G-III Apparel Group, Ltd. (GIII) Q2 2018 Earnings Report, Transcript and Summary

Welcome to the G-III Apparel Group’s Second Quarter Fiscal 2018 Earnings Conference Call. My name is Allen, 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. [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 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 to everyone for joining us. With me today are Sammy Aaron, our Vice Chairman and President; Wayne Miller, our Chief Operating Officer; Neal Nackman, our Chief Financial Officer; and Jeff Goldfarb -- Executive Vice President. We exceeded our financial goals in the second quarter led by strong double-digit growth in our wholesale business. We’ve built a very strong fall holiday order book and have increased our full year guidance. Our deliveries of the new lines for the DKNY and Donna Karan brands are underway. These new brands are expected to generate approximately $200 million -- $200 million in total net sales in the second half. Furthermore, we’re pleased to see growth coming from many of our brands and categories. Before I discuss our operations in more detail, here are a few high level financial metrics from the second quarter. Net sales in the second quarter were $538 million, up 22% compared to $442 million in the same quarter last year. That strong pace of growth included solid increases across the board, including $45 million of net sales from our DKNY and Donna Karan product. Our net loss per share in the second quarter was $0.18. This performance was better than our expectations. I note that these results are not comparable to prior year’s net loss of $0.03 per share, which was before our acquisition of Donna Karan. Neal will take you through the details of our reported and adjusted results. But essentially, we exceeded our forecasted numbers and have confidence in both our full year guidance and also on the long-term direction and pace of our business. Our design, sourcing and merchandising operations are energized and innovative, and hitting the sweet spot for consumers. This is an important time at G-III and I’m quite pleased with contributions made by many across our operations. Our results and future expected performance demonstrate that powerful global brands continue to have a very important place in the market. We’ve made the right investments and formed valuable strategic partnerships. Our five power brands Calvin Klein, DKNY, Donna Karan, Tommy Hilfiger and Karl Lagerfeld, are anchors for an even wider assortment of well-known brands, and we believe we are in a very strong position to succeed. We expect to grow sales, improve our profitability, become even more important to our customers and continue to be a leader in our industry, everyone, our customers, their consumers and certainly our shareholders should expect nothing less. We believe that our investment in Donna Karan was the right one for our company. We are confident that our financial results from this business beginning with second half operations -- operating profitability will increasingly demonstrate the wisdom of this investment. We continue to see Donna Karan as potentially the highest operating margin business in our portfolio. Overall, for G-III, while we have historically been primarily a North American business, we now have some big profit opportunities internationally, with brands we own and control. Vilebrequin, which has its roots in the European luxury market, was our only significant overseas business. It’s actually performing well as I will discuss. Now with DKNY and Donna Karan, we have iconic globally renowned names that position us to grow in a much more meaningful way around the world. In addition to capitalizing on growth opportunities, we also continued to be focused on reducing risk and exposure in our own Wilsons and Bass stores. Comps were down a bit better than expected at 4% and 5% for each, respectively. We anticipate further improvement in the second half. I’ll have more to say about retail in a bit. From a high level, the momentum in our wholesale business continued to build throughout the first half of our business -- through the first half as our business remain strong with powerful brands, outstanding product in every category, great execution, and a diversified and well-managed distribution strategy. I will now turn to our major brands and their performance. Calvin Klein remains a deeply relevant and important brand for consumers and was strong overall. Our Calvin Klein business was up by an aggregate of 15% this past quarter. Calvin Klein dresses even after years of incredible growth was up solid double digits in net sales for the quarter. Calvin Klein sportswear and performance is also doing very well, particularly with respect to the performance portion of the assortment, which has been outstanding. We continue to grow nicely in Calvin Klein handbags in spite of promotional environment for handbags. We are expecting high single-digit increases in sales for Calvin Klein men’s and women’s outerwear this upcoming fall and holiday season. With respect to Tommy Hilfiger, we are now about a year into our shipping history with our women’s categories. We expect to roughly double these businesses in the second half over prior year. Tommy Hilfiger dresses performed exceptionally well for the second quarter. Performance, sportswear and denim, our newer categories, and we are pleased with the product and the consumer response. Across all categories, we shipped almost $50 million of Tommy Hilfiger product this quarter. We expect Tommy Hilfiger men’s and women’s coats to capture solid double-digit sales increases for this upcoming outerwear season. We remain confident we will do in excess of $250 million of annual sales this year in Tommy Hilfiger. As I’ve said before, PVH has been a great partner, the brilliance of bringing on talent like Chief Creative Officer, Raf Simons and having the collaboration of celebrities as Gigi Hadid is working. The marketing is excellent and the future looks very good. We are really pleased to have executed well on our licenses from PVH for Calvin Klein and Tommy Hilfiger, and to be a key partner with PVH. Karl Lagerfeld is also in its early stage of growth. We doubled also a modest base in the prior year second quarter. We’re building a very good business in dresses, shoes, handbags and sportswear. Overall, Lagerfeld is performing well and retailers are carving out floor space for this contemporary iconic brand. We expect to grow the business by over 50% this year. Before I move to our own retail business and to Donna Karan and DKNY, I’d like to note some of the better performance in some of our other businesses. Standouts in the second quarter were Eliza J and Vince Camuto dresses. Both brands are important retail resources and resonate well with consumers. Our team sports business is booked well for fall, and outerwear, as I stated before, we’re expecting a good upcoming fall holiday season from Calvin Klein, Tommy Hilfiger as well as over 25% growth in Levi’s. With respect to our own retail business, narrowing our exposure to losses is a major priority of ours. We have now eliminated $12 million of annual run rate expenses from our retail business and we’re still looking for more efficient ways to run the business. Our Wilsons and Bass store fleet began the current fiscal year with 353 locations. We are now down to 320 locations and expect to be down to approximately 285 locations by this year-end January 31, 2018 and approximately 240 locations by next year-end January 31, 2019, of which Bass is expected to be approximately 110 locations and Wilsons approximately 130 locations. We intend to remain focused on door count reduction, efficiency and productivity. At Wilsons, we have a lot of changes to our merchandising plan underway. We’ve already seen seeing improvements in productivity in August, with a 20% comp gain. We are looking for a mid single-digit increases for the second half of the fiscal year. At Bass, August comps were down 5%. New floor sets will become a factoring factor in September and should improve productivity. We are planning for mid single-digit gains for the second half of the year. We will continue to monitor both our Wilsons and Bass business with our goal to considerably reduce losses this year. In our own ecommerce businesses, which include DKNY, Karl Lagerfeld, Vilebrequin, Bass, Wilsons and Andrew Marc, we had a 20% increase in net sales in the second quarter. We are building a great team to help us expand our e-commerce opportunities going forward. A lot of attention and excitement in wholesale is being given to DKNY and Donna Karan. It is quite an accomplishment to have owned the business for less than a year and to now be shipping product in all major categories in both brands to stores around the world. The integration and execution with respect to this business reflect the contribution and a shared vision of many key people throughout the organization. We remain confident that we will see full year net sales approaching $300 million for Donna Karan and DKNY. We will have new DKNY ready-to-wear handbags and shoes in a 130 -- 200 Macy’s doors, all top tier locations. Of these about 30 will have in-store shop-in-shops for ready-to-wear and handbags and the balance of doors will have brands specific fixturing. We think the point of purchase marketing looks great. Additionally, DKNY women’s outerwear will be in about 400 Macy’s stores. For Donna Karan, we will have new ready-to-wear handbags and shoes in approximately 100 total doors led by Lord & Taylor and Dillard’s. For both DKNY and Donna Karan we have great product in place. Some early test runs have gone really well and while it is too early to draw conclusions, all the pieces seem to be in place for a great fall and holiday season for the brands. As you know, company-owned retail is an important part of the DKNY business. We are seeing good indications of higher productivity, with some of the newer product we’ve put in our DKNY outlet stores. With respect to our Donna Karan licensing portfolio, we’re excited about our new DKNY and Donna Karan menswear license with PVH. The product looks great and we look forward to a successful spring 2018 launch. As recently announced, we have formed a new joint venture that we established with Amlon and Fred Gehring to produce and market women’s and men’s apparels, footwear and accessories. This is a long-term license for DKNY and Donna Karan in China, Hong Kong, Macao and Taiwan. Income from that venture is expected to begin in fiscal 2019. We have partnered with Fred with respect to the Karl Lagerfeld brands and are excited to extend our partnership with him. He and his organization have a great track record of success, including having been responsible for building a global business for Tommy Hilfiger prior to its acquisition by PVH. Our marketing initiatives for DKNY continue with Emily Ratajkowski for this fall season, as we’ve had an amazing campaign with her this last spring in intimates, hosiery and sleepwear. I will close my commentary by mentioning Vilebrequin, which is doing well. Comps in the U.S. were up high-single digits and outside of the United States were up over 20%. We are expanding the women’s collection, further developing men’s resort wear and working hard in developing the online and in-store shopping experience. The management team at Vilebrequin has a goal to build much bigger business over the next several years. I will reserve a few comments for closing, but will now turn the call over to Neal for a closer look at the numbers for the second quarter.

Starting with the second quarter results, net sales for the second quarter increased 22% to $538 million from $442 million in the same period last year. Donna Karan added approximately $45 million of sales in the quarter, excluding the Donna Karan sales organic growth was strong at approximately 12% compared to the prior year. Net sales of our wholesale operation segment increased 30% to $468 million from $361 million, net sales from our new DKNY and Donna Karan product lines accounted for $35 million of this increase. Organic wholesale sales growth excluding Donna Karan was 20% in the quarter. Net sales of our wholesale segment also increased as a result of increases in net sales of our Tommy Hilfiger licensed products, which is now shipping products in all categories, as well as increases in net sales of our Calvin Klein and Karl Lagerfeld licensed products. Net sales of our retail operation segment increased 6% to $106 million from $100 million due to the inclusion of net sales of $15 million from our new DKNY stores, offset in part by a decrease in net sales at our Wilsons and G. H. Bass store chains. We reported same-store sales decreases of 4.3% for our Wilsons stores and 5.2% for our G. H. Bass stores compared to the prior year’s quarter. We also operated 34 fewer stores at the end of the second quarter fiscal 2018, compared to the same quarter at the end of fiscal 2017. Our gross profit percentage was 37.7% in the three-month period, end of July 31, 2017, compared to 35.2% in the prior year’s period. Gross profit percentage in our wholesale operation segment was 32.4% compared to 30.7% in last year’s quarter. DKNY and Donna Karan licensing revenues for which there were no associated cost of goods sold, are now included in our wholesale operation segment, which increases our wholesale segment gross profit percentage by approximately 100 basis points. The gross profit percentage in our retail operation segment was 48.4%, compared to 44.8% in the prior year’s quarter. Total SG&A expenses increased to $196 million in the quarter, from $153 million in the same period last year. This increase includes approximately $36 million of expenses associated with the newly acquired Donna Karan business. The remainder of the increase is primarily due to increases in personnel costs and facility costs, which were offset in part by a decrease in professional fees, related to the fees incurred in connection with the acquisition of Donna Karan in the same period last year. Our GAAP net loss for the second quarter was $8.6 million or $0.18 per share, compared to a net loss of $1.3 million or $0.03 per share in the previous quarter. On a non-GAAP basis, we incurred a net loss of $0.15 per share in the current second quarter, compared to net income of $0.01 per share in the prior year second quarter. Non-GAAP results for the current second quarter exclude the impact of severance expenses of approximately $700,000 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 and excludes $3 million of professional fees associated with the acquisition for the second quarter of the prior year. Included in both GAAP and non-GAAP results for the second quarter of this year, our operating losses of approximately $14 million, an additional cash interest expense of $7.2 million related to the operation and ownership of DKI equal to an aggregate of $0.27 per share. The acquisition was completed in our fourth quarter of fiscal 2017 on December 1, 2016. Regarding our balance sheet, accounts receivable increased 16% to $283 million from $243 million at the end of the prior year second quarter. Inventory increased 15% to $655 million from $570 million at the end of the second quarter of last year. We spent approximately $10.6 million on capital expenditures the first half of this year, primarily related to additional fixturing cost at department stores, as well as for improving remodeling and relocating our retail stores. At the end of the quarter, we had long-term debt outstanding of approximately $569 million, which we incurred in connection with the purchase of Donna Karan. We had no long-term debt a year ago. In addition, our cash balances at the end of the quarter were $59 million, compared to $45 million a year ago. Regarding our guidance, for the fiscal year ending January 31, 2018, we are now forecasting net sales of approximately $2.8 billion and net income between $56 million and $60 million or between a $1.11 and a $1.21 per diluted share, compared to our previous guidance of net sales of approximately $2.76 billion and net income between $52 million and $57 million or between a $1.04 and a $1.14 per diluted share. Our forecast includes Donna Karan-related transitional expenses of approximately $8 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 $64 million and $69 million or between a $1.28 and a $1.38 per diluted share. Our previous forecast was for non-GAAP net income between approximately $60 million and $65 million or between a $1.20 and a $1.30 per diluted share. The forecasted GAAP and non-GAAP results for the full year reflect expected operating losses of $23 million and additional interest expense of $23 million equal to an aggregate of $0.57 per diluted share associated with the Donna Karan business. The forecast also includes the full year impact of the issuance of approximately 2.6 million shares of new G-III common stocks issued to the seller of DKI. From a cash flow standpoint, as a result of the structure of the acquisition, we do realize approximately $15 million of annual cash tax benefits that are not reflected in our operating loss or EBITDA. We are now forecasting projected full-year adjusted EBITDA for fiscal 2018 of between $180 million and $188 million, compared to adjusted EBITDA of $148 million in fiscal 2017 and compared to our previous forecast of adjusted EBITDA between $178 million and $186 million. This adjusted EBITDA guidance includes a forecasted full year operating loss impact of approximately $12 million associated with the Donna Karan business. For the third fiscal quarter ending October 31, 2017, we are forecasting net sales of approximately $1.03 billion and net income of between $69 million and $73 million or between a $1.36 and a $1.46 per diluted share. This forecast compares to net sales of $883 million and net income of $70 million or a $1.50 per diluted share reported in the third quarter of fiscal 2017. The third quarter forecast assumes Donna Karan-related transitional expenses of approximately $6 million and non-cash imputed interest expense of $1.4 million. On an adjusted basis, excluding transitional and imputed interest expenses, we are forecasting third quarter non-GAAP net income of between $73 million and $78 million or between a $1.45 and a $1.55 per diluted share. This compares to non-GAAP net income of $70 million and a $1.50 per diluted share in the prior year’s third quarter. There were no non-GAAP adjustments in the prior year’s third quarter. Regarding our retail performance for the third quarter, we are anticipating positive low single-digit comp increases for Wilsons and Bass combined and strong mid-to-high single-digit comps for the fourth quarter. That concludes my comments. I’ll now turn the call back to Morris for closing remarks.

Thanks for your attention today. We’re one of the relatively few companies in the retail consumer industry performing well with very tangible growth opportunities with more and better located real estate within department stores. Our points of differentiation are simple, but powerful. First, we’ve aligned our business with truly special brands that motivate and excite consumers. We provide great design, sourcing and merchandising and bring compelling product to market. Our brands perform well with consumers regardless of where the transaction occurs. We believe we are one of a handful of suppliers, because of our brand portfolio that has the breadth and depth of assortment to be in the position to sustain growth in sales and profits, whether brick and mortar or e-commerce. We take a partnership approach to each customer and we simply get the job done. The environment is tough, traffic levels are down, all of that just means you have to be better and more focused, that is what we strive for everyday at G-III. Finally, we work hard at being proactive. We are always looking down the road, working to understand what lies ahead and making sure that we are prepared to deal with anything that comes our way. Even as we have grown in scale, we’ve stayed nimble and flexible. We listen to our customers, to our consumers, to our partners, to our long-term vendors and to our shareholders, and when we set out to build value, we take all of that into consideration. Thank you for the support you’ve shown us and we are now ready to take your questions.

Thank you. [Operator Instructions] Our first question is from Ed Yruma with KeyBanc Capital Markets.

Hi. Good morning, guys. Thanks for taking my questions. I guess, first, and I might have missed it. On the total outerwear business, I know you gave a couple of statistics on Hilfiger, I think Dockers. How are you still viewing the outerwear business for the back half, and I guess, what’s the commentary you’re hearing from your retail partners in terms of channel inventory?

Our belief is that the second half of the year will be strong in outerwear, our early reads are excellent and we believe that we’ll have a strong second half. Our retail partners inventory are all intact, whether it’s the off-price channel or the department store channel. There the levels don’t appear very high, there seems to be open-to-buy opportunity for pretty much every retailer that we trade with. The off-price channel seems to be nimble and prepared for growth and for buying more products as does the department store sector. So, our reads are good. We’ve gotten reorders in outerwear starting about two weeks ago, our early shipments are performing well, they look good at retail and we have no reason to believe that we’re not going to have good growth in outerwear this year.

Great. And one other follow-up if I may. On Donna Karan, the losses have been, I think, a little less than you had expected initially for, I guess, two quarters in a row now. What’s the major area of variance and as we start to look out to next year, should we start thinking about potential more constructive view than maybe you’d initially laid out? Thank you.

Yeah. For this year in the second quarter, we saw improved performance in really both wholesale and retail. At wholesale, we were able to start shipping some of our product, our design product that helped us out a bit margins, margins were good in both wholesale and retail. We did have some expenses that got pushed into the second half. You can see that we’ve actually increased the total operating loss from Donna Karan from about $21 million to $23 million. And then, of course, the last thing that helped us is the on our retail side, we had very strong gross margins as a result of some of the discounting that we were able to take advantage of in terms of the acquisition on the initial inventory purchases.

Great. Thanks so much.

I think in terms of next year, it’s a little too early for us to give you future guidance. I mean, we’ve talked about these businesses. We expect the business to perform very well. We’ve designed a lot of product across a lot of different categories. But it’s a little too early for us to give you specifics on the -- on where we think the business will perform next year.

Great. Thank you.

Thank you, Ed.

Our next question is from Erinn Murphy with Piper Jaffray.

Great. Thanks. Good morning. I guess I wanted to start with the outerwear question just following up on Ed’s comments. I think when we spoke at the end of the first quarter you talked about the order booking tracking up low single for this category. With just the confidence in the last few weeks, can you talk about how the order book ended up, any changes to that number?

The orders are coming in and the number is changing. Our order book grows literally every day in outerwear. The limitation is the level of inventory that we carry to support the growth, producing additional product overseas today and bringing it in time for reorder and capture of business for fiscal 2018 is a little difficult. So the limitation -- our limitation today is level of inventory that we have. I see no reason that we don’t go through the inventory and end up very low on inventory levels at the end of the year.

Okay. Thank you. And then maybe just a little bit more on the retail side. It did outperform your plan in the second quarter, I think the guide was for download double-digit and you comp down mid-single for both banners. What was the incremental improvement, with the traffic conversion ticket? And then, would love to understand a little bit more about what happened in August for Wilsons, given that strong comp increase?

Thanks, Erinn. The -- that’s a good question. Our retail really has -- when we view our retail, it really has three components. We’re looking at Wilsons, Bass and DKNY. The standout for the moment only because we have visibility and we’ve corrected the product mix and we’re on our way with what we described is going to be the strategy for this year’s Wilsons. So we have combination of lots of things. We’re running the business much more efficiently. We’ve reduced our expenses by $12 million aggregately -- as an aggregate. We’ve brought up our average unit retail at Wilsons and our margins have improved by over 200 basis points at Wilsons. For August, the numbers is significantly higher than that, we’re tracking at over 20% comp in topline and our margins are better than 200 basis points improved over last year. Bass, our product isn’t all-in, the floor set isn’t perfected yet, but we’re expecting to beat the plan that we have in Bass. The -- we’ve taken some action in transforming the couple of Bass stores into Karl Lagerfeld, they’re working extremely well. We’re tracking at about a 40% improvement in Lagerfeld stores versus what was a Bass store, and therefore, we’re eliminating some of the significant losses that occurred in the same locations. So that’s going to make a huge difference for Bass. We’re not going to expand Lagerfeld to another 110 stores. We’re not ready for that. The brand is not suited for some of the locations that Bass is in. But what’s strange is the best locations in the country served up our biggest losses for Bass and those are great locations for Lagerfeld. So those conversions alone should improve Bass by over $3 million in adjustments just relative to swapping out Bass for Lagerfeld. DKNY, we’re not fully assorted in our outlet stores, so the early reads are good, the new product is selling well, eliminating some of the old product, which means markdown is effecting some of the margin that we would be proud of, so that will take a little while. But as the new product gets in, we’re working very long on margins, it’s a brand that we own, there is no royalty attached to it. So, as I said earlier, DKNY eventually will be our best performer from a profit point of view. It’s ours and the expense that we incur in paying royalties in advertising, we do not occur with -- incur with DKNY. So, three different models, all on their way. They’re not traveling at the same speed as the leader as I said is Wilsons.

Got it. And then just last on the international opportunities for DKNY and Donna Karan, you talked little bit about the opportunity in China, but can you talk about the rest of the world, any other opportunities you see in the near-term for that brand? Thank you.

Sure. The opportunities are very significant in Europe. We have an order book that’s filling up each delivery, it seems to grow. Some of the early reads on handbags and performance apparel are very good. Again, our margins are excellent as we ship outside of the country and we’re excited about it. The -- as we’ve all noticed, the earning releases of companies are now in our universe, most of the earnings seemed to be coming from Europe and Asia, and this is the first time we’re going to be able to address those geographic areas, and we’re excited by it. We’re staffing appropriately for it. We wanted to limit the undertaking and we took on an amazing partner for Asia. As you guys know, Fred and his organization built Tommy Hilfiger and basically put the old band back together, and he is going to be running DKNY and Donna Karan for Southeast Asia. As -- it’s a partnership it’s not a license, so we will derive the benefit of how he prospers and our confidence level is very high for it. The Middle East is doing as Russia is doing well. We have a distributor in Russia and we’ve changed the profile of our deal, that the distributorship deal that we inherited for LVMH and we believe even Russia will be a good market for us. Lots to do. Thank you, Erinn.

The next question -- pardon me, the next question is from John Kernan with Cowen.

Good morning, everyone. Congrats on the momentum. Thanks for taking my question.

Yeah. Thanks.

So, Neal, I think, there has been some upside to your expectations for the wholesale business, ex Donna Karan in the first half. I’m just wondering what -- how we should think about the wholesale business, which has a lot of positive momentum going into the back half of the year. How we should think about topline growth for that part of the business that’s embedded in your guidance? Thanks.

Well, we’ve been talking about mid-to-high single-digit growth in the core business, which is in the current environment is very, very strong and it has shown that way in the first half. This -- when you look at the beat for the second quarter, it’s not as significantly in the core business, but the core business plan was up mid-single digits, under double-digit. So just achieving a slight beat is pretty significant. I think in terms of the second half we expect continued solid growth for that business.

Okay. And then just to go back to the prior outerwear questions. Obviously, there has been a quite a bit of markdowns in the past two years in that category, just wondering how you’re thinking about the margin profile of the outerwear business as you go into the back half of the year and order book is obviously very healthy and inventory levels at retail are very healthy. So, Neal, I’m just wondering what’s imbedded in your guidance for the gross margin within the outerwear category?

Yeah. We’re not looking for any tremendous increase over the prior year. One of the things we’ve always been very good at even in bad seasons managing our way through and blending well our full price with our work price. We’re judicious about marking down product. So we didn’t really get hammered on it last year. We’re really expecting a relatively neutral event in terms of gross margins maybe a slight uptick. We’ve seen a slight uptick in wholesale in general for this year and we do continue to see that for the back half as well.

And John, as we develop further, the DKNY and Donna Karan brands, you’ve got to remember that we pay royalties that are somewhere all-in 10% to 12%, that’s eliminated. So the margin and -- that’s a margin enhancement for DKNY and Donna Karan, and those two brands will be exceptionally good on the outerwear side. We’re seeing good reads as we started to ship the men’s and ladies products already.

Excellent. Thanks. And then one final question. Morris you used the term double for the Hilfiger women’s business, I think, you said it doubled this year versus last and it’s going to hit $250 million this year for Tommy. I think you also said that Karl Lagerfeld business doubled in the second quarter year-over-year. Can you just talk about the overall, the growth profile of these businesses and how big they can become not just this year but over time?

So, correctly, they have doubled. They are strong and I stated when we took over the Tommy brand that it has the potential of being close to a $1 billion brand. I’m not off of that. I said within four years, we would be a $0.5 billion. So, the Lagerfeld brand is not intended for the same distribution and thus we believe that the Lagerfeld brand will be and it has a smaller opportunity, yet we have global interest in Lagerfeld and that’ll help the growth as well. We see Lagerfeld is a potential of a $0.5 billion in sales globally.

Okay. Thank you.

[Inaudible] (42:36)

Okay. Thank you.

Thanks for your questions, John.

The next question is from Eric Beder with FBR Capital.

Hey. Good morning. Congratulations.

Thanks, Eric.

Could you talk a little bit about the handbag business, you guys have really gone against the grain with the Calvin Klein handbags. Are there opportunities for other cate -- other brands that you have to do the handbag business and what is kind of the -- and the secret to success there?

There is no secret. We are pretty good on every undertaking, we overachieve in coats, we overachieve in dresses, we overachieve in sportswear, what kind of resonates is, you’re seeing a pullback and some of the handbag makers, and we are still at the early stage of growth, if you compare us to Michael Kors, we are a fraction of the size, if you compare us with Coach, again we are a fraction of their size. So, there’s early growth so we yet to scale. At the moment, Calvin Klein is doing exceptionally well. We grow -- we’ve grown every year since we’ve had the license by north of 20%. This year it should be pretty close and we have the ability of growing the handbag business in Calvin to probably $350 million to $400 million in size. We now can exploit all the -- all that we’ve learned in the last few years for Karl Lagerfeld and then for DKNY and Donna Karan, and the early reads for DKNY and Donna Karan in handbags are great, and that’s global distribution. So, that can even be larger than the Calvin business, because of the global distribution that -- that’s afforded us.

Well, when you look at your outlet strategy, longer term what should be the returns there and how big should the change end up being when your finally done pruning what some of the bad ones are?

It’s hard to say and I hesitate to respond because we did so many things wrong with our retail. It’s not a product of simply bad real estate. I would really point to a choice of product for all our venues, whether it’s DKNY, whether it’s Bass or Wilsons. The first thing that we’re addressing is correcting the product and it’s working. It’s working at Wilsons. We see -- saw it very quickly. So to tell you that we would eliminate our retail and bring it down to an insignificant scale, I’d say that’s too early on. I’ve stated it before. I believe that we can build an amazing retail business. We can go contrary to the market. The same as we do with handbags and the same as we do with coats. We’ll get it right. And if we don’t, I’ll find another solution. But everything I have as far as information leads me to believe that we’ll have a viable retail business and giving you where we end up in right sizing it, I don’t know, it could be a 1,000 stores or it could be no stores. So, it’s -- if our formula works, we’ll be a little bit more aggressive. This is a wonderful time to build retail. If you have the wherewithal and you have a successful model, there is no better time to be able to negotiate with developers on real estate. They have always had the upper hand. Today, if you are building a retail model and starting from scratch, you have an advantage. Your rents are less. Your ability to create a kick out clause are probably there. I’ve not addressed it, because I’m not acquiring retail, I’m not leasing retail. But I would imagine that if I was, this would be a good day to build retail, if you had a formula that was right.

Okay. Good luck guys for the holiday season.

Thank you.

[Operator Instructions] The next question is from Eric Tracy with Buckingham.

Hey guys. Good morning and I’ll add my congrats. I guess if you could frame -- potentially frame the DK ramp and I appreciate you don’t want to give specific guidance into next year. But is there any kind of change to how we should be thinking about the revenue ramp as we move into next year and then understanding that you’re now adding a China JV not profitable until ‘19. How we should be thinking about incremental sort of expenses associated with that as well?

Sure. You have to remember, we are only in possession of this brand for approximately nine months. And the numbers that you are seeing are just splinters that seem to be falling off of what we’re creating. We have Sammy Aaron leading the charge on developing two brands simultaneously, two comprehensive collections. So, this is merely the start. I believe that a year from now, you will look anywhere from $500 million to $700 million in topline sales between the two brands. So, I wouldn’t use this -- the last nine months of sales as a guide at all. Part of it is a band aid, part of it is selling -- getting recognition for some of the old inventory that we had to move through. So this is really the beginning and we’ve got committed obligations from Macy’s and we’ve got major support from every department store in the country. Let me clear that up, it’s not the country, we’ve got a good deal of support from department stores throughout the world. We visited with many, we’re in conversations with many and they are as eager as we are to build the brand. So, we are very excited about this opportunity that’s been offered to us, that we’ve taken advantage of.

And I guess with that Morris, let me, sorry, go ahead, Neal.

Just to add to your question on the JV. We don’t see any expense -- a significant expense event in the first year, they will get off to the ground very quickly, there is both sourcing income and licensing income from the transaction for us. So, it’s not a major key element for us next year and then we expect it to start turning positive.

Yeah. We also have world-class licensees, Estée Lauder, Haynes, PVH and Fossil. They’re all very significant licensees that are aggressive in building these brands. When we first acquired the brand, we noticed that there was no love given to licensees. And being a licensee for the last 30 years, I was a little sensitive to it. We’ve spent a good deal of money marketing the licensee products. We did an amazing shoot for Haynes with intimates and sleepwear the Fossil event. So we are eager to build a licensing business, as well as our own business. It’s -- I don’t mind clipping coupons. So, but it comes, it comes with a lot of work where we’re shoring up our teams, it’s not only in the merchandising side, it’s licensing, it’s legal, it’s marketing and all of this is moving at and it’s moving so rapidly, it’s amazing when you see what’s been accomplished in the last nine months.

And then my follow-up just in terms of, I mean, having capacity for the management team, resource perspective to manage all of this regarding a lot of falls in geographic in category and channel opportunities. There -- do you feel comfortable that the -- how do you stand now the team in place or there have to be -- how are you just think about balancing that versus sort of taking it in a more measured approach?

So, as I stated with retail that, this will be a great time to build the retail chain. I would tell you this is a great time to build a wholesale company. There is so much great talent that’s available. The downsizing of Ralph Lauren, of Michael Kors, of Coach, of Macy’s has brought the sensational talent to seek jobs. And fortunately for us, we’re familiar with a good deal of them and there is -- there have been great people that we’ve hired from Macy’s, from Ralph, from Michael Kors and from Coach. So this is a great time to undertake the initiative that we have. There are times that you can’t find appropriate labor, today we can, and we’re that company that people would like to work for. So we’re not having problems finding talent, occasionally you got to upgrade, occasionally you make a mistake, but overall, I would tell you that again this is a good time to build.

I appreciate all the thoughts guys. Best of luck.

Thank you.

We have no further questions at this time. I’d like to turn the call back over to Morris Goldfarb for closing remarks.

Thank you all for staying with us and thank you for your support. Have a good day.