retail expansion has been concentrated on its outlet stores, run as a separate business that’s considered profitable. The company plans to open 25 new full-price stores over the next 12 months, adding to the current count of 10 units. Sportswear concepts are expected to represent two-thirds of the new store base, with the remainder having a jeans-oriented format.
“The company’s goal is to provide an ideal shopping environment for the customer, complementing its existing distribution. This sounds good in theory, but, in our view, it is an ambitious undertaking given management’s limited experience with these newer formats. It could raise Tommy Hilfiger’s risk profile,” UBS Warburg’s Edelman wrote.
Dennis Rosenberg, equity analyst at Credit Suisse First Boston, observed that Hilfiger has been losing share to Nautica, which entered the jeans business 1 1/2 years ago, as well as Polo and a proliferation of urban brands. “Investors fear that the weak men’s sportswear and jeans sales will cause a fourth-quarter earnings shortfall, an inventory issue and increased markdowns,” he said.
Rosenberg was the first to upgrade the stock last July to “buy” from “hold,” and again in November to a “strong buy.” He’s still bullish about the company’s fundamentals.
According to Thursday’s research note, Rosenberg’s fourth-quarter estimate is 33 cents. Excluding a restructuring charge, the year-ago quarter’s earnings per share was 37 cents. Rosenberg wrote: “We believe the market has overreacted to what we estimate is only a moderate risk.” Men’s sportswear and jeans inventories at both wholesale and retail have been kept in balance, with markdowns substantially less than a year ago, he concluded. In addition, women’s and junior sales “remain strong.”
Men’s and women’s categories are 36 percent and 24 percent, respectively, of Hilfiger’s total volume for the last several years. However, a few analysts cautioned that declines might be forthcoming in fiscal 2002, should retailers decide to further trim open-to-buy dollars if the economy shows additional signs of weakening.
Shares of Hilfiger’s stock closed Friday at $11.70, up 88 cents, in New York Stock Exchange trading. They reached their 52-week high of $17.25 on Feb. 2.

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