Several Wall Street analysts downgraded the stock, saying that unknown details surrounding the inquiry by the U.S. Attorney’s office in Manhattan and uncertainty regarding its outcome will likely cloud the firm’s future. Shares fell by as much as 26 percent, to $9.75, before closing at $10.30, down $2.87 from Friday’s close. It was a new 52-week low.
Tommy Hilfiger U.S.A. said in a statement on Friday that it had received a grand jury subpoena for documents relating to the commission rate it paid to a non-U.S. subsidiary. Investigators are seeking documents dating to 1990, and the company is cooperating, the statement said. In addition, some current and several former employees also received subpoenas. Officials at Tommy Hilfiger on Monday declined further comment.
Tommy Hilfiger U.S.A. said that the commission rate was paid for services that included product development, sourcing, production scheduling and quality control functions, but didn’t elaborate.
Industry professionals, who spoke on condition of anonymity, told WWD that the typical arrangement in the industry is a rate of 5 to 8 percent of the cost of the unit sold by the factory, also known as FOB or “freight on board.” They said that intercompany transfers are typically part of a transfer pricing agreement between the sister firms.
Generally, a higher commission rate would lower profits for the firm making the payment, which has the consequence of reducing taxes owed. The receiving firm would see higher profits on its income statement and end up paying more tax, but the tax rate for operators in Asia also tends to be lower than here in the U.S.
Tommy Hilfiger Corp., based in Hong Kong, is seeking to restore sales and profits. Over the last three quarters, Hilfiger earnings have seesawed from profit to loss, while top-line results have been inconsistent. For the most recent quarter, ended June 30, the company reported a net loss of $7.6 million, compared with last year’s earnings of $17 million. Sales fell 10.5 percent to $328.6 million from $367.2 million.