G-III Apparel Group, Ltd. — Form 10-Q Summary
Period clarification: The filing is for the quarter and nine months ended October 31, 2017 (fiscal 2018 third quarter), not 2016 Q3 as indicated in the request metadata. Dollar amounts below are in millions except per-share data.
Business context and reporting period
G-III designs, markets and sells apparel and accessories through wholesale and retail operations, including proprietary, licensed and private-label brands. Its portfolio includes DKNY and Donna Karan, acquired on December 1, 2016. The filing notes that results are seasonal and not necessarily indicative of the full fiscal year.
Financial performance
| Metric | Three months ended Oct. 31, 2017 | Three months ended Oct. 31, 2016 | Nine months ended Oct. 31, 2017 | Nine months ended Oct. 31, 2016 |
|---|---|---|---|---|
| Net sales | $1,025.0 | $883.5 | $2,092.0 | $1,783.1 |
| Gross profit / margin | $390.9 / 38.1% | $321.5 / 36.4% | $795.6 / 38.0% | $642.8 / 36.0% |
| Operating profit / margin | $141.2 / 13.8% | $115.1 / 13.0% | $132.1 / 6.3% | $115.3 / 6.5% |
| Net income | $81.6 | $70.6 | $62.7 | $72.0 |
| Diluted EPS | $1.65 | $1.50 | $1.27 | $1.53 |
- Third-quarter sales rose about 16% year over year; nine-month sales rose about 17%. Growth reflected the DKI acquisition and increases in Tommy Hilfiger, Calvin Klein, Karl Lagerfeld Paris and Andrew Marc products. Private-label sales declined.
- Third-quarter gross margin improved, while nine-month operating margin edged lower. Nine-month SG&A rose to $636.0 million from $504.5 million, including $115.4 million of DKI-related expenses. Nine-month interest and financing charges increased to $33.5 million from $4.0 million, contributing to lower net income despite higher sales and operating profit.
- For the nine months, operating cash flow was negative $245.6 million, compared with negative $117.3 million a year earlier, primarily reflecting increases in receivables ($336.8 million) and inventory ($108.3 million). Investing cash outflow was $21.5 million; financing cash inflow was $253.9 million. Cash declined from $80.0 million at fiscal year-end to $68.2 million.
- At October 31, 2017, current assets were $1,297.1 million and current liabilities $368.7 million. Notes payable had a carrying amount of $726.6 million, including $300 million of term loans, $349.6 million drawn on the revolving facility and a $125 million LVMH note at principal value. The company reported covenant compliance.
Material changes and business developments
- DKI contributed to year-over-year growth; its acquisition also increased goodwill and intangible assets and significantly increased debt and interest expense. Purchase-price allocations remained preliminary.
- Retail operations remained loss-making: operating losses were $7.3 million in the quarter and $50.7 million for the nine months. Management described a turnaround effort involving cost reductions, lease actions, store repurposing and fewer Wilsons Leather and G.H. Bass locations.
- In August 2017, G-III formed a 49%-owned China joint venture for DKNY and Donna Karan products, with a $10 million G-III funding commitment by August 2018. It expected the venture to begin generating revenue in early fiscal 2019. Macy’s was scheduled to become the exclusive U.S. department store for specified DKNY women’s categories beginning February 2018.
Outlook, risks and contingencies
- Management expected fiscal 2018 capital expenditures of approximately $35 million and said cash on hand, operating cash generation for the year and availability under the ABL facility were expected to cover operating and capital needs. It also anticipated investing approximately $10 million in the China joint venture by August 2018.
- G-III Canada received a customs reassessment from the Canada Border Services Agency covering imports from February 2014 through October 2017. The company estimated additional duties of $9 million to $15 million plus interest, was required to prepay within 90 days, and intended to appeal while seeking a refund.
- Key risks cited include licensed-brand dependence, consumer and fashion trends, retail customer concentration and credit risk, competition and online-channel shifts, foreign sourcing and operations, acquisition integration, and increased acquisition-related debt. Management said there had been no material changes to previously disclosed risk factors.
- Revenue standard adoption was expected to affect wholesale revenue timing and presentation, including estimated future markdowns and allowances and reclassification of certain customer-assistance costs. The company estimated a transition reduction to retained earnings of approximately $23 million to $30 million as of February 1, 2018; the estimate could change.
Most important facts for investors to verify
- Confirm the reporting period: this filing covers fiscal 2018 Q3, ended October 31, 2017.
- Assess whether DKI-related growth and integration benefits can offset higher SG&A, amortization and financing costs.
- Monitor seasonal working-capital needs, operating cash flow, revolving-facility borrowings and covenant headroom.
- Track the outcome and cash impact of the Canadian customs appeal and reassessment.
- Verify final DKI purchase accounting and the eventual revenue-standard transition adjustment.
- Evaluate progress in reducing retail losses and executing the stated store-count and capital-spending plans.