G-III Apparel Group, Ltd. — Form 10-Q Summary
Reporting period: Quarter ended October 31, 2013; this is the 2013 third quarter, notwithstanding the request metadata indicating 2012 Q3. The filing also reports nine-month results through October 31, 2013, compared with the corresponding 2012 periods. Amounts below are in millions except per-share data. Interim financial statements are unaudited.
Business context
G-III designs, manufactures and markets apparel and related products under licensed, proprietary and private-label brands, and operates retail stores. Its three reportable segments are licensed products, non-licensed products and retail operations. Results are seasonal, and Vilebrequin and the Calvin Klein Performance China/Hong Kong joint venture report on calendar-year periods; their results are included through September 30.
Financial performance
| Metric | Three months ended Oct. 31, 2013 | Three months ended Oct. 31, 2012 | Nine months ended Oct. 31, 2013 | Nine months ended Oct. 31, 2012 |
|---|---|---|---|---|
| Net sales | $668.7 | $543.5 | $1,245.5 | $1,024.4 |
| Gross profit / margin | $227.3 / 34.0% | $190.2 / 35.0% | $419.1 / 33.7% | $333.7 / 32.6% |
| Operating profit / margin | $98.7 / 14.8% | $81.1 / 14.9% | $109.3 / 8.8% | $84.4 / 8.2% |
| Income attributable to G-III | $59.6 | $48.3 | $64.3 | $48.8 |
| Diluted earnings per share | $2.85 | $2.37 | $3.09 | $2.40 |
Quarterly sales grew 23% year over year and nine-month sales grew 22%. Nine-month income attributable to G-III rose 32%; quarterly income attributable to G-III rose 23%. Nine-month results include a full period of Vilebrequin operations in 2013, versus less than two months in the comparable 2012 period. Gross margin improved for the nine months, but declined in the quarter, primarily reflecting lower margins in certain Calvin Klein categories. Retail gross margins benefited from less promotional activity and a higher-margin product mix.
- Expenses and financing: Quarterly SG&A was $125.5 million, or 18.8% of sales, versus $106.3 million, or 19.6%. Nine-month SG&A was $300.3 million, or 24.1% of sales, versus $242.4 million, or 23.7%. Higher personnel, facility and advertising costs were cited. Nine-month interest and financing charges increased to $6.5 million from $5.2 million, mainly due to Vilebrequin promissory-note interest and credit-facility fees.
- Cash flow: Operating activities used $136.2 million in the first nine months, compared with $140.3 million used in 2012. The outflow reflected seasonal growth in receivables ($219.2 million cash use) and inventory ($42.2 million cash use). Investing activities used $15.7 million, primarily for retail-store and distribution-center expenditures. Financing activities provided $155.2 million, including $150.8 million of net borrowings. Cash increased $2.5 million from the fiscal-year start to $29.8 million.
- Balance sheet and liquidity at Oct. 31, 2013: Current assets were $777.8 million and current liabilities were $430.0 million. Inventory was $323.3 million and accounts receivable was $397.5 million. Notes payable totaled $236.1 million, comprising $215.8 million current and $20.3 million long-term. The company reported $222.2 million available under its $450 million asset-based credit facility and was in covenant compliance. The facility is secured by specified company assets.
Material changes, outlook and risks
- Licensed-product sales growth was led by Calvin Klein. Non-licensed growth reflected Vilebrequin, including the longer comparison period and new stores. Retail sales increased with store additions and comparable-store sales growth of 10.1% for the quarter and 11.9% for the nine months.
- On November 4, 2013, after quarter-end, G-III acquired substantially all assets of G.H. Bass & Co., including approximately 160 outlet stores, for approximately $50 million cash, subject to post-closing adjustments. The acquisition was not reflected in the October 31 balance sheet.
- Management said cash, operating cash generation and facility availability were expected to meet operating and capital expenditure needs. The company may need additional financing for future acquisitions; no quantified earnings or revenue guidance is provided in the filing.
- Management cited uncertain consumer spending and fashion demand, intense competition, dependence on licensors and retail customers, customer credit exposure, sourcing and input-cost pressures, foreign operations, seasonality, and acquisition and financing risks. The company stated there were no material changes to previously disclosed risk factors or market-risk disclosures.
- The credit agreement restricts cash dividends, stock redemptions and repurchases until February 2014, after which they remain subject to covenant compliance. The filing reports a contingent Vilebrequin purchase-price liability of $5.9 million; the acquisition terms provide for potential contingent consideration tied to performance objectives.
Important facts for investors to verify
- Whether the quarter’s sales and earnings growth persists after accounting for acquisition timing, seasonality and the strong contribution from licensed products.
- Receivables, inventory and seasonal borrowing trends, including the company’s ability to convert earnings into operating cash flow.
- G.H. Bass integration, post-closing purchase-price adjustments, store performance and the effect on leverage and liquidity.
- Credit-facility availability and covenant compliance, and the implications of the dividend and repurchase restrictions.
- Exposure to licensed brands, major customers, consumer-demand shifts, and contingent Vilebrequin consideration.