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Tommy Hilfiger’s Blue Year Yields Red Ink of $513.6 Million

Tommy Hilfiger posted nine-digit losses for its fourth-quarter and year-after special charges and amid declines in its wholesale and retail operations.

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NEW YORK — Tommy Hilfiger Corp. finished what its chief executive termed the most difficult year in its history as a special charge drove it to a loss of over $100 million.

Amid declines in its men’s and women’s wholesale divisions and its retail operation, the firm on Thursday posted a net loss of $113.8 million, or $1.26 a diluted share, for the fourth quarter ended March 31. That’s against net income of $40.7 million, or 45 cents, in the year-ago period. The loss in the most recent year resulted from a noncash charge of $150.6 million for goodwill impairment relating mostly to the firm’s U.S. wholesale component offset in part by a $9.3 million pre-tax reversal of a previous charge for specialty store closure expenses which came in below expectations.

Excluding the one-time items, the company’s income was $28.3 million, or 31 cents, 30.4 percent below last year’s level but at the high end of the company’s May forecast.

Revenues in the three months were essentially flat, dipping 0.4 percent to $498 million from $499.8 million last year. Wholesale sales declined by 0.6 percent to $406.5 million from $409.1 million. While the children’s business rose 12 percent to $91 million, the men’s and women’s businesses fell by 4 percent to $157 million and by 3.5 percent to $158.4 million, respectively.

Joel Horowitz, chairman and chief executive officer, said during a conference call, “The overall misses’ category has softened compared with a year ago as women continue to be conservative with their apparel spending, and accelerating markdown rates and highly promotional pricing are now the rule.”

Horowitz, who will remain as chairman but leave the ceo post when his contract is up next year, said during the conference call that the firm has interviewed some strong candidates to succeed him as ceo, but that strategic initiatives announced last month, including possible acquisitions, “will not take a back seat to the appointment of a new ceo.”

The ceo didn’t discuss what brands his firm was considering, but several sources suggested that the search for acquisitions and the search for a ceo might come together if Hilfiger were to acquire Sweetface Fashion Co., the New York-based firm that produces the JLo by Jennifer Lopez apparel line. Several financial sources said that Hilfiger is exploring Sweetface, a joint venture between Lopez and Andy Hilfiger, younger brother of Tommy. Furthermore, its president and ceo, Denise Seegal, is known to have been among the ceo prospects considered at Tommy Hilfiger.
Neither Horowitz nor Seegal could be reached for comment at press time.

Andrew Jassin of the consulting firm The Jassin-O’Rourke Group observed, “Denise Seegal is a good apparel leader who knows the marketplace and understands brands. With the company searching for a ceo, to me it makes sense for Tommy Hilfiger to absorb JLo as an operating division and rollup, which would give its women’s business a shot in the arm. Maybe in the process, it finds that its ceo candidate is right in its own backyard.”

Jennifer Black, an analyst at Wells Fargo who follows retail and apparel firms, but not Tommy Hilfiger specifically, said, “Sweetface makes perfect sense. It’s not so big that it can’t be managed and it has existing management talent through Denise Seegal.”

The Tommy women’s wear business in Europe grew significantly in fiscal 2003 and contributed about 25 percent of Europe’s revenue for the year. The ceo said that gains in the Tommy Europe women’s business partially offset declines in the U.S. and that women’s continues to represent an opportunity for the firm in the European market.

In the juniors’ category, the U.S. continued to be highly promotional during the fourth quarter. “Teens continue to be price-sensitive and have traded down to shop in the moderate channel, resulting in price pressure,” Horowitz noted. “In response, we continue to focus on pre-launch testing to identify potential best sellers to deliver trend-right fashion, and to minimize production and delivery time.”

Retail sales in the period fell by 3.7 percent to $73.1 million from $75.9 million. An increase in the number of stores partially offset a comparable-store sales decline in the mid-teen percentage range. Retail revenues include those of 37 stores previously slated for closure, with 18 closed at the end of the reporting quarter.

Licensing revenue rose 24.2 percent to $18.4 million, but the company said the increase was due entirely to the recognition of royalties on an underperforming license that had not previously been recognized.

For the year, the firm sustained a walloping $513.6 million loss, or $5.68 a diluted share, from income of $134.5 million, or $1.49, last year, due mostly to a $430 million charge reflecting the cumulative effect of a change in accounting principle. Revenues inched up 0.6 percent to $1.89 billion from $1.88 billion.
The company provided guidance for fiscal 2004, and said that earnings per share are expected in the range of between $1 and $1.20. Revenues are expected to be below that of fiscal 2003 in the high-single digit percentage range.

Horowitz said that the company “remains very pleased with the momentum of Tommy Europe. We believe our pan-European distribution strategy and balanced product portfolio in this market will enable Tommy Europe to achieve revenue growth of over 20 percent for fiscal 2004.” He told analysts that the European operation “achieved revenues for the full fiscal [2003] year of $275.8 million, ahead of expectations we originally established for the business when we acquired it in July 2001 and 44.2 percent above last year on a constant currency basis.”

Prior to the company’s earnings release, Joseph Teklits at Wachovia Securities downgraded the firm to “market perform” because of the lack of any “actual sign of significant improvement” and the limited upside potential now that Tommy is not likely to be taken over by another firm.

Dennis Rosenberg of Credit Suisse First Boston upped the rating of Tommy to “neutral” from “underperform” owing mostly to the expectation of stabilization of the U.S. wholesale business, continued growth in wholesale in Europe and retail via the children’s outlets and stores in Europe and Canada.

Shares of Tommy rose 36 cents, or 4.1 percent, to close at $9.13 in Big Board trading Thursday.