G-III Apparel Group, Ltd. — Form 10-Q Summary
Reporting period: The filing covers the quarter and six months ended July 31, 2019, comparing with the corresponding 2018 periods. Although the request metadata says 2018 Q2, the filing itself is for fiscal 2020 Q2. G-III designs, sources and markets branded and licensed apparel and accessories, and operates wholesale and retail businesses.
Financial performance and liquidity
| Metric | Three months ended July 31, 2019 | Six months ended July 31, 2019 |
|---|---|---|
| Net sales | $643.9 million; prior year $624.7 million | $1,277.4 million; prior year $1,236.4 million |
| Gross profit / margin | $231.8 million / 36.0%; prior year 37.1% | $467.8 million / 36.6%; prior year 37.7% |
| Operating profit | $26.9 million; prior year $23.2 million | $52.5 million; prior year $46.3 million |
| Net income | $11.1 million; diluted EPS $0.23 | $23.2 million; diluted EPS $0.47 |
| Operating cash flow | Not separately provided for the quarter | $(132.9) million; prior year $(85.5) million |
For the six months, wholesale sales increased to $1.16 billion, while retail sales fell to $165.6 million from $211.2 million. Retail same-store sales declined 21.9% at Wilsons and 13.6% at G.H. Bass; DKNY same-store sales rose 1.0%. G-III operated 292 stores at July 31, versus 347 a year earlier. Retail operations continued to report an operating loss: $35.4 million for the six months.
Cash and equivalents were $39.6 million at July 31, 2019, versus $42.3 million a year earlier and $70.1 million at January 31, 2019. Current assets were $1.45 billion and current liabilities $697.2 million. Inventory was $842.1 million, up from $678.6 million a year earlier. Management attributed cash use in part to seasonal inventory buildup and accelerated receipts ahead of anticipated China tariffs.
Debt principal included a $300 million term loan, $160 million drawn on a $650 million revolving facility, a $125 million LVMH note and a $3.2 million unsecured loan. Reported notes payable, net of discounts and issuance costs, were $553.1 million. Operating lease liabilities totaled $346.9 million. The company said it was in compliance with debt covenants at July 31. It used $35.2 million to repurchase shares during the quarter.
Changes, outlook and notable items
- Six-month sales rose about 3%, and net income rose about 16% year over year. Wholesale growth, including Tommy Hilfiger, DKNY/Donna Karan and Calvin Klein products, more than offset lower retail sales and the expiration of the Ivanka Trump license.
- Gross margin declined year over year in both reported periods. Management cited the lower share of higher-margin retail sales in the overall mix; wholesale and retail segment gross margins also softened in the six-month comparison.
- G-III adopted lease accounting standard ASC 842 on February 1, 2019. It recognized lease liabilities of $384.5 million and lease assets of $341.2 million at adoption, and recorded a $9.6 million after-tax impairment through retained earnings. July 31 lease balances were $346.9 million of liabilities and $309.4 million of assets.
- Management said cash on hand, expected full-year operating cash generation and revolving-facility availability should cover expected operating and capital needs. The filing gives no specific revenue or earnings guidance; results are seasonal and first-half results are not necessarily indicative of the full year.
- Retail management is pursuing lease exits or renegotiations, cost cuts, merchandising improvements and a more aggressive store-count reduction. Outside advisors were engaged in July 2019. Management anticipated some product-related performance benefits in the fall and holiday season while continuing to reduce costs.
- Tariffs are a material uncertainty. G-III estimated that the increase to 25% tariffs on certain China-origin handbags and leather outerwear could add about $6 million of costs in fiscal 2020 if maintained. New 15% tariffs on additional China imports were expected to add about $12 million of second-half fiscal 2020 costs, assuming no offsets. The company was considering price increases, sourcing shifts, earlier inventory receipts and vendor support.
- A Canadian customs-duty dispute remains under appeal. A CAD$26.9 million bond, reported as approximately $20.9 million, secures claimed duties and interest. G-III said it disputes the assessment; from June 1, 2019 it resumed paying based on pre-audit import values while continuing to defer additional duties paid through May pending the appeal.
- Other disclosed risks include dependence on licensors and foreign manufacturers, retail customer financial health, competition and e-commerce shifts, consumer demand, and potential additional tariffs. The filing reported no material changes to previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether wholesale growth can continue to offset persistent retail weakness and declining same-store sales at Wilsons and G.H. Bass.
- Whether inventory levels, tariff-related purchasing and seasonal working-capital needs convert into cash as expected.
- The eventual tariff cost and the effectiveness of price increases, vendor concessions and sourcing diversification.
- The outcome and potential financial exposure of the Canadian customs-duty appeal.
- Debt availability and covenant headroom, interest-rate exposure, and the combined cash demands of debt service, leases and share repurchases.
- Progress and costs associated with retail restructuring, store closures and lease actions.