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(excerpt from nytimes.com
Dressing Down Tommy Hilfiger
Published: December 26, 2004
The company said in September that a federal grand jury was investigating whether it had evaded taxes by inflating the commissions that its American unit had paid to a foreign subsidiary for services like quality control and product development as far back as 1990.
IN a rare interview, Mr. Hilfiger last week declined to comment on the investigation or the lawsuits. Tommy's chief executive, David F. Dyer, has said it would "vigorously" fight the shareholders' lawsuits and was cooperating with the federal grand jury. Mr. Dyer also refused to answer specific questions on the investigation, referring a reporter to prior company statements. Asked whether the legal problems were proving a distraction, Mr. Dyer said "it certainly was at the beginning" but was less of one now. Mr. Hilfiger said simply, "That's what lawyers are for."
Although Mr. Hilfiger, 53, acknowledged last week that the business "had hit a plateau, and was going down" two years ago, he insisted that it was now coming back. His H line of men's and women's suits, blazers and boldly striped shirts was not successful in department stores, he conceded, but it did sell well in the company's two stand-alone specialty stores in Manhattan's SoHo and a Westchester mall, so he said he would build more in well-heeled neighborhoods.
A "full bore" Web site is on the way, he said, along with an advertising campaign in the spring to herald Tommy's return to a reinvigorated style he called "preppy with a twist."
As part of the effort to turn itself around, the company bought Karl Lagerfeld's brand, Lagerfeld Gallery, for what an executive who discussed the deal with Mr. Hilfiger called a bargain-basement price of $30 million. Last week, Mr. Hilfiger said he planned to start another Lagerfeld-designed line - a less expensive one - perhaps in the coming year. (Mr. Dyer said on Wednesday that any "secondary" Lagerfeld line, tailored for stores like Sears and Kohl's, would not be ready until 2006.) And the company is still looking for other acquisitions, preferably in the hot contemporary business - Mr. Dyer named the Theory brand as a possible competitor in that marketplace.
Mr. Hilfiger, who received $18.3 million last year for his work as the company's honorary chairman and principal designer, said he would also reintroduce the leonine "Tommy crest" for next spring's Tommy Hilfiger line. "We've had the crest in remission for a few years," he said, pointing to an old color photograph in a book that chronicles the company's history. "We've brought it back, to great accolades from the buyers."
But last week, retail analysts were wondering if Mr. Lagerfeld, who is 70, wasn't overextending himself. Not only does Mr. Lagerfeld design his own collection - the label he is selling, along with his own services, to Tommy - but he also designs very influential haute couture and runway collections for Chanel, and the fur and ready-to-wear collections for Fendi. A few months ago, Mr. Lagerfeld rocked the fashion world by designing a moderately priced collection for Hennes & Mauritz - the Swedish mass-marketer better known as H&M - though the chief executive of H&M said it was a one-time collaboration.
MR. HILFIGER dismissed concerns that his new partner is stretched too thin. "We'll have our design team - under Karl's supervision, of course," he said.
Mr. Dyer said last week that, at least for the coming year, Mr. Lagerfeld's team would stay in Paris; a full New York design team might come later.
Even more worrisome than Mr. Lagerfeld's stamina, at least to analysts, is whether Mr. Hilfiger can fix what they called the core brand: the one with his own name on it.
Part of the problem is that Hilfiger has invested millions of dollars in his shops-within-shops, the Tommy Hilfiger boutiques in hundreds of midlevel department stores all over the country. Mr. Hilfiger said the brand became overdistributed, and that the company is cutting back on the number of those shops. In a report last month, Robert S. Drbul, an analyst for Lehman Brothers, forecast that Hilfiger's worldwide "wholesale" revenue - that is, sales to department stores - would fall another 16.6 percent this year. The decrease would be more than 20 percent in the United States, he added.
While he said that "a turnaround remains several quarters away," Mr. Drbul was optimistic about the company's eventual recovery - praising its performance in Europe, especially in Germany and Spain. He rated the stock "3-Underweight," the firm's lowest rating, yet advised his clients to be patient.
The stock has been on a roller coaster ride. When the company went public in 1993, it traded for the equivalent of $3.75 a share. It was split twice since its original offering. It peaked above $40 a share in 1999, but has slid back to close Thursday at $10.73. Revenue has grown from $139 million in 1993 to $1.9 billion last year, but has stalled. For the second quarter of fiscal 2005, the period ending Sept. 30, the company reported pretax income of $69.3 million, compared with $81 million in the same quarter the year before. The company did not provide net earnings, citing the investigation.
In a statement on Nov. 3, Mr. Dyer, looking toward the future, assured investors that "the company expects to cure any noncompliance in a timely fashion." If any settlement resulted in acceleration of its public debt, "the company expects to use its available cash and possible alternative financing sources to satisfy its obligations."
As of the end of September, he continued in the statement, Tommy had "cash, cash equivalents and short-term investments totaling $428.9 million, and total indebtedness of $343.2 million."
Analysts who cover the company have estimated that if the government finds that the company committed fraud, the tax liabilities alone might range from $120 million to $160 million. Penalties might be substantially more.
Last week, Emanuel Weintraub, who heads a consulting company that bears his name, said in an interview, "They can handle it," meaning any financial consequences. If the company has committed any wrongdoing, he added, "They should settle."
The Hilfiger company last year paid taxes at an effective consolidated tax rate of 22.3 percent. But competitors, including Ralph Lauren and Liz Claiborne, have reported that they paid closer to 35 percent during the same period. What Hilfiger is being investigated for - possibly paying inflated commissions through a Hong Kong subsidiary - would have certainly helped to lower its overall tax rate, tax experts said.
Tommy's travails are being closely followed in the garment industry, and some executives see parallels between Mr. Hilfiger and Martha Stewart. "Both are more about creating a lifestyle than about designing," said Mr. Abboud. But what the company is being investigated for could be more serious, he said. "It's really ramping up the ramifications for our industry." He paused. "Everybody's watching."
Dressing Down Tommy Hilfiger
Published: December 26, 2004
The company said in September that a federal grand jury was investigating whether it had evaded taxes by inflating the commissions that its American unit had paid to a foreign subsidiary for services like quality control and product development as far back as 1990.
IN a rare interview, Mr. Hilfiger last week declined to comment on the investigation or the lawsuits. Tommy's chief executive, David F. Dyer, has said it would "vigorously" fight the shareholders' lawsuits and was cooperating with the federal grand jury. Mr. Dyer also refused to answer specific questions on the investigation, referring a reporter to prior company statements. Asked whether the legal problems were proving a distraction, Mr. Dyer said "it certainly was at the beginning" but was less of one now. Mr. Hilfiger said simply, "That's what lawyers are for."
Although Mr. Hilfiger, 53, acknowledged last week that the business "had hit a plateau, and was going down" two years ago, he insisted that it was now coming back. His H line of men's and women's suits, blazers and boldly striped shirts was not successful in department stores, he conceded, but it did sell well in the company's two stand-alone specialty stores in Manhattan's SoHo and a Westchester mall, so he said he would build more in well-heeled neighborhoods.
A "full bore" Web site is on the way, he said, along with an advertising campaign in the spring to herald Tommy's return to a reinvigorated style he called "preppy with a twist."
As part of the effort to turn itself around, the company bought Karl Lagerfeld's brand, Lagerfeld Gallery, for what an executive who discussed the deal with Mr. Hilfiger called a bargain-basement price of $30 million. Last week, Mr. Hilfiger said he planned to start another Lagerfeld-designed line - a less expensive one - perhaps in the coming year. (Mr. Dyer said on Wednesday that any "secondary" Lagerfeld line, tailored for stores like Sears and Kohl's, would not be ready until 2006.) And the company is still looking for other acquisitions, preferably in the hot contemporary business - Mr. Dyer named the Theory brand as a possible competitor in that marketplace.
Mr. Hilfiger, who received $18.3 million last year for his work as the company's honorary chairman and principal designer, said he would also reintroduce the leonine "Tommy crest" for next spring's Tommy Hilfiger line. "We've had the crest in remission for a few years," he said, pointing to an old color photograph in a book that chronicles the company's history. "We've brought it back, to great accolades from the buyers."
But last week, retail analysts were wondering if Mr. Lagerfeld, who is 70, wasn't overextending himself. Not only does Mr. Lagerfeld design his own collection - the label he is selling, along with his own services, to Tommy - but he also designs very influential haute couture and runway collections for Chanel, and the fur and ready-to-wear collections for Fendi. A few months ago, Mr. Lagerfeld rocked the fashion world by designing a moderately priced collection for Hennes & Mauritz - the Swedish mass-marketer better known as H&M - though the chief executive of H&M said it was a one-time collaboration.
MR. HILFIGER dismissed concerns that his new partner is stretched too thin. "We'll have our design team - under Karl's supervision, of course," he said.
Mr. Dyer said last week that, at least for the coming year, Mr. Lagerfeld's team would stay in Paris; a full New York design team might come later.
Even more worrisome than Mr. Lagerfeld's stamina, at least to analysts, is whether Mr. Hilfiger can fix what they called the core brand: the one with his own name on it.
Part of the problem is that Hilfiger has invested millions of dollars in his shops-within-shops, the Tommy Hilfiger boutiques in hundreds of midlevel department stores all over the country. Mr. Hilfiger said the brand became overdistributed, and that the company is cutting back on the number of those shops. In a report last month, Robert S. Drbul, an analyst for Lehman Brothers, forecast that Hilfiger's worldwide "wholesale" revenue - that is, sales to department stores - would fall another 16.6 percent this year. The decrease would be more than 20 percent in the United States, he added.
While he said that "a turnaround remains several quarters away," Mr. Drbul was optimistic about the company's eventual recovery - praising its performance in Europe, especially in Germany and Spain. He rated the stock "3-Underweight," the firm's lowest rating, yet advised his clients to be patient.
The stock has been on a roller coaster ride. When the company went public in 1993, it traded for the equivalent of $3.75 a share. It was split twice since its original offering. It peaked above $40 a share in 1999, but has slid back to close Thursday at $10.73. Revenue has grown from $139 million in 1993 to $1.9 billion last year, but has stalled. For the second quarter of fiscal 2005, the period ending Sept. 30, the company reported pretax income of $69.3 million, compared with $81 million in the same quarter the year before. The company did not provide net earnings, citing the investigation.
In a statement on Nov. 3, Mr. Dyer, looking toward the future, assured investors that "the company expects to cure any noncompliance in a timely fashion." If any settlement resulted in acceleration of its public debt, "the company expects to use its available cash and possible alternative financing sources to satisfy its obligations."
As of the end of September, he continued in the statement, Tommy had "cash, cash equivalents and short-term investments totaling $428.9 million, and total indebtedness of $343.2 million."
Analysts who cover the company have estimated that if the government finds that the company committed fraud, the tax liabilities alone might range from $120 million to $160 million. Penalties might be substantially more.
Last week, Emanuel Weintraub, who heads a consulting company that bears his name, said in an interview, "They can handle it," meaning any financial consequences. If the company has committed any wrongdoing, he added, "They should settle."
The Hilfiger company last year paid taxes at an effective consolidated tax rate of 22.3 percent. But competitors, including Ralph Lauren and Liz Claiborne, have reported that they paid closer to 35 percent during the same period. What Hilfiger is being investigated for - possibly paying inflated commissions through a Hong Kong subsidiary - would have certainly helped to lower its overall tax rate, tax experts said.
Tommy's travails are being closely followed in the garment industry, and some executives see parallels between Mr. Hilfiger and Martha Stewart. "Both are more about creating a lifestyle than about designing," said Mr. Abboud. But what the company is being investigated for could be more serious, he said. "It's really ramping up the ramifications for our industry." He paused. "Everybody's watching."
