G-III Apparel Group, Ltd. — Form 10-Q Summary
Period note: The request identifies “2016 Q2,” but the supplied filing is for the quarter and six months ended July 31, 2017, filed September 8, 2017. Amounts below are in millions of dollars unless stated otherwise.
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. Results include Donna Karan International (DKI), acquired December 1, 2016; therefore, 2017 comparisons include DKI while the comparable 2016 periods do not. The company notes that its business is seasonal and interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Three months ended July 31, 2017 | Three months ended July 31, 2016 | Six months ended July 31, 2017 | Six months ended July 31, 2016 |
|---|---|---|---|---|
| Net sales | $538.0 | $442.3 | $1,067.0 | $899.7 |
| Gross profit / margin | $202.9 / 37.7% | $155.6 / 35.2% | $404.7 / 37.9% | $321.3 / 35.7% |
| Operating income (loss) | $(3.7) | $(5.2) | $(9.1) | $0.2 |
| Net income (loss) | $(8.6) | $(1.3) | $(19.0) | $1.5 |
| Basic diluted loss per share | $(0.18) | $(0.03) | $(0.39) | $0.03 |
Quarterly sales rose about 21.6% year over year; six-month sales rose about 18.6%. Gross margin improved in both comparisons. Higher sales and gross profit were offset by increased selling, general and administrative costs, depreciation and amortization, and financing expense. Interest and financing charges were $9.6 million for the quarter and $19.6 million for six months, versus $1.1 million and $2.3 million, respectively, in 2016.
For the quarter, wholesale operations reported $15.7 million of operating profit, while retail reported a $19.4 million operating loss. For six months, wholesale operating profit was $34.1 million and retail operating loss was $43.2 million. Retail same-store sales fell 5.2% at G.H. Bass and 4.3% at Wilsons for the quarter; for six months, they fell 7.0% and 8.1%, respectively.
Cash flow, debt and liquidity
- Cash and cash equivalents were $58.8 million at July 31, 2017, compared with $45.0 million a year earlier and $80.0 million at January 31, 2017.
- Operating activities used $114.4 million of cash in the first six months, versus $39.0 million used in 2016. The main working-capital use was a $171.2 million inventory increase, reflecting seasonal buildup; accounts receivable also used $23.2 million. Payables and accrued expenses provided $82.2 million.
- Investing activities used $10.6 million, primarily for capital expenditures. Financing activities provided $103.2 million, mainly from revolving-credit borrowings.
- At July 31, principal debt consisted of a $300.0 million term loan, $194.0 million drawn on the revolving facility and a $125.0 million LVMH note. The debt carrying amount was $568.8 million after debt discount and issuance costs. The term loan and revolver carried average rates of 6.3% and 2.41%, respectively; the LVMH note bears 2% stated interest.
- Current assets were $1,083.6 million and current liabilities were $394.6 million. The company said cash on hand, operating cash generation and available ABL borrowing capacity should be sufficient for expected operating and capital needs. It was in compliance with stated debt covenants at quarter-end.
Material changes, outlook and risks
- DKI contributed to year-over-year sales growth and expanded the brand portfolio, but also added significant costs, debt and acquired goodwill and intangible assets. The DKI purchase-price allocation remained preliminary; estimates could change, including in connection with the Section 338(h)(10) election.
- Management attributed wholesale margin improvement partly to DKI/DKNY licensing income and improved Calvin Klein dress margins. Retail margins benefited from the higher-margin DKNY stores, while lower consumer traffic and declining same-store sales remained concerns.
- Management was pursuing retail cost reductions, lease actions, store repurposing and fewer Wilsons and Bass locations. It expected those store counts to decline from 320 at July 31 to approximately 285 by fiscal year-end.
- Management expected fiscal 2018 capital expenditures of approximately $35 million. It also expected to contribute $10 million by August 2018 toward a China joint venture for DKNY and Donna Karan; the venture was formed after quarter-end, and revenue was expected to begin in fiscal 2019.
- The filing provides no clear earnings or revenue guidance. Management cited risks including seasonal working-capital needs, retail customer financial stress and concentration, competition and e-commerce shifts, licensed-brand dependence, foreign sourcing and operations, and DKI integration and increased indebtedness.
- The company reported no material changes to previously disclosed risk factors or market-risk disclosures. It stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied 10-Q covers 2017 Q2, not 2016 Q2.
- Track whether seasonal inventory converts to sales and cash, given the $171.2 million first-half inventory cash use and increased revolver borrowing.
- Assess retail turnaround progress, including store closures, same-store sales, segment losses and restructuring or lease-related costs.
- Monitor DKI integration, brand performance, final acquisition accounting and the company’s ability to manage the higher debt and interest burden.
- Review borrowing availability, covenant headroom and the planned capital spending and China joint-venture contributions.