G-III Apparel Group Ltd (GIII) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the G-III Apparel Group Ltd. first quarter 2010 earnings call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

I would now like to turn the conference over to Mr. Neal Nackman, Chief Financial Officer of G-III Apparel Group. Please go ahead, sir.

Thank you. Good afternoon, everybody.

Before we get started, I want to remind you of the Company's Safe Harbor language. Statements concerning G-III's business outlook or future economic performance, anticipated revenues, expenses, or other financial items, product introductions and plans and objectives related thereto, and statements concerning assumptions made or expectations of any future events, conditions, or other matters 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, risks of doing business abroad, the current economic and credit crisis, the nature of the apparel industry, including changing customer demand and taste, customer concentration, seasonality, risks of operating a retail business, customer acceptance of new products, the impact of competitive product and pricing, dependence on existing management, possible disruptions from acquisitions and general economic conditions, as detailed in G-III's filings with the Securities and Exchange Commission. G-III assumes no obligation to update the information on this call.

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

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

We've exceeded our financial plan in the first quarter and have made progress on a number of our strategic initiatives. We're continuing to see the benefits of our diversification by distribution channel and the strong mix of brands within our business. I will start with a few highlights for the quarter.

Net sales in the first quarter were strong and rose 54% to $115 million compared to $75.4 million in the year-ago quarter. The growth was driven by the addition of the Wilsons retail outlet stores and the stronger than anticipated performance from our sportswear and dress businesses. Our net loss for the quarter was also better than plan at $0.41 per share. This compares to the year-ago net loss of $0.42 per share and our guidance for the quarter of net loss of $0.48 to $0.53 per share. We saw stronger operating results in our wholesale business with gains in the dress and sportswear categories. Even with the seasonal losses associated with our Wilsons retail outlet stores, which are not included in our year-ago results, we exceeded our expectations.

Inventory is a key factor in this environment. Our inventory is in good shape at the end of the quarter, at $89 million compared to $58 million at the end of the first quarter last year. Of the increase, $21 million is associated with Wilsons, which we did not own at this time last year, and $10 million is associated primarily with the growth in our sportswear and dress business. We expect to enter the fall season with a fresh mix of merchandise which we believe will yield better margins to us all -- much better than last year. Our order book at the close of the first quarter was tracking with our full-year plan. We're 75% booked to plan for the remainder of the year which is comparable to this same time last year.

As we look at our business, we think the pieces are in place for us to have a good year. Our sportswear and our dress businesses are putting up some impressive results. Our sportswear brand is Calvin Klein, and our dress business is composed of offerings for Calvin Klein, as well as for our own Jessica Howard and Eliza J. brands, and for our licensed Ellen Tracy and Jessica Simpson brands. We've put together compelling designs and offered product at price points that reflect great value, partly as a result of improvements in our buying and our sourcing. We're seeing very good sell-through rates and significant growth both within these existing doors and through door expansion. We continue to believe that we're really just scratching the surface of our ultimate opportunity in these categories, and we are really pleased with the spring season performance.

Based upon our recent performance we expect further growth for dresses and sportswear in the coming fall season. We also expect our suit business to show improvement this year. The results we're achieving validate our abilities in these relatively newer businesses and we're excited to diversify through adding new programs and possibly new brands to the mix. We've reduced our expenses and streamlined our infrastructure in some areas but continue to devote increased resources to the dress and sportswear categories. These businesses hold a great deal of promise for us. In our own Andrew Marc business we've broadened the design and price point and expect to see good performance.

We have also continued to expand the brand. We've signed two licenses, one from men's cold weather accessories and another for women's handbags. This builds upon our women's footwear and men's accessory licenses. We've selected excellent licensees. While these new categories will obviously take time to develop, the brand is strong, and we believe that retailers will support significant expansion into a variety of new areas. I'm also pleased to note that this fall we'll be launching Marc New York dresses into retailers such as Nordstrom's, Lord & Taylor, and Bon-Ton.

We've made improvements since acquiring Wilsons last July. We're clearing old accessory inventory in preparation for what we think is an appropriate mix for this year and expect to see an improvement in margin and sales by the second half of the year. We've adjusted our infrastructure, created a much better buying and merchandising organization, and have many talented people in place. We believe that this will become an important and profitable piece of our business.

With respect to our wholesale outerwear business, our fashion brands continue to book well. We really believe that in times like these consumers are drawn to strong brands that are designed well at compelling prices. That has been our formula for success. We're particularly pleased with the reaction we've seen to some of our key license brands in this category including Calvin Klein, Guess?, Kenneth Cole and Sean John. We're also excited about the Andrew Marc assortment you will see at retail this fall.

Our collegiate and pro sports licensing business is planned out for this year as we've been able to get some better costing overseas and expect improved margins in this business. In this environment, we've been really careful with our sales plan and are focused on driving gross profit. We've cut our expenses where we deemed appropriate in order to protect and enhance our operating profit. We've taken executive pay cuts and reduced professional fees and tightened oversight over discretionary items such as travel and entertainment. Our organization has been very accepting of the adjustments to our business that the market conditions have made necessary. While cost reduction is important in this environment, we also wanted to preserve our opportunity to grow and gain market share. We think we've accomplished both.

Challenging times and significant opportunity go hand in hand. We believe that we have positioned ourselves to take advantage of the long-term opportunities that are presenting themselves in this environment.

Thank you. And I will now turn the call over to Neal Nackman to review the financial results.

Thanks, Morris. Net sales for the quarter ended April 30, 2009, were $116 million compared to $75 million in the year-ago first quarter. Our first quarter continues to be our lowest sales quarter. However, we did see good increases in wholesale sales this quarter primarily as a result of non outerwear sales in our licensed segment. Increases in net sales of licensed apparel were primarily the result of increased sales of Calvin Klein dresses and the launch of Calvin Klein women's sportswear. Net sales of non licensed apparel decreased slightly in the quarter.

Net sales of our retail operations were $27.2 million in the quarter, almost all of which are attributable to our Wilsons retail outlet stores. The Wilsons acquisition occurred during the second quarter last year and accordingly our first quarter results last year did not include Wilsons. We had a net loss of $6.8 million for the quarter, or $0.41 per share compared to net loss of $6.9 million or $0.42 per share in the year-ago quarter. Gross margin percentage increased during the quarter to 26.9% from 23.3% for the prior year's quarter, primarily because retail gross margins are higher than wholesale gross margins in the rest of our business. Gross margin in our retail segment was 38.7%. Excluding our retail business, our gross margin percentages were similar to the prior year.

SG&A expenses, exclusive of depreciation and amortization, increased to $40.9 million from $27.2 million in the year-ago quarter. This increase is primarily attributable to expenses associated with the acquired Wilsons business and to a much lesser extent advertising and promotion expense increases associated with the increased sales from Calvin Klein dresses and sportswear. Both of these increases offset reduced personnel costs resulting from our previously discussed cost reduction program.

Our balance sheet continues to be healthy. Our debt levels are only slightly ahead of last year and our working capital has increased by approximately $10 million. With respect to our second quarter guidance, we are forecasting sales of approximately $135 million this year compared to $113.5 million in the comparable period in the prior year. We're forecasting a net loss of $4.8 million to $5.4 million, or between $0.28 and $0.32 per share, compared to a net loss of $3.9 million or $0.23 per share in last year's second quarter. The increase in our net loss forecasted during this year's second fiscal quarter is primarily attributable to the anticipated incremental loss realized as a result of the seasonal nature of the Wilsons retail outlet business which was included in our results for only the last three weeks of last year's second quarter. And the addition of continued shift in outerwear sales to more closely match the retail selling season.

That concludes my comments and I'll now turn the call back to Morris for closing remarks.

Before we open the call up for your questions, I want to reiterate that we are operating well, capitalizing on areas of strength in the marketplace and expect to put up good results for the year. We've done an excellent job of adjusting our business to reduce risk, protect profitability and capture market share. We have significant competitive advantages in terms of scale, capabilities, and our financial position that are enabling us to drive value to our customers and ultimately to the consumer. Our organization is forward thinking, disciplined, and highly capable. We are well down the path towards building a larger, more diversified apparel company. We have an excellent track record of building businesses, helping to build brands, and executing on a world-class level. Thank you. We're now ready to take your questions.

(Operator Instructions) And your first question will come from Edward Yruma with Keybanc.

Thanks very much for taking my question. You mentioned that excluding the impact of retail gross margins were flat yet you also talked about some costing benefits you were seeing. Can you talk about the impact in future quarters in your potential to drive gross margin expansion from lower costing?

We're seeing it in our bookings, as we said earlier. 75% of our order book relative to plan is in-house. Our margins have improved, and we believe we will end up with improvement in margin at the end of the year. Our overseas organization is very much in tune with the needs of the US market, and they've been negotiating very carefully. We've produced product in a timely fashion and gotten the benefits for it. The strength of our brands generally enable us to produce early. We get great guidance because our orders are booked early, and we believe, again, that our shareholder will derive the benefit of all this.

Great. And you talked about upside relative to your previous guidance and the strength in wholesale. Is it fair to assume then that Wilson has performed in line to your expectations?

Wilsons -- currently we've been in liquidation mode for a good deal of our accessory inventory, and I can tell you that neither top line nor bottom line they've performed according to plan. We believe that we can break even this year and possibly make a little bit of money with Wilsons. But that all comes in -- the jury really comes in for that business in fourth quarter, so it's very difficult to forecast it. We're playing it conservatively. We're managing our inventory differently. There's a good deal of private label advantage that Wilsons is taking advantage of right now. Our design -- the blended design talents of Wilsons and G-III are building a much better product. We're traveling, we're executing well, and we believe that we will have a reasonably good year with Wilsons.

Great. One final question. Have you seen benefits from the pricing changes you implemented in the Marc New York line?

This is a very good point. Thank you. We've created another tier of retail price points with Marc New York. We've gotten great reception at department store sector. Not all of our orders are in, but we will exceed our initial plan in Marc New York this year.

Great, thank you.

Thank you for your question.

And from Lazard Capital you will hear from Todd Slater.

Hi, it's Diana Katz for Todd Slater. Great quarter. I have a few questions here. You talked about brands you're looking to add to your mix. Can you talk about some of the brands that are coming before you and what categories also and how you're looking to fund those?

There are brands that we're looking at in the dress area and the sportswear area. There's nothing that I would plug into my numbers for this year at all, but this is normal business for us, this is the business that we're in. We've managed to get better than the 50% market share on the coat floor of most department stores. We're headed down the same path with dresses. We believe, as we mature our sportwear business, which, by the way, has launched extremely well. We believe that we have more doors to service than our predecessor did and they were at it for maybe six years, and we believe today we have double the doors that we're servicing than they did at their best. So as we mature that business, it will be likely that will you find us in other areas on the sportwear floor. As we get that down to a science and do classification you will find that those are the classifications we would concentrate on to build new brands, or sign new licenses.

Great. Can you also comment on perhaps your order book in the suit business? I know that category had been challenging. You're now expecting this business to improve this year. Can you talk a little bit more about that?

Yes. We think we've found a pretty good solution for the suit business. We're shipping suits separate that are retailing very well. Our designs have changed. We went through three changes in design leadership. We think we have the appropriate one now. And there's been a turnover in management. Denise Miller, who just joined our company, is spearheading that initiative. And our costing is also changed. Our margins are improving, the designs are improving, and the reception at retail is improving.

Great. Also on SG&A, how should we be looking at SG&A leverage for the remainder of the year? It looks like fourth quarter is your easiest dollar year-over-year growth comparisons. Should we be continuing to look for an improvement in SG&A rate each quarter this year?

In general, Diana, what I will tell you is that we're still not anniversary with the Wilsons' SG&A which is really the single largest driver. So we'll certainly have a big lurch in Q2. The only other thing that's significantly going on as far as the SG&A in our business is that we're out building Calvin Klein sportwear initiatives this year so we've got some cost increases. But I expect that those will continue to be offset to some extent by the payroll deductions we've had in place in the past.

Great. Thank you very much.

And moving on, we'll hear from Eric Beder with Brean Murray.

Great quarter, guys.

Thank you, Eric.

Before I ask some real questions, just some housekeeping questions here. What should we look at for the tax rate going forward?

I think, Eric, if you plug in 42% you'll be in reasonable shape.

What should be the annual D&A?

The D&A should come down from last year.

Okay. Could you talk a little bit about the Calvin Klein activewear business? How is that doing and how is that to your expectations?

It's doing okay. We don't have a very large number in for the activewear piece. Ran into a little bit of hurdles. We thought we'd have a much greater reception at the sports specialty stores, and it's a slower walk than most of the other categories at Calvin Klein. We are opening up many specialty stores throughout the country and in Canada. We're having success, more success now than we had a year ago. Our product's improved, the door count's increased, but it is not the largest piece of our Calvin Klein business. It's well managed, well sourced. We have opportunities on the sourcing side today. And what has happened, interestingly, is that we're developing a private label piece of business that is an offshoot of that Calvin Klein line. So benefits are derived every time we launch something with a license.

In terms of Calvin Klein sportswear, how much more penetration, in terms of spring versus fall, how much more depth are we going to see in terms of SKUs and doors and are we seeing any penetration for the different seasons.

Currently we're in approximately 275 doors, and we believe before the year is out we'll be in approximately 400 doors. The door penetration we're working on now, we're working on fixturing concepts which we have not matured yet. We've not spent the money to fixture the appropriate doors. So we have a long way to go. This has the potential of being the biggest piece of our business. We're comfortable with it. We have great talent leading it and developing it, sourcing it. It's a wonderful team that was put together in record time. So this is a growth area for us.

Great. Finally, what has been the response to the Marc New York line now that you're highly differentiated from the Andrew Marc line?

What we've done is, we've retained the specialness of Andrew Marc at the luxury tier. We fully recognize that there's more pressure on the luxury tier than anything else. But I've learned, through my history in this business, which goes back quite a long way, that if you damage your brand, it's very hard to come back. So we're protecting Andrew Marc, insulating it from the any damage. We're developing great product in small doses. We're not over-supplying it. We are exposing it in the right doors. We're getting the cooperation from our retail partners.

And then we took Marc New York as the diffusion piece and brought it to a Macy's level, and they've received it extremely well. We believe it will be one of their premier brands on the selling floor in the coat area. We're launching dresses. Dresses will be on the selling floor quite soon, actually. We have orders from Lord & Taylor, we have orders from Nordstrom's, we have orders from Bon-Ton, and we believe that we will have orders from Macy's and Dillard's very shortly.

So that business, the dress business, is through Marc New York, if I didn't mention it. And we are now discussing internally the merit of doing Andrew Marc dresses in the small (inaudible) to the luxury tier to continue to expose the brand in different sectors. And the licenses that we have signed will give us additional exposure and capability in spending money in advertising and bringing the brand to the eyes and ears of the consumer. So we're excited by that brand. Our view internally is that it was an excellent purchase for this company.

Great. Again, congratulations. Thank you.

Thank you.

The next question will come from Jim Duffy with Thomas weevil Thomas Weisel Partners.

Thanks for taking my question. Morris, I'm wondering, can you comment on any variances you're seeing in the tone of business between the different channels?

I'm sorry, I didn't hear you.

Variances

Oh, variances in different channels of business?

Yes, in terms of the tone of business.

The tone of business, as far as we're concerned, I would tell you that we're down in the sector. It is more the mass channel of distribution, and that is not indicative of performance at retail. It's simply some of the misses that we have internally. Our private label business, and some of our key mass and moderate retailers are off. The luxury tier is a struggle. There is reception.

There needs to be built-in markup because we are cognizant of the fact that there will be a major give-back. The consumers become very much acclimated to mark-downs and sales, and I think we're appropriately reserved for it. But it it will be a tough sector, yet it is a smaller sector. It's one that we're a little cautious in. We're not over-supplying it, as I said, with Andrew Marc or Cole Haan. We're going to leave them hungry in spite of its small business. So if I gave you anything, I would tell you that our department store business is probably the best. Mass is troubled maybe because of our miss, and the luxury tier is not a very large business.

That's helpful. And then in terms of your contribution to profitability, the department store would be the strongest channel for you.

Yes. Historically, it has been, and it will continue to be.

Congratulations on your success in dresses and sportswear. Shipping gears to outwear a bit. You said 75% of the book is in for this year, which is consistent with last year. Is that to say bookings for outerwear are flat with last year?

Bookings in outwear are close to flat. We're down a little and that's really the private label piece that I described. But we're very close. Our order book is 75% into plan as it was last year. And obviously the plan this year is a bigger plan than last year.

And have you seen any sort of change in the sales process there? Any reluctance to book, requests from retailers to take more back stock inventory, anything of that nature?

No, not at all. We've had some very high level of conversations, and our indicators are that we're going to grow in the departments that we're in. Our orders support that. The cooperation that we're getting is far better than it's ever been. Scale is important. Delivering a product that historically has the retail because of brand, because of value, because of compliance, because of everything that we do right really pays off. We've garnered a major market share in the classifications that we're in and we continue to build it. We're really on offense mode, again, being very aware of what our surroundings are. We're looking at a pretty good year. And a pretty good future.

Glad to hear it. And then, Neal, historically you guys have provided full year guidance after the 1Q call when you had a better view on bookings. Is it fair to say just the uncertainty of the environment is the reason for your departure from that?

Yes, I think it's that. There's certainly uncertainty both at the wholesale as well as the retail level, and that's similar to the trend that I think is going on with a lot of companies in the industry, and we're really no different from the rest.

And final question. At the end of the year, looking at full year numbers, where would you see outwear as a percent of revenue, obviously ticking down the success you're having elsewhere?

My earlier look on -- we've been slowly coming down as a percentage. I think last year we closed at about 70%, total revenue, I think we could be down around 65%, outerwear for the full year.

Okay, thanks so much.

Thank you, Jim.

(Operator Instructions) Next question will come from Mimi Bartel with Telsey Advisory Group.

Hi, guys, thank you. First, I was wondering if I could just get the receivable number for the quarter.

The accounts receivable at the end of April are $52 million, and that's compared against $49 million last year.

Okay, great, thanks. And then just to clarify, in terms of the inventory composition of the Wilsons business, are we still in that liquidation mode? And what is the timing on that, then, and how does the Wilsons' inventory, the complexion there look?

We're no longer in liquidation mode. We were for the entire first quarter. Today the inventory has been pretty much corrected, and that had to do with fashion accessories that needed to be moved out. What we had done as part of our approaches with Wilsons, was we acquired 500 stores' worth of inventory in accessories and thought that we would move through it in a timely fashion, promoting it throughout the year, and the year didn't turn out the way we had expected, and it carried into first quarter. Today I'd say we're fairly clean, and the inventories are much better balanced. It'll be what we believe the correct model in late July, early August, just in time for the new season.

Okay, great. And then just lastly, the gross margin in the Wilsons business, I think it was 38% last year, obviously a bit up in this quarter. How should we be thinking about that? Are there long-term expectations for the gross margin for the Wilsons business in your mind?

We certainly feel that for many of the reasons that we've been talking about on this call and other calls, there's a lot of improvement in gross margins. We stepped in and really have not been able to achieve anywhere near what we originally expected.

So there's no specific kind of target number there?

I think it would be in the mid-40s, mid to high 40s is certainly more along with what our expectations would be.

Okay, great, thank you.

(Operator Instructions) And seeing no further questions, I would like to turn the conference back over to management for any additional or closing remarks.

Thank you for listening to our story, and thank you for your support. Have a good day.

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.