G-III Apparel Group, Ltd. — Form 10-Q summary
Reporting period: Three months ended April 30, 2017, compared with the three months ended April 30, 2016. The filing is for fiscal 2018 first quarter; this differs from the request metadata’s “2016 Q1.” Financial amounts below are in U.S. dollars, generally millions unless stated otherwise.
Business context and key results
G-III designs, markets and sells apparel and accessories through wholesale and retail operations, using owned, licensed and private-label brands. Its portfolio includes DKNY and Donna Karan, acquired in December 2016. Results include DKI from the acquisition date. The company cautions that the quarter is not necessarily indicative of full-year results because of seasonality.
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $529.0 | $457.4 |
| Gross profit / margin | $201.9 / 38.2% | $165.7 / 36.2% |
| Operating income (loss) | $(5.4) | $5.4 |
| Net income (loss) | $(10.4) | $2.8 |
| Diluted EPS | $(0.21) | $0.06 |
| Operating cash flow | $(33.2) | $1.8 |
Sales rose 15.7% year over year. Wholesale sales were $453.0 million versus $382.4 million; retail sales were $99.2 million versus $95.0 million, before intersegment eliminations. Wholesale operating profit declined to $18.1 million from $22.4 million, while the retail operating loss widened to $23.5 million from $17.1 million.
Margins, liquidity and debt
- Gross margin improved to 38.2% from 36.2%. Management attributed the wholesale improvement partly to DKI licensing income, which has no associated cost of goods sold, and favorable product mix; retail margin benefited from the acquired DKNY stores.
- SG&A increased to $197.4 million from $153.1 million, including $40.9 million attributable to DKI. Higher facility and advertising expenses also contributed. Depreciation and amortization rose to $9.8 million from $7.2 million.
- Interest and financing charges increased to $9.9 million from $1.2 million, largely due to acquisition-related borrowing and amortization of financing costs. The tax benefit was $6.1 million; the stated effective tax rate was 37.0% in both periods.
- Cash and cash equivalents were $67.1 million at April 30, 2017, versus $95.4 million a year earlier. Current assets were $841.6 million and current liabilities were $239.7 million, implying working capital of about $601.9 million.
- Operating cash use was $33.2 million, mainly reflecting a $69.6 million decline in accounts payable, accrued expenses and other liabilities and the net loss, partly offset by inventory reductions of $37.4 million and receivables reductions of $7.7 million. Investing cash use was $5.7 million; financing provided $29.0 million, primarily from revolving-credit borrowings.
- At April 30, principal debt included a $300 million term loan, $120 million drawn on the $650 million revolving facility and a $125 million LVMH seller note. Debt carrying value was $492.8 million after $52.2 million of debt discount and issuance costs. Term-loan interest averaged 6.3%; revolving-facility interest averaged 2.6%. The company reported compliance with its debt covenants. Revolver availability is not clearly stated in the filing text.
Material changes, outlook and risks
- DKI acquisition-related sales, assets and debt materially changed the company’s scale and financial profile. The approximately $669.8 million purchase-price allocation remained preliminary; goodwill was reduced by $2.7 million in the quarter for indemnification assets related to pre-acquisition matters.
- Wilsons and G.H. Bass same-store sales declined 11.3% and 9.2%, respectively, with management citing greater promotional activity. Management described ongoing retail turnaround efforts, including lease renegotiations or exits, cost reductions, merchandising changes and repurposing selected stores.
- Management said cash on hand, expected operating cash generation for the year and funds available under the ABL facility were expected to cover operating and capital needs. No specific earnings or revenue guidance is provided in the filing text. The company noted possible need for additional financing if it pursues acquisitions.
- Principal risks include licensed-brand dependence, changing consumer tastes, competition, customer financial distress and consolidation, foreign sourcing and operating risks, seasonality, retail losses, acquisition integration, higher indebtedness and financing needs. The filing reports no material changes to the risk factors in the prior Form 10-K.
- The company expects the new lease standard to significantly increase reported long-term assets and liabilities. It was still evaluating revenue-standard adoption; its initial assessment anticipated changes principally to wholesale revenue timing and classification of cooperative advertising.
Important facts for investors to verify
- Whether DKI integration and brand-development plans generate sales and earnings sufficient to offset acquisition-related SG&A, amortization and financing costs.
- Retail turnaround progress, including comparable sales, store profitability, promotional intensity and lease actions.
- Seasonal working-capital needs, cash generation and actual availability under the revolving facility.
- Debt covenant headroom, interest expense and the required excess-cash-flow prepayments under the term loan.
- Final DKI purchase-price allocation and any material changes to the preliminary accounting estimates.