Tommy Hilfiger Takes an 18% Hit as Growth Slows

A shift into the competitive womenswear market fails to bolster results.
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What's good for retailers isn't necessarily good for their suppliers. And even a hot brand can cool off.

Tommy Hilfiger

(TOM)

learned both of those Apparel Industry 101 lessons last quarter. It

warned Thursday that it expects to report third-quarter earnings of between 58 cents and 64 cents per share, far short of the 73 cents expected by Wall Street analysts, and that fourth-quarter results will also suffer. Its shares fell 18%.

The company, which is expanding beyond its trademark brightly colored sportswear into womenswear and licensed products like home goods, said department stores aggressively marked down merchandise during the holidays, particularly in menswear and women's sportswear.

The Maturity Issue

Tommy's woes emphasize how tough the climate is for apparel-makers, and how all hot brands eventually mature and have to settle for slower growth rates, analysts say. When apparel-makers like Tommy,

Polo Ralph Lauren

(RL) - Get Report

and

Nautica

(NAUT)

saw slower sales in their menswear businesses, they moved into the competitive womenswear market, where they went head-to-head with established specialty retailers like the

Limited

(LTD)

and

Gap

(GPS) - Get Report

. Gains there propped up the top line for a while, but now womenswear sales are slowing, too, says Jennifer Secallus, an analyst with

Atlantis Research

, who rates Tommy shares a sell. (Her firm hasn't done underwriting for Tommy.)

And in addition to maturing markets, apparel-makers have to contend with department stores, which themselves aren't exactly setting the world on fire. They've been pulling in shoppers by putting merchandise on sale, and the vendor gets stuck paying them what's called "markdown money" to make up the difference. That's what's happening to Tommy. "They are not immune to all the pressures and stresses that have gone on in apparel retailing," says Faye Landes, analyst with

Thomas Weisel Partners

, who cut her rating on Tommy shares from a strong buy to a buy. (Her firm hasn't done recent underwriting for the company.)

As a result of all this gloom and doom, the apparel group has suffered. Tommy's shares are now 61% off their 52-week highs, while Polo Ralph Lauren stock has slid 36% from its high, and Nautica shares are down more than 30%.

Fashion Problem

But Tommy's problems go beyond industry turbulence. It suffers what garmentos politely call a "fashion problem" in its newer womenswear line. In a research note,

Robertson Stephens

analyst Alexandra DalPan said Tommy didn't have enough jeans in its women's sportswear line and that its color palette -- usually blindingly bright -- was subdued. And that zig came as fashion zagged. "Color is back," says Candace Corlett, a partner with

WSL Marketing

.

Corlett says Tommy needs to work hard to keep its image fresh. "Novelty fades," she says. "The urban kids aren't wearing Tommy anymore, and suburban kids have moved on to Gap leather."

Analysts said that while they still like the potential of the Tommy brand, particularly in faster-growing areas like kids' clothing and home furnishings, it may take a while to adjust to a slower growth rate in its core clothing businesses. And while the spring line looks good, the bulk of merchandising changes won't be felt until the fall, says DalPan. That puts any share-price improvement out a few months, she says. (She rates Tommy shares a buy, and her firm hasn't done recent underwriting for the company.)

There is one shard of near-term hope for Tommy shareholders. The company said in its statement that it is "fully committed to enhancing long-term shareholder value and will be actively addressing this goal in the coming weeks." Analysts said that likely means the company is considering a share buyback, among other things.