G-III Apparel Group, Ltd. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2022. The request metadata says “2021 Q2,” but the filing itself covers the fiscal quarter ended July 31, 2022 (fiscal 2023 Q2). Amounts below are in U.S. dollars; financial statement amounts are converted to millions unless otherwise noted.
Business context
G-III designs, sources and markets apparel and accessories through wholesale and retail operations, with a portfolio of licensed, proprietary and private-label brands. On May 31, 2022, it acquired the remaining 81% of Karl Lagerfeld Holding B.V. (KLH), making KLH wholly owned. KLH’s results are consolidated beginning on that date, so the reported quarter includes only one month of KLH results.
Financial performance
| Metric | Three months ended July 31, 2022 | Three months ended July 31, 2021 | Six months ended July 31, 2022 | Six months ended July 31, 2021 |
|---|---|---|---|---|
| Net sales | $605.2 | $483.1 | $1,294.0 | $1,003.0 |
| Gross profit | $228.9 | $192.9 | $475.0 | $388.3 |
| Gross margin | 37.8% | 39.9% | 36.7% | 36.7% |
| Operating profit | $31.3 | $38.9 | $85.8 | $85.8 |
| Net income attributable to G-III | $36.3 | $19.2 | $67.0 | $45.5 |
| Diluted earnings per share | $0.74 | $0.39 | $1.36 | $0.92 |
- Quarterly sales increased about 25%; six-month sales increased about 29%. Wholesale sales drove most revenue, while retail sales also grew.
- Quarterly operating profit declined about 20% despite higher sales; six-month operating profit was essentially unchanged. Quarterly gross margin fell 2.1 percentage points, while the six-month margin was flat.
- Management attributed wholesale margin pressure to inflation in product costs and higher freight costs, partly offset by less promotional activity and price increases. SG&A rose with compensation, warehouse and facility costs, and advertising.
- Other income included a $30.9 million noncash gain from remeasuring G-III’s previously held KLH and KLNA interests upon acquiring KLH. This materially boosted reported net income; quarterly other income was $30.3 million.
Cash flow, balance sheet and debt
- Operating cash flow was negative $109.9 million for the six months, versus positive $193.8 million a year earlier. The principal use was a $496.4 million inventory increase, partly offset by higher accounts payable and lower receivables.
- Investing activities used $224.6 million, including $168.6 million net cash paid for KLH, a $25.0 million minority investment in an e-commerce retailer, and $22.4 million invested in equity securities. Financing activities provided $22.9 million.
- Cash was $151.0 million at July 31, 2022, down from $466.0 million at January 31, 2022. Inventory was $1.041 billion, up from $512.2 million at January 31, 2022 and $499.3 million a year earlier.
- Current assets were $1.765 billion and current liabilities $769.4 million. G-III reported approximately $580 million of availability under its revolving credit facility and compliance with debt covenants.
- Notes payable totaled $575.8 million on the balance sheet, including $80.1 million classified as current. Outstanding borrowings included $400 million of 7.875% senior secured notes due 2025, a $125 million LVMH note bearing 2% interest and due in installments in June and December 2023, and $51.6 million under the ABL facility. The ABL’s reported average interest rate was 6.05% at July 31.
Material developments, outlook and risks
- The KLH acquisition’s initial purchase price was approximately $216.8 million, funded from cash on hand. The purchase-price allocation remained preliminary. KLH contributed $18.2 million in sales and $0.2 million in operating income after acquisition during the reported periods.
- Management said inflationary pressures were expected to continue through fiscal 2023 and that price increases were being used to mitigate higher costs, with uncertain effects on demand.
- Supply-chain disruption and accelerated production schedules resulted in inventory levels higher than expected. Management expected distribution-center capacity pressures and additional labor, storage and other costs to continue into the first half of calendar 2023.
- The company cited uncertainty from COVID-19, foreign-exchange volatility, supply-chain disruption, inflation and broader economic effects of the war in Ukraine. It did not provide a clear quantified earnings or revenue outlook in the supplied filing text.
- In a post-quarter development, the Canadian International Trade Tribunal ruled on August 22, 2022 in favor of G-III Canada in its customs-duty valuation appeal. The CBSA could appeal the ruling until November 21, 2022. The company had paid and deferred cumulative amounts of CAD$14.8 million (US$11.6 million) relating to the disputed valuation and had a bond of CAD$26.9 million (US$20.9 million).
- G-III repurchased 811,874 shares for $16.6 million during the quarter. Management stated disclosure controls were effective and reported no material changes in internal control over financial reporting; KLH controls were still being integrated.
Most important facts for investors to verify
- How much of sales and earnings growth is organic versus attributable to the KLH acquisition, and how KLH performs after full-period consolidation.
- Whether elevated inventory clears as planned, and the resulting effect on promotions, gross margins, storage costs and operating cash flow.
- The recurring earnings picture excluding the $30.9 million acquisition-related remeasurement gain and other unusual items.
- Liquidity and refinancing needs, particularly the LVMH note installments due in 2023, ABL borrowings and the facility’s springing-maturity provisions.
- The outcome of any CBSA appeal and whether G-III ultimately receives a refund of the disputed Canadian duties.