G-III Apparel (GIII) Up On Q2 Earnings Beat, Updates View

G-III Apparel Group, Ltd. (NASDAQ:GIII) posted mixed second-quarter fiscal 2020 results, with the bottom line beating the Zacks Consensus Estimate and the top line missing the same. Notably, earnings beat estimates for the 10th straight quarter. Moreover, top and bottom line improved year over year.

Quarterly results benefited from continued strength in the company’s wholesale business, somewhat offset by challenges in retail operations. Nevertheless, management is on track to revive retail operations. To this end, the company expects to shut more than 140 stores by the end of fiscal 2020. In the latter half of the fiscal, the company expects to gain from the DKNY and Karl Lagerfeld stores on the back of improved product and store design.

Management also expects to leverage strength in the company’s five global power brands — DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld — by enhancing and developing brand design to supply commercial products. Moreover, the company’s robust supply-chain efforts have expanded its sourcing base worldwide. Also, it is on track with product diversification.

However, management trimmed bottom-line view for fiscal 2020 due to adverse impacts of tariffs. Although the company is apprehensive about the tariff environment, it focuses on global sourcing and is accelerating inventory receipt capabilities to mitigate the impacts. Additionally, the company is obtaining price concessions from vendor partners in China and implementing appropriate wholesale price increases. Notably, the anticipated production in China will decline below 50% in fiscal 2020, down from 80% four years ago.

Driven by the aforesaid positives, shares of the company have increased 26.5% on Sep 5. In the past three months, the stock has moved up 1.9% against the industry’s 11.3% decline.

Q2 in Detail

Adjusted earnings improved 4.5% year over year to 23 cents per share and surpassed the Zacks Consensus Estimate of 22 cents. Quarterly earnings benefited from top-line growth and higher operating margin.

Net sales of $643.9 million rose 3.1% year over year. However, the top line missed the Zacks Consensus Estimate of $655 million, marking fourth straight quarter of sales miss. The figure mainly benefited from stellar results in wholesale operations on impressive brand performances. This was partly offset by persistent challenges in the company’s retail operations.

Moreover, gross profit dipped 0.1% year over year to $231.8 million. Meanwhile, gross margin of 36% contracted 110 basis points (bps), thanks to lower gross margins in the retail and wholesale segments.

Furthermore, SG&A expenses inched down 1.3% year over year to $196.4 million. Operating profit increased 15.9% to $26.9 million in the fiscal second quarter, with operating margin expansion of 50 bps to 4.2%.

Segmental Performance

Net sales in the Wholesale segment were $588.6 million, up almost 8.1% year over year. Tommy Hilfiger, Calvin Klein and DKNY brands were primary growth drivers.

Net sales for this Zacks Rank #5 (Strong Sell) company’s Retail segment were $84 million, down nearly 22% from the prior-year quarter’s reported figure. The segment witnessed sales decline across Wilsons and G.H. Bass, somewhat offset by growth at DKNY. Notably, same-store sales declined nearly 21% at Wilsons and 16% at G.H. Bass, while it improved 3% at DKNY stores. A decline in the number of stores operated by the company also exerted pressure on the segment’s performance.

Other Financial Details

GIII-Apparel ended second-quarter fiscal 2020 with cash and cash equivalents of $39.6 million, and long-term debt of $553.8 million. Total stockholders’ equity was $1,167.8 million.

On a year-to-date basis, the company spent nearly $18 million as capital expenditures in fiscal 2020. Further, it repurchased about 1.3 million shares for $35 million, following which it had roughly 2.9 million shares available for buybacks under its authorized share repurchase plan.

Guidance

Management updated its view for fiscal 2020 to reflect the anticipated impacts of additional and potential tariffs. The company anticipates costs of roughly $12 million for this fiscal, thanks to impacts of the fourth tranche of tariffs.

The company now estimates net sales of nearly $3.30 billion in fiscal 2020 compared with the earlier projection of $3.28 billion, and $3.08 billion generated in fiscal 2019.

Moreover, the company now foresees adjusted EBITDA in the range of $295-$300 million compared with the prior anticipation of $307-$313 million. Adjusted earnings per share (EPS) are now expected in the band of $3.15-$3.25, down from $3.25-$3.35 guided earlier. In fiscal 2019, it recorded adjusted earnings of $2.86 per share. The Zacks Consensus Estimate for the company’s earnings is currently pegged at $3.18 for the current fiscal.

Furthermore, management estimates adjusted losses in the company’s Retail segment to be around $5 million higher than the loss reported in fiscal 2019. This incorporates high-single-digit decline in comps at Wilsons and Bass. DKNY’s retail sales are expected to remain flat compared with the year-ago period’s figure due to fall in the average comp store count. For DKNY’s Wholesale and Licensing operations, top line is estimated to improve by roughly 25%.

For third-quarter fiscal 2020, G-III Apparel anticipates net sales of around $1.17 billion and adjusted EPS in the band of $1.87-$1.97. In the year-ago quarter, the company recorded sales of $1.07 billion and adjusted earnings of $1.88. The Zacks Consensus Estimate for the quarter is currently pegged at $2.11, which is likely to witness downward revisions in the upcoming days. Moreover, the company assumes a high-single-digit decrease in comps at its retail operations.

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