G-III Apparel Group, Ltd. (GIII) Q3 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the GIII Apparel Group Ltd. Third Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Neal Nackman, Chief Financial Officer. Please go ahead, Sir.

Thank you. Due to technical difficulties with our web posting, we had to delay the start of this call. We apologize for that delay. 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 adjusted EBITDA and non-GAAP net income per share, which are both non-GAAP financial measures. We have provided a reconciliation of non-GAAP net income per share and adjusted EBITDA to our net income per share and 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 to discuss our third quarter results. With me today are Sammy Aaron, our Vice Chairman; Wayne Miller, our Chief Operating Officer; and Neal Nackman, our Chief Financial Officer. At third quarter, our peak seasonal period was strong despite the challenges created by Hurricane Sandy, which coincided exactly with our largest shipping week of the year. Our inability to ship during the storm period negatively impacted our sales for the quarter. Our sales were a little less than planned; our margins were stronger than planned. The increase in margins resulted in earnings being ahead of our previous estimates. The lost operating days due to Hurricane Sandy resulted in an absolute halt to our shipping. Despite all this, we had strong results. We're on plan to exceed the full year's EPS guidance we provided to you in September. I'd like to step back a moment and give you the financial highlights for the quarter. Sales in the third quarter were $544 million, up 7%, compared to the year-ago level. We think we would have done better than this had it not been for the missed shipping at the end of the quarter. Gross margin in the third quarter was 35%, up 320 basis points compared to the prior year. We saw a better initial gross margin than last year, both because of an improved mix of product and better sourcing. Net income in the third quarter was $2.37 per diluted share, up 10% compared to last year's $2.16. We would have beat last year's strong number by a larger amount had it not been for the softer revenues due to the hurricane. Please keep in mind this quarter's EPS also included $0.06 of expense associated with our acquisition of Vilebrequin. Our balance sheet is in very good shape, which continues to provide a full range of strategic options for the business. In outerwear, while the next 3 weeks of selling are important, the season is progressing well. Generally, we're seeing modest increases in outerwear sales with lower stock levels. Calvin is the strongest-performing outerwear brand in the market again this year. I'd also like to mention that the team sports business continues to do well, with solid results in both Big Box and Specialty Theme shops. Our strong increases in sales in our team sports business were achieved despite an NHL strike which has adversely impacted our shipping. The fan base for the NFL seems to be stronger than any point in its past. NFL is the biggest part of our Team Sports business and is having a great year. We're pleased with our business across a number of categories. I'd like to talk a little bit about each. Let's start with our Calvin Klein business first. I'd like to note that, while these are obviously licenses for us, this has become, for PVH and our company, a strong strategic relationship. We expect it to be in place for a very long time to come, and I will note that the average tenure of our licenses of 8 years reflects this commitment. Calvin Klein outerwear, both men's and women's, is a dominant resource for many retailers today and is outperforming every other brand in the market. We controlled our inventory well and are driving good sales gains. Dresses continue to be a cornerstone of our business and our diversification strategy. Calvin Klein dresses, which is our biggest business in the category, is an anchor brand for the dress departments of our major customers. We had a very good fall selling season, which is continuing into holiday. We're seeing a strong order book for our major customers for the first quarter of next year. Calvin Klein Women's Suits and Suit Separates continues to be one of our fastest-growing businesses. We're devoting additional resources to grow this business aggressively next year and believe it will continue to be a major business for us. We are clearly one of the few standouts in the women's suits department. I attribute our success here to a really strong team in design, merchandising and planning. We're looking forward to building on our momentum in the category for spring. Our Calvin Klein Women's Sportswear also continues to deliver good results again this quarter. We're experiencing good sell-throughs and are seeing increased bookings for spring. New leadership in Sportswear has made a big difference. Calvin Klein Performance is progressing quickly. We're proud to be a leader paving the way for this casual branded assortment in department stores. We've fixtured over 250 doors thus far to reinforce the brand. We expect to continue to capture this opportunity. All of our major customers are planning high growth potential for next year. We're expanding the distribution and penetration of Calvin Klein handbags. We're building shops in department stores, and will continue to add additional shops well into next year. We're now seeing sales gains in department stores that are ahead of plan and far exceeding the department. Our door count continues to expand, and we now expect to be in approximately 1,000 doors for spring, up from 800 doors this fall. As you know, Calvin Klein is approximately half of our wholesale volume. I'd like to take you now through the balance, which is comprised of some other very strong brands. Our Outercoat businesses, which include Andrew Marc, which did very well for both men's and women; as well as important brands including Cole Haan; Kenneth Cole; Guess?; Tommy Hilfiger; Levi's and Dockers are performing, excluding the storm impact, in line with our plan. In general, we're positioned for slightly lower sales with conservative inventory commitment. This has driven, as intended, the improved profitability you see in the quarter. Our broader dress business, including Jessica Simpson, Eliza J, Guess?, Ellen Tracy, Kensie and Jessica Howard, as well as our own Andrew Marc and a number of other private label programs, were also in line. We continue to lead the department and see growth from both well-established and newer brands. Across the dress business, we're booking well for spring and are excited about the continued potential. Kensie contemporary sportswear, which we launched this year, is doing quite well, and we continue to expect solid growth. Door counts is now up to over 1,500 doors, up from 1,200 this past spring. We're very pleased with the leadership provided by Erik and Lani Karls. We expect several new exciting new initiatives within this business. Our plan is to grow this brand at a rapid pace. Our Wilsons retail business is quite strong in the quarter. Comps were up 18% for the quarter, gross margins were up over 2 full points compared to last year and, while we will see some impact in the fourth quarter from the hurricane, we've seen a solid pickup in business over the last few weeks. We think the assortment is positioned extremely well for a strong finish this year. We're encouraged by this progress and looking forward for continued growth next year. With respect to our specialty retail initiatives, I would note that we sold back our interest in the JV for Vince Camuto retail stores to the Camuto Group during the quarter. We think this business will be successful, and it shows significant promise, but collectively, we believe that this business will be better served by the brand owner. Now before I turn the call over to Neal, very pleased to talk a little bit about our acquisition of Vilebrequin. For those of you who are not familiar with Vilebrequin, it is regarded as the best status men's and boy's swimwear brand in the world. This is a global business that is underpenetrated in many markets, especially in the United States. The price points and the margin the brand carries are extraordinary. There are 60 company-owned stores globally, which make up the bulk of the approximately $60 million in annual revenues, with another 20 franchise partners in international markets, each with multiple stores. On top of this is a small wholesale business to luxury specialty retailers. Our growth strategy for the business will proceed along 2 paths. First, geographically, we are pushing for a significant expansion in the United States. We're now developing specific plans to grow the brand's wholesale distribution and to augment that within additional retail stores. We're also developing a stronger e-commerce presence. We believe that there is a great opportunity to grow the brand in the Pacific Rim, Europe and the United States. In the U.S., we will be first working to increase the Vilebrequin's presence in the first-tier cities in the New York metropolitan area, Florida and California. Our second path to growth with Vilebrequin is through category expansion. We believe there is a great opportunity to develop men's resort wear. This will include the expansion of categories like knits, wovens, accessories, slippers, towels and other items. This brand is particularly known for its relationship between father and son. We'll strengthen this product line as well as its message. In addition, women respond extremely well to this brand. We think there is an excellent opportunity for Vilebrequin to develop a multicategory women's business in the same core categories, especially swimwear. While the brand is relatively small, it is an incredibly strong and attractive brand for the wide luxury market. We have an excellent management team in place to grow this business, and we are very excited about its future. Thank you, and now I'll turn the call over to Neal for a closer look at the numbers for the quarter.

Thank you, Morris. First, for the quarterly review. Net sales for the third quarter ended October 31, 2012, were $543.5 million, up 6.6% compared to $510 million in the year-ago third quarter. Net sales of wholesale licensed products in the quarter increased to $402.7 million from $374.2 million. We achieved increases in wholesale licensed products sales this quarter, primarily as a result of our new Kensie sportswear line, as well as increased sales in the team sports business. Net sales of wholesale nonlicensed products in the quarter decreased to $102.6 million from $109.9 million in last year's third quarter. Net sales in our retail segment increased approximately 21% to $44.7 million in the current quarter from $36.9 million in the comparable period last year. This was primarily from the same-store sales increases of 18.9% and, to a lesser degree, an increase in new stores. The quarter's results also include net sales of $6.8 million from the operations of Vilebrequin from the start period from August 7, the day of acquisition, through September 30, 2012. Vilebrequin's results will be included in our consolidated results on a calendar year basis. Our gross margin percentage was 35% in the third quarter compared to 31.8% in last year's third quarter. Gross margin percentage in our wholesale licensed product segment was 32.9% this quarter, compared to 29.8% in the prior year period. We achieved higher margins in our Kensie, team sports and several Calvin Klein product lines. The gross margin percentage in our wholesale nonlicensed product segment was 29.9%, compared to 29.8% in last year's quarter. Gross margin percentage in our retail segment improved to 49.8% compared to 48.4% in the prior year. Gross margins on Vilebrequin net sales were 70%. SG&A expenses increased to $106.3 million for the quarter from $87 million in the prior year's third quarter. As anticipated, the increase is primarily attributable to increases in personnel costs, third party warehousing, advertising costs and professional fees. Personnel costs increased to support the growth of our business. Third party warehousing costs increased as a result of our increased shipping volume. Advertising cost increased as a result of sales increases and increased advertising commitments for our licensed segment. Special fees increased as a result of costs relating to the Vilebrequin acquisition. This quarter includes $4.9 million of expenses related to the Vilebrequin operation. Our net income for the quarter was $48.3 million, or $2.37 per diluted, share compared to $43.6 million, or $2.16 per diluted share in the same period last year. In the third quarter, we incurred approximately $1.9 million or $0.06 per diluted share after taxes of one-time expenses related to the Vilebrequin acquisition. When we exclude these costs from our net income, our non-GAAP net income per diluted share was $2.43 for the quarter compared to $2.16 in the prior year's quarter. Regarding our balance sheet. Accounts receivable on October 31 were approximately $363 million, compared to $368 million at the end of the comparable period last year. Our inventory increased to $307 million from $273 million last year. We're pleased that, despite our cash expenditure of approximately $100 million this year in connection with the acquisition of VBQ, that our bank debt only increased to $265 million compared to $245 million last year. We do now have approximately $19 million in long-term debt associated with the VBQ acquisition, which represents promissory notes issued as part of the consideration for the acquisition. Lastly, with respect to our value guidance. We are forecasting net sales to increase by approximately 13% to $1.39 billion for our 2013 fiscal year that ends January 31, 2013, compared to a previous forecast of $1.41 billion. We are now forecasting net income in the range of $55.5 million to $57.6 million or $2.71 and $2.81 per diluted share for fiscal 2013, compared to our prior guidance of net income in the range of $55.2 million to $57.2 million or between $2.68 and $2.78 per diluted share. Our full year forecast does not take into account any additional expenses and integration costs that may be incurred in the fourth quarter with respect to the acquisition. We are increasing our full year non-GAAP net income per share by $0.08. We are forecasting non-GAAP net income per diluted share to range between $2.82 and $2.92, as compared to our previous guidance of $2.74 to $2.84 per diluted share. We are forecasting adjusted EBITDA to grow between 20% and 24%, a range between approximately $111 million and $114 million compared to our previous forecast of $108 million to $111.5 million and to $92.4 million in fiscal 2012. Forecasted non-GAAP net income per share and adjusted EBITDA excludes expenses and integration costs related to the Vilebrequin acquisition. That concludes my comments, and I will now turn the call back to Morris Goldfarb for closing remarks.

Thank you, Neal. We're positioned well to close out a strong year. We're continuing to drive value by growing the business, expanding our opportunities for growth and pushing ourselves to improve profitability. Our balance sheet can clearly support appropriate acquisitions, and our management team is motivated to do more. We have succeeded in becoming the best-in-class in many categories, including coats, dresses, women's suits and now men's swimwear. This is a rare company with many opportunities. We defined our path years ago and have executed well. We're positioned to conclude a strong year in all our businesses. Thank you for your attention today and for your support, and I'll now open up the call for questions. Operator?

[Operator Instructions] And we'll take our first question from Erinn Murphy from Piper Jaffray.

Just a question, Morris, for you, if you think about the Hurricane Sandy impact, particularly with the shipping level at the end of the quarter, could you maybe just help us appreciate the -- what that disruption had from either basis points on sale or just some sort of sizing up of that impact?

Difficult to give you the exact miss for this year, but what I can do is I can tell you what the last 3 days of the third quarter in 2010 and 2011 were. And in 2010, the last 3 days were $36 million in shipping and in 2011, the number was $43 million. So inasmuch as we shipped some product, most of those 3 days were missed.

That's helpful. And then I guess as we think about just the weather kind of season to date, it seemed a little bit cooler right after Columbus Day and then November has been a little bit cooler than last year, really hasn't been a kind of historic standard. I'm just curious what you're seeing just overall on the outerwear space, specifically in November. How comfortable are you with the sell through rates right now, and just any other color you can give on kind of current trend will be really helpful.

Clearly, our biggest brand in outerwear is Calvin Klein, and the sell-throughs are quite good. They're better than they have been historically. They lead the department and they lead out -- clearly, they lead our other brands. Our other brands are running pretty much flat. Our inventory levels have been adjusted. The inventory at the store level is down, and we're very pleased with current performance.

And just one last question, Morris, for you on the Vilebrequin. You are included -- excuse me, on the gross margin improvement in the quarter, how much of that was just true recovery from last year and how much was just the fact what you're now integrating Vilebrequin? It has the higher margin and it's longer-term. How do you think about that gross margin rate as you integrate the 2 businesses?

Well, currently all the improvement is organic without Vilebrequin in the mix. The quarter was not a big quarter for Vilebrequin. The margins are stellar. They are the best in the company at Vilebrequin, but the company is not of scale yet. We acquired it because of the amazing margins that it can provide for us and the amazing opportunities. So we see this as a good contributor in the coming years, but the impact today is insignificant.

Then I guess just longer term on that -- in the next year on that, how should we be thinking about the distribution opportunity in North America? What should we be building in our models if you think about the opportunities both on a direct as well as on a wholesale side of the North American business for that brand?

The growth in direct wholesale, and we define the wholesale in the United States as the product that we sell to department stores and better specialty stores. That business will grow quite significantly. We're meeting with our retail partners. We're building shops, and we're trying to create a presence 12 months a year and devote a good deal of energy to show that this can become a lifestyle brand that is not nearly a swimwear brand volume season. It's a brand that will be bought 12 months a year. The shops that we build will survive that 12-month period, and we expect, in the next 18 months, to see a great improvement in the wholesale sales. On direct retail, our focus will be to grow the U.S. market. We have signed several leases, and we're focused on signing many more this year. The stores are small, the locations are the best in the country, and performance per square foot is just great. So there is no reason that we can't grow this business at a rapid rate.

And we'll take our next question from Edward Yruma from KeyBanc.

Just to follow up on the hurricane, was the bulk of the impact felt in your Wilsons business or was it on a wholesale front? And I guess, as you think through, what are the implications in terms of were inventory levels at your wholesale partners depleted, was it -- were there missed sales, and kind of how do those sales get made up?

The miss in that shipping was not Wilsons. Wilsons business is good. We had some stores that were closed, but as a percentage of the whole, again, Wilsons was not a miss at all in top line volume. The miss related to pure shipping. This is a peak shipping period in coats. The trucks were lined up, the warehouses were full of inventory and ready to go, and they turned dark. All our warehouses in New Jersey were without power and there was an absolute stall to shipping products for at least 3 days, and I could tell you the story that it was probably more than a week before we retooled and got back to normality. So taking all that into consideration, we had a really, really good quarter, and we recovered a good deal of the shipping. You don't tend to recover sales at retail, which is the retailers' issue that we supplement with assistance if it's necessary, but we feel we're okay. We feel that our inventory levels are in check. They appear to be better than ever. And there's all signs of having a very good fourth quarter.

You clearly sound very optimistic about your recent acquisition [ph] of the Vilebrequin business. I'm just trying to dig in a little bit from a longer-term perspective. How big do you think the business can be, ultimately? Like when you think about expansion in wholesale, do you think there will be any move to make some of the price points more accessible given the, obviously, kind of ultra-premium position?

We believe that the brand in pure swimwear can more than double in size, and I believe that the swimwear piece of this business, globally, can be a $200 million business. We're aggressively doing research on the appropriate companion pieces to the swimwear, and we will have those identified within the next 6 months, and we'll build this as a lifestyle brand at a very premium level. The intention is not to dilute the retail or wholesale pricing. It's to keep it at a very luxury and status segment of the market, and we've hired a team that understands it extremely well. The management team is composed of several executives of Hermès as well as other luxury brands throughout the world. So the intention is not to promote it, not to put product on sale, it's to protect the integrity of a very, very special brand.

[Operator Instructions] And we'll take our next question from Eric Beder from Brean Capital.

Could you talk a little about the inventory? How much of the inventory you have there is Vilebrequin and how much of it is the rest of the business?

The inventory on Vilebrequin is very, very small at this point, and probably will continue to be.

Okay. And in terms of seasonality for that business, and I know it's mostly retail stores, is this going to be an offset in the first half, and can it provide you more seasonal flow of earnings?

This is a brand that's positioned globally in many resort areas, and those resort areas do business pretty much 12 months a year. The winter months are highlighted in certain parts of the world and the summer months are highlighted in other times of the year. So we don't see dramatic seasonality in this brand. We're not seeing a big swing in our own retail stores, and what we're trying to get through to our department stores, the ones that carry it, whether it's Neiman, Saks, Bloomingdale's, Nordstrom and Bergdorf Goodman, is retaining space throughout the year because it is, in our minds, a 12-month-a-year brand.

Okay. And the Vince Camuto joint venture, you've given it back. Is your relationship still very strong there in terms of Jessica Simpson? And how is that fleet, the Vince Camuto Jessica Simpson outerwear business, do?

Our relationship couldn't be stronger. It was difficult to -- I'll give you a little bit of a footnote. Our relationship, as I said, is strong. Running outlet stores for a brand that you do not own is quite difficult. I guess our strategies weren't aligned, and the brand is best suited -- the outlet stores are best suited for the brand owner, and we came to an agreement, a very friendly agreement, where the Camuto Group is operating those stores. If they need our help in any degree -- I don't believe they do, they've got a fine structure in place -- we'll provide it for them. And conversely, if there's anything that we need, they're there for us. Our relationships, both with Vince Camuto as a brand in dresses and in men's clothes is good. This is our launch year on the dresses. The dresses have performed well. The cooperation between the teams couldn't be better. And Jessica Simpson, the brand owned by the Camuto Group, is one of the premier brands, premier selling brands, at the department store level in dresses, and we currently -- this is our first season in the coat area and business is exceeding plan by probably north of 15%. So we're happy with the relationship, happy with the product, and we see this as a long relationship.

And we'll go next to John Kernan with Cowen.

I wanted to stay on Vilebrequin for at least 1 question. As we think about next year, long term, how are you planning business from a profitability standpoint? It looks like the 1-year financials we have show a mid-teen operating margin. What should -- was the plan to be there for now over your [ph] long-term implications of profitability for Vilebrequin?

In a short time -- we're not out with next year's guidance yet on VBQ. We've got a new management team. We're doing a lot of continuing evaluation in terms of rolling out next year's plan. So I think it's premature for us to speak to next year. You did see the guidance -- the historical results in the 8-K that we filed, where operating margins actually varied from high single digits to good mid double digits. And I think that long term, it's really safe to say that this is a high double-digit operating margin operation that we expect to get from the business.

Great, that's helpful. And then some of the categories outside of outerwear, particularly dresses, how are we looking at growth for the Vince Camuto, Jessica Simpson and Kensie lines in dresses for next year?

We're going to project that as mid-teens in a growth pattern for next year. Our business is ending up strong, our designs are getting better, and in most cases, we're getting additional door count. So we, as a company, are doing extremely well on the dress side of the business. I believe we're either the largest or maybe the second largest dress maker and provider in the country. We occupy a good deal of space, and we get very good cooperation from our department store partners.

Great. And one final question, any update on the plans for Calvin Klein performance in China and the U.S. and the performance of the stores that have been opened in the U.S.?

The stores in the U.S. are still a work in progress. We haven't designed an absolute great formula. We've looked at many locations. We have teed up approximately 12 new locations for this year, and we decided that we would wait until we got the formula right. So at the moment, we're not on an aggressive mode with it, we're on a watch and see. And in China, we opened -- by the end of this week, I think we'll have 4 opened stores in China. And by the end of the year, it will be 5 or 6 within the next couple of weeks, and we're looking at about 20 for the coming year. And that, as you might know, is a joint venture with a good partner, and we see that as a growth opportunity for us.

And we'll go next to Mike Richardson with Sidoti.

I was just wondering if you could elaborate a little bit more on what you're seeing on the sourcing front regarding costs and maybe give us some color on how we should be thinking about that going forward?

As we get more entrenched in classifications outside of coats, we get better at the sourcing side. As the scale of that business improves and classifications like dresses, performance, sportswear, we're finding price advantages for us. The timing of which we can place our orders today is improved for the benefit of the provider, the provider being the factory. So that's -- we're getting price advantages, very interested in producing off-season, and we're giving them that production. They're holding the product. They're shipping it as we need it, but that will provide us with added improvement in our margin. The advantage we're having this year is the European economy is weak and production is not filled by the Europeans and therefore, we're getting our advantage there as well. So all said, sourcing is really in check and we believe that this will be, yet again, a margin improvement year.

And there are no additional questions in the queue at this time. I will turn the call back over to Morris Goldfarb for additional closing remarks.

Thank you very much. I apologize for the early delay, and thanks for tuning in. Have a good day.

This does conclude today's conference. Thank you for your participation.