G-III Apparel Group Ltd (GIII) 2016 Q2 法說會逐字稿

Welcome to the G-III Apparel Group's second-quarter FY16 earnings conference call.

(Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Mr Neal Nackman, Chief Financial Officer. 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 non-GAAP net income per diluted share and to adjusted EBITDA, which are both non-GAAP financial measures. We have provided reconciliations of these non-GAAP financial measures to GAAP measures 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. Thank you to everyone 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 are pleased to report results of another strong quarter. Just as importantly, we believe we have the momentum and the opportunity to follow-up a solid first half with strong fall and holiday seasons. We are optimistic. Our wholesale bookings are up 22%. We are booked 90% to plan for the year. We are assorted well in our specialty retail business and expect good growth in the second half in these businesses as well. We have our challenges. We have to continue to work hard to sustain our operational performance. We have consistently achieved or surpassed our goals. I have confidence in our abilities to continue to do so going forward.

We again outperformed in the second quarter, not only relative to our peers, but also to our own internal plan. We're excited with improving trends in our business and excellent feedback from our customers as we move into the fall season. As a result, following an upward revision of our guidance after the first quarter, we are now flowing through the impact of a stronger than expected second quarter. Even ahead of the key fall selling season, we are comfortable with an increase in our net income forecast. On a full-year sales increase of 13%, to $2.4 billion, we're now projecting our FY16 adjusted EPS to grow by 25% to between $2.78 and $2.88 per diluted share.

In the second quarter, we grew our total net sales by 12% to a record level of $474 million compared to last year's $424 million. The increase in our revenues was all organic growth. The additional $50 million of sales came from a combination of excellent wholesale performance in a number of important categories in our growth oriented brands. This included a 24% improvement in comps at GH Bass. Net income more than doubled to $12.5 million in the quarter compared to last year's $6.2 million.

In our wholesale business, we continue to see sales growth and strong margins. Sell-through rates have remained high, our bookings and reorders have stayed healthy and the combination of strong brands and great product at compelling price points has enabled us to continue to take market share. Our department store business continues to be our strongest channel. We continue to be one of the best-performing vendors in department stores in most of our categories including sportswear, dresses, suit separates, athleisure, handbags and of course, outerwear.

As always, we certainly want to share the credit for this kind of performance with the outstanding brands we partner with especially Calvin Klein, as well as many other licensed and owned brands in our portfolio. Our portfolio approach to the business enables us to differentiate our merchandise and communicate value to a broad range of consumers. We have a unique ability to manage a diverse collection of brands that enables us to mitigate risk and protect, enhance and build our position on the selling floor.

Now for some of the details by category, our dress business remains the industry leader. Calvin Klein dresses, now in over 1,300 doors, had a good second quarter. We anticipate we'll have another year of growth. We ended the first half of the year with clean inventory. We're looking good for the fall. Eliza J, an owned brand, in 700 doors, the number one dress brand at Nordstrom, continued its strong selling. Vince Camuto dresses, now in over 500 doors, continues to log strong sales gains and had a very good quarter. These businesses are growing at a better than 50% annual rate. Jessica Howard, which is also owned by us, is one of the few growing core moderate dress lines in the market. I'm also pleased to note that we nearly doubled our Ivanka Trump dress volume.

Calvin Klein Better Sportswear, now in more than 1,000 doors, had increased sales volume and improved margins, driven both by product mix and reduced markdowns compared to last year. The Calvin Klein Performance business, in 1,300 doors, also had another good quarter of sales and profits. We're very pleased with the entire range of Calvin Klein sportswear. We expect to push our momentum into fall and expect to post another really good year of growth.

Our Kensie Contemporary Sportswear, in over 1,200 doors, also did well. Again, Ivanka Trump sportswear continued to grow at an impressive rate. We believe that Ivanka Trump's brand is developing an increasingly important and sustainable position in the marketplace. We expect the total brand to nearly double this year. We continue to think that this at a minimum is going to be $100 million brand for us.

Calvin Klein handbags, now in over 1,000 doors, continues to be one of the standouts of our business. Our wholesale net sales for the second quarter increased by 40% as compared to last year's second quarter. We captured more long-term floor space with our hard fixtured shop program. We expect to be at 75 shops by the end of the year, up from 35 today. We are introducing new innovative, athleisure handbag product that will also help in capturing new sales. The growth for Calvin Klein handbags is impressive. Our margins are solid. We should be at $100 million in wholesale by year end and continue to see this as a $200 million opportunity.

Our Calvin Klein Women's Suit Separates business, now in over 1,200 doors, had another stellar quarter with growth of 60% over last year and also had increased margins. We think we'll see a growth rate of approximately 30% for the full year and are very pleased with the development of this business. Our team sports business had a very good quarter and should have a strong second half. We're working on some exciting new initiatives, which should begin to bear some fruit in the second half of this year and over the next several years.

Finally, let's turn to outerwear. We are now in the key shipping period for this category. We booked really well and are poised for what may be our best outerwear season in several years. We think our lines are spot on for the trends this season and our value proposition is powerful. As most of you know, outerwear is our most diversified and well-developed business. Simply put, there's no category we know better. We have some great brands in this area including: Calvin Klein, Guess?, Kenneth Cole, Tommy Hilfiger, Levi's and Cole Haan.

Let me take a few moments to talk about our Karl Lagerfeld initiative. Our ownership of this business in North America through a joint venture allows us to build the proprietary business and capture licensing income. We are confident that the Lagerfeld brand can support a wide array of businesses. We believe that total brand opportunity, conservatively, is well in excess of a $0.5 billion. We are moving quickly and have already begun marketing and selling dresses, sportswear and handbags which should be in the stores by the end of fourth quarter.

One very significant opportunity is for Karl Lagerfeld Women's Shoes. We're working towards a shoe launch that will have product in stores in the first half of next year. We've hired an experienced shoe executive, who has built her team to drive this forward. Once successful, we believe this will open the door to other important brands for us. As you know, when G-III embarks on a path in a new category, particularly one with this large opportunity, we succeed. While these are early days for G-III in footwear, I think this is one of the more exciting growth initiatives that we may have undertaken in some time.

I will now turn to our specialty retail businesses. Wilsons had steady performance in the quarter, comps were up low single-digits, conversion is up, margins are up. As you know, the fall and holiday seasons are important to the Wilsons business. We are confident that Wilsons is poised for a strong second half. Vilebrequin is showing steady performance against a challenging backdrop. Even with soft tourism, foreign currency weakness, Europe's macroeconomic challenges, our business has done relatively well. We have and will continue to work very hard to offset all of these issues to drive good results.

Our big specialty retail story right now is Bass. Comps accelerated nicely against again this quarter to 24%. We expect continued growth of strong comps for the remainder of this year. We're also excited about some very real gross margin improvement. Our revised merchandise plan is taking hold with consumers. We are especially excited to incorporate a much improved apparel assortment. With the integration behind us, we'll build this brand and drive the business methodically. Our expanded eCommerce platform is around the corner. We're looking to offer a wider array of product online by spring 2016.

Our brand building efforts also include our licensing and wholesale strategies, both of which are also progressing nicely. We will have our new internally designed Bass Women's collection in department stores over the next two months. The men's collection, which is under license to PVH, continues to expand. The women's business will be in approximately 250 department stores this fall. Men's product is now in over 700 department store doors. Bass is shaping up to what has been a truly excellent acquisition.

I will reserve a few comments for closing, but will now turn the call over to Neal Nackman, our Chief Financial Officer, for a closer look at the numbers for the second quarter.

Net income for the second quarter was $12.5 million or $0.27 per diluted share, compared to net income of $6.2 million or $0.14 per diluted share in last year's second quarter. Net sales for the second quarter ended July 31, 2015 increased 12% to $474 million from $424 million in the same period last year. Net sales of wholesale operations increased 14.5% to $391.5 million from $342 million, primarily as a result of increased sales of Calvin Klein licensed products, with the largest increases in the women's suit, sportswear and handbags lines. In addition, we had increases in our Ivanka Trump, Andrew Marc and Vince Camuto product lines.

Net sales of our retail operations increased 12% to $111.5 million from $99 million in the second quarter, primarily due to same-store sales increase of 21.4% for our GH Bass stores compared to the prior-year's quarter. Our gross margin percentage was 35.5% in the three-month period ended July 31, 2015, compared to 35% in the prior-year's period. The gross margin percentage in our wholesale operation segment was 29.7%, compared to 30.2% in last year's quarter. The gross margin percentage in our retail operation segment was 46.8%, compared to 45.3% in the prior-year's quarter. Gross margins improved significantly in our Bass retail stores.

Total SG&A expenses increased to $141.5 million in the same quarter ended July 31, 2015 from $132 million in the same period last year. This increase is primarily due to increases in personnel costs, advertising costs and design and product development costs. The increase in personnel costs is related to an increase in headcount as a result of continued growth in our wholesale operations and to staff additional stores open since last year. The increase in advertising expenses is mostly driven by an increase in net sales of licensed products. The increase in design and product development costs is due to additional expenses incurred to further develop our product offerings.

Regarding our balance sheet. Accounts receivable increased to $239 million from $192 million at the end of the prior-year's second quarter. Inventory increased approximately 13% to $605 million, compared to $534 million at the same period last year. We spent approximately $17 million on capital expenditures in the second quarter this year, on a year-to-date basis and expect the full-year's capital expenditures to be between $39 million and $43 million, primarily due to leasehold improvements for new and remodeled Wilsons, GH Bass and Vilebrequin stores, as well as fixturing costs at department stores. At the end of the quarter, we had a net cash position of $13 million, compared to a prior-year net debt balance of $44 million, consisting of our revolving bank debt and promissory notes, less our cash on hand balance.

Lastly, I will discuss our guidance for the full fiscal year and the third quarter. For the fiscal year ending January 31, 2016, we are forecasting net sales of approximately $2.4 billion. This would result in an increase of approximately 13% from the $2.1 billion in net sales in FY15. We are increasing our forecasted net income to be between $129 million and $134 million, compared to a previous forecast of between $123 million and $128 million. We are now forecasting net income per diluted share of between $2.78 and $2.88, up from our previously forecasted range of between $2.66 and $2.76.

Our revised guidance compares to net income per diluted share of $2.48 and non-GAAP net income per diluted share of $2.26 in FY15. The non-GAAP net income per diluted share excluded items resulting in other income in FY15 of $0.22 per share net of taxes. We are estimating a fully diluted share count of approximately 46.5 million shares for FY16, which includes the effect of our public offering of common stock in June 2014.

We are forecasting adjusted EBITDA to grow between 27% and 31% to between $237 million and $245 million, an increase from our previous guidance of between $225 million and $233 million and to adjusted EBITDA of $187 million in FY15. With respect to our third-quarter guidance, we are forecasting net sales to increase to approximately $920 million in this year's third quarter, an increase of 13% from the $812 million of net sales in the comparable quarter in the prior year.

We are forecasting net income between $83 million and $85.3 million or between $1.78 and $1.83 per diluted share for the third quarter, compared to net income of $81 million or $1.76 per diluted share and non-GAAP net income per diluted share of $1.54 in the previous year's third quarter. The non-GAAP net income per diluted share excluded items resulting in other income in the third quarter of FY15 of $0.22 per share net of taxes. That concludes my comments. I will now turn the call back to Morris for closing remarks.

Thank you for listening today. I think one important reason why we continue to be successful, even when our industry is having a hard time, is that we have managed to stay a highly creative and entrepreneurial Company. Our diversified model, which doesn't rely on any one brand or category or retail channel, means that there is always something new and fresh happening at G-III. People come to work every day with a lot of enthusiasm for what they do. We attract great talent. We learn from each other constantly.

Our ability to create great style for great brands has become our great strength. We have that strength across the business. We reinforce it each time we make a new acquisition such as Bass, or enter into a strong new brand like Karl Lagerfeld, or expand our presence deeper in a key category as we are doing with sportswear. We are excited that not only does this creativity and entrepreneurial approach help us do new things well, it also enables us to take a fresh approach to the businesses we know the best.

I'd like to thank you for your time today. I believe we will continue to demonstrate to our investors that not only does this make G-III an exciting and dynamic place to work, but it makes us a great investment year in and year out, as we set our sights on higher and higher goals. Operator, let's open it up for questions please.

(Operator Instructions)

Joan Payson, Barclays.

Congratulations on another great quarter. Could you talk a little bit, I guess, to start out about the third-quarter revenue guidance? What plays into that in terms of the outerwear growth? The wholesale bookings that you're seeing up 22%? How that all plays into what you're expecting for next quarter?

Yes. Look, we're expecting good growth in all the categories for the third quarter. At this point, we are fully booked. So on the wholesale side of our business, we take great guidance from the order book that we have in place. In terms of the retail side of the business, as we mentioned, the comps at Bass were 24%. My speech was 21%; I just want to clarify that. The comps in the quarter were 24%. We do continue to expect some significant double-digit comp growth from Bass for the balance of the year and mid-single-digit comp growth for Wilsons. That's how we roll it up, Joan.

Okay. Great. Then on the footwear initiative that you mentioned, Morris, does that change at all how you think about potential acquisition targets going forward? Also what type of investment is required to develop footwear manufacturing capabilities?

I'm not sure that it changes our outlook and type of acquisitions, if that's what you're asking. We've always had a broad view of what we could undertake. There was never a fear factor in taking on a footwear acquisition. As you know, we have Bass. Bass is about two-thirds footwear and one-third other in our retail venues. So we are currently producing Bass Footwear on a direct basis. We're designing it. We're sourcing it. We're selling it. So there's not a fear factor.

The type of shoe we'll be doing under Lagerfeld is definitively different; so is the brand. But we do have our antennas out there for acquisitions that could include a footwear acquisition. We're excited by the prospects of bringing footwear to market. It will be soon. I'm sorry, your second question, Joan, you had a follow-up that I missed, sorry.

Yes. Just around what type of investment would be required to develop additional footwear manufacturing capabilities?

A little bit more than traditional outerwear. We've hired some amazing staff. As some of the industry has undergone some difficult times, the opportunity to garner the best-in-class talent is ours. We've gotten very lucky in hiring top talent. We pay them. We incentivize them. At the end of the day, everybody prospers if the business is good. But it's no more costly than any other venture we've gone into on a startup.

Okay. Great. Then my last one is just that you've mentioned in the past that there's potential for 20% EPS growth going forward. You're now tracking well above that for this year. Is that still the target in mind on a go-forward basis? Or are there any other areas where you're unlocking additional value?

Look, I think that we have lots of different opportunities. Obviously, we're adding additional opportunities for growth in terms of new categories. I think that our mantra continues to be that we see high single, low double-digit top-line growth in the existing portfolio, continue to see the ability to leverage the business. Certainly, with the new categories, our revenue expectations are going to be going up in terms of that range. We still see ourselves as a high-growth EPS Company going forward.

Joan, I think I need to reinforce the fact that all the growth that we've had is organic. So it doesn't include the new initiatives that we're investing in. Karl Lagerfeld is a very large initiative for us that is likely to prosper in the short-term. In the next couple of weeks, we'll announce a couple of additional initiatives. So we'll take it out of pure organic growth. So I don't think there's a concern internally for providing growth.

Okay. Great. Thank you. Best of luck with the rest of the year.

Thank you, Joan.

Erinn Murphy, Piper Jaffray.

Congratulations on another solid quarter. I guess, just following-up on the guidance firstly, if you could just help us explain on a full-year basis -- obviously, a lot of visibility in the back half from an EPS perspective, but you kept your full-year sales target at $2.4 billion. So maybe just with the visibility that you do have, could you just walk through the rationale for maintaining that sales guidance at this point?

Erinn, we took up internally where we were at the third quarter, slightly. The $2.4 billion in terms of an approximation is still probably a good approximation. Again, we've got an order book that's booked out for about 90% of the year. So we do still have some work to do in terms of our wholesale business. Obviously, we have a lot of retail assumptions built into the back half of the year. But, look, we're comfortable with the growth. We're comfortable with the forecast that we have on EPS growth. We think it's a very, very strong year. That was really our rationale.

Okay. Thank you. Then, I guess, Morris, for you on the Karl Lagerfeld opportunity. Could you just, I think, this is the first time you've given a revenue opportunity longer-term for the business. Can you just talk a little bit more about what you guys have been doing in the development phase? It sounds like you'll already be shipping some product in Q4. Just -- when you talk to retailers about this line, what gets them excited? Where will we see this on the retail floor?

Well, clearly -- I'll start with -- I won't go in order of your questions, but what gets them excited is, the iconic positioning of this brand. As we all know, Karl Lagerfeld is the Creative Director of Chanel. Every retailer in the world is very, very excited about seeing our execution and interpretation of what Karl Lagerfeld is going to mean to the North American market. So there's a lot of enthusiasm. Our order book is pretty strong for the retailers that we've targeted. We have several department stores we're launching.

You'll see the product, in about 60 days, beginning to hit the floors. You'll first see it in dresses, sportswear, coats, and handbags. Yet to come, which hopefully will get some part of first quarter, will be the footwear side of the business. As we showed historically, these areas that we have a competency in have great potential to generate great dollar volume and prosperity. So I'm not really concerned about the $0.5 billion number that I've given out. It's quite achievable over time. It's a brand that we have for the first time; it's a significant brand that we have unique control of. So we're looking at this as a very important component to G-III's future.

Okay. That's helpful. Then, I guess, Morris, on the handbag side, you mentioned in your prepared remarks that the Calvin Klein Handbag business remains very strong. Can you just help us think about who you're taking share from? The overall handbag category has been a little bit more sluggish. Maybe just your thoughts on the category going forward?

The handbag's sector is, I guess, we all read the same papers has had some troubled times. The competition that's on the floor of department stores is really who we are taking market share from. I hesitate to point out to any one wholesaler. There's some wonderful people that have slipped for the moment. We're progressing and garnering additional space. Our product is performing, actually I hesitate to say it, but I believe it's pretty much best-in-class in the department store on a percentage growth basis.

We've got a long way to go. We're not the largest brand in the stores. But hopefully, we get to be number one, two, or three in the near future. But on a growth and performance basis, we are very proud of our achievement. It continues to get support at every level. So we're pleased with it.

As I indicated, there's going to be another segment to the handbag business that we will have at Macy's initially, which I guess we'll call the, at leisure, component. Which is, that girl that will take a nylon bag or a neoprene bag and go to the gym or go to the movies and it's far less expensive. It will be created with sensitivity to having a good time and far less formal than what we have on the handbag floor. So that's another component to the business that we've just added on. We haven't shipped it yet. It will be in the stores very, very soon, probably within the next 60 days.

Great. Then, just my final question would be again for you, Morris. Just obviously, that momentum organically, it's been very strong. But if you could just take a moment and discuss what you're seeing on the acquisition landscape? What does the pipeline of opportunities look like? What are multiples looking like right now? How are you prioritizing your time on the acquisition front? Thanks.

I'm spending a disproportionate amount of my time on the acquisition front. We've looked at many opportunities. We've either rejected the opportunities or we've been rejected on the proposals. It's part of what we do. It's an important part of what we do, but we're very select on what we believe integrates well into our future. So it's hard work. It's work that we enjoy.

We have a talented in-house group of people that work at this. We're likely to find an acquisition within a reasonable period of time. Whatever reason is in finding a good acquisition, it's hard to put a calendar to it. But we've been close and walked away from the table. We've been close and another party walked away from the table. So we're looking. There are several opportunities that we're still pursuing.

Great. Thank you, guys. Best of luck.

Thank you, Erinn.

Ed Yruma, KeyBanc Capital.

Congratulations on an outstanding quarter. Morris, just on footwear, you've dimensionalized from time to time, market opportunity. I know you said Lagerfeld is $500 million for the brand. How do you think about the footwear opportunity? Also how should we think about or how do you think about the competitive set there? I know you've obviously grown to dominate in many of classifications you target. How would you characterize the competitive set in footwear versus other classifications that you've entered?

It is competitive. But so is the dress business, so is the coat business, so is the handbag business. We do well when it comes to competing. This is a new segment of business. As always, we're approaching it with best-in-class talent, best-in-class development, sourcing, fabrication. There's no hedging on putting our best effort into making this extremely successful. We're not really concerned about what the selling floor looks like today.

We have a little bit of an advantage. We are a Company that is in favor in most of the department stores that we trade in, if not all. So we will certainly be given an opportunity to present what we do. We'll be given floor space to test our product. We are sensitive to price points in footwear, as we are in performance, as we are in suits, as we are in coats. So, it's basically the same model that we established as a coat resource years ago. So you're likely to see additional brands that will be housed in our footwear silo in the coming year. As it succeeds, it's easy to tailor on additional brands.

Got it. Obviously, some very nice results out of GH Bass. How should we think about overall profitability of the business now? Neal, what you have embedded as the financial contribution embedded within guidance?

Yes. So, last year, Ed, as you know it was a money loser for us. This year it will make some money for us, not a significant amount. We still think there's a long way to go. As I mentioned earlier, we've got double-digit comp growth that we're still anticipating going forward. Business is performing at about a $250 square foot productivity level at the current moment just in the outlet piece of the business. Obviously, we're very excited as well about the wholesale opportunities in the GH Bass brand as well. So, I think it will be a nice contributor for us this year in terms of a change from the prior year and then still lots of good news going forward.

Great. One final question, Morris, your performance has outperformed the overall department store space for a number of years. I guess, just at some point, does G-III's continued growth necessitate a healthier department store base? Or do you think you can continue to take share? Thank you.

Historically, I've been doing this for a long time. This Company has prospered in difficult times. In difficult times, retailers culled down their risk piece of business and married to a safe, profitable proposition. We've proved that -- to be that safe, profitable proposition. Resources that are second tier are generally eliminated in difficult times and spaces given to success stories. The places that margin is best, the place where creativity is at a pinnacle and that's what we do.

We create, we deliver, and we're sensitive to the profitability and the needs of the retailer. So we approach it a little bit differently. We have a team of people that first shop retail to see where the void is, whether it's a brand, whether it's a style, whether it's a price point. I think that method of operating internally is respected by every retailer. So in troubled times, I think they turn to the best. Just -- I'm very proud to say I feel that this Company is the best.

Great. Thanks so much, guys.

Thank you.

Rick Patel, Stephens Inc.

I'll also add my congrats on terrific results in a tough environment. Some big department stores out there have talked about getting leaner with inventory management. I know that this has been a theme for a while now but it seems like they want to continue getting tighter. Can you talk about how this impacts the way you manage your own inventories? Are you buying leaner than you once were a few quarters back? Does it mean less upfront shipments and more replenishments to your customers? Just a little help understanding how the changes are affecting you?

We kind of have a balanced business. Part of it is replenishment, part of it is bought upfront. We have an amazing team of people that have joined the Company over the last, I would say, the last 36 months, that are on the planning side. So we're generally -- we approach the business not playing defensively. We're fairly aggressive, but we're, call it, cautiously aggressive on inventory risk. We have some brands that generally do not provide difficulty in moving through the retail system. Our inventories, in the worst of times, have been managed well.

So this kind of plays into my prior response to when things are tough, I guess the best inventory is sought out first. So we manage our inventory well. We have great inventory to support our retailers' needs. We're not blind. We are very aware of sales trends. We are very much aware, probably more so than most, of the economic trends both at the retail level and at the global level. We are great students of it. I'd say that our business takes on the posture that we internalize at the senior corporate level. It's worked; I have no concern for our inventory levels.

I'm also curious about the health of the activewear market. We've seen a number of companies trying to make strides in this category as of late. So I'm curious if the heightened competition is having any impact on your ability to scale this market? Secondly, as you think about the market as a whole, is it still growing double-digits? Or have you seen it start to cool now?

It is a crowded market. You're absolutely right. But what I've found -- I did have a concern, but as late as yesterday, I shopped what we do internally. What a crowded space has done, its motivated our people to work harder to be innovative and again, to be best-in-class. So it's not just a replenishment path that we offer. It's just not a sports bra that we offer. Styling changes every couple of weeks in our area of business. We manage it. Again, there's some sensitivity to inventory.

We manage that inventory very carefully, but we're very fast to change style. I would say that many would say that we set the tone, the pace and the productivity of that sector. So it is crowded. I don't know what the future brings. There is talk of a woman looking toward possibly wearing a denim pant rather than an athletic pant, the performance pant. That may change the profile of what we do. But what that will do is, it will motivate us to find a denim company to supplement what we do. We are great students of fashion, great students of retail.

Lastly, can you update us on where the sales productivity stands for Wilsons? Any updates to your long-term target for that concept?

Yes. Year-to-date, we're about flat at Wilsons. We were up small single-digits in the second quarter. So our productivity now is around $390 per square foot. We've not put a cap on where we think that productivity lands. We continue to look for ways to improve. Outerwear still dominates the business. I think our accessories business could still get better there.

So I think we'll continue to see growth there, probably a little bit less than what we've seen in the past but continue to see good growth. Of course, we have got an opportunity to grow our footprint as well. So in terms of looking at it as a growth vehicle, we certainly still look at that business as such.

Thanks, everyone. Good luck this fall.

Thank you.

(Operator Instructions)

David Glick, Buckingham.

Add my congratulations to the team on the quarter. Morris, I had a question on operating margins. If you look at the last three years, you made some modest improvement each year. Obviously, strong top line but you're making a lot of investments in some of the brands and categories that are doing very well this year. This year seems to be a real inflection point, with at least 100 basis points of improvement.

Your goal has been double-digits. You're getting closer to that. I was just wondering if you could update us on how you're thinking about the operating margin potential for the business? How potentially more licensing income and then your joint venture ownership in Karl Lagerfeld kind of plays into the operating margin structure going forward? Thanks.

The operating margin as you cited, is somewhat affected by the new businesses that we're developing. Some you're aware of, some you're not. We will launch two additional areas of business before the end of the year that have not been announced yet. They're in development. There's a good deal of money spent, so that's not factored in. You're assuming that it's all Karl Lagerfeld; it's not. So we need to dissect it a little bit further than what you're seeing.

As far as the licensing revenue that we are expecting, it's not only Lagerfeld, but as Bass improves, our licensing revenue at Bass is going to grow. The piece that we're doing -- the pieces that we are doing internally are all the women's sportswear and the retail. Short of that, we need to remind you that Genesco, who again is best-in-class footwear and PVH, who is best-in-class in apparel, is licensing classifications from us. So PVH is doing the men's. It's growing, the royalty revenue is increasing.

Thirdly, we signed an important license in Europe for our footwear as well as retail stores. There will be a retail store opening I think within the next six months. That will be our first store. We assume before the year is out, there will be four to six. Those are under license. I think the first store is going to open in Soho in London. So there's a good deal that will be -- a good deal of licensing revenue over time that will be generated through the ownership of Bass.

As far as Lagerfeld is concerned, we will take on all the women's initiatives. There will be a jewelry licensee -- where we believe we are close to signing on a jewelry licensee. There will be men's sportswear, tailored clothing, shirts, ties, suits. There will be skin care. There's a lot to go with Karl Lagerfeld as far as generating licensing -- shared licensing revenue. Again, I need to remind you we only own 49% currently of the North American piece of Karl Lagerfeld.

We will be opening several stores with Lagerfeld within the next 12 months. The first few stores will be flagships. Then there's a strong possibility we'll open Karl Lagerfeld outlet stores. So again, the dressing, the growth historically -- historically, meaning this year -- that's organic. I think I'm citing some major opportunities in new growth that has been untapped.

David, just to add to it from a numeric standpoint, I think that we continue to see in the short-term the goal of getting to low double-digit operating margins for the business. I think we've shown, certainly, shown a good ability to launch new things and not have that impact us significantly. Our bottom line growth has been stellar over the years as we've launched a lot of new initiatives. I think we continue to do that very well as we step into new things and do it cost efficiently.

So, certainly in the near term that continues to be our mantra. Certainly as you look at the portfolio that exists today, I think in the retail side of our business, that's really where the lowest hanging fruit is for us. The GH Bass business again, as I mentioned earlier, having a very good year this year. But really, our expectation for that is to have continued significant positive growth in that business from a bottom line standpoint.

Great. Thank you very much. Good luck.

Thanks, David.

John Kernan, Cowen.

Congrats on another excellent quarter. Morris, could you comment on how you expand your leadership position in dresses in US wholesale channel? How big that business is now? Where you're taking that business?

So our dress business, again going back backwards there, our dress business is north of $500 million of retail. So we are clearly the leader in this sector. We have some very important brands. We're -- as the industry is culling down some of the resources have evaporated. Some of the department stores have eliminated some existing brands. We're growing pretty much all of our key pieces. So it's a great piece of business for us. It continues to grow. To tell you the truth, the first exciting feature that we get on a Monday morning when we look at sales is how did the dress business do?

We get energized when we see the performance; our performance. When we comp it to what the departments on the dress floor look like, we are far superior on a weekly basis. So we are competitive. We applaud ourselves when we do well on a given week. You can see sulking faces if we haven't beat big enough. So it's an aggressive team of people that, I have to tell you, these guys take no prisoners. We are growing every day on the dress side of the business. I'm in tune with the retailer. The sector is not growing nearly at the pace that we are. Again, another testament to the team at G-III. They do a great job of performing in tough times.

That's helpful. Thanks. Morris, you have a lot of knowledge in terms of the sourcing business. How would a material devaluation of the Chinese currency affect sourcing costs in the Far East?

It's a strange thing. When currency goes the other way, there's always a very quick increase in prices. When you try to renegotiate prices because the US currency is stronger than the currencies in countries that we trade in, it's very hard to get the benefit of it. We're succeeding mildly.

I was on a phone call late last night trying to revise some prices going forward. Clearly, the on order status that we have, we're not going to get any benefit from. There are no adjustments that are doable in trying to get a discount in product that's on order. But I would tell you that for part of fourth quarter and part of first quarter, we believe we do get a benefit in currency -- a small benefit. Not to the degree that the devaluations have occurred.

Okay. That's helpful. Then if I could just sneak one more question on GH Bass? Pretty incredible comps. Can you give us some color on what drove the comps between traffic and ticket?

Traffic? Okay. Traffic is clearly down. Traffic is down, I could tell you that, traffic was down 4% in Bass and conversion was up 9%. So we work hard at closing a sale. So in spite of traffic being down, for us to comp better than we had expected, better than we had planned, we're comping at 24% for Q2. It's down traffic. I'd say it's great. We're communicating much better with our customer. We're communicating both at the store level, pricing is much clearer, the apparel piece of what we do has gotten significantly better than it was a year ago.

What's yet to come is the perfection of some key footwear initiatives that we have. We do own what is maybe this year's key fashion statement, which is the Weejun. There's hardly a supplier of men's footwear that does not have a penny loafer on their line and promoting it. Well, we would say that Bass founded the Weejun. We own the heritage and the story that will promote it as good as anybody. So there's much more to come on Bass as we perfect the footwear piece.

All right, guys. Congrats. Thank you.

Thank you, John.

Liz Pierce, Brean Capital.

Congrats on a nice quarter. Just related to GH Bass. In the few stores that I have seen, how -- you talked about the apparel side as improving. How do you see the mix in the store ultimately between the footwear, hard goods, and apparel?

The mix currently is about one-third men's footwear, about one-third women's footwear and about one-third other, which would be men's apparel, women's apparel and accessories would blend into the third quadrant. We believe that it will tip a little bit more to the apparel side. I think that we should be able to get apparel and accessories to better than 40% of the business. Footwear, men's and women's, may be 28% to 30% of each -- in each gender as the formula for success.

Are you rolling out new fixturing to enhance how the apparel is going to be presented?

We are testing new fixturing concepts. We are looking at flagship stores. We will probably open, within the next 12 months, two or three flagships under Bass as we perfect the product, which I believe we are very close to. As we're proud of what we're selling, we'll put it in key markets. We will test new fixture packages. What we are fixturing newly is shop-in-shops.

You'll see at Macy's Herald Square in about, I'd say about two to three weeks, a new Bass shop; the first Bass shop in women's. There'll be a rollout of about 125 doors at Macy's, some with hard shops, some with soft shops. There will be about 100 and some odd doors at Dillard's and the Bay as well. So you'll see some evidence of how we're going to tell our story through fixturing and marketing.

Great. Thank you and best of luck.

Thank you for your question, Liz.

Thank you. We have no further questions at this time. I will now turn the call over to Morris Goldfarb for closing remarks.

Thank you all for spending the morning with us. I can't wait till third quarter to tell you how we've succeeded with all our initiatives. Thank you very much for being with us.

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