G-III Apparel Group, Ltd. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter and nine months ended October 31, 2020, not 2019 Q3. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Business context and reporting period
G-III designs, sources and markets apparel and accessories through wholesale and retail operations, including owned, licensed and private-label brands. The filing covers the fiscal third quarter and first nine months of fiscal 2021. Results were materially affected by the COVID-19 pandemic, including reduced consumer demand, store restrictions and customer financial distress.
Financial results
| Metric | Three months ended Oct. 31, 2020 | Prior-year quarter | Nine months ended Oct. 31, 2020 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $826.6 million | $1,128.4 million | $1,528.9 million | $2,405.8 million |
| Gross profit / margin | $297.8 million / 36.0% | $399.0 million / 35.4% | $556.8 million / 36.4% | $866.9 million / 36.0% |
| Operating profit | $110.1 million | $142.9 million | $55.4 million | $195.3 million |
| Net income | $63.2 million | $95.4 million | $8.9 million | $118.5 million |
| Diluted EPS | $1.29 | $1.97 | $0.18 | $2.42 |
| Cash from operating activities | Not presented for the quarter | Not presented for the quarter | $(127.6) million | $(220.2) million |
Quarterly sales fell about 27% year over year; nine-month sales fell about 36%. Nine-month gross margin edged up despite much lower sales, while operating profit and net income contracted sharply. Quarterly SG&A declined to $177.6 million from $246.6 million, largely reflecting reduced personnel, advertising and facility costs. Quarterly interest and financing charges rose to $18.7 million from $12.5 million, including a $6.5 million charge for extinguished financing costs.
Liquidity, debt and balance sheet
- At October 31, 2020, cash and cash equivalents were $149.7 million; availability under the ABL revolving facility exceeded $600 million. No ABL borrowings were outstanding, and the company reported compliance with debt covenants.
- Debt included $400 million of 7.875% senior secured notes due 2025, the $125 million face-value LVMH note (reported carrying value $106.4 million), and approximately $10.1 million of Vilebrequin unsecured loans and overdrafts. The former $300 million term loan was repaid in August 2020.
- Current assets were $1.372 billion and current liabilities $482.1 million. Accounts receivable were $721.0 million, net of a $15.5 million doubtful-account allowance; inventory was $461.8 million.
- Nine-month operating cash use was $127.6 million, chiefly reflecting higher receivables and reductions in customer refund liabilities and lease liabilities. Financing activities provided $93.4 million, primarily from the notes issuance, partly offset by repayment of the term loan and financing costs.
Material changes, outlook and risks
- Retail restructuring: G-III is closing all Wilsons Leather and G.H. Bass stores and Calvin Klein Performance stores, with closures expected by fiscal year-end January 31, 2021. The company expects approximately $100 million in aggregate restructuring charges and about $65 million in net cash outflow; $2.2 million of restructuring charges had been recorded through October 31. The related store lease liability was $28 million, expected to be paid in the quarter ending January 31, 2021.
- COVID-19 outlook: Management expects business operations, sales, earnings and cash flows to remain materially adversely affected for at least the balance of fiscal 2021. It says liquidity is adequate, but notes the duration and effects of the pandemic remain uncertain. No specific financial guidance is provided in the supplied filing text.
- Customer credit and impairment: The allowance for doubtful accounts increased by $14.9 million during the nine-month period, primarily for department-store customers with announced or possible bankruptcy filings. Management identified $370 million of indefinite-lived trademarks with limited fair-value headroom and warned that future impairment charges are possible; no impairment indicators were identified in its third-quarter review.
- Other unusual items and contingencies: The company recorded approximately $20 million of second-quarter asset impairment charges, primarily for store lease assets and fixtures. A Canadian customs valuation dispute remains unresolved; the company is contesting the assessment and had provided a CAD$26.9 million bond. It reported CAD$12.9 million of cumulative additional duties paid and deferred through October 31, 2020.
- Subsequent event: Effective December 1, 2020, G-III increased its ownership of Fabco, which operates its DKNY business in China, from 49% to 75% for nominal consideration and began consolidating it.
Most important facts for investors to verify
- Whether pandemic-related demand, customer store operations and wholesale orders recover or deteriorate, and how that affects cash generation.
- Actual total restructuring charges, timing of store closures and cash outflows, and whether the continuing retail and digital businesses reach profitability.
- Receivable collectability and further reserve needs given retailer bankruptcies; also monitor inventory levels, markdowns and gross margins.
- Whether the $370 million of trademarks with limited fair-value headroom face impairment, and how the Canadian customs dispute is ultimately resolved.
- Debt service capacity under the 7.875% notes, ABL availability and covenants, including the ABL facility’s springing-maturity provisions.