Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended October 31, 2003, for G-III Apparel Group, Ltd., a Delaware corporation engaged in the design, manufacture, and marketing of licensed and non-licensed apparel. The company operates two primary segments: licensed apparel and non-licensed apparel. The financial statements are unaudited but include all normal recurring adjustments necessary for a fair presentation.
Key Financial Metrics
Three Months Ended October 31, 2003
- Net Sales: $125.5 million
- Gross Profit: $37.3 million (29.7% margin)
- Operating Income: $20.6 million
- Net Income: $11.4 million
- Diluted EPS: $1.50
- Cash and Cash Equivalents: $1.7 million
- Notes Payable: $43.4 million
Nine Months Ended October 31, 2003
- Net Sales: $189.6 million
- Gross Profit: $57.4 million (30.3% margin)
- Operating Income: $21.0 million
- Net Income: $11.5 million
- Diluted EPS: $1.54
- Net Cash Used in Operating Activities: $(44.0) million
Material Changes vs. Prior Period
Compared to the same periods in 2002, the company reported significant growth driven by its licensed apparel segment.
- Revenue Growth: Net sales increased 22.7% for the quarter and 22.3% for the nine-month period. This was primarily due to a $44.7 million increase in licensed apparel sales (quarterly), offset by a $21.4 million decrease in non-licensed apparel sales.
- Profitability: Net income rose 34% for the quarter and 134% for the nine-month period. Gross profit margins improved to 29.7% (quarterly) and 30.3% (nine-month) from 27.3% and 25.6% respectively, driven by higher margins in sports apparel and commission fee income.
- Expense Management: Selling, general, and administrative (SG&A) expenses increased due to the expansion of the sports apparel business, including higher personnel and facility costs. However, interest expense decreased due to lower average debt levels and lower interest rates.
- Segment Shift: Licensed apparel now represents 76.8% of net sales for the quarter, up from 50.5% in the prior year.
Outlook, Risks, and Management Commentary
Management attributes the strong performance to the successful expansion of sports apparel and new license agreements. The company has transitioned to more third-party sourcing following the closure of its Indonesian manufacturing facility in the fourth quarter of fiscal 2003, which reduced inventory levels and interest costs.
Liquidity and Capital Resources
The company maintains a collateralized working capital line of credit ranging from $45 million to $90 million. As of October 31, 2003, direct borrowings were $42.6 million. The company is in compliance with all covenants, which include maintaining specified earnings and tangible net worth levels and prohibiting cash dividends.
Risks and Contingencies
- Seasonality: Results for the nine-month period are not necessarily indicative of full-year results due to the seasonal nature of the apparel business.
- Operational Risks: Risks include reliance on foreign manufacturers, changing consumer tastes, and dependence on licensed products.
- Accounting Changes: The company is monitoring the adoption of FIN 46 regarding Variable Interest Entities, though management does not expect a material effect on financial position.
Investor Verification Checklist
- Verify the sustainability of the 29.7% gross margin given the heavy reliance on sports apparel and new licenses.
- Monitor the $42.6 million debt balance against the borrowing base formulas and the requirement to have no loans outstanding for 45 consecutive days annually.
- Assess the impact of the closure of the Indonesian facility on future non-licensed apparel sales and supply chain stability.
- Review the cash flow statement, noting the $44 million net cash used in operating activities, driven largely by a $68.6 million increase in accounts receivable.
- Confirm the effective tax rate of 43% and its components, specifically increased state and local taxes.