G-III Apparel Group, Ltd. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2012, the first quarter of fiscal 2013 (unaudited). The request labels the period “2011 Q1,” but the filing covers 2012. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context
G-III designs, sources, markets and retails apparel and accessories through wholesale licensed products, wholesale non-licensed products, and retail operations. It operates Wilsons and Andrew Marc outlet stores and has a Vince Camuto outlet-store joint venture. The business is seasonal, with inventory and receivables funding needs generally peaking in the third fiscal quarter.
Financial results and liquidity
- Revenue: Net sales were $229.4 million, up 16.5% from $196.9 million. Wholesale licensed sales rose to $157.0 million from $127.7 million; non-licensed wholesale sales were $47.3 million versus $46.8 million; retail sales increased to $36.1 million from $32.6 million.
- Profitability: Gross profit was $68.7 million versus $59.5 million. Gross margin was 29.9%, compared with 30.2%. SG&A increased to $66.6 million from $57.9 million, and depreciation and amortization rose to $2.1 million from $1.5 million. Operating profit was $23,000 versus $6,000.
- Net result: Net loss was $847,000, or $0.04 per diluted share, versus a $520,000 loss, or $0.03 per share. Interest and financing charges increased to $1.1 million from $759,000, mainly reflecting higher average borrowings. Income tax benefit was $520,000.
- Cash flow: Operating activities used $38.3 million, compared with $29.8 million used a year earlier. Investing activities used $2.2 million, including $1.9 million of capital expenditures. Financing activities provided $54.1 million, principally from $53.0 million of net revolving-credit borrowings. Cash increased to $38.3 million from $24.7 million at fiscal year-end.
- Balance sheet and debt: At April 30, cash was $38.3 million, accounts receivable $176.5 million, and inventory $208.8 million. Revolving borrowings were $83.1 million, versus $35.0 million a year earlier and $30.1 million at January 31, 2012. Total current liabilities were $159.7 million. The filing does not provide a clear figure for unused borrowing capacity under the facility.
- Credit facility: The company had a senior secured revolving facility of up to $300 million, expiring July 31, 2013; actual availability is subject to borrowing-base formulas. Rates at April 30 were 3.75% under the prime option or 3.00% under the LIBOR option. The company reported compliance with its covenants.
Changes versus the prior-year quarter
- Sales growth was led by Calvin Klein, Jessica Simpson dresses, and the new Kensie sportswear line; retail sales also benefited from more stores and a 6.3% comparable-store sales increase.
- Wholesale non-licensed gross margin declined to 24.6% from 25.4%, with pressure in the moderate dress business from input costs and retail promotions. Retail gross margin improved to 46.3% from 44.9%, reflecting less promotional activity and a higher-margin mix; licensed wholesale margin was broadly stable at 25.7% versus 25.8%.
- Higher personnel, advertising and third-party warehousing costs contributed to increased SG&A. The quarter’s net loss widened despite higher sales and gross profit.
- Cash and borrowings were both higher than a year earlier. Seasonal operating cash use increased, and the company cited lower first- and second-quarter sales and timing of vendor, bonus and inventory payments as typical contributors.
Outlook, risks and notable items
- No numerical earnings or sales guidance is provided. Management stated that cash on hand, operating cash generation and credit-facility availability were expected to be sufficient for operating and capital needs, while noting that acquisitions could require additional financing.
- Management cautioned that economic uncertainty could weigh on discretionary consumer spending and fiscal 2013 results. Other disclosed risks include dependence on licensed brands, customer concentration, retailer financial stress, competition, changing consumer tastes, sourcing and input-cost pressures, seasonality, and the risks of operating retail stores.
- In March 2012, G-III formed a joint venture to operate Calvin Klein Performance stores in mainland China and Hong Kong, retaining 51% ownership. The venture expected to begin store operations in fall 2012. The company also reported new or expanded licensing initiatives, including an expanded NFL license that began April 1, 2012.
- The company had 134 Wilsons and four Andrew Marc outlet stores at April 30, 2012; 11 Vince Camuto joint-venture stores were operating. No shares were repurchased during the quarter under the previously authorized two-million-share program.
- Management reported no material changes to previously disclosed risk factors or market-risk disclosures. Disclosure controls were concluded to be effective, with no material internal-control changes reported.
Important facts for investors to verify
- Whether subsequent seasonal sales, collections and inventory levels supported the borrowing increase and management’s liquidity assessment.
- Credit-facility availability under the borrowing-base formulas, covenant headroom, and the facility’s July 2013 maturity and refinancing needs.
- Whether growth in licensed and new product lines translated into sustained margins, particularly given higher SG&A and pressure in non-licensed wholesale products.
- Execution, funding requirements and performance of the Calvin Klein Performance China/Hong Kong joint venture and other expansion initiatives.
- Customer concentration, retailer credit exposure, and the effects of economic conditions, promotions and input costs on demand and profitability.