G-III Apparel Group Ltd (GIII) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the G-III Apparel Group, Ltd. second quarter 2008 earnings conference call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for your questions. I would now like to turn the conference over to Mr. Neal Nackman, Chief Financial Officer of G-III Apparel Group. Please go ahead, sir.

Thank you. Good afternoon, everybody. Before we get started, I just want to remind you of the Company's Safe Harbor language. Certain 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 & Exchange Commission. The Company assumes no obligation to update information in this call. With that out of the way I will turn the call over to 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 Wayne Miller, our Chief Operating Officer; and Neal Nackman, our Chief Financial Officer.

We're very pleased with our financial results for the second quarter, which exceeded our plan for both net sales and earnings. More importantly, we're confident with our outlook for the remainder of the year. Our order book is on plan, our key performing are performing well at retail, we have created a range of compelling growth initiatives and our strategy to diversify our business is proceeding well.

In the nine-month period beginning in July of last year, we successfully raised $51 million of new capital. We utilized some of that capital to extend our business in to the suit and dress categories. We also built a significant infrastructure for sportswear. These new businesses have positioned us for renewed levels of growth in sales and earnings well into the future. Our balance sheet remains sufficiently powerful to continue to evaluate additional acquisitions, and to continue to push our strategy forward.

It is our goal to eliminate the losses we have historically seen in the first half of the year and to become profitable in each quarter. As you can see from our recent results, the progress we are making is tangible. Here are some of the financial highlights from the second quarter. Our net sales for the quarter were really good, rising 21% to $84 million, compared to the year-ago levels of $69 million. This represents an increase over our previous forecast for net sales of approximately $75 million.

The sales increases were driven primarily by new sales of dresses both in our Calvin Klein division and from our recent acquisition. Our net loss for the quarter was $0.05 per share. This compares favorably to our previous guidance of a loss between $0.19 and $0.24 per share and it is an improvement compared to the year-ago loss of $0.14.

As of today, we are well into the booking period for our upcoming fall selling season. I'm pleased to report that we have booked over 85% of our plan for the remainder of the year, which is similar to this time last year. As a result, we remain confident we will achieve our full-year targeted net sales of approximately $510 million. We are set to achieve record levels of net sales and net income this year. This is the result of our strong portfolio of brands and the diversification of our business in to new categories.

Our expertise and strength in the outerwear business is well established, but we're now proving capable of quickly building a strong presence in other categories. Our Calvin Klein dresses have been a stand out at retail. We expect to continue to add new licenses to our mix as well as tap in to what we believe is a large private label opportunity. As we previously announced, we're now developing dresses under the Sean John and the Ellen Tracy labels. The combination of our acquired dress businesses with our existing business will continue to help us increase our sales and improve our operating results during the first half of our fiscal year.

While it is early in the outerwear season, we have seen promising results from some of our early outerwear programs at retail. Our fall bookings are on plan. Calvin Klein, Kenneth Cole, Guess, Sean Jean, and Ellen Tracy remain amongst our strongest department store brands and have all shown good increases in initial orders from the prior year. In the luxury tier, our Cole Haan business had an excellent spring season at retail and is also poised for a sales increase in the coming fall season.

We are also continuing to refine and expand our capabilities in sportswear. The growth in these initiatives has been slower than we expected and continues to be a work in progress, but ultimately we believe it could be a bigger opportunity than the dress business. We're building platform for design, sourcing, merchandising, and sales. We remain enthusiastic about the Exsto program with Wal-Mart and about our potential with the Sean John, Jr. program. We're working on new fixturing program with Wal-Mart for the Exsto business that we believe will generate better sell throughs and margin. We're also adapting our design and merchandising in both this business and in Sean John, Jrs. to reflect a trend in the urban-inspired business that is skewed toward a cross-over customer. This will be good for business and should expand our distribution opportunity.

We have add experienced management and sportswear design and merchandising personnel to the Sean John, Jr. effort. While we do not expect this line to contribute materially this year, we're preparing for a more aggressive market posture for next spring. Given our growth in new areas, we're incredibly focused on operational development right now. We have been work diligently to fully integrate the systems, personnel, and procedures of the Jessica Howard, Eliza J, and Industrial Cotton operations we acquired in May 2007. We're making excellent progress in each of those areas, and positioning the business to both grow at a healthy pace and to generate incremental profitability. We have also added an incremental design and merchandising infrastructure to the dress business as we prepare for the launch of Ellen Tracy and Sean John dresses next year.

The multi-category platform we're working on to build is robust, and designed to be highly capable across a number of tiers of distribution. Ultimately, we expect that our success in product diversification is going to greatly reduce our seasonality. It will leverage our position to acquire new licenses and it will increase our capability to take advantage of private-label programs. Our balance sheet has never been as strong as it is today. Again, our recent capital raises and the support from our bank group, leave us in an enhanced position to seek suitable acquisitions that fit our strategic plans and further accelerate our efforts.

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 for the quarterly review. Net sales for the quarter were $83.9 million compared to $69.1 million last year. Net sales of licensed apparel in the quarter increased to $52 million from $41.5 million and net sales of non-licensed apparel in the quarter increased to $31.8 million from $27.6 million in the prior year. Similar to our first quarter, net sales of our expanded non-outerwear product offerings continue to show good increases in both the licensed and non-licensed segments.

The increase in our net sales of licensed apparel in the quarter was primarily attributable to sales of Calvin Klein dresses which did not start shipping until the third quarter of the prior year. The increase in non-license sales was attributable to approximately $10 million in sales resulting from our Jessica Howard Industrial Cotton acquisition completed in late May 2007 off set in part by some reductions in a few private label programs in women's outerwear. Our net loss for the quarter of $884,000 or $0.05 per share compares to a net loss of $1.7 million or $0.14 per share in the same period last year.

Our gross margin percentage increased to 26.1% in the quarter, compared to 24.4% last year. Gross margins of licensed apparel were similar at 27.3%, compared to 27.4% in last year's quarter. Gross margin of our non-licensed apparel increased to 24.2% in the quarter from 19.8% in last year's period. This improvement was impacted by the reversal of accrued returns in the current year as a result of better sell-through at the retail level and improved gross margins in our Exsto division as a result of executing on our production earlier and reducing freight end costs.

SG&A expenses increased $4.7 million to $23.3 million for the quarter from $18.6 million in the prior year's second quarter. This quarter's expense increases are primarily attributable to SG&A expenses associated with the companies we acquired in May. Personnel costs associated with the growth in our Calvin Klein women's suits and dress initiatives and cost associated with the new Sean John sportswear program. Our advertising costs have also increased s a function of our increases in sales of licensed products since our advertising obligation is generally based on percentage of sales.

Turning to the six-month period. For the first six months of fiscal 2007, we reported net sales of $119 million, compared to $83 million last year. Net sales of licensed apparel increased to $81.9 million from $54.2 million and net sales of non-licensed apparel increased to $37.1 million from $29.3 million in the prior year's period. Increased sales in the first half were most favorably impacted by an increase in sales of Calvin Klein licensed products and sales from our newly acquired Jessica Howard and Industrial Cotton businesses. Our net loss of $7.3 million or $0.46 per share in the first six months of fiscal 2007, compared to a net loss of $10.6 million or $0.85 per share in last year's comparable period.

Gross margin percentage for the six-month period increased to 24.6% from 21% in the prior year period. Gross margin of licensed apparel improved to 25.6% from 24.1% in the prior year. This increase was primarily attributable to sales of Calvin Klein dresses which did not stick in the prior year period. Gross margin of non-licensed apparel increased to 22.4% from 15.2% last year. The improvement was impacted by the reversal of accrued returns in the current year as a result of better sell-through at the retail level, improved gross margins in our Exsto division, as a result of better operational execution and the impact of sales from the newly acquired businesses.

SG&A expenses for the six-months increased $7.4 million to $41.4 million from $34 million in the prior year. This increase is attributable primarily to expenses associated with the businesses we acquired in May 2007 to increase personnel expenses associated with our new initiatives and both warehousing and advertising costs associated with our higher sales volume. 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.

Lastly, with respect to our guidance. We are now expecting to achieve approximately $510 million in net sales volume, which equates to a 19% increase over the prior year. This is up from our previous guidance of $500 million. EBITDA is forecasted range between 38.1 million to $39.5 million or an increase of 18 to 22% from the prior year. We are currently forecasting net income per diluted share of $0.98 per $1.03 for the current fiscal year ending Jan 31, 2008.

Our net income per share in the prior fiscal 2007 was $0.94, which included approximately $0.07 per share for the reversal of tax reserves. Our outstanding share count is expected to increase approximately 22%, to approximately 17.1 million shares for the year, primarily the result of our public offering in the spring of this year. A reconciliation of EBITDA to our GAAP net income is included in our press release which is posted on our website. And with I will now turn the call back over to Morris.

I would like to thank everyone for their continued support for our Company. We are aggressively and purposefully expanding our business as our results indicate. We remain focused on our opportunities as one of the dominant outerwear suppliers, but G-III is quickly developing high levels of competency in new categories. We plan to leverage our expanding capabilities to continue to service every meaningful tier of distribution and we will continue to look for the right opportunities at retail.

In addition, we continue to look at potential acquisitions that will help us broaden our apparel capabilities in a profitable manner. We're poised for a strong fiscal 2008, and an even stronger fiscal 2009 and beyond. Thank you. We're now ready to take some questions.

(OPERATOR INSTRUCTIONS) We'll take our first question from Jim Duffy with Thomas Weisel Partners.

Thank you. Hello, everyone.

Hi, Jim.

Nice quarter. Couple of questions, Morris you spoke to the bookings for your outerwear business being on pace with your expectations. Is that to say on pace with your expectations for flat year to year which was what I think you had spoken about coming out of Q2.

Actually we can dissect it a little bit. Our brands -- our fashion brands are running well ahead of last year, and our private label business, I think I addressed this in an earlier call, is down a little bit because of some unique programs, and all in all, our business is very healthy, and we're pleased with the early results.

Okay. With regards to third quarter, is it typically your policy not to provide specific guidance for the third quarter?

Yes, Jim, we -- we really felt that giving a guidance for the balance of the year should really help get you there. We have got a significantly large quarter in Q3. We do have issues as far as retailers and retail calendars changing with respect to month-end deliveries, and we just felt more comfortable giving guidance for the entire year.

Results are consistent with what we have done in past years, the balance of the year estimate that we put out.

And any help on the acquired businesses? How those shake out from a seasonality standpoint across the final two quarters of the year?

We're still looking at approximately 60% in the first half, 40% in the second half. We said on a previous call we were looking for about 30 million to $40 million in sales this year. That's probably still consistent with -- with our expectation. And we are still thinking that we'll be -- with the acquisition we'll be anti-dilutive this year in the magnitude of $0.05 to $0.10.

Okay. And then your interest expense in Q2 was lower than I had expected. Any thoughts on interest expense for the year or updated thoughts there?

I think the only thing that would help you, is that at the end of Q4 last year we did start to have the benefit of the pipe. But essentially, you should see improvement, really, in both Q3 and Q4 on interest expense.

On a year-to-year basis?

Yes.

Okay. But it should ramp-up across the back half of the year just from working capital usage?

That's correct.

Okay.

We grow the inventory and the receivables to meet our large third quarter and fourth quarter sales.

Okay. And then Morris, I'm hoping you expand on something you spoke to a little bit earlier in the call. The cross-over customer you were targeting in the sportswear initiative. That wasn't exactly clear to me.

Both the men's and women's sportswear initiative that we're involved with are targeted toward the urban consumer, and the urban consumer has become a little bit more contemporary. A little bit -- she's grown up a little bit on the women's side and the men's side. If you notice the jeans aren't coming down to the knees any longer, there's -- there's cross-over appeal. It's not necessarily the -- at the consumer that is buying our product. It's actually a good thing. The fit is more modified and the styling is modified to the extent that there is a broader appeal for the product.

That's helpful. Thanks I'll let someone else jump in.

Thank you, Jim.

Thank you. We'll go next to Todd Slater with Lazard Capital Markets.

Thank you, and also kudos on the quarter.

Thank you.

Regarding the outerwear trends. If memory serves last year's winter was unusually warm, what sort of weather trends does your outlook assume this year? What happens if December is equally as warm as last year? How much cushion have you built into your forecast I guess is my question.

Well, generally we run a fairly conservative business, and we do factor in sufficient, we believe, sufficient mark-down allowances in the event that we have a season that's inclement to our product. We are in many cases driven by fashion. Our early -- our early business is good. Our wool business in -- I would say 80, 90 degree weather is the best piece of what we have, and -- doesn't appear that it is highly at this moment, dependant on weather pattern. A little bit later on, if it doesn't get cold, we -- we -- as everybody else we'll have issues. The retailer, any commodity that you are in, is -- is faced with seasonal swings, based on weather patterns.

Yes.

I don't think we're any different than a blouse, a sweater, a jean, the consumer reacts to weather and we'll be part of that.

Okay.

I think we have sufficient reserve to accommodate a swing.

Okay. Let me ask another way. Are you anticipating you would have a little bit more of a reorder business this year on a more normalized winter, let's say than you would have had last year?

We probably won't be able to accommodate an aggressive reorder business. Our inventories are bought differently today. The consolidation at retail has brought us to a different view of what the value of inventory is, and I would say, if -- if -- if the business -- if it's incredibly cold, we're not going to get a dramatic swing. We want to have the inventory to support it. And if it's incredibly warm, we won't have residual inventory to deal with.

Okay. Good. Sounds like a goldilocks type of situation. Let me ask a question about the Ellen Tracy business, because if Liz sells that brand, and the new owners decide to -- let's say take it more downstream. Just talk about how that might change or impact your plans on the dress business.

Actually if they took it downstream it wouldn't be a terrible view. If they move it to JC Penny, we need a JC penny brand and we could utilize Ellen Tracy as our vehicle to do JC Penny business with a brand. The coat business, very much the same. So we're -- we're fairly well postured in every retail tier. So I don't believe we would be dramatically impacted.

Okay. Maybe a little higher volume, little lower margin or something like that?

Okay. One could view it that way.

All right. And then you guys mentioned the retail calendar change a little bit between the third and fourth quarter, could you just give us a little more sense about the -- or detail about how how that -- what that does for the quarters or how we should be looking at that?

It's really hard to look at the department store sector. Pretty much rules -- sometimes there's a two or a three-day swing and generally it straddles over a quarter. So, I think, Neal's comment about giving you guidance, it's the back end of the year versus a specific quarter is a good strategy. If we have a four-day swing, or a three-day swing in late October, there's likely to be a disappointment in the quarter. But we're giving you our comfortable guidance for the remainder of the year.

I'm just wondering if it puts a little bit more -- if there's a little more revenue in the fourth quarter versus the third quarter or vice versa relative to last year, what your sense is? We'll play with the numbers, but.

We believe our third quarter is -- we don't believe that there will be any disappointments. There's -- the -- it's really -- it's hard to give it to you in concrete form, we're not vertically integrated. We are at the mercy of retailers, EDI is for product. And occasionally they come a little bit later than we would like.

Okay. Fair enough. The -- just to -- a follow-up on to your comment about the -- one of the reasons that -- that you exceeded the numbers is you named the acquisition as helping to exceed the numbers a little bit. I'm wondering if the acquisitions were more -- performed better than you had expected or were more accretive second quarter.

No, they were right on plan.

Okay. Then lastly on the new fixtures at Wal-Mart for Exsto.

Yes.

Is there something that needs to be accounted for in the numbers at all? Are these cost shared or are they barn by G-III? How does that shake out? What part of the P&L would that end up on?

No, the cost is borne by Wal-Mart, and it is initially, it's a couple of dozen stores that will be fixtured differently, and the assortment would be a broader assortment than we normally ship.

That's terrific. Thank you.

Thank you, Todd.

Thank you. We'll go next to Jody Kane with Sidoti & Company.

Thanks. In this text you talk a little bit about developing new sportswear programs. Can you elaborate on that a little bit, please.

Well, what we're doing currently, is as you know the -- the Sean John, Jr. sector, and we have through our acquisition of Jessica Howard and Eliza J there's a sportswear component that's denim, denim driven sportswear component called Industrial Cotton and through Industrial Cotton we're developing private label programs with the likes of JC Penny, Charming Shops, Kato stores. So we now have a private label initiative in sportswear through our latest acquisition. And then will you be looking to make any more acquisitions more along the dress side or along the sportswear side? That's really a good question. I'm not -- I'm not certain we're focused on -- on the specific sector today. Right now the focus is managing our business efficiently, and looking at great opportunities, if they become available. It's not -- it's not necessarily a dress sector. It's not necessarily a coat sector. It's not necessarily sportswear. I think we've proved over the last 18 months that we're certainly capable of running more than a coat business, and that capability enables us to look broader at acquisitions. So we're -- we're seeing, very comfortable. We -- we have the capital to acquire. We have the infrastructure to support the acquisition, and our patience is at a high level. We -- we don't have a need to acquire. We will -- we will only acquire it if the acquisition is right for this Company for long-term growth.

All right. And then -- now when you just said that -- you are no longer just a coat company. Does that mean you have more and more companies coming to you and saying while you guys do well with the dresses here is more -- here is more products here is more licenses.

In a form, they either come to us, or we go to them. And there is not a question as to whether we are capable of producing it. We have proved that out with Sean John on the dress side. We have proved it with Ellen Tracy, we've certainly proved it out on the Calvin Klein side. So if we were to go to our current roster of licensors, I don't believe we would have an issue as to capability of performing on any category. The bigger question is -- is the category right for the brand? And we take that into consideration before we approach a licensor.

Okay. Great. And then it sounds like the Exsto business is doing a little bit better, is there anything in particular in terms of the merchandising and should we be looking at door expansion along the men's or boy's side or anything like that?

The boy's side is doing well. It would be an overstatement if I told you that the men's side was doing well. I'm not certain I would lead you to believe that there would be door expansion immediately on the men's side. The boy's side it is possible. We started with 50 doors. We're now at 270, and we're in 510 doors on the men's side.

Okay. And you feel pretty confident that Wal-Mart is dedicated to the brand?

All of the conversations that I have had lead me to believe that that is the case. The most current conversation I had was two weeks ago in Las Vegas with some of the management at Wal-Mart, and there's no reason for me to believe that they are not supportive. They seem to be very much on board and we're all trying to find the appropriate solution for Wal-Mart.

And then just as far as the acquisition that you made, the integration, was that easy, or was that taking some time on some of the more economies of scale to be gained?

We haven't gotten any economies of scale yet. Our philosophy is get in there, let them operate in their form. View the capacity of the infrastructure and then either support it or eliminate some of the duplication of process. So we're -- we're currently at the evaluating stage. We have not capitalized on the synergistic value of the acquisition.

Just last question, just about the weather, do you do any or refer to any weather forecasts that are long term or look in to the wind in anyway.

Quite honestly, I listen a lot, and I watch the news a lot, but I do personally, I do not subscribe to any of the weather forecast services.

Great. Thank you very much.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) We'll go next to Eric Beder with Brean Murray.

Good afternoon.

Hi, Eric.

Could you talk a little bit about the sports licensing division? How that's been doing and what are the seasonal components of that?

Our sports license division is running low single-digits ahead of last year. And if we evaluate why, I would say we are doing an incredible job. We -- we lost a tier of distribution in NFL Properties, which had we been able to anniversary that, we probably would be at about a 20% growth pattern on the sports license division. Our baseball business is -- is excellent, it's running double digits ahead of last year. Our NFL business in the sector that we're permitted to distribute to is running ahead. Our private -- our corporate premium business is doing in excess of 15% better than last year, and our women's initiative is, actually from a low base is on fire. We're doing extremely well. We see great growth potential or our women's initiative.

Our collegiate business is continuing to mature, we continue to get more opportunities in sectors of business well beyond the outerwear area. So we're comfortable with management. We're comfortable with our margins, our product is proving to be premier in sports licensing. We -- we are the stand out in most cases when it comes to outerwear. And we -- and that's an area that we aggressively look for an acquisition. We can use an acquisition in that sector.

Cool. In terms of Ellen Tracy for next year for the dresses, what do you think the opportunity is? Is this an opportunity that could be as big as Calvin Klein? How do you look at the size in terms of Ellen Tracy?

I'm not certain it is as big as Calvin Klein, but I think it is a significant opportunity. We -- before we signed this deal, we did our market research. We spoke to retailers, and there's clearly a reception for the brand at the department store sector. And maybe for the future there there might be possibility for a direct retail with the brand.

You talked before about how the -- this kind of a deal gave you the potential to have at least two licenses and one of them was Ellen Tracy, is that still a case that you believe you would add another license, you'll increase the infrastructures even more or how do you look at that?

I'm sorry, your question -- Jessica Howard did not bring Ellen Tracy to us.

No.

Post acquisition we negotiated with Liz Claiborne for the brand, it was not part of the Jessica Howard acquisition. We put the Ellen Tracy brand into that world. When we acquired Jessica Howard there was a component that we didn't go forward with. It was called Positive Attitude, and the team that managed Positive Attitude is now managing the Ellen Tracy brand. And they do have the capability of adding additional brands under that umbrella.

Okay. Could you talk a little bit about the Guess business. The designer business in general, but how has the Guess business done specifically?

If I were to choose an outerwear brand today that's performing best at retail, I would tell you that it was Guess. I was just on the phone with a retailer that said they have 11% of their inventory in outerwear is Guess and it's generating 32% of the sales on 11% of the inventory. Their styling is right. The quality is great. The price is right. And the brand is hot. We -- we -- this is -- this brand came us to through an acquisition. It's being managed well. The acquisition is pretty much fully integrated in to the G-III world, and it's gotten better, so we're very, very happy with the performance of Guess, more so on the women's side, we have greater distribution than on the men's side. But even the men's business at Guess is growing at a double-digit rate over last year, and we're getting more participation on the direct Guess store business where the -- the retail venues that Guess holds are -- they have become much more supportive of the coat sector, and that's working out very, very well for us.

Great. Congratulations and we look forward to a solid year.

Thank you for your questions.

Thank you next we'll take a follow-up from Todd Slater with Lazard Capital Markets.

My follow-up was answered thank you.

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

I thank you all for tuning in and being part of our G-III world. Thank you, very much, and have a good afternoon.

That does conclude today's conference. You may disconnect your lines at that time.