G-III Apparel Group, Ltd. (GIII) Q4 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the G-III Apparel Group Fourth Quarter of Fiscal 2012 Earnings Call. Today's call is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Neal Nackman, Chief Financial Officer. Please go ahead.

Thank you. Before we begin, I would like to remind participants that certain statements made on today's call and in the Q&A session may constitute forward-looking statements within the meaning of the Federal Securities laws. Forward-looking statements are not guarantees, and actual results may differ materially from those expressed or implied in forward-looking statements. Important factors that could cause actual results of operations or the financial condition of the company to differ are discussed in the documents filed by the company with the SEC. The company undertakes no duty to update any forward-looking statements. In addition, during the call we will refer to EBITDA, which is a non-GAAP number. We have provided a reconciliation of EBITDA to our net income according to GAAP in our press release and on our website. I will now turn the call over to our Chairman and Chief Executive Officer, Morris Goldfarb.

Good morning, and thank you for joining us. With me today are Sammy Aaron, our Vice Chairman; Wayne Miller, our Chief Operating Officer; and Neal Nackman, our Chief Financial Officer. I'd like to start by saying this is the second-best year in the history of the company. Unfortunately, we didn't reach our expectations. This was caused by primarily by unseasonably warm weather during our peak selling period. We made a lot of progress through the year, and our financial results are certainly respectable. We did what was needed to move product during the season, and importantly, we positioned the company for the year ahead. We have some powerful opportunities in several areas of the business that we're really focused on. First, let me take you through the financial highlights from the fourth quarter and the year end. Consolidated net sales for the quarter were $294 million. This lower-than-planned net sales reflects higher markdowns and allowances dilution compared to prior years. We work with our customers to help them achieve adequate sell-throughs. Gross margin was down 400 basis points compared to last year. As a result, we had net income per share of $0.25 in our fourth quarter. For the full year, we had $1,230,000,000 in net sales and net income of $49.6 million and $2.46 per share. Our balance sheet remain strong. We had a $5 million net debt position at year end compared to cash of $10 million at the end of last year. We're planning conservatively on the revenue lines for our outerwear business next fall as a result of this year's holiday sale, but we expect to see better margins. This should result both from better inventory control and from lower sourcing costs. Even in a tough season, there are some bright spots in our outerwear business that we can and will leverage as we go forward. Our sports business, which still is about 2/3 toast [ph] was up 20% over the prior year, notwithstanding the uncertainty caused last year at this time by the threat of a lockout. Our product is well-designed in stores. Our sports margins have been strong, and our relationship with the leagues has never been better. We're excited about our expanded NFL license that goes into effect April 1. This expanded license incorporates broader distribution rights in mid-tier department stores and the sporting goods channel. Andrew Marc, our own brand, which is heavily weighted towards outerwear, was impacted by the warm weather. We now have many licenses across a variety of categories. We've increased our marketing initiatives, and we had a good campaign this past fall, and we continue to believe there's a lifestyle opportunity for this brand. Our dresses are selling very well this spring season for the first time. We added both Jessica Simpson and Vince Camuto coats to extend our contemporary outerwear business. These are 2 very powerful new coat opportunities for our company. Beyond outerwear, our new business initiatives have stayed on track. I'll take a few minutes to update you on some of them. Let's start with sportswear. We're very excited to see a strong reaction to Calvin Klein sportswear, particularly for next fall, and we're anticipating growth and improved profitability. This is our best collection to date. We've refocused the lines, added new merchandising talent, and the response from our customers has been excellent. We are also pleased to report that the Kensie contemporary sportswear business is doing well. We believe that Kensie as a whole, and sportswear for the brand specifically, can be an important business for us and our retail partners. With respect to our dress business, Calvin Klein dresses has become the cornerstone of the dress department. We're leveraging that position to drive not only Calvin sales, but sales for our other dress lines. This is particularly true in the contemporary business. Jessica Simpson is an important brand that has a lot of growth potential. They are a top performer in the category, and we expect to see continued sales growth this year. The opportunity for Kensie is also strong in this category, and we're launching the Castle Collection [ph] of Kensie contemporary dresses for 2012 holiday season. Vince Camuto, another strong brand, has also supported the quick development of the dress business, which we've launched this spring, and also into Nordstrom's and many other department stores. The line has quickly made an impact. Macy's, Dillards, Bon-Ton as well as Lord & Taylor have all bought this dress collection aggressively. We'll be in more than 500 doors this year. Guess? dresses has, for the first time, become a top-selling brand for us. When we layer these new lines on top of Calvin Klein dresses, we expect a lot of growth in the dress category in fiscal 2013. I should also mention that our Calvin Klein suits separates business is getting a lot of attention right now. We are the bright spot in an otherwise tough category, and the strength in design of the product is obvious. Blouses are key components of the separates business. This is a nice complement to our dress program, and we believe it will continue to do well. While our largest businesses are positioned to perform well, our biggest growth opportunities are in accessories, handbags and luggage. Our handbags and luggage business, led by licenses with Calvin Klein, recorded approximately $50 million in sales in 2011, and we're just getting started. We're continuing to increase both our door count and the volume per door. We're confident in our team, we have a powerful opportunity to build the platform, and we expect to attract additional complementary licenses in this category. Another major opportunity for growth is with our Calvin Klein Performance license. This brand is performing exceptionally well at retail. Our wholesale customers are using our products to anchor their women's active business, where we're getting more floor space. Our first company-owned retail store opened in Scottsdale, Arizona in February and was significantly above plan. We're looking forward to our second store in just a few weeks in Union Square, San Francisco. While these are clearly test stores, we believe that the market is ready and excited for this concept. We're continuing to plan for a fall launch of Calvin Klein Performance retail in China and have today signed up China Ting as our joint venture partner. China Ting is publicly traded on the Hong Kong Exchange and has the expertise and resources to help us build and grow this retail concept in China. We know them very well as they are a key supplier of ours. They are also a key retailer in China. We could not be more pleased to have them partner with us in this venture. Our Wilsons retail business continued its improved results, although less than we planned, as outerwear sales, which comprised about 55% of Wilsons sales, were impacted by the warm weather. Even so, we saw a productivity gain, and we're positioned to make further gains. We're also continuing to test our Vince Camuto stores, which are still a work in progress, but we remain confident that with some key merchandising changes, this can be a successful initiative. We have a lot of positive momentum across the business, and we're really determined to demonstrate our true potential. There's no denial that 2011 was a difficult year. Despite all the negative issues we face, this was still one of our best years in business. Over $1.2 billion in sales is a record for G-III. Earnings of $2.46 per share is second only to last year's earnings. We have a well-motivated team that is primed for a record-breaking year in 2012. I will reserve some additional comments for closing. But with that overview of our business, I will now turn the call over to Neal, who will take you through the numbers for the quarter and the year and also provide you with guidance for fiscal 2013.

Thanks, Morris. For the full fiscal year, we reported net sales of $1.23 billion, an increase of approximately 16% compared to last year's net sales of $1.06 billion. Net sales of wholesale licensed product increased 17% to $840.7 million, from $718.5 million. Our net sales of wholesale non-licensed product increased 13.8% for $277.6 million from $244 million in the previous year. Net sales in our retail segment increased 15.5% to $164.3 million from $142.3 million in the prior year. Sales of our wholesale licensed product were favorably impacted by the introduction of 3 new Calvin Klein product lines as well as an increase in sales from most of our established Calvin Klein product lines. We also had increases in Jessica Simpson dresses and licensed sports apparel. Increased sales of non-licensed products were primarily attributable to increases in sales of private label programs and, to a lesser extent, increases from Andrew Marc products. The retail segment increases were from a combination of a higher store count, as well as same-store sales increases of 6.6%. Although we achieved record sales for the year, our net income for the year decreased to $49.6 million or $2.46 per diluted share, compared to $56.7 million or $2.88 per diluted share in the prior year. The main reason for this decrease was a decline in our achieved gross margin. The overall gross margin percentage for the year was 30.1%, compared to 33% in the prior year. Gross margin for the wholesale licensed product segment was 26.5% this year, compared to 29.7% last year. For the wholesale non-licensed product segment, was 26% this year, compared to 28.9% last year and for the retail segment, was 46% this year compared to 47.1% last year. The gross margins in all 3 segments were impacted by promotional activity throughout the year, which resulted in lower discounted initial selling prices and additional markdown support. We also experienced significant increases in product cost during the year, and we're not always able to increase selling prices to offset cost increases. SG&A expenses for the year increased $28.6 million to $277 million. Our expense increased were primarily attributable to increased personnel costs resulting from the addition of new product lines and increased outlet store count, higher outside warehousing costs associated with our sales growth and increased advertising costs related to both higher advertising fees paid under our license agreements and increased cooperative advertising spending. Regarding our fourth quarter. Net sales increased 9% to $294 million compared to $270 million in last year's comparable quarter. Net sales of wholesale licensed products in the quarter increased to $180.7 million from $176.6 million, primarily as a result of the introduction of the 3 new Calvin Klein product lines. Net sales of non-licensed wholesale product increased 28.3% to $70.2 million from $54.7 million. This sales increase was primarily attributable to increases in private label sales. Sales in our retail operation segment increased 15% to $66.6 million, from $57.9 million in last year's comparable quarter. This was from a combination of a higher store count as well as same-store sales increases of 4.8%. Our net income for the quarter was $5 million, or $0.25 per diluted share, compared to $12.3 million or $0.62 per diluted share in last year's comparable quarter. Our overall gross profit margin percentage for the fourth quarter was 28.3%, compared to 32.3% in last year's fourth quarter. The gross margin percentage for our wholesale licensed product segment was 21.1%, compared to 26.7% in the prior year. For our wholesale non-licensed product segment was 21.3% compared to 22.6% in the prior year and for our retail segment was 45.6% compared to 47.9% in the previous year. The gross margin percentage in our wholesale licensed segment was negatively impacted by higher discounting and markdown participation. The gross margin percentage in the non-licensed segment was down as a result of product mix and pricing pressures. SG&A expenses increased $7.6 million to $72.3 million. The increase in the quarter was, again, primarily attributable to higher advertising, warehousing and personnel costs. Regarding our balance sheet, accounts receivable at year end were approximately $163 million compared to $138 million at the end of the prior year. Our inventory at year end increased to $254 million from $205 million last year. Approximately 1/2 of this increase is attributable to our newer business units. For the 2012 fiscal year, we spent approximately $17 million on capital expenditures, which is primarily to the expansion of our showroom in office space, as well as the opening of additional outlet stores. We expect our capital spending to be less in fiscal 2013, and our showroom and office construction is now substantially complete. For fiscal 2013, we anticipate the rollout of approximately 15 additional stores under the Wilsons and Andrew Marc nameplates, also including the opening of 2 new Calvin Klein Performance retail stores. With respect to guidance. For the fiscal year ending January 31, 2013, we are forecasting net sales of approximately $1.33 billion compared to $1.23 billion in fiscal 2012, and net income to increase between $54 million and $56 million or between $2.62 and $2.72, compared to $49.6 million or $2.46 per share in fiscal '12. We are forecasting EBITDA to grow between 11% and 15% from last year to a range between $102.5 million to $106 million, compared to $92.4 million in fiscal '12. With regard to the first quarter ending April 30, 2012, we are forecasting net sales of approximately $215 million, compared to $197 million in last year's first quarter. We are also forecasting our net loss of $400,000 to $1.2 million, or between $0.02 and $0.06 per share, compared to a net loss of $520,000, or $0.03 per share in last year's first fiscal quarter. That concludes my comments, and I will now turn the call back to Morris for closing remarks.

Thank you, Neal. Over the last few years, our progress, our diversification and our growth has been rapid. We're in a position to continue this trend and drive superior value to our shareholders, our customers, our partners and our consumers. While this past year was not, perhaps, what it might have been with a normal winter season and a little better economic picture, all things considered, it was the second-best year in our history. Next year should be a good year. We certainly have the pieces in place to make that happen. We at G-III never take success for granted. We know that we need to continue to work hard, drive to execute better and search out more opportunities. We've chosen our growth initiatives and our investments carefully. Not only did this enable us to have a good year in a tough market, but those choices were made to support long-term growth. As we look to the year ahead, we're dedicated to capturing the full range of growth in front of us by brand, by category, by tier of distribution and by market. Thank you. And now, we're ready to take your questions. Operator?

[Operator Instructions] And we'll take our first question from Edward Yruma with KeyBanc.

Can you talk a little bit about the inventory and the channel? Do you feel like retailers have packed away outerwear, and has that been contemplated in your guidance?

No, surprisingly. One might think that there's significant amount of packaway to support next year's needs, but fortunately for us, that's really not the case. There's been a good deal of sell-through on inventory, which is the result of some our depletion in margin. And the other point is some of the product that we're dealing with on the department store level is being re-bought for next year by our stores. Now we're utilizing some of the brands that we had inventory in for our own outlet stores. Our own outlet stores have developed a model where 60% or 65% of the business is done through private label to support their business. This year's formula will change. The year that we're in will utilize existing inventory to support the sales of Wilsons by brand rather than -- by national brands that we have, rather than the private label that they've done historically.

Great. I wanted to draw on a little bit on 1Q guidance. I know that you added some SG&A as you've grown the business. We had a significant design staff. How should we think about that addition on a year-over-year basis, think about that flows through the P&L on an annual basis?

Yes, I think that we really are looking at the next year SG&A expansion, really. We have -- we've made investments in people, we've made investments in design, and we've still got a number of businesses that are growing, so I think we'll have warehousing and advertising cost increases. And I think that for us, next year is not one that we're anticipating our SG&A leverage on. I think what you'll see is and what you can anticipate is some gross margin improvements and probably not on the SG&A side. And you've seen that in the first quarter.

We'll take our next question from Diana Katz with Lazard Capital Markets.

Neal, I'm wondering if you can just extend the part about you just not anticipating SG&A leverage but some gross margin improvement. I guess, any way to quantify at all either of those lines for our modeling purposes?

I don't think we're ready to quantify it, but we stepped into a number of new businesses. The Kensie business is a new business for us, the handbags and luggage is in the second year of rollout. We're launching a number of new dress businesses. So we've got a number of business units that are growing. We're still feeding some of the growth in our pre-existing businesses. So I think that that's really what's driving the SG&A increases for next year.

On the SG&A side for overseas offices, we're utilizing the strength of outsourcing to become sourcing agents for both European and American customers, which will bring down the cost of that office, and the net effect will be a savings on the SG&A side. And we will be significant number on the sourcing development side in our overseas offices.

That's great. I'm wondering if you could let us know for last year what percentage of your business ended up being outerwear versus dresses and sportswear?

Yes. The outerwear was 64%, and the dresses were right around 25%. And that should move slightly down going into next year.

Total number...

Yes, the outerwear, too. Okay. And then for the portion of the inventory that isn't being bought from new businesses? Can you describe if that inventory is clean?

Our inventory is clean. We've been dealing with moving what we would classify as dated inventory from November on. We've done a pretty good job of it. Some of it appears to be more dated than we're accustomed to, but that's a product of being in the fulfillment business, in both the shoe business and in the sportswear business. So we need to have a level of inventory to support maintaining stock levels at the retail stores. But beyond that, our inventory is clean.

[Operator Instructions] We'll take our next question from Eric Beder with Brean Murray.

Could you talk a little bit about the leather business and how you see a change -- are leather prices -- you believe leather prices are going to go -- where are leather prices are going to go this year, and how are you looking at that?

We -- our leather businesses come down to well below 10% of our total business. That would be -- not a question that you asked, but -- so the impact of price change is less important to our company today than ever before. The -- taking it divisionally, Andrew Marc was impacted by increased leather prices for calendar 2011. The cost had gone up as much as 25% to 30% on the material side, and we needed to pass along a good deal of the increase to the retailer, and we absorbed some of it internally. This year, we see that prices are coming down. It will impact again Andrew Marc and a little bit of our private label business. But overall, it's a negligible impact on our business, although we anticipate leather prices coming down.

Okay. How are the initial results from Tommy Hilfiger luggage? And the Calvin Klein handbag business, last year you kind of -- you had a number of issues in how the prices rolled out and how quickly you could start to monetized. But how should we think about the opportunity at Calvin Klein handbags going forward now that you can flow it much better?

Our business in Calvin Klein handbags and luggages was actually quite good this year. We beat our plan. The product is well-positioned at retail. We're getting additional space at retail. What impacted us negatively was a mixed start [ph]. We sourced it, we sourced the handbags in 2 factories that were not right for Calvin Klein. We stopped production and moved on to 2 new factories right out of the box. So what occurred was we got the right product in, but we paid to air the product in, and we worked on a shorter margin to get it placed appropriately and began to garner space in the retail venues that were supporting us. So all said, we had a good year, if you pull out the margin side that were more influenced on the airfreight costs and placing product in factories at the last minute without an appropriate plan. So we did great damage control, and we're looking at a much better margins on the handbag business as well as additional door count and greater penetration. The Tommy Hilfiger luggage piece of our business is distributed into 400 Macy's stores, doing quite well, and we're pleased with that business. We have a seasoned professional in the luggage business that's been creating wonderful product, and we're managing through that business as well. We're getting better on freight costs, we're getting better on warehouse costs, and we're going to see margin improvements in that area as well for 2013. We have a small initiative that we're launching in Major League Baseball luggage we're getting good attention for. We don't know the scale of it. And the other piece that would be of interest is we have an opportunity for Kensie handbags that we've not focused on yet. We're working on our Calvin Klein area very hard, and we're leaving Kensie for a little bit later. I'm not sure we get to it in next quarter, but certainly, by the end of the year, we'll begin to concentrate on a rollout of Kensie. We've taken Andrew Marc in house. We weren't satisfied with the licensees of that handbags, and the collection is being shown right now. I don't have responses for you, but I will tell you that it will be an improvement over last year.

Great. And when you look at the guidance for this year, what are you assuming in terms of the outerwear business? Are you assuming something we had this year, are you assuming something from your [indiscernible], how should we think about your guidance, how you're looking at the outerwear business for the second half?

Our guidance, basically, is an anniversary of this -- the year that we're in. We believe -- we believe that it's possibly a conservative number. We believe there's some opportunity in the coat business. We're planning it down to flat. And we believe that there's -- based on what I've been getting in the last couple of weeks, it appears to be a little better than that.

And we'll take our next question from Eric Alexander with Stifel, Nicolaus.

Sitting in for Jim Duffy. I just had a few questions. We're thinking about normalized gross margin levels. Any sort of parameters that we should be maybe thinking about? Obviously, last year is difficult with weather-related things and maybe some prices, pricing issues. Help me out here thinking about that.

Yes. I think at this point, the best that we can give you is that we're definitely looking for gross margin improvement, probably throughout each quarter of next year.

Okay. And then beyond that, just kind of -- you guys obviously did, what, a 33% your prior ---- I mean, should we be expecting to see some sort of improvement to that maybe past this year thinking out longer term?

No. Well, I think longer-term, it's certainly possible that we can get back into that. I think that from an operating margin standpoint, we've still got our eye set on double-digit operating margin. So I think next year is a little bit of a soft year for us, it's in reaction to -- with the way we come through this year, at least that's our initial view on it. We've only got 44% of our year booked for this year, which is comparable to where we've been in the past, but that doesn't give us a tremendous amount of guidance for the current year. But I think our business will definitely bounce back to a stronger operating margin after this first year, and then, again, we'll start to see some more SG&A leverage also as we move forward.

Okay. And then just talking about for fiscal year '13, thinking about you had indicated gross margin improvement. Are you guys -- where do you see greater improvements? In your wholesale licensed business or in your non-licensed business? Just help me out directionally kind of for modeling that out.

Yes. I think it could be a little bit of both. If I was to lean on one, I would say that the licensed side has more opportunity than the non-licensed side. But they both have got some room for improvement. We really had decreases in all areas in the business this past year.

Okay, that's great. And then last question for retail, thinking total store count, I apologize if I missed it, total door count increase for fiscal '13 that you guys are maybe thinking, and then maybe directionally, low single-digits, mid-single-digit, flat type of comps should we be thinking about?

Yes. So we closed the year with about 144 doors. We're opening up about 15. There'll be some closes, I would expect it at the end of next year. We're around 150, maybe just north of there. In terms of like-for-like plan, were in really, mid- to high single-digits as far as a like-for-like plan for next year.

And it appears we have no other questioners at this time. I'd like to turn the conference back to Mr. Goldfarb for any additional or closing remarks.

Thank you very much for participating this morning, and have a good day.

And that does conclude today's conference. Again, thank you for your participation today.