G-III Apparel Group Ltd (GIII) 2007 Q2 法說會逐字稿

We do thank you for standing by and welcome to today's G3 G-III Apparel Group, Limited second-quarter fiscal 2007 earnings conference call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session and instructions will be provided at that time for you to queue up for your questions. Now at this time I'd like to turn the conference over to Neal Nackman, Chief Financial Officer. Mr. Nackman, please go ahead.

Before we get started, I just want to remind you of the Company's Safe Harbor language. 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 license product, reliance on foreign manufacturers, the nature of the apparel industry including changing customer demands and taste, 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 Jeannette Nostra, our President; Wayne Miller, our Chief Operating Officer; and Neal Nackman, our Chief Financial Officer.

We are pleased with our financial results for the second quarter. Our net loss of $0.14 per share was better than our previous forecast of a net loss of $0.30 to $0.35 per share. We are growing more confident with respect to our prospects for the remaining year. Our orderbook has built nicely. Our key businesses are performing well. We continue to have a wide variety of vehicles for growth, and our strategy to diversify our business into new categories with strong brands is moving ahead as planned.

I will begin today with some financial highlights from the second quarter. The $0.14 per share net loss in this year's second quarter compares to our previously disclosed pro forma net loss of $0.41 per share in the year-ago quarter, which reflected results as if we had owned Marvin Richards and Winlit for the full quarter last year. Both of these businesses have in the past had a similar seasonality to our G3 business and incurred losses in the first half of the year.

Our net sales for the quarter were strong, rising 27% to $69.1 million compared to the year-ago level of $54.6 million. This was also ahead of our forecast of approximately $60 million in net sales for our second fiscal quarter. We are well into the booking period for our upcoming fall selling season. We’ve booked over 90% of our forecasted revenues for the remainder of the year, which is a mid-single digit improvement compared to this time last year.

The strength in our orderbook is the result of good performance from several of our businesses, such as sports licensing, Sean John, Kenneth Cole, Guess?, and Ellen Tracy, as well as with new private label programs, including Exsto, Wal-Mart and significant contributions from our Calvin Klein products. Our Calvin Klein business now includes women's and men's outerwear, women's suits and women's dresses. We are poised for a strong second half of the year.

I cannot emphasize enough the contributions from the Calvin Klein businesses. This is simply one of the best brands in the world, and we’re very excited to be participating in the growth that PVH has planned for this brand. PVH has had great success with this brand, and coupled with the fact that they've got a great organization and management team which we enjoy being partner to. The Calvin Klein outerwear business makes a significant contribution to our results. In addition, the new initiatives for Calvin Klein’s women's suits and dresses are very exciting opportunities.

The sell-through rates on the women's suit business, which we began shipping this past January, are very strong. We're getting good penetration, and we believe we have a lot of opportunity to continue to grow this business. Calvin Klein dresses has booked above our initial expectations. It will be in the stores for this holiday season and we look forward to watching its performance develop at retail. We believe that this is going to prove to be a very meaningful business for us in a relatively short period of time.

These two initiatives are an important piece of our diversification effort. They're expected to ship 12 months a year; as they grow we expect to be able to leverage our infrastructure in the first half of the year. Traditionally, this is our slowest period.

Similarly, we're excited about our new sportswear efforts. We continue to plan for a 2007 launch of Sean John women's junior sportswear. A joint management effort with Sean John Corporate in the initial development of this line should result in an exciting business. P. Diddy has taken a special and personal interest in this effort that will bring newness to the market and is expected to be very successful.

We're moving forward with the [Dorang] category expansion of the Exsto Urban young men's and boy's brand for Wal-Mart. While Exsto is still small and still new, we believe this brand provides us with a solid opportunity for growth and further builds our sportswear platform. We also believe that Exsto will become a four-season business that will lessen our seasonality. Exsto is currently in over 300 doors and we are looking forward to opening more.

I think it is very important to realize that these initiatives in women's suits, dresses, and sportswear are in the early stages of what we believe will eventually become the diversified efforts in these categories. Over time, we plan to layer on additional license businesses in private label programs. This is expected to give us new revenue opportunities and create a variety of operational efficiencies as we go forward.

We also made progress this quarter in terms of our balance sheet of financial position. We were very pleased to have received the support of Prentice Capital and completed the private offering with them that brought over $15 million of new common equity into the Company.

We continue to look for ways to grow our business. We believe we have the ability from the financial perspective to support growth, both intrinsically and with the right opportunities; we believe that we can grow further with acquisitions.

This past quarter, we also cemented some plans to improve our operational capabilities. We signed the lease for a new distribution center in South Brunswick, New Jersey to expand our warehouse capacity. This is expected to both improve our shipping efficiency and prepare us to handle some of the increased volume we anticipate next year. We expect this facility to be fully operational by May of 2007. We will continue to balance our needs with third party warehouse facilities, but this is an important piece of our ongoing efforts to grow and improve our profitability. Thank you. And now I will turn the call over to Neal Nackman, our Chief Financial Officer, who will give you some details on the numbers.

First, for the quarterly review. Net sales for the quarter were $69.1 million compared to $54.6 million last year. Our net sales were impacted most significantly by increased sales of Calvin Klein women's outerwear and new sales of women's suits.

The suit line started shipping in January of this year. In addition, we shipped our first deliveries of Exsto product to Wal-Mart.

Our net loss for the quarter of $1.7 million or $0.14 per share compared to a net loss of $301,000 or $0.03 per share in the same period last year. This compares to a pro forma loss of $5 million or $0.41 per share in the year-ago second quarter. The prior year's quarter and six month's actual results include the results of the acquired Marvin Richards and Winlit divisions from July 11, 2005 the date of the acquisition.

The previously reported pro forma results include the results of Marvin Richards and Winlit as if we had owned those companies in the quarter. These companies incurred the same seasonal losses that we do. Note that our first year results have been retroactively adjusted to reflect our three-for-two stock split completed in March of 2006.

Our gross margin percentage increased finally to 24.4% this year compared to 23.4% last year. This increase was favorably impacted by an improved sales mix toward higher margin product. SG&A expenses increased to $18.6 million for the quarter from $12.6 million in the prior year second quarter. This increase is consistent with our prior quarters since the acquisition and it's principally due to overhead-related to the acquired companies.

The quarter also reflects increased expenses associated with our new initiatives, mainly the Calvin Klein suits and dresses, Sean John sportswear, and Exsto sportswear programs.

Turning to the six-month period -- for the first six months of fiscal 2007, we reported net sales of $83.5 million compared to $68.3 million last year. Net sales in the first half were favorably impacted by the inclusion of Calvin Klein's suits and outerwear.

Our net loss of $10.6 million or $0.85 per share in the first six months of fiscal 2007 compared to a net loss of $5 million or $0.45 per share in the comparable period. On a pro forma basis, as previously reported, the first half net loss last year was $13 million or $1.09 per share.

Gross margin for the six month period increased slightly to 21% from 20% in the prior year's period, primarily as a result of the higher gross margin percentage achieved in the second quarter. SG&A expenses for the six months increased to $34 million from $21.7 million. Again, this is primarily due to the additional expenses related to the acquired businesses. In both the six-month and quarter comparisons we have also reported higher depreciation and amortization expenses due to the amortization of intangibles acquired in connection with the two acquisitions last year.

Lastly, with respect to guidance, we are increasing our net sales guidance to approximately $410 million for the full fiscal 2007 year. This is a 27% increase from last year and is up from our previous guidance of approximately $400 million in net sales for fiscal 2007.

We're also now increasing our expectation for EBITDA to a range of $26 million to $27 million compared to the year-ago level of $20.1 million. This expected performance equates to a net income to August of the year in the range of $8.8 to $9.3 million or $0.63 to $0.67 per share. This is up from our previous guidance of diluted net income per share of $0.58 to $0.62 per share. A reconciliation of our EBITDA to our gap net income is included in our press release, which is posted on our website. I will now turn the call back over to Morris.

I would like to thank everyone for their continued support for our Company. At no time in our history have we been more energized, more dedicated, more diversified, or had so many opportunities. We are beginning to see the improvement in our financial results this year. We are focused on driving the value we are creating for our shareholders and we look forward to showing you what we are capable of in the quarters ahead. Thank you. We are now ready to take some questions.

(OPERATOR INSTRUCTIONS). [Dennis Rosenburg, DSR Investment Advisors]

Could you give me some help on your second half outlook? You beat the second quarter by $0.15 to $0.20, and yet you raised your full-year guidance by only a nickel. So, what's changed for the second half?

Thanks for your question. We've revised our guidance somewhat. In our business, the lion's share is still to come. We're watching it closely, all indications are good. We believe we've given the appropriate guidance for the coming six months. When we're forecasting approximately $410 million of volume when we have barely maybe 25% of it in, and we still have 75% to go, many things can happen. As we all know, we've got an economy that we deal with; we've got weather that we deal with; we have retailers that we deal with; and all those leave questions unanswered and therefore, we've given what we believe is the appropriate guidance at this time.

Nelson Obus, Wynnefield.

Look, guys, you had a great quarter and I want to congratulate you for what you seem to be putting together here. And clearly, given the kind of guidance you're giving is helpful, but I did want to just follow up on the first gentleman's call and just so you understand the implication of what he's saying; because if you look at -- you did give us revenue guidance for the second half, and the revenue guidance is basically flat from what you expected before. And as the first gentleman pointed out, that is not creating the same level of profit that you earlier anticipated, so the implication is not that your sales aren't there, but either the mix is not what you hoped it to be, or there's been some margin erosion.

So, obviously, giving projections is always a risky thing. I guess I'm in favor of it, but it does raise the kind of questions that he raised and it raises a question in my mind too as to why there is an implied margin erosion in the second half, because clearly, the $10 million increase in sales that you've put for the year has all occurred in Q2. So, I'm sorry to have to ask that question, but if you give us that kind of information, you've got to be ready for it.

No, that's fine. Thank you for your question. But as you stated, we have revised the guidance for $10 million more in topline and with that, $0.05 a share in earnings as well. Achieving increases in non-performing quarters is generally significantly easier than in your most prosperous quarters. So we hesitate at this stage to give further guidance for the year for third and fourth quarter. Our orderbook is in great shape. We indicate that we're 90-some odd percent to plan or to the $410 million number. So, you can really roll that out at your own discretion -- there are so many things that can occur. We can have a banner year and we can have a mediocre year. At this time, not knowing enough, we're comfortable with this guidance.

So let me ask the question in this way. Assuming that you do deliver on the revenues that you're projecting in the second half, and obviously, things can happen, but assume that for a second, what you're saying is there's no reason to anticipate margin weakness that you didn't anticipate when you gave the initial guidance after the first quarter, to paraphrase what I think you just said. Am I correct? You're just being conservative here in regard to the margins. You haven't put your finger on any operating occurrence that could potentially create that small margin weakness.

What we're trying to do is give you a fair assessment at this time with the knowledge, the concrete knowledge, that we have. There are so many unknowns, even more so than last year. As we know and as you know, the lay of the land has changed. The retailers that we trade with, some of them are no longer here. We don't know what the outcome at the end of the year will be and we're properly reserving and being conservative with our forecast.

The queue is open at this time. (OPERATOR INSTRUCTIONS) Adam France, Keane Capital.

Congratulations guys. Can you all speak to what Wal-Mart needs to see to expand the number of doors they're doing business with you all?

The effort is somewhat of a joint effort. What we need to work on jointly is getting logistics right. It's very difficult to get a complete collection on the store floor all at once, and in your effort to have appropriate sellthroughs waiting for new deliveries, a product needs to be on the floor. We are dealing with that -- both parties are, Wal-Mart and G-III. As we accomplish that, we will grow the store base. Wal-Mart is very cooperative. They would like nothing better than to grow this brand. But, we are again watching it, we're building it, we're designing it, we're pricing it, we're serving it, and the cooperation from Wal-Mart has been absolutely great. And when the appropriate time comes to rollout more doors, we will. We're currently evaluating the doors that perform, the doors that are less significant and altering the mix. So, there are no shortage of doors to do business with in Wal-Mart and as we perform, those doors will expand.

Dan Schwarzwalder, Buckingham Capital.

Congratulations, it was terrific. I hate to go back to where Nelson was, but you made a comment on properly reserving. I guess, do you mean by that that you want to have all bases covered in case there's any problems that you would have to work well with your retail partners? Is that what's meant by it? So it's something that's very conservative?

As you know, the guidelines that we follow are monitored very closely by our outside accounting firm and the adjustments are made to make sure that we are managing our business appropriately. What I state really, and you're correct in what you heard, but what I really mean to say is the lay of the land is very difficult to properly evaluate. And at this time with the information we have, with the retailers that we're trading with, with the sensitivity of the retailers we trade with, these are the numbers that we're comfortable in releasing. If we find in weeks to come that our numbers need to be adjusted, we will be there front and center and let our investors know what we believe.

No, the only reason I say it again is because you gave the topline unless we're talking about on the bottom line. So is there any other area or was it only in the margin that could be effected? It's not an SG&A or anything else? Am I right in assuming that?

I would say you're right in assuming that.

And my second question is, could you talk a little of what your experience was showing and being at Magic and some of the reactions that people had to the line or -- and any of the new businesses that you are developing? Because I really didn't notice you spoke about anything new.

Well, the bookings at Magic for sports licensing was strong. Our bookings for our new collection, which is incorporated into sports licensing, it's merely another SKU with Alyssa Milano, drew a lot of excitement. It is a brand that enables us to sell women's sportswear with Major League baseball, so we're quite excited by the opportunity. That is, again, it's blended into sports licensing, so if we look at the whole, our bookings at Magic were very good. Our bookings in Sean John were very good. If we look at the rationale as to why pieces like Sean John or maybe sports licensing perform very well, we have thousands of specialty stores in both those areas that support the brand. And as you cultivate those accounts and they attend those shows, they write and you're able to generate cutting figures through the shows.

When you have one of the marquee brands in the country such as Calvin Klein, your customer base is much more defined. The programs, the development, the presentations are done well in advance. They're done with many fewer accounts, and the show doesn't generate as much business as the specialty stores that write for sports licensing and the urban brands. So, we weren't disappointed. We need a presence. We have high-level meetings, and I would say that, all in all, the show was a very successful show for us.

Any reaction on the Calvin Klein dress business?

Great reaction.

Care to share?

Our bookings are very strong. We are shipping the product at the early part of October. The stores are excited by it. I was in China revealing the product as it was being produced and it looks absolutely great. There are no problems in production. We chose wisely on a vendor base as we did in our suit business, and we believe that the Calvin Klein properties that we manage for them -- the suit, the dress and the business -- will be very, very strong for the future and we will reap the benefits of the new categories, both this year and when we have a full year shipping behind us, our shareholders as well as our associates here will finally feel what it's like to do business 12 months a year.

Any insight what the fashion gurus are saying about dress business going forward?

The dress business today appears to be the trend. Dresses are hot, pretty much in any category whether it's contemporary, whether it's Junior, every woman on the street is wearing a dress in some form or another. So, I guess, timing is everything. We chose wisely -- we were chosen wisely by the dominant brand in our industry in a category that appears to be the premier category at retail this year.

Congratulations and look forward to continuing.

Thank you for your continued support and your questions.

(OPERATOR INSTRUCTIONS) No further questions. And with that, I'd like to turn the conference back to Morris Goldfarb for a closing remark.

Thank you very much for being in attendance and for your great questions and have a great day.