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|  | SEPTEMBER 28, 2004
By Amy Tsao A Bad Shirt Day for Tommy Hilfiger Newly worried about its prospects -- and management's ability -- investors are dumping the ailing apparel maker's shares On Sept. 27, investors rushed to dump Tommy Hilfiger (TOM ) stock after the clothing maker disclosed late on Friday, Sept. 24, that it had received a grand jury subpoena related to commissions paid in its international buying offices since 1990. Shares fell more than 20%, to $10.30, a new 52-week low. The suspicion: Tommy reported revenue generated in the U.S. as if it were earned in a foreign division, lowering the company's tax rate. "We believe these buying-agency commissions, which are an effective royalty on Tommy's wholesale businesses in the U.S. and Europe, effectively shifted profits to lower-tax jurisdictions," writes Virginia Genereux, an analyst with Merrill Lynch, in a report on Sept. 27. She adds: "This is certainly a new risk, though it is not clear what magnitude." Plenty of analysts are recommending investors not wait to see the fallout. They point out that Tommy has revenues of $1.9 billion, chiefly manufacturing apparel and licensing its brands, which shouldn't be affected directly by the allegation of possible tax fraud. But profitability will decline if Tommy is taxed at a higher rate or ordered to pay fines. The subpoena also casts doubt on Tommy's leadership. "If the company is guilty, it calls to question the credibility of management," says Eric Jemetz, senior equity analyst at New York-based asset management firm Rockefeller & Co. "NOT A BIG FAN." Marie Driscoll, retail analyst at Standard & Poor's cut her rating on the stock to avoid from hold and lowered her 12-month stock-price target to $10, from $15. She has also increased her expectations for the level at which Tommy will be taxed -- to 37.5% instead of last year's 22% -- to more closely reflect how apparel makers of comparable size are typically taxed. As a result, Driscoll reduced her earnings estimate to 86 cents per share, down from $1.16, for the fiscal year ending March, 2005. Bargain hunters may not swoop in for a good long while. "I'm not a big fan of the company," Jemetz says. "It's a brand whose best days are perhaps behind it." The efforts to keep the business lean and renew some of its former luster have been modestly successful. Driscoll says Tommy's launch of a higher-end line this year, called H, was solid. But competition among department-store clothing lines -- Ralph Lauren (RL ), Jones New York (JNY ), and Liz Claiborne (LIZ ) -- has been intense. Tommy has been mum about the subpoena's particulars, but all the hoopla is certainly an unwanted distraction for an already challenged company. "You have senior execs and lawyers all wrapped up dealing with this [instead of] managing the business," says Driscoll. For many investors, that makes owning Tommy shares a poor fit.  Tsao is a reporter for BusinessWeek Online in New York Edited by Thane Peterson
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