G-III Apparel Group Ltd (GIII) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the G-III Apparel Group, Ltd. first quarter 2012 earnings conference call. Today's call is being recorded. At this time all participants are in a listen only mode. Following the presentation we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for your questions.

And now I'd like to turn the conference over to Mr. Neal Nackman, Chief Financial Officer.

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 which is a non-GAAP number. We have provided a reconciliation of EBITDA 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 first quarter results. With me today are Wayne Miller, our Chief Operating Officer, and Neal Nackman, our Chief Financial Officer.

We've begun the year well and are confident in our full year guidance. Our outlook for growth, increased efficiency, profitability, and continued strategic development for the remainder of the year is on track. Our bookings performance in the first quarter is key to cementing our annual financial targets. And I'm pleased to note that we've achieved our backlog objectives. We also have quickly built the handbag and luggage infrastructure to capture what we believe will ultimately be an important opportunity. Before I detail additional areas of progress, I'd like to provide some of the financial highlights for the quarter.

For the quarter which historically has been our smallest, net sales increased by 28% to $197 million, slightly ahead of our forecast. We experienced a decline in gross margin percentage, particularly in seasonal items due primarily to the unseasonally wet and cold spring in the Midwest and Northeast. In response, we've provided the appropriate level of support to our customers to keep inventories at retail in line. As a result, we reported a small net loss of $0.03 per share. This does not, however, reduce our confidence in full year forecast of net income per share between $3.15 and $3.25 a share. We continue to post strong growth in revenues. And as we layer in the beginning of new handbag and luggage platform, we expect to sustain an excellent rate of growth. I'm pleased to report that we're booking well across our businesses. Our products performed well. And as of today, we're booked slightly better than 75% to plan which is consistent with where we were at this time last year. This gives us confidence for the quarters ahead.

Our bookings include initial orders from our new Calvin Klein handbag and luggage line. We've not yet achieved scale in these businesses which slightly impacted our first quarter gross margin. We're looking forward to door expansion and improved penetration of these products in the fall season. Our expense build for handbags and luggage began last year. These expenses include personnel, showrooms and warehousing. We've built the basic infrastructure that can handle additional brands and distribution channels. The luggage door count is expected to be approximately 800 doors. And for handbags, we expect to reach 700 doors this fall versus just 300 this past spring. We continue to believe Calvin Klein handbags and luggage will be at least a $200 million opportunity. And we expect to grow our effort into new brands in these categories. In fact, we've just recently signed a license for Tommy Hilfiger luggage and believe this will be a great addition to our business.

Our top line in the dress business was good in the first quarter, and we continued to build market share. The unseasonably cold and wet weather had an impact on this business and it impacted our margins. In late April and May with the improvement in weather, we've seen selling in retail strengthen in most areas of the business. We've booked well for the upcoming fall season and expect to continue to grow our dress business at a strong pace. I'm also happy to report we've just recently signed a new dress license. We'll be launching dresses for the Vince Camuto brand for the Spring 2012 season. Our Calvin Klein sportswear business performed well and we expect the door count to continue to expand for the upcoming fall season. Last fall we were in 360 doors and expect to be in approximately 600 this coming fall. We continue to be confident that the Calvin Klein sportswear business is also at least a $200 million opportunity.

Our team licensing business, which is a smaller part of our overall business, has booked well. As you no doubt know, if you are a football fan, the NFL piece of our business could come under some pressure if the decision to start the season later comes about. With respect to our specialty retail business, I'm pleased to note that Wilsons continued to post comp sales increases. For the first quarter, comparable store sales increased 9% on top of a 7% increase in the same quarter last year. May comp store sales at Wilsons have increased at a 15% rate on top of last year's 10%. We're pleased with the assortments and with the outlook for these stores. Additionally, through our joint venture with The Camuto Group, we opened the first group of Vince Camuto outlet stores. The stores look great. Over the next few months we'll be in a test and evaluation mode to tweak the assortment and the density as we seek to optimize the performance of these stores. We've opened 7 Camuto stores and we're on plan to open a total of 10 this year.

We're now confident we have the basis for a specialty retail platform that can support multiple concepts. We have a well-structured management team, an excellent distribution capability, the real estate capability, and the merchandising expertise to extend this business. We're actively seeking to grow this effort organically with our existing concept and we're including specialty retail businesses into the range of candidates that we evaluate for acquisition.

With respect to our Company owned brands, we're also hard at work enhancing the opportunities for Andrew Marc. This business has also booked well for fall. We've developed an advertising plan for fall which features the work of a well-known A-list photographer that will be very visible and should catch a lot of attention. We've continued to develop our licensee portfolio for Andrew Marc which now includes 10 licensees. By the end of the year there will be product available to consumers all year long. For fall we have a great presence with a multi-category floor set which will add men's dress shirts and men's tailored clothing. Going forward, we're excited to further develop the license portfolio including an exciting new watch license.

We've also extended the brand into the international marketplace for the first time. For fall we expect to have retail distribution with 87 doors in Germany and 45 doors in the UK. We believe this can prove to be the basis for a wider global business. These initiatives should further solidify the position of Andrew Marc as a full lifestyle brand.

Across all of our businesses, we are, of course, still concerned about the rising input costs as it is an issue for companies in our industry. The increases we expect to continue to be relatively modest in the 5% to 9% range for this fiscal year. We've selectively raised prices. We believe that our brand and our products are sufficiently strong to protect our rate of sale and still show strong value to the consumer. In summary, the year is off to a good start. We're executing well, booking well and moving decisively on our strategic development plan. Our full year plan remains on target.

I'll reserve some additional comments for closing but I'll now turn the call over to Neal Nackman, our Chief Financial Officer, for a more detailed rundown of the numbers.

Thank you, Morris. Our diversification into non-outerwear categories continues to result in positive improvements in our operating results. Our net loss for the quarter was reduced to $520,000 or $0.03 per share from $1.4 million or $0.07 per share on last year's first quarter. The reduction in our net loss was driven by continued wholesale and retail sales growth. Our wholesale operations were profitable in the first quarter for the first time in the Company's history. Net sales for the quarter ended April 30, 2011 increased 28% to $197 million from $154 million in the same period last year. Net sales of wholesale licensed apparel increased to $127.7 million from $92.4 million, driven by increased net sales of Calvin Klein licensed product, primarily in our women's sportswear and dresses. In addition, this was the first quarter for shipping the Calvin Klein handbag and luggage. Net sales of wholesale non-licensed apparel increased to $46.8 million from $41.2 million, primarily due to increases in net sales of our private label programs and Andrew Marc product.

Net sales of our retail operations were $32.6 million compared to $29.0 million in the prior year's first quarter. The gross margin percentage was 30.2% in the three-month period ended April 30, 2011 as compared to 31.8% in the prior year. The gross margin percentage in our wholesale license product segment was 25.8% this quarter compared to 26.1% in the prior year. In our wholesale non-license product segment was 25.4% compared to 28.5% in the prior year. And in our retail operation segment, was 44.9% compared to 45.2% in the prior year. In both wholesale segments we experienced lower gross margins in our dress businesses which we attribute to a soft retail environment driven by mostly by unseasonable weather. Selling, general and administrative expenses improved as a percentage of sales to 29.4% from 32.2% in the prior year's first quarter. Total SG&A increased $8.2 million to $57.9 million in the quarter ended April 30, 2011, from $49.7 million in the same period last year. This increase is primarily a result of increases in personnel costs, facility costs, and outside warehousing expenses associated with our growth in sales.

Regarding our balance sheet, accounts receivable increased primarily as a result of increased sales and were $128 million compared to $83 million at the end of the prior year's first quarter. Our inventory was $168 million at the end of the quarter compared to $100 million at the end of the prior year's first quarter. As planned, our inventory levels are significantly higher than at the same time last year. We continue to purchase goods sooner to take advantage of lower prices and assure deliveries. There is also increased inventory related to initial shipments for our wider handbag and luggage rollout as well as inventory related to the expected growth in sales.

Lastly I'd like to discuss our guidance for the full fiscal year in the second quarter. For the fiscal year ending January 31, 2012, we are maintaining our previous forecast which calls for net sales to increase approximately 14% to approximately $1.2 billion compared to $1.06 billion of net sales in fiscal 2011. Net income to increase between 14% to 17%, to $64.5 million to $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 diluted share in fiscal 2011. We also continue to forecast EBITDA to grow between 14% to 18% to approximately $117 million to $121 million compared to $102.7 million in fiscal 2011.

With respect to our second quarter guidance, we are forecasting net sales to increase 14% to approximately $215 million in this year's second quarter compared to $189 million in the comparable quarter in the prior year. We are forecasting net income to increase to $3.7 million to $4.5 million or between $0.18 and $0.22 per diluted share for the second quarter, compared to net income of $3 million or $0.15 per diluted share in the previous year's second quarter.

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

Thank you, Neal. We're very pleased to have seen the continuation of the momentum we had last year in the beginning of fiscal 2012. We have a great opportunity to sustain that through the summer and into fall. In addition to solid core booking rates, we have a number of new and very substantial opportunities. Our Calvin Klein sportswear is on a great trajectory, and as I mentioned, should be a $200 million plus opportunity. So we're just now getting started. The new handbag license we've signed with them should be of similar size.

We've recently built the infrastructure for sportswear, handbags and luggage and for specialty retail as additional platforms for growth. We expect over time to capture those opportunities and to layer on new brands that reach additional consumers and possibly additional tiers of distribution. This kind of business development should allow us to sustain the strong rates of growth into the future. We are confident that we have designs, sales, distribution, marketing and back office functionality to add sales in a very efficient manner. We certainly have the financial resources to do so, but equally as important, we have the management, depth and expertise. Even as we build our capabilities, we have expanded our profitability. The benefits of scale in our business are increasingly important and this is increasingly a tremendous competitive advantage for us. We have a superior ability to offset rising costs, to drive value to our customers and consumers, and to insure our shareholders receive excellent returns. Our operational progress is compelling and our financial position remains very strong. We have significant near and long term organic growth opportunities and a continued desire and capability to augment through acquisition. While the market will likely remain challenging, we're positioned to take market share, build our business and drive value to our shareholders.

Thank you for your time, attention, and support. And now we're ready to take your questions.

(Operator Instructions) Jeffrey Klinefelter with Piper Jaffrey.

Yes, thank you. Just had a few questions for you guys this afternoon. First would be, in terms of the Q1 results, what impacted SG&A, if anything, relative to initial expectations? Was it impacted by any of your growth initiatives? Or how should we think about that SG&A rate going forward given some of these initiatives that you outlined?

Sure, Jeff. It's Neal. The SG&A was really pretty much where we were forecasting it to be. No surprises there for us. And we continue to see leverage as far as the whole year goes. We're certainly, as far as this year goes, we're experiencing the balance of the year, the build out of the handbags and luggage businesses, certainly growth associated in the SG&A with the growth in our business. We're expanding the retail footprint, so there's some SG&A increases on that front, as well. But all said, similar to what we've said in the past, we really continue this year to see SG&A leverage as we round out the year.

Okay, Neal. Maybe more specifically, on that handbag and luggage business, as it scales, at what point, or what size does it become leveragable at, say, comparable to the corporate op margin rate or even higher? At what point do you get that accretive inflection point in that business?

We expect that to be by the end of this year. The SG&A from that business will be an improvement to our total SG&A as a percentage of sales.

Okay. And then in terms of Q2, hearing your comments about some of the seasonal pressure in Q1, are you expecting or modeling in at this point that Q2 you will also experience some gross margin pressure from promotional support in the seasonal area? Or do you feel that that's mostly behind you and you're going back to a normalized gross margin rate?

I think we're at a normalized gross margin rate, Jeff. It was mostly an effect of the unseasonably cold and wet weather. In May, our business was good. We saw an improvement in margin. We saw an improvement in demand. So I think we're back to a normal cycle.

Okay. Just a couple other quick things. Inventory, you said it was higher for both the new businesses and also some early receipts. Could you just provide a little bit more clarity in terms of quantifying how much of that year-over-year is the luggage and handbag versus maybe additional doors of sportswear versus just early receipts of your core product?

Without breaking down the specifics, I will tell you that it's significantly more about receiving product earlier than it has been about the new businesses at this point in time.

Okay And so you're attempting to get in front of what you anticipate to be -- maybe this leads into the final question more broadly, Morris and Neal. The supply chain as it exists today, maybe give an update on your visibility there, the cost dynamics, et cetera. And what you're getting in front of, are you anticipating some shortages in the back half of the year?

No, the supply chain -- I just came back from China, actually, a week ago, just reaffirming what we've been thinking. We're okay as far as the supply chain is concerned. As we've stated, and as you see, we've brought a good deal of our inventory in early to support our needs. The wholesalers that we're buying from are in a position to deliver some of the reorders that we expect to get. And we're transitioning into some other countries which will also enable us not only for the back end of this year but the future to have a supportive supply chain that is not totally focused on China. So I feel very confident on where we're sourcing, how we're sourcing, and the prices that we're paying. We are a dominant factor to pretty much everybody that we trade with. The factories that we engage for production are generally occupied overwhelmingly by G-III product so we do have leverage over the factories.

Okay. And Morris, generally, are you seeing stabilization? Any thoughts on second half? And then in the beginning of 2012 are we starting to see some stabilization or normalization in any of the major inputs?

It's a little bit too early. I believe that we'll see stabilization in there. The factories generally are known to beat the drum quite loudly when you're out there placing your orders. As the season evolves and there's a need to fill those factories, they respond with lower prices. We're seeing open pockets where there are factories that are looking for production that we can fill and get at a very very fair price, in some cases, very similar to last year. So prices are not totally out of hand. There are some pockets that are. One commodity that I would highlight disappointingly is the leather business. Leather raw material is very high. And therefore factory capacity has basically dwindled. A lot of the factories have shut down because they don't have leather orders. So I would say there are unique situations but overall, I would say it's fairly stable.

Edward Yruma with KeyBanc Capital Markets.

Hi, thanks for taking my question. Morris, I know you mentioned that you would contemplate a specialty retail acquisition or that you're at least open to it. Could you give us an update in terms of timing on any type of acquisition? Is it something that's going to take place in the near term or is it just more of a longer term goal?

That's a hard one to put a calendar to. I could tell you that there's not a day that there's a meeting that relates to an acquisition or identifying a potential candidate or doing diligence on one that we've identified. So it's hard to put a calendar to it. A lot of deals are slated, in our minds, to close in a short period of time and they never cross the finish line. So it's a hard one to respond. And that's both wholesale or retail.

Got you. I know you indicated that you had to provide some additional support to some of your retail partners because of the unseasonable weather. Has that been fully realized or was there some residual impact into Q2?

No, we believe it's fully realized.

Got you. And finally, wanted to get a quick update on two of the other growth initiatives you'd mentioned in the past, Marc Moto jeans, and Guess dresses. Thank you.

Guess dresses were shipped for the tail end of first quarter. Performance was just okay. This is no different than the launches of pretty much every one of our dress lines. You need to stabilize fit, you need to identify fabric and style. And it was nothing to rave about, yet there is demand for the brand. The door count has expanded so every retailer that we've shipped also understands that your first shipping includes mistakes. And in each delivery you start to eliminate those mistakes. So we're very very happy with that license. We only shipped 100 doors. And if it follows the path of Jessica Simpson, we would be very very happy.

Jessica Simpson went through the same gyration. We shipped initially, the fit was not on target. There was criticism for the uniqueness of styling. The styling was good. But every retailer had some commentary. When you finally collated, by the third delivery you get it right. So as long as you have support of the retail world, you're fine. We believe that the opportunity is north of 500 doors for both Guess and for Jessica Simpson. They basically are managing the same doors.

And as it relates to Marc Moto, Jones is very consistent with our experience. When you launch a brand, you don't always get the fit right the first time out of the door. You sometimes don't get the pricing right. And sometimes you don't get the marketing right. So they did what they had to. They're great partners. Jones is a great partner to have in business. And they participated in markdown money and returns, as they needed to, on Marc Moto, and have expanded the door count. And the line looks much better now. And next delivery, it will look better than that. So both ways, Jones does not have an aggressive minimum guarantee to us in the early years. And we, in the same vein, when it comes to signing a brand such as Guess or Jessica Simpson, are very moderate in our guarantees. So that enables us to find the flaws in the business, perfect it and then go on to build what could be a significant business.

Brean Murray, Eric Beder.

Could you talk a little bit about the outwear opportunity for fall? I know in Q1, you mentioned that you were assuming some level of product cancellations. As we are now getting closer to the season, are you seeing that? And how should we think about outerwear growth for the back half of the year?

I think what you might be referring to, Eric, if my memory is right, is the assumption that we might get cancellations on the back end of the year and therefore, we were tempering our buys. If that's what you're referring to. Our order book is on growth mode. It's not on cancellation mode. The first quarter is a combination of an order book that is immediate shipping for spring, Packaways, which is the off price channel, and forward orders that are generally to be delivered starting July-August. And I would tell you in every one of those cases, we're in great shape. We're growing our business in mid to high single digit growth in our order book and it's never looked better. So if I'm not hitting the point that you're asking--

No, that's the point. You mentioned this on Q1 about you were thinking about people were tempering their orders in terms of potential cancellations and you hadn't done that before.

That's absolutely right. But to date it's not come to fruition and we're feeling a little bit better about retail performance in the channels that we're shipping. Again, we're not deeply entrenched in the mass markets here of distribution, so that's where I would have a little bit of a concern.

Okay. And for Wilsons, what is driving the sales in the springtime now? What have you changed, for your two very strong Q1s, what have been driving Q1 sales in leather? Usually it's not a huge business for you.

I guess it goes just very much in line with what I said about Guess and Ellen Tracy and Marc Moto. As you refine a business that you take on, and as you realign management, you realign your assortment, you do better store presentation, it all adds up to better business. So we're seeing a little bit better margin, we're seeing much better top line and we're seeing opportunities for growth. So there's not one single issue that I could point to and say this is why we're up 10% and this is why May is 15% up. But it's a totally different experience when you walk into the store today versus when you walked in two years ago. So if you haven't been into a Wilsons store in a while, I suggest that take a little time and I think you'll recognize a definitive difference.

I've been to the stores and I agree with you. Just one quick one. You've increased your warehouse and you've changed the internal and your New York headquarters.

Yes. We've expanded our warehousing to accommodate additional distribution and additional categories. Some of the categories that we're now doing require pallet receipts and pallet shipping. So we've modified and increased our space needs to accommodate that growth. In house, being the New York City facility, we had an opportunity. Things worked out. All of the stores were aligned and we were in three different buildings. We were able to sign a lease, an advantageous lease, in the building that our corporate headquarters is located in to enable us to bring all of the pieces here. So for the short-term, there's a little bit of CapEx expenditure. For the long term, there are efficiencies as well as cost reductions in rent that we're paying. So it's all appropriate in running our businesses and we plan in the giving months to have an Investor Day where we'll invite you guys in to see what we're doing and the rationale for our spendings.

Mitchell Leeds with Morgan Stanley Smith Barney.

Can you expound just a little bit on the NFL?

I can. The team license business for G-III totally is less than 10% of our total business. The piece that relates to NFL is approximately, let's say, 3% to 4% of our total business. There is absolutely a negative effect if the season doesn't start on time, but it's not detrimental to our business. It's not helpful but it's not something that we would say would catastrophically affect us. We will be reaching out to our vendor base in another 2 to 3 weeks if we see no sign of resolution and ask our vendors to participate either in delayed receipts or delayed shipping if we're not able to ship this year. The product is not as time sensitive as pure fashion is. The retailers, we believe some of our key retailers will participate and take the product in. And maybe we have to give them additional dating so it's a financial issue. And maybe we would carry a little bit more inventory than we had anticipated for this year in the team license area. And we would be deficient on our gross margin dollars contributed through that area.

(Operator Instructions) Stifel Nicolaus, Jim Duffy.

Thank you, good afternoon. I may have a bad connection so if you lose me just move on. First question relates to the fall order book increase. How much of that is units versus how much is price?

I would tell you that it's a little bit of both, Jim, and without being able to give you specific break down. We've got a 14% projected increase in the business. That's what the order book looks like right now. And we are expecting our costs to be up in the 5% to 9% range so you've got a little bit of both.

Okay, that's helpful. Thanks, Neal. And then I want to explore the inventory some more. How much of the increase that we're seeing on a year to year basis is related to spring merchandise, spring season, summer season merchandise?

At this time, we would be significantly past the spring. We're really into shipping summer transition and then starting the fall. So we're past the spring for the most part.

And so you don't have spring excess to contend with, is what you're saying?

No, very little. I'll add there's cotton dresses. Spring coat inventory we wish we had more. If there was a problem we're working through it in a couple of fabrics within the dress area and nothing at all that would concern us.

Okay. And then what do you see as a normalized rate of inventory turn for the business? And when should we expect inventory to regress back towards those turn levels?

I think that we're going to expect it to be, historically we've turned pretty quickly and I think as our business grew we really couldn't maintain that. We probably been north of 5 if you looked at us, at our turns historically. Right now I think we're hoping to get to about a 4 time turn overall throughout the year, somewhere between 4 and 4.5. And we're still really looking as we project that inventories right now, I think Q2 is still looking like it's going to be on the heavy side, again primarily fighting the cost increases that we're having. We find that to be a decent tool for us right now. So we probably still expect this year to be slow. I would suggest that probably by the end of the year we'd get back to a more normalized turn if you were to look at a trailing 12 month analysis.

Jim, we also have a couple of issues that begin to come into play. As we grow our retail, our retail inventory is not going to turn as rapidly as our wholesale inventory. We have the sportswear business that we're building fairly aggressively. And a good part of that is the replenishment business. So the optics of that might appear that inventory levels are high but it's a different model. And maybe the third piece that I would point to is the luggage piece of our business where we are going to warehouse some luggage. And most of the luggage business is also on replenishment. Retailers don't have the physical space to put luggage in so basically every week you get replenishment. So those 3 factors resonate in my mind quickly as becoming encumbrances in bettering our inventory levels, or worsening our turns.

That makes sense. And then within the legacy business, have you seen any change in the timing in which retailers are receiving orders or want receipt of orders? Or is that business as usual?

I think it's business as usual. The scale of business, or having product and businesses that the retailer wants generally leads them to cooperate with you. So today the strength of Calvin we do leverage at retail. And when there's a need for us to call in a favor, and that might be early receipts of another brand or an initiative that we're either running short of space or we believe it's in the best interest of both parties for the retailer to take the product in, we do get cooperation. And I'll tell you years ago, it was like talking to a brick wall. So today, scale is important and dominance in an industry is also important.

And there are no further questions at this time. I'll turn the conference back over to management for any additional or closing comments.

Okay. I thank you all and have a great day, and thank you for being patient with us.

Ladies and gentlemen, that does conclude today's conference. Thank you for joining.