G-III Apparel Group, Ltd. — Form 10-K Summary
Period clarification: The supplied filing is the annual report for the fiscal year ended January 31, 2023 (fiscal 2023), not a filing for 2021 Q4. Comparisons below are principally fiscal 2023 versus fiscal 2022.
Business context and reporting period
G-III designs, sources, markets and sells apparel and accessories through wholesale and retail operations. Its portfolio includes owned brands such as DKNY, Donna Karan, Karl Lagerfeld and Vilebrequin, licensed brands including Calvin Klein and Tommy Hilfiger, and private-label products. Wholesale is the much larger segment. Fiscal 2023 included seven months of consolidated Karl Lagerfeld results following the acquisition of the remaining 81% interest in May 2022.
Key financial metrics
| Metric | Fiscal 2023 | Fiscal 2022 |
|---|---|---|
| Net sales | $3.227 billion | $2.767 billion |
| Gross profit / margin | $1.101 billion / 34.1% | $988.2 million / 35.7% |
| Operating income (loss) | $(109.5) million | $311.1 million |
| Net income (loss) attributable to G-III | $(133.1) million; $(2.79) per diluted share | $200.6 million; $4.05 per diluted share |
| Cash from (used in) operating activities | $(104.6) million | $185.8 million |
| Cash and cash equivalents at year-end | $191.7 million | $466.0 million |
Fiscal 2023 included a $347.2 million non-cash goodwill impairment charge, which fully impaired goodwill and was the principal reason for the reported operating and net losses. The company also recorded a $27.1 million non-cash gain from remeasuring its previously held Karl Lagerfeld interests. The effective tax rate was 2.7%, versus 26.2% in fiscal 2022, primarily reflecting the goodwill impairment’s effect on pretax book income.
Wholesale net sales were $3.160 billion, up from $2.711 billion; retail net sales were $137.2 million, up from $117.7 million. Wholesale operating loss was $75.8 million, including the goodwill impairment, and retail operating loss widened to $33.6 million from $24.8 million. Retail gross margin declined to 49.9% from 50.9%.
Material changes versus the prior year
- Sales rose 16.6%, reflecting higher Calvin Klein sales, the inclusion of Karl Lagerfeld for seven months, and growth in Karl Lagerfeld Paris, DKNY/Donna Karan and Tommy Hilfiger products.
- Consolidated gross margin fell 1.6 percentage points. The company cited freight and demurrage costs, higher promotional activity, inflationary product costs and increased freight costs; price increases partly offset these pressures. Wholesale gross margin was 32.6%, versus 34.2%.
- Selling, general and administrative expense increased to $833.2 million from $648.0 million, including acquired Karl Lagerfeld expenses and higher warehousing, facilities, advertising and compensation costs.
- Operating cash flow shifted from a $185.8 million inflow to a $104.6 million outflow, driven in part by increases in inventory and receivables and a decrease in accounts payable and accrued expenses. Inventory was $709.3 million, versus $512.2 million.
- The company used $168.6 million of cash, net of acquired cash, for the Karl Lagerfeld acquisition and paid $26.9 million to repurchase shares during fiscal 2023.
Liquidity, debt and cash commitments
At January 31, 2023, cash was $191.7 million and reported availability under the $650 million asset-based revolving facility exceeded $550 million. Borrowings under that facility were $80.1 million, compared with none a year earlier; the company reported compliance with its debt covenants. It also had $400 million of 7.875% senior secured notes outstanding, due in 2025, and a $125 million LVMH note bearing 2% interest, with $75 million due June 2023 and $50 million due December 2023. Additional foreign unsecured loans, overdrafts and a foreign credit facility were also outstanding.
The filing states that cash, operating cash generation and facility availability are expected to meet operating and capital expenditure requirements. However, the LVMH repayments fall in fiscal 2024, and the ABL facility’s stated August 2025 maturity is subject to a springing maturity provision linked to the LVMH note. Debt interest costs increased with higher average revolving borrowings; the ABL rate was 5.31% at January 31, 2023. The company was transitioning its reference rate from LIBOR to SOFR.
Outlook, management commentary and risks
- Outlook: The filing provides no specific numerical fiscal 2024 revenue or earnings guidance in the supplied text. Management expects inflationary pressures to persist through fiscal 2024 and inventory to remain above normal through at least the first half, with additional warehouse labor and storage costs and potentially less efficient operations.
- Supply chain and inventory: Earlier shipping disruption and limited distribution-center capacity led to higher inventory and significant demurrage charges, especially in the third quarter. Continued delivery delays, retailer inventory reductions and promotional activity could pressure sales and margins.
- Brand and license dependence: Licensed products were 58.6% of fiscal 2023 net sales; Calvin Klein and Tommy Hilfiger products together were approximately 48.0%. Extensions run by category through 2024–2027, but PVH has indicated it intends to produce the products itself after the agreements expire. The company announced a new Nautica license in March 2023, effective January 2024, and plans to relaunch Donna Karan for Spring 2024.
- Customer concentration: The ten largest customers represented 74.2% of sales. Macy’s accounted for 21.6% and TJX Companies 15.4%; loss of a major customer or reduced orders could materially affect results.
- Other risks: The filing highlights consumer demand and inflation, interest rates and borrowing costs, seasonality and weather, foreign sourcing and tariffs, currency exposure, cybersecurity and privacy, and risks associated with international operations. Products sourced from China were 37.6% of fiscal 2023 purchases and Vietnam 31.4%; the company said it does not currently hedge currency risks.
- Contingencies and unusual items: Management does not believe pending ordinary-course legal matters will have a material adverse effect. A Canadian customs tribunal ruled in the company’s favor; it received a CAD $1.5 million refund and expects approximately CAD $13.2 million of additional refunds after adjustments, for which adjustment requests were filed. The filing reports the potential refund, not that it has been received.
Important facts for investors to verify
- How sales, margins and operating cash flow develop as elevated inventory is worked down, and whether additional markdowns or warehouse costs arise.
- Repayment or refinancing of the $125 million LVMH note and the timing and terms of the senior notes and ABL facility maturities.
- Renewal prospects and category-level exposure for Calvin Klein and Tommy Hilfiger licenses as expirations begin in 2024.
- Performance and integration economics of Karl Lagerfeld, including the assumptions behind the goodwill impairment and the carrying value of trademarks and other intangible assets.
- Collection and timing of the anticipated Canadian customs refunds, and the extent of customer concentration and receivable exposure.