Applications in Marketing/Management

A PPLICATIONS IN M ARKETING/MANAGEMENT Lesson Plan #3

Hilﬁger’s Fashion Empire Starts to Show Some Wear

The Wall Street Journal June 12, 1998

By Wendy Bounds Staff Reporter of The Wall Street Journal

Chinks are forming in Tommy question for men’s sportswear over- different designers, including us,” Hilfiger’s armor. all: How frequently will men replace Mr. Horowitz adds. “Tommy is very Building a profitable empire their khakis and pullover sweaters? focused on getting a different point by wrapping suburban preppies and Muses Faye Landes, an analyst with of view back into his sportswear.” urban street kids in his sportswear, Smith Barney: “The guy who needed But with the robust gains in its Mr. Hilfiger has been the fashion something besides torn sweatpants core clothing line behind it, Hilfiger industry’s Teflon man. he wears to play weekend touch is veering quickly into womenswear But now growth in Mr. Hil- football has already filled his closet.” and other product categories. figer’s core casual-menswear busi- Whatever is causing the slow- Women’s apparel particularly is a ness is slowing. Tommy Hilfiger down, Wall Street is taking it out on more competitive market and sub- Corp.’s steady annual sales gains of the casual menswear titan, Tommy ject to the vagaries of more fickle 20% or more in that category have Hilfiger. The company’s stock has fashion tastes. slimmed down. When corporate fallen 12% from its close June 4, the In 1996, the company casual first burst on the scene in the day before the company reported launched a women’s sportswear early 1990s, confused men flocked earnings and discussed the slowing line, which rang up about $165 mil- to Mr. Hilfiger because he offered of menswear sales. In New York lion in sales during fiscal 1998 — stylish products and a recognizable Stock Exchange composite trading more than double the total in fiscal brand name. Emboldened, men are yesterday, shares closed down 68.75 1997. Until recently, Mr. Hilfiger reaching beyond Hilfiger and often cents at $59.875. had licensed out the womenswear to for cheaper clothes from stores such Hilfiger acknowledges a slow- Pepe Jeans USA Inc., which was con- as J. Crew, Banana Republic, Ameri- down but says it isn’t surprised. trolled by four Tommy Hilfiger can Eagle Outfitters and the Gap; “This category couldn’t continue to directors and executive officers, Gap Inc., for example, reported that grow forever,” says Joel Horowitz, including Mr. Hilfiger and Mr. May sales leapt 24% at stores open a the company’s chief executive, not- Horowitz. Mr. Hilfiger also recently year or more. ing that revenue will slow to “low-to- introduced a top-end collection of “Men are looking for product mid single-digit growth.” pricier women’s apparel under his that isn’t nearly as expensive as Still, the Hilfiger name “Red” and “White” labels, with suits Tommy,” says Britt Beemer, presi- remains one of the strongest in fash- that range from $450 to $1,500 and dent of America’s Research Group, ion, and company profits continue up. which surveyed 2,000 male buyers to be strong. Hilfiger last week said “I think Hilfiger’s women’s earlier this year. Plus, he says, “They fiscal fourth-quarter earnings for the business can eventually be bigger are tired of going to work and seeing period ended March 31 rose 23%. than men’s,” says Allison Malkin, an three people that look like them- As for the main men’s busi- analyst with SBC Warburg Dillon selves. And Tommy’s clothes, con- ness, Mr. Hilfiger will be digging in, Read & Co., noting that the overall sumers think, are particularly trying to reestablish his signature in women’s apparel market is double identifiable.” forthcoming designs. “There was Further, there is a looming also a lot of sameness between the (Continued) A PPLICATIONS IN M ARKETING/MANAGEMENT Lesson Plan #3

the size of the men’s. profited handsomely from the com- noted that “the most controversial But Hilfiger will also be dueling pany’s success. His employment aspect of the arrangement has been more with popular more-established agreement stipulates he receive a the likely enrichment of those four brands from rivals like Donna Karan, payment of 1.5% of the company’s executive directors of the company Calvin Klein and Ralph Lauren. net sales above $48.3 million. Mr. who control [Pepe], particularly Mr. Horowitz says, “Women Horowitz receives 5% of Hilfiger Messrs. Hilfiger and Horowitz.” have always wanted Hilfiger clothes Corp.’s annual operating profit as A lawsuit by three investors, and we knew that because they were part of his bonus. filed in New York State Supreme buying our men’s clothes.” He notes Both agreements are “unusu- Court in February, charges that the that the company recently expand- al,” says Robert J. Stucker, a Chicago Pepe deal “presents an irreconcil- ed its women’s shop in Macy’s flag- executive-compensation attorney. able conflict of interest and . . . an ship New York store to 4,500 square “Typically an annual cash incentive overnight multimillion-dollar feet from 1,800 square feet. plan has a cap.” bonanza” for Mr. Hilfiger and Hil- Mr. Hilfiger’s knack for mar- Earlier this year, the company figer management. Mr. Horowitz keting himself has certainly helped bought Pepe — bringing its says the suit has no merit. his company. He has transformed women’s business back in house — “Having those four guys hold his earnest, almost geekish, charm as well as its Canadian distributor, shares is a plus,” says John Hayes, a into a marketing vehicle for preppy, for about $1.15 billion in cash and portfolio manager at Independence clean-cut fashions. At one fashion stock. That gave the four executives, Investment Associates that held show at Macy’s in New York, Mr. Hil- who owned no Hilfiger stock, a 19% 1,660,000 shares as of March. Still, figer loped down the stage, whipped stake in the company. he adds: “It seems like a very lucra- off his vest, twirled it and then While the stock soared on the tive deal.” hurled it into the screaming crowd. news, a report by Institutional Share- Mr. Hilfiger personally has holder Services of Bethesda, Md.,

©1999 Dow Jones & Company, Inc. All rights reserved. Lesson Plans contributed by The Wall Street Journal Classroom Edition. This material may be reproduced for classroom use. A PPLICATIONS IN M ARKETING/MANAGEMENT Lesson Plan #3

Questions for: “Hilﬁger’s Fashion Empire Starts to Show Some Wear”

1. How will the new collection of clothing be a departure from Polo ? Ralph Lauren Corp.’s tradition of producing upscale clothing?

2. Why is the young-women’s market one that Ralph Lauren can’t ignore?

3. According to “Hilﬁger’s Empire Starts to Show Some Wear,” why is growth slowing in its casual-menswear line?

4. Describe Tommy Hilﬁger Corp.’s new line of women’s wear.

? 5. For further discussion: (a) Why are Ralph Lauren and Tommy Hilﬁger focused on making their brands more recognizable to women aged 16 to 25. What business strategies are these companies using to stay competitive?

(b) How will Ralph Lauren and Hilﬁger compete with each other in the young-women’s-apparel market? Who are their rivals? How are they competitive with these rivals?

©1999 Dow Jones & Company, Inc. All rights reserved Lesson Plans contributed by The Wall Street Journal Classroom Edition. This material may be reproduced for classroom use. A PPLICATIONS IN M ARKETING/MANAGEMENT Lesson Plan #3

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