G-III Apparel Group, Ltd. — Form 10-Q Summary
Reporting period: The filing covers the three months ended April 30, 2019 (the first quarter of fiscal 2020), compared with the three months ended April 30, 2018. The request metadata says “2018 Q1,” but that does not match the filing period.
Business context and results
G-III designs, sources and markets apparel and accessories through wholesale and retail operations, with a portfolio of licensed, proprietary and private-label brands. The unaudited interim results are seasonal and are not necessarily indicative of full-year performance. Amounts below are in millions of dollars unless noted.
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $633.6 | $611.7 | +3.6% |
| Gross profit / margin | $236.1 / 37.3% | $234.5 / 38.3% | Margin down 1.0 percentage point |
| Operating profit | $25.6 | $23.1 | +10.8% |
| Net income | $12.0 | $9.9 | +21.8% |
| Diluted earnings per share | $0.24 | $0.20 | +$0.04 |
| Cash used in operating activities | $25.3 | $24.3 | Cash use increased $1.0 |
| Capital expenditures | $13.3 | $5.3 | Increased $8.0 |
Segment performance and material changes
- Wholesale: Sales increased to $570.6 million from $527.7 million. Growth included $44.6 million in Tommy Hilfiger sales and $15.9 million in DKNY/Donna Karan sales, partly offset by a $10.1 million decline following expiration of the Ivanka Trump license. Segment operating profit rose to $44.3 million from $42.5 million.
- Retail: Sales fell to $81.9 million from $104.5 million; same-store sales declined 23.1% at Wilsons, 10.9% at G.H. Bass and 1.1% at DKNY. Stores decreased from 350 to 296 year over year. The segment’s operating loss narrowed to $18.7 million from $19.5 million.
- Consolidated gross margin declined despite higher sales. Wholesale margin was 34.8% versus 35.2%; retail margin was 45.2% versus 46.3%, with higher Wilsons promotions cited as a factor.
- SG&A was broadly flat at $201.9 million. Operating profit included an $0.8 million gain on lease terminations. Interest and financing expense increased to $10.3 million from $9.6 million, attributed to higher rates partly offset by lower average borrowings. The effective tax rate declined to 17.5% from 24.0%, mainly due to greater excess tax benefits from equity award vesting.
Financial position, cash flow and liquidity
- At April 30, 2019, cash was $48.3 million, down from $70.1 million at January 31, 2019 and $71.0 million a year earlier. Current assets were $1,171.6 million and current liabilities were $540.2 million.
- Balance-sheet notes payable, net of discount and issuance costs, were $411.1 million. Principal debt comprised a $300 million term loan, $22.5 million drawn on the revolving facility and a $125 million LVMH note. The term loan’s average rate was 7.76%; the revolver’s was 4.52%. The term loan matures in December 2022, the revolver in December 2021, and the LVMH note payments are due in 2023.
- The company used $25.3 million in operating cash, reflecting payments and seasonal working-capital movements; financing activities provided $16.9 million, including net revolver borrowings. Management said cash on hand, full-year operating cash generation and revolver availability should be sufficient for expected operating and capital needs. Borrowings under the revolver are subject to borrowing-base limits.
- G-III adopted ASC 842 on February 1, 2019. At April 30, it reported $320.2 million of operating lease assets and $361.4 million of lease liabilities. Adoption included a $9.6 million, net-of-tax impairment recorded against retained earnings. Lease costs were $25 million for the quarter.
Outlook, risks, contingencies and unusual items
- Management plans to continue reducing retail losses through cost control, lease actions, store repurposing and store closures; it anticipated closing approximately 40–45 stores in fiscal 2020. It reported approximately $5 million of annualized reductions in retail-office expenses and salaries.
- Tariffs on Chinese handbags and leather outerwear rose to 25% beginning May 10, 2019. Those categories represented about 7% of fiscal 2019 sales; the company estimated a roughly $6 million cost increase if the higher tariffs remained for the rest of fiscal 2020. Potential broader tariffs remained uncertain, and management could not estimate their impact. Mitigation efforts include shifting sourcing, vendor support and possible price increases.
- A Canadian customs valuation dispute remains under appeal. G-III provided a CAD$26.9 million bond (reported as $20.9 million) for claimed duties and interest and had deferred cumulative additional duty expense of CAD$12.4 million ($9.2 million) through April 30, 2019. The company says it intends to contest the assessment. Effective June 1, it resumed paying duties using pre-audit import values while continuing to defer additional duty paid through May pending the appeal.
- Management cited risks including consumer acceptance and fashion trends, reliance on licensors and foreign manufacturers, retail customer financial distress and consolidation, e-commerce competition, sourcing and tariff exposure, cybersecurity, seasonality, and acquisition execution. The company reported compliance with its debt covenants and effective disclosure controls; it reported no material changes to the risk factors in its prior annual report.
Important facts for investors to verify
- Whether wholesale growth and improved retail operating losses continue, given falling retail sales and same-store sales.
- The effect of tariffs, including whether additional China tariffs are imposed and whether pricing or sourcing changes offset cost increases.
- The outcome and potential cash or earnings impact of the Canadian customs appeal and related deferred duties.
- Seasonal working-capital needs, revolver availability and compliance with debt covenants as peak borrowing season approaches.
- Execution and costs of planned store closures and the expected impact of the newly recognized lease liabilities.