G-III Apparel Group, Ltd. (GIII) Q4 2016 Earnings Report, Transcript and Summary

Welcome to the G-III Apparel Group Fourth Quarter and Full-Year 2016 Earnings Conference Call. My name is Paulette and I will be your operator for today's call. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the call over to Neal Nackman, Chief Financial Officer. You may begin.

Thank you. Before we begin, I would like to remind participants that certain statements made on today's call and 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 non-GAAP net income per share and to adjusted EBITDA which are both non-GAAP financial measures. We have provided reconciliations of these non-GAAP financial measures to GAAP measures in our press release and on our website. I will now turn the call over to our Chairman, President and Chief Executive Officer, Morris Goldfarb.

Good morning and thank you for joining us to discuss our fourth quarter and full-year results. With me today on the call are Sammy Aaron, our Vice Chairman; Wayne Miller, our Chief Operating Officer; Neal Nackman, our Chief Financial Officer; and Jeff Goldfarb, our Director of Strategic Planning. FY '16 was another record year of growth, operational success and strategic progress for G-III. Of course, as you know, warm weather and soft traffic made for a very difficult retail environment in the fourth quarter. Our fourth quarter sales increased by 3% to $527 million versus last year's $514 million. This was roughly $50 million below our forecast. The shortfall was entirely related to lower outerwear sales in both our wholesale and retail businesses. Our adjusted net income per diluted share was $0.17 per share compared to $0.49 in the fourth quarter last year. This was $0.21 below the low end of our previous guidance. The profit shortfall reflects lower than forecasted wholesale and retail sales in outerwear as well as higher discounting and promotion of outerwear. I would like to provide some full-year highlights. We grew full-year sales by 11% to a record of $2.3 billion. We grew our full-year adjusted EBITDA in FY '16 by 13% to a record $210 million. Similarly, our non-GAAP net income grew by 12% to a record $113 million and adjusted EPS for the full year grew 8% to $2.44 per share. Beyond the good annual financial performance, we captured a number of important initiatives across multiple categories with powerhouse brands. We've dramatically expanded the range and size of our growth opportunity. We expect to see positive sales and profit impact from our deals with Karl Lagerfeld and Tommy Hilfiger to accelerate into the back half of the year. Longer term, we believe Tommy Hilfiger and Karl Lagerfeld represent a $1.5 billion annual revenue opportunity for G-III. We're pleased that our consistent execution and great product has continued to reinforce our leadership position in the industry. We work hard to be a creative force for our customers and consumers and to be a reliable and trusted partner. We made that evident in the context of a tough fourth quarter for retail in general and for outerwear in particular. We worked with our customers effectively and collaboratively and ended the season with manageable levels of inventory, both for them and for us. Even so, we're planning prudently and have a reduced outerwear plan for FY '17 versus FY '16. We see strong growth in every other category this coming year and believe it is prudent to protect the expectation of relatively secure diversified growth in sales and operating profit from the kind of seasonal risk we've just experienced. The balance of our wholesale business is on a great trajectory following a solid holiday performance. To be clear, our understanding is that this was not very common this past year. Our performance in a wide range of categories has continued to set us apart from the pack. We think this superior performance gives us good momentum and a competitive advantage for this upcoming year. Now let's discuss in more detail how each of our businesses are doing. This past holiday dress, sportswear, performance, handbag and women's suit businesses all continued to sell through well and our margins remained strong. Team sports also had an excellent fall and holiday season. Let's put numbers to each of these businesses. In dresses, we had net sales of approximately $390 million this past year. We see good opportunity to sustain a double-digit rate of top-line growth in the dress category. Calvin Klein, Eliza J, Vince Camuto and Jessica Howard dresses were standout performance this past year. For FY '17, Tommy Hilfiger dresses has just launched for spring and we expect to quickly establish a strong position for Karl Lagerfeld dresses as we build our successful launch this past fall and holiday. In sportswear and performance, we had net sales of about $350 million in FY '16. We're pleased with these results but at the same time this is the single biggest category in the industry. At $350 million, we're only at the beginning stage of our long term opportunity. So far, our success in the sportswear and performance business has primarily been driven by Calvin Klein. We're now poised for major growth expansion and diversification across a number of brands, including what we see as a tremendous opportunity with both Tommy Hilfiger and Karl Lagerfeld. We think sportswear and performance is likely to be our largest as well as our fastest growing business. Handbags has been a great business for us this year in which we achieved approximately $100 million in net sales. Here too we're in the early days of a long term plan in a very large category. Thus far, our business is essentially all with Calvin Klein. We like the sales opportunity we see in handbags, the margins we're achieving and the breadth and depth of expansion opportunities. This is another key brand-building category for our Lagerfeld strategy and we're pleased to have launched Karl Lagerfeld handbags this past holiday season. We're confident that, like dresses and sportswear, handbags is a strong double-digit growth business for us. Women's suits and suit separates was about a $120 million business for us this past year. We've done a good job of leading this category for key department store customers with a range of brands. This year we have some really great catalysts to cement our leadership position in the category. We will launch Tommy Hilfiger women's suits in the second half of the year. Karl Lagerfeld women's suits will also be available this August. We believe that having three great brands, Calvin Klein, Tommy and Lagerfeld will enable us to further dominate this category. Again, our expectation is sustainable and strong double-digit growth. Team sports had a great year, led by NFL and the launch of Hands High by Jimmy Fallon this past holiday season. We have a great business with expanding rights and, again, we see strong sustainable growth for us over the next several years. There is great excitement in our organization for all these businesses. To have the opportunity to create a worldwide resurgence of the Karl Lagerfeld brand is something special. To have the opportunity to help greatly expand an iconic brand like Tommy Hilfiger in North America is equally powerful. There's also tremendous energy around the ongoing turnaround of GH Bass, a storied authentic American brand. More in a moment on GH Bass. Wilsons fourth quarter and full-year comp sales were disappointing at a negative 12.4% and 7.6%, respectively. Clearly, the warm weather this winter season impacted outerwear sales which is key to the business. We also saw softness in our tourist-driven outlet locations. We're looking closely at how we can continue to evolve the business and regain the profitability Wilsons had achieved prior to this fiscal year. We've realigned our Wilsons management organization and recently hired a talented Chief Merchandising Officer. We're working on reassorting and rebalancing our product mix for the upcoming fall holiday season, as well as launching new branding initiatives both in our stores and online. GH Bass had comp sales increases of 8% and 12.1% in the fourth quarter and full year, respectively. Here, too, we've taken steps to improve our profitability. We have more work to do in our footwear assortment where we're now beginning to produce our own shoes. We also are working hard to capture what we view as an untapped e-commerce opportunity. We're also cognizant that beyond our approach of greater store productivity and a stronger online business, we have a great brand in GH Bass that is not constrained to its own stores. GH Bass has potential in retail, wholesale and licensing, both here and abroad. We have a great licensing partnership already in place with PVH, Overland and Genesco and we're working aggressively on new licensing and wholesale initiatives. We're also looking closely at some meaningful international distribution partnerships, both for wholesale and for retail. Turning to our Vilebrequin business, it is fundamentally sound, that the brand remains healthy. Even so, our reported results are off from last year. Our European business has been hit by the macroeconomic and political environment over the past year. In addition, the stronger U.S. dollar impacted sales in our U.S. stores as international tourism spending declined. With regards to what we can control, our team is doing a great job with respect to product innovation and this will help the business globally regardless of the environment. Our real estate portfolio is excellent. We still see the same long term opportunity for the brand. I'll reserve some comments for closing and will now turn the call over to Neal for a closer review of our financial performance.

Thank you. For the full FY '16, we grew net sales by 11% to $2.34 billion compared to last year's net sales of $2.12 billion. Net sales of our wholesale operation segment increased 12% to $1.9 billion from $1.7 billion, primarily as a result of increased sales of Calvin Klein products, with the largest increases occurring in women's suits, handbags, dresses and performance wear. In addition, we had increases in sales of Ivanka Trump products, Eliza J dresses and our team sports products and private-label programs. Net sales in our retail operation segment increased 3% to $514 million from $499 million due to an increase in same-store sales of 12% for GH Bass, offset in part by a comp decrease of 7.6% in Wilsons as compared to the same period in the prior year. Our gross margin percentage was 35.8% in both FY '16 and FY '15. Gross margin percentage in our wholesale operation segment improved to 30.9% compared to 30.1% in the prior year. The gross margin percentage in our retail operation segment was 46.1% compared to 46.4% in the prior year. Selling, general and administrative expenses increased to $629 million or 26.8% of sales in FY '16 from $572 million or 27% in the prior year. This reflects greater cost for personnel, facilities and advertising. Personnel cost increases were attributable to staffing additional retail stores, the expansion of certain product lines and for bonus accruals related to increased profitability. Facility cost increases reflect greater rent expense for additional retail store leases, open since the prior year. In addition, we increased our use of third-party shipping facilities to satisfy the higher shipping volume. Advertising costs were related to the increased net sales of licensed products as well as greater cooperative advertising pursuant to many of our license agreements. Our effective tax rate was 36.2% in the current year, compared to 35.3% in the prior year. The lower rate in the prior year was significantly impacted by certain nonrecurring transactions recorded in other income in the prior year that were not subject to income tax. We're anticipating a 37% tax rate in our outlook for FY '17. Net income for the year increased to $114 million or $2.46 per diluted share from $110 million or $2.48 per diluted share in the prior year. Included in our net income in the current year is approximately $1.1 million of other income equal to $0.02 per diluted share which primarily consists of the reduction of the estimated contingent consideration payable in connection with the acquisition of Vilebrequin. The prior year's other income was $11.5 million or $0.22 per diluted share and primarily consisted of three items, first payments for the sale of rights to operate Calvin Klein performance stores in Asia, including the sale of the Company's interest in the joint venture that operated Calvin Klein performance stores in China, second a gain in connection with the reduction of the estimated contingent consideration payable in connection with the acquisition of Vilebrequin; and, lastly, a gain with respect to the early extinguishment of debt at a discount constituting a portion of the consideration paid for the acquisition of Vilebrequin. On an adjusted basis, excluding these other income items from the current- and prior-year's full results, non-GAAP net income per diluted share was $2.44 for FY '16, compared to $2.26 for FY '15. Regarding our fourth quarter, net sales increased 3% to $527 million compared to $514 million in last year's comparable quarter. Net sales in our wholesale operation segment in the quarter increased 1% to $399 million from $397 million. Net sales in our retail operation segment are consistent with the prior year at about $175 million in each period. Our consolidated gross margin percentage for the fourth quarter was 33.9% compared to 35.7% in last year's fourth quarter. The gross margin percentage for our wholesale operation segment was 24.7% in the fourth quarter, compared to 25% in the prior year's quarter. Gross margin percentage for our retail operation segment was 45.9% compared to 48.2% in the previous year's quarter that was due to increased promotional activity in that segment. SG&A expenses increased $17.6 million to 30.2% of net sales from 27.5%. We have increases in payroll costs, in-third party shipping, advertising and design expenses, all of which support our overall growth. SG&A increases were impacted by new initiatives related to our launch of Karl Lagerfeld products, Tommy Hilfiger dresses and GH Bass wholesale initiatives. Our net income for the quarter was $8 million or $0.17 per diluted share compared to $22.2 million or $0.48 per diluted share in last year's fourth quarter. Regarding our balance sheet, accounts receivable at fiscal year-end increased 13% to $222 million from $196 million at the end of the prior year. Our inventory at year end increased approximately 14% to $485 million from $426 million last year. This is about 5 percentage points above our forecasted first quarter sales. This increment is attributable to excess outerwear which we're holding for this coming fall. While this ties up some working capital we do not expect a negative impact on our margin in the upcoming season. In FY '16, we spent approximately $42 million on capital expenditures, primarily for fixturing in key department store doors, as well as leasehold improvements for new and remodeled Wilsons, GH Bass and Vilebrequin stores. We also invested approximately $25 million for a 49% ownership in Karl Lagerfeld North America. At the end of the year we had no outstanding debt and cash on hand of $133 million, compared to a prior year cash on hand balance of $128 million. Regarding guidance, for the fiscal year ending January 31, 2017 we're forecasting net sales to increase approximately 9% to approximately $2.56 billion compared to $2.34 billion in FY '16. We expect net income to increase between $120.5 million and $124.5 million or between $2.55 and $2.65 per diluted share, as compared to net income of $114 million or $2.46 per diluted share and $2.44 per diluted share on a non-GAAP adjusted basis. We're assuming a fully diluted share count of approximately 47 million shares. We're forecasting FY '17 adjusted EBITDA to grow between 9% and 12% to a range of approximately $228 million to $236 million from $210 million in FY '16. With regard to the first quarter ending April 30, 2016, we're forecasting net sales of approximately $475 million compared to $433 million in last year's first fiscal quarter. We also are forecasting net income between $0.1 million and $2.4 million or between zero and $0.05 per diluted share compared to net income of $6.8 million or $0.15 per diluted share in last year's first fiscal quarter. The first quarter will also be impacted by additional expenses related to our new initiatives. The sales impact from these new initiatives will accelerate in the latter half of the upcoming year. That concludes my comments and I will now turn the call back to Morris for closing remarks.

Thank you, Neal. The fourth quarter aside, our FY '16 was powerful, both in terms of our financial performance and, more importantly, our strategic development. Over the past several years, we certainly have been very fortunate to have found such a powerful partner with the Calvin Klein organization and PVH. Calvin Klein is a truly powerful iconic global brand. We view the opportunity now immediately in front of us with the Tommy Hilfiger and Karl Lagerfeld relationships in the same way. These are also great iconic brands with tremendous potential. I think it's worth repeating that we have mapped out roughly $1.5 billion in annual revenue opportunity for G-III from just these two brands and while I'm focusing on them, given they are recent and have scale, we also have great opportunities in every category across many brands in our diversified mix of businesses. As we begin the new fiscal year, a major challenge continues to simply rise to the goals and the high standards that we've set for ourselves. We just finished a year where we drove decisively forward through one of the toughest outerwear seasons ever, through one of the most challenging macro environments ever and yet we managed to post record results. At the same time, we also created the biggest set of future opportunities we've ever seen. We're confident that these opportunities will propel us to new record levels of sales and profits for many years to come. Thank you, operator. We're now ready for some questions.

[Operator Instructions]. Our first question comes from Ed Yruma from KeyBanc Capital Markets. Please go ahead.

This is Jessica Schmidt on for Ed. Thanks for taking my question. Just first, you talked about it a little bit, but if you could just elaborate on inventories in the channel for outerwear. And then I know you typically try to avoid doing some pack-aways but you did that for this upcoming fall. Can you just add some color on what some of your partners are doing in terms of pack-away? And then my second question, just in terms of, just given the severity of the miss, is there any reason why you didn't necessarily pre-announce at ICR? Is this an indication that maybe trends -- last a few weeks in the quarter? Thanks.

Our inventory levels are a little higher than normal. We made a strategic decision to hold back some of the off-price sales that we historically do at this time of the year. The rationale for that, there were opportunities, more opportunities than ever, for the off-price channel to consume the leftover inventories or the troubled inventories in our sector. So, seeing that we decided that we would dispose of our fashion-risk inventory and hold onto our core basics because we believe that we can appropriately reassort them for the coming year and generate more value for them than we could have in a high-density disposable area of business. So, we opted to hold onto our inventory. The pack-away segment of what we talk about today, I would assume, is quite deep. And part of the rationale for what we believe is a fair analysis of what we might expect in the coming year is the knowledge that there is a fair amount of pack-away product being held by our off-price retailers. So we take that into consideration and we temper the growth of our business with that knowledge. As far as the pre-announce segment of the business, we've had internal discussions as to the benefit of pre-announce to our shareholders and to ourselves and inasmuch as we're more of a wholesale business than a retail business. It is a moving target. We do not have visibility the same as a retailer does. We do not know immediately the effect of inventory that the department stores hold on us. So we wait. We wait until we solve our problems with, call it, vendor assistance, returns, product that we have to solve for the retailer. So that comes a little bit later. The decision was made that we felt that we were best for the shareholder and for ourselves to announce as we do normally. We view our business as very healthy. We have all these great opportunities. We believe that it was well understood that the weather that we had to deal with was well understood. In all our conversations we alluded to how difficult the coat business was and how the weather impacted us. Thank you, Jessica.

Our next question comes from Erinn Murphy from Piper Jaffray. Please go ahead.

Just a couple of questions for you guys. First, just following up on Jessica's question, as you think forward into fall of 2016, given what you're seeing with pack-away and how you're seeing inventory in the channel, are you still comfortable at the wholesale level, [indiscernible] department store level with the flattish order book and is it really the off-price that's causing a little bit more concern? Just help us think about how you see the order book panning out right now for fall of 2016 for outerwear.

We're forecasting our business as a conservative one going forward. We're comping the weather patterns that we just went through and I don't believe we're going to have the same situation to deal with. So, there is upside to our plan. We're not incurring too much of an issue on the department store level. The size of the department may decrease to some degree but our percentage of the pie, as always, is increasing. In troubled times the retailer leans on their best resources, the resources that protected them in a tough environment and the resources that sold best in a tough environment and we qualify for both of those. So, I would say that our business is fairly projected for the year. I'd be disappointed if we merely hit the projection that we're putting out on the coat side.

And this is probably more for Neal but it sounds like you guys started adding some costs for the new businesses, the Tommy Hilfiger dress business, the Karl Lagerfeld businesses that started. It seems like some of those charges started in the fourth quarter. Could you just help us think about the trajectory of some of these added expenses? What was the impact specifically to the fourth quarter? And how do you see that first half versus second half of this year, if there's any way to break out the incremental expenses related to how you're fueling the growth.

Yes Erinn. We did start to incur expenses. The Karl Lagerfeld business was launched in the third quarter. We actually were building expenses, although small, in the earlier part of this year. It certainly continued in Q3, it continued in Q4. We did not have a significant amount of sales in either one of those quarters. But a small impact really overall to the deleverage for the current year. As you move into next year, we're really starting to build all the new Tommy Hilfiger businesses. That's going to be dependent upon how quickly we hire people. Some of those people have been hired already. There will be more people hired for the Karl Lagerfeld initiatives. There will also be a marketing spend relative to our GH Bass business. There will be more space that we're going to need to incur. So, those things will continue to ramp up as we go through, as far as the expense side, as we go through fiscal year-end 2017. Of course, the good news is that as the year progresses, we're in the Karl Lagerfeld business. We're shipping throughout the year. Tommy will start to ship more with strength in the latter part of the year. Karl will also probably accelerate. So, I think next year we'll be under pressure in terms of, again, levering SG&A at the wholesale side of the business, but we do expect that, come the end of next year, we should be well aligned and then going forward to start to see more positive operating performance from the new initiatives.

Okay. And then two clarifications, Neal. First, is the Tommy Hilfiger business, excluding the dress business, the piece that you just picked up from PVH, is that actually accretive this year in total?

The Tommy Hilfiger dress business for this year would have been slightly accretive. With all the businesses that we run when we start businesses we've been very, very good at always having them accretive. The issue is that they're not at the same operating margin percentage as we would expect the overall.

And then, sorry, the other Tommy Hilfiger business, the suiting, denim, sportswear, the most recent licenses, is that still accretive, just not as accretive as if it was fully scaled?

Yes, that's our anticipation for next FY, that's right.

Okay. And then just last, Neal, for you, if we were to take the midpoint of your guidance, call it, from an EPS perspective, the $2.60, what are your expectations for gross margin and SG&A within that?

Just in total, Erinn, we're looking at a year that's going to be, on the gross margin side, we're looking for pick-up really in the retail side of the business. The wholesale business margins have been good. We expect that those will continue at relatively the same rates as they were for this year. As I mentioned, we're expecting some SG&A pressure so we'll probably have a little bit of pressure on operating margin performance in general for that entire business. As I said, the retail businesses we're looking for much more seasonal weather as far as Wilsons is concerned, that should help our margins and still continued increases on the GH Bass business, as well.

Our next question comes from Eric Beder from Wunderlich. Please go ahead.

You've talked before about how outerwear is about 35% of your business I think was the comment you made last year. What should we be thinking about going forward is going to be the percentage of business with outerwear? And when you look at Karl and Tommy, how are you going to, A, Karl, what is going to be the distribution strategy initially? And for Tommy how are you going to expand that beyond its core at Macy's here in the U.S.?

The first question relative to the size of our outerwear business, we're just shy of 40% outerwear. But if you look at Wilsons, Wilsons alone is about 70% outerwear. So where the serious impact in retail really exists for us is Wilsons. So, just maneuvering through a business that's faced with outlet stores, the premier outlet stores that we have that are in tourist centers that are dependent on foreign tourism, that was off dramatically, as well as the worst weather that I can ever remember, I would say that we're not likely to anniversary that with Wilsons. We're changing our product mix, to a degree. We had some deficiencies in fashion, not critical to the business, but we believe we can alter the assortment and make it better than it has been. We're altering the levels of inventory that we have. The sign on the door says Wilsons Leather. Leather is evaporated to a small percentage of what we do, leather being the highest ticket in the store. We were negatively impacted by that. So we're making the appropriate adjustments for Wilsons. And we include Wilsons as part of that 40% coats. On the wholesale side, we really don't see a major issue in being the dominant supplier of outerwear. We're clearly the dominant supplier in the department store sector for both men's and women's. In tough times, as I said before, the vendor base does change and we derive the benefits for that. We provide great margin for the department stores. They clearly don't want to give up the type of margin that they get on the outerwear side. It's the best that we provide for the retailer in any classification. So there's a desire to grow it, not to shrink it and we're there for long term in outerwear. As a matter of fact, we're adding another brand to it. We're adding Karl Lagerfeld as an outerwear brand this year. So, we don't have a fear of the outerwear business. And your second question, the distribution of Karl and Tommy are a little bit different. Karl, the initial distribution is to Lord & Taylor and to Dillard's and several specialty stores. It's a breadth of product. We've shipped footwear for the first time. The footwear is retailing very well. We're pleased. We've gotten decent distribution for Lord & Taylor. We clearly are obvious on the footwear floor and we're retailing exceptionally well. The Dillard's to a lesser degree has distribution and those shoes are selling well, also. We've made a couple of fashion faux pas on our early distribution, as we always do. That's not a problem for us. We've adjusted some of the retails to clear some of the inventory at retail for Lagerfeld. Second delivery is much better and we believe that our third delivery is exceptional. I encourage you to shop the store, shop Lord & Taylor and Dillard's and see what the product looks like. We're proud of it, as always. We've got best-in-class associates that have joined our Company to help grow it. This being a troubled time for a lot of brands has given us the opportunity to get the best talent in the industry to spearhead all the initiatives that we're going forward with. Tommy has got two issues. One is the exclusive distribution to Macy's is ours to deal with in FY '18. We basically take over at the beginning of next year for the sportswear piece that services only Macy's. All the other classifications and they are coats, dresses, suit separates, denim, all the other and performance apparel, all those classifications are basically open to distribute. It's basically the same distribution as Calvin Klein. It's department stores, it's a level of off-price, it's a level of club business. And it's a large initiative. It's not often that you're able to sign a license and not make an acquisition, not go out-of-pocket, not affect your balance sheet and feel comfortable within three years you have $0.5 billion worth of business that you can generate. And that's a fair number. Part of it comes through the guarantee from Macy's and the other pieces come from the knowledge that we have and the capabilities we have in building product, shipping product and having great retail partners that are supporting the real estate that we need to make us feel comfortable that, that number's a realistic number.

Our next question comes from Rick Patel from Stephens. Please go ahead.

Can you just delve a little deeper into your outlook? As we think about your first quarter earnings guide for lower year-over-year earnings growth, are you being hit by continued mark downs in the new quarter or is it just a function of higher expenses that's the primary culprit there? And to what extent is there an element of conservatism in those numbers?

Just on the first quarter, really, let me start in order of magnitude. In terms of P&L, we're probably most impacted in the first quarter with the incremental spend on our new initiatives. I mentioned the categories before. That's probably, in terms of magnitude, the greatest impact on our first quarter, so we'll definitely see SG&A pressure. We're building those businesses and the sales are still nowhere near normal or where we expect them to be. The second issue really is an impact of reduced gross margin percentages. We're still finding in our Wilsons business, has still continued to never have seasonal weather for the entire season that's impacted them. They've continued to move out of inventory. There's also a drag to some extent on the GH Bass business as that has impacted traffic, as well. So, certainly some pressure on the retail side of the business in the first quarter. Much less of an impact in terms of mark downs. Just to be very clear, when we end a season we accrue for all the mark downs as far as the items that we've shipped. So, we've had all our conversations. We've cleaned up all of our inventory and our positions through the end of the year. And we essentially go into the first quarter based upon how we perform at retail. Other than the general reality that retail is impacted, coming off of a very weak fourth quarter and things have not really picked up extremely well, we continue to see our brands performing at the best within categories, but we'll see some pressure on the wholesale that will not be a function of catching up to prior mark downs. It's really more a function of what we see going on in the marketplace today. So just to recap that for you a little bit, gross margin pressure, mostly on the outlet side of our business, some of the wholesale side of our business. Certainly SG&A pressure from a leverage standpoint with respect to the new initiatives. And since I'm giving you color on the first quarter, I might as well lead a little bit into the second quarter, as well. The one thing that we do continue to see in the second quarter, we'll continue to see that expense pressure. Hopefully by that point in time our retail business will start to normalize margins but we will have SG&A pressure into the second quarter. We also think that we'll have to some extent the outerwear season is certainly one that is more challenged as we go into this year and the second quarter is the start of our outerwear shipping. So, we do see a little bit of pressure on the top-line sales in terms of the ability to get that early outerwear out as early as we've done in the past. There may be more of a focus on taking that outerwear closer to what will hopefully be seasonal weather next year for us. So, that's the additional guidance I'd be willing to give you at this point on the quarters.

And can you also just revisit your long term growth algorithm? Based on the guidance for 2016, looking for mid to high single-digit EPS growth, has your thinking changed about the longer term potential for the Company?

The potential for the Company has never been better. I think we've cited three huge opportunities. The opportunities we have between Bass, Karl Lagerfeld, Tommy Hilfiger and the organic growth that's still achievable and that we still factor into our businesses, can double the size of our business. It's an amazing spot that we're in. We're explaining the situations of the past and the future's never looked better. We have assets that are deliverable assets. We have talent in place that can make it happen. We have capital that can support the growth of the business. We have no long term debt. So, I would tell you the prognosis for the future has never, in my career, been better than where we sit today.

And Morris, can you give us more color on the opportunity for Hilfiger? I know in the past you've mentioned that Lagerfeld could be a $500 million opportunity. So, as we think about the $1 billion that would apply to Hilfiger, how do you see that breaking out across all the different categories that you've lined up?

It's difficult for me to break it out by category, but all I can tell you is it took us a decade to assume all the rights that we have with Calvin Klein. And with Tommy Hilfiger, it took us two weeks to negotiate through a contract and we have what took us 10 years to amass with Calvin Klein. And we have an amazing partner that is aligned with us in the desire to grow the brand. Steve Shiffman, who leads the charge, has been an amazing partner, cooperating at every level. We believe that it's a reasonable bet that we can achieve what we've achieved through Calvin Klein with Steve Shiffman, we can achieve with Gary Sheinbaum in Tommy Hilfiger. Gary has worked with Sammy Aaron in carving out the essential elements of the business that can help us grow rapidly. We're on our way today. The only thing we lack right now is a showroom that can properly house it. The product got here before the showroom did. And there's excitement in the industry for what we're showing and what we're beginning to deliver. I'm comfortable that the numbers are realistic.

Our next question comes from John Kernan from Cowen. Please go ahead.

I just wanted to go back to the first quarter again. There is a pretty big acceleration in the year-over-year growth in terms of sales. I guess you're implying that things are looking better in certain categories. Can you walk us through what's gotten better since the end of the fourth quarter outside of outerwear?

John, really I would tell you that the outerwear story continues. The only negative that we're really looking at has been the outerwear story. That continues slightly into the first quarter. Our non-outerwear businesses have been growing at either high single digits or double-digit growth. We've done well in dresses, sportswear, in suits and handbags. And that continues into the first quarter, as well.

Okay. And then just looking beyond the first quarter and this year, the $1.5 billion in revenues that you've talked about, the incremental revenues from Hilfiger and Lagerfeld, can you talk about the expenses that are going to go into supporting that, but also the long term goal of double-digit operating margin that you spoke of in the past? How far out does that get pushed now that there are expenses in building these two new businesses?

I would tell you, look, ultimately when we build all these businesses out, there will be probably at around the same operating margins that we experienced today for our wholesale business which is now really a double-digit operating margin performance on the wholesale side of our business and ultimately the businesses that we're adding will be in about that same operating margin zone. The big issue for us in terms of getting to a consolidated double-digit operating margin is improving the retail side of the business. This is really the first time at the end of this year that we'll actually have incurred a loss or first time in over a handful of years that we've had a loss from that segment of the business. While it's small, that's unusual for us. We see no reason why that business can't get righted, both the Wilson's business returning back to where it had been and still improving. Just to remind you, the Wilson's business had really been a high single-digit operating margin business for several years prior to the rough patch of weather and now of course this year weather and tourism. We see no reason fundamentally why that won't get back to high single digits and then ultimately be a double-digit operating margin business. GH Bass has been a loser since we've taken it on from an operating margin standpoint. We've significantly improved that loss this past year. We're expecting small profitability out of it as we go into next year. And we continue to think that, that's a double-digit operating margin business for us. So, in total for us to get to the double-digit operating margin that we've been talking about, it really will be reliant on us improving the retail business and moving that from, really, what we're now looking at is, in the forecast, a low single-digit operating margin up to the double-digit operating margin level.

And then two quick housekeeping questions. Just going back to a prior question, the percentage of your business that is outerwear in the fourth quarter, did you give that?

We didn't but it runs, fourth quarter tends to be comparable to what we run for the whole year which is around 40% at wholesale. Of course, much more impacted by the Wilson's business is more significantly impacted in the fourth quarter where that would be slightly higher.

Okay. And then one final question, it looks like there's working capital tied up in the business right now with the inventory elevated. Can you help us understand what cash flow, free cash flow, looks like in your FY '17?

Sure. Without a doubt, the slowdown in terms of retail selling, we've got more inventory that we would have expected to have converted into receivables and then cash. Going into this year we were probably averaging about $45 million a year of free cash flow. This last year we were probably down at around $30 million if you added back the investment that we've got in Karl Lagerfeld. We were expecting to be probably closer to about $50 million of free cash flow this past year. I think the slowdown in terms of our business forced us to tie up more of our free cash flow and working capital. So, I think you're right about that observation. I think going forward we'll return to some nice, healthy increases in free cash flow going forward, should certainly be at that $50 million level or better going forward before we get into investments.

Our next question comes from David Glick from Buckingham Research. Please go ahead.

Neal, just a clarification on your guidance. That was very helpful on Q1 and Q2. On a consolidated basis for the FY, where are you planning gross margins relative to last year and are you planning SG&A deleverage, is my first question? I have some follow-ups.

Just to be clear, again, for the full year we're anticipating increasing gross margin percentage and that will be offset by increasing SG&A deleverage. And if you looked at our guidance and you rolled it out you'll see we're looking at a pretty flat year in terms of an operating margin percentage.

And then from a sales perspective, I just want to clarify, where are you planning your wholesale outerwear business? Where are you planning your Bass business from a top-line perspective? So, that implies obviously probably a double-digit non-outerwear business but I'm just wondering if you could break that out for us.

We're planning the outerwear business, as Morris said, that it will be negative mid-single levels at this point. The Bass business we're expecting essentially almost to anniversary the increasing comps we had this year. We had a comp increase this year of about 12%. We're expecting that same type of increase on Bass again next year. Just to give you a little more color, even on the Wilson's side, where we were about negative 7.5% this year, we're expecting about high single-digit comps for next year on Wilsons.

David, just to get back to Bass for a minute, Bass isn't exclusively a retail play. It's a licensing model. It's wholesale for us, both in coats as well as women's sportswear. So, there are elements of Bass that are working better than retail for the moment. As we get the retail aligned, as we make some adjustments in the way we promote, the way the store looks and the levels of inventory necessary to run the Bass stores, we have segments of the business that are working well. The licensing piece is working extremely well.

One last follow-up Morris for you, if I could. You issued equity a few years ago. Now you've generated a lot of sales growth opportunities, as you described, without making a major acquisition. Given where the stock is trading at the moment, you have a share repurchase authorization, would you consider putting your net cash position to work to buy back stock at this point?

We might. Our Board has given us the right to repurchase 5 million shares. We're reviewing it all now and we're going to do the prudent thing for ourselves and for the investment community. If we view it as the best use of our capital we will absolutely buy back stock.

Our next question comes from Liz Pierce from Brean Capital. Please go ahead.

Just a couple clarifications. On the Wilsons, when you talked about comp, that's a positive high single digit, right?

Yes.

Okay. And then in terms of also on the pack-away, I just want to make sure I understood what you said on the outerwear. You packed away the core basic problem and moved the more fashion off into the off-price channel?

Yes. We either promoted the fashion through the department store sector or sold the fashion elements off to the off-price channel.

And that's just basically because you believe you can still sell, right? There's a longer shelf life theoretically if weather normalizes.

Absolutely.

For the stuff that you packed away.

The stuff that we packed away and didn't aggressively push through the retail venues that were there, we believe that we can benefit long term by reassorting it, then re-shipping it for fall of 2016.

Okay. So just feeling that it doesn't have as much risk, just more shelf life. And then in terms of Wilsons, you talked about the change of mix. This is also largely an outerwear question. Given how difficult it is to predict the weather and consumers continuing to buy closer to need, are you rethinking how you do outerwear on a larger scale, like more layering pieces, less heavyweight, really changing that mix up?

Yes, absolutely. What we're doing is creating either systems jackets that have the ability of taking off a layer and wearing an inner layer. We're producing transitional weight garments. So, the assortment is changing as the consumer needs and consumer taste levels change. A lot of our outerwear can be worn in mild environments versus all the heavyweights that we had done historically.

And then my final question, just on Jimmy Fallon, I think you had mentioned at ICR that you had recently signed up more universities. So, two questions. Are you continuing to build that book of business, not only in number of schools but across maybe other categories?

Yes, very much so. The number of schools that we've signed on are north of 30 important colleges and universities. And the initiatives that we're looking at don't necessarily have to have the application of team sports or colleges. The concept of logo placements can work for premium product, they can work for pedestrian, just wearable apparel. So, we're looking at all opportunities with Jimmy Fallon. We've got a big launch that's planned for major league baseball and we have an ongoing situation with NFL.

[Operator Instructions]. And our next question comes from Jim Duffy from Stifel. Please go ahead.

Neal, can you size the expected revenue contribution from the new Tommy licenses and Lagerfeld in FY '17. And then, Morris, I have some bigger picture questions on strategy.

Jim, it's too early for us to do that. We've been on sale for parts of the year. We haven't decided not to size that just yet.

Okay. Morris, question's for you. You have a lot going on in the portfolio. Do you see any opportunities for active portfolio management, maybe exiting some businesses which are less strategic, such that you can prioritize resources to others that have more attractive returns? Is that part of the thought process?

We have done some of that. We've exited some of the smaller businesses that are space intensive, people intensive and, really, at the level that we're at and the sights that we've set for ourselves don't rationalize in our business any longer. There have probably been a half a dozen of those that have been eliminated, things like Sean John and Jones New York, to a major degree, Nine West, the dress business at Andrew Marc. There are a lot of elements that make up the portfolio of brands and businesses within G-III and we've exited them. We're under review with several other pieces of business, some that are mildly profitable and some that contribute to the reduction of our corporate overhead and some that don't will go away.

And then a question for you just on the retail footprint, given the challenges we've seen distort traffic of late, do you view that as a transient phenomenon? And what are your thoughts on allocation of capital towards owned retail on a go-forward basis?

I'm not aggressive on opening new stores. Currently we're committed to several leases for this year. For Wilsons we have five new stores opening this year whereas last year we had about 15. So we've tempered the growth until we figure out what the consumer is all about. We're a little confused. We don't know if there's long term instability on outlet centers such as Orlando, Las Vegas, Woodbury Commons, Sawgrass. These are premium centers for us, premium in the sense that they provide the biggest share of our revenue. And as I said earlier the traffic is down dramatically. When you're down in your top stores, it's very hard to redeem it in your local centers. So we're reviewing what we do with retail. We have three different models. They all have different dynamics. We're finding some wonderful opportunities in Vilebrequin. We just opened three new locations in Germany. Those locations weren't available to us in the past. The locations of Vilebrequin are very small. The CapEx in these locations is very small, as well. And they fit into the long term plan of the business. We have an unblemished brand that's careful on how we open stores and we will continue to open those. We flipped a little bit. Two years ago the strategy was to open more American stores and less European stores. Today, we flipped it. Europe is doing better than the states and we have opportunities that we never had in stores. The third model is the Bass model and that's a little interesting. I encourage you to walk into a Bass today. If you were in a Bass store a year ago you'd see a dramatic difference in how the product is presented, the quality of the product, the promotions that are being run throughout the store. And I will tell you that we're opening an outlet store in Manchester, Vermont and another one, a refit, in Woodbury Commons in late April. The Woodbury Commons will show you what the future of Bass might look like. The store's a little bit smaller. It will be much more intensive on the footwear side of the business. And we believe that we have a gem in our hands that just needs a little bit more love before it gives us the earnings stream that we think is still attainable.

And our last question comes from Erinn Murphy from Piper Jaffray. Please go ahead.

Just two clarifications. First, on the outerwear order book, I thought earlier in the call you mentioned that it was trending flattish at department stores but that was being somewhat offset by more of a cautious off-price outlook. I think Neal, towards the end of the call, said it was actually down mid-single digits. Is that accurate and that's all in? That's my first clarification.

What I'm referring to is the full year going forward and the order book really is soft at this point relative to where we've been in the past. And I think that's retailers really also still trying to figure out and adjust to what their formal plans will be for outerwear next year.

What percent of your order book is completed at this point versus what's normal this time of year?

We're generally around 50% complete for the year in total, all categories. And we're slightly below where we were last year.

Okay. So, then if you're slightly below where you were last year, with about 50% done, to get to your negative mid single digit all-in you're assuming that things don't meaning things actually get worse, just to clarify what's in your guide.

No, it's too early to do that math, I think, Erinn. We're still anticipating lots of orders to come in on both categories. So we're not anticipating any future degradation to that book.

Okay. And then just a second clarification, just on the comp outlook for Wilsons, I think you said high single-digit positive comp, with the year that we just had what gives you confidence in this trend? And is that something that you're seeing already quarter to date in the first quarter?

We're not seeing it yet. We're really still experiencing unseasonable weather and actively promoting to move goods where that makes sense. What gives us confidence at this point is that we really think that this is a very unusual weather pattern that we experienced for this past year. If you look at the previous few years of Wilson's performance, the performances was much better and we don't see anything fundamentally wrong with our box and our model of what's going on at Wilsons. We think that in terms of bounce back, we think we will get a bounce back on weather. In terms of tourism, not sure that that bounces back quite as quickly or as robustly.

Erinn, in a follow-up to Neal's answer on our order book, when you have elements of our business that are bought, they're not seasonal, there are multiple buys. As we build a dress business that delivers many times a year, as we build a sportswear business that delivers many times a year, as we build a footwear business, those orders come in by collection versus the coat business where your orders are in early. There is an element that you can refer to that includes just the coat business but what we've just done is we've put online Tommy Hilfiger, we've put online Karl Lagerfeld, we’ve Bass sportswear. All these orders are not in, they're not in early. They're bought relative to a collection. So the anticipation is that relative to our plan, the percentage of our order book would be less. That's the rationale.

I will now turn the call over to Morris Goldfarb, Chief Executive Officer, for closing remarks.

Thank you, operator. Thank you for joining us this morning. And hopefully we have results that are more appealing for our next earnings release. Thank you for staying with us and have a good morning.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.