G-III Apparel Group Ltd (GIII) 2005 Q2 法說會逐字稿

Good afternoon and welcome to the G-III Apparel Group's Second Quarter Fiscal 2005 Earnings Conference Call.

All participants have been placed on a listen-only mode, and the floor will be opened for questions following the presentation.

It is now my pleasure to turn the floor over to our host, Mr. Bill Zema of Integrated Corporate Relations. Sir you may begin.

Thank you, Melissa. Good afternoon everybody.

I'd just like to remind you of the Company's Safe Harbor language before we get started. I'm sure you are all familiar with it. Statements concerning the Company's business outlook or future economic performance of anticipated revenues, expenses, or other financial items, introductions, 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 pace, seasonality, consumer interest in new products, the impact of competitive pricing, dependence on the financial 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 Apparel Group.

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

Our results for the second quarter were in line with our expectations, but obviously below last year's level. The year-over-year swing in results continued due to lower sales of our fashion sports apparel. That said, our core sports apparel is booking well and is on plan.

Overall, we are anticipating a good second half. Initial reads on self [inaudible] of outerwear are promising and we have received good early feedback on the styling and appeal of our various product lines.

As we have discussed in past conference calls, the margins last year on fashion sports merchandise were higher than average. This was the primary reason for the decrease in gross profit compared to last year. Our other businesses remain strong and we are pleased across the board with their performance. They are steady, healthy and positioned to have a strong fall and holiday season.

As you may know, we recently entered into a long-term licensing deal with CC Cord for apparel and accessories. Initially, we were shipping designer handbags to Bergdorf Goodman. We've adapted a careful brand-building philosophy for this business, which is focused at the very high end of price points and specialty store distribution. Some of the handbags in the line carry price points in excess of $8,000, although we expect most of the initial value to be done at price points between $1,500 and $3,000.

Over time, we will look to broaden the range of our product, price points, and distribution. For now, we are comfortable with the large and our pace of progress. We think we have something very special and intend to be careful with its development.

In summary, although we do not expect our financial results for the full year to reach last year's total because of the reduction in our sports fashion business, we expect to see profit growth in the second half of the year compared to last year.

We also continue to be in a position to capture new programs and new licensing. Our balance sheet remains healthy, and we have become a more flexible, responsive company over the recent past. This makes us comfortable that we will execute well the opportunities in front of us.

I would like now 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 comments on a market environment that we expect in the year ahead.

First, as Morris said, core sports continues to perform very well. Bookings for fall are good, and we have received good feedback on these lines from major retailers. Our licenses with major fashion brands, the department and specialty store distribution are also booking well. Cole Hahn's women's business is exceeding plan, as booking are up over 250% compared to the same time last year.

The initial response to our pre-season outer layer business in the department stores is stronger than this time last year. Similar to other apparel categories, novelty tweeds, texture, and color are driving the business. This is particularly true in wools, which is a great vehicle for color and novelty. Wool is one of the keys to our early season business.

Currently at Federated, we are in the top one or two spots in terms of outerwear volume for vendors. Our position at Nordstrom's is good, and we are excited about the anniversary and pre-season sale events, which jump started our businesses there.

Similarly, we are pleased with the tone of our business at Bloomingdale's and Marshall Fields. Our men's order book is up in the high single digits compared to last year led by good increases in Sean John and Cole Hahn Men's. Early reads on our women's knit tier businesses are promising. JC Penney's outwear sales are being led by wool and leather jackets and coats.

In the women's mass area, initial selling on lamb blazers is strong. As a follow to our cold weather assortment, in the fourth quarter, we are planning for better volume in categories such as rain wear and active outerwear. This should improve our sales level in the spring season next year as well.

Overall we remain optimistic about our businesses and look forward to a good second half.

I'll now pass the call over to Wayne Miller, our Chief Operating and Chief Financial Officer who will review the numbers.

Thank you Jeanette.

For the second quarter of fiscal 2005, we reported net sales of $43.9m compared to $45.3m last year and a net loss of $1.7m, or 23 cents per share compared to net income of $2.7m, or 37 cents per diluted share in the same period last year.

The current quarter includes a non-cash charge of $882,000 equal to 12 cents per share associated with our decision of our attempt to sell our joint venture interest in our factory in China. The amount of this non-cash charge represents the difference between our current investment of $1.1m in the joint venture and the estimated proceeds we would receive on sale of this joint venture interest.

As we discussed in our press release, the decision to sell our 39% joint venture interest in the manufacturing facility in China is primarily due to the current losses in the facility and the expectation of continuing losses in the foreseeable future. It is our intention to continue to contract with this facility as a key resource.

Net sales decreased due to lower shipments of fashion sports apparel offset somewhat by higher shipments of women's outerwear. Gross margin decreased due to the lower shipments of higher margin fashion sports apparel products compared to last year.

SG&A expenses for the quarter were $11.7m compared to $10.8m in the prior year second quarter. The increase in SG&A is primarily due to personnel, design, and advertising expenses.

And now for the 6 months review; for the six months of fiscal 2005, we reported net sales of $64m compared to $60.4m last year, and a net loss of $6.5m, or 91 cents per share compared to net income of $91,000, or one cent per diluted share last year.

The current six-month period includes the previously discussed charge of $882,000 equal to 12 cents per share. Gross margin decreased as a result of decreased shipments of our higher margin sports apparel, and increased clearance activity in fashion sports apparel.

SG&A expenses for the 6 months were $21.9m compared to $19.6m for the same period last year. The higher expenses are primarily the result of higher personnel, design, and advertising expenses.

And now for some balance sheet highlights, our stockholders' equity at July 31, 2004 stood at $59.1m compared to $55.9m a year ago. Our book value per share is $8.25 at July 31, compared to $8.12 a year ago. And our inventory is down from $59.4m to $50.5m at July 31 of this year.

Finally, with respect to guidance for the full 2005 fiscal year, we are forecasting net sales of approximately $250m, and diluted net income per share between 38 and 43 cents. The forecast includes the effects of the previously discussed charge of $882,000 equal to 12 cents per share.

Thank you for your attention, and now I would like to turn the call back over to Morris.

Thank you Wayne. Before we take some questions, I would just like to comment that we are really excited about our prospects for the fall season given that our product lines have received positive feedback. We feel good about the momentum in our business and look forward to delivering a strong second half.

Thank you for your attention, and we will open the call up for some questions. Operator.

Thank you. The floor is now open for questions. If you have a question, please press star 1 on your touchtone phone at this time. If at any point, your question is answered you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question that you pick up your handset to provide optimum sound quality. Once again, that is star 1 on your touchtone phone at this time.

Our first question is coming from Nelson Albis with Winfield Capital.

Hi Morris.

Hi Nelson.

How are you? I wonder if you could just give us a little color on the magnitude of our investment exposure in China and generally how we outsource there, and do we have other joint ventures? And candidly, I thought it was kind of hard to lose money in a joint venture in China, but that's my inexperience. Maybe you could elaborate on what we learned here.

We have found in most cases, I guess as it relates to our business specifically, we were able to reduce our inventory levels significantly. If you recall, we had a venture in Indonesia. We were very happy after closing that facility and being able to manage our inventory far better by utilizing more third-party sourcing. This is pretty much consistent with our plan. Third-party sourcing is something that we do very well. We have actually begun to move our Korean merchandisers and lead staff into China. That's enabling us to source more efficiently through that region.

So we believe that it's in our best interest to operate looser and free of commitment to one facility.

As far as your exposure is concerned, I think this inherent charge pretty much does it. We don't believe there's anything further that this company is exposed to as far as financial exposure.

Nelson, this is Wayne. We have no other joint venture interests at this point. The investment that was on the books was $1.1m. We accounted for it on the equity method of accounting. And just to add to what Morris said, I think our objective of outsourcing gives us more flexibility. We will still continue to provide [skin] for that facility, but this moves us away from ownership, which is where we want to be. And the facility is losing money, and we felt that it was the right and prudent decision to make at this point. And I might add that our relationship with our partner is excellent, and we plan on continuing to work in this facility and utilizing the capacity that they will permit us to use.

So this is in our eyes, this is not viewed as a negative for the future.

Right, with the exception of the rule in terms of how we were outsourcing. And just sort of a forward-looking kind of generalization about the fashion licensing side, fashion changes and you know, shifts go up and shifts go down, revenues go up and revenues go down, but as you look ahead to like next fiscal year, do you have any thoughts about what that business might look like in general and what kind of tact we could take to benefit as much as we possibly could since as you alluded to on the call, the margins are quite nice if you get caught with the wind at your back.

If you get caught with the wind at your back, generally the margins going in are quite good. If you're in a volatile fashion cycle, the wind blows really hard on those markdowns, so you get caught on the back end. So the benefit this year is that our fourth quarter will not have let's call it liquidation initiatives to deal with. Our business is strong. Pretty much all of our [coat] divisions are doing well. Our reorder activity is strong performance. Our retail is good. We've identified some of the leaders in the outerwear market, leaders by way of style, and we are doing well. Our margins are good. We plan on signing additional licenses before the year is out. And that's enabling us to grow next year. We're aggressive for the coming year. We think we have pretty much all the bad stuff behind us and good stuff is looking forward.

And we'll continue some fashion licensing in fiscal 2006, but it sounds as though we're not going to increase it or make any kind of a major increase in capital employed of in design capabilities employed in that area until it levels out and starts to look up in some future years. Is that a fair statement?

I believe you're referring to sports license.

Yeah the fashion side.

The fashion side is pretty much gone. It doesn't really exist today. What we did last year is we shored up our sports license division knowing that we were in a volatile cycle. We fragmented it and we really ran 2 divisions in sports, one that was core and one that we refer to as the fashion sports license. The fashion sports license, which I'll tell you the styles. It was a Jersey dress last year that we produced about a half a million units. It was a satin jacket, and some Jerseys. That business is not performing well at all. What we did is we staffed fashion people, fashion designers and fashion sales people to spearhead that initiative last year. What we did about 4 weeks ago is we reduced the head count in that division, and we realigned the remaining people into areas of our business that needed them.

So we're very much in good shape. Our core sports business is growing, it's growing nicely. We have solid licenses, great relationships with the leads, and we're getting reorders every day. We had a good Magic show, actually it was better than last year on the core piece, and the fashion piece, as I said doesn't really exist. We redeployed the talent to work on some swimwear that we're doing nicely with. It's growing area for us as well as a little niche area called World Poker Tour, and World Poker Tour at Magic I would say was a highlight. If we're careful with it, it'll be a nice little business for us. The margins are good. And we also recognize that this may not be a long-term business, and we're incorporating it in our corporate premium business and producing most of the product domestically.

Okay, but in general, I mean just to finish up, what you're saying here is the re-emphasis on the so-called traditional side of sports licensing all things being equal should make for less volatility in earnings going forward over the next couple of years. Is that fair?

Yes.

Okay, thanks.

Thank you for your questions Nelson.

Thank you. Once again, if you do have a question, you may press star 1 on your touchtone phone at this time. Once again, if you do have a question, you may press star 1 on your touchtone phone at this time.

Gentlemen there appear to be no further questions at this time.

Thank you for your participation on our call, and have a great afternoon.

Thank you for your participation. This does conclude this teleconference. You may disconnect your lines at this time, and have a wonderful day.