Tommy Hilfiger's Upscale Move to Macy's

Having upgraded in Europe, the onetime hip-hop house brand will now focus exclusively on sales at department stores and standalone outlets

Although sales at Macy's (M) department stores fell in September, at least one of its offerings was on the ascent: Tommy Hilfiger. The battered label once associated with baggy jeans and oversized logos saw sales rise in the "double digits" over last year, according to Hilfiger Chief Executive Fred Gehring. Globally, Hilfiger sales rose 31% to $1.01 billion in the six months that ended Sept. 30.

But Gehring's progress in steering Hilfiger back to health may hit a roadblock. Having made the brand an upscale success in Europe, the Dutch-born CEO is ramping up his efforts in the U.S. market amid a miserable retail environment. Even before the turmoil, Hilfiger had seen U.S. sales decrease from $1.7 billion in 2001 to $836 million in the fiscal year ended Mar. 31, 2008. Though Gehring points out the drop was a result of deliberately shrinking the US business to take better control of the brand. Its most recent sales report, for the six months ended in September, showed U.S. sales of $356 million were about a third of the company's total. The company just forged an exclusive distribution deal with Macy's at a time when the retailer expects its same-store sales could fall up to 6% in the third quarter alone. And Gehring is trying to reposition the brand from a hip-hop favorite to a full-price "classic" label, as shoppers seek more bargains. Hilfiger himself, now head designer, explains that "our customer has matured and therefore we've grown up as well."

Despite the challenges, Gehring is optimistic because the company has already re-structured their American business making it better positioned in the US than most of its rivals, he says. He adds that exclusivity with Macy's will give Hilfiger unique advantages: "Now we have great retail space—front stage, right off the escalator, not somewhere in the back." The company is also keeping its nearly 860 standalone Tommy stores, with 77 more stores expected to open by the end of March (roughly half through franchise deals). Gehring doesn't expect the credit crunch to derail those plans. "In tough times like these," he says, "people buy [fewer] risky products that will go out of fashion in a season."

But Hilfiger comes with a troubled reputation. Its logo was once plastered on everything from baby clothes and bath towels to sunglasses and shoes, which diluted the brand. Equally damaging, according to David Lockwood of consumer research firm Mintel International Group, "the same item was being sold simultaneously in a luxury store and a knockoff store." In 2006, London-based Apax Partners took the struggling company private, keeping Hilfiger on as head designer while installing Gehring as global CEO.

A Flashy Past

Even if the red, white, and blue Tommy flags no longer dominate Hilfiger clothes, analysts argue that memories of its flashy past are likely to linger. Jim Taylor, vice-chairman of marketing consultancy Harrison Group, argues that the company "will have a difficult time now becoming upscale and prominent in the face of a history of being second tier" to brands like Polo Ralph Lauren (RL). Taylor doubts consumers will buy it.

While Gehring did delay the company's public offering earlier this year because of financial conditions, he says he's pleased with how Hilfiger is faring so far. He expects tough times to boost sales at Tommy stores in designer outlet malls, where the brand is slightly cheaper.

Gehring also points to Hilfiger's success in Europe, where annual sales jumped from $110 million in 2001 to $1.1 billion last year, thanks to a strategy of selling fewer but better products at full price in upscale outlets. While the Tommy name now resonates from England to Estonia, where the locals call him "Tommy Highflyer," Gehring admits that even Europe may become a challenge. Though Hilfiger recently announced that total sales in Europe increased by nearly 30% to $523 million for the past six months, same stores sales were flat in September.

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