G-III Apparel Group Ltd (GIII) 2008 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 2008 earnings conference call. Today's conference is being recorded. (OPERATOR INSTRUCTIONS). I would now like turn the conference call 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. 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 disruptions from acquisitions and general economic conditions, as well as other risks detailed in the Company filings with the Securities and Exchange Commission. The Company assumes no obligation to update information in this call.

I will now turn the call over to our Chief Executive Officer, Morris Goldfarb.

Good afternoon and thank you for joining us to review our third-quarter results. With me today are Neal Nackman, our Chief Financial Officer, and Wayne Miller, our Chief Operating Officer.

I'm pleased to report that business trends for us at retail are strong, and we are leading our departments in sell-through rates which continue to accelerate. Our products are performing well across all the major tiers of distribution. As a result, we are confident in our fourth-quarter and full-year plans.

Net sales in the quarter were $271.2 million, up 10.8% compared to the year ago level. This is driven by strong outerwear sales and by continued increases in sales of dresses. For the nine months, net sales were up 18.9% to $390.2 million. This strong performance comes despite tough weather and a challenging market. There are a few reasons why have we have been able to operate at a high-level.

First, a great assortment of brands. Our Calvin Klein businesses continue to lead the way for us with strong increases in net sales from last year's quarter. We also had outstanding performances from Guess?, Cole Haan and Kenneth Cole men's and women's outerwear businesses. We are in a very strong contemporary market cycle, and our product assortments for Guess? and Kenneth Cole is setting the pace at retail for this consumer.

Young and edgy, as well as luxury, were good areas of business for us. Our fashion brands, in addition to our sports licensed brands and private-label programs, gives us strong balanced business.

Second is our exceptional design merchandising and execution abilities. We have a developed world-class operation that has happened over the past several years. We have a designer and merchandising department that can work effectively with any tier of distribution. We have the ability to sell Wal-Mart, as well as to Neiman Marcus and everyone in between.

Additional opportunities for private-label dress and suits are happening as a result of our new competencies. This makes us something of a rare breed in the apparel industry and enables us to reach a level of diversification that many companies find elusive. We have built a global sourcing operation, consistently producing high-quality product at compelling price points. Our sourcing leaders travel the world, further diversifying our sourcing in India, Sri Lanka, Vietnam and Eastern Europe.

As some of our long-term shareholders know, this is no easy task and took many years to achieve. We are very proud of this accomplishment and consider our sourcing operations to be one of our core strengths.

We have also developed the ability to smoothly integrate acquisitions, which is now and will continue generating additional opportunities for growth. I'm proud of our team for their planning and execution with respect to our recent acquisitions.

Jessica Howard is proceeding well, and we continue to expect to see accretion from this deal in the first 12 months.

We continue to work towards achieving our goal of developing G-III into an all-season diversify business. We're excited about our prospects and are pushing forward constantly. We expect to see continued strong rates of growth for both sales and earnings next year and to further reduce our degree of seasonality. Evidence of this is already taking shape as we look to our first-quarter bookings, which are almost double those of a year ago.

I will reserve some comments for closing, but I would now like to hand over the call to Neal Nackman, our Chief Financial Officer.

Thank you, Morris. Firstly, the quarterly review. Net sales for the quarter were $271 million compared to $245 million last year. Net sales of licensed apparel in the quarter increased to $193 million from $141.6 million, and net sales of nonlicensed apparel in the quarter decreased to $78.2 million from $103.1 million in the prior year. The increase in net sales of licensed apparel was primarily outerwear-driven. We had nice improvements in our Calvin Klein, Kenneth Cole and Guess? brands.

Calvin Klein dresses also showed large increases as the line was new last year, and we shipped only one month in the year ago quarter. Net sales in nonlicensed apparel declined as our customers continued to shift their focus to branded products, and as we have previously indicated, we did lose a few private-label programs in outerwear.

Our net income for the quarter of $23.8 million or $1.41 per share compares to net income of $23.3 million or $1.59 per share in the same period last year.

The prior year's net income per share was positively impacted by the reversal of $950,000 or $0.07 per share of tax reserves upon the completion of a federal income tax audit. Also, net income per share in the current quarter was impacted by a 15% increase in weighted average shares outstanding primarily as a result of our public offering in March 2007.

Our gross margin percentage was the same in both periods, 29.6%. SG&A expenses increased $6.8 million to $36.5 million for the quarter from $29.7 million in the prior year's second quarter. This quarter's expense increases are primarily attributable to expenses associated with the Company requiring (inaudible). Personnel costs associated with the growth in our Calvin Klein women's suits and dress initiatives and costs associated with the new Sean John sportswear program.

Advertising costs increased as a function of increases in sales of our licensed product since our advertising obligation under our license agreement is generally based on a percentage of sales. And lastly, shipping and warehousing costs were up as a result of our increased sales volume.

Turning to the nine-month period, for the first nine months of fiscal 2008, we reported net sales of $390.2 million compared to $328.2 million last year, an increase of 19%. Net sales of licensed apparel increased to $275 million from $197.6 million, and net sales of nonlicensed apparel decreased to $115 million from $130.6 million in the prior year's period. Net sales of licensed apparel increased more significantly as a result of increased outerwear sales.

We also achieved significant increases in our Calvin Klein dress business. Similar to the impact on the third quarter, net sales of nonlicensed apparel decreased in the year-to-date period.

Net income for the nine-month period increased to 29% to $16.4 million compared to $12.7 million in the year ago period. Net income per share for this year's nine-month period was $0.99 compared to $0.93 in last year's comparable period. Again, keep in mind that the prior year's net income per share was positively impacted by the reversal of tax reserves of $0.07 per share. And again, similar to the third quarter, our net income per share in the current period is impacted by a 21% increase in weighted average shares outstanding.

Gross margin percentage for the nine-month period increased to 28.1% from 27.4% in the prior year's period. SG&A expenses for the nine months increased $13.5 million to $75 million from $61.5 million in the prior year's period. This increase is attributable primarily to expenses associated with the business we acquired in May 2007 against increased personnel expenses associated with our new initiatives and both new housing 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 reiterating our previous guidance and continue to expect to achieve approximately $510 million in full-year net sales volume, which would equate to a 19% increase over the prior year. We continue to forecast full-year EBITDA between $38.1 million and $39.5 million or an increase of 18 to 22% from the prior year. We are continuing to focus net income per diluted share of $0.98 to $1.03 for the current fiscal year ending January 31, 2008.

Our net income per share in the prior fiscal 2007 was $0.94, which again includes $0.07 per share for the reversal of tax reserves. Our outstanding weighted average outstanding share account is expected to increase approximately 22% to approximately 17 million shares for this year, primarily as a 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.

I will now turn the call back over to Morris.

I hope you're getting a good sense of the strategic progress we are making and the financial benefits that are associated with it. We have got many opportunities for growth in our Company. We can continue to increase the penetration of some of our key properties. We will reinforce our existing categories with new licenses, and we will develop new categories. There remains a lot of opportunity to improve our operating margin, particularly in our traditionally lower volume quarters. We intend to deploy capital thoughtfully and believe that we can find additional acquisition-related growth opportunities.

In light of some very challenging market conditions, I am very proud of our accomplishments. I would like to thank our employees for all their hard work and successes and our shareholders for their continued support.

Operator, we are now prepared to answer any questions.

(OPERATOR INSTRUCTIONS). Elizabeth Montgomery, Cowen and Company.

Congratulations. Very good quarter.

Thank you.

I had I guess my first question, Neal, could you speak to inventory and how you guys feel you are positioned relative to any replenishment opportunities in Q4 and then also looking into the spring?

Sure. Our inventory is up about 25% compared to last year, which is really consistent with what we're forecasting in terms of fourth-quarter sales. And as we look across the divisions, including the new divisions and the new businesses we have, we are very comfortable that we will be capable certainly to meet the existing orders and then hopefully to take advantage of some opportunities that may present themselves as we continue to ride the cold weather.

And could you guys give an update on the Sean John juniors line and also on Exsto, maybe specifically with some of those new fixtures that they were putting in or testing in some of the doors?

Sure. The Sean John junior business remains pretty much a work-in-progress. We consider this an investment in the future. We are in 141 doors. The sector has been and continues to be under pressure. We are hopeful that this does succeed. We're working at it, but today I cannot give you extraordinary news on it.

The Exsto business, as we have all read, Wal-Mart is consistently under pressure to improve their apparel sector. We're working closely with them. I was in Bentonville, Arkansas last week, reconfiguring store counts and trying to build and manage this business appropriately. They are very supportive. We have decided that the appropriate thing to do is cut back the door count to properly control the distribution and get the formula correct. We believe this is a really good business going forward. But today again I cannot tell you that we are posting any profits in that sector.

Okay. Thanks very much and congratulations.

Todd Slater, Lazard Capital Markets.

This is actually Jennifer Davis in for Todd. Congratulations on a great quarter. Could you talk -- I think I missed a little bit of it. Did you say that Q1 bookings were up 100%?

Yes, they are.

And is that for everything?

That is a combination -- that is the entire Company. (multiple speakers). Our Company orderbook is double -- is this year double what it was a year ago.

Okay. That is great. On Exsto how many doors are you cutting back to?

We're cutting back to approximately 350 to 400 doors. We're doing the planning as we speak.

And how many doors were you in?

We were in as many as 600 at one point.

And then could you talk a little bit about markdown reserves in Q3 and Q4? I guess what markdown reserves did you take in Q3 and how does that compare to last year?

Actually part of our normal process is to look at the history of where we have been with accounts. We look at the current business environment. We look at how we're selling into different accounts. There is nothing different with the process of providing markdowns. We provide them as we shipped. We feel they were appropriately provided for all of the sales we have incurred to date, and then, of course, there are additional provisions that we expect for Q4 as well.

We believe that we are comfortable and appropriately accrued for on the markdown reserves. We review them regularly. We do understand the pressure at retail. Our management team fits with finance at this stage of the game pretty much every week to review any problems. So I do not believe there should be any surprises in our business.

Okay, great. And then your guidance for Q4, it looks like the high end of the guidance assumes a flat net income. So you are either expecting income down or flat. Is that because of the increase in SG&A expense for the new acquisitions?

That is right. On the low side, we are going to be marginally profitable or breakeven, and we felt we got some upside if things go well for us.

Okay, and then one last question. How many doors are you in now with Calvin Klein dresses?

About 390 doors, about almost 400 doors.

Okay. And last year you were in about 250 when you started?

Well under 300 doors, correct. The door penetration in this sector is incredibly important. In some cases we eliminated some of the doors because they were inappropriate. So we believe we have some quality doors that are turning the product well. We're outperforming the department average week after week, and today I would be comfortable in telling you we're one of the premier brands in the dress area with Calvin Klein, and our bookings going forward look very strong. Our retail support is very strong, and this turns out to be a very good license for this Company.

Great. Thanks. Good luck, you guys.

Jody Kane, Sidoti & Co.

Could you just talk a little bit about the share count for the end of the year, where we should expect that?

You know, in terms of Q4, we still do a lot of outerwear shipping in Q4. The end of Q4 we will start with -- we will start to get some decent dress business, and you will see in terms of our model, you can sort of lay out what Q4 results will be. And in terms of share count, we expect in terms of a profitable quarter to be at about the same share count that we were for Q3.

Which is much -- Jody, which is much higher than last year, of course.

Yes, okay. So net income was going to be up closer to 30 to 35%? Is that correct?

Our forecast in net income for the full year is the 16.7 to 17.5, and we are 16.4 year-to-date.

Okay. And then the dress business, if you would not mind expanding a little bit more or talking a little bit more about what you see in the private-label side of the dresses with Jessica Howard and Industrial Cotton and where that is helping you get some new private label business?

Well, it is easy to get excited about the dress business. What we set out to do and this strategy was explained about a year ago. We felt that -- not thought, we had strategized in building the dress business very much the way we have our coat business. We have an assortment of licenses that fits within different venues, retail venues, different tiers of distribution, and then take the strength of the creativity that we're producing for those brands, and that would be today I would say it is Calvin Klein and Ellen Tracy and the acquisition of Jessica Howard brought along Eliza J., which is a strong brand at retail as well. All these brands enabled us to go after some private label business which we're doing now. The strength of Calvin and the attention that it has brought to our Company brings private-label requests on a regular basis.

So I would say that our dress business is going to grow significantly, both the branded and the private-label sector. Where we have proved out our ability of producing product that is fashion right, and we're certainly able to produce it where it is priced right. And that has been recognized and applauded in the marketplace.

Alright. And then do you plan on adding any new licenses? I mean are you actively out there seeking new licenses from different brands that you already do business with in outerwear or even new brands that you have never done business with?

Again, our strategy remains consistent. We're attempting to further penetrate the trophy brands that we hold in other categories. We're negotiating deals regularly, and some happen and some don't. But we are not just after any license. We are after the appropriate licenses for our Company, and we continue to look for those as well as we look for acquisitions and try to mature and grow our core businesses. We do not lose sight of our coat business. You know, it is very key. In a difficult coat year, and we all recognize the weather patterns, we are having a very good coat year.

So we do not lose sight of what got us here. We work very hard at maintaining it, and then we take care of the pieces on the side very carefully.

Okay, that sounds great. Just last question. Are you still expanding the number of products, the number of dress styles with your existing licensees?

Styles are chosen very carefully by design. It is not necessarily expanding the SKU count. It is choosing wisely and in many cases trying to produce less SKUs, produce them effectively and get them to the retail venues that can showcase them and sell them appropriately. SKU count does not necessarily grow our business.

Eric Beder, Brean Murray.

Could you talk a little bit about the sports apparel business and how that will work in terms of I guess sports licensing business and I guess in terms of the TOUCH business also?

Our sports business is doing quite well. We lost a little sector -- not a little -- we lost a sector of our business. Part of our distribution in NFL Properties was taken away. We believe that this could be temporary. With that, we continue to grow that business. That business is very profitable. We are gaining market share in the categories that we are involved with. We're growing our collegiate business very well. Our baseball business is strong. We were given additional rights in collegiate fairly regularly as we request them. As we find the need for it, we find that our college license business and the licensors cooperate with us.

The TOUCH business with Alyssa Milano is doing very well. We have some opportunities to retail venues that could make this a large business. We believe that within the next 30 to 45 days we will have our answer on how big that business can grow to.

So we're pleased with that business. We're looking for not necessarily licenses in that area. More so looking at acquisitions in that sector to additionally grow it. We've got a great management team. It is consistent. We shuffled some things around several months ago where Wayne Miller became effectively the VP that it reports up to, and that was a great change.

Great. In terms of capacity to do additional licenses, where is your capacity right now to take -- how many more additional dress licenses can you take on (multiple speakers) if you have to buy more talent?

This environment, and I guess the environment we would refer to some of the larger companies in the apparel sector, they are going through their own crises. And that in itself gives us the talent pool to draw from. There is a great deal of talent that we can attract if the brands are right and if we decide that we're growing that business today. I don't believe there is an issue at all in getting the talent.

The factories to produce are a non-issue. There are many many sewing, wonderful sewing machines throughout the world that can produce the product, and fabric is not a problem to get.

So if the demand is there, there is clearly the ability of feeding that demand and feeding it very rapidly.

And in terms of new items, where are we? How is Ellen Tracy looking for next year in the dress world?

We just received some wonderful orders from Dillard's. I would say maybe the bigger question is, where is Ellen Tracy as a brand for next year? And that would be the only uncertainty that we would look at. We have a licensing agreement with them. As you all know, Liz Claiborne owns that brand. And the decision has not been made as to where that brand goes.

We are comfortable in our situation with the brand, and I think if that brand was taken to a lower tier, we could manage it. We believe it will remain in this tier of distribution. So it is a nice business for us. It is a nice growing business, and for the short-term, the short-term being the length of our license which is another couple of years, we see no problem at all.

Okay. A final question. I know you have not given guidance for '08, so I don't want to know the numbers. But you have talked about being profitable all four quarters, and you are profitable this year in two quarters. Could we look for next year or take up another -- what should be the next quarter where you should be profitable, and do you think that is something that could happen potentially in '08?

The two quarters that we are profitable in are the third and fourth. So clearly I can only give you one or two that are the possibilities. We're working hard on Q1. We see some major improvements. There is a revitalization of the coat business for first quarter. We have not had a real first-quarter coat business for years. And today I would be comfortable in telling you that there is a first-quarter coat business. That is really good news for us.

The other categories that we manage -- that is is the suit business, the women's suit business, the dress business and the sports business -- they are clearly first-quarter businesses. So if we improve on the coats, we further penetrate the dresses, there is a suit business that improves to a degree and our sports business maintains, I would tell you that there is a good possibility that there is a profitable first quarter and second quarter follows suite. There is a second-quarter possibility as well.

Again, I don't put a lot of weight on Exsto today, but the early initiatives we had planned first and second-quarter success on Exsto. And if that happens, we have got a really well rounded business.

That is what we strive for. We have achieved pretty much everything that we have told the street for I would say the last 36 months. And there is no reason to believe that we are not down the path of a nonseasonal business, a 12 month a year business.

Great. Congratulations and look forward to next call.

Jim Duffy, Thomas Weisel Partners.

This is actually [Christian Booth] calling. Jim is unfortunately traveling in Europe today. I had a quick question around bookings and excluding the acquired businesses what bookings look like. If you can give a little color on that, I would appreciate it.

The acquired businesses that we would refer to that are current would only be Jessica Howard.

Okay. And is that a big Q1 business?

That is a reasonable Q1 business.

Is there any way you can help me sort of back out what the bookings would look like excluding that?

We really do not break it out.

Okay. Alright. And then I'm wondering if you can give a little color on who you think you might be taking share from in the outerwear business given that you guys are clearly outperforming some of the other guys out there?

I think by our skillset in identifying fashion, we're creating additional demand. I'm not sure we're getting market share from any one company. I think we are good at what we do. Our Calvin brand supports the needs of the retailer in the form of product and pricing. A highlight this year was our Guess? business. That grew incredibly over just a 12-month period because of the ability to identify the appropriate fashion and bring it to market in quick form.

Kenneth Cole. Kenneth Cole is a very, very strong brand for us. This year our business at Kenneth Cole will grow -- I don't have the number in front of me, but I would be comfortable in telling you it is very close to 20% compared to last year.

So we are comfortable in pretty much telling you that we choose wisely in the brands that we get, we choose wisely in the talent that we hire, and we incorporate with our retailers as well as our vendors to be different than the rest of the field.

Alright. Thanks a lot. That is very helpful. Congratulations on a nice quarter again.

(OPERATOR INSTRUCTIONS). Todd Slater, Lazard Capital Markets.

I had one quick follow-up. Could you talk about what percent of the business this year is going to be outerwear?

Yes, we will probably be about 80% outerwear this year, which will be down from about the low '90s last year.

Okay. Can you say what percent is dresses?

We have not been breaking out the other product categories.

Elizabeth Montgomery, Cowen and Company.

Morris, I guess just following up on the comment you made about that now being more of an outerwear business in Q1 than you have seen for quite awhile, could you just explain that to me a bit further? Because I thought that Q1 was still mostly you know like clearance from Q4. But if there's an opportunity to introduce more spring coats or something, I'm just uncertain.

Well, Q1 we start to ship actually in late fourth quarter, and it goes into the first quarter. The excitement that surrounds it is stronger than I have seen as I said in years. We have a raincoat business. We have a lightweight jacket business. We have some fashion pieces. We have some novelty leathers that are all playing into what fashion is calling for. The retailers are receptive both at the department store level, as well as the specialty store level where we do private-label. So I think that we are going to have a strong first quarter in our coat business.

So there had been -- there were years in the past where the retailers did not want to do any like more fashion outerwear pieces like raincoats and stuff in that quarter?

Well, traditionally the entire department turned into swimwear. So there was not even the opportunity of doing that. The followers in the industry, the [mitten and mask] gear, as well as some of the specialty stores, if they did not see it at the department store level and it was not promoted, they got the message that it was out of fashion. And today there is a different view.

Alright. That is helpful. (multiple speakers)

Clearly a part of the wardrobe.

That makes sense. Thank you.

And there are no further questions at this time. I would like to turn the conference back over to our speakers for any additional or closing remarks.

I thank you all for taking part in our conference call, and thank you for being patient with us. Have a good day.

Thank you, everyone. That does conclude today's conference. You may now disconnect.