UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2017April 30, 2020
ORor
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission File Number 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 | (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 x☒ 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 x☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“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¨☐Nox☒
As of December 1, 2017,June 4, 2020, there were 49,080,95348,052,834 shares of issuer’s common stock, par value $0.01 per share, outstanding.
TABLE OF CONTENTS
2
PART I – FINANCIAL INFORMATION Item 1. Financial Statements. G-III APPAREL GROUP, LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS April 30, April 30, January 31, 2020 2019 2020 (Unaudited) (Unaudited) (In thousands, except per share amounts) ASSETS Current assets Cash and cash equivalents $ 616,183 $ 48,312 $ 197,372 Accounts receivable, net of allowance for doubtful accounts of $10.4 million, $0.9 million and $0.7 million, respectively 421,143 478,371 530,137 Inventories 500,410 538,955 551,918 Prepaid income taxes 9,724 9,369 8,566 Prepaid expenses and other current assets 66,594 96,545 80,695 Total current assets 1,614,054 1,171,552 1,368,688 Investments in unconsolidated affiliates 58,299 63,361 61,987 Property and equipment, net 72,918 89,848 76,023 Operating lease assets 251,565 320,169 270,032 Other assets, net 32,691 35,663 32,629 Other intangibles, net 37,321 41,486 38,363 Deferred income tax assets, net 34,548 25,212 18,135 Trademarks 437,643 438,675 438,658 Goodwill 259,922 260,578 260,622 Total assets $ 2,798,961 $ 2,446,544 $ 2,565,137 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of notes payable $ 512 $ — $ 673 Accounts payable 114,750 172,806 204,786 Accrued expenses 60,523 78,619 101,838 Customer refund liabilities 157,886 210,310 233,418 Current operating lease liabilities 63,632 74,761 63,166 Income tax payable 9,115 3,588 8,468 Other current liabilities 116 147 1,611 Total current liabilities 406,534 540,231 613,960 Notes payable, net of discount and unamortized issuance costs 900,682 411,087 396,794 Deferred income tax liabilities, net 7,797 14,777 7,952 Noncurrent operating lease liabilities 231,323 286,663 249,040 Other noncurrent liabilities 6,391 6,960 6,719 Total liabilities 1,552,727 1,259,718 1,274,465 Stockholders' Equity Preferred stock; 1,000 shares authorized; 0 shares issued — — — Common stock - $0.01 par value; 120,000 shares authorized; 48,052, 49,393 and, 49,396 shares issued, respectively 264 264 264 Additional paid-in capital 449,840 456,835 452,142 Accumulated other comprehensive loss (22,034) (18,421) (18,008) Retained earnings 853,843 761,344 893,138 Common stock held in treasury, at cost - 1,344, 470 and 1,386 shares, respectively (35,679) (13,196) (36,864) Total stockholders' equity 1,246,234 1,186,826 1,290,672 Total liabilities and stockholders' equity $ 2,798,961 $ 2,446,544 $ 2,565,137 The accompanying notes are an integral part of these 3Item 1. October 31,
2017 October 31,
2016 January 31,
2017 (Unaudited) (Unaudited) (In thousands, except per share amounts) ASSETS CURRENT ASSETS Cash and cash equivalents $ 68,229 $ 44,996 $ 79,957 Accounts receivable, net of allowances for doubtful accounts and sales discounts 601,179 537,073 263,881 Inventories 592,822 490,555 483,269 Prepaid income taxes — — 8,885 Deferred income taxes, net — 17,571 — Prepaid expenses and other current assets 34,841 16,326 46,946 Total current assets 1,297,071 1,106,521 882,938 INVESTMENTS IN UNCONSOLIDATED AFFILIATES 60,642 61,456 61,171 PROPERTY AND EQUIPMENT, NET 98,522 101,579 102,571 OTHER ASSETS 33,883 25,244 36,181 OTHER INTANGIBLES, NET 47,076 9,910 48,558 DEFERRED INCOME TAX ASSETS, NET 16,169 — 15,849 TRADEMARKS, NET 441,490 68,637 435,414 GOODWILL 264,200 50,094 269,262 TOTAL ASSETS $ 2,259,053 $ 1,423,441 $ 1,851,944 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Notes payable $ — $ 91,334 $ — Accounts payable 216,860 181,653 217,902 Accrued expenses 128,891 103,844 95,275 Income tax payable 22,949 25,184 2,242 Total current liabilities 368,700 402,015 315,419 NOTES PAYABLE, net of note discount and unamortized issuance costs 726,608 — 461,756 DEFERRED INCOME TAXES, NET 16,325 21,575 14,300 OTHER NON-CURRENT LIABILITIES 40,488 29,949 39,233 TOTAL LIABILITIES 1,152,121 453,539 830,708 STOCKHOLDERS’ EQUITY Preferred stock; 1,000 shares authorized; No shares issued and outstanding Common stock - $0.01 par value; 120,000 shares authorized; 49,196, 46,407 and 49,016 shares issued, respectively 247 235 253 Additional paid-in capital 447,555 359,149 437,777 Accumulated other comprehensive loss (15,499 ) (20,526 ) (27,722 ) Retained earnings 675,084 632,534 612,418 Common stock held in treasury, at cost – 115, 376 and 376 shares, respectively (455 ) (1,490 ) (1,490 ) TOTAL STOCKHOLDERS’ EQUITY 1,106,932 969,902 1,021,236 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 2,259,053 $ 1,423,441 $ 1,851,944 statements.statements.
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
| | | | | | |
| | Three Months Ended April 30, | ||||
|
| 2020 |
| 2019 | ||
| | (Unaudited) | ||||
| | (In thousands, except per share amounts) | ||||
Net sales | | $ | 405,131 | | $ | 633,552 |
Cost of goods sold | | | 280,730 | | | 397,488 |
Gross profit | | | 124,401 | | | 236,064 |
Selling, general and administrative expenses | | | 154,620 | | | 201,859 |
Depreciation and amortization | | | 9,867 | | | 9,473 |
Loss (gain) on lease terminations | | | 3,187 | | | (829) |
Operating profit (loss) | | | (43,273) | | | 25,561 |
Other loss | | | (2,056) | | | (648) |
Interest and financing charges, net | | | (10,379) | | | (10,320) |
Income (loss) before income taxes | | | (55,708) | | | 14,593 |
Income tax expense (benefit) | | | (16,413) | | | 2,550 |
Net income (loss) | | $ | (39,295) | | $ | 12,043 |
| | | | | | |
NET INCOME (LOSS) PER COMMON SHARE: | | | | | | |
Basic: | | | | | | |
Net income (loss) per common share | | $ | (0.82) | | $ | 0.25 |
Weighted average number of shares outstanding | | | 48,025 | | | 48,781 |
| | | | | | |
Diluted: | | | | | | |
Net income (loss) per common share | | $ | (0.82) | | $ | 0.24 |
Weighted average number of shares outstanding | | | 48,025 | | | 49,774 |
| | | | | | |
Net income (loss) | | $ | (39,295) | | $ | 12,043 |
Other comprehensive income: | | | | | | |
Foreign currency translation adjustments | | | (4,026) | | | (3,227) |
Other comprehensive loss | | | (4,026) | | | (3,227) |
Comprehensive income (loss) | | $ | (43,321) | | $ | 8,816 |
Three Months Ended October 31, | ||||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
(In thousands, except per share amounts) | ||||||||
Net sales | $ | 1,024,993 | $ | 883,476 | ||||
Cost of goods sold | 634,128 | 562,024 | ||||||
Gross profit | 390,865 | 321,452 | ||||||
Selling, general and administrative expenses | 242,740 | 198,274 | ||||||
Depreciation and amortization | 6,906 | 8,033 | ||||||
Operating profit | 141,219 | 115,145 | ||||||
Equity earnings (loss) in unconsolidated affiliates | 612 | (1,437 | ) | |||||
Interest and financing charges, net | (13,884 | ) | (1,701 | ) | ||||
Income before income taxes | 127,947 | 112,007 | ||||||
Income tax expense | 46,322 | 41,443 | ||||||
Net income | $ | 81,625 | $ | 70,564 | ||||
NET INCOME PER COMMON SHARE: | ||||||||
Basic: | ||||||||
Net income per common share | $ | 1.67 | $ | 1.54 | ||||
Weighted average number of shares outstanding | 48,846 | 45,918 | ||||||
Diluted: | ||||||||
Net income per common share | $ | 1.65 | $ | 1.50 | ||||
Weighted average number of shares outstanding | 49,528 | 46,902 | ||||||
Net income | $ | 81,625 | $ | 70,564 | ||||
Other comprehensive income: | ||||||||
Foreign currency translation adjustments | 4,182 | (59 | ) | |||||
Other comprehensive income (loss) | 4,182 | (59 | ) | |||||
Comprehensive income | $ | 85,807 | $ | 70,505 |
The accompanying notes are an integral part of these statements.
4
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOMESTOCKHOLDERS’ EQUITY
Nine Months Ended October 31, | ||||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
(In thousands, except per share amounts) | ||||||||
Net sales | $ | 2,092,040 | $ | 1,783,145 | ||||
Cost of goods sold | 1,296,428 | 1,140,381 | ||||||
Gross profit | 795,612 | 642,764 | ||||||
Selling, general and administrative expenses | 636,000 | 504,547 | ||||||
Depreciation and amortization | 27,480 | 22,898 | ||||||
Operating profit | 132,132 | 115,319 | ||||||
Loss in unconsolidated affiliates | (540 | ) | (820 | ) | ||||
Interest and financing charges, net | (33,472 | ) | (3,999 | ) | ||||
Income before income taxes | 98,120 | 110,500 | ||||||
Income tax expense | 35,454 | 38,458 | ||||||
Net income | $ | 62,666 | $ | 72,042 | ||||
NET INCOME PER COMMON SHARE: | ||||||||
Basic: | ||||||||
Net income per common share | $ | 1.29 | $ | 1.58 | ||||
Weighted average number of shares outstanding | 48,729 | 45,713 | ||||||
Diluted: | ||||||||
Net income per common share | $ | 1.27 | $ | 1.53 | ||||
Weighted average number of shares outstanding | 49,410 | 46,947 | ||||||
Net income | $ | 62,666 | $ | 72,042 | ||||
Other comprehensive income: | ||||||||
Foreign currency translation adjustments | 12,223 | 3,163 | ||||||
Other comprehensive income | 12,223 | 3,163 | ||||||
Comprehensive income | $ | 74,889 | $ | 75,205 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Accumulated | | | | | Common | | | | ||
| | | | | Additional | | Other | | | | | Stock | | | ||||
| | Common | | Paid-In | | Comprehensive | | Retained | | Held In | | | ||||||
|
| Stock |
| Capital |
| Loss |
| Earnings |
| Treasury |
| Total | ||||||
| | (Unaudited) | ||||||||||||||||
| | (In thousands) | ||||||||||||||||
Balance as of January 31, 2020 | | $ | 264 | | $ | 452,142 | | $ | (18,008) | | $ | 893,138 | | $ | (36,864) | | $ | 1,290,672 |
Equity awards exercised/vested, net | | | — | | | (1,185) | | | — | | | — | | | 1,185 | | | — |
Share-based compensation expense | | | — | | | (811) | | | — | | | — | | | — | | | (811) |
Taxes paid for net share settlements | | | — | | | (306) | | | — | | | — | | | — | | | (306) |
Other comprehensive loss, net | | | — | | | — | | | (4,026) | | | — | | | — | | | (4,026) |
Net loss | | | — | | | — | | | — | | | (39,295) | | | — | | | (39,295) |
Balance as of April 30, 2020 | | $ | 264 | | $ | 449,840 | | $ | (22,034) | | $ | 853,843 | | $ | (35,679) | | $ | 1,246,234 |
| | | | | | | | | | | | | | | | | | |
Balance as of January 31, 2019 | | $ | 264 | | $ | 464,112 | | $ | (15,194) | | $ | 758,881 | | $ | (19,054) | | $ | 1,189,009 |
Equity awards exercised/vested, net | | | — | | | (5,818) | | | — | | | — | | | 5,858 | | | 40 |
Share-based compensation expense | | | — | | | 4,227 | | | — | | | — | | | — | | | 4,227 |
Taxes paid for net share settlements | | | — | | | (5,686) | | | — | | | — | | | — | | | (5,686) |
Other comprehensive loss, net | | | — | | | — | | | (3,227) | | | — | | | — | | | (3,227) |
Cumulative effect of adoption of ASC 842 | | | — | | | — | | | — | | | (9,580) | | | — | | | (9,580) |
Net income | | | — | | | — | | | — | | | 12,043 | | | — | | | 12,043 |
Balance as of April 30, 2019 | | $ | 264 | | $ | 456,835 | | $ | (18,421) | | $ | 761,344 | | $ | (13,196) | | $ | 1,186,826 |
The accompanying notes are an integral part of these statements.
5
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended October 31, | ||||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
Cash flows from operating activities | ||||||||
Net income | $ | 62,666 | $ | 72,042 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation and amortization | 27,480 | 22,898 | ||||||
Loss on disposal of fixed assets | 2,832 | 1,295 | ||||||
Equity loss in unconsolidated affiliates | 540 | 820 | ||||||
Equity based compensation | 15,362 | 13,265 | ||||||
Deferred income taxes | — | (2,682 | ) | |||||
Deferred financing charges and debt discount amortization | 8,185 | 609 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | (336,818 | ) | (315,426 | ) | ||||
Inventories | (108,284 | ) | (4,986 | ) | ||||
Income taxes, net | 29,573 | 48,526 | ||||||
Prepaid expenses and other current assets | 12,314 | 5,851 | ||||||
Other assets, net | 8,455 | (279 | ) | |||||
Accounts payable, accrued expenses and other liabilities | 32,103 | 40,816 | ||||||
Net cash used in operating activities | (245,592 | ) | (117,251 | ) | ||||
Cash flows from investing activities | ||||||||
Investment in unconsolidated affiliate | (49 | ) | (35,432 | ) | ||||
Capital expenditures | (21,428 | ) | (18,400 | ) | ||||
Net cash used in investing activities | (21,477 | ) | (53,832 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from borrowing – revolving credit facility, net | 258,527 | 91,334 | ) | |||||
Taxes paid for net share settlement | (6,114 | ) | (6,955 | ) | ||||
Debt issuance costs | — | (690 | ) | |||||
Proceeds from exercise of equity awards | 1,532 | 260 | ||||||
Net cash provided by financing activities | 253,945 | 83,949 | ||||||
Foreign currency translation adjustments | 1,396 | (457 | ) | |||||
Net decrease in cash and cash equivalents | (11,728 | ) | (87,591 | ) | ||||
Cash and cash equivalents at beginning of period | 79,957 | 132,587 | ||||||
Cash and cash equivalents at end of period | $ | 68,229 | $ | 44,996 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash payments: | ||||||||
Interest, net | $ | 24,664 | $ | 3,163 | ||||
Income tax payments (refund), net | 4,564 | (7,534 | ) |
| | | | | | |
| | Three Months Ended April 30, | ||||
|
| 2020 |
| 2019 | ||
| | (Unaudited) | ||||
| | (In thousands) | ||||
Cash flows from operating activities | | | | | | |
Net income (loss) | | $ | (39,295) | | $ | 12,043 |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | |
Depreciation and amortization | | | 9,867 | | | 9,473 |
Loss on disposal of fixed assets | | | 180 | | | 1,154 |
Non-cash operating lease costs | | | 17,443 | | | 20,284 |
Loss (gain) on lease terminations | | | 3,187 | | | (829) |
Dividend received from unconsolidated affiliate | | | 1,960 | | | 1,960 |
Equity (gain) loss in unconsolidated affiliates | | | 580 | | | (358) |
Share-based compensation | | | (811) | | | 4,227 |
Deferred financing charges and debt discount amortization | | | 2,704 | | | 2,596 |
Deferred income taxes | | | (16,415) | | | 6 |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable, net | | | 108,994 | | | 23,762 |
Inventories | | | 51,508 | | | 37,428 |
Income taxes, net | | | (422) | | | (6,302) |
Prepaid expenses and other current assets | | | 13,900 | | | 224 |
Other assets, net | | | (1,046) | | | (1,195) |
Customer refund liabilities | | | (75,532) | | | (33,279) |
Operating lease liabilities | | | (13,129) | | | (21,544) |
Accounts payable, accrued expenses and other liabilities | | | (136,769) | | | (74,979) |
Net cash used in operating activities | | | (73,096) | | | (25,329) |
| | | | | | |
Cash flows from investing activities | | | | | | |
Operating lease assets initial direct costs | | | (1,918) | | | — |
Capital expenditures | | | (6,391) | | | (13,291) |
Net cash used in investing activities | | | (8,309) | | | (13,291) |
| | | | | | |
Cash flows from financing activities | | | | | | |
Repayment of borrowings - revolving facility | | | (355,477) | | | (482,496) |
Proceeds from borrowings - revolving facility | | | 855,477 | | | 505,005 |
Repayment of borrowings - unsecured term loan | | | (118) | | | — |
Proceeds from borrowings - unsecured term loan | | | 1,832 | | | — |
Proceeds from exercise of equity awards | | | — | | | 40 |
Taxes paid for net share settlements | | | (306) | | | (5,686) |
Net cash provided by financing activities | | | 501,408 | | | 16,863 |
| | | | | | |
Foreign currency translation adjustments | | | (1,192) | | | (69) |
Net increase (decrease) in cash and cash equivalents | | | 418,811 | | | (21,826) |
Cash and cash equivalents at beginning of period | | | 197,372 | | | 70,138 |
Cash and cash equivalents at end of period | | $ | 616,183 | | $ | 48,312 |
| | | | | | |
Supplemental disclosures of cash flow information | | | | | | |
Cash payments: | | | | | | |
Interest, net | | $ | 6,839 | | $ | 7,542 |
Income tax payments, net | | $ | 653 | | $ | 8,844 |
The accompanying notes are an integral part of these statements.
6
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, manufacturessources 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 its proprietary brands underfor several product categories.
The Company consolidates the accounts of its wholly-owned and majority-owned subsidiaries. KL North America B.V. (“KLNA”) is aand Fabco Holding B.V. (“Fabco”) are Dutch joint venture limited liability companycompanies that is a joint venture that isare 49% owned by the Company. Karl Lagerfeld Holding B.V. (“KLH”), formerly known as Kingdom Holdings 1 B.V., is a Dutch limited liability company that is 19% owned by the Company. Fabco Holding B.V. (“Fabco”) is a Dutch limited liability company that is a joint venture that is 49% 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 and KLNAFabco 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 and Fabco are, and will be, included in the financial statements for the quarter ended or ending closest to the Company’s fiscal quarter end. For example, with respect to the Company’s results for the three-month period ended April 30, 2020, the results of Vilebrequin, KLH, KLNA and Fabco are included for the three-month period ended March 31, 2020. The Company’s retail stores report resultsoperations segment reports on a 52/53-week fiscal year.
The Company’s three-month periods ended April 30, 2020 and 2019 were each 13-week fiscal quarters for the retail operations segment. For fiscal 2021 and 2020, the three-month period for the retail operations segment ended on May 2, 2020 and May 4, 2019, respectively.
The results for the three and nine-month periodsmonths ended October 31, 2017April 30, 2020 are not necessarily indicative of the results expected for the entire fiscal year, given the recent acquisition and integrationseasonal nature of Donna Karan International Inc.(“DKI”)the Company’s business and the seasonal naturesignificant effects of the COVID-19 pandemic on the Company’s business. The accompanying financial statements included herein are unaudited. All adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim period presented have been reflected.
The accompanying financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 20172020 filed with the Securities and Exchange Commission (the “SEC”).
The Company’s international subsidiaries use different functional currencies, which are the local selling currency. In accordance with the authoritative guidance, operating assetsAssets and liabilities of the Company’s foreign operations, where the functional currency is not the U.S. dollar (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 loss within stockholders’ equity.
Accounting Policies
On April 10, 2020, the Financial Accounting Standards Board (“FASB”) issued a Staff Q&A to respond to frequently asked questions about accounting for lease concessions related to the effects of the COVID-19 outbreak. Consequently, for lease concessions related to the effects of the COVID-19 outbreak, an entity will not have to analyze each lease to determine whether the enforceable rights and obligations for concessions exist in the contract and can elect to apply or not apply the lease modification guidance to those leases. Entities may make the elections for any lessor-provided concessions related to the effects of the outbreak (e.g., deferrals of lease payments, cash payments made to the lessee, or reduced future lease payments) as long as the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. The Company has elected to not apply the lease modification guidance for contracts with COVID-19 related rent concessions. As of April 30, 2020, the Company has $6.8 million of deferred lease payments recorded within accounts payable on its condensed consolidated balance sheets.
7
Liquidity and Impact of COVID-19
The Company relies on its cash flows generated from operations and the borrowing capacity under its credit facilities to meet the cash requirements of its business. The primary cash requirements of its business are the seasonal buildup in inventory, compensation paid to employees, payments to suppliers in the normal course of business, capital expenditures, maturities of debt and related interest payments and income tax payments. The rapid expansion of the COVID-19 pandemic resulted in a sharp decline in net sales and earnings in the first quarter of fiscal 2021, which had a corresponding impact on the Company’s liquidity. The Company is focused on preserving its liquidity and managing its cash flow during these unprecedented conditions. The Company has taken preemptive actions to enhance its ability to meet its short-term liquidity needs, including, but not limited to, reducing payroll costs through employee furloughs and salary reductions, reduction of all discretionary spending, deferring certain lease payments, deferral of capital projects and drawing down on its revolving credit facility. In addition, the Company is closely monitoring its inventory needs and is working with its suppliers to curtail, or cancel, production of product that the Company believes will not be able to be sold in season. The Company has also been working with its suppliers and licensors to negotiate extended payment terms in order to preserve capital.
In March 2020, in response to the uncertainty of the circumstances surrounding the COVID-19 outbreak, the Company borrowed an aggregate of $500 million under its revolving credit facility as a precautionary measure, to provide the Company with additional financial flexibility to manage its business during the unknown duration and impact of the COVID-19 pandemic. In May and June 2020, the Company repaid an aggregate of $500 million of its borrowings under the revolving credit facility as financial markets stabilized. As of April 30, 2020, the Company was in compliance with all covenants under its term loan and revolving credit facility.
Note 2 – Acquisition of Donna Karan InternationalAllowance for Doubtful Accounts
On DecemberFebruary 1, 2016, G-III acquired all2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which had no material impact on the Company’s financial statements. The Company’s financial instruments consist of trade receivables arising from revenue transactions in the ordinary course of business. The Company considers its trade receivables to consist of two portfolio segments: wholesale and retail trade receivables. Wholesale trade receivables result from credit the Company has extended to its wholesale customers based on pre-defined criteria and are generally due within 30 to 60 days. As a result of the outstanding capital stockCOVID-19 pandemic, certain of DKI from LVMH Moet Hennessy Louis Vuitton Inc. (“LVMH”) for a total purchase price of approximately $669.8 million.
DKI owns Donna Karan and DKNY, two of the world’s most iconic and recognizable power brands. DKI sells its products through department stores, specialty retailers and online retailers worldwide, as well as through company-operated retail stores, e-commerce sites and distribution agreements. The acquisition of DKI strengthens and diversifies the Company’s brand portfolio and offers additional opportunities to expand G-III’s business through the development of the DKNY and Donna Karan brands and product categories.
The results of DKI have been included in the Company’s consolidated financial statements since the date of acquisition.
Allocation of the purchase price consideration
The Company initially recognized goodwill of approximately $220.6 million in connection with the acquisition of DKI.
Under Accounting Standards Codification (“ASC”) 805 — Business Combinations, a company may adjust preliminary amounts recognized at the acquisition date to their subsequently determined final fair values during the measurement period. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of acquisition).
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The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition, as adjusted:
(In thousands) | Preliminary Purchase Price Allocation at October 31, 2017 | |||
Cash and cash equivalents | $ | 44,375 | ||
Accounts receivable | 16,129 | * | ||
Inventories | 13,716 | * | ||
Prepaid expenses & other current assets | 22,235 | * | ||
Property, plant and equipment | 15,414 | * | ||
Goodwill | 212,803 | * | ||
Tradenames | 370,000 | |||
Other intangibles | 40,000 | |||
Other long-term assets | 2,703 | |||
Total assets acquired | 737,375 | |||
Accounts payable | (21,436 | ) | ||
Accrued expense | (39,087 | )* | ||
Income taxes payable | (3,443 | ) | ||
Other long-term liabilities | (3,631 | ) | ||
Total liabilities assumed | (67,597 | ) | ||
Total fair value of acquisition consideration (net of $40 million imputed debt discount) | $ | 669,778 |
There was no change to the purchase price; however, the estimates of fair value of assets acquired and liabilities assumed are preliminary and subject to change based on finalizing the election under Internal Revenue Code Section 338(h)(10) which may have an impact on purchase price.
Goodwill was assigned to the Company’s wholesale operationscustomers have asked for extended payment terms. Retail trade receivables primarily relate to amounts due from third-party credit card processors for the settlement of debit and credit card transactions and are typically collected within 3 to 5 days. The Company’s accounts receivable and allowance for doubtful accounts as of April 30, 2020 were:
| | | | | | | | | |
| | April 30, 2020 | |||||||
|
| Wholesale |
| Retail |
| Total | |||
| | (In thousands) | |||||||
Accounts receivable, gross | | $ | 428,762 | | $ | 2,828 | | $ | 431,590 |
Allowance for doubtful accounts | | | (10,419) | | | (28) | | | (10,447) |
Accounts receivable, net | | $ | 418,343 | | $ | 2,800 | | $ | 421,143 |
The allowance for doubtful accounts for wholesale trade receivables is estimated based on several factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligation (such as in the case of bankruptcy filings (including potential bankruptcy filings), extensive delay in payment or substantial downgrading by credit rating agencies), a specific reserve for bad debts is recorded against amounts due to reduce the net recognized receivable to the amount reasonably expected to be collected. For all other wholesale customers, an allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the end of the reporting unitperiod for financial statements, assessments of collectability based on historical trends and an evaluation of the impact of economic conditions. The Company considers both current and forecasted future economic conditions in determining the adequacy of its allowance for doubtful accounts.
The allowance for doubtful accounts for retail trade receivables is estimated as the wholesale operations reporting unit is expected to benefit from the synergies of the combination and from the future growth of DKI. Subsequentcredit card chargeback rate applied to the acquisition, DKI’s wholesale operations were integrated into G-III’sprevious 90 days of credit card sales. In addition, the Company considers both current and collection operating system and both entities are expectedforecasted future economic conditions in determining the adequacy of its allowance for doubtful accounts.
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During the three months ended April 30, 2020, the Company recorded a $9.7 million increase in its allowance for doubtful accounts primarily due to share several processes such as information technology, finance, logistics, human resources, sourcing and overseas quality control.allowances recorded against the outstanding receivables of certain department store customers that have publicly announced bankruptcy filings or possible bankruptcy filings. The Company andhad the seller have made an election under Internal Revenue Code Section 338(h)(10). Accordingly,following activity in its allowance for credit losses for the book and tax basis of the acquired domestic assets and liabilities are the same as of the purchase date and the goodwill is deductible for tax purposes over a 15-year period.three months ended April 30, 2020:
| | | | | | | | | |
| | April 30, 2020 | |||||||
|
| Wholesale |
| Retail |
| Total | |||
| | (In thousands) | |||||||
Beginning balance | | $ | (628) | | $ | (82) | | $ | (710) |
Provision for credit losses | | | (9,791) | | | 54 | | | (9,737) |
Ending balance | | $ | (10,419) | | $ | (28) | | $ | (10,447) |
The fair values assigned to identifiable intangible assets acquired were based on assumptions and estimates made by management using unobservable inputs reflecting the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability based on the best information available. The fair values of these identifiable intangible assets were determined using the discounted cash flow method and the Company classifies these intangibles as Level 3 fair value measurements. The Company recorded other intangible assets of $410.0 million, which included customer relationships of $40.0 million (17-year life), as well as tradenames of $370.0 million, which have an indefinite life.
Note 3 – Investment in Unconsolidated AffiliatesInventories
Investment in Fabco Holding B.V.
In August 2017, the Company entered intoWholesale inventories, which comprise a joint venture agreement with Amlon Capital B.V. (“Amlon”), a private company incorporated in the Netherlands, to produce and market women’s and men’s apparel and accessories pursuant to a long-term license for DKNY and Donna Karan in the People’s Republic of China, including Macau, Hong Kong and Taiwan. The Company owns 49%significant portion of the joint venture, with Amlon owning the remaining 51%. The joint venture will be funded with $25 million of equity to be used to strengthen the DKNY and Donna Karan brands and accelerate the growth of the business in the region. Of this amount, G-III is required to contribute an aggregate of $10.0 million to the joint venture by August 2018. G-III funded $49,000 of this amount upon the signing of the joint venture agreement. As of January 1, 2018, this joint venture will be the exclusive seller of women’s and men’s apparel, handbags, luggage and certain accessories under the DKNY and Donna Karan brands in the territory. The investment in Fabco, which is being accounted for under the equity method of accounting, is reflected in Investment in Unconsolidated Affiliates on the Condensed Consolidated Balance Sheets at October 31, 2017.
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Investment in Karl Lagerfeld Holding B.V.
In February 2016, the Company acquired a 19% minority interest in KLH, the parent company of the group that holds the worldwide rights to the Karl Lagerfeld brand. The Company paid 32.5��� million (approximately $35.4 million at the date of the transaction) for this interest. This investment is intended to expand the partnership between the Company and the Karl Lagerfeld brand and extend their business development opportunities on a global scale. The investment in KLH, which is being accounted for under the equity method of accounting, is reflected in Investment in Unconsolidated Affiliates on the Condensed Consolidated Balance Sheets at October 31, 2017.
Note 4 – Inventories
Subsequent to the adoption of Accounting Standard Update 2015-11 (Inventory - Topic 330), wholesale inventoriesCompany’s inventory, are stated at the lower of cost (determined by the first-in, first outfirst-out method) or net realizable value which comprises 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. AlmostSubstantially all of the Company’s inventories consist of finished goods.
The inventory return asset, which consists of the amount of goods that are anticipated to be returned by customers, represented $21.3 million, $35.5 million and $31.0 million as of April 30, 2020, April 30, 2019 and January 31, 2020 respectively. The inventory return asset is recorded within prepaid expenses and other current assets on the condensed consolidated balance sheets.
Inventory held on consignment by the Company’s customers totaled $6.6 million, $3.8 million and $9.1 million at April 30, 2020, April 30, 2019 and January 31, 2020, 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 4 – 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. |
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The following table summarizes the carrying values and the estimated fair values of the Company’s debt instruments:
| | | | | | | | | | | | | | | | | | | | |
| | | | Carrying Value | | Fair Value | ||||||||||||||
| | |
| April 30, | | April 30, | | January 31, |
| April 30, | | April 30, | | January 31, | ||||||
Financial Instrument | | Level | | 2020 | | 2019 | | 2020 | | 2020 | | 2019 | | 2020 | ||||||
| | | | (In thousands) | ||||||||||||||||
Term loan | | 2 | | $ | 300,000 | | $ | 300,000 | | $ | 300,000 | | $ | 300,000 | | $ | 300,000 | | $ | 300,000 |
Revolving credit facility | | 2 | | | 500,000 | | | 22,509 | | | — | | | 500,000 | | | 22,509 | | | — |
Note issued to LVMH | | 3 | | | 103,438 | | | 97,938 | | | 102,009 | | | 109,910 | | | 90,065 | | | 95,126 |
Unsecured loans | | 2 | | | 4,504 | | | — | | | 2,860 | | | 4,504 | | | — | | | 2,860 |
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.
The fair value of the note issued to LVMH was considered a Level 3 valuation in the fair value hierarchy.
Non-Financial Assets and Liabilities
The Company’s non-financial assets that are measured at fair value on a nonrecurring basis include long-lived assets, which consist primarily of property and equipment and operating lease assets. The Company reviews these assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable. For impaired assets, an impairment loss is recognized equal to the difference between the carrying amount of the asset or asset group and its estimated fair value. For operating lease assets, the Company determines the fair value of the assets by discounting the estimated market rental rates over the remaining term of the lease. These fair value measurements are considered level 3 measurements in the fair value hierarchy. 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 5 – Leases
The Company leases retail stores, warehouses, distribution centers, office space and certain 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.
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.
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The Company’s lease assets and liabilities as of April 30, 2020, April 30, 2019 and January 31, 2020 consist of the following:
| | | | | | | | | | | |
| | | | | | | | | | | |
Leases | | Classification | | April 30, 2020 | | April 30, 2019 | | January 31, 2020 | |||
| | | | (In thousands) | |||||||
Assets | | | | | | | | | | | |
Operating | | Operating lease assets | | $ | 251,565 | | $ | 320,169 | | $ | 270,032 |
Total lease assets | | | | $ | 251,565 | | $ | 320,169 | | $ | 270,032 |
| | | | | | | | | | | |
Liabilities | | | | | | | | | | | |
Current operating | | Current operating lease liabilities | | $ | 63,632 | | $ | 74,761 | | $ | 63,166 |
Noncurrent operating | | Noncurrent operating lease liabilities | | | 231,323 | | | 286,663 | | | 249,040 |
Total lease liabilities | | | | $ | 294,955 | | $ | 361,424 | | $ | 312,206 |
The Company recorded lease costs of $22.4 million and $25.0 million during the three months ended April 30, 2020 and 2019, respectively. Lease costs are recorded within selling, general and administrative expenses in the Company’s condensed consolidated statements of operations and comprehensive income (loss). The Company recorded variable lease costs and short-term lease costs of $3.4 million and $3.3 million for the three months ended April 30, 2020 and 2019, respectively. Short-term lease costs are immaterial.
As of April 30, 2020, the Company’s maturity of operating lease liabilities in the years ending up to January 31, 2025 and thereafter are as follows:
| | | |
Year Ending January 31, | | Amount | |
| | (In thousands) | |
2021 | | $ | 63,890 |
2022 | | | 76,088 |
2023 | | | 66,758 |
2024 | | | 52,732 |
2025 | | | 42,709 |
After 2025 | | | 58,068 |
Total lease payments | | $ | 360,245 |
Less: Interest | | | 65,290 |
Present value of lease liabilities | | $ | 294,955 |
As of April 30, 2020, there are no material leases that are legally binding but have not yet commenced.
As of April 30, 2020, the weighted average remaining lease term related to operating leases is 5.1 years. The weighted average discount rate related to operating leases is 7.9%.
Cash paid for amounts included in the measurement of operating lease liabilities is $23.4 million and $26.4 million during the periods ended April 30, 2020 and 2019, respectively. Right-of-use assets obtained in exchange for lease obligations were $4.6 million and $1.8 million as of April 30, 2020 and 2019, respectively.
Note 6 – Goodwill and Intangible Assets
As of April 30, 2020, there is $259.9 million of goodwill and $437.6 million of indefinite-lived trademarks recorded on the Company’s condensed consolidated balance sheet. The Company reviews and tests its goodwill and intangible assets with indefinite lives for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may be impaired. Due to the impact of the COVID-19 pandemic on the Company’s operations, the Company performed a quantitative test of its goodwill as of April 30, 2020 using an income approach through a discounted cash flow analysis methodology. The discounted cash flow approach requires that certain assumptions and estimates be made regarding industry economic factors and future profitability. The Company also performed quantitative tests of each of its indefinite-lived intangible assets using a relief from royalty method, another form of the income approach. The relief from royalty method requires assumptions regarding industry economic factors and future profitability. There were 0 impairments identified as of April 30, 2020 as a result of these tests.
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While no impairment was identified as of the test date, $370.0 million of the Company’s indefinite-lived trademarks could be deemed to have a risk of future impairment as there is limited excess fair value over the carrying value of these assets at April 30, 2020. The continued impact of the COVID-19 pandemic could give rise to global and regional macroeconomic factors that could impact the Company’s assumptions relating to net sales growth rates, discount rates, tax rates or royalty rates and may result in future impairment charges for indefinite-lived intangible assets.
The fair value of the Company’s goodwill and indefinite-lived intangible assets are considered a Level 3 valuation in the fair value hierarchy.
Note 7 – Net Income (Loss) per Common Share
Basic net income (loss) per common share has been computed using the weighted average number of common shares outstanding during each period. Diluted net income per share, when applicable, is computed using the weighted average number of common shares and potential dilutive common shares, consisting of unvested restricted stock unit awards and stock options outstanding during the period. In addition, allApproximately 355,900 shares of common stock have been excluded from the diluted net income per share basedcalculation for the three months ended April 30, 2019. All share-based payments outstanding that vest based on the achievement of performance and/or market price conditions, and for which the respective performance and/or market price conditions have not been achieved, have been excluded from the diluted per share calculation. Approximately 1.1 million shares of common stock have been excluded from the diluted net income per share calculation for the nine months ended October 31, 2017. 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. For the nine months ended October 31, 2016, the Company issued 194,618 shares of common stock and utilized 291,181 shares of treasury stock in connection with the exercise or vesting of equity awards.
The following table reconciles the numerators and denominators used in the calculation of basic and diluted net income (loss) per share:
| | | | | | |
| | Three Months Ended April 30, | ||||
|
| 2020 |
| 2019 | ||
| | (In thousands, except per share amounts) | ||||
Net income (loss) | | $ | (39,295) | | $ | 12,043 |
Basic net income (loss) per share: | | | | | | |
Basic common shares | | | 48,025 | | | 48,781 |
Basic net income (loss) per share | | $ | (0.82) | | $ | 0.25 |
| | | | | | |
Diluted net income (loss) per share: | | | | | | |
Basic common shares | | | 48,025 | | | 48,781 |
Dilutive restricted stock unit awards and stock options | | | — | | | 993 |
Diluted common shares | | | 48,025 | | | 49,774 |
Diluted net income (loss) per share | | $ | (0.82) | | $ | 0.24 |
Three Months Ended | Nine Months Ended | |||||||||||||||
October 31, | October 31, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Net income attributable to G-III | $ | 81,625 | $ | 70,564 | $ | 62,666 | $ | 72,042 | ||||||||
Basic net income per share: | ||||||||||||||||
Basic common shares | 48,846 | 45,918 | 48,729 | 45,713 | ||||||||||||
Basic net income per share | $ | 1.67 | $ | 1.54 | $ | 1.29 | $ | 1.58 | ||||||||
Diluted net income per share: | ||||||||||||||||
Basic common shares | 48,846 | 45,918 | 48,729 | 45,713 | ||||||||||||
Diluted restricted stock awards and stock options | 682 | 984 | 681 | 1,234 | ||||||||||||
Diluted common shares | 49,528 | 46,902 | 49,410 | 46,947 | ||||||||||||
Diluted net income per share | $ | 1.65 | $ | 1.50 | $ | 1.27 | $ | 1.53 |
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Note 68 – Notes Payable
Notes PayableLong-term debt consists of the following (in thousands):following:
October 31, 2017 | October 31, 2016 | January 31, 2017 | ||||||||||
Prior revolving credit facility | $ | — | $ | 91,334 | $ | — | ||||||
Term loan | 300,000 | — | 300,000 | |||||||||
New revolving credit facility | 349,648 | — | 91,121 | |||||||||
Note issued to LVMH | 125,000 | — | 125,000 | |||||||||
Subtotal | 774,648 | 91,334 | 516,121 | |||||||||
Less: Net debt issuance costs and debt discount(1) | (48,040 | ) | — | (54,365 | ) | |||||||
Total | $ | 726,608 | $ | 91,334 | $ | 461,756 |
| | | | | | | | | |
|
| April 30, 2020 |
| April 30, 2019 |
| January 31, 2020 | |||
| | (In thousands) | |||||||
Term loan | | $ | 300,000 | | $ | 300,000 | | $ | 300,000 |
Revolving credit facility | | | 500,000 | | | 22,509 | | | — |
Note issued to LVMH | | | 125,000 | | | 125,000 | | | 125,000 |
Unsecured loans | | | 4,504 | | | — | | | 2,860 |
Subtotal | | | 929,504 | | | 447,509 | | | 427,860 |
Less: Net debt issuance costs (1) | | | (6,748) | | | (9,360) | | | (7,402) |
Debt discount | | | (21,562) | | | (27,062) | | | (22,991) |
Current portion of long-term debt | | | (512) | | | — | | | (673) |
Total | | $ | 900,682 | | $ | 411,087 | | $ | 396,794 |
(1) |
12
Term Loan
In connection with the acquisition of DKI, theThe Company borrowed $350.0 million under a senior secured term loan facility (the “Term Loan”). The Term Loan will mature that matures in December 2022. The Term Loan was subject to amortization payments of 0.625% of the original aggregate principal amount of the Term Loan per quarter, with the balance due at maturity. On December 1, 2016, the Company prepaid $50.0 million in principal amount of the Term Loan. This prepayment relieved G-III of its obligation to make quarterly amortization payments forLoan, reducing the remainderprincipal balance of the term.Term Loan to $300.0 million. The Term Loan is guaranteed by certain of the Company’s subsidiaries.
Interest on the outstanding principal amount of the Term Loan accrues at a rate equal to LIBOR,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, 2017,April 30, 2020, interest under the Term Loan was being paid at ana weighted average rate of 6.47%6.66% 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 Term 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 withinin the term loan agreement. 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, 2017,April 30, 2020, the Company was in compliance with these covenants.
New Revolving Credit Facility
Upon closing of the acquisition of DKI, the Company’s priorThe Company has a $650 million credit agreement (the “prior revolving“revolving credit facility”) was refinanced and replaced by a $650 million amended and restated credit agreement (the “new revolving credit facility”). Amountsunder which amounts available under the new revolving credit facility are subject to borrowing base formulas and over advances as specified in the new 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 new revolving credit facility agreement. As of October 31, 2017, interest under the new revolving credit agreement was being paid at the average rate of 2.42% per annum. The new revolving credit facility has a five-year term ending December 1, 2021. In addition to paying interest on any outstanding borrowings under the new 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.
The revolving credit facility is secured by specified assets of the Company and certain of its subsidiaries.
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 April 30, 2020, the Company was in compliance with these covenants.
As of October 31, 2017,April 30, 2020, the Company had $349.6$500 million of borrowings outstanding under the new revolving credit facility, all of which are classified as long-term liabilities. This borrowing was a precautionary measure in response to the uncertainty of the circumstances surrounding the COVID-19 outbreak. The Company subsequently repaid an aggregate of $500 million of its borrowing under the revolving credit facility in May and June 2020.
As of October 31, 2017,April 30, 2020, interest under the revolving credit agreement was being paid at an average rate of 2.13% per annum. The revolving credit facility also includes amounts available for letters of credit. As of April 30, 2020, there were outstanding trade and standby letters of credit amounting to $4.5$10.5 million and $3.4$5.2 million, respectively.
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LVMH Note
As parta portion of the consideration for the acquisition of DKI, the Company issued to 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.
13
ASC 820 - Fair Value Measurements requires the note to be recorded at fair value.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.
Unsecured Loans
On April 15, 2019, T.R.B. International SA (“TRB”), a subsidiary of Vilebrequin, borrowed €3.0 million under an unsecured loan (the “2019 Unsecured Loan”). During the term of the 2019 Unsecured Loan, TRB is required to make quarterly installment payments of €0.2 million. Interest on the outstanding principal amount of the 2019 Unsecured Loan accrues at a fixed rate equal to 1.50% per annum, payable quarterly. The 2019 Unsecured Loan originally matured on April 15, 2024. Due to the COVID-19 outbreak, the bank agreed to amend the 2019 Unsecured Loan to suspend the March and June 2020 quarterly installment payments and add these payments to the balance due at the end of the loan term. The 2019 Unsecured Loan now matures on September 15, 2024.
On February 3, 2020, TRB borrowed €1.7 million under another unsecured loan (the “2020 Unsecured Loan”). During the term of the 2020 Unsecured Loan, TRB is required to make quarterly installment payments of €0.1 million. Interest on the outstanding principal amount of the 2020 Unsecured Loan accrues at a fixed rate equal to 1.50% per annum, payable quarterly. The 2020 Unsecured Loan originally matured on March 31, 2025. Due to the COVID-19 outbreak, the bank agreed to amend the 2020 Unsecured Loan to suspend the June 2020 quarterly installment payment and add this payment to the balance due at the end of the loan term. The 2020 Unsecured Loan now matures on June 30, 2025.
Note 79 – Revenue Recognition
Disaggregation of Revenue
In accordance with ASC 606 – Revenue from Contracts with Customers, 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 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 revenues from license agreements related to the DKNY, Donna Karan, G.H. Bass, Andrew Marc and Vilebrequin trademarks owned by the Company. As of April 30, 2020, 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.
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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 offers a limited loyalty program where customers accumulate points redeemable for cash discount certificates that expire 90 days after issuance. Total contract liabilities were $4.1 million, $6.3 million and $5.9 million at April 30, 2020, April 30, 2019 and January 31, 2020, respectively. The Company recognized $3.5 million in revenue for the three months ended April 30, 2020 related to contract liabilities that existed at January 31, 2020. The Company recognized $4.3 million in revenue for the three months ended April 30, 2019 related to contract liabilities that existed at January 31, 2019. There were 0 contract assets recorded as of April 30, 2020, April 30, 2019 and January 31, 2019. Substantially all of the advance payments from licensees as of April 30, 2020 are expected to be recognized as revenue within the next twelve months.
Note 10 – Segments
The Company’s reportable segments are business units that offer products through different channels of distribution. The Company has two2 reportable segments: wholesale operations and retail operations. The wholesale operations segment includes sales of products under brandsthe Company’s owned, licensed by the Company from third parties,and private label brands, as well as sales of products underrelated to the Company’s own brands and private label brands.Vilebrequin business. Wholesale sales andrevenues also include revenues from license agreements related to theour owned trademarks including DKNY, Donna Karan, Vilebrequin, G.H. Bass and DKNY business are included in the wholesale operations segment.Andrew Marc. The retail operations segment consists primarily of thedirect 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 well as a limited numberoutlet stores. Sales through Company-owned websites, with the exception of Calvin Klein Performance and Karl Lagerfeld Paris stores.Vilebrequin, are also included in the retail operations segment.
The following segment information in thousands, is presented for the three and nine-monththree-month periods indicated below:
Three Months Ended October 31, 2017 | ||||||||||||||||||||||||||||
Wholesale | Retail | Elimination(1) | Total | |||||||||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||||||
| | Three Months Ended April 30, 2020 | ||||||||||||||||||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||||||||||||||||||
| | (In thousands) | ||||||||||||||||||||||||||
Net sales | $ | 966,820 | $ | 118,709 | $ | (60,536 | ) | $ | 1,024,993 | | $ | 378,871 | | $ | 33,908 | | $ | (7,648) | | $ | 405,131 | |||||||
Cost of goods sold | 636,878 | 57,786 | (60,536 | ) | 634,128 | | | 266,639 | | | 21,739 | | | (7,648) | | | 280,730 | |||||||||||
Gross profit | 329,942 | 60,923 | — | 390,865 | | | 112,232 | | | 12,169 | | | — | | | 124,401 | ||||||||||||
Selling, general and administrative | 174,679 | 68,061 | — | 242,740 | ||||||||||||||||||||||||
Selling, general and administrative expenses | | | 112,600 | | | 42,020 | | | — | | | 154,620 | ||||||||||||||||
Depreciation and amortization | 6,790 | 116 | — | 6,906 | | | 8,292 | | | 1,575 | | | — | | | 9,867 | ||||||||||||
(Gain) loss on lease terminations | | | (5) | | | 3,192 | | | — | | | 3,187 | ||||||||||||||||
Operating profit (loss) | $ | 148,473 | $ | (7,254 | ) | $ | — | $ | 141,219 | | $ | (8,655) | | $ | (34,618) | | $ | — | | $ | (43,273) |
Three Months Ended October 31, 2016 | ||||||||||||||||||||||||||||
Wholesale | Retail | Elimination(1) | Total | |||||||||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||||||
| | Three Months Ended April 30, 2019 | ||||||||||||||||||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||||||||||||||||||
| | (In thousands) | ||||||||||||||||||||||||||
Net sales | $ | 794,382 | $ | 107,238 | $ | (18,144 | ) | $ | 883,476 | | $ | 570,639 | | $ | 81,904 | | $ | (18,991) | | $ | 633,552 | |||||||
Cost of goods sold | 521,359 | 58,809 | (18,144 | ) | 562,024 | | | 371,580 | | | 44,899 | | | (18,991) | | | 397,488 | |||||||||||
Gross profit | 273,023 | 48,429 | — | 321,452 | | | 199,059 | | | 37,005 | | | — | | | 236,064 | ||||||||||||
Selling, general and administrative | 140,356 | 57,918 | — | 198,274 | ||||||||||||||||||||||||
Selling, general and administrative expenses | | | 147,258 | | | 54,601 | | | — | | | 201,859 | ||||||||||||||||
Depreciation and amortization | 5,169 | 2,864 | — | 8,033 | | | 7,522 | | | 1,951 | | | — | | | 9,473 | ||||||||||||
Gain on lease terminations | | | — | | | (829) | | | — | | | (829) | ||||||||||||||||
Operating profit (loss) | $ | 127,498 | $ | (12,353 | ) | $ | — | $ | 115,145 | | $ | 44,279 | | $ | (18,718) | | $ | — | | $ | 25,561 |
Nine Months Ended October 31, 2017 | ||||||||||||||||
Wholesale | Retail | Elimination(1) | Total | |||||||||||||
Net sales | $ | 1,887,902 | $ | 324,329 | $ | (120,191 | ) | $ | 2,092,040 | |||||||
Cost of goods sold | 1,251,368 | 165,251 | (120,191 | ) | 1,296,428 | |||||||||||
Gross profit | 636,534 | 159,078 | — | 795,612 | ||||||||||||
Selling, general and administrative | 433,324 | 202,676 | — | 636,000 | ||||||||||||
Depreciation and amortization | 20,403 | 7,077 | — | 27,480 | ||||||||||||
Operating profit (loss) | $ | 182,807 | $ | (50,675 | ) | $ | — | $ | 132,132 |
Nine Months Ended October 31, 2016 | ||||||||||||||||
Wholesale | Retail | Elimination(1) | Total | |||||||||||||
Net sales | $ | 1,538,096 | $ | 302,188 | $ | (57,139 | ) | $ | 1,783,145 | |||||||
Cost of goods sold | 1,029,829 | 167,691 | (57,139 | ) | 1,140,381 | |||||||||||
Gross profit | 508,267 | 134,497 | — | 642,764 | ||||||||||||
Selling, general and administrative | 333,906 | 170,641 | — | 504,547 | ||||||||||||
Depreciation and amortization | 15,539 | 7,359 | — | 22,898 | ||||||||||||
Operating profit (loss) | $ | 158,822 | $ | (43,503 | ) | $ | — | $ | 115,319 |
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The total assets for each of the Company’s reportable segments, as well as assets not allocated to a segment, are as follows:
| | | | | | | | | |
|
| April 30, 2020 |
| April 30, 2019 |
| January 31, 2020 | |||
| | (In thousands) | |||||||
Wholesale | | $ | 1,754,052 | | $ | 1,813,238 | | $ | 1,912,175 |
Retail | | | 232,626 | | | 376,619 | | | 272,832 |
Corporate | | | 812,283 | | | 256,687 | | | 380,130 |
Total assets | | $ | 2,798,961 | | $ | 2,446,544 | | $ | 2,565,137 |
October 31, 2017 | October 31, 2016 | January 31, 2017 | ||||||||||
(In thousands) | ||||||||||||
Wholesale | $ | 1,871,373 | $ | 1,072,994 | $ | 1,477,259 | ||||||
Retail | 251,649 | 227,743 | 228,352 | |||||||||
Corporate(1) | 136,031 | 122,704 | 146,333 | |||||||||
Total Assets | $ | 2,259,053 | $ | 1,423,441 | $ | 1,851,944 |
Note 11 – Stockholders’ Equity
For the three months ended April 30, 2020, the Company issued 0 shares of common stock and utilized 42,195 shares of treasury stock in connection with the vesting of equity awards. For the three months ended April 30, 2019, the Company issued 0 shares of common stock and utilized 207,325 shares of treasury stock in connection with the vesting of equity awards.
Note 12 – Income Taxes
The Company recorded an income tax benefit of $16.4 million for the three months ended April 30, 2020. The Company recorded income tax expense of $2.6 million for the three months ended April 30, 2019. Historically, the Company has calculated its provision for income taxes during interim reporting periods by applying the estimated annual effective tax rate for the full fiscal year to pre-tax income or loss, excluding discrete items, for the reporting period. Due to the uncertainty related to the impact of the COVID-19 pandemic on our operations, the Company used a discrete effective tax rate method to calculate taxes for the three-month period ended April 30, 2020. The Company will continue to evaluate income tax estimates under the historical method in subsequent quarters and employ a discrete effective tax rate method if warranted.
Note 813 – 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 futuregoods imported goods.in the future.
In March 2018, G-III Canada is requiredprovided a bond to make a pre-paymentguarantee payment to the CBSA of thefor additional duties payable as a result of the reassessment within 90 days of the daterequired by the final report was issued even though G-III Canada intends to appeal this reassessment.audit report. The Company has estimatedsecured a bond in the amount of additional dutiesCAD$26.9 million ($20.9 million) representing customs duty and interest through December 31, 2017 that couldis claimed to be payableowed to the CBSACBSA. In March 2018, the Company amended the duties filed for the month of January 2018 based on the new valuation method. This amount was paid to be between $9the CBSA. Beginning February 1, 2018, the Company began paying duties based on the new valuation method. There were no amounts paid and deferred for the three months ended April 30, 2020, related to the higher dutiable values. Cumulative amounts paid and deferred through April 30, 2020, related to the higher dutiable values, were CAD$13.5 million ($9.7 million).
Effective June 1, 2019, G-III commenced paying based on the dutiable value of G-III Canada’s imports based on the pre-audit levels. G-III continued to $15 million, plus interest. defer the additional duty paid through the month of May 2019 pending the final outcome of the appeal.
G-III Canada, based on the advice of counsel, believes it has positions that support its ability to receive a refund of this amountamounts 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.
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Note 914 – Recent Adopted and Issued Accounting Pronouncements
Recently Adopted Accounting Guidance
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This pronouncement changed how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU 2016-13 replaced the “incurred loss” model with an “expected loss” model. Under the “incurred loss” model, a loss (or allowance) was recognized only when an event had occurred (such as a payment delinquency) that caused the entity to believe that a loss was probable (i.e., that it had been “incurred”). Under the “expected loss” model, an entity recognizes a loss (or allowance) upon initial recognition of the asset that reflects all future events that may lead to a loss being realized, regardless of whether it is probable that the future event will occur. The “incurred loss” model considered past events and current conditions, while the “expected loss” model includes expectations for the future which have yet to occur. The Company adopted ASU 2016-16 as of February 1, 2020. The adoption of this standard did not result in a material change to the Company’s condensed consolidated financial statements.
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 made 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 modified 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 have been applied prospectively in the initial fiscal year of adoption. All other amendments have been applied retrospectively to all periods presented in the initial year of adoption. The Company adopted the standard effective February 1, 2020. The adoption of this standard did not result in a material change to the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is A Service Contract which addresses the accounting for implementation costs incurred in a cloud computing arrangement (“CCA”) that is a service contract. ASU 2018-15 aligned the accounting for costs incurred to implement a CCA that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, ASU 2018-15 amended ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a CCA that is considered a service contract. The Company adopted the standard effective February 1, 2020. The adoption of this standard did not result in a material change to the Company’s condensed consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (“ASC 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The standard is intended to provide optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. The guidance was effective upon issuance, and may be applied prospectively through December 31, 2022. The adoption of this standard did not result in a material change to the Company’s condensed consolidated financial statements.
Issued Accounting Guidance Being Evaluated for Adoption
In May 2017, the Financial Accounting Standard Board (“FASB”)The Company has reviewed all recently issued Accounting Standards Update (“ASU”) ASU 2017-09, “Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting.” ASU 2017-09 provides clarification on when modification accounting should be used for changes to the termspronouncements and concluded that they were either not applicable or conditions of a share-based payment award. ASU 2017-09 does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there 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, with early adoption permitted. The adoption of ASU 2017-09 is not expected to have ana significant impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The purpose of ASU 2017-04 is to simplify the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment should be applied on a prospective basis. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within that year. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect ASU 2017-04 to have an impact on its consolidated financial statements.
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. Early adoption is permitted. The Company does not expect ASU 2017-01 to have an impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” 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 does not expect ASU 2016-16 to have a material impact on its consolidated financial statements.
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In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which clarifies guidance with respect 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 application of the predominance principle. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Under the provision, entities must apply the guidance retrospectively to all periods presented but may apply it prospectively if retrospective application would be impracticable. The Company does not believe that adoption of this new guidance will have a material effect on its condensed consolidated financial statements.
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Note 15 – Subsequent Events
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 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. The guidance is effective for public entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the potential impact of ASU 2016-02 on its consolidated financial statements. 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.
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. Early application is permitted. The Company does not expect that the adoption of this ASU will have a material impact on its statement of operations.
In May 2014,and June 2020, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." This update will replace the existing revenue recognition guidance in GAAP and requiresCompany repaid an entity to recognize the amountaggregate of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The FASB has continued to clarify this guidance and has issued 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 are 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 will be effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. 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 has decided to adopt the pronouncement using a modified retrospective approach. The Company performed an analysis$500 million of its current revenue streams worldwide and identified potential changes that will result fromborrowings under its revolving credit facility as financial markets stabilized.
On June 5, 2020, the adoptionCompany announced the restructuring of the new guidance. The Company is currently identifying and preparing to implement changes to its accounting processes and controls to support the new revenue recognition and disclosure requirements. The Company currently believes that the adoption of Topic 606 will primarily affect its wholesaleretail operations segment inincluding the timingclosing of recognition of certain adjustments that are currently recorded in net sales. For example, the Company is currently recording markdownsall Wilsons Leather and certain customer allowances when the liability is known or incurred. Under the new guidance,G.H. Bass stores. Additionally, the Company will have to estimate a liability for future anticipated markdowns and allowances related toclose all shipments that have taken place. The Company also expects that reclassificationsCalvin Klein Performance stores. In connection with the restructuring of certain operating expenses that are considered customer assistance, such as cooperative advertising, which aggregated approximately $26.0 million in fiscal 2017 and are currently recorded in selling, general and administrative expenses, will be recorded as an offset to net sales under the new guidance. The Company believes that the retail operations segment, will not be materially impacted by the new guidance, as its retail stores do not currently offer significant loyalty programsCompany expects to customers. Underincur an aggregate charge of approximately $100 million related to landlord termination fees, severance costs, store liquidation and closing costs, write-offs related to right-of-use assets and legal and professional fees. The Company expects the new standard, the transition adjustment ascash portion of February 1, 2018 to retained earnings is estimatedthis charge to be between approximately $23 million and $30$65 million. This estimate may change as the Company continues the evaluation of the new guidance.
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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, 20182021 is referred to as “fiscal 2018”.2021.” Vilebrequin, KLH, KLNA 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, KLNA 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, in this Form 10-Qwith respect to our results for the nine-monththree-month period ended October 31, 2017,April 30, 2020, the results of Vilebrequin, KLH, KLNA and KLNAFabco are included for the nine-monththree-month period ended September 30, 2017.March 31, 2020. We account for our investment in each of KLH, KLNA and KLNAFabco using the equity method of accounting. The Company’s retail stores report results onoperations segment uses a 52/53-week fiscal year. The Company’s three-month period ended April 30, 2020 and 2019 were both a 13-week fiscal quarter for the retail operations segment. For fiscal 2021 and 2020, the retail operations segment three-month periods ended on May 2, 2020 and May 4, 2019 respectively.
The operating results of DKI have been included in our financial statements since December 1, 2016, the date of acquisition.
Various statements contained in this Form 10-Q, in future filings by us with the SEC, in our press releases and in oral statements made from time to time by us or on our behalf constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as “anticipate,” “estimate,” “expect,” “will,” “project,” “we believe,” “is or remains optimistic,” “currently envisions,” “forecasts,” “goal” and similar words or phrases and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from the future results, performance or achievements expressed in or implied by such forward-looking statements. Forward-looking statements also include representations of our expectations or beliefs concerning future events that involve risks and uncertainties, including, but not limited to:to, the following:
● | the outbreak of COVID-19 and its numerous adverse effects, including the closing of stores and shopping malls, the reduction of consumer purchases of the types of products we sell, the impact on our supply chain, restrictions on travel and group gatherings and the general material adverse effect on the economy in the U.S. and around the world, all of which negatively impact our business, sales and results of operations; |
● | 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; |
● | risks related to the proposal to implement a national security law in Hong Kong; |
● | 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 operations segment; |
● | our ability to achieve operating enhancements and cost reductions from the restructuring of our retail operations, as well as the impact on our business and financial statements resulting from any related costs and charges which may be dilutive to our earnings; |
● | the impact on our business and financial statements related to the early closure of stores or the termination of long-term 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, the bankruptcy of a number of prominent retailers and the impact of online apparel purchases and innovations by e-commerce retailers; |
● | consolidation of our retail customers; |
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● | the impact on our business of the imposition of tariffs by the United States government and the escalation of trade tensions between countries; |
● | additional legislation and/or regulation in the United States or around the world; |
● | our ability to import products
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-K for the year ended January 31, Recent Developments Restructuring of Our Retail Operations Segment On June 5, 2020, we announced a restructuring of our retail operations segment, including the closing of all Wilsons Leather and G.H. Bass stores. Additionally, we will close all Calvin Klein Performance stores. We have hired Hilco Global to assist in the liquidation of these stores, which will begin immediately or as stores reopen. After completion of the restructuring, our retail operations segment will consist of 41 DKNY stores and 13 Karl Lagerfeld Paris stores, as well as the e-commerce sites for DKNY, Donna Karan, Karl Lagerfeld Paris, Andrew Marc, Wilsons Leather and G.H. Bass. Part of our restructuring plan includes making significant changes to our DKNY and Karl Lagerfeld store operations. In addition to the stores operated as part of our retail operations segment, as of April 30, 2020, Vilebrequin products were distributed through 104 company-operated stores, as well as through 63 franchised locations and e-commerce stores in Europe and the United States. In connection with the restructuring of our retail operations, we expect to incur an aggregate charge of approximately $100 million related to landlord termination fees, severance costs, store liquidation and closing costs, write-offs related to right-of-use assets and legal and professional fees. A significant portion of these charges will be incurred during our second fiscal quarter ending July 31, 2020. We expect the cash portion of this charge to be approximately $65 million. We believe that this restructuring plan will enable us to greatly reduce our retail losses and to ultimately have this segment become profitable. Impact of COVID-19 Pandemic Outbreaks of COVID-19 were detected beginning in December 2019 and, in March 2020, the World Health Organization declared COVID-19 a pandemic. The President of the United States has declared a national emergency as a result of the COVID-19 pandemic. Federal, state and local governments and private entities mandated various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories, and quarantining of people who may have been exposed to the virus. The response to the COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains, and created significant disruption of the financial and retail markets, including a disruption in consumer demand for apparel and accessories. 20 The COVID-19 pandemic has had multiple impacts on our business, including, but not limited to, the temporary closure of our customers’ stores and closures of our own stores in North America, a mandate to require our employees who work in our headquarters to work remotely and temporary disruption of our global supply chain. The COVID-19 pandemic has impacted our business operations and results of operations for the first quarter of fiscal 2021 resulting in lower sales, lower liquidity and higher leverage. COVID-19 could continue to have an adverse impact on our results of operations and liquidity, the operations of our suppliers, vendors and customers, and on our employees as a result of quarantines, facility closures, and travel and logistics restrictions. Even as businesses slowly begin to reopen as governmental restrictions are loosened with respect to stay at home orders and previously closed businesses, the ultimate economic impact of the COVID-19 pandemic is highly uncertain. We expect that our business operations and results of operations, including our net sales, earnings and cash flows, will be materially adversely impacted for at least the balance of fiscal 2021. During this crisis we are focused on protecting the health and safety of our employees, our customers, and our communities. We have taken precautionary measures intended to help minimize the risk of COVID-19 to our employees, including temporarily requiring employees to work remotely and temporarily closing all of our retail stores. Requiring our employees to work remotely may disrupt our operations or increase the risk of a cybersecurity incident. Most of our retail partners have closed their stores in North America, including our largest customer, Macy’s. Some of our customers, such as Costco and Sam’s Club, remain open for business. Our retail partners that have closed stores have asked to extend their payment terms with us. We continue to negotiate resolutions with our retail partners that are equitable and fiscally responsible for each of us. Certain of our retail partners have publicized actual or potential bankruptcy filings or other liquidity issues that could impact our anticipated income and cash flows, as well as require us to record additional accounts receivable reserves. In addition, we could be required to record increased excess and obsolete inventory reserves due to decreased sales or noncash impairment charges related to our intangible assets or goodwill due to reduced market values and cash flows. There is significant uncertainty around the breadth and duration of store closures and other business disruptions related to the COVID-19 pandemic, as well as its impact on the U.S. and global economies and on consumer willingness to visit stores once they re-open. Recently, consumer businesses have begun to re-open in many areas of the United States under governmental social distancing and other restrictions that are expected to limit the scope of operations compared to pre-COVID-19 business operations for an unknown period of time. These restrictions are expected to adversely impact sales even as retail stores continue to reopen. The extent to which COVID-19 impacts our results will depend on continued developments in the public and private responses to the pandemic. The continued impact of COVID-19 remains highly uncertain and cannot be predicted. New information may emerge concerning the severity of the outbreak and the actions taken to contain COVID-19 or treat its impact may change or become more restrictive if a second wave of infections occurs as a result of the loosening of governmental restrictions. In response to these challenges, we have taken measures to contain costs that include, but are not limited to, employee furloughs, temporary salary reductions, reduced advertising and other promotional spending and deferral of capital projects. We are also reviewing our inventory needs and working with suppliers to curtail, or cancel, production of product which we believe will not be able to be sold in season. We have also been working with our suppliers, landlords and licensors to renegotiate related agreements and extend payment terms in order to preserve capital. Due to the impact of the COVID-19 pandemic on our operations, we performed a quantitative test of our goodwill as of April 30, 2020 using an income approach through a discounted cash flow analysis methodology. The discounted cash flow approach requires that certain assumptions and estimates be made regarding industry economic factors and future profitability. We also performed quantitative tests of each of our indefinite-lived intangible assets using a relief from royalty method, another form of the income approach. The relief from royalty method requires assumptions regarding industry economic factors and future profitability. While no impairment was identified as of April 30, 2020 as a result of these tests, $370.0 million of our indefinite-lived trademarks could be deemed to have a risk of future impairment as there is limited excess fair value over the carrying value of the assets at April 30, 2020. The continued impact of the COVID-19 pandemic could give rise to global and regional macroeconomic factors that could impact our assumptions relating to net sales growth rates, discount rates, tax rates or royalty rates and may result in future impairment charges for indefinite-lived intangible assets. 21 We believe that we have sufficient cash and available capacity under our revolving credit facility to meet our liquidity needs. As of April 30, 2020, we had cash of approximately $616.2 million. Our cash balance included draw downs in March 2020 of $500 million under our revolving credit facility taken as a precautionary measure to provide us with additional financial flexibility to manage our business. In May and June 2020, we repaid an aggregate of $500 million of our borrowings under our revolving credit facility as the financial markets stabilized. Overview G-III designs, Our own proprietary brands York. We sell products under an extensive portfolio of well-known licensed brands, including Calvin Klein, Tommy Hilfiger, Karl Lagerfeld Paris, We believe that the international sales and profit opportunity is quite significant for our DKNY and Donna Karan businesses. We are also expanding our DKNY business globally through our distribution partners in key regions. The key markets in which our DKNY merchandise is currently distributed include the Middle East, Russia, Indonesia, the Philippines, South East Asia and Korea, as well as in China where we operate through a joint venture. Continued growth, brand development and marketing in these key markets is critical to driving global brand recognition. 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
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Trends Industry Trends Significant trends that affect the apparel industry include retail chains closing unprofitable stores, an increased focus by retail chains and others on expanding
We sell our products over the web through retail partners such as macys.com and nordstrom.com, each of which has a substantial online business. As e-commerce sales of apparel continue to increase, we are A number of retailers are experiencing financial difficulties, which in some cases
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
On August 1, 2019, the 23 China. In January 2020, the It is difficult to accurately estimate the Notwithstanding the Phase One Deal, the United States government continues to negotiate with China with respect to a trade deal, which could lead to the removal or postponement of 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. Tariffs 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 and will negatively impact our operating results. We have engaged in a number of efforts to mitigate the effect on our results of Results of Operations Three months ended Net sales for the three months ended Net sales of our wholesale operations segment
Net sales of our retail operations segment Gross profit 24 Selling, general and administrative expenses Depreciation and amortization Other loss was $2.1 million in the Interest and financing charges, net, for the three months ended Income tax Historically, we calculated our provision for
Liquidity and Capital Resources Cash Requirements and Trends and Uncertainties Affecting Liquidity We rely on our cash flows generated from operations and the borrowing capacity under our revolving credit facility to meet the cash requirements of our business. The primary cash requirements of our business are the seasonal buildup in inventories, compensation paid to employees, payments to vendors in the normal course of business, capital expenditures, maturities of debt and related interest payments and income tax payments. The rapid expansion of the COVID-19 pandemic resulted in a sharp decline in net sales and earnings in the first quarter of fiscal 2021, which has a corresponding impact on our liquidity. We are focused on preserving our liquidity and managing our cash flow during these unprecedented conditions. We have taken preemptive actions to enhance our ability to meet our short-term liquidity needs including, but not limited to, reducing payroll costs through employee furloughs and salary reductions, deferring certain lease payments, deferral of capital projects and drawing down on our revolving credit facility. In addition, we are closely monitoring our inventory needs and we are working with our suppliers to curtail, or cancel, production of product that we believe will not be able to be sold in season. We have also been working with our suppliers, landlords and licensors to renegotiate related agreements and extend payment terms in order to preserve capital. 25 In March 2020, in response to the uncertainty surrounding the COVID-19 pandemic, we borrowed an aggregate of $500 million under our revolving credit facility as a precautionary measure to provide us with additional financial flexibility to manage our business during the unknown duration and impact of the COVID-19 pandemic. In May and June 2020, we repaid an aggregate of $500 million of our borrowings under the revolving credit facility. As of April 30, 2020, we were in compliance with all covenants under our term loan and revolving credit facility. We cannot be sure that our assumptions used to estimate our liquidity requirements will remain accurate due to the unprecedented nature of the disruption to our operations and the unpredictability of the COVID-19 outbreak. As a result, the impact of COVID-19 on our future earnings and cash flows could continue to have a material impact on our results of operations and financial condition depending on the duration of the COVID-19 pandemic. We believe we have sufficient cash and available borrowings for our foreseeable liquidity needs. Revolving Credit Facility We are party to a five-year senior secured 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. 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% and (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 Borrowers’ availability under the revolving credit facility . As of April 30, 2020, interest under the revolving credit facility was being paid at the weighted average rate of 2.13% 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 with respect to the unutilized commitments. The commitment fee shall accrue at a rate equal to 0.25% per annum on the average daily amount of the available commitment. The revolving credit facility contains 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 fixed charge coverage ratio, as defined in the agreement, which may not be less than 1.00 to 1.00 for each period of twelve consecutive fiscal months. As of April 30, 2020, we were in compliance with these covenants. As of April 30, 2020, we had $500 million of borrowings outstanding under the revolving credit facility that had been borrowed in March 2020 as a precautionary measure in response to the uncertainty of the circumstances surrounding the COVID-19 pandemic outbreak. In May and June 2020, we repaid an aggregate of $500 million of our borrowings under the revolving credit facility. Term Loan
The Term 26 Interest on the outstanding principal amount of the Term The Term The Term The Term Loan
LVMH Note
Based on an independent valuation, it was determined that the LVMH Note should be treated as having been issued at a discount of $40 million in accordance with ASC 820 — Fair Value Measurements. This discount is being amortized as interest expense using the effective interest method over the term of the LVMH Note. In connection with the issuance of the LVMH Note, LVMH entered into (i) a subordination agreement
On April 15, 2019, T.R.B. International SA (“TRB”), a 27 On February 3, 2020, TRB borrowed €1.7 million under another unsecured loan (the “2020 Unsecured Loan”). During the term of the 2020 Unsecured Loan, TRB is required to make quarterly installment payments of €0.1 million. Interest on the outstanding principal amount of the 2020 Unsecured Loan accrues at a fixed rate equal to 1.50% per annum, payable quarterly. The 2020 Unsecured Loan originally matured on March 31, 2025. Due to the COVID-19 pandemic, the bank agreed to amend the 2020 Unsecured Loan to suspend the June 2020 quarterly installment payment and add this payment to the balance due at the end of the loan term. The 2020 Unsecured Loan now matures on June 30, 2025. 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 We incurred significant additional debt in connection with our acquisition of DKI.
Share Repurchase Program Our Board of Directors has authorized a share repurchase program of 5,000,000 shares. The timing and actual number of shares repurchased, if any, will depend on a number of factors, including market conditions and prevailing stock prices, and are subject to compliance with certain covenants contained in our loan agreement. Share repurchases may take place on the open market, in privately negotiated transactions or by other means, and would be made in accordance with applicable securities laws. No shares were Cash from Operating Activities We used The changes in 28 Cash from Investing Activities We used
Cash from Financing Activities
Critical Accounting Policies Our discussion of results of operations and financial condition relies on our consolidated financial statements that are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. We believe that investors need to be aware of these policies and how they impact our financial statements as a whole, as well as our related discussion and analysis presented herein. While we believe that these accounting policies are based on sound measurement criteria, actual future events can, and often do, result in outcomes that can be materially different from these estimates or forecasts. The accounting policies and related estimates described in our Annual Report on Form 10-K for the year ended January 31, 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-K for the year ended January 31,
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) 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. Changes in Internal Control over Financial Reporting 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. 29 PART II – OTHER INFORMATION Item 1A. Risk Factors. 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-K for the The global health crisis caused by the COVID-19 pandemic has had, and the current and uncertain future outlook of the outbreak will likely continue to have, a significant adverse effect on our business, financial condition and results of operations. Outbreaks of COVID-19 were detected beginning in December 2019 and, in March 2020, the World Health Organization declared COVID-19 a pandemic. The President of the United States has declared a national emergency as a result of the COVID-19 pandemic. Federal, state and local governments and private entities mandated various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories, and quarantining of people who may have been exposed to the virus. The response to the COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains and created significant disruption of the financial and retail markets, including a disruption in consumer demand for apparel and accessories. The COVID-19 pandemic has had, and will likely continue to have, a significant adverse effect on our business, financial condition, and results of operations. The effects of COVID-19 could affect our ability to successfully operate in many ways, including, but not limited to, the following factors: 30
As stated, COVID-19 has had and is continuing to have a material adverse impact on our business, operating results and financial condition. The COVID-19 outbreak has impacted our worldwide sourcing operations in China and elsewhere. There is hardly anywhere in the world that is not being impacted by the effects of COVID-19. Travel within and between many countries has been restricted. The length of these travel restrictions is not certain at this time. Travel restrictions may impact our suppliers’ ability to obtain necessary materials and inhibit travel by our employees and our suppliers’ employees. As a result of any travel restrictions, potential factory closures, inability to obtain materials, disruptions in the supply chain and potential disruption of transportation of goods produced for us in China and other countries adversely impacted by the coronavirus outbreak, or threat or perceived threat of such outbreak, we may be unable to obtain adequate inventory from these regions, which could adversely affect our business, results of operations and financial condition. Potential financial impacts associated with the outbreak include, but are not limited to, lower net sales in markets affected by the outbreak, the delay of inventory production and fulfillment, potentially impacting net sales, and potential incremental costs associated with mitigating the effects of the outbreak. As our suppliers open their factories for production, we will need to balance the production orders given to these factories against the demand for our products in the United States. Restrictions on travel and group gatherings, the closing of restaurants, sports leagues and all forms of communal entertainment and the fear of contracting COVID-19 has materially adversely affected store traffic and retail sales. Many retail store chains and shopping malls closed their store operations beginning in March 2020 and have only recently begun to reopen on a limited basis. The restrictions imposed as a result of the COVID-19 outbreak and the closing of retail stores in connection with the outbreak are causing a significant adverse effect on the economy in the United States and around the world. If the retail economy continues to weaken and/or consumers continue to reduce purchases in the near or long-term as a result of the negative effects of on the U.S. and worldwide economies caused by COVID-19, retailers may need to further reduce or limit store operations, close additional stores and be more cautious with orders. A slowing or changing economy as a result of the coronavirus outbreak and the governmental restrictions imposed in the United States and around the world as a result thereof would adversely affect the financial health of our retail, distributor and joint venture partners, which in turn could have an adverse effect on our business, results of operations and financial condition. If economic conditions caused by the COVID-19 outbreak worsen and our earnings and operating cash flows do not begin to recover, this could impact our ability to maintain compliance with our debt covenants and could require us to seek modifications to our term loan and revolving credit facility. In the unlikely event we are not able to obtain such modifications on acceptable terms, this would lead to an event of default and, if not cured timely, our lenders could require us to repay our outstanding debt. In that situation, we may not be able to raise sufficient debt or equity capital, or divest assets, to refinance or repay lenders. The COVID-19 pandemic is ongoing, and its dynamic nature, including uncertainties relating to the geographic spread of the virus, the severity of the disease, the duration of the outbreak, and the restrictive actions that are being taken by governmental authorities in the United States and around the world to contain the outbreak or to treat its impact makes it difficult to forecast its effects on our fiscal 2021 results. Our results of operations for the first quarter of fiscal 2021 reflected some of the impacts of the COVID-19 pandemic and we expect that the results for our second quarter of fiscal 2021, and potentially for the balance of fiscal 2021, will likely reflect further impacts. It is difficult, if not impossible, at this time to predict the magnitude of the effect of the COVID-19 outbreak on our business and results of operations. However, we expect our results for fiscal 2021 to be materially adversely affected compared to fiscal 2020 as a result of the impact of COVID-19. 31 There are risks associated with the restructuring of our retail operations segment. In June 2020, we announced a restructuring of our retail operations segment, including the closing of all Wilsons Leather, and G.H. Bass stores. Additionally, we will close all Calvin Klein Performance stores. We have hired Hilco Global to assist in the liquidation of these stores, which will begin immediately or as stores reopen. After completion of the restructuring, our retail operations segment will initially consist of 41 DKNY stores and 13 Karl Lagerfeld Paris stores, as well as the e-commerce sites for DKNY, Donna Karan, Karl Lagerfeld Paris, Andrew Marc, Wilsons Leather and G.H. Bass. Part of our restructuring plan includes making significant changes to our DKNY and Karl Lagerfeld store operations. In connection with this restructuring of our retail operations segment, we anticipate incurring an aggregate charge of approximately $100 million relating primarily to landlord termination fees, severance costs, store liquidation and closing costs, write-offs relating to right-of-use assets and professional fees. A significant portion of these charges will be incurred during our second fiscal quarter ending July 31, 2020. We expect the cash portion of this charge to be approximately $65 million. We may incur additional costs during fiscal 2021 until the restructuring is completed which may include, among other costs, additional severance, lease termination, inventory liquidation or non-cash asset impairment costs. Additional costs and impairment charges could materially exceed our estimates. In connection with the restructuring of our retail business, we negotiated the termination of leases for a majority of our retail stores in return for certain cash payments made to lessors. There can be no assurance that we would be able to negotiate termination of any other leases if we should desire to do so. As indicated, part of our restructuring plan includes the liquidation of our retail inventory. The ability to liquidate our retail inventory is currently severely limited by COVID-19 restrictions on retail businesses. Even as these restrictions continue to be loosened, our ability to liquidate retail inventory will still be adversely affected by the reduction in the disposable income of consumers, the reduced desire and ability of consumers to spend on apparel and accessories and the general turbulent environment caused by the COVID-19 pandemic and its aftereffects. In addition, we will face significant competition in the marketplace as retailers are opening their stores and are expected to reduce prices significantly in order to sell their excess inventory resulting from store closures and other COVID-19 related restrictions that were put in place in mid-March and have only recently begun to be modified. All of these factors may result in the reduction in the net proceeds we receive from the liquidation of our inventory and in the increase in the time period we need to close our stores, both of which would have an adverse effect on our financial condition and results of operation. We may not be able to complete the restructuring of our retail operations segment, including the closing of the substantial majority of the stores we currently operate,in the timeframe, on the terms or in the manner we expect. Any of the foregoing could also result in the cost of the restructuring exceeding our estimates. If the actual restructuring costs or impairment charges exceed our estimates, this could adversely impact our business, operating results, financial position and cash flows. In addition, the announced restructuring involves numerous risks including, but not limited to:
If any of these or other factors impair our ability to successfully implement the restructuring, we may not be able to realize other business opportunities as we may be required to spend additional time and incur additional expenses relating to the restructuring that otherwise would be used on the development and expansion of our other businesses, which could adversely impact our business, operating results, financial position and cash flows. 32 The recently approved proposal to implement a national security law in Hong Kong may result in disruptions to our business operations in Hong Kong and additional tariffs and trade restrictions. On May 28, 2020, China’s legislature approved a proposal to implement a national security law that would change the way Hong Kong has been governed since the territory was handed over by England to China in 1997. This proposal would increase the power of the central government in Beijing over Hong Kong, limit the civil liberties of residents of Hong Kong and could restrict their ability to conduct business in the same way as in the past on a go forward basis. A legislative committee will draft the law, a process that is expected to take a couple of months. The U.S. State Department has announced the U.S. would no longer consider Hong Kong to have significant autonomy from China which could end some or all of the U.S. government’s special trade and economic relations with Hong Kong. This may result in disruption to our offices and employees located in Hong Kong, as well as the shipment of our products from Hong Kong to the United States. Further, the U.S. may impose the same tariffs and other trade restrictions on exports from Hong Kong that it places on goods from mainland China. The potential disruption to our business operations in Hong Kong and additional tariffs and trade restrictions could have an adverse impact on our results of operations. 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 April 30, 2020. Included in this table are shares withheld during March and April 2020 in connection with the settlement of vested restricted stock units to satisfy tax withholding requirements.
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34 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.
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