G-III Apparel Group Ltd (GIII) 2015 Q3 法說會逐字稿

Welcome to the G-III Apparel Group third-quarter FY15 earnings conference call. My name is Lorraine and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Mr. Neal Nackman. Mr. Nackman, you may begin.

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 adjusted EBITDA and non-GAAP net income per share, which are both non-GAAP financial measures. We have provided a reconciliation of GAAP net income per share to non-GAAP net income per share and of GAAP net income to adjusted EBITDA in our press release and on our website. I will now turn the call over to our Chairman, Chief Executive Officer, and President, 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; Neal Nackman, our Chief Financial Officer; and Jeff Goldfarb, our Director of Strategic Planning.

We're very pleased to report a record third quarter. Outerwear is a big part of our third quarter and we shipped well. With great product and a good stretch of cold weather we're seeing strong sell-through rates at retail.

While it is still early in the fourth quarter, as of today outerwear has been one of the strongest categories at retail and we expect to have a good finish to the season in our wholesale business. Here are some financial highlights for the quarter.

Net sales were $812 million, up 21.5% compared to last year. Excluding the Bass acquisition, our organic net sales increased 11.9% compared to last year's quarter.

Our adjusted EBITDA increased by 16.6% to $119.7 million from $102.7 million last year. Our adjusted net income per share was $3.09 compared to $2.88 last year, an increase of 7.3%.

This reflects a generally strong performance across our businesses. We're very pleased with this performance which exceeded our plan, and we've increased our full-year guidance.

Our wholesale business for the quarter grew 12% compared to last year. Outerwear, which is roughly 60% of our wholesale sales in the quarter, is off to a strong start for the season.

Early cold weather across nearly the entire country helped get the outerwear season moving. Our best performers thus far are Calvin Klein, Andrew Marc, Guess, Jessica Simpson, Kenneth Cole, and Tommy Hilfiger.

I'd like to note that the launch of Ivanka Trump outerwear was excellent, and while small this shows that the reception for the brand as a whole is strong. The strength of the outerwear category extends to all tiers of distribution, and given the strong early sell-throughs our expectation is that we will see a strong finish to our outerwear business in the fourth quarter.

Our sportswear businesses are all performing well. Our Calvin Klein Better Sportswear continues to be a key brand. Even after having grown it from almost nothing to now over $150 million in five years, it continues to post double digit increases.

Calvin Klein Performance has become an important business in a short amount of time. I would note that this brand was in 350 doors at the end of 2012. At the end of this year we expect it to be in over 1,200 doors.

We expect continued growth with department stores and are beginning to test distribution in sporting goods chains as potential additional growth. Kensie, our contemporary sportswear business, is performing to plan, and our Ivanka Trump sportswear separates shipped well. Like we've seen with outerwear, Ivanka Trump is demonstrating that it is a brand that can play across a full range of categories.

Women's sportswear is one of the toughest categories to execute well on a consistent basis. We believe that our design and merchandising teams are the best in the industry and have enabled us to execute well in this category.

Our women's suit and suit separates business is doing well in department stores, running modestly up versus last year. We continue to be a category leader for our customers in this area.

Let's move to our dress business. Calvin Klein is our anchor brand in this business, and it continues to lead the dress category in department stores.

We're also seeing strong selling by our own Eliza J and Jessica Howard brands. Jessica Simpson, Vince Camuto, and Ivanka Trump dresses also performed well in the quarter. Overall bookings for the upcoming spring dress season are strong, and the early feedback on our assortment across a number of brands is encouraging.

Our team sports business had another standout quarter, particularly from a profitability standpoint, with our NFL business leading the way. Calvin Klein handbags and cold weather accessories continue to be good performers at retail.

We've grown this business to almost $100 million this year from $40 million since its launch in 2012. This is partly from increased doors, but also from a 20% increase in average unit prices.

We've delivered an increasingly diverse array of products. I would also note our investment in shop-in-shops carries a particularly high return in this category. We have an excellent opportunity for sustained growth and diversification in handbags in Calvin Klein and also over time with some of our other brands.

Turning now to specialty retail. Wilsons had a comp store sales increase of 6.4% in the third quarter. We continued really into that trend in November and through Black Friday, and we believe Wilsons is well positioned for the holiday season.

We've continued to reposition our G.H. Bass business to improve its results. New updated inventory has been flowing into the stores and our sell-through and gross margins are improving. We also have completed our back office integration project, and now we're operating with one warehouse, one finance and operations department, and a common set of systems.

Although Bass is a little behind its financial plan, it's now on a good path. They had a 1% comp store sales increase for the quarter, but more importantly had comp store sales increase of 11.4% for October. November remains strong as well.

We're pleased with the evolution we're seeing with our Bass business, as our repositioning improves the product offered, the visual merchandising of the product, and the overall position of the brand. Not only will we help our own stores with this improvement, but it should pay dividends with increased royalty income we derived from a number of partners. We're excited about the future of G.H. Bass.

With regard to Vilebrequin, the US business performed well in the quarter and continued to present significant opportunity for growth. At the same time Europe has been a little bit more challenging. We had a mid-single digit comp store increase for the quarter in the US and a comp store sales decrease of about 10% in Europe and Asia.

While the macro issues in Europe and Asia are beyond our control, the brand and the business remain fundamentally healthy both in our stores and in our wholesale business. We're managing our Vilebrequin business well in this challenging environment.

We've signed a license for footwear to launch next year, and we're looking forward to PVH's launch of neckwear for next fall. We will continue to expand Vilebrequin, which we believe has a strong lifestyle position.

I'll reserve some additional comments for closing, but will now turn the call over to Neal Nackman, our Chief Financial Officer.

Thank you, Morris. Net income for the third quarter ended October 31, 2014 was $80.6 million, or $3.53 per diluted share, compared to net income of $59.6 million or $2.85 per diluted share in the prior year's comparable period.

Included in our net income in the current quarter is $12 million of non-recurring other income equal to $0.44 per diluted share on an after-tax basis, which consists of payments for the sale of the rights to operate Calvin Klein Performance stores in Asia, including the sale of the Company's interest in the joint venture that operated Calvin Klein Performance stores in China; the reduction of the estimated contingent consideration payable in connection with the acquisition of Vilebrequin; and the early extinguishment of debt constituting a portion of the consideration for the acquisition of Vilebrequin for an amount less than the principal amount of this debt.

On an adjusted basis, excluding these items in the current quarter and excluding certain non-recurring acquisition and potential acquisition related expenses in the prior year's period, non-GAAP net income per diluted share was $3.09 for the quarter compared to $2.88 in the prior year's third quarter. Net sales for the quarter ended October 31, 2014, increased 21% to $812 million from $669 million in the same period last year.

Net sales of licensed products increased to $542 million from $505 million driven by increased sales of Calvin Klein women's sportswear as well as Tommy Hilfiger and Guess outerwear. Net sales of non-licensed products increased to $180 million this quarter from $124 million in the comparable quarter of last year. This increase is primarily related to an increase in net sales of private label programs.

Net sales of our retail operations increased to $130 million from $55 million in the prior year's third quarter, primarily attributable to the addition of net sales from our G.H. Bass business acquired in November 2013. We also had an increase in Wilson's net sales from the addition of new stores and a comp store sales increase of 6.4% for the quarter.

Our overall gross profit percentage was 36.3% in the three-month period, compared to 33.9% in the prior year's period. The gross profit percentage in our licensed product segment was 32.2% this quarter, compared to 30.9% in the comparable quarter in the prior year. Gross profit percentage in our non-licensed product segment was 34.8% compared to 34.7% in the prior year.

The gross margin percentage in our retail operation segment was 44.7% compared to 50.3% in the prior year's period. The decrease in the gross margin percentage for our retail operation segment is primarily due to our new G.H. Bass business that operated at a lower gross profit percentage than the rest of our retail business.

Selling, general, and administrative expenses increased to $176 million in the quarter from $125 million in the same period last year. This increase is primarily attributable to selling, general, and administrative expenses associated with our new G.H. Bass business as well as expenses associated with payroll and third party shipping that resulted from our growth in sales, profitability, and our overall increased retail store count.

Our effective tax rate in the quarter was 35.3%, which was lower than last year due to the tax treatment of certain non-recurring income realized in the period. We continue to expect that our normalized effective tax rate will be slightly under 38% for the full year.

Regarding our balance sheet, accounts receivable increased 14% to $454 million from $398 million at the end of the prior year's third quarter. Inventory increased approximately 35% to $436 million, compared to $323 million. The inventory increase, excluding G.H. Bass, is approximately 13% and is in line with our forecasted sales growth.

Our bank debt less cash balances on hand decreased to $105 million from $186 million at the end of last year's third quarter. In addition to our normal working capital and capital expenditures, we had two major financing activities that impacted our net debt levels. In June 2014, we raised just under $130 million in net proceeds from a follow on equity offering. And in November 2013, we paid approximately $50 million for the purchase price in the G.H. Bass acquisition.

We have spent approximately $34 million on capital expenditures during the first nine months of our fiscal year, and expect our capital expenditures to be approximately $36 million for the FY15. These expenditures are primarily for the integration of the G.H. Bass business onto our distribution platform, leasehold improvements for new Wilsons and Vilebrequin stores, and fixturing costs at department stores.

Lastly I would like to discuss our revised guidance for the full fiscal year ending January 31, 2015. We are now forecasting net sales of approximately $2.13 billion, up from our previous forecast of $2.11 billion. This would be an increase of approximately 24% from the $1.72 billion of net sales in FY14.

We are increasing our forecasted net income to be between $103 million and $106 million, compared to our previous forecast range of between $90.6 million and $94 million. We are now forecasting net income per share of between $4.65 and $4.80 per diluted share compared to our previous forecast range of between $4 and $4.15.

Our revised guidance includes the effect of our issuance of 1.725 million shares in a public offering completed in June of this year, which we estimated the impact on our forecasted net income per diluted share to be approximately $0.16. In addition, the revised guidance includes items of non-recurring other income included in our results for the third quarter equal to $0.45 per share net of taxes.

Excluding the other income reported in the third quarter, our revised guidance of non-GAAP net income per share is between $4.20 and $4.35, and that compares to non-GAAP net income of $3.74 per diluted share in FY14. We are forecasting adjusted EBITDA for FY15 to grow between 20% and 24% to between $176 million and $181 million, compared to $147 million in FY14. That concludes my comments, and I will now turn the call back to Morris for closing remarks.

Thanks, Neal. I think we're in a strong position right now, particularly relative to much of our industry. Our results are solid, our planning has been on the mark, our inventory position is good, and we have momentum going into the peak period of the holiday season.

To be on this kind of footing enables us to concentrate on our vision for the future. We expect to complete a very good year. Going into next year we will continue to grow, drive for efficiency, and build new brands and businesses.

To call out a few opportunities that we are increasingly excited about; G.H. Bass is going to be a much improved position next year. We have an opportunity to remake and reestablish their heritage and improve their market position. As part of this effort, we are looking to launch a new women's wholesale sportswear assortment with our own design teams, and expect to see all of the brand's merchandise continue to improve.

This includes the men's sportswear collection that we licensed to PVH, which is retailing very well and is planned to nearly double its store count to 700 department store locations next year. Our effort with the G.H. brand should benefit us both in store and through increased royalty income.

Calvin Klein also continues to top our list of ongoing opportunities. We expect to continue to grow our Calvin Klein sportswear, dress, and handbag businesses, each of which can take market share.

The Vilebrequin opportunity remains strong. We have an opportunity to drive this brand into new categories, new licenses, and additional distribution both in the United States and overseas.

Ivanka Trump, which is now lunched in each of our major categories, has an opportunity to be an increasingly meaningful brand.

We have a strong balance sheet that will enable organic growth as we continue to look for acquisitions to supplement that growth. Over the last several years our organic growth and acquisitions have enabled us to achieve compound growth rate of approximately 20% for our top and bottom line. We have the initiatives, the infrastructure, the balance sheet, and the organizational drive to sustain this kind of growth and the value it creates for our shareholders.

Thank you and I think we're now ready to answer questions.

Thank you. (Operator Instructions) Our first question comes from Erinn Murphy from Piper Jaffray.

Great, thank you, good morning, and congratulations on a very solid third quarter.

Morris, I was hoping, for you -- if you could maybe just continue on your thoughts on G.H. Bass? I would just love to hear more about the product that you have in the stores right now. It sounds like it's really resonating well thus far in November. I think you've got some further line extensions in retail at least planned for spring.

And then maybe just if you could add a little bit more context for what you guys have been seeing at wholesale with the PVH relationship -- that would be really helpful.

Perfect, thank you, Erinn. We acquired Bass from PVH just about a year ago. This is a great heritage brand that obviously in the PVH portfolio probably didn't fit very well. In our world, it's a good asset; it's an amazing asset. We're building it strong.

The level of quality and design that we inherited for our first two deliveries weren't appropriate for what we believe the brand should stand for. We've altered it. The third-quarter delivery and holiday delivery is significantly better.

What we did early on -- the operation as it stood in PVH had two separate buying teams; a buying team for retail and an entire organization for wholesale. Their wholesale area was absolutely wonderful. They built a collection of product that they were marketing to department stores.

Retail didn't speak to wholesale. They were on a different path for the retail stores, and we decided that we would work with the wholesale side of PVH to support our men's needs at retail.

The product was shipped. The product is retailing well on men's, and PVH has begun to exploit the potential at wholesale with Bass. And as I stated before, we believe that they will be in approximately 700 department stores, led by approximately 350 Macy's doors next year.

We took on the initiative early in November to explore the possibility of building a wholesale collection in women's. We are working hard at it, and we believe we'll be ready to ship in September of next year. So, although it won't reach many doors for third and fourth quarter of next year, it will be the start of what we believe will be a significant wholesale business.

We also took a pretty good stand in trying to market the classifications that we felt were better suited in the hands of seasoned professionals in the regions that we were looking to exploit. We signed a great license for European distribution for footwear with a company called Overland. Overland has significant plans, and has begun to take orders for wholesale distribution in Europe. We will open several flagships -- or they will open several flagship stores in Europe, and several outlet stores, hopefully before the end of this coming year.

So, long winded, but it's an area that really shouldn't be forgotten. We are going to build this as an important part of our business.

That's very helpful.

Okay, and I think your question on -- I think you were asking about relationship with PVH on wholesale? Was it the wholesale component of Bass?

Yes, I think you addressed that as you talked about the acceleration of store openings and kind of the retail sell-through rates, it sounded like they were fairly strong thus far.

Yes, they are.

Okay. And then just dovetailing that, I guess into the margin opportunity for Bass, maybe for Neal, I believe obviously when you guys brought the business in, gross margin was obviously well below that of Wilsons. Could you talk as you see this business really build as a much bigger brand over time, what we should anticipate the gross margin rate to evolve to?

Yes, sure, Erinn. We see this business really in a 50% gross margin range when it's operating right at the outlet store business.

Great, thank you. And then just my last question, Neal, for you. Just on this actual third quarter, the gross margin expansion for the entire business was just very strong. Could you just maybe speak to some of the more major components of that build throughout the quarter, whether it was lower markdown rates, just better full-price selling, or just the components of the mix that drove that benefit? Thank you.

Sure. So, look, as I said in the remarks, it was the licensed side of the business that was up significantly. Our non-licensed part of the business was flat.

In terms of category, it really was the outerwear business that led the way. As Morris indicated, we had good sell-throughs initially, so we went in well, and we're retailing well so far to date.

So, I would say that outerwear was probably the stand-out piece of our business, although the other categories performed well. There was really no ?- there were no serious detractors, if you will, from our portfolio.

Erinn, to add to that, we, alongside of PVH, have had an initiative to modify the distribution that existed. And our distribution might be considered better in form; it's more department store than off-price. We've eliminated a percentage of the off-price business to secure the longevity of the brand, and not to damage the integrity of the brand.

Great, thank you, guys, and best of luck during the holidays. Thank you.

Our next question comes from Ed Yruma from KeyBanc Capital Markets.

Hi, good morning, and thanks for taking my question, and congratulations on great results in a very difficult environment.

Morris, how would you characterize -- obviously, you're seeing nice results in outerwear, but how would you characterize sell-through at retail versus last year? And I guess to take that a step further then, how would you expect it to play out as you start to have markdown discussions at the end of the year?

There seems to have been -- thank you, by the way, for your question and your kind remarks. There seems to have been an intentional effort to modify the inventory levels in the department stores this year. The department stores are carrying far less inventory, and strangely, they're doing more sales, more dollar sales, and obviously a greater percentage of the inventory is moving through the doors. So, with that, the residual would be far, far less, and we believe we're in very good shape as far as markdown considerations.

In the areas that concern us, we do have a vote to the level of inventory that is carried. We've become much more proficient in (technical difficulty). We have planners in every division. We have field merchandisers that communicate closely on product that is moving, that needs to be positioned differently, that needs to be marked down. So, we're tailoring our markdowns to support the retailers' need much more appropriately than we have historically.

And we've also opened up opportunities that seem to turn better at retail, which are the -- the women's large size business has been a focus for us in most areas; that's turning much better. So, all in all, we are very comfortable where we are on -- I guess the question might be towards liability in fourth quarter.

Got it. And Neal, a question on Vilebrequin and the contingent consideration -- I think the earn out. I think you indicated on the call, and maybe I missed it earlier, but that you reversed some of that. Just where in the P&L did that hit? Does that really reverse the balance of it? And are you now not expecting to accrue further contingent consideration? Thank you.

Yes, sure, Ed. The total purchase price of Vilebrequin was about $110 million. And of that $110 million, at the time of acquisition, we had anticipated about $5 million of total contingent consideration. We reversed about $4 million of that today. It goes through the other income line item on the P&L. And obviously, there's still $1 million that will be subject to continued evaluation.

It was a three-year period of time in which that earn out could be achieved. So, we'll have one year before that decision gets made.

Got it. And from a longer-term perspective, I think at one point you had envisioned the division as being a mid-teens type EBIT margin, if not higher. How do you think about it longer term, and are these really just near-term, macro, global considerations that are dampening performance? Thank you.

Thanks, Ed. You're absolutely right. We view this as short term. We had some stretch plans out there. We continue to feel very bullish about all the different things that we can do with that brand.

The gross margins on that business are extremely high. The ability to diversify product, to expand with licensees, to do our own wholesale continues to be extremely positive. And we still do feel that it is probably one of the highest operating margin potential businesses for us in the mid-teen area.

Great, thanks so much, guys.

Our next question comes from Rick Patel from Stephens, Inc.

Good morning, everyone, and congrats on the strong performance.

Big changes going on at Bass from a merchandise perspective. Do you feel customers know about these changes, or will you need to spend more in marketing in order to raise your visibility?

And then as a follow-up, how should we think about accretion playing out for this concept as we think about the next few quarters?

Thank you for your question, Rick. Marketing is key to this brand. We've been very fortunate; the archives that were given to us with the acquisition by PVH are amazing. We are taking them extremely seriously.

We have a team of people that are challenged to appropriately market this brand. It's got great heritage. We have a library of product that we're utilizing. I think the visibility of the brand will increase significantly within the next 12 months.

We will create a budget -- we've not done it yet -- that will include a fair amount of advertising. We have the benefit, as I stated earlier, of being able to sign on licensees that are going to share in the advertising expense.

Our stores are going to be designed a little bit more appropriately for the brand. That, in itself, will be a great marketing tool.

I encourage you to visit some of our new stores. If you like, I will get you a list of stores that are in your area that you'll see much improved from history.

So, as I stated earlier, this is a good bet for us. We're going to make great logic out of this brand. We'll build women's product that we'll take care of in-house, and there is no better partner on the men's side than PVH. They're taking this seriously. Their showroom represents great product and great compliance with what the brand stands for.

Rick, just in terms of the accretion, you know, it's been a tough year, but we're really just getting started. It's really the start of our product, as Morris mentioned, that's starting to hit the stores now. I think, from this point forward, we're certainly looking for a slightly accretive event in the fourth quarter. And then we'll hope to see steady improvement really throughout the rest of the next year.

Great. And then a question on handbags -- it's doing very well. Can you talk about the opportunity with shop-in-shops perhaps, where you're at right now and where it could go? And then also touch upon some other brands that you can expand to outside of the core Calvin Klein brand?

We're finding that when we're given the opportunity to build shops appropriately, we see a bump in sales that's as much as 30%. We currently are in 39 shop-in-shops, and we believe we're going to go to as much as 90 for the coming year.

It's a major initiative for us. We take the opportunity very seriously. We fight for positioning, not only the build-out that's incredibly important, but location within the store. So, we're constantly negotiating for as good location as we can get within the store.

And beyond that, our salespeople -- as I said earlier, we have merchandisers and salespeople in all the department stores that are aiding the sales, and we're currently in 1,000 doors. This is a great area of growth for G-III.

Thanks very much.

And the additional -- I'm sorry, the additional handbag lines that we're marketing that are just beginning to break into retail are Kensie -- Kensie looks great. The handbags coordinate with the sportswear quite nicely. It's a different price point. It's contemporary; there's virtually no leather on it, most of it is synthetic, yet it looks great and it's retailing very well.

Wilsons has a well-developed handbag business that is as much as 20% of their overall business. That business is growing every year. We're driving the average unit retail a little bit higher than we have historically.

And through Bass, we've identified a handbag potential that we didn't even know existed. We've developed one handbag that will retail in our own stores. We'll sell about 70,000 units this year in one tote bag; that was quite a surprise.

So, Bass can be a handbag business as well. We will more than likely launch an area for Bass within the coming year as well.

I appreciate the commentary, thank you.

Our next question comes from Joan Payson from Barclays.

Hi, good morning, everyone. And I'll add my congratulations on another really impressive quarter.

Just in terms of the outlets and some of the comps you saw, it sounds like the outlet channel more broadly in the industry was a little more challenged than G.H. Bass or Wilsons in terms of the comps. So, could you talk a little bit about the differentiating factors of those stores that enable that type of comp at performance?

Other than amazing management? Yes, I guess I can [finish] that. (laughter)

The Wilsons stores are predominantly outerwear stores. Fortunately for us, outerwear is performing very well. We're in key markets. We have a limited amount of stores. We have 155 outlet stores, and we have 22 mall locations.

The mall locations are not faring as well as the outlet stores. The outlets -- although they're garnering far less traffic today than they have historically, we're doing fine. We're getting the customer to walk through our door, and we're closing our sales.

It's an effort in hiring better field people. During these times, as the better retailers are identified, I think there's an opportunity to better your employees, train them, and get more of an effort, and we're kind of there with Wilsons. We still have a ways to go with G.H. Bass. I seem to be applauding it maybe a little bit too early. There's still improvements that need to be made, but we're highly confident that they will be made this year.

So, if we're giving you the impression that we're the only ones that are doing well in outlets, that's not the story. And we've got a long way before I can tell you we're really doing well. We're just barely scratching the surface. The year is not an amazing retail year. Our struggles are more on the retail side than they are on the wholesale side.

Okay, and did either of those comp growth numbers, either in the third quarter or quarter to date, include traffic increases, or were they still primarily conversion lifts?

They're conversions. We're converting at about 24% at Wilsons, which is a high rate for us.

Okay, and then just my last question is in terms of the fourth quarter revenue expectations, could you remind us which brands or which categories are the most relevant to the fourth-quarter wholesale business? And also, what type of bookings you've been seeing so far for some of those key businesses?

So, just in total, again, the fourth quarter -- our retail business becomes about 35% of our expectation, which is fairly consistent with last year. Once we go into the wholesale category, we still do a fair amount of outerwear shipping. And of course, January becomes the start of spring shipping. So, we start to look for our sportswear components to be strong in the month of January -- sportswear and dresses.

All right, great, thank you, and best of luck into the holidays.

Our next question comes from John Kernan from Cowen.

Hi, guys, this is Jerry Gray on for John. Thanks for taking our question.

I just want to verify, on the CK performance business, that gain you booked was from the exit of your joint venture in China? And if maybe you could give a little color on the rationale behind that transaction, specifically if there was anything in the Chinese activewear market that you are seeing or saw that made you want to exit that business?

And then also, on the domestic CK performance business, if you could give us an update on how you're viewing the potential of that business, and any initial read you have on that sporting goods chain testing that you're doing?

Thanks for your question, Jerry. Jerry, we had 28 stores in China. We've spent the last three years trying to build an organization jointly with a Chinese partner.

The business was moving along -- not profitable. It was losing some money; nothing that we didn't plan for. And PVH, along with their acquisition at -- I don't want to speak for them as to their strategy, but I'll give you our take on it -- along with their acquisition at -- the Warnaco acquisition -- decided that they wanted to take a bigger retail position in China.

As we were building this area, we weren't 100% pleased. It was going to take far longer than we anticipated to make it profitable for ourselves.

PVH came along and made us an offer to buy out the entity. We decided it was the right thing to do for us, and PVH has taken hold of it right now; had nothing to do at all with the appetite for activewear in China. We were helping to create the market. We were early on.

Lululemon has come on, and several other performance type retailers have entered the marketplace as well. So, there is an opportunity, and a strong opportunity, for growth, and I would assume that PVH will do well with it. We are supplying them with some product. We would love for it to do well, and we also gave up our -- some of our global rights to expand, to PVH at the same time.

As far as our domestic side of the business, we've opened five stores. The latest one is in Mall of America. It's a little bit smaller than what we're accustomed to. The stores are doing well.

The CapEx expense is fairly aggressive; complying to what the PVH organization would like to see in build-outs -- costs a lot of money. And the early stages of growth -- there's a fair amount of CapEx. We're evaluating the potential of building out additional stores. They are all in centers, either lifestyle centers or regional malls. We have no outlet stores to date. And the dollars per square foot that we're generating are far above the average in the centers. So, I'd say we're very pleased with it.

The opportunity that you cited, or I cited earlier, in the sports specialty chains is there. We're testing online with Dick's currently, and we have another large opportunity with another sporting goods chain that we have a significant order for going forward. If this works, we have growth that is quite significant in an area that we haven't anticipated in a while. And our department store business is quite strong as well. So, we like this business.

If anybody is in Herald Square, I'd encourage you to visit Macy's and see what we've done in the Macy's store with a build-out for performance. The area includes a juice bar, and the product reads very strong, and we're doing well with it. So, thank you for your question, Jerry.

All right, great. Thanks, that was very helpful.

And also I have a follow-up on the outerwear business. It seems like the sell-throughs have been really strong at retail. And with inventories seeming kind of lean there as we go into Q4, could you talk about any opportunity you guys have for replenishment in that business?

Talking about replenishment post-Thanksgiving is impossible. We planned our business a little bit tighter than usual. As I said earlier, the retailers bought their inventory tighter, and therefore, we planned our business a little tighter.

So, a huge opportunity in growth for fulfillment really is not there. There is some. We've gotten reorders, and are still very busy shipping, but to take an order now, manufacture, and get it to the stores is quite impossible. We're not operating domestically where we can turn on a dime any longer.

All right, great, thanks, guys.

Thank you. (Operator Instructions) Our next question comes from Jim Duffy from Stifel.

Thank you. Hello, everyone. I hope you're well.

A few questions -- one clarification question on Bass, and then I'll go more big picture. Just to be clear on Bass, is the improvement in the Bass comps that you're seeing in October and into November a function of the timing of the receipt of new merchandise? Is it coincidental with that, or is there something else that's contributing to that?

Well, it's several different factors. The key one is just what you described; our product, with time, gets better.

The early inventory was inventory that we were almost in liquidation mode. We acquired the inventory as part of the purchase price of Bass from PVH. And as the inventory improved, so did our business.

The fact that we've hired different field people -- there's been a major change in store managers and store associates. The education that we have given them over the last 10, 12 months has helped all of this.

The responses in reacting to difficult business are pretty much instantaneous, which was not the case before. So, we're on the road. We don't have a perfectly tuned machine yet, but I would say that we are well advanced, and we're happy with where we are.

Great, thanks for that perspective.

And then, Morris, your commentary around sustainability of a 20% earnings CAGR -- is that dependent on acquisitions, or could the business support that on an organic basis? And then, what are you seeing on the acquisition landscape?

The business can support a 20% growth, at least for the next three, four years. I don't really see a problem. I think if we dissect it, it's fairly simple to see. The handbag businesses, the sportswear areas, the dress areas of our business, retail -- there's huge opportunity that we are working hard at cultivating and improving on.

As far as the acquisition side of the world, we're very active in searching. We spend a good deal of time on looking at opportunities, traveling, evaluating the merit of a deal; and sometimes it happens quickly, sometimes it just takes a little bit longer. But we're consistent with our strategy of wanting to acquire a lifestyle brand that we can do the same thing we're doing with Bass.

And what helps us today is we're less handicapped on a financial basis than we've ever been. We have the ability of making acquisitions, depending on the balance sheet of the company we look at, probably near a $1 billion acquisition. So, the boundaries have expanded in what we can look at.

Great, thanks for that. And then last question, the Calvin Klein licenses have been, for years now, a strong contributor to growth. For perspective, Neal, can you share, exiting the year where Calvin Klein licenses -- what they will represent as a percent of revenue and maybe operating profit?

We're probably around 35% of our total business at this point, in terms of all of the Calvin Klein products. And it is probably slightly above the average productivity, in terms of operating profit, as far as our businesses go.

Okay. And then, one last one that came to me, license royalty stream is becoming more significant. Is that something you expect you'll break out in coming periods?

I think if it becomes material, Jim, then we would. And our hope is that that will be the case. But as far as when that happens, I couldn't forecast that for you yet.

Great, thanks very much, guys; good luck into the holidays.

Our next question comes from Eric Beder with Wunderlich.

Good morning; congratulations on a great quarter.

Could you talk a little bit -- I think you talked about it in pieces, but could you talk about aggregate, how you're seeing Ivanka Trump business do, and where do you think it can go? I know you've talked about it before. I'm curious if it's ahead of where you thought about it before.

From an organizational point of view -- by the way, thank you, Eric. From an organizational point of view, Ivanka is well advanced. We have an amazing management team in design, sales and sourcing that is postured for significant growth. We've built this, at least the foundation, to attain sizeable volumes.

The positioning of the brand is intended to be Nordstrom, Dillard's, some Macy's, and we are also positioned at Lord & Taylor. Lord & Taylor was one of the early fans of the brand. They were one of the retailers that brought the brand to us.

So, this year, we probably won't do more than $20 million, $25 million of sales with the brand. But it's about what we projected. We see the potential of this brand being well north of $100 million [its] next [three] years. And if the stars are aligned, we'll get there.

We have the support of the retailer. We have the ability to produce it. And we have a wonderful partner; Ivanka is a great asset to the brand. She's there every day, as needed. She promotes the brand; she promotes it with the highest of standards. She's very focused on social media, and this is going to be a really fine exploration for us.

Great. And in terms of Wilsons Leather, could you give us an update on how the full-price stores are doing, and what do you expect to do with them in 2015?

Well, it's still sort of a work in progress that is leaning towards maybe we shouldn't be in malls. We're not doing particularly well. If we had eliminated the 22 stores that we have in the centers, our performance would have been better. So, we're not aggressively exploring it.

What we will do is modify some of the store build-outs in the centers -- they look too close to what we have in the outlet centers. And what we had gambled on, to some degree, was a larger distribution of leather apparel in the malls, and this was not a very good leather year. So, there are a couple of things that didn't go right. We'll try to correct them. And if they don't work, we will not expand the mall locations for Wilsons.

Great. And last question, where are you seeing in terms of raw materials? I know leather prices have gone up. What are you seeing in terms of wool and some of your other key categories here?

Wool prices are quite the same as last year; they have not increased at all. Leather prices actually are down for apparel leather. There's not a good deal of business being done, so it may be an artificial decrease in price.

There's very little going on in the leather jacket area at the moderate level. The piece that G-III was known for many years, that in a sense evaporated. So, demand is forcing (technical difficulty) degree.

Down business is pretty fair. There's nothing that deserves a headline for it. Performance was very good. There are quite a few units in the marketplace -- if you had to cite an area of business that propelled the outerwear business, you would have to say it was a down business this year.

Great, thank you. Good luck on the holiday season.

Our last question comes from David Glick from Buckingham Research.

Thank you. Just a quick follow-up -- couple follow-ups for Neal, and then one question for Morris. Neal, obviously inventories are up because you haven't anniversaried the Bass acquisition until Q4. Do you expect inventories to be in line with your sales trends by the end of the season? And then also, what are you factoring into your projections for Bass for the fourth quarter? And then I have a follow-up for Morris.

Sure. So, we do expect the inventory levels will start to come more in line with the actual sales increases, once we anniversary this quarter, actually. Bass was not in the numbers at the end of the third quarter last year. We acquired it on the first day of the fourth quarter. So, I think you'll start to see that normalize.

In terms of the fourth quarter, Bass, we're looking for a very slightly accretive event. And then, as I said earlier, we expect to continue to show improvement as we go into next year. I think we anticipate steady improvement in that business year over year.

So, accretive means a sales increase obviously?

Yes.

For the fourth quarter. And then, Morris, just I'm wondering if you could give us some perspective. The key channel you sell into -- department stores have been pretty choppy this fall season. A lot of retailers talking more optimistically when they reported in the second and third week of November, and then a lot of debate and controversy over how the month ended up in November.

What are you seeing, and what's the mindset going forward into the key channel you sell into? Obviously, your brands are performing very well within that channel and in your categories, but just curious if you can give us some perspective there?

I'm not seeing an amazing retail year. I'm a little surprised by it. With gasoline prices down, you would think that a little bit more money would be spent on consumer, and I'm not seeing it spent yet.

As always, there are the select few that do well in troubled times. If you go to the history of G-III, we always do well in difficult times.

People that are desperate make bad decisions, and sometimes we're able to capitalize on those bad decisions that people make. We're either able to buy competitively because we have the capital and we have the distribution to enable us to take a stand at an appropriate price. You see a little bit of a bump up in our performance from a margin point of view, and a lot of that has to do with our ability to buy at times when most people are not.

We also manage our business a little bit better. The best shine more in troubled times. I've said a couple of times on this call the fact that we have field merchandisers that are sprucing up our garments on a daily basis. We have better real estate than most in our department stores. There's only one center court, and we fight for great space.

So, we believe that troubled times afford us an opportunity. We can play a little bit more offensively, and we've succeeded with it.

That said, we do put a caution hat on. We're in the stores, and we're more critical of ourselves than our retailers are. We tend to pull product off the floor if we don't like it, and replace it with more appropriate product.

We've put quality control in all of our entities in Asia that are much more stringent than ever before. As a matter of fact, today we have 150 of our vendors in Hangzhou going through what is required for next year on quality and cooperation. So, we take a lot of effort to try to survive, and even prosper, in difficult times.

Great. Thank you very much, Morris, good luck.

Thank you. I would now like to turn the call over to Mr. Morris Goldfarb for closing remarks. Please go ahead, sir.

Well, thank you for spending the morning with us, and thank you for your questions. And hopefully we can continue to provide earnings for our shareholders. Thank you.

Thank you. And thank you, ladies and gentlemen; this concludes today's conference. Thank you for participating. You may now disconnect.