G-III Apparel Group Ltd (GIII) 2017 Q3 法說會逐字稿

Welcome to the G-III Apparel Group third quarter FY17 earnings conference call. My name is Katie 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, CFO. 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 afternoon and thank you to everyone for joining us. With me today are our Sammy Aaron, our President and Vice Chairman; Wayne Miller, our Chief Operating Officer; Neal Nackman, our Chief Financial Officer; and Jeff Goldfarb, our Executive Vice President. Today we will discuss our third quarter results and also provide you some more color on our transformative acquisition of Donna Karan, which closed earlier today.

There were important bright spots in our third quarter results, but on balance, it was a challenging environment. The strongest part of our business continued to be in non-outerwear wholesale. We maintained good sell through, drove 20% top line growth, and we made plan. The wholesale outerwear category was a different story in the third quarter. We were prepared for softness, as we talked about last quarter, but the repeat of unseasonably warm weather created even more pressure than we anticipated.

With several years of hard work, strong brands and great product, we have driven outerwear from nearly 100% of our wholesale mix 10 years ago to approximately 32% this year. With the addition of several Donna Karan product categories, the overall percentage of outerwear will further be reduced over the next several years. This reduction minimizes our exposure to unseasonable weather.

Our own retail business continued to reflect sluggish traffic and spending patterns and fell short of plan for the third quarter. This could have been mitigated to some extent had we done a better job of designing and merchandising handbags and accessories in both Wilsons and Bass in the quarter. We're managing the headwinds related to the weather and slow traffic, and we will continue to control what we can in our retail business. We are managing inventory tightly, reviewing operating expenses, and working with our landlords to improve our lease portfolio.

We are always working to become a fundamentally stronger company. This is most obvious in nearly ideal portfolio of world renowned brands in which we now operate, including Calvin Klein, Tommy Hilfiger, Karl Lagerfeld, Vilebrequin, and now Donna Karan. They form a uniquely powerful platform that gives us momentum and provides many opportunities to drive growth and create sustainable value for years to come. We remain dedicated, energized and focused on delivering results.

Before I go into additional detail with respect to our operations and our strategies, I will review a few high level financial metrics from the third quarter. Net sales in the third quarter were down 3%, to $883 million, compared to last year's $910 million. Compared to last year, revenues were down $17 million in our retail business and $13 million in our wholesale business. In wholesale, a $65 million sales increase in our non-outerwear business was offset by a larger than expected decline in outerwear. Our EBITDA in the third quarter was $122 million, compared to $147 million last year.

Net income per diluted share in the quarter was $1.50. This compares to net income per diluted share of $1.87 in the third quarter of last year. We have revised our full-year outlook to incorporate our third quarter results and reflect additional pressure on our retail business expected in the fourth quarter. This would put us at roughly $2.4 billion in revenues and approximately $1.90 to $2.00 in non-GAAP earnings per share, excluding the impact of the Donna Karan acquisition. Neal will provide more detail on our guidance shortly.

I'd like to now turn to the details of the quarter and start with our retail business. Wilsons has 190 stores, with 65% to 70% of the product mix at this time of the year in outerwear. Another warm fall and slower than expected traffic made for a tough quarter, especially in outerwear. Wilsons' third quarter comp was down 20%, about 15 percentage points lower than planned. November improved to down 11% and Black Friday was stronger than that, at down 3%. We're seeing good year-over-year margin improvements, and we believe that we have an opportunity to achieve a better holiday season than last year; but we are resolved to make some changes to this business. We're looking to potentially repurpose and reduce our number of stores, improve our product mix, and rationalize our expense structure.

First, we have an opportunity to repurpose a number of stores. We have recently transformed four stores to Karl Lagerfeld Outlet concepts, including locations in Chicago and Las Vegas. We've also converted five locations to heritage leather stores, with a much greater focus on leather outerwear and accessories at a higher average price point. It is still quite early in both cases, but we have confidence that these new stores will work.

G.H. Bass is 165 outdoor lifestyle stores. Bass had a comp decline of 11% in the quarter against a plan of up 1%. Comps remained at this level through November and over the Black Friday weekend. Ironically, we think the stores are in great shape, the merchandise is good and the management is effective. The reality is, the product is geared toward a younger consumer and is a little bit more expensive than in the past. Educating and motivating our customers is taking a little more time than we expected. We're using targeted mailers and campaigning on social media to help drive better awareness. We are seeing big increases in our online business, although off a small base.

We also think that our wholesale presentation in women's apparel and our licensing partners, particularly at Genesco and PVH, are doing a great job with the brand message. We are designing, producing and marketing good product and so are our partners. We believe we understand the customer, and we need to have a little patience, continue to raise awareness, and to largely stay the course in order to see the overall success we believe Bass will be.

We now have over 150 leases between Bass and Wilsons due to expire over the next two years. While we expect to repurpose some additional stores, especially for the Donna Karan business, we plan to either renegotiate or, if necessary, exit some of these leases. We're very focused on executing our strategies in both Wilsons and Bass in order to greatly improve our profitability in this business.

I'd like to quickly touch on Vilebrequin. The brand is strong and the business is showing itself to be relatively stable. While international tourist spending in the US and France has softened, Vilebrequin performed well during the past quarter, with comp sales showing low single digit increases. We're investing in our online initiatives with Vilebrequin and also in the continued rollout of men's and women's ready-to-wear.

Now I will give you some details with respect to our wholesale business. Wholesale outerwear sales were down roughly 20% relative to last year. This created a $40 million shortfall of revenues against our plan. We do expect seasonal weather as we go into the holiday season. For the full year, we are now anticipating a double digit decrease. This compares to our prior expectation of a high single digit decline. Even so, we and our retail partners bought carefully this year and we do not expect to have any significant inventory issues.

In contrast, we drove $65 million of net sales growth compared to the prior year in a variety of non-outerwear categories. Sell through remained strong and we and our customers captured increasing margins in dresses, sportswear, handbags and performance apparel. These categories, as well as our denim and shoe initiatives, put us squarely into the largest categories in the market.

Again, our powerhouse portfolio of Calvin Klein, Tommy Hilfiger, Karl Lagerfeld and Donna Karan puts us in an excellent position to capture the large and sustainable growth opportunities we see. Calvin Klein, with our highly diversified and well distributed mix of categories, had a solid quarter across the board. Our product performance was excellent and Calvin Klein remained a clear leader in the merchandising plan in each of our categories. We continue to plan to be up high single digits overall for Calvin Klein, reaffirming the power and the durability of this icon.

Our newer wholesale business with Tommy Hilfiger and Karl Lagerfeld continue to be well received. We're making good progress on product, marketing and merchandising. We are hitting our stride, delivering great assortments and achieving planned levels of growth. For Karl Lagerfeld, our marketing campaign, both in print and online, is resonating well with consumers. With a controlled distribution focused on Lord and Taylor, the Bay and Dillard's, we expect to see good sales improvement into next year.

For Tommy Hilfiger, we're now shipping dresses, suit separates, performance, jeans and luggage. Sportswear will begin shipping for retail selling early in 2017. We are quickly expanding door count, category by category, and we're confident that Tommy Hilfiger will grow in importance as part of our overall wholesale mix next year. We need to work and execute over the next five years to achieve $5 billion in sales, but I'm more confident than ever with Calvin Klein, Tommy, Karl and now Donna Karan all under one roof.

I would also like to comment on two other areas of our business. Our Ivanka Trump line continues to sell well, and we're looking forward to good increases next year. Our Eliza J, Jessica Howard and Vince Camuto dress lines also continue to perform well at retail.

Before we move to Donna Karan, I'd like to comment on our overall e-com strategy, which is twofold. For our own brands, such as Donna Karan, Karl Lagerfeld, Bass, Wilsons, Vilebrequin and Andrew Marc, we will continue to invest and grow these platforms. Although we are building from a small base, we're getting solid increases and expect this area of the business to be a good contributor to sales and profit over time. For our licensed brands, as well as owned brands, we will continue to be the direct beneficiary of our retail partners' e-com businesses strong growth. We're also working to build our relationships with Amazon, Fanatics and other well-established online sites.

Now I'd like to focus on Donna Karan and DKNY. We're really pleased to have closed the acquisition of these powerful iconic brands. Our retail partners have been clear that they have an urgent demand for newness in fashion to excite the market. While Tommy Hilfiger and Karl Lagerfeld also address that need, the Donna Karan acquisition deepens our ability to serve that demand. They're really excited about our upcoming expanded launches of the DKNY products.

The DKNY brand alone has the potential over time to generate $1 billion in annual sales in North America and additional volume internationally. We're working to make both DKNY and Donna Karan cornerstone brands for retailers such as Macy's, Dillard's, Lord and Taylor, Nordstrom's, Bloomingdale's and Saks. Our first focus will be on enhancing and building a comprehensive collection of products for DKNY both here and around the world.

We are increasingly confident that this is a transformative business that will take our Company to the next level of strategic diversification, growth and competitive position globally. We're pleased to also see deep interest in the brand in international markets.

Our integration team is hard at work to ensure a fast start post closing. We have already hired some of the best talent in the industry to complement the team at DKI. Caroline Brown, the current CEO, will be leaving in the coming weeks. I'm grateful for the work she has done at the company over the past two years, which streamlined the business and strengthened the operations in a number of important areas. Also, I'd like to thank her for her professionalism and her commitment during this transaction.

We are cementing our strategy that the first leg of growth will be led by the classifications that we know best, dresses, suit separates, sportswear, performance, coats, handbags and shoes. We believe the strength in our existing sourcing and supply chain organization will prove to be a major advantage to the business. We have already begun to work on an introduction of performance and dress product, both of which should be available in existing DKNY stores this coming summer.

We also believe that DKI has an excellent group of licensees and distributors. We have identified a number of untapped categories and territories where we expect to see significant demand and we plan to expand our partnerships to capture these opportunities as we go forward. We're pleased that each of our major licensees and the majority of our distributors understand and are very supportive of our vision for the brand.

From a systems perspective, we expect to have both wholesale and retail systems fully up and on our platform in the second half of 2017. We also are excited for the omni-channel path that the Donna Karan e-com business is already on. LVMH identified and partnered with Farfetch in London to revamp Donna Karan's entire e-com offering on a distinct and highly capable platform that will ultimately enable a seamless customer experience with service available from any store or any location globally.

We remain confident that at the end of the third year of operation, our fiscal year ending January 31, 2020, we will have the DKI business running close to an annualized revenue of $750 million, with an operating margin in the mid teens and a growing contribution from licensing income. DKNY and Donna Karan are iconic brands that truly transcend time and have us very, very energized. 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 third quarter.

Thank you. Net sales for the third quarter ended October 31, 2016 decreased 2.9%, to $883 million from $909 million in the same period last year. Net sales of our wholesale operations decreased 1.6%, to $794.4 million from $807 million, primarily as a result of a decrease in shipments of outerwear products. Our non-outerwear product categories performed to plan and were up strong double digits. We had good increases in our Calvin Klein handbags and sportswear categories, and the new launches of Karl Lagerfeld and Tommy Hilfiger also achieved their plans. Net sales of our retail operations decreased 14%, to $107.2 million from $124.7 million, primarily due to same store sales decreases of 20% for our Wilsons stores and 11% for our G.H. Bass stores compared to the prior year's quarter.

Our gross margin percentage was 36.4% in the three-month period ended October 31, 2016, compared to 37% in the prior year period. The gross margin percentage in our wholesale operation segment was 34.4%, compared to 34.7% in last year's quarter. The gross margin percentage in our retail operations segment was 45.2%, compared to 45.9% in the prior year's quarter. Gross margins decreased in our Wilsons business as a result of the unseasonal weather, highly promotional environment, and efforts to meet our objectives of getting our inventories in line for the upcoming season.

Total SG&A expenses increased to $198 million in the quarter, from $191 million in the same period last year. This increase is primarily due to increases in facility costs. The increase in facility costs is due to increased shipping from our third-party warehouses and higher rent expense as a result of additional retail stores open since the prior year. In addition, we incurred increased promotional expenses on the launches of Karl Lagerfeld, G.H. Bass and Tommy Hilfiger. Payroll increases associated with the new divisions were offset by reductions in overall bonus accruals. Net income for the third quarter was $70.6 million, or $1.50 per diluted share, compared to $87.2 million, or $1.87 per diluted share in last year's third quarter.

Regarding our balance sheet, accounts receivable are flat, at $537 million, compared to the end of the prior year's third quarter. Inventory decreased approximately 4%, to $491 million, compared to $510 million at the end of the third quarter last year. We spent approximately $18 million on capital expenditures this year, primarily due to leasehold improvements for new and remodeled Wilsons, G.H. Bass and Vilebrequin stores, as well as fixed ring costs at department stores. At the end of the quarter, we had a much improved net debt position of $46 million, compared to $118 million at the end of the third quarter in the prior year.

With respect to our guidance, the Company today revised its prior guidance for the full FY17 ending January 31, 2017. The Company is now forecasting net sales of approximately $2.43 billion and net income $66 million and $71 million (Sic-see press release "$67m and $72m"), or a range between $1.41 and $1.51 per diluted share. The full-year forecast now includes our estimate of revenues of approximately $25 million and operating losses and additional interest expense of approximately $21 million, or $0.28 per diluted share, associated with the acquisition of Donna Karan, which is effective as of today. The current year's forecast also includes professional fees of approximately $15 million, or $0.20 per diluted share in connection with the acquisition. In addition, our estimates include the impact of the issuance of approximately 2.6 million shares of new G-III common stock issued to the seller.

On an adjusted basis, excluding the impact of the acquisition, our updated forecast would be for net sales of $2.41 billion and net income between $87 million and $93 million, or a range between $1.86 and $1.96. That would compare to our previous guidance of 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. The previous forecast and the adjusted forecast have both been reduced for professional fees already incurred of $3 million, or $0.04 per diluted share.

For the FY16 year, net sales were $2.34 billion and net income was $114 million, or $2.46 per diluted share. The Company is forecasting non-GAAP net income per diluted share, which excludes the professional fees associated with the acquisition and other income in FY16, of between $1.61 and $1.71 per diluted share for the full FY17, compared to $2.44 for the FY16. The non-GAAP forecast includes the estimated operating losses and additional interest expense of approximately $21 million, or $0.28 per share, and the additional issuance of shares associated with the acquisition.

Excluding the acquisition impacts and the additional issuance of shares, the non-GAAP forecasted net income per diluted share is $1.90 to $2.00 per diluted share. The Company had previously forecast non-GAAP net income of between $2.20 and $2.30 per diluted share, which excluded any operating losses, additional interest expense and the additional issuance of shares relating to the acquisition.

The Company is now projecting adjusted EBITDA for FY17 of between approximately $162 million and $170 million (Sic-see press release "$163m and $171m"), compared to adjusted EBITDA of $210 million in FY16 and from our previous guidance of adjusted EBITDA of between $199 million and $206 million. The current projection includes estimated operating losses of $14 million from the acquisition, but excludes professional fees associated with the acquisition.

With respect to our fourth quarter guidance, we are forecasting net sales to increase to approximately $650 million in this year's fourth quarter, or $625 million without the additional revenue from the Donna Karan acquisition. Excluding the forecast revenues for the Donna Karan business, this is an increase of approximately 23% from the $527 million of net sales in the comparable quarter in the prior year.

We are forecasting a net loss between $0.5 million and $5 million, or between $0.01 or $0.11 per share for the fourth quarter, compared to net income of $7.8 million, or $0.17 per diluted share in the previous year's fourth quarter. Our fourth quarter forecast includes operating losses and interest expense of $21 million, equal to $0.28 per diluted share, related to the acquisition. In addition, the fourth quarter forecast includes professional fees of approximately $12 million, equal to $0.16 per diluted share. It also includes the issuance of additional shares in conjunction with the acquisition. Excluding the Donna Karan operating loss, interest expense and the dilutive effect of the shares, and professional fees associated with the acquisition, we are forecasting non-GAAP net income per diluted share of $0.33 to $0.43 per diluted share.

We are now anticipating that our wholesale outerwear sales for the full year will be down approximately 15%, as compared to our previous view of a high single digits decline. This decrease anticipates that our outerwear sales will be stronger in the fourth quarter than in the prior year's fourth quarter, and we did see a good spike in sell throughs in outerwear sales during the Black Friday week. Our non-outerwear sales growth forecast remains strong in the fourth quarter and is planned to increase by approximately 20%. We are anticipating low single digit comp increases at both Wilsons and Bass, compared to negative 8% and positive 12% comps, respectively, in the prior year. That concludes my comments. I will now turn the call back to Morris for closing remarks.

We have systematically, steadily and thoughtfully diversified into a wide range of categories and brought new brands into our portfolio. With Calvin, Tommy, Karl and Donna Karan, along with others, we have great points of entry and paths to solid growth in every major branded category. This now includes a wide array of high margin global licensing opportunities for our own brands. We think that over time, we can be generating licensing revenue of $75 million to $100 million annually.

While the scale and the pace of our overall growth should be very strong, it's important to remember that we are systematically building the business on a solid foundation so that we can create long-term sustainable growth. Across the organization, we have the commitment and the talent to create that kind of business and make it work extremely well for our shareholders, our customers, our partners and for our own company.

No other company operating today has been able to assemble a portfolio of brands like ours. No other company has the kind of long-term track record of accomplishment that we have put on the board. No other company has been able to evolve over time and compete as effectively as we have. Our entire management team is dedicated to making the most of the incredible, diverse, deep and global opportunity set now in front of us. I thank you again for your time today. And Operator, we're now ready to take some questions.

(Operator Instructions)

Eric Beder, Wunderlich Securities.

Good afternoon. Could you talk a little bit about the, when you look at the Tommy Hilfiger rollout, where are you seeing the strength there, and how do you look upon that brand going forward as a driver here in terms of being able to give you an even better leadership position in some of the women's categories?

We've currently distributed, as you know, we've had the license for coats, both men's and women's coats historically, and those businesses are very strong. The men's brand matches up in performance to Calvin Klein, and the women's is slowly getting there. So those are well positioned for the future. The new categories that we've shipped are dresses, suit separates, performance, and we are shipping a little bit of denim, and all of them are working extremely well. We had an incredible week on the performance side in our department stores. The sell throughs just blew away plan. We're quite energized on the potential of pretty much all the categories. Suit separates has done well, and dresses need a little bit of work. We know where we missed a little bit. The dresses were good. They need to get a little bit better. We are on it. And the classifications that we're eager to get out there are the sportswear classification for Q1.

So this will be a large, significant piece of our business. I've stated that it is a driver for the future for us. We have a really good situation with PVH. They have the confidence level in us to give us, again, one of their two trophy assets to manage on the women's side. We won't disappoint them. This is going to be a fabulous piece of business for us.

Great. Now I'll do the follow-up. So the handbag segment, you have a number department store competitors pulling back on handbags. How do you look upon that as an opportunity? Is it an opportunity for you to get more aggressive in the handbag space?

We currently do handbags. As I stated earlier, let me get rid of the piece that trouble us the most, which is our own retail stores. That doesn't enter into the areas that we're really talking about. We've made some merchandising mistakes. We made some fabric mistakes, both for Wilsons and for Bass. Those are being corrected as we speak. Wholesale distribution, we're doing very, very well. Our business is growing. We're going to be north of 25% in growth in the Calvin Klein handbag business.

What you need to remember is, we don't have the scale of business that a Michael Kors or a Coach, where we're growing our business, we're growing it well, we have the support of the retailer, and we have the demand of the consumer. What we're anxious to do now is to launch DKNY. We believe that there's great appetite for DKNY going forward. The best part of DKNY's business currently really is the handbag business. So we're going to fast track it. We're going to implement our sourcing team and engage them to buy a little bit better. We're currently designing product that we believe can appeal to a larger segment of the population, and I think we're going to have another great brand in handbags in the next 18 months.

Great. Good luck for the holiday season.

Thank you, Eric.

Ed Yruma, KeyBanc Capital Markets.

Hi. Good afternoon, guys. Thanks for taking my question. First, on the guidance revision, is it fair to assume that really the outerwear business in its entirety was responsible for the shortfall? And as you weigh the two components, how much was the shortfall due to the lower wholesale shipments versus how much is due to the underperformance at places like Wilsons?

Ed, with respect to the miss in the third quarter, the wholesale top line miss is really all outerwear. The retail miss, as we referred to, we really missed comps in both chains by almost 15%. We were also light on margin relative, gross margin percentage relative to where we were forecasted. So as Q3 is concerned, our retail business really was the more painful part of the business. It was a combination of really Wilsons and Bass. The outerwear miss that we had in wholesale, we actually were fortunate to have some offsets. We had some higher gross margin than we had forecasted in the wholesale business. We had some reductions in SG&A expenses relative to what we forecast. And that's really a summary of the Q3 part of the miss.

With respect to your question in terms of the fourth quarter and the guidance, the biggest part of our change in terms of Q4 is an adjustment to what's going on at retail. We were previously forecasting our comps to be in the mid-single digits. We've pull them both back to low single digits. We've also pulled back the gross margin expectation. While we do expect them to improve over the prior year, compared to where we were previously forecast, we've pulled that back. The outerwear refinements in the fourth quarter are negligible.

Got it. Just to underline the point a little bit, I think at one point you had indicated that you had planned for some reorder business in the fourth quarter that you maybe historically haven't seen but expected, assuming a more normal winter. Now I'm assuming that that's not happening, and I guess I'm trying to square that and your comment that you feel pretty good about your outerwear inventory levels. Maybe how do you feel about them in the wholesale channel, as well? Thanks so much.

We anticipate some reorders. Our business has gotten somewhat better post Black Friday. We believe that we're positioned well to service reorders. We are believe we're positioned well to manage our inventory. We learned our lesson a year ago. Our responses a year ago to the inventory issues came a little bit late this year. So gauging the business, we're managing to move inventory, we're managing to cancel some of the purchases that we've made, and we're managing to hold piece goods at the factory level for production at a later time. So we're very comfortable with where our inventories are, and we believe that there's still a good opportunity for strong coat business. We haven't had a stretch of cold weather yet. So if we have it this week, we could still have a reasonably good coat season.

Got it. I'm sorry. Just the final piece, so does your guidance assume that you have a reasonably good coat season or is this a, the conditions are what they are, you haven't had cold weather, and so you just assume that is going to be a pretty tough winter for the balance of the year? Thanks so much.

Our guidance does not assume that we're going to have a good coat season.

Great. Thanks so much.

Erinn Murphy, Piper Jaffray.

Great. Thanks. Good afternoon. Building on Ed's question on Q4 guidance, I just want to make sure I understand that. So if I look at Q3, the miss is about $57 million relative to where you guided; and the full year, I believe you brought down by about $70 million, $71 million. So Q4 is really just coming in by about $14 million. Is that readjustment, is that just the difference in comps going from an up mid-single to a low single? And then Neal, could you break out what percent is reorders for outerwear in Q4? That would be helpful. That's my first question.

Your figures are just about accurate. It's only reasonable, Erinn. The fourth quarter pull down is a function in terms of top line significantly going from the mid-single digit comp to the low single digit comp. The pullback in terms of, again, the total profitability on the fourth quarter is that we did pull back margin, as well, in terms of our forecast assumptions for the fourth quarter. And as I said, just a small adjustment to wholesale forecasted sales in the fourth quarter. So it is significantly the comp decline in retail.

With respect to your second question, we are still looking for a significant number of reorders and close out orders that take place in the fourth quarter. I can't give you a specific number on that, but that is a part of our forecast for the fourth quarter. In terms of our total outerwear book, we're really looking to return to probably where we were, slightly less than where we were two years ago. Last year was truly, we believe, is an anomaly for us.

Okay. That's helpful. My second question is just on DKNY. I think Morris, you mentioned that Caroline would be leaving the company. Any thoughts on changing up the design direction that you have there currently, and then when do you feel like you'll be able to affect product for that business?

And then the second piece on DKNY for Neal, I may have missed this, is it still a $10 million EBIT dilution in terms of the EBIT contraction in terms of DKNY for next year? And then with the financing, should we be thinking about this as about $0.65 to $0.70 dilutive, all in? Thank you.

So Erinn, in design and maybe a little bit of distribution, I've mentioned that we're redirecting the brand, to some degree. To do this, we kind of have a plan to reshape, to redistribute and reintroduce DKNY from its current niche path to a more commercial direction, which should create the demand that we're looking for, and we're in the middle of designing it now. Some of the product will begin to trickle out in second quarter. Most of the product will be in for third quarter. That's where you'll see what we plan on standing for. We're excited by it. We're quite energized. It will take a little time to integrate two cultures, and we'll do amazingly well with this brand. This is the future of G-III.

Erinn, with respect to your question for me, the operating, we are still comfortable with the operating losses that we put out at about $10 million. In terms of dilution from our debt load, we've taken on about $650 million of additional debt. The blended interest rate on that is probably just shy of 5%. So that will be incremental. And we've also got the incremental shares that we've issued. That dilution is roughly about 6%.

Great. Thank you, guys, and best of luck.

Thank you.

(Operator Instructions)

David Glick, Buckingham Research.

Thank you. Yet another question on your Q4. The revenue increase seems pretty significant. It's about $100 million. Maybe the simplest thing to understand, Neal, is if you could break that dollar increase down by the dollar increase in outerwear, your organic growth, and you obviously have a lot of pipeline fill, you're shipping new categories to Tommy Hilfiger, Karl Lagerfeld, they're non-comp. I think investors are trying to get comfortable that after a couple tough quarters that you can hit that wholesale number. So breaking that down would be helpful, if you can.

Let me give you a little more color then on that, David. We're looking for the outerwear increases to be at about 10% from where we were before. And that's --

Is it 10% versus last year or higher than what you had before?

10% off of last year. So that's roughly $10 million. The balance will be in the non-outerwear categories. I would say that if you were to think about that increase, which is quite significant, about half of that relates to the new businesses, and then half of that is still going to be driven by the Calvin Klein and the Jessica Howard businesses.

Okay. So that organic growth, if you will, that rate of growth is consistent with where you've been running year-to-date and you just have more new categories that you're shipping?

It's actually up a little bit from where we've been year-to-date. We're still looking for that core group to be in the high single digits. So this is slightly higher for us in the fourth quarter.

Okay. And I think the other issue that I think folks are struggling with a little bit is the retail comp guidance relative to your trend. You did note some improvement, particularly, it sounds like, last week. How can we get confidence that you're going to move out of that negative comp territory, particularly in Bass, which doesn't seem to have improved so far in November, but how do we get some comfort level that we can turn positive here? Obviously, December has to be up pretty significantly.

David, we're still, in both our chains, we're weather sensitive. Wilsons is a coat chain. The comfort I can give you is what I believe. I believe that it will get cold. Wilsons is positioned to do better with their inventory. And Bass, Bass, as I stated earlier, is taking a little longer. We've strategically repositioned the brand. We're directing the brand toward a younger customer that is now beginning to pay attention to the brand. Social media has been very kind to us. We've spent a lot of money marketing this brand and a lot of effort. And there's not a day that there's an editorial piece that involves Bass. In many cases, it's been described as an essential component of somebody's wardrobe. The Weejun has become a hot shoe. The quality of the footwear today is light years away from where it was a year ago. The apparel is strong. Yet we need to make that younger customer feel comfortable in our doors.

The department store segment, our licensees are doing well with the product. PVH has got the men's piece of it, and they're virtually in every door at Macy's and expanding into many different department stores. They're doing well. And Genesco, in the same regard, is also doing well.

Our outlet, partly weather, partly traffic, partly tourists. That needs a little bit of work. So for me to sit here and make you comfortable that it's going to get better, I can't. I can assure you that we're not sitting still. We're negotiating with our landlords. We're promoting, where we believe it's efficient. And we're managing our business as efficiently and as properly as we know how. Those are the assurances that I am qualified to make. Weather, unfortunately, I can't do that one.

Thank you. Just one last one, if I could. The DKNY distribution, should we think of your customer base to be similar to Calvin Klein? And obviously, Tommy Hilfiger has been historically, or at least recently historically, exclusive to Macy's, but you're broadening it. But should we think about your biggest customers for Calvin and Tommy are likely to be the same hierarchy for DKNY?

David, we distribute Calvin Klein to virtually every department store in the country, short of Bergdorf Goodman and maybe Neiman Marcus. So to the extent that they'll share accounts, absolutely. The price points of DKNY should be a little bit higher. The attitude of the product is going to be different, but yes, the audience that we have domestically is similar. The added feature for us is that we have global distribution for the first time with this brand. There are global distributors, global partners, global franchisees and global licensees that we'll be able to take advantage of in this initiative. So it's a broader distribution than Calvin Klein quite, honestly. And it's both genders. It's children, it's home, it's many different classifications of product. It's fragrance. In some elements of the business, you can compare it to Calvin, but it's a far broader distributed brand for us. It has the ability of being distributed far broader than Calvin.

Thank you very much for the color. Appreciate it. And good luck in the fourth quarter.

Thank you, David.

Rick Patel, CLSA.

Thank you. Good afternoon, everyone. I was hoping you could talk about the transition of DKNY as it moves out of your current distribution points into those that you see as more appropriate. When exactly does that process began and how long does it take?

And then secondly, as we think about liquidation sales that may need to happen and the impact that could have on sales and margins, is it safe to assume that all of that is baked into your current guidance of a $10 million operating loss for 2017, or is that a work in progress that you still need to work on?

Rick, it's a safe assumption. Again, we're in control of the inventory. What has been kind to us is the fact that the product is not over distributed in North America. It's got a small distribution, it's tiny, so we start almost with a blank canvas as far as inventory is concerned, and we're positioning it. It has an image. It's been well marketed as more luxury and aspirational than we intend it to be. So we're going to bring it down a notch or two, and we're designing toward it now. So you'll see by third quarter, you'll see what the brand stands for. So we've started that process through design. We're working on marketing plans, and we've engaged the team at DKNY. We've been fully transparent with them as to where this brand is going in our hands. And the collaboration of both our teams is going to make this work quickly.

And given the potential distortion that Donna Karan could have on your margins next year, can you talk about the outlook for gross and operating margins as we think about your retail versus wholesale segments as we weigh not just Donna Karan, but also the need for potential markdown support versus changing product mix in general?

Rick, it's too early for us to talk about the gross margins and operating margins for next year. Obviously, we're going to be looking for improvement. We've got to make our way through this season in terms of outerwear and come through and see how our retail segment performs, as well. So I think at this point, it's a little premature to roll G-III's core business into next year. In terms of Donna Karan, we certainly are of the opinion and feel confident that over the mid term, we are going to get improvement in terms of operating margins. And we've said before, that's a function of not having to pay a license or a royalty, and that's a function of having a much stronger licensing revenue stream that's highly profitable. So we have forecasted out three years that our operating margins at Donna Karan would be at about the 14% level. That will certainly improve where we are today. Certainly in terms of our current order book, as we look into spring, we're very comfortable where with the way we have shown and taking orders so far.

All right. Thank you and good luck this winter.

Thank you, Rick.

Thank you. This concludes the question-and-answer session. I will turn the call back to management for concluding remarks.

Thank you for staying with us this afternoon. And I wish you a happy holiday season and talk to you soon. Thank you.

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