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WAL-MART EYES TOMMY HILFIGER ACQUISITION

Move Would Boost Retail Giant's Fashion Credibility

September 27, 2005

By Mya Frazier

COLUMBUS, Ohio (AdAge.com) -- In an effort to boost its fashion credibility, Wal-Mart is reportedly considering the acquisition of Tommy Hilfiger.

Wal-Mart vs. Target
Although the embattled apparel marketer is operating in the red, to Wal-Mart it represents a chance to draw more upscale shoppers and better compete against Target Stores, which features the Mossimo, Merona and Isaac brands. “Just like Martha Stewart at Kmart for home fashions, Tommy could do the same thing for Wal-Mart in fashion,” said Marshal Cohen, a fashion and apparel analyst with NPD Group.

Mr. Cohen said acquiring the Hilfiger brand makes sense for Wal-Mart. “They are already in the mid-level market,” he said. “This could be a huge success for Wal-Mart.”

Financial problems
Hilfiger is mired in financial problems and has still not filed an annual report for fiscal 2005, although it is expected by the end of the month. Its most recent results for the first quarter of fiscal 2006 were incomplete, with the company simply reporting its “net loss for the quarter was smaller” than the loss during the same period last year. In 2004, Hilfiger earned $7 million on sales of $1.875 billion.

According to Wal-Mart’s last quarterly filing with the Securities and Exchange Commission, the retailer had cash and cash equivalents totaling $5.6 billion on its balance sheet.

Wal-Mart did not return calls for comment and a spokesman for Tommy Hilfiger declined to comment on the talks, which were first reported by Women’s Wear Daily.

Speed is essential
“Wal-Mart has the cash to shell out the money, what it doesn’t have is years” to build their own private-label brand, said Mr. Cohen. While Wal-Mart has already made one private-label investment with its George line, “it’s not working fast enough. Ten years from now it might be a success but Wal-Mart needs instant recognition now with the consumer.”

Despite the brand’s financial woes, almost $80 million in Tommy Hilfiger licensing revenue in 2005 was “essentially pure profit,” said Lee Backus, a retail analyst with Buckingham Research Group. But Mr. Cohen said Wal-Mart isn’t likely to be interested in licensing: “Wal-Mart is buying [Hilfiger] to own it and not to share it.”

The decline of the Hilfiger brand has been blamed by analysts on unwieldy growth that led to oversaturation. Even Tommy Hilfiger admitted as much in a 2004 letter to shareholders: “Over the last few years, the boundaries between our brands has begun to blur, confusing the customer and diluting the value of our individual trademarks.”

Fashion scene icon
The Hilfiger brand came on the fashion scene in the late ‘80s and exploded in the early ‘90s. Troubles began in the late ‘90s, when many department stores dropped the brand’s men’s collection. An attempt in fall 2004 to push the brand upscale again with the so-dubbed “H Collection” failed to deliver despite an aggressive ad campaign with supermodel Iman and her husband, aging rocker David Bowie.

Toth Brand Imaging, Boston, was hired to handle creative in July 2005. The shop had worked on Hilfiger in the 1990s. Media stayed at PGR Media, Providence, R.I. Measured media spending has ranged from $33 million to $40 million a year from 2000 to 2004, according to TNS Media Intelligence.