G-III Apparel Group, Ltd. — Form 10-Q Summary
Period clarification: The request identifies 2017 Q2, but the supplied filing is for the quarter and six months ended July 31, 2018 (fiscal 2019 Q2). Comparative figures are for 2017.
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. Its portfolio includes DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld Paris. The company operated 347 stores at July 31, 2018, down from 378 a year earlier. Interim results are unaudited and subject to seasonal fluctuations.
Financial performance and liquidity
| Metric | Three months ended July 31, 2018 | Six months ended July 31, 2018 |
|---|---|---|
| Net sales | $624.7 million; prior year $538.0 million | $1,236.4 million; prior year $1,067.0 million |
| Gross profit / margin | $231.5 million / 37.1%; prior year 37.7% | $466.1 million / 37.7%; prior year 37.9% |
| Operating profit (loss) | $23.2 million; prior year loss $3.6 million | $46.3 million; prior year loss $9.1 million |
| Net income (loss) | $10.1 million; prior year loss $8.6 million | $20.0 million; prior year loss $19.0 million |
| Diluted earnings (loss) per share | $0.20; prior year loss $0.18 | $0.40; prior year loss $0.39 |
Wholesale drove sales growth: segment sales rose to $544.6 million for the quarter and $1,072.3 million for the six-month period. Retail sales were broadly flat for the quarter at $106.7 million and rose to $211.2 million for six months; retail operations remained loss-making, with operating losses of $15.1 million and $34.6 million, respectively.
For the six months, operating cash flow was a use of $85.5 million, versus a use of $114.4 million in the prior year. Capital expenditures were $11.5 million; financing activities provided $98.4 million, largely from net revolver borrowings. Cash was $42.3 million at July 31, 2018.
At July 31, current assets were $1,276.1 million and current liabilities $601.3 million. Notes payable, net of discount and issuance costs, were $494.2 million; stated principal debt was $536.4 million, comprising a $300 million term loan, $111.4 million revolver borrowing and $125 million LVMH note. The company reported compliance with debt covenants. Term-loan and revolver rates were 7.24% and 3.61%, respectively.
Material changes versus prior comparable period
- Sales increased about 16% year over year in both the quarter and six-month period, led by DKNY/Donna Karan and other wholesale product lines. Quarterly net income improved from a loss to profit.
- Wholesale gross margin improved, while overall gross margin edged lower; retail gross margin also declined. The retail segment continued to generate operating losses despite improved results versus the prior year.
- Operating cash use improved year over year, but seasonal working-capital needs remained substantial, including increases in receivables and inventory.
- Adoption of ASC 606 on February 1, 2018 reduced opening retained earnings by $53.7 million, net of tax, and created a $204.4 million customer refund liability. The company said adoption had no net effect on operating cash flow. ASC 606 increased reported quarterly net income by $5.4 million and six-month net income by $3.7 million versus the company’s presentation without adoption.
Outlook, commentary, risks and unusual items
- Management expects retail-segment losses to decline in fiscal 2019, with a longer-term goal of returning the segment to profitability. It is reducing store count, reviewing leases and expenses, and repurposing some stores.
- Management believes cash, operating cash generation and funds available under its asset-based revolver will meet expected operating and capital needs; additional financing may be needed for acquisitions. No specific earnings or sales guidance is provided in the supplied text.
- The company identifies tariffs and trade tensions as a material risk: a significant majority of products sold in the U.S. are manufactured in China. Tariffs could raise prices or reduce gross margins; the impact was not yet predictable.
- G-III Canada is appealing a customs-duty reassessment. It posted a CAD$26.9 million bond (about $20.9 million) and deferred $4.5 million of additional duties paid during the six-month period pending the appeal. The company says it believes it has grounds for a refund and intends to contest the findings.
- The company paid $4.6 million to LVMH in February 2018 for a final tax adjustment related to the DKI acquisition, and funded a further $9.9 million contribution to its China joint venture on August 7, 2018.
- Management cites seasonality, retail customer financial health and consolidation, competition and e-commerce shifts, foreign sourcing, licensing dependence, and acquisition-related debt among key risks. It also notes that lease accounting adoption is expected to significantly increase long-term assets and liabilities, without an expected material impact on operating results.
Important facts for investors to verify
- Confirm the intended reporting year: the supplied filing covers 2018 Q2, not 2017 Q2.
- Assess how much reported improvement reflects underlying performance versus ASC 606 timing and classification effects.
- Track retail losses, store closures, comparable sales and progress toward management’s retail profitability goal.
- Monitor seasonal receivables and inventory, operating cash flow, revolver utilization and debt covenant headroom.
- Follow the Canadian customs appeal and potential tariff exposure, including any effect on sourcing costs and margins.