G-III Apparel Group, Ltd. — Form 10-Q Summary
Period note: The supplied filing is for the quarter ended July 31, 2016 (the second quarter of fiscal 2017), not 2015 Q2 as indicated in the request metadata. Comparative figures are for periods ended July 31, 2015. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
G-III designs, manufactures and markets apparel and accessories through wholesale and retail operations. Its portfolio includes licensed, proprietary and private-label brands; its retail segment is primarily Wilsons Leather and G.H. Bass stores. The business is seasonal, and interim results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Three months ended July 31, 2016 | Three months ended July 31, 2015 | Six months ended July 31, 2016 | Six months ended July 31, 2015 |
|---|---|---|---|---|
| Net sales | $442.3 | $473.9 | $899.7 | $906.8 |
| Gross profit | $155.6 | $168.3 | $321.3 | $322.8 |
| Gross margin | 35.2% | 35.5% | 35.7% | 35.6% |
| Operating profit (loss) | $(5.2) | $20.9 | $0.2 | $32.7 |
| Net income (loss) | $(1.3) | $12.5 | $1.5 | $19.2 |
| Basic EPS | $(0.03) | $0.28 | $0.03 | $0.43 |
- Cash flow: For the six months, operating activities used $39.0 million, investing activities used $48.0 million, and financing activities used $1.8 million. Operating cash use reflected inventory growth of $84.5 million and receivables growth of $21.5 million, partly offset by a $60.3 million increase in payables, accrued expenses and other liabilities. Capital expenditures were $12.6 million.
- Liquidity and debt: Cash was $45.0 million at July 31, 2016, versus $18.8 million a year earlier and $132.6 million at January 31, 2016. No borrowings were outstanding under the existing credit facility; $343.4 million was available, subject to borrowing-base limits. The company reported compliance with its covenants. Current liabilities were $305.3 million and total liabilities were $359.4 million.
- Balance sheet: Total assets were $1,259.5 million and stockholders’ equity was $900.1 million at July 31, 2016. Inventory was $570.0 million, compared with $605.2 million a year earlier.
Material changes and management commentary
- Quarterly sales declined 6.7%. Management cited lower outerwear shipments as customers worked through excess inventory after warm weather, as well as weaker private-label, Kensie and team-sports sales. New Karl Lagerfeld and Tommy Hilfiger dress sales partly offset declines.
- Retail sales fell to $100.0 million from $111.5 million. Same-store sales declined 16.9% at Wilsons and 9.8% at G.H. Bass for the quarter; management attributed weakness to reduced traffic, fewer tourist visitors and heavier promotions.
- Quarterly operating results moved to a loss as SG&A rose to $153.2 million from $141.5 million. Higher facility, personnel and advertising expenses, plus $3.0 million of Donna Karan acquisition-related expenses, contributed. Depreciation and amortization also increased.
- For the six-month period, wholesale sales were nearly flat, while retail sales declined. Wholesale gross margin improved, but retail gross margin declined due to deeper discounting to clear excess inventory.
- The company recognized a $2.4 million tax benefit related to vesting equity awards following early adoption of ASU 2016-09. Excluding the equity-award tax benefit, management reported an effective tax rate of 37.0% for both comparable periods.
Outlook, transaction, and risks
- No specific consolidated revenue or earnings guidance is provided in the supplied filing text. Management expects significant additional Donna Karan acquisition expenses during the second half of fiscal 2017 and said current cash, operating cash generation and available credit were expected to meet operating and capital needs; the acquisition requires substantial additional financing.
- In July 2016, G-III agreed to acquire Donna Karan International from LVMH for approximately $650 million, subject to adjustments and closing conditions, with closing expected in the fourth quarter of fiscal 2017. Consideration includes cash, $75 million of newly issued G-III shares and a $75 million junior-lien seller note. Committed financing includes a $350 million term facility and a new $650 million asset-based revolver; the planned funding also includes cash on hand and up to $250 million of revolver borrowings.
- Key acquisition risks include failure or delay to close, financing availability and terms, integration and retention challenges, transaction and integration costs, increased leverage and interest-rate exposure, restrictive debt covenants, and potential impairment of increased goodwill and intangible assets.
- Other identified risks include reliance on licensed brands and foreign manufacturers, changing consumer preferences, retail customer financial distress and concentration, competition, seasonality, sourcing and product-cost pressures, and international business risks. Management stated that disclosure controls were effective and that no material changes in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether the Donna Karan acquisition closed on the expected timeline, and the final purchase price, funding mix, financing costs and resulting leverage.
- Whether inventory levels and seasonal shipments normalized, and whether weak Wilsons and G.H. Bass comparable sales or promotional activity persisted.
- How much acquisition-related and integration expense was incurred, and whether expected benefits from the transaction were realized.
- Availability under the credit facility, covenant compliance and liquidity during the seasonal working-capital build.
- The filing’s actual reporting period: July 31, 2016, notwithstanding the request metadata indicating 2015 Q2.