Item 1.
|
Financial Statements.
|
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
July
31, 2016
|
|
|
July
31, 2015
|
|
|
January 31,
2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In
thousands, except per share amounts)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
44,950
|
|
|
$
|
18,810
|
|
|
$
|
132,587
|
|
Accounts receivable, net of allowances for doubtful accounts and sales discounts of $64,016, $54,213 and $74,261, respectively
|
|
|
243,108
|
|
|
|
238,659
|
|
|
|
221,500
|
|
Inventories
|
|
|
569,996
|
|
|
|
605,214
|
|
|
|
485,311
|
|
Prepaid income taxes
|
|
|
31,130
|
|
|
|
8,668
|
|
|
|
23,347
|
|
Deferred income taxes, net
|
|
|
17,576
|
|
|
|
16,057
|
|
|
|
17,564
|
|
Prepaid expenses and other current assets
|
|
|
33,149
|
|
|
|
30,386
|
|
|
|
22,131
|
|
Total current assets
|
|
|
939,909
|
|
|
|
917,794
|
|
|
|
902,440
|
|
INVESTMENTS IN UNCONSOLIDATED AFFILIATES
|
|
|
62,882
|
|
|
|
25,490
|
|
|
|
25,662
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
103,697
|
|
|
|
89,743
|
|
|
|
103,579
|
|
OTHER ASSETS
|
|
|
24,782
|
|
|
|
26,817
|
|
|
|
24,886
|
|
OTHER INTANGIBLES, NET
|
|
|
10,217
|
|
|
|
11,609
|
|
|
|
10,799
|
|
TRADEMARKS, NET
|
|
|
68,169
|
|
|
|
68,182
|
|
|
|
67,267
|
|
GOODWILL
|
|
|
49,864
|
|
|
|
49,844
|
|
|
|
49,437
|
|
TOTAL ASSETS
|
|
$
|
1,259,520
|
|
|
$
|
1,189,479
|
|
|
$
|
1,184,070
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
—
|
|
|
$
|
5,503
|
|
|
$
|
—
|
|
Accounts payable
|
|
|
244,904
|
|
|
|
297,724
|
|
|
|
173,586
|
|
Accrued expenses
|
|
|
60,423
|
|
|
|
56,225
|
|
|
|
71,218
|
|
Total current liabilities
|
|
|
305,327
|
|
|
|
359,452
|
|
|
|
244,804
|
|
DEFERRED INCOME TAXES, NET
|
|
|
24,902
|
|
|
|
19,006
|
|
|
|
23,840
|
|
CONTINGENT PURCHASE PRICE PAYABLE
|
|
|
—
|
|
|
|
888
|
|
|
|
—
|
|
OTHER NON-CURRENT LIABILITIES
|
|
|
29,186
|
|
|
|
24,958
|
|
|
|
27,299
|
|
TOTAL LIABILITIES
|
|
|
359,415
|
|
|
|
404,304
|
|
|
|
295,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock; 1,000 shares authorized; No shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - $.01 par value; 120,000 shares authorized; 46,407, 46,204 and 46,212 shares issued respectively
|
|
|
231
|
|
|
|
232
|
|
|
|
229
|
|
Additional paid-in capital
|
|
|
360,947
|
|
|
|
343,582
|
|
|
|
353,739
|
|
Accumulated other comprehensive loss
|
|
|
(20,467
|
)
|
|
|
(20,112
|
)
|
|
|
(23,689
|
)
|
Retained earnings
|
|
|
561,970
|
|
|
|
465,372
|
|
|
|
560,491
|
|
Common stock held in treasury, at cost – 650, 984 and 667 shares respectively
|
|
|
(2,576
|
)
|
|
|
(3,899
|
)
|
|
|
(2,643
|
)
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
900,105
|
|
|
|
785,175
|
|
|
|
888,127
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
1,259,520
|
|
|
$
|
1,189,479
|
|
|
$
|
1,184,070
|
|
The accompanying notes are an integral part
of these statements.
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(LOSS) AND COMPREHENSIVE INCOME (LOSS)
|
|
Three
Months Ended July 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per
share
amounts)
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
442,267
|
|
|
$
|
473,884
|
|
Cost of goods sold
|
|
|
286,624
|
|
|
|
305,544
|
|
Gross profit
|
|
|
155,643
|
|
|
|
168,340
|
|
Selling, general and administrative expenses
|
|
|
153,168
|
|
|
|
141,483
|
|
Depreciation and amortization
|
|
|
7,672
|
|
|
|
5,914
|
|
Operating profit (loss)
|
|
|
(5,197
|
)
|
|
|
20,943
|
|
Equity income in joint venture
|
|
|
348
|
|
|
|
—
|
|
Interest and financing charges, net
|
|
|
(1,056
|
)
|
|
|
(1,177
|
)
|
Income (loss) before income taxes
|
|
|
(5,905
|
)
|
|
|
19,766
|
|
Income tax expense (benefit)
|
|
|
(4,612
|
)
|
|
|
7,313
|
|
Net income (loss)
|
|
$
|
(1,293
|
)
|
|
$
|
12,453
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
$
|
(0.03
|
)
|
|
$
|
0.28
|
|
Weighted average number of shares outstanding
|
|
|
45,667
|
|
|
|
45,073
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
(0.03
|
)
|
|
$
|
0.27
|
|
Weighted average number of shares outstanding
|
|
|
45,667
|
|
|
|
46,362
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,293
|
)
|
|
$
|
12,453
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(2,810
|
)
|
|
|
1,117
|
|
Other comprehensive income (loss)
|
|
|
(2,810
|
)
|
|
|
1,117
|
|
Comprehensive income (loss)
|
|
$
|
(4,103
|
)
|
|
$
|
13,570
|
|
The accompanying notes are an integral part
of these statements.
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
|
|
Six
Months Ended July 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share
amounts)
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
899,670
|
|
|
$
|
906,849
|
|
Cost of goods sold
|
|
|
578,358
|
|
|
|
584,082
|
|
Gross profit
|
|
|
321,312
|
|
|
|
322,767
|
|
Selling, general and administrative expenses
|
|
|
306,273
|
|
|
|
278,516
|
|
Depreciation and amortization
|
|
|
14,865
|
|
|
|
11,601
|
|
Operating profit
|
|
|
174
|
|
|
|
32,650
|
|
Equity income in joint venture
|
|
|
617
|
|
|
|
—
|
|
Interest and financing charges, net
|
|
|
(2,298
|
)
|
|
|
(2,153
|
)
|
Income (loss) before income taxes
|
|
|
(1,507
|
)
|
|
|
30,497
|
|
Income tax expense (benefit)
|
|
|
(2,985
|
)
|
|
|
11,284
|
|
Net income
|
|
$
|
1,478
|
|
|
$
|
19,213
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
0.03
|
|
|
$
|
0.43
|
|
Weighted average number of shares outstanding
|
|
|
45,601
|
|
|
|
45,020
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
0.03
|
|
|
$
|
0.42
|
|
Weighted average number of shares outstanding
|
|
|
46,967
|
|
|
|
46,289
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,478
|
|
|
$
|
19,213
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
3,222
|
|
|
|
(10,007
|
)
|
Other comprehensive income (loss)
|
|
|
3,222
|
|
|
|
(10,007
|
)
|
Comprehensive income
|
|
$
|
4,700
|
|
|
$
|
9,206
|
|
The accompanying notes are an integral part
of these statements.
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
Six
Months Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,478
|
|
|
$
|
19,213
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
14,865
|
|
|
|
11,601
|
|
Loss on disposal of fixed assets
|
|
|
657
|
|
|
|
532
|
|
Equity income in joint venture
|
|
|
(617
|
)
|
|
|
—
|
|
Equity based compensation
|
|
|
9,028
|
|
|
|
7,634
|
|
Deferred financing charges
|
|
|
421
|
|
|
|
419
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(21,508
|
)
|
|
|
(40,679
|
)
|
Inventories
|
|
|
(84,537
|
)
|
|
|
(179,681
|
)
|
Income taxes, net
|
|
|
(7,781
|
)
|
|
|
4,569
|
|
Prepaid expenses and other current assets
|
|
|
(10,998
|
)
|
|
|
(7,317
|
)
|
Other assets, net
|
|
|
(349
|
)
|
|
|
(949
|
)
|
Accounts payable, accrued expenses and other liabilities
|
|
|
60,322
|
|
|
|
113,590
|
|
Net cash used in operating activities
|
|
|
(39,019
|
)
|
|
|
(71,068
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Investment in unconsolidated affiliate
|
|
|
(35,432
|
)
|
|
|
(25,490
|
)
|
Capital expenditures
|
|
|
(12,617
|
)
|
|
|
(16,600
|
)
|
Net cash used in investing activities
|
|
|
(48,049
|
)
|
|
|
(42,090
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from notes payable, net
|
|
|
—
|
|
|
|
5,503
|
|
Taxes paid for net share settlement
|
|
|
(2,011
|
)
|
|
|
—
|
|
Proceeds from exercise of equity awards
|
|
|
256
|
|
|
|
376
|
|
Net cash provided by (used in) financing activities
|
|
|
(1,755
|
)
|
|
|
5,879
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
1,186
|
|
|
|
(2,265
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(87,637
|
)
|
|
|
(109,544
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
132,587
|
|
|
|
128,354
|
|
Cash and cash equivalents at end of period
|
|
$
|
44,950
|
|
|
$
|
18,810
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,748
|
|
|
$
|
1,785
|
|
Income taxes
|
|
|
3,875
|
|
|
|
6,504
|
|
The accompanying
notes are an integral part of these statements.
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Note 1 – Basis of Presentation
As used in these financial statements, the
term “Company” or “G-III” refers to G-III Apparel Group, Ltd. and its subsidiaries. The Company designs,
manufactures and markets an extensive range of apparel, including outerwear, dresses, sportswear, swimwear, women’s suits
and women’s performance wear, as well as women’s handbags, footwear, small leather goods, cold weather accessories
and luggage. The Company also operates retail stores.
The Company consolidates the accounts of all
its wholly-owned and majority-owned subsidiaries. KL North America BV (“KLNA”) is a Dutch limited liability company
which is a joint venture that is 49% owned by the Company. This investment is accounted for using the equity method of accounting.
All material intercompany balances and transactions have been eliminated. Vilebrequin International SA (“Vilebrequin”),
a Swiss corporation, which is wholly-owned by the Company, and KLNA report results on a calendar year basis rather than on the
January 31 fiscal year basis used by the Company.
The results for the six month period ended
July 31, 2016 are not necessarily indicative of the results expected for the entire fiscal year, given the seasonal nature of the
Company’s business. The accompanying financial statements included herein are unaudited. All adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows
for the interim period presented have been reflected.
The accompanying financial statements should
be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the
fiscal year ended January 31, 2016 filed with the Securities and Exchange Commission (the “SEC”).
On April 1, 2015, the Board of Directors approved
a two-for-one stock split of the Company’s outstanding shares of common stock, to be effected in the form of a stock dividend.
The stock dividend was paid to stockholders of record as of the close of market on April 20, 2015 and was effected on May 1, 2015.
All share and per share information has been retroactively adjusted to reflect this stock split.
The Company’s international subsidiaries
use different functional currencies, which are the local selling currency. In accordance with the authoritative guidance, assets
and liabilities of the Company’s foreign operations are translated from foreign currency into U.S. dollars at period-end
rates, while income and expenses are translated at the weighted-average exchange rates for the period. The related translation
adjustments are reflected as a foreign currency translation adjustment in accumulated other comprehensive income (loss) within
stockholders’ equity.
Certain reclassifications have been made to
the Condensed Consolidated Statements of Cash Flows as a result of the Company’s electing to apply the amendments related
to the presentation of excess tax benefits on the statement of cash flows using a retrospective transition method as prescribed
by Accounting Standard Update (“ASU”) 2016-09. This change resulted in a $6.7 million decrease in net cash used in
operating activities and a corresponding decrease in net cash provided by financing activities in the accompanying Condensed Consolidated
Statement of Cash Flows for the period ended July 31, 2015, compared to the amounts previously reported.
Note 2 – Equity Investment
In February 2016, the Company acquired
a 19% minority interest in Kingdom Holdings 1 B.V. (“KH1”), the parent company of the group that holds the worldwide
rights to the Karl Lagerfeld brand. The Company paid 32.5€ million (approximately $35.4 million at the date of the transaction).
This investment is intended to expand the partnership between the Company and the Karl Lagerfeld brand and extend their business
development opportunities on a global scale. The investment in KH1 is reflected in Investment in Unconsolidated Affiliates on the
Condensed Consolidated Balance Sheets at July 31, 2016.
In June 2015, the Company entered into
a joint venture agreement with Karl Lagerfeld Group BV. The Company acquired a 49% ownership interest in KLNA, an entity that holds
brand rights to Karl Lagerfeld trademarks for all consumer products (except eyewear, fragrance, cosmetics, watches, jewelry and
hospitality services) and apparel in the United States, Canada and Mexico. The Company is also the first licensee of the joint
venture and has been granted a five year license (with two renewals of five years each) for women’s apparel, women’s
handbags, women’s footwear and men’s outerwear. The Company began shipping Karl Lagerfeld sportswear, dresses, women’s
outerwear and handbags in the third quarter of fiscal 2016 and Karl Lagerfeld women’s footwear in the first quarter of fiscal
2017.
Note 3 – Inventories
Wholesale inventories are stated at the lower
of cost (determined by the first-in, first out method) or market which comprises a significant portion of the Company’s inventory.
Retail inventories are valued at the lower of cost or market as determined by the retail inventory method. Vilebrequin inventories
are stated at the lower of cost (determined by the weighted average method) or market. Inventories consist of:
|
|
July
31, 2016
|
|
|
July
31, 2015
|
|
|
January
31, 2016
|
|
|
|
(In thousands)
|
|
Finished goods
|
|
$
|
567,864
|
|
|
$
|
600,529
|
|
|
$
|
484,805
|
|
Raw materials and work-in-process
|
|
|
2,132
|
|
|
|
4,685
|
|
|
|
506
|
|
|
|
$
|
569,996
|
|
|
$
|
605,214
|
|
|
$
|
485,311
|
|
Note 4 – Net Income (Loss) per Common Share
Basic net income (loss) per common share has
been computed using the weighted average number of common shares outstanding during each period. Diluted net income per share,
when applicable, is computed using the weighted average number of common shares and potential dilutive common shares, consisting
of unvested restricted stock awards and stock options outstanding, during the period. In addition, all share based payments outstanding
that vest based on the achievement of performance and/or market price conditions, and for which the respective performance and/or
market price conditions have not been achieved, have been excluded from the diluted per share calculation. Approximately 349,000
shares of common stock have been excluded from the diluted net income per share calculation for the six months ended July 31, 2016.
For the six months ended July 31, 2016 and 2015, 195,156 and 262,830 shares of common stock, respectively, were issued in connection
with the exercise or vesting of equity awards.
On February 1, 2016, the Company adopted the
Accounting Standard Update 2016-09 (see Note 7 for further details). The new guidance prescribes that excess tax benefits are no
longer recognized in additional paid in capital. The assumed proceeds from applying the treasury stock method when computing net
income (loss) per share is amended to exclude the amount of excess tax benefits that would be recognized in additional paid-in
capital. This change in accounting results in approximately 303,000 additional diluted common shares being included in the diluted
net income per share calculation for the six months ended July 31, 2016.
The following table reconciles the numerators
and denominators used in the calculation of basic and diluted net income (loss) per share:
|
|
Three
Months Ended
July 31
|
|
|
Six
Months Ended
July 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands, except per share
amounts)
|
|
|
|
|
|
Net income (loss) attributable to G-III
|
|
$
|
(1,293
|
)
|
|
$
|
12,453
|
|
|
$
|
1,478
|
|
|
$
|
19,213
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic common shares
|
|
|
45,667
|
|
|
|
45,073
|
|
|
|
45,601
|
|
|
|
45,020
|
|
Basic net income (loss) per share
|
|
$
|
(0.03
|
)
|
|
$
|
0.28
|
|
|
$
|
0.03
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic common shares
|
|
|
45,667
|
|
|
|
45,073
|
|
|
|
45,601
|
|
|
|
45,020
|
|
Diluted Restricted stock awards and stock options
|
|
|
—
|
|
|
|
1,289
|
|
|
|
1,366
|
|
|
|
1,269
|
|
Diluted common shares
|
|
|
45,667
|
|
|
|
46,362
|
|
|
|
46,967
|
|
|
|
46,289
|
|
Diluted net income per share
|
|
$
|
(0.03
|
)
|
|
$
|
0.27
|
|
|
$
|
0.03
|
|
|
$
|
0.42
|
|
Note 5 – Notes Payable
The Company’s credit agreement with JPMorgan
Chase Bank, N.A., as Administrative Agent for a group of lenders, is a five year senior secured credit facility through August
2017 providing for borrowings in the aggregate principal amount of up to $450 million. Amounts available under the credit agreement
are subject to borrowing base formulas and other advances as specified in the credit agreement. As of July 31, 2016, there was
$343.4 million available under the credit agreement.
Borrowings bear interest, at the Company’s
option, at LIBOR plus a margin of 1.5% to 2.0% or prime plus a margin of 0.5% to 1.0%, with the applicable margin determined based
on availability under the credit agreement. The credit agreement requires the Company to maintain a minimum fixed charge coverage
ratio, as defined, and, under certain circumstances, permits the Company to make payments for cash dividends, stock redemptions
and share repurchases subject to compliance with certain covenants. As of July 31, 2016, the Company was in compliance with these
covenants.
The credit agreement is secured by all of the
assets of G-III Apparel Group, Ltd. and its subsidiaries, G-III Leather Fashions, Inc., Riviera Sun, Inc., CK Outerwear, LLC, Andrew &
Suzanne Company Inc., AM Retail Group, Inc., G-III Apparel Canada ULC, G-III License Company, LLC and AM Apparel Holdings, Inc.
At July 31, 2016, the Company had no borrowings
outstanding under the Company’s credit agreement and at July 31, 2015, the Company had borrowings of $5.5 million outstanding
under the Company’s credit agreement.
Note 6 – Segments
The Company’s reportable segments are
business units that offer products through different channels of distribution. The Company has two reportable segments: wholesale
operations and retail operations. The wholesale operations segment includes sales of products under brands licensed to the Company
from third parties, as well as sales of products under the Company’s own brands and private label brands. The retail operations
segment consists primarily of sales by the Wilsons Leather and G.H. Bass stores, as well as a limited number of Calvin Klein Performance
stores.
The following information, in thousands, is
presented for the three month and six month periods indicated below:
|
|
Three
Months Ended July 31, 2016
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Elimination
(1)
|
|
|
Total
|
|
Net sales
|
|
$
|
361,344
|
|
|
$
|
99,958
|
|
|
$
|
(19,035
|
)
|
|
$
|
442,267
|
|
Cost of goods sold
|
|
|
250,475
|
|
|
|
55,184
|
|
|
|
(19,035
|
)
|
|
|
286,624
|
|
Gross profit
|
|
|
110,869
|
|
|
|
44,774
|
|
|
|
—
|
|
|
|
155,643
|
|
Selling, general and administrative
|
|
|
96,613
|
|
|
|
56,555
|
|
|
|
—
|
|
|
|
153,168
|
|
Depreciation and amortization
|
|
|
5,370
|
|
|
|
2,302
|
|
|
|
—
|
|
|
|
7,672
|
|
Operating profit (loss)
|
|
$
|
8,886
|
|
|
$
|
(14,083
|
)
|
|
$
|
—
|
|
|
$
|
(5,197
|
)
|
|
|
Three
Months Ended July 31, 2015
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Elimination
(1)
|
|
|
Total
|
|
Net sales
|
|
$
|
391,461
|
|
|
$
|
111,497
|
|
|
$
|
(29,074
|
)
|
|
$
|
473,884
|
|
Cost of goods sold
|
|
|
275,308
|
|
|
|
59,310
|
|
|
|
(29,074
|
)
|
|
|
305,544
|
|
Gross profit
|
|
|
116,153
|
|
|
|
52,187
|
|
|
|
—
|
|
|
|
168,340
|
|
Selling, general and administrative
|
|
|
87,081
|
|
|
|
54,402
|
|
|
|
—
|
|
|
|
141,483
|
|
Depreciation and amortization
|
|
|
4,055
|
|
|
|
1,859
|
|
|
|
—
|
|
|
|
5,914
|
|
Operating profit (loss)
|
|
$
|
25,017
|
|
|
$
|
(4,074
|
)
|
|
$
|
—
|
|
|
$
|
20,943
|
|
|
|
Six
Months Ended July 31, 2016
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Elimination
(1)
|
|
|
Total
|
|
Net sales
|
|
$
|
743,715
|
|
|
$
|
194,950
|
|
|
$
|
(38,995
|
)
|
|
$
|
899,670
|
|
Cost of goods sold
|
|
|
508,471
|
|
|
|
108,882
|
|
|
|
(38,995
|
)
|
|
|
578,358
|
|
Gross profit
|
|
|
235,244
|
|
|
|
86,068
|
|
|
|
—
|
|
|
|
321,312
|
|
Selling, general and administrative
|
|
|
193,551
|
|
|
|
112,722
|
|
|
|
—
|
|
|
|
306,273
|
|
Depreciation and amortization
|
|
|
10,371
|
|
|
|
4,494
|
|
|
|
—
|
|
|
|
14,865
|
|
Operating profit (loss)
|
|
$
|
31,322
|
|
|
$
|
(31,148
|
)
|
|
$
|
—
|
|
|
$
|
174
|
|
|
|
Six
Months Ended July 31, 2015
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Elimination
(1)
|
|
|
Total
|
|
Net sales
|
|
$
|
743,945
|
|
|
$
|
214,026
|
|
|
$
|
(51,122
|
)
|
|
$
|
906,849
|
|
Cost of goods sold
|
|
|
520,717
|
|
|
|
114,487
|
|
|
|
(51,122
|
)
|
|
|
584,082
|
|
Gross profit
|
|
|
223,228
|
|
|
|
99,539
|
|
|
|
—
|
|
|
|
322,767
|
|
Selling, general and administrative
|
|
|
171,675
|
|
|
|
106,841
|
|
|
|
—
|
|
|
|
278,516
|
|
Depreciation and amortization
|
|
|
7,987
|
|
|
|
3,614
|
|
|
|
—
|
|
|
|
11,601
|
|
Operating profit (loss)
|
|
$
|
43,566
|
|
|
$
|
(10,916
|
)
|
|
$
|
—
|
|
|
$
|
32,650
|
|
(1)
|
Represents intersegment sales to the Company’s retail operations.
|
The total assets for each of the Company’s reportable segments
are as follows:
|
|
July
31, 2016
|
|
|
July
31, 2015
|
|
|
January
31, 2016
|
|
|
|
(In thousands)
|
|
Wholesale
|
|
$
|
874,258
|
|
|
$
|
875,347
|
|
|
$
|
763,353
|
|
Retail
|
|
|
212,296
|
|
|
|
223,829
|
|
|
|
210,118
|
|
Corporate
|
|
|
172,966
|
|
|
|
90,303
|
|
|
|
210,599
|
|
Total Assets
|
|
$
|
1,259,520
|
|
|
$
|
1,189,479
|
|
|
$
|
1,184,070
|
|
Note 7 – Recent Accounting Pronouncements
Recently Adopted Accounting Guidance
In March 2016, the FASB issued ASU
2016-09, “
Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting
”. ASU 2016-09 simplifies various aspects related to share-based payments. The Company elected to
early-adopt ASU 2016-09 with an effective date of February 1, 2016. Under previous guidance, excess tax benefits and
deficiencies from stock-based compensation arrangements were recorded in equity when the awards vested or were settled. ASU
2016-09 requires prospective recognition of excess tax benefits and deficiencies in the income statement, resulting in the
recognition of excess tax benefits of approximately $2.4 million in income tax expense or $0.05 per diluted share, rather
than in paid-in capital, for the six months ended July 31, 2016. The Company has elected to continue to estimate the number
of stock-based awards expected to vest, as permitted by ASU 2016-09, rather than electing to account for forfeitures as they
occur.
Accounting Guidance Issued Being Evaluated
for Adoption
In April 2016, the FASB issued ASU 2016-10,
“
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
”. The
guidance clarifies two aspects of Topic 606: (i) identifying performance obligations and (ii) the licensing implementation guidance,
while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers
to transfer goods and services in exchange for consideration and (b) determining whether an entity's promise to grant a license
provides a customer with either a right to use the entity's intellectual property (which is satisfied at a point in time) or a
right to access the entity's intellectual property (which is satisfied over time). The amendments in this update are intended to
render more detailed implementation guidance with the expectation of reducing the degree of judgment necessary to comply with Topic
606. The FASB continues to clarify this guidance and most recently issued ASU 2016-08, “
Principal versus Agent Considerations
(Reporting Revenue Gross versus Net)
”, ASU 2016-10, “
Identifying Performance Obligations and Licensing
”,
and ASU No. 2016-12, “
Narrow-Scope Improvements and Practical Expedients
”, which have the same effective date
as ASU 2014-09. These new standards will be effective for public entities for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact, if
any, the adoption of these standards will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU
2016-07, “
Investments — Equity Method and Joint Ventures (Topic 323: Simplifying the Transition to the Equity
Method of Accounting)
”. ASU 2016-07 eliminates the requirement that when an investment, initially accounted for
under a method other than the equity method of accounting, subsequently qualifies for use of the equity method, an investor
must retrospectively apply the equity method in prior periods in which it held the investment. This requires an investor to
determine the fair value of the investee’s underlying assets and liabilities retrospectively at each investment date
and revise all prior periods as if the equity method had always been applied. The new guidance requires the investor to apply
the equity method prospectively from the date the investment qualifies for the equity method. The investor will add the
carrying value of the existing investment to the cost of the additional investment to determine the initial cost basis of the
equity method investment. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, and interim periods
within those fiscal years. Early adoption is permitted in any interim or annual period. The Company does not expect the
adoption of this guidance to have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
“
Leases (Topic 842)
”. The primary difference between the current requirement under GAAP and ASU 2016-02 is the
recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. ASU 2016-02 requires
that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use
asset representing its right to use the underlying asset for the lease term (other than leases that meet the definition of a short-term
lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to
adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to
be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating
leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification
will be based on criteria that are for the most part similar to those applied in current lease accounting. ASU 2016-02 may be adopted
using a modified retrospective transition, and provides for certain practical expedients. Transactions will require application
of the new guidance at the beginning of the earliest comparative period presented. The guidance is effective for public entities
for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The
Company is currently assessing the potential impact of ASU 2016-02 on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01,
“
Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities
”. This standard modifies how entities measure equity investments and present changes in the
fair value of financial liabilities; simplifies the impairment assessment of equity investments without readily determinable
fair values by requiring a qualitative assessment to identify impairment; changes presentation and disclosure requirements, and
clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale
securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. Early application is permitted. The Company
is not expecting that the adoption of this ASU will have any impact on its statement of operations.
In November 2015, the FASB issued ASU
2015-17, “
Income Taxes (Topic 740) — Balance Sheet Classification of Deferred Taxes
”. Prior to ASU 2015-17,
GAAP required an entity to separate deferred income tax asset and liabilities into current and noncurrent amounts on the balance
sheet. ASU 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified
as noncurrent on the balance sheet. ASU 2015-17 is effective for annual and interim periods beginning after December 15,
2016 and early adoption is permitted. ASU 2015-17 may be applied either prospectively to all deferred tax assets and liabilities
or retrospectively to all periods presented. The Company expects the adoption of this guidance to only affect the balance sheet
classification of its deferred tax assets and liabilities.
In July 2015, the FASB issued ASU 2015-11,
“
Inventory (Topic 330): Simplifying the Measurement of Inventory
”. Under this standard, inventory will be measured
at the “lower of cost and net realizable value” and options that currently exist for “market value” will
be eliminated. The standard defines net realizable value as the “estimated selling prices in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current
guidance on inventory measurement. This guidance is effective for interim and annual periods beginning after December 15,
2016. Early adoption is permitted and should be applied prospectively. The Company does not expect the adoption of this guidance
to have a material impact on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05,
“
Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for
Fees Paid in a Cloud Computing Arrangement
”. The update includes explicit guidance about a customer’s accounting
for fees paid in a cloud computing arrangement such as software as a service, platform as a service, infrastructure as a service,
and other similar hosting arrangements. The update is effective for interim and annual periods beginning after December 15,
2016 with early adoption permitted, including in the interim periods. The Company is currently evaluating the impact of this update
on its consolidated financial statements.
Note 8 – Pending Acquisition
On
July 22, 2016, the Company entered into a stock purchase agreement with LVMH Moet Hennessy Louis Vuitton Inc. (“LVMH”)
providing for the Company’s purchase of all of the outstanding capital stock of Donna Karan International (“DKI”)
from LVMH for a total purchase price of approximately $650 million, subject to certain adjustments. The stock purchase agreement
provides for the purchase price to be paid by the Company with a combination of (i) cash, (ii) $75 million of newly issued shares
of common stock, par value $0.01 per share of the Company to LVMH and (iii) a junior lien secured promissory note in favor of LVMH
in the principal amount of $75 million.
The Company
plans to pay the cash portion of the purchase price from the proceeds of $350.0 million of borrowings under a senior secured term
loan facility, up to $250.0 million of borrowings under a $650.0 million senior secured asset-based revolving credit facility and
cash on hand. Subject to the conditions set forth in the stock purchase agreement, the transaction is expected to close in the
fourth quarter of the Company’s fiscal year ending January 31, 2017.
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
Unless the context otherwise requires, “G-III”,
“us”, “we” and “our” refer to G-III Apparel Group, Ltd. and its subsidiaries. References to
fiscal years refer to the year ended or ending on January 31 of that year. For example, our fiscal year ending January 31, 2017
is referred to as “fiscal 2017”. Vilebrequin and KLNA report results on a calendar year basis rather than on the January
31 fiscal year basis used by G-III. Accordingly, the results of Vilebrequin and KLNA are and will be included in our financial
statements for the quarter ended or ending closest to G-III’s fiscal quarter. For example, in this Form 10-Q for the six
month period ended July 31, 2016, the results of Vilebrequin and KLNA are included for the six month period ended June 30, 2016.
We account for our investment in KLNA using the equity method of accounting.
All share and per share data in this Form 10-Q
have been retroactively adjusted to reflect our two-for-one stock split effected on May 1, 2015.
Various statements contained in this Form 10-Q,
in future filings by us with the SEC, in our press releases and in oral statements made from time to time by us or on our behalf
constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on current expectations and are indicated by words or phrases such as “anticipate,”
“estimate,” “expect,” “will,” “project,” “we believe,” “is or
remains optimistic,” “currently envisions,” “forecasts,” “goal” and similar words or
phrases and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements
to be materially different from the future results, performance or achievements expressed in or implied by such forward-looking
statements. Forward-looking statements also include representations of our expectations or beliefs concerning future events that
involve risks and uncertainties, including, but not limited to:
|
•
|
our dependence on licensed products;
|
|
•
|
our dependence on the strategies and reputation of our licensors;
|
|
•
|
costs and uncertainties with respect to expansion of our product offerings;
|
|
•
|
the performance of our products at retail and customer acceptance of new products;
|
|
•
|
retail customer concentration;
|
|
•
|
risks of doing business abroad;
|
|
•
|
price, availability and quality of materials used in our products;
|
|
•
|
the need to protect our trademarks and other intellectual property;
|
|
•
|
risks relating to our retail business;
|
|
•
|
dependence on existing management;
|
|
•
|
our ability to make strategic acquisitions and possible disruptions from acquisitions;
|
|
•
|
need for additional financing;
|
|
•
|
seasonal nature of our business;
|
|
•
|
our reliance on foreign manufacturers;
|
|
•
|
the need to successfully upgrade, maintain and secure our information systems;
|
|
•
|
the impact of the current economic and credit environment on us, our customers, suppliers and vendors;
|
|
•
|
the effects of competition in the markets in which we operate;
|
|
•
|
consolidation of our retail customers;
|
|
•
|
additional legislation and/or regulation in the United States or around the world;
|
|
•
|
our ability to import products in a timely and cost effective manner;
|
|
•
|
our ability to continue to maintain our reputation;
|
|
•
|
fluctuations in the price of our common stock;
|
|
•
|
potential effect on the price of our common stock if actual results are worse than financial forecasts;
|
|
•
|
the effect of regulations applicable to us
as a U.S. public company; and
|
|
•
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matters relating to the pending acquisition of Donna Karan International Inc., including:
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the possibility that the Donna Karan acquisition does not close,
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our ability to integrate the Donna Karan business, to realize the benefits of the Donna Karan acquisition
or to do so on a timely basis,
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our ability to combine our business with the Donna Karan business successfully or in a timely and
cost-efficient manner,
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failure to obtain any required financing or to do so on acceptable terms,
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the increase in our indebtedness as a result of the acquisition,
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the significant costs we will incur as a result of the acquisition,
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the significant increase in the amount of our goodwill and other intangibles, and
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the degree of business disruption relating to the acquisition.
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These forward-looking statements are based
largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable
and beyond our control. A detailed discussion of significant risk factors that have the potential to cause our actual results to
differ materially from our expectations is described under the heading “Risk Factors” in our Annual Report on Form
10-K for the year ended January 31, 2016 and in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update
or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required
by law.
Stock Purchase Agreement to Acquire Donna
Karan International
In July 2016, we entered into a stock purchase
agreement with LVMH Moet Hennessy Louis Vuitton Inc. (“LVMH”) providing for our purchase of all of the outstanding
capital stock of Donna Karan International Inc. (“DKI”) from LVMH for a total purchase price of approximately $650
million, subject to certain adjustments. We believe that Donna Karan is one of the world’s most iconic and recognizable power
brands. The acquisition of Donna Karan fits squarely into our strategy to diversify and expand our business. We intend to focus
on the expansion of the DKNY brand, while also re-establishing DKNY jeans, Donna Karan and other associated brands. We believe
that we can also capitalize on significant, untapped global licensing potential in a number of men’s categories, as well
as in home and jewelry. We believe that our strong track record of driving organic growth, identifying and integrating acquisitions
and developing talent throughout the organization makes the potential of the Donna Karan brand especially appealing.
In connection with entering into the stock
purchase agreement, we entered into, and subsequently amended, a debt financing commitment letter with Barclays Bank PLC, JPMorgan
Chase Bank, N.A., Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated U.S. Bank National Association,
HSBC Bank USA, National Association, HSBC Securities (USA) Inc., Wells Fargo Bank, N.A., Wells Fargo Securities, LLC, KeyBank National
Association and Capital One, National Association (together, the “Commitment Parties”). Pursuant to the commitment
letter, as amended, the Commitment Parties committed, subject to the terms and conditions set forth therein, to provide us with
a $650 million principal amount, five-year senior secured asset-based revolving credit facility (the “New ABL Facility”)
and a $350 million principal amount six year senior secured term loan facility (the “Term Facility”). The financing
commitments of the Commitment Parties are subject to certain conditions set forth in the Commitment Letter. The New ABL Facility
will refinance and replace our existing credit facility.
The
stock purchase agreement provides for the purchase price to be paid by us with a combination of (i) cash, (ii) $75 million of newly
issued shares of our common stock, par value $0.01 per share, to LVMH and (iii) a junior lien secured promissory note in favor
of LVMH in the principal amount of $75 million.
We plan to pay the cash portion of the purchase price from the proceeds of the borrowing under the Term Facility, up to $250.0
million of borrowings under the New ABL Facility and cash on hand. Subject to the conditions set forth in the stock purchase agreement,
the transaction is expected to close in the fourth quarter of our fiscal year ending January 31, 2017.
Overview
G-III designs, manufactures and markets an
extensive range of apparel, including outerwear, dresses, sportswear, swimwear, women’s suits and women’s performance
wear, as well as women’s handbags, footwear, small leather goods, cold weather accessories and luggage. We sell our products
under our own proprietary brands, which include Vilebrequin, G.H. Bass, Andrew Marc, Marc New York, Eliza J, Jessica Howard and
Black Rivet, as well as under private retail labels.
We sell products under an extensive portfolio
of well-known licensed brands, including Calvin Klein, Tommy Hilfiger, Karl Lagerfeld, Kenneth Cole, Guess?, Levi’s and Cole
Haan. In our team sports business, we have licenses with the National Football League, National Basketball Association, Major League
Baseball, National Hockey League, Touch by Alyssa Milano, Hands High and over 100 U.S. colleges and universities.
We operate in fashion markets that are intensely
competitive. Our ability to continuously evaluate and respond to changing consumer demands and tastes, across multiple market segments,
distribution channels and geographic areas is critical to our success. Although our portfolio of brands
is aimed at diversifying our risks in this
regard, misjudging shifts in consumer preferences could have a negative effect on our business. Our success in the future will
depend on our ability to design products that are accepted in the marketplace, source the manufacture of our products on a competitive
basis, and continue to diversify our product portfolio and the markets we serve.
We report based on two reportable segments:
wholesale operations and retail operations. The wholesale operations segment mainly consists of wholesale sales of our licensed
products and non-licensed products and includes sales of products under brands licensed to us from third parties, as well as sales
of products under our own brands and private label brands. The retail operations segment consists primarily of the Wilsons Leather
and G.H. Bass stores, as well as a limited number of Calvin Klein Performance stores.
We have expanded our portfolio of proprietary
and licensed brands through acquisitions and by entering into license agreements for new brands or for additional products under
previously licensed brands. Acquisitions are part of our strategy to expand our product offerings and increase the portfolio of
proprietary and licensed brands that we offer through different tiers of retail distribution.
The sale of licensed products is a key element
of our strategy and we have continually expanded our offerings of licensed products over the past 20 years.
In July 2016, we signed a three year extension
through March 2020 of our license agreement with the National Football League. This agreement includes men’s and women’s
outerwear, Starter men’s and women’s outerwear, men’s and women’s lifestyle apparel, Hands High men’s
and women’s lifestyle apparel, and Touch women’s lifestyle apparel.
In April 2016, Vilebrequin entered into a worldwide
license agreement for a line of watches that is expected to commence distribution in 2017. In July 2015, Vilebrequin entered into
a license agreement for a line of sunglasses that is expected to commence distribution in 2017.
In February 2016, we acquired a 19% minority
interest in Kingdom Holdings 1 B.V. (“KH1”), the parent company of the group that holds the worldwide rights to the
Karl Lagerfeld brand. This investment is intended to expand the partnership between us and the Karl Lagerfeld brand and extend
their business development opportunities on a global scale. In June 2015, we acquired a 49% interest in a joint venture that holds
brand rights to the Karl Lagerfeld trademarks for consumer products (with certain exceptions) and apparel in the United States,
Canada and Mexico. We are also the first licensee of the joint venture, having been granted a license for women’s apparel,
women’s handbags, women’s shoes and men’s outerwear. We began shipping Karl Lagerfeld sportswear, dresses, women’s
outerwear and handbags in the third quarter of fiscal 2016 and Karl Lagerfeld women’s footwear in the first quarter of fiscal
2017.
In February 2016, we expanded our relationship
with Tommy Hilfiger through a new license agreement for Tommy Hilfiger womenswear in the United States and Canada. This license
for women’s sportswear, suit separates, performance and denim is in addition to existing Tommy Hilfiger licenses for dresses,
men’s and women’s outerwear and luggage. The new license agreement has an initial term of five years and a renewal
term of four years. Macy’s will continue to be the principal retailer of Tommy Hilfiger in the United States and women’s
sportswear will continue to be a Macy’s exclusive offering. In October 2015, we entered into a license agreement for Tommy
Hilfiger women’s dresses. The collection was available beginning February 2016 at select department stores, including Macy’s,
specialty stores, and e-commerce partners in the United States and Canada. We believe Tommy Hilfiger is an iconic American
brand. We intend to leverage our market expertise to help build sales of Tommy Hilfiger women’s apparel.
In October 2015, we also announced the launch
of Hands High, a new licensed sports apparel line inspired by Jimmy Fallon. Hands High features professional team logos from the
NFL, NBA, MLB and NHL that will be located under a fan's arms. Hands High product was launched in October 2015 at retailers throughout
the country, as well as at official team and stadium shops and official league websites. We started to ship Hands High product
to over 40 universities in July 2016.
We believe that consumers prefer to buy brands
they know, and we have continually sought licenses that would increase the portfolio of name brands we can offer through different
tiers of retail distribution, for a wide array of products at a variety of price points. We believe that brand owners will look
to consolidate the number of licensees they engage to develop product and they will seek licensees with a successful track record
of expanding brands into new categories. It is our objective to continue to expand our product offerings and we are continually
discussing new licensing opportunities with brand owners.
Our retail operations segment consists primarily
of our Wilsons Leather and G.H. Bass stores, substantially all of which are operated as outlet stores. As of July 31, 2016, we
operated 191 Wilsons Leather stores and 167 G.H. Bass stores, as well as 5 Calvin Klein Performance stores.
Trends
Retailers are seeking to expand the differentiation
of their offerings by devoting more resources to the development of exclusive products, whether by focusing on their own private
label products or on products made exclusively for a retailer by a national brand manufacturer. Retailers are placing more emphasis
on building strong images for their private label and exclusive merchandise. Exclusive brands are only made available to a specific
retailer, and thus customers loyal to their brands can only find them in the stores of that retailer.
A number of retailers are experiencing financial
difficulties, which in some cases has resulted in bankruptcies, liquidations and/or store closings. The financial difficulties
of a retail customer of ours could result in reduced business with that customer. We may also assume higher credit risk
relating to receivables of a retail customer
experiencing financial difficulty that could result in higher reserves for doubtful accounts or increased write-offs of accounts
receivable. We attempt to mitigate credit risk from our customers by closely monitoring accounts receivable balances and shipping
levels, as well as the ongoing financial performance and credit standing of customers.
We have attempted to respond to trends in our
industry by continuing to focus on selling products with recognized brand equity, by attention to design, quality and value and
by improving our sourcing capabilities. We have also responded with the strategic acquisitions made and new license agreements
entered into by us that have added additional licensed and proprietary brands and helped diversify our business by adding new product
lines and additional distribution channels and expanding the retail component of our business. We believe that our broad distribution
capabilities help us to respond to the various shifts by consumers between distribution channels and that our operational capabilities
will enable us to continue to be a vendor of choice for our retail partners.
Results of Operations
Three months ended July 31, 2016 compared
to three months ended July 31, 2015
Net sales for the three months ended July
31, 2016 decreased to $442.3 million from $473.9 million in the same period last year. Net sales of our segments are reported
before intercompany eliminations. Net sales of our wholesale operations segment decreased to $361.3 million from $391.5 million
in the comparable period last year. The decrease in net sales of our wholesale operations segment was negatively impacted
by a decrease in shipments of outerwear to certain of our retail customers having excess outerwear inventory levels as a result
of the warm weather last fall and winter. The decrease in net sales of our wholesale operations segment is also the result of
decreases of $11.4 million in net sales of private label products, $6.7 million, in net sales of Kensie licensed products and
$6.7 million in net sales of our team sports licensed products. These decreases were offset, in part, by net sales from our new
Karl Lagerfeld line of products ($7.2 million) and net sales from our new Tommy Hilfiger dresses product category ($5.8 million).
Net sales of our retail operations segment decreased to $100.0 million for the three months ended July 31, 2016 from $111.5 million
in the same period last year primarily as the result of a decrease of 16.9% in Wilsons’ same store sales compared to the
same period in the prior year and a decrease of 9.8% in G.H. Bass same store sales compared to the same period in the prior year.
These decreases are mainly the result of reduction in customer traffic partly attributable to reductions in tourist visitors and
greater promotional activity by us.
Gross profit decreased to $155.6 million, or
35.2% of net sales, for the three months ended July 31, 2016, from $168.3 million, or 35.5% of net sales, in the same period last
year. The gross profit percentage in our wholesale operations segment was 30.7% in the three months ended July 31, 2016 compared
to 29.7% in the same period last year, primarily due to a change in product mix. The gross profit percentage in our retail operations
segment was 44.8% for the three months ended July 31, 2016 compared to 46.8% for the same period last year. The decrease in gross
profit percentage in our retail operations segment was driven by offering deeper discounts in order to sell excess inventory.
Selling, general and administrative expenses
increased to $153.2 million in the three months ended July 31, 2016 from $141.5 million in the same period last year. This increase
is primarily due to increased facility costs ($5.4 million), personnel costs ($4.2 million) and advertising expenses ($3.3 million),
as well as expenses associated with the Donna Karan acquisition ($3.0 million). We expect to incur significant additional expenses
in connection with our acquisition of Donna Karan during the second half of fiscal 2017. Facility costs increased as a result of
increased shipping, storage and processing costs incurred at our third party warehouses, as well as higher rent expense resulting
from additional retail stores opened since the prior year. Personnel costs increased as a result of staffing for new product lines
under new license agreements, as well as an increase in headcount to staff additional retail stores that opened since last year.
The increase in personnel costs is offset by a $4.1 million decrease in bonus accrued during the period related to the decrease
in profitability. Advertising costs increased due to an increase in cooperative advertising, an increase in advertising purchased
and an increase in retail stores promotional activities.
Depreciation and amortization increased to
$7.7 million in the three months ended July 31, 2016 from $5.9 million in the same period last year. These expenses increased as
a result of depreciation and amortization related to the increase in capital expenditures in previous years primarily related to
fixturing costs at department stores, as well as remodeling, relocating and adding new Wilsons, G.H. Bass and Vilebrequin stores.
Interest and financing charges, net, for the
three months ended July 31, 2016 was $1.1 million compared to $1.2 million for the same period last year as both borrowings and
interest rates were steady over the two periods.
Income tax benefit for the three months ended
July 31, 2016 was $4.6 million compared to a $7.3 million tax expense for the same period last year. Excluding the tax benefit
from the equity awards, our effective tax rate remained the same for both periods at 37.0%. For the period ended July 31,
2016, we
recorded a $2.4 million tax benefit realized in connection with the vesting of equity awards subsequent to the
adoption of ASU 2016-09.
Six months ended July 31, 2016 compared
to six months ended July 31, 2015
Net sales for the six months ended July 31,
2016 decreased to $899.7 million from $906.8 million in the same period last year. Net sales of our segments are reported before
intercompany eliminations. Net sales of our wholesale operations segment were $743.7 million in the six months ended July 31, 2016
and $743.9 million in the comparable period last year. Our wholesale operations segment realized $16.8 million of new Karl Lagerfeld products and $13.5 million increase
in additional net sales of Tommy Hilfiger licensed products, as well as a $11.8 million increase in net sales of Ivanka Trump licensed
products. These increases were offset by a $16.7 million decrease in net sales of private label products and $11.7 million in net
sales of Kensie licensed products. Net sales of our retail operations segment decreased to $195.0 million for the six months ended
July 31, 2016 from $214.0 million in the same period last year primarily as the result of a decrease of 15.1% in Wilsons’
same store sales compared to the same period in the prior year and a decrease of 7.8% in G.H. Bass same store sales compared to
the same period in the prior year. These decreases are mainly the result of a reduction in demand for outerwear and cold weather
products due to unseasonably warm weather, as well as a decrease in sales at locations that are frequented by international tourists.
In addition, the outlet and retail business was highly promotional.
Gross profit was $321.3 million, or 35.7% of
net sales, for the six months ended July 31, 2016, and $322.8 million, or 35.6% of net sales, in the same period last year. The
gross profit percentage in our wholesale operations segment was 31.6% in the six months ended July 31, 2016 compared to 30.0% in
the same period last year. This increase was primarily the result of a more favorable product mix, as well as an increase in gross
profit of our Calvin Klein, Tommy Hilfiger, Eliza J, Jessica Howard, and Ivanka Trump licensed product lines. The gross profit
percentage in our retail operations segment was 44.1% for the six months ended July 31, 2016 compared to 46.5% for the same period
last year. The decrease in gross profit percentage was the result of offering deeper discounts in order to sell excess inventory.
Selling, general and administrative expenses
increased to $306.3 million in the six months ended July 31, 2016 from $278.5 million in the same period last year. This increase
is primarily due to increased personnel costs ($9.9 million), facility costs ($8.0 million) and advertising expenses ($6.2
million), as well as expenses associated with the Donna Karan acquisition ($3.0 million). We expect to incur significant additional
expenses in connection with our acquisition of Donna Karan during the second half of fiscal 2017. Personnel costs increased as
a result of staffing for new product lines under new license agreements, as well as an increase in headcount to staff additional
retail stores that opened since last year Facility costs increased as a result of increased shipping, storage and processing costs
incurred at our third party warehouses, as well as higher rent expense resulting from additional retail stores opened since the
prior year. Advertising costs increased due an increase in cooperative advertising, an increase in advertising and advertising
costs incurred due to the increase in net sales of licensed products. We typically pay an advertising fee and are required to
participate in customer cooperative advertising pursuant to many of our license agreements based on a percentage of net sales
of licensed products.
Depreciation and amortization increased to
$14.9 million in the six months ended July 31, 2016 from $11.6 million in the same period last year. These expenses increased as
a result of depreciation and amortization related to the increase in capital expenditures in previous years primarily related to
fixturing costs at department stores, as well as remodeling, relocating and adding new Wilsons, G.H. Bass and Vilebrequin stores.
Interest and financing charges, net, for the
six months ended July 31, 2016 was $2.3 million compared to $2.2 million for the same period last year as both borrowings and interest
rates were steady over the two periods.
Income tax benefit for the six months ended
July 31, 2016 was $3.0 million compared to an income tax expense of $11.3 million for the same period last year. Excluding
the tax benefit from the equity awards, our effective tax rate remained the same for both periods at 37.0%. For the period
ended July 31, 2016, we recorded a $2.4 million tax benefit realized in connection with the vesting of equity awards
subsequent to the adoption of ASU 2016-09.
Liquidity and Capital Resources
Our primary operating cash requirements are
to fund our seasonal buildup in inventories and accounts receivable, primarily during the second and third fiscal quarters each
year. Due to the seasonality of our business, we generally reach our peak borrowings under our asset-based credit facility during
our third fiscal quarter. The primary sources to meet our operating cash requirements have been borrowings under this credit facility,
cash generated from operations and the sale of our common stock.
We had cash and cash equivalents of $45.0 million
on July 31, 2016 and $18.8 million on July 31, 2015. Our contingent liability under open letters of credit was approximately $11.9
million as of July 31, 2016 compared to $11.1 million as of July 31, 2015.
Credit Agreement
We have a five year senior secured credit facility
through August 2017 with JPMorgan Chase Bank, N.A., as Administrative Agent for a group of lenders, providing for borrowings in
the aggregate principal amount of up to $450 million. Amounts available under the credit agreement are subject to borrowing base
formulas and over advances as specified in the credit agreement. Borrowings bear interest, at our option, at LIBOR plus a margin
of 1.5% to 2.0% or prime plus a margin of 0.5% to 1.0%, with the applicable margin determined based on availability under the credit
agreement. The credit agreement requires us to maintain a minimum fixed charge coverage ratio, as defined, and under certain circumstances
permits us to make payments for cash dividends, stock redemptions and share repurchases, subject to compliance with certain covenants.
As of July 31, 2016, we were in compliance with these covenants.
The credit agreement is secured by all of the
assets of G-III Apparel Group, Ltd. and its subsidiaries, G-III Leather Fashions, Inc., Riviera Sun, Inc., CK Outerwear, LLC, Andrew &
Suzanne Company Inc., AM Retail Group, Inc., G-III Apparel Canada ULC, G-III License Company, LLC and AM Apparel Holdings, Inc.
As previously discussed, upon closing of the
acquisition of Donna Karan, this credit agreement would be refinanced and replaced by the New ABL Facility.
Share Repurchase Program
Our Board of Directors has authorized a share
repurchase program of 5,000,000 shares. The timing and actual number of shares repurchased, if any, will depend on a number of
factors, including market conditions and prevailing stock prices, and are subject to compliance with certain covenants contained
in our loan agreement. Share repurchases may take place on the open market, in privately negotiated transactions or by other means,
and would be made in accordance with applicable securities laws. No shares were purchased under the program during the three months
ended July 31, 2016. As of July 31, 2016, we have approximately 45,756,000 shares of common stock outstanding.
Cash from Operating Activities
We used $39.0 million of cash in operating
activities during the six months ended July 31, 2016, primarily as a result of an increase of $84.5 million in inventory and an
increase of $21.5 million in accounts receivable, offset by an increase in accounts payable and accrued expenses of $60.3 million.
The changes in these operating cash flow items
are generally consistent with our seasonal pattern of building up inventory for the fall shipping season resulting in the increases
in inventory and accounts payable. The fall shipping season begins during the latter half of our second quarter.
Cash from Investing Activities
We used $48.0 million of cash in investing
activities in the six months ended July 31, 2016, of which $35.4 million related to our investment in KH1. The remainder of the
cash used in investing activities of $12.6 million consisted of capital expenditures related primarily to additional fixturing
costs at department stores, as well as remodeling, relocating and adding new G.H. Bass and Wilsons stores.
Cash from Financing Activities
We used $1.8 million of cash in financing activities
in the six months ended July 31, 2016, primarily as a result of taxes paid in connection with the net share settlement of certain
vested equity awards.
Financing Needs
We believe that our cash on hand and cash generated
from operations together with funds available under our credit agreement, are sufficient to meet our expected operating and capital
expenditure requirements and any purchases we may make under our recently expanded share repurchase program. Our pending acquisition
of Donna Karan will require significant additional bank financing as described above under “Stock Purchase Agreement to Acquire
Donna Karan International.” In the future, we may seek to acquire other businesses in order to expand our product offerings.
We may need additional financing in order to complete one or more additional acquisitions. We cannot be certain that we will be
able to obtain additional financing, if required, on acceptable terms or at all.
Critical Accounting Policies
Our discussion of results of operations and
financial condition relies on our consolidated financial statements that are prepared based on certain critical accounting policies
that require management to make judgments and estimates that are subject to varying degrees of uncertainty. We believe that investors
need to be aware of these policies and how they impact our financial statements as a whole, as well as our related discussion and
analysis presented herein. While we believe that these accounting policies are based on sound measurement criteria, actual future
events can, and often do, result in outcomes that can be materially different from these estimates or forecasts.
The accounting policies and related estimates
described in our Annual Report on Form 10-K for the year ended January 31, 2016 are those that depend most heavily on these judgments
and estimates. As of July 31, 2016, there have been no material changes to our critical accounting policies.