G-III Apparel Group Ltd (GIII) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the G-III Apparel Group Limited second quarter fiscal 2006 earnings conference call. Today's call is being recorded. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would now like to turn the conference over to Mr. Neal Nackman, Vice President of Finance for G-III Apparel. Please go ahead sir.

Thank you. Good afternoon, everybody. Before we get started I just want to remind you of the Company's Safe Harbor language. I'm sure you are all familiar with it. Some statements made today on the call are forward-looking statements as that term is defined under the federal securities laws. Forward-looking statements are subject to risks, uncertainties and factors which include, but are not limited to -- reliance on foreign manufacturers, the nature of the apparel industry, including changing customer demands and tastes, the long-term licensed products, seasonality, customer acceptance of new products, the impact of competitive products and pricing, dependence upon existing management, possible business disruption from acquisitions, 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 information in this call.

With that out of the way, I would like to turn the call over to our Chief Executive Officer, Morris Goldfarb.

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

This has been an extremely busy quarter for us. We completed two acquisitions -- Marvin Richards and Winlit -- and also signed a new three-year bank deal lead by CIT. With these acquisitions we have elevated our competitive position and expanded our suite of licensed brands, lead by Calvin Klein for men's and women's outerwear. We believe that these transactions have improved our ability to deliver sales and profit growth. Aided by these acquisitions, we believe that we have become the supplier of choice for men's and women's outerwear.

We are pleased with the level and the composition of our order book as well as our inventory position. Our order book is up more than 45% versus last year. The majority of the increase is, obviously, due to the acquisitions. The order book for our pre-existing businesses also increased at good pace.

With respect to Winlit, as you may remember, our key Winlit businesses are Guess men's and lady's outerwear, Ellen Tracy women's and Tommy Hilfiger men's outerwear. In addition, Winlit has a solid private-label business. All are off to a good start. We believe that Winlit's licensed businesses are underpenetrated and could provide opportunities for revenue growth.

We have high regard for David Winn and his design, merchandise and sales team, and are confident that they will provide significant contributions to our company. We have migrated Winlit's systems, integrated their planning, allocation and warehouse functions, and consolidated back-office functions. We will be seeking to gain better sourcing expertise through our sourcing teams at Winlit and G-III.

With respect to Marvin Richards, the Marvin Richards business is lead by Calvin Klein women's and men's outerwear. The Marvin Richards brand, which is company-owned, is a significant contributor that is distributed in department stores such as Bloomingdale's, Nordstrom and Lord and Taylor.

The Marvin Richards management team is also looking at expanding the St. John's outerwear license distribution. In addition to Sammy Aaron's corporate role, he leads a strong management team that has produced excellent bookings, which we believe will translate into successful fall business.

As planned, we will begin the back-office integration for Marvin Richards after the fall shipping season. Over the next six months, we expect to integrate all back-office functions, and in addition seek benefits in sourcing and production.

In summary, these acquisitions were a transforming event for our company. As the retail industry continues to consolidate, many of our key customers are becoming larger and more demanding. We believe that by growing our business aggressively, we can become more competitive. As a result of these acquisitions, we believe that we are in an improved position to increase our market share and drive value to our shareholders.

With respect to G-III's existing business, first, our core sports business continues to be solid. Including the acquired companies, our core sports business should represent nearly 15% of our total sales volume for the year. The reaction we received for our fall line continues to be very good.

Within the men's businesses we are working at elevating the Kenneth Cole New York brand and enhancing the Kenneth Cole Reaction department store distribution. As I mentioned last quarter, we continue to be pleased with our Sean John and Cole Haan business. Our men's private-label business has shown some good increases this year.

The women's side of the business is strong in private-label. Cole Haan, Kenneth Cole, and Jones New York remain good performers for us. As a whole, women's is performing on plan.

In summary, with our heaviest shipping season upon us, we are pleased with our prospects and increasingly confident in our ability to drive results to the bottom line. I will now pass the call over to Wayne Miller, our Chief Operating and Financial Officer, who will review the numbers.

Thank you, Morris. Good afternoon. For the second quarter of fiscal 2006, we reported net sales of 54.6 million compared to 44 million last year, and a net loss of 301,000, or $0.04 per share, compared to a net loss of 1.7 million, or $0.23 per share in the same period last year. This year's quarter and six-month results include the results of our new Marvin Richards and Winlit divisions from July 11, 2005, the date of acquisition. The prior year's quarter and six-month results include a non-cash charge of $882,000, equal to $0.12 per share, associated with the Company's sale of its joint venture interest in China.

Net sales increased due to higher sales in men's and women's non-licensed outerwear and licensed sports apparel, as well as due to the inclusion of sales from our newly acquired companies. Our gross margin percentage decreased due to lower commission fee income as compared to last year.

SG&A expenses for the quarter were 12.6 million compared to 11.8 million in the prior year's second quarter. The increase in SG&A is primarily due to SG&A of the acquired businesses, offset in part by lower advertising expenses.

And now for a six-month review. For the six months of fiscal 2006 we reported net sales of 68.3 million compared to 60.5 million last year and a net loss of 5 million, or $0.68 per share, compared to a net loss of 6.5 million, or $0.91 per share last year. Net sales increased due to higher sales of men's and women's licensed outerwear, as well as due to the inclusion of sales from our newly acquired companies. And again, our gross margin percentage decreased primarily due to lower commission fee income as compared to last year. Our six-month expenses for SG&A were about the same as last year. An increase in SG&A related to our acquired business was offset primarily by lower advertising expenses.

There are two balance sheet highlights for you. Our stockholders equity at July 31 was 66.2 million compared to 59.1 million last year at the same time. Our inventory stood at 72.7 million compared to 60.5 million last year at the same time. And the majority of that increase, of course, is related to the newly acquired businesses.

Guidance. With respect to guidance for the fiscal -- full 2006 fiscal year, we are forecasting net sales of 330 to 340 million and diluted net income per share between $0.95 and $1.

And now I would like to turn the call back over to Morris.

Thank you, Wayne. Before we take your questions, I'd note this is a truly exciting time for our company. Completing two acquisitions and a new banking agreement at one time was quite a feat, but we feel that the best lies ahead for our company and our shareholders. Our bookings are strong. We anticipate a solid fall season and we look forward to delivering excellent results this year. Thank you, and we're now ready to take any questions, operator.

(OPERATOR INSTRUCTIONS). Stephen Zakowich (ph), Winfield Capital.

Just a question about the balance sheet. When do you expect debt to be at its maximum, and can you give us some sense of what that could be?

We signed up for (indiscernible) line is at 195 million. That is the peak line. We'll be nowhere near that. Peak debt levels will probably hit sometime September, October. And then we will work our way on down into January through March.

Is there any reason why you left yourself -- what could the peak be?

I'm sorry --

What could the peak indebtedness be?

We have not put that number out (indiscernible) but we will be nowhere near the 195. It works off of availability on inventory and receivables, and we think we are in very good shape (indiscernible) this year and well into the future.

Just a refresher. The acquisition -- do they change due to the seasonality or the leather/non-leather mix of the business?

The leather/non-leather mix has been an evolution. It's not necessarily the acquisitions. The industry or fashion has dictated that leather become less important in current years. And what's been actually wonderful is that this company has been able to grow when its core competency was leather. 10 years ago we did exclusively leather. And today leather represents maybe 30% of our overall business. Should leather become popular again or more popular, this would be an absolute boost to our business. Your second question -- I'm sorry.

(indiscernible) the seasonality component?

The seasonality aspect is pretty much the same. We've got some components in our business, in our existing business that seem to be maturing and growing in our off season. Our first-quarter business is sports. Sports licensing has grown because of our affiliation with the collegiate licenses as well as Major League Baseball on the (indiscernible) side. So we've got some nice programs going forward in sports, as well as some spring interests at the mass level in our outerwear pieces. So I'm not sure it's the acquisitions that are doing it. I think that we're taking advantage of situations that do exist. We have got a talent pool this year that is very aware of the opportunities that exist throughout the world, and we're taking advantage of it. I think that we are currently with the properties that we own with the same problems that exist in the marketplace, doing better than ever in our first and second quarter.

Last question, and I will let somebody else ask a question. Obviously, these acquisitions -- well not obviously -- but it looks to me as though these acquisitions have great exciting potential. But the question was one of accountability internally, and the fact that integration can be a very daunting exercise. Who actually in the organization, or do you have such an individual in the organization who will be accountable for part or all of the integration? How is that going to work?

I really see that there are (indiscernible) people in the Company that are challenged with the integration and accountability, and the team is composed of myself, Wayne Miller, Jeanette Nostra, Sammy Aaron, and I would say David Winn. We are all challenged with making G-III as a whole a very (indiscernible) company. And at the same time what is very important is not integrating and losing the integrity of the companies that we acquired. In our purchase agreement with Marvin Richards, Sammy Aaron and his partners Lee Lipton and Andy Reid have a component of their payday which relates to an earnout that goes over a period of time, and David Winn has the same. So we are not going to just lose sight of the credibility, integrity, and profitability of the companies that we acquired. We are going to look at bettering the whole, not losing of what we did acquire and what we do own. And I would say we're doing a great -- if you were going to ask me today, if this would be your follow-up question -- well, how are you doing with the process? I would say we are doing far, far better than we had expected in record time. These acquisitions were made less than 60 -- maybe just about 60 days ago. And they're integrating just great. The people all same to be on board. It seems as if it's a unified group that is looking to better the profitability and operating as a one-unit organization, which we thought might be a bigger problem than it really is.

(OPERATOR INSTRUCTIONS). Burke McKay (ph), Southwest Securities.

This is actually Oz from Southwest. A couple of quick questions. You guys made some good acquisitions. Can you give us a sense as to, Morris, when you feel you will be completed with the integration process, the timeline if you will?

I would say it is certainly not going to be for third quarter. Third quarter we are drowning in shipping our product and maintaining our business. So the last thing we want to is strip the organization of the talent pool that is essential in bringing your products to market. As somebody told me today -- actually it was Jeanette that mentioned it today; it's quite interesting, and I never really thought about it -- but she said she had a conversation with a retailer, an executive at May Company, who stated business is kind of mediocre and not great out there. And the executive told the buyer -- well, let's look at it this way. You've got 97% of the coat season ahead of you. And that's where we operate now. We have 97% of our coat business in front of us, and that is the peace that we're looking to protect. So it would be foolish on management's part to strip the organization of this talent pool that is essential in bringing all that product to market and taking advantage of reorders and additional production that we might need. As the season tapers off, I will concentrate on all the alignments that are necessary to be more profitable.

Can you maybe give us a little bit more color as to some of the lower-hanging fruit in terms of synergies and maybe the longer-term benefits of these acquisitions?

The low-hanging fruit is not as much on the synergistic level as it is on the maturation of the equities that we now hold. We have brought on some properties that are young in their existence. Calvin Klein outerwear is relatively young and can grow to be an absolute monster in our industry. We believe that is the dominant brand in our industry, the most dominant available brand in our industry.

We have just started shipping men's. We have very, very little under our belt on the shipping cycle. We will have let's call it a (indiscernible) here on the men's side of the business that has the opportunity of growing to be -- I hesitate to give you a number -- but certainly the largest outerwear brand in the industry. And on the men's -- on the women's side we are a little further down the road, but we have got a great deal to go on the maturation of that as well. And we believe there are other opportunities within that brand that could surface in the near future that could provide additional growth for our company.

Guess is very much the same. We believe there is a huge opportunity in Guess. It's a different sector of the market. We believe that Guess as a brand has taken very, very seriously on the design and sorting side of the business, could provide double the revenues that it currently does. And (indiscernible) that G-III has held also shows some growth potential. We just signed -- this is our first year out with Kenneth Cole men's. And Kenneth Cole men's has the opportunity of being an important brand for us. We have virtually no volume under our belt with Kenneth Cole men's.

In respect to the synergies that could surface and will surface, we believe they exist on the design side. We believe they exist on the sourcing side. We believe that there are opportunities to buy far better overseas, being one of the largest if not the largest outerwear company, and providing huge potential for our vendor base. Our vendor base is very excited about what we represent today, and they're eager to participate in our future. So the synergies lie in cost reductions. The synergies and opportunities lie in buying better and getting -- beyond the vendor base, I think we're getting some interesting responses from our customer base. There is a greater level of interest at the senior level of management in developing programs throughout this company and giving us greater retail space on their floor. So everything that we look for in these acquisitions we believe is happening.

Do you think you will have a full plate, or should we -- what should we think about the future acquisitions? Do you still have room to fill in terms of different brands or (indiscernible), or will these acquisitions take enough of your time for the next couple of years?

Certainly not the next couple of years. I think what you're beginning to see is a different G-III. The level of energy that has been brought in is great. It is shaking up some people within our organization. There's new talent. There's new excitement. And the ability to grow does exist here. New acquisitions are not out of the question. We have a bank group that's very excited about who we are, where we are and where we are growing. CIC has been an excellent partner for us, and I believe they would be very, very cooperative if we brought a reasonable acquisition to the table. And we feel that the acquisitions that we just made may enable us to grow even faster, because there's a talent pool that can take on other functions.

Sure. So what should be (multiple speakers) expectation in terms of revenue growth next year?

I think I stated a couple of seconds ago we've got 97% of the year ahead of us. I don't know what that 97% this year is going to represent, so I hesitate to give you what next year is going to look like.

(indiscernible) come out at 330 or 340 million (indiscernible). And I think what Morris is describing to you are the many opportunities, and we're going to get on that in the next couple of months in terms of forecasting out next (multiple speakers)

I'm thinking more in terms of if you were to forget about acquisitions for a while, if you were to look at the core offerings you have over the next couple of years in terms of the topline growth, some of the synergies you mentioned, and so on.

I think at this point we're not prepared to put that out, other than to tell you that we are all very excited about what we've got put together now. And we think we're going to have good organic growth from the businesses that we now have.

(OPERATOR INSTRUCTIONS). There are no further questions in the queue. I will turn the conference back to management for any additional or closing comments.

Thank you very much for joining us this afternoon and thank you for your questions and your patience. Have a good afternoon.

That does conclude today's conference. You may now disconnect your lines.