UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2014
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-18183
G-III APPAREL GROUP, LTD.
(Exact name of registrant as specified in its charter)
| Delaware | 41-1590959 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 512 Seventh Avenue, New York, New York | 10018 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(212) 403-0500
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | x | Accelerated filer | ¨ |
| Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of December 1, 2014, there were 22,471,697 shares of issuer’s common stock, par value $0.01 per share, outstanding.
| 2 |
PART I – FINANCIAL INFORMATION
| Item1. | Financial Statements. |
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| October 31, 2014 | October 31, 2013 | January 31, 2014 | ||||||||||
| (Unaudited) | (Unaudited) | |||||||||||
| (In thousands, except share and per share amounts) | ||||||||||||
| ASSETS | ||||||||||||
| CURRENT ASSETS | ||||||||||||
| Cash and cash equivalents | $ | 49,158 | $ | 29,811 | $ | 22,091 | ||||||
| Accounts receivable, net of allowances for doubtful accounts and sales discounts of $60,685, $60,503 and $54,987, respectively | 453,571 | 397,546 | 160,010 | |||||||||
| Inventories | 436,367 | 323,334 | 359,639 | |||||||||
| Prepaid income taxes | — | — | 6,807 | |||||||||
| Deferred income taxes, net | 16,335 | 10,318 | 16,331 | |||||||||
| Prepaid expenses and other current assets | 17,833 | 16,811 | 21,312 | |||||||||
| Total current assets | 973,264 | 777,820 | 586,190 | |||||||||
| PROPERTY AND EQUIPMENT, NET | 79,583 | 49,639 | 62,832 | |||||||||
| OTHER ASSETS | 28,969 | 30,320 | 31,259 | |||||||||
| OTHER INTANGIBLES, NET | 13,497 | 14,065 | 13,926 | |||||||||
| TRADEMARKS, NET | 75,815 | 77,499 | 81,086 | |||||||||
| GOODWILL | 53,273 | 55,257 | 55,604 | |||||||||
| TOTAL ASSETS | $ | 1,224,401 | $ | 1,004,600 | $ | 830,897 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| CURRENT LIABILITIES | ||||||||||||
| Notes payable | $ | 153,853 | $ | 215,782 | $ | 48,843 | ||||||
| Income taxes payable | 24,117 | 30,905 | — | |||||||||
| Accounts payable | 165,162 | 113,914 | 131,241 | |||||||||
| Accrued expenses | 89,877 | 69,432 | 56,468 | |||||||||
| Due to noncontrolling shareholder | — | 4,180 | 4,674 | |||||||||
| Total current liabilities | 433,009 | 434,213 | 241,226 | |||||||||
| NOTES PAYABLE | — | 20,287 | 20,560 | |||||||||
| DEFERRED INCOME TAXES, NET | 20,585 | 20,026 | 22,100 | |||||||||
| CONTINGENT PURCHASE PRICE PAYABLE | 1,015 | 5,936 | 5,550 | |||||||||
| OTHER NON-CURRENT LIABILITIES | 21,548 | 18,298 | 19,465 | |||||||||
| TOTAL LIABILITIES | 476,157 | 498,760 | 308,901 | |||||||||
| STOCKHOLDERS’ EQUITY | ||||||||||||
| Preferred stock; 1,000,000 shares authorized; No shares issued and outstanding | ||||||||||||
| Common stock - $.01 par value; 80,000,000 shares authorized; 22,963,922, 20,892,046 and 20,935,804 shares issued | 229 | 209 | 209 | |||||||||
| Additional paid-in capital | 329,944 | 182,602 | 184,841 | |||||||||
| Accumulated other comprehensive income (loss) | (1,969 | ) | 4,769 | 6,165 | ||||||||
| Retained earnings | 423,939 | 322,895 | 335,797 | |||||||||
| Common stock held in treasury, at cost – 492,225 shares | (3,899 | ) | (3,899 | ) | (3,899 | ) | ||||||
| Total G-III stockholders’ equity | 748,244 | 506,576 | 523,113 | |||||||||
| Noncontrolling interest | — | (736 | ) | (1,117 | ) | |||||||
| TOTAL STOCKHOLDERS’ EQUITY | 748,244 | 505,840 | 521,996 | |||||||||
| TOTAL LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY | $ | 1,224,401 | $ | 1,004,600 | $ | 830,897 | ||||||
The accompanying notes are an integral part of these statements.
| 3 |
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
| Three Months Ended October 31, | ||||||||
| 2014 | 2013 | |||||||
| (Unaudited) | ||||||||
| (In thousands, except per share amounts) | ||||||||
| Net sales | $ | 812,330 | $ | 668,702 | ||||
| Cost of goods sold | 517,078 | 441,757 | ||||||
| Gross profit | 295,252 | 226,945 | ||||||
| Selling, general and administrative expenses | 176,383 | 125,457 | ||||||
| Depreciation and amortization | 5,589 | 3,158 | ||||||
| Operating profit | 113,280 | 98,330 | ||||||
| Other income | 11,950 | — | ||||||
| Interest and financing charges, net | (1,988 | ) | (2,592 | ) | ||||
| Income before income taxes | 123,242 | 95,738 | ||||||
| Income tax expense | 43,469 | 36,381 | ||||||
| Net income | 79,773 | 59,357 | ||||||
| Add: Loss attributable to noncontrolling interest | 842 | 238 | ||||||
| Income attributable to G-III | $ | 80,615 | $ | 59,595 | ||||
| NET INCOME PER COMMON SHARE: | ||||||||
| Basic: | ||||||||
| Net income per common share | $ | 3.60 | $ | 2.92 | ||||
| Weighted average number of shares outstanding | 22,411 | 20,399 | ||||||
| Diluted: | ||||||||
| Net income per common share | $ | 3.53 | $ | 2.85 | ||||
| Weighted average number of shares outstanding | 22,862 | 20,911 | ||||||
| Net income attributable to G-III | $ | 80,615 | $ | 59,595 | ||||
| Other comprehensive income (loss): | ||||||||
| Foreign currency translation adjustments | (7,805 | ) | 3,761 | |||||
| Other comprehensive income (loss) | (7,805 | ) | 3,761 | |||||
| Comprehensive income | $ | 72,810 | $ | 63,356 | ||||
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 INCOME
| Nine Months Ended October 31, | ||||||||
| 2014 | 2013 | |||||||
| (Unaudited) | ||||||||
| (In thousands, except per share amounts) | ||||||||
| Net sales | $ | 1,602,532 | $ | 1,245,476 | ||||
| Cost of goods sold | 1,028,762 | 826,654 | ||||||
| Gross profit | 573,770 | 418,822 | ||||||
| Selling, general and administrative expenses | 430,433 | 300,329 | ||||||
| Depreciation and amortization | 14,770 | 9,523 | ||||||
| Operating profit | 128,567 | 108,970 | ||||||
| Other income | 11,950 | — | ||||||
| Interest and financing charges, net | (5,988 | ) | (6,183 | ) | ||||
| Income before income taxes | 134,529 | 102,787 | ||||||
| Income tax expense | 47,758 | 39,059 | ||||||
| Net income | 86,771 | 63,728 | ||||||
| Add: Loss attributable to noncontrolling interest | 1,370 | 577 | ||||||
| Income attributable to G-III | $ | 88,141 | $ | 64,305 | ||||
| NET INCOME PER COMMON SHARE: | ||||||||
| Basic: | ||||||||
| Net income per common share | $ | 4.12 | $ | 3.17 | ||||
| Weighted average number of shares outstanding | 21,370 | 20,290 | ||||||
| Diluted: | ||||||||
| Net income per common share | $ | 4.04 | $ | 3.09 | ||||
| Weighted average number of shares outstanding | 21,841 | 20,818 | ||||||
| Net income attributable to G-III | $ | 88,141 | $ | 64,305 | ||||
| Other comprehensive income (loss): | ||||||||
| Foreign currency translation adjustments | (8,134 | ) | 1,246 | |||||
| Other comprehensive income (loss) | (8,134 | ) | 1,246 | |||||
| Comprehensive income | $ | 80,007 | $ | 65,551 | ||||
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, | ||||||||
| 2014 | 2013 | |||||||
| (Unaudited) | ||||||||
| (In thousands) | ||||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 86,771 | $ | 63,728 | ||||
| Adjustments to reconcile net income to net cash used in operating activities, net of assets and liabilities disposed: | ||||||||
| Depreciation and amortization | 14,770 | 9,523 | ||||||
| Loss on disposal of a retail store | 275 | — | ||||||
| Gain on repurchase of unsecured promissory notes | (1,893 | ) | — | |||||
| Change in contingent purchase price payable | (4,186 | ) | — | |||||
| Gain on the sale of joint venture interest | (2,365 | ) | — | |||||
| Equity based compensation | 8,431 | 6,826 | ||||||
| Tax benefit from exercise/vesting of equity awards | 11,657 | 4,639 | ||||||
| Deferred financing charges | 657 | 565 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | (294,502 | ) | (219,198 | ) | ||||
| Inventories | (79,654 | ) | (42,238 | ) | ||||
| Income taxes, net | 30,889 | 18,727 | ||||||
| Prepaid expenses and other current assets | 2,849 | 3,031 | ||||||
| Other assets, net | (5,265 | ) | (10,628 | ) | ||||
| Accounts payable, accrued expenses and other liabilities | 69,090 | 28,849 | ||||||
| Net cash used in operating activities | (162,476 | ) | (136,176 | ) | ||||
| Cash flows from investing activities | ||||||||
| Capital expenditures | (33,892 | ) | (15,714 | ) | ||||
| Proceeds from sale of interest in joint venture | 2,695 | — | ||||||
| Proceeds from sale of a retail store | 517 | — | ||||||
| Net cash used in investing activities | (30,680 | ) | (15,714 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from sale of common stock, net | 128,686 | — | ||||||
| Proceeds from notes payable, net | 105,814 | 150,781 | ||||||
| Repurchase of unsecured promissory notes | (17,755 | ) | — | |||||
| Proceeds from exercise of equity awards | 665 | 1,016 | ||||||
| Excess tax benefit from exercise/vesting of equity awards | 6,978 | 2,526 | ||||||
| Taxes paid for net share settlement | (4,316 | ) | (1,005 | ) | ||||
| Noncontrolling interest investment | — | 1,905 | ||||||
| Net cash provided by financing activities | 220,072 | 155,223 | ||||||
| Foreign currency translation adjustments | 151 | (882 | ) | |||||
| Net increase in cash and cash equivalents | 27,067 | 2,451 | ||||||
| Cash and cash equivalents at beginning of period | 22,091 | 27,360 | ||||||
| Cash and cash equivalents at end of period | $ | 49,158 | $ | 29,811 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | 5,314 | $ | 6,120 | ||||
| Income taxes | 5,146 | 15,445 | ||||||
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, manufactures and markets an extensive range of apparel, including outerwear, dresses, sportswear, swimwear, women’s suits and women’s performance wear, as well as footwear, luggage and women’s handbags, small leather goods and cold weather accessories. The Company also operates retail stores.
The Company consolidates the accounts of all its wholly-owned and majority-owned subsidiaries. All material intercompany balances and transactions have been eliminated. Vilebrequin International SA (“Vilebrequin”), a Swiss corporation, reports results on a calendar year basis rather than on the January 31 fiscal year basis used by the Company.
The results for the three month and nine month periods ended October 31, 2014 are not necessarily indicative of the results expected for the entire fiscal year, given the seasonal nature of the Company’s business. The accompanying financial statements included herein are unaudited. In the opinion of management, 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, 2014 filed with the Securities and Exchange Commission.
Certain reclassifications have been made to the Condensed Consolidated Balance Sheet and the Condensed Consolidated Statements of Operations and Comprehensive Income for the prior year period to present that information on a basis consistent with the current year.
In the ordinary course of our business, the Company is subject to periodic lawsuits, investigations and claims. Although the Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, there is currently no pending legal proceeding or proceedings that will have a material adverse effect on our business, financial condition or results of operations.
Note 2 – Public Offering
In June 2014, the Company sold 1,725,000 shares of its common stock, including 225,000 shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares, at a public offering price of $77.63 per share. The Company received net proceeds of $128.7 million from the offering after payment of underwriting discounts and expenses of the offering. The net proceeds are being used for general corporate purposes.
| 7 |
Note 3 – Inventories
Wholesale inventories are stated at the lower of cost (determined by the first-in, first out method) or market which comprises a significant portion of the Company’s inventory. Retail inventories are valued at the lower of cost or market as determined by the retail inventory method. Vilebrequin inventories are stated at the lower of cost (determined by the weighted average method) or market. Inventories consist of:
| October
31, 2014 | October
31, 2013 | January
31, 2014 | ||||||||||
| (In thousands) | ||||||||||||
| Finished goods | $ | 429,531 | $ | 314,780 | $ | 350,627 | ||||||
| Raw materials and work-in-process | 6,836 | 8,554 | 9,012 | |||||||||
| $ | 436,367 | $ | 323,334 | $ | 359,639 | |||||||
Note 4 – Net Income per Common Share
Basic net income per common share has been computed using the weighted average number of common shares outstanding during each period. Diluted net income per share is computed using the weighted average number of common shares and potential dilutive common shares, consisting of unvested restricted stock awards and stock options outstanding, during the period. In addition, all share based payments outstanding that vest based on the achievement of performance and/or market price conditions, and for which the respective performance and/or market price conditions have not been achieved, have been excluded from the diluted per share calculation. Approximately 342,000 shares of common stock have been excluded from the diluted net income per share calculation for the nine months ended October 31, 2014. For the nine months ended October 31, 2014 and 2013, 303,118 and 275,089 shares of common stock, respectively, were issued in connection with the exercise or vesting of equity awards.
The reconciliation between basic and diluted net income per share is as follows:
| Three
Months Ended October 31, | Nine
Months Ended October 31, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
| Net income attributable to G-III | $ | 80,615 | $ | 59,595 | $ | 88,141 | $ | 64,305 | ||||||||
| Basic net income per share: | ||||||||||||||||
| Basic common shares | 22,411 | 20,399 | 21,370 | 20,290 | ||||||||||||
| Basic net income per share | $ | 3.60 | $ | 2.92 | $ | 4.12 | $ | 3.17 | ||||||||
| Diluted net income per share: | ||||||||||||||||
| Basic common shares | 22,411 | 20,399 | 21,370 | 20,290 | ||||||||||||
| Restricted stock awards and stock options | 451 | 512 | 471 | 528 | ||||||||||||
| Diluted common shares | 22,862 | 20,911 | 21,841 | 20,818 | ||||||||||||
| Diluted net income per share | $ | 3.53 | $ | 2.85 | $ | 4.04 | $ | 3.09 | ||||||||
| 8 |
Note 5 – Notes Payable
The Company’s credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent for a group of lenders, is a five year senior secured credit facility through August 2017 providing for borrowings in the aggregate principal amount of up to $450 million. Amounts available under the credit agreement are subject to borrowing base formulas and over advances as specified in the credit agreement. As of October 31, 2014, there was $285.9 million available under the credit agreement.
Borrowings bear interest, at the Company’s option, at LIBOR plus a margin of 1.5% to 2.0% or prime plus a margin of 0.5% to 1.0%, with the applicable margin determined based on availability under the credit agreement. The credit agreement requires the Company to maintain a minimum fixed charge coverage ratio, as defined, and under certain circumstances, permits the Company to make payments for cash dividends, stock redemptions and share repurchases subject to compliance with certain covenants. As of October 31, 2014, the Company was in compliance with these covenants.
The credit agreement is secured by all of the assets of G-III Apparel Group, Ltd. and its subsidiaries, G-III Leather Fashions, Inc., Riviera Sun, Inc., CK Outerwear, LLC, Andrew & Suzanne Company Inc., AM Retail Group, Inc., G-III Apparel Canada ULC, G-III License Company, LLC and AM Apparel Holdings, Inc.
In October 2014, the Company repurchased the unsecured promissory notes issued in August 2012 in connection with the acquisition of Vilebrequin. The notes were repurchased at a discount from the original principal amount of €15.0 million (See Note 7 – Other Income).
Notes payable under the Company’s credit agreement were $153.9 million at October 31, 2014 and $215.8 million at October 31, 2013.
Note 6 – Segments
The Company’s reportable segments are business units that offer products through different channels of distribution. The Company has three reportable segments: licensed products, non-licensed products and retail operations. The G.H. Bass business was added to the retail operations segment upon its acquisition in November 2013. There is substantial intersegment cooperation, cost allocations and sharing of assets between the licensed and non-licensed products segments. As a result, the Company does not represent that these segments, if operated independently, would report the operating results set forth in the table below. The following information, in thousands, is presented for the three month and nine month periods indicated below:
| Three Months Ended October 31, 2014 | ||||||||||||||||||||
| Licensed | Non-Licensed | Retail | Elimination (1) | Total | ||||||||||||||||
| Net sales | $ | 542,094 | $ | 180,041 | $ | 130,101 | $ | (39,906 | ) | $ | 812,330 | |||||||||
| Cost of goods sold | 367,723 | 117,362 | 71,899 | (39,906 | ) | 517,078 | ||||||||||||||
| Gross profit | 174,371 | 62,679 | 58,202 | — | 295,252 | |||||||||||||||
| Selling, general and administrative | 90,054 | 28,937 | 57,392 | — | 176,383 | |||||||||||||||
| Depreciation and amortization | 1,284 | 2,227 | 2,078 | — | 5,589 | |||||||||||||||
| Operating profit (loss) | $ | 83,033 | $ | 31,515 | $ | (1,268 | ) | $ | — | $ | 113,280 | |||||||||
| Three Months Ended October 31, 2013 | ||||||||||||||||||||
| Licensed | Non-Licensed | Retail | Elimination (1) | Total | ||||||||||||||||
| Net sales | $ | 504,910 | $ | 123,995 | $ | 55,395 | $ | (15,598 | ) | $ | 668,702 | |||||||||
| Cost of goods sold | 348,790 | 81,021 | 27,544 | (15,598 | ) | 441,757 | ||||||||||||||
| Gross profit | 156,120 | 42,974 | 27,851 | — | 226,945 | |||||||||||||||
| Selling, general and administrative | 76,995 | 24,516 | 23,946 | — | 125,457 | |||||||||||||||
| Depreciation and amortization | 538 | 1,715 | 905 | — | 3,158 | |||||||||||||||
| Operating profit | $ | 78,587 | $ | 16,743 | $ | 3,000 | $ | — | $ | 98,330 | ||||||||||
| 9 |
| Nine Months Ended October 31, 2014 | ||||||||||||||||||||
| Licensed | Non-Licensed | Retail | Elimination (1) | Total | ||||||||||||||||
| Net sales | $ | 1,012,739 | $ | 336,330 | $ | 324,522 | $ | (71,059 | ) | $ | 1,602,532 | |||||||||
| Cost of goods sold | 708,193 | 214,699 | 176,929 | (71,059 | ) | 1,028,762 | ||||||||||||||
| Gross profit | 304,546 | 121,631 | 147,593 | — | 573,770 | |||||||||||||||
| Selling, general and administrative | 194,582 | 74,329 | 161,522 | — | 430,433 | |||||||||||||||
| Depreciation and amortization | 3,307 | 6,350 | 5,113 | — | 14,770 | |||||||||||||||
| Operating profit (loss) | $ | 106,657 | $ | 40,952 | $ | (19,042 | ) | $ | — | $ | 128,567 | |||||||||
| Nine Months Ended October 31, 2013 | ||||||||||||||||||||
| Licensed | Non-Licensed | Retail | Elimination (1) | Total | ||||||||||||||||
| Net sales | $ | 887,871 | $ | 253,823 | $ | 141,742 | $ | (37,960 | ) | $ | 1,245,476 | |||||||||
| Cost of goods sold | 626,841 | 167,062 | 70,711 | (37,960 | ) | 826,654 | ||||||||||||||
| Gross profit | 261,030 | 86,761 | 71,031 | — | 418,822 | |||||||||||||||
| Selling, general and administrative | 171,748 | 63,679 | 64,902 | — | 300,329 | |||||||||||||||
| Depreciation and amortization | 1,598 | 5,531 | 2,394 | — | 9,523 | |||||||||||||||
| Operating profit | $ | 87,684 | $ | 17,551 | $ | 3,735 | $ | — | $ | 108,970 | ||||||||||
| (1) | Represents intersegment sales to the Company’s retail operations. |
The total assets for each of the Company’s reportable segments are as follows:
| October 31, | ||||||||
| 2014 | 2013 | |||||||
| (In thousands) | ||||||||
| Licensed | $ | 610,570 | $ | 503,838 | ||||
| Non-Licensed | 324,939 | 335,390 | ||||||
| Retail | 198,579 | 101,902 | ||||||
| Corporate | 90,313 | 63,470 | ||||||
| Total Assets | $ | 1,224,401 | $ | 1,004,600 | ||||
| 10 |
Note 7 – Other Income
Sale of rights to operate Calvin Klein Performance stores in Asia
In September 2014, the Company entered into agreements that terminated its rights to operate Calvin Klein Performance Stores in Asia, which included the sale to the licensor, PVH Corp, of the Company’s 51% interest in G-T (International) Fashion Company Limited, a joint venture that operated Calvin Klein Performance stores in China. The sale of the joint venture interest resulted in a $2.4 million gain in the current period. The licensor agreed to pay the Company $3.5 million in consideration of the early termination of previously granted rights to operate Calvin Klein Performance stores in Japan, Taiwan and Singapore. This amount is included in other income in the current period.
Repurchase of unsecured promissory notes
In October 2014, the Company repurchased the €15.0 million principal amount of unsecured promissory notes (“the notes”) issued in August 2012 as part of the consideration for the acquisition of Vilebrequin. The notes were due December 31, 2017 and carried a stated interest rate of 5% per annum. The notes were repurchased for €13.5 million, representing approximately a 10% discount on the outstanding amount of the notes, which resulted in a gain of €1.5 million (approximately $1.9 million using the transaction date exchange rate).
Contingent consideration adjustment
In addition to the aggregate consideration paid at closing, the purchase agreement relating to the acquisition of Vilebrequin provided for contingent consideration of up to €22.5 million (approximately $27.9 million using the acquisition date exchange rate) based upon Vilebrequin achieving certain performance objectives related to the growth of its business over the three years ending December 31, 2015. As of the acquisition date, the estimated fair value of the contingent consideration payable was $5.5 million (based on the acquisition date exchange rate). The Company is required to assess the probability of Vilebrequin achieving these performance objectives which requires management to make certain estimates and judgments based on forecasts of future performance. As of October 31, 2014, the fair value of the liability was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in the FASB’s Accounting Standards Codification (ASC) 820 - Fair Value Measurements and Disclosures. The significant inputs in the Level 3 measurement not supported by market activity included our probability assessments of expected future cash flows related to Vilebrequin until the end of the earnout period, appropriately discounted and calculated in accordance with the terms of the purchase agreement. Based upon Vilebrequin’s most recent forecast and the related discounted cash flows, the Company has revised its prior estimate of the fair value of the contingent consideration payable to €0.8 million (approximately $1.0 million using Vilebrequin’s current reporting period end exchange rate), which resulted in a gain in the current period of €3.2 million (approximately $4.2 million using Vilebrequin’s current reporting period end exchange rate).
Note 8 – Recent Accounting Pronouncements
In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) — Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (ASU 2014-08). This ASU changes the threshold for reporting discontinued operations and adds new disclosures. The new guidance defines a discontinued operation as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results.” For disposals of individually significant components that do not qualify as discontinued operations, the Company must disclose pre-tax earnings of the disposed component. This guidance is effective for the Company prospectively for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company early adopted this guidance and applied it to the sale of its interest in the joint venture.
In June 2014, the FASB issued ASU 2014-12, “Compensation — Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (ASU 2014-12). This ASU provides for explicit guidance on how to account for awards with performance targets that affect vesting and could be achieved after the requisite service period. A performance target that affects vesting and that could be achieved after an employee’s requisite service period shall be accounted for as a performance condition. As such, the performance target shall not be reflected in estimating the fair value of the award at the grant date. Compensation cost shall be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service already has been rendered. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, “Going Concern (Subtopic 205-40) — Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The ASU is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company does not expect the adoption of this guidance to have an impact on its consolidated financial statements.
Note 9 – Effective Tax Rate
The effective tax rate was 35.5% in the current year compared to 38.0% in the prior year and 35.3% in the current quarter compared to 38.0% in the same period prior year. The effective tax rate is lower primarily due to the tax treatment of certain other income items realized in the current period.
Note 10 – Subsequent Events
The Company has considered subsequent events up to the filing date and does not believe there are any occurrences that would have a material impact on its results of operations.
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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”, “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, 2015 is referred to as “fiscal 2015”. Vilebrequin reports results on a calendar year basis rather than on the January 31 fiscal year basis used by G-III. Accordingly, the results of Vilebrequin are and will be included in our financial statements for the quarter ended or ending closest to G-III’s fiscal quarter. For example, in this Form 10-Q for the three month and nine month periods ended October 31, 2014, the results of Vilebrequin are included for the three month and nine month periods ended September 30, 2014.
Various statements contained in this Form 10-Q, in future filings by us with the Securities and Exchange Commission (the “SEC”), in our press releases and in oral statements made from time to time by us or on our behalf constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as “anticipate,” “estimate,” “expect,” “will,” “project,” “we believe,” “is or remains optimistic,” “currently envisions,” “forecasts,” “goal” and similar words or phrases and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from the future results, performance or achievements expressed in or implied by such forward-looking statements. Forward-looking statements also include representations of our expectations or beliefs concerning future events that involve risks and uncertainties, including, but not limited to:
| • | our dependence on licensed products; |
| • | our dependence on the strategies and reputation of our licensors; |
| • | costs and uncertainties with respect to expansion of our product offerings; |
| • | the performance of our products at retail and customer acceptance of new products; |
| • | customer concentration; |
| • | risks of doing business abroad; |
| • | price, availability and quality of materials used in our products; |
| • | the need to protect our trademarks and other intellectual property; |
| • | risks relating to our retail business; |
| • | risks relating to our Vilebrequin and G.H. Bass businesses; |
| • | dependence on existing management; |
| • | our ability to make strategic acquisitions and possible disruptions from acquisitions; |
| • | need for additional financing; |
| • | seasonal nature of our business; |
| • | our reliance on foreign manufacturers; |
| • | the need to successfully upgrade, maintain and secure our information systems; |
| • | the impact of the current economic and credit environment on us, our customers, suppliers and vendors; |
| • | the effects of competition in the markets in which we operate; |
| • | consolidation of our retail customers; |
| • | additional legislation and/or regulation in the U.S. or around the world; |
| • | our ability to import products in a timely and cost effective manner; |
| • | our ability to continue to maintain our reputation; |
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| • | fluctuations in the price of our common stock; |
| • | potential effect on the price of our common stock if actual results are worse than financial forecasts; and |
| • | the effect of regulations applicable to us as a U.S. public company. |
These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. A detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations is described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended January 31, 2014. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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Overview
G-III designs, manufactures and markets an extensive range of apparel, including outerwear, dresses, sportswear, swimwear, women’s suits and women’s performance wear, as well as footwear, luggage and women’s handbags, small leather goods and cold weather accessories. We sell our products under our own proprietary brands, which include Vilebrequin, Bass, G.H. Bass, Andrew Marc and Marc New York, licensed brands and private retail labels. G-III operates retail stores under the Wilsons Leather, G.H Bass, Vilebrequin, Calvin Klein Performance and Andrew Marc names.
Our business is dependent on, among other things, retailer and consumer demand for our products. We believe that economic conditions continue to negatively impact the level of consumer spending for discretionary items. The current uncertain economic environment has been characterized by a decline in consumer discretionary spending that may affect retailers and sellers of consumer goods, particularly those whose goods are viewed as discretionary purchases, such as fashion apparel and related products, such as ours. We cannot predict the direction in which the current economic environment will move. Continued uncertain macroeconomic conditions may have a negative impact on our results of operations.
We operate in fashion markets that are intensely competitive. Our ability to continuously evaluate and respond to changing consumer demands and tastes, across multiple market segments, distribution channels and geographic areas is critical to our success. Although our portfolio of brands is aimed at diversifying our risks in this regard, misjudging shifts in consumer preferences could have a negative effect on our business. Our success in the future will depend on our ability to design products that are accepted in the marketplace, source the manufacture of our products on a competitive basis, and continue to diversify our product portfolio and the markets we serve.
We have three reportable segments: licensed products, non-licensed products and retail operations. The licensed products segment includes sales of products under brands licensed by us from third parties. The non-licensed products segment includes sales of products under our own brands and private label brands. The retail operations segment consists primarily of our Wilsons and G.H. Bass stores, as well as a limited number of Andrew Marc stores and Calvin Klein Performance stores.
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We have expanded our portfolio of proprietary and licensed brands through acquisitions and by entering into license agreements for new brands or for additional products under previously licensed brands. Our acquisitions have helped to broaden our product offerings, expand our ability to serve different tiers of distribution and add a retail component to our business.
Acquisitions are part of our strategy to expand our product offerings and increase the portfolio of proprietary and licensed brands that we offer through different tiers of retail distribution.
The G.H. Bass business acquired in November 2013 added a well-known heritage brand that developed the iconic original penny loafer (known as “Weejuns”). We sell G.H. Bass footwear, apparel and accessories primarily through G.H. Bass outlet stores located in the Unites States. This acquisition doubled the size of our retail footprint and is expected to enable us to leverage our Wilsons infrastructure to operate our Bass stores. G.H. Bass also licenses the brand for wholesale distribution of men’s and women’s footwear and men’s sportswear. In June, 2014, we entered into a multi-year wholesale license agreement with Overland Ltd. for the sale of men’s, women’s and children’s footwear under the G.H. Bass and related brands in Europe. Overland plans to sell G.H. Bass footwear primarily to department and specialty stores beginning in Spring 2015. A companion agreement also permits Overland to operate G.H. Bass retail locations throughout Europe.
The Vilebrequin business acquired in August 2012 provides us with a premier brand, selling status products worldwide. Vilebrequin is a well-known brand and we expect to add more company owned and franchised retail locations and increase our wholesale distribution throughout the world, as well as develop the business beyond its heritage in men’s swimwear, resort wear and related accessories.
The sale of licensed products is a key element of our strategy and we have continually expanded our offerings of licensed products over the past 20 years. In December 2012, we entered into a license agreement covering a broad range of women’s apparel under the Ivanka Trump brand and, in April 2013, we entered into a license agreement for Calvin Klein men’s and women’s swimwear that became effective on December 1, 2013. We launched Ivanka Trump product in the third quarter of fiscal 2014 and began shipping Calvin Klein swimwear for the Spring 2014 season. In November 2013, we expanded our relationship with Tommy Hilfiger to include a license for women’s outerwear. We launched Tommy Hilfiger women’s outerwear in the Fall 2014 season. We have nine different license agreements relating to a variety of products sold under the Calvin Klein brand. In March 2014, the current term of each of these nine license agreements was extended to December 31, 2023.
We believe that consumers prefer to buy brands they know, and we have continually sought licenses that would increase the portfolio of name brands we can offer through different tiers of retail distribution, for a wide array of products at a variety of price points. We believe that brand owners will look to consolidate the number of licensees they engage to develop product and they will seek licensees with a successful track record of expanding brands into new categories. It is our objective to continue to expand our product offerings and we are continually discussing new licensing opportunities with brand owners.
Our retail operations segment consists primarily of our Wilsons and G.H. Bass stores, substantially all of which are operated as outlet stores. As of October 31, 2014, we operated 179 Wilsons stores, 158 G.H. Bass stores and 80 Vilebrequin stores, as well as 6 Andrew Marc stores and 5 Calvin Klein Performance stores.
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Trends
Retailers are seeking to expand the differentiation of their offerings by devoting more resources to the development of exclusive products, whether by focusing on their own private label products or on products produced exclusively for a retailer by a national brand manufacturer. Retailers are placing more emphasis on building strong images for their private label and exclusive merchandise. Exclusive brands are only made available to a specific retailer, and thus customers loyal to their brands can only find them in the stores of that retailer.
A number of retailers are experiencing financial difficulties, which in some cases has resulted in bankruptcies, liquidations and/or store closings. The financial difficulties of a retail customer of ours could result in reduced business with that customer. We may also assume higher credit risk relating to receivables of a retail customer experiencing financial difficulty that could result in higher reserves for doubtful accounts or increased write-offs of accounts receivable. We attempt to lower credit risk from our customers by closely monitoring accounts receivable balances and shipping levels, as well as the ongoing financial performance and credit standing of customers.
We have attempted to respond to these trends 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 have added additional licensed and proprietary brands and helped diversify our business by adding new product lines, additional distribution channels and a retail component to our business. We believe that our broad distribution capabilities help us to respond to the various shifts by consumers between distribution channels and that our operational capabilities will enable us to continue to be a vendor of choice for our retail partners.
Results of Operations
Three months ended October 31, 2014 compared to three months ended October 31, 2013
Net sales for the three months ended October 31, 2014 increased to $812.3 million from $668.7 million in the same period last year. Net sales of licensed products increased to $542.1 million from $504.9 million, primarily as a result of an increase of $11.9 million in net sales of Tommy Hilfiger licensed products as a result of an increase in sales of men’s outerwear and the addition of women’s outerwear, as well as an increase of $9.0 million in net sales of Calvin Klein licensed products, primarily in women’s sportswear and an increase of $5.7 million in net sales of Guess licensed product lines. Net sales of non-licensed products in the three months ended October 31, 2014 were $180.0 million compared to $124.0 million in the same period last year. The increase in net sales of non-licensed products is primarily the result of an increase in net sales of private label products. Net sales of our retail operations increased to $130.1 million for the three months ended October 31, 2014 from $55.4 million in the same period last year primarily as the result of $65.6 million in net sales of the G.H. Bass retail business that was acquired in November 2013. In addition, Wilsons had increased sales as a result of a same store sales increase of 6.4% in the quarter and the operation of new stores in the period.
Gross profit increased to $295.3 million, or 36.3% of net sales, for the three months ended October 31, 2014, from $226.9 million, or 33.9% of net sales, in the same period last year. The gross profit percentage in our licensed products segment was 32.2% in the three months ended October 31, 2014 compared to 30.9% in the same period last year. This increase was primarily attributable to improved gross margins in our Calvin Klein men’s and women’s outerwear and women’s suit divisions. The gross profit percentage in our non-licensed products segment was 34.8% in the three month period ended October 31, 2014 compared to 34.7% in the same period last year. The gross profit percentage in our retail operations segment was 44.7% for the three months ended October 31, 2014 compared to 50.3% for the comparable period last year. This decrease in gross profit percentage is primarily due to our new G.H. Bass business that operated at a lower gross profit percentage compared to the rest of our retail business.
Selling, general and administrative expenses increased to $176.4 million in the three months ended October 31, 2014 from $125.5 million in the same period last year. This increase is primarily due to the additional $29.0 million in selling, general and administrative expenses resulting from the G.H. Bass business that was acquired in November 2013. In addition, we had increases in personnel costs ($14.7 million) and facility costs ($6.5 million). Personnel costs increased primarily as a result of an increase in bonus accruals related to higher profitability, as well as an increase in headcount to staff additional stores opened since the prior year. Facility costs increased primarily as a result of increases in third party warehouse costs. Our existing distribution centers are operating at capacity and, as a result, we needed to utilize third party facilities to satisfy the increased shipping volume related to increased domestic sales. We also incurred additional rent expense associated with our new retail stores.
Depreciation and amortization increased to $5.6 million in the three months ended October 31, 2014 from $3.2 million in the same period last year. These expenses increased as a result of depreciation and amortization related to department store fixturing programs for our licensed divisions, the opening of additional retail stores, and with respect to the G.H. Bass business acquired at the beginning of the fourth fiscal quarter last year.
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Other income was $12.0 million in the three months ended October 31, 2014. The other income recognized in the current period relates to a $4.2 million gain with respect to the revised estimated contingent consideration payable in connection with the acquisition of Vilebrequin, $3.5 million received as compensation for the early termination of the right to operate Calvin Klein Performance stores in Japan, Taiwan and Singapore, a $2.4 million gain from the sale of our interest in a joint venture that operated Calvin Klein Performance stores in China and a $1.9 million gain related to the repurchase, at a discount, of the unsecured promissory notes issued as part of the consideration for the acquisition of Vilebrequin.
Interest and financing charges, net for the three months ended October 31, 2014, were $2.0 million compared to $2.6 million for the same period last year. Interest expense decreased due to lower average borrowings resulting mainly from the application of the proceeds of our public offering in June 2014.
Income tax expense for the three months ended October 31, 2014 was $43.5 million compared to $36.4 million for the same period last year. The increase in income tax expense is related to higher pretax income in the current period. The effective tax rate was 35.3% in the current year compared to 38.0% in the prior year. The effective tax rate is lower primarily due to the tax treatment of certain other income items realized in the current period.
Nine months ended October 31, 2014 compared to nine months ended October 31, 2013
Net sales for the nine months ended October 31, 2014 increased to $1.60 billion from $1.25 billion in the same period last year. Net sales of licensed products increased to $1.01 billion from $887.9 million primarily as a result of an increase of $68.4 million in net sales of Calvin Klein licensed products, with the largest increases occurring in women’s sportswear, women’s outerwear, dresses and women’s performance wear. The increase in net sales of licensed products is also due to an increase of (i) $13.5 million in net sales of Tommy Hilfiger licensed products as a result of an increase in net sales of men’s outerwear and the addition of women’s outerwear, (ii) $13.0 million in net sales of Cole Haan men’s and women’s outerwear, (iii) $12.3 million in net sales of our Guess licensed product lines and (iv) $11.5 million in nets sales of our Ivanka Trump licensed product lines. Net sales of non-licensed products in the nine months ended October 31, 2014 were $336.3 million compared to $253.8 million in the same period last year. The increase in net sales of non-licensed products is primarily the result of an increase in net sales of private label products and a $10.4 million increase in net sales of Andrew Marc products with the largest increases occurring for the Marc New York women’s outerwear and women’s performance wear product lines. Net sales of our retail operations increased to $324.5 million for the nine months ended October 31, 2014 from $141.7 million in the same period last year, primarily due to net sales of $162.1 million of the G.H. Bass retail business that was acquired in November 2013. In addition Wilsons had increased sales as a result of a same store sales increase of 3.1% in the nine month period and the operation of new stores.
Gross profit increased to $573.8 million, or 35.8% of net sales, for the nine months ended October 31, 2014, from $418.8 million, or 33.6% of net sales, in the same period last year. The gross profit percentage in our licensed products segment was 30.1% in the nine months ended October 31, 2014 compared to 29.4% in the same period last year. This increase was mainly attributable to improved gross margins in our Calvin Klein dress, handbag, men’s and women’s outerwear and women’s suit divisions. The gross profit percentage in our non-licensed products segment was 36.2% in the nine month period ended October 31, 2014 compared to 34.2% in the same period last year. This increase was primarily attributable to improved gross margins of our Jessica Howard, Eliza J and Andrew Marc product lines, offset, in part, by the unfavorable impact from the private label division which operated at a lower margin than the segment’s average. The gross profit percentage for our retail operations segment was 45.5% for the nine months ended October 31, 2014 compared to 50.1% for the comparable period last year. This decrease in gross profit percentage is primarily due to our new G.H. Bass business that operated at a lower gross profit percentage compared to the rest of our retail business.
Selling, general and administrative expenses increased to $430.4 million in the nine months ended October 31, 2014 from $300.3 million in the same period last year. This increase is primarily due to the additional $82.5 million in selling, general and administrative expenses resulting from the G.H. Bass business that was acquired in November 2013. The remainder of the increase is a result of increases in personnel costs ($31.9 million) and facility costs ($14.1 million). Personnel costs increased primarily due to increases in personnel to staff additional retail stores, an increase in headcount related to the expansion of certain product lines and increases in bonus accruals related to increased profitability. Facility costs increased as a result of rent expense incurred for additional retail store leases opened since the prior year. In addition, our existing distribution centers are operating at capacity and, as a result, we needed to utilize third party facilities to satisfy the increased shipping volume related to increased domestic sales.
Depreciation and amortization increased to $14.8 million in the nine months ended October 31, 2014 from $9.5 million in the same period last year. These expenses increased as a result of depreciation and amortization associated with department store fixturing programs for some of our licensed divisions, the opening of additional retail stores and with respect to the G.H. Bass business acquired at the beginning of the fourth fiscal quarter last year.
Other income was $12.0 million in the nine months ended October 31, 2014. The other income recognized in the current period relates to a $4.2 million gain with respect to the revised estimated contingent consideration payable in connection with the acquisition of Vilebrequin, $3.5 million received as compensation for the early termination of the right to operate Calvin Klein Performance stores in Japan, Taiwan and Singapore, a $2.4 million gain from the sale of our interest in a joint venture that operated Calvin Klein Performance stores in China and a $1.9 million gain related to the repurchase, at a discount, of the unsecured promissory notes issued as part of the consideration for the acquisition of Vilebrequin.
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Interest and financing charges, net for the nine months ended October 31, 2014, were $6.0 million compared to $6.2 million for the same period last year. Interest expense decreased due to lower average borrowings mainly resulting from the application of the proceeds of our public offering in June 2014.
Income tax expense for the nine months ended October 31, 2014 was $47.8 million compared to $39.1million for the same period last year. The increase in income tax expense is related to higher pretax income in the current year. The effective tax rate was 35.5% in the current year compared to 38.0% in the prior year. The effective tax rate is lower primarily due to the tax treatment of certain other income items realized in the current period.
Liquidity and Capital Resources
Our primary operating cash requirements are to fund our seasonal buildup in inventories and accounts receivable, primarily during the second and third fiscal quarters each year. Due to the seasonality of our business, we generally reach our peak borrowings under our asset-based credit facility during our third fiscal quarter. The primary sources to meet our operating cash requirements have been borrowings under this credit facility, cash generated from operations and, more recently, the sale of our common stock.
On October 31, 2014, we had cash and cash equivalents of $49.2 million and outstanding borrowings of $153.9 million. On October 31, 2013, we had cash and cash equivalents of $29.8 million and outstanding borrowings of $215.8 million. The reduction in our outstanding borrowings was the result of the application of the net proceeds of our recent public offering of common stock offset by the amount paid for G.H. Bass in November 2013 and for the repurchase of the notes issued as part of the consideration for the Vilebrequin acquisition.
Our contingent liability under open letters of credit was approximately $6.5 million as of October 31, 2014 compared to $10.5 million as of October 31, 2013.
Public Offering
In June 2014, we sold 1,725,000 shares of our common stock, including 225,000 shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares, at a public offering price of $77.63 per share. We received net proceeds of $128.7 million from this offering after payment of the underwriting discount and expenses of the offering. The net proceeds are being used for general corporate purposes.
Credit Agreement
We have a five year senior secured credit facility through August 2017 with JPMorgan Chase Bank, N.A., as Administrative Agent for a group of lenders providing for borrowings in the aggregate principal amount of up to $450 million. Amounts available under the credit agreement are subject to borrowing base formulas and over advances as specified in the credit agreement. Borrowings bear interest, at our option, at LIBOR plus a margin of 1.5% to 2.0% or prime plus a margin of 0.5% to 1.0%, with the applicable margin determined based on availability under the credit agreement. The credit agreement requires us to maintain a minimum fixed charge coverage ratio, as defined, and under certain circumstances permits us to make payments for cash dividends, stock redemptions and share repurchases subject to compliance with certain covenants. As of October 31, 2014, we were in compliance with these covenants.
The credit agreement is secured by all of the assets of G-III Apparel Group, Ltd. and its subsidiaries, G-III Leather Fashions, Inc., Riviera Sun, Inc., CK Outerwear, LLC, Andrew & Suzanne Company, Inc., AM Retail Group, Inc., G-III Apparel Canada ULC, G-III License Company, LLC and AM Apparel Holdings, Inc.
Amounts payable under our credit agreement were $153.9 million at October 31, 2014 compared to $215.8 million at October 31, 2013.
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Cash from Operating Activities
We used $162.5 million of cash in operating activities during the nine months ended October 31, 2014, primarily as a result of an increase of $294.5 million in accounts receivable and $79.7 million in inventories, offset, in part, by our net income of $86.8 million, an increase in accounts payable and accrued expenses of $69.1 million and an increase in income taxes payable of $30.9 million.
The changes in these operating cash flow items are generally consistent with our seasonal pattern of building up inventory for the fall shipping season resulting in the increases in inventory and accounts payable. The fall shipping season begins during the latter half of our second quarter resulting in the increase in accounts receivable during the third quarter. The increase in income taxes payable is a result of an increase in pre-tax income.
Cash from Investing Activities
We used $30.7 million of cash in investing activities in the nine months ended October 31, 2014 primarily as a result of $33.9 million in capital expenditures related to remodeling and adding new Wilsons, G.H. Bass and Vilebrequin stores, fixturing costs at department stores, leasehold improvements at our corporate office, the expansion of the Wilsons distribution center to accommodate the G.H. Bass business and the conversion of the G.H. Bass point of sale system from the system used by the prior owner of G.H. Bass to our system.
Cash from Financing Activities
Cash from financing activities provided $220.1 million in the nine months ended October 31, 2014, primarily as a result of the receipt of net proceeds of $128.7 million in connection with our public offering of common stock in June 2014 and of $105.8 million of net borrowings under our credit agreement offset by the repurchase of the unsecured promissory notes for $17.8 million. We increased our borrowings primarily to pay for purchases of inventory.
Financing Needs
We believe that our cash on hand and cash generated from operations and our recent public offering, together with funds available under our credit agreement, are sufficient to meet our expected operating and capital expenditure requirements. We may seek to acquire other businesses in order to expand our product offerings. We may need additional financing in order to complete one or more acquisitions. We cannot be certain that we will be able to obtain additional financing, if required, on acceptable terms or at all.
Critical Accounting Policies
Our discussion of results of operations and financial condition relies on our consolidated financial statements that are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. We believe that investors need to be aware of these policies and how they impact our financial statements as a whole, as well as our related discussion and analysis presented herein. While we believe that these accounting policies are based on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts. The accounting policies and related estimates described in our Annual Report on Form 10-K for the year ended January 31, 2014 are those that depend most heavily on these judgments and estimates. As of October 31, 2014, there have been no material changes to our critical accounting policies.
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| 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, 2014.
| 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 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 Commission’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, and thus, are effective in making known to them material information relating to G-III required to be included in this report.
During our last fiscal quarter, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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| 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 year ended January 31, 2014, which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
| Item 6. | Exhibits. |
| 31.1 | Certification by Morris Goldfarb, Chief Executive Officer of G-III Apparel Group, Ltd., pursuant to Rule 13a - 14(a) or Rule 15d - 14(a) of the Securities Exchange Act of 1934, as amended, in connection with G-III Apparel Group, Ltd.’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2014. | |
| 31.2 | Certification by Neal S. Nackman, Chief Financial Officer of G-III Apparel Group, Ltd., pursuant to Rule 13a - 14(a) or Rule 15d - 14(a) of the Securities Exchange Act of 1934, as amended, in connection with G-III Apparel Group, Ltd.’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2014. | |
| 32.1 | Certification by Morris Goldfarb, Chief Executive Officer of G-III Apparel Group, Ltd., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with G-III Apparel Group, Ltd.’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2014. | |
| 32.2 | Certification by Neal S. Nackman, Chief Financial Officer of G-III Apparel Group, Ltd., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with G-III Apparel Group, Ltd.’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2014. | |
| 101.INS | XBRL Instance Document. | |
| 101.SCH | XBRL Schema Document. | |
| 101.CAL | XBRL Calculation Linkbase Document. | |
| 101.DEF | XBRL Extension Definition. | |
| 101.LAB | XBRL Label Linkbase Document. | |
| 101.PRE | XBRL Presentation Linkbase Document. |
| 21 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| G-III APPAREL GROUP, LTD. (Registrant) | ||
| Date: December 9, 2014 | By: | /s/ Morris Goldfarb |
| Morris Goldfarb | ||
| Chief Executive Officer | ||
| Date: December 9, 2014 | By: | /s/ Neal S. Nackman |
| Neal S. Nackman | ||
| Chief Financial Officer | ||
| 22 |
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULE 13a - 14(a) OR RULE 15d - 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Morris Goldfarb, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of G-III Apparel Group, Ltd.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: December 9, 2014
| /s/ Morris Goldfarb | |
| Morris Goldfarb | |
| Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULE 13a - 14(a) OR RULE 15d - 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Neal S. Nackman, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of G-III Apparel Group, Ltd.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting, and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: December 9, 2014
| /s/ Neal S. Nackman | |
| Neal S. Nackman | |
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of G-III Apparel Group, Ltd. (the “Company”) on Form 10-Q for the quarterly period ended October 31, 2014, as filed with the Securities and Exchange Commission (the “Report”), I, Morris Goldfarb, Chief Executive Officer of the Company, hereby certify that, to my knowledge, (a) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Morris Goldfarb | |
| Morris Goldfarb | |
| Chief Executive Officer |
Date: December 9, 2014
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of G-III Apparel Group, Ltd. (the “Company”) on Form 10-Q for the quarterly period ended October 31, 2014, as filed with the Securities and Exchange Commission (the “Report”), I, Neal S. Nackman, Chief Financial Officer of the Company, hereby certify that, to my knowledge, (a) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Neal S. Nackman | |
| Neal S. Nackman | |
| Chief Financial Officer |
Date: December 9, 2014
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.