G-III Apparel Group, Ltd. — Form 10-Q Summary
Period clarification: Although the request metadata says 2010 Q3, this filing reports the unaudited quarter and nine months ended October 31, 2011 (fiscal 2012 Q3). Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context and results
G-III designs, sources and markets apparel and accessories under licensed, proprietary and private-label brands, and operates outlet stores. It reports wholesale licensed, wholesale non-licensed and retail segments. Results are seasonal and the company cautions that interim results are not necessarily indicative of the full year.
| Metric | Three months ended Oct. 31, 2011 | Comparable 2010 period | Nine months ended Oct. 31, 2011 | Comparable 2010 period |
|---|---|---|---|---|
| Net sales | $510.0 | $450.0 | $936.9 | $793.2 |
| Gross profit / margin | $162.3 / 31.8% | $153.9 / 34.2% | $287.3 / 30.7% | $263.7 / 33.2% |
| Operating profit | $73.4 | $72.3 | $77.3 | $76.0 |
| Net income | $43.6 | $42.7 | $44.6 | $44.4 |
| Diluted EPS | $2.16 | $2.16 | $2.21 | $2.26 |
Financial position, cash flow and liquidity
- At October 31, 2011, cash was $16.1 million, accounts receivable $368.1 million, inventory $273.2 million and current assets $681.9 million. Current liabilities were $401.5 million.
- Revolving-credit borrowings were $245.1 million, up from $166.7 million a year earlier. The senior secured facility provides for up to $300 million, subject to borrowing-base formulas, and runs through July 31, 2013. The company reported covenant compliance. Open letters of credit totaled approximately $18.1 million.
- For the nine-month period, operating activities used $222.2 million, investing activities used $16.3 million and financing activities provided $244.6 million. Ending cash increased by $6.0 million from January 31, 2011.
- Operating cash use principally reflected increases in receivables ($229.7 million) and inventory ($68.2 million), partly offset by net income and an increase in income taxes payable. Management attributed higher inventory to seasonal outerwear needs and replenishment and new luggage and handbag lines.
Material changes and management commentary
- Quarterly sales rose 13.3%; nine-month sales rose 18.1%. Growth was led by licensed products, notably Calvin Klein, including handbag, accessory and luggage lines. Retail sales also increased with store growth and comparable-store sales growth of 4.2% for the quarter and 7.8% year to date.
- Gross margin declined 2.4 percentage points for the quarter and 2.5 points year to date. Management cited greater wholesale promotions, retailer allowances, lower initial selling prices and a higher mix of lower-margin products.
- Quarterly net income increased modestly, but nine-month net income was nearly flat and diluted EPS declined year over year. Higher SG&A, interest expense and a $0.8 million year-to-date equity-method loss from the Vince Camuto outlet-store joint venture offset sales growth. Interest costs rose with higher average borrowings, primarily associated with inventory.
- The board authorized repurchases of up to 2 million shares in September 2011; 125,000 shares were repurchased for approximately $2.9 million during the quarter.
Outlook, risks and contingencies
- Management said cash, operating cash generation and the revolving facility should be sufficient for expected operating and capital needs, including potential repurchases. It noted that acquisitions could require additional financing, which may not be available on acceptable terms.
- Management expected the retail segment to be profitable in fiscal 2012. The filing provides no clear numerical sales or earnings guidance.
- Risks highlighted include dependence on licensed products and large customers, uncertain consumer demand and economic conditions, intense competition, fashion and product-acceptance risk, raw-material and transportation cost increases, retailer financial distress, foreign sourcing and import timing, retail execution, seasonality and financing needs. The filing reported no material changes to previously disclosed risk factors.
- The company described new and expanded licensing initiatives and store expansion, including Calvin Klein performance-apparel retail rights and additional outlet locations. These plans involve execution and demand risks. It reported no material subsequent event affecting results.
Important facts for investors to verify
- Whether margin pressure from promotions, allowances and product mix persists, and whether sales growth translates into sustained earnings and EPS growth.
- Whether seasonal receivables and inventory convert to cash as expected, and the resulting borrowing needs and availability under the borrowing-base facility.
- Customer concentration, licensed-brand dependence, retailer credit exposure and the performance of newer product lines and outlet-store ventures.
- Compliance with credit covenants, capital needs for expansion and the execution and profitability of planned licensing and retail initiatives.