G-III Apparel Group, Ltd. — Form 10-K Summary
Business context and reporting period. This filing is the annual report for the fiscal year ended January 31, 2014 (fiscal 2014), not a standalone 2012 Q4 report. G-III designs, markets and sources apparel and related products through licensed brands, proprietary and private-label brands, and retail stores. It reports licensed products, non-licensed products and retail operations. Fiscal 2014 includes G.H. Bass results from its November 2013 acquisition and a full year of Vilebrequin results; Vilebrequin and the China retail joint venture report on a calendar-year basis.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
| Metric | Fiscal 2014 | Fiscal 2013 |
|---|---|---|
| Net sales | $1,718.2 million | $1,399.7 million |
| Gross profit / gross margin | $585.6 million / 34.1% | $451.6 million / 32.3% |
| Operating profit / operating margin | $131.5 million / 7.7% | $100.5 million / 7.2% |
| Net income | $76.4 million | $56.6 million |
| Net income attributable to G-III | $77.4 million | $56.9 million |
| Diluted EPS | $3.71 | $2.80 |
| Cash from operating activities | $84.6 million | $54.5 million |
- Fiscal 2014 net sales grew approximately 22.8%; gross margin improved 1.8 percentage points. SG&A increased to $440.5 million, or 25.6% of sales, from $341.2 million, or 24.4%.
- Cash and cash equivalents were $22.1 million at year-end, versus $27.4 million. Working capital was $345.0 million. Current assets were $586.2 million and current liabilities $241.2 million.
- At January 31, 2014, revolving credit borrowings were approximately $48.0 million, Vilebrequin promissory notes were $20.6 million, and cash was $22.1 million; management reported net debt of $47.3 million. The $450 million secured credit facility had $217.9 million available, subject to borrowing-base limits. The company said it was compliant with covenants.
- Investing activities used $78.4 million, including $49.1 million for G.H. Bass and $29.3 million of capital expenditures. Financing activities used $10.0 million. Inventory rose to $359.6 million from $280.9 million, partly reflecting the Bass acquisition.
- Fiscal 2014 Q4 (quarter ended January 31, 2014) sales were $472.8 million and net income attributable to G-III was $13.1 million, compared with $375.3 million and $8.1 million, respectively, in the prior-year quarter.
Material changes versus the prior year
- Licensed-product sales rose to $1,145.2 million from $981.8 million, led largely by Calvin Klein categories. Licensed products were 64.1% of sales, down from 67.3%.
- Non-licensed sales increased to $342.7 million from $281.9 million, principally reflecting a full year of Vilebrequin; this segment’s gross margin rose to 33.0% from 27.8%.
- Retail sales grew to $298.0 million from $196.2 million, including $61.5 million from newly acquired G.H. Bass, more Wilsons stores and a 10.7% comparable-store sales increase at Wilsons. Retail gross margin increased to 49.5% from 47.8%.
- Interest and financing charges rose to $9.2 million from $7.8 million, primarily due to credit-agreement fees, higher card fees and interest on Vilebrequin notes. The effective tax rate declined to 37.5% from 38.5%.
Outlook, risks and unusual items
- Management’s strategy is to diversify brands, products and channels and reduce reliance on the second half of the fiscal year. It expected to add retail locations in fiscal 2015, including approximately 9 Wilsons stores, 3 G.H. Bass stores and 15 Calvin Klein Performance stores in China.
- The business remains highly seasonal: July through November generated approximately 57% of fiscal 2014 sales, and management expects the second half to continue contributing a disproportionate share of sales and almost all net income.
- Major risks include reliance on licensed brands (especially Calvin Klein), customer concentration, fashion and inventory risk, weather sensitivity, foreign sourcing and currency exposure, and integration and performance risks from acquisitions. The ten largest customers represented 61.3% of sales; Macy’s represented 21.0%.
- License agreements impose minimum sales, royalty and advertising obligations and may be terminated if requirements are not met. Contractual minimum royalty and advertising payments totaled $535.0 million over the periods disclosed. Operating lease commitments totaled $320.8 million.
- The Vilebrequin acquisition included $20.6 million of promissory notes outstanding at year-end and potential contingent consideration tied to performance. G.H. Bass’s pre-acquisition stores had declining comparable sales, sales per square foot and gross margins, according to the company.
- Management stated that pending legal proceedings were not expected to have a material adverse effect. Ernst & Young issued unqualified opinions on the financial statements and internal control; G.H. Bass internal controls were excluded from the fiscal 2014 assessment.
Important facts for investors to verify
- Whether growth and margins are sustainable after separating acquisition contributions from comparable-business performance.
- G.H. Bass integration progress, store profitability and comparable-store trends, alongside planned store expansion.
- Calvin Klein license performance, renewal and compliance conditions, and the company’s continued dependence on licensed sales.
- Customer concentration, inventory levels, customer allowances and the cash conversion of seasonal working capital.
- Revolver availability and covenant headroom during seasonal borrowing peaks, as well as the repayment terms and foreign-currency exposure of Vilebrequin obligations.
- Execution against management’s expansion plans and the financial burden of lease and minimum royalty commitments.