G-III Apparel Group Ltd (GIII) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by and welcome to the G-III Apparel Group Limited second 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 a 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, before we begin I would like to remind participants that certain statements made on today's call and in the Q&A session may constitute forward-looking statements within the meaning of the Federal Securities Laws. Forward-looking statements are not guarantees and actual results may differ materially from those expressed or applied in forward-looking statements. Important factors that could cause actual results of operations of the financial condition of the Company to differ are discussed in the documents filed by the Company with the SEC. The Company undertakes no duty to update any forward-looking statements. 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'll now turn the call over to our Chairman and Chief Executive Officer Morris Goldfarb.

Good afternoon, and thank you for joining us to discuss our second quarter results. With me today are Neal Nackman, our Chief Financial Officer, and Wayne Miller our Chief Operating Officer. We had a good second quarter. Our revenues for the quarter were 135 million up 20% versus a second quarter of last year. Our revenue performance was driven by continued gains in dresses and sportswear, both remain strong businesses for us, as well as net sales from our Wilsons Outlet Stores which were owned for the whole quarter this year compared to 20 days in last year's quarter. Our net loss for the quarter was $0.17, a good performance compared to last year's net loss of $0.23 per share. Please keep in mind that we only had 20 days of Wilsons losses last year as compared to a full quarter's normal seasonal loss this year.

Our order book is consistent with our expectations and we are booked at about 90% to plan which is comparable to last year. In generally posted good results and positioned both our wholesale businesses and our Wilsons Outlet Retail Stores for the upcoming fall and holiday season with what we think is the right mix and right level of inventory. The dress category is one of the hot categories of retail today. Our Calvin Klein dresses continue to increase their penetration in the marketplace as the line exceeds expectations for us and our retail partners. Our Jessica Howard dress line is also exceeding expectations. We believe we're on the right track with the design and placement of the Jessica Simpson dress line are seeing door expansion for holiday and spring. The fall line was showcased in several windows at Macy's Herald Square. Our sportswear business is also strong and our first year of Calvin Klein Sportswear we will exceed our initial expectations. The line is selling well and we're growing both by increasing our turn in existing doors and through penetrating more doors.

For fall of 2009 we expect to be in over 300 doors versus only 150 last fall. Sell-through, margin and door count are the profit drivers of this business and we are pleased with each one of them. Overall our outerwear business is healthy. We have some excellent properties, and although there continues to be some softness in sales and in orders for private label and the luxury brands, the business is very diversified and, therefore, we believe we will perform well again this year. Highlighted brands which have booked especially well are Calvin Klein, Marc New York, Guess?, and Kenneth Cole.

Additionally in our Andrew Marc business we are continuing to build the outerwear business and bringing the dress collection for Marc New York into select distribution for this fall. We've made very good progress in using the Marc New York label to appeal to a wider audience. We've expanded our range of price points to give consumers a lower entry point and an excellent value. We've increased our penetration in department stores. We're protecting the integrity of Andrew Marc label which we expect to have a more challenging season because of its luxury position. We continue to maintain it's premium reputation and preserve growth and licensing opportunities. We've made significant changes in our Wilsons Outlet Retail operations which should favorably impact second half results. We've reconstructed the merchandising of Wilsons stores to match our vision of what that concept should be. We've shifted in more leather with a strong assortment of private label. We've improved the margin structure and focussed on better initial markups. Recent results which reflect this new position of validating these changes. I believe our organization across the board has adapted to the pressures of today's retailing environment. We focused on delivering great product at the right price point and margin structure. We believe we will demonstrate excellent values to consumers in each tier of distribution for this fall and holiday season. We've streamlined our infrastructure, increasing efficiencies in some areas while investing in growth in other businesses, particularly in the dress and sportswear area which we consider major opportunities over the long term.

I'll reserve some additional comments for closing but will now turn the call over to Neal Nackman to run through the numbers for the quarter in some additional detail.

Thank you, Morris. Net sales for the quarter ended July 31, 2009 increased approximately 20% to 135.9 million compared to 113.5 million in the year-ago period. Net sales of wholesale license apparel for the quarter were $90.9 million compared to $67.8 million in the year-ago quarter. Net sales of wholesale non-licensed apparel decreased in the quarter to 28.8 million from 38.4 million, in last year's comparable quarter. Net sales in our retail operations increased by $14 million, to $21 million in the quarter. We saw increases in wholesale licensed apparel sales this quarter primarily as a result of increased sales of Calvin Klein product. The current year is our launch year from Calvin Klein women sportswear and we had increases in dresses, outerwear and performance wear product. Net sales of wholesale non-licensed apparel decreased due to lower sales in our women's outerwear division and the closing of Junior denim division.

Finally, the acquisition of Wilsons Outlet Retail Stores occurred during July 2008 and accordingly last year's quarterly results did not include Wilson sales for the full period. We had a net loss of $2.8 million for the quarter or $0.17 per share compared to net loss of $3.9 million or $0.23 per share in a year ago quarter. The Wilsons operation generated a seasonal loss of approximately $0.16 per share in the current quarter. Our wholesale licensed and non-licensed apparel segments showed an aggregate operating profit of approximately $1.2 million in this year's quarter compared to last year's aggregate operating loss of approximately $4.1 million. Gross margin percentage increased during the quarter to 30%, from 25.5% in the prior year's quarter. Margin percentages increased in wholesale segments and we operated our retail segment where sales are done at higher margins than wholesale for the entire quarter this year. The gross margin percentage in our wholesale licensed apparel segment increased to 26.9%, from 25.5%, while the gross margin percentage in our wholesale non-licensed apparel segment increased to 25.5% from 22.2%. Gross margin percentages in our retail segment were 42.9% in both periods.

SG&A expenses exclusive of depreciation and amortization increased to $43.2 million from $32.5 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 expense increases associated with the new Calvin Klein sportswear line and increased net sales from our other Calvin Klein lines. Our balance sheet continues to be in good shape. Accounts receivable at July 31 were $91 million compared to 83.5 million at the end of the comparable period last year. Our bank debt is down to $111 million from $118 million last year, and our working capital is increased by over $15 million compared to last year. We are pleased to have a bank group led by J.P. Morgan that is strong, supportive, flexible and committed to helping us achieve our goals.

With respect to our guidance, we are forecasting sales of approximately $770 million for the fiscal year ending January 31, 2010, compared to $711 million of net sales in fiscal 2009. We are forecasting EBITDA to grow between 10 to 18%, to a range of approximately $40.2 to $43.2 million as compared to $36.6 million in the prior year. We are forecasting net income of $16.6 million and $18.4 million, or between $0.95 and $1.05 per diluted share, compared to a net loss of $14 million or $0.85 per share in the previous fiscal period. Please note that the previous fiscal year reflected charges on a post-tax basis for the impairment of goodwill and trademarks and an aggregate of $28.4 million or $1.69 per share. Excluding these items the prior year's adjusted net income would have been $14.4 million, adjusted net income per share would have been $0.84 per share. Reconciliation of these results to our results in accordance with GAAP, can be found in the about G-III section of our website.

That concludes my comments and I will turn the call back to Morris Goldfarb for some closing remarks.

Thank you, Neal. We focussed on moving this organization forward. We have some very good opportunities to not only do business but also to grow stronger and more diversified in the process. We've always had a market dominant position in outerwear. Today we also have a dominant position in dresses. We have a well-constructed portfolio of licenses, private-label brands and now our own lifestyle brands. Our presence in every peer of distribution gives us the ability to seek out the stronger zones of retailing.

Additionally, we believe that owning our own retail distribution in our core category of product will provide us with additional growth opportunities. Our entry into dresses, women's suits and sportswear has been executed very well. This year these businesses are expected to do more than 30% of our wholesale sales. We are seizing the opportunity to become an all-season diversified apparel company in every tier of distribution. We have accomplished scale, have acquired excellent assets and built the infrastructure for growth. Furthermore, our suite of opportunities is no longer limited by category. Our financial position remains strong and we expect to have additional opportunities to incrementally expand our business. We expect to generate considerable value for our consumers, our customers, and our shareholders.

Thank you, and I'll now open the call to questions.

(Operator Instructions). We'll take our first question from Todd Slater with Lazard Capital.

Thanks, very much, and good job, everyone. I have a question about the retail piece real quick. It lost I think -- did you say $0.16 a share in the quarter?

Yes, that's what I said.

And then last year lost about $0.05, but I think that was only about 20 days. Is that right?

That's about right, yes.

So if you had -- I don't know if you can do this, but if it was sort of you had it for the whole time, what would have the comparable performance have been like for LY?

It's probably not a fair calculation because last year the business certain would have been in quite a state of distress. Overall we've been seeing so far is the Wilsons Retail business is slightly worse performance than last year and that is really because we really feel that the strategy we implemented is not really just yet taken hold and we're now looking in the back half of this year for that to start to change.

Are you seeing any -- I know that is your hope and plan, but are you seeing any evidence of that, maybe towards the latter part of the quarter, or why do you expect that to improve? And my real question is, in your guidance, in your $0.95 to $1.95 range, what type of expectation do you have for retail relative to, for this year relative to last year?

Let me start with the -- with what we're seeing as far as improved positive. We've got the month of August sales and we are starting to see some nice lift over the previous year and that starts to give us some comfort that the things that we're doing are working well for us. In terms of what we're looking in the model in the second half of the year, last year was a very difficult year from an economy standpoint and a difficult year for us in terms of being able to strategically to get done what we needed to get done at the stores. So we are looking for both top line growth and we're also looking for margin improvement. The margin improvement if you look at what we did at Wilsons last year should be easy to accomplish. As I said, we're looking for the strategies to start to take hold for the last half of the year.

The only month that we can compare to last year is August. We bought the company in mid-July, and I'll give you the approximate comp increase. The estimated comp increase this year over last year is high single-digit, we're very comfortable that we've proceeded well with the assortment. We've done all the right things. Last year we were encumbered by, let's call it a troubled brand that was being liquidated in 500 locations in the malls. We had a cram down of inventory from those malls as we had to liquidate. There are many factors that have entered into the poor performance of retail last year that I think are behind us. So we're comfortable that we can be near break-even this year.

Okay. And if you're near break-even which, is a sort of $15 million, let's say, turn or inflection, is that what your $1.05, your $0.95, $1.05 assumes or are you assuming something more conservative to that.

Let me clarify one thing. We only had Wilsons for part of the year. So the retail segment you looked at had a $6 million operating lost in all of last year in our consolidated results. So that is what we're looking at going from a loss of 6 million to a break-even operation.

Okay. Great, that is helpful. On the gross margin side, they were much better than we had expected. Is there continued improvement in the back half if the retail division doesn't -- only 15% of your business -- but if that business doesn't turn quite as quickly as you like is there room for gross margin improvement from the rest of the business?

Yes, we are still comfortable that we can achieve grows margin improvement on the back half of the business.

That is helpful. Have a good back half of the year.

We'll take our next question from Jim Duffy from Thomas Weisel.

Thank you. Can I ask you to speak to some of the things you've done with some of the Wilsons Stores in an attempt to improve the merchandising and give us an example of where you're getting traction in some areas where maybe your efforts have been disappointing?

If you were in a Wilsons Store a year ago you would have walked through the door and you would have been hit very hard with a message of highly embellished handbags, and probably every style known to man in both men's and ladies' outerwear. It was a very confusing message. We thought our better said, I thought, that a lot of the -- a lot of the cures of the business could be helped by some of the brands that we were manufacturing. That didn't play out. We -- we were in the mode, as I said earlier, of liquidating most of the handbags during the course of the year, and correcting our thought of just putting a barrage of product in the store without refining the assortment. Part of it was the encumbrance of buying the business in August last year and not having sufficient inventory to flow into the stores for fall sales. So it was more of a cram-down from wholesale into retail. It did not operate as a standalone retail entity. This year it is a standalone retail entity, it does have a defined message. It has probably 30 to 35% branded apparel, and the balance being private label. The product was well thought out, bought early, bought with I guess great negotiating skill, so the margins are going to pan out to be very good. And the assortment in handbags and accessories really marries the outerwear assortment. It will be fairly core basic, it will be value-driven. The message will be very clear. And the consumer is buying it to the concept, at least the early reads indicate that. Now, even with -- with a shift in -- in Labor Day, we had a comp increase for the month of August, which is, in my mind, a pretty good win.

Okay. Yes, we've been in the stores and certainly the assortments look better than a year ago. Are you doing anything to track store traffic to gauge, how much of it is a traffic versus transaction type?

Yes, we do have traffic counters. We measure it very closely. We also measure the number of transactions done relative to the traffic, and we work hard at improving it. We've turned over our sales associates, I would say, this is a guess, but I am going to guess at 40% of our personnel is relatively new and trained differently than the old. When you operate a troubled company as Wilsons was for several years, you don't attract the best talent.

The confidence level, in at the employee level, is quite rich. They're incented differently than they have in the past, and we have a different quality of sales associate today than we did in years past, so we see the improvement there to speak to transactions into how they have closed in traffic and how that is borne out, is quite difficult because it is a seasonal business and we're just starting our season today. So most of it is fairly irrelevant. We've measured the time of the year where everything is highly promotional. Everything in the store was 50 to 70 off, and it was out of season. We are now getting into season with the appropriate pricing. So I guess the traffic will show itself as time goes on. We see room where all we have to do is approach at $250 a square foot performance, which I believe is very doable to be in a good profit mode in the outlet centers.

With regards to the outlet centers for the second half of the year, do you feel like you've been conservative with the guidance and should traffic show like you hope that it will, that that represents an area of upside opportunity?

Absolutely. I mean, we're -- traffic is -- it will drive the sales. And if the consumer -- if the consumer comes out, there's -- there is absolute room to grow both the top line and the bottom line of this business. We have the product to fill the stores with. So should the traffic be there, we have the product to fill it.

Okay. And then just doing some quick back of the envelope calculations your full-year guidance seems to imply a year-to-year decline in revenue in the second half of the year, second half versus the second half. What is the outerwear order book look like that, causing you to guide in that fashion?

The outerwear order book is pretty much flat. Let's put it this way, the one-piece that shows a reduction in scale, is the private-label piece. The private label piece is the mast here that would include -- that would include J.C. Penney, it would include that tier of distribution. And if there is a mix in the Company, that's where you would prefer to see it. You don't want to see it anywhere, but that is the lowest margin business in the Company. So as far as the guidance that we're showing you, that is affected by top line, the top line mix, is created predominantly by the private label piece of the business. The other piece that shows softness as I stated earlier, is the luxury piece. The luxury piece of our business is not very large. It is the image piece in two vast sectors, and I think we have a good solid business that also has opportunity to beat the forecast.

And just to qualify a little more on that. We didn't go out with a range on the back end of sales. So we're giving you an approximately 770. As you do the specific math, you'll see we're up slightly with the $770 million. Obviously there is variable for it. I will tell you that we're looking at the retail sales improvement, and then the wholesale side, while it is probably plus or minus a small percentage, that business should be flat for the year. So the second half of the year should show some top line growth even with the loss of the -- of some of the private-label outerwear programs.

Okay. I'll leave it at that and jump back into the queue.

Thanks, Jim.

We'll take out of next question from Eric Beder with Brean Murray. Mr. Beder, if you would check your mute function at this time, we cannot hear you. I'm getting no response from that line. We'll move on to our next question that's from Mimi Bartow with Telsey Advisory Group.

(inaudible) The licenses driven by the Calvin Klein businesses but I was pleasantly surprised on the non-license side what was driving that.

Mimi, the beginning part of your question got cut off. Can you just repeat that?

Sure. Just looking at the gross margin came in better than we had expected and I was wondering if you could talk about the dynamics on the license side, assuming that is on the Calvin Klein business and also on the non-license side which came in better than we had expected.

Yes--

Go ahead.

On a license business it really was driven by the Calvin Klein sportswear business. That really drove the gross margin percentage increase. And on the non-license side our Jessica Howard were significantly stronger than the previous year and performed well in retail.

On the SG&A dollar side, if we think about the guidance for the year, how should we be thinking about that now obviously we're an versine the Wilsons business in the third quarter or fourth quarter, should we think the rest is flat given the cost cuts you guys made earlier but obviously putting some money behind some of the new Calvin Klein stuff?

I think that is exactly right, Mimi.

Okay. And I think that was it. Thank you.

Thank you, Mimi.

We'll take our next question from Edward Yruma with KeyBanc.

To follow up on Wilsons, have you given thought to resizing the store base? Do you think you're in the right locations, and, you know, at what point do you need to consider the potential for store closures?

Well, we think we're in most of the appropriate locations. There are several stores that we would prefer not to be in and some of those leases are becoming due. And as they come due, we'll not -- we'll certainly not renew or maybe renegotiate. But we believe that this is a good concept. It's a concept that we want to be in. And we're there. It's a first time that we've become somewhat vertically integrated. There is an intangible that this affords us in troubled times from transferring inventory from wholesale to retail and having the ability to liquidate it with better margins and a closeout. So I would say that we're okay with it. Very few stores, will not, will not have a positive fall on contribution, assuming strategy work.

Got you. Discussing some of the improvements you've made to the Marc New York line, can you talk about the core Andrew Marc and given from the weakness, if you had to make any adjustments to that product lineup.

We brought back down the price line slightly not dramatically. It addresses the tier really well. We have not lost any accounts to my knowledge. We're in the right accounts. We're in with the right assortments, and we're in there in what could be viewed as not the best of all times for luxury. We're careful with our inventory, we're not -- we're not aggressively buying for back-end opportunity, because there is -- there is a level -- a great level of risk should retail not perform, but we need that -- we need that product out there, that tier to promote the brand, you know, to show the specialness of the brand for positioning for licenses, for both Andrew Marc and for Marc New York.

What we have done is we've adjusted the price point from Marc New York and have gotten as Neal would say, a great lift in orders from our department stores. So Marc New York will show an increase. Our licensing revenue will begin to hit us for maybe first quarter of next year, but we've positioned it fairly well. We have signed on four licenses. We have spent a fair amount of money advertising the brand, and we've positioned it really well for growth. And for the future. We're proud of that investment .

Great. Thank you very much.

Thank you , Ed.

And we'll return to Eric Beder with Brean Murray.

Good afternoon, do you hear me?

Yes, loud and clear.

Yes, not my normal phone. Could you talk a little bit about what you're seeing in terms of gains, potential gains from better sourcing and taking advantage of the weak economic times on the sourcing side?

We took advantage of tough economic times, we tell you, from November of last year through maybe March, April, of this year, and the outer wear area. We were fortunate to get early orders, bookings were very strong early, and we took advantage of buying offshore both raw material and production space were at a discount. Today that is really not the case. There was a cleansing of the troubled factories, so production is dear, and quite honestly if we were in a position to chase for a product in the back end of the we're, we would have to sacrifice the margin.

The factory structure is not abundant, and the raw material when you have to first put it into work in rush mode, you do pay a little bit more for you. So there would be a contraction for possible contraction should we have to go out further from the inventory levels that we currently have. And we can make our numbers without going out and chasing business. We have sufficient inventory to support the currently margin position.

Okay. And in terms of the Calvin Klein sportswear business, is that primarily a second half business historically? I mean, how should we look at that in terms of the second half?

Yes, it is pretty well rounded. Eights 12-month-a-year business. We deliver approximately every 10 weeks. We monitor it very carefully and it's a good balance. We need to remember that the first piece of sportswear that this company shipped was in February of this past year, we're new to it. We're doing extremely well with it. We've got, a seasoned staff managing it, designing it, and we've gotten double the door count that we started with.

Okay. Just conceptually, for us to kind of figure out what the split is between Q3 and Q4, a lot of crazy things in Q4, how should we conceptually look at Q4 in terms of relative performance, versus Q3 in other pieces here?

Eric, the vision for us is the -- when Q3 and Q4 split into such a prime time part of our business, in terms of the wholesale side, so we really don't give guidance on that, only because there's such a significant amount of volume that's happening in the last week of October, and the first week in November. Ideally our business should be relatively steady with last year. Of course, Q4, we're expecting some more volume from the retail business to kick in.

And should we be looking for, I guess, the next quarter of the profitability to be Q2 down the road?

Yes, that is a strong possibility. I think we have just shown that the wholesale side of our business, was very close to break-even, which is a great accomplishment. I'm certain that we can improve on that, and if we improve on the retail, which we will, it will be a lesser liquidation mode than we had been. Strong possibility that we're profitable for the second quarter of next year.

Okay. Congratulations.

Thank you , Eric.

And as a reminder, if you would like to question at this time, please signal by pressing star one. We'll return to Todd Slater with Lazard Capital.

Return to Calvin Klein sportswear, one of your biggest needle-movers, should it pan out. Can you remind us how it is doing, tracking relative to your plan, what you plan and what you think you can do this year. And, you know, sounds like you doubled the door count. Remind us again, how many doors you have now, and how many more doors or retailers would you need to get through the next leg up which is let's say to the 100 million-plus level?

Well, Todd, I'll tell you that when we negotiated the situation and gave some guidance to PVH, who I must add, are amazing partners, they've done incredible things with us, and for us. We -- we will achieve close to double what we laid out to them in our first year of performance. So we don't segregate, volume by sector, but needless to say it is a great achievement, we have -- we went out to the major department stores in the country, met with them, and got immediate support. There were department stores that did not carry the brand for three years. That stepped up to the plate the moment we took over. And our every day increasing the door count. I could tell you this, it would not be unbelievable to see $200 million business in two years in the sportswear side of our business.

So if I understand it, you're running at a rate double what you had originally, minimally planned, and so that is 200 and a couple of years is I was assuming that's over 100 million and then potentially next year.

That's -- that's a possibility, as well. That is doable.

Okay. We're probably more like close to 50 or 60 now. Is that a fair estimate , in terms of run rate.

That is hard to respond. The other two were easier .

Okay. All the best.

Thank you .

And that does conclude our question-and-answer session. At this time, I'd like to turn the call back to management for any additional or closing remarks.

All right. Thank you, all, for being part of G-III, and have a great Labor Day weekend.

That concludes today's conference. Thank you for your participation.