Business Context and Reporting Period
Company: G-III Apparel Group, Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2009 (Second Quarter of Fiscal Year 2010)
Business Overview: G-III designs, manufactures, and markets outerwear, dresses, sportswear, and women's suits under licensed brands (e.g., Calvin Klein, Guess), proprietary brands (e.g., Andrew Marc), and private retail labels. The company operates three segments: Wholesale Licensed Apparel, Wholesale Non-Licensed Apparel, and Retail Operations (primarily Wilsons outlet stores).
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended July 31, 2009 | Six Months Ended July 31, 2009 |
|---|---|---|
| Net Sales | $135,926 | $243,489 |
| Gross Profit | $40,815 (30.0% margin) | $72,030 (29.6% margin) |
| Operating Loss | $(3,764) | $(14,836) |
| Net Loss | $(2,776) | $(9,595) |
| Net Loss Per Share (Basic/Diluted) | $(0.17) | $(0.57) |
| Cash and Cash Equivalents | $5,682 (as of July 31, 2009) | N/A |
| Notes Payable (Debt) | $111,336 (as of July 31, 2009) | N/A |
| Net Cash Used in Operating Activities | N/A | $(73,141) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 19.8% for the three months and 29.0% for the six months compared to the prior year periods. This was driven primarily by a significant increase in Calvin Klein licensed product sales ($21.7M increase in Q2; $36.9M increase in YTD) and the inclusion of a full quarter of Wilsons retail operations.
- Segment Performance:
- Wholesale Licensed: Sales increased due to Calvin Klein and Guess outerwear.
- Wholesale Non-Licensed: Sales decreased due to declines in women's outerwear and Jessica Howard divisions.
- Retail: Sales increased significantly due to the full quarter impact of the Wilsons acquisition (acquired July 2008).
- Profitability: Gross profit margins improved (30.0% vs. 25.5% in Q2; 29.6% vs. 24.6% in YTD) largely due to the higher-margin retail segment and better margins in Calvin Klein sportswear. However, the company reported an operating loss in both periods due to increased Selling, General, and Administrative (SG&A) expenses associated with the retail operations.
- SG&A Expenses: Increased by $10.7M in Q2 and $24.4M YTD, primarily attributable to the Wilsons retail outlet store operations.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management notes that significant economic uncertainty and a slowdown in the global macroeconomic environment continue to negatively impact consumer spending on discretionary items. They cannot predict the direction of the economic downturn but anticipate it may continue to negatively impact results for the remainder of fiscal 2010.
- Strategic Initiatives: The company is implementing initiatives to improve Wilsons retail performance, including improving merchandise mix (more leather outerwear and private label), enhancing store presentation, and reducing distribution center overhead.
- Liquidity: The company has a $250 million senior secured revolving credit facility expiring in July 2011. As of July 31, 2009, outstanding borrowings were $111.3 million. Management believes cash on hand and available credit are sufficient to meet operating requirements.
- Risks: Key risks include reliance on licensed products, foreign manufacturing, retailer financial difficulties (bankruptcies/liquidations), and changing consumer tastes. The company faces credit risk regarding receivables from financially distressed retail customers.
- Unusual Items: The company paid $5.2 million in contingent purchase price payments related to acquisitions made in 2005 (Marvin Richards and Winlit Group), which was the final year of obligation for these payments.
Investor Verification Checklist
- Inventory Levels: Verify the $172.4 million inventory balance, which increased significantly ($55.8M cash outflow YTD) in preparation for the fall shipping season.
- Debt Covenants: Confirm continued compliance with the maximum senior leverage ratio and minimum fixed charge coverage ratio under the $250M credit facility.
- Retail Segment Turnaround: Monitor the effectiveness of cost-cutting and merchandise mix initiatives at the Wilsons retail outlets, which currently operate at a loss.
- Customer Concentration: Assess the financial health of the top ten customers, which account for a majority of sales, given the risk of retailer bankruptcies.
- License Renewals: Track the performance of new licenses (Enyce, Sean John boys' outerwear) and the expansion of existing ones (Calvin Klein) to ensure revenue sustainability.