Normally, I would get very excited about a stock like
. Lately trading at about $7.20, this leading global, branded apparel company maintains a strong portfolio of products and licenses in most areas of its industry.
Its shares trade for 5 times earnings, 0.50% of revenue and 3 times enterprise value to EBITDA. Even in today's stock market, those are compelling valuations for a very healthy consumer business that generates significant free cash flow.
Keeping It Inside
However, management's propensity for enriching themselves and a weak corporate board restricts my enthusiasm for the shares. Though I am long a modest position in the stock because of its cheapness, I'd really load up if material changes in corporate governance occurred.
Even though Tommy Hilfiger mints cash flow, the shareholders see little -- if any -- of it. The cash seems to be reserved to purchase licenses owned by officers and directors at very rich prices. In the past five years, the corporation has spent nearly $1 billion acquiring rights to various product lines and geographies from these officers and directors. Why doesn't the corporation fund these ventures with internal cash? Why do these individuals own these valuable rights? When these assets are sold, why have the prices been so steep, even if some investment bank has approved them?
Despite the stock's cheap valuations over the past few years, the company has repurchased minimal stock and paid no dividends. While senior management has gotten rich over the past decade, shareholders have gotten nothing: No dividends and no appreciation. The stock is virtually the same price as it was in 1993, and the share count is up some 70%!
Tough Times for TOM Shareholders
My proposal is for management to institute a meaningful payout ratio. The business is mature and highly profitable and could comfortably support a payout of up to 35% of earnings. After instituting a meaningful dividend, the company could begin a share-repurchase program to exploit the market's underappreciation of this franchise. If senior management sold licenses for small parts of the business to the corporation for nearly $1 billion, clearly they should find the whole business undervalued with a market cap of only $675 million.
Lofty Compensation Levels
The other issue that irks current and prospective shareholders is the company's compensation packages for senior management -- most notably, Tommy himself and CEO Joel Horowitz. Hilfiger receives a meaningful base salary and 1.5% of the gross revenue above $48 million, totaling $80 million over the past three years. How many Fortune 500 CEOs get a cut of the gross? I can find none. Horowitz garners a large base and 5% of the company's operating profit, worth more than $30 million the past three years. Which officers of large corporations get a cut of the operating profit? Few, if any.
Over that three-year period, shareholders have only gotten hosed. This compensation package is as egregious as it gets and should be renegotiated yesterday. The independent directors (if there are any) need to get a clue. Governance issues like these depress a company's stock valuation and harm shareholders.
Aren't the officers and directors hurting their own equity positions? Certainly, but the equity component of their wealth is much less than you might expect. Horowitz owns only 500,000 shares, and Tommy himself owns 4 million. Contrast this with Ralph Lauren, who holds 43 million shares of
Polo Ralph Lauren
and was paid a total of "only" $20 million the past three years.
At current prices, Horowitz's equity holdings are worth only $3.75 million, a small fraction of his annual salary and bonus. All officers and directors combined, other than Hilfiger, own only 2.3 million shares. Why don't they reinvest some of the hundreds of millions of dollars they generated selling assets to the company back into the company's shares? Maybe with larger equity holdings, they would run the company for the benefit of shareholders and not just their own.
But all is not lost for shareholders of Tommy Hilfiger. Operationally, the company has performed decently in a difficult retail and apparel environment. The company's brand seems to be strong. With the nation's newfound focus on patriotism, a longtime theme of Tommy's product lines, the company should remain very profitable.
It still has attractive opportunities for growth abroad, especially in Europe. The men's apparel business has been difficult for so long that there
be a recovery out there. The fad aspect of Tommy Hilfiger will probably never return, but the company should continue to generate modest growth and all that cash. If only management would send some of that cash to its shareholders, we might get a fairer valuation in the stock market again.
Robert Marcin is the principal of Marcin Asset Management, a private investment firm. Formerly, Marcin was a partner at Miller, Anderson & Sherrerd and a managing director at Morgan Stanley, where he managed the MAS Value fund (currently Morgan Stanley Institutional Value). At the time of publication, Marcin was long Tommy Hilfiger, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Marcin appreciates your feedback and invites you to send it to