G-III Apparel Group, Ltd. — Form 10-Q Summary
Period note: The request metadata says “2011 Q3,” but the filing is for the quarter ended October 31, 2012, and the nine months then ended. Financial amounts below are in U.S. dollars; “million” is used for readability.
Business context and reporting period
G-III designs, sources and markets apparel and accessories under licensed, proprietary and private-label brands, and operates retail stores. Its four reporting segments are wholesale licensed products, wholesale non-licensed products, retail operations and “other,” which includes Vilebrequin. The business is seasonal, with working-capital needs and borrowings generally peaking in the third fiscal quarter. Results are unaudited.
On August 7, 2012, G-III acquired Vilebrequin, a swimwear and resort-wear business, and included its results from the acquisition date through September 30, 2012. The filing reports Vilebrequin sales of $6.8 million for that period.
Key financial results
| Metric | Three months ended Oct. 31, 2012 | Three months ended Oct. 31, 2011 | Nine months ended Oct. 31, 2012 | Nine months ended Oct. 31, 2011 |
|---|---|---|---|---|
| Net sales | $543.5 million | $510.0 million | $1,024.4 million | $936.9 million |
| Gross profit / margin | $190.2 million / 35.0% | $162.3 million / 31.8% | $333.7 million / 32.6% | $287.3 million / 30.7% |
| Operating profit | $81.1 million | $73.4 million | $84.4 million | $77.3 million |
| Income attributable to G-III | $48.3 million | $43.6 million | $48.8 million | $44.6 million |
| Diluted EPS | $2.37 | $2.16 | $2.40 | $2.21 |
| Net cash used in operating activities | Not separately presented | Not separately presented | $140.3 million | $222.2 million |
For the quarter, sales rose 6.6%, operating profit 10.4%, and income attributable to G-III 10.9% year over year. Gross margin expanded 3.2 percentage points; operating margin was approximately 14.9% versus 14.4%. For the nine months, sales rose 9.3%, operating profit 9.2%, and income attributable to G-III 9.4%; gross margin expanded 1.9 percentage points.
Quarterly sales growth reflected higher licensed-product and retail sales, partly offset by lower non-licensed sales. New Kensie lines and licensed sports apparel contributed to licensed growth; retail comparable-store sales increased 18.9%. For the nine months, retail comparable-store sales increased 12.9%. Andrew Marc sales declined in both periods.
Cash flow, liquidity and debt
- At October 31, 2012, cash was $39.6 million, accounts receivable $362.7 million and inventory $307.5 million. Current assets were $737.0 million and current liabilities $462.8 million.
- Nine-month operating cash outflow was $140.3 million, primarily reflecting increases in receivables ($193.2 million) and inventory ($44.0 million), partly offset by net income and increases in taxes payable and accounts payable/accruals. Operating cash outflow was $222.2 million in the prior-year period.
- Investing cash outflow was $85.3 million, including $80.3 million for the Vilebrequin acquisition and $7.0 million of capital expenditures. Financing activities provided $240.3 million, mainly from $235.0 million of net borrowings.
- Revolving-facility borrowings were $265.1 million; the company also had $18.6 million of seller notes related to Vilebrequin, due in 2017 and bearing 5% interest. The filing reports $245.1 million of borrowings under the prior facility at October 31, 2011.
- A new five-year, senior secured credit facility provides for up to $450 million, subject to borrowing-base limits. G-III said it was in compliance with its covenants at October 31, 2012. The agreement restricts cash dividends and share repurchases until February 2014, subject to subsequent covenant conditions.
Material changes, outlook and risks
- Vilebrequin acquisition consideration was approximately $111.7 million including estimated contingent consideration: $87.6 million cash, $18.6 million in unsecured notes and $5.5 million estimated fair value of contingent consideration. Up to approximately $27.9 million of additional payments may be due if performance objectives are met through 2015. Purchase-price allocation was preliminary; approximately $99.9 million was assigned to goodwill and intangible assets, with finalization expected by year-end.
- Quarterly SG&A rose to $106.3 million from $87.0 million; as a share of sales, it increased to 19.6% from 17.1%. Management cited personnel, advertising and promotion, warehousing and acquisition-related professional fees. Nine-month SG&A was $242.4 million versus $204.7 million.
- Management said cash on hand, operating cash generation and facility availability should be sufficient for expected operating and capital requirements. The filing provides no specific quantitative earnings or revenue guidance and cautions that seasonal interim results are not necessarily indicative of full-year results.
- Management noted uncertain macroeconomic conditions and risks involving discretionary consumer demand, fashion trends and product acceptance, dependence on licensed products, customer concentration and retailer credit, sourcing and import costs, competition, seasonality, acquisition integration and financing needs. Management also stated that continued economic uncertainty could negatively affect fiscal 2013 results.
- Disclosure controls were assessed as effective; the filing reported no material changes in internal control over financial reporting during the quarter. Vilebrequin was expected to be excluded from the year-end internal-control effectiveness assessment.
Important facts for investors to verify
- Final Vilebrequin purchase accounting, contingent-payment assumptions, integration costs and the acquired business’s subsequent sales and profitability.
- Receivables and inventory quality, customer collections and seasonal cash conversion, given the large working-capital outflow.
- Borrowing-base availability, covenant headroom, debt costs and the company’s ability to manage seasonal financing needs.
- Whether gross-margin improvement persists as product mix and promotional activity change, and whether SG&A growth is controlled.
- Exposure to major customers and licensed brands, and performance of weaker non-licensed lines such as Andrew Marc.