GIII

Business Context and Reporting Period

This Form 10-Q covers G-III Apparel Group, Ltd. for the quarterly period ended October 31, 2009, and the nine months ended on that date. The company designs, manufactures, and markets outerwear, dresses, sportswear, and women's suits through three segments: wholesale licensed apparel, wholesale non-licensed apparel, and retail operations (primarily Wilsons outlet stores). The company operates in a competitive fashion market currently impacted by economic uncertainty and reduced consumer discretionary spending.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 3.4% for the quarter and 12.3% for the nine-month period compared to the prior year. Growth was driven primarily by a $38.1 million increase in Calvin Klein licensed product sales for the quarter and a $74.0 million increase for the nine months.
• Profitability: Gross profit margins improved across segments. The wholesale non-licensed segment margin rose to 33.8% (quarter) and 29.6% (nine months) due to improved margins in the Andrew Marc division. Retail operations maintained high margins (47.7% for the quarter).
• Expenses: Selling, general, and administrative (SG&A) expenses increased significantly ($7.8 million for the quarter; $32.2 million for nine months). This was driven by higher personnel costs (accrued bonuses), increased advertising fees tied to licensed sales, and the inclusion of the Wilsons retail business for the full nine-month period in 2009 versus a partial period in 2008.
• Segment Performance: The retail operations segment reported an operating loss of $1.1 million for the quarter and $10.0 million for the nine months, though performance improved compared to the prior year due to higher sales volume.

Outlook, Risks, and Management Commentary

• Economic Environment: Management notes that significant economic uncertainty and a slowdown in the global macroeconomic environment continue to negatively impact consumer spending on discretionary items. The company cannot predict the direction of the current downturn.
• Retail Strategy: The company is implementing initiatives to improve the Wilsons retail outlet business, including improving merchandise mix (emphasizing leather and private label), enhancing store presentation, and reducing distribution center overhead costs.
• Liquidity: The company has a $250 million senior secured revolving credit facility. As of October 31, 2009, outstanding borrowings were $167.8 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 dependencies, customer concentration (top 10 customers represent a majority of sales), and the financial stability of retail partners.

Investor Verification Checklist

• Accounts Receivable: Verify the $166.2 million increase in accounts receivable during the nine-month period, which significantly impacted operating cash flow.
• Debt Covenants: Confirm continued compliance with the maximum senior leverage ratio and minimum fixed charge coverage ratio under the $250 million credit facility.
• Retail Turnaround: Monitor the effectiveness of cost-cutting and merchandise mix initiatives at the Wilsons retail segment to reduce operating losses.
• License Concentration: Assess the impact of the heavy reliance on Calvin Klein sales, which drove the majority of revenue growth.
• Inventory Levels: Review the $127.1 million inventory balance to ensure it aligns with anticipated fourth-quarter wholesale orders and holiday retail demand.