G-III Apparel Group, Ltd. (GIII) Q2 2019 Earnings Report, Transcript and Summary

Welcome to the G-III Apparel Group Second Quarter Fiscal 2019 Earnings Conference Call. My name is Paulette, and I’ll 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, the Company’s CFO. Sir, you may begin.

Thank you. Good morning and thank you for joining us. 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, which is also available 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. 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, the Executive Vice President. We’re pleased to report that our growth and momentum from the first quarter continued into the second quarter. We exceeded our forecast and are pleased with the results we’re reporting. In light of our results and continued confidence in our business, we are raising our guidance for the full fiscal year. Neal will provide you with the detail shortly. The retail environment continues to be intensely competitive. The desire of consumers to shop whenever and wherever they want has only heightened. These market factors drive our focus on continuing to make G-III a supplier of choice with incredible brands. We have a comprehensive understanding of the marketplace, trends, consumer shopping preferences across both brick and mortar and digital channels of distribution. In this environment, we continue to successfully demonstrate our ability to leverage our five global power brands DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger, and Karl Lagerfeld. Each brand creates and delivers specific market relevant product that resonate with consumers. We work extremely hard at consistently delivering well-designed product at compelling price points. Our retail relationships and partnerships have never been stronger as we continue to drive our Company to higher levels of sales and profitability. Now, let’s look at the summary of the results for the second quarter. I’m pleased to report that our results were once again fueled by broad-based strength across our wholesale business. Our results for the quarter exceeded our top and bottom line expectations. A few financial highlights for the second quarter. Net sales were up 16% to $625 million, an $87 million increase compared to last year and a record for our second quarter. Our second quarter non-GAAP net income per diluted share was $0.22 compared to a non-GAAP net loss of $0.15 per share in last year’s second quarter. Now for some details on our results. Our own retail business came close to achieving its plan for the quarter. Wilsons delivered a low single digit positive comp. Both men’s and women’s outerwear were strong sellers for the quarter. We believe that our product will be well-positioned for the important holiday season to deliver better results than last year. Bass had a low single digit comp decline in the quarter. We’re in the process of shifting the product mix in our Bass stores to a higher penetration of apparel. This merchandise shift will be rolled out to all of our Bass stores for the full holiday season. Based on our apparel sales for the past quarter, we expect this initiative to deliver higher year-over-year sales. Regarding our Wilsons and Bass retail store portfolio, we’re on track to close approximately 105 stores, ending this year with approximately 245 stores. This compares to the 350 in operations at the beginning of fiscal 2018. We’ve already closed 70 of the approximately 105 targeted locations. The 9 high profile outlet centers that we converted to Karl Lagerfeld Paris stores experienced solid performance in the quarter. As part of our repurposing and store closure plan, we will be opening to 2 more Karl Lagerfeld Paris stores in San Francis and Palm Springs this fall. We now expect to achieve a reduction of losses in our Bass and Wilsons business of approximately $10 million as compared to last year. We continue to push forward our goals of returning these businesses to profitability. As for DKNY outlet stores, we continue to make improvements, both in the U.S. and in Europe. Since we acquired the business, we’ve changed the product mix dramatically and we’re seeing the results of this change. In the quarter, DKNY stores registered a strong comp sales increase of 25% before converting and/or opening locations. We want to make sure we have the appropriate product assortment and economic model in place. Our wholesale business registered another outstanding quarter. Here are some brand level highlights to give you a better sense of our broad-based second quarter strength. Calvin Klein continues to perform well, led by particular strength in dresses and suit separates. Our Calvin Klein business continues to be fueled by leveraging our well-diversified assortment across the women’s market, combined with strong in-house execution. We continue to see robust momentum from our Tommy Hilfiger business as well, which grew more than 60% in the quarter. We saw a strong growth across a number of categories, led by sportswear and dresses. Tommy Hilfiger’s quarter-over-quarter performance is bolstered by our team’s strong product development and execution, and the superior marketing strategy and brand management by PVH. We continue to see a significant runway for future growth of Tommy Hilfiger. Our Karl Lagerfeld business registered another outstanding quarter with net sales up approximately 30%. The business saw healthy increases, led by sportswear dresses and shoes. Karl Lagerfeld is one of the fashion industry’s most decorated designers. Besides being the head of creative director of his namesake brand, Karl is also the head creative director of the Chanel and Fendi fashion houses. Our interpretation of the Karl Lagerfeld brand has translated successfully to the U.S. market. We look for every opportunity to learn and tailor our product offerings to further penetrate our distribution, both in-stores and online. Last month, Karl Lagerfeld worldwide launched capsule collection with Kaia Gerber called Karl Lagerfeld x Kaia, which launched in partnership with Revolve.com on August 30th. In support of that launch, starting this Monday, the capsule collection will also be available at our Karl Lagerfeld flagship store in SoHo. Kaia Gerber will also be making a personal appearance during the New York Fashion Week to promote the collection. Limited availability collaborations like Kaia will be a big help to us as we continue to develop our Karl Lagerfeld business in the U.S. We believe we are well-positioned in our wholesale outerwear businesses for the upcoming fall and holiday season. Our order book is set up well and we’re bringing in some really great products for our retail partners. We will have much more to say about outerwear at the end of the third quarter. I also just want to quickly note that our Eliza J and our other Nordstrom’s initiatives continue to perform well and had another very good quarter. Our DKNY and Donna Karan businesses continued to grow as we doubled net sales, compared to last year’s second quarter. This was another solid quarter of across the board progress, and strong execution and development of our DKNY and Donna Karan brands. We are working closely with our strategic partners to set the stage for a meaningful future profitable growth of these brands. Further, with the acquisition of DKNY, we now have the opportunity to grow our business internationally. Currently, the DKNY business outside of North America is less than $100 million with tremendous potential for growth. We’re currently working with our offices in Milan and several large European retailers on new business for the spring 2019 season. As I highlighted on our first quarter call, we believe we have major opportunity with DKNY and Donna Karan product category licensees. Licensees are an important component of profitability and the margin structure of this business. We continue to reinvigorate DKNY’s licensee base to ensure we are working with the best in class partners who have the right product category and distribution expertise and are vested in growing our brands. In July, Estée Lauder launched the new DKNY fragrance globally called DKNY Stories, and has planned a global marketing campaign to promote this much anticipated new fragrance. Further, this past quarter, we executed a license agreement with Marchon Eyewear, an industry in eyewear fashion, specializing in distinct designs and innovative materials. We look forward to the launch of their eyewear product in the spring of 2019. DKNY continues to expand its men’s product categories. We executed the license with DKNY men’s underwear with 2(X)IST with the product launch scheduled for this holiday season. Next week, DKNY will be kicking off the latest marketing campaign as we head into the important fall and holiday season. The DKNY campaign will feature diverse group of models and social influencers, all living in New York City. It is design to play off the brand’s deep routed city based heritage while telling percentage attributes of the talent -- that total into concept called 100% DKNY. The campaign has a digital first strategy that will aim to captivate consumers who began their shopping journey online. The strategy is to engage with consumer through multiple touch points, utilizing key digital and social platforms and strategic outdoor media in key markets along with some fashion and lifestyle print. All of these efforts are to enhance the brand’s visibility and to keep DKNY top of the mind for the consumer. Digital has been a focus for G-III. In addition to the work we are doing at DKNY, we’re investing in best-in-class systems, experienced personnel, online marketing and advertising performance campaigns to ensure that we capture an ever-growing market share of online purchases whether it be on our own brand sites or that of our retail partners. Although a small base, our e-commerce direct-to-consumer business is up 20% for the quarter versus last year. Lastly, Vilebrequin our status swimwear and resort brand had year-to-date worldwide positive comparable sales in the low single-digits. We continue to drive brand awareness in key European and U.S. cities. This quarter, we opened five pop-up stores in Paris, London, Ibiza, Porto Cervo, Los Angeles, and they will remain open through the fall. We are developing and expanding the brand in China and the Middle East. We recently opened the store in Singapore and just launched the new premium denim collection around the world through our licensee GIADA. We expect to drive sales and profit increases at Vilebrequin over the next several years. I’ll now turn the call over to Neal to provide additional detail on our financial performance for the quarter and our comments on guidance for the year.

Thank you, Morris. Net sales for the second quarter ended July 31, 2018, increased approximately 16% to $625 million from $538 million in the same period last year. Net sales of our wholesale operation segment increased 16% to $545 million from $468 million. Donna Karan and Tommy Hilfiger brands were the main drivers of this increase. Net sales of our retail operations segment were flat to last year at $106 million. We reported a same-store sales increase of 2.5% for our Wilsons stores and a 2.8% comp decline at our G. H. Bass stores. Our gross margin percentage was 37.1% in the second quarter of fiscal year 2019 compared to 37.7% in the prior year’s period. Gross margin percentage in our wholesale operations segment was 33.4% compared to 32.4% in last year’s quarter. Gross margins improved due to increased licensing income and more favorable product mix. The gross margin percentage in our retail operations segment was 46.6%, compared to 48.5% in the prior year’s quarter. Similar to the first quarter, gross margins for our DKNY stores were lower in the quarter compared to the prior year. The prior year gross margins for Donna Karan reflect the reversal of valuation reserves from the acquisition accounting. Gross margin percentage for our Wilsons and G. H. Bass stores was higher than last year. Total SG&A expenses increased $199 million in the quarter from $196 million in the previous year. This was significantly driven by employee costs, which increased $6 million, primarily related to increased bonus expense and salaries. In addition, the SG&A expenses in the quarter do not reflect approximately $6 million of cooperative advertising expenses, which are now treated as a reduction in net sales in the current year in accordance with the new accounting rules that became applicable starting in fiscal 2019. Net income for the second quarter of this fiscal year was $10 million or $0.20 per diluted share, compared to a net loss of $9 million or $0.18 per share in last year’s second quarter. Non-GAAP net income per diluted share was $0.22 for the second quarter, compared to a net loss of $0.15 in the same period of the prior year. Non-GAAP net income per share in this quarter excludes non-cash imputed interest expense related to the acquisition of Donna Karan of $1.2 million. Non-GAAP net loss per share in the second quarter of last year excludes $1.4 million in imputed interest and transitional expense of $700,000, both related to the acquisition of Donna Karan. The aggregate effect of these exclusions was equal to $0.02 per diluted share in this year and $0.03 per share in the second quarter of the prior year. Looking at our balance sheet, accounts receivable increased to $448 million from $288 million at the end of the prior year’s second quarter. This increase is predominantly related to the Company’s adoption of the new accounting rules related to revenue recognition contained in ASC 606. These rules require the liabilities recorded in connection with variable consideration, which were previously reported as an offset to accounts receivable, now be reflected as short-term liabilities. Excluding the impact of a new classification, accounts receivable would have been up 6%. Inventory classifications have also been impacted by the new accounting rules under ASC 606 and now exclude anticipated returned inventory. On an adjusted and comparable basis, inventory increased approximately 7% to $679 million and aligns with our forecasted sales. We spent approximately $11 million on capital expenditures this year-to-date. We had long-term debt outstanding of approximately $494 million at the end of the current quarter, compared to $569 million at the end of the same quarter last year. In addition, our cash balances at the end of the quarter were $42 million this year, compared to $59 million in the previous year. Regarding our guidance. For the fiscal year ending January 31, 2019, we are raising our guidance and are now forecasting net sales of approximately $3.06 billion and net income between $125 million and $130 million, or between $2.45 and $2.55 per diluted share, compared to our previous guidance of net sales of approximately $2.97 billion and net income between $112 million and $117 million or between $2.20 and $2.30 per diluted share. This compares to net sales of $2.81 billion and net income of $62 million or $1.25 per diluted share in fiscal 2018. We expect non-cash imputed interest expense for fiscal 2019 of approximately $5 million or $0.07 per diluted share. On an adjusted, basis excluding non-cash imputed interest, we expect non-GAAP net income for fiscal 2019 of between $129 million and $134 million or between $2.52 and $2.62 per diluted share compared to our previous guidance of non-GAAP net income of $116 million and $121 million or between $2.27 and $2.37 per diluted share. This compares to non-GAAP net income of $79 million or $1.60 per diluted share in fiscal 2018. We are now forecasting projected full year adjusted EBITDA for fiscal 2019 of between $250 million and $260 million compared to our previous forecast of between $236 million and $246 million. This compares to adjusted EBITDA of $201 million in fiscal 2018. With respect to retail, we are expecting a reduction in the retail losses in our Wilsons and G. H. Bass operations by approximately $10 million in fiscal 2019. This will be from a combination of expected comp sales increases, expected gross margin improvement and reduced losses from closed stores. For our third fiscal quarter ending October 31, 2018, we are forecasting net sales of approximately $1.08 billion and net income of between $85 million and $90 million or between $1.70 and a $1.80 per diluted share. This forecast compares to net sales of $1.02 billion, net income of -- or net income of $81.6 million or $1.65 per diluted share reported in the third quarter of fiscal 2018. The third quarter forecast includes non-cash imputed interest expense of $1.2 million related to the note issued to the seller as part of the consideration for the DKI acquisition. On an adjusted basis, excluding imputed interest expense, the Company is forecasting third quarter non-GAAP net income of between $85.9 million and $90.9 million or between $1.72 and $1.82 per diluted share. This compares to non-GAAP net income of $82.6 million or $1.67 per diluted share for the third quarter of fiscal 2018. Regarding our retail performance for the third quarter, we are anticipating positive low single-digit comp inclusive of both Wilsons and Bass, and mid single-digit positive comp increases for both chains in the fourth quarter. Our forecasted second half sales growth rate is impacted this year by the closure of Bon-Ton. We continue to expect strong sales and profit growth in the future. That concludes my comments. I will now turn the call back to Morris for closing remarks.

Before we take your questions, I’d like to take a moment to thank our teams around the globe for their unwavering support and dedication to superior execution. We know that these are challenging times in many industries with consumer buying habits being diverse and ever-changing. We’re constantly mining available and evolving data metrics and analytics to gain insight to proactively forecast trends to meet consumer demands and their channel of preference. These insights are enabling us to deliver more targeted products faster to our consumer. I’m confident that as we always have, we will adapt and do whatever is necessary to remain competitive and grow our business. G-III’s DNA is anchored in creating and seizing opportunities, developing our skill sets to diversify and expand in new directions and adapting to new challenges. We’ve positioned ourselves among the most important resources for the retail market here in North America. And we have only begun to explore the many opportunities for growth throughout the world. With our five global power brands DKNY, Donna Karen, Calvin Klein, Tommy Hilfiger, and Karl Lagerfeld, we believe we have the ability to continue to chart our path of growth forward and continue to win. Thank you. Operator, we’re 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 Edward Yruma from KeyBanc Capital. Please go ahead.

I guess, first, on the quarter, I just want to understand, were there any calendar shifts that we should or shipping shifts that we should consider, particularly as it relates to the interplay between 2Q and 3Q? Second, Morris, any kind of last comments on the outerwear season, how it’s shaping up, retailer inventories? And then, finally, on DK, I guess, just kind of zooming out a little bit, obviously, some nice comments on some of the momentum in the new product. How is the DK performance plotting in with some of the longer term performance goals you guys put out? Thanks so much.

So, in terms of the first part of your question, Ed, there is no significant shift between Q2 and Q3.

So, Ed, as far as coat business, our positioning is very, very strong. It’s consistent with where we’ve been in the last few years. We dominate most coat departments in department stores with all our brands. And performance started on time. We got some very good reads. We got early reads from Nordstrom’s anniversary sale that reorders direction and that kind of got us started. And as of late, our department store business has been very good. So, our order book is strong, as I said earlier, it’s shaping up to be, at this moment, even stronger than it was last year. And our own retail, anything new that we’ve shipped into our stores, our outerwear store predominantly, I guess, I would consider Wilsons is that -- the outerwear store. New product is retailing really well. So, we’re happy with where we are positioned in the outerwear business. As far as DKNY and performance relative to what we’ve been forecasting and telling our partners. We’re there. We’re on target to deliver what we said we would. Our volume is strong; our product gets better every day. We didn’t start out perfect on the product side of it, but that was part of our expectation. That’s the way we work. We get started very quickly. We go through a little bit of a process of trial and error and then we get close to as good as an industry supplier can get. We’re almost there. So, we’re pleased with where we’re positioned with DKNY.

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

Neal, if I just simply look at the performance in the first half of the year on a profitability standpoint, you generated over $46 million in EBIT versus the $7 million loss last year and just a incredible turnaround. If I look at the implied guidance, there is not a lot of growth in EBIT dollars in the back half of the year. I’m just wondering if you could help us understand the margin drivers as we go into the back half of the year by where we stand with Donna Karan and what you’re forecasting within that core wholesale business, because you’ve given us pretty specific guidance on the retail part of the business. I’m just wondering if you help us understand the drivers of Donna Karan profitability and that core wholesale business ex-Donna Karan as we go into the back half of the year, because it does look like a pretty big deceleration in profitability metrics, despite all the momentum you have now. Thanks.

Yes, John. I guess, the things to focus on are really two main points in terms of first half versus the second half. The single biggest thing we’re missing is the Bon-Ton business, which was quite significant in the second half of the year. I think if you added back to our profitability, we feel that we really would be performing about where we need to be. The other reason that you’re seeing a little bit of softness relative to the first half, just keep in mind that we did launch -- the Donna Karan business was really launched under the G-III ownership in the second half. So, certainly, the comparisons in the second half are now against our launched product in the fall of last year. So, we’re still showing very nice increases in the business, but the comp is a little bit -- is obviously different than the first half.

And Neal, can you just remind us where you -- or give us a ballpark idea of where you stand from an overall Donna Karan profitability standpoint right now as we head into next year?

Sure. So, rough numbers, last year, we did about $260 million in Donna Karan business, lost a little over $20 million. This year, cumulatively, we expect the number to be about $410 million. And as I have mentioned before, the profitability on those incremental sales is quite significant. So, I’m expecting solid low single digit operating margin positive for the Donna Karan business.

Right. And then, just right around the topic of Donna Karan more. So, I think you said, Donna Karan comps, albeit off a very low store base, were up over 20%. How does that shape you’re thinking about the potential for more Donna Karan stores going into the future? Thanks.

John, certainly, we will have more Donna Karan stores as we go into the future. Right now, our focus is rightsizing our retail fleet, evaluating what stores in our fleet, the Bass stores and Wilsons stores are on line for conversion into either DKNY or into Karl Lagerfeld. So, it is a focus. So, we will still continue to shrink -- we currently have the 45 stores in DKNY. We will shrink some of those. They’re not appropriate for the future. There’s probably 6 or 7 stores that I’d like to close. So, before we grow, we’ll shrink it. And then, we will -- this is a good time to expand the retail concept. Our developers are working closely with us to help us repurpose stores, find better locations for the future, and maybe swap out some poor locations in deals for better locations. Most of that is targeted toward DKNY. We are not expanding Bass; we are not expanding Wilsons. So, you’re likely to see, as time goes on, more than 100 DKNY stores as we perfect the product and find the appropriate real estate for it.

Our next question comes from Eric Tracy from Buckingham Research. Please go ahead.

Good morning, everyone, and I will add my congrats. I guess, if I could follow up on the DKNY, perhaps this is little semantics. But I believe the prior guide was approaching $400 million and modestly profitable. It seems like just based on the elements you said, Neal, that maybe outpacing the prior target. So, just kind of curious on any color where the upside may be coming from, is that first half driven or an expectation of something in the second half coming through?

Yes. Eric, I would tell you, it’s a little bit of both, first half and the second half. And so, in the first half, licensing income was very strong, probably stronger than what we were originally thought in those -- in the earlier comments of lower operating profitability. And then, we are -- we had increased sales slightly in the second half on the wholesale side of the business.

Okay. And then -- and just curious, you mentioned some international developments in terms of spring next year. Could Morris -- could you maybe just strategically talk about the bigger white space opportunity but maybe as we think about next year where some of that development for DK could arrive?

So, clearly, this isn’t just DKNY initiative. With the presence in Europe, both with Vilebrequin and now with DKNY, we’re becoming much more comfortable in developing that part of the world. Hopefully, in the near future, we can come back to and announce another strategy that is focused specifically on Europe. What we achieved in North America is a little bit unique. Most of the universe of companies that we compete with, their shining lights are really in Europe and in Asia; ours is clearly North America. And we’re going to take page out of their playbook and enter into North America with more relevance than we currently have. So, we’re excited about Europe and the opportunities that it affords us. So, there’s more to come.

And then, just lastly for me. You talked about Tommy, strength and momentum, obviously DK. Correct me, I might have missed this. But, did you quantify CK in the quarter, and then, just a broader color in terms of that brand and the expectation going forward there?

Eric, I’m sorry. You said, CK?

Yes, Calvin Klein. I’m sorry.

Yes. The Calvin business, in terms of -- we didn’t quantify sales. Just to level set where we think the Calvin business is. We’re expecting a low single-digit negative this year due to the Bon-Ton. I think without Bon-Ton, we would have probably been low to mid single digit positive for that business. And, it was a strong performer for second quarter, without getting into the specifics by quarter for the Calvin Klein performance for the prior year.

Our next question comes from Susan Anderson from B. Riley FBR. Please go ahead.

Hi. Good morning. Let me add my congrats on the quarter. I guess, just a follow-up really quick on the Calvin Klein business. So, it sounded like excluding Bon-Ton, it was strong grower in the quarter. I guess, I was just curious, is it so far running in line with your expectations for the year? And then, I guess, if you could talk about what you’re seeing from a margin perspective as we heard from PVH that the gross margin would be lower now for that business? Thanks.

Our Calvin Klein business is very strong. It doesn’t seem like we lost any pace with the departure of Bon-Ton from the universe. We’re copying up significantly, our margins are excellent and our sell-throughs are better than they’ve ever been. So, in our world, we see nothing but positive for the future for Calvin Klein. It is our trophy piece.

Great. That’s helpful. Thanks. And then, I guess, on the DKNY business in Europe, maybe if you could just talk a little bit about how big you think that business could be at some point, how many doors you think you could be in for next spring?

So, the market in Europe has got a lot of opportunities for us. We’re penetrated somewhat in handbags and footwear, and we’re light on distribution in ready-to-wear. We’re working hard at it. The opportunity is taking the store count that we have today, which is not company-owned stores at all; we only have a couple of efforts stores in Europe. But, just clearly wholesale distribution with probably no more than 3 to 4 -- 3 to 350 doors that we’re in, that can expand to probably 2,000 doors on wholesale distribution; we believe there are opportunities in specialty stores and unique situations and performance stores; there is possibility on focusing more on footwear and accessories. So, we’re just scratching the surface of what’s available to us in Europe. And we’re beginning to make our mark. So, it’s a significant opportunity for us.

Great. That sounds exciting. And then, one last one on Bass and Wilsons retail. It sounds like you guys -- I think you expect an acceleration in the comp as we go into the back half and particularly in the fourth quarter. Maybe if you could just kind of touch on what’s going to be the driver of that? Thank you.

So, as I said earlier, in Bass, we’ve changed our assortment mix. We’re finding, in spite of the fact that this is really a heritage footwear brand that our apparel has done much better than our footwear. So, the penetration of apparel is going to be far greater than it has been historically. And we’ll hone down on just a focus group of footwear styles that will make a huge difference. We’ve entered into the children’s business to a small degree. Those margins in the early stages of development there for Bass, and kid’s footwear is very good. So, I believe the mix of product will make a significant change in our performance. Wilsons as well, our product mix on the -- the mix of product at Wilsons historically has been a third coats, women’s coats, a third men’s coats, and a third accessories. And we’re clear today that the accessory business is an elastic business for us. We haven’t found a solution to improve that business or to even maintain these -- the size that we have. We’ll shrink it. And I don’t really care if it’s 5% accessories, and the mix is men’s and women’s coats. So, the strategy is, your allocation of funds for buying is based on your performance. If the menswear buyer is performing better, menswear buyer gets more money. There is nothing in our constitution that mandates that we have to anniversary a category, and we’re playing by those rules, and it is going to make a difference.

Our next question comes from Rick Patel from Needham & Company. Please go ahead.

Hi. This is Steve Lengel on for Rick Patel. Thank you for taking my question. I was curious, if you could give me a little more color around Tommy Hilfiger sales and Macy’s based on the ramp up you’ve been experiencing. What’s going wrong well and what needs to be improved as we think about the potential to grow this business in the second half and in ‘19? Thank you.

Let’s start with everything in the world needs to be improved. We’re never perfect. But, as far as where we sit, we’re doing very well. We’ve taken a brand in a very short period of time that was less than $100 million in size and sat at that level for many years. We built it very quickly to one that is north of $300 million and growing. And the product is part of what’s driving it. And the other piece that’s driving it is the amazing marketing that PVH has put behind it. Maybe coincidentally, maybe the stars were all aligned, but as we signed a deal with PVH, their marketing campaigns kicked in and the combination of G-III type products with the marketing the PVH has done has made a world of a difference. And we’re very comfortable with all the categories that we ship. As I said earlier, related to DKNY, our first shipments are never perfect. Our first shipments with Tommy were never perfect. They were the same as our profile is consistently. But today, they’re good, they’re excellent. The first delivery needed some improvement, second delivery needed less improvements. And we’re on a path today where we’re very pleased with what the product looks like, the performance of the product, the margin. The margin at the retailer is maintaining and the margin at G-III is maintaining as well. So, I guess, that commentary says we’re very pleased with it.

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

Thank you. Good morning. I have a couple of questions for Neal and then a bigger picture question for you, Morris. Neal, I want to start just around the shape of the guidance for the second half of the year. The implied fourth Q outlook implies kind of step down in revenue growth. But, while you’re expecting operating margin down year-to-year in the third quarter, you’re looking for a reversal in the fourth quarter. Can you just talk about what’s going in each of those quarters that would be lead to that?

Yes. Jim, essentially, for the second half, we’re really just looking at the specifics of our order book and the mix of margins and sales that are happening. So, it’s just a matter of refining what the order books looks like. Without getting into too much gives and takes, some gross margin plus and minuses in SG&A.

Okay. Was the reversal of the valuations reserves on Donna Karan, does that go away in the second half of the year?

No, it goes away after the year. It was something that reversed the entire year of last year.

Okay. And then, this gets into the nuance, but the share count implies a big step up in the fourth quarter to get to the full year guide. Is there something specific behind that or perhaps you’re just being conservative on the share count?

Yes. No, there is nothing devious in the share count. We’re probably looking for about an average of $51 million for the year. Yes.

What brings it up from where it is, coming out of the second quarter?

The, RSU grants primarily, the role of the RSU grants.

Okay. And then, lastly on the fourth quarter, are there any sizable spring programs you expect to ship in the fourth quarter? And then, related to that just thinking of this to wrap around into next year. What does the impact of the wind-down of the Ivanka business look like?

I’ll take that one Jim, and maybe I can help you. Let me take your second question first. The Ivanka business, the wind-down of it is negligible. We’re in full control. Our inventory is in good shape. Retailers are taking in what their commitments were. And we won’t miss a beat. And all that’s factored in. This was not a surprise to us. This is a decision that was made. And it was the appropriate decision for the time. Your first question was spring. Yes. There is always a spring program. We fight very hard to get early spring programs in the mix. This is where you get product on the floor of the stores as they’re liquidating inventories, spring makes a difference, it sparkles, and we fight to get it in early. And on top of it, we fight to get it in early because from an economic point of view, it resonates well on our financials. So, the answer is, yes. There will be spring programs. We fight for it every single day.

Any specific call, out there, Morris?

That wouldn’t be appropriate for me to tell you and tell our competition what we have in mind with it.

Fair enough. Last one for you, Morris, bigger picture question. You spoke to embracing analytics speeding response times. That’s new commentary for you. I suppose, it’s not new effort for the Company. Can you give us an idea of where you are in this agenda and some of the associated investments behind that?

Sure. And it is new for the Company. One follows the Company, it used to be a Company that licensed most of its assets. And in that scenario, we never had the luxury of concentrating on our e-commerce business. That was not part of our licensing agreement. Now, that we own some brands and some significant brands, the investment that we’re making is warranted. And the commentary that we give that we’re going to be best-in-class in hire is new.

Okay. How about -- can you talk about where you are with respect to that and planned investments? Have you started hiring people?

Sure. We have hired people, we’ve hired north of 20 people in our e-commerce area. We’ve hired people in our marketing area. A lot of what you see that appears to be market -- margin dilution is SG&A based.

Okay. Thank you.

Neal?

Yes. In terms of -- there is no -- in terms of investment spend on this is really incorporated into our forecast, it’s been something that we’ve been doing. A little bit to the extent at the wholesale business we had retail planners, we’ve been tracking information more tightly over the years and planning more tightly with our retail partners. And that’s something that’s happened in the past, that is happening more so now as more data obviously influences the buying decisions. So, there is -- there are certainly new nuances to the work that we need to do with respect to aligning with our retail customers and their online efforts.

And our last question comes from Eric Johnson from Piper Jaffray. Please go ahead.

Hi, guys. This is Eric on for Erinn today. I just got -- I’m sorry, I apologize if anything’s been asked. But, just go ahead and ignore it, if so. But, I was just curious, if you guys could comment on how the off-price customers are approaching the year, specifically with outerwear and they’re open to buy. I know that was a little bit of a challenging setup in years past. I was curious if there’s anything to comment on that?

Yes. Our off-price customers are very much the same as they have been historically. With our licensees, we have a cap that we can’t exceed. So, we are always at that cap. We do not have -- we never have an issue with how much business we can do with the demand that’s out there from the off-price channel. It’s how we control that demand and how we deliver the right amount of product, not to affect our department store customers and staying in compliance with our cap. So, it’s a zero issue as to whether we can comp to last year or whether we can grow that. That’s all -- that seems to be in our control with the type of brands that we manage that we own, there is always a strong demand for what we provide at reasonable margin for the Company.

Okay, great. That’s helpful. And then, on the retail business, the negative impact on the gross margin from DKNY. Is that expected to play out into the second half, and how does that look as we move into 2019? And then, if you could comment on freight and materials sourcing, kind of cost outlook, that’d be great as well.

So, our margins should be better for the second half of the year and on a go forward basis, based on our earlier conversations of further penetrating into the Europe and Asia. Those margins are historically better than what the North American margins are. So, we see some major opportunity with DKNY, both in margin and licensing revenue. There are assortment benefits that are likely to come in the coming years for DKNY.

And just to clarify that because the question was asked earlier, the valuation reserves that did benefit the Donna Karan business last year, those will happen throughout the quarter. What will be impactful is in the second half, obviously our businesses are a lot larger. So, the impact of that particular business and those higher margins will obviously become lessened versus what we experienced in the second quarter.

Okay. Thanks, guys.

Sorry. In terms of freight, we are seeing some very near-term freight issues which are also incorporated into our plans.

Thanks so much.

Thank you. Thank you for your questions. And thank you all. And have a good day.

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. And you may now disconnect.