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Stock Analyst Update

Tommy Hilfiger Shares Look Cheap

But with a turnaround still uncertain, the stock will remain volatile.


What Happened?
On Wednesday, clothing designer and retailer Tommy Hilfiger (TOM) reported earnings for the quarter ending September 30 of $0.49 per share, beating First Call analyst estimates by $0.03. Gross margins increased to 41.6% from 39.9% during the June quarter, as fewer markdowns were required to stabilize inventory levels. Management said the general retail selling environment remains "challenging," and that pricing in all of its clothing lines is weak as markdowns and discounts at department stores and factory outlets continue to be the norm. On the conference call, management also said it expects to meet First Call estimates for the third and fourth quarters of fiscal 2001, ending in December and March, respectively, but refused to speculate on fiscal 2002 earnings.

What It Means for Investors
On the basis of Tommy's ultralow valuation, we think risk-tolerant investors may want to consider buying shares at this time. The stock price has declined almost 70% in the past 15 months, and now looks attractive at less than 10 times First Call estimates for fiscal 2001. The company has made progress in dealing with its rising inventory levels and has paid down some debt. It also repurchased about 4% of its outstanding shares with excess cash flow, and plans to expand the share buyback during the remainder of the fiscal year.

Mark Sellers does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.