G-III Apparel Group, Ltd. — Fiscal 2019 Form 10-K
Period clarification: The supplied filing is for the fiscal year ended January 31, 2019, not 2017 Q4 as indicated in the request metadata. Fiscal 2018 is the prior comparable year.
Business context
G-III designs, sources, markets and retails apparel and accessories through wholesale and retail operations. Its portfolio includes owned and licensed brands, with DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld Paris identified as global power brands. The fiscal 2019 results include a full year of DKNY and Donna Karan operations acquired in December 2016.
Financial results and liquidity
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Net sales | $3.076 billion | $2.807 billion |
| Gross profit / margin | $1.107 billion / 36.0% | $1.055 billion / 37.6% |
| Operating profit / margin | $230.7 million / 7.5% | $153.8 million / 5.5% |
| Net income | $138.1 million | $62.1 million |
| Diluted earnings per share | $2.75 | $1.25 |
| Operating cash flow | $103.8 million | $79.7 million |
- Sales increased 9.6%. Wholesale sales rose to $2.717 billion; retail sales declined to $476.8 million.
- Gross margin fell 1.6 percentage points. Management cited unfavorable wholesale product mix and the ASC 606 reclassification of cooperative advertising; licensing revenue, which carries no associated cost of goods sold, partly offset pressure.
- Fiscal 2019 net income benefited from stronger operating profit and a lower effective tax rate of 24.9%, versus 43.6% in fiscal 2018. The prior-year rate included provisional tax-reform charges.
- Cash and cash equivalents were $70.1 million at year-end, versus $45.8 million. Working capital was $673.1 million. The company reported current assets of $1.254 billion and current liabilities of $580.8 million.
- Operating cash flow rose, but was affected by working-capital movements: accounts receivable increased $207.9 million and inventories increased $23.6 million; customer refund liabilities increased $177.1 million. Management said ASC 606 materially changed the presentation of these balances.
- Debt at face value comprised a $300 million term loan, a $125 million LVMH note and no year-end revolving-credit borrowings. The balance sheet reported $386.6 million of notes payable, net of discounts and issuance costs. The company had a $650 million asset-based revolving facility and was in covenant compliance.
Material changes versus the prior year
- Operating profit increased to $230.7 million from $153.8 million, while net income more than doubled. Higher sales, lower SG&A and lower impairment charges contributed.
- Wholesale growth was led by DKNY/Donna Karan, Tommy Hilfiger and Karl Lagerfeld Paris. Retail sales fell partly due to 59 fewer stores year over year and the prior year’s additional retail fiscal week.
- Retail operations continued to post an operating loss: $49.0 million, essentially unchanged from $48.9 million in fiscal 2018. Retail gross margin declined to 47.7% from 49.9%.
- Fiscal 2019 asset impairment charges were $2.8 million, compared with $7.9 million in fiscal 2018.
- Adoption of ASC 606 reduced opening retained earnings by $53.7 million, net of tax. For fiscal 2019, the company reported ASC 606 increased net income by $1.2 million compared with the prior method; it had no net effect on operating cash flow.
Outlook, risks and contingencies
- Management believes cash on hand, cash from operations and available revolving-credit capacity are adequate for expected operating and capital needs. No specific consolidated revenue or earnings guidance is provided in the supplied filing text.
- The company aims to reduce retail losses through lease renegotiations or expirations, cost controls, merchandising changes and store repurposing. It expected to close approximately 40 to 45 additional stores by the end of fiscal 2020.
- Tariffs on China-origin handbags and leather outerwear began at 10% in September 2018; a proposed increase to 25% had been postponed. These categories represented about 7% of fiscal 2019 sales, and the reported fiscal-year impact was minimal. Management could not estimate the effect of potential fiscal 2020 tariff increases.
- A Canadian customs valuation dispute remains under appeal. A CAD$26.9 million (approximately $20.9 million) bond secures claimed duties and interest through December 2017; the company also deferred approximately $8.0 million of fiscal 2019 expense relating to higher dutiable values. An unsuccessful appeal could result in charges and higher ongoing import costs.
- Key exposures include dependence on licensed brands (57.4% of fiscal 2019 sales), concentration in PVH-owned Calvin Klein and Tommy Hilfiger (about 46% of sales), and customer concentration: the ten largest customers generated 69.7% of sales; Macy’s generated 24.8% and TJX 12.4%.
- China accounted for 61.5% of inventory purchases. Other stated risks include retail traffic and e-commerce competition, seasonality, fashion and inventory risk, foreign sourcing, customer financial distress, interest-rate exposure and potential impairment of substantial acquired goodwill and brand assets.
- Operating lease obligations were $433.2 million and minimum royalty and related payments were $478.2 million. The company expected adoption of the new lease standard to add approximately $300 million to $400 million in lease assets and liabilities to the balance sheet.
Most important facts for investors to verify
- Whether wholesale growth and gross-margin performance remain sustainable, particularly after the fiscal 2019 margin decline.
- Whether the retail turnaround reduces the approximately $49 million annual operating loss and achieves the planned store closures.
- Whether tariffs expand or increase, and whether sourcing shifts, vendor support or price increases can mitigate the cost impact.
- The outcome and potential financial exposure of the Canadian customs appeal, including treatment of deferred duties.
- Whether customer and brand concentration, working-capital requirements and debt covenants remain manageable as seasonal borrowing needs fluctuate.
- Whether the acquired DKNY and Donna Karan businesses deliver the expected growth without impairment of the company’s significant goodwill and intangible assets.