G-III Apparel Group Ltd (GIII) 2011 Q4 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 fourth-quarter 2011 earnings conference call. One note that 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. At this time, I would like to turn the conference over to Mr. Neal Nackman, Chief Financial Officer. 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 implied in forward-looking statements. Important factors that could cause actual results of operations or 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, adjusted net income and adjusted net income per share, which are all non-GAAP numbers. We have provided a reconciliation of EBITDA, adjusted net income and adjusted net income per share to our net income, according to GAAP in our press release and on our website. 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 fourth-quarter and full-year results. With me today are Sammy Aaron, our Vice Chairman, Wayne Miller, our Chief Operating Officer, and Neal Nackman, our Chief Financial Officer. We finished the year well, and have reported a record fourth quarter and year for both net sales and net income. We're proud of this performance, but it is certainly more important that some of the most substantial growth opportunities in our history are still in front of us. In the year ahead, we expect to continue to report double-digit percentage sales and earnings increases. Here are the financial highlights for the quarter and the year.

Revenues were strong. For the quarter, net sales grew 39% to $270 million. For the year, we had net sales of over $1 billion, a 33% increase over the prior year. We had set $1 billion as our target several years ago. We're now proud to have achieved it. Net income for the quarter was $12.3 million, and for the year it was $56.7 million. Finally, we were pleased to achieve net income per share of $0.62 for the fourth quarter, and $2.88 for the full fiscal year.

Our strength was broad-based, and we achieved solid growth in the fourth quarter in both outerwear and non-outerwear product categories. Our brands continue to take market share. We continue to see particular strength in Calvin Klein, Andrew Marc, Kenneth Cole and Guess. Our newer business categories, dresses and sportswear, have also booked well for the upcoming spring season, led by Calvin Klein, Jessica Howard, Eliza J, and Jessica Simpson. We expect further expansion in these categories for the fall season.

We have also initiated our Calvin Klein handbag and luggage launch, with product now in retailers across the country. We'll look to expand the door count and floor penetration for this upcoming fall season, in both of these categories. We now have eight licenses with Calvin Klein, and could not be more pleased with the growth and success of this business partnership. We're most appreciative of the confidence that PVH and Calvin Klein team has in us to execute across multiple categories. Our team sports business further expanded its offerings in 2010 and is positioned to have a strong year in 2011, with increased bookings and penetration with its men's and women's sportswear.

Our Wilsons business comped up 14% in the fourth quarter, and generated a profit for the year. We have turned the corner in this business, after posting losses during fiscal 2009 and 2010. We still have opportunities to improve our stores, and we're working on a number of merchandising initiatives to drive comps and margins to produce better four-wall productivity. Our first Vince Camuto outlet, pursuant to our joint venture with The Camuto Group, will be opening next month in Wrentham, Massachusetts. We plan on opening approximately 10 Vince Camuto shoe outlet stores this year.

Our Company-owned Andrew Marc business continues to expand. We're developing our licensee portfolio to include an extensive array of product, as we seek to develop Andrew Marc into a meaningful lifestyle brand. We're currently working on two additional licenses, and we will be rolling out a more visible ad campaign for Andrew Marc this fall. We expect to achieve another milestone with regards to seasonality.

Last year for the first time, we reported a profit in our second fiscal quarter. In our fiscal quarter ended April 30, 2011, we expect to report a profit for our first quarter for the first time in our history. This shows the power of our diversification in new categories. We now expect to show a profit in each quarter of our fiscal year.

Our ability to perform well comes from a combination of factors. First, we have built a reputation as an excellent partner. We benefit from having some tremendous brands in our licensing portfolio. We're fortunate to have built great businesses and strong relationships with a wide range of partners. For a long time, we have been proud to be a licensee of choice in the outerwear category. We have extended that reputation to dresses and sportswear. In the years ahead, we intend to demonstrate that we deserve the reputation in handbags and luggage as well.

Second, we built a world-class infrastructure. We have a well balanced global sourcing network, extensive design, sales and merchandising organizations, a strong balance sheet, great systems and highly capable management. In today's competitive environment, it is extremely important to have scale and resources. I think we're seeing how vital this is in the context of the cost increases facing us and our competitors. We're working very hard to mitigate the pressure of cost increases in our bottom line. We'll attempt to do so by, among other things, shifting the fabrics we use, negotiating well with our suppliers and, where appropriate, passing on price increases to our customers. We also are using our financial strength to bring inventories in early, as we did this past quarter. This is an opportunity for us to take market share and increase growth, especially in a tough environment.

Third, we have leveraged the people, capabilities, and relationships of our acquired businesses to create new opportunities. Our expanded relationship with Calvin Klein has its origins in the acquisition of Marvin Richards. Our dress business has grown far beyond what was brought to us when we acquired Jessica Howard. Our new joint venture for Vince Camuto outlet stores is only feasible for us because of the Wilsons transaction. We consider the ability to do value-adding acquisitions to be among our core competencies, and we expect to continue to identify, evaluate, and execute additional transactions over time. I will reserve some additional comments for closing, but I will now turn the call over to Neal Nackman, our Chief Financial Officer, for a more detailed rundown of the numbers.

Thank you, Morris. For the full fiscal year, we reported net sales of $1.06 billion, an increase of 33% compared to last year's net sales of $801 million. Net sales of wholesale licensed apparel increased 37% to $718.5 million, from $523.6 million. And net sales of wholesale non-licensed apparel increased 30% to $244 million from $188.3 million. Net sales in our retail segment increased 12.4% to $142.3 million, from $126.6 million in the prior year.

Sales of our licensed apparel were favorably impacted by an increase in sales of our Calvin Klein licensed product, most notably in the dress and women's sportswear categories. In addition, we had increased sales of Guess and Kenneth Cole Men's and Women's outerwear.Sales of non-licensed apparel were favorably impacted by an increase in sales of our proprietary Jessica Howard and Andrew Marc businesses, and increases in net sales of our private label programs.

Our net income for the year increased to $56.7 million or $2.88 per diluted share, from net income of $31.7 million or $1.83 per diluted share in the prior year. Adjusted net income in the prior year was $30.2 million or $1.74 per diluted share, which excludes a one-time tax benefit related to an increase in an acquired net operating loss of $1.6 million equal to $0.09 per share. The gross margin percentage for the year was 33.0%, compared to 33.3% in the prior year. Gross margin for the wholesale licensed apparel segment was 29.7% this year, compared to 29.8% last year. For the wholesale non-licensed apparel segment was 28.9% this year, compared to 28.5% last year. And for the retail segment, increased to 47.1% this year from 45.0% last year.

SG&A expenses increased $43 million to $248 million. Our expense increases were primarily attributable to personnel, facility, and advertising costs associated with our growth in sales and profitability. Regarding our fourth quarter, net sales increased 39% to $270.2 million compared to $194 million in last year's comparable quarter. Net sales of wholesale licensed apparel increased to $176.6 million from $119.8 million, primarily as a result of the increased sales of Calvin Klein product, again in the dress and women's sportswear categories. In addition, we had increased sales of Guess and Calvin Klein men's and women's outerwear.

Net sales of non-licensed wholesale apparel increased 32% to $54.7 million from $41.4 million. This sales increase was primarily attributable to increases in private label sales and sales of our Andrew Marc product. Sales in our retail operations segment increased 18.6% to $57.9 million from $48.8 million in last year's comparable quarter. Our net income for the quarter increased to $12.3 million or $0.62 per diluted share from $9 million or $0.49 per diluted share in last year's comparable quarter. Adjusted net income was $7.5 million or $0.40 per diluted share in the prior year's quarter. Again, the adjusted net income for the fourth quarter in the prior period excludes an adjustment for the tax item previously mentioned.

Our gross profit margin for the fourth quarter decreased to 32.3% from 35.7% last year. The gross margin percentage for our wholesale licensed apparel segment decreased to 26.7% from 29.8%, for our wholesale non-licensed apparel segment decreased to 22.6% from 24.7%, and for our retail operations segment was 47.9% this year and 47.8% last year. Gross margins in both of our wholesale segments were negatively impacted by higher discounting and markdown participation. We believe this leaves our inventory position with our retail partners in good shape as we enter the spring season. We expect our wholesale gross margins to return to more historical comparisons in the first quarter.

SG&A expenses increased $10 million to $64 million. The increase was again significantly attributable to higher personnel, facility and advertising costs, associated with our sales and profitability growth. Our balance sheet continues to be in good shape. We ended the year with $10 million of cash and no outstanding borrowings under our revolving credit agreement. Accounts receivable at year-end were approximately $138 million compared to $73 million at the end of the prior year.

As we mentioned in our third quarter conference call, we expected a larger than usual inventory increase as of year-end and into our first quarter of fiscal 2012. Our inventory at year-end increased to $205 million from $120 million last year. We have been accelerating receipts and production to take advantage of early buying opportunities. In addition, at year-end, as a result of the timing of an earlier Chinese New Year which impacted our vendor supply calendar, we accelerated spring receipts. We are also carrying more inventory this year, as a result of new key item and replenishment programs in our sportswear and suit areas. Our working capital increased by $65 million compared to the end of last year.

For the 2011 fiscal year we spent approximately $20 million on capital expenditures, which were principally for the expansion of our warehouse and showroom space. We expect our capital spending to be slightly less in fiscal 2012, as we complete our showroom construction and roll out 20 to 25 new stores under the Wilsons and Camuto name plates. Our facility expenditures are expected to make us more efficient, both on the front and back ends of on our operation. We also expect our new store expenditures will help leverage our retail cost base.

For the fiscal year ending January 31, 2012, we are forecasting net sales to increase approximately 12% to approximately $1.2 billion, compared to the $1.06 billion of net sales in fiscal 2011. And net income to increase between 14% and 18% to between $64.5 million and $66.5 million, or between $3.15 and $3.25 per diluted share compared to net income of $56.7 million or $2.88 per share in fiscal 2011. We're forecasting EBITDA to grow between 14% and 18% from last year to range between approximately $117 million to $121 million, compared to $102.7 million in fiscal 2011.

With regard to the first quarter ending April 30, 2011, we are forecasting net sales of approximately $195 million, compared to $154 million in last year's first fiscal quarter. We are expecting that our gross margin percentage will be similar to the prior year's quarter. We will also forecast a net profit of $0.1 million to $1 million or between $0.00 and $0.05 per diluted share, compared to a net loss of $1.4 million or $0.07 per share on last year's first fiscal quarter.

Lastly, I would like to take a moment to talk about input costs which, as we mentioned on our last conference call, will begin to effect us this year. We are experiencing cost increases on our new production. We are working to offset the impact of increased costs on our gross margins. Price increases will be a part of this. The strength of our brands and the high quality of our products should serve us well in this respect. We are looking at alternate supply sources in some cases, and some savings based on switching materials and others. Additionally, we will be working as always to offset some of this impact through the advantages of scale and diversification by product category that is one of the drivers of our growth.

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

We had a very strong year, and we expect that the momentum to carry into fiscal 2012. We are pleased that our opportunities over the next couple of years have given us the ability to sustain a double-digit rate of sales and earnings growth. We have great organic opportunities, the continued ability and desire to supplement internal growth with acquisitions, and a balance sheet and management infrastructure that will support all of our efforts. As I step back and look at what we have accomplished, I am very proud that we have transformed our business from what was once strictly a coat company into a well diversified multi-category apparel and accessory provider.

We have developed a number of growth engines that we can continue to leverage. While still a major force in licensing and private label, we now also own a powerful brand of our own. We have added and are growing a retail division to take advantage of the vertical opportunity associated with that. We have utilized our capital thoughtfully to accelerate our growth and create value through acquisition. We will continue to be a leader in the industry. We have the ability to attract new licenses, acquire companies, expand a talented management team and reap the benefits of our scale. We believe that this scale is a tremendous benefit, particularly in a rising cost environment, as we have the experience and the expertise to work directly with our vendor base, which is a competitive point of differentiation for us.

We will continue to push forward into new businesses. This includes growing beyond our position in the United States to take advantage of global market opportunities. We have the sourcing and sales infrastructure necessary, and we're serving additional markets around the world. We're still only scratching the surface of this opportunity. As always, we remain very focused on building value for all of the stakeholders in our business, including our shareholders, our business partners, customers, and consumers. Thank you very much for your attention today, and your continued support, and we're now ready to take your questions.

(Operator Instructions).We'll go first to Jeff Klinefelter with Piper Jaffray.

Thank you. Congratulations, everyone, on a great finish to the year. Morris, I wanted to start with your guidance for the year. Given what seems to be a fairly strong start to the year with your forecast for a first-time profit in Q1, can you address the degree of conservatism that you have factored into that guidance for the year, to what extent the inflationary environment is playing into that, and what the scenario would be in the second half of the year that could result in upside to that guidance at this point?

As always, we try to forecast to the best of our ability. This year is a little bit unique. We're all looking at price increases and complexity of maybe producing garments. We look at our order book and for the first time in a long time, we're discounting what the order book looks like in the event that the consumer does not accept the price points, so we're being fairly conservative. We're allowing or anticipating some cancellations and dilutions of what our order book looks like, so there is outside opportunity. This is a unique year, that I would say the metrics that we impose on evaluating the future of this year are different than the history.

And maybe one follow-up to that. Are you expecting at this point that any price increases you're pushing through to your retailers, that you're going to get offsetting declines in unit volume? Are you looking for a parity between those two metrics?

No. Everything that we're seeing, the units are up and clearly the dollars are up significantly because of the cost increases, so we're not seeing any slippage in unit purchases, which is actually what I am referring to in implementing a little different metrics in measuring our business. We're concerned that it actually looks too good, so if the consumer does not respond for the back end of the year, I think we have the ability of some cutbacks and still making our guidance.

Okay. Two other quick things, one on inventory moving up meaningfully here at the end of Q4. What would you anticipate, as we went through the year, kind of a Q1 and towards second half are you expecting that to come in closer to your year-over-year sales guide or revenue guide, and then on the Calvin Klein handbags and luggage, can you remind us again what your current door count is, and what you do believe your potential is for the second half of the year to increase?

Let me address the inventory issue. Part of the inventory issue in Q4 actually relates a little bit to our handbag and our luggage business. We were able to produce, to design, produce, and import our product for last year for fiscal 2011, but we didn't have the right to ship contractually our handbags and our luggage until Q1, so the inventory was in stock. We could do nothing with it until February. The shipping was actually quite good. We're very pleased with it.

The door count in luggage, I believe, is 840 doors, and in handbags, it is 300 doors. One might read that incorrectly. The amount of luggage that sits on the floor in a department store is far less than handbags, so the dollar inventory is much greater on the handbag, on the handbag side of it. We believe the handbag side of our business is a much larger business for us. Was there another part to the inventory question?

Our inventory actually, we accelerated our receipts for Q4 in anticipation of price increases. Normally, we wouldn't bring in down coats and wool coats until the second quarter. We tried to accelerate it into Q4, and we were successful to a degree. So our inventories, just where we believe it should be. You will see it a little bit more in line with our reporting in Q2. I have said that in Q3 that it gets realigned, and becomes more in sync with what you would expect from us, but the inventory's in good shape and really no concern to us.

Okay. Great. Thanks a lot. Good luck.

Thank you.

Next we'll hear from Eric Beder with Bream Murray.

Good afternoon. Congratulations on an outstanding quarter.

Thank you, Eric.

Can you talk a little bit about what you're seeing in terms of Calvin Klein sportswear for this year, in terms of door counts and how you're looking at that business and any update on Andrew Marc Moto?

The door count for Calvin sportswear for spring of 2011 is 540 doors compared to spring 2010 of 360. The door penetration has been more our initiative. We have succeeded. If you walk into any department store and see the amount of real estate that we occupy, that is absolutely the key. It is quite impressive that our Company has been able to garner the amount of real estate in pretty much every A door that we look to occupy, and it is a great story.

We believe that sportswear is going to be a major piece of our business. We stated that a year ago. We stayed true to it. We get better on design. We get better on sourcing. The sell-through is reflected.

When you launch an area of business, you go through trials and tribulations to right-size it, to make the fit a little bit better. You go through several designers, and we're at a point where we're very happy with the leadership staff at Calvin Klein sportswear and we're good to grow. On your question on the Andrew Marc. You had a follow-up question.

Andrew Marc Moto.

The Marc Moto piece was initiated, first launched by Jones New York. It was just fair. It was a soft launch. The jeans were just okay. The tops were better. Every retailer that participated in soft launch is back on for fall of this year, so the good news is we didn't lose any retailers. We didn't spend any money in an ad campaign for Marc Moto yet, so it functions pretty much on its own volition. Jones is an amazing partner, and I'm sure, before we turn around, Jones will have 1000 doors with Marc Moto, and it will be an important piece of our business.

I guess the final question, when you look at next year, what is do you think the biggest opportunity for you in terms of the business?

Well, handbags clearly is a big opportunity. We have spoken about our retail initiatives. We'll probably have a couple of dozen new stores open when we report next year this time, and half of them will be new initiatives with Vince Camuto and footwear stores. We believe those will be immensely successful. They're well designed, and we believe that will be a good part of our future.

Luggage, luggage is starting far better than we had anticipated, so we're going to see growth there. We believe there is a good deal of growth left in our coat businesses. Our dress businesses are, all of our dress businesses are showing double-digit increases right now. There is a lot left in Calvin Klein dresses. Our order book today would indicate that we have a business that is up north of 20% for next year, so there is plenty left. Every one of our initiatives is far from maturity.

Thank you.

Next we'll hear from Jim Duffy with Stifel Nicolaus.

Thanks. Good afternoon, everyone. Congratulations to the team for eclipsing the $1 billion mark. As you look to the $1.2 billion in revenue expected for fiscal 2012, could you bucket that into categories? Just outerwear, dresses, sportswear, retail and other for us?

Yes. Let me just -- what I can do is that tell you is that the outerwear percentage of our total business is around 55%, and we do expect -- I am sorry, about 57% for this past year, and we do expect, as we forecast going forward, that the higher growth will be in the non-outerwear categories.

Okay. Can you put some parameters around the size of dresses and sportswear at this point?

Only just to reiterate, as Morris just indicated, that those are both going to be high-growth areas for us in next year.

Okay. And then, Morris, can you comment on your current visibility into the outerwear order book?

Our outerwear order book is up just south of 15% comped to last year. It is a little bit early yet, but this is an area that we're good at, we manufacture quite well. We have a time in action calendar that's a little bit tighter in our coat area because of our all time relationships, and to augment some of what's occurring on the pricing side of it, we have moved some of our production from the coastal areas of China to the interior. That's helping us as well on the pricing and margin, so our coat business is not being disregarded. It is still a major piece. We lead the industry in coats and we believe that there is still much to do.

We are succeeding in one of our own brands, Black Rivet is making its mark. We have worked hard at developing that brand, and that brand is going to hit the radar screen this year, so that adds to what we currently do. We're taking a new look at what the leather industry should look like. We disregarded it for the last couple of years, and we believe there is a great opportunity in growing our leather business, and most people in our field do not look at it as closely as we do, so there is still growth left if leather becomes a viable commodity. I think we have a business that's going to grow probably north of 20% for the year. So we're pleased with the coat side of the business as well.

Is that the leather business you expect to grow north of 20% or the coats as a whole?

The leather business growing 20% wouldn't be a big deal quite honestly, so if the leather business grows to the scale that I anticipate it could, it could move our coat business 20%.

I see. Interesting. Okay. That's very encouraging. And then circling back to comments after the third quarter, you had been talking about operating leverage in fiscal 2012. Has anything changed with regards to that?

No, Jim. We really still expect to have some operating leverage on next year. I think the issue that we're certainly concerned about is how much gross margin we can maintain and that's going to be the challenge for us, and in terms of SG&A growth, we do expect to leverage that, and I think if you look at our guidance, we're still looking for improving the operating margin for next year.

Okay, Neal.And a couple housekeeping items. You mentioned a tax rate in the guidance for fiscal 2012?

We didn't. I would be comfortable telling you to use somewhere around 39%.

Okay. And then the final question, where did the allowances and reserves account stand at year end?

The specific percentages will come out in our 10-K with that disclosure. I will tell you that certainly we go through the same process we have before. There is really nothing unusual in terms of that percentage.

Very helpful. Thank you.

We'll go next to Edward Yruma with KeyBanc.

This is Charu for Ed. Thanks for taking my question. I was wondering if you could share with us your updated view on the level of potential price increases? I think you mentioned on your last call, mid-to high single-digit price increases, and you were comfortable, the consumer would be able to accept that. Does that still remain the case?

On our last call we were looking at numbers that were in the mid-single to high-single digits, and we're probably slightly higher than that at this point, but again the challenge for us, the good news for us so far is that the price increases that we have been offering to our retail partners have been getting accepted, and so we're encouraged by the early action that we have had with respect to selling and the higher prices.

Okay. Great. And then on Wilsons, can you give some more color on the performance there? You have owned that business for quite some time now, and now that you have got, it is profitable with 14% comp and you have some operating history behind you, how comfortable are you with the real estate portfolio overall in terms of productivity and then longer term opening and closing stores there?

The store that is we have at Wilsons were chosen when we acquired it, so we're quite comfortable with it. There is annual dilution as leases expire, and this is really the first time that we're going through a growth mode. I think we have defined 14 stores this year, if I am not mistaken that will be new Wilsons initiatives. You will see the growth at Wilsons a little bit better than have you seen in the last three years. The concern that one might have is, our outlet concept only has the ability of growing to maybe 150 doors by the end of this year, we'll be near 130 with Wilsons, and after that you get into real estate that you don't want to own, so we're cautious of that, and so what we're doing is, we're going after several other initiatives that will let us occupy space in the same centers that Wilsons is in.

The Vince Camuto stores are a really good example. We're opening ten new stores, ten new well-designed Vince Camuto footwear stores that will be in the same centers that Wilsons is in, so with the Camuto stores we have another opportunity of what we believe is 150 doors, and we will probably find two or three other initiatives, including Andrew Marc that have the ability to grow to 150 door count operations. Our growth will come utilizing the Wilsons platform, but not necessarily using the Wilsons marquise as the branded store.

Got it. Okay. My last question is on acquisitions. You mentioned your openness towards identifying potential acquisition targets, and I was wondering if you could just give us a sense of timing on perhaps how likely are you to do a deal this year, and also if you could just give us some color on the general deal environment right now in your conversations that are happening?

Well, that's kind of a moving target. Had you asked me what I thought about two months ago, about closing a deal the following day, I would have said it was very good shot. Deals happen and then they don't. We're likely to make probably more than one acquisition this calendar year.

We're looking at several situations today, the same that we have for the last I would say eighteen months. We're very selective. We're not -- we don't have the confines of what we did historically. We have a stronger balance sheet, so we have greater choices than we ever had, and we have an operating team that can integrate it exceptionally well. The answer is I am quite comfortable we'll identify a couple of acquisitions this year.

Okay. And just a quick follow-up on that more than one acquisition possible for this year. You mentioned looking at the global market and looking at opportunities there. Can I ask, would this be -- would international growth be organic or would you be open to looking externally for that?

We're open to look externally. The growth that we're seeing right now is utilizing some of our own brands for wholesale distribution, as well as doing private label development for retailers throughout the world. We have taken a greater interest in acting as agents for European retailers, for Chinese retailers, for Korean retailers, for Latin American retailers. We staffed our office more aggressively than we ever had. We moved into a better location. We have a strong worldwide initiative.

Great. Thanks very much.

Thank you.

(Operator Instructions).At this time there are no further questions. I will turn the conference back over to management for any additional or closing comments.

Thank you all for participating and have a great day.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.