G-III Apparel Group, Ltd. — Form 10-Q summary
Reporting period: Fiscal first quarter 2023, the three months ended April 30, 2022; comparative period is the three months ended April 30, 2021. Amounts are in U.S. dollars. The filing describes an apparel designer, sourcer and marketer operating wholesale and retail businesses, with licensed, proprietary and private-label brands.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $688.8 million | $519.9 million | Up 32.5% |
| Gross profit / margin | $246.0 million / 35.7% | $195.5 million / 37.6% | Margin down 1.9 percentage points |
| Operating profit / margin | $54.5 million / 7.9% | $46.8 million / 9.0% | Profit up 16.5%; margin down |
| Net income attributable to G-III | $30.6 million | $26.3 million | Up 16.4% |
| Diluted EPS | $0.62 | $0.53 | Up $0.09 |
| Cash from operating activities | $11.2 million | $47.0 million | Down $35.9 million |
Wholesale sales were $680.9 million before intersegment eliminations, versus $511.5 million; retail sales were $27.9 million versus $19.4 million. Retail operating loss widened to $10.4 million from $7.3 million, while wholesale operating profit rose to $64.9 million from $54.1 million. The company attributed wholesale growth to higher sales across Calvin Klein, DKNY/Donna Karan, Karl Lagerfeld Paris and Tommy Hilfiger products.
Gross margin pressure reflected inflation in product costs and higher freight, partly offset by less promotional activity and selected price increases. SG&A rose to $185.4 million from $141.6 million, including higher compensation, advertising, facilities, warehouse costs and acquisition-related professional fees. Other loss was $2.7 million, versus $1.8 million of other income, primarily reflecting foreign-currency losses. The effective tax rate declined to 22.7% from 28.0%, including a $1.3 million discrete foreign-tax-credit carryback benefit.
Cash, liquidity and debt
- Cash and cash equivalents were $438.4 million at April 30, 2022, down from $466.0 million at January 31, 2022 and up from $396.3 million a year earlier. Current assets were $1.62 billion and current liabilities $452.0 million.
- Operating cash flow was $11.2 million. Cash uses included a $37.9 million inventory increase and a $55.1 million decrease in accounts payable, accrued expenses and other liabilities; cash generation included a $31.9 million decline in receivables and a $20.5 million increase in accrued income taxes. Inventory was $550.1 million, up from $346.7 million a year earlier.
- Investing activities used $29.3 million, including a $25.0 million minority investment in an e-commerce retailer and $4.3 million of capital expenditures. Financing activities used $8.7 million, mainly for taxes on net share settlements.
- Notes payable had a net carrying value of approximately $521.4 million, including $400 million of 7.875% senior secured notes due 2025 and a $125 million, 2% LVMH note due in installments in June and December 2023. The ABL facility had no borrowings; the company reported approximately $560 million available and was in compliance with debt covenants. Letters of credit totaled $22.2 million.
Developments, outlook and risks
- On May 31, 2022, after quarter-end, G-III completed its acquisition of the remaining 81% of Karl Lagerfeld Holding for approximately €200 million, or $214 million, funded with cash on hand. Karl Lagerfeld and its affiliate were to become wholly owned and consolidated following the transaction. The quarter included acquisition-related professional fees and foreign-currency losses.
- Management reported improving consumer demand and business recovery compared with the COVID-19-affected prior-year period, but cautioned that pandemic effects remain uncertain. The filing provides no specific quantitative full-year guidance in the supplied text.
- Management expects inflationary pressures, particularly freight costs, to continue during fiscal 2023. Port congestion, shipping capacity and transportation constraints may delay deliveries and raise costs; the company is using carrier contracts, shipment planning, earlier production and selective price increases to respond.
- Other cited risks include changing consumer preferences, retailer financial distress and customer concentration, reliance on major licenses, foreign currency and international operations, and broader economic effects of the war in Ukraine. Less than 1% of fiscal 2022 revenue came from Russia and Ukraine, but indirect macroeconomic effects could be material.
- A Canadian customs valuation dispute remains on appeal. The company reported a CAD$26.9 million bond securing claimed duties and interest and cumulative amounts paid and deferred of CAD$14.4 million (US$11.6 million). G-III Canada says, based on counsel’s advice, it believes its position supports its declared valuations and recovery of amounts on appeal.
- Share-based compensation was $20.5 million, versus $2.5 million in the prior-year quarter. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and margin performance persist as freight, product and other operating costs evolve.
- Inventory levels, sell-through and cash conversion, given the year-over-year inventory build and lower operating cash flow.
- The post-quarter Karl Lagerfeld acquisition’s cash impact, integration, consolidation effects and contribution to earnings.
- Liquidity and covenant headroom after the acquisition, including seasonal borrowing needs and the LVMH note repayment dates.
- Developments in the Canadian customs appeal, supply-chain conditions and the effect of inflation and price increases on demand.