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Talking Tommy: Hilfiger Shares Fall as Wal-Mart Eyes Brand

Shares of Tommy Hilfiger Corp. and Wal-Mart both fell on the news that Wal-Mart Corp. was interested in possibly acquiring the brand.

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NEW YORK — Tommy Hilfiger Corp. shares took a see-saw ride Monday after reports Wal-Mart may be plotting an acquisition of the designer brand.

After initially sending Hilfiger shares up by as much as 3 percent, Wall Street sent them back down again and they closed at $16.91, down 8 cents, in trading on the New York Stock Exchange.

Shares of Wal-Mart, also trading on the Big Board, fell 9 cents to close at $43.11.

Both companies remained mum on Monday on the news that Wal-Mart was poised to begin due diligence on Hilfiger.

Acquiring Hilfiger would fit Wal-Mart's recent merchandise strategy. The retailer's chief executive officer, H. Lee Scott, has said the company can offer varying price points, from entry level to more upscale products. Acquiring Hilfiger would turn up Wal-Mart's fashion quotient and better position the discounter against chief rival Target Corp.

While the initial talks were centered on the Tommy Hilfiger brand, the expectation is that Karl Lagerfeld would be sold if Wal-Mart goes through with a bid. Tommy Hilfiger Corp. in December acquired the Karl Lagerfeld trademarks for an undisclosed amount of cash. The deal allows Hilfiger to globally expand Lagerfeld Gallery, the women's luxury ready-to-wear collection that encompasses the Karl Lagerfeld trademark, and the Lagerfeld brand women's, men's and accessories lines, which are licensed. In addition, Hilfiger has the option of adding apparel and accessories categories, as well as opening retail stores worldwide. The transaction also includes the two Lagerfeld Gallery stores in Paris and Monaco.

While news of a possible Hilfiger bid generated surprise within the industry, it would fit in with Wal-Mart's more aggressive attitude toward the apparel sector over the last year.

The change in Wal-Mart's merchandising focus is attributed to John Fleming, chief marketing officer, sources said. Fleming was promoted to the post in April, and before that was president and ceo of walmart.com. A standout on Fleming's résumé is a 19-year stint at Target, where he was senior vice president of fashion merchandising.

Several sell-side analysts, some who spoke on the condition of anonymity because of their respective firm's policies, believe that while a designer name such as Tommy Hilfiger would elevate Wal-Mart's apparel offerings, there was at least one reservation over how Wal-Mart would position the brand in light of the discounter's reputation for being the purveyor of goods at "everyday low prices."
"Wal-Mart needs content in apparel," one analyst said. "When the company talks of acquisitions, one thinks of Wal-Mart making international purchases to expand overseas. Adding Tommy sounds out of left field, but it's not impossible."

The analyst noted the discounter is known for growing brands internally, but has had a hard time creating the types of brands that drive traffic to the stores for its fashion offerings. The analyst added that buying an existing brand may be viewed as easier than the idea of continuing to build one from scratch.

"Wal-Mart is still working on George, but the problem there is not the fashion. The problem is the brand itself. George may have [resonated] with consumers overseas, but it doesn't mean anything in the U.S.," the analyst said.

George, popular in London, is the brand that Wal-Mart acquired when it bought Asda. A fashion contact, whose firm has worked with Wal-Mart on George-branded apparel, observed the name George "sounds good for a men's label, but I'm not sure how many women feel connected to something labeled as George on their clothes. That said, the fashion quality is very good."

George is one of the U.K's largest apparel brands, with sales of more than $1 billion a year in women's, men's and children's apparel and accessories. At one point Asda executives predicted George had the potential to become the world's largest single apparel brand as Wal-Mart rolled it out throughout its global operations.

Another sell-side analyst observed of a possible Wal-Mart/Hilfiger deal: "I know Wal-Mart is looking for a big designer name to counter Target and its designer offerings, such as Isaac Mizrahi, which gives Target its cooler image."

This analyst believed a Wal-Mart/Hilfiger marriage could be good for the retailer, but that it would depend on how the brand was positioned in its stores.

"From a Wal-Mart standpoint, it makes sense. Tommy gives them a huge brand to get its apparel to where they want it to be. However, the double-edged sword for Wal-Mart is how to be like Target and have the cool designers, while living with the everyday low price mantra it keeps pushing," he said.
The analyst added there are risks for the Hilfiger brand, as well as for Wal-Mart.

"While Tommy as a brand has been cold lately in the U.S., there is a good chance that the brand can also reinvigorate Wal-Mart's apparel, and at the same time pull up the visibility of Wal-Mart's apparel content. However, if it fails to do so, could Tommy also then drag down Wal-Mart? The risk then, too, is that the Tommy brand languishes in the discount channel," he said.

Lizabeth Dunn, an analyst at Prudential Equity Group, believes in the possibility of a Wal-Mart/Hilfiger marriage because it fits with the discounter's recently discussed merchandising strategy. She wrote in a research note Monday that the strategy had an eye "more toward national brands to attract incremental customers and increase its average ticket."

Dunn noted the discounter, with $5.7 billion in cash and equivalents as of July 2005, could certainly afford the company, and could even buy out designer and founder Tommy Hilfiger's contract.

At least one source with familiarity of the thought processes at Wal-Mart said a preliminary purchase price was in the $2 billion range, excluding the cash to buy out the designer's contract.

The proposal that was given to some potential acquirers had included $250 million in cash as the buyout amount of the designer's contract. The terms of Tommy Hilfiger's contract entitles him to receive 1.5 percent of U.S. revenues in excess of $48 million. According to an apparel executive who saw the proposal last month and had contemplated a purchase of the company, Tommy Hilfiger received in the "$14 million range last year, and the cost of the buyout would be between $200 million and $300 million."

The apparel executive also believed that, because in his opinion much restructuring is needed for the U.S wholesale operation, a sale to Wal-Mart makes sense due to the retailer's ability to blow out product in different categories.

Some analysts also viewed a scenario where Wal-Mart would not have to pull the Hilfiger brand out of department store distribution.