G-III Apparel Group, Ltd. (GIII) Q1 2020 Earnings Report, Transcript and Summary

Welcome to the G III Apparel Group First Quarter Fiscal 2020 Earnings Conference Call. My name is Sheryl 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 call is being recorded. I will now turn the call over to Neal Nackman. Sir, you may begin.

Thank you. Good morning and thanks 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, non GAAP net income 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, our Executive Vice President. We are pleased to have begun the year with a good first quarter. Our first quarter performance was anchored by our winning formula of leveraging our power brands through successful design development and execution of great product that resonates with consumers. The strength of our business continues to be represented by our five global power brands DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld. In North America, we have achieved the status as the supplier of choice to our retail partners in many major apparel categories including outerwear, sportswear, dresses, suit separates and performance. We quickly have achieved great recognition for creating some of the best handbags and footwear in the marketplace. We are also expanding our international presence where we see a significant runway for future growth. Now that we have completed a full year of having our own DKNY and Donna Karan product in stores and with the solid performance of our remaining power brands, G III remains well positioned for continued growth into the foreseeable future. Before I review the results of our first quarter, I wanted to address the topic of tariffs. As you all know the first level of tariffs is 10% which for us primarily impacted the handbag business was just increased to 25% as of export dates commencing with May 10. This business represented approximately 7% of our annual net sales for fiscal 2019. We estimate that the incremental 15% increase in tariffs for the remainder of fiscal 2020 will increase our cost by approximately $6 million. We have included this increase into our reaffirmed guidance issued today; we have been seeking to diversify our sourcing networks by arranging to move some production out of China, and also succeeded in obtaining price concessions from our Chinese vendors. In addition, we have obtained price increases from some of our customers here in the U.S. As for the proposal to increase tariffs on the remaining categories imported from China, we have had in depth conversation with our vendors and our retailers and although there’ll likely be short term disruption, all parties are willing to share in the increased cost. We have not quantified the impact of the potential near term disruption on our results of operations should these increases come into effect. We believe that our customer who is shopping in department stores is one who appreciates aspirational brands and is willing to pay more for our products. These price increases will be supported by the fact that we have the best global power brands, well designed products at the highest quality, better real estate positioning in the stores and our always price better than our competition. Looking ahead, we recognize the need to further reduce our production in China to a level where we can still maintain the consistent high quality and craftsmanship that we have developed with our vendors over the past 40 years. Now on a few financial highlights of our first quarter, our results were in line with our bottom line expectations and were led by continued outperformance in our wholesale business which more than offset the challenges in our own retail operations. First quarter net sales were up 4% to $634 million. Our first quarter wholesale net sales increased 8% to $571 million. Our first quarter non GAAP net income per diluted share was $0.25 as compared to non GAAP net income per diluted share of $0.22 in the last year's first quarter. Now let's provide you some details on our results. In our own retail operations for Wilsons and Bass, we were disappointed with our results comparable store sales decreased by 23% for Wilsons and 11% for Bass. As we mentioned on our fourth quarter earnings call, we have so far eliminated approximately $5 million of annualized expenses and salaries which better positions us to deliver on our goal of reducing our retail losses. The merchant teams have created compelling products for the upcoming fall season. We're continuing to review every opportunity to accelerate our path to profitability including continued store closures, accelerating convergence of Wilsons and Bass stores into DKNY and Karl Lagerfeld Paris stores and implementing additional operating efficiencies. Now let's turn to our wholesale business. Our largest business, Calvin Klein represented in excess of $1 billion of our net sales in fiscal 2019 and performed well in the first quarter of this year. Our Calvin Klein business is a dominant resource across the women's apparel market. Excluding the impact from sales to Bon Ton, we were pleased to deliver another quarter of solid top line growth which was led by dresses, sportswear and suit separates. Additionally, as you may have seen in the announcement this past Monday, we're thrilled to extend our partnership with PVH with our new women's CK jeans license. We have all read about the resurgence of denim and we believe we are well positioned to leverage our market expertise in women's apparel to tap into the momentum and build a substantial lifestyle jeans collection. Our retail partners are quite excited about the initial products they've seen. I know it's early but based on our past experience with significant product launches, this business has the potential to get to $250 million in annual sales over the next several years. We expect a full launch for spring 2020 and do not expect a material impact on our results in this fiscal year. Our Tommy Hilfiger business remained quite strong during the first quarter with greater than 50% year over year sales growth. But strength in the business was broad based and was led by sportswear, dresses and suit separates. The strength of the business showcases our continued strong execution and expertise in design, merchandising, sourcing and selling, combined with a compelling brand managed print in marketing by our partners at PVH. We continue to expand the distribution on reach of our Tommy Hilfiger product. I'm also pleased to highlight that this spring we launched various Tommy Hilfiger categories into approximately 150 dealers doors. We have also expanded Tommy Hilfiger Sport into numerous specialty stores including Urban Outfitters, JD Sport and Pacsun with additional launches still to come. We remain very excited about the meaningful opportunities to grow this business over the next several years. Our Karl Lagerfeld business did well in the quarter and we continue to be excited by the success of this brand that we introduced to the North American market. Looking ahead, Carine Roitfeld, the former Editor in Chief of Vogue Paris, stylish fashion Director and entrepreneur who has had a long history of collaborating and influencing Karl Lagerfeld's himself has been interested to lead the brands global creativity creative stylings for the upcoming three seasons. On June 20th, our own Karl Lagerfeld company in addition to the fashion house of Chanel and Sandy will host a significant memorial celebration for Karl Lagerfeld at the Grand Palai in Paris. This event will pay tribute to Karl's legacy and his unprecedented creativity which expanded beyond fashion to include design, photography, publishing, illustration and architecture. As I mentioned on our yearend earnings call, fiscal 2000 was the first full year of our brand repositioning and distribution of G III developed products for our own DKNY and Donna Karan brands. We have learned much about how we can continue to build this business going forward. At $400 million in annual net sales in fiscal 2019, this has quickly grown into a meaningful business and represents one of our biggest growth drivers. For the first quarter of this year, we have registered stellar double digit growth with strength across all categories led by sportswear, handbags and shoes. On the DKNY marketing front, we continue to leverage the momentum of the 100% DKNY campaign. Our digital branding efforts and high impact premium outdoor media placements are ongoing and not only performing well but also exceeding benchmarks of success across media channels. Last week, we launched the DKNY pride capsule collection, playing off the 100% DKNY concept celebrating the arrival of world pride in New York City and raising awareness. Licensing is an important part of our DKNY and Donna Karan business. We recently renewed DKNY partnership with our watch licensee Fossil. We have new eyewear licensee Marchon who showcased their newly designed DKNY eyewear line and launched the product line globally in April. DKNY and Donna Karan offer the opportunity for significant domestic and international growth over the next several years. We have accomplished a lot in the short period of time and have a plan to accomplish a great deal more with these two brands. Overall, spring outerwear performed well for us and we expect that we again will have a good upcoming fall and holiday season. At G III, we continue to focus on capturing our share of the ever growing market for online sales, whether it be on our own brands, websites of our retail or our websites of retail customers. Our brands are in demand and we continue to allocate more investments and personnel in the online space. Lastly, Vilebrequin our status swimwear and resort brand had worldwide comparable sales increases in the mid single digits and continues to do well. This quarter we opened two new stores, one is the Hudson Yards in New York City and the second in Sylt, Germany. We continue to focus on selectively expanding the brand brick and mortar and digital footprint. I'll now pass it to Neal for a detailed discussion of our first quarter and our guidance for the second quarter and for fiscal 2020.

Mid sales for the first quarter ended April 30, 2019 increased approximately 4% to $634 million from $612 million in the same period last year. Net sales of our wholesale operations segment increased 8% to $571 million from $528 million and the Tommy Hilfiger and DKNY brands were the main drivers of this increase. As previously indicated, our growth rate was suppressed by the sales of Bon Ton in the first quarter of last year. Net sales of our retail operations segment for the quarter were $82 million approximately 22% lower compared to last year sales of $105 million. We reported same store sales decreases of approximately 23% for our Wilsons stores, 11% of our G.H. Bass stores and 1% for our DKNY stores. Net sales of our retail operation segment were also negatively affected by the decrease of approximately 60 stores operated by us compared to the first quarter of last year. Our gross margin percentage was 37.3% in the first quarter of fiscal 2020 as compared to 38.3% in the prior year's period. The gross margin percentage in our wholesale operations segment was 34.9% compared to 35.2% in the previous year's quarter. The gross margin percentage in our retail operations segment was 45.2% compared to 46.3% in the prior year's quarter, mostly as a result of higher promotions in the current year to Wilsons stores. SG&A expenses were flat at $202 million in this fiscal quarter and the same in the period previous year. Net income for the quarter of this fiscal year was $12 million or $0.24 per diluted share compared to a $10 million or $0.20 per diluted share in last year's quarter. Non-GAAP net income per diluted share was $0.25 for the quarter compared to $0.22 per share in the prior year. Non-GAAP results exclude the impact of non cash and period interest and a gain on lease terminations. Looking at our balance sheet, accounts receivable increased to $478 million from $429 million at the end of the quarter, up approximately 12% and consistent with our wholesale sales growth. Inventory increased approximately 16% to $539 million. This increase is higher than our forecasted sales growth as a result of accelerated inventory receipts and increases in the DKNY inventory which is still building up and normalizing, when compared to launch levels of inventory in the prior year. In this fiscal year we adopted accounting standards codification topic 842 with ASC-842 and additional details regarding the adoption can be found in our first quarter 10 Q which will be filed with the SEC shortly. Per ASC 842 we evaluated our portfolio of real estate leases and have accordingly capitalized the lease liability and in light of these assets associated with these leases on our balance sheet. We expect the impact of applying the new standard to be negligible to our results of operation and cash flows as compared to the previous accounting methods. We spent approximately $13 million on capital expenditures this quarter. We had long term debt outstanding of approximately $411 million at the end of this quarter, compared to $448 million at the end of the first quarter last year. In addition, our cash balance at the end of the quarter was $48 million this year compared to $71 million a year ago. We currently have 4.3 million shares outstanding under our authorized share repurchase agreement, as for our guidance, we are reaffirming our guidance for the fiscal year ending January 31, 2020, and forecasting net sales of approximately $3.28 billion, net income between $163 million and $168 million or between $3.19 and $3.29 per diluted share, this compares to net sales of $3.08 billion and net income of $138 million or $2.75 per diluted share in fiscal 2019. On an adjusted basis excluding non cash computed interest expense of $5.4 million and an $800,000 gain on lease terminations, we are anticipating non GAAP net income of between $167 million and $172 million or between $3.25 and $3.35 per diluted share compared to non GAAP net income of $144 million or $2.86 per diluted share in the previous year, our guidance continues to assume weighted average diluted share count of approximately 51 million shares. We are projecting full year adjusted EBITDA for fiscal 2020 of between $307 million to $313 million compared to $269 million in fiscal 2019. We now anticipate the non GAAP retail losses in our retail operations segment in fiscal 2020 will be similar to fiscal 2019. This assumes mid single digit comp declines at both Wilsons and Bass for the full year. For DKNY retail operations, we are planning for a high single digit comp increase for the full year. Total sales are planned about flat to prior year for DKNY, as the average comp store count is down. As for DKNY's wholesale and licensing operations, revenues continue to be planned to grow by approximately 20%. For our second fiscal quarter ending July 31, 2020, we are forecasting net sales of approximately $660 million and net income between $8 million and $13 million or between $0.15 and $0.25 per diluted share, this compares to net sales of $625 million and net income of $10 million or $0.20 per diluted share reported in the second quarter of fiscal 2019. On an adjusted basis we are forecasting non GAAP net income of between $9 million and $14 million or between $0.17 and $0.27 per diluted share as compared to non GAAP net income of $11 million or $0.22 per diluted share in the previous year's quarter. And as one of our retail operations, we are assuming a mid single digit comp decline in total for the quarter. That concludes my comments. I will now turn the floor back to Morris for closing remarks.

Thank you, Neal. In this difficult geopolitical and retail environment we continue to have the confidence in our ability to adapt to unique challenges. Anchored on the strength of our global power brands, G III is poised to achieve significant organic growth over the next several years. Our experience in worldwide sourcing and the size and flexibility of our organization in Asia is a competitive advantage for us. We remain in the strong financial position with a healthy balance sheet. I’d like to thank our shareholders, partners and stakeholders for their support. 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 Markets. Your line is open.

Hey, good morning guys and congrats on navigating a very difficult environment. I guess first, Morris kind of a bigger picture question, I know you guys have placed a lot of attention on the retail business, you've change out leadership there, you've closed stores, yet as you guys indicated losses will be comparable year over year I guess what's your openness to accelerating store closures further or potentially bending the cost curve in a more significant way and then as a follow up, Neal you guys called out a couple of different headwinds to earnings between the tariffs as well as the losses in retail operations. I know you were able to maintain guidance, I guess where are you seeing kind of areas of incremental upside versus your plan? Thanks so much.

Thanks Ed, Ed we are very conscious of our problems at retail, we’re working hard at mitigating the damage that we have, the damage that possibly we’ve created. But it takes a while, you have to snap my fingers and say I am done and take a very aggressive right off is not what I'm ready to do. We’ve accelerated our store conversions because we found some exceptional solutions to some of the Wilsons stores, as we had predicted as we had discussed on earlier calls as we got DKNY in better shape where we were comfortable with the product. It took a little while. It took us three deliveries and today we are seeing a dramatic change in performance in our own retail stores as well as the department stores in the European distribution that we have. We're on track with DKNY and we're finally ready to expand the door count there, we’ve got short of 40 doors in DKNY today. So the expansion capacity is easily another 50 to 70 doors. So we are moving faster than we had originally thought. We have identified several new stores that will be converted into DKNY stores in the coming months. That said it takes a little while even to execute that, whereas store construction there is getting the appropriate inventory stage for opening new stores and with that we also have picked up traction with Karl Lagerfeld, Karl Lagerfeld is performing exceptionally well. We have one store in soho that’s a non-achiever it’s a very high rent district that inherited through DKNY, we converted it into Karl Lagerfeld, it's not working but the good news is the lease is over, we’re done with that store at the end of this year so that again provides a little aid into prosperity for us. So we’re on track and there is nothing that says, I've said before that I can't do anything that's graphical. Our balance sheet supports an aggressive write off as needed. I am not ready to make that call yet. So we are conscious of it, we're working hard at it, we've changed management and I think we are on a path to preserve moneys that otherwise would have been written off risk.

You know as far as the second part of the question in terms of the adjustments to the back three quarters we look at our order book for wholesale and primarily the adjustments that have been positive in terms of top line and bottom performance are all in the wholesale category across the brands.

Great thanks so much guys.

Thanks Ed.

Our next question comes from Erinn Murphy from Piper Jaffray. Your line is now open.

Great. Thanks and good morning. I guess a couple of questions maybe first starting with the first quarter. As you think about it relative to your expectations that came in at just over $50 million light, retail obviously being a part of that shortfall but Morris, if you could share with us what you saw in your non, kind of five power brands key to the wholesale business and then how did Karl Lagerfeld do relative to your expectation?

The non-power brand business for Q1 is, it's a very small business, quite honestly. So there was negligible impact the area that we missed a little bit on is there are team license business and Kensie which also is Kensie sportswear, which is not a very important component to our business today or going forward. All said we really had, what I would return as an excellent first quarter relative to not only the industry, relative to our sales in the past, our increase in comp sales was north of 8% in wholesale. I'm not sure, I saw many postings that read that way in our universe. So we’re pleased. The future couldn't look better. All the experiences of integrating companies which we’re very aggressive on are behind us. We’ve got of the most amazing talent in this industry, supporting the strategy that we’ve implemented. They execute well, they execute on an exceptionally timely manner and the future has never looked better for us.

Got it, thank you and then on, sorry yeah.

I’m sorry, my response to Karl, the only hiccup we have to the original plan, again it’s not our own doing, it’s more Taylor centric than anything else, when we bought the brand we were very fast to describe what our strategy was, it was going to be a brand that was guided toward dealers Lauren Taylor, the Bay and beyond it was not a Macy's brand, it was carefully distributed we never said that this was going to grow quickly, it was going to grow carefully, and it is. So the only hiccup we're incurring right now is really the unknown future of Lloyd & Taylor. We’re very pleased with the product and when you walk through the showroom it's product that makes you smile, it's great quality, it's great design and it's price affordability, it's a surprise to most consumers as to how affordable it is. It's a brand that really reeks of luxury and we’ve made it a little bit more moderate and affordable, it’s just the brand that we needed.

Great and then just on tariffs, Morris you’ve talked about price increases that retailers are willing to share and burden with, guess can you share with us what type of price increases you think you can get through without meaningfully altering kind of consumer demand and then just mechanically when would we start to see some of the price increases? And I'm assuming you're just speaking about the handbag side of your business that is currently impacted.

Sure. There has been a lot of talk on tariffs and price increases and moving from country to country, we’ve yet to hear anybody calculating the damage that could be done in moving inappropriate time from one country that's been developed for 30 to 40 years by a vendor and ourselves and being able to do it seamlessly. Our concern is to make a radical move, take out total production out of China, it's very easy we have aligned outdoor from factories that we don't do business, that use the calling card of do business with us and you can avoid tariffs. Well if we didn't choose to do business with you before, maybe you are not meant for us today. We are not choosing factories or countries solely on the merit of tariff. We have great product. We work hard at developing these relationships. We are not very fast to give them up. In a perfect world, there would be these tariffs wouldn't be in play but if they are and they become a reality, I assure you that we will find a solution. We're not going to abandon 40 years of hard work and quality product for entering into a virgin territory and risking our company. That's not who we are, so there might be some short term pain in margin but I believe this is the best solution for us.

Okay fair and then just last question for Neal. The inventory you said you had accelerated which caused a kind of the 16% build; it is the highest rate we have seen for several years relative to sales. I'm just curious how do you expect the kind of work that through throughout the year, when should it be more aligned with sales and was there any kind of pull forward with because of tariffs or was it just you guys holding more inventory for retailers. Thank you.

You know, I think that we have certainly been conscious of the environment as far as trying to take advantage of good pricing as well as potential tariff issues. So, as I mentioned there were accelerated receipts for both of those reasons, the DKNY business still is in the year two of more maturing and growing. I would tell you that we would probably still be in the mode of accelerating receipts at the end of the second quarter for sure. And then we would hope that probably by the end of the year that we are probably back in line with more consistent with future growth.

Okay. Thank you guys, all the best

Thank you, Erinn.

Our next question comes from John Kernan from Cowen. Your line is now open.

Hey guys, sorry about that. Thanks for taking the question. Neal you took up the order book outlook in wholesale, I'm just wondering if you could share what specific brands categories or even channels and partners that are firming up at this point because we saw a pretty significant deceleration in traffic drop in the entire retail ecosystem from January through May. So I'm just wondering where you're seeing maybe better trends play out?

Yeah look I think it keep in mind as Morris mentioned before we have continued to outperform the marketplace and what we saw with the order book was really across the brands. I don't have a single item to call out, we had the strength across the Calvin brand, Tommy’s business, DKNY increases, Karl had a small increase, so they were not extreme. Our top line sales guide is back to where we were originally. Our mix was significant was half retail and half wholesale. So we sort of made certainly made up of what was a pretty small miss in terms of the wholesale business but no, I don't have any specific brand product to call out for you John other than that.

Okay and then just Neal one more for you, just the confidence in the gross margin reacceleration in the back half of the year. If you look at kind of where Q1 shook out, have some ideas around Q2 and then it does assume some increases in the back half of the year, given the inventory situation, potential tariff situation in the fourth quarter. Just wondering how your confidence in that gross margin picture you do have some pretty comparisons for the back half of the year are not typical. I'm just wondering given the disruption in the retail business and a lot of the uncertainty in the back of the year and inventory being a little elevated, how confident you are in that gross margin outlook?

I’m sorry, with the end of your comments, I mean the inventory increases are not a concern for us, this is not bad inventory, this is good inventory going forward. So we don’t see any kind of pressure on margin in terms of cleaning out inventories. With respect to your accurate view of back half improvement, if you look at towards the back half of last year, we did have some challenging periods so the comparison is a little bit easier. If I had to lean into anyone particularly, I would tell you that the non-outerwear business in the fourth quarter of last year was probably more impacted by retail selling and some mock-down pressure. That’s about it John, so we got a order book that is the basis for our forecast and it's only in the short term we are in the mid seventies as far as the order book being completed which is comparable to where we were last year and that's what gives us confidence that with our forecasted figures.

Got it. Thank you and then, Morris, can you remind us the lease expiration timing of the store base? You have been active in reducing the footprint, I'm just wondering as we look into beyond fiscal 2020, what's the overall store closure cadence looks like?

So I'm going to let Neal respond to that. Neal, I'll give it to you by here.

You've got the disclosures in the 10 K, I would tell you that on average the retail store base now is down to about the three year average. I mean, keep in mind that one of the things we have been extending lease where they make sense and we’ve been doing that on short term basis. So that's bringing the average, not to say that we don't have some outliers in terms of longer years on some of the stores but on average we are making good headway at bringing the lease term down.

Got it and then just last question for me. Donna Karan has been a source of-, I think upside to where you thought it would be, just remind us the margin profile of business right now as we head into the rest of fiscal 2020?

Yes, so last year we were low single digit positive, in the current year we will see improvements to that. It is getting a little bit more difficult to break out the specifics as the business melts in and absorbs different corporate all heads. But perspectively just as a reminder we think there will be for sure one of the higher operating margins of the business. We are still thinking that's in the 15% to 20% operating margin range and again that's because of the,- that’s a business that we do not pay royalties on number one and number two we got a nice licensing base that’s highly profitable for the business.

Excellent. Thanks guys. Best of luck.

Thanks John.

Our next question comes from Rick Patel from Needham & Co. Your line is now open.

Good morning guys and congrats on the new Calvin Klein license. I was hoping you can talk about the opportunity in jeanswear. So as you look at that line and what it's done historically, what are you most excited about as you think about the opportunity. And along those lines, I was hoping you can touch on the distribution as well, what that looks like in spring 2020 and how quickly you expect to ramp to your $250 million sales target?

So basically let's start with your question on distribution. It's the same distribution as we have in Calvin Klein and Tommy Hilfiger and DKNY. It's sector of retail community that we know well, it's not uncharted waters. As far as wear I'll expand on a little bit, well we now get is another path to sit on that is a classification. We love classifications that's how we grow our business. It is not a sportswear pad that houses all of what we do, this might be as much as 15 separate locations we would sit in the Macy's or maybe less so in Dillard's and Lauren Taylor in the bay and Nordstrom's but it gives us great opportunity. Denim, we're very excited about the denim business. We believe there is, denim is coming back in a very significant way and we've changed it a little bit from what people would have expected. We are going to be approximately 30% denim and maybe 70% tops. So it's an active area that reads as denim but it's t shirts, it's hoodies, it's sweaters, it's active outerwear, and it's a change from what's been out there. There is not a retailer that's passed through our showroom, our makeshift showroom, we've not built out a space yet, and has been excited about everything that we've done. It's a lifestyle that has been in existence forever. Denim is an incredibly old fabrication and we've made it much more modern than one would anticipate. So, distribution is not going to be heavy on the off price channel. It's priced appropriately. It's exciting and we believe this is a major growth opportunity for us. I think there's a lot to learn on the way we're marketing this that will transcend into making even Tommy Hilfiger, DKNY and maybe even Karl Lagerfeld a little bit more Denim centric.

Also a question on retail. So, given Wilsons and G.H. Bass are running a bit softer, can you touch on your recently converted stores? Some global brands out there have been talking about tourist headwinds for a while now. So just curious to what extent that might be affecting your performance in Lagerfeld and DKNY stores?

Well for us we don't have very much of a comp. What we do have a comp for is Wilsons. Our traffic is down. I don't really believe that Wilsons was a major tourist destination. I think that maybe the world can live without a code outlet store. So that's more about us than the consumer. The Bass business. We were retooling on Bass. We're raising our price points. We're delivering better products. And we're seeing a slight difference, traffic would help. But we, our online business is excellent at Bass and we're picking up as we get rid of our markdown inventories. There is better effort and better performance on the rest of what we do. As far as DKNY and Karl Lagerfeld, we believe we are capturing the tourist. I can't tell you we're capturing more or less than last year because quite honestly I don't believe there was a last year. So this is the first year out as far as I'm concerned with appropriate product, and it's not bad. So, imagine if the tourist was out, how good our business would be. So we're exactly where we want to be. We have great product. We have great management. And I think we have two great brands that we can build our retail business appropriately with. We never had that. We never had the ability of building out Calvin Klein or Tommy Hilfiger retail. We're a licensee with wholesale rights in North America, and with our own brands we have the ability of expanding that.

Thanks very much.

Thank you. Thanks for your question.

Our next question comes from Heather Balsky from Bank of America. Your line is now open.

Hi, good morning. Thanks for taking my questions. First, I was curious on the Donna Karan. I guess Karl Lagerfeld retail business, the profitability has also been a drag. I'm curious if you can talk about what gets you to better profitability there and even maybe positive operating income? And then also with regards to your retail business, just curious if 2Q comps are running in line with your guidance for the quarter?

So, in response to your question, and I guess what makes us comfortable is that we're better at DKNY, I guess I'll paraphrase it. I think I...

Sorry, what was that, that would be helpful and also just what got you to profitability for that retail business?

I think I've addressed it. I think it's primarily a better product which we had. A product it's taken three deliveries to get it right, which is fine. We are right on the appropriate assortment, the right quality and the appropriate price points for the consumer that we're addressing. So we're seeing a build in our volume in our comp stores. I think that's all about product. I'm not sure it's about tourist. So we're comfortable that we're on a path. Those doors are contributing and they are strong contribution to the future of DKNY and Karl Lagerfeld on a four door basis. And

And then.

And with respect to your second part of your question, I would tell you that the outlet business at present is a little bit under pressure. We certainly have factored that in terms of the forecast for Q2 but I would tell you that we're off to a little bit of a challenging start in the first month.

Thank you.

Operator, next question please?

Our next question comes from Jim Duffy from Stifel. Your line is now open.

Thank you. Good morning. A couple of questions from me. First, Neal, on the SG&A flight year to year in the first quarter, how are you guys doing that and what's the outlook for SG&A for the remainder of the year? Is there an investment in the second half to build towards the launch of the Calvin Klein Denim?

Yes, so Jim the, if you look at the SG&A we do have less stores. So on the retail side of our business, we're having decreases in terms of SG&A as a result of the lower store count primarily. The wholesale side as we're really making investments, continuing to make investments as the business grows and those are in the main areas where people, space and then advertising, more specifically in the DKNY business. So, I would tell you that there is nothing unusual in terms of those increases. We still look for operating margin improvement in the wholesale segment. We'll have a little bit of, hopefully a couple of kicks at both gross margin improvement as well as SG&A leverage throughout the whole year.

Jim, as it relates to the Denim, the increase in possible increase in the SG&A, as a percentage of sales, we're going to get a great advantage because the areas integrating into our CK performance area, so leadership will be at of CK performance. There'll be some additional designers. There'll be some space needs. And as far as shop buildouts, we have the collaboration with both the retailer and PVH and our need to build out shops in the department stores. So, actually it's a very good asset for us. It's not cost-intensive, I think we have the capability to expand it and expand it rapidly.

Great. And then just a question around the environment. I know it's been a challenging spring for softlines, I'm curious based on what you're seeing today, does an order today mean the same as an order a year ago? Are you seeing cancellations? How do you think about the order book, is there any movement in whether those orders are firm or more at risk?

There is nothing that's led me to believe that these orders are any different than in the past. We have a high dependency on some retailers, but conversely those same retailers have a high dependency on us. We work together, we - more cases than not a cancellation of product is generally caused by us when we have our planners and our analysts evaluating sales from our retailers on a regular basis and what we don't do is we don't flood the inventory into retail stores simply because there is an order in place that is a solid order. We try to mitigate the damage by finding solutions before it is a desperation issue. So there is nothing at all that is - that leads me to believe that an order is any less solid today than it was a year ago, two years ago, five years ago. The one thing we can't forecast is a surprise bankruptcy. If that occurs, there is nothing I can do about that. But we're exceptionally good on monitoring that and we work on and the most amazing awareness factor that you would believe our network is not only on the frontline in sales, but it's in finance with communications with competition where we are very much aware of what goes on. Bon-Ton, we were one of the largest suppliers at Bon-Ton, yet we didn't get caught in their bankruptcy, and we were there all the way through the end. I can cite many of these situations, we are careful, we are prudent and we're actually pretty good at what we do on all basis. The organization here is one that I am most proud of, there are lots of changes but we are rock-solid on the structure. The structure that sights the impediments of business and deals with them as we've done that historically and Jim you've been part of it for many years. You haven't seen too many changes, and this time I think what you are most happy with when you have an organization like G-III is that you have a vast amount of people that you can depend on to make the right solutions when they appear - when the problem appears. Anyway little wordy but I guess it needed to have a call out in these difficult times.

Understood and thank you for that and the last question from me Morris, can you comment on the opportunity with the off-price channel for the fall season, what [technical difficulty] channel that is contemplated in the line growth.

So Jim with our licenses we have a cap, a contractual cap that we're permitted to sell the off-price channel. We're careful with that cap, we don't want to exceed it. We don't believe it's appropriate for the brand and there is a lineup for our brands, there is basically an allocation that we provide for the off-price channel as to what we will give them in dollar value, so I cannot tell you it's for all our brands, but it is certainly for our call it our five power brands, DKNY where the allocation is created by us we are very much in sync with licenses that we take from PVH, we try to keep it close to what we have with Tommy and Calvin. So we don't have an overabundance of products in the up-price channel and we have a very - we always have a high demand for our brands.

Great. Thank you.

And our final question comes from Susan Anderson from B. Riley. Your line is now open.

Good morning this is [indiscernible] on for Susan. Can you talk about the broader Calvin Klein portfolio performance in the quarter, I think you called that dresses, sportswear and suits as top-line drivers but were there any categories that underperformed relative to your expectations and then are there any categories also where you are seeing increased space allocation or increased demand from your wholesale partners?

No, we don't have any specific call-outs other than we the – just as a reminder the Bon-Ton business was probably the most significant – the most significant impact of the loss of the Bon-Ton business was on the Calvin Klein brand. So our volumes were pretty good, we would have had very solid increases in Calvin if you stripped out the Bon-Ton business that we did do with them in the first quarter of last year. And as far as going forward, obviously it's the Calvin Klein jeans business is the one that at this point is new space for us that we expect to capitalize very quickly on.

Great thank you and then can you also talk about the growth you're seeing for DKNY at the wholesale partners outside of Macy's and sort of any differences you're seeing in the broader department store portfolio there compared to Macy's?

Sure, our business is consistent, it's very good at Macy's, our shoe business is stellar, our handbags in little bit difficult time for handbags but our handbags are right in sync with some of the top-tier handbags that are in the department stores and it's not only Macy's, it's all the department stores that we sell. And this one we can sight global distribution on where we're doing exceptionally well on footwear and handbags throughout Europe, and we're making inroads on our sportswear, our dresses and our performance apparel. Some of our franchise partners are opening performance stores. One has opened two stores and doing incredibly well and planning on expanding the unique concept. So, we are very pleased globally, we don't, we no longer refer domestically to just the Macy's business, although it's our largest account, we've gotten much broader distribution today and they're all in sync, they're all doing well, trying to create capsule groups that are a little bit different than what we provide to Macy's for some of their other accounts to differentiate them, and it's really on a much stronger platform today than it was a year ago.

Got it. Thanks for taking our questions and good luck next quarter.

Thank you.

That concludes our question-and-answer session.

All right, thank you very much for being with us this morning and talk to you soon. Thank you very much.

And thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.