Business context and reporting period
G-III Apparel Group designs, markets and sells licensed, proprietary and private-label apparel and accessories, and operates retail stores. This Form 10-Q covers the three months ended April 30, 2016, the first quarter of fiscal 2017; the filing compares results with the three months ended April 30, 2015. This differs from the request metadata of “2015 Q1.” Results are unaudited and subject to seasonality.
Key financial results
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $457.4 | $433.0 | +5.6% |
| Gross profit / margin | $165.7 / 36.2% | $154.4 / 35.7% | +7.3%; +0.5 pp |
| Operating profit / margin | $5.4 / 1.2% | $11.7 / 2.7% | -54.1% |
| Net income | $2.8 | $6.8 | -59.0% |
| Diluted EPS | $0.06 | $0.15 | Down $0.09 |
| Operating cash flow | $1.8 | $(35.8) | Improved |
Wholesale sales rose to $382.4 million from $352.5 million; retail sales fell to $95.0 million from $102.5 million. Wholesale operating profit was $22.4 million versus $18.6 million. Retail posted an operating loss of $17.1 million versus a $6.8 million loss.
Liquidity, cash flow and debt
At April 30, 2016, cash and cash equivalents were $95.4 million, total current assets $785.4 million, and current liabilities $151.8 million. The company had no borrowings under its $450 million asset-based senior secured facility; $407.0 million was available, subject to borrowing-base limits. The facility runs through August 2017. The company reported compliance with its covenants. Open letters of credit totaled approximately $17.9 million.
Operating cash flow was $1.8 million, reflecting a $79.0 million inventory decrease and an $8.0 million accounts-receivable decrease, substantially offset by a $93.6 million decrease in accounts payable, accrued expenses and other liabilities. Investing activities used $41.5 million, including $35.4 million for a 19% investment in KH1, the parent of the group holding worldwide Karl Lagerfeld brand rights, and $6.1 million in capital expenditures. Cash declined by $37.1 million during the quarter.
Material changes and management commentary
- Sales growth reflected, among other factors, increased Calvin Klein, Ivanka Trump and Tommy Hilfiger sales, plus $9.6 million from the new Karl Lagerfeld line; declines in Kensie, Guess and private-label products partly offset growth.
- Retail same-store sales declined 13.6% at Wilsons and 5.1% at G.H. Bass. Management attributed weakness to unusually warm weather, lower demand for outerwear and cold-weather products, fewer sales at tourist-oriented locations, and promotional activity to clear excess inventory.
- Gross margin improved in wholesale, including for Calvin Klein, Eliza J and Jessica Howard products. Retail gross margin fell to 43.4% from 46.2% because of deeper discounts.
- SG&A increased to $153.1 million from $137.0 million, driven principally by higher personnel, advertising and facility costs. Depreciation and amortization rose to $7.2 million from $5.7 million.
- The company expanded its Tommy Hilfiger womenswear licensing relationship and continued developing Karl Lagerfeld products. It also reported a new Vilebrequin worldwide watch license.
Outlook, risks and unusual items
No numerical earnings or sales guidance is provided in the supplied filing text. Management said cash on hand, operating cash generation and credit availability should be sufficient for expected operating and capital needs and potential repurchases. It noted that seasonal working-capital needs generally peak in the third fiscal quarter and that acquisitions could require additional financing, which may not be available on acceptable terms.
Risks highlighted include dependence on licensors and licensed products, fashion and consumer-demand shifts, retail customer financial difficulties and concentration, foreign sourcing and operations, competition, inventory and seasonal exposure, and the ability to finance or integrate acquisitions. The company said there were no material changes to previously disclosed risk factors or market-risk disclosures. It early-adopted ASU 2016-09; approximately $37,000 of excess tax benefits were recognized in income tax expense, and the change added approximately 350,000 diluted shares to the EPS calculation.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is for the quarter ended April 30, 2016 (Q1 fiscal 2017), not 2015 Q1.
- Track whether retail same-store sales, discounting and the retail operating loss improve, and whether inventory is cleared without further margin pressure.
- Assess whether wholesale growth from licensed brands and new product lines can offset higher operating expenses and retail weakness.
- Verify credit-facility availability, covenant compliance and refinancing plans ahead of the August 2017 maturity.
- Monitor returns and strategic progress from the KH1 investment and the expanded Karl Lagerfeld and Tommy Hilfiger initiatives.