G-III Apparel Group Ltd (GIII) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to this G-III Apparel Group third quarter 2005 earnings results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. James Palczynski. Please go ahead, Sir.

Good afternoon, everybody, and thank you for joining us. Before we get started I'd just like to read the Company's Safe Harbor language.

Statements concerning the Company's business outlook for future economic performance, anticipated revenues, expenses, or other financial items, product introductions, and plans and objectives related thereto in statements concerning assumptions made or expectations at any future events, conditions, performance or other matters are forward-looking statements as that term is defined under the Federal Securities law. Forward-looking statements are subject to risk, uncertainties, and factors including but not limited to reliance on foreign manufacturers, the nature of the apparel industry including change in customer demands and tastes, reliance on licensed products, 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 obligations to update the information in this conference call.

Thank you very much. With that out of the way I'd like to turn the floor over to Morris Goldfarb, our Chief Executive Officer and Chairman of G-III Apparel Group.

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

Our financial position is strong; and we are looking forward to capitalizing on growth opportunities in the upcoming year for both our existing and new businesses. While our results for the year are somewhat disappointing, I am, however, satisfied with the overall direction of our business. There are several bright spots I will highlight for you.

First I'd like to talk about some of the areas that were strong for us this past year. Our Cole Haan, Sean John and Black Rivet businesses are now generating healthy margins on increasing sales.

Our gross margin as a percentage of net sales for the third quarter was 29.2 percent compared to 29.7 percent in last year's comparable quarter. We have worked hard to offset the decline in retro fashion sports apparel sales that we have experienced this year. In addition to these three higher margin lines, our core sports business remains strong and well positioned for the upcoming year.

We carefully monitored our expense structure in view of our lower level of net sales. We believe that our infrastructure levels are appropriate for our upcoming needs as we continue to develop new properties.

As you know, a key part of our business strategy is to diversify our product offerings. We've continued to build our fleet of licensed businesses as we've broadened our channels of distribution.

We are pleased to have expanded our relationship with Kenneth Cole and are proud that we will now produce both men's and women's outerwear for both the Kenneth Cole New York and Reaction Kenneth Cole brands. We have long considered the Kenneth Cole women's business to be one of our most important lines and are looking forward to taking over the already significant Kenneth Cole men's business and capitalizing on its growth process.

We are excited about the potential volume that Kenneth Cole men's can add to our business in fiscal 2006.

As you may remember, we also signed a new initiative with Cece Cord for a very high-end line of handbags. The response from consumers and from retailers has been encouraging and we are expanding that business for next fall.

With regard to our sourcing initiatives, we continue to work to diversify our manufacturing base to continue to produce the best quality product. To that end, we have open two liaison offices in (indiscernible) to supervise our third party production.

In summary, we are striving to see a return to growth in revenues and profits next year. The combination of anticipated increases in our core business, potential for new programs, and an infrastructure that consolidates functions across divisions is expected to drive and improve profitability.

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

Thank you, Morris, and good afternoon, everyone. I'd like to update you on our business and provide some information on the market environment. Our licenses with major fashion brands for department and specialty store distribution are generally performing well. Cole Haan continues to demonstrate excellent growth. We expect that on a full year basis this business will have grown by approximately 55 percent, compared to sales in fiscal 2004.

Sean John is also performing well and we expect that it will be up better than 35 percent compared to last year. It is worth noting that both of these brands represent some of our highest margin product and show good prospects for continued growth.

Our own Black Rivet women's outerwear brand is also posting strong increases from its launch year, last year. We are moving ahead with the test of men's products for next fall which we think the Black Rivet brand will nicely support.

In a very competitive landscape for contemporary designer brands, Kenneth Cole women's has more then held its own. The Kenneth Cole women's outerwear is one of the best performers. Actually it is the number one brand in wool in Federated. And we are looking forward to expanding into Kenneth Cole men's outerwear next year.

With respect to mass and new tier customers, our women's business is strong but the men's business is still somewhat challenging. In the women's area, novelty wool and colored leather drove this business early in the season. Similar to the situation with department stores, we planned more conservative time-tested assortments for the latter part of the season. And we are very pleased with the results.

In the men's area we have strengthened our merchandising and marketing team and expect better results next year.

Core sports continues to generate good sales and profits. During the fall 2004 season, our wool and leather commemorative NFL and Major League Baseball championship jackets were the hottest selling items in team sports. This commemorative type of jacket will continue to be a strong category going forward. NCAA activewear, both men's and ladies, is also an significant growth opportunity in 2005.

We already have early indications for stronger year in sports apparel next year as some of our larger accounts are responding favorably to our new offerings.

In summary, we have had both challenges and successes this year and we look forward to a strong fiscal 2006 year.

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

Thank you, Jeanette. Good afternoon. For the third quarter fiscal 2005, we reported net sales of 114.9 million and net income of 9.9 million or $1.33 per diluted share, compared to net sales of 125.5 million and net income of 11.4 million for $1.50 per diluted share in last year's third quarter.

SG&A expenses for the third quarter were 15.6 million compared to 16.8 million in the prior year's quarter. The decrease in SG&A expenses is primarily attributable to lower personnel cost, sales commissions, and facility cost offset somewhat by increases in designs and advertising expenses.

For the first nine months of fiscal 2005, we reported net sales of 175.3 million and net income of 3.4 million or 46 cents per diluted share compared to net sales of 189.6 million and net income of 11.5 million or $1.54 per diluted share in last year's nine-month period.

Gross margin percentage declined from 30.3 percent to 26.2 percent, primarily due to lower sales of higher margins, fashion sports apparel product compared to last year.

SG&A expenses for the nine months were 37.5 million compared to 36.4 million in the same period last year. The increase in SG&A expenses was primarily attributable to higher advertising, design, and personnel expenses, offset somewhat by a decrease in sales commission.

Let me give you a few balance sheet highlights.

As of October 31, '04, our working capital stood at 62.4 million compared to 59.1 million last year same time. Our stockholders equity today is at 69.1 million -- excuse me at October 31. At October 31 last year it was 67.4 million. Our book value per share today stands at $9.59. At October 31 last year, it was at $9.73. Our inventories are lower, down to 37 million from 40.5 million.

And, finally, with respect to guidance. As you may recall for the year ended January 31, 2005, we have been looking for revenues of approximately 215 million in earnings per diluted share of 38 to 43 cents. While we are not changing our revenue guidance we now believe that earnings are likely to range between 18 and 23 cents per diluted share.

This forecast includes the effect of the previously announced non-cash charge of $882,000 equal to 12 cents per share. (technical difficulty) our decision to attempt to sell our joint venture interest in a factory in China.

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

Before we take your questions, I'd like to say that despite our expected results, G-III is fundamentally a stronger company than ever before. Three years ago, we were predominantly a leather company. This year leather product will constitute less than half of our business. We recognized this shift in fashion trends and positioned our business appropriately. We added a significant component of woven and wool product.

Today, we source aggressively from many countries through third parties limiting our risk and maximizing our flexibility. At some point, we think the cyclicalities for leather will shift in a favorable direction. If this occurs, we should be able to capitalize as, of course, we have maintained our expertise and excellence in all the aspects of design and production of leather apparel.

In the meantime, diversification is healthy for our business and we have continued to make money, despite some tough retail environments. This year, our retro fashion sports apparel, which was a great vehicle for sales and profits last year, is not repeating its performance. However, our diversification is expected to provide us with good opportunities next year, regardless of where fashion trends take us.

We look forward to demonstrating the benefits of our diversification as many of our newer programs hit their stride. Thank you for your attention and support and we are ready to take your questions.

(OPERATOR INSTRUCTIONS) Tony Chiarenza (ph) with Key Equity Investments.

Good afternoon. First question is obviously one that comes right to mind is, as we looked at your lower forecast, can you explain to us what was the cause of the reduction of about 20 cents in your earnings forecasts this year?

A lot of it was weather and, also, we had our leather business, generally, as was in the marketplace went down. And it really was an impact right from our margin lines that the reorder business was not as we had initially thought it would be and as that reorder business was not coming through, we looked to manage our inventories tightly and we are getting a big lesson out of inventory but we expect to be in good position with our inventory by the end of the year.

So it really was all in the margin lines.

So if it was kind of shipped to the lower margin product?

Lower margin product, it's lower margins on the product that we sold. In the end it turned out to be a lower margin.

Understood. Can you give me what the accounts receivable and cash position was at the end of the quarter?

Sure. Cash was about $3 million and our AR was about 81.7 million.

One thing I would be interested in. How does your compliance with Sarbanes-Oxley going? Is it something that is going to be relatively expensive as we go into next year? Or is it something that you pretty much have a handle on at this point?

We are -- at this point we are considered a small cap filer, Tony.

(MULTIPLE SPEAKERS)

-- will be for the year 1/31/06; but we are -- I consider us right in line with where we want to be without Sarbanes-Oxley work. We are well underway.

And it's not going to be a huge burden in terms of expense in second fiscal '06?

It will be an increase, not a huge burden.

Do you expect to have any positive impact of the end of the quota coming out of the Far East going in January 1? Will it give you more sourcing opportunity? Or what will the impact be?

We believe, Tony, we believe that we will have a positive benefit as the quota barriers coming down. We have aligned ourselves with the appropriate partners who have taken an aggressive stance in producing product at appropriate prices and what will be record time, thus enabling us to do major programs with the retailers and provide a service that very few people in the outerwear market can.

So that in itself will give us a competitive advantage. A lot of what we do is still -- just shy of 50 percent of what we do is still leather-related and the quota barriers coming down are really a nonevent. Leather is a nonquota item.

So in essence for the nonleather goods, do you expect a little bit of an increase in margin or is it pretty much going to be passed on or --?

I think there is going to need to be some downward pressure on pricing. Therefore I can't comfortably tell you that we will be able to increase our margins. But we will be able to be competitive in the marketplace in getting reasonable margins.

Good luck in the new fiscal year. Thank you.

Thank you for your questions, Tony.

(OPERATOR INSTRUCTIONS)

There are no further questions at this time. I will turn the conference back to Mr. Goldfarb for any additional or closing comments.

Thank you all for participating in this call and we look forward to serving you with better results.

This does conclude today's conference. We thank you for your participation. You may now disconnect.