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GIII > SEC Filings for GIII > Form 10-Q on 9-Sep-2013All Recent SEC Filings

Show all filings for G III APPAREL GROUP LTD /DE/

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


9-Sep-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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, 2014 is referred to as "fiscal 2014". Vilebrequin reports results on a calendar year basis rather than on the January 31 fiscal year basis used by G-III. Accordingly, the results of Vilebrequin are and will be included in our financial statements for the quarter ended or ending closest to G-III's fiscal quarter. For example, in this Form 10-Q for the quarter ended July 31, 2013, Vilebrequin's results are included from April 1, 2013 through June 30, 2013.

Various statements contained in this Form 10-Q, in future filings by us with the Securities and Exchange Commission (the "SEC"), in our press releases and in oral statements made from time to time by us or on our behalf constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as "anticipate," "estimate," "expect," "will," "project," "we believe," "is or remains optimistic," "currently envisions," "forecasts," "goal" and similar words or phrases and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from the future results, performance or achievements expressed in or implied by such forward-looking statements. Forward-looking statements also include representations of our expectations or beliefs concerning future events that involve risks and uncertainties, including, but not limited to:

our dependence on licensed product;

our dependence on the strategies and reputation of our licensors;

costs and uncertainties with respect to expansion of our product offerings;

the performance of our products at retail and customer acceptance of new products;

customer concentration;

risks of doing business abroad;

price, availability and quality of materials used in our products;

the need to protect our trademarks and other intellectual property;

risks relating to our retail business;

risks relating to our acquisition of Vilebrequin;

dependence on existing management;

our ability to make strategic acquisitions and possible disruptions from acquisitions;

need for additional financing;

seasonal nature of our business;

our reliance on foreign manufacturers;

the need to successfully upgrade, maintain and secure our information systems;

the impact of the current economic and credit environment on us, our customers, suppliers and vendors;

the effects of competition in the markets in which we operate;

consolidation of our retail customers;

additional legislation and/or regulation in the U.S. or around the world;

our ability to import products in a timely and cost effective manner;

our ability to continue to maintain our reputation;

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fluctuations in the price of our common stock;

potential effect on the price of our common stock if actual results are worse than financial forecasts; and

the effect of regulations applicable to us as a U.S. public company.

These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. A detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations is described under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended January 31, 2013. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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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. G-III also operates retail stores under the Wilsons Leather, Vilebrequin, Calvin Klein Performance and Andrew Marc names.

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 our Wilsons retail stores, as well as a limited number of Andrew Marc retail stores and Calvin Klein Performance stores.

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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.

The Vilebrequin business acquired last year provides us with a premier brand selling status products worldwide. Vilebrequin is a well-known brand and we 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. We recently launched sun tan lotion products and a capsule collection of women swimwear and resort wear under the Vilebrequin brand.

The sale of licensed products is a key element of our strategy and we have continually expanded our offerings of licensed products for the past 20 years. Most recently, in December 2012, we entered into a license agreement covering a broad range of women's apparel under the Ivanka Trump brand and, in April 2013, we entered into a license agreement for Calvin Klein men's and women's swimwear that will become effective on December 1, 2013. We expect to launch Ivanka Trump product in the fourth quarter of fiscal 2014 and begin shipping Calvin Klein swimwear 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 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 our Wilsons stores are operated as outlet stores. We believe that operation of the Wilsons stores is part of our core competency, as outerwear comprised approximately one-half of our net sales at Wilsons in fiscal 2013. As of July 31, 2013, we operated 146 Wilsons stores and 5 Andrew Marc stores.

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 currently operate Calvin Klein Performance stores in Scottsdale, Arizona and in San Francisco, California, and expect to open a third store in Las Vegas, Nevada in September 2013. In March 2012, we entered into a joint venture agreement, with Finity Apparel Retail Limited to open and operate Calvin Klein Performance retail stores in mainland China and Hong Kong. We currently operate seven stores pursuant to this joint venture and plan to open approximately ten additional stores by the end of our current fiscal year. We consolidate the results of operations of this joint venture, of which we own 51%, in our financial statements.

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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.

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 our 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 by making strategic acquisitions and entering into new license agreements 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, 2013 compared to three months ended July 31, 2012

Net sales for the three months ended July 31, 2013 increased to $304.2 million from $251.5 million in the same period last year. Net sales of licensed products increased to $202.5 million from $178.4 million, primarily as a result of an increase of $27.1 million in net sales of our licensed Calvin Klein products with the largest increases occurring in the women's suits and women's sportswear categories. Net sales of non-licensed products in the three months ended July 31, 2013 were $70.4 million compared to $48.3 million in the same period last year. The increase in net sales of non-licensed products is primarily the result of net sales of $18.0 million by Vilebrequin, which was acquired in August 2012. Net sales of our retail operations increased to $41.1 million for the three months ended July 31, 2013 from $32.9 million in the same period last year as a result of a comparative store sales increase of 13.7%, as well as an increase in the number of stores.

Gross profit increased to $99.4 million, or 32.7% of net sales, for the three months ended July 31, 2013, from $74.8 million, or 29.8% of net sales, in the same period last year. The gross profit percentage in our licensed products segment was 27.1% in the three months ended July 31, 2013 compared to 26.2% in the same period last year. The gross profit percentage in our licensed products segment improved primarily due to a continued increase in penetration of our Calvin Klein sportswear and women's suits in higher margin department stores. The gross profit percentage in our non-licensed products segment was 34.8% in the three month period ended July 31, 2013 compared to 25.6% in the same period last year. This increase in gross profit percentage is primarily attributable to our Vilebrequin business which operates with a higher gross margin than our other non-licensed businesses. The gross profit percentage for our retail operations segment was 49.0% for the three months ended July 31, 2013 compared to 48.0% for the comparable period last year. Gross profit percentage for the retail operations segment was positively impacted by a higher margin product mix and less promotional activity.

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Selling, general and administrative expenses increased to $89.0 million in the three months ended July 31, 2013 from $69.5 million in the same period last year. This increase is primarily a result of increases in personnel costs ($11.3 million), facility costs ($4.2 million) and third party warehousing ($1.3 million). Personnel costs increased primarily as a result of the acquisition of Vilebrequin, as well as the expansion of our Calvin Klein product lines and an increase in personnel to staff additional outlet stores in our retail division. Facility costs increased primarily as a result of costs associated with our new Vilebrequin business and additional retail store leases. 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.

Depreciation and amortization increased to $3.2 million in the three months ended July 31, 2013 from $2.1 million in the same period last year primarily as a result of depreciation and amortization related to the acquisition of Vilebrequin.

Equity loss in joint venture in the three months ended July 31, 2012 was $146,000. There was no comparable amount for the three months ended July 31, 2013 due to the sale of the Company's interest in the joint venture that operated outlet stores under the Vince Camuto name to the Camuto Group in October 2012. The Company's interest in this joint venture was accounted for by the equity method.

Interest and financing charges, net for the three months ended July 31, 2013, were $1.8 million compared to $1.0 million for the same period last year. Our interest charges were higher because of higher average borrowings under our credit facility during the quarter primarily due to funding higher inventory levels and additional borrowings to fund our acquisition of Vilebrequin and interest related to the notes issued in connection with that acquisition.

Income tax expense for the three months ended July 31, 2013 was $2.0 million compared to $802,000 for the same period last year. The effective tax rate was 38.0% for the three months ended July 31, 2013 and 2012.

Six months ended July 31, 2013 compared to six months ended July 31, 2012

Net sales for the six months ended July 31, 2013 increased to $576.8 million from $480.9 million in the same period last year. Net sales of licensed products increased to $383.0 million from $335.4 million as a result of an increase of $45.7 million in net sales of Calvin Klein licensed products primarily due to increases in net sales of women suits, sportswear and handbags. Net sales of non-licensed products in the six months ended July 31, 2013 were $131.1 million compared to $95.6 million in the same period last year. The increase in net sales of non-licensed products is primarily the result of net sales of $30.6 million by Vilebrequin. Net sales of our retail operations increased to $86.3 million for the six months ended July 31, 2013 from $69.1 million in the same period last year as a result of a comparative store sales increase of 13.1%, as well as an increase in the number of stores.

Gross profit increased to $191.8 million, or 33.3% of net sales, for the six months ended July 31, 2013, from $143.5 million, or 29.8% of net sales, in the same period last year. The gross profit percentage in our licensed products segment was 27.4% in the six months ended July 31, 2013 compared to 25.9% in the same period last year. This increase is the result of improved margins with respect to sales of Calvin Klein women's suits and women's sportswear. The gross profit percentage in our non-licensed products segment was 33.3% in the six month period ended July 31, 2013 compared to 25.1% in the same period last year. This increase in gross profit percentage is primarily attributable to our Vilebrequin business which operates with a higher gross margin than our other non-licensed businesses. The gross profit percentage for our retail operations segment was 50.0% for the six months ended July 31, 2013 compared to 47.1% for the comparable period last year. Gross profit percentage for the retail operations segment was positively impacted by a higher margin product mix.

Selling, general and administrative expenses increased to $174.9 million in the six months ended July 31, 2013 from $136.1 million in the same period last year. This increase is primarily a result of increases in personnel costs ($20.9 million), facility costs ($8.2 million), advertising expenses ($2.6 million) and third party warehousing charges ($2.5 million). Personnel costs increased primarily due to the acquisition of Vilebrequin, as well as due to increases in personnel with respect to our Calvin Klein divisions and staff needed for additional outlet stores in our retail division. Facility costs increased primarily as a result of costs associated with our acquired Vilebrequin business and additional retail store leases. Advertising costs increased because sales of licensed product increased, primarily Calvin Klein, and we typically pay an advertising fee under our license agreements based on a percentage of sales of licensed products. Third party warehousing costs increased as a result of our increased shipping volume compared to the same period last year.

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Depreciation and amortization increased to $6.4 million in the six months ended July 31, 2013 from $4.2 million in the same period last year primarily as a result of depreciation and amortization related to the acquisition of Vilebrequin, leasehold improvements and fixtures added for an additional showroom and office space we leased last year, as well as for retail locations added since last year.

Equity loss in joint venture in the six months ended July 31, 2012 was approximately $433,000. There was no comparable amount for the six months ended July 31, 2013 due to the sale of the Company's interest in this joint venture to the Camuto Group in October 2012. The Company's interest in this joint venture was accounted for by the equity method.

Interest and financing charges, net for the six months ended July 31, 2013, were $3.5 million compared to $2.1 million for the same period last year. Our interest charges were higher because of higher average borrowings under our credit facility during the period primarily as a result of higher inventory levels than in the prior year and additional borrowings to fund our acquisition of Vilebrequin and interest related to the notes issued in connection with that acquisition.

Income tax expense for the six months ended July 31, 2013 was $2.7 million compared to $282,000 for the same period last year. The effective tax rate was 38.0% for the six months ended July 31, 2013 and 2012.

Liquidity and Capital Resources

Our primary cash requirements are to fund our seasonal buildup in inventories, primarily during the second and third fiscal quarters each year. Due to the seasonality of our business, we generally reach our peak borrowings under our asset-based credit facility during our third fiscal quarter. The primary sources to meet our cash requirements have been borrowings under our credit facility and cash generated from operations.

At July 31, 2013, we had cash and cash equivalents of $16.5 million and outstanding borrowings of $122.1 million. At July 31, 2012, we had cash and cash equivalents of $22.7 million and outstanding borrowings of $87.0 million.

Our contingent liability under open letters of credit was approximately $22.3 million as of July 31, 2013 compared to $24.6 million as of July 31, 2012.

Credit Agreement

In August 2012, we entered into a new credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent for a group of lenders. The credit agreement is a five year senior secured credit facility providing for borrowings in the aggregate principal amount of up to $450 million. Amounts available under the credit agreement are subject to borrowing base formulas and over advances as specified in the credit agreement. Borrowings bear interest, at our option, at LIBOR plus a margin of 1.5% to 2.0% or prime plus a margin of 0.5% to 1.0%, with the applicable margin determined based on availability under the credit agreement. The credit agreement requires us to maintain a minimum fixed charge coverage ratio, as defined, under certain circumstances and prohibits payments for cash dividends and stock redemptions until February 2014, after which such payments may be made subject to compliance with certain covenants. As of July 31, 2013, we were in compliance with these covenants.

The credit agreement is secured by all of the assets of G-III Apparel Group, Ltd. and its subsidiaries, G-III Leather Fashions, Inc., Riviera Sun, Inc., CK Outerwear, LLC, Andrew & Suzanne Company, Inc., AM Retail Group, Inc., G-III Apparel Canada ULC, G-III License Company, LLC and AM Apparel Holdings, Inc.

Amounts payable under our credit agreement were $122.1 million at July 31, 2013 compared to $87.0 million payable at July 31, 2012 under the Company's prior financing agreement.

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Cash from Operating Activities

We used $58.9 million of cash in operating activities during the six months ended July 31, 2013, primarily as a result of an increase of $125.4 million in inventory and a decrease of $16.8 million in income tax payable, offset, by an increase of $76.7 million in accounts payable and accrued expenses.

The changes in these operating cash flow items are generally consistent with our seasonal pattern of building up inventory for the fall shipping season resulting in the increases in inventory and accounts payable. The fall shipping season begins during the latter half of our second quarter. The decrease in income taxes payable is a result of payments made for Federal, state and local income tax liabilities for our year ended January 31, 2013.

Cash from Investing Activities

We used $10.7 million of cash in investing activities in the six months ended July 31, 2013 for capital expenditures related primarily to build out costs and fixtures with respect to the addition of new outlet stores and, to a lesser extent, expansion of our distribution center in New Jersey.

Cash from Financing Activities

Cash from financing activities provided $60.2 million in the six months ended July 31, 2013, primarily as a result of $57.1 million of net borrowings under our credit agreement. We increased our borrowings primarily to pay for purchases of inventory.

Financing Needs

We believe that our cash on hand and cash generated from operations, together with funds available under our credit agreement, are sufficient to meet our expected operating and capital expenditure requirements, as well as to fund any repurchase of shares we elect to make. 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, 2013 are those that depend most heavily on these judgments and estimates. As of July 31, 2013, there have been no material changes to our critical accounting policies.

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