GIII

Business Context and Reporting Period

Company: G-III Apparel Group, Ltd.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended April 30, 2009 (First Quarter of Fiscal 2010)
Business Overview: G-III designs, manufactures, and markets outerwear, sportswear, and accessories through three segments: wholesale licensed apparel, wholesale non-licensed apparel, and retail operations (primarily Wilsons Leather outlet stores). The company operates in a challenging economic environment characterized by reduced consumer discretionary spending.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 53.8% to $115.9 million, driven primarily by a $15.1 million increase in Calvin Klein licensed product sales (dresses and sportswear) and the inclusion of the Wilsons retail segment acquired in July 2008.
• Segment Performance:
  • Licensed Apparel: Sales rose to $60.0 million; gross margin improved to 24.6% due to higher-margin dress sales.
  • Non-Licensed Apparel: Sales declined to $28.8 million due to a decrease in Jessica Howard division sales; gross margin dropped to 20.7% due to markdowns on Andrew Marc outerwear.
  • Retail Operations: Generated $27.2 million in sales but reported an operating loss of $4.0 million.
• Expense Increases: Selling, general, and administrative (SG&A) expenses rose $13.7 million to $40.9 million, largely due to the inclusion of Wilsons retail operations ($14.3 million) and increased advertising costs.
• Balance Sheet: Inventory decreased to $89.4 million from $116.6 million at the end of the prior fiscal year, reflecting seasonal liquidation. Accounts receivable decreased to $52.3 million.

Outlook, Risks, and Management Commentary

• Economic Outlook: Management expects the recessionary environment to continue negatively impacting consumer spending on discretionary items like fashion apparel. Worsening macroeconomic conditions and credit access concerns are cited as risks for the remainder of fiscal 2010.
• Retail Strategy: The company is implementing initiatives to improve Wilsons retail performance, including improving merchandise mix, enhancing store presentation, and reducing distribution center overhead by cutting leased space by half.
• Liquidity: The company maintains a $250 million senior secured revolving credit facility. As of April 30, 2009, $31.1 million was outstanding. The agreement was amended in April 2009 to revise leverage ratios and increase borrowing rates (Prime + 0.75% or LIBOR + 3.0%).
• Risk Factors: Key risks include reliance on licensed products, foreign manufacturing dependencies, retailer bankruptcies, and the high concentration of sales among the ten largest customers.

Investor Verification Checklist

• Inventory Levels: Verify the valuation of $89.4 million in inventory, particularly the $46.9 million in licensed apparel finished goods, given the economic downturn and markdown risks.
• Debt Covenants: Confirm continued compliance with the amended credit facility covenants (maximum senior leverage ratio and minimum fixed charge coverage ratio).
• Retail Segment Viability: Monitor the effectiveness of cost-cutting and merchandise mix initiatives at the Wilsons retail stores to determine if the segment can achieve profitability.
• Customer Concentration: Assess the financial health of the top ten customers, as their stability is critical to the company's revenue stream.
• Contingent Liabilities: Note the $4.9 million contingent purchase price payable related to prior acquisitions (Marvin Richards/Winlit Group), which is expected to be paid in the second quarter of fiscal 2010.