NEW YORK — The debt ratings for Tommy Hilfiger USA Inc. Friday were cut to junk status by Standard & Poor’s Ratings Service.
This story first appeared in the January 12, 2004 issue of WWD. Subscribe Today.
The agency lowered the corporate credit and senior unsecured debt ratings on Tommy Hilfiger USA Inc. to a non-investment grade rating of “BB-plus” from “BBB-minus.” About $351 million in long-term debt was outstanding at the company as of Sept. 30. The outlook remains “stable.”
S&P credit analyst Susan Ding wrote that the change “reflects the company’s vulnerability to changing consumer preferences in the better-priced segment of the apparel industry and its overall customer concentration, as well as difficult industry conditions. The ratings are supported by the company’s strong brand name, moderate financial policy, and solid liquidity position. The revised ratings provide room for small- to medium-size debt-financed acquisitions.”
She noted that the company “is suffering from lackluster revenue performance and the weakening of operating results and related financial measures.” The analyst wrote that the company’s announced intention to purchase another branded company “could” lead to more aggressive financial policies.
As reported, the firm was put on CreditWatch, with negative implications in mid-November after it disclosed that it was in discussions with Dillard’s Inc., its largest customer, about reducing its sales to the Little Rock, Ark.-based department store chain. With the downgrade, the firm is no longer on CreditWatch and it hasn’t disclosed the status of its talks with Dillard’s.
Tommy Hilfiger products are distributed primarily in a concentrated group of department stores, including Dillard’s, Federated Department Stores Inc. and May Department Stores Co. Sales to those customers historically have been more than 50 percent of wholesale revenue, and customer concentration in a channel that is experiencing weakness continues to be a rating concern, Ding noted, adding that Tommy Hilfiger is still one of the top men’s brands in the better-priced category and continues to invest heavily to maintain the brand’s image at the retail level.
S&P noted that, having maintained “significant” cash balances, the company’s liquidity should remain satisfactory. As of Sept. 30, it had $251 million in cash and cash equivalents. In addition, the apparel firm’s $300 million unsecured facility includes a sub-limit of $175 million available for direct borrowings. The facility, which matures in July 2005 and does not contain ratings triggers, is guaranteed by Tommy Hilfiger Corp. Ding noted that Tommy Hilfiger Corp., of which TH USA is a subsidiary, was in compliance with covenants, such as a minimum net worth requirement and a maximum leverage ration, as of September 2003.
The analyst said the company’s 2001 purchase of its European license has been beneficial, providing it with a platform for sales growth, while at the same time reducing its dependence on the U.S. business.
What has hurt Tommy has been “weaker economic conditions and higher levels of inventory closeouts during the past few years,” which have impacted operating margins. Before nonrecurring charges, operating margins for the fiscal year ended Mar. 31, 2003 were 16.2 percent, which is well below the high of 23.7 percent of fiscal 1999. However, the apparel firm’s solid operating cash flow adequately funds its capital spending needs, the analyst noted.
With TH USA off CreditWatch, Ding said S&P will continue to “monitor the firm’s strategy to revitalize sales by expanding its women’s business and European operations, reducing overdistribution in the U.S. department stores [including Dillard’s], and diversifying beyond the Tommy Hilfiger brand name.”
Also downgraded Friday were shelf registration ratings for TH USA, which were lowered to “BB-plus” from “BBB-minus.”
Shares of Tommy Hilfiger Corp. fell 38 cents, or 2.6 percent, to $14.12 in trading Friday on the New York Stock Exchange.
The company is scheduled to report third-quarter earnings results on Feb. 4.