G-III Apparel Group, Ltd. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter and nine months ended October 31, 2022 (fiscal 2023 Q3), not 2021 Q3 as stated in the request metadata. Amounts below are in millions of U.S. dollars unless noted otherwise.
Business context and reporting period
G-III designs, sources, licenses and sells apparel and related products through wholesale and retail operations. Its brands include DKNY, Donna Karan, Karl Lagerfeld, Vilebrequin and licensed Calvin Klein and Tommy Hilfiger products. The filing compares the three and nine months ended October 31, 2022 with the same periods in 2021.
G-III acquired the remaining 81% of Karl Lagerfeld Holding (KLH) on May 31, 2022 for approximately $216.8 million in cash, bringing KLH and its subsidiary KL North America under full ownership and consolidation. The reported periods include KLH only from the acquisition date; comparisons therefore include a change in consolidation scope.
Key financial metrics
| Metric | Three months ended Oct. 31, 2022 | Prior year | Nine months ended Oct. 31, 2022 | Prior year |
|---|---|---|---|---|
| Net sales | $1,078.3 | $1,015.4 | $2,372.3 | $2,018.4 |
| Gross profit / margin | $344.6 / 32.0% | $347.5 / 34.2% | $819.6 / 34.5% | $735.9 / 36.5% |
| Operating profit | $97.2 | $158.1 | $183.0 | $243.9 |
| Net income attributable to G-III | $61.1 | $106.7 | $128.1 | $152.2 |
| Diluted EPS | $1.26 | $2.16 | $2.62 | $3.07 |
| Interest and financing charges | $16.1 | $12.4 | $40.8 | $36.9 |
For the quarter, sales increased about 6%, while gross profit declined and operating profit and attributable net income each fell about 42% year over year. For the nine-month period, sales increased about 18%, but operating profit declined about 25% and attributable net income about 16%. Quarterly SG&A rose to $239.9 million from $182.4 million; nine-month SG&A rose to $616.4 million from $470.8 million.
Cash flow: Operating activities used $415.3 million in the nine months, compared with $15.4 million used in the prior-year period. Investing activities used $211.1 million, including $168.6 million net cash paid for KLH and $25.0 million for an e-commerce investment. Financing activities provided $322.2 million, primarily from revolving-facility borrowings. Cash declined from $466.0 million at January 31, 2022 to $150.7 million at October 31, 2022.
Liquidity and debt: At October 31, 2022, current assets were $1,984.5 million and current liabilities were $643.2 million. Cash was $150.7 million and revolving-credit availability was approximately $290 million. Notes payable had a carrying value of $879.5 million, including $91.6 million classified as current; principal debt was approximately $889.8 million before discounts and issuance costs. Major obligations included $400 million of 7.875% senior secured notes due 2025, $340.2 million outstanding on the ABL revolver, and a $125 million LVMH note, of which $75 million is due June 2023 and $50 million December 2023. The company reported compliance with debt covenants.
Inventory was $901.0 million, compared with $449.0 million a year earlier and $512.2 million at January 31, 2022. Accounts receivable was $881.1 million. Operating lease liabilities totaled $235.8 million.
Material changes and unusual items
- Quarterly wholesale sales benefited from $51.9 million of KLH sales; nine-month sales included $69.2 million of KLH sales. Higher licensed-brand and proprietary-brand sales also contributed to year-to-date growth.
- Wholesale gross margin was pressured by demurrage charges of $26.7 million in the quarter and $30.8 million year to date, along with promotions, product-cost inflation and freight costs. Price increases partly offset these pressures. Retail gross margin improved, helped by less promotional activity.
- Warehouse and facility costs increased with elevated inventory. Management attributed the unusually high inventory and operating cash use partly to accelerated production intended to mitigate supply-chain delays.
- Nine-month other income included a $30.9 million non-cash gain from remeasuring G-III’s previously held KLH and KLNA interests at acquisition. It is not recurring operating income.
- G-III repurchased 811,874 shares for $16.6 million during the nine months. It had 9,188,126 shares remaining under its authorized repurchase program as of December 1, 2022.
- A Canadian customs tribunal ruled for G-III Canada. The ruling provides for a CAD $1.8 million refund, and the company is pursuing further adjustments it estimates could yield an additional CAD $13.0 million, including interest and net of design-assist deductions. The additional amount was still being pursued.
Outlook, management commentary and risks
The filing provides no specific numerical earnings or revenue guidance. Management said it expects inflationary pressures to continue through fiscal 2023 and fiscal 2024, and elevated inventory at least through the first half of fiscal 2024. It expects warehouse inefficiency and additional labor and storage costs, but said added warehouse capacity and improved logistics should significantly reduce demurrage charges. Consumer demand, promotions and the effects of price increases remain uncertain.
Supply-chain congestion, freight and storage costs, inflation, higher interest rates, foreign-currency volatility, consumer demand, customer credit risk, seasonality and COVID-19 uncertainty are identified risks. Calvin Klein and Tommy Hilfiger products represented approximately 48.2% of nine-month net sales. License extensions announced November 30, 2022 run by category through dates from December 2024 to December 2027; PVH has indicated it intends to produce the products itself after the licenses expire. G-III stated that losing these licenses without replacement growth could materially harm sales and results.
The company completed its evaluation of disclosure controls and concluded they were effective. It is integrating KLH controls and plans to include them in its fiscal 2024 internal-control assessment.
Important facts for investors to verify
- Confirm the reporting period: this filing covers fiscal 2023 Q3, ended October 31, 2022, rather than 2021 Q3.
- Track inventory levels, receivable collections, operating cash flow and the resulting use of the ABL revolver.
- Assess whether demurrage, freight, warehouse and promotional costs decline as management expects, and how inventory is cleared without further margin erosion.
- Review the timing and funding of the $125 million LVMH note repayments in 2023, revolving-facility availability and interest-rate exposure.
- Monitor KLH integration and performance, including the final purchase-price allocation and the distinction between operating results and the one-time remeasurement gain.
- Evaluate dependence on Calvin Klein and Tommy Hilfiger licenses, their staggered expirations, and G-III’s progress diversifying revenue.
- Check the status and accounting treatment of the expected Canadian customs refunds and other contingencies.