Tommy, Can You Hear Me? (News) January 13, 2000

Tommy, Can You Hear Me?

By Dave Marino-Nachison (TMF Braden)
January 13, 2000

When companies like fashion designer and marketer Tommy Hilfiger (NYSE: TOM) are "on" -- as Hilfiger was at the beginning of the current fiscal year -- it's a pretty powerful enterprise and a compelling investment. That oh-so-important "on-ness," though, is predicated upon the consumer's willingness to pay extra for the Tommy dream.

And when they aren't? You've got fiscal Q3 2000. Shares of Hilfiger quickly dumped approximately 20% of their market value this morning as the company said a highly promotional holiday sales environment will hurt the company's performance for at least the next two quarters.

"We are very disappointed with our performance at retail during this past holiday season," said CEO Joel Horowitz. "Aggressive price reductions and promotions within the department stores have resulted in greater price adjustments than we anticipated. Promotions were evident in most categories of our wholesale business, particularly in menswear and womens' sportswear."

Hilfiger now expects fiscal Q3 (ended Dec. 31) EPS of between $0.58 and $0.64, compared to $0.61 a year ago and missing First Call's $0.73 consensus projection. Revenues are seen between $515 million and $525 million; sales for the previous year's quarter ended up at $463.2 million.

That would mark the first time in six quarters Tommy has failed to live up to Wall Street's expectations -- and it will likely be followed by the second time in short order, as the company expects Q4 EPS to come in between $0.35 and $0.45. Last year's figure was $0.48, and Wall Street was looking for that to rise by a dime this time around.

"Assuming the current trends continue," Horowitz said, "we expect our fourth quarter also to be adversely affected. While it is too early to gauge the retail performance of our spring deliveries in the coming quarter, we expect that promotional pressures will continue to impact our results."

The company's fiscal year ends March 31, and Horowitz and his co-Hilfiger-horts are busy putting together next year's business plan. On a broader scale, Hilfiger wants to continue expanding into new lines of business and become a global lifestyle brand a la Polo Ralph Lauren Corp. (NYSE: RL) -- which we looked at in an early November Fool Plate Special -- but that kind of repositioning takes time and costs money. That's not something investors with small stomachs for earnings disappointments are generally good at dealing with.

Throw into the mix the already uncertain dynamic of relying heavily on in-and-out-of-favor department stores as sales drivers, and there's plenty for investors to think about here -- especially since Hilfiger's promotional spending (check out the company's new promotional site for its latest effort) stands a pretty good chance of delivering sales to, say, the Nautica (Nasdaq: NAUT) booth as well as its own

And as Foolish research analyst Bob Fredeen -- who yesterday wrote a story about a footwear designer that has major retail chain concerns -- pointed out to me this morning, promotional sales environments can hurt upscale product producers who stand to lose repeat business when former sale shoppers come back to find prices returned to their regular levels.

These aren't necessarily Hilfiger-specific factors, though, so the question really becomes whether the company's management is up to the challenge. Its growing wholesale business is one way that might happen. If you believe they are, well, people have been calling the company's stock cheap on a forward-earnings basis for months now, and that certainly didn't change this morning.

Related Links:
Tommy Hilfiger Message Board
Fool Plate Special, 11/2/99: "Polo: Ready To Start Swinging?"
Fool Plate Special, 7/30/99: "Tommy Tops Estimates"

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