G-III Apparel Group Ltd (GIII) 2004 Q4 法說會逐字稿

Welcome to the G-III Apparel Group fiscal fourth-quarter and year-end earnings conference call. (OPERATOR INSTRUCTIONS).

Now it is my pleasure to turn the floor over to your host, Mr. James Palczynski of Integrated Corporate Relations. Sir, the floor is yours.

Thank you, operator. Good afternoon, everybody. I would just like to remind you of the Company's Safe Harbor language before we get started. I am sure you are all familiar with it. Statements concerning the Company's business outlook or future economic performance, anticipated revenues, expenses or other financial items, product introductions and plans and objectives related thereto, and statements concerning assumptions made or expectations as to any future events, conditions performance or other matters are forward-looking statements, as that term is defined under the federal securities laws. Forward-looking statements are subject to risks, uncertainties and factors including but not limited to reliance on foreign manufacturers, the nature of the apparel industry including changing customer demand and tastes, seasonality, customer acceptance of new products, the impact of competitive products and pricing, dependence on existing management, general economic conditions, as well as other risks detailed in the Company's filings with the Securities and Exchange Commission. The Company assumes no obligation to update the information in this conference call.

Thank you, and with that out of the way, I would like to introduce you to Morris Goldfarb, Chairman and Chief Executive Officer of G-III.

Good afternoon, and thank you for joining us for a review of our fourth-quarter and full-year results. With me today are Jeanette Nostra, our President, and Wayne Miller, our Chief Financial and Operating Officer.

We are pleased with our results for the fiscal year, driven by the strong performance of our sports apparel business. The market environment for leather outerwear was somewhat challenging. Despite the challenges, we achieved our plan for the year, and ended the year with a strong balance sheet. For the full year, our net sales increased 10.6 percent to $224.1 million, compared to 202.7 million in fiscal 2003. Our net income per share increased to $1.14, compared to 5 cents per share in fiscal 2003. It should be remembered that fiscal 2003 results included the effects of a $4.1 million charge related to the closing of our Indonesian facility, as well as after-tax operating losses at the facility of approximately $1.8 million.

Our strongest contributor during the year was our sports apparel business. We expanded into fashion sportswear from both a design and sourcing standpoint. Our Sean John business showed a solid performance, and continues to be one of the strongest brands in the urban apparel market. We are excited about the future of this business, and believe that we will continue to see excellent growth in this line.

The market for higher-end product continues to be encouraging, and is showing signs of strength. We benefited from this in our Cole Haan and Siena Studio collections, and expect our good results in these divisions to continue in the coming year. We continue to be pleased with the progress we have made in the expansion of our wool and woven outerwear lines. Our wool and woven business was good, with our Kenneth Cole, Jones New York and Nine West lines all benefiting from this diversification. As you know, nonleather categories, which just a few years ago represented a small portion of our business, now represent greater than 50 percent of our total sales. Clearly, this diversification helps provide us with new growth opportunities, mitigates fashion trends and gives us a better balanced product offering.

G-III continues to be a dominant player in the outerwear industry, and we have made good progress in expanding our product offerings beyond outerwear. We are optimistic that this will enable us to continue to expand our portfolio of brands. We are currently at work on securing additional properties to expand our business. We believe that with our broad range of expertise, and the various retail channels, our strong account relationships and our flexible base of sourcing and distribution, we are well positioned for the future.

I would now like to turn the call over to Jeanette Nostra, our President.

Thank you, Morris, and good afternoon, everyone. I would like to update you on a few of our businesses, and then provide some information on the current market environment.

First, our sports apparel business. There are two distinct pieces to this business. There is the core sports business and the fashion component, which includes the classics and vintage business. The core sports business, primarily at the mass and midtier level, is doing very well. We are pleased with our businesses with the major leagues, especially NFL but also with MLB and NHL. We continue to believe that a consolidation of licensees will occur over time, and that we are well positioned to capitalize on this trend. This is a strong business for us, and we believe has very good long-term growth prospects. The classics portion of our sports apparel business is driven more by fashion trends. While this business is expected to contract compared to this past year, we are confident that it still represents an ongoing opportunity for G-III.

The consumer has returned to the luxury market, and is demonstrating a willingness to buy at full price. We are reaping the rewards in our Cole Haan division. For fall '03 was an outstanding success and we have strong increases in bookings for the upcoming fall '04 season. Although department stores experienced a somewhat challenging fall '03 selling season, we are encouraged by the recent trends, and feel the department store business has turned the corner. Our strong portfolio of department store brands -- which includes Kenneth Cole, Jones New York and Nine West -- have shown early favorable booking trends. We continue to focus on developing our own Black Rivet brand, and are pleased with our initial launch here. Finally, Sean John had an excellent year at retail. We expect further growth by increased volume within existing and additional accounts.

I would now like to turn the call over to Wayne Miller, our Chief Financial and Operating Officer, who will review the numbers.

Thank you, Jeanette, and good afternoon, everybody. For the full fiscal year 2004 that just ended January 31, 2004, we reported net sales of 224.1 million, compared to 202.7 million last year, and net income of 8.4 million or $1.14 per diluted share, compared to 382,000 or 5 cents per diluted share last year. The results for the prior year ended January 31, 2003 including the effects of charges aggregating 4.1 million or 3.4 million on an after-tax basis, or 46 cents per share in connection with the closing of our manufacturing facility in Indonesia, as well as after-tax operating losses at our Indonesian facility, prior to the closedown of approximately 1.8 million or approximately 25 cents per share. Gross margin for the year was 27.6 percent, an improvement of 330 basis points over the prior year, due primarily to increased sales of higher-margin sports apparel.

SG&A expenses for the full year were 47 million, compared to 41.6 million in fiscal 2003. The increase in SG&A was primarily attributable to increases in personnel and selling expenses in our sports apparel business and increased third parties shipping costs.

Interest expense for the year was 1.2 million, compared to $1.9 million for the same period last year. The lower interest expense is due to lower average borrowings acquired (ph) as a result of lower average inventory levels and lower interest rates.

For the fourth quarter of fiscal 2004, we reported net sales of 34.5 million, compared to 47.7 million in last year's fourth quarter, and a net loss of 3.1 million or 44 cents per share, compared to a net loss of 4.5 million or 66 cents per share in last year's fourth quarter. The results for the quarter ended January 31, 2003 also included impacts from the charges related to the closing of our Indonesian facility. Gross margin during the fourth quarter decreased to 12.9 percent from 20.2 percent in the fourth quarter of last year, due to lower levels of regular-priced sales and increased allowances and markdowns.

SG&A expenses for the fourth quarter were 10.7 million, compared to 11.4 million in the prior year's quarter. The decrease in SG&A expenses is primarily attributable to a bad debt provision related to a retailer bankruptcy that increased SG&A in last year's fourth quarter, and lower advertising and promotion expenses this year, offset somewhat by higher personnel costs this year. Our cash position as of January 31, 2004 was 16.1 million, compared to 3.4 million a year ago. Our working capital position also benefited throughout the year from the use of more third-party sourcing due to the closing of our Indonesian facility.

Some balance sheet highlights for you -- our working capital stood at 57.4 million this year at January 31, compared to 47.3 million. Our inventories are down to 28.4 million from approximately 40 million. Our stockholders equity now stands at 65.3 million, versus 55.7 million last year. And our book value per share has increased to $9.19 from $8.11, which our book value per share now trades for approximately -- our current closing price today was approximately -- was about $1 more than book value.

For the fourth quarter ended -- now for some guidance for the first quarter of this year. For the first quarter ended April 30, 2004, we are forecasting an estimated loss per share between 55 and 60 cents. In last year's first quarter, we had a net loss of 38 cents per share.

Thanks for your attention, and now I would like to turn the call back over to Morris for some closing comments.

Thank you, Wayne. Before we take some questions, I would just like to reiterate that we are working hard on expanding our outerwear product offerings, continuing to grow our core sports business and pursuing other opportunities in fashion.

Operator, we are now ready to take some questions.

(OPERATOR INSTRUCTIONS). Christina Henry (ph), Berman Capital.

I just had a couple questions. The first was I was hoping you could maybe give a little bit more color on what you're seeing in the urban apparel market?

We believe that urban apparel is a category that is wide open. It provides future growth for both the providers of product and the retailers of product. It becomes a little bit more legitimized, as people like Liz Claiborne acquire companies and plan future growth with them, so we are clearly interested in expanding our urban business.

That is through Sean John, correct?

Or today, it's the vehicle that we are using in men's outerwear. In our sports licensed area, the classics and vintage pieces of business, in junior sportswear as well as young men's, was targeted directly at the urban consumers.

It seems like there's definitely some strong interest there. Then the other question that I had was just in terms of on the balance sheet -- I was wondering if you could comment on the inventory levels and your level of comfort with them, the quality and so on?

I think we are in good ship shape in our inventories; we've gone from 30.9 down to 28.4. Raw materials have gone -- raw materials are down about $3 million. That's further consolidation from our skin (ph) inventory after the closedown of Indonesia, and our finished goods is relatively flat to last year.

Great, thank you so much.

Dave Starky (ph), Smith Barney.

I have got a couple questions. The Cole Haan business, you said, which was strong here in the quarter, can you tell me what -- you did not really say what the percentage of the business overall, that businesses is at this point?

We don't fragment our brands or our division. That is something we have not done historically, and we are not planning on doing it in the near future.

You said your nonleather business, though, is now over 50 percent of your total. Is that considered nonleather?

That's a comprehensive collection of both men's and women's outerwear, and it ranges anywhere from a cotton jacket all the way through a shearling, and wools are part of the mix, as well as leather.

There were two other presentations that it sounded like there were two different things said -- the woman that was talking said there was a higher level of full-priced sales in the quarter, and your CFO said, though, the fourth quarter or the latest quarter, sales were down because of the lower level of full-priced sales. Can you rectify those two comments?

Let me address the first point. What I was referring to was the luxury market at retail, and a return of the luxury consumer at retail and her willingness to pay full price for that product, and the benefit that we were reaping in our Cole Haan division, which services that tier of distribution. But that's what I was talking about overall.

Not in the fourth quarter

Not in the fourth quarter.

The fall season.

Okay. So, in the fourth quarter, that was not really occurring?

No, as I commented, the fourth quarter did have increased markdowns and allowances.

I understand it was a nice cold season this year, a lot of outerwear sales, most retailers had very good Christmas seasons. Are they just not buying leather anymore?

No, as a matter of fact, our current on order book represents a very large percentage of leather, so leather is on the runways. It is quite strong. It's changed in appearance. There is a good deal of color. There is a good deal of texture. It may not be that basic black cycle jacket that people have bought historically, or basic scuba (ph), but there is a good amount of interest in leather.

So, in this last quarter, when sales were down so much from last year, was that pretty much due to markdowns, you are saying?

No, actually, most of the dip in sales could clearly relate to a shift in our shipping of our largest account. It moved into third quarter, rather than fourth of the prior probably five or six years.

So it was more of a shifting of sales than a loss of sales?

Yes, and the sales that Jeanette referred to earlier in the luxury area of our business were fairly good for the fourth quarter. We were profitable, but as far as the entire mix, we were managing our inventory, and took the proper write-downs to move our inventory and be in a good position for the coming year.

What does that do -- you were talking about the next quarter, potentially the loss being pretty dramatically higher than last year's same quarter. What is the reasoning for that?

Again, a little bit of a shift in our business. Our business in our sports active apparel sector is down, and that entire mix is pretty much attributed to our sports license division.

Okay. Your stock is trading close to book value right now, but one of the reasons I guess is maybe the seasonality and kind of unpredictable nature of that business. And I know you are taking steps to get away from that, but are there additional steps you can take to sort of minimize the loss periods, at all?

I think we have proven that we are aggressive in managing our business, both from a seasonality point of view, as well as pure profitability point of view, which is more focused on the year than the absolute quarter. If we are put to the test of trying to be profitable in a dominant outerwear company, we would risk too much trying to get there. Our inventory levels would have to be too high, and the markdowns could be catastrophic, so we prefer not to play during the time cycles of the year that we do not belong in.

Can you tell us when approximately you will be able to give more of an annual guidance? Is that going to be after this next quarter's report?

Yes, when we come out with first quarter, which should be toward the end of May, we will give out a highlight for the year of where we believe we are going to be.

Any reason to assume it's going to be dramatically different from this past year?

I think it is to early for us to comment on that.

Steven Velkowicz (ph), Winfield Capital.

Hi, guys. Nelson Obis (ph). Jeanette, can you tell us why the fashion sports apparel business is likely to contract in fiscal 2005?

I think that the junior sportswear market is very volatile, and she is on and off trend very quickly. (technical difficulty). And so I think that because we are in the fashion business in the classics and Hardwood and Cooperstown, that we are more apt to see peaks and valleys in that business.

Nelson, as Jeanette explained earlier, we have two areas of business that are related to sports license. One is the core piece, which caters to the fan, and that business is actually up. The fashion piece goes along -- again, as Jeanette stated, it's a volatile customer, and that customer this year has elected to dress up a little more. So the jerseys of last year are not as strong as they currently were; wovens are very important. You'll see as suitings (ph) appear in urban that have not been there for a little while. So urban as a whole has taken a change in how they are projecting their future fashion.

That's pretty clear. You have not said too much about your house brands -- Siena, Colebrook, G-III. I know you do not want to break out percentages, but I assume they are less and less a percentage of the revenues, but what can you say about them?

I think that what we can say is our that our bridge business in Siena continues to maintain its position with Neiman Marcus and Saks Fifth Avenue and N.M. Brecht (ph). Our G-III business has really -- actually taken G-III brand, taken a back step to the Black Rivet, which we have launched last year. And our Colebrook brand remains the driver for our private-label product development. So those brands certainly continue. There is a shift among them, but they continue to be an important part of our portfolio.

Finally, last question, I know you're not going to give -- you made it very clear that you do not have enough visibility to give your guidance, but what you think the critical variables are, the critical successes you have to have in order to have a year that is say, better than this year? Where are the opportunities that you don't have visibility on at this point, but might later on in the year?

I think really we have to see see the consumer have some confidence in spending on apparel. And I think that we see that in the spring, the menswear business seems to have turned the corner. The department store business seems to have turned the corner, but I think it's more about the consumer spending on apparel, and that's going to be a critical driver for us.

And then you will feel it across the board, is your point.

I think every division's boat will float.

Peter Keane, Keane Capital Management.

A lot of my questions have been answered already, or have been asked. Sports apparel -- I know you do not like to characterize sizes of business, but in the past you have given some indication of the pace of growth within sports apparel, and roughly size of sports apparel. You mentioned you have, in the core and fashion areas within sports apparel, and that core was -- is showing some slight positive momentum, while you expect fashion to contract. Can you give any sense of relative size between core and fashion, what it was in the fiscal year that we just completed?

Overall, last year -- we don't break core and fashion separately. But overall, the business did experience some great growth this past year. We were up from 35 million -- we wrapped up the year in excess of 75 million in sports apparel, between core and fashion together.

Can you say which one is -- were they roughly equivalent, or were they roughly equivalent in size last year?

We don't comment on the breakdown, Pete.

Okay. Because obviously, if -- let's say -- fashion was 70 million, that would make it an extreme case, and it's contracting this year.

Core is a significant part of the business also.

(OPERATOR INSTRUCTIONS). I am showing no further questions at this time. I will now turn the call back over to management for any further or closing comments.

Thank you all, and have a good afternoon.

Thank you. This does conclude this afternoon's teleconference. You may disconnect your lines, and enjoy your day.