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TOM
13 3/16
+3/16
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Thursday November 2, 1:00 pm Eastern Time
Sector of the Day: Tommy Hilfiger, We Can Hear You
Glenn S. Curtis, Columnist
Its days as an ultra-trendy label may be over, but Tommy Hilfiger has a solid turnaround plan in place.
In the fickle world of fashion, yesterday's cool threads are today's rags. Take clothier Tommy Hilfiger (Nasdaq:TOM - news) as an example. As recently as last year, his clothes were a must-own, in both urban and suburban environments.
A year later, the ``Tommy'' brand has become a synonym for passé.
As a result, management has continually had to apologize for slowing sales and evaporating profits. And that has taken the stock down from $40 in early 1999 to a recent $12.
But a turnaround may be at hand. And an ironclad balance sheet should provide a tail wing to any eventual rebound.
Solid Strategy, Solid Colors
Acknowledging that slowing sales are a new reality, management has embarked on a program to alter merchandising mix at some of its outlet stores. More importantly, the fashion house has simplified this year's product line: Instead of putting out high-risk, fashion-oriented merchandise, Tommy has decided to increase emphasis on the core, solid-color merchandise not geared to any particular season.
This should help lengthen the average product lifespan and most importantly, should help diversify the risk away from the unpredictable fashion-oriented garments. In addition, merchandise markdowns helped to flush out some of the excess men's and women's sportswear that had been flooding distribution channels. All told, these efforts have placed the company in a relatively good position considering the general weakness of the fashion-apparel industry.
Those efforts bore fruit in the company's just-announced second quarter. Tommy managed to earn 49 cents a share, 3 cents ahead of consensus estimates. Of course this doesn't compare favorably with last year, where Tommy earned 79 cents a share, but given the operating environment, it was impressive, nonetheless.
Looks Like a Warm Spring
Presently Tommy has about 94 outlet stores that generate just over 14% of total revenue. Over the next year the company will likely add between five and 10 outlet stores.
More than 50% of its business, however, comes from sales to three stores -- Dillard's (Nasdaq:DDS - news); Federated (Nasdaq:FD - news), which operates stores such as Bloomingdale's and Macy's; and May Department Stores (Nasdaq:MAY - news), which controls Lord & Taylor, Filenes, Hecht's and others. With the exception of Dillard's, all of those stores are generating positive comparable-store results.
In addition, Tommy execs commented that they are comfortable with sales of the new fall product lines. Looking out a bit further, spring previews have also apparently received a fairly warm response from retailers.
Again, this year will not compare favorably to last year. But the company has stated that it is comfortable with consensus earnings estimates of 46 cents a share in the third quarter and 33 cents per share in the fourth quarter.
Board Sets Buyback
Putting money where its mouth is, the board of directors authorized a $150 million share-repurchase program back in April. To date it has bought back 4.1 million shares for $35.1 million. And although the company has a solid cash position of $254 million, or $2.74 a share, the fact that it is willing to use precious capital to acquire shares in the open market is a good sign that the worst is over.
Consensus estimates have Tommy earning $1.34 per share in fiscal 2001 on roughly $1.87 billion in revenue, a number I feel very comfortable with. In 2002 the Street is expecting earnings of $1.49 a share on more than $1.9 billion in revenue -- also a doable number.
Given expectations that earnings before interest, taxes, deprecation, and amortization (EBITDA) will grow from $308 million in fiscal 2001 to roughly $335 million in fiscal 2002, I think the stock has at least a 35% upside. At three times EBITDA, it's safe to say that Tommy trades at a noticeable discount to some of the other major players in the industry such as Polo Ralph Lauren (Nasdaq:RL - news), which trades at a multiple of roughly 5.8 times EBITDA, and Liz Claiborne (Nasdaq:LIZ - news), which sells for more than 6 times EBITDA.
If we place a multiple of just 5 times EBITDA on the stock -- roughly in parity with its peers -- a price more representative of the company's worth would be north of $18 a share. |
