G-III Apparel Group, Ltd. — Form 10-Q
Reporting period: Quarter and six months ended July 31, 2011 (fiscal 2012). The request metadata says “2010 Q2,” but the filing itself reports 2011 results and compares them with 2010.
Business context and performance
G-III designs, manufactures and markets apparel, accessories and related products through wholesale licensed, wholesale non-licensed and retail operations. Its retail business is primarily Wilsons outlet stores; it also has a 50%-owned Vince Camuto outlet-store joint venture. The company describes its business as highly seasonal, with substantial working-capital needs ahead of fall shipments.
| Metric | Three months ended July 31, 2011 | Six months ended July 31, 2011 |
|---|---|---|
| Net sales | $230.0 million; up 21.7% | $426.8 million; up 24.4% |
| Gross profit / margin | $65.6 million / 28.5%, versus $60.8 million / 32.2% | $125.0 million / 29.3%, versus $109.8 million / 32.0% |
| Operating profit | $3.9 million, versus $5.6 million | $3.9 million, versus $3.7 million |
| Net income | $1.6 million, versus $3.0 million | $1.0 million, versus $1.6 million |
| Diluted EPS | $0.08, versus $0.15 | $0.05, versus $0.08 |
Material changes and management commentary
- Sales growth reflected licensed products (notably Calvin Klein), private-label outerwear and growth in retail stores. Comparable-store sales rose 11% for the quarter and 10% for the six-month period.
- Gross margins contracted in both wholesale segments. Management attributed this to increased promotions and retailer allowances, lower initial selling prices, and a greater mix of lower-margin products. Higher raw-material, manufacturing and transportation costs remained industry pressures; the company cited sourcing changes and price increases as mitigation efforts.
- SG&A rose to $59.8 million for the quarter and $117.8 million for six months, reflecting higher personnel, facility, warehousing and advertising costs. Higher interest expense also weighed on earnings as seasonal inventory needs increased borrowings.
- Retail operations recorded an operating loss of $3.7 million for the quarter and $5.4 million for six months, although comparable-store sales and retail gross margin improved year over year.
Cash flow, liquidity and debt
- Six-month operating cash flow was negative $135.4 million, primarily due to increases in inventory ($117.4 million), receivables ($33.2 million) and prepaid expenses and other current assets ($11.5 million), partly offset by higher payables and accrued liabilities.
- Investing cash outflow was $10.5 million, including $8.0 million of capital expenditures and $2.5 million invested in the Vince Camuto joint venture. Financing provided $144.5 million, primarily from revolving-credit borrowings.
- At July 31, 2011, cash was $8.6 million, inventory $322.4 million, current assets $542.6 million and current liabilities $302.1 million. Revolver borrowings were $142.0 million, versus $77.4 million a year earlier and none at January 31, 2011.
- The company had a senior secured revolving facility of up to $300 million, maturing July 31, 2013; availability was subject to borrowing-base formulas. It reported compliance with its financial covenants. Open letters of credit were approximately $31.3 million.
Outlook, risks and unusual items
- Management expected the Wilsons retail segment to be profitable in fiscal 2012 and planned 10–15 additional outlet stores during the year. It expected approximately $15 million of fiscal 2012 capital expenditures and joint-venture investments; five new Wilsons stores and 10 Vince Camuto stores were operating as of August 31, 2011.
- Management believed cash, operating cash generation and facility availability would meet expected operating and capital needs, while noting that acquisitions could require additional financing and that acceptable financing might not be available.
- The company warned that uncertain economic conditions could weaken discretionary consumer spending. Other highlighted risks included customer concentration and retailer credit, dependence on licensed products, fashion and competition, sourcing and import costs and timing, and seasonal working-capital requirements.
- The Vince Camuto joint venture generated a $0.5 million equity-method loss for the six-month period. Management said there were no subsequent events believed to have a material impact on results.
Important facts for investors to verify
- Confirm the reporting period: the filing covers the quarter ended July 31, 2011, not 2010.
- Review inventory growth, seasonal borrowing and borrowing-base availability, and the facility’s covenants and maturity.
- Assess whether wholesale margin pressure and higher operating costs persist, and whether planned price and sourcing actions offset them.
- Track retail-store expansion, segment profitability and the Vince Camuto joint venture’s losses and funding needs.
- Evaluate customer concentration, retailer credit exposure, licensed-brand dependence and the effect of economic conditions on discretionary demand.