G-III Apparel Group Ltd (GIII) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the G-III Apparel Group Limited third quarter fiscal 2007 earnings conference call. Today's call is being recorded. At this time, 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 with G-III Apparel. Please go ahead, sir.

Good afternoon, everybody. 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 licensed 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. With me today are Janette Nostra, our President; Wayne Miller, our Chief Operating Officer; and Neal Nackman, our Chief Financial Officer.

We had an outstanding third quarter. Sales and earnings were at record levels and exceeded our plan. We see this strength continuing into the fourth quarter and we are revising our guidance upward for the full year.

These strong results are being driven not only by a solid season for outerwear, but are also a function of the strategic expansion of our business into other product categories, specifically women's suits and dresses. These new products have multiple deliveries throughout the year and their expected growth could have a positive effect on our performance and our traditionally slower quarters as we move forward.

Here are the financial highlights from the third quarter. Net sales for the quarter rose 31% to a record $245 million compared to the year-ago level of $187 million. Net income for the quarter increased at a faster pace than net sales, jumping 57% to $23 million compared to the year-ago level of $15 million.

Our net income per share for the third quarter rose 38% to $1.59 per share compared to $1.15 per share in the year-ago period. We shipped well through the fall and holiday seasons and expect that our net sales for the fourth quarter will be up over 40% from the prior year.

We are also pleased to report that our bookings for first quarter already exceed our net sales for the first quarter of this fiscal year.

I'd like to start with a discussion of our Calvin Klein businesses. Calvin Klein has provided us with the opportunity to branch out to women's suits and dresses and we intend to build on our initial efforts in these areas. The performance of these businesses at retail and our demonstration of an ability to execute in these areas are extremely important as we look to further expand and diversify our product offerings.

Calvin Klein women's suits, which we began shipping in January, are now in over 400 doors. Our sellthrough has been consistently among the best, if not the best, in our department store customers. The growth of our women's suit business has been driven by new doors and increased turn and penetration. Our outlook for this fourth season business is strong.

We have received good feedback from our customers about the current collection as well as our offerings for spring. We began shipping our Calvin Klein dresses in mid-October. We brought this line to market ahead of our plan timetable and the initial shipments have done extremely well.

We had a beautiful display in October in Macy's windows on Broadway in New York City for Calvin Klein's coats, suits, and dresses, and the consumer response has been great. Our expectation for spring is real strong.

I think it's important to note that our Calvin Klein dress line will have many components such as casual, active, career, as well as cocktail and evening dresses. Further, the demographic targets of the brand is very wide. We can legitimately market to women from 18 to 60 years old.

We expect to be in excess of 250 doors for spring and anticipate good growth in this business. We're very pleased to be part of the growth of the Calvin Klein brand and value our relationship with PVH and their management team. PVH is truly an outstanding apparel organization.

With respect to sportswear, our Exsto men's lines were at Wal-Mart, is now shipping to over 500 doors. We continue to work on expanding product offerings to hats, boys, and footwear. We're also focused on marketing and enhancing store presentations. Our Sean John women's sportswear is still in the developmental stage and we expect to launch this for fall of 2007.

Of course, the base of our third quarter business is outerwear, with the early cold weather in much of the country and a strong portfolio of brands and private label programs, we shipped well, sold through early deliveries well, and have received significant reorder business. Once again, our Calvin Klein business is excellent.

Our Kenneth Cole business has shown significant increases in sales compared to last year. Sean John men's coats are performing well both in specialty stores and department stores. We've just begun shipping Sean John women's coats which were well received.

We're excited about this new opportunity and are already receiving reorders for many styles. Additionally, we've seen good performance from our Jones (indiscernible) business and from Cole Haan in the luxury tier.

Our sports business has performed well particularly in hot markets and corporate promotions business. We're working on developing new initiatives for next year, especially in the women's area both for Major League baseball and for college logo product.

We're excited about our growth prospects and our ability to deploy strategic capital. Marvin Richards and Winlit, both acquired last year, have been integrated into our operations and our business has been invigorated by them.

These businesses have exceeded our expectations both from the performance and management standpoint. The Winlit business has far exceeded its plan for this year and our Calvin Klein division is the fastest-growing operation we have today. The management teams at Winlit and Marvin Richards have added immensely to our talent pool.

We intend to continue to pursue other acquisition opportunities. We're focused on accretive transactions consistent with our strategic plan to diversify into a four season all category company. While product diversification is happening organically, at this point, we believe the right acquisition could reinforce this transformation. I'm going to leave the guidance update for Neal.

In summary, we've never been in a stronger position. We have growth opportunities of the breadth and scale that we've never seen. Our financial position is healthy and our operations are running smoothly. We've developed a deep, highly capable management team. We grow stronger with every day and we look forward to demonstrating our capabilities to our customers and our shareholders as we move ahead.

Thank you and I will now turn the call over to Neal Nackman, our Chief Financial Officer, who will give you some details on the numbers.

Thank you, Morris. First, overview of our third quarter results. I note that this is our first quarterly comparison that includes our acquired Marvin Richards and Winlit businesses in both this year's and last year's periods. These businesses were acquired in July 2005.

Net sales for the quarter were $245 million compared to $187 million last year. The increase in our net sales was primarily the result of increased sales of Calvin Klein products and for the new and existing private label programs.

Our Calvin Klein product deliveries now include women's suits and dresses. Last year's sales of this brand were only in women's and men's outerwear. The [T-line] started shipping in January 2006 and the dress line started shipping this quarter.

Our net income for the quarter was $23.3 million or $1.59 per diluted share compared to net income of $14.8 million or $1.16 per diluted share over the same period last year. Note that all of our first-year results have been retroactively adjusted to reflect our three-for-two stock split completed in March 2006.

Our gross margin percentage was consistent with last year and remained seasonally high at 29.6% [to] this year as compared to 29.5% last year. SG&A expenses increased to [$40.8] million for the quarter and $27.3 million in the prior year's third quarter. This increase is primarily attributable to cost associated with the increased sales volume in the quarter. The quarter reflects increased expenses associated with our new initiatives, mainly Calvin Klein women's suits and dresses, Sean John women's sportswear and Exsto men's sportswear for Wal-Mart.

Expenses in the prior year's quarter included $1.6 million non-cash compensation charge related to the vesting of restricted shares of common stock and have been granted to key management.

Turning to the nine month period -- for the first nine months of fiscal 2007, ended October 31, 2006, we reported net sales of $328 million compared to $255 million last year. Similar to the impact in the quarter, net sales in the first nine months were favorably impacted by the additional sales of Calvin Klein products and both new and existing private label programs.

Our net income of $12.7 million or $0.93 per diluted share in the first nine months of fiscal 2007 compared to net income of $9.8 million or $0.82 per diluted share in last year's comparable period. Prior year's results for the nine month period include the results of the acquired Marvin Richards [and Limited] Winlit on July 11, 2005, the date of the acquisition and that's excluding the seasonal losses of these businesses for the period prior to the acquisition date.

The previously reported pro forma results with the nine months ended October 31, 2005, included the results of Marvin Richards and Winlit as if we had owned those companies for the entire nine month period. On a pro forma basis, net income for the nine month ended October 31, 2005 was $1.8 million or $0.15 per share.

Gross margin for the nine month period increased slightly to 27.4% and 27% in the prior year period. SG&A expenses for the nine month increased to $64.8 million from $49 million. Again, this is primarily due to the additional expenses related to the acquired businesses and (indiscernible) extend to our new initiatives.

In the nine month period in the current fiscal year, we also reported higher depreciation and amortization expenses, [paying] the amortization of intangibles acquired in connection with the two acquisitions last year and incurred higher interest expense primarily as a result of the funding or cost of the acquisitions. The quarter and nine month effective tax rates [with] net income were favorably impacted by the reversal of tax reserves of approximately $970,000 or $0.07 per diluted share based upon the favorable completion of the tax order.

Lastly, with respect to guidance -- we're increasing our net sales guidance to approximately $430 million for the full fiscal 2007 year. This is over a 30% increase from last year and is up from our previous guidance of approximately $410 million of net sales for fiscal 2007.

We're also now increasing our expectation for EBITDA to a range of $31 million to $32 million compared to the year-ago level of $20.1 million. This expense in performance equates to a net income targets of a year in the range of $12.5 million to $13.5 million or $0.90 to $0.95 per diluted share. This is up from our previous guidance of diluted net income per share of $0.63 to $0.67 per share. A reconciliation of our EBITDA to our GAAP net income was 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 all of our shareholders for their continued support for our Company. In addition, I would like to thank all of our employees for their hard work and dedication to G-IIII. The future indeed looks bright and we will continue our focus of creating increased value for our shareholders. Thank you and we are now ready to take some questions.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Eric Beder, Brean Murray.

Great quarter, guys. Could you talk a little bit about some others brands here? How did Guess? do during the quarter?

Guess? did significantly better than last year. The sellthroughs at Guess? both in men's and ladies were excellent. We didn't have an aggressive plan this year as we were realigning some of the functions at Guess? but we surpassed our internal plan as well as the bank plan. Margins are good. Our inventories are in great shape and we look at Guess? as an opportunity for the future.

In terms of the sports business, you rolled out the Alyssa Milano -- kind of soft rolled it out. Where is that and what's going to fall through that line?

The Alyssa Milano collection will be in many of the stadium shops. They received it well as far as writing the orders. We have not shipped the product yet. And we believe that this area of business will bring attention to our capabilities of doing junior sportswear in the sports arena.

In terms of Exsto, we've heard a lot about Wal-Mart having problems dealing with fashion and other pieces. How has Exsto worked in terms of what they want to do and how in terms of -- how do you look at Exsto going forward from here?

I can't forecast for Wal-Mart, but I can tell you that we have an extremely talented team working on aligning our needs with that of Wal-Mart. The product that we have shipped has been presented well as far as a fashion point of view.

When you are dealing with a retailer that's as large as Wal-Mart, it's not easy to affect perfection day one. So, what we are doing is working towards bettering the business. I don't believe that it is lack of fashion, inappropriate pricing, quality, or the Wal-Mart organization. It's simply the size of the animal that we are trying to feed suitable to our needs. It's hard to get the product from the back door on the floor in collection form, and when we achieve that the results are much better.

And just some housekeeping questions. What should we be using as a tax rate for Q4, and the shares outstanding and what are the shares outstanding for the fiscal '07?

I think if we used around $14 million for shares outstanding for the full year you'd be fine. The effective tax rate that we're using is around 33% when you X-out the reserve reversal.

So without the 970, it's 43%.

That's right.

And that's what we should think about going forward for the next year?

At this point that's our best view.

I'm going to let someone else ask questions.

(OPERATOR INSTRUCTIONS). Jody Kane, Sidoti & Co.

Congratulations on a great quarter. The warmer weather last fall, did that have any effect on the orders of this fall?

The warm weather is always a factor if you are in the coat business. Our early bookings were quite strong. We could not feel the pain of last year's weather. I think our results indicate that we were fashion right. The retailer believed and the consumer bought. So, I would say that there was not a major effect on the warm weather of last year. And if I recall, I don't have the information in front of me, but I believe that the year ended quite cold.

December was a very cold month of 2005 and we might have had a late start. I think the early part of the fall season, the September period, was warm and it ended up seasonally right.

Okay, so it seems -- I know there were a couple of record months of sort of warm weather last year, so that means even though the weather is warm, the retailer store wants your product and it's still selling through very well.

Well, we've also diversified our product offerings and it appears that the retailer ended up quite clean at the end of last year and was able to buy aggressively. In anticipation of the follow-up question, our mark-down allowances last year were quite in control and were well within budget. So the memory of last year was actually not a bad year.

And you wouldn't happen to know the breakdown what was outerwear and what was non-outerwear for the third quarter, would you?

The full year will probably still be predominately outerwear and it should be around the 90% -- 90% of our business for the full year should still be outerwear for this year.

You guys sound very confident with Calvin Klein. It seems like that's gone very, very well. You didn't say as much on extras. Is that means it's not going as well?

We have a matured business with Calvin Klein. We have many, many more stores and a varied point of view. When you're focused on one retailer, you're locked into one point of view and one area that you need to improve on and clearly, there needs to be an improvement in how the product is presented on the product that we are selling on, and the sales will improve as the presentation improves.

So it's still sort of adding and taking away stores and sort of getting the product right in certain stores and out of other stores?

Yes, and the amount of business that we're doing with Exsto is insignificant to the whole, whereas Calvin is significant, so one might look at Exsto if we get the formula right, as a very good opportunity.

I'll jump back in the queue. Thanks.

(OPERATOR INSTRUCTIONS). Dennis Rosenberg, DSR Investment Advisers.

Looking to next year, how do you see that 90%, 10% changing?

Well, it will change. We are maturing, clearly maturing our dress business. We are clearly just scratching the surface on the women's suit business. We have an initiative in Sean John Jr. sportswear. We've got many things that will round out the seasonality, but we also believe that there's a pretty good opportunity to continue to grow our coat business.

And if we're really, really good, we grow our coat business and we build our sportswear suits/dress business into something significant and still retain a 90/10% [chop]. There's still this great opportunity to build a coat business. We're not giving up on it. It's our core competency.

And looking at the better-than-expected results in the third quarter, how much of that was attributed to the coat business and how much of that was attributed to the other businesses?

Most of it was attributed to the coat business.

On the last call, you said that the goal was to be profitable every month. Is that achievable with the current portfolio of businesses or do you need acquisitions to do that?

That's kind of a tough question. It can be done. This organization is very creative on how we do business. We have opportunities at pretty much every door that the country has in the malls. Our opportunities go from Wal-Mart to Neiman Marcus and they can go from [Migers] to Footlocker. We can create a sports business that is profitable based on the seasonality of the individual sport, and we can build sportswear to pick up the weak months of the outerwear business. So I would respond with if managed appropriately and the stars are all aligned and the retailers are all on our side then we could be profitable 12 months a year.

What would the timeframe be to be at least breakeven every quarter?

I really can't forecast that. But clearly if we're profitable every month, I'll give you that.

What would be the timeframe to be profitable every month? What would be a reasonable timeframe? Are we talking three years or five years?

I really -- we have an internal plan to be as profitable as we possibly can every month of the year, and if we mitigate any damage created by weather, retail weakness, then we have done our job. Traditionally, we maximize our profits in quarters and in tough environments we seem to control our business well and I think more the question is how would we control our business if business slowed down? And we look at -- we're not foolish people. We've been in this business a long time. The leadership team here has been here an average of probably greater than 10 years. I, myself, have been at the helm of this Company for I think it's -- we're approaching 35 years. So we've managed to do well in tough times and we've managed to do better in good times.

Follow-up from Eric Beder, Brean Murray.

In terms of Sean John, where are you in terms of having -- ramping up the designers and all the other pieces to kind of ensure that comes out in fall?

I'm going to defer to Janette Nostra on this one.

We are in flat-out design and development mode. We will do a very soft, [bring] delivery, and we anticipate rolling out the fall for magic.

So we'll see it in February?

It will be fall in February.

The other thing is, you talk about acquisitions. Is it acquiring businesses or it is acquiring other licenses to do into other areas? Or to kind of leverage off Calvin Klein?

I think that we are always looking at [turning] licenses, but there's been a serious focus on trying to acquire companies that are compatible and agree to our current business. We work hard at researching the appropriate situations and it was quite special to us that we were able to accomplish a little more than a year ago, two acquisitions on the same day and managed to integrate them and have them both provide prosperity for our Company. They both proved to be exceptional deals and there is a lesson to be learned here. There is a lot of hard work that went into it. We've learned what we can do, what we should do better and we don't have a fear of going out and acquiring companies that are appropriate for us.

Follow-up from Jody Kane, Sidoti & Co.

I just wanted to find out if you guys had a sort of a number out there of the number of stores that the Exsto brand could be sold at in Wal-Mart?

We're working on perfecting it. We've started with approximately 200 stores which is too few. We recognize that. Wal-Mart recognized it. We expanded it to 650 to 700 doors and we're trying to find the appropriate fit which we believe is probably some number less than 600 doors.

And then the guidance that you've given, that implies a profitable fourth quarter, right?

That's about a breakeven, if you look at our full year compared to where we've been at three or three quarters.

At this time it appears there are no further questions. I would like to turn the program back over to Mr. Goldfarb for any additional or closing comments.

I thank you all for participation and wish you all a good day. Thank you.

That does conclude today's program. You may disconnect your line at any time.