G-III Apparel Group, Ltd. — Form 10-Q Summary
Period note: The supplied filing is for the quarter ended October 31, 2018 (G-III fiscal 2019 Q3), not 2017 Q3 as stated in the request metadata. The filing is unaudited; amounts below are in millions of dollars unless noted.
Business context and reporting period
G-III designs, sources and markets apparel and accessories across licensed, proprietary and private-label brands, and operates retail stores and e-commerce sites. Its reportable segments are wholesale and retail. The quarter and nine-month periods were 13 and 39 weeks, respectively. The business is seasonal, so interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Three months ended Oct. 31, 2018 | Three months ended Oct. 31, 2017 | Nine months ended Oct. 31, 2018 | Nine months ended Oct. 31, 2017 |
|---|---|---|---|---|
| Net sales | $1,073 | $1,025 | $2,309 | $2,092 |
| Gross profit | $382 | $391 | $848 | $796 |
| Operating profit | $140 | $141 | $186 | $132 |
| Net income | $94 | $82 | $114 | $63 |
| Diluted earnings per share | $1.86 | $1.65 | $2.26 | $1.27 |
| Gross margin | 35.6% | 38.2% | 36.7% | 38.0% |
- Quarterly sales rose about 4.7% year over year, while net income increased about 15%. Nine-month sales rose about 10.4% and net income about 82%.
- Quarterly gross profit fell despite higher sales; management attributed lower gross margin primarily to product mix, weaker margins in DKNY/Donna Karan, and the ASC 606 presentation change for cooperative advertising. Nine-month gross profit increased, but margin also declined.
- Wholesale sales growth was led by Tommy Hilfiger and DKNY/Donna Karan; Karl Lagerfeld Paris also grew. Retail sales declined year over year in both the quarter and nine-month period. Retail operating losses were $14.2 million for the quarter and $48.8 million for nine months.
- Effective income tax rates declined to 26.5% for the quarter and 25.9% for nine months, versus 36.2% and 36.1%, respectively, primarily due to the lower corporate tax rate under the Tax Cuts and Jobs Act.
Cash flow, liquidity and debt
- Nine-month operating cash flow was a use of $236.1 million, compared with a use of $245.6 million in the prior-year period. Working-capital use included a $525.3 million increase in receivables and a $63.3 million increase in inventory, partly offset by a $169.0 million increase in customer refund liabilities. Management said ASC 606 affected the presentation of these balances, alongside seasonal working-capital needs.
- Investing cash outflow was $29.5 million, including $19.5 million of capital expenditures and $10.0 million contributed to the Fabco joint venture. Financing cash inflow was $292.8 million, mainly reflecting net revolving-facility borrowings.
- Cash and cash equivalents were $66.1 million at October 31, 2018. Current assets were $1,584.8 million and current liabilities $623.3 million; current liabilities included $235.4 million of customer refund liabilities.
- Debt principal outstanding was $734.6 million: $300.0 million term loan, $309.6 million revolving borrowings and a $125.0 million LVMH note. The balance-sheet carrying value, net of debt discount and issuance costs, was $694.3 million. Term-loan interest averaged 7.36% and revolving-facility interest 3.71%. The company reported compliance with debt covenants.
Material changes, outlook and risks
- G-III adopted ASC 606 on February 1, 2018 using the modified retrospective method, recording a $53.7 million reduction to opening equity, net of tax. It introduced customer refund liabilities and changed the presentation of cooperative advertising and estimated return costs. Adoption reduced reported nine-month sales by $13.3 million but increased operating profit by $4.6 million versus amounts shown without adoption; cash flows were not affected overall.
- The company said cash on hand, operating cash generation and availability under its revolving credit facility should cover expected operating and capital needs. It provided no specific quantified full-year earnings or sales guidance in the supplied filing text.
- U.S. tariffs on certain China-sourced handbags and leather outerwear began at 10% in September 2018, with a planned increase to 25% postponed for three months after the U.S.-China G20 meeting. These categories represented about 7% of annual sales; management expected tariffs imposed to date to have a minimal fiscal 2019 impact, but could not estimate fiscal 2020 effects. Mitigation efforts included diversifying sourcing, negotiating vendor support and discussing price increases.
- A Canadian customs authority disputed the valuation basis for certain imports and sought additional duties. G-III Canada appealed and provided a CAD$26.9 million bond (about $20.9 million); the company said it believed it had grounds to obtain a refund. Additional duties paid under the disputed valuation method were deferred pending the appeal.
- Management described retail-store closures and lease renegotiations as part of its turnaround efforts, alongside expense controls, merchandising changes and repurposing selected stores. Store count declined to 343 from 378 a year earlier.
- Other identified risks include reliance on licensors and foreign manufacturing, customer concentration and retailer financial distress, competition and e-commerce shifts, tariffs, seasonality, acquisitions and debt, and data-security risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers fiscal 2019 Q3, ended October 31, 2018, rather than 2017 Q3.
- Assess how much reported sales, margins, receivables and refund liabilities reflect ASC 606 presentation and timing changes versus underlying operating trends.
- Monitor receivables, customer refund liabilities and seasonal working-capital needs, given the substantial operating cash outflow.
- Review debt-service capacity and available revolving-facility borrowing capacity, including covenant requirements and seasonal peak borrowings.
- Track the Canadian customs appeal and any change in U.S. tariffs, sourcing costs or pricing actions.
- Evaluate whether retail-store rationalization improves segment profitability and whether wholesale growth offsets weaker retail results.