Fashion designer and marketer Tommy Hilfiger (NYSE:TOM) said after Friday's market close that it's in discussions with key customer Dillard's (NYSE:DDS), the department store chain that accounted for $240 million, or 13%, of its fiscal 2003 (ended March 31) revenues, about changes in the number of stores in which its products are sold. While details on potential changes were slim, the implication seems to be that those numbers will continue falling.

When announced, the near-term impacts of any changes to their deal will likely mean the shares take a short-term hit. (They did this morning in early trading.) Makes sense -- nobody likes to lose a revenue source. But Tommy says this fits with its strategy of reducing distribution to U.S. department stores, and based on available information this seems a logical step.

Sales to Dillard's, Federated (NYSE:FD), and May (NYSE:MAY) made up a third of the company's sales last fiscal year, but that was down from 38% in FY 2002 and 43% in FY 2001, when Dillard's was good for 17% of Tommy's revenue. In other words, department store chains such as Dillard's are less and less influential to the company's top line -- though this has no doubt been a painful realization.

On top of that, revenue growth at the wholesale division has slowed. In fact, it fell in both of the last two full years while the retail division -- which boasts better profit margins -- has picked up. While wholesale still represents the lion's share of Tommy's revenues, the company no doubt sees more opportunity in taking a more hands-on role in the sale of its products. (Interestingly, Tommy's European wholesale business also delivered better profit margins than did its U.S. counterpart last year.)

Meanwhile, Tommy's department store partners have problems of their own. Dillard's sales and same-store sales both fell 3% for the fiscal year ended Feb. 1 and are down 4% this year through Nov. 1. There have been similar slowdowns at May, which owns Lord & Taylor, Filene's, Hecht's and others, and Federated, operator of businesses including Bloomingdale's, Macy's, and Goldsmith's.

Looking past today's news, the challenge for David Dyer, who took over as Tommy president and CEO in early August, becomes less about managing his Dillard's relationship and more about shoring up what he can in the department store business and, more importantly, looking for credible alternatives in the retail and licensing segments.

Dave Marino-Nachison can be reached at