NEW YORK — The long-term picture for the U.S. wholesale business at Tommy Hilfiger Corp. isn’t a pretty one.
Meanwhile, the chances of Hilfiger being acquired by Wal-Mart Stores Inc. no longer seems so far-fetched; one investment banker pegged them at “50-50.”
According to investment sources who have seen the company’s offering memorandum, Hilfiger is projecting that U.S. wholesale sales will drop by more than half, to just more than $400 million, by fiscal year 2009, from just under $900 million in fiscal year 2004.
Corporate earnings before interest, taxes, depreciation and amortization over that same period are expected to drop to around $7 million from nearly $40 million this year.
In 2004, EBITDA in the wholesale area — which is around a $1 billion business — was more than $100 million. This year, that figure drops tenfold, according to one insider who has seen the book.
Men’s wholesale volume, which was approximately $200 million in 2004, will drop by more than 50 percent to less than $100 million by the end of fiscal 2006. Women’s and children’s sales are also projected to fall and “young men’s disappears,” the insider said.
Wholesale sales are projected to grow, however, in Europe and Canada, along with the outlet business.
“Most books project growth, even if it’s not accountable,” said one investment banker familiar with the Hilfiger numbers. “I’ve never seen a book that projects down.”
Two weeks ago, the company released preliminary financial results because of an accounting restatement. For the fiscal year 2005 that ended in March, the firm said preliminary net income was $86 million, or 93 cents a diluted share. It added that it expects the restatements to reduce fiscal-year 2004 net income to $131 million from $132 million, and to increase the net loss for fiscal-year 2003 to $518 million from $513 million.
Hilfiger recently retained J.P. Morgan Chase to try to sell the company. Among those said to be interested is Wal-Mart, which is considering a bid. While Wal-Mart’s interest in the brand initially was greeted with skepticism, the investment banker said he now gives the world’s largest retailer a “50-50 chance,” and said it was likely Wal-Mart would work with someone else to purchase Hilfiger.
Fred Gehring, chief executive officer of Tommy Hilfiger Europe, had joined hedge fund Apax Partners this past summer in a possible bid for all of Hilfiger. There are differing views as to the state of that bid; some describe Gehring and Apax as the front-runners, while others say they may no longer be working together. Gehring, who was in Milan last Thursday to celebrate the official opening of the Hilfiger store there, declined to comment.
When asked if European sales could compensate for the expected drop in U.S. wholesale business, Tommy Hilfiger responded: “Europe and Asia are doing fantastic. We’re rebuilding America and there are signs of success as we become more focused. We’re no longer just a purely American brand. It’s all about retail in Europe, not wholesale, so we’re all over Holland and Germany, and are looking to open in Florence, Rome and Paris. Young people worldwide love preppie classic, but with an edge, and that’s what we’re giving them — great quality and great prices in Europe.”
Back in the U.S., Hilfiger is looking to the revival of its H Hilfiger label for future growth opportunities. The label was pulled this year from the 120 Federated Department Store doors where it was sold. It is being reinvented as a more high-end lifestyle label developed for Hilfiger’s own stores, with the eventual goal of becoming a 200-unit global chain. Company executives said this was the initial plan for the H brand before it switched gears and was launched exclusively with Federated in spring 2004.
Still, executives believe there is a lot of life left in the label. For several months, a new team has been working on the redesign of the product and the development of the three freestanding stores scheduled to open in the first quarter of next year. The first will be a 5,500-square-foot space in Tysons Corner in Vienna, Va., on Feb. 2, followed by North Park Center in Dallas later in February and Oak Brook Center in Chicago in March.
The company plans to open 10 to 12 H Hilfiger stores by the end of next year. The goal is 20 stores in three years, and down the road, 200 stores globally, said Michele Parsons, general merchandise manager for the brand.
The relaunch of H Hilfiger is a step toward more new business opportunities for Tommy Hilfiger Corp. The $1.8 billion firm also plans to launch the Karl Lagerfeld contemporary men’s and women’s collections in February for fall 2006 retailing. Just last week, the 20-year-old company cut about 135 U.S.-based employees as part of its initiative to align the cost structure of its U.S. wholesale business. U.S. wholesale revenue for the first quarter dropped 29.4 percent to $115 million from $163 million in the year-ago period.
— With contributions by Julee Greenberg, New York, and Courtney Colavita and Amanda Kaiser, Milan