G-III Apparel Group, Ltd. — Form 10-Q Summary
Reporting-period note: The supplied filing is for the three months ended April 30, 2018 (the first quarter of fiscal 2019), not 2017 Q1 as indicated in the request metadata. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
G-III designs, markets and sells apparel and accessories through wholesale and retail operations, including licensed, proprietary and private-label brands. Its portfolio includes DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld. The quarter is seasonally weak relative to the company’s peak selling periods, so results are not necessarily indicative of the full fiscal year.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $611.7 | $529.0 |
| Gross profit / margin | $234.5 / 38.3% | $201.7 / 38.1% |
| Operating income (loss) | $23.1 | $(5.5) |
| Net income (loss) | $9.9 | $(10.4) |
| Diluted earnings (loss) per share | $0.20 | $(0.21) |
| Cash used in operating activities | $(24.3) | $(33.2) |
| Cash and cash equivalents at period end | $71.0 | $67.1 |
Sales rose 15.6%. Wholesale sales were $527.7 million, up from $453.3 million; retail sales were $104.5 million, up from $99.2 million, before intersegment eliminations. Wholesale operating income was $42.5 million; retail operations recorded an operating loss of $19.5 million. Gross margin improved modestly, while the company moved from an operating and net loss to profitability.
Operating cash outflow reflected seasonal working-capital needs, including higher receivables and lower accounts payable and accrued liabilities. The company attributed substantial reported changes in receivables, customer refund liabilities and inventory presentation to ASC 606 adoption. Investing activities used $5.3 million, mainly for store and department-store fixtures and improvements. Financing activities provided $54.3 million, primarily from net revolving-facility borrowings.
At April 30, 2018, current assets were $1,067.9 million and current liabilities were $453.6 million, including $214.7 million of customer refund liabilities. Reported notes payable, net of discount and issuance costs, were $448.3 million. Principal balances were $300.0 million on the term loan, $67.4 million on the revolving facility and $125.0 million on the LVMH note. The revolving facility had a $650 million commitment, subject to borrowing-base limits. The company reported compliance with its debt covenants.
Material changes and accounting effects
- Net sales increased principally on higher DKNY and Donna Karan, Calvin Klein and Karl Lagerfeld Paris wholesale sales. Retail sales also increased, though G.H. Bass sales declined.
- Wholesale gross margin increased to 35.3% from 34.2%, reflecting product mix and licensing revenue; retail gross margin declined to 46.3% from 47.1%.
- SG&A increased to $202.1 million from $197.4 million. Higher personnel and advertising costs were partly offset by a $6.3 million reduction in reported SG&A from the ASC 606 reclassification of cooperative advertising to net sales.
- G-III adopted ASC 606 using the modified retrospective method. The adoption reduced opening stockholders’ equity by $53.7 million, net of tax. For the quarter, it reduced reported net sales by $7.6 million and net income by $1.7 million versus presentation without adoption. It also changed balance-sheet classification, including $214.7 million of customer refund liabilities.
- Income tax expense was $3.1 million versus a $6.1 million tax benefit in the prior-year quarter. The reported effective tax rate declined to 24.0% from 37.0%, primarily reflecting the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act.
Outlook, commentary and risks
Management said cash on hand, operating cash generation and ABL availability should be sufficient for expected operating and capital needs, while noting that acquisitions could require additional financing. No numerical earnings or sales guidance is provided in the supplied filing text. Management expects to reduce retail-segment losses in fiscal 2019, with an ultimate goal of returning the segment to profitability, through cost reductions, store-count rationalization, lease actions and merchandising changes.
A material contingency concerns a Canadian customs-duty examination. The CBSA challenged the valuation method for certain imports and claimed approximately CAD$26.9 million (about $20.9 million) in duties and interest through December 2017; G-III Canada posted a bond and appealed in May 2018. The company says it intends to contest the findings. It began paying duties under the new method in February 2018 and deferred $1.9 million of related duties during the quarter pending the appeal.
Other disclosed risks include reliance on licensed brands and licensors, retail customer concentration and financial distress, competition and shifting consumer preferences, overseas sourcing and import risks, seasonality, acquisition-related debt and goodwill, and information-security risks. Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the large customer refund-liability estimate and other ASC 606 adjustments remain appropriate as actual returns, markdowns and allowances emerge.
- The status and potential financial exposure of the CBSA appeal, including future duties paid under the revised valuation method.
- Revolving-facility availability, seasonal peak borrowing needs, debt-covenant headroom and the effect of floating interest rates.
- Progress toward reducing retail losses, including comparable-store trends, store closures and the costs of lease or restructuring actions.
- How much of the sales and margin improvement reflects sustained demand and mix versus timing, seasonality and accounting-presentation changes.