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Tommy’s Latest Tune: Contracts to 3 Divisions As It Reports Net Loss

NEW YORK — The shakeup at Tommy Hilfiger Corp. continues, with news of weaker earnings and an organizational streamlining.About 24 hours after...

NEW YORK — The shakeup at Tommy Hilfiger Corp. continues, with news of weaker earnings and an organizational streamlining.

About 24 hours after naming chief executive officer Joel Horowitz chairman on Tuesday, the firm said it was dividing its business into three wholesale operating units — men’s wear, women’s wear and children’s wear — resulting in the elimination of Todd Howard’s post as head of big children’s sizes, men’s jeans and junior jeans, each of which will be integrated into one of the new divisions.

Earlier in the day, Hilfiger reported third-quarter results that were down without special charges and in the red with them. For the three months ended Dec. 31, 2002, the company lost $22.1 million, or 24 cents a diluted share, against earnings of $37 million, or 41 cents, in the same year-ago quarter. Excluding special charges of $87.5 million, the company would have earned $34.8 million, or 38 cents, below year-ago levels but at the high end of the firm’s guidance.

Additionally, in the face of a tough, promotional climate at retail, conservative buying patterns among retailers and the continuing burden of price deflation, the firm lowered fiscal 2004 guidance and reduced capital expenditure plans for next year to between $70 million and $75 million from about $85 million during the current year.

The special charges, which pertain to the company’s closure of 38 U.S. specialty stores, announced last year, include a $73.3 million store closure provision, $2.6 million for write-down of inventory that was included in its cost of goods sold, and $11.6 million in impairment charges to write down fixed assets and leasehold improvements for the stores that will remain open. The affected units contributed $10.3 million and $12 million in net revenue for the quarters ended Dec. 31, 2002 and 2001, respectively.

Revenue for the quarter inched up 0.5 percent to $477.3 million from $474.8 million. Wholesale sales dipped by less than 1 percent compared with last year. Revenue in the children’s and women’s components was up 14.7 percent to $70.6 million and 3.4 percent to $137.7 million, respectively, in the third quarter from last year, but men’s wear declined 11.7 percent to $123.2 million.
The gain in the women’s component was attributed mostly to continued expansion in Europe and the expansion of TH Women, now in 700 doors in the U.S. versus just 300 a year ago. Sales began softening in August and the company said it expects the "promotional environment at retail to continue as women become more conservative in [their] spending on apparel."

Retail sales rose 2 percent to $130.3 million, driven by an increase in the number of stores for the quarter, but comparable-store sales posted a mid-single-digit decline in the quarter.

Licensing revenue jumped 22.2 percent to $15.5 million due mostly to higher royalties received and an increase in the company’s Far East buying office revenue. Licensing income is likely to see future gains from the newly announced agreements for the distribution of Tommy apparel in South Korea and Australia.

Joel Horowitz, the chief executive officer who added the title of chairman on Tuesday, said in a conference call: "In the United States, our children’s business was much improved and our women’s business remained a category leader. However, we continued to experience difficulty in the men’s wear arena. Our outlet retail business also remains a strong and consistent source of profits and cash flow.

"Internationally, we are very pleased with the continued growth and profitability of Tommy Europe, even as weakening markets pose new challenges."

Horowitz reiterated that he plans to remain ceo while the search for his successor in that post continues. He said that he is interviewing candidates both inside and outside the apparel industry on an ongoing basis. "It’s a succession plan, so we’re not in any hurry to do something. When the right candidate is found, it will be announced," Horowitz said.

As reported, Horowitz will not renew his contract as ceo when it expires in March 2004. The designer, who was chairman for just three months, returns to his role as honorary chairman and principal designer.

The restructuring of Hilfiger’s wholesale units took place even before the news of Horowitz’s new title had been digested. In the new structure, Christa Michalaros will serve as president of missy sportswear, junior jeans and TH Woman; David McTague as president of men’s sportswear and jeans, and Michael Spillane as president of children’s.
Howard, who will leave the firm, was described in a statement from Horowitz as "an important contributor to Tommy Hilfiger for the past 12 years."

The company said it now expects revenue for fiscal 2004 to be below fiscal 2003 levels, with earnings per share of between $1 and $1.20 for the year.

The company’s original outlook was for revenue and earnings to remain comparable with those of fiscal 2003. The company also said that it plans to expand its marketing to feature additional outdoor advertising. "Our marketing efforts will also include further development of the higher-tier product line currently being offered in our U.S. specialty stores and soon to be available in our network of specialty stores worldwide," Horowitz said in a statement.

Executives told analysts that the company believed it was on track with its product offerings, and is planning to exit less profitable doors in fiscal 2004. The door count would drop in the fall for both junior jeans and men’s sportswear to 1,400 from 1,500 doors and men’s jeans to 1,600 from between 1,700 and 1,800 doors. The bright spot will be women’s, which is currently in 1,500 doors and will likely see a slight gain in doors in part to accommodate growth in the plus-size business.

For the nine months, weighed down by a $430 million aftertax charge to reflect a change in accounting principle, the firm lost $399.8 million, or $4.41 a diluted share, against income of $93.8 million, or $1.04, a year ago. Excluding all nonrecurring charges, income dropped 7.1 percent to $87.1 million. Revenue rose 0.9 percent to $1.39 billion from $1.38 billion.

Robert Drbul, analyst at Lehman Bros., said in a research note: "Tommy Hilfiger’s results continue to be negatively affected by a highly promotional retail environment and a deflationary pricing environment for apparel. We expect these trends to continue in the near term."

Shares of the company gained 16 cents, or 2.4 percent, to close Wednesday at $6.72 in New York Stock Exchange trading.
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