G-III Apparel Group, Ltd. — Form 10-Q summary
Period: Fiscal third quarter and nine months ended October 31, 2016. The filing period differs from the request metadata, which says 2015 Q3. Financial statement amounts below are in U.S. dollars; dollar figures are in millions unless noted.
Business context and financial results
G-III designs, markets and sells apparel and accessories through wholesale and retail operations. Its portfolio includes licensed, proprietary and private-label brands; retail operations are primarily Wilsons Leather and G.H. Bass stores. The business is seasonal, with substantial working-capital needs around the fall shipping season.
| Metric | Three months ended October 31, 2016 | Three months ended October 31, 2015 | Nine months ended October 31, 2016 | Nine months ended October 31, 2015 |
|---|---|---|---|---|
| Net sales | $883.5 | $909.9 | $1,783.1 | $1,816.7 |
| Gross profit / margin | $321.5 / 36.4% | $337.1 / 37.0% | $642.8 / 36.0% | $659.8 / 36.3% |
| Operating profit | $115.1 | $139.4 | $115.3 | $172.1 |
| Net income | $70.6 | $87.2 | $72.0 | $106.4 |
| Diluted EPS | $1.50 | $1.87 | $1.53 | $2.29 |
Quarterly sales fell about 2.9% and net income about 19% year over year; nine-month sales declined about 1.8% and net income about 32%. Quarterly SG&A was $198.3 million versus $191.0 million; nine-month SG&A was $504.5 million versus $469.6 million. Nine-month depreciation and amortization rose to $22.9 million from $18.2 million. Interest and financing charges were $4.0 million for the nine months, compared with $4.1 million.
Cash flow, liquidity and debt
- Nine-month operating cash flow was a use of $117.3 million, versus a use of $184.8 million in the comparable period. The seasonal increase in receivables used $315.4 million of cash; changes in income taxes and payables/accruals partly offset the outflow.
- Investing cash outflow was $53.8 million, including $35.4 million for the KH1 investment and $18.4 million of capital expenditures. Financing provided $83.9 million, mainly from $91.3 million of net revolving-credit borrowings.
- Cash was $45.0 million at October 31, 2016, compared with $54.3 million a year earlier. Notes payable were $91.3 million, compared with $171.8 million. The then-existing $450 million secured facility had $345.0 million available; the company reported covenant compliance.
- Current assets were $1,106.5 million and current liabilities $402.0 million at October 31, 2016. The filing describes seasonal working-capital requirements and peak borrowings generally occurring in the third fiscal quarter.
Material changes, outlook and risks
- Wholesale sales weakened in part because retailers had excess outerwear inventory after warm weather, while new Tommy Hilfiger and Karl Lagerfeld categories and growth in Calvin Klein partly offset declines in several brands and private-label products. Retail sales fell; same-store sales declined 20.0% at Wilsons and 11.1% at G.H. Bass for the quarter.
- Quarterly gross margin declined in both wholesale and retail. For the nine months, wholesale margin improved to 33.0% from 32.4%, but retail margin fell to 44.5% from 46.3%, reflecting deeper discounting. Management cited promotional conditions, lower traffic, warm weather and weaker tourist-related demand.
- On December 1, 2016, after the reporting date, G-III acquired Donna Karan International for approximately $650 million, subject to adjustments. Consideration included cash, $75 million of newly issued G-III shares and a $125 million junior-lien note. Financing included a $350 million term loan and a new $650 million asset-based revolver, replacing the prior credit facility. Management expected higher interest expense and significant additional acquisition-related expenses; it described plans to expand DKNY and develop Donna Karan brands and licensing.
- The term loan carries LIBOR plus 5.25% (or an alternate base rate plus 4.25%), matures in December 2022, and includes amortization and excess-cash-flow prepayment provisions. Acquisition integration, increased debt and costs, seasonal working capital, retailer financial health, licensed-brand dependence, competition and sourcing are notable risks.
- No specific forward financial guidance is provided in the supplied filing text. Management said pre-acquisition cash, operating cash generation and available credit were expected to support operating and capital needs; the acquisition added substantial financing needs. The filing also notes that ASU 2016-09 adoption generated a $3.1 million tax benefit for the nine months, or about $0.07 per diluted share.
Important facts for investors to verify
- Confirm the period: this is the quarter ended October 31, 2016, not 2015 Q3.
- Review post-acquisition debt balances, borrowing availability, interest costs, covenants and the final purchase-price allocation for Donna Karan; acquisition financing was not reflected in the October 31 balance sheet.
- Track receivables, inventory, operating cash flow and seasonal borrowing needs, along with same-store sales and wholesale demand for outerwear.
- Assess whether margin pressure, acquisition expenses and integration risks affect subsequent results; the filing provides no quantified forward guidance.