G-III Apparel Group, Ltd. — Form 10-Q Summary
Period: Three months ended April 30, 2013, compared with the three months ended April 30, 2012. The request metadata says “2012 Q1,” but the filing itself reports first-quarter fiscal 2014 results for the period ended April 30, 2013. Amounts below are U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
G-III designs, markets and sells apparel and accessories through licensed and proprietary brands and retail stores. Its reportable segments are licensed products, non-licensed products and retail operations. Results are seasonal and this quarter is not necessarily indicative of the full fiscal year. Vilebrequin, acquired in August 2012, is included in the current-period results; its reported quarter covers January 1 through March 31, 2013.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $272.6 | $229.4 |
| Gross profit / margin | $92.4 / 33.9% | $68.7 / 29.9% |
| SG&A | $85.8 | $66.6 |
| Depreciation and amortization | $3.1 | $2.1 |
| Operating profit | $3.4 | $0.02 |
| Interest and financing charges, net | $1.8 | $1.1 |
| Income (loss) before taxes | $1.7 | $(1.4) |
| Net income (loss) attributable to G-III | $1.1 | $(0.8) |
| Diluted earnings (loss) per share | $0.05 | $(0.04) |
Material changes and operating drivers
- Sales rose 18.8%. Licensed-product sales increased to $180.5 million from $157.0 million, mainly on Calvin Klein and Kensie growth. Non-licensed sales rose to $60.7 million from $47.3 million, including $12.6 million from Vilebrequin. Retail sales increased to $45.3 million from $36.1 million, reflecting additional stores and a 12.4% comparable-store sales increase.
- Gross margin improved to 33.9% from 29.9%. Management cited improved margins in Calvin Klein and Kensie products, Vilebrequin’s higher-margin business mix, and better retail product mix and lower promotional activity.
- SG&A increased $19.2 million, driven principally by higher personnel costs, facilities, advertising and third-party warehousing. Depreciation and amortization and interest expense also increased, with the latter reflecting acquisition-related financing and higher average borrowings.
- Segment operating profit was $3.5 million for licensed products, a $2.0 million loss for non-licensed products, and $2.0 million for retail operations. Non-licensed results included acquisition-related Vilebrequin operations.
Cash flow, balance sheet and liquidity
- Operating cash use was $14.2 million, versus $38.3 million in the prior-year quarter. Investing cash use was $4.6 million, primarily for retail-store buildouts and fixtures; financing provided $11.8 million, mainly from $11.1 million of net borrowings.
- Cash was $20.6 million at April 30, 2013, down from $27.4 million at January 31, 2013 and $38.3 million a year earlier. Inventory was $242.1 million, down from $280.9 million at January 31 but up from $208.8 million a year earlier.
- Current assets were $451.4 million and current liabilities were $176.2 million at April 30, 2013. The filing reports total borrowings of $95.3 million: $76.1 million under the revolving credit facility and $19.2 million of Vilebrequin acquisition notes. The company reported $73.4 million available under its credit agreement.
- The five-year, senior secured credit facility permits up to $450 million, subject to borrowing-base limits. It requires a minimum fixed-charge coverage ratio under specified circumstances and restricts cash dividends, stock redemptions and repurchases until February 2014, subject to covenant compliance thereafter. The company said it was in compliance at quarter-end and believed available cash, operating cash flow and credit availability would meet expected operating and capital needs.
Outlook, risks and unusual items
- No specific financial guidance or quantified forecast is provided. Management cautioned that uncertain macroeconomic conditions could weigh on fiscal 2014 results and emphasized the seasonal nature of the business.
- Risks highlighted include dependence on licensed brands and licensors, changing consumer tastes, customer concentration and retailer financial health, international operations, sourcing and input costs, competition, retail execution, acquisitions, and the need for financing.
- The Vilebrequin acquisition involved approximately $111.7 million of total consideration, including $87.6 million cash, $18.6 million in unsecured notes and estimated contingent consideration. Up to approximately $27.9 million of additional contingent consideration is possible based on performance; the estimated payable at April 30, 2013 was $5.6 million. Purchase-price allocation remained preliminary and included $101.0 million of goodwill and intangible assets.
- Other notable developments include a 51%-owned Calvin Klein Performance retail joint venture in mainland China and Hong Kong, and new Calvin Klein men’s and women’s swimwear licensing rights expected to begin shipping for Spring 2014. The filing reported no material changes to previously disclosed risk factors or market-risk disclosures.
Important facts for investors to verify
- Confirm the period discrepancy: the filing is for the quarter ended April 30, 2013, not 2012 Q1.
- Track whether sales growth and margin improvement persist after separating Vilebrequin’s contribution and other mix effects.
- Assess the seasonal working-capital pattern, inventory levels, cash generation and reliance on revolving borrowings.
- Monitor Vilebrequin integration, final purchase accounting and possible contingent payments, as well as performance of the new licensing and retail initiatives.
- Review credit-facility availability and covenant restrictions, especially in light of the seasonal peak in borrowings.