Years ago in an accounting class, my classmates and I were instructed to analyze the financial statements of Tommy Hilfiger (NYSE:TOM) and Polo Ralph Lauren (NYSE:RL). Basically, we were to decide which company we liked better and pick a stock.
I wonder how that exercise would have changed if we had taken alleged stock pumping and inappropriate tax minimization into account.
Tommy Hilfiger could end up paying for the latter. The stock is down 20% to $10.59 today after its U.S. subsidiary disclosed that it had received a federal grand jury subpoena seeking documents related to commissions paid to a non-U.S. subsidiary since 1990. In the press release issued Friday after the bell, the company said it believed the investigation "is focused on whether the commission rate is appropriate."
The worry is that if the commission rate on the books is found to overstate the cost of the services -- product development, sourcing, production scheduling, and quality control functions -- Tommy Hilfiger may be guilty of taking an inequitable tax benefit. And in addition to getting a bad reputation, the company would be subject to both fines for the deed and the back taxes it owes.
For reference, according to Investopedia.com, "There is a difference between tax minimization and tax evasion. All citizens have the right to reduce the amount of taxes they pay as long as it is by legal means."
Apparently, Tommy's approach to tax minimization isn't quite up to standards.
In retrospect, my accounting class lacked the stock analysis tools to really make an appropriate decision, but my group picked Polo Ralph Lauren. Ironically, if you're a Motley Fool Hidden Gems subscriber (formerly The Motley Fool Select), you may be familiar with the Companies on the Road to Ruin piece I wrote several years ago, suggesting that investors should be wary of Polo Ralph Lauren's stock-pumping antics and focus on actual results.
To Polo's credit, that company has at least delivered. Tommy Hilfiger, on the other hand, has stumbled lately and lost ground to the likes of Motley Fool Stock Advisor pick Gap (NYSE:GPS), American Eagle Outfitters (NASDAQ:AEOS), and Abercrombie & Fitch (NYSE:ANF).
For more Foolish coverage, check out:
- Can Tommy Cut It?
- Hilfiger's Still on the Downers
- Hilfiger Drowning in U.S.
- Tommy Looks to the Future
Fool contributor Jeff Hwang owns none of the companies mentioned above.
