G-III Apparel Group Ltd (GIII) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the G-III Apparel Group fourth quarter of fiscal 2012 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 your question. I would now like to turn the conference over to Mr. Neil Nachman, Chief Financial Officer. Please go ahead.

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 morning and thank you for joining us. With me today are Sammy Aaron, our Vice Chairman; Wayne Miller, our Chief Operating Officer; and Neal Nackman, our Chief Financial Officer. I would like to start by saying this is the second best year in the history of the Company. Unfortunately, we did not reach our expectations. This was caused primarily by unseasonably warm weather during our peak selling period. We made a lot of progress through the year and our financial results are certainly respectable. We did what was needed to move products during the season. Importantly we positioned the Company for the year ahead. We have some powerful opportunities in several areas of the business that we are really focused on.

First let me take you through the financial highlights from the fourth quarter and the year end. Consolidated net sales for the quarter were $294 million. This lower than planned net sales reflects higher markdowns in allowances and dilutions compared to prior years. We worked with our customers to help them achieve adequate sales grids. Gross margin was down 400 basis points compared to last year. As a result, we had net income per share of $0.25 in our fourth quarter. For the full year we had $1.230 billion in net sales and net income of $49.6 million and $2.46 per share.

Our balance sheet remains strong. We had a $5 million net debt position at year-end compared to cash of $10 million at the end of last year. We are planning conservatively on the revenue line for our outerwear business next fall as a result of this year's holiday sales. But we expect to see better margins. This should result both from better inventory control and from lower sourcing costs.

Even in a tough season there were some bright spots in our outerwear business that we can and will leverage as we go forward. Our sports business, which still is about two-thirds coats, was up 20% over the prior year, notwithstanding the uncertainty caused last year at this time by the threat of a lockout. Our product is well designed and sourced. Our sports margins have been strong. Our relationship with the leagues have never been better.

We are excited about our expanded NFL license that goes into effect April 1. This expanded license incorporates broader distribution rights in mid tier department stores and the sporting goods channel. Andrew Marc, our own brand, which is heavily weighted towards outerwear, was impacted by the warm weather. We now have many licenses across a variety of categories. We've increased our marketing initiatives. We had a good campaign this past fall. We continue to believe that there is a lifestyle opportunity for this brand.

Our dresses are selling very well this spring season for the first time. We added both Jessica Simpson of Vince Camuto coats to extend our contemporary outerwear business. These are two very powerful new coat opportunities for our Company. Beyond outerwear, our new business initiatives have stayed on track. I'll take a few moments to update you on some of them.

Let's start with sportswear. We are very excited to see a strong reaction to Calvin Klein sportswear, particularly for next fall. We are anticipating growth and improved profitability. This is our best collection to date. We have refocused the lines, added new merchandising talent. The response from our customers has been excellent. We are also pleased to report that the Kensie contemporary sportswear business is going well. We believe that Kensie as a whole, and sportswear for the brand specifically, can be an important business for us and our retail partners.

With respect to our dress business, Calvin Klein dresses has become the cornerstone of the dress department. We are leveraging that position to drive not only Calvin sales, but sales for our other dress lines. This is particularly true in the contemporary business. Jessica Simpson is an important brand that has a lot of growth potential. They are a top performer in the category and we expect to see continued sales growth this year. The opportunity for Kensie is also strong in this category and we're launching a Castle collection of Kensie contemporary dresses for the 2012 holiday season.

Vince Camuto, another strong brand, has also supported the quick development of the dress business which we have launched this spring in all doors for Nordstrom's and many other department stores. The line has quickly made an impact. Macy's, Dillards, Bon-Ton, as well as Lord and Taylor all bought this dress collection aggressively. We'll be in more than 500 doors this year. Guess? dresses has for the first time become a top-selling brand for us. When we layer these new lines on top of Calvin Klein dresses, we expect a lot of growth in the dress category in fiscal 2013.

I should also mention that our Calvin Klein suit separates business is getting a lot of attention right now. We are the bright spot in an otherwise tough category and the strength and design of the product is obvious. Blouses are key components to the separates business. This is a nice complement to our dress program and we believe it will continue to do well.

While our largest businesses are positioned to perform well, our biggest growth opportunities are in accessories, handbags and luggage. Our handbags and luggage business, led by licenses with Calvin Klein, recorded approximately $50 million in sales in 2011. We're just getting started. We're continuing to increase both our door count and the volume per door. We're confident in our team. We have a powerful opportunity to build the platform and we expect to attract additional complementary licenses in this category.

Another major opportunity for growth is with our Calvin Klein performance license. This brand is performing exceptionally well at retail. Our wholesale customers are using our products to anchor their women's active business and we're getting more floor space. Our first Company-owned retail store opened in Scottsdale, Arizona in February, and was significantly above plan. We're looking forward to our second store in just a few weeks in Union Square in San Francisco. While these are clearly test stores, we believe that the market is ready and excited for this concept.

We are continuing to plan for a fall launch of Calvin Klein performance retail in China. Have today signed up China Ting as our joint venture partner. China Ting is publicly traded on the Hong Kong exchanges and has the expertise and resources to help us build and grow this retail concept in China. We know them very well as they are a key supplier of ours. They're also a key retailer in China. We could not be more pleased to have them partner with us in this venture.

Our Wilsons retail business continued its improved results, although less than we planned. As outerwear sales, which comprise about 55% of Wilsons sales, were impacted by the warm weather. Even so, we saw our productivity gain and we are positioned to make further gains. We are also continuing to test our Vince Camuto stores which are still a work in progress but we remain confident that with some key merchandising changes, this could be a successful initiative.

We have a lot of positive momentum across the business and we are really determined to demonstrate our true potential. There's no denial that 2011 was a difficult year. Despite all the negative issues we faced, this was still one of our best years in business. Over $1.2 billion in sales is a record for G-III. Earnings of $2.46 per share is second only to last year's earnings. We have a well-motivated team that is primed for a record-breaking year in 2012. I will reserve some additional comments for closing. But with that overview of our business, I will now turn the call over to Neal who will take you through the numbers for the quarter and the year, and also provide you with guidance for fiscal 2013.

Thanks, Morris. For the full fiscal year we reported net sales of $1.23 billion, an increase of approximately 16% compared to last year's net sales of $1.06 billion. Net sales of wholesale license product increased 17% to $840.7 million from $718.5 million. Net sales of wholesale non-license product increased 13.8% to $277.6 million from $244 million in the previous year. Net sales in our retail segment increased 15.5% to $164.3 million from $142.3 million in the prior year.

Sales of our wholesale licensed product was favorably impacted by the introduction of three new Calvin Klein product lines. As well as an increase in sales from most of our established Calvin Klein product lines. We also had increases in Jessica Simpson dresses and licensed sports apparel. Increased sales of non-licensed product were primarily attributable to increases in sales of private label programs and, to a lesser extent, increases from Andrew Marc products.

The retail segment increases were from a combination of a higher store count, as well as same-store sales increases of 6.6%. Although we achieved record sales for the year, our net income for the year decreased to $49.6 million or $2.46 per diluted share compared to $56.7 million or $2.88 per diluted share in the prior year. The main reason for this decrease was the decline in our achieved gross margin. The overall gross margin percentage for the year was 30.1% compared to 33% in the prior year. Gross margin for the wholesale licensed products segment was 26.5% this year compared to 29.7% last year. For the wholesale non-licensed product segment, it was 26% this year compared to 28.9% last year. For the retail segment was 46% this year compared to 47.1% last year. The gross margins in all three segments were impacted by promotional activity throughout the year. Which resulted in lower discounted initial selling prices and additional markdown support.

We also experienced significant increases in product costs during the year. We're not always able to increase selling prices to offset cost increases. SG&A expenses for the year increased $28.6 million to $277 million. Our expense increases were primarily attributable to increased personnel costs resulting from the addition of new product lines, an increased outlet store count, higher outside warehousing costs associated with our sales growth. Increased advertising costs related to both higher advertising fees paid under our license agreements, and increased cooperative advertising spending.

Regarding our fourth quarter, net sales increased 9% to $294 million compared to $270 million in last year's comparable quarter. Net sales of wholesale licensed product in the quarter increased to $180.7 million from $176.6 million, primarily as a result of the introduction of the three new Calvin Klein product lines. Net sales of non-licensed wholesale product increased 28.3% to $70.2 million from $54.7 million. This sales increase was primarily attributable to increases in private label sales. Sales in our retail operations segment increased 15% to $66.6 million from $57.9 million in last year's comparable quarter. This was from a combination of a higher store count, as well as same-store sales increases of 4.8%.

Our net income for the quarter was $5 million, or $0.25 per diluted shares, compared to $12.3 million or $0.62 per diluted share in last year's comparable quarter. Our overall gross profit margin percentage for the fourth quarter was 28.3% compared to 32.3% in last year's fourth quarter. The gross margin percentage for our wholesale licensed product segment was 21.1% compared to 26.7% in the prior year. For our wholesale non-licensed product segment, it was 21.3% compared to 22.6% in the prior-year. For our retail segment, was 45.6% compared to 47.9% in the previous year. The gross margin percentage in our wholesale licensed segment was negatively impacted by higher discounting in markdown participation. The gross margin percentage in the non-licensed segment was down as a result of product mix and pricing pressures.

SG&A expenses increased $7.6 million to $72.3 million. The increase for the quarter was again primarily attributable to higher advertising, warehousing and personnel costs. Regarding our balance sheet, accounts receivable at year end were approximately $163 million compared to $138 million at the end of the prior year. Our inventory at year-end increased to $254 million from $205 million last year. Approximately half of this increase is attributable to our newer business units.

For the 2012 fiscal year we spent approximately $17 million on capital expenditures which was primarily for the expansion of our showroom and office space, as well as the opening of additional outlet stores. We expect our capital spending to be less in fiscal 2013 as our showroom and office construction is now substantially complete. For fiscal 2013 we anticipate the rollout of approximately 15 additional stores under the Wilsons and Andrew Marc nameplates. Also including the opening of two new Calvin Klein performance retail stores.

With respect to guidance, for the fiscal year ending January 31, 2013, we are forecasting net sales of approximately $1.33 billion compared to $1.23 billion in fiscal 2012. Net income to increase between $54 million and $56 million, or between $2.62 and $2.72. Compared to $49.6 million or $2.46 per share in fiscal '12. We are forecasting EBITDA to go between 11% and 15% from last year to a range between $102.5 million to $106 million compared to $92.4 million in fiscal '12. With regard to the first quarter ending April 30, 2012 we are forecasting net sales of approximately $215 million compared to $197 million in last's first quarter. We are also forecasting a net loss of $400,000 to $1.2 million, or between $0.02 and $0.06 per share, compared to a net loss of $520,000 or $0.03 per share in last year's first fiscal quarter. That concludes my comments and I will now turn the call back to Morris for closing remarks.

Thank you, Neal. Over the last few years, our progress, our diversification and our growth has been rapid. We're in a position to continue this trend and drive superior value to our shareholders, our customers, our partners, and our consumers. While this past year was not perhaps what it might have been with a normal winter season and a little better economic picture, all things considered, it was the second best in our history. Next year should be a good year.

We certainly have the pieces in place to make that happen. We at G-III never take success for granted. We know that we need to continue to work hard, drive to execute better, and search out more opportunities. We have chosen our growth initiatives and our investments carefully. Not only did this enable us to have a good year in a tough market, but those choices were made to support long-term growth. As we look to the year ahead, we are dedicated to capturing the full range of growth in front of us by brand, by category, by tier of distribution, and by market. Thank you. Now we're ready to take your questions.

(Operator Instructions)

Edward Yruma, KeyBanc.

Can you talk a little bit about the inventory in the channel? Do feel like retailers have packed away outerwear? And has that been contemplated in your guidance?

No. Surprisingly, one might think that there is a significant amount of packaway to support next year's needs. But fortunately for us, that is really not the case. There has been a good deal of self rule on inventory, which is the result of some of our depletion in margin. And the other point is some of the products that we are dealing with on the department store level is being rebought for next year by our stores. And we are utilizing some of the brands that we had inventory in for our own outlet stores. Our own outlet stores have developed a model where 60% or 65% of the business is done through private label to support their business. This year's formula will change. The year that we are in, we'll utilize existing inventory to support the sales of Wilson's by the national brands that we have rather than the private label that they have done historically.

Great. I wanted to drill in a little bit on 1Q guidance. I know that you have added some SG&A as you've grown the business. You had a significant design staff. How should we think about that addition on a year-over-year basis and think about how that flows through the P&L on an annual basis?

I think that we really are looking at next year's SG&A expansion, really. We have made investments in people, we have made investments in design. And we've still got a number of businesses that are growing. We're going to have warehousing and advertising cost increases. And I think that for us, next year is not one that we are anticipating SG&A leverage on. I think what you'll see is, and what you can anticipate, is some gross margin improvement and probably not on the SG&A side. And you're seeing that in the first quarter.

Super, thank you.

Diana Katz, Lazard Capital Markets

Neal, I'm wondering if you could just expand upon what you just discussed, not anticipating SG&A leverage but some gross margin improvement. Any way to quantify at all on either of those lines for our modeling purposes?

I don't think we are ready to quantify it. But we have stepped into a number of new businesses. The Kensie business is a new business for us. The handbags and luggage is in the second year of rollout. We're launching a number of new dress businesses. So we have got a number of business units that are growing. We are still feeding some of the growth in our previously-existing businesses. So I think that is really what is driving the SG&A increases for next year.

On that SG&A side, for our overseas offices, we are utilizing the strength of our sourcing to become sourcing agents for both European and American customers which will bring down the cost of that office. The net effect will be a savings on the SG&A side. So it will be a significant number on the sourcing and development side in our overseas offices.

That's great. I'm wondering if you could let us know for last year what percentage of your business ended up being outerwear versus dresses and sportswear?

The outerwear was 54% and the dresses were right around 25%. That should move slightly down going into next year.

The outerwear piece?

The outerwear.

Great. And then for the portion of inventory that is not being brought for new businesses, can you describe if that inventory is clean?

Yes our inventory is clean. We have been dealing with moving what we would classify as dated inventory from November on. We've done a pretty good job of it. Some of it appears to be more dated than we are accustomed to. But that is a product of being in the fulfillment business in both the suit business and in the sportswear business. So we need to have a level of inventory to support maintaining stock levels at the retail stores. But beyond that, our inventory is clean.

Okay, thanks for much.

(Operator Instructions)

Eric Beder, Brean Murray.

Could you talk a little bit about the leather business and how you see a change? Where are leather prices going to go this year? And how are you looking at that?

Our leather business has come down to well below 10% of our total business. That would be not a question that you asked. But, the impact of price changes is less important to our Company today than ever before. Taking it divisionally, Andrew Marc was impacted by increased leather prices for calendar 2011. And costs have gone up as much as 25% or 30% on the materials side. And we needed to pass along a good deal of the increase to the retailer and we absorbed some of it internally. This year, we see that prices are coming down. It will impact, again, Andrew Marc and a little bit of our private label business. But overall, it is a negligible impact on our business although we anticipate leather prices coming down.

Okay. How are the initial results from Tommy Hilfiger luggage? And for the Calvin Klein handbag business, last year you had a number of issues with how the license rolled how and how quickly you could start to monetize that. How should we think about the opportunity with Calvin Klein handbags going forward now that you can flow it much better?

Our business in Calvin Klein handbags and luggage was actually quite good this year. We beat our plan. The product is well-positioned at retail. We are getting additional space at retail. What impacted us negatively was a mixed start. We sourced the handbags in two factories that were not right for Calvin Klein. We stopped production and moved on to two new factories right out of the box. So what occurred was we got the right product in but we paid to air the product in. And we worked on a shorter margin to get it placed appropriately and begin to garner space in the retail venues that were supporting us. So all said, we had a good year, if you pull out the margin side. We were more influenced on the air freight costs and placing product in factories at the last minute without an appropriate plan. So we did great damage control and we're looking at much better margins on the handbag business, as well as additional store counts and greater penetration.

The Tommy Hilfiger luggage piece of our business is distributed into 400 Macy's stores. Doing quite well. And we're pleased with that business. We have a seasoned professional in the luggage business that has been creating wonderful product. And we're managing through that business, as well. We are getting better on freight costs. We're getting better on warehouse costs. And we are going to see margin improvements in that area as well for 2013.

We have a small initiative that we are launching in major league baseball luggage, which we are getting good attention for. We don't know the scale of it. And the other piece that would be of interest is that we have an opportunity for Kensie handbags that we have not focused on yet. We are working on our Calvin Klein area very hard and we are leaving Kensie for a little bit later. I'm not sure we get to it in the next quarter but certainly by the end of the year we will begin to concentrate on a rollout of Kensie. We have taken Andrew Marc in-house. We weren't satisfied with the licensee that had handbags. And the collection is being shown right now. I don't have responses for you but I will tell you that it will be an improvement over last year.

Great. And when you look at the guidance for this year, what are you assuming in terms of the outerwear business? Are you assuming something we had this year? Are you assuming something from prior years? How should we think about your guidance and how you are looking at the outerwear business for the second half?

Our guidance basically is an anniversary of the year that we're in. We believe that it is possibly a conservative number. We believe there is some opportunity in the coat business. We are planning it down to flat. And we believe that based on what I have been getting in the last couple of weeks, it appears to be a little better than that.

Great, thank you, and good luck this year.

Eric Alexander, Stifel Nicolaus

I'm sitting in for Jim Duffy. I just had a few question. When we're thinking about normalized gross margin levels, any sort of parameters that we should be maybe thinking about? Obviously, last year was difficult with the weather-related things and maybe some pricing issues. Help me out here thinking about that.

Yes I think that at this point the best that we can give you is that we're definitely looking for gross margin improvement probably throughout each quarter of next year.

Okay. And then beyond that, obviously you guys did 33% the year prior. Should we be expecting to see some sort of improvement to that, maybe past this year in, thinking out longer term?

I think longer term it is certainly possible that we can get back into that. And I think that from an operating margin standpoint we've still got our eyes set on double-digit operating margins. So I think next year is a little bit of a soft year for us. It's in reaction to the way we have come through this year. At least that's our initial view on it. We've only got 44% of our year booked for this year. Which is comparable to where we have been in the past but that does not give us a tremendous amount of guidance for the current year. But I think our business will definitely bounce back to a stronger operating margin after this first year. And then again we will start to see some more SG&A leverage also as we move forward.

Okay. And then just talking about for fiscal year '13, thinking about, you had indicated gross margin improvement. Where do you see greater improvement in your wholesale license business or in your non-licensed business? Just help me out directionally for modeling that out.

I think it could be a little bit of both. If I was to lean on one, I would tell you that the license side has more opportunity than the non-licensed side. But they both have got some room for improvement. We really had decreases in all areas of the business this past year.

Okay, that's great. And then last question for retail. Thinking total store count, I apologize if I missed this. Total door count increase for fiscal '13 that you guys are maybe thinking? And then maybe directionally low-single digits, mid-single digits, flat type of comps, should we be thinking about?

We closed the year with about 144 doors. We're opening up about 15. There will be some closures. I would expect that at the end of next year we're around 150, maybe just north of there. In terms of like-for-like plan, we are in really mid- to high-single digits as far as a like-for-like plan for next year.

Okay, thank you very much. Best of luck.

It appears we have no other questioners at this time. I would like to turn the conference back over to Mr. Goldfarb for any additional or closing remarks.

Thank you very much for participating this morning. And have a good day.

And that does conclude today's conference. Again, thank you for your participation today.