UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended October 31, 20182019
or
For the transition period from to
Commission File Number: 0-18183
G-III APPAREL GROUP, LTD.LTD.
(Exact name of registrant as specified in its charter)
Delaware |
| 41-1590959 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
|
|
|
512 Seventh Avenue, New York, New York |
| 10018 |
(Address of principal executive offices) |
| (Zip Code) |
(212) (212) 403-0500
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | GIII | The Nasdaq Stock Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes ☒ No ◻☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer |
|
Non-accelerated filer |
| Smaller reporting company |
|
Emerging growth company |
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻☐ No ☒
As of December 3, 2018,5, 2019, there were 49,355,58747,825,398 shares of issuer’s common stock, par value $0.01 per share, outstanding.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 18 | ||
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2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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| October 31, |
| October 31, |
| January 31, |
| |||
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| 2018 |
| 2017 |
| 2018 |
| |||
|
| (Unaudited) |
| (Unaudited) |
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| ||
|
| (In thousands, except per share amounts) |
| |||||||
ASSETS |
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Current assets |
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Cash and cash equivalents |
| $ | 66,080 |
| $ | 68,229 |
| $ | 45,776 |
|
Accounts receivable, net of allowance for doubtful accounts |
|
| 819,636 |
|
| 601,179 | (1) |
| 294,430 | (1) |
Inventories |
|
| 616,162 |
|
| 592,822 |
|
| 553,323 |
|
Prepaid income taxes |
|
| — |
|
| — |
|
| 15,058 |
|
Prepaid expenses and other current assets |
|
| 82,933 |
|
| 34,841 |
|
| 51,014 |
|
Total current assets |
|
| 1,584,811 |
|
| 1,297,071 |
|
| 959,601 |
|
Investments in unconsolidated affiliates |
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| 67,874 |
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| 60,642 |
|
| 62,422 |
|
Property and equipment, net |
|
| 89,658 |
|
| 98,522 |
|
| 97,857 |
|
Other assets, net |
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| 35,109 |
|
| 33,883 |
|
| 32,478 |
|
Other intangibles, net |
|
| 43,409 |
|
| 47,076 |
|
| 46,405 |
|
Deferred income tax assets, net |
|
| 28,336 |
|
| 16,169 |
|
| 11,439 |
|
Trademarks |
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| 440,505 |
|
| 441,490 |
|
| 442,265 |
|
Goodwill |
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| 261,366 |
|
| 264,200 |
|
| 262,710 |
|
Total assets |
| $ | 2,551,068 |
| $ | 2,259,053 |
| $ | 1,915,177 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities |
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Income tax payable |
| $ | 25,194 |
| $ | 22,949 |
| $ | 19,748 |
|
Accounts payable |
|
| 224,826 |
|
| 216,860 |
|
| 232,364 |
|
Accrued expenses |
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| 137,878 |
|
| 128,891 |
|
| 95,055 |
|
Customer refund liabilities |
|
| 235,400 |
|
| — |
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| — |
|
Total current liabilities |
|
| 623,298 |
|
| 368,700 |
|
| 347,167 |
|
Notes payable, net of discount and unamortized issuance costs |
|
| 694,277 |
|
| 726,608 |
|
| 391,044 |
|
Deferred income tax liabilities, net |
|
| 15,276 |
|
| 16,325 |
|
| 15,888 |
|
Other non-current liabilities |
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| 37,262 |
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| 40,488 |
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| 40,389 |
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Total liabilities |
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| 1,370,113 |
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| 1,152,121 |
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| 794,488 |
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Stockholders' Equity |
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Preferred stock; 1,000 shares authorized; no shares issued |
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| — |
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| — |
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| — |
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Common stock - $0.01 par value; 120,000 shares authorized; 49,356, 49,196 and 49,219 shares issued, respectively |
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| 264 |
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| 247 |
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| 245 |
|
Additional paid-in capital |
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| 461,457 |
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| 447,555 |
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| 451,844 |
|
Accumulated other comprehensive loss |
|
| (15,566) |
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| (15,499) |
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| (5,522) |
|
Retained earnings |
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| 734,800 |
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| 675,084 |
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| 674,542 |
|
Common stock held in treasury, at cost - 0, 115 and 106 shares, respectively |
|
| — |
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| (455) |
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| (420) |
|
Total stockholders' equity |
|
| 1,180,955 |
|
| 1,106,932 |
|
| 1,120,689 |
|
Total liabilities and stockholders' equity |
| $ | 2,551,068 |
| $ | 2,259,053 |
| $ | 1,915,177 |
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| | | | | | | | | |
| | October 31, | | October 31, | | January 31, | |||
| | 2019 | | 2018 | | 2019 | |||
|
| (Unaudited) |
| (Unaudited) |
| | | ||
| | (In thousands, except per share amounts) | |||||||
ASSETS | | | | | | | | | |
Current assets | | | | | | | | | |
Cash and cash equivalents | | $ | 55,801 | | $ | 66,080 | | $ | 70,138 |
Accounts receivable, net of allowance for doubtful accounts | | | 899,029 | | | 819,636 | | | 502,133 |
Inventories | | | 650,633 | | | 616,162 | | | 576,383 |
Prepaid income taxes | | | 2,942 | | | — | | | 8,308 |
Prepaid expenses and other current assets | | | 77,328 | | | 82,933 | | | 96,933 |
Total current assets | | | 1,685,733 | | | 1,584,811 | | | 1,253,895 |
Investments in unconsolidated affiliates | | | 62,231 | | | 67,874 | | | 66,587 |
Property and equipment, net | | | 90,830 | | | 89,658 | | | 86,407 |
Operating lease assets | | | 293,819 | | | — | | | — |
Other assets, net | | | 34,389 | | | 35,109 | | | 35,459 |
Other intangibles, net | | | 39,297 | | | 43,409 | | | 42,404 |
Deferred income tax assets, net | | | 25,135 | | | 28,336 | | | 22,427 |
Trademarks | | | 437,247 | | | 440,505 | | | 439,742 |
Goodwill | | | 259,926 | | | 261,366 | | | 261,137 |
Total assets | | $ | 2,928,607 | | $ | 2,551,068 | | $ | 2,208,058 |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | |
Current liabilities | | | | | | | | | |
Income tax payable | | $ | 32,029 | | $ | 25,194 | | $ | 8,859 |
Accounts payable | | | 215,217 | | | 224,826 | | | 225,499 |
Accrued expenses | | | 137,402 | | | 137,878 | | | 102,841 |
Customer refund liabilities | | | 260,040 | | | 235,400 | | | 243,589 |
Current operating lease liabilities | | | 66,850 | | | — | | | — |
Current portion of notes payable | | | 655 | | | — | | | — |
Other current liabilities | | | 1,056 | | | — | | | — |
Total current liabilities | | | 713,249 | | | 623,298 | | | 580,788 |
Notes payable, net of discount and unamortized issuance costs | | | 674,741 | | | 694,277 | | | 386,604 |
Deferred income tax liabilities, net | | | 14,300 | | | 15,276 | | | 15,128 |
Noncurrent operating lease liabilities | | | 260,010 | | | — | | | — |
Other noncurrent liabilities | | | 6,005 | | | 37,262 | | | 36,529 |
Total liabilities | | | 1,668,305 | | | 1,370,113 | | | 1,019,049 |
| | | | | | | | | |
Stockholders' Equity | | | | | | | | | |
Preferred stock; 1,000 shares authorized; 0 shares issued | | | — | | | — | | | — |
Common stock - $0.01 par value; 120,000 shares authorized; 49,395, 49,356 and, 49,387 shares issued, respectively | | | 264 | | | 264 | | | 264 |
Additional paid-in capital | | | 457,278 | | | 461,457 | | | 464,112 |
Accumulated other comprehensive loss | | | (23,060) | | | (15,566) | | | (15,194) |
Retained earnings | | | 867,850 | | | 734,800 | | | 758,881 |
Common stock held in treasury, at cost - 1,570, 0 and 678 shares, respectively | | | (42,030) | | | — | | | (19,054) |
Total stockholders' equity | | | 1,260,302 | | | 1,180,955 | | | 1,189,009 |
Total liabilities and stockholders' equity | | $ | 2,928,607 | | $ | 2,551,068 | | $ | 2,208,058 |
The accompanying notes are an integral part of these statements.
3
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
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| Three Months Ended October 31, |
| Nine Months Ended October 31, | ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
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| (As Adjusted) |
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| (As Adjusted) | ||
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| (Unaudited) | ||||||||||
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| (In thousands, except per share amounts) | ||||||||||
Net sales |
| $ | 1,072,982 |
| $ | 1,024,993 |
| $ | 2,309,423 |
| $ | 2,092,040 |
Cost of goods sold |
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| 690,882 |
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| 633,897 |
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| 1,461,252 |
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| 1,296,239 |
Gross profit |
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| 382,100 |
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| 391,096 |
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| 848,171 |
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| 795,801 |
Selling, general and administrative expenses |
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| 232,052 |
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| 242,740 |
|
| 632,983 |
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| 636,000 |
Depreciation and amortization |
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| 10,033 |
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| 6,906 |
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| 28,868 |
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| 27,480 |
Operating profit |
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| 140,015 |
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| 141,450 |
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| 186,320 |
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| 132,321 |
Other income (loss) |
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| 176 |
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| (2,072) |
|
| (303) |
|
| (2,935) |
Interest and financing charges, net |
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| (12,323) |
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| (11,431) |
|
| (32,153) |
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| (31,266) |
Income before income taxes |
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| 127,868 |
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| 127,947 |
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| 153,864 |
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| 98,120 |
Income tax expense |
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| 33,843 |
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| 46,322 |
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| 39,877 |
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| 35,454 |
Net income |
| $ | 94,025 |
| $ | 81,625 |
| $ | 113,987 |
| $ | 62,666 |
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NET INCOME PER COMMON SHARE: |
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Basic: |
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Net income per common share |
| $ | 1.91 |
| $ | 1.67 |
| $ | 2.32 |
| $ | 1.29 |
Weighted average number of shares outstanding |
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| 49,231 |
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| 48,846 |
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| 49,176 |
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| 48,729 |
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Diluted: |
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Net income per common share |
| $ | 1.86 |
| $ | 1.65 |
| $ | 2.26 |
| $ | 1.27 |
Weighted average number of shares outstanding |
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| 50,494 |
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| 49,528 |
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| 50,345 |
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| 49,410 |
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Net income |
| $ | 94,025 |
| $ | 81,625 |
| $ | 113,987 |
| $ | 62,666 |
Other comprehensive income: |
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Foreign currency translation adjustments |
|
| (1,979) |
|
| 4,182 |
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| (10,044) |
|
| 12,223 |
Other comprehensive income (loss) |
|
| (1,979) |
|
| 4,182 |
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| (10,044) |
|
| 12,223 |
Comprehensive income |
| $ | 92,046 |
| $ | 85,807 |
| $ | 103,943 |
| $ | 74,889 |
| | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
| | (Unaudited) | ||||||||||
| | (In thousands, except per share amounts) | ||||||||||
Net sales | | $ | 1,128,403 | | $ | 1,072,982 | | $ | 2,405,847 | | $ | 2,309,423 |
Cost of goods sold | | | 729,384 | | | 690,882 | | | 1,538,995 | | | 1,461,252 |
Gross profit | | | 399,019 | | | 382,100 | | | 866,852 | | | 848,171 |
Selling, general and administrative expenses | | | 246,580 | | | 232,052 | | | 644,887 | | | 632,983 |
Depreciation and amortization | | | 9,701 | | | 10,033 | | | 28,963 | | | 28,868 |
Gain on lease terminations | | | (124) | | | — | | | (2,346) | | | — |
Operating profit | | | 142,862 | | | 140,015 | | | 195,348 | | | 186,320 |
Other income (loss) | | | 677 | | | 176 | | | (722) | | | (303) |
Interest and financing charges, net | | | (12,518) | | | (12,323) | | | (33,623) | | | (32,153) |
Income before income taxes | | | 131,021 | | | 127,868 | | | 161,003 | | | 153,864 |
Income tax expense | | | 35,634 | | | 33,843 | | | 42,454 | | | 39,877 |
Net income | | $ | 95,387 | | $ | 94,025 | | $ | 118,549 | | $ | 113,987 |
| | | | | | | | | | | | |
NET INCOME PER COMMON SHARE: | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | |
Net income per common share | | $ | 2.00 | | $ | 1.91 | | $ | 2.45 | | $ | 2.32 |
Weighted average number of shares outstanding | | | 47,768 | | | 49,231 | | | 48,333 | | | 49,176 |
| | | | | | | | | | | | |
Diluted: | | | | | | | | | | | | |
Net income per common share | | $ | 1.97 | | $ | 1.86 | | $ | 2.42 | | $ | 2.26 |
Weighted average number of shares outstanding | | | 48,356 | | | 50,494 | | | 49,056 | | | 50,345 |
| | | | | | | | | | | | |
Net income | | $ | 95,387 | | $ | 94,025 | | $ | 118,549 | | $ | 113,987 |
Other comprehensive income: | | | | | | | | | | | | |
Foreign currency translation adjustments | | | (6,212) | | | (1,979) | | | (7,866) | | | (10,044) |
Other comprehensive loss | | | (6,212) | | | (1,979) | | | (7,866) | | | (10,044) |
Comprehensive income | | $ | 89,175 | | $ | 92,046 | | $ | 110,683 | | $ | 103,943 |
The accompanying notes are an integral part of these statements.
4
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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| Nine Months Ended October 31, | ||||
|
| 2018 |
| 2017 | ||
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| (Unaudited) | ||||
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| (In thousands) | ||||
Cash flows from operating activities |
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Net income |
| $ | 113,987 |
| $ | 62,666 |
Adjustments to reconcile net income to net cash used in operating activities: |
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Depreciation and amortization |
|
| 28,868 |
|
| 27,480 |
Loss on disposal of fixed assets |
|
| 154 |
|
| 2,832 |
Dividend received from equity investment |
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| 1,470 |
|
| — |
Equity loss in unconsolidated affiliates |
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| 1,421 |
|
| 540 |
Share-based compensation |
|
| 14,876 |
|
| 15,362 |
Deferred financing charges and debt discount amortization |
|
| 7,481 |
|
| 8,185 |
Changes in operating assets and liabilities: |
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|
Accounts receivable, net |
|
| (525,331) |
|
| (336,818) |
Inventories |
|
| (63,312) |
|
| (108,284) |
Income taxes, net |
|
| 20,507 |
|
| 29,573 |
Prepaid expenses and other current assets |
|
| (33,958) |
|
| 12,314 |
Other assets, net |
|
| (4,569) |
|
| 8,455 |
Customer refund liabilities |
|
| 168,954 |
|
| — |
Accounts payable, accrued expenses and other liabilities |
|
| 33,345 |
|
| 32,103 |
Net cash used in operating activities |
|
| (236,107) |
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| (245,592) |
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Cash flows from investing activities |
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Capital expenditures |
|
| (19,516) |
|
| (21,428) |
Investment in unconsolidated affiliate |
|
| (9,951) |
|
| (49) |
Net cash used in investing activities |
|
| (29,467) |
|
| (21,477) |
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|
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Cash flows from financing activities |
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|
|
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|
|
Repayment of borrowings - revolving facility |
|
| (1,454,510) |
|
| (1,242,194) |
Proceeds from borrowings - revolving facility |
|
| 1,752,106 |
|
| 1,500,721 |
Proceeds from exercise of equity awards |
|
| 56 |
|
| 1,532 |
Taxes paid for net share settlements |
|
| (4,843) |
|
| (6,114) |
Net cash provided by financing activities |
|
| 292,809 |
|
| 253,945 |
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| (6,931) |
|
| 1,396 |
Net increase (decrease) in cash and cash equivalents |
|
| 20,304 |
|
| (11,728) |
Cash and cash equivalents at beginning of period |
|
| 45,776 |
|
| 79,957 |
Cash and cash equivalents at end of period |
| $ | 66,080 |
| $ | 68,229 |
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Supplemental disclosures of cash flow information |
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Cash payments: |
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Interest, net |
| $ | 26,071 |
| $ | 24,664 |
Income tax payments, net |
| $ | 20,041 |
| $ | 4,564 |
| | | | | | |
| | Nine Months Ended October 31, | ||||
|
| 2019 |
| 2018 | ||
| | (Unaudited) | ||||
| | (In thousands) | ||||
Cash flows from operating activities | | | | | | |
Net income | | $ | 118,549 | | $ | 113,987 |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | |
Depreciation and amortization | | | 28,963 | | | 28,868 |
Loss on disposal of fixed assets | | | 1,343 | | | 154 |
Non-cash operating lease costs | | | 55,048 | | | — |
Gain on lease terminations | | | (2,346) | | | — |
Dividend received from unconsolidated affiliate | | | 1,960 | | | 1,470 |
Equity (gain)/loss in unconsolidated affiliates | | | (2,248) | | | 1,421 |
Share-based compensation | | | 13,657 | | | 14,876 |
Deferred financing charges and debt discount amortization | | | 6,586 | | | 7,481 |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable, net | | | (396,895) | | | (525,331) |
Inventories | | | (74,250) | | | (63,312) |
Income taxes, net | | | 28,614 | | | 20,507 |
Prepaid expenses and other current assets | | | 19,278 | | | (33,958) |
Other assets, net | | | (382) | | | (4,569) |
Customer refund liabilities | | | 16,450 | | | 168,954 |
Operating lease liabilities | | | (61,063) | | | — |
Accounts payable, accrued expenses and other liabilities | | | 26,567 | | | 33,345 |
Net cash used in operating activities | | | (220,169) | | | (236,107) |
| | | | | | |
Cash flows from investing activities | | | | | | |
Operating lease assets initial direct costs | | | (2,014) | | | — |
Capital expenditures | | | (31,903) | | | (19,516) |
Investment in unconsolidated affiliate | | | — | | | (9,951) |
Net cash used in investing activities | | | (33,917) | | | (29,467) |
| | | | | | |
Cash flows from financing activities | | | | | | |
Repayment of borrowings - revolving facility | | | (1,536,448) | | | (1,454,510) |
Proceeds from borrowings - revolving facility | | | 1,816,328 | | | 1,752,106 |
Repayment of borrowings - unsecured term loan | | | (338) | | | — |
Proceeds from borrowings - unsecured term loan | | | 3,380 | | | — |
Proceeds from exercise of equity awards | | | 116 | | | 56 |
Purchase of treasury shares | | | (35,216) | | | — |
Taxes paid for net share settlements | | | (8,367) | | | (4,843) |
Net cash provided by financing activities | | | 239,455 | | | 292,809 |
| | | | | | |
Foreign currency translation adjustments | | | 294 | | | (6,931) |
Net (decrease)/increase in cash and cash equivalents | | | (14,337) | | | 20,304 |
Cash and cash equivalents at beginning of period | | | 70,138 | | | 45,776 |
Cash and cash equivalents at end of period | | $ | 55,801 | | $ | 66,080 |
| | | | | | |
Supplemental disclosures of cash flow information | | | | | | |
Cash payments: | | | | | | |
Interest, net | | $ | 25,822 | | $ | 26,071 |
Income tax payments, net | | $ | 13,975 | | $ | 20,041 |
The accompanying notes are an integral part of these statements.
5
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, sources 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 and licenses several of its proprietary brands under variousseveral product categories.
The Company consolidates the accounts of all its wholly-owned and majority-owned subsidiaries. KL North America BVB.V. (“KLNA”) and Fabco Holding B.V. (“Fabco”) are Dutch joint venture limited liability companies that are joint ventures 49% owned by the Company. Karl Lagerfeld Holding B.V. (“KLH”) is a Dutch limited liability company that is 19% owned by the Company. These investments are accounted for using the equity method of accounting. All material intercompany balances and transactions have been eliminated.
Vilebrequin International SA (“Vilebrequin”), a Swiss corporation that is wholly-owned by the Company, KLH, KLNA Fabco and KLHFabco report results on a calendar year basis rather than on the January 31 fiscal year basis used by the Company. Accordingly, the results of Vilebrequin, KLH, KLNA Fabco and KLHFabco are, and will be, included in ourthe financial statements for the quarter ended or ending closest to G-III’sthe Company’s fiscal quarter.quarter end. For example, with respect to ourthe Company’s results for the nine-month period ended October 31, 2018,2019, the results of Vilebrequin, KLH, KLNA Fabco and KLHFabco are included for the nine-month period ended September 30, 2018.2019. The Company’s retail operations segment usesreports on a 52/53‑week53-week fiscal year. The Company’s three and nine-month periods ended October 31, 2019 and 2018 and 2017 were each a 13‑week13-week fiscal quarter and a 39‑week fiscal39-week period, respectively, for both periods for the retail operations segment. For fiscal 20192020 and 2018,2019, the three and nine monthnine-month periods for the retail operations segment ended on November 2, 2019 and November 3, 2018, and October 28, 2017, respectively.
The results for the three and nine-month periodsnine months ended October 31, 20182019 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‑K10-K for the fiscal year ended January 31, 20182019 filed with the Securities and Exchange Commission (the “SEC”).
Assets and liabilities of the Company’s foreign operations, where the functional currency is not the U.S. Dollardollar (reporting currency), 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 incomeloss within stockholders’ equity.
Certain reclassifications have been made to the Condensed Consolidated Statements of Income and Comprehensive Income as
Note 2 – Inventories
Wholesale inventories, which comprise a resultsignificant portion of the Company’s reclassifying the impact of certain components of foreign currency gain (loss) from cost of goods sold and interest expense to other income (loss).
Note 2 – Revenue Recognition
On February 1, 2018, the Company adopted Accounting Standard Codification Topic 606 (“ASC 606”) using the modified retrospective method as of January 31, 2018. The Company recognized a cumulative effect adjustment to the opening balance of stockholders’ equity at February 1, 2018 that reduced stockholders’ equity by $53.7 million, net of tax, as a result of the adoption of ASC 606.
6
Prospectively, the adoption of ASC 606 primarily affects the timing of recognition of certain adjustments that are recorded in net sales for the wholesale operations segment. Under ASC 606, revenue is recognized upon the transfer of goods to customers in an amount that reflects the expected consideration to be received in exchange for these goods. The difference between the amount initially billed and the amount collected represents variable consideration. Variable consideration includes trade discounts, end of season markdowns, sales allowances, cooperative advertising, return liabilities and other customer allowances. Under ASC 606, the Company estimates the anticipated variable consideration and records this estimate as a reduction of revenue in the period the related product revenue is recognized. Prior to adopting ASC 606, certain components of variable consideration were recorded at a later date when the liability was known or incurred.
The adoption of ASC 606 also resulted in prospectively changing the presentation of certain items on the Condensed Consolidated Balance Sheets and the Condensed Consolidated Statements of Income and Comprehensive Income. Under the prior guidance, the liability recorded in connection with variable consideration was recorded as a reduction to accounts receivable. With the adoption of ASC 606, these amounts have been classified as a current liability under “Customer refund liabilities” in the Condensed Consolidated Balance Sheet. Additionally, the Company now classifies cooperative advertising as a reduction of net sales in the Condensed Consolidated Statements of Income and Comprehensive Income. Previously, cooperative advertising was recorded in selling, general and administrative expenses. ASC 606 requires that costs expected to be incurred when products are returned should be accrued for upon the sale of the product as a component of cost of goods sold. These restocking costs were previously recognized when incurred and recorded in selling, general and administrative expenses.
The following tables summarize the impact of adopting ASC 606 on the Company’s Condensed Consolidated Balance Sheet as of October 31, 2018 and the Company’s Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended October 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
| October 31, 2018 | |||||||
|
| (In thousands) | |||||||
|
| As Reported |
| Without Adoption |
| Impact of Adoption | |||
Assets |
|
|
|
|
|
|
|
|
|
Accounts receivable |
| $ | 819,636 |
| $ | 646,333 |
| $ | 173,303 |
Inventories |
|
| 616,162 |
|
| 653,664 |
|
| (37,502) |
Prepaid expenses and other current assets |
|
| 82,933 |
|
| 48,991 |
|
| 33,942 |
Deferred income tax assets, net |
|
| 28,336 |
|
| 11,792 |
|
| 16,544 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
| 137,878 |
|
| 136,627 |
|
| 1,251 |
Customer refund liabilities |
|
| 235,400 |
|
| — |
|
| 235,400 |
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
Retained earnings |
|
| 734,800 |
|
| 785,164 |
|
| (50,364) |
7
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended October 31, 2018 | |||||||
|
| (In thousands, except per share amounts) | |||||||
|
| As Reported |
| Without Adoption |
| Impact of Adoption | |||
Net sales |
| $ | 1,072,982 |
| $ | 1,081,879 |
| $ | (8,897) |
Cost of goods sold |
|
| 690,882 |
|
| 690,367 |
|
| 515 |
Selling, general and administrative expenses |
|
| 232,052 |
|
| 240,916 |
|
| (8,864) |
Operating profit |
|
| 140,015 |
|
| 140,563 |
|
| (548) |
Income tax expense |
|
| 33,843 |
|
| 34,039 |
|
| (196) |
Net income |
|
| 94,025 |
|
| 94,377 |
|
| (352) |
|
|
|
|
|
|
|
|
|
|
Net income per common share |
|
|
|
|
|
|
|
|
|
Basic |
|
| 1.91 |
|
| 1.92 |
|
| (0.01) |
Diluted |
|
| 1.86 |
|
| 1.87 |
|
| (0.01) |
|
|
|
|
|
|
|
|
|
|
|
| For the nine months ended October 31, 2018 | |||||||
|
| (In thousands, except per share amounts) | |||||||
|
| As Reported |
| Without Adoption |
| Impact of Adoption | |||
Net sales |
| $ | 2,309,423 |
| $ | 2,322,675 |
| $ | (13,252) |
Cost of goods sold |
|
| 1,461,252 |
|
| 1,458,494 |
|
| 2,758 |
Selling, general and administrative expenses |
|
| 632,983 |
|
| 653,602 |
|
| (20,619) |
Operating profit |
|
| 186,320 |
|
| 181,711 |
|
| 4,609 |
Income tax expense |
|
| 39,877 |
|
| 38,632 |
|
| 1,245 |
Net income |
|
| 113,987 |
|
| 110,623 |
|
| 3,364 |
|
|
|
|
|
|
|
|
|
|
Net income per common share |
|
|
|
|
|
|
|
|
|
Basic |
|
| 2.32 |
|
| 2.25 |
|
| 0.07 |
Diluted |
|
| 2.26 |
|
| 2.20 |
|
| 0.06 |
The adoption of ASC 606 had no net impact on the Company’s cash flows from operations.
Disaggregation of Revenue
In accordance with ASC 606, the Company elected to disclose its revenues by segment. Each segment presents its own characteristics with respect to the timing of revenue recognition and the type of customer. In addition, disaggregating revenues using a segment basis is consistent with how the Company’s Chief Operating Decision Maker manages the Company. The Company identified the wholesale operations segment and the retail operations segment as distinct sources of revenue.
Wholesale Operations Segment. Wholesale revenues include sales of products to retailers under owned, licensed and private label brands, as well as sales related to the Vilebrequin business. Wholesale revenues also include revenues from license agreements related to trademarks owned by the DKNY, Donna Karan, G.H. Bass, Andrew Marc and Vilebrequin businesses. Wholesale revenues are recognized when control transfers to the customer. The Company considers control to have been transferred when the Company has transferred physical possession of the product, the Company has a right to payment for the product, the customer has legal title to the product and the customer has the significant risks and rewards of the product. Wholesale revenues are adjusted by variable considerations arising from implicit or explicit obligations. As of October 31, 2018, revenues from license agreements represented an insignificant portion of wholesale revenues.
Retail Operations Segment. Retail store revenues are generated by direct sales to consumers through company-operated stores and product sales through the Company’s owned websites for the DKNY, Donna Karan, Wilsons, G.H. Bass, Andrew Marc and Karl Lagerfeld Paris businesses. Retail stores primarily consist of Wilsons Leather, G.H. Bass and DKNY retail stores, substantially all of which are operated as outlet stores. Retail operations segment revenues are recognized at the point of sale when the customer takes possession of the goods and tenders payment. E-commerce revenues primarily consist of sales to consumers through the Company’s e-commerce platforms. E-commerce revenue is recognized when a customer takes possession of the goods. Retail sales are recorded net of applicable sales tax.
8
Variable Consideration. The difference between the amount initially billed and the amount collected represents variable consideration. The Company may provide customers with discounts, rebates, credit returns and price reductions. The Company may also contribute to customers’ promotional activities or incur charges for compliance violations. These adjustments to the initial selling price often occur after the sales process is completed.
The Company identified the following elements of variable consideration:
Markdowns. Markdown allowances consist of accommodations in the form of price reductions to wholesale customers for purchased merchandise. In general, markdowns are granted to full price customers, such as department stores. Markdowns may vary year-over-year and are granted based on the performance of Company merchandise at customer retail stores.
Term Discounts. Term discounts represent a discount from the initial wholesale sales price to certain wholesale customers consistent with customary industry practice.
Sales Allowances. Sales allowances are reductions of the selling price agreed upon with wholesale customers. Sales allowances may be contractual or may be granted on a case-by-case basis. Non-contractual sales allowances may be granted in connection with billing adjustments and, in some cases, for product related issues.
Advertising Allowances. Advertising allowances consist of the Company’s financial participation in the promotional efforts of its wholesale customers. Wholesale customers may charge back a portion of the advertising expense incurred against open invoices. Advertising programs are generally agreed upon at the beginning of a season.
Other Allowances. General allowances consist of price reductions granted to a wholesale customer and may relate to the Company’s participation in costs incurred by the customer during the sales process, as well as price differences, shortages and charges for operational non-compliance.
Return of Merchandise. For wholesale customers, the Company may make accommodations for returns of merchandise that is underperforming at a customer’s retail stores. For retail customers, as a matter of Company policy, whether merchandise is purchased at the Company’s stores or on its e-commerce platforms, the consumer has up to 90 days to return merchandise from the date of purchase.
Variable consideration is estimated based on historical experience, current contractual and statutory requirements, specific known events and industry trends. The reserves for variable consideration are recorded under customer refund liabilities. As of October 31, 2018, customer refund liabilities amounted to $235.4 million. Customer refund liabilities were recorded as a reduction to accounts receivable as of January 31, 2018 and October 31, 2017. Historical return rates are calculated on a product line basis. The remainder of the historical rates for variable consideration are calculated by customer by product lines.
Contract Liabilities
The Company’s contract liabilities, which are recorded within accrued expenses in the accompanying Condensed Consolidated Balance Sheets, primarily consist of gift card liabilities and advance payments from licensees. In some of its retail concepts, the Company also runs a limited loyalty program where customers accumulate points redeemable for cash discount certificates that expire 90 days after issuance. Total contract liabilities were $4.2 million and $6.0 million at October 31, 2018 and January 31, 2018, respectively. The Company recognized $2.8 million in revenue for the three months ended October 31, 2018, which related to contract liabilities that existed at July 31, 2018. The Company recognized $4.9 million in revenue for the nine months ended October 31, 2018, which related to contract liabilities that existed at January 31, 2018. There were no contract assets recorded as of October 31, 2018 and January 31, 2018. Substantially all of the advance payments from licensees as of October 31, 2018 are expected to be recognized as revenue within the next twelve months.
9
Note 3 – Inventories
Substantially all of the Company’s inventories consist of finished goods. Wholesale inventoriesinventory, are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value, which comprise a significant portion of the Company’s inventory.value. 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 net realizable value. Substantially all of the Company’s inventories consist of finished goods.
6
The inventory return asset, which consists of the amount of goods that are anticipated to be returned by customers, represented $41.9 million, $37.5 million $39.4 million and $40.8$42.4 million as of October 31, 2018, January2019, October 31, 2018 and OctoberJanuary 31, 2017,2019 respectively. The inventory return asset is recorded within prepaid expenses and other current assets.
Inventory held on consignment by the Company’s customers totaled $11.0 million, $7.3 million and $4.9 million at October 31, 2019, October 31, 2018 and January 31, 2019, respectively. Consignment inventory is stored at the facilities of the Company’s customers. The Company reflects this inventory on its condensed consolidated balance sheets.
Note 3 – Fair Value of Financial Instruments
Generally Accepted Accounting Principles establish a three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy for a particular asset or liability depends on the inputs used in its valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally-derived (unobservable). A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
● | Level 1 — inputs to the valuation methodology based on quoted prices (unadjusted) for identical assets or liabilities in active markets. |
● | Level 2 — inputs to the valuation methodology based on quoted prices for similar assets or liabilities in active markets for substantially the full term of the financial instrument; quoted prices for identical or similar instruments in markets that are not active for substantially the full term of the financial instrument; and model-derived valuations whose inputs or significant value drivers are observable. |
● | Level 3 — inputs to the valuation methodology based on unobservable prices or valuation techniques that are significant to the fair value measurement. |
The following table summarizes the carrying values and the estimated fair values of the Company’s debt instruments:
| | | | | | | | | | | | | | | | | | | | |
| | | | Carrying Value | | Fair Value | ||||||||||||||
| | |
| October 31, | | October 31, | | January 31, |
| October 31, | | October 31, | | January 31, | ||||||
Financial Instrument | | Level | | 2019 | | 2018 | | 2019 | | 2019 | | 2018 | | 2019 | ||||||
| | | | (In thousands) | ||||||||||||||||
Term loan | | 2 | | $ | 300,000 | | $ | 300,000 | | $ | 300,000 | | $ | 300,000 | | $ | 300,000 | | $ | 300,000 |
Revolving credit facility | | 2 | | | 279,880 | | | 309,599 | | | — | | | 279,880 | | | 309,599 | | | — |
Note issued to LVMH | | 3 | | | 100,623 | | | 95,345 | | | 96,618 | | | 100,825 | | | 95,345 | | | 88,608 |
Unsecured loan | | 2 | | | 2,948 | | | — | | | — | | | 2,948 | | | — | | | — |
The Company’s debt instruments are recorded at their carrying values in its condensed consolidated balance sheets, which may differ from their respective fair values. The carrying amount of the Company’s variable rate debt approximates the fair value, as interest rates change with the market rates. Furthermore, the carrying value of all other financial instruments potentially subject to valuation risk (principally consisting of cash, accounts receivable and accounts payable) also approximates fair value due to the short-term nature of these accounts.
The 2% note issued to LVMH Moet Hennessy Louis Vuitton Inc. (“LVMH”) in connection with the acquisition of Donna Karan International (“DKI”) was issued at a discount of $40.0 million in accordance with Accounting Standards Codification (“ASC”) 820 – Fair Value Measurements. For purposes of this fair value disclosure, the Company based its fair value estimate for the note issued to LVMH on the initial fair value as determined at the date of the acquisition of DKI and records the amortization using the effective interest method over the term of the note.
7
Non-Financial Assets and Liabilities
The Company’s non-financial assets, which primarily consist of operating lease assets, goodwill, other intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial instruments are assessed for impairment and, if applicable, written down to and recorded at fair value, considering external market participant assumptions. During the first quarter of fiscal 2020, the Company recorded an impairment of $9.6 million, net of tax, in connection with the adoption of ASC 842 – Leases (“ASC 842”) that was recognized through retained earnings.
Note 4 – Leases
On February 1, 2019, the Company adopted ASC 842 using the optional transition method to apply the standard as of the effective date and, therefore, the standard has not been applied retroactively to the comparative periods presented in its financial statements. The Company has elected the transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and initial direct costs. The hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of right-of-use assets, has not been elected. Further, the Company elected the short-term lease exception policy, permitting it to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component.
The Company determines whether an arrangement is, or contains, a lease at contract inception. The Company leases certain retail stores, warehouses, distribution centers, office space and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
Total rent payable is recorded during the lease term, including rent escalations in which the amount of future rent is certain or fixed on the straight-line basis over the term of the lease (including any rent holiday periods beginning upon control of the premises and any fixed payments stated in the lease). For leases with an initial term greater than 12 months, a lease liability is recorded on the balance sheet at the present value of future payments discounted at the incremental borrowing rate (discount rate) corresponding with the lease term. An operating lease asset is recorded based on the initial amount of the lease liability, plus any lease payments made to the lessor before or at the lease commencement date and any initial direct costs incurred, less any tenant improvement allowance incentives received. The difference between the minimum rents paid and the straight-line rent (deferred rent) is reflected within the associated operating lease asset.
The lease classification evaluation begins at the commencement date. The lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain or the failure to exercise such option would result in an economic penalty. All retail store, warehouse, distribution center and office leases are classified as operating leases. The Company does not have any finance leases. Operating lease expense is generally recognized on a straight-line basis over the lease term.
Certain leases contain provisions that require contingent rent payments based upon sales volume (variable lease cost). Contingent rent is accrued each period as the liabilities are incurred.
Most leases are for a term of one to ten years. Some leases include one or more options to renew, with renewal terms that can extend the lease term from one to ten years. Several of the Company’s retail store leases include an option to terminate the lease based on failure to achieve a specified sales volume. The exercise of lease renewal options is generally at the Company’s sole discretion. The exercise of lease termination options is generally by mutual agreement between the Company and the lessor.
Certain of the Company’s lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.
8
The Company’s lease assets and liabilities as of October 31, 20182019 consist of the following:
| | | | | |
| | | | | |
Leases | | Classification | | October 31, 2019 | |
| | | | (In thousands) | |
Assets | | | | | |
Operating | | Operating lease assets | | $ | 293,819 |
Total lease assets | | | | $ | 293,819 |
| | | | | |
Liabilities | | | | | |
Current operating | | Current operating lease liabilities | | $ | 66,850 |
Noncurrent operating | | Noncurrent operating lease liabilities | | | 260,010 |
Total lease liabilities | | | | $ | 326,860 |
The Company’s leases do not provide the rate of interest implicit in the lease. Therefore, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. For transition purposes, the incremental borrowing rate on February 1, 2019 was used for operating leases that commenced prior to that date.
The Company recorded lease costs of $24.4 million and $74.3 million during the three and nine months ended October 31, 2019, respectively. Lease costs are recorded within inventoriesselling, general and administrative expenses in the Company’s condensed consolidated statements of income and comprehensive income. The Company recorded variable lease costs and short-term lease costs of $4.4 million and $11.9 million for the three and nine months ended October 31, 2019, respectively. Short-term lease costs are immaterial.
As of October 31, 2019, the Company’s maturity of operating lease liabilities in the years ending up to January 31, 2024 and thereafter are as follows:
| | | |
Year Ending January 31, | | Amount | |
| | (In thousands) | |
2020 | | $ | 20,031 |
2021 | | | 89,483 |
2022 | | | 75,858 |
2023 | | | 66,550 |
2024 | | | 53,197 |
After 2024 | | | 97,891 |
Total lease payments | | $ | 403,010 |
Less: Interest | | | 76,150 |
Present value of lease liabilities | | $ | 326,860 |
As of October 31, 2019, there are no material leases that are legally binding but have not yet commenced.
As of October 31, 2019, the weighted average remaining lease term related to operating leases is 5.3 years. The weighted average discount rate related to operating leases is 7.8%.
Cash paid for amounts included in the measurement of operating lease liabilities is $75.9 million as of January 31, 2018 and October 31, 2017.2019. Right-of-use assets obtained in exchange for lease obligations were $21.3 million as of October 31, 2019.
9
Note 4 – Fair Value of Financial Instruments
GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy for a particular asset or liability depends on the inputs used in its valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally-derived (unobservable). A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
|
|
|
|
|
|
The following table summarizes the carrying values and the estimated fair values of the Company’s debt instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Carrying Value |
| Fair Value | ||||||||||||||
|
|
|
| October 31, |
| October 31, |
| January 31, |
| October 31, |
| October 31, |
| January 31, | ||||||
Financial Instrument |
| Level |
| 2018 |
| 2017 |
| 2018 |
| 2018 |
| 2017 |
| 2018 | ||||||
|
|
|
| (In thousands) | ||||||||||||||||
Term loan |
| 2 |
| $ | 300,000 |
| $ | 300,000 |
| $ | 300,000 |
| $ | 300,000 |
| $ | 300,000 |
| $ | 300,000 |
Revolving credit facility |
| 2 |
|
| 309,599 |
|
| 349,648 |
|
| 12,003 |
|
| 309,599 |
|
| 349,648 |
|
| 12,003 |
Note issued to LVMH |
| 3 |
|
| 95,345 |
|
| 90,239 |
|
| 91,667 |
|
| 95,345 |
|
| 90,239 |
|
| 91,667 |
The Company’s debt instruments are recorded at their carrying values in its condensed consolidated balance sheets, which may differ from their respective fair values. The carrying amount of the Company’s variable rate debt approximates the fair value, as interest rates change with the market rates. Furthermore, the carrying value of all other financial instruments potentially subject to valuation risk (principally consisting of cash, accounts receivable and accounts payable) also approximates fair value due to the short-term nature of these accounts. For purposes of this fair value disclosure, the Company based its fair value estimate for the LVMH Note (as defined in Note 6) on the initial fair value as determined at the date of the acquisition of Donna Karan International (“DKI”) and records the amortization using the effective interest method over the term of the LVMH Note.
10
Non-Financial Assets and Liabilities
The Company’s non-financial assets, which primarily consist of goodwill, other intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial instruments are assessed for impairment and, if applicable, written down to and recorded at fair value, considering external market participant assumptions. No events or circumstances indicate an impairment has been identified subsequent to the Company’s January 31, 2018 impairment testing.
Note 5 – Net Income per Common Share
Basic net income 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 unit awards and unexercised stock options outstanding during the period. Approximately 846,200 and 344,000 and 1,000,000unvested shares of common stock have been excluded from the diluted net income per share calculation for the three months ended October 31, 20182019 and 2017,2018, respectively. Approximately 680,700 and 330,000 and 1,100,000unvested shares of common stock have been excluded from the diluted net income per share calculation for the nine months ended October 31, 20182019 and 2017,2018, respectively. 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.
The following table reconciles the numerators and denominators used in the calculation of basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Three Months Ended October 31, |
| Nine Months Ended October 31, | ||||||||||||||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||||||||||
|
| (In thousands, except per share amounts) | ||||||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||
| | Three Months Ended October 31, | | Nine Months Ended October 31, | ||||||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||||||||||||
| | (In thousands, except per share amounts) | ||||||||||||||||||||||
Net income |
| $ | 94,025 |
| $ | 81,625 |
| $ | 113,987 |
| $ | 62,666 | | $ | 95,387 | | $ | 94,025 | | $ | 118,549 | | $ | 113,987 |
Basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Basic common shares |
|
| 49,231 |
|
| 48,846 |
|
| 49,176 |
|
| 48,729 | | | 47,768 | | | 49,231 | | | 48,333 | | | 49,176 |
Basic net income per share |
| $ | 1.91 |
| $ | 1.67 |
| $ | 2.32 |
| $ | 1.29 | | $ | 2.00 | | $ | 1.91 | | $ | 2.45 | | $ | 2.32 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Basic common shares |
|
| 49,231 |
|
| 48,846 |
|
| 49,176 |
|
| 48,729 | | | 47,768 | | | 49,231 | | | 48,333 | | | 49,176 |
Diluted restricted stock awards and stock options |
|
| 1,263 |
|
| 682 |
|
| 1,169 |
|
| 681 | ||||||||||||
Diluted restricted stock unit awards and stock options | | | 588 | | | 1,263 | | | 723 | | | 1,169 | ||||||||||||
Diluted common shares |
|
| 50,494 |
|
| 49,528 |
|
| 50,345 |
|
| 49,410 | | | 48,356 | | | 50,494 | | | 49,056 | | | 50,345 |
Diluted net income per share |
| $ | 1.86 |
| $ | 1.65 |
| $ | 2.26 |
| $ | 1.27 | | $ | 1.97 | | $ | 1.86 | | $ | 2.42 | | $ | 2.26 |
11
Note 6 – Notes Payable
Long-term debt consists of the following:
| | | | | | | | | |
|
| October 31, 2019 |
| October 31, 2018 |
| January 31, 2019 | |||
| | (In thousands) | |||||||
Term loan | | $ | 300,000 | | $ | 300,000 | | $ | 300,000 |
Revolving credit facility | | | 279,880 | | | 309,599 | | | — |
Note issued to LVMH | | | 125,000 | | | 125,000 | | | 125,000 |
Unsecured loan | | | 2,948 | | | — | | | — |
Subtotal | | | 707,828 | | | 734,599 | | | 425,000 |
Less: Net debt issuance costs (1) | | | (8,055) | | | (10,667) | | | (10,014) |
Debt discount | | | (24,377) | | | (29,655) | | | (28,382) |
Current portion of long-term debt | | | (655) | | | — | | | — |
Total | | $ | 674,741 | | $ | 694,277 | | $ | 386,604 |
|
|
|
|
|
|
|
|
|
|
|
| October 31, 2018 |
| October 31, 2017 |
| January 31, 2018 | |||
|
| (In thousands) | |||||||
Term loan |
| $ | 300,000 |
| $ | 300,000 |
| $ | 300,000 |
Revolving credit facility |
|
| 309,599 |
|
| 349,648 |
|
| 12,003 |
Note issued to LVMH |
|
| 125,000 |
|
| 125,000 |
|
| 125,000 |
Subtotal |
|
| 734,599 |
| �� | 774,648 |
|
| 437,003 |
Less: Net debt issuance costs (1) |
|
| (10,667) |
|
| (13,279) |
|
| (12,626) |
Debt discount |
|
| (29,655) |
|
| (34,761) |
|
| (33,333) |
Total |
| $ | 694,277 |
| $ | 726,608 |
| $ | 391,044 |
(1) |
| Does not include debt issuance costs, net of amortization, totaling $5.2 million, $7.7 million |
10
Term Loan
In connection with the acquisition of DKI, the Company borrowed $350.0 million under a senior secured term loan facility (the “Term Loan”). On December 1, 2016, the Company prepaid $50.0 million in principal amount of the Term Loan. The Term Loan is payable on maturitywill mature in December 2022.
Interest on the outstanding principal amount of the Term Loan accrues at a rate equal to the London Interbank Offered Rate (“LIBOR”), subject to a 1% floor, plus an applicable margin of 5.25% or an alternate base rate (defined as the greatest of (i) the “prime rate” as published by the Wall Street Journal from time to time, (ii) the federal funds rate plus 0.5% or (iii) the LIBOR rate for a borrowing with an interest period of one month) plus 4.25%, per annum, payable in cash. As of October 31, 2018,2019, interest under the Term Loan was being paid at an average rate of 7.36%7.62% per annum.
The Term Loan is secured by certain assets of the Company and certain of its subsidiaries. The Term Loan is required to be prepaid with the proceeds of certain asset sales if such proceeds are not applied as required by the agreement prior toTerm Loan within specified deadlines. The Term Loan contains covenants that, among other things, restrict the Company’s ability, subject to among other things,certain exceptions, to incur additional debt,debt; incur liens; sell or dispose of certain assets,assets; merge with other companies; liquidate or dissolve the Company; acquire other companies; make loans, advances, or guarantees; and make certain investments, incur liens and enter into acquisitions.investments. This loan also includes a mandatory prepayment provision based on excess cash flow as defined in the term loan agreement. A first lien leverage covenant requires the Company to maintain a level of debt to EBITDA over the term of the agreement at a ratio as set forthdefined in the term loan agreement. As of October 31, 2018,2019, the Company was in compliance with these covenants.
Revolving Credit Facility
Upon closing of the acquisition of DKI, the Company’s previousprior credit agreement was refinanced and replaced by a $650 million amended and restated credit agreement (the “revolving credit facility”). Amounts available under the revolving credit facility are subject to borrowing base formulas and over advances as specified in the revolving credit facility agreement. Borrowings bear interest, at the Company’s option, at LIBOR plus a margin of 1.25% to 1.75% or an alternate base rate (defined as the greatest of (i) the “prime rate” of JPMorgan Chase Bank, N.A. from time to time, (ii) the federal funds rate plus 0.5% or (iii) the LIBOR rate for a borrowing with an interest period of one month) plus a margin of 0.25% to 0.75%, with the applicable margin determined based on the availability under the revolving credit facility agreement. As of October 31, 2018,2019, interest under the revolving credit agreement was being paid at an average rate of 3.71%3.30% per annum. The revolving credit facility has a five-year term ending December 1, 2021. In addition to paying interest on any outstanding borrowings under the revolving credit facility, the Company is required to pay a commitment fee to the lenders under the credit agreement with respect to the unutilized commitments. The commitment fee accrues at a rate equal to 0.25% per annum on the average daily amount of the unutilizedavailable commitments.
12
As of October 31, 2018,2019, the Company had $309.6$279.9 million of borrowings outstanding under the revolving credit facility, all of which are classified as long-term liabilities. As of October 31, 2018,2019, there were outstanding trade and standby letters of credit amounting to $8.6$3.6 million and $3.4 million, respectively.
The revolving credit facility contains covenants that, among other things, restrict the Company’s ability, subject to specified exceptions, to incur additional debt; incur liens; sell or dispose of certain assets; merge with other companies; liquidate or dissolve the Company; acquire other companies; make loans, advances, or guarantees; and make certain investments. In certain circumstances, the revolving credit facility also requires the Company to maintain a fixed charge coverage ratio, as defined in the agreement, not less than 1.00 to 1.00 for each period of twelve consecutive fiscal months of the Company. As of October 31, 2019, the Company was in compliance with these covenants.
LVMH Note
As part of the consideration for the acquisition of DKI, the Company issued to LVMH Moet Hennessy Louis Vuitton Inc. (“LVMH”) a junior lien secured promissory note in the principal amount of $125.0 million (the “LVMH Note”) that bears interest at the rate of 2% per year. $75.0 million of the principal amount of the LVMH Note is due and payable on June 1, 2023 and $50.0 million of such principal amount is due and payable on December 1, 2023. Accounting Standards Codification (“ASC”) 820 - Fair Value Measurements requires the note to be recorded at fair value at issuance. As a result, the Company recorded a $40.0 million debt discount in the amount of $40.0 million.discount. This discount is being amortized as interest expense using the effective interest method over the term of the LVMH Note.
11
Unsecured Loan
On April 15, 2019, T.R.B. International SA (“TRB”), a subsidiary of Vilebrequin, borrowed €3.0 million under an unsecured loan with Banque du Leman S.A (the “Unsecured Loan”). The Unsecured Loan matures on April 15, 2024. During the term of the Unsecured Loan, TRB is required to make quarterly installment payments of €0.2 million. Interest on the outstanding principal amount of the Unsecured Loan accrues at a fixed rate equal to 1.50% per annum, payable quarterly in cash.
Note 7 – SegmentsRevenue Recognition
Disaggregation of Revenue
In accordance with ASC 606 – Revenue from Contracts with Customers, the Company has elected to disclose its revenues by segment. Each segment has its own characteristics with respect to the timing of revenue recognition and the type of customer. In addition, disaggregating revenues using a segment basis is consistent with how the Company’s Chief Operating Decision Maker manages the Company. The Company has identified the wholesale operations segment and the retail operations segment as distinct sources of revenue.
Wholesale Operations Segment. Wholesale revenues include sales of products to retailers under owned, licensed and private label brands, as well as sales related to the Vilebrequin business. Wholesale revenues from sales of products are recognized when control transfers to the customer. The Company considers control to have been transferred when the Company has transferred physical possession of the product, the Company has a right to payment for the product, the customer has legal title to the product and the customer has the significant risks and rewards of the product. Wholesale revenues are adjusted by variable considerations arising from implicit or explicit obligations. Wholesale revenues also include royalty revenues from license agreements related to our owned trademarks including DKNY, Donna Karan, Vilebrequin, G.H. Bass and Andrew Marc. As of October 31, 2019, revenues from license agreements represented an insignificant portion of wholesale revenues.
Retail Operations Segment. Retail store revenues are generated by direct sales to consumers through company-operated stores and product sales through the Company’s owned websites for the DKNY, Donna Karan, Wilsons, G.H. Bass, Andrew Marc and Karl Lagerfeld Paris businesses. Retail stores primarily consist of Wilsons Leather, G.H. Bass and DKNY retail stores, substantially all of which are operated as outlet stores, as well as a small number of Karl Lagerfeld Paris and Calvin Klein Performance stores. Retail operations segment revenues are recognized at the point of sale when the customer takes possession of the goods and tenders payment. E-commerce revenues primarily consist of sales to consumers through the Company’s e-commerce platforms. E-commerce revenue is recognized when a customer takes possession of the goods. Retail sales are recorded net of applicable sales tax.
Contract Liabilities
The Company’s reportable segmentscontract liabilities, which are business unitsrecorded within accrued expenses in the accompanying condensed consolidated balance sheets, primarily consist of gift card liabilities and advance payments from licensees. In some of its retail concepts, the Company also offers a limited loyalty program where customers accumulate points redeemable for cash discount certificates that offer products through different channelsexpire 90 days after issuance. Total contract liabilities were $5.4 million, $4.2 million and $6.4 million at October 31, 2019, October 31, 2018 and January 31, 2019, respectively. The Company recognized $4.5 million in revenue for the three months ended October 31, 2019 related to contract liabilities that existed at July 31, 2019. The Company recognized $5.5 million in revenue for the nine months ended October 31, 2019 related to contract liabilities that existed at January 31, 2019. There were 0 contract assets recorded as of distribution. October 31, 2019, October 31, 2018 and January 31, 2019. Substantially all of the advance payments from licensees as of October 31, 2019 are expected to be recognized as revenue within the next twelve months.
12
Note 8 – Segments
The Company has two2 reportable segments: wholesale operations and retail operations. The wholesale operations segment includes sales of products under the Company’s owned, licensed and private label brands, as well as sales related to the Vilebrequin business. Wholesale salesrevenues also include royalty revenues from license agreements related to our owned trademarks owned by theincluding DKNY, Donna Karan, Vilebrequin, G.H. Bass and Andrew Marc and Vilebrequin businesses.Marc. The retail operations segment consists primarily of direct sales to consumers through Company-operated stores, consisting primarily of Wilsons Leather, G.H. Bass and DKNY stores, substantially all of which are operated as outlet stores, as well as a limitedsmaller number of Karl Lagerfeld Paris and Calvin Klein Performance stores. SalesThis segment also includes sales through Company-owned websites for the Company’s owned websites, with the exception of Vilebrequin, are also included in the retail operations segment.DKNY, Donna Karan, Wilsons, G.H. Bass, Andrew Marc and Karl Lagerfeld Paris businesses.
The following segment information is presented for the three and nine-month periods indicated below:
| | | | | | | | | | | | |
| | Three Months Ended October 31, 2019 | ||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||
| | (In thousands) | ||||||||||
Net sales | | $ | 1,067,858 | | $ | 89,671 | | $ | (29,126) | | $ | 1,128,403 |
Cost of goods sold | | | 713,063 | | | 45,447 | | | (29,126) | | | 729,384 |
Gross profit | | | 354,795 | | | 44,224 | | | — | | | 399,019 |
Selling, general and administrative expenses | | | 190,166 | | | 56,414 | | | — | | | 246,580 |
Depreciation and amortization | | | 7,748 | | | 1,953 | | | — | | | 9,701 |
Gain on lease terminations | | | — | | | (124) | | | — | | | (124) |
Operating profit (loss) | | $ | 156,881 | | $ | (14,019) | | $ | — | | $ | 142,862 |
| | | | | | | | | | | | |
| | Three Months Ended October 31, 2018 | ||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||
| | (In thousands) | ||||||||||
Net sales | | $ | 1,005,358 | | $ | 110,934 | | $ | (43,310) | | $ | 1,072,982 |
Cost of goods sold | | | 677,011 | | | 57,181 | | | (43,310) | | | 690,882 |
Gross profit | | | 328,347 | | | 53,753 | | | — | | | 382,100 |
Selling, general and administrative expenses | | | 166,423 | | | 65,629 | | | — | | | 232,052 |
Depreciation and amortization | | | 7,709 | | | 2,324 | | | — | | | 10,033 |
Operating profit (loss) | | $ | 154,215 | | $ | (14,200) | | $ | — | | $ | 140,015 |
| | | | | | | | | | | | |
| | Nine Months Ended October 31, 2019 | ||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||
| | (In thousands) | ||||||||||
Net sales | | $ | 2,227,404 | | $ | 255,282 | | $ | (76,839) | | $ | 2,405,847 |
Cost of goods sold | | | 1,480,678 | | | 135,156 | | | (76,839) | | | 1,538,995 |
Gross profit | | | 746,726 | | | 120,126 | | | — | | | 866,852 |
Selling, general and administrative expenses | | | 478,964 | | | 165,923 | | | | | | 644,887 |
Depreciation and amortization | | | 23,033 | | | 5,930 | | | | | | 28,963 |
Gain on lease terminations | | | — | | | (2,346) | | | | | | (2,346) |
Operating profit (loss) | | $ | 244,729 | | $ | (49,381) | | $ | — | | $ | 195,348 |
| | | | | | | | | | | | |
| | Nine Months Ended October 31, 2018 | ||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||
| | (In thousands) | ||||||||||
Net sales | | $ | 2,077,628 | | $ | 322,115 | | $ | (90,320) | | $ | 2,309,423 |
Cost of goods sold | | | 1,381,342 | | | 170,230 | | | (90,320) | | | 1,461,252 |
Gross profit | | | 696,286 | | | 151,885 | | | — | | | 848,171 |
Selling, general and administrative expenses | | | 439,014 | | | 193,969 | | | — | | | 632,983 |
Depreciation and amortization | | | 22,192 | | | 6,676 | | | — | | | 28,868 |
Operating profit (loss) | | $ | 235,080 | | $ | (48,760) | | $ | — | | $ | 186,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended October 31, 2018 | ||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||
|
| (In thousands) | ||||||||||
Net sales |
| $ | 1,005,358 |
| $ | 110,934 |
| $ | (43,310) |
| $ | 1,072,982 |
Cost of goods sold |
|
| 677,011 |
|
| 57,181 |
|
| (43,310) |
|
| 690,882 |
Gross profit |
|
| 328,347 |
|
| 53,753 |
|
| — |
|
| 382,100 |
Selling, general and administrative expenses |
|
| 166,423 |
|
| 65,629 |
|
| — |
|
| 232,052 |
Depreciation and amortization |
|
| 7,709 |
|
| 2,324 |
|
| — |
|
| 10,033 |
Operating profit (loss) |
| $ | 154,215 |
| $ | (14,200) |
| $ | — |
| $ | 140,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended October 31, 2017 | ||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||
|
| (In thousands) | ||||||||||
Net sales (2) |
| $ | 966,820 |
| $ | 118,709 |
| $ | (60,536) |
| $ | 1,024,993 |
Cost of goods sold (3) |
|
| 636,636 |
|
| 57,797 |
|
| (60,536) |
|
| 633,897 |
Gross profit |
|
| 330,184 |
|
| 60,912 |
|
| — |
|
| 391,096 |
Selling, general and administrative expenses |
|
| 174,679 |
|
| 68,061 |
|
| — |
|
| 242,740 |
Depreciation and amortization |
|
| 6,790 |
|
| 116 |
|
| — |
|
| 6,906 |
Operating profit (loss) |
| $ | 148,715 |
| $ | (7,265) |
| $ | — |
| $ | 141,450 |
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended October 31, 2018 | ||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||
|
| (In thousands) | ||||||||||
Net sales |
| $ | 2,077,628 |
| $ | 322,115 |
| $ | (90,320) |
| $ | 2,309,423 |
Cost of goods sold |
|
| 1,381,342 |
|
| 170,230 |
|
| (90,320) |
|
| 1,461,252 |
Gross profit |
|
| 696,286 |
|
| 151,885 |
|
| — |
|
| 848,171 |
Selling, general and administrative expenses |
|
| 439,014 |
|
| 193,969 |
|
| — |
|
| 632,983 |
Depreciation and amortization |
|
| 22,192 |
|
| 6,676 |
|
| — |
|
| 28,868 |
Operating profit (loss) |
| $ | 235,080 |
| $ | (48,760) |
| $ | — |
| $ | 186,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended October 31, 2017 | ||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||
|
| (In thousands) | ||||||||||
Net sales (2) |
| $ | 1,887,902 |
| $ | 324,329 |
| $ | (120,191) |
| $ | 2,092,040 |
Cost of goods sold (3) |
|
| 1,251,372 |
|
| 165,058 |
|
| (120,191) |
|
| 1,296,239 |
Gross profit |
|
| 636,530 |
|
| 159,271 |
|
| — |
|
| 795,801 |
Selling, general and administrative expenses |
|
| 433,323 |
|
| 202,677 |
|
| — |
|
| 636,000 |
Depreciation and amortization |
|
| 20,403 |
|
| 7,077 |
|
| — |
|
| 27,480 |
Operating profit (loss) |
| $ | 182,804 |
| $ | (50,483) |
| $ | — |
| $ | 132,321 |
|
|
|
|
|
|
The total assets for each of the Company’s reportable segments, as well as assets not allocated to a segment, are as follows:
|
|
|
|
|
|
|
|
|
| |||||||||
|
| October 31, 2018 |
| October 31, 2017 |
| January 31, 2018 | ||||||||||||
|
| (In thousands) | ||||||||||||||||
| | | | | | | | | | |||||||||
|
| October 31, 2019 |
| October 31, 2018 |
| January 31, 2019 | ||||||||||||
| | (In thousands) | ||||||||||||||||
Wholesale |
| $ | 2,155,840 |
| $ | 1,871,373 |
| $ | 1,554,191 | | $ | 2,342,209 | | $ | 2,155,840 | | $ | 1,834,610 |
Retail |
|
| 224,593 |
|
| 251,649 |
|
| 215,568 | | | 348,898 | | | 224,593 | | | 190,996 |
Corporate |
|
| 170,635 |
|
| 136,031 |
|
| 145,418 | | | 237,500 | | | 170,635 | | | 182,452 |
Total assets |
| $ | 2,551,068 |
| $ | 2,259,053 |
| $ | 1,915,177 | | $ | 2,928,607 | | $ | 2,551,068 | | $ | 2,208,058 |
Note 89 – Stockholders’ Equity
|
|
|
|
|
|
|
|
| Nine Months Ended October 31, | ||||
|
| 2018 |
| 2017 | ||
|
| (In thousands) | ||||
Balance at beginning of period |
| $ | 1,120,689 |
| $ | 1,021,236 |
Comprehensive income |
|
| 103,943 |
|
| 74,889 |
Equity awards exercised/vested, net |
|
| 56 |
|
| 1,532 |
Share-based compensation expense |
|
| 14,876 |
|
| 15,362 |
Adjustments related to tax withholding for share-based compensation |
|
| (4,843) |
|
| (6,114) |
Other |
|
| (38) |
|
| 27 |
ASC 606 cumulative effect to retained earnings opening balance |
|
| (53,728) |
|
| — |
Balance at end of period |
| $ | 1,180,955 |
| $ | 1,106,932 |
The changes in stockholders’ equity for the three and nine months ended October 31, 2019 and 2018 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Accumulated | | | | | Common | | | | ||
| | | | | Additional | | Other | | | | | Stock | | | ||||
| | Common | | Paid-In | | Comprehensive | | Retained | | Held In | | | ||||||
|
| Stock |
| Capital |
| Loss |
| Earnings |
| Treasury |
| Total | ||||||
Balance as of July 31, 2019 | | $ | 264 | | $ | 456,195 | | $ | (16,848) | | $ | 772,463 | | $ | (44,254) | | $ | 1,167,820 |
Equity awards exercised/vested, net | | | — | | | (2,224) | | | — | | | — | | | 2,224 | | | — |
Share-based compensation expense | | | — | | | 4,308 | | | — | | | — | | | — | | | 4,308 |
Taxes paid for net share settlements | | | — | | | (1,001) | | | — | | | — | | | — | | | (1,001) |
Other comprehensive gain, net | | | — | | | — | | | (6,212) | | | — | | | — | | | (6,212) |
Net income | | | — | | | — | | | — | | | 95,387 | | | — | | | 95,387 |
Balance as of October 31, 2019 | | $ | 264 | | $ | 457,278 | | $ | (23,060) | | $ | 867,850 | | $ | (42,030) | | $ | 1,260,302 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Accumulated | | | | | Common | | | | ||
| | | | | Additional | | Other | | | | | Stock | | | ||||
| | Common | | Paid-In | | Comprehensive | | Retained | | Held In | | | ||||||
|
| Stock |
| Capital |
| Loss |
| Earnings |
| Treasury |
| Total | ||||||
Balance as of July 31, 2018 | | $ | 263 | | $ | 460,000 | | $ | (13,587) | | $ | 640,774 | | $ | (233) | | $ | 1,087,217 |
Equity awards exercised/vested, net | | | 1 | | | (234) | | | — | | | — | | | 233 | | | — |
Share-based compensation expense | | | — | | | 5,436 | | | — | | | — | | | — | | | 5,436 |
Taxes paid for net share settlements | | | — | | | (3,745) | | | — | | | — | | | — | | | (3,745) |
Other comprehensive loss, net | | | — | | | — | | | (1,979) | | | 1 | | | — | | | (1,978) |
Net income | | | — | | | — | | | — | | | 94,025 | | | — | | | 94,025 |
Balance as of October 31, 2018 | | $ | 264 | | $ | 461,457 | | $ | (15,566) | | $ | 734,800 | | $ | — | | $ | 1,180,955 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Accumulated | | | | | Common | | | | ||
| | | | | Additional | | Other | | | | | Stock | | | ||||
| | Common | | Paid-In | | Comprehensive | | Retained | | Held In | | | ||||||
|
| Stock |
| Capital |
| Loss |
| Earnings |
| Treasury |
| Total | ||||||
Balance as of January 31, 2019 | | $ | 264 | | $ | 464,112 | | $ | (15,194) | | $ | 758,881 | | $ | (19,054) | | $ | 1,189,009 |
Equity awards exercised/vested, net | | | — | | | (12,124) | | | — | | | — | | | 12,240 | | | 116 |
Share-based compensation expense | | | — | | | 13,657 | | | — | | | — | | | — | | | 13,657 |
Taxes paid for net share settlements | | | — | | | (8,367) | | | — | | | — | | | — | | | (8,367) |
Other comprehensive loss, net | | | — | | | — | | | (7,866) | | | — | | | — | | | (7,866) |
Repurchases of common stock | | | — | | | — | | | — | | | — | | | (35,216) | | | (35,216) |
Cumulative effect of adoption of ASC 842 | | | — | | | — | | | — | | | (9,580) | | | — | | | (9,580) |
Net income | | | — | | | — | | | — | | | 118,549 | | | — | | | 118,549 |
Balance as of October 31, 2019 | | $ | 264 | | $ | 457,278 | | $ | (23,060) | | $ | 867,850 | | $ | (42,030) | | $ | 1,260,302 |
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| | | | | | | | | | | | | | | | | | |
| | | | | | | | Accumulated | | | | | Common | | | | ||
| | | | | Additional | | Other | | | | | Stock | | | ||||
| | Common | | Paid-In | | Comprehensive | | Retained | | Held In | | | ||||||
|
| Stock |
| Capital |
| Loss |
| Earnings |
| Treasury |
| Total | ||||||
Balance as of January 31, 2018 | | $ | 245 | | $ | 451,844 | | $ | (5,522) | | $ | 674,542 | | $ | (420) | | $ | 1,120,689 |
Equity awards exercised/vested, net | | | 19 | | | (383) | | | — | | | — | | | 420 | | | 56 |
Share-based compensation expense | | | — | | | 14,876 | | | — | | | — | | | — | | | 14,876 |
Taxes paid for net share settlements | | | — | | | (4,843) | | | — | | | — | | | — | | | (4,843) |
Other comprehensive loss, net | | | — | | | (37) | | | (10,044) | | | (1) | | | — | | | (10,082) |
Cumulative effect of adoption of ASC 606 | | | — | | | — | | | — | | | (53,728) | | | — | | | (53,728) |
Net income | | | — | | | — | | | — | | | 113,987 | | | — | | | 113,987 |
Balance as of October 31, 2018 | | $ | 264 | | $ | 461,457 | | $ | (15,566) | | $ | 734,800 | | $ | — | | $ | 1,180,955 |
For three months ended October 31, 2019, the Company issued 0 shares of common stock and utilized 80,353 shares of treasury stock in connection with the exercise or vesting of equity awards. For the three months ended October 31, 2018, the Company issued 117,774 shares of common stock and utilized 58,790 shares of treasury stock in connection with the vesting of equity awards. For the threenine months ended October 31, 2017,2019, the Company issued 144,3908,851 shares of common stock and utilized 228,378435,703 shares of treasury stock in connection with the exercise or vesting of equity awards. For the nine months ended October 31, 2018, the Company issued 137,050 shares of common stock and utilized 106,043 shares of treasury stock in connection with the exercise or vesting of equity awards. For the nine months ended October 31, 2017, the Company issued 179,302 shares of common stock and utilized 261,208 shares of treasury stock in connection with the exercise or vesting of equity awards.
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Note 9 – Final Tax Adjustment of Donna Karan International Acquisition
In February 2018, the Company paid $4.6 million to LVMH for the final tax adjustment related to the Company’s election under Internal Revenue Code Section 338(h)(10) in connection with the acquisition of DKI.
Note 10 – Canadian Customs Duty Examination
In October 2017, the Canada Border Service Agency (“CBSA”) issued a final audit report to G-III Apparel Canada ULC (“G-III Canada”), a wholly-owned subsidiary of the Company. The report challenged the valuation used by G-III Canada for certain goods imported into Canada. The period covered by the examination is February 1, 2014 through October 27, 2017, the date of the final report, October 27, 2017.report. The CBSA has requested G-III Canada to reassess its customs entries for that period using the price paid or payable by the Canadian retail customers for certain imported goods rather than the price paid by G-III Canada to the vendor. The CBSA has also requested that G-III Canada change the valuation method used to pay duties with respect to goods imported in the future.
In March 2018, G-III Canada provided a bond to guarantee payment to the CBSA to secure payment of thefor additional duties payable as a result of the reassessment required by the final audit report. The Company issuedsecured a bond in the amount of CAD$26.9 million ($20.9 million) representing customs duty and interest through December 31, 2017 that is claimed to be owed to the CBSA. In March 2018, the Company amended the duties filed for the month of January 2018 based on the new valuation method. The additional duty claimedThis amount was paid to be owed for January 2018 was approximately CAD$1.4 million ($1.1 million).the CBSA. Beginning February 1, 2018, the Company began paying duties based on the new valuation method. The additional dutiesAmounts paid beginning on February 1, 2018 on the higher dutiable value will not be charged as an expense in the Company’s statement of operations, but will be recorded as a deferred expense until the appeal process has concluded. Expense amountsand deferred for the three and nine months ended October 31, 2018,2019, related to the higher dutiable values, were CAD$2.52.2 million ($1.91.7 million). Cumulative amounts paid and deferred through October 31, 2019, related to the higher dutiable values, were CAD$8.412.7 million ($6.49.7 million), respectively..
G-III Canada, based on the advice of counsel, believes it has positions that support its ability to receive a refund of amounts claimed to be owed to the CBSA on appeal and intends to vigorously contest the findings of the CBSA. G-III Canada filed its appeal with the CBSA in May 2018.
Note 11 – Investment in Fabco Holding B.V.
In August 2017,Effective June 1, 2019, G-III commenced paying based on the Company entered into a joint venture agreement with Amlon Capital B.V. (“Amlon”)dutiable value of G-III Canada’s imports based on the pre-audit levels. G-III continued to produce and market women’s and men’s apparel and accessories pursuant to a long-term license for DKNY and Donna Karan indefer the People’s Republicadditional duty paid through the month of China, including Macau, Hong Kong and Taiwan. The Company owns 49% of this joint venture, with Amlon owningMay 2019 pending the remaining 51%. The joint venture was funded with $25.0 million of equity to be used to strengthen the DKNY and Donna Karan brands and accelerate the growthfinal outcome of the business in the region. Of that amount, the Company was required to contribute an aggregateappeal.
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Note 1211 – Recent Adopted and Issued Accounting Pronouncements
Recently Adopted Accounting Guidance
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” 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 certain adjustments. The Company adopted ASU 2016-02 during the first quarter of fiscal 2020 using the optional transition method to apply the standard as of the effective date. As a result of adopting this standard, as of February 1, 2019, the Company recognized operating lease liabilities of $384.5 million and corresponding operating lease assets of $341.2 million. In addition, the Company recorded a $9.6 million impairment of the operating lease assets, net of tax, at adoption. The impairment was recorded as a reduction to retained earnings.
In June 2018, the FASB issued ASU 2018‑03, “Technical Corrections2018-07, “FASB Simplifies Guidance on Nonemployee Share-Based Payments,” which supersedes ASC 505-50 and Improvementsexpands the scope of ASC 718 to Financial Instruments – Overall (Subtopic 825‑10): Recognitioninclude all share-based payment arrangements related to the acquisition of goods and Measurementservices from both nonemployees and employees. As a result, most of Financial Assetsthe guidance in ASC 718 associated with employee share-based payments, including most of its requirements related to classification and Financial Liabilities”, which makes technical correctionsmeasurement, applies to certain aspects of ASU 2016‑01 (on recognition of financial assets and financial liabilities), including the following: (i) equity securities without a readily determinable fair value — discontinuation, (ii) equity securities without a readily determinable fair value — adjustments, (iii) forward contracts and purchased options, (iv) presentation requirements for certain fair value option liabilities, (v) fair value option liabilities denominated in a foreign currency and (vi) transition guidance for equity securities without a readily determinable fair value. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, were not required to adopt the amendments until the interim period beginning after June 15, 2018.nonemployee share-based payment arrangements. The Company adopted the provisions of ASU 2018‑032018-07 during the thirdfirst quarter of fiscal 2019.2020. The adoption of ASU 2018‑03 did not have anyan impact on the Company’s condensed consolidated financial statements.
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In May 2017,February 2018, the Financial Accounting Standards Board (“FASB”)FASB issued ASU 2017‑09, “Compensation2018-02, “Income Statement — Stock CompensationReporting Comprehensive Income (Topic 718)220): ScopeReclassification of Modification Accounting.Certain Tax Effects from Accumulated Other Comprehensive Income,” ASU 2017‑09which provides clarification asfinancial statement preparers with an option to when modification accounting should be used for changesreclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the terms or conditionseffect of a share-based payment award. ASU 2017‑09 does notthe change in the accounting for modifications but clarifies that modification accounting guidance should only be applied if thereU.S. federal corporate income tax rate (or portion thereof) in the Tax Cut and Jobs Act is a change to the value, vesting conditions or award classification and would not be required if the changes are considered non-substantive. The amendments of ASU 2017‑09 are effective for reporting periods beginning after December 15, 2017.recorded. The Company adopted the provisions of ASU 2017‑092018-02 during the first quarter of fiscal 2019.2020. The adoption of ASU 2017‑09 did not have anyan impact on the Company’s condensed consolidated financial statements.
In December 2017, the SEC staff issued Staff
Issued Accounting Bulletin 118 (“SAB 118”) to provide guidanceGuidance Being Evaluated for companies that had not completed their accounting for the income tax effects of the Tax Cuts and Jobs Act (“TCJA”). Due to the complexities of the TCJA, the Company’s final tax liability may materially differ from provisional estimates due to additional guidance and regulations issued by the U.S. Treasury Department, the Internal Revenue Service ("IRS") and state and local tax authorities. G-III will finalize its accounting for the TCJA during the one-year measurement period, and any adjustments to the provisional amounts will be included in income tax expense or benefit in the appropriate periods, and disclosed if material, in accordance with guidance provided by SAB 118. As of October 31, 2018, the Company has not identified or recorded adjustments to the provisional amounts previously disclosed in its Annual Report on Form 10‑K for the year ended January 31, 2018.Adoption
In January 2017, the FASB issued ASU 2017‑01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The purpose of ASU 2017‑01 is to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017‑01 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The amendments in ASU 2017‑01 should be applied prospectively on or after the effective date. The Company adopted the provisions of ASU 2017‑01 during the first quarter of fiscal 2019. The adoption of ASU 2017‑01 did not have any impact on the Company’s condensed consolidated financial statements.
In OctoberJune 2016, the FASB issued ASU 2016‑16, “Income Taxes2016-13, “Financial Instruments-Credit Losses (Topic 740)326): Intra-Entity TransfersMeasurement of Assets Other Than Inventory.Credit Losses on Financial Instruments.” The update requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset upon transfer other than inventory, eliminating the current recognition exception. Prior to the update, GAAP prohibited the recognition of current and deferred income taxes for intra-entity asset transfers until the asset was sold to an outside party. The amendments in this update do not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. For public business entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years. The Company adopted the provisions of ASU 2016‑16 during the first quarter of fiscal 2019. The adoption of ASU 2016‑16 did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2016,Subsequently, the FASB issued amendments to clarify the codification, in addition to also clarifying the implementation dates and the items that fall within the scope of the pronouncement. This pronouncement will change how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU 2016‑15, “Statement2016-13 will replace the current “incurred loss” model with an “expected loss” model. Under the “incurred loss” model, a loss (or allowance) is recognized only when an event has occurred (such as a payment delinquency) that causes the entity to believe that a loss is probable (i.e., that it has been “incurred”). Under the “expected loss” model, an entity will recognize a loss (or allowance) upon initial recognition of Cash Flows (Topic 230): Classificationthe asset that reflects all future events that may lead to a loss being realized, regardless of Certain Cash Receiptswhether it is probable that the future event will occur. The “incurred loss” model considers past events and Cash Payments,”current conditions, while the “expected loss” model includes expectations for the future which clarifies guidance with respecthave yet to occur. The new standard will require entities to record a cumulative-effect adjustment to the classification of eight specific cash flow issues. ASU 2016‑15 was issued to reduce diversity in practice and prevent financial statement restatements. Cash flow issues include: debt prepayment or debt extinguishment costs, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and applicationbalance sheet as of the predominance principle.beginning of the first reporting period in which the guidance is effective. ASU 2016‑152016-13 is effective for public businessall entities for fiscal years beginning after December 15, 2017,2019, including interim periods within those fiscal years. Under ASU 2016‑15, entities must apply the guidance retrospectively to all periods presented but may apply it prospectively if retrospective application would be impracticable.years, with early adoption permitted. The Company adoptedis currently evaluating the provisionspotential impact of ASU 2016‑15 during the first quarter of fiscal 2019. The adoption of ASU 2016‑15 did not have a material impact2016-13 on the Company’sits condensed consolidated financial statements.
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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 (i) modifies how entities measure equity investments and present changes in the fair value of financial liabilities, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) changes presentation and disclosure requirements and (iv) 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. The Company adopted the provisions of ASU 2016‑15 during the first quarter of fiscal 2019. The adoption of ASU 2016‑15 did not have a material impact on the Company’s condensed consolidated financial statements.
In May 2014, the FASB issued ASU 2014‑09, “Revenue from Contracts with Customers (Topic 606).” This update replaces the previous revenue recognition guidance in GAAP and requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The FASB clarified this guidance by issuing ASU 2017‑13, “Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments”; ASU 2016‑08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”; ASU 2016‑10, “Identifying Performance Obligations and Licensing”; ASU 2016‑12, “Narrow-Scope Improvements and Practical Expedients”; and ASU 2016‑20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” The amendments to ASU 2014‑09 were intended to render more detailed implementation guidance with the expectation of reducing the degree of judgment necessary to comply with Topic 606. These new standards have the same effective date as ASU 2014‑09 and were effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted the provisions of ASU 2014‑09, as subsequently amended, during the first quarter of fiscal 2019. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company adopted the pronouncement using a modified retrospective approach. The Company performed an analysis of its current revenue streams worldwide and identified changes that resulted from the adoption of the new guidance. The Company implemented changes to its accounting processes and controls to support the new revenue recognition and disclosure requirements. The adoption of Topic 606 primarily affects the wholesale operations segment in the timing of recognition of certain adjustments that were recorded in net sales. For example, the Company previously recorded markdowns and certain customer allowances when the liability was known or incurred. Please refer to Note 2 for further details with respect to the adoption of this guidance by the Company.
Issued Accounting Guidance Being Evaluated for Adoption
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement among or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. The amendments in ASU 2018-13 modify the disclosure requirements with respect to fair value measurements based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. The amendments to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2018-13 on its consolidated financial statements.
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In June 2018, the FASB issued ASU 2018‑07, “FASB Simplifies Guidance on Nonemployee Share-Based Payments”, which supersedes ASC 505‑50 and expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. As a result, most of the guidance in ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to nonemployee share-based payment arrangements. ASU 2018‑07 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of ASU 2018‑07 is permitted for all entities, but no earlier than the date on which an entity adopts ASC 606. The Company does not expect ASU 2018‑07 to have an impact on its condensed consolidated financial statements.
In February 2018, the FASB issued ASU 2018‑02, “Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, which provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate (or portion thereof) in the TCJA is recorded. The amendments to ASU 2018‑02 are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of ASU 2018‑02 is permitted, including adoption in any interim period for the public business entities for reporting periods for which financial statements have not yet been issued. The amendments of ASU 2018‑02 should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. The Company is currently assessing the impact that adopting ASU 2018‑02 will have on its financial statements and footnote disclosures.
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. The FASB has continued to clarify this guidance and most recently issued ASU 2018-11, “Leases (Topic 842) – Targeted Improvements”, ASU 2018-10, “Codification Improvements to Topic 842, Leases” and ASU 2017‑13, “Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments.” 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. With the issuance of ASU 2018-11, the FASB has provided entities with an additional transition method which will not require adjustments to comparative periods or require modified disclosures in those comparative periods. 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 impact of ASU 2016‑02 on its consolidated financial statements. Given the Company’s significant number of leases, the Company expects this standard will result in a significant increase to its long-term assets and liabilities, but does not expect it to have a material impact on its statements of operations. The Company is required to adopt the new standard in the first quarter of fiscal 2020 and does not expect to early adopt this new standard.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context otherwise requires, “G-III”, “us”,“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, 20192020 is referred to as “fiscal 2019”.2020.” Vilebrequin, KLH, FabcoKLNA and KLNAFabco 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, KLH, FabcoKLNA and KLNAFabco are, and will be, included in our financial statements for the quarter ended or ending closest to G-III’s fiscal quarter.quarter end. For example, with respect to our results for the nine-month period ended October 31, 2018,2019, the results of Vilebrequin, KLH, FabcoKLNA and KLNAFabco are included for the nine-month period ended September 30, 2018.2019. We account for our investment in each of KLH, KLNA Fabco and KLHFabco using the equity method of accounting. The Company’s retail operations segment uses a 52/53‑week53-week fiscal year. The Company’s three and nine-month periods ended October 31, 2019 and 2018 and 2017 were each a 13‑week13-week fiscal quarter and a 39‑week fiscal39-week period, respectively, for both periods for the retail operations segment. For fiscal 20192020 and 2018, the three and nine month periods for2019, the retail operations segment three and nine-month periods ended on November 2, 2019 and November 3, 2018, and October 28, 2017, respectively.
Various statements contained in this Form 10‑Q,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 the following:
| 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 |
| our ability to achieve operating enhancements and cost reductions from the potential significant changes to our retail operations, as well as the impact on our business resulting from any related charges to our financial statements, which may be dilutive to our earnings in the short-term; |
● | the impact on our business resulting from potential costs, obligations and charges related to the early closure of stores or the termination of long-term, non-cancellable leases; |
● | 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; |
| data security or privacy breaches; |
| 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, including from e-commerce retailers; |
| the redefinition of the retail store landscape in light of widespread retail store closings, |
| consolidation of our retail customers; |
| the impact on our business of the imposition of tariffs by the United States |
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| 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; |
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| the effect of regulations applicable to us as a U.S. public company; and |
|
|
- our ability to realize the anticipated benefits of the acquisition of DKI;
- the increase in our indebtedness as a result of the acquisition; and
- the significant increase in the amount of our goodwill and other intangibles.
Any 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‑K10-K for the year ended January 31, 20182019 and in thePart II-Other Information, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q for the quarter ended July 31, 2018.10-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.
Overview
G-III designs, sources 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. G-III has a substantial portfolio of over 40more than 30 licensed and proprietary brands, anchored by five global power brands: DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld Paris. We are not only licensees, but also brand owners, and we distribute our products through multiple brick and mortar and online channels.
Our own proprietary brands include DKNY, Donna Karan, Vilebrequin, G.H. Bass, Eliza J, Jessica Howard, Andrew Marc and Marc New York, Eliza J and Jessica Howard.York. We sell products under an extensive portfolio of well-known licensed brands, including Calvin Klein, Tommy Hilfiger, Karl Lagerfeld Paris, Kenneth Cole, Cole Haan, Guess?, Vince Camuto, Levi’s and Dockers. Through our team sports business, we have licenses with the National Football League, National Basketball Association, Major League Baseball, National Hockey League Starter and over 150 U.S. colleges and universities. We also source and sell products to retailers under their private retail labels for retailers suchlabels.
We are also expanding our business globally through our distribution partners in key regions. Continued growth, brand development and marketing in these key markets is critical to driving global brand recognition. DKNY is currently being distributed in the Middle East, Russia, Indonesia, Philippines, South East Asia and Korea, as Costco, Christopher & Banks, Harley-Davidson and JC Penney.well as in China, where we operate through a joint venture.
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.
Segments
We report based on two reportable segments: wholesale operations and retail operations.
Our wholesale operations segment includes sales of products to retailers under owned, licensed and private label brands, as well as sales related to the Vilebrequin business. Wholesale revenues also include royalty revenues from license agreements related to our owned trademarks owned by theincluding DKNY, Donna Karan, DKNY,Vilebrequin, G.H. Bass and Andrew Marc and Vilebrequin businesses.Marc.
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Our retail operations segment includesconsists primarily of direct sales to consumers through our company-operated stores, consisting primarily of Wilsons Leather, G.H. Bass and productDKNY stores, substantially all of which are operated as outlet stores, as well as a smaller number of Karl Lagerfeld Paris and Calvin Klein Performance stores. This segment also includes sales through our owned websites for the DKNY, Donna Karan, Wilsons, G.H. Bass, Andrew Marc and Karl Lagerfeld Paris businesses. Our retail operations segment consists primarily of our Wilsons Leather, G.H. Bass and DKNY retail stores, substantially all of which are operated as outlet stores, as well as a limited number of Karl Lagerfeld Paris and Calvin Klein Performance stores. As of October 31, 2018,2019, we operated 157127 Wilsons Leather stores, 125104 G.H. Bass stores, 4640 DKNY stores, 1113 Karl Lagerfeld Paris stores and 4 Calvin Klein Performance stores. In addition, as of October 31, 2019, we operated for the holiday season 5 short-term temporary Wilsons Leather stores, 6 short-term temporary G.H. Bass stores and 1 short-term temporary DKNY store.
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Licensed Products
The
For more than 25 years, the sale of licensed products ishas been a key element of our strategy and westrategy. We have continually expandedsought to increase our portfolio of name brands, product offerings and tiers of licensed products for more than 20 years.distribution because we believe that consumers prefer to buy brands that they know and brand owners prefer to engage licensees who have a successful track record of developing brands.
Our most significant licensor is Calvin Klein with whom we have eleven different license agreements for 10 different product categories.in the United States and Canada. We have also entered intohave distribution agreements with respect to Calvin Klein luggage in a limited number of countriesforeign countries. In June 2019, we expanded our relationship with Calvin Klein by entering into a license agreement with an initial term of five years for the design, production and wholesale distribution of Calvin Klein Jeans women’s jeanswear in Asia, Europethe United States and North America.Canada. This was our eleventh license agreement with Calvin Klein. Shipments of our first Calvin Klein Jeans women’s jeanswear line began during our third fiscal quarter.
We also have a significant relationship with Tommy Hilfiger, that has grown in recent years. In February 2016,with whom we expanded our relationship with Tommy Hilfiger throughhave a newmulti-category womenswear license agreement for Tommy Hilfiger womenswear in the United States and Canada. This license for women’s sportswear, dresses, suit separates, performance and denim wasis in addition to our existing United States and Canada Tommy Hilfiger men’s and women’s outerwear license and Tommy Hilfiger luggage licenses.license, both also in the United States and Canada.
In February 2018, we expanded
We own a 49% interest in a joint venture that owns the product offerings under ourtrademarks for the Karl Lagerfeld Paris license to include men’s apparel (previously men’s outerwear only) and men’s footwearbrand in North America. These expanded product categories are in addition to our existing North America rights for Karl Lagerfeld Paris women’s apparel, women’s footwear and women’s handbags, allAs part of which are produced and distributed pursuant tothat relationship, we have a long-term license agreement with KLNA.the joint venture for the Karl Lagerfeld Paris brand in North America, pursuant to which we produce and distribute women’s apparel, women’s footwear, women’s handbags, men’s apparel, men’s footwear and luggage under the Karl Lagerfeld Paris brand.
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.
Licensing of Proprietary Brands
As
We currently license our portfolio of proprietary brands has grown, we have licensedin a variety of categories and continue to seek new licensing opportunities for these brands in new categories. to broaden the reach of these brands.
We began licensing Andrew Marc, Vilebrequinhave strong relationships with category leading license partners, including, but not limited to, Estee Lauder, Fossil, Marchon and G.H. Bass in selected categories after acquiring these brands in 2008, 2012 and 2013, respectively. Our licensing program has significantly increased as a result of owning theKomar. The DKNY and Donna Karan brands which were acquired in December 2016.
We currentlyhave worldwide license the DKNY and Donna Karan brands internationallyagreements for a broad array of products including fragrance, watches, fashion jewelry, hosiery, intimates, eyewear, children’s appareljewelry, bedding and accessories, home furnishings,bath products and women’s sleepwear and men’s tailored clothing. We alsoloungewear. Additionally, we license the DKNY brand in North America in the following product categories:United States and internationally for children’s clothing, children’s footwear, men’s and women’s watches, men’s tailored clothing, men’s sportswear, men’s dress shirts, men’s neckwear, men’s underwear, men’s loungewear, men’s swimwear, men’s belts and small leather goods, women’s belts and cold weather accessories and men’s and women’s belts. In summer 2017, wesocks. We have also licensed the DKNY and Donna Karan brands for men’s and women’s apparel and accessories in China pursuant to a long-term license agreement with a joint venture of which we are a 49% owner. More recently,In July 2019, we entered intosigned a new license agreement for DKNY men’s underwearfurniture in the United States, Canada, Mexico and loungewear and DKNY and Donna Karan men’s and women’s socks, both in North America. China.
We intend to continue to focus on expanding licensing opportunities for the DKNY and Donna Karan brands. We believe that we can capitalize on significant, untapped global licensing potential for these brands in a number of categories.categories and we intend to grow royalty streams by expanding existing licenses, as well as through new categories with new licensees.
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We currently license the G.H. Bass brand in the United States and internationally for a broad array of products including: men’s, women’s and children’s footwear, men’s sportswear, men’s and boy’s tailored clothing, men’s socks, and women’s hosiery and men’s accessories, men’s belts and small leather goods.goods, men’s underwear and loungewear and bedding and bath products.
We recently licensedlicense the Vilebrequin brand internationally for a denim line.
We currently licenseline and the Andrew Marc brand in North America for men’s and boy’s tailored clothing and men’s footwear.clothing.
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Retail Operations
Given the current retail environment we are focused on turning aroundand the losses being incurred in our retail business by allowing leasesoperations segment, we intend to expiremove more broadly with respect to store closures while remaining committed to mitigating losses from our retail operations as they come up for renewal ifswiftly and efficiently as possible. In July 2019, we engaged outside advisors to assist us with this process. We are unableworking diligently with our landlords and outside advisors to satisfactorily renegotiate the termsreshape and right-size our retail operations. Our strategy also includes continued execution of those leases. In addition, we continue to evaluate our operating expenses, revisecost-cutting initiatives, revising our merchandising strategy to drive additional sales and repurposerepurposing certain Wilsons Leather and G.H. Bass stores for the Karl Lagerfeld Paris or DKNY brands. We intend to continue our program of door count reduction and of increasing the efficiency and productivity of our retail operations.
Trends
Significant trends that affect the apparel industry include retail chains closing unprofitable stores, an increased focus by retail chains and others on expanding e-commerce sales and providing convenience-driven fulfillment options, the continued consolidation of retail chains and the desire on the part of retailers to consolidate vendors supplying them. In addition, consumer shopping preferences have continued to shift from physical stores to online shopping and retail traffic remains under pressure. All of these factors have led to a more promotional retail environment that includes aggressive markdowns in an attempt to offset declines caused by a reduction in physical store traffic.
We sell our licensed products over the web through retail partners such as Macys.commacys.com and Nordstrom.com,nordstrom.com, each of which has a significantsubstantial online business. As e-commerce sales of apparel continue to increase, we are developing additional digital marketing initiatives on our web sites and through social media. We are building an e-commerce teaminvesting in digital personnel, marketing, logistics, planning and distribution to help us expand our online opportunities going forward. Our e-commerce business consists of our own web platforms at www.dkny.com, www.donnakaran.com, www.wilsonsleather.com, www.ghbass.com, www.vilebrequin.com and www.andrewmarc.com. We also sell Karl Lagerfeld Paris products on our website, www.karllagerfeldparis.com. We have also increased salesIn addition, we sell to pure play online retail partners such as Amazon and Fanatics.
A number of retailers are experiencing financial difficulties, which in some cases have resulted in bankruptcies, liquidations and/or store closings, such as the announced store closing plans for Lord & Taylor and last year’s bankruptcy of Bon-Ton earlier this year.Bon-Ton. 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.
Retailers are seeking to expand the differentiation ofdifferentiate their offerings by devoting more resources to the development of exclusive products, whether by focusing on their own private label products or on products produced 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.
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 by us and new license agreements entered into by us that added to our portfolio of licensed and proprietary brands and helped diversify our business by adding new product lines and expanding distribution channels. 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.
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Tariffs
The apparel and accessories industry has been impacted by tariffs implemented by the United States government on goods imported from China. Tariffs on handbags and leather outerwear imported from China were effective beginning in September 24, 2018, and arewere initially in the amount of 10% of the merchandise cost to us. The level of additional tariffs on these product categories was scheduled to increaseincreased to 25% beginning January 1, 2019 and other tariffs on a broader range of apparel and accessory products are also under consideration. After the G20 summit held recently in Buenos Aires, Argentina, the United States government announced a three month postponement of the increase in tariffs to 25% while the U.S. and China seek to resolve their trade and related differences. Actions or statements by the President or other members of his administration may provide further clarification as to whether the current 10% tariff increase will continue, whether the 25% increase will take effect in the future and what other products may become subject to additional tariffs.May 10, 2019.
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The initial tariffs imposed to date on products imported by us from China primarily impactimpacted our handbag and leather outerwear categories. These specific categories representrepresented approximately 7% of our current annual net sales. Accordingly,sales in fiscal 2019. If the incremental 15% increase in tariffs on these categories remain in place for the remainder of fiscal 2020, we expectestimate that our costs would increase by approximately $6.0 million.
On August 1, 2019, the United States government announced new 10% tariffs that cover the remaining estimated $300 billion of inbound trade from China, including most of our apparel products. On August 23, 2019, the United States government announced that the new tariffs to go into effect would increase from 10% to 15%. The new 15% tariffs went into effect on September 1, 2019, although the additional tariffs on certain categories of products were delayed until December 15, 2019. The announcement follows an earlier proposal by the United States government that would have imposed 25% tariffs on the balance of inbound trade from China, but that were suspended pending trade negotiations with China. It is difficult to date will have a minimalaccurately estimate the impact on our resultsbusiness from these tariff actions or similar actions or when additional tariffs may become effective. For fiscal 2019, approximately 61% of operations forthe products that we sold were manufactured in China. For fiscal 2019.2020, we estimate that approximately 50% of the products that we sell will have been manufactured in China. Assuming no offsets from price increases, sourcing changes or other changes to regulatory rulings, all of which are currently under review, we estimate that the additional 15% tariff effective as of September 1, 2019 will increase our costs in the second half of fiscal 2020 by approximately $12.0 million.
The United States government continues to negotiate with China with respect to a trade deal, which could lead to the removal or postponement of the additional tariffs. If the U.S. and China are not able to resolve their differences, additional tariffs may be put in place and additional products may become subject to tariffs. Potential tariffsTariffs on additional products imported by us from China would increase our costs, could require us to increase prices to our customers and would cause us to seek price concessions from our vendors. If we are unable to increase prices to offset an increase in tariffs, this would result in our realizing lower gross margins on the products sold by us.us and will negatively impact our operating results. We have engaged in a number of efforts to mitigate the effect on our results of operations of increases in tariffs on products imported by us from China, including accelerating the receipt of inventory, diversifying our sourcing network by arranging to move some production out of China, negotiating with our vendors in China to receive vendor support to lessen the impact of increased tariffs on our cost of goods sold, and discussing with our customers the implementation of price increases that we believe our products can absorb because of the strength of our portfolio of brands. Because of the uncertainties involved with respect to the amount of tariffs that may be applicable, the products to which any additional tariffs will be applied and the results of our mitigation efforts, we cannot estimate at this point the effect of tariffs on our results of operations for fiscal 2020.
Results of Operations
Three months ended October 31, 20182019 compared to three months endedOctober 31, 20172018
Net sales for the three months ended October 31, 20182019 increased to $1.07$1.13 billion from $1.02$1.07 billion in the same period last year. Net sales of our segments are reported before intercompany eliminations.
Net sales of our wholesale operations segment increased to $1.07 billion for the three months ended October 31, 2019 from $1.01 billion from $966.8 million in the comparable period last year. This increase is primarily the result of a $56.2$37.8 million increase in net sales of Calvin Klein licensed products, a $28.5 million increase in net sales of Tommy Hilfiger licensed products and a $35.1$24.8 million increase in net sales of our DKNY and Donna Karan products. The increase in sales of Tommy Hilfiger products was primarily related to outerwear and sportswear, the increase in sales of Calvin Klein products was primarily related to performancewear, outerwear and dresses, as well as the introduction of jeanswear, and the increase in sales of DKNY/Donna Karan products was primarily related to sportswear, outerwear and dress product lines and the DKNY/Donna Karan increase was primarily related to DKNY sportswear, dress, outerwear and footwear product lines. Net sales of Karl Lagerfeld Paris products increased by $11.0 million as a result of increased sales of sportswear, outerwear, handbags and shoes.performancewear. These increases were offset, in part, by a $27.3$12.2 million decrease in net sales of our Andrew Marc lineIvanka Trump product in connection with the expiration of products, a $15.5 million decrease in net salesthat license.
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Net sales of our retail operations segment were $110.9$89.7 million for the three months ended October 31, 20182019 compared to $118.7$110.9 million in the same period last year. Net sales decreased $7.0$11.3 million at our G.H. Bass store chain, and $2.6$7.9 million at our Wilsons retail stores. These decreases were partially offset by a net sales increase of $1.8stores and $2.1 million at our DKNY retail stores. Comparable same store sales increased by 12.9% at DKNY retail stores as a result of the sale of products designed and developed by us. Same store sales decreased by 9.1%8.4% at Wilsons stores and by 7.3%14.5% at G.H. Bass stores compared to the same period in the prior year. Same store sales increased by 0.3% at DKNY stores compared to the same period in the prior year. Net sales of our retail operations segment were negatively affected by the decrease in the number of stores operated by us from 378 at October 31, 2017 to 343 at October 31, 2018.2018 to 288 at October 31, 2019. In addition, as of October 31, 2019, we operated 12 short-term, temporary stores for the holiday season.
Gross profit decreased to $382.1was $399.0 million, or 35.6%35.4% of net sales, for the three months ended October 31, 2018, from $391.12019, compared to $382.1 million, or 38.2%35.6% of net sales, in the same period last year. The gross profit percentage in our wholesale operations segment was 32.7%33.2% in the three months ended October 31, 20182019 compared to 34.2%32.7% in the same period last year. The decrease in gross profit percentage was primarily the result of unfavorable product mix, lower gross margins in our DKNY and Donna Karan businesses and the reclassification of cooperative advertising from selling, general and administrative expenses to a reduction in net sales beginning in fiscal 2019 in connection with the adoption of ASC 606. The decrease in gross profit percentage in our wholesale operations segment was partially offset by an increase in licensing revenue for which there is no associated costs of goods sold. The gross profit percentage in our retail operations segment was 48.5%49.3% for the three months ended October 31, 20182019 compared to 51.3%48.5% for the same period last year. This decrease is primarily the result of a decline in the gross profit percentage of our DKNY stores. The gross profit percentage for our Wilsons stores was also lower as compared to the same period last year, primarily as a result of higher promotions.
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Selling, general and administrative expenses decreasedincreased to $232.1$246.6 million in the three months ended October 31, 20182019 from $242.7$232.1 million in the same period last year. PriorThe increase in expenses was primarily due to increases of $8.8 million in third-party warehouse expenses and $6.3 million in advertising expenses as a result of increased spending related to the adoption of the guidance in ASC 606, cooperative advertising, relating to our participation in the advertising initiativesmarketing of our customers,DKNY brand and, to a lesser extent, an increase in contractual advertising under our license agreements. The increase was recorded under selling, generaloffset, in part, by a $3.0 million decrease in rent, personnel costs and administrative expenses. Under the new guidance, cooperative advertising is recordedother benefits primarily as a reduction to net sales. This change in presentationresult of cooperative advertising reduced selling, general and administrative expenses by $10.7 million in the quarter.store closures.
Depreciation and amortization was $10.0$9.7 million for the three months ended October 31, 20182019 compared to $6.9$10.0 million in the same period last year. Depreciation expense in the prior year comparable period was lower primarily due to lower depreciation and amortization recorded in the third quarter of fiscal 2018 compared to additional depreciation expense recorded in the first and second quarters of fiscal 2018 with respect to the fixed assets acquired in connection with the acquisition of DKI. In addition, depreciation expense increased due to capital expenditures during the current year.
Other income was $176,000$0.7 million in the three months ended October 31, 20182019 compared to other loss of $2.1$0.2 million infor the same period last year. This increase is primarily the result of lowerrecording $0.2 million of foreign currency losses recorded forduring the three months ended October 31, 20182019 compared to $0.5 million during the three months ended October 31, 2017.2018. In addition, we recorded $0.8 million in income from unconsolidated affiliates during the three months ended October 31, 2019 compared to $0.7 million in the same period last year.
Interest and financing charges, net, for the three months ended October 31, 20182019 were $12.3$12.5 million compared to $11.4$12.3 million for the same period last year. The increase is due to higher interestInterest rates offset,and borrowings were similar in part, by lower average borrowings.both periods.
Income tax expense was $33.8$35.6 million for the three months ended October 31, 20182019 compared to $46.3$33.8 million for the same period last year.year primarily as a result of recording additional pre-tax book income. Our effective tax rate decreasedincreased to 26.5%27.2% in the current year’s quarter from 36.2%26.5% in last year’s comparable quarter primarily as a result of the reduction in the corporate tax rate in the TCJA.quarter. Our effective tax rate includes the effect of an income tax charge of $0.3 million in the three months ended October 31, 2019 and an income tax benefit of $663,000$0.7 million in the three months ended October 31, 2018 and $1.4 million in the three months ended October 31, 2017 in connection with the vesting of equity awards as provided for in ASU 2016‑09.awards.
Nine months ended October 31, 20182019 compared to nine months ended October 31, 20172018
Net sales for the nine months ended October 31, 20182019 increased to $2.31$2.41 billion from $2.09$2.31 billion in the same period last year. Net sales of our segments are reported before intercompany eliminations.
Net sales of our wholesale operations segment increased to $2.08$2.23 billion for the nine months ended October 31, 2019 from $1.89$2.08 billion in the comparable period last year. This increase is primarily the result of an $115.9a $95.9 million increase in net sales of Tommy Hilfiger licensed products, a $57.4 million increase in net sales of our DKNY and Donna Karan productproducts and a $92.6$52.4 million increase in net sales of Tommy HilfigerCalvin Klein licensed products. The DKNY/Donna Karan increase was primarily related to DKNY women’s performance wear and footwear product lines, as well as the new suits, men’s and women’s outerwear and luggage product lines and thein sales of Tommy Hilfiger increaseproducts was primarily related to sportswear, performance wear,dress, performancewear and women’s outerwear. Netouterwear, the increase in sales of Karl Lagerfeld ParisDKNY/Donna Karan products increased by $27.9 millionwas primarily related to handbags, sportswear, performancewear and footwear and the sportswearincrease in sales of Calvin Klein products was primarily related to performancewear and new outerwear, product lines.as well as the introduction of jeanswear. These increases were offset, in part, by a $20.6$32.9 million decrease in net sales of our licensed sports division and a $13.8 million decreaseIvanka Trump product in net salesconnection with the expiration of our Andrew Marc line of products.that license.
Net sales of our retail operations segment were $322.1$255.3 million for the nine months ended October 31, 2018 and $324.32019 compared to $322.1 million in the same period last year. Net sales fromdecreased $31.9 million at our G.H. Bass store chain, decreased by $17.7$28.4 million while net sales from our DKNY retail stores increased by $10.9 million and net sales from
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at our Wilsons retail stores increasedand $6.3 million at our DKNY retail stores. Same store sales decreased by $3.8 million. Comparable17.5% at Wilsons stores and 13.9% at G.H. Bass stores compared to the same period in the prior year. Same store sales increased by 3.1% at Wilsons, which benefited from favorable weather and increased promotional activities and by 19.9%0.8% at DKNY retail stores as a result of the sale of products designed and developed by us. G.H. Bass same store sales decreased by 4.1% compared to the same period in the prior year. Net sales of our retail operations segment were negatively affected by the decrease in the number of stores operated by us from 378 at October 31, 2017 to 343 at October 31, 2018.2018 to 288 at October 31, 2019. In addition, as of October 31, 2019, we operated 12 short-term, temporary stores for the holiday season.
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Gross profit increased to $848.2was $866.9 million, or 36.7%36.0% of net sales, for the nine months ended October 31, 2018, from $795.82019, compared to $848.2 million, or 38.0%36.7% of net sales, in the same period last year. Retail sales generally have a higher gross profit percentage than wholesale sales. Accordingly, there is a negative impact on the gross profit percentage of our business as a whole as retail sales constitute a reduced percentage of our total sales. The gross profit percentage in our wholesale operations segment was 33.5% for each of the nine months ended October 31, 2018 compared to 33.7% in the same period last year. The gross profit percentage in our wholesale operations segment was negatively impacted by unfavorable product mix2019 and the reclassification of cooperative advertising from selling, general and administrative expenses to a reduction in net sales beginning in fiscal 2019 in connection with the adoption of ASC 606. The gross profit percentage in our wholesale operations segment was positively impacted by an increase in licensing revenue for which there is no associated costs of goods sold.2018. The gross profit percentage in our retail operations segment was 47.2%47.1% for the nine months ended October 31, 20182019 compared to 49.0%47.2% for the same period last year. This decrease is primarily the result of a decrease in the gross profit percentage of our DKNY retail stores and our Wilsons stores compared to the same period last year. These decreases in gross profit percentage were offset, in part, by an increase in the gross profit percentage at G.H. Bass stores compared to the same period in the prior year.
Selling, general and administrative expenses decreasedincreased to $633.0$644.9 million forin the nine months ended October 31, 20182019 from $636.0 million in the same period last year. Prior to the adoption of the guidance in ASC 606, cooperative advertising, relating to our participation in the advertising initiatives of our customers, was recorded under selling, general and administrative expenses. Under the new guidance, cooperative advertising is recorded as a reduction to net sales. This change in presentation of cooperative advertising reduced selling, general and administrative expenses by $22.6 million during the nine months ended October 31, 2018. The Company recorded increased personnel costs of $14.1 million, primarily due to an increase in the bonus expense compared to the prior year as a result of our increased profitability. Advertising costs increased by $7.0 million compared to the same period last year due to an increase in advertising purchased to promote the brands we own, increased advertising fees paid under many of our license agreements that are based on a percentage of net sales of licensed products, and an increase in expenses related to additional digital marketing initiatives.
Depreciation and amortization was $28.9 million for the nine months ended October 31, 2018 compared to $27.5$633.0 million in the same period last year. The increase in expense isexpenses was primarily due to capital expenditures during the current year.increases of $14.1 million for third-party warehouse expenses and $8.5 million of advertising expenses. The increase was offset, in part, by a $12.6 million decrease in rent, personnel costs and other benefits primarily as a result of store closures.
Other loss decreased to $303,000
Depreciation and amortization was $29.0 million for the nine months ended October 31, 2018 from $2.92019 compared to $28.9 million in the same period last year.
Other loss was $0.7 million in the nine months ended October 31, 2019 compared to $0.3 million in the same period last year. This decreaseincrease is primarily the result of recording $1.1 million of foreign currency losses during the nine months ended October 31, 2019 compared to $0.8 million of foreign currency gains recorded during the nine months ended October 31, 2018, while also recording $0.4 million of income from unconsolidated affiliates during the nine months ended October 31, 2019 compared to $1.1 million of losses in the same period last year.
Interest and financing charges, net, for the nine months ended October 31, 2018 compared to foreign currency losses recorded in the prior comparable period. This was offset, in part, by increased losses in unconsolidated entities in the current year compared to the prior year.
Interest and financing charges, net, for the nine months ended October 31, 2018 2019 were $32.2$33.6 million compared to $33.7$32.2 million for the same period last year. The increase is due to higher interestInterest rates offset,and borrowings were similar in part, by lower average borrowings.both periods.
Income tax expense was $39.9$42.5 million for the nine months ended October 31, 2018,2019 compared to $35.5$39.9 million for the same period last year. Our effective tax rate decreasedincreased to 25.9% for the nine months ended October 31, 2018 from 36.1%26.4% in the last year’s comparablecurrent period as a result of the reductionfrom 25.9% in the corporate tax rate by the TCJA.same period last year. Our effective tax rate includes the effect of an income tax benefit of $1.0 million in the nine months ended October 31, 2019 and $1.1 million in the nine months ended October 31, 2018 and $1.3 million in the nine months ended October 31, 2017 in connection with the vesting of equity awards as provided for in ASU 2016‑09. The Company’s pre-tax income increased $55.7 million compared to the prior period which resulted in increased income tax expense even though the effective tax rate decreased.awards.
Liquidity and Capital Resources
Term Loan
In connection with the acquisition of DKI,
On December 1, 2016, we borrowed $350.0 million under a senior secured term loan facility (the “Term Loan”). OnAdditionally, on December 1, 2016, we prepaid $50.0 million in principal amount of the Term Loan.Loan, reducing the principal balance of the Term Loan to $300.0 million. The Term Loan is payable on maturitywill mature in December 2022.
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Interest on the outstanding principal amount of the Term Loan accrues at a rate equal to the London Interbank Offered Rate (“LIBOR”), subject to a 1% floor, plus an applicable margin of 5.25% or an alternate base rate (defined as the greatest of (i) the “prime rate” as published by the Wall Street Journal from time to time, (ii) the federal funds rate plus 0.5% orand (iii) the LIBOR rate for a borrowing with an interest period of one month) plus 4.25%, per annum, payable in cash. As of October 31, 2018,2019, interest under the Term Loan was being paid at anthe average rate of 7.36%7.62% per annum.
The Term Loan is secured (i) on a first-priority basis by a lien on, among other things, our real estate assets, equipment and fixtures, equity interests and intellectual property and certain related rights owned by us and by certain of our subsidiaries and (ii) by a second-priority security interest in other of our assets and certain of our subsidiaries other assets, which will secure on a first-priority basis our asset-based loan facility described below under the caption “Revolving Credit Facility.”
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The Term Loan is required to be prepaid with the proceeds of certain asset sales if such proceeds are not applied as required by the agreement within certain specified deadlines. The Term Loan is also required to be prepaid in an amount equal to 75% of our Excess Cash Flow (as defined in the agreement) with respect to each fiscal year ending on or after January 31, 2018. The percentage of Excess Cash Flow that must be so applied is reduced to 50% if our senior secured leverage ratio is less than 3.00 to 1.00, to 25% if our senior secured leverage ratio is less than 2.75 to 1.00 and to 0% if our senior secured leverage ratio is less than 2.25 to 1.00.
The Term Loan contains covenants that, restrict the Company’s ability to among other things, restrict our ability, subject to certain exceptions, to incur additional debt,debt; incur liens; sell or dispose of certain assets,assets; merge with other companies; liquidate or dissolve G-III; acquire other companies; make loans, advances, or guarantees; and make certain investments, incur liens and enter into acquisitions.investments. As described above, the Term Loan also includes a mandatory prepayment provision with respect to Excess Cash Flow. A first lien leverage covenant requires the Company to maintain a level of debt to EBITDA at a ratio as defined overin the term of theloan agreement. As of October 31, 2018,2019, we were in compliance with these covenants.
Revolving Credit Facility
Upon closing of the acquisition of DKI in
On December 1, 2016, our previous credit agreement was refinanced and replaced by a five-year senior secured revolving credit facility providing for borrowings in the aggregate principal amount of up to $650 million (the “revolving credit facility”). Amounts available under the revolving credit facility are subject to borrowing base formulas and over advances as specified in the revolving credit facility agreement. Borrowings bear interest, at our option, at LIBOR plus a margin of 1.25% to 1.75% or an alternate base rate (defined as the greatest of (i) the “prime rate” of JPMorgan Chase Bank, N.A. from time to time, (ii) the federal funds rate plus 0.5% orand (iii) the LIBOR rate for a borrowing with an interest period of one month) plus a margin of 0.25% to 0.75%, with the applicable margin determined based on the availability under the revolving credit facility agreement. As of October 31, 2018,2019, interest under the revolving credit agreement was being paid at anthe average rate of 3.71%3.30% per annum. The revolving credit facility is secured by specified assets of us and certain of our subsidiaries. In addition to paying interest on any outstanding borrowings under the revolving credit facility, we are required to pay a commitment fee to the lenders under the revolving credit facility agreement with respect to the unutilized commitments. The commitment fee accrues at a rate equal to 0.25% per annum on the average daily amount of the unutilized commitments.available commitment.
The revolving credit facility contains a number of covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional debt; incur liens; sell or dispose of certain assets; merge with other companies; liquidate or dissolve G-III; acquire other companies; make loans, advances, or guarantees; and make certain investments. In certain circumstances, the revolving credit facility also requires us to maintain a minimum fixed charge coverage ratio, as defined in the agreement, that may not exceedbe less than 1.00 to 1.00 for each period of twelve consecutive fiscal months of holdings.months. As of October 31, 2018,2019, we were in compliance with these covenants.
LVMH Note
As part of the consideration for the acquisition of DKI,
On December 1, 2016, we issued to LVMH Moet Hennessy Louis Vuitton Inc. (“LVMH”), as a portion of the consideration for the acquisition of DKI, a junior lien secured promissory note in the principal amount of $125.0 million (the “LVMH Note”) that bears interest at the rate of 2% per year. $75.0 million of the principal amount of the LVMH Note is due and payable on June 1, 2023 and $50.0 million of such principal amount is due and payable on December 1, 2023. Based on an independent valuation, it was determined that the LVMH Note should be treated as having been issued at a discount of $40.0 million in accordance with ASC 820 - – Fair Value Measurements requires the note to be recorded at fair value. As a result, we recorded a debt discount in the amount of $40.0 million.. This discount is being amortized as interest expense using the effective interest method over the term of the LVMH Note.
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In connection with the issuance of the LVMH Note, LVMH entered into (i) a subordination agreement providing that our obligations under the LVMH Note are subordinate and junior to our obligations under the revolving credit facility and the Term Loan, and (ii) a pledge and security agreement with us and our subsidiary, G-III Leather Fashions, Inc. (“G-III Leather”), pursuant to which we and G-III Leather granted to LVMH a security interest in specified collateral to secure our payment and performance of our obligations under the LVMH Note that is subordinate and junior to the security interest granted by us with respect to our obligations under the revolving credit facility and the Term Loan.
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Unsecured Loan
On April 15, 2019, T.R.B. International SA (“TRB”), a subsidiary of Vilebrequin, borrowed €3.0 million under an unsecured loan with Banque du Leman S.A (the “Unsecured Loan”). The Unsecured Loan matures on April 15, 2024. During the term of the Unsecured Loan, TRB is required to make quarterly installment payments of €0.2 million. Interest on the outstanding principal amount of the Unsecured Loan accrues at a fixed rate equal to 1.50% per annum, payable quarterly in cash.
Outstanding Borrowings
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 revolving credit facility during our third fiscal quarter. The primary sources to meet our operating cash requirements have been borrowings under our revolving credit facility and cash generated from operations and the sale of our common stock.operations.
We incurred significant additional debt in connection with our acquisition of DKI. We had borrowings outstanding under the revolving credit facility of $309.6$279.9 million and $349.6$309.6 million at October 31, 2019 and 2018, and 2017, respectively, andrespectively. In addition, we had $300.0 million in borrowings outstanding under the Term Loan of $300.0 million at both October 31, 20182019 and 2017.2018. Our contingent liability under open letters of credit was approximately $12.0$7.0 million and $7.9$12.0 million at October 31, 20182019 and 2017,2018, respectively. In addition to the amounts outstanding under these two loans,loan agreements, at October 31, 20182019 and 2017,2018, we had $125.0 million of face value principal amount outstanding under the LVMH Note. As of September 30, 2019, we also had €2.7 million ($2.9 million) outstanding under the Unsecured Loan.
We had cash and cash equivalents of $55.8 million on October 31, 2019 and $66.1 million on October 31, 2018 and $68.2 million on October 31, 2017.2018.
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. NoWe repurchased 1,327,566 shares were repurchased duringof our common stock in the nine months ended October 31, 2018.2019 for an aggregate purchase price of $35.2 million. We have 2,949,362 authorized shares remaining under this program. As of December 3, 2018,5, 2019, we had 49,355,58747,825,398 shares of common stock outstanding.
Cash from Operating Activities
We used $236.1$220.2 million of cash in operating activities during the nine months ended October 31, 2018,2019, primarily due to a $525.3increases of $397.0 million increase in accounts receivable a $63.3and $74.3 million increase in inventories and a $34.0decrease of $61.1 million increase in prepaid expenses and other current assets.operating lease liabilities. These increasesitems were offset, in part, by our net income of $114.0$118.5 million a $169.0and non-cash charges in the aggregate amount of $103.0 million increaserelating primarily to operating lease costs ($55.0 million), depreciation and amortization ($29.0 million) and share-based compensation ($13.7 million). These items were further offset by increases of $28.6 million in customer refund liabilities, a $33.3our income tax liability and $26.6 million increase in accounts payable and accrued expenses and non-cash depreciation and amortization of $28.9 million and share-based compensation of $14.9 million.expenses.
The changes in accounts receivable and customer refund liabilities are mainly the result of the adoption of ASC 606. The adoption of ASC 606 resulted in recognizing the cumulative effect adjustment to the opening balance of retained earnings and classifying, on a prospective basis, the reserves for variable consideration from accounts receivable to customer refund liabilities. The adoption of ASC 606 also resulted in the classification, on a prospective basis, of the carrying value of the inventory return asset from inventories to prepaid expenses and other current assets.
Excluding the effect of the adoption of ASC 606, 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 receivable and payable. The fall shipping season begins during the latter half of our second quarter. In addition, we accelerated inventory receipts in anticipation of expected increases in tariffs on apparel products imported from China.
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Cash from Investing Activities
We used $29.5$34.0 million of cash in investing activities forduring the nine months ended October 31, 2018. The cash used in investing activities consisted $19.5 million in2019 for capital expenditures and initial direct costs of operating lease assets. Capital expenditures in the period primarily related to information technology expenditures and additional fixturing costs at department stores, as well as improvementsstores. Operating lease assets initial direct costs in the period primarily related to payments of key money and remodelsbroker fees.
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Cash from Financing Activities
Net cash provided by financing activities was $292.8$239.5 million for theduring nine months ended October 31, 2018,2019 primarily as a result of the net proceeds of $297.6$280.0 million in borrowings under theour revolving credit facility partially offset, in part, by $35.2 million of cash used to repurchase shares under our share repurchase program and $8.4 million for taxes paid forin connection with net share settlements.
Financing Needs
We believe that our cash on hand and cash generated from operations over the full fiscal year, together with funds available under our revolving credit facility, are sufficient to meet our expected operating and capital expenditure requirements. We may seek to acquire other businesses.businesses in order to expand our business. We may need additional financing in order to complete one or more acquisitions. We cannot be certain that we will be able to obtain additional financing, if required, on acceptable terms or at all.
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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‑K10-K for the year ended January 31, 20182019 are those that depend most heavily on these judgments and estimates. As of October 31, 2018,2019, there have been no material changes to our critical accounting policies, other than the adoption of recentnew lease accounting standards as discussed in Note 24 to the Condensed Consolidated Financial Statements.condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There are no material changes to the disclosure made with respect to these matters in our Annual Report on Form 10‑K10-K for the year ended January 31, 2018.2019.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a‑15(e)13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, and thus, are effective in making known to them material information relating to G-III required to be included in this report.
During our last fiscal quarter, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Item 1A. Risk Factors” in our Annual Report on Form 10‑K10-K for the year ended January 31, 20182019 (the “Annual Report”) and in “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended July 31, 2018,, which could materially affect our business, financial condition and/or future results. There have been no material changes in our risk factors from those disclosed in our Annual Report, except for the risk factors set forth below, which serve as an update to these two risk factors as of October 31, 2018.that were contained in our Annual Report. The risks described in our Annual Report on Form 10‑K and in thethis Quarterly Report on Form 10‑Q10-Q are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or future results.
Our retail operations segment may continue to incur losses if the potential significant revisions to our retail operations do not significantly improve our results of operations.
Our retail operations segment reported an operating loss of $49.4 million in the nine months ended October 31, 2019, $49.0 million in fiscal 2019 and $49.1 million in fiscal 2018. Given the overall uncertainty of the retail landscape, we are continuing our efforts to significantly reduce the losses in our retail operations. We intend to move more broadly with respect to store closures and have engaged outside advisors to assist us with this process. Our strategy also includes overall cost cutting, revising our merchandising strategies to drive additional sales and re-purposing certain Wilsons and G.H. Bass stores for our Karl Lagerfeld Paris or DKNY brands. We need to successfully implement this strategy in order to significantly reduce the losses in our retail operations. There is no assurance that we can do so.
We may be required to record impairments of long-lived assets or incur other charges relating to our company-operated retail stores.
Impairment testing of our retail stores’ long-lived assets requires us to make estimates about our future performance and cash flows that are inherently uncertain. These estimates can be affected by numerous factors, including changes in economic conditions, our results of operations, and competitive conditions in the industry. Due to the fixed-cost structure associated with our retail operations, negative cash flows or the closure of a store could result in an impairment of leasehold improvements, operating lease assets or other long-lived assets, write-downs of inventory, severance costs, lease termination costs or the loss of working capital, which could adversely impact our business and financial results. We recorded impairments related to our retail operations of $2.8 million in fiscal 2019, $6.5 million in fiscal 2018 and $10.5 million in fiscal 2017 and may be required to record additional impairments or other charges relating to our retail operations in our financial statements. These impairment or other charges may increase as we continue to evaluate our retail operations. The recording of additional impairments or other charges in the future may have a material adverse impact on our business, financial condition and/or future results.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to the Company’s common stock that the Company repurchased during the three months ended October 31, 2019. Included in this table are shares withheld during October 2019 in connection with the settlement of vested restricted stock units to satisfy tax withholding requirements.
| | | | | | | | | | |
Date Purchased | | Total Number of Shares Purchased (1) (2) | | Average Price Paid Per Share (1) | | Total Number of Share Purchased as Part of Publicly Announced Program (2) | | Maximum Number of Shares that may yet be Purchased Under the Program (2) | ||
August 1 - August 31, 2019 | | — | | $ | — | | — | | | 2,949,362 |
September 1 - September 30, 2019 | | — | | | — | | — | | | 2,949,362 |
October 1 - October 31, 2019 | | 40,797 | | | 24.55 | | — | | | 2,949,362 |
| | 40,797 | | $ | 24.55 | | — | | | 2,949,362 |
| |
(1) | Included are 40,797 shares withheld during October 2019 in connection with the settlement of vested restricted stock units to satisfy tax withholding requirements. The 2015 Long-Term Incentive Plan provides that shares withheld are valued at the closing price per share on the date withheld. |
(2) | In December 2015, our Board of Directors reapproved and increased a previously authorized share repurchase program from the 3,750,000 shares remaining under that plan to 5,000,000 shares. This program has no expiration date. Repurchases under the program may be made from time to time over the period through open market purchases, accelerated share repurchase programs, privately negotiated transactions or other methods, as we deem appropriate. |
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31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | XBRL Instance Document. |
101.SCH | XBRL Schema Document. |
101.CAL | XBRL Calculation Linkbase Document. |
101.DEF | XBRL Extension Definition. |
101.LAB | XBRL Label Linkbase Document. |
101.PRE | XBRL Presentation Linkbase Document. |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| G-III APPAREL GROUP, LTD. | |
Date: December 6, | By: | /s/ Morris Goldfarb |
Morris Goldfarb | ||
Chief Executive Officer | ||
Date: December 6, | By: | /s/ Neal S. Nackman |
Neal S. Nackman | ||
Chief Financial Officer |
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