G-III Apparel Group Ltd (GIII) 2017 Q2 法說會逐字稿

Welcome to the G-III Apparel Group Ltd's second-quarter FY17 earnings conference call. My name is Ellen 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 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, Chief Executive Officer and President, Morris Goldfarb.

Good morning and 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 Executive Vice President. In addition to discussing our second-quarter results, we want to provide more detail on the Donna Karan acquisition, which we believe will further transform and diversify our Company, generate significant cash flow and expand our margins.

Our second-quarter results did not meet our expectations. As many of you can appreciate, this organization is not accustomed to disappointment. All of our teams are dedicated to working harder, staying energized and remaining focused on delivering our best possible performance.

Importantly, our non-outerwear wholesale business stayed strong in all categories. We sustained momentum across the breadth and depth of these categories despite a tough retail environment. We delivered well-designed, well-priced product with the quality and integrity that we're known for. This enabled us to achieve double-digit growth in this portion of our wholesale business.

Before I go into additional detail with respect to our operations, I'll review a few high level financial metrics from the second quarter. Sales in the second quarter were $442 million compared to last year's record level of $474 million. The $40 million shortfall against our guidance primarily reflects later than expected timing for outerwear shipments and a shortfall in our retail outlet sales.

The loss per share in the quarter was $0.03 compared to net income per diluted share of $0.27 last year. The loss per share includes professional fees of $0.04 per share net of taxes incurred in the connection with our pending acquisition of Donna Karan.

Our EBITDA in the second quarter was $3 million compared to $27 million last year. This also reflects the delayed shipping of outerwear and comparative sales declines in our retail outlet business. This quarter's EBITDA also reflects the $3 million professional fees incurred in connection with our pending acquisition of Donna Karan. We now expect our FY17 revenue to grow 6% over last year to $2.5 billion, and to report non-GAAP net income per diluted share between $2.20 and $2.30.

Now let's dive a bit deeper into what is driving our businesses. In wholesale, we are seeing growth in established parts of our business including Calvin Klein. We're investing in and now beginning to see increased sales in new businesses with Tommy Hilfiger and Karl Lagerfeld. These new businesses are tracking above our plan.

During the quarter we started shipping several categories of Tommy Hilfiger products that will make a good contribution in the second half. We have good bookings for spring. We're expanding distribution to a wider base of customers and will see more growth, stronger average price points and better margins as we move forward. We will continue our consistently strong track record in women's apparel with Tommy Hilfiger. As we've previously stated, we estimate, with our current licenses, that Tommy Hilfiger is a $1 billion annual revenue opportunity over time in North America.

The reception to our Karl Lagerfeld initiatives has been extremely positive. Our new fall national advertising campaign is supporting a wide range of categories in women's apparel and accessories. Bookings for holiday and spring are in very good shape. We continue to see a $500 million long-term annual revenue potential with Lagerfeld.

We've hired the best-in-class talent in design, merchandising and sales for both Tommy Hilfiger and Karl Lagerfeld. It's very exciting for us as we expand our customer relationships relating to Tommy Hilfiger and Karl Lagerfeld. We are receiving greater floor space because department stores need the newness and fresh merchandise we are in a position to provide. Our product tends to lead each department in sell-through rates and maintain margins. This is giving us a significant market share build as we displace underperforming vendors on our customer's selling floor.

The opportunity we have with Calvin Klein is as strong as ever. We've experienced continued strength in Calvin Klein women's apparel and accessories. We expect to have approximately $1 billion in sales for Calvin Klein product this fiscal year. We're proud of the accomplishment having grown this business from just $35 million in 2005.

Eliza J, Jessica Howard and Vince Camuto dresses continue to be strong businesses for us. Eliza J remains the number one dress brand at Nordstrom.

Outerwear is a different story. We're now planning for a high single-digit decline in outerwear sales for the full fiscal year. Although we executed well and the product is excellent, the early season shipments we expected did not materialize. Retailers have had to focus on getting inventory in line and did not fully commit to early season outerwear buys.

We think inventories are in good shape, both for us and for our customers, including in the off-price channel. We've reduced our forecast but we believe there will be an appetite for product reorders as the selling season progresses. With the visibility we now have, we think we've captured the right view of the season.

We had similar issues in our own retail outlet businesses. Wilsons is approximately 190 men's and women's outlet coat and accessories stores. They had a comp decline of 17% in the quarter.

GH Bass is a 160 store chain predominantly merchandised around an outdoor lifestyle. They had a comp decline of 10% in the quarter.

Across the outlet environment, traffic was down, conversion was weaker and margins came under pressure. Like our wholesale customers, we also had to cut back on inbound receipts to manage our own inventory. We successfully focused on clearance, but with the traffic drop in outlet centers, we had to sacrifice some in-season business and did not make our comp goals during the quarter.

We are now clean and resetting the floors with some great fall product in both Wilsons and Bass. We anticipate some improvement in the back half of the year, particularly in the fourth quarter with easier comparisons. We've worked hard to reduce expenses at both Wilsons and Bass to maximize our profit opportunity.

Additionally, it should also be noted that we have approximately 100 store locations with lease expirations in 2017 and 2018. This should give us some flexibility in discussions with landlords and in planning the number of stores we will operate going forward.

Our Vilbrequin brand is strong but has been impacted by lower international tourist spending in the US and macroeconomic political issues overseas. We're continuing to develop the brand and excited to be introducing a status collection of men's lifestyle apparel for spring. Our team continues to put out great product and we will look to expand our online presence as well as our wholesale and distributer business.

Now I think it's important to take a few moments to discuss our acquisition of Donna Karan International that we expect to close later this fiscal year, and explain in more depth our rationale for this acquisition and how we see it contributing to our Company in the coming years. We believe Donna Karan is a powerful extension of our competitive and strategic position. Earlier today we included an investor presentation in the Form 8-K filed with the SEC that discusses the transaction, our strategy and preliminary three-year sales and operating targets. I'll now discuss some of the information included in this presentation.

In Donna Karan, we are acquiring one of the world's most iconic and recognizable power brand portfolios. This is a business in which we believe the DKNY brand alone has the potential to be a business that generates at least $1 billion in annual sales. Keep in mind, this is a $1 billion opportunity primarily in North America, [excludes] the Donna Karan brand and any additional royalty income potential for Donna Karan and DKNY which we believe is quite significant.

Donna Karan International fits squarely into our stated strategy to diversify and expand our business. An asset like Donna Karan does not become available often and we could not be more excited for what the future holds. We have a very firm grasp on the Donna Karan business, its revenue ramp-up opportunity, the state of its operations, and the progress and potential of the operating initiatives we plan to implement.

Over the course of the last year and a half at a significant financial cost, LVMH took steps to reposition and elevate the brand and meaningfully reduce overhead costs. They eliminated unprofitable stores, limited channels of distribution by greatly reducing sales to off-price and club accounts, and brought in new management. These changes fundamentally improved the foundation of the business and dramatically reduced sales in both the wholesale and retail channels.

We think the $300 million in sales reflect a very clean distribution base from which to grow, and we value the business based on a future operating income multiple. We see a tremendous opportunity to grow the business, particularly in our core US market. Worldwide wholesale sales for 2016 are expected to be $150 million. We've had numerous discussions with major retailers and we're confident that we can in year three, post closing, with the entire DKNY business running at a rate of $750 million in annual sales.

At that sales level we think we can produce operating margin percentages in the mid teens, particularly as we will collect rather than pay out licensing fees. The rapid revenue ramp opportunity exists because of how powerful the intellectual property is, the brands, the history, the unique Donna Karan emotion and aesthetic. And just as important the Donna Karan and DKNY brands are highly complementary to our existing portfolio. We intend to focus on the expansion of the DKNY brand, relaunching the Donna Karan brand and developing other associated brands and product categories.

Additionally, we expect to leverage our strong industry relationships to expand the DKNY wholesale categories. Lastly, we believe we can capitalize on the significant untapped global licensing potential in a number of men's categories, as well as in home, jewelry and strength in online retail channels and brick-and-mortar stores.

Further, we have a proven track record in delivering growth and ramping up sales of iconic brands, first, with Calvin Klein and now with Tommy Hilfiger and Karl Lagerfeld. The growth in Donna Karan in the US will be led by sportswear, jeans and shoes. We believe the strength in our existing sourcing and supply chain organizations, as well as our own internal product infrastructure, will be a big advantage to us in building the Donna Karan and DKNY brands.

We're confident this acquisition will prove to be the single best brand we could have acquired and will also derive a great return on our investment.

I will reserve a few comments for closing but will now turn the call over to Neal for a closer look at the numbers for the second quarter.

Net sales for the second quarter ended July 31, 2016 decreased 6.7% to $442 million from $474 million in the same period last year. Net sales of our wholesale operations decreased 7.7% to $361 million from $391 million, primarily as a result of a decrease in shipments of outerwear products. Net sales of our retail operations decreased 10% to $100 million from $111 million in the second quarter, primarily due to same-store sales decreases of 16.9% for our Wilsons stores and 9.8% for our GH Bass stores compared to the prior year's quarter.

Our gross margin percentage was 35.2% in the three-month period ended July 31, 2016 compared to 35.5% in the prior year's period. The gross margin percentage in our wholesale operation segment was 30.7% compared to 29.7% in last year's quarter. The gross margin percentage in our retail operation segment was 44.8% compared to 46.8% in the prior year's quarter. Gross margins decreased in both our Bass and Wilsons businesses as we offered deeper discounts in order to sell excess inventory.

Total SG&A expenses increased to $153 million in the quarter ended July 31, 2016 from $141 million in the same period last year. This increase is primarily due to increases in facility costs, advertising expenses, and professional expenses associated with the Donna Karan acquisition. The increase in facility cost was due to increased shipping from our third-party warehouses and higher rent expenses as a result of additional retail stores open since the prior year.

Advertising costs increased due to an increase in cooperative advertising and advertising purchased by us, which is partly associated with the newer Bass, Karl Lagerfeld and Tommy Hilfiger product lines. Payroll cost increases associated with new hires were offset by reductions in bonus accruals.

Our income tax benefit was impacted positively by a $2.4 million tax benefit realized in connection with the vesting of restricted stock units subsequent to our adoption of new accounting rules regarding the tax treatment of benefits on the exercise of restricted tax units. Excluding this item our effective tax rate of 37% would have been consistent with the prior year.

The net loss for the second quarter was $1.3 million or $0.03 per share compared to net income of $12.5 million or $0.27 per diluted share in last year's second quarter. Our results for the second quarter were impacted by professional fees of approximately $3 million equal to approximately $0.04 per share net of taxes, incurred in connection with our pending acquisition of Donna Karan.

Regarding our balance sheet, accounts receivable increased to $243 million from $239 million at the end of the prior year's second quarter. Inventory decreased approximately 6% to $570 million compared to $605 million at the end of the prior year's quarter.

We spent approximately $13 million on capital expenditures this year, primarily due to leasehold improvements for new and remodeled Wilsons, GH Bass and Vilbrequin stores, as well as fixturing costs at department stores. At the end of the quarter we had a net cash position of $45 million compared to $13 million in the prior year.

Lastly, I will discuss our guidance for the full fiscal year and the third quarter. For the FY17 year ending January 31, 2017, we are now forecasting net sales of approximately $2.48 billion and net income between $102 million and $106 million, or a range between $2.16 and $2.26 per diluted share, compared to our previous guidance of net sales of approximately $2.56 billion and net income between $120 million and $125 million, or a range between $2.55 and $2.65 per diluted share.

The forecasted net income per diluted share includes professional fees of approximately $0.04 per share related to the pending acquisition of Donna Karan. Our revised guidance compares to net income per diluted share of $2.40 in FY16.

Forecasted non-GAAP net income per diluted share for FY17 is expected to decrease 6% to 10% to between $2.20 and $2.30 compared to non-GAAP net income per diluted share of $2.44 in FY16. The non-GAAP net income per diluted share, excluding professional fees of approximately $0.04 per share, related to the pending acquisition of Donna Karan International incurred through the end of the second quarter in FY17 and items resulting in other income of $0.02 per share in FY16. Our GAAP and non-GAAP net income per diluted share forecasted for FY17 does not include significant additional expenses to be incurred in connection with the pending acquisition of Donna Karan during the second half of FY17.

We are estimating a fully diluted share count of approximately 47 million shares for FY17. Our estimated share count does not include the additional shares of our common stock that are issuable to the seller upon the closing of our pending acquisition. Assuming the acquisition closes at the end of the fiscal year, we are anticipating our additional expenses, comprised of professional fees and interest expense, could be between $9 million to $12 million.

We are reforecasting adjusted EBITDA to increase between 2% and 5% to between $199 million and $206 million compared to our previous guidance of between $228 million and $236 million, and to adjusted EBITDA of $210 million in FY16.

With respect to our third-quarter guidance we are forecasting net sales to increase to approximately $940 million in this year's third quarter, an increase of 3% from $910 million of net sales in the comparable quarter in the prior year. We are forecasting net income between $70 million and $76 million, or between $1.50 and $1.60 per diluted share for the third quarter, compared to net income of $87 million or $1.87 per diluted share and non-GAAP net income per diluted share of $1.85 in the previous year's third quarter. Our GAAP and non-GAAP net income per diluted share forecasted for the third quarter do not include additional expenses to be incurred in connection with the pending acquisition of Donna Karan.

We are now anticipating that our wholesale outerwear sales for the year will be down in the high single-digit percentages. Our wholesale outerwear shipments are largest in the upcoming third quarter and represented approximately 55% of the prior year's third-quarter wholesale sales.

Our third-quarter forecast reflects a planned double-digit percentage decrease in sales of outerwear products. Our non-outerwear sales growth remains strong in the third quarter and is planned to increase by approximately 20%. We are anticipating that our outerwear sales will be stronger than the prior year in the fourth quarter.

We are anticipating a low single-digit comp increase at Bass and a mid single-digit decrease at Wilsons in the third quarter with improvement to mid single digits for both chains in the fourth quarter.

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

Thanks for your attention today. For those of you who follow these calls regularly, you know that we're not shy about claiming victory and setting ambitious performance goals. We talk regularly about our get-it-done culture and about how this is what's enabled us to succeed and outperform our industry peers even when the environment is tough. This environment, the weather issues we experienced last year, and the persistent consumer traffic issues, these are a bit humbling. Even though these issues are discrete to our outerwear and our outlet business, we are eager to show that we can move past them, that we are in better shape with much bigger and more exciting growth plans than ever in our industry.

Across the organization, we're very mindful that the kind of success we want and are capable of does not just happen, particularly not with the pressures we've seen. We're taking ownership of the tough environment, ownership of our need to execute on a number of important work streams simultaneously, and ownership of our responsibility to show you the results that identify G-III as a truly special company.

I thank you again for your time today. Operator, we're now ready to take some questions.

(Operator Instructions)

Our first question is from Ed Yruma with KeyBanc Capital Markets.

Hi, good morning, guys, and thanks for taking my question. First on the reduction in outerwear, Morris, I know you indicated that you believe your inventory and your channel partners' inventory is pretty solid. But help us think through, were you able to adjust your manufacturing plans? Are you anticipating higher closeouts of outerwear should this not materialize? How should we think about this change in order pattern?

I think we are being conservative because we're responding a little bit to the lack of enthusiasm we thought we might get with our quick shipping. Some of these numbers and projections were done just recently, giving us a little time to get some visibility.

The big percentage of our shipping, or a reasonable percentage of our shipping, occurs in July. So, we had a few weeks under our belt and watched it very closely, and we're responding to clearly the lack of enthusiasm at retail at our own outlet stores and we are canceling some goods. We have the time to do that. We have the cooperation of our vendor base.

So, we're playing it conservatively. We will not be in inventory issues this year the same as we were last year.

On the wholesale side, we've played it fairly conservatively. We felt that we would leave a little bit on the table if business was great.

But we're in good shape in inventory. The dated inventory that we had, we were able to liquidate pretty much all of it through the course of spring. So, we're positioned well as it relates to inventory.

Great. And two other quick follow-ups -- first, really, on the $10 million operating loss from DK next year, how should we think about the pro forma interest expense? Are there any other expense items that would fall either in the G-III piece of the Business or below the line that we should think about when we think about dilution for next year?

And then, second, Neal, I think you mentioned you early-adopted some of the accounting changes. Are you going to restate the previous periods or how should we think about the annual benefit from the early adoption? Thank you.

Ed, starting with the latter part first, we are going to be doing the tax benefit prospectively.

With respect to the Donna Karan acquisition expenses, the borrow is a combination of a draw on existing ABL, which is at a fairly low interest rate. We've got a seller note which is also at a fairly low interest rate. And of course, now we've got to go into the marketplace and syndicate about a $350 million term loan.

We think our interest rates will be very manageable. We think the leverage on the Company is also very manageable. Now you can see that with the forecasted sales projections that we've got that we actually expect to delever fairly quickly.

Do you have any kind of price talk on the interest, or just round about how we should think about the expense for next year?

I think we've got to go into the marketplace. We're subject to that.

We're very positive. The Company's results have been very well. We're strongly capitalized. We have existing firm commitments from our lead banks. So, we're certainly comfortable, but I think it's premature to give you specific rates.

Great. Thanks so much.

The next question is from Erinn Murphy with Piper Jaffray.

Great, thanks, good morning. Just a couple of clarifications -- first, Neal, for you, on the $40 million shortfall relative to plan, you mentioned both outerwear shipments being pushed out, as well as the retail business running under plan. Is it more weighted to the outerwear shipments, is my question.

The reason I ask is, when you guys provided the DKNY acquisition announcement, I think you only had about two weeks left of the quarter. So, I'm assuming that it was really the shipments, which I know those are very important weeks for you that maybe fell under plan. I'm just trying to understand the magnitude of the miss relative to the lack of pre-announcement.

Yes, I would say that about 60%, maybe 65%, of the miss was on the outerwear shipping. And we did -- as you know, we ship a significant amount of volume in our wholesale business every quarter in the last weeks of the quarter. So, we were not able to actually ship as much as we thought we could have. There were certainly more orders, as there always are, that it was just a matter of timing and the ability to get them out. The outerwear was a larger percentage of our miss.

Okay, that's helpful. And then just going back to the financials that you provided for DKNY in the 8-K, you mentioned next year, I think, it's $325 million top line and $10 million EBIT loss. Is that a similar run rate to what you're seeing this year in the business, or are you assuming some growth or recovery as you give that initial forecast for next year?

We are anticipating some improvement. We're expecting to be able to impact the business in the back half to some extent. Of course, this all depends upon how quickly we can get through our closing process. But we do expect some improvement, and that does represent improvement over the existing business.

Okay. And then, just last, on the Wilsons business, I think you said it was down 17% in this quarter. I know there's a fairly broad spread reset of the stores happening right now. Can you just talk about if there's been any improvement in what you've done during the actual reset? And what are some of those controllables that you have your finger on the pulse to hopefully correct some of that comp decline?

If you look at the resets at Wilsons, you'll see improved fixturing at minimal expense, signage is better, the promotional cadence that have impeded the normal sales of the business have improved. The product mix is much more appropriate to what the store needs. And what we've done, actually this week, we evaluated regions of the country that are cooler than comp to last year, and those regions are doing significantly better than the rest and they're comping better than last year.

We're getting a reasonable read. I can't imagine that Wilsons doesn't comp up for Q4. There's so many things that went wrong last year, leading with the warm weather, there was a little bit of a port slowdown. The world was not aligned for Wilsons last year. So, there's an opportunity to do significantly better than last year in Q4.

Okay. And if I could just sneak one more in, Morris, for you -- when you look out over five years, you've given this $5 billion target now across many of your major marquee brands. As you're seeing this pathway for growth for Calvin, for DKNY, for Tommy Hilfiger, all which [happened] early, hefty top-line assumptions in five years, where is that base coming from? What brands are losing? And are you confident that you can grow the businesses to that level without cannibalizing some of maybe your smaller brands in your mix? Thank you.

To respond to your last comment first, we're very careful to plan our businesses and develop our businesses in order not to cannibalize existing brands and businesses. We've done that from the beginning of our licensing history in coats. And we still do -- and north of 50% on the women's side of the coat department at Macy's, we have 60% of the men's coat department, all with a multitude of brands that all march to a different beat. They look different, they are priced a little bit differently, and they read specific to the DNA of the brand that's being marketed.

So, we are cautious about the cannibalization piece of it. We now have some of the best brands in the industry. We have Tommy Hilfiger, we have Calvin Klein, we have Karl Lagerfeld, and soon to have Donna Karan. I would say that we have the heroes of the industry.

What the department stores look for today is some level of discrimination in what they market and the brands that they market. So, today, we're serving up two power brands that virtually don't exist in the United States. These brands are huge.

There's nobody bigger than Karl Lagerfeld, and he had no presence in the United States. We're bringing that brand here. We will double our plan for the year. We're doing extremely well. The brand is retailing in pretty much all of the categories that we've shipped.

We're going to bring Donna Karan back to reality. The brand is clearly one of the biggest American brands there is. We've been after this brand for years. We succeeded in acquiring it.

We're developing a plan that's appropriate for our Company and for the retailers, in collaboration with the retailers. And we see $5 billion is a very attainable number. These are absolute giants in the industry that we're going to further their presence and improve on the product mix that's been brought out.

It sounds like a staggering number. I'm not accustomed to referring to G-III as a company that can handle $5 billion in sales, but we have the tools to do it, we have the people to do it, and I think we have the financial support to do it. So, contrary to what we're presenting today, this is probably the best time for G-III. We've got just great stuff that's planned on bringing to market and with great talent doing it.

Great, thank you for that. Best of luck.

The next question is from Eric Beder with Wunderlich Securities.

Good morning, everyone. This is Bryan Caronia on for Eric.

The first question we had was, if you could offer any insight you've been able to glean from your retail partners in terms of the consumer outerwear market for the fall and the holiday season. Are you seeing an expectation of greater discounting and pricing competition, or greater [full]-priced efficacy given the reduced inventory levels? Just any thoughts you have on that mark.

Bryan, surprisingly, our biggest concern in the outerwear segment of the Business was the off-price channel, and the fact that they had packaways and they had levels of inventory that they purchased at the end of last year opportunistically that would impact our Business. The first reads that we got were from the off-price channel, the first reorders -- not the first -- Nordstrom's anniversary sale was very good to us. They're out early. They promote their anniversary and we get really good reads, good and bad. The indicators were that it's a pretty good year for them.

The off-price channels came back and bought product that -- we had three reorders in the last week, significant reorders, from the off-price channel in commodities that I thought we might be troubled with for the remainder of the year. So, it's good news in the off-price channel. It shows that good product does retail.

The sales that we made to them were not liquidation sales. I hope nobody is listening on the off-price side of it, but we made good margin on it. So, we're off to what seems to be a fairly balanced year. But as you read from our numbers, and as you've heard, we're watching it and we're playing it conservatively.

And, by the way, the reads from the department stores, it's a little bit too early to respond to that. It takes a couple weeks to get it on the floor. So, our bigger accounts at the department store level haven't provided us with the indicators that we need to really get excited.

Okay, perfect. And if I could just add one more here -- looking a bit more over the longer term, obviously you've spoken about in the past obviously your key relationship with the large department store players. But in the face of Macy's announcing their closing of about 100 stores over the next 6 to 12 months or so, how, one, do you think that might affect your Business, particularly with Macy's? And then how it might be an indication of the dynamic of the department store wholesale business over the long term? Thanks.

I think the department stores today are doing the appropriate thing. They are reviewing their strategy. They are eliminating door count, and most of the doors that they're eliminating are pretty much the ones that are impossible to build scale in.

I believe you'll see areas of the country where there are vibrant sales available that department stores will again start to open. They are doing what most prudent people are doing. They are closing their non-performing stores.

That's a good strategy for us. We help on margin assistance for these department stores. The biggest leaders for us are the stores that they're closing. So, from a margin point of view, a maintained margin point of view, we should see improvement.

From scale, all I can tell you, as some of these stores are closing, our Business is growing. Our biggest account we're tracking at high-teens comp increase for the year. We did the same last year.

So, it's really not linear, where, as the stores close we lose the same percentage of business. That's not the way it works. There are brands that are losing space; there are brands that are not performing.

And in Macy's world, as well as any department stores, they're very, very eager to have new collaborations and new brands, and that's where we fit in. We're bringing the most powerful new brands into the industry. So that has to bode well for us.

We know how to produce it, we know how to service it, and we can finance it. And there's a comfort level from the department stores that are in need of newness to play with the providers that can do it, and we're getting that interest. Our show rooms are jammed every day. Developments in new initiatives are just, for me, they're unimaginable. The desire for our participation at retail is great.

So, we believe that the department stores are trying to offer greater purpose to their customers, and we're here to help them.

Thank you for your question, Bryan.

Thank you.

The next question is from John Kernan with Cowen.

Good morning, Morris and Neal. Thanks for taking my questions.

I just wanted to ask a shorter-term question and a longer-term. What gives you confidence (technical difficulty)?

John, we can't hear you. You're breaking up.

Can you hear me better now?

Yes.

Sorry about that. Can you just help us understand the Q4 sales and margin assumptions? It doesn't imply a (technical difficulty) acceleration from Q2 and Q3. Can you help us understand the assumptions for both non-outerwear as we head into the fourth quarter? Thank you.

Sure, John. In really both the wholesale business as well as in our outlet and retail business, last year's Q4 was not strong. We were under pressure. Weather was a significant factor.

So, obviously we're up against some poor comps. Those were negative comps in the retail space, as well as pressure on margins. And the same thing is really true for our wholesale business.

The only dynamic that's changed for us a little bit is that in the wholesale business we are anticipating that the outerwear season will become much more robust later in the year as we get to a more normalized winter season. And, again, in addition to that we're launching a number of new initiatives, both with Tommy in particular starting in the latter half of the year, but the Karl initiatives continue to grow later in the year, as well. All of those factors are what gives us confidence that we'll see fourth-quarter improvement at both the retail side, sales and margin, as well as in the wholesale side of our Business.

Could you provide any color on the total sell-in for Hilfiger and Lagerfeld in the fourth quarter?

In the fourth quarter, it will be -- I won't guide you on the numbers side of it for the moment. But in classifications we will have dresses distributed, we will have suits, we will have performance apparel, and we will have the early stages of sportswear as PVH vacates some of the space. That relates to Tommy.

If your question is broader than that, on Karl Lagerfeld, we're handbags, dresses, suits, sportswear, footwear, which is trending very strong. We're fairly well exploiting all of the retail space in departments with Lagerfeld.

That's helpful. And then just longer term, with Donna Karan, the margin assumptions that you're making for 2018 and beyond, I think above double-digit operating margins, can you help us understand what is driving that improvement? Is it product margin? Is it SG&A reduction? What gives you the confidence?

And what are you doing to enhance distribution and marketing? And can you help us understand some of the product launches you expect to go through? Thank you.

On the margin side, John, if we look at our current business and we run our wholesale business in the high single-digit operating margins, that's done without the benefit of a significant royalty income stream, which is pure profit. And it's also significantly impacted by royalty expenses that we pay to our licensors. The absence of those two things really is what gives us confidence that the operating margin for Donna Karan should be -- we're comfortable in the mid-double digits and then even north of there.

And in response to your marketing questions and how do we get there, we're developing a plan right now, as we speak. As you know, we don't have the keys to the business yet.

Every day we're interviewing and understanding how they're marketing, advertising, and the existing staff has serviced the market that they are addressing. We're clearly going to go down another path, so there's some sensitivity there. But we've defined it; we've collaborated with our retailers.

The appetite is quite significant for this brand globally. We're getting calls every day from existing partners and people that would like to partner with us for the future through licensing and through becoming customers of the brand if it's repositioned -- and it will be repositioned. So, we're excited by it.

Do we have something that we can clearly announce as to who the participants and who the retail distribution will be? It's a little bit early for us to announce that, but you can bet that it's going to be significant in scale.

Okay, Neal, just one final question -- any step-ups in SG&A and marketing around Donna Karan next year, or CapEx potentially associated with it, and working capital build that we should try to put into our models now?

We're planning for significant size, and not significant SG&A reductions off the existing base. We'll be evaluating the way they run businesses, and obviously we'll bring them in line with what we do in general. But our forecast is really based on top-line growth more than SG&A leverage, as far as the existing infrastructure.

In terms of CapEx, the beauty of our plan is we're really significantly growing the wholesale channel, and that's significantly less capital intensive than if we were to be rolling out stores. So, there will be shop development that we do, similar to what we do, but nothing too dramatic in terms of the size that we think the business can get to.

John, it's Wayne. Just let me add also that there's a team of us right now that are very focused on the integration side of the business. So, although we're not prepared to say about savings, I think your takeaway, everybody's takeaway should be that this will be a very, very efficient operation as soon as practicable. And we're working very closely with teams of people right now, both on the front end and the back end of the business.

So, next year when you look at top line on the chart that we gave you guys in terms of the deck, you could see top line is impacted very little because we're assuming a close of January 31, 2017. I think everybody knows the timetable on that, that what we can impact is probably late into the fourth quarter. But suffice it to say, the way G-III operates, we're already working behind the scenes to do whatever we can do, within the scope that we have not closed on this business yet, but we're very excited to really make an impact when we can get in there and have this thing closed.

All right, thanks, guys. Best of luck.

(Operator Instructions)

Our next question is from David Glick with Buckingham Research Group.

Thank you. A question about the core business -- we have greater visibility on how you're thinking about the DKNY business over the next three years, which is helpful, and more information than we had expected. Conversely, we have less visibility on your core business, just given the revision today. Your guidance suggests about a 7% operating margin.

And I'm just wondering how much of the drop of, call it, 100 basis points this year in your EBIT you think is recoverable near term, i.e., next year? And it would also be helpful to know what your base of wholesale outerwear sales are expected to be this year, so we can segregate that from some of your growth opportunities, and how much you're going to lose in retail this year, so we can also try to plan that out better going forward. Thank you.

Let me try to recap it this way for you, David. The outerwear business we've talked about as a high single-digit decline; it was approximately a $700 million business last year. Our core non-outerwear businesses are growing very nicely, high-single digits. When you look at the balance with the new launches that we have, our growth rates are significant, up in the almost 20% level when you take the core business and the new businesses that we're launching.

I think in terms of where the operating margins go for next year, obviously we're thinking about it. We've got a big season in front of us, and I think it's a little premature for us to be talking about exactly how that comes back.

Clearly, this year, we've had SG&A pressure both as a result of the outerwear decline and as a result of the new launches of the business. We definitely expect that on the Karl and Tommy front, and GH Bass, as well, in terms of the additional SG&A spends we had, that we will start to leverage those much better next year. Outerwear, we're hoping for a good end of the year, and it's a little premature to say what we will do and how that performance will be as we roll into next year.

In terms of retail performance for the full year, this is a challenging first half and we're hoping to bounce back pretty strongly at the back end. Our total top-line performance for the full year on these change is, really, low- to mid-single-digit declines in terms of comps for the full year.

We're looking for improvement in the fourth quarter. We expect, if we see that, I think we can feel much more comfortable about seeing it prospectively, as well. But, again, a little bit early for us to be out there for next year's growth on the retail side, as well.

Are you planning an EBIT loss from a contribution margin perspective in retail this year?

We are.

Okay. And then just a quick follow-up in terms of -- you talked about DKNY leading, I believe, with sportswear and jeans. What are the other categories? Obviously, you're strong in dresses. You have a lot of strength in related classification categories, active as well in Calvin Klein, you're rolling that out in Tommy Hilfiger. What's the opportunity on some of those related categories for DKNY, which can be very substantial businesses for you?

The interest -- as you know, DKNY is a collection business; it's shipped as a collection, it's produced as a collection, and the retail is a collection. The pads that we've created in department store are collection pads. We're very proud of approximately a 14,000 square foot pad that we occupy in Macy's.

What's very interesting and why this brand is appropriate for this time is that a lot of our competition, our two biggest competitors, are either giving up space or space is being taken away from them on similar pads. So, we will be offered those pads to showcase our collection of Donna Karan. And as time goes on, we will appropriately surround it by classifications.

There's a huge demand for footwear. We're in the middle of developing it, as we speak. And there's great opportunity to distribute footwear through the same cycle.

We pretty much out of the box at Lord & Taylor for Karl Lagerfeld became a very important footwear vendor to them. And we believe we can duplicate that, and bring it to a different level and scale with DKNY. And that will be brought to market.

The other piece is we have a built-in business globally with partners. They've been underserved with appropriate product. We're in the process of interviewing them and understanding what their needs are throughout the globe. So, that should improve literally overnight.

And we're going to work on our online business and improve our outlet stores. We think, if there is an outlet business, this is the best brand for us to pursue in the outlet centers.

Thank you very much.

Our next question is from Jim Duffy with Stifel.

Thanks, good morning. A few questions for me -- Morris, could I ask you to repeat what you said about the leases up for renewal, and maybe talk about strategically how you're thinking about the retail footprint from here?

Sure. We have approximately 100 leases that are coming due in 2017 and 2018. I think it breaks out -- there are 65 in 2017 and maybe another 35 in 2018. So, we're reviewing those.

If we don't get deals from the developers that bring those stores to profitability, we have the opportunity to walk away. That's 25% of our fleet of stores, so that changes the profile.

Our strategy with Bass is to -- I believe today's strategy -- if retail gets worse and I'm wrong, we have the ability within the next 18 months to change directions. But my desire is to continue the growth of Bass. The brand is getting great positioning in wholesale. The footwear is doing extraordinarily well, both men's and ladies, in wholesale venues.

Genesco has done a great job of developing the product, pricing it appropriately, and bringing out the quality that we were hoping they would. PVH is doing well on their men's piece of the business.

And the women's piece we're looking to improve. We took that on and our first delivery was not what we thought it would be. We've retooled on the design side and the pricing side, and we think it's a good business.

We've also added -- you can't really look at Bass as a stand-alone retail business. It's wholesale, it's licensing, it's the globe. And part of outlet is to help standardize and expand on the overall brand.

Wilsons is something that we look at a little closer. I'm not sure how much the world would miss Wilsons today. If we don't get better on the product side of it and find that the demand for outerwear is just beyond a four-month demand, we might consider transferring some of those pieces of real estate to Donna Karan.

Okay. Just listening to you guys talk over the course of the call, there's an awful lot of balls in the air. What gives you the confidence that you have enough management depth such that you can keep all of these balls in the air and execute on the integration of this acquisition?

I guess history might do that. We've done it before. We do it consistently.

We've launched Tommy Hilfiger in record time. And the level of interest, the level of orders are sensational, and it comes because great product and great people are creating that great product. So, we have them.

Karl Lagerfeld, very much the same way. Retail -- as we add retail pieces, the staff is there to support it.

In these times -- we used to have a difficult time years ago in attracting talent, partly because of who we were, and partly with how the industry functioned and how successful some of our competitors were. Today, I think we all have read the amount of people that have been laid off at Ralph Lauren and Michael Kors and Jones New York. There's some great talent that's looking for a home. We interview people all the time. I've never seen the level of talent that's available, and they're eager to come to G-III and build businesses.

So, I'm not doing it alone. The celebrity status that four or five of us have in running the Business, it's really not the Business. The Business are these amazing people that take on a challenge and make it work.

It would be great if you came and saw what we did and how we've changed over time. We're not the same Company we were years ago. We've corrected everything we need to correct for sustainability in this industry.

At one point we were exclusively, as you know, Jim, a company that just had licenses. Today, we're well balanced with great people. And I'd say that if you polled the industry, the retailers in the industry, and asked them to line up their top resources, we hit the charts really high. So, some of those elements make me comfortable that we can do this.

Okay. A couple of questions on the specifics of the deal -- the shares issued to LVMH, is the price fixed on those?

No, it is not.

Okay. And then, Neal, you characterize the interest rates and the leverage as manageable; you're positive. I pencil out about $25 million in annual interest expense before the $10 million operating loss, before all of the professional fees and other expenses.

With this as a starting point, what type of IRR for shareholders do you calculate for this Donna Karan deal? And what gives you the comfort that you're getting to a hurdle on that basis of assessment?

Jim, we've put out the short-term targets in our deck this morning. That's got us up with very strong top line, very strong operating margins.

In the short run, of course, there's some expenses to get this launch and get it accurate. The value creation that we think we can add to what we paid is extreme, and will result in very good, positive returns to shareholders and a very strong IRR.

Okay, I'll leave it at that. Thank you.

The next question is from Rick Patel from CLSA.

Thank you. Good morning, everyone, and thanks for taking my question. Just a follow-up question on the retail lease expirations -- can you frame how many of those 100 stores that are going to be expiring are Wilsons versus GH Bass? And is there any way to provide context on how many of those locations are currently unprofitable?

I can tell you that the first group that we looked at, and most sensitive, we have 23 that are not profitable for Wilsons. We'll probably react to those very quickly. They will either -- I gave you the lease expiration; there are others that we're going to try to negotiate our termination on. The blend of those are about 23 that we'll respond to quickly.

Some we'll just have to take a write-off on. They are just not productive stores that we believe we need to exit. The rest of it -- it's approximately a 50/50 split between Bass and Wilsons, and door count expirations in the period of time that I gave you.

And in 3Q, you expect Bass comps to be up low-single digits. Is that based on what you're seeing right now, or do you have new product initiatives that give you some confidence in better results versus what you saw in 2Q?

We are looking for new product to start to show us better improvement overall. I would tell you that the start of the season is where we have planned, consistent with the start of the season, but we are looking for an acceleration as we get into back-to-school and set the floors and start to see more traffic.

And then last question for me -- there's some aspirational luxury brands out there that are pulling back on inventory across various categories and department stores, as they protect themselves from promotional pressure. Do you see this as a growth opportunity for your brands, or is this a different pricing tier that's likely to be replaced by higher-priced brands in those department stores?

We don't really classify ourselves as aspirational luxury. We're a little bit more affordable. Maybe we might call ourselves affordable luxury in some of our brands. So, I think that what we will get is the customer that is shopping aspirational luxury that will step down a tier, and I think we get the benefit of the trade-down or the trade-off.

Thanks very much, and all the best this fall.

This concludes our question-and-answer session for today. At this time, I'll turn the call back to Morris for any additional or closing remarks.

Thank you very much. I hope our next call is a better call. Thank you for paying attention, and have a great day.

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