G-III Apparel (GIII) Q1 Earnings Beat, Tariff Woes Hurt Stock

G-III Apparel Group, Ltd. (NASDAQ:GIII) posted first-quarter fiscal 2020 results, wherein top and bottom lines improved year over year. Moreover, earnings beat estimates, marking the company’s ninth straight bottom-line beat. Quarterly results benefited from the sturdy performance of its wholesale business. Further, management reiterated its view for fiscal 2020 and provided encouraging guidance for the second quarter.

However, the company remains disappointed with the tariff environment, which has been weighing on some of its product categories, particularly handbags. This business represented about 7% of its annual net sales in fiscal 2019. Notably, the first round of tariffs of 10% has significantly impacted the handbags business over the past few quarters. This tariff is now increased to 25%, effective from May 10. The company estimates the 15% increase in tariffs to result in cost increases of nearly $6 million for the rest of fiscal 2020.

Though this impact of costs has been incorporated in the company’s guidance, the forward guidance does not include any additional rise in tariffs.

Meanwhile, G-III Apparel is looking to combat the situation by seeking alternative sourcing networks to move production out of China. Additionally, the company has been successful in getting price concessions from its China vendors. Also, it received approvals for price increases from some of its customers in the United States. Clearly, the company is looking to combat the tariff impacts by engaging in talks for vendor concessions and price increases for retailers. Though this strategy looks promising, the company expects some short-term disruptions on its operating results.

Despite the strong results and reiterated view, concerns regarding the increase in tariffs and results of costs and price increases hurt investor sentiment. Consequently, shares of the company declined nearly 9.4% on May 5. In the past three months, this Zacks Rank #3 (Hold) company has moved down 29.5%, much wider than the industry’s decline of 0.6%. The decline in stock has been more prominent over the past month, reflecting a 36.9% decline.

Q1 in Detail

Adjusted earnings improved 13.6% year over year to 25 cents per share and surpassed the Zacks Consensus Estimate of 22 cents. Earnings gains reflect strong top-line growth, offset by lower gross margin.

Net sales of $633.6 million grew 3.6% year over year. However, the top line missed the Zacks Consensus Estimate of $650.4 million, marking three straight quarters of sales miss. Sales mainly benefited from stellar wholesale operations’ results, which gained from impressive brand performances. The company’s five global power brands — DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld — contributed meaningfully to top-line growth. This was partly offset by continued challenges in the retail business.

Gross profit increased 0.7% year over year to $236.1 million. Meanwhile, gross margin of 37.3% contracted 100 basis points (bps). This was due to dismal gross margins in retail and wholesale segments. Meanwhile, SG&A expenses were nearly flat at $201.9 million compared with $202.1 million in the year-ago quarter.

Operating profit of $25.6 million increased 10.8% from the prior-year figure of $23.1 million.

Segmental Performance

Net sales in the Wholesale segment were $571 million, up almost 8%. Tommy Hilfiger and DKNY brands were primary growth drivers.

Net sales for the Retail segment were $82 million, down roughly 22% from the prior-year quarter. The segment witnessed a sales decline across Wilsons, G.H. Bass and DKNY stores. Notably, same-store sales declined nearly 23% at Wilsons, 11% at G.H. Bass and 1% at DKNY stores. A decline in the number of stores operated by the company also weighed upon the segment’s performance.

Other Financial Details

GIII-Apparel ended first-quarter fiscal 2020 with cash and cash equivalents of $48.3 million, and long-term debt of $411.1 million. Total stockholders’ equity was $1,186.8 million.

Guidance

Management is impressed with performance of the company’s five global power brands — DKNY, Donna Karen, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld. This has been aiding the company’s top-line performance for a while now.

Backed by this momentum, management reiterated its earnings and sales view for fiscal 2020 and provided an encouraging guidance for the second quarter. The company estimates net sales of nearly $3.28 billion in fiscal 2020 compared with $3.08 billion in fiscal 2019. It foresees adjusted EBITDA of $307-$313.0 million and adjusted earnings per share of $3.25-$3.35. The Zacks Consensus Estimate for the company’s earnings currently stands at $3.07.

For second-quarter fiscal 2020, G-III Apparel anticipates net sales of around $660 million and adjusted earnings per share of 17-27 cents.

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