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| GIII > SEC Filings for GIII > Form 10-Q on 8-Sep-2009 | All Recent SEC Filings |
8-Sep-2009
Quarterly Report
Unless the context otherwise requires, "G-III", "us", "we" and "our" refer to
G-III Apparel Group, Ltd. and its subsidiaries. References to fiscal years refer
to the year ended or ending on January 31 of that year. For example, our fiscal
year ending January 31, 2010 is referred to as "fiscal 2010".
Statements in this Quarterly Report on Form 10-Q concerning our business outlook
or future economic performance; anticipated revenues, expenses or other
financial items; product introductions and plans and objectives related thereto;
and statements concerning assumptions made or expectations as to any future
events, conditions, performance or other matter, are "forward-looking
statements" as that term is defined under the Federal securities laws.
Forward-looking statements are subject to risks, uncertainties and other
factors, which could cause actual results to differ materially from those stated
in such statements. Such risks, uncertainties and factors include, but are not
limited to, reliance on licensed product, reliance on foreign manufacturers,
risks of doing business abroad, the current economic and credit crisis, the
nature of the apparel industry, including changing consumer demand and tastes,
customer concentration, seasonality, risks of operating a retail business,
customer acceptance of new products, the impact of competitive products and
pricing, dependence on existing management, possible disruption from
acquisitions and general economic conditions, as well as other risks detailed in
the Company's filings with the Securities and Exchange Commission, including
this Quarterly Report on Form 10-Q.
Overview
G-III designs, manufactures, imports and markets an extensive range of
outerwear, dresses, sportswear and women's suits under licensed brands, our own
proprietary brands and private retail labels. G-III also operates 121 retail
stores, 118 of which are outlet stores operated under the Wilsons Leather name.
While our products are sold at a variety of price points through a broad mix of
retail partners and our own outlet stores, a majority of our sales are
concentrated with our ten largest customers.
Our business is dependent on, among other things, retailer and consumer demand
for our products. We believe that significant economic uncertainty and a
slowdown in the global macroeconomic environment continue to negatively impact
the level of consumer spending for discretionary items. The current depressed
economic environment has been characterized by a decline in consumer
discretionary spending that has disproportionately affected retailers and
sellers of consumer goods, particularly those whose goods are viewed as
discretionary purchases, such as fashion apparel and related products, such as
ours. We cannot predict the direction in which this current economic downturn
will move. Worsening macroeconomic conditions and concerns about the access of
retailers and consumers to credit may continue to have a negative impact on our
results for the remainder of fiscal 2010.
We operate in fashion markets that are intensely competitive. Our ability to
continuously evaluate and respond to changing consumer demands and tastes,
across multiple market segments, distribution channels and geographies is
critical to our success. Although our portfolio of brands is aimed at
diversifying our risks in this regard, misjudging shifts in consumer preferences
could have a negative effect on our business. Our success in the future will
depend on our ability to design products that are accepted in the markets we
serve, source the manufacture of our products on a competitive basis, and
continue to diversify our product portfolio and the markets we serve.
We have expanded our portfolio of proprietary and licensed brands over the past
15 years through acquisitions and by entering into license agreements for new
brands or for additional product categories under previously licensed brands. We
have made five acquisitions since July 2005, which have helped to broaden our
product offerings, expand our ability to serve different tiers of distribution
and add a retail component to our business.
Our two most recent acquisitions were made in fiscal 2009. 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. It also
had a seasonal operating loss in the first half of fiscal 2010. 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, with increased
emphasis on leather outerwear and a stronger assortment of private label
product;
• 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 the operation of the Wilsons retail outlet stores is
part of our core competency, as outerwear is expected to comprise approximately
one-half of our annual net sales at Wilsons. We expect to continue 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 wholesale licensed apparel
segment includes sales of apparel brands licensed by us from third parties. The
wholesale 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 a nominal 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. In June 2009, we entered into a license agreement for men's, women's,
boys' and girls' outerwear under the Enyce brand and added another license with
Sean John for boys' outerwear. Product under both of these license agreements
will begin shipping for the Holiday 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 have experienced 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 July 31, 2009 compared to three months ended July 31, 2008
Net sales for the three months ended July 31, 2009 increased to $135.9 million
from $113.5 million in the same period last year. Net sales of wholesale
licensed apparel increased to $90.9 million from $67.8 million primarily as a
result of an increase of $21.7 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
significant portion of the increase in net sales of Calvin Klein product
resulted from our launch of Calvin Klein women's sportswear earlier in fiscal
2010. Net sales of wholesale non-licensed apparel in the three months ended
July 31, 2009 decreased to $28.8 million from $38.4 million primarily due to a
$4.9 million decrease in net sales by our women's outerwear division and a
$4.7 million decrease in net sales by our Jessica Howard division. Net sales of
our retail operations were $21.0 million for the three months ended July 31,
2009 compared to $7.2 million in the same period last year. Almost all of these
sales were from the Wilsons retail outlet stores. The Wilsons retail outlet
stores were acquired on July 11, 2008. The net sales for the prior period only
include sales from the date of acquisition.
Gross profit increased to $40.8 million, or 30.0% of net sales, for the three
month period ended July 31, 2009, from $28.9 million, or 25.5% of net sales, in
the same period last year. Gross profit as a percentage of net sales increased
primarily as a result of the increased sales volume in the retail segment. The
gross profit percentage for the retail segment, which is higher than the gross
profit percentage in our wholesale segments, was 42.9% for each of the three
month periods. The gross profit percentage in our wholesale licensed apparel
segment increased to 26.9% in the three month period ended July 31, 2009 from
25.5% in the same period last year. The increase in the gross profit percentage
was due primarily to the higher margin in our Calvin Klein sportswear division
which began shipping this year. The gross profit percentage in our wholesale
non-licensed apparel segment was 25.5% in the three month period ended July 31,
2009 compared to 22.2% in the same period last year. The increase is primarily a
result of better margins in our Jessica Howard division.
Selling, general and administrative expenses increased $10.7 million to
$43.2 million in the three month period ended July 31, 2009 from $32.5 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 ($9.4 million). The operating results of the Wilsons retail outlets
have been included since July 11, 2008, the date of acquisition. Advertising and
promotion expenses increased $1.1 million due to 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 July 31, 2009 from $1.8 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 July 31, 2009 were
approximately $1.0 million compared to $1.1 million for the comparable period
last year.
Income tax benefit for the three months ended July 31, 2009 was $2.0 million
compared to $2.7 million for the same period last year. The effective tax rate
for the three month period ended July 31, 2009 was 42.0% compared to an
effective tax rate of 40.9% 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 in our AM Retail Group, Inc. subsidiary.
Six months ended July 31, 2009 compared to six months ended July 31, 2008
Net sales for the six months ended July 31, 2009 increased to $243.5 million
from $188.9 million in the same period last year. Net sales of wholesale
licensed apparel increased to $150.9 million from $109.5 million primarily
attributable to an increase of $36.9 million in net sales of Calvin Klein
licensed product and $6.3 million in net sales of Guess licensed outerwear. The
increase in Calvin Klein net sales was primarily attributable to increased sales
of Calvin Klein dresses and sales of Calvin Klein sportswear which began
shipping in the first quarter of the current fiscal year. Net sales of wholesale
non-licensed apparel in the six months ended July 31, 2009 decreased to
$57.6 million from $71.7 million primarily due to a decrease of $8.0 million in
net sales by our Jessica Howard division and $4.2 million by our women's
outerwear division. Net sales of our retail operations were $48.1 million for
the six months ended July 31, 2009 compared to $7.6 million in the same period
last year. Almost all of these sales were from the Wilsons retail outlet stores.
The Wilsons retail outlet stores were acquired on July 11, 2008. The sales for
the prior period only include sales from the date of acquisition.
Gross profit increased to $72.0 million for the six month period ended July 31,
2009 from $46.4 million in the same period last year. Gross profit as a
percentage of net sales increased to 29.6% for the six months ended July 31,
2009 compared to 24.6% in the prior year period. Gross profit as a percentage of
net sales increased primarily as a result of the increased sales volume in the
retail segment, which has a higher gross profit percentage than our wholesale
segments. The gross profit in our wholesale licensed apparel segment increased
to $39.2 million for the six month period ended July 31, 2009 from $26.0 million
in the same period last year. The gross profit percentage in our wholesale
licensed apparel segment increased to 26.0% from 23.8% in the same period last
year. This increase in the gross profit percentage was due to higher margin net
sales in the Calvin Klein sportswear division which began shipping this year.
The gross profit in our wholesale non-licensed apparel segment decreased to
$13.3 million from $17.1 million in the same period last year and the gross
profit percentage in our wholesale non-licensed apparel segment decreased to
23.1% from 23.8% in the same period last year. This decrease in the gross profit
percentage is primarily attributable to increased closeout activity in our
women's outerwear division. The gross profit percentage in our retail operations
segment was 40.5% in the six month period ended July 31, 2009 compared to 43.1%
in the comparable period last year.
Selling, general and administrative expenses increased $24.4 million to
$84.1 million in the six month period ended July 31, 2009 from $59.7 million in
the same period last year. Selling, general and administrative expenses
increased primarily as a result of expenses related to the Wilsons retail
business ($23.4 million); acquired in July 2008.
Depreciation and amortization decreased to $2.8 million in the six months ended
July 31, 2009 from $3.4 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 were $1.7 million for the six months ended
July 31, 2009 and 2008.
Income tax benefit for the six months ended July 31, 2009 was $6.9 million
compared to $7.5 million in the comparable period last year. The effective rate
for the current period was 42.0% compared to 41.3% for the comparable prior
period.
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 July 31, 2009, we had cash and cash equivalents of $5.7 million
and outstanding borrowings of $111.3 million. At July 31, 2008, we had cash and
cash equivalents of $3.0 million and outstanding borrowings of $118.3 million.
Our contingent liability under open letters of credit was approximately
$16.8 million as of July 31, 2009 compared to $28.4 million as of July 31, 2008.
Financing Agreement
Our financing agreement is a senior secured revolving credit facility providing
for a maximum revolving line of credit of $250 million that expires in July
2011. Borrowings under this credit facility bear interest at the prime rate plus
0.75% or LIBOR plus 3.0%, at our option. 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 July 31, 2009, we were in compliance with these covenants.
Cash from Operating Activities
We used $73.1 million of cash from operating activities during the six months
ended July 31, 2009, primarily as a result of an increase in inventory of
$55.8 million, an increase in accounts receivable of $21.2 million, a net
increase in our prepaid income tax of $12.6 million, our net loss of
$9.6 million and an increase in prepaid expenses of $6.2 million offset, in
part, by an increase of $28.3 million in accounts payable.
The increases in these operating cash flow items are consistent with our
seasonal pattern. We typically have a net loss through our first two fiscal
quarters. During the second quarter, we build inventory for the fall shipping
season accounting for the increase in inventory and accounts payable. The fall
shipping season begins during our second quarter resulting in an increase in
accounts receivable. The net increase in income taxes is a result of the tax
benefit recorded for our loss through the six months ended July 31, 2009 and
income taxes paid subsequent to year end as a result of our fiscal 2009 income.
Prepaid expenses increased primarily as a result of minimum payments due under
our licensing agreements for royalty and advertising.
Cash from Investing Activities
We used $6.3 million of cash in investing activities in the six months ended
July 31, 2009 of which $5.2 million was for contingent payments earned as a
result of the fiscal 2009 operating results of the businesses acquired in 2005.
Fiscal 2009 was the final year we were obligated to pay additional purchase
price in connection with these acquisitions. We also used $1.2 million during
the six months ended July 31, 2009 for capital expenditures for renovations of
various showrooms.
Cash from Financing Activities
Cash from financing activities provided $82.6 million in the six months ended
July 31, 2009, primarily as a result of $82.3 million 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 July 31, 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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