Hilfiger Success Story Begins to Unravel

He dressed rappers and pinup boys and, in so doing, was the coolest of cool.

But when Tommy Hilfiger tried to dress women and kids and make cologne, the trail of red, white and blue fashion turned decidedly cold.

Tommy Hilfiger Corp. tried to appeal to urban teens, female sophisticates and preppy suburban kids all at the same time. “You had a core business that was maturing, and in order to sustain growth Tommy extended the brand into numerous different categories,” said retail analyst Todd Slater of Lazard Freres in New York.

On Friday, Hilfiger acknowledged that there are big problems with that strategy. The Hong Kong-based fashion house said that fiscal fourth-quarter profit will fall 30% to 40%, and that earnings will be lower in fiscal 2001 as well. Analysts had expected fourth-period profit to rise about 10%.

“You can’t grab the hip-hop kids, the white suburban kids, the middle-aged trendoids and the celebrity Oscar crowd all at the same time,” said Haysun Hahn, the director of trend forecasting group FutureMode Inc. in New York City. “It’s always the case with creative companies: Their strength becomes their weakness. His strength was to negotiate the urban look for the masses. Now that’s over-saturated.”

Friday’s earnings warning is the second this year for Hilfiger, whose shares peaked at $41.06 13 months ago, and investors didn’t take the news well. Hilfiger shares, already down 60% the last 12 months, hit a five-year low Friday of $9.19. It closed at $9.75, down $4.06, or 29%, in New York Stock Exchange trading.

Hilfiger said it plans to buy back as much as $150 million in stock, a move it hopes will bolster its sagging share price.

In February, when the first earnings warning was disclosed, Hilfiger said it would close its two flagship stores, the one in London and his white palace in Beverly Hills at Rodeo Drive and Santa Monica Boulevard.

Sales Drop Follows Explosive Growth

“It’s finished as a stock,” said John Hayes, an analyst at Independence Investment Associates, a John Hancock subsidiary, which had owned shares. “It’s going to take a long time for investors to return.”

The earnings hit, the company said, will come from a combination of lower sales, new store opening costs and e-commerce investments. The sales decline comes after five years of explosive growth, with an average annual gain of 48%.

“It’s very painful for us to be revising our numbers so soon after we gave you what we believed was good guidance,” said Joel Horowitz, Hilfiger’s president and chief executive, in a Friday conference call.

Several fashion companies have suffered during the last year, including Warnaco Group Inc., whose shares are down 57%, and Polo Ralph Lauren Corp., down 19%.

Hilfiger, which sells mainly through department stores, also is getting hurt as more shoppers turn to specialty chains, said analyst Leslie McCall at Brown Bros. Harriman, who cut her rating to long-term “neutral” from long-term “buy.”

The company has postponed plans for new product lines and hired designers to try to revive sales of its sportswear and plans to change how it presents its juniors clothing.

Hilfiger also hired Morgan Stanley Dean Witter in February for advice on acquisitions and ways to boost its stock.

The designer looked at several purchases and new businesses, including a brief but unsuccessful courtship of Calvin Klein Inc., but instead decided to buy back shares, Horowitz said. He ruled out a leveraged buyout of the company. Hilfiger had $400 million in cash at the end of December. Now, Hilfiger’s depressed stock could make it a takeover candidate, analysts said.

“Some of these companies beg for consolidation into single branded apparel companies,” Slater said. “Tommy was a great--and still is--a solid, strong brand, but it has probably outgrown itself. Brands cannot grow to the sky.”

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Tommy Warning

Tommy Hilfiger stock fell sharply Friday after the company said earnings will fall below expectations for the fourth quarter of fiscal 2000 and for the full year. The company’s sales and income had been showing steady growth, but its stock price has been falling for a year.

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Stock price quarterly closes and latest:

Friday: $9.75, down $4.06

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Sales in billions $1.64 billion

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Earnings in millions$173.7 million

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Sources: Bloomberg News, company reports

Researched by NONA YATES / Los Angeles Times