G-III Apparel Group, Ltd. (NASDAQ:GIII) Q3 2023 Earnings Call Transcript

G-III Apparel Group, Ltd. (NASDAQ:GIII) Q3 2023 Earnings Call Transcript December 2, 2022

Operator: Good day, and thank you for standing by, and welcome to the G-III Apparel Group Third Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Company's CFO, Neal Nackman, you may begin.

Neal Nackman: 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 statement. In addition, during the call, we will refer to non-GAAP net income, non-GAAP net income per diluted share and 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. Also disclosed in our press release for your reference are last year's GAAP and non-GAAP results by quarter. I will now turn the call over to our Chairman and Chief Executive Officer, Morris Goldfarb.

Morris Goldfarb: Thank you, Neal, and thank you, everyone, for joining us. In the third quarter, we delivered topline results that met our expectations. Our strategy continues to deliver on key priorities to drive profitable growth for our shareholders despite increasing macroeconomic headwinds, which softened consumer demand as the quarter progressed. Net sales for the third quarter were $1.08 billion, an increase of 6.2% compared to last year's third quarter net sales of $1.02 billion. Non-GAAP net income per diluted share was $1.35 in the current period compared to $2.18 in the third quarter last year. During the quarter, our higher inventory levels were due to our accelerated production calendar, which was in anticipation of longer supply chain lead times.

As these lead times improve, we will continue to adjust our production and receipt calendars. Our inventory consists of current purchases and is guided by our order book. As expected, our overall inventory position is now enabling us to immediately service the reorders for coats, dresses and other in-demand categories. During the quarter, our higher inventory levels resulted in storage and processing complications within our distribution centers that were above our expectations. This, alongside with port congestion, resulted in significant one-time charges of approximately $0.40 per diluted share in the third quarter. These charges, along with elevated warehousing costs, contributed to our earnings being lower than our guidance for the quarter.

We've secured additional third-party warehousing space, which should eliminate almost all of these charges in the future. Currently, third-party warehouses make up approximately 70% of our total warehousing space. Now I'd like to discuss the extensions of our licensing agreements with the Calvin Klein and Tommy Hilfiger brands. They're an important part of our business. In our 8-K filed last night, we announced staggered extensions by category beginning in January of 2024 and continuing through December of 2027 for these brands. Just to be clear, we do not expect significant reductions in sales, net income and cash generation from these businesses for the next three years. These agreements will allow us time to accelerate our long-term strategic priorities.

And we will continue to direct resources toward our growth areas, including further leaning into building our own brands, continuing to acquire new businesses, expanding our private label business and developing appropriate licensing opportunities. Currently, we've been pursuing a number of near-term initiatives across our existing, owned, and licensed brands, and private label business, including category expansion, geographic growth focused on Europe and digital expansion. We believe we can deliver growth because we've built a powerful foundation and have become a well-diversified company with expertise across a range of global brands with a broad range of price points for a broad range of customers, multiple points of distribution with strong retail relationships in North America and around the world with partners that include department and specialty stores, value retailers, wholesale clubs, digital pure plays and marketplaces in addition to our own omnichannel platforms.

Dominance in designing, manufacturing and sourcing across a broad range of more than 20 categories, including apparel, footwear and accessories for women and men; a strong and growing geographic presence with leadership and offices in eight countries across North America, Europe and Asia; and a well-developed, flexible supply chain infrastructure with broad global sourcing relationships. Over the past five years, we've leveraged our strong balance sheet to focus on a brand acquisition strategy, which has evolved our portfolio to a significantly higher penetration of brand ownership. These brands are our most profitable sales because we do not pay royalty fees, and they provide highly accretive licensing royalty income. Three of our recently acquired or launched brands, DKNY, Karl Lagerfeld Paris in North America, and the remaining global Karl Lagerfeld business have added $1 billion in annual sales to our business.

We see even greater growth ahead with these businesses and the rest of our own portfolio, including Donna Karan, Vilebrequin and Sonia Rykiel. A proven track record and diversified foundation has and continues to enable us to acquire or license and quickly scale brands by leveraging the resources that already exist in this company. We're confident in our ability to drive profitable growth and maximize shareholder value in the future, and we look forward to keeping you updated on our progress. Now I'll briefly update you on the progress we are making against our strategic priorities. Our first priority is to drive our power brands across categories. We're especially focused on driving our owned brands. From a category perspective, we continue to see strength across all of our divisions.

With full ownership brands, we can now leverage newly created categories. Karl Lagerfeld Europe, for example, just introduced the full jeans category into their collection, and we plan on expanding the business by introducing it into North America next fall. Additionally, we've also been able to drive higher AURs, which help offset significant inflationary pressures this year. Our second priority is to expand our portfolio through ownership of brands and drive their licensing opportunities. Our current owned brands are led by DKNY, Donna Karan, Karl Lagerfeld, Vilebrequin and Sonia Rykiel. With full end-to-end control of these brands, we have and continue to grow them by developing new categories, increasing distribution and digital penetration.

We've also built strong marketing capabilities that continue to develop awareness and global recognition. Our owned brands combined are expected to represent annual revenues of greater than $2.5 billion over time while generating higher operating margins than the company's historic average. As brand owners, we have the ability to license out our brand names to best-in-class partners in categories that we do not produce. These agreements bring in a revenue stream that is highly accretive to our profit, currently generating $65 million annually. We have always actively worked with our licensees to build bigger and better businesses. Companies that operate exclusively under a licensor model are valued based on a low teens multiple of their revenue stream.

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With our own brands, we've created a strong licensing revenue stream already and see powerful opportunity to continue to build this profit center and enhance value for our shareholders. Our top owned brands, DKNY, Karl Lagerfeld Paris in North America and Vilebrequin, also with the purchase of the entire Karl Lagerfeld brand, demonstrate our proven track record of building our own portfolio. As we look to the future, we continue to believe there is significant growth potential in the brands that we own. Our current, strong financial position will enable us to acquire additional brands. We continue to prioritize the expansion of our revenues and profits through brand ownership. Our next priority is to extend our global reach by expanding our European-based brand portfolio.

Amsterdam-based Karl Lagerfeld Europe continues to perform well. Having launched the jeans categories I previously mentioned, we're planning on bringing it to North America. We also made progress on key digital initiatives and are on track to open 12 company and partner-operated stores and shop-in-shops this fiscal year. Saint-Tropez founded Vilebrequin, our status swimwear brand's robust momentum continues with another quarter of strong double-digit growth and remains on track to register a record year of sales and profitability. It continues unique collaborations to address a range of customer segments, including streetwear brand, and previously with Palm Angels and Off-White. Additionally, the brand has begun limited edition Capsule Collections featuring the artwork of acclaimed contemporary artists.

Their latest collection is currently being exhibited in the Miami Art Basel. We completed the acquisition of the restaurant and beach club in the South of France and are currently rebranding it to the Vilebrequin La Plage. The brand is also opening its first Cabana Club in new retail location in the totally renovated Boca Raton Beach Club this winter. Both advanced Vilebrequin's leading luxury swimwear position by touching all aspects of beach lovers and created an immerse customer experience and brand recognition. The Paris-based, Sonia Rykiel, the European team relaunched with core categories and established a physical presence in Paris and New York. We also opened in major department stores, including in Paris, and Isetan in Tokyo. Since our Karl Lagerfeld acquisition, our existing European management teams are working to develop synergies to strengthen our European operations overall.

Areas they're focused on include leveraging their vendor base and creating a unified back-end structure for all of our digital businesses. Ultimately, this new infrastructure further develops our European platform and will allow us to continue expansion with any brand. Our next priority is to maximize omnichannel opportunities and leverage data. We've expanded our pure-play presence and developed strong capabilities to drive demand on our retail partners' digital platforms with strong double-digit sales growth led by Amazon and our largest retail partners, Macy's. We've also increased sales with Zalando, Fanatics, Nordstrom's and Hudson Bay. We've started to develop our vendor direct shipping capabilities, which provide additional opportunities to grow our digital business.

The digital businesses of our owned brands are in their infancy. They present a tremendous opportunity, and we believe that these businesses can grow to become significant contributors to our overall business over time. In our own retail operations, Karl Lagerfeld Paris had another solid quarter in North America with a significant rebound in traffic fueling strong double-digit growth. DKNY remained challenged, mostly driven by the lack of tourists, primarily from China and our European stores. We are well positioned across both businesses to capitalize on holiday demand during this key selling period and remain focused on driving omnichannel growth wherever the consumer chooses to shop. In conclusion, having met topline expectations for the quarter, we made progress on all of our priorities.

We experienced some one-time logistical challenges that negatively impacted our results in the third quarter, which we believe are mostly behind us. As our bottom line net income per diluted share was below our guidance and with some uncertainties ahead, we're adjusting our order book for the fourth quarter and full-year. I'll now pass the call to Neal for a discussion of our third quarter financial results as well as guidance for our fourth quarter and full fiscal 2023 year.

Neal Nackman: Thank you, Morris. Net sales for the third quarter ended October 31, 2022, increased approximately 6% to $1.08 billion from $1.02 billion in the same period last year. Included in our sales for this quarter were $55 million in sales of the Karl Lagerfeld business, which became a wholly owned subsidiary on May 31, 2022. Accordingly, the results of the Karl Lagerfeld business were included in our results for the entire third quarter. Net sales of our Wholesale segment increased approximately 5.5% to $1.07 billion from $1.01 billion last year. Net sales of our Retail segment were $29 million for the third quarter compared to net sales of $26 million in last year's third quarter. Our gross margin percentage was 32% in the third quarter of fiscal 2023 compared to 34.2% in the previous year's third quarter.

The reduction in gross margin percentage is attributable to the decrease in the gross margin percentage in our Wholesale segment. The Wholesale segment gross margin percentage was 30.7% compared to 33% in last year's comparable quarter. Our elevated inventory levels resulted in storage and processing capacity pressures within our distribution centers. We have been seeking and have now procured additional third-party warehouse capacity to handle our higher inventory levels. Going into the third quarter, we were not able to secure additional warehouse space in the time frame we had planned. Several negotiations took longer than expected, and in certain situations, we did not want to enter into expensive long-term commitments for such capacity.

The lack of additional space in our warehouses, along with port congestion and the logistical challenges related to trucking, all contributed to us incurring approximately $27 million of demurrage charges in the third fiscal quarter, resulting in a one-time 250 basis point negative impact to our gross margin percentage. Demurrage charges are paid to steamship carriers for delays in picking up freight from their terminals and were the most significant contributor to the decrease in our gross margin percentage for the quarter. We expect that the additional warehousing space we have now secured should eliminate almost all demurrage charges in the future. The gross margin percentage in our retail operations segment was 54.9% compared to 49.8% in the prior year's quarter.

SG&A expenses were $240 million or 22.2% compared to $182 million or 18% of net sales in last year's third quarter. Warehouse costs increased significantly as a result of our higher inventory levels and the timing of receipts. SG&A also grew by approximately $30 million as a result of the inclusion of the acquired Karl Lagerfeld business in our results for the quarter. Looking ahead, we expect to continue to have elevated warehouse costs associated with higher inventory levels through the second quarter of next year. We also expect that the addition of the Karl Lagerfeld business in our results of operations will increase the percentage of net sales represented by SG&A expenses as the Karl Lagerfeld business model includes a higher amount of direct-to-consumer business, which has a higher SG&A rate.

GAAP net income for the third quarter was $61 million or $1.26 per diluted share compared to $106 million or $2.16 per diluted share in last year's third quarter. Non-GAAP net income for the third quarter was $65 million or $1.35 per diluted share compared to $108 million or $2.18 per diluted share in last year's third quarter. Net income per share was negatively impacted by higher-than-anticipated demurrage costs equal to approximately $0.40 per diluted share. These charges, along with elevated warehousing costs, contributed to our net income per share being lower than forecasted. A full reconciliation of our GAAP to non-GAAP results are included in our press release issued last night. Turning to the balance sheet. Our inventory was about 2x last year's third quarter levels, which was a historical low base due to the supply chain issues and strong consumer demand that occurred last year.

A better comparison would be to consider comparable wholesale inventory levels to the pre-pandemic third quarter in which we are up approximately 60%. Inventories are up primarily as a result of the increased shipping times, higher freight costs and the pull forward of the production calendar. Our inventory increases are all from current purchases and will be viable into next year. We have already and will continue to temper our buying into next year to also take account of our inventory levels. We ended the quarter with a net debt position of $728 million compared to $238 million in the prior year. This increase is predominantly related to the Karl Lagerfeld acquisition, which we funded with cash on hand as well as the increase in our inventory position.

We had cash and availability under our credit agreement of approximately $440 million at the close of the quarter. We believe that our liquidity and financial position provide us the flexibility to take advantage of acquisition opportunities and invest in our future growth. We expect our availability to grow significantly as we normalize inventory levels. As for our guidance, for the full fiscal year 2023, we now expect net sales of approximately $3.15 billion and net income of between $147 million and $152 million or between $3 and $3.10 per diluted share. This compares to net sales of $2.77 billion and net income of $200 million or $4.05 per diluted share last year. On a non-GAAP basis, we expect net income for the full fiscal year of 2023 of between $142 million and $147 million or between $2.90 and $3 per diluted share.

This guidance compares to non-GAAP net income of $208 million or $4.20 per diluted share for fiscal 2022. Full-year fiscal 2023 adjusted EBITDA is expected to be between $265 million and $270 million. This compared to adjusted EBITDA of $350 million in fiscal 2022. Let me add some context around modeling of the line items. As a result of our third quarter results, we are now expecting that our full fiscal year 2023 gross margin percentage will be lower than fiscal 2022. For the upcoming fourth quarter, we continue to expect that our gross margin percentage will exceed the prior year's fourth quarter. For the full-year, we expect SG&A to delever primarily as a result of the inclusion of the acquired Karl Lagerfeld business and higher warehousing costs.

We are anticipating interest expense to be approximately $55 million, which includes approximately $7 million of non-cash imputed interest. We are estimating a tax rate of 24.5% after the inclusion of some discrete items during the year. We have not anticipated any potential share repurchases in our guidance. That concludes my comments. I will now turn the call back to Morris for closing remarks.

Morris Goldfarb: Thank you, Neal, and thank you all for joining us today. Our team remains steadfast and is focused on executing our strategy for long-term value creation. We continue to actively work on new initiatives to evolve our business for the future and as always, deliver for our shareholders. Our diversification is a testament to the stable business model and solid foundation we've created, enabling us to navigate any environment. As we continue in the fourth quarter, our order book is strong, and we are delivering on the balance of the holiday season. I'd like to thank our entire G-III organization and all our stakeholders for their continued support, and wish everyone a happy holiday season. Operator, we are now ready to take some questions.

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