Welcome to the G-III Apparel Group Third Quarter Fiscal 2017 Earnings Conference Call. My name is Katie and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Neal Nackman, CFO. Mr. Nackman, you may begin.

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 non-GAAP net income per diluted 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 Web site. I will now turn the call over to our Chairman and Chief Executive Officer, Morris Goldfarb.

Good afternoon and thank you to everyone for joining us. With me today are Sammy Aaron, our President and Vice Chairman; Wayne Miller, our Chief Operating Officer; Neal Nackman, our Chief Financial Officer; and Jeff Goldfarb, our Executive Vice President. Today, we will discuss our third quarter results and also provide you some more color on our transformative acquisition of Donna Karan, which closed earlier today. There were important bright spots in our third quarter results, but on balance it was a challenging environment. The strongest part of our business continued to be a non-outerwear wholesale. We maintain good sell-through drove 20% top-line growth and we made plan. The wholesale outerwear category was a different story in the third quarter. We were prepared for softness as we talked about last quarter. But, the repeat of unseasonably warm weather created even more pressure than we anticipated. With several years of hard work, strong brands and great products, we have driven outerwear from nearly 100% of our wholesale mix 10 years ago to approximately 32% this year. With the addition of several Donna Karan product categories, the overall percentage of outerwear will further be reduced over the next several years. This reduction minimizes our exposure to unseasonable weather. Our own retail business continued to reflect sluggish traffic and spending patterns and fell short of plan for the third quarter. This could have been mitigated to some extent had we done a better job of designing and merchandising handbags and accessories in both Wilsons and Bass in the quarter. We are managing the headwinds related to the weather and slow traffic and we will continue to control what we can in our retail business. We are managing inventory tightly, reviewing operating expenses and working with our landlords to improve our lease portfolio. We…

Thank you. Net sales for the third quarter ended October 31, 2016 decreased 2.9% to $883 million from $909 million in the same period last year. Net sales of our wholesale operations decreased 1.6% to $794.4 million from $807 million primarily as a result of a decrease in shipments of outerwear products. Our non-outerwear product categories performed to plan and we are up strong double digits. We had good increases in our Calvin Klein handbags and sportswear categories and the new launches of Karl Lagerfeld and Tommy Hilfiger also achieved their plans. Net sales of our retail operations decreased 14% to $107.2 million from $124.7 million primarily due to same-store sales decreases of 20% for our Wilsons stores and 11% for our G.H. Bass stores compared to the prior year's quarter. Our gross margin percentage was 36.4% in the three month period ended October 31, 2016, compared to 37% in the prior year's period. The gross margin percentage in our wholesale operation segment was 34.4% compared to 34.7% in last year's quarter. The gross margin percentage in our retail operation segment was 45.2% compared to 45.9% in the prior year's quarter. Gross margins decreased in our Wilsons business as a result of the unseasonal weather, highly promotional environment and efforts to meet our objectives of getting our inventories in line for the upcoming season. Total SG&A expenses increased to $198 million in the quarter from $191 million in the same period last year. This increase is primarily due to increases in facility costs. The increase in facility costs is due to increased shipping from our third-party warehouses and higher rent expense as a result of additional retail stores opened since the prior year. In addition, we incurred increased promotional expenses on the launches of Karl Lagerfeld, G.H. Bass and Tommy…

We have systematically steadily and thoughtfully diversified into a wide range of categories and brought new brands into our portfolio. With Calvin, Tommy, Karl and Donna Karan along with others, we have great points of entry and pass to solid growth in every major branded category. This now includes a wide array of high margin global licensing opportunities for our own brands. We think that over time, we can be generating licensing revenue of $75 million to $100 million annually. While the scale and the pace of our overall growth should be very strong. It's important to remember that we are systematically building the business on a solid foundation, so that we can create long-term sustainable growth. Across the organization, we have the commitment and the talent to create that kind of business and make it work extremely well for our shareholders, our customers, our partners and for our own company. No other company operating today has been able to assemble a portfolio of brands like ours. No other company has the kind of long-term track record of accomplishment that we have put on the board. No other company has been able to evolve over time and compete as effectively as we have. Our entire management team is dedicated to making the most of the incredible, diverse, deep and global opportunity set now in front of us. I thank you again for your time today and operator. We are now ready to take some questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Eric Beder from Wunderlich Securities. Please go ahead.

Good afternoon.

Hi, Eric.

Hi. Could you talk a little bit about the -- when you look at the Tommy Hilfiger rollout, where are you seeing the strength there? And how do you look upon that brand going forward as a driver here in terms -- and they are able to give you even better leadership position in some of the women's categories?

We've currently distributed, as you know, we have had the license for coat both men's and women's coat historically. And those businesses are very strong. The men's brand matches up in performance to Calvin Klein. And the women's is slowly getting there. And so those are well-positioned for the future. The categories that -- the new categories that we have shipped are dresses, suit separates, performance and we are shipping a little bit of denim and all of them are working extremely well. We had an incredible weak on the performance side in their department stores. The sell-throughs just blew away plan. We are quite energized on the potential of -- pretty much all the categories, suit separates has done well. And dresses need a little bit of work, we know -- we know where we missed a little bit. The dresses were good. They need to get a little bit better. We are on it. And the classification is that we are eager to get out there or the sportswear classification for Q1. So, this will be a large significant piece of our business. I've stated that. It is a driver for the future for us. We have a really good situation with PVH. They had the confidence level in us -- to give us again one of their two trophy assets to manage on the women's side. We won't disappoint them. This is going to be a fabulous piece of business for us.

Great. And I will do the follow-up. So the handbag segment, you have a number of department stores [indiscernible] is pulling back on handbags. How do you look upon that as an opportunity, I mean, is it an opportunity for you to get more aggressive in the handset space?

We currently do handbag. As I stated earlier, let me get rid of the piece that troubles us the most, which is our own retail stores. That doesn't enter into the areas that we are really talking about. We've made some merchandising mistakes. We made some fabric mistakes both for Wilsons and for Bass; those are being corrected as we speak. Wholesale distribution, we are doing very, very well, our business is growing -- we are going to be north of 25% in growth in the Calvin Klein handbag business, what you need to remember is, we don't have the scale of business that Michael Kors or Coach, we are growing our business. We are growing it well. We have the support of the retailer and we have the demand of the consumer. What we are anxious to do now is to launch DKNY. We believe that is great appetite for DKNY going forward. The best part of DKNY's business currently really is the handbag business. So we are going to fast track it. We are going to implement our sourcing team and engage them to buy a little bit better. We are currently designing product that we believe can appeal to a larger segment of the population. And I think we are going to have another great brand in handbags in the next 18 months.

Great. Good luck for the holiday season.

Thank you, Eric.

And our next question comes from Ed Yruma from KeyBanc Capital Markets. Please go ahead.

Hi, good afternoon guys. Thanks for taking my question. I guess first on the guidance revision, is it fair to assume that really the outerwear business in its entirety was responsible for the shortfall and I guess as you weigh the two components, how much was the shortfall on to the lower wholesale segment versus how much is due to underperformance at places like Wilsons?

With respect to the miss in the third quarter, the wholesale top-line misses really all outerwear -- the retail misses we referred to -- we really miss comps in both chains by almost 15%. We were also late on margin relative -- gross margin percentage relative to where we have forecasted. So, as Q3 is concerned, our retail business really was the more painful part of the business, it was a combination of really Wilsons and Bass. The outerwear miss that we had in wholesale, we actually were fortunate to have some offsets, we had some higher gross margin than we had forecasted in the wholesale business. We had some reductions in SG&A expenses relative to what we forecast and that's really sort of a summary of the Q3 part of the miss. With respect to your question in terms of the fourth quarter and the guidance, the biggest part of our change in terms of Q4 is an adjustment to what's going on at retail. We were previously forecasting our comps to be in the mid-single digits. We pulled them both back to low single digits. We have also pulled back the gross margin expectation, while we do expect them to improve over the prior year, compared to where we were previously forecast, we pulled that back. The outerwear refinements in the fourth quarter are negligible.

Got it. Just to underline the point a little bit, I think at one point you had indicated that you had plan for some reorder business in the fourth quarter that you maybe historically haven't seen, but expected assuming a more normal winter now. I'm assuming that's not happening. And I guess just -- I'm trying to score that in your comment that, you feel pretty good about your outerwear inventory levels. I guess, maybe how do you feel about them in the wholesale channel as well. Thanks so much.

So we anticipate some reorders. Our business has gotten somewhat better post Black Friday. We believe that we are positioned well to service reorders. We believe we are positioned well to manage our inventory. We learned our lesson a year ago. Our responses a year ago to the inventory issues came a little bit late. And this year gauging the business, we are managing to move inventory. We are managing to cancel some of the purchases that we have made. And we are managing to hold piece goods at the factory level for production at a later time. So, we are very comfortable with where our inventories are. And we believe that there is still a good opportunity for strong coat season. We haven't had a stretch of cold weather yet. So, if we have it this week, we could still have a reasonably good coat season.

Okay. I got. Sorry, just the final piece. So does your guidance assume that you have a reasonably good coat season or is that -- is this kind of a -- the conditions are kind of what they are, you haven't had cold weather and so, you just assume that it's going to be a pretty tough winter for the balance of the year? Thanks so much.

Our guidance doesn't assume that we are going to have a good coat season.

Great. Thanks so much.

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

Great. Thanks. Good afternoon. I guess fielding on a question on the Q4 guidance. I just want to make sure I understand that. So, if I look at Q3, the miss is about 57 million relative to kind of where you guided and the full year, I believe you brought down by about $70 million, $71 million. So, Q4 is really just coming in by about $14 million? Is that -- that kind of readjustment, is that just a difference in comps going from an up mid singles to a low singles? And then, Neal, could you just breakout what percent is reorders for outerwear in Q4, that would be helpful. That's my first question.

Yes. So, your figures are just about accurate, it's only reasonable Erinn. The fourth quarter pull down is a function in terms of top-line significantly going from the mid-single digit comp to the low single digit comp. The pull back in terms of again, the total profitability on the fourth quarter is that, we did pull back margin as well in terms of our forecast assumptions from the fourth quarter. And as I said, just a small adjustment to wholesale forecasted sales in the fourth quarter. So it is significantly -- the comp decline in retail. With respect to your second question, we are still looking for a significant number of reorders and close out orders to take place in the fourth quarter. I can't give you a specific number on that. But that is a part of our forecast for the fourth quarter. In terms of our total outerwear book, we are really looking to return to probably where we were slightly less than where we were two years ago, last year was truly -- we believe is an anomaly for us.

Okay. That's helpful. And then, my second question is just on DKNY, I think Morris you mentioned that Caroline would be leaving the company, any thoughts on changing up the design direction that you have there currently. And then, when do you feel like you will be able to affect a product for that business. And then, I guess, the second piece on DKNY for Neal, I may have missed this, is it till a $10 million EBIT dilution in terms of the -- or the EBIT contraction in terms of DKNY for next year. And then, with the financing, should we be thinking about this is about $0.65 to $0.70 dilutive all-end? Thank you.

So Erinn, in design and maybe a little bit of distribution, I have mentioned that we are redirecting the brand to some degree. To do this, we're going to have a plan to reshape to redistribute and reintroduce DKNY from its current niche path to a more commercial direction which will -- it should create the demand that we are looking for. And we are in the middle of designing it now. Some of the product will begin to trickle out in the second quarter; most of the product will be in for the third quarter that's where you will see what we plan on spending for. We are excited by it. We are quite energized. It will take a little time to integrate two cultures. And we will do amazingly well with this brand. This is the future of GIII.

Erinn with respect to your question for me.

Yes.

The operating -- we are still comfortable with the operating losses that we put out at about $10 million. In terms of dilution from our debt load, we are taking on about $650 million of additional debt, the blended interest rate on that is probably just shy of 5%, so that will be incremental. And we have also got the incremental shares that we have issued that dilution is roughly about 6%.

Great. Thank you, guys. And best of luck.

Thank you.

[Operator Instructions] And our next question comes from David Glick from Buckingham Research. Please go ahead.

Thank you. Just a -- you got another question on Q4. I mean, the revenue increase seems pretty significant, it's about $100 million. Maybe just simplest thing to understand Neal, if you could break that dollar increase down by -- the dollar increase in outerwear, your organic growth and you obviously had a lot of pipeline failures, you are shipping new categories at Tommy Hilfiger, Karl Lagerfeld, they are non-comp. I think investor just trying to get comfortable that after a couple of tough quarters that you can hit that wholesale number. So breaking that would be helpful, if you can.

Yes. Let me give you a little bit -- a little more color then on that David. We are looking for the outerwear increases to be about 10% from where we were before. Then, that's --

It's 10% versus last year or higher than what you had before?

10% half of last year.

Okay.

That’s roughly $10 million. The balance will be in the non-outerwear categories. I would say that if we were to think about that increase, which is quite significant about half of that relates to the new businesses. And then, half of that is still going to be driven by the Calvin Klein or Jessica Howard businesses.

Okay. so that organic growth if you will -- that rate of growth is consistent with kind of where you have been running year-to-date, and you just have more kind of new categories that you are shipping?

It's actually up a little bit from where we have been year-to-date. We are still looking for that core group to be in that high single-digit. So this is slightly higher for us in the fourth quarter.

Okay. And I think the other issue that, I think folks are struggling little bit is, the retail comp guidance relatively to your trend, you did note some improvement particularly it sounds like the last week. How can we get confidence that you are going to kind of move out of that negative comp territory particularly in Bass, which doesn't seem to have improved so far in November. But, just how do we get some comfort level that we can turn positive here. Obviously, December has to be up pretty significantly?

David, we are still -- in both our chains were weather sensitive. Wilsons is a co-chain. The comfort I can give you is, what I believe, I believe that it will get cold. Wilsons is positioned to do better with their inventory. And Bass, as I stated earlier, it's taking a little longer. We have strategically repositioned the brand where directing the brand toward a younger customer that is now beginning to pay attention to the brand. Social media has been very kind to us. We spent a lot of money marketing this brand and a lot of effort. And there is not a day that there is -- there is an editorial piece that involves Bass, in many cases, it's been described as an essential component of somebody's wardrobe. So [indiscernible] has became a hot shoe, the quality of the footwear today is light years away from where it was a year ago. The apparel is strong. We need to make that younger customer feel comfortable in our doors. The department store segment, our licensees are doing well with the product. PVH has got the men's piece of it and they are virtually in every door at Macy's and expanding into many different department stores. They are doing well in Genesco and the same regard is also doing well. Our outlet partly weather, partly traffic, partly tourists, that needs a little bit of work. So for me to sit here and make you comfortable that that it's going to get better and better, I can assure you that we are not sitting still. We are negotiating with our landlords. We are promoting where we believe it's efficient. We are managing our business as efficiently and as properly as we know-how. Those are the assurances that I'm qualified to make, weather, I unfortunately I can't do that one.

Thank you. Just one last one, if I could. The DKNY distribution, should we think of and your customer base to be similar to Calvin Klein and obviously, Tom Hilfiger has been historically or at least recently historically exclusive in Macy's. But you are broadening it. But, should we think about the -- your biggest customers for Calvin and Tommy, you are likely to be -- this same hierarchy for DKNY?

David, we distribute Calvin Klein to virtually every department store in the country. We are short of [indiscernible] maybe Neiman market. So, to the extent that they all share accounts absolutely. The price points of DKNY should be a little bit higher and the attitude of the product is going to be different. But, yes, the audience that we have domestically is similar. The added feature for us is that we have global distribution for the first time with this brand. There are global distributors, global partners, global franchisees and global licensees that we'll be able to take advantage of in this initiative. So, it’s a broader distribution than Calvin Klein quite honestly. And it's both genders. Its children. Its home. Its many different classifications and product. It's fragrance. So, in some element of the business you can compare it to Calvin. But, it's a far broader distributed brand for us. It has the ability of being distributed far broader than Calvin.

Thank you very much for the color. I appreciate it and good luck in the fourth quarter.

Thank you, David.

And our next question comes from Rick Patel with CLSA. Please go ahead.

Thank you. Good afternoon everyone. I was hoping you could talk about the transition of DKNY, as it moves out of your current distribution points into those that you see as a more appropriate. When exactly does that process begin and how long does it take? And then, secondly, as we think about liquidation sales that may need to happen and the impact that could have on sales and margins. Is it safe to assume that all of that is baked into your current guidance of $10 million operating loss for 2017, or is that a work in progress that you still need to work on?

Rick, it's a safe assumption. Again, we are in control of the inventory. What has been sort of kind towards is the fact that, the product is not over distributed in North America. It's got a small distribution, it's tiny. So we start almost with a blank canvas as far as inventory is concerned. And we are positioning it -- it has an image where it's been well-marketed as more luxury and aspirational than we intended to be. So, we are going to bring it down a notch or two. And we are designing toward it now. So, you will see by third quarter, you will see what the brand stands for. So, we have started that process through design. We are working on marketing plans and we have engaged the team at DKNY. We have been fully transparent with them as to where this brand is going in our hands. And the collaboration of both our teams is going to make this work quickly.

And given the potential distortion that Donna Karan could have on your margins next year? Can you talk about the outlook for gross and operating margins as we think about your retail versus wholesale segments as we weigh, not just on the Karan but also the need for potential markdown support versus changing product mix in general?

Rick, it's too early for us to talk about the gross margins and operating margins for next year. Obviously, we are going to be looking for improvements. We got to make our way through this season in terms of outerwear and come through and see how our retail segment performance as well. So I think there is -- at this point it's a little premature to roll GIII's core business into next year. In terms of Donna Karan, we certainly are of the opinion and feel confident that over the mid-term, we are going to get improvement in terms of operating margins. And we have said before that's a function of not having to pay a license or royalty. And that's the function of having a much stronger licensing revenue stream that's highly profitable. So, we have forecasted out three years that our operating margins at Donna Karan will get to -- about the 14% level that will certainly improve where we are today. Certainly, in terms of our current order book, as we look into spring, we are very comfortable where with the way we have shown and taking order so far.

All right. Thank you. And good luck this winter.

Thank you, Rick.

Thank you. This concludes the question-and-answer session. I will turn the call back to management for concluding remarks.

Thank you for staying with us this afternoon. And I wish you a happy holiday season and talk to you soon. Thank you.