It was February 2005, and Fred Gehring and Ludo Onnink—CEO and CFO, respectively, of Tommy Hilfiger Europe (the European subsidiary of Tommy Hilfiger)—had just left the conference room in Amsterdam after hearing Tommy Hilfiger’s quarterly results. For the fifth consecutive year, the results in the U.S. were disappointing; sales had declined by 11% on average over this period, dropping from $1.9 billion in 2000 to $1.1 billion in 2005. In Europe, however, the firm’s performance continued to be strong with sales growing at more than 40% a year, from $82 million in 2000 to $428 million in 2005 (see Exhibit 1). In an attempt to compensate for the decline in its core Tommy Hilfiger brand, the company had acquired the rights to the Karl Lagerfeld brand and was contemplating further brand acquisitions and expansions. Gehring and Onnink were concerned that Tommy Hilfiger’s steady decline in the U.S. would start spilling over to the European business, which thus far had been insulated and was growing at a healthy pace. Tommy Hilfiger, the second of nine children, had grown up in Elmira, New York. In 1969, while a senior in high school, Hilfiger began his fashion career with $150, just enough to purchase 20 pairs of bell-bottom jeans. He opened a shop called People’s Place which quickly grew to 10 stores, expanding to serve nearby college campuses, such as Cornell University. A big rock ‘n’ roll fan, Hilfiger was influenced by the British rock scene, and numerous young musicians—including a young Bruce Springsteen—visited his stores. Hilfiger’s goal was to bring London and New York City fashion to upstate New York. Over time, he gradually shifted from retailer to designer as he began to customize jeans and the other items he sold.  Larger sizes, more prominent logos, and brighter colors became a staple of Tommy Hilfiger designs in the late 1990s. Customers responded with enthusiasm, and Tommy Hilfiger’s sales exploded, crossing the $2 billion mark in 2000. Riding its rapidly growing sales and increasing popularity, the Tommy Hilfiger brand expanded aggressively via additional lines—such as boys’ clothing—and licensing abroad in markets such as Australia, India, Korea, Japan, and South America. However, by the early 2000s the company was beginning to lose steam in the U.S. market. Hiphop artists and their fans had moved on to more urban brands, such as Marc Ecko and FUBU, while the Tommy Hilfiger brand had already become tarnished in the eyes of preppy consumers.In response to this decline, the company began to cut prices, filling the clearance racks of Macy’s and Bloomingdale’s. In addition, the company tried to get away from core design themes to pick up sales by mimicking designs that were selling well in department stores and to expand the brand lineup in order to cater to more audiences. When Tommy Hilfiger filed for its IPO in 1992 it had only its one flagship Tommy Hilfiger brand. By 2005, the company had significantly expanded its brand portfolio. The U.S. Distribution Channel The early 2000s coincided with massive consolidation in the U.S. department store channel. One notable example was Federated’s 2005 acquisition of Marshall Field’s to create the nation's secondlargest department store chain, accounting for 35% of conventional and chain department store sales in the U.S. Within the all-important department store channel, there was an inherent pecking order. At the top of the pyramid were luxury stores such as Neiman Marcus and Saks. The next step down included bridge retailers like Bloomingdale’s and Nordstrom. Below that was the better category, with stores like Macy’s and Parisian. Moderate stores—such as Dillard’s and J. C. Penney—came in next, followed by budget stores, which included Kohl’s and Mervyns. In 2005, department stores accounted for 18% of U.S. clothing sales. The 24-and-under age group—a fashionable, trend-driven market—accounted for 36.5% of Tommy Hilfiger’s sales, but only 29.7% of Polo’s sales. Additionally, while Polo children’s wear accounted for only 8.2% of total sales, this segment made up more than 15% of Tommy Hilfiger’s sales. Tommy Hilfiger ranked highly in terms of awareness relative to Polo (90% vs. 86%). However, the brand fared worse in terms of other key factors deemed to be important for apparel purchasers, such as quality, style, and fit. Market research conducted by the company showed that retailers were offering Tommy Hilfiger merchandise at prices 30% below Polo for comparable items, although customers were willing to pay prices just one tier below Polo (7% to 10% lower). This disconnect in pricing depended primarily on the economics of the U.S. wholesale sector. Department stores requested discounts or markdown support from Tommy Hilfiger to drive higher volumes and traffic to their stores. In order to protect the margins generated from the department store channel, Tommy Hilfiger responded by pushing more and more product volume at lower prices into the channel, which in turn created pressure to discount the products in order to sell through the large volumes. In 2005, Tommy Hilfiger changed its segment reporting to separately report the U.S. and international (including Canada and Europe) wholesale results, which had previously been consolidated in a single wholesale figure. (The financial results by geographic region are reported in Exhibits 5 and 6.) This revealed that, from 2004 to 2005, gross margins in the U.S. wholesale channel declined from 33.5% to 26.2%, and the U.S. wholesale EBITDA dropped from $111 million in 2004 to $11 million in 2005. During the same period, retail’s contribution to sales in the U.S. was increasing. Sales for the U.S. retail business increased from $320 million in 2004 to $345 million in 2005, while the U.S. retail EBITDA went from $64 million in 2004 to $65 million in 2005. Retail gross margins in 2005 were strong at about 50.4%, vs. 26.2% in the wholesale channel. In contrast, the European wholesale distribution channel contributed $365 million in sales in 2004 and $459 million in 2005, with EBITDA of $63 million in 2004 and $98 million in 2005. Gross margins in European wholesale were at 55.4%, more than double the gross margin in the U.S. wholesale business. The European retail channel generated $47 million in sales in 2004 and $72 million in 2005. European retail EBITDA reached $9 million in 2004 and $5 million in 2005. Tommy Hilfiger had already attempted to move into the upscale apparel segment in the spring of 2004 with the launch of the H Hilfiger line, a brand that was intended to be more fashionable and formal. The line, backed by a $10 million marketing budget and Hilfiger’s personal involvement with a tour of six U.S. department stores, did well in Europe and the U.S. (in the company’s own retail stores) but was relatively unsuccessful in the U.S. wholesale channel. The Lagerfeld acquisition was an even larger departure from Tommy Hilfiger’s traditional audience. In early March 2005, Gehring and Onnink presented their fully worked-out plans, first to the CEO and later to the entire board. To their surprise, while the board recognized that there was merit in the plan, they did not embrace it. Gehring and Onnink engaged in several conversations with Hilfiger to express their concerns about the developments in the business and Gehring’s possible interest in acquiring the company. Gehring also had conversations with Joel Horowitz, then chairman of the board, to express Gehring’s concerns about the financial results of the U.S. wholesale operations and his interest in the acquisition. From these interactions, Gehring concluded he would need to secure financing to make his bid credible to Tommy Hilfiger’s board, and he called Silas Chou to discuss potential options. Chou committed his financial support, conditional on Gehring finding a private equity firm to support his bid. Gehring also secured some financing from a European bank, but again the financing was conditional on a private equity-led transaction. In March and April 2005, Gehring and Onnink met with several private equity firms and financial institutions to discuss their interest in acquiring Tommy Hilfiger. In May 2005, Gehring delivered a letter to the board of directors of Tommy Hilfiger, backed with equity financing from Apax Funds and debt financing from Citibank, expressing their joint interest in making a proposal to acquire Tommy Hilfiger for $14.50 in cash per share (representing a 33% premium over the most recent closing price of $10.91). The board rejected the offer but retained J.P. Morgan as a financial advisor to seek additional offers from potential buyers, whether strategic or financial. Gehring and Onnink were appointed the new CEO and CFO, respectively. Hilfiger and Horowitz were invited into the transaction as co-investors and board members. The Way Forward Gehring and Onnink were now in control of the business. They realized they needed to start executing their plan immediately. Could they turn the company’s performance around in the U.S.? And what changes, if any, should they make to support the global expansion of the company? What should their immediate next steps be? The Turnaround (2006–2010) Between signing the transaction documentation in December 2005 and completing the acquisition in May 2006, Gehring and Onnink worked with the Apax team to put together a detailed 100-day plan that included all initiatives the new management team was going to implement immediately after taking charge. Gehring relocated from Amsterdam to New York to take over and initiate a set of radical changes to the U.S. operations right after the closing in May 2006. Approximately 40% of wholesale and corporate staff positions in the U.S. were eliminated, and three distribution centers in the U.S. were consolidated into one site. In terms of the brand portfolio, Karl Lagerfeld and the Tommy Hilfiger brand extension “H” were closed in New York, which resulted in additional savings. The worldwide trademarks for Karl Lagerfeld, Lagerfeld Gallery, and KL Lagerfeld/Lagerfeld had been acquired by Tommy Hilfiger in January 2005. One of the core components of Gehring’s plan was the importance of changing the brand’s perception and positioning in the U.S. The objective was to move from the blurred positioning between low-tier urban street wear and the mid-tier “traditional” brand (competing with Nautica and Charter Club) to a best-in-class “neo-traditional” brand (competing with J. Crew and Polo Ralph Lauren). A turning point in the company’s wholesale strategy was an exclusive distribution deal with Macy’s. In a first-of-its-kind deal that was later adopted by several other brands, the company agreed to eliminate distribution through all other stores in exchange for “most favored nation” status with Macy’s. The collaboration between Gehring and Onnink on the one hand and Apax on the other was crucial to effect this transformation. In May 2010, Apax sold Tommy Hilfiger to Phillips-Van Heusen Corporation, now known as PVH Corp. (NYSE: PVH), for a total consideration of approximately €2.2 billion ($3.0 billion), including €1.9 billion ($2.6 billion) in cash and €276 million ($380 million) in PVH common stock. The price achieved by Apax at exit was almost twice what it paid for Tommy Hilfiger in 2006. This implied that Apax achieved a 5 times money multiple on its equity investment in the transaction. Tommy Hilfiger in 2014 The Tommy Hilfiger business progressed well after the transaction between Apax and PVH. European growth kept up its momentum even during the extremely turbulent European debt crisis and the related recessionary environment that was triggered by it. The pan-European penetration of the brand proved to be a significant strong point whereby a slowdown in business in the Southern European markets was offset by ongoing growth in the Northern markets. The Hilfiger brands generated significant revenue for PVH. In 2012, the Tommy Hilfiger North America segment generated earnings for interest and taxes (EBIT) of $183 million on total revenue of $1.4 billion. This represented significant growth over 2010, when EBIT for North America was $111 million. Meanwhile, the Tommy Hilfiger International segment generated EBIT of $243 million on $1.8 billion of total revenue. Similar to North America, the 2012 EBIT represented significant growth over the 2010 figure of $155 million. In November 2013 Gehring announced his plans to retire from his CEO position during the second half of 2014 and to hand over leadership of the company to long-time associate Daniel Grieder, a 52-year-old Swiss national who has been with the company in various roles since 1997, most recently as CEO of the European business. PVH reached an agreement with Gehring to continue with the company on an ongoing basis as chairman of Tommy Hilfiger and vice chairman of PVH Corp. Onnink also announced his planned resignation effective April 2014, when he would seek new entrepreneurial endeavors but remain involved with the company in an advisory capacity for another year.

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