Business context and reporting period
G-III Apparel Group, Ltd. designs, markets and distributes apparel and accessories through wholesale and retail operations, using licensed, proprietary and private-label brands. This is the Form 10-K for the fiscal year ended January 31, 2017—not a filing for 2015 Q4 as stated in the request metadata. The fiscal 2017 results include Donna Karan International (DKI) only from its December 1, 2016 acquisition date.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $2.386 billion | $2.344 billion |
| Gross profit / margin | $840.9 million / 35.2% | $838.6 million / 35.8% |
| Operating profit | $93.5 million | $184.5 million |
| Net income attributable to G-III | $51.9 million | $114.3 million |
| Diluted earnings per share | $1.10 | $2.46 |
| Cash from operating activities | $105.7 million | $74.3 million |
| Cash and cash equivalents at year-end | $80.0 million | $132.6 million |
| Working capital | $567.5 million | $657.6 million |
| Total assets | $1.852 billion | $1.184 billion |
Revenue grew 1.8%, while operating profit fell about 49% and net income about 55%. The FY2017 net margin was approximately 2.2%, versus 4.9% in FY2016. Cash used in investing activities was $525.8 million, principally for the DKI acquisition; financing activities provided $367.6 million. Cash declined by $52.6 million during the year.
At January 31, 2017, debt included $300 million of term loans, $91.1 million drawn on the $650 million asset-based revolving facility and a $125 million seller note to LVMH. The balance sheet reported notes payable of $461.8 million net of debt discount and issuance costs; the face-value obligations totaled $516.1 million. The company reported compliance with debt covenants.
For the fourth quarter ended January 31, 2017, net sales were $603.3 million and G-III reported a net loss of $20.1 million, compared with sales of $527.4 million and net income of $8.0 million in the prior-year quarter.
Material changes versus the prior comparable period
- Wholesale sales rose to $2.014 billion from $1.950 billion, supported by new Tommy Hilfiger, Karl Lagerfeld and DKI product, and growth in Calvin Klein and Ivanka Trump. Retail sales fell to $474.2 million from $514.0 million.
- Wilsons Leather same-store sales declined 14.2% and G.H. Bass declined 7.5%. Management cited reduced tourist traffic, a highly promotional retail environment and unseasonably warm weather.
- SG&A increased to $704.4 million from $628.8 million, including DKI expenses, higher facility, advertising and personnel costs, and $7.8 million in DKI acquisition-related professional fees. A $10.5 million impairment charge related to certain Wilsons and G.H. Bass store assets was recorded.
- Retail operations posted a $61.3 million operating loss, compared with a $1.2 million loss. Wholesale operating profit declined to $153.0 million from $185.6 million.
- Interest and financing charges rose to $15.7 million from $6.7 million, reflecting acquisition-related borrowing and financing costs.
Outlook, management commentary and risks
Management expected the DKI acquisition to negatively affect FY2018 results, primarily in the first half, and projected approximately $12 million of additional depreciation and amortization in FY2018 from the acquisition. No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management planned to rationalize retail stores, including closing 60 by the end of FY2018 and potentially another 55 by FY2019; it also planned to close four DKNY stores in FY2018.
The company’s strategy is to expand DKNY, re-establish Donna Karan and DKNY Jeans, and grow licensing and product categories. A March 2017 agreement makes Macy’s the exclusive U.S. department store for DKNY women’s apparel and accessories beginning February 2018. Management noted that the acquisition’s success depends on integrating DKI and restoring sales and profitability. DKI contributed $29.5 million in sales and a $13.1 million operating loss from acquisition through year-end.
Principal risks include dependence on licensed products (60.7% of FY2017 net sales), concentration among large retailers (the ten largest accounted for 64.1%; Macy’s alone 21.8%), seasonality, volatile consumer demand and outlet traffic, foreign sourcing and potential tariff changes, and the increased debt burden and related covenants. Goodwill, trademarks and other intangibles totaled $753.2 million; impairment could materially affect earnings. The company reported no pending legal proceedings expected to have a material adverse effect. Ernst & Young issued unqualified opinions on the financial statements and internal control; DKI’s controls were excluded from management’s FY2017 assessment.
Important facts for investors to verify
- Assess whether DKI integration, the Macy’s DKNY arrangement and brand relaunches can deliver the sales and profit improvement management anticipates.
- Review debt repayment capacity, revolving-facility availability, covenant headroom, variable-rate exposure and the seller note’s terms; management estimated a 100-basis-point rate increase would add about $4.3 million in annual interest expense at year-end balances.
- Track retail comparable sales, promotional intensity, store closures and cash needs associated with leased locations.
- Monitor renewal and performance of major licenses, particularly given the high licensed-sales share and the concentration of sales under PVH-owned Calvin Klein and Tommy Hilfiger brands.
- Evaluate the assumptions supporting the $753.2 million intangible-asset balance and the acquired DKI goodwill and trademarks.