G-III Apparel Group Ltd (GIII) Q4 2019 Earnings Conference Call Transcript

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G-III Apparel Group Ltd  (NASDAQ:GIII)Q4 2019 Earnings Conference CallMarch 21, 2019, 8:30 a.m. ET

Prepared Remarks Questions and Answers Call Participants
Prepared Remarks:


Welcome to the G-III Apparel Group Fourth Quarter and Full Fiscal Year 2019 Earnings Conference Call. My name is Paulette, and I will be your operator for today’s call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) Please note that this conference call is being recorded.

I will now turn the call over to Neal Nackman, the Company’s CFO. Mr. Nackman, you may begin.

Neal S. Nackman — Chief Financial Officer and Treasurer

Good morning, and thank you for joining us.

Before we begin, I would like to remind participants that certain statements made on today’s call and in the Q&A session may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees, and actual results may differ materially from those expressed or implied in forward-looking statements. Important factors that could cause actual results of operations or the financial condition of the Company to differ are discussed in the documents filed by the Company with the SEC. The Company undertakes no duty to update any forward-looking statements.

In addition, during the call, we will refer to non-GAAP net income, non-GAAP net income per share and to adjusted EBITDA, which are all non-GAAP financial measures. We have provided reconciliations of these non-GAAP financial measures to GAAP measures in our press release, which is also available on our website.

I will now turn the call over to our Chairman and Chief Executive Officer, Morris Goldfarb.

Morris Goldfarb — Chairman and Chief Executive Officer

Good morning, and thank you for joining us. With me today are Sammy Aaron, our Vice Chairman and President; Wayne Miller, our Chief Operating Officer; Neal Nackman, our Chief Financial Officer; and Jeff Goldfarb, our Executive Vice President.

We’re pleased to report that we’ve completed a record year of net sales, EBITDA and non-GAAP net income per share. A first full year of having our own DKNY and Donna Karan product in stores was a big success. The sales growth in our business was led by DKNY, Tommy Hilfiger and Karl Lagerfeld. Calvin Klein, our largest and most profitable business, also had a very good year in spite of the loss of business due to the closing of Bon-Ton department stores.

We’ve built a strong foundation, anchored by our five power brands DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld. And I’m confident that we’re well positioned for continued substantial organic growth into the future.

Now, let’s look at the fourth quarter and full year results. We delivered fourth quarter net sales growth of approximately 7% to $767 million from $715 million last year. Fourth quarter non-GAAP net income was $0.55 per diluted share compared to $0.26 per diluted share in the fourth quarter last year.

For the full fiscal year, we grew net sales by 10% to $3.08 million from $2.81 billion in the prior year. Non-GAAP net income per diluted share increased 79% to $2.86 from the $1.60 in the prior year. Our adjusted EBITDA for the year increased to $269 million, an increase of 34% from the prior year.

Here are some details of our businesses, beginning with our retail business. On our last earnings call, we told you that we were very disappointed with the results of our own retail business and that all options were on the table. In January, we hired Fran Della Badia as President of our retail business to help transform this business. Fran is a smart and savvy retail merchant and has great retail experience, having spent 16 years at Coach ultimately as Head of all North American retail.

As a recap, at the end of fiscal year 2017, we had a total store fleet of 411 stores. We ended fiscal 2019 with approximately 308 stores, representing net closures of 103 stores. In the upcoming fiscal year, we are in the process of converting approximately 10 locations to DKNY stores. In this coming fiscal year, our plan also includes the closure of an additional 43 locations, which will leave us with a store fleet of approximately 265. This will include approximately 41 DKNY and 11 Karl Lagerfeld stores.

We are actively working toward additional conversions to DKNY and Karl Lagerfeld as we continue to see significant upside operating performance from both nameplates. We had double digit positive comp performance for the fourth quarter and full year in both our DKNY and Karl Lagerfeld stores.

We’ve taken a hard look at our back office support functions and have already eliminated approximately $5 million of annualized expenses and salaries from our retail operations. Fran and the merchant teams are very focused on merchandise offerings and are planning to make significant changes for the upcoming fall season.

Our goal is to significantly reduce the losses in our retail business this year. And we will take whatever steps are necessary to get there, including continued store closures, obtaining additional operating efficiencies and implementing further product design changes.

Now, let’s turn to our Wholesale businesses. We’ve concluded fiscal 2019 with net sales of our Calvin Klein products in excess of $1 billion. We were pleased with the performance of this business throughout the year. As for the fourth quarter, Calvin Klein performed well and was led by dresses and men’s and women’s outerwear.

On the heels of more than doubling our Tommy Hilfiger business in fiscal 2018, we registered significant sales growth of 45% in fiscal 2019, annual net sales and now approximately $400 million. Tommy did well in the fourth quarter, with net sales growing by about 40%, led by dresses, sportswear, performance and outerwear.

These results illustrate the powerful combination of our strong execution and expertise in design, merchandising, sourcing and selling, combined with the marketing and brand management of our partners at PVH. Our product and distribution continues to broaden, allowing us to grow and expand the department store business more aggressively. We’re excited about the meaningful opportunities to grow this business over the next several years.

Before I provide an update on our Karl Lagerfeld Paris business, let me take a moment to acknowledge the loss of one of the greatest fashion designers of our time, a true fashion icon and innovator Mr. Karl Lagerfeld. We at G III are proud to have known and worked with Karl. His loss has impacted so many across the globe. The powerful legacy and influence she leaves behind will live on. The Karl Lagerfeld Paris brand has always sought to convey Karl’s design aesthetics and this will continue to be the core of the brand.

We capped off 2019 with fourth quarter net sales growth of 20% for Karl Lagerfeld, which was led by sportswear and handbags. For fiscal 2019, net sales grew more than 40%, are now in excess of $100 million. We are big believers in this brand, which we introduced to the North American market in the beginning of 2016. The momentum for Karl Lagerfeld continues and we see significant growth opportunities ahead for us over the next several years.

Now, an update on our own DKNY and Donna Karan businesses. Following our integration of the DKNY and Donna Karan brands and the successful launch of the wide range of categories, we’re pleased to see that these businesses grew by over 50%, reaching $400 million in annual net sales for fiscal 2019.

Our fourth quarter business growth was led by handbags, shoes, sportswear and outerwear. This past year was the first full year of our brand repositioning and distribution, and we’ve learned much about how we can continue to build this business going forward.

On the international front with DKNY, we’re building good businesses with our distribution partners in the Middle East, Russia, Southeast Asia and Korea. In China, a joint venture partner now has over 50 points of sale and continues to see meaningful growth opportunities. In Europe, we have over 700 points of sale in 36 countries and continue to expand our distribution into additional accounts.

We see licensing for both our DKNY and Donna Karan brands as not only as an important profit driver, but a great way to expand our global presence through the introduction of additional lifestyle product categories. We’ve added some great new licensing partners, such as Swarovski for fashion jewellery in international markets, and Marchon for sun and optical eyewear globally.

Just recently, we executed a license for DKNY men’s underwear, lounge wear, swimwear and socks for Europe, the UK and Russia. Our team has done a great job leveraging the unique 100% DKNY campaign, which launched this past fall and holiday season. We will continue this campaign into the spring, with an updated and fresh approach highlighting new talent. Our goal for the season is to increase and elevate global awareness and share product offerings through our campaign and our editorial and brand feature coverage.

This spring DKNY campaign has just kicked off with high impact outdoor media units in key global cities, including New York City, London, Toronto, Dubai and Mexico City. We will continue to have print presence in core US and UK fashion and lifestyle publications and we will also include significant digital exposure.

DKNY now reaches over 5 million followers across all social media channels. We will continue to invest significantly in the marketing and advertising of DKNY over the next several years. Further, I’m excited to share the news of our collaboration of DKNY sport with the major sports leagues to launch DKNY’s first ever women’s co-branded product capsule this spring. This special co-branding opportunity with DKNY and the leagues expose us to a wider consumer audience. The distribution will include dkny.com, fanatics.com, the league’s e-commerce sites, stadium stores and Macy’s.

This past year, we’ve established a solid foundation for DKNY and Donna Karan, and we look forward to continued growth and success ahead. Our strategy for acquiring these well-known global power brands is really beginning to pay off.

Let me take a moment to talk about our outerwear business. While we’ve become more diversified and less seasonal with each passing year, outerwear remains a big category for us. We had another great season with broad-based performance, led by Calvin Klein, Tommy Hilfiger, Levi’s, DKNY, Guess and Karl Lagerfeld. We look forward to a good outerwear season this upcoming fall.

Vilebrequin, our status swimwear brand, delivered a solid year, posting a mid-single digit comparable sales increase. Currently, combining our own locations with those operated by our distribution partners, the Vilebrequin brand has a presence at approximately 760 locations across 65 countries. We are expanding into key new cities, including Macao, Shanghai and Beijing. In addition, we continue to push for expanded wholesale distribution.

And lastly, with Vilebrequin, we’re building and further developing our e-commerce business and a digital presence. Corporate wide, we’re looking to capture an ever growing share of online purchases through our own sites, and more importantly, through the web sites of our retail partners, which is the biggest part of this business. Our online marketing and planning teams work very closely with digital teams of our retail partners to ensure that consumers are viewing our product in the best manner possible. We’re also working to effect higher conversions through marketing, social influencers and other online drivers of sales. Overall, looking ahead to fiscal 2020 and beyond, we see a significant opportunity for us to continue to grow our business.

I now pass it to Neil for a detailed discussion of our fourth quarter and full year results.

Neal S. Nackman — Chief Financial Officer and Treasurer

Thank you, Morris. Net sales for the fourth quarter ended January 31, 2019, increased approximately 7% to $767 million from $715 million in the same period last year. Net sales of our Wholesale Operations segment increased 13% to $639 million from $566 million. DKNY and Tommy Hilfiger brands were the main drivers of this increase.

Net sales of our Retail Operations segment for the quarter were $155 million, approximately 13% lower compared to last year’s sales of $178 million. We reported same-store sales decreases of approximately 9% for our Wilsons stores, 2.6% for our G.H. Bass stores and the same store sales increase of 10% at our DKNY stores. Net sales of our Retail Operations segment were also negatively affected by the decrease in the number of stores operated by us.

Our gross margin percentage was 33.8% in the fourth quarter of fiscal 2019 compared to 36.2% in the prior year’s period. The gross margin percentage in our Wholesale Operations segment was 28.7% compared to 29.6% in the prior year. This percentage decrease in gross margins in our Wholesale Operations segment was primarily the result of the reclassification of cooperative advertising expense, from SG&A to a reduction of net sales as a result of the application of the new accounting rules related to revenue recognition.

The gross margin percentage in our Retail Operations segment was 48.9% compared to 51.5% in the prior year’s quarter. Similar to the rest of this year, gross margins for our DKNY stores were lower in the quarter this year as compared to the prior year. Gross margins for DKNY in the prior year reflected the benefit of the reversal of valuation reserves as a result of acquisition accounting. Going forward, in fiscal 2020, the gross margin for the DKNY retail operations will be on a comparable basis.

The gross margin percentage for our Wilsons stores was also lower than last year, mostly as a result of higher promotions. The gross margin in the quarter was lower than we had anticipated due to continued promotional pressure in our Retail Operations. In addition, the Wholesale segment provided higher markdown support than planned to ensure that our inventories are in good shape heading into the spring season.

SG&A expenses decreased to $202 million in the quarter from $219 million in the same period last year. Due to the revenue recognition reclassification, $5.4 million of cooperative advertising expenses in the quarter are now treated as a reduction in net sales. Prior to this year, these expenses were part of SG&A. Further, we are continuing to see the benefit of leveraging our SG&A base primarily as a result of DKNY and Tommy Hilfiger revenue growth.

Net income for the fourth quarter of this fiscal year was $24 million,

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