G-III Apparel Group Ltd (GIII) 2008 Q1 法說會逐字稿

Welcome to the G-III Apparel Group, Ltd. first quarter 2008 earnings conference call. (OPERATOR INSTRUCTIONS) At this time, I'll my pleasure to turn the call over the Neal Nackman, Chief Financial Officer of G-III Apparel Group. Mr. Nackman, please go ahead.

Good afternoon, everybody. Before we get started, I just 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. 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 the reliance on licensed products, reliance on foreign manufacturers, the nature of the apparel industry, including changing customers demands and tastes, seasonality, customer acceptance of new products, the impact of competing 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 & Exchange Commission.

The company assumes no obligation to update information in this call. In addition, during the call we will refer to EBITDA, a non-GAAP number, we have provided a reconciliation of our EBITDA numbers to our net income according to GAAP in our press release and on our website. I would now like to turn the call over to Chief Executive Officer, Morris Goldfarb.

Good morning, and thank you for joining us to discuss our first quarter results. With me today are Wayne Miller, our Chief Operating Officer; and Neal Nackman, our Chief Financial Officer. I would like to start with the financial highlights of the quarter.

Our net sales more than doubled to $35.1 million from $14.4 million in our first quarter last year. Gross margin was greatly improved at 21% compared to 4.7 last year. We cut our operating losses by 27% to $10.8 million from $14.7 million in the year-ago quarter. Our loss per share improved $0.30 to $0.42, versus the $0.72 loss in the first quarter of last year.

In summary, we're very pleased with our first quarter performance, which is above the levels we expected to see. The first quarter improvement we reported was driven largely by contributions from the dress, suits, and sportswear businesses that we have layered into our operating model. I would like to address our business by tier of distribution and by category and then talk about our recent acquisition and our strategic plan.

In outerwear we saw a relatively good performance across the board. As you know, first quarter is our lowest volume quarter and the outwear is mostly clearance, with a small amount of spring products. It is, however, an important time to build bookings for the upcoming fall season. In general, our bookings are strong for the upcoming fall and holiday season.

However, we've seen bookings decrease in a few private label programs primarily for one customer. As you know, we have stated in the past that the private label business is very elastic in terms of orders. We believe that our quick response capability and the potential for additional third and fourth quarter bookings will mitigate some of this issue as the year progresses. We're pleased with how mid-tier and department store business is booking.

In addition to a good outerwear performance, we expect to increase our penetration in to these channels with dresses, sportswear and women's suits. Our Calvin Klein businesses, which includes women's suits dresses and the men's and women's outerwear business is projected to increase in excess of 50% this year. The dress launch, this past holiday season was very strong. Our dress momentum continued into the first quarter of this year, and this trend is expected to continue.

Our department store's door count in dresses is expected to grow further this fall, and we're enjoying one of the best sell-through rates in the dress department right now. We're excited to have such a key brand in our portfolio. Our relationship with Philip Van Heusen and the Calvin organization is strong, and we look forward to growing our business and working on additional opportunities together.

Sean John, Jr. sportswear is currently testing well in approximately 200 doors. We're anticipating our full launch of Sean John Jr. in September, this will coincide with Sean John's new fragrance launch, Unforgivable for women. We recently hired a new President, Leslie Singer, and Head Designer, Jennifer Stein, both formerly of Tommy Hilfiger, for that business, and we're optimistic about their collective impact on this business going forward. We think their experience in the upscale urban market will prove very valuable and we believe that the Sean John brand is an excellent vehicle for their talents.

Exsto continues to have an uptapped opportunity, but it is proving to be a challenge. We're working with the Wal-Mart organization to create appropriate inventory levels. We're currently in 514 doors with a target of 540. Boys in is in 50 doors and will be up to 230 doors in August. Both G-III and Wal-Mart remain committed to Exsto's success.

The financial impact of these counter-seasonal businesses is considerable. We will more effectively leverage our fixed cost in the early part of our year as strategy remains to continue to diversify our company until we are a four-season all-category provider of apparel products.

While we will continue to have a keen focus on our outerwear business, as we have announced two weeks ago, we've also completed another strategic acquisition to accelerate our transformation in to a more diversified company. We acquired the business of Jessica Howard, Eliza J, and Industrial Cotton, which has approximately $60 million of dress and sportswear revenue during 2006.

Together the acquired brands and business have good department store and mid-tier distribution. This business began over 30 years ago, and they have, really, a well-respected and long-standing operational capability, which we believe we can leverage to capture new brands and private label programs. Recent conversations with our existing licensesors and customers have reinforced this view.

We expect the acquisition to be accretive in its first 12 months of operation. But given the timing of the acquisition, it will prove dilutive to our earnings in the current fiscal year. Neal will provide you some additional details on the expected financial impact. In general, our business is strong. Our growth opportunities, including the new ones from the acquisition remain very compelling.

Our balance sheet remains sufficiently strong to pursue additional acquisition opportunities to accelerate our growth and push our diversification forward. Our reserves from additional comments for closings, but I'll now turn the call over to Neal Nackman, our Chief Financial Officer to review the financial results and our guidance.

Thank you, Morris, net sales for the quarter ended April 30, 2007 were $35.1 million compared to $14.4 million in the year-ago first quarter. Our first quarter continues to be our smallest sales quarter.

However, we did see increases in net sales this quarter, primarily as a result of non-outerwear shipping in both the licensed and non-licensed segment. Licensed sales were most significantly impacted by shipments of Calvin Klein suits and dresses. The suit line was in its infancy last year, and there were no dress shipments in the prior year's quarter. Non-licensed shipments increased mostly from shipments of our Exsto brand, and to a lesser extent to some new private label spring outerwear programs. There with no shipments of Exsto products in last year's quarter.

We had a net loss of $6.4 million for the quarter or $0.42 per share compared to a net loss of $8.9 million or $0.72 per share in the year-ago quarter. Gross margin percentage increased significantly during the quarter to 20.9% from 4.7% for the prior year's quarter. The gross margin percentage for our license segment increased to 22.5% from 14.4%, primarily due to better margins from the dress and suit shipments. The gross margin percentage from our non-licensed segment increased to 11.5% from a negative gross margin, as a result of higher margins from the Exsto and spring programs and, in addition, now the higher level of net sales allowed us to cover our fixed costs.

SG&A expenses increased to $16.5 million from $14.3 million in the year-ago quarter. This increase is attributable to warehousing, advertising and salary costs associated with the higher sales volume and to a lesser extent salary costs associated with the building of our new dress and sportswear divisions. Depreciation and amortization increased $510,000 to $1.6 million.

A large part of this increase was attributable to a one-time write-off of leasehold improvements associated with certain vacated office space. We expect that our SG&A will continue to increase during the remainder of the year as a result of our recent acquisition and the continued expansion of our business.

We'll also expect our depreciation and amortization to be slightly higher than in this previous year as the result of additional amortization from the acquisition. With respect to guidance, we are expecting full-year sales to increase approximately 17% to approximately $500 million. With respect to EBITDA, we are now expecting a range of $37.3 to $38.7 million which will result in an increase of 16 to 20% over the prior year. There is some negative impact from our recent acquisition included here, which we expect to more than recoup in the first half of next year.

As Morris mentioned this deal is expected to be accretive in the first full 12-month period. But given anticipated transition costs and the smaller part of the dress season, the positive impact will be in the first half of fiscal 2009. The EBITDA expectation translates in an expectation of approximately $0.90 to $0.95 of income per diluted share for the full year. Keep in mind that last year's net income per share of $0.94 included approximately $0.07 per share for a reversal of tax reserves.

We are anticipating that the acquisition will result in dilution of approximately $0.05 to $0.10 per diluted share which is included in the current year's forecast. In addition, per share earnings are being impacted by a significant share increase attributable primarily to our recent public offering and our private offering in July 2006. We are expecting a diluted outstanding share count to increase approximately 22% to $17.1 million shares for the year.

We expect second quarter sales of approximately $75 million and a net loss of $0.19 to $0.24 per share versus a year-ago level of $69.1 million and a net loss of $0.14 per share. The increase in our net loss is primarily attributable to the impact of retailers pushing back outerwear delivery dates into our third fiscal quarter, to better align with their consumer demand.

In addition, our sales in the quarter will be impacted by the loss of a few private label programs again, primarily attributable to one customer. That concludes my comments and I will now turn the call back to Morris Goldfarb for closing remarks.

We're off to good start for the year. I think the benefits of our push in to non-outerwear categories is very clear from our improved first quarter results, and we're looking forward to accelerating this strategy.

The asset acquisition we announced is a strong step in the right direction, and will not affect our ability or willingness to complete additional transactions. Importantly, this acquisition has also deepened our management team and our capabilities.

The key people at Jessica Howard and Industrial Cotton are very strong managers and the departments for dresses and sportswear will, will be great compliments to our organization. This transaction will be an across-the-board win for everyone involved including our shareholders. Our business overall looks very promising for the upcoming fall and holiday season. Thank you for taking the time to listen to our call today, and, Operator, we're now ready for some questions.

Excellent. (OPERATOR INSTRUCTIONS) Our first question will come Jim Duffy with Thomas Weisel Partners.

Hello, good afternoon, everyone.

Hi, Jim.

Seems like a nice start to the year. I want to talk more about the acquired properties and some of the opportunities for them. Can -- Morris, maybe, can you provide a little bit color on each of the different entities, and where within your current existing product portfolio you see opportunities for synergies, and other types of opportunities, whether it be it private label or licensed in general terms that that could lead to additional revenue from?

Well, the strategy we had discussed actually for the last year of reaching out and trying to acquire companies in other apparel sectors that could create a platform that is similar to what we have done in the coat area. We identified Jessica Howard who, clearly, was the dominant factor in the dress business. Dresses are trending very, very hot today, the management team as I said earlier, at Jessica Howard has been there consistently for 30 years. Their capabilities are clearly there. The market is right for it. The synergies that we can take advantage of are their capabilities in building the product, their retail relationships, and our relationships at the licensor level. We have reached out during our process of due diligence, we reached out to our current licensors and we're in discussions with three of our current licensors to get dress classifications granted us to.

We believe in the coming month or so, we will be successful in announcing several deals or at the very least, one deal for a brand that we currently have. So, when we succeed in that initiative, we'll layer that on to the Jessica Howard organization, and begin to build a better dress business, catering to the department store tier. The sportswear component that Jessica Howard had which was Industrial Cotton, is of great interest to us. It's a compliment to what we do. It's a bottoms business, primarily, it's a compliment to what we do in Sean John, Jr. sportswear. So that team can efficiently help us source and produce the bottoms essential in our launch of Sean John, Jr. We believe this acquisition to be very important to the future of G-III.

It does seem like there's a lot of opportunity. The revenue run rate that you suggested the businesses were producing at the time of acquisition, seems fairly significant. I think you said better than $60 million for the acquisition price. Is there some bad revenue here? Is this an instance where revenue needs to go backwards for profitability to go forwards? Or how should we think about the existing revenue run rate from these businesses? And then a follow-up to that, what is the seasonality of that -- how does that flow in to the model?

Hay, Jim, it's Wayne. The annual revenue 2006 was $60 million, and we think that even without the new opportunities that Morris was talking about with license that we could add to that in that they have a great brand, Eliza J. that's is in department stores, that's in "better". We think we could build on that brand, we think the Jessica Howard brand which is in "moderate" can grow. And certainly the Industrial Cotton business we think could, we think we could grow that. The mix is probably about 60% in spring, 40%, 40% in fall, and one thing that we made sure of is, you know, this was an asset acquisition, so we, we bought the properties of moderate and up. We did not, we did not step into their budget business that they had.

We would call that -- I'm sorry, Jim. But we would call the piece that we did not step into as the bad revenue.

Okay.

So -- which not , which was not eliminated.

Right. Which was not in the $60 million.

I see. Okay. And so, in terms of the accretion from this, is this just a factor of the timing of the acquisition, relative to the seasonality of the business, or is there more than needs to be done to make this a profitable entity?

We believe simply as a stand-alone it's accretive. We've -- we've done what we have considered the damage control by eliminating the bleeding component with the positive attitude piece. So -- and now, we will layer on the additional pieces, which we believe will be far more significant than their current holdings.

Just to add to that Jim, the, in terms of the dilution for the current year. I think it is a lower-volume in the last half of the year. The cost base is relatively fixed, and that's why we're -- and there will be some transitional cost that we, that we do incur in terms of bringing them on board.

Jim, Jim, it's Wayne again. The upside to that is, as Morris stated before, the opportunity we're going after on the, on the fashion brands, we hope, that we could get some -- we could, we could get some activity in to the fourth quarter of this year.

Okay, very good. I'll let somebody else jump in. Thanks.

Thank you, Jim.

Our next question is from Eric Beder with Green Murray.

Good afternoon.

Hi, Eric.

Could you talk a little bit about the response to Sean John, and kind of where you are seeing that kind of flowing in in terms of Q3 and beyond?

We've spent a good deal of time developing the launch, and getting to, to the point where we're comfortable in the full launch of Sean John sportswear. We're at that point right now. The reception for the product, especially this week -- this is a market week for us, has been absolutely great. And you have never heard me say great as we speak about Sean John, Jr.'s. We had, we had a meeting earlier this morning with a department store group for October delivery and they were shocked as to how good with product was. We realigned design, we shored up the sourcing piece of it.

As we said earlier, we hired the former President of Tommy Hilfiger junior sportswear, as well as the lead designer, for Tommy Hilfiger juniors and it has made all of the difference in the world. So not only is P-diddy or Sean John very happy with the product, but the retailers are voting, you know, very very positively toward it, and quite honestly about 10 minutes ago, prior to this meeting, we were just given permission by, by P-diddy to do dresses for the classification area. So, that's a new announcement. And we're, you know, we're going to have dresses, made by Sean John in the classification department for holiday of this year.

Wow.

So we're -- we're very excited, really, for the first time, you know, since signing this deal with the prospects of what this brand has to offer us.

One housekeeping question on the Jessica Howard deal - is all that revenue non-licensed at this point?

The $60 million we referred the is combination of private label and their brands -- now our brands. There, there's no licensing revenue there.

And it does fall in o our non-licensed segment, Eric.

Should we view this business, this Jessica Howard business as a higher -- as waiting a full year of seeing if sales as a higher margin business than your core business now? How do we, I mean, how do we, I'm trying to view in '08 what to think of this $60 million additional revenue and the impact it can have on the company?

I would not use a model that's any higher than the existing one you have for G-III.

Okay. How much capacity -- when you look at the Jessica Howard business, what is the capacity that gives you -- you talked about another licensee -- how many licensees do you think you can you add to this business before you have to think of another acquisition, in terms of - -?

Let me just give you a little background on what Jessica Howard was several years ago. This is a business that is approximately $250 million several years ago. It has seen better days. We, we eliminated through this acquisition, about $30 million, I believe, of volume. So we brought it down to what we believe is the appropriate base to build from. So we have got some really good businesses to build from. We've got a lot of room to grow the existing brands. And getting, getting additional licenses to layer on both in dresses, and in sportswear or bottoms for that matter, we've got the -- two platforms to build on so there's a good deal of room. I mean, the -- you know, I hesitate to give you a top-line number, but it's quite large. I don't see a cap.

Great. Thank you.

(OPERATOR INSTRUCTIONS) We'll next go to Jody Kane with Sidoti & Company.

Hi, thank you very much. Just a quick question about the first quarter. It looks like revenue came in 25% higher than what you originally expected. Can you tell us what sort of happened there that there was such a big difference.

Yes, I think, Jody, that the dress and suit businesses performed better than we had originally anticipated.

Okay. And then as far as extra, can you just talk a little bit about the door expansion there, and the -- you know, the strategy going forward, I guess?

You know, this is a brand that is specific to one retailer. They are in control, quite honestly of our destiny. There's been sufficient press as to the performance of apparel at, at Wal-Mart. We are quite comfortable that Wal-Mart can figure it out. We are working with them to find the appropriate levels of inventory per door that could sufficiently display the product that we want to market. We're finding the right price points, and we are getting full cooperation from them.

There was an article not long ago in the Wall Street journal that stated that Wal-Mart was a highlight of performers within Wal-Mart's assortment. So we're comfortable that they are committed to the brand. We're working very diligently to get it right for them and with them. And our business should, should improve. We have cut back the projection to get it right, quite honestly, this was planned to be a bigger year with the brand, but in light of, you know, trying to find the appropriate solutions, we have cut it back a little bit.

And do you have any sort of door projects for the year?

We're currently, as I said earlier, we're in -- you know, we'll be up to 540 doors in the young-men's sector, and we're, we should be up to 230 doors on the men's sector, and we have been invited in to, to do other product that I can't share with you for the moment possibly with this same brand so the relationship is good. There's a good understanding as to why the miss occurred, and, you know, it's a, it's a work in progress, and it's a great work in progress. It's not often that one is invited in to the inner sanctums of the, the largest company in the world.

All right, terrific. And then, just finally, any particular reason for the loss of the private label business?

I'm sorry?

Any particular reason for the loss of the private label business with that one specific customer?

Well, there's one specific customer that had utilized a key item -- let's call it -- for a door buster a year ago. There was a low-margin business, a high-volume business that was not anniversaried that was one, and there are a couple of other misses, and all of it -- really at the mass tier low-margin business that we didn't anniversary, whether it was the retailers choice or us is really not important. We just don't have it, and we believe that we can -- we can do better in the better margin businesses that we're in today. We're evaluating the non-essential components of our business and speaking to the essentials and making them better. Margin improvements should be a little bit obvious this year, our earnings stream is not effected. I think what we look at, maybe as the -- missing would be just the top line.

Great. Thanks.

Our next question is from Todd Slater with Lazard.

Thank you very much. Excellent quarter, guys.

Thank you.

Thanks, Todd.

Could you maybe give us a little bit color as to how the Calvin suit business is going in the key doors and how it's sort of adapting to the inherently promotional environment in the suit departments, and if it follows sort of a similar flow as the rest of the brands in there in terms of regular price and first mark-downs. And do you have a sense of how the stores are faring versus their sales and their maintained margin plans? And if you could just remind us about the door count, where is it now, and where it is going?

Well the current door count in this suit area 350 doors. The business in the suit department overall has not made plan for the stores, and in conversations that I've had with the department stores, our brand is a stand out. We are one of the best, if not the best performing in the department, which is a great accomplishment due to the fact we're only in this business for a year. We will warn that suits are different than coats. It's a hard tax to master.

The fit is different, the drape is different. The fabrics are different, and to have accomplished all of this in a year, and be the best performing -- although not in the great performing sector, I would say we have done our job. We, we are not -- we believe we are not losing door count. We believe that we are front and center in the department, and we believe that there is a good future for the suit business.

And is it -- is -- is the margin -- you know, the maintained margin or the price after market-down is it sort of in the range that was hoped.

We have appropriately accrued for it, if that is your question. And to date, you know, we've just, we've gone through a season -- we have gone through several seasons, and I -- the early stage where there was no backlog of inventory, no residual inventory to deal with, we did a stellar job. Today we have been in several seasons, and the markdowns are a little more aggressive than they were a year ago, but we were prepared for it, there were no surprises for it.

So the 350 door count, does that sort of stay where it is for right now, or is there a chance to take -- what sort of , you know, when the suit business generally speaking has, it starts to improve, what is the opportunity in that door count or does Calvin Klein have, sort of, special product that you wouldn't necessarily want to put into the - see in some of these second and third-tier doors.

Well, we're, we're kind of cautious with how we distribute the product. This is our trophy brand, this is a brand that we want to preserve for eternity, quite honestly, so we're, we're, we're not aggressively looking for new door counts or additional door counts. We're looking for the right doors. We find that if you are in the right doors and you service it appropriately, it's a far better package than being in more doors so we're evaluating it. We have got great planners, and we, if you would have asked a year ago, would I be happy with where we are today I would say I would be thrilled.

Okay, so should we expect to see some increased penetration, then, in those, in the best doors?

I can't really speak for the buyer today. As I said earlier, it is not the best-performing category.

Right. Okay. And then just a question on the coat side, if the -- if the retail business out there continues to -- let's say be soft or to weaken any further, or whatever, but - . In either the mass or the better channel, is there any risk to the third quarter coat orders, or is that kind of set in stone and they'll take it in and see what happens from there.

Due to the fact that the retailer is taking product in closer to need, we're clearly going to be really in the third quarter before receipts are taken. So there is very little risk in that third quarter business, and we've left a lot open for opportunity on fourth quarter. And as we can all recall, fourth quarter of last year in November and December there was no reorder business. You know, there was a 70 -- the 70-degree days in December. We believe we won't anniversary that so there is opportunity for fourth quarter, and I might add that our bookings in the coat sector are ahead of last year, significantly ahead of last year.

And is the fourth quarter opportunity also on the margin side addition to the reorder, let's say, revenue side?

Well, if we're not liquidating goods, and we're taking reorders, it would be likely that the reorders would be at a profit, whereas the liquidation cycle in troubled time is negative margin.

Okay, and then so, lastly if you look at your guidance then for the year, what kind of assumptions are you making on, for -- you know, on the coat business and the weather and so on and so forth. Are they sort of average assumptions, aggressive assumptions, very conservative ones?

We believe they are appropriate for our company. And I might, I might expand on that, we are generally known o be fairly conservative.

Okay, thank you very much. Best of luck.

Thank you, Todd.

And with that, there are no further questions in the queue. I would like to turn the conference back to Morris Goldfarb for any additional or closing comments.

Thank you for being with us today, and good luck to us all, we're looking forward to a great year. Thank you.