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GIII > SEC Filings for GIII > Form 10-K on 12-Apr-2013All Recent SEC Filings

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Form 10-K for G III APPAREL GROUP LTD /DE/


12-Apr-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

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 ended January 31, 2013 is referred to as "fiscal 2013."

The following presentation of management's discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our financial statements, the accompanying notes and other financial information appearing elsewhere in this Report.

Overview

G-III designs, manufactures and markets an extensive range of apparel, including outerwear, dresses, sportswear, swimwear, women's suits and women's performance wear, as well as luggage and women's handbags, small leather goods and cold weather accessories. We sell our products under our own proprietary brands, which include Vilebrequin, Andrew Marc and Marc New York, licensed brands and private retail labels. As of January 31, 2013, G-III operated 218 retail stores, of which 145 are operated under our Wilsons Leather name, 4 are operated under our Andrew Marc brand, 63 are operated under our Vilebrequin brand and 6 are operated under the Calvin Klein Performance name.

While our products are sold at a variety of price points through a broad mix of retail partners and our own stores, a majority of our sales are concentrated with our ten largest customers. Sales to our ten largest customers comprised 62.7% of our net sales in fiscal 2011, 63.3% of our net sales in 2012 and 63.7% of our net sales in fiscal 2013.

Our business is dependent on, among other things, retailer and consumer demand for our products. We believe that economic uncertainty and a slowdown in the global macroeconomic environment continue to negatively impact the level of consumer spending for discretionary items. The current uncertain economic environment has been characterized by a decline in consumer discretionary spending that may affect 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 the current economic environment will move. Continued uncertain macroeconomic conditions may have a negative impact on our results for fiscal 2014.

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 marketplace, source the manufacture of our products on a competitive basis, and continue to diversify our product portfolio and the markets we serve.

We aggregate our operating divisions into three reportable segments: licensed products, non-licensed products and retail operations. The licensed products segment includes sales of products under brands licensed by us from third parties. The non-licensed products segment includes sales of products under our own brands and private label brands, as well as of the Vilebrequin business that we acquired in August 2012, including the retail operations conducted by Vilebrequin. The retail operations segment consists almost entirely of the operations of our Wilsons retail stores and, beginning in the second half of fiscal 2012, a limited number of Andrew Marc retail stores and Calvin Klein Performance stores.

We have expanded our portfolio of proprietary and licensed brands through acquisitions and by entering into license agreements for new brands or for additional products under previously licensed brands. Our acquisitions 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 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.


Our recent acquisition of Vilebrequin provides us with a premier brand selling status products worldwide. We believe that Vilebrequin is a powerful brand and expect to add more company owned and franchised retail locations and increase our wholesale distribution throughout the world, as well as develop the business beyond its heritage in men's swimwear, resort wear and related accessories.

When we acquired Andrew Marc, it was a supplier of fine outerwear and handbags for both men and women to upscale specialty and department stores, and we have since expanded our product categories and product offerings for Andrew Marc, both in house and through licensing arrangements. We have expanded the distribution of outerwear by penetrating additional doors and selling into new channels of distribution. We enhanced our website for Andrew Marc (www.andrewmarc.com) to expand our online product offerings. We began a program to license our Andrew Marc and Marc New York brands and have entered into agreements to license these brands for a number of product categories.

The sale of licensed product has been a key element of our business strategy for many years. Sales of licensed product accounted for 67.3% of our net sales in fiscal 2013, 65.5% of our net sales in fiscal 2012 and 65.0% of our net sales in fiscal 2011.

Our most significant licensor is Calvin Klein with whom we have ten different license agreements. We have also entered into distribution agreements with respect to Calvin Klein luggage in a limited number of countries in Asia, Europe and North America.

Commencing April 1, 2012, we have operated under an expanded five year license agreement with the National Football League to manufacture and market men's and women's outerwear, sportswear, and swimwear products in the United States under a variety of NFL trademarks.

In May 2011, we entered into two new agreements with the Camuto Group, expanding our relationship with Camuto to include licenses for dresses and men's outerwear. Dresses under the Camuto label begin shipping for Spring 2012. In June 2011, we also expanded our product categories with Tommy Hilfiger to include luggage, which began shipping in August 2011.

In November 2011, we entered into a license agreement to develop sportswear, dresses, tailored clothing, active wear and sweaters under the Kensie and Mac & Jac brands for the U.S. and Canadian markets. In December 2011, we added licenses under these brands for women's handbags and women's cold weather accessories. We began shipping Kensie sportswear in the first quarter of fiscal 2013 and began shipping Kensie dresses in July 2012.

In December 2011, we entered into a license agreement that expanded our Jessica Simpson products to include women's outerwear. We began shipping Jessica Simpson outerwear for the Fall 2012 season.

In December 2012, we entered into a license agreement covering a broad range of women's apparel under the Ivanka Trump brand. We expect to begin shipping Ivanka Trump apparel by the fourth quarter of fiscal 2014.

In April 2013, we entered into a license agreement for men's and women's swimwear under the Calvin Klein brand. This license agreement is effective as of December 1, 2013 and we expect to begin shipping swimwear under this agreement for the Spring 2014 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 expanding brands into new categories. It is our objective to continue to expand our product offerings and we are continually discussing new licensing opportunities with brand owners.

Our retail operations segment consists almost entirely of our Wilsons retail store business, substantially all of which are operated as outlet stores. We believe that operation of the Wilsons stores is part of our core competency, as outerwear comprised about one-half of our net sales at Wilsons in fiscal 2013. During fiscal 2013, we increased the number of our Wilson stores by 5 and, as of January 31, 2013, operated 145 Wilsons stores and 4 Andrew Marc stores. We expect to add approximately 20 new stores in fiscal 2014.


In November 2011, we entered into a license agreement granting us the retail rights to distribute and market Calvin Klein women's performance apparel in the United States and China. We opened our first Calvin Klein Performance store in Scottsdale, Arizona in February 2012 and opened a second store in San Francisco, California in May 2012. In March 2012, we entered into a joint venture agreement, in which we own 51%, with Finity Apparel Retail Limited to open and operate Calvin Klein Performance retail stores in mainland China and Hong Kong. The joint venture began operating retail locations in major Chinese markets in Fall 2012. We consolidate the results of operations of this joint venture in our financial statements.

In October 2012, we sold back our 50% interest in the joint venture that had operated 11 outlet stores under the Vince Camuto name to the Camuto Group for an amount approximating our carrying cost. Our interest in this joint venture was accounted for by the equity method.

Trends

Significant trends that affect the apparel industry include increases in raw material, manufacturing and transportation costs, the continued consolidation of retail chains and the desire on the part of retailers to consolidate vendors supplying them.

During fiscal 2012, we and other apparel manufacturers experienced increases in raw material prices and other costs. These conditions moderated during fiscal 2013.

Retailers are seeking to expand the differentiation of their offerings by devoting more resources to the development of exclusive products, whether by focusing on their own private label products or on products produced exclusively for a retailer by a national brand manufacturer. Retailers are placing more emphasis on building strong images for their private label and exclusive merchandise. Exclusive brands are only made available to a specific retailer, and thus customers loyal to their brands can only find them in the stores of that retailer.

A number of retailers are experiencing 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 attempt to lower credit risk from our customers by closely monitoring accounts receivable balances and shipping levels, as well as the ongoing financial performance and credit standing of customers.

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.

Use of Estimates and Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Significant accounting policies employed by us, including the use of estimates, are presented in the notes to our consolidated financial statements.

Critical accounting policies are those that are most important to the portrayal of our financial condition and our results of operations, and require management's most difficult, subjective and complex judgments, as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our most critical accounting estimates, discussed below, pertain to revenue recognition, accounts receivable, inventories, income taxes, goodwill and intangible assets and equity awards. In determining these estimates, management must use amounts that are based upon its informed judgments and best estimates. On an on-going basis, we evaluate our estimates,


including those related to customer allowances and discounts, product returns, bad debts and inventories, and carrying values of intangible assets. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

Revenue Recognition

Goods are shipped to retailers in accordance with specific customer orders. We recognize wholesale sales when the risks and rewards of ownership have transferred to the customer, determined by us to be when title to the merchandise passes to the customer. In addition, we act as an agent in brokering sales between customers and overseas factories. On these transactions, we recognize commission fee income on sales that are financed by and shipped directly to our customers. Title to goods shipped by overseas vendors, transfers to customers when the goods have been delivered to the customer. We recognize commission income upon the completion of the delivery by our vendors to the customer. We recognize retail sales upon customer receipt of our merchandise, generally at the point of sale. Our sales are recorded net of applicable sales tax. Net sales take into account reserves for returns and allowances. We estimate the amount of reserves and allowances based on current and historical information and trends. Sales are reported net of returns, discounts and allowances. Discounts, allowances and estimates of future returns are recognized when the related revenues are recognized.

Accounts Receivable

In the normal course of business, we extend credit to our wholesale customers based on pre-defined credit criteria. Accounts receivable, as shown on our consolidated balance sheet, are net of allowances and anticipated discounts. In circumstances where we are aware of a specific customer's inability to meet its financial obligation (such as in the case of bankruptcy filings, extensive delay in payment or substantial downgrading by credit sources), a specific reserve for bad debts is recorded against amounts due to reduce the net recognized receivable to the amount reasonably expected to be collected. For all other wholesale customers, an allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the financial statements, assessments of collectability based on historical trends and an evaluation of the impact of economic conditions.

An allowance for discounts is based on reviews of open invoices where concessions have been extended to customers. Costs associated with allowable deductions for customer advertising expenses are charged to advertising expenses in the selling, general and administrative section of our consolidated statements of income. Costs associated with markdowns and other operational charge backs, net of historical recoveries, are included as a reduction of net sales. All of these are part of the allowances included in accounts receivable. We reserve against known charge backs, as well as for an estimate of potential future deductions by customers. These provisions result from seasonal negotiations with our customers as well as historical deduction trends, net of historical recoveries and the evaluation of current market conditions.

Inventories

Wholesale inventories are stated at lower of cost (determined by the first-in, first-out method) or market. The cost elements included in inventory consist of all direct costs of merchandise, inbound freight and merchandise acquisition costs such as commissions and import fees. Retail inventories are valued at the lower of cost or market as determined by the retail inventory method. Retail inventory cost includes the cost of merchandise, inbound freight, duty and other merchandise-specific charges. Vilebrequin inventories are stated at the lower of cost (determined by the weighted average method) or market.

We continually evaluate the composition of our inventories, assessing slow-turning, ongoing product as well as fashion product from prior seasons. The market value of distressed inventory is based on historical sales trends of our individual product lines, the impact of market trends and economic conditions, expected permanent retail markdowns and the value of current orders for this type of inventory. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if required.


Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax expense, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet.

Goodwill and Intangible Assets

ASC 350 requires that goodwill and intangible assets with an indefinite life be tested for impairment at least annually and are required to be written down when impaired. We perform our test in the fourth fiscal quarter of each year, or more frequently, if events or changes in circumstances indicate the carrying amount of such assets may be impaired. Goodwill and intangible assets with an indefinite life are tested for impairment by comparing the fair value of the reporting unit with its carrying value. Fair value is generally determined using discounted cash flows, market multiples and market capitalization. Significant estimates used in the fair value methodologies include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples of the reportable unit. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for our goodwill and intangible assets with an indefinite life. Our annual impairment test is performed in the fourth quarter each year.

The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. In estimating the fair value of a reporting unit for the purposes of our annual or periodic analyses, we make estimates and judgments about the future cash flows of that reporting unit. Although our cash flow forecasts are based on assumptions that are consistent with our plans and estimates we are using to manage the underlying businesses, there is significant exercise of judgment involved in determining the cash flows attributable to a reporting unit over its estimated remaining useful life. In addition, we make certain judgments about allocating shared assets to the estimated balance sheets of our reporting units. We also consider our and our competitor's market capitalization on the date we perform the analysis. Changes in judgment on these assumptions and estimates could result in a goodwill impairment charge.

We have allocated the purchase price of the companies we acquired to the tangible and intangible assets acquired and liabilities we assumed, based on their estimated fair values. These valuations require management to make significant estimations and assumptions, especially with respect to intangible assets. As a result of the acquisition of Vilebrequin, during fiscal 2013 we allocated $58.6 million to trademarks with an indefinite life and $32.2 million to goodwill.

Critical estimates in valuing intangible assets include future expected cash flows from license agreements, trade names and customer relationships. In addition, other factors considered are the brand awareness and market position of the products sold by the acquired companies and assumptions about the period of time the brand will continue to be used in the combined company's product portfolio. Management's estimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.

If we did not appropriately allocate these components or we incorrectly estimate the useful lives of these components, our computation of amortization expense may not appropriately reflect the actual impact of these costs over future periods, which may affect our results of operations.

Trademarks having finite lives are amortized over their estimated useful lives and measured for impairment when events or circumstances indicate that the carrying value may be impaired.

Equity Awards

All share-based payments to employees, including grants of restricted stock units and employee stock options, are recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values. Restricted stock units that do not have a market condition are valued based on the quoted market price on date of grant. Restricted stock units with a market condition are valued using a valuation expert. Stock options are valued using the Black-Scholes option pricing


model. The Black-Scholes model requires subjective assumptions regarding dividend yields, expected volatility, expected life of options and risk-free interest rates. These assumptions reflect management's best estimates. Changes in these inputs and assumptions can materially affect the estimate of fair value and the amount of our compensation expenses for stock options.

Results of Operations

The following table sets forth selected operating data as a percentage of our net sales for the fiscal years indicated below:

                                                       2011         2012         2013
  Net sales                                             100.0 %      100.0 %      100.0 %
  Cost of goods sold                                     67.0         69.9         67.7

  Gross profit                                           33.0         30.1         32.3
  Selling, general and administrative expenses           23.4         22.5         24.4
  Depreciation and amortization                           0.5          0.6          0.7

  Operating profit                                        9.1          7.0          7.2
  Equity loss in joint venture                              -          0.1          0.1
  Interest and financing charges, net                     0.4          0.5          0.6

  Income before income taxes                              8.7          6.4          6.5
  Income taxes                                            3.4          2.4          2.5

  Net income                                              5.3          4.0          4.0
  Add: loss attributable to noncontrolling interest         -            -          0.1

  Net income attributable to G-III                        5.3 %        4.0 %        4.1 %

Year ended January 31, 2013 ("fiscal 2013") compared to year ended January 31, 2012 ("fiscal 2012")

Net sales for fiscal 2013 increased to $1.4 billion from $1.2 billion in the prior year. Net sales of licensed products increased to $981.8 million from $840.7 million primarily as a result of an increase of $66.8 million in net sales of Calvin Klein licensed products, $45.1 million in net sales of our new Kensie sportswear and dress lines and an increase of $20.6 million in net sales of licensed team sports apparel. Net sales of non-licensed products in fiscal 2013 increased to $281.9 million from $277.6 million in the prior year primarily as a result of $19.1 million in net sales of our new Vilebrequin business offset, in part, by a decrease in net sales of our Andrew Marc product lines. Net sales of our retail operations increased to $196.2 million for fiscal 2013 from $164.3 million in the prior year, primarily as a result of a comparative store sales increase of 12.6% and net sales of $11.3 million from new stores.

Gross profit increased to $451.6 million, or 32.3% of net sales, for fiscal 2013 from $370.7 million, or 30.1% of net sales, in the prior year. The gross profit percentage in our licensed products segment was 28.5% in fiscal 2013 compared to 26.5% in the prior year. The gross profit percentage in our licensed products segment improved due to our new Kensie division which realized higher than average gross margins, as well as increased penetration of our Calvin Klein women's suits and sportswear in higher margin department stores. The gross profit percentage in our non-licensed products segment was 27.8% in fiscal 2013 compared to 26.0% in the prior year. The gross profit percentage in our non-licensed products segment improved due to our new Vilebrequin business which realized higher gross margins than other portions of our non-licensed business. The gross profit percentage for our retail operations segment was 47.8% for fiscal 2013 compared to 46.0% for the prior year. Gross profit percentage for the retail operations segment was positively impacted by less promotional activity and a higher margin product mix.

Selling, general and administrative expenses increased to $341.2 million, or 24.4% of net sales, in fiscal 2013 from $277.0 million, or 22.5% of net sales, in the prior year. The increase in these expenses is primarily a


result of increases in personnel costs ($28.2 million), advertising and promotion expenses ($10.6 million), third party warehousing ($7.5 million) and professional fees ($5.9 million). Personnel costs increased primarily as a result of the addition of our new Vilebrequin business, an increase in staffing to support growth in our Calvin Klein businesses, and an increase in personnel to staff additional retail stores in our retail segment. Advertising costs increased due to increased cooperative advertising with our customers, as well as increased cooperative advertising directly purchased by us. Third party warehousing costs increased as a result of our increased shipping volume, as well as storage costs resulting from our higher inventory levels compared to the same period last year. Professional fees increased primarily due to expenses associated with the acquisition of Vilebrequin.

Depreciation and amortization increased to $9.9 million in fiscal 2013 from $7.5 . . .

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