G-III Apparel Group Ltd (GIII) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the G-III Apparel Group Limited fourth quarter fiscal 2007 earnings conference call. Today's call is being recorded. [OPERATORS INSTRUCTIONS] 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 like to turn the conference over to Mr. Neal Nackman, Chief Financial Officer of G-III Apparel Group. Please go ahead.

Thank you. Good afternoon, everybody. Before we get started, I want to remind you of the Company's Safe Harbor language. I'm sure you're 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 risk, 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 and 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.

I would now like to turn the call over to Chief Executive Officer, Morris Goldfarb.

Good afternoon, and thank you for joining us for a review of our fourth quarter and full year results. With me today are Wayne Miller, our Chief Operating Officer, and Neal Nackman, our Chief Financial Officer. We had a strong fourth quarter which capped off an extraordinary year. For the full year, we grew our net sales by 32% to $427 million. We grew net income per diluted share by 62% to $0.94 per share. Our EBITDA also increased by 61%, rising to $32.3 million. We are as you know the largest fashion coat manufacturer in the country. This category represented over 90% of our volume for the fiscal year. Despite that, this was the warmest winter on record. Our sales and profitability growth was excellent. Despite our seasonal exposure, we believe that we did the best possible job in managing through the season.

In outerwear we saw a particularly good performance from brands such as Calvin Klein, up 75%, Kenneth Cole up 33%, Sean John up 24% and Guess up 50%. We also had a strong showing from our private label business and our sports business, and our sports business also had another good year led by product expansion in the women's area. We're very pleased with the growth of our department store, mid tier and specialty store business. Our mass business also performed exceptionally well. Our well-balanced portfolio of brands and strong private label programs gives us the ability to service all channels of distribution. We're working hard to develop non seasonal businesses that have the ability to create significant leverage on our fixed expense in the first half of the year. Our Calvin Klein suit and dress licenses are performing well. We believe we can double the size of each of these businesses in the next year.

Dresses remain a very strong category for spring and we have one of the best brands in the market so we expect to benefit from the trend. We're also strengthening our Exsto, urban sportswear offerings with Wal-Mart and are committed to its success. Exsto is now in 600 doors for young men's. As a recent update, we've expanded our boy's offering from 50 to 175 doors for this coming fall. Our Sean John sportswear will be launched in August of 2007. We have a great design team in place and we're excited about the future of this business.

G-III always has been a strong Company with a good track record of performance. Even so, we have never had the range or scale of opportunities that we do today. This month we completed a successful equity follow-on offering which provided us with approximately $30 million of net proceeds. We're now in a position to utilize our significantly stronger balance sheet as well as expected increased cash flow to seek out new sizable opportunities. We will deploy these resources appropriately to take this Company to yet another level of diversification and success. We have built and reinforced the talented management team. The strength in our organization is deep.

This brings a wealth of skill sets and relationships to us and we are confident that regardless of the specific methods we pursue for growth, we have the ability to execute well. I think it's significant that we have acquired four companies in the last five years, all fine addition to our company that created value for our shareholders. We've been able to approve our practices and operations by taking the best practices from each piece of the acquired companies and implementing them across the entire company. The culture of cooperation that developed from those transactions is an integral part of our business.

Neal will take you through the numbers in a moment but before he does, let me reinforce how pleased we are with the year we've just concluded. We're dedicated to continuing the transformation of our company and are really excited for the year ahead and the future that will follow.

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

Thank you, Morris. For the full year we reported net sales of $427 million, an increase of 32% compared to last year's $324 million. Our sales growth was broad based with increases coming from both the licensed and non licensed segments of our business. Licensed sales increased 36% and non licensed sales increased 24%.

In the licensed area, Calvin Klein has the largest volume growth followed by the Kenneth Cole brand and our Sports License business. Calvin Klein sales included the initial shipment of dresses starting in Q3, and also included suit shipments throughout the year. Suits were shipped for the first time in January 2006. The non license sales increase was attributable to the expansion of existing programs and several new initiatives. Net income for the year doubled to 13.2 -- almost doubled to 13.2 million from 7.1 million last year and net income per per diluted share increased to $0.94 from $0.58 in the prior year. The current year's results include the reversal of approximately $950,000 or $0.07 per share in tax reserves following the conclusion of a tax audit.

The prior year's results include the results of the acquired Marvin Richards and Winlit provisions from July 11, 2005, the date of acquisition and thus excluded the seasonal losses of these businesses for the period prior to the acquisition date. Our gross profit margin percentage for the full year improved to 27.1% compared to 26.2% in the prior year. The 90 basis point increase is attributable to the license segment and was primarily due to improved margins from the Kenneth Cole and Calvin Klein brands. The Kenneth Cole margins improved primarily because of the mix of products sold and better sell throughs.

The Calvin Klein gross margin percentage increase was attributable to the shipments of dresses and suits which were sold at a higher margin than our outerwear business. SG&A expenses exclusive of depreciation increased 18.5 million to 83.3 million due significantly to the additional expenses associated with the acquired businesses. In addition, we had increased advertising costs associated with our higher sales volume.

Lastly, payroll costs also increased from the build up of staff associated with the Calvin Klein dress, suit, Sean John sportswear, and Exsto teens. Depreciation and amortization expenses increased 1.3 million, again due to the amortization from the acquisition in the year ago period. Interest expense in the current year increased by 2 million to $6.4 million. Primarily the result of borrowings associated with the cost of the acquisitions and to a lesser extent due to higher interest rates.

Now with respect to the fourth quarter, net sales increased 43% to 98.8 million in the fourth quarter, compared to last year's 69.1 million. The sales increase was primarily in our license segment and was largely attributable to increased sales of our Calvin Klein, sports licensed and Kenneth Cole brands. Net income for the quarter improved significantly to $500,000 or $0.03 per share from a net loss of 2.8 million or $0.23 per share in the previous year.

The improvement in earnings was due to continued strength in our outerwear business as well as the inclusion of new and non seasonal business that's helped leverage our fixed cost base. Our gross profit margin percentage for the fourth quarter increased 280 basis points to 26% compared to 23.2% last year. The improvement related to both our licensed and non licensed segments.

Licensed gross margin increased primarily due to improved margins in the Kenneth Cole brand which was due again to improve product mix and better sell through at retail. In addition our non licensed gross margin also improved as a result of improved product mix in the segment.

SG&A expenses exclusive of depreciation increased 4 million to 21.8 million. Advertising, shipping and product development costs all increased due to the higher sales volume and again to a lesser extent payroll costs also increased from our staff builds for our new initiatives.

Now turning to guidance. For the first quarter, we are forecasting net sales of approximately $28 million compared to $14 million last year. With a net loss of $7.7 to $8.4 million or between $0.51 to $0.56 per share as compared to a net loss of $8.9 million or $0.72 per share last year.

With that I'll turn the call over to Morris.

Thank you for taking the time to listen to our call today. This is certainly been a very gratifying year for us. We have seen our business reach record levels. We've got continued opportunities and unprecedented scope and breadth and we have developed strategically and operationally and most importantly we've been able to deliver tremendous value to our shareholders and customers over the course of last year.

As we look to what comes next in the future of our company, we're dedicated to further diversifying, maintaining strong rates of growth in sales and earnings, and making the most of our opportunities. Our mission remains to take this company and remake it into a business that is profitable on a year round basis, by growing our non-outerwear businesses at a faster pace than the overall growth that we expect.

We have a new range of abilities in sportswear, women's suits and dresses and we will be looking to expand these areas. This is a very exciting time in our development and I'd like to sincerely thank our business partners, our vendors, our management, and employees and of course our shareholders for their on going contributions to our success. Operator, were now ready for some questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]. We'll pause just a moment to allow everyone a chance to signal by pressing star one. We'll go first to Jim Duffy of Thomas Weisel Partners.

Thank you. Hello, everyone. Nice job executing through a difficult quarter. Morris, question for you I suppose on the outerwear business. As you look into the current fiscal year, do you see any hangover impact from the challenging season in calendar year '06?

No, actually we came out of the year very strong. In spite of the fact that it was the warmest winter on record. Our inventories are actually in good shape. They're lower than they've ever been as a percentage of our overall sales. And as far as the retail is concerned, their sell-throughs have been quite good. The inventories has been -- the inventory has been liquidated at retail or sold through at retail. Our audit book reads double-digit increases over last year same time. So all indications are that we're going to have a good coat year going forward.

So you do expect the outerwear business to be a growth business for you in the current fiscal year?

Yes. We expect that to be the case.

And what are the principle components of that that you think will be driving growth? Is it the same brands where you saw strength?

Actually it is our -- we seem to be operating in the outerwear area on all cylinders. All our brands are doing well. Private label initiatives are stronger than they've ever been and the opportunities are there for further expansions in unexplored areas. So it's really wide open for us. We're well-respected in the sector. When there's a need for private label, we are I believe the go-to resource for development. And the dominance of our brands in that sector would almost mandate that we get the greater percentage of growth in the coat area.

Okay. Very good. And then on the suits and dresses it seems like early signs are very positive there. You mentioned you expect those businesses to double in -- by that, did you mean double calendar year '06 to calendar year '07? Or --

Yes.

Okay. And then the culmination of the two double or each of the respective contributions double?

Each of the respective contributions would double. Our indications today are that that prediction is fairly conservative, our bookings are strong.

And which of the two would you expect to have disproportional contribution to that growth?

If we're looking at the calendar, the fact that we just shipped dresses from October to January, it would dictate that the growth as a percentage in dresses would be far greater.

Yes, so doubling that should be a very conservative assumption?

Okay.

Okay. I guess I'll leave it at that, let someone else jump in and ask questions. Thank you.

Thank you very much, Jim.

We'll go next to Elizabeth Montgomery of Cowen & Company.

Hi, guys. Can you hear me okay?

Yes.

Yes, congratulations on a good quarter.

Thank you.

I had a question also on the dresses and the suits. In addition to them I'm assuming some pretty significant door expansion potential. What are the other drivers of the growth in that category would it be a broader penetration within the doors or additional floor space or really kind of broadening out the product offering?

I think it's a combination of all of those, Elizabeth, particularly in the dress sector. We signed a license with PVH in mid last year. We brought the product to market very quickly. We had great design in place. But we were not fully developed on the collection. So today that collection is far broader than it's ever been. It's more right than it's ever been and ever is really not a long time in our dress business. But it is clearly more right and we believe that through design through quality and through historic sell-throughs, we will get additional space within the individual doors and the door expansion is occurring as we speak.

Okay. And then in terms of the dress cycle in its current kind of wave, I mean, it seems like it's really been the hot item of or the hot new item of the past, say two seasons. How long do you see these trends generally lasting?

That's really a good question. I've always been in a category of product that people have viewed as cyclical and we have always managed through it and become the dominant provider even in a very seasonal or cyclical area. Now, coming from the leather area we were always questioned as to what happens when leather dies. We always found the solutions. We either developed different types of leather, we developed different fashions, we found additional doors and we're generally known to be pretty creative in our marketing and design skills. So I can't ensure that we will always be in a positive trend in the dress sector but what I feel comfortable in saying is that we will do it better than anybody. We're good at what we do.

Okay. That's really helpful. Just one last question on the outerwear. I know Neal highlighted the fact that the sell through was better this year than last year I guess specifically in the Kenneth Cole New York brand. But was there like a one major driver of what allowed the improved sell through this year, despite what would appear to be pretty unfavorable weather.

The fact that we designed appropriately, we sold the right retailers and we were priced effectively for the retailer. We were -- we provided value and if we're speaking directly to the Kenneth Cole issue, we had a comparable year in calendar 2005 that we were up against, a licensee that had exited the brand and we had taken over and there were many issues to get past. There was residual inventory in the brand from prior licensee. So that's no longer the issue. We had a clear year to deal with. It was all our product and our product did perform and we're reaping the benefits of it. We outperformed the sector and the audit is going forward are better than they were last year.

Okay. Great. Thanks and good job.

We'll go next to Eric Beder of Brean Murray.

Good morning.

Good afternoon, excuse me. It's a long day. Five.

Five hours into it, Eric.

Oh, gosh. I have some simple housekeeping questions. For Q1, what's share count and what should we use the share count going forward as?

The share count, Eric, is around 15 million in Q1. If you look forward, we ended last year at 14.2 million. We've got the follow on offering. It's the Greenshoe gets picked up with additional dilution we would expect to be around 17 million next year.

Are we going back to the 43% or so tax rate.

Yes, I think that's right. If you add back the 950 tax reversal, you would be at 43% for this past year.

Okay. In terms of Sean John, what is -- you showed the product at Magic in February. What has been kind of the response and where do you see that in terms of flowing into the second half?

Well, we have two areas in Sean John juniors. One is the coat area. We did let's call it a soft launch or some initial shipping that occurred in December. The sell-throughs were excellent. We could could not service the reorders and again, not that I'm a weather man, but it was clearly the warmest winter ever. In December would have been not my first choice in retrospect time to ship new product. But we sold incredibly well and there was an appetite for far more than we could service. That speaks to the strength of the brand and the quality of design.

The junior sector, we shipped some product recently. At some specialty stores, again a soft launch, more of a test than even a launch and the sell-throughs, the product just got on the floor within the last 10 days. And the visibility I have is the product is retailing and retailing quite well. And if I had to give you my opinion, the designs are less than perfect. We are getting much better on design going forward so again, I would tell you that it speaks to the strength of the brand and we're comfortable that we're going to have good business in Sean John juniors.

When you look at potential either acquisitions or licenses in the dress or suit business, what is your criteria? What are you looking to do with the next after Calvin Klein ramps up fully?

Calvin Klein, because of the size of the business or the potential size of the business will remain as a stand-alone. We do not plan on integrating any dress businesses onto the management team, be it design, sourcing, sales. It's clearly a very, very important business to our company and the last thing we want to do is take the focus of that management team and dilute it with another initiative.

So that said, I guess the parameters of what we would look for today on an acquisition would be a management team that can in a sense mirror image what we created in the coat area with both private label and branded sectors that are not going to be as large as the potential of Calvin Klein but that can be serviced under one senior management team. What we would look for is a company that in size that could be somewhere around $50 million, 50 to $100 million. They don't necessarily have to be incredibly profitable. It could be a management play, so we could acquire management and an infrastructure and if it was a situation where there was an existing brand, we would -- we'd feel comfortable in telling you that it would be an accretive purchase. So there are -- there are two things we might look at. An existing management team that could take out -- bring to market brands that we feel comfortable we could layer on, or a company that does have a brand that either needs capital or help in an infrastructure including sourcing, as well as back office IT, distribution, as well as relationships with retailers. There are -- we're kind of broad but in a sense we believe it's fairly specific.

Okay. And I guess the final housekeeping question, what what the split in Q4 between license and non licensed?

It was around 80% for the licensed business there.

Great. Thank you and congratulations on a really strong quarter.

Thank you, Eric.

Thank you we'll go next to Todd Slater of Lazard Capital Markets.

Thanks very much. Congratulations on a great year.

Thank you.

Fabulous. Just keeping with the suit and dress theme for a second, if I may, if you look out a couple years, because obviously can be kind of lumpy, but if you look at what you've got a couple years out, are you likely to have sort of a conglomeration more of licensing deals, mixed in with some acquisitions. How do you see that? How big -- what kind of an axe do you think you can become in that space, it is very fragmented but it also has different challenges than outerwear. I'm wondering if you can speak to what some of the challenges may be if there are any differences at all and then also, you mentioned some unexplored areas in outerwear, so I'm curious what you're referring to there. And lastly, if you could just talk about or give us a little bit more meat on the dress and suit doubling this year, can you give us a sense of the size of the base now? I mean, is it a 10 versus 5 or without getting us a number, just give us a sense of the substantial at of that double? Thanks.

Todd, in trying to address the first question, really, on what we plan on doing with the suit business, it's similar to what I explained to Eric. We would like to build a suit business that provided suits to most sectors of our population in different forms. It can be through private label. We feel very, very comfortable in the model that we built in the coat sector. It took us a long time to get here. It runs quite well for us. We're approximately 60% licensed and approximately 40% combination of private label as well as proprietary brand. That mix is very, very workable for us in coats and we have no reason to believe it should be any different in the suit sector. The suit sector, the suit -- and I guess I'm going to blend the dresses into the suits, because I'm not sure they're too different. They're very different. One may be trend right today and the other trend right tomorrow. In a sense if you manage your business well, you really can dominate the sector.

So what we would like to do is really mirror image what we created in the coat area. It's a good blend. And if you have not only brands but you have a good management team with the talent to create the product, produce the product, ship the product, I think that it's a good formula for success and it's a good formula for longevity. We're not in this for one year. I think we've emphasized that over the last 25 years that we've been a public company. It wasn't a one year event. And we feel comfortable that we're addressing the right sectors of the business, classifications work for us. We understand how to service classifications. So we're comfortable with that model going forward. The --

Just if I could just follow up with that. It sounds like your focus is more opportunistic as opposed to strategic. If we're going to build out the better suit and dress area in department stores in the branded area, sound like you're saying you'll develop a private label business as well and then -- or are you going to -- maybe we'll look at stuff in the mass channel as well as in the -- what would you rather do, sort of build out competency let's say in the better channel or you're going to pursue -- sounds like you're going to pursue multiple channels, multiple brands as well as private label. Am I reading that correctly?

What we've done in the coat sector, that's what I can refer to is the model that we like a lot, is we created a matrix that was not intended to cannibalize dollars. We have Calvin Klein, we have Guess, we have Kenneth Cole, we have Sean John. We do coats in all those areas. So they each address a different sector of our population. And we don't see any reason that we can't do the same thing in the dress sector as well as the suit sector.

And going beyond that, we have a private label area in our business that does do business with Wal-Mart, Kohl's, J.C. Penney and their own brands. And taking the competencies that you learn through branded or through the luxury sectors of the business and taking the appropriate applications and bringing them to mass is a formula that really has worked for us. So I don't think it is specific to coats. It's specific to classification, which we feel that we can handle. And we're going to build teams that can do that.

Okay. And then the unexplored areas in outerwear?

Well, the unexplored areas in outerwear, maybe they're considered white zones in my world, if I disclose that to you on a conference call, they may not be unexplored. So quite honestly, those are our strategic advantages for us that this isn't the appropriate time to discuss.

Okay. And then sort of what is the -- can you give us a sense, order of magnitude or something of the size of dress and suit category right now?

I'll clearly tell you that it's not $5 million and not $10 million. It's some number greater. We do not break out our businesses that way. But we are still -- currently this past year, we're still 90% outerwear. That mix is changing. That mix clearly has changed for first quarter. The increases that Neal had stated for or given guidance for the first quarter in a major form is really the effect of the beginning effects of the suit and the dress business.

Got it. Okay. Thanks a lot.

Thank you. Once again if you'd like to ask a question it's star one. We'll go next to Jody Kane of Sidoti & Company.

Thanks. I want to find how many dress lines you actually have and what sort of expansion opportunity there are in those lines?

In the current Calvin Klein, we only have one brand that we're marketing and what we do with the Calvin Klein brand is we really enable the woman to buy her casual dress, her career dress and her party dress, her evening dress is an important -- as important to her today as the casual and career piece. So we design multiple lines and they all hang in the classification area of the department stores. So if that answers your question, if not, please ask and I'll go further.

Well, maybe can you expand into cocktail dresses, mini skirts, I'm not sure what other options there are out there, but are there something -- can you do something like that?

We can't do mini skirts. We do evening dresses. We can do the dress that are affordable priced. They're not designer dresses. We do career dressing. You might see an analyst sitting next to you wearing a Calvin Klein dress to work. So if you were to walk into the Macy's dress department, you would see a fairly comprehensive collection of dresses that would range in fabrications. It can be linen. It can be cotton. It can be satin. So it's expensively designed. But It is one brand, consistent message today. It is the Calvin Kline message. The aesthetic is one that Calvin had created years ago and we're consistent with.

And then the -- as the dress business grows and becomes a bigger part of the revenue, would you expect the gross margins to continue to increase?

Yes, I would say yes. Over time the answer is yes.

All right. And final question, just about Exsto. That seemed to be a very exciting opportunity when you first started it. You guys haven't spoken about it as much. Is there any sort of change there? Is it getting any better? Getting any worse?

We're trying to make it get better. We expanded the door count and then we recently contracted it to get the formula right. The issues are a combination of some of the Wal-Mart logistic issues, the fact that I guess it's no secret that Wal-Mart did not have the best of all apparel years. And taking on a new initiative when they had inventory issues to deal with and bringing product to the selling floor, I'd say that a little bit of the focus was lost. So what we're trying to ensure today is that the product that we produced, design and price jointly gets to the selling floor. It's very difficult to sell the product if it's not on the floor and we found that it -- in many cases our product was not on the selling floor.

So it sounds like the brand is still strong and it's just a matter of execution?

Yes, and my script, what I did say earlier was that the boy's product we shipped 50 individual Wal-Mart doors with a collection of boy's apparel that sold very well. And we're now expanding that door count to approximately 175 doors.

All right. Great. Thanks.

Thank you.

Thank you. With no further questions, I'd like to turn the conference back over to Morris Goldfarb, for any additional or closing remarks.

I thank you all and have a great day.

Thank you for your participation. That does conclude today's conference. You may disconnect at this time.