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| GIII > SEC Filings for GIII > Form 10-Q on 9-Jun-2009 | All Recent SEC Filings |
9-Jun-2009
Quarterly Report
In February 2008, we acquired Andrew Marc, a supplier of fine outerwear and
handbags for both men and women to upscale specialty and department stores. As a
result of this acquisition, we added Andrew Marc and Marc New York as additional
company-owned brands and Levi's and Dockers as additional licensed brands. We
believe that the Andrew Marc brand can be leveraged into a variety of new
categories to become a meaningful lifestyle brand for us. Since we acquired
Andrew Marc, we entered into agreements to license the Andrew Marc and Marc New
York brands for women's footwear, men's accessories, women's handbags and men's
cold weather accessories.
In July 2008, we acquired certain assets of Wilsons The Leather Experts, which
had been a national retailer of outerwear and accessories. The assets acquired
included 116 outlet store leases, inventory, distribution center operations and
the Wilsons name and other related trademarks and trade names.
Our retail operations segment, which consists almost entirely of our Wilsons
retail outlet store business, had an operating loss during fiscal 2009. We
acquired Wilsons during the middle of the fiscal year when the merchandise plan
for the key Fall and Holiday seasons was already set. The difficult economic
environment also contributed to a weaker than expected performance by our
Wilsons retail business. We have undertaken the following initiatives to improve
the performance of our retail outlet business:
• Improve the merchandise mix of outerwear at our stores;
• Emphasize presentation of product in our stores and training of our sales associates;
• Incorporate an improved mix of private label and branded accessories; and
• Reduce overhead costs at the distribution center for our retail operations by reducing our leased space by one-half at that distribution center.
We continue to believe that operation of the Wilsons retail stores is part of
our core competency, as outerwear comprises about one-half of our net sales at
Wilsons. We expect to implement these initiatives with a view to creating a
store concept that is capable of building growth over the long term.
Our acquisitions are part of our strategy to expand our product offerings and
increase the portfolio of proprietary and licensed brands that we offer through
different tiers of retail distribution and at a variety of price points. We
believe that both Andrew Marc and the Wilsons retail outlet business leverage
our core strength in outerwear and provide us with new avenues for growth. We
also believe that these acquisitions complement our other licensed brands, G-III
owned labels and private label programs.
We market our products to department, specialty and mass merchant retail stores
in the United States. We also supply our outerwear to the Wilsons outlet stores
and to the Wilsons e-commerce business we acquired. In 2008, we re-launched a
website for Andrew Marc product to further expand our e-commerce presence.
We operate our business in three segments; wholesale licensed apparel, wholesale
non-licensed apparel and retail operations. The licensed apparel segment
includes sales of apparel brands licensed by us from third parties. The
non-licensed apparel segment includes sales of apparel under our own brands and
private label brands. The retail segment consists almost entirely of the Wilsons
retail outlet stores we acquired in July 2008, now operating as AM Retail Group,
Inc. We had an insignificant retail operation prior to the Wilsons acquisition.
The sale of licensed product has been a key element of our business strategy for
many years. As part of this strategy, we continue to add new fashion and sports
apparel licenses. We have expanded our relationship with Calvin Klein by adding
licenses for women's performance wear in December 2007 and for better women's
sportswear in August 2008. We began limited shipments of women's performance
wear for the Spring 2008 season and expanded distribution for the Fall 2008
season. We began shipping women's better sportswear for the Spring 2009 season.
In July 2008, we entered into a license agreement to design and distribute
Jessica Simpson dresses, which we also began shipping for the Spring 2009
season.
We believe that consumers prefer to buy brands they know and we have continually
sought licenses that would increase the portfolio of name brands we can offer
through different tiers of retail distribution, for a wide array of products and
at a variety of price points. We believe that brand owners will look to
consolidate the number of licensees they engage to develop product and they will
seek licensees with a successful track record of developing brands. We are
continually having discussions with licensors regarding new opportunities. It is
our objective to continue to expand our product offerings.
Significant trends that affect the apparel industry include the continuing
consolidation of retail chains, the desire on the part of retailers to
consolidate vendors supplying them, the increased focus by department stores on
their own private label brands and a shift in consumer shopping preferences away
from traditional department stores to other mid-tier and specialty store venues.
The weakness in the economy and financial markets has reduced consumer
confidence and consumer spending. There has also been significant downward
pressure on average retail prices for many categories of apparel, in large part
as a result of the weakness of the economy.
A number of retailers are experiencing significant financial difficulties, which
in some cases has resulted in bankruptcies, liquidations and/or store closings.
The financial difficulties of a retail customer of ours could result in reduced
business with that customer. We may also assume higher credit risk relating to
receivables of a retail customer experiencing financial difficulty that could
result in higher reserves for doubtful accounts or increased write-offs of
accounts receivable.
We have attempted to respond to these trends by continuing to focus on selling
products with recognized brand equity, by attention to design, quality and value
and by improving our sourcing capabilities. We have also responded with the
strategic acquisitions made by us and new license agreements entered into by us
that have added additional licensed and proprietary brands and helped diversify
our business by adding new product lines, additional distribution channels and a
retail component to our business. We believe that our broad distribution
capabilities help us to respond to the various shifts by consumers between
distribution channels and that our operational capabilities will enable us to
continue to be a vendor of choice for our retail partners.
Results of Operations
Three months ended April 30, 2009 compared to three months ended April 30, 2008
Our lowest sales traditionally occur in the first fiscal quarter of the year.
Net sales for the three months ended April 30, 2009 increased to $115.9 million
from $75.4 million in the same period last year. Net sales of licensed apparel
increased to $60.0 million from $41.7 million primarily as a result of an
increase of $15.1 million in net sales of Calvin Klein licensed product. Our
Calvin Klein licensed product consists of men's and women's outerwear and
women's sportswear, dresses, suits and performance wear. A substantial majority
of the increase in net sales of Calvin Klein product resulted from increased
sales of Calvin Klein dresses and our launch of Calvin Klein women's sportswear.
Net sales of non-licensed apparel in the three months ended April 30, 2009
decreased to $28.8 million from $33.7 million primarily due to a $3.3 million
decrease in net sales by our Jessica Howard division. Net sales of our retail
operations were $27.2 million. Almost all of these sales were from the Wilsons
retail outlet stores we acquired in July 2008.
Gross profit increased to $31.2 million, or 26.9% of net sales, for the three
month period ended April 30, 2009, from $17.5 million, or 23.3% of net sales, in
the same period last year. Gross profit as a percentage of net sales increased
primarily because the gross profit percentage of 38.7% of our retail segment,
which we did not have last year, is higher than the gross profit percentage in
our licensed and non-licensed apparel segments. The gross profit percentage in
our licensed apparel segment increased to 24.6% in the three month period ended
April 30, 2009 from 21.0% in the same period last year. The increase in the
gross profit percentage was due primarily to increased sales volume in the
higher margin Calvin Klein dress division. The gross profit percentage in our
non-licensed segment was 20.7% in the three month period ended April 30, 2009
compared to 26.0% in the same period last year. This decrease in our gross
profit percentage is primarily attributable to an increased level of markdowns
and allowances with respect to our seasonal Andrew Marc and Marc New York
outerwear business.
Selling, general and administrative expenses increased $13.7 million to
$40.9 million in the three month period ended April 30, 2009 from $27.2 million
in the same period last year. Selling, general and administrative expenses
increased primarily as a result of expenses of our Wilsons retail outlet store
operations ($14.3 million) which we did not own in the previous year and an
increase of $800,000 in advertising and promotion expenses, excluding those
expenses related to Wilsons, offset by a net decrease in personnel costs of
$1.6 million in the remainder of our company as a result of cost cutting
measures. Advertising and promotion expenses increased primarily due to
cooperative advertising in our department store business and increased
advertising paid to licensors based on a percentage of net sales of licensed
product.
Depreciation and amortization decreased to $1.4 million in the three months
ended April 30, 2009 from $1.6 million in the same period last year primarily as
a result of certain intangible assets that became fully amortized during fiscal
2009.
Interest and finance charges, net for the three months ended April 30, 2009 were
approximately $685,000 compared to $566,000 for the comparable period last year.
Interest expense increased due to higher average borrowings primarily as a
result of the two acquisitions made in the prior year, offset, in part, by lower
interest rates.
Income tax benefit for the three months ended April 30, 2009 and April 30, 2008
was $4.9 million. The effective tax rate for the period ending April 30, 2009
was 42.0% compared to an effective tax rate of 41.5% in the same period last
year. The increase in the effective tax rate is primarily due to not recognizing
the benefit of certain state losses for our AM Retail Group, Inc. subsidiary.
Liquidity and Capital Resources
Our primary cash requirements are to fund our seasonal build up in inventories
and accounts receivable, primarily during our second and third fiscal quarters
each year. Due to the seasonality of our business, we generally reach our
maximum borrowing under our asset-based credit facility during our third fiscal
quarter. The primary sources to meet our operating cash requirements have been
borrowings under our credit facility and cash generated from operations.
The amount borrowed under the line of credit varies based on our seasonal
requirements. At April 30, 2009, we had cash and cash equivalents of
$2.3 million and outstanding borrowings of $31.1 million. At April 30, 2008, we
had cash and cash equivalents of $2.6 million and outstanding borrowings of
$26.2 million.
Our contingent liability under open letters of credit was approximately
$23.5 million as of April 30, 2009 compared to $25.0 million as of April 30,
2008.
Financing Agreement
We have a financing agreement with The CIT Group, Inc., as Agent for a
consortium of banks, that expires in July 2011. The financing agreement is a
senior secured revolving credit facility providing for a maximum revolving line
of credit of $250 million. Amounts available under this facility are subject to
borrowing base formulas and over advances as specified in the financing
agreement.
The financing agreement requires us, among other things, to maintain a maximum
senior leverage ratio and minimum fixed charge coverage ratio, as defined. It
also limits payments for cash dividends and stock redemptions to $1.5 million
plus an additional amount based on the proceeds of sales of equity securities.
As of April 30, 2009, we were in compliance with these covenants.
In April 2009, the financing agreement was amended to revise the maximum senior
leverage ratio and minimum fixed charge ratio and increase the borrowing rate to
the prime rate plus 0.75% (4.0% at May 1, 2009) or LIBOR plus 3.0% (3.4% at
May 1, 2009) at our option.
Cash from Operating Activities
We used $1.4 million of cash from operating activities during the three months
ended April 30, 2009, primarily as a result of a decrease in accounts payable
and accrued expenses of $26.8 million, a net decrease in our income tax payable
of $10.4 million, our net loss of $6.8 million and an increase in prepaid
expenses of $4.0 million offset, in part, by a decrease of $17.4 million in
accounts receivable, a decrease of $27.3 million in inventory and non-cash
depreciation and amortization charges of $1.4 million.
The decrease in accounts payable is primarily attributable to vendor payments
made in the first quarter as we collected our accounts receivable. The decrease
in income taxes payable is attributable to income taxes paid subsequent to year
end as a result of our fiscal 2008 income and the increase in prepaid taxes is a
result of the tax benefit recorded for our first quarter fiscal 2010 loss. The
decrease in accounts receivable for the three months resulted primarily from the
collection of accounts receivable related to net sales in the fourth quarter of
fiscal 2009 which were higher than net sales in the first quarter of fiscal
2010. This is consistent with our seasonal pattern in prior years. The decrease
in inventory is a result of closing out year end inventory. This is also
consistent with our seasonal pattern of reducing our inventory levels throughout
the first quarter.
Cash from Investing Activities
We used $830,000 of cash in investing activities in the three months ended
April 30, 2009 for capital expenditures, primarily for updating our New York
City showrooms.
Cash from Financing Activities
Cash from financing activities provided $2.0 million in the three months ended
April 30, 2009 as a result of increased borrowings under our line of credit.
Financing Needs
We believe that our cash on hand and cash generated from operations, together
with funds available from our line of credit, are sufficient to meet our
expected operating and capital expenditure requirements. We may seek to acquire
other businesses in order to expand our product offerings. We may need
additional financing in order to complete one or more acquisitions. We cannot be
certain that we will be able to obtain additional financing, if required, on
acceptable terms or at all.
Critical Accounting Policies
Our discussion of results of operations and financial condition relies on our
consolidated financial statements that are prepared based on certain critical
accounting policies that require management to make judgments and estimates that
are subject to varying degrees of uncertainty. We believe that investors need to
be aware of these policies and how they impact our financial statements as a
whole, as well as our related discussion and analysis presented herein. While we
believe that these accounting policies are based on sound measurement criteria,
actual future events can and often do result in outcomes that can be materially
different from these estimates or forecasts. The accounting policies and related
estimates described in our Annual Report on Form 10-K for the year ended
January 31, 2009 are those that depend most heavily on these judgments and
estimates. As of April 30, 2009, there have been no material changes to our
critical accounting policies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There are no material changes to the disclosure made with respect to these
matters in our Annual Report on Form 10-K for the year ended January 31, 2009.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, our management, including
the Chief Executive Officer and Chief Financial Officer, carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as such term is defined in Rule 13a-15(e) under the
Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is (i) recorded,
processed, summarized and reported, within the time periods specified in the
Commission's rules and forms and (ii) accumulated and communicated to our
management, including our principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure, and
thus, are effective in making known to them material information relating to
G-III required to be included in this report.
During our last fiscal quarter, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
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