G-III Apparel Group, Ltd. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended July 31, 2020—G-III’s fiscal 2021 second quarter—not Q2 2019. Unless otherwise stated, amounts below are in U.S. dollars.
Business context and reporting period
G-III designs, sources and markets apparel and accessories through wholesale and retail operations, including proprietary, licensed and private-label brands. The filing covers the three and six months ended July 31, 2020, compared with the corresponding 2019 periods. COVID-19-related store closures, lower consumer demand and disruption to retail customers and supply chains materially affected the period.
Financial performance and liquidity
| Metric | Three months ended July 31, 2020 | Three months ended July 31, 2019 | Six months ended July 31, 2020 | Six months ended July 31, 2019 |
|---|---|---|---|---|
| Net sales | $297.2 million | $643.9 million | $702.3 million | $1,277.4 million |
| Gross profit / margin | $134.7 million / 45.3% | $231.8 million / 36.0% | $259.1 million / 36.9% | $467.8 million / 36.6% |
| Operating income (loss) | $(11.4) million | $26.9 million | $(54.7) million | $52.5 million |
| Net income (loss) | $(15.0) million | $11.1 million | $(54.3) million | $23.2 million |
| Diluted EPS | $(0.31) | $0.23 | $(1.13) | $0.47 |
- Sales fell approximately 54% in the quarter and 45% for the six-month period year over year. Wholesale sales were $266.8 million for the quarter and $645.7 million for six months; retail sales were $34.5 million and $68.4 million, respectively, before intersegment eliminations.
- Quarterly gross margin improved largely due to reversals of previously expected markdown accruals and royalty expense; retail margins deteriorated amid closures, promotions and liquidation activity. Six-month consolidated gross margin was broadly stable.
- SG&A was $122.1 million for the quarter and $276.7 million for six months, down from $196.4 million and $398.3 million. Lower personnel, advertising and warehouse costs were partly offset over six months by $10.4 million of higher bad-debt expense.
- Operating cash flow was $59.8 million for six months, versus cash used of $132.9 million in 2019. Investing activities used $13.1 million; financing activities provided $6.9 million. Cash increased to $252.8 million from $197.4 million at January 31, 2020.
- At July 31, current assets were $1,173.7 million and current liabilities $472.4 million. Reported notes payable, net of discount and costs, totaled approximately $408.7 million, including the current portion. The company had no revolving-facility borrowings at quarter-end and stated it was in compliance with debt covenants.
- Inventory was $574.8 million, versus $842.1 million a year earlier. Accounts receivable, net, was $276.5 million; the doubtful-account allowance was $11.2 million, following a $10.5 million six-month provision.
Material changes, outlook and risks
- Management attributed the steep sales decline and operating losses to COVID-19, including store closures, constrained customer operations, weaker apparel demand and reduced tourism. Management expected results, sales, earnings and cash flows to remain materially adversely affected for at least the balance of fiscal 2021.
- The company did not provide financial forecasts, citing uncertainty from the pandemic. It said it believed cash and available borrowing capacity were adequate for foreseeable liquidity needs, while noting that the duration and scope of COVID-19 made liquidity estimates uncertain.
- G-III announced closure of all Wilsons Leather and G.H. Bass stores and its Calvin Klein Performance stores, with completion expected by fiscal year-end 2021. It estimated total restructuring charges of approximately $100 million and net cash outflow of approximately $65 million; $1.2 million was recorded in the quarter. Retail operations reported an $83.8 million operating loss for the six months.
- Asset impairments were $14.3 million in the quarter and $17.5 million for six months in the income statement; the cash-flow reconciliation reports $20.0 million of impairment charges for six months. Management identified $370.0 million of indefinite-lived trademarks as having limited fair-value headroom and potential future impairment risk, although its April impairment tests found no impairment.
- On August 7, 2020, after quarter-end, G-III issued $400 million of 7.875% senior secured notes due 2025, using proceeds to repay its 2022 term loan, pay related expenses and for general corporate purposes. It also amended and extended its $650 million ABL facility. These transactions increase the importance of debt-service costs, collateral priorities and covenant restrictions.
- Other notable exposures include potential customer bankruptcies and collection losses, seasonality, licensed-brand dependence, tariffs and sourcing risks, and a Canadian customs-duty appeal. The company had a CAD $26.9 million bond securing the CBSA claim and reported CAD $13.0 million of cumulative higher-duty amounts paid and deferred through July 31, 2020; management intended to contest the assessment.
- Effective October 1, 2020, G-III was to increase its ownership of the Fabco China joint venture from 49% to 75% and consolidate its results. In August, it also renewed Levi’s and Dockers outerwear licenses through November 30, 2024.
Important facts for investors to verify
- Whether the sales recovery and customer payment trends support management’s liquidity assessment, particularly as COVID-19 effects and customer credit risks evolve.
- The ultimate total cost, cash outflow, timing and execution of the retail closures, including any additional lease, liquidation, severance or impairment charges.
- The cost and terms of the August refinancing, including interest expense, ABL availability, springing maturity conditions and compliance with debt covenants.
- Whether weaker forecasts or market conditions trigger impairment of trademarks, goodwill or other assets; $370.0 million of trademarks was identified as having limited fair-value headroom.
- The outcome and potential financial impact of the Canadian customs-duty appeal and the collectability of receivables from financially distressed retailers.