G-III Apparel Group, Ltd. — Form 10-Q summary
Reporting period: Quarter and six months ended July 31, 2012 (fiscal 2013). The filing period differs from the request metadata’s “2011 Q2.” Financial statements are unaudited and the company cautions that seasonal results are not necessarily indicative of the full year.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Three months 2012 | Three months 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $251.5 | $230.0 | $480.9 | $426.8 |
| Gross profit | $74.8 | $65.6 | $143.5 | $125.0 |
| Gross margin | 29.8% | 28.5% | 29.8% | 29.3% |
| Operating profit | $3.3 | $3.9 | $3.3 | $3.9 |
| Income attributable to G-III | $1.4 | $1.6 | $0.5 | $1.0 |
| Diluted earnings per share | $0.07 | $0.08 | $0.03 | $0.05 |
- For the six-month period, cost of goods sold was $337.4 million; SG&A was $136.1 million and depreciation and amortization was $4.2 million. Net interest and financing charges were $2.1 million; income tax expense was $0.3 million.
- Net cash used in operating activities was $57.7 million, versus $135.4 million used a year earlier. Capital expenditures were $4.5 million, and financing activities provided $60.3 million, mainly from net revolver borrowings.
- At July 31, cash was $22.7 million, inventory $336.4 million, current assets $581.0 million, current liabilities $283.8 million, and notes payable $87.0 million. Open letters of credit totaled approximately $24.6 million.
Changes and business drivers
- Quarterly sales rose 9.4%; six-month sales rose 12.7%. Licensed wholesale sales and retail operations drove growth, while non-licensed wholesale sales declined. Management attributed licensed-product growth in part to Calvin Klein and new Kensie lines; retail growth reflected more stores and comparable-store sales gains of 12.7% for the quarter and 9.3% for the half-year.
- Gross margin improved, but operating profit and G-III-attributable income declined in both reported comparisons. SG&A rose faster than sales, reflecting personnel, advertising, warehousing, and acquisition-related professional costs. Management also cited higher average borrowing costs associated with inventory levels.
- Retail gross margin benefited from reduced promotional activity and a higher-margin product mix. Licensed wholesale margins benefited from Kensie and increased Calvin Klein sales in higher-margin channels; unanticipated outerwear returns partly offset that improvement.
- Inventory increased to $336.4 million from $322.4 million a year earlier, in line with the seasonal buildup for fall shipments. Accounts receivable was $184.8 million, up from $171.5 million.
Outlook, financing, and notable events
- No specific earnings or revenue guidance is provided. Management said cash on hand, operating cash generation, and availability under the new credit agreement were expected to meet operating and capital expenditure needs. It warned that uncertain economic conditions could weigh on discretionary consumer spending and fiscal 2013 results.
- On August 6, 2012, the company entered a five-year, senior secured revolving credit facility of up to $450 million, replacing its prior $300 million facility. It repaid approximately $97.1 million under the prior facility. The new agreement restricts dividends and share repurchases until February 2014, subject thereafter to covenants.
- On August 7, 2012, after quarter-end, G-III acquired Vilebrequin for approximately $106.2 million, subject to post-closing adjustments: approximately $87.6 million in cash and $18.6 million in unsecured notes bearing 5% interest and due in 2017. The deal also provides for up to $27.9 million in contingent payments tied to performance through 2015. The cash consideration was funded under the new credit facility.
- Management identified acquisition integration and international expansion risks, including Vilebrequin’s reliance on a single major manufacturing facility, unfamiliarity with luxury full-price retail, foreign regulatory and geopolitical risks, and economic instability in Europe. Other cited risks include customer concentration, licensed-brand dependence, fashion demand, competition, sourcing, seasonality, and retailer credit exposure.
- The company held a 51% interest in a Calvin Klein Performance retail joint venture for China and Hong Kong; stores were expected to begin operating in major Chinese markets in fall 2012. Management reported compliance with the prior facility’s covenants at July 31. Disclosure controls were assessed as effective, with no material internal-control changes reported.
Important facts for investors to verify
- Post-acquisition debt, borrowing availability, covenant headroom, and the final Vilebrequin purchase-price adjustments and contingent-payment exposure.
- Whether sales growth translates into improved operating profit as elevated SG&A, inventory, and seasonal working-capital needs continue.
- Inventory quality and sell-through, outerwear returns, customer receivable collectability, and exposure to concentrated retail customers.
- Vilebrequin integration progress, manufacturing continuity, international expansion costs, and performance against the contingent-payment targets.
- Actual fiscal 2013 results relative to management’s qualitative economic and seasonal cautions; the filing provides no clear numerical guidance.