G-III Apparel Group, Ltd. (GIII) Q1 2018 Earnings Report, Transcript and Summary

Welcome to G-III Apparel Group First Quarter Fiscal 2018 Earnings Conference Call. My name is Silvia and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Neal Nackman, Chief Financial Officer. 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 and loss, non-GAAP net income and loss per share and to adjusted EBITDA, which are all 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 and Chief Executive Officer, Morris Goldfarb.

Good morning, and thank you for joining us to discuss our first quarter results. With me today on the call are Sammy Aaron, our Vice Chairman and President; Wayne Miller, our Chief Operating Officer; Neal Nackman, our Chief Financial Officer; and Jeff Goldfarb, our Executive Vice President. Our first quarter wholesale results were strong, with net sales up 18% over last year. We have a powerful portfolio of brands and have creative compelling products across many categories. This has enabled us to be one of the most valuable vendors to our customers. In demand brands and high value merchandise are part of the solution for retailers. Offsetting our wholesale strength were continued challenges in our own retail business. Traffic declines and related margin pressure from increased promotional activity are persistent. Our comp sales at both Bass and Wilsons were down approximately 10% for the quarter as expected. We remained laser focused on our strategy of eliminating exposure in this area. We are closing stores, we are repurposing stores to DKNY and Karl Lagerfeld, we had lowered the operating cost of our retail business and we are enhancing our product offerings. Our DKNY and Donna Karan transition and wholesale launches are moving full steam ahead. We have brought to market a comprehensive and coordinated assortment of major categories for both DKNY and Donna Karan. The response and initial bookings has been very encouraging. Our Donna Karan businesses will become profitable beginning in the second half of this year. With that basic backdrop, I’ll provide some highlights from the first quarter. We grew net sales in the quarter by 16% to a first quarter record of $529 million compared to last year’s $457 million. Our net loss of $0.21 per share came in better than our forecast for a loss of $0.41 to $0.51 per share. The strength in our wholesale business is considerable and we believe it will continue. Since last year we have launched a number of important categories on to the Tommy Hilfiger and Karl Lagerfeld brands. These new merchandise assortments are creating opportunity for our retail customers to drive traffic and sales. Today’s bookings for Tommy Hilfiger have nearly tripled last year’s level and Karl Lagerfeld is up nearly double last year’s level. We also will see a meaningful contribution from our fall launch of the Donna Karan and DKNY brands. It remains a bit early and the importance of execution has never been greater. But we are right where we need to be to drive a solid overall second half and a full year performance. Let me provide some more color on our first quarter and future plans. I’ll start with a more detailed update with respect to our own retail operations. First, with respect to expense reductions, we have already eliminated $4 million of annual run rate expenses, we have identified another $8 million. We are confident that by year end, we will have achieved $12 million of run rate expense savings. We are also reducing the size of our fleet. We began the current fiscal year with 353 Bass and Wilsons outlet stores. Over the course of the first quarter we closed 28 Bass and Wilsons locations out of the total of 69 planned closing for the current fiscal year. We're planning to close an additional 45 locations next year. In addition, we are repurposing stores to DKNY and Karl Lagerfeld. Last year we repurposed four outlets and expect to repurpose 15 more locations later this year. It’s early, but we've seen strong improvements in store economics asset conversions with forecasted annual sales gains of more than 40% in these locations. With only 44 DKNY outlets today there is room for DKNY conversions over the next 12 to 24 months. In total, with both closings and conversions, we expect a total reduction of 129 Bass and Wilsons locations bringing a store account for both brands to 223 from a present level of 353 locations. We expect our newly designed DKNY product to improve the results for our DKNY outlets. We've seen dramatic sales improvements with some early deliveries of our new performance wear and dress styles. We are revising the merchandise assortment at Wilsons as well. The offering at Wilsons will be more focused on national brand, as well as more aligned with projected best-selling outer wear categories for the upcoming holiday season. At Bass, our footwear has been upgraded considerably and are sold well in our own outlet -- in our own website. We expect better shoe sales in our own stores this upcoming holiday season. That said our plans for the second half of the year with respect to both Bass and Wilsons are modest with mid-single digit comp gains anticipated. Our Bass licensing partners led by PVH, Genesco and Overland continue to perform well. We've also launched Bass men's outer wear at wholesales using our in-house expertise. We are confident that expense reduction initiatives, reducing the stores fleet and enhancing our products will greatly reduce our losses and ultimately make our own retail stores a profitable area of business for us. We’ve seen our Vilebrequin business stabilize and begin to improve with increases in both Europe and the United States. Our product has never been sharper and we believe that is driving improved results for Vilebrequin. Our online shopping experience has been greatly enhanced and we see this area being a contributor of improved results going forward. Our Vilebrequin management team is very focused on building a bigger more profitable business over the next several years. With respect to e-commerce, we’re certainly seeing the opportunities associated with changing consumer behavior. In our own e-commerce business which include DKNY, Karl Lagerfeld, Vilebrequin, Bass, Wilsons and Andrew Marc we’ve seen a 13% increases sales in the first quarter. We are working to embrace these emerging opportunities for growth, while remaining faithful to the needs and concerns of our traditional retail customers. We're also seeking to take advantage of the same online opportunities. I’ll now turn to our wholesale business which continues to produce strong results. As we’ve said in the past, our goal is to be the premier wholesale provider of outstanding global brands. We are well on our way with DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld. Our department store business remains healthy, we are growing both organically and through acquisition. excluding the Donna, Calvin and DKNY brands net sales in our wholesale business was up 8% for the first quarter and we are plan to be up mid to high single-digits for the year. With Donna Karan and DKNY ramping up in the second half, our wholesale business is expected to generate net sales increases of approximately 18% for the full year. Our dress business remains strong, Calvin Klein continues to lead the market and the growth in Tommy Hilfiger dresses is impressive with sales up almost 50% over last year's first quarter. Our Eliza J and Vince Camuto brands also continue to increase the sales and profits. Additionally, Karl Lagerfeld dresses is expanding rapidly, we're excited to soon add Donna Karan and DKNY dresses, which should be a powerful category for both brands and a significant source of new growth for the us. Our women's sportswear and performance business is an important part of our growth. Calvin Klein continues to be a leading brand in these categories. Tommy Hilfiger sportswear performance and denim are doing well for the spring season. Lagerfeld sportswear continues to take its place in this category. With these key brands reinforced by new lines under Donna Karan and DKNY sportswear performance and denim will be a major driver for our overall growth in the future. Handbags remain a consistent performer and one of our most compelling opportunities over the longer term. We see avoid emerging in the market that we are in a very good position to fill. Our Calvin Klein assortment with multiple points of sale on department store selling floors is an anchor brand in this category. We're excited about adding Lagerfeld to this area of business. The iconic status of Donna Karan and DKNY is important in helping to secure some excellent real estate on the selling floor and will further contribute to handbags being an important category for us. We're planning outerwear up low single-digits this year with strength in the order book we expect a much better performance than we've seen over the past two years. Within outerwear our team sports business also has an order book up versus last year led by NFL. Other outerwear standouts are Calvin Klein, Tommy Hilfiger and Levi’s. The transition and launch of Donna Karan and DKNY is important to our overall financial performance for the second half. We are booking well, and the reactions to both lines across multiple categories have been very good. It's a great accomplishment to quickly bring two comprehensive and coordinated brand launches to market. We're working closely with Macy's to ensure smooth launch for its exclusive DKNY product for spring 2018. Our launch of the Donna Karan brand to better department stores is also preceding well and is on plan. Our DKNY licensing portfolio is now starting to build with a newly signed menswear license with PVH. Our marketing initiatives continue as we are coming off one of the most successful campaigns with Emily Ratajkowski an intimate hosiery and sleepwear. Our teams are working hard to demonstrate that this is an outstanding acquisition and that both the Donna Karan and DKNY brands are as iconic and as relevant as they ever were. With a portfolio to build on DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld we're now a company of giant. We intent to take a rifle position in the marketplace tough market or not. I'll reserve some comment for closing and will turn the call over to Neal for a closer review of our financial performance.

Thank you. Net sales for the quarter ended April 30, 2017 increased 16% to $529 million from $457 million in the same period last year. Net sales of our wholesale operations segment increased 18.5% to $453 million from $382 million. Net sales of our wholesale segment increased primarily as a result of an increase in net sales of our Tommy Hilfiger license products, driven by our new denim sportswear, women's performance wear and women's suits product lines, as well as from the inclusion of net sales of approximately $40 million from our new DKNY and Donna Karan product lines. Net sales of our retail operations segment increased 4% to $99 million from $95 million, due to the inclusion of net sales of $15 million from our new Donna Karan stores offset impart by a decrease in net sales at our Wilsons and G.H. Bass store chains. We reported same store sales decreases of 11.3% for our Wilsons stores and 9.2% for our G.H. Bass stores, compared to the prior year’s quarter. Our gross margin percentage was 38.2% in the three month period ended April 30, 2017 compared to 36.2% in the prior year’s period. The gross margin percentage in our wholesale operations segment was 34.2% compared to 32.5% in last year’s quarter. Our existing wholesale businesses had a gross margin percentage improvement of approximately 1%, this was led by our dress and sportswear categories and the Calvin Klein brand in particular. In addition, Donna Karan licensing revenues for which there are no associated cost of goods sold are now included in our wholesale operations segment. The gross margin percentage in our retail operations segment was 47.6% compared to 43.5% in the prior year. This increase in gross margin percentage is primarily due to our new DKNY retail store business, which had a higher gross profit percentage than the rest of our retail businesses. Total SG&A expenses increased to $197 million in the quarter from $153 million in the same period last year. This increase includes approximately $39 million of expenses associated with the newly acquired Donna Karan business. The remainder of the increase is primarily due to increased facility costs and advertising expenses, facility costs increased as a result of increased shipping, storage and processing costs incurred at our third-party warehouse as well as higher rent expense. Advertising expense increased as a result of an increase in coop [ph] advertising and additional promotional expenses related to the launches of the new product lines for Tommy Hilfiger. The net loss for the quarter was $10.4 million or $0.21 per share compared to net income of $2.8 million or $0.06 per diluted share in last year’s first quarter. On a non-GAAP basis, we incurred a net loss of $0.18 per share in the current first quarter compared to net income of $0.06 per share in the previous year. Non-GAAP results exclude the impact of professional fees and severance expenses aggregating $1.1 million relating to the DKI acquisition and non-cash imputed interest of $1.4 million related to the note issued to the seller as part of the consideration for the DKI acquisition. Included in both GAAP and non-GAAP results for the first quarter of this year, our operating losses of $14.8 million and additional cash interest expense of $7.3 million related to the operation and ownership of DKI equal to an aggregate of $0.29 per share. Regarding our balance sheet. Accounts receivable increased to $256 million from $214 million and our inventory increased approximately 10% to $446 million compared to $407 million in the previous year. At the end of the quarter, we had long-term debt outstanding of approximately $493 million, which we incurred in connection with the purchase of Donna Karan. In addition our cash balances at the end of the quarter were $67 million compared to $95 million in the previous year. Regarding our guidance. For the fiscal year ending January 31, 2018 we are now forecasting net sales of approximately $2.76 billion and net income between $52 million and $57 million or between $1.04 and $1.14 per diluted share compared to our previous guidance of net sales of approximately $2.73 billion and net income between $40 million and $45 million or between $0.80 and $0.90 per diluted share. Our forecast includes Donna Karan related transitional expenses of $7 million and non-cash imputed interest expense of approximately $6 million. On an adjusted basis, excluding transitional and imputed interest expenses, we are anticipating non-GAAP net income between approximately $60 million and $65 million or between $1.20 and $1.30 per diluted share. Our previous forecast was for non-GAAP net income between approximately $49 million and $54 million or between $0.99 and $1.09 per diluted share. The forecast to GAAP and non-GAAP results reflect expected operating losses of $21 million and additional interest expense of $28 million equal to an aggregate of $0.62 per diluted share associated with the Donna Karan business. Forecast also includes the full year impact of the issuance of approximately 2.6 million shares of new GIII common stock to the seller of DKI. We are now forecasting projected full year adjusted EBITDA for fiscal 2018 of between $178 million to $186 million compared to adjusted EBITDA of $148 million in fiscal 2017 and compared to our previous forecast of adjusted EBITDA between $162 million and $171 million. This adjusted EBITDA guidance includes a forecasted full year operating loss of approximately $11 million associated with the Donna Karan business. We continue to anticipate that we will incur losses from the Donna Karan operations during the first half of fiscal 2018 that will be partially offset by operating profitability beginning in the third quarter as the company commence its shipments of DKNY and Donna Karan products produced by G-III in connection with our launch of the DKNY and Donna Karan brands. For the second fiscal quarter ended July 31, 2018 we are forecasting net sales of approximately $520 million and the net loss between $15 million and $20 million or between $0.30 and $0.40 per share. This forecast compares to net sales of $442 million and a net loss of $1.3 million or $0.03 per share reported in the second quarter of fiscal 2017. The second quarter forecast assumes the Donna Karan related transitional expenses of $3 million and non-cash imputed interest expense of $1.4 million. On an adjusted basis excluding transitional and imputed interest expenses, we are forecasting a second quarter non-GAAP net loss between $12 million and $17 million or between $0.24 and $0.34 loss per share. The forecasted GAAP and non-GAAP results for the second quarter of fiscal 2018 reflect expected operating losses of approximately $17 million and additional interest expense of approximately $10 million equal to an aggregate of $0.35 per share associated with the Donna Karan business. Regarding our retail performance for the second quarter, we are anticipating comp decreases at both Wilsons and Bass similar to those in the first quarter. That concludes my comments, I will now turn the floor back to Morris for closing remarks.

Thanks, Neal. We are off to a good start this year, we expect fiscal 2018 will improve to be a powerful year as we transition Donna Karan from investment spending to increased revenues and profitability. We are now close to the point where our vision of what is possible with the strong brand and category platform will clearly be seen in our financial results. We are truly excited about our future, as we now operate with some of the most powerful brands in our industry. Thank you, operator. We're now ready for some questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ed Yruma from KeyBanc.

Hi, good morning guys, thanks for taking my question. I guess first, Morris could you go back to the nice strength in wholesale a little bit more, how much of it was due to kind of new classifications you might have entered versus kind of what was the organic growth rate of wholesale? And then as a follow-up, I know you -- it seems like you guys have adjusted the DK loss a little bit for the year, I guess what drove -- what’s driving the better forecast initially laid out in the fourth quarter call? Thanks.

So let me try to answer the first of your question. The -- as I stated earlier the organic growth and we term organic as the brands that we have had that we anniversary and pretty much all of wholesale other than DKNY and Donna Karan fall into the bucket. There are some category launches that were not in place in the prior year, we took on all of the Tommy Hilfiger classifications in women’s and we didn’t launch them all at one time, so they don’t have a full year under their belt. So one might say they are not organic, but in our world it’s kind of a moving target though we eliminate some brands which we have. We have taken some of the non-essential brands that we've distributed in the past and eliminated them. So I could tell you that if we comp, we'll announce some of the brands that we're not paying attention to probably in the next quarter, either we bought our way out or we've terminated the license based on the calendar. So not wanting to be evade, but it's hard to peg it as what new classifications specifically are in place that were not in the past. But if we relate it to Calvin Klein, Calvin Klein being our biggest piece of business. The growth is quite good in every classifications that we have and have had for the last three years. We're a little soft on the suit business, but other than that handbags, sportswear, coats all of it are showing comp increases and our order book is up to the extent that we're forecasting a beat for the end of the year. And the second half of your question, Neal?

Yes, regarding the Donna Karan, some of this really it is refining the focus that we had. Essentially , we've done a little bit better in sales, probably done a lot better in gross margin and refined our sales -- our SG&A and that's kind a come down a little bit. So that's the primary changes that we've got so far as far as the business is performing, it's performing pretty much to our expectations. And the real show for us is the second half as we said, when we start to produce product and that product starts to hit the floor.

Great. And one other follow-up if I may, I'm sorry if I missed this. Morris, did you give any commentary on outerwear, I know it's a little bit early, but kind of how is that business look for the year and kind of now the season is over, what do you think about the packaway inventory that retailers may have. Thanks so much.

Our order book kind of leads us to believe we're going to have a very good outerwear year. With the addition of DKNY and pieces of Donna Karan and Karl Lagerfeld into the mix. We're showing a good beat compared to last year in our outerwear business. The inventory levels I believe at the packaway silo [ph] are lower than they've been historically, we're getting cut up orders, we're getting a little bit of packaway. Our inventory levels in coats at the end of the year were low. So we didn’t force the off price channel to take residual inventory and there should be a fair amount of open to buy in the off price channel for the coat season. This is not a season where they have stack them high based on non-performance in the prior year.

Great, thanks so much guys.

Thanks, Ed. Thanks for your question.

Our following question comes from Eric Beder from Wunderlich.

Good morning, congratulations on a good start to the year.

Thanks, Eric.

Could you talk a little bit about Donna Karan internationally? How much of that business is there, and where do you see that going as an opportunity?

Donna Karan international is a huge opportunity. The reason it's a huge opportunity is that not a lot of it exits, and we're sorting through it. There are losses associated with some licenses, some distributors, some lack of performance that’s existed for the last four years. And we're re-posturing it and not on solid ground. Everything that we've spoken about that relates to wholesale uniquely compares to the universe that we travel in is related to the United States. There if I'm sure you listen to the competition and where there prosperity comes from. It's not the U.S., ours is solely the U.S. and we have an amazing opportunity for international be it Europe, or China or the Middle East, and we're sorting through it. We're deciding on what the best solution for us should be, but clearly it’s an opportunity that we have not even scratched the surface on or brought to the investor community.

Okay. And in terms of the Donna Karan brand, could you give some more color on that, I know that was not -- and you mentioned rolling that out a little more aggressively, where is that going to be rolled out here in the U.S and where is the customer base going to be for that?

So as you know we have contract with Macy’s to do many classifications exclusively for them under DKNY as that evolve we have a loyalty to all the department stores in the United States. And by isolating DKNY as Macy’s brand, our challenge was to come up with something equally relevant to all of our other customers and Donna Karan became that solution. Sammy Aaron and his team of designers and sourcing executives in record time brought to market two great brands they are both booking exceptionally well, we’ve produced a little bit of product some of it went to our outlet stores, performance and taste of dresses and they are doing well. We will simultaneously launch DKNY with Donna Karan short of maybe a category or two, the customer base for Donna Karan will be Lord & Taylor, the Bay, Dillard's it will be in Bloomingdale's and Saks to a degree. So we have got pretty much all the department store groups covered between the two brands.

Great, good luck in the back half.

Thank you.

Our next question comes from Erinn Murphy from Piper Jaffray.

Great thanks, good morning. A couple of questions for you guys this morning. First on gross margin, you obviously had a very strong margin performance in the quarter, how much was the benefit from the added mix shift from Donna Karan licensing in the quarter? And then given that you will be benefiting from licensing contribution the entire year, I guess Neal, is that the type of level we should be anticipating from an improvement perspective through the balance of the year?

Yes, so Erinn I would tell you that it’s about 1% of an impact on the first quarter and it’s fairly the volume of the licensing is really consistent through the year. So obviously that will have less impact on our third quarter and our fourth quarter.

Okay. And then just in terms of the other points of margin benefit Neal, what were the kind of major puts and takes there?

The sportswear and dress categories were very strong compared to the prior year and Calvin Klein was the main brand that exhibited that performance.

Okay. And then maybe Morris for you on the retail side, I think you guys talked about the second quarter trends, you are still anticipating them to be a similar level of decline of Q1 so kind of down high single, low double. But in the second half I think you talked about mid-single digit positive retail comp trends, can you just talk a little bit more about what’s driving that from kind of the some of the things you can control on the product side?

Sure, I have stated from I guess from fourth quarter of last year till now the change of mix that will occur at Wilsons. Wilsons assortment is going to change drastically and that gets put into place July or August. So everything that we’re selling today is really old news, the new news comes into place in July and August. Bass to a lesser degree will have a product assortment change. The inventory levels will come down, it will operate where you will have a complete visual as you walk into the store rather than clattered variety store image. So we believe that’s going to impact our business somewhat positively, we have corrected the static of both chains and we believe we're being appropriate in forecasting an increase in the back half of the year.

So just around that out it's really coming from kind of ticket and I'm assuming improved conversion. Are you making any assumption to just the overall traffic environment in the back half more?

Traffic is only a small part of it. And it's not -- yes conversions, but conversions occur when you've got the appropriate service, the appropriate static and most of all you have the appropriate product. We've not had the right product in the stores for some time. And my bet is the solution is going to occur because of the appropriate product more than anything else. We can point to traffic, we can point the tourism. But you really have to look in the mirror and say what have we done wrong, and we've done a lot wrong that I believe is corrected going forward. So the real test will be after we put corrective surgery in both organizations and then we view what we're responsible for and what impact traffic is.

Thank you. And then just my last clarification on the outerwear order book, I think last call you've talked 50% of the order book have been finalized. What percent of order book is now complete?

Yes, in total we're about 79% complete for this year. The outerwear mix is probably a little bit higher than that.

Okay. Got it, so good visibility. Thank you.

Our next question comes from John Kernan from Cowen.

Good morning Morris and Neal. Thanks for taking my question. Just wanted to go back to Donna Karan, congrats on the improved outlook there. I was just wondering if you gave the operating profit loss for Donna Karan in the first quarter, you've obviously given details on what you expect in Q2 and for the full year. So I'm just wondering what the profit loss was in the first quarter for Donna Karan?

Yes, it was $14.8 million was the non-GAAP figure.

Okay, that's helpful. Thanks. And then Morris, you talked a lot about retail, closing doors I think you said 69 this year, 45 locations next year. How does the profitability of the retail segment evolve from the $51 million operating profit loss last year. Can you give us expectations for profit this year and potentially next year? And when you can potentially eliminate those losses?

Well, we're working toward eliminating them now. I stated that our operating expenses are going to go down on an annualized basis over $12 million, so we can start with that as an absolute. And the rest of it is through operating -- besides operating efficiencies the mix of product, the margin improvements as your product gets better your margins improve. We're looking at 15% to 20% margin improvement for -- markup improvements for the coming year, for the remainder of the year.

Just to clear it’s $15 million to $20 million improvement in the loss for the current year is what we said at the end of the first quarter and that's just still what we're targeting.

Okay.

The repurposing that we're doing will have some impact as well, if not immediate, because you need a little bit of runway to feel the benefit of it. But as I said earlier, the four stores that we converted are performing at 40% better rate than the stores that were there before.

And John, just to clarify one other thing, that improvement is to the non-GAAP results. We have a $10 million of write-offs last year. So we're expecting to be $15 million to $20 million better in the Wilsons and Bass brands.

Okay, that's helpful thanks. And then Morris, just dramatically, how do you -- what do you think if vision is for the U.S. department store channel, I know there is a lot of door closures that have been announced for this year and there is probably some more coming next year. How you see that channel fitting into the overall consumer shopping experience. And what's your long-term vision for how this channel evolves in G-III’s exposure to that channel?

We believe that channel will exists maybe it exists in better form. It's clearly the stores that are closing are the poor performing stores. Everybody’s fleet of stores is being called down and what you get I believe greater efficiencies, concentrated good inventory and the better performing doors. So the solutions not a bad one, there will be less department stores to trade with but better department stores to trade with. There is a life after these closures and I think it’s a better life. What is really resonating for department stores is, they need a solution and they are all investing in solutions, whether it’s a better environment to shop in, better environment to be entertaining with concepts of food that draw the customer rather than another promotion on apparel. Every department store is working diligently to find a solution that maybe should have been dealt with 10 years ago. So, I believe there will be a strong department store business as time goes on.

And Neal if I could just sneak in one final question on the capital structure and how you think this will evolve as Donna Karan becomes more profitable. Is it fair to assume a level of debt pay down next year, can you help us understand the magnitude of how fast you think you can pay the debt down on the balance sheet and delever the capital structure?

Yes, John. So, look being once a debt free company prior now having debt we will view these debt levels as very modest. The company G-III was throwing what probably an average of $50 million of free cash flow a year prior to the acquisition without the success and cash that comes in the Donna Karan business. We continue to feel we could pay the debt back just from the continuation of that, but the Donna Karan business will also start to throw off cash. Initially my only hedge as far as the specifics with respect to next year will be just how much growth we have in the first quarter and how much free cash flow we put back to receivables and inventory to match the growing business. But I think after the first years so we’ll probably get on a faster phase of being able to pay down that debt. And again the total debt to EBITDA levels are very comfortable at around 3 to 1 on an average for the year.

Excellent, thank you.

[Operator Instructions] Our following question comes from Jim Jaffe from Stifle.

Thanks, good morning. Can you guys talk some about how the quarter unfolded by month, it’s curious to me that the guidance for the first quarter was so bad and then you did so much better in the wholesale business in the final months of the quarter you must have really seen things accelerate?

Jim, in general we don’t give specifics for each month, but I will tell you that what also traditionally is our story is that the last months in general are very important to us for most quarters that's probably true for Q2, Q3 and Q4. In the first quarter that's a little bit less of an issue we saw some strong wholesale performance actually relatively consistently throughout the quarter.

Okay. What was that enabled you to come in so much ahead of your guidance?

Well look our businesses performed well, we’ve got a $30 million top-line beat again that really was when you compare to the previous year certainly our total strength is really driven from Tommy and Donna Karan in terms of top-line. In terms of operating performance as I mentioned the -- we had nice gross margin improvement in both Calvin Klein on the sportswear and dress side. Then we had a lot of small increases across all of our business units in terms of the beat, which was primarily driven by our wholesale business. And our retail business performed really essentially to plan maybe slightly ahead of plan.

Okay.

And Jim, we carry good inventory to support reorders, not everything is bought up front, we take a little bit of risk on inventory ownership and our mission in the past has been on quick turn as well. It is possible for this company to produce within a quarter and deliver in that same quarter. So we've taken advantage of what we've built toward over the last 50-60 years. We're a quick turning house.

Okay. Neal, couple of more questions on the outlook for Donna Karan, did you changed the revenue view for Donna Karan?

Probably, to a very small extent, if the Donna Karan beat was just under $5 million for the first quarter, I would suggest that we would be rolling that. So if we were looking for about $285 million before we're probably looking at something closer to $290 million now.

Okay. And you're now expecting the GAAP and non-GAAP operating income to be the same and previously we're looking at like a $9 million spread. I think you were previously saying…

No, that's not true Jim. We've previously anticipated about $9 million for transitional expenses. We probably beat the GAAP guidance by about $2 million in the first quarter and are still anticipating another $6 million per quarter for Q2 and Q3. So in total we're now looking for about $7 million of transitional expenses and of course the other non-GAAP items is the imputed interest, which has been that we wouldn't expect any change and that's about $6 million for the year about $1.5 million for each quarter and that will be by calculation. So that shouldn't move going forward.

Okay. And then Neal, can you share thoughts on cash flow for the year, where you expect that to come in contemplative of some of the new programs that are building and additional working capital looking into 2018?

Yes, so I sort of indicated just before Jim, the current year I'm not expecting a great free cash flow event, only because at the moment we have to see how that Donna Karan growth looks like in the first quarter, what we start to invest in terms of inventory and receivables, how essentially our fourth quarter and first quarter plans roll out. G-III has been generating about $50 million on average of free cash flow. I would expect that to be a relatively reasonable base going into this next year. But we could have an investment into a working capital. I think in terms of CapEx we'll probably -- we spent about $6 million in the first quarter we'd probably expect to spend $25 million to $30 million for CapEx in the whole year.

Very helpful. Thank you.

Our following question comes from Rick Patel [ph] from Needham and Company.

Thanks good morning everyone. Thanks for taking the question. Can you talk about the outlook for Calvin Klein? Given it’s such a big brand already and we have department store shrinking their footprints. What's your outlook for growth there as we think about the rest of this year and beyond? Can you frame where that opportunity is whether it's by category or by channel. And should we baking in some level of cannibalization given the launch of DKNY?

So what's happened is alongside of the fact that the store count reduction is also a supplier reduction both in French suppliers and some of the non-performing larger suppliers. So what we're getting is we're not cannibalizing our own brands that we're very focused on. The intention is not to trade dollars from one brand to another, our intention is to take the dollars that are available from other brands. And we're succeeding with that. We are bettering our real estate every day. We have a clear focus on negotiation for better space with every retailer that we trade with, we're succeeding with it because our product is performing. And we do have a little bit of leverage because of the scale of our business with most department stores. So we are gathering categories that are important in the store, we're obviously and does in different areas of the store and they all tend to grow. Calvin Klein seems to be the best performing brand within most department stores that we trade in. So we don't believe we're nearly as matured as some might think, there is a lot of room to grow, we are forecasting growth in our largest asset and you do make mistakes to correct. So with correcting some of the mistakes that we have made historically, we believe that there is still significant growth left in our more mature brands.

So Morris just to dig into that, do you expect higher productivity in your existing point of distribution, or do you see distribution growing as well for some of your under penetrated categories?

It’s difficult to find distribution in the department store sector, it’s hard to find another department store to trade with. So, it’s got to be further penetration within the stores that we are trading it and that is clearly happening. We are supportive of the department store sector, we’re sensitive to their performance, our job is not done, when we sell the product we continue on with the product until it’s sold through the stores, our formula is a little bit unique, we take very special care in how the product is presented, how it’s sold through at what rate the mark downs are taken we play an active role with our retailers to add a little bit of our competencies to help stack the deck as they control expenses, sometimes they dilute the help that’s on the floor, so we help it move through. And we’re in the stores all the time understanding where we could help and our customers are permitting us access to help. So our formula is working well, but it is clearly I can’t believe there is going to be another department store group that enters into the environment in the coming years, not in the United States. But I can tell you that, every one of them is looking for a better solution and we seems to be that better solution to that business.

Great. And just a quick one on outerwear, so low single-digit growth for this year, are there any timing elements that we should be thinking in thinking about in terms of sell-in that could create quarterly volatility?

The volatility is probably created most by the weather. The shipping cycle is pretty much the same as it’s been historically, a little bit pushed back, everybody is trying to manage their inventory a little bit better. But the cycle is very much the same as it’s been for 20 years.

Thank you very much.

Thank you.

This concludes our question-and-answer session. I like to turn the call back over to management for any additional or closing remarks.

Thank you operator and thank you all for listening to our story and we have more to come. Have a good day.