SEC Filing | GIII Apparel Group

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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, 2019


☐	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)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	GIII	The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files.) Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of December 5, 2019, there were 47,825,398 shares of issuer’s common stock, par value $0.01 per share, outstanding.

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TABLE OF CONTENTS

		Page No.
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets – October 31, 2019, October 31, 2018 and January 31, 2019	3
	Condensed Consolidated Statements of Income and Comprehensive Income - For the Three and Nine Months Ended October 31, 2019 and 2018 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended October 31, 2019 and 2018 (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27

Part II	OTHER INFORMATION
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 6.	Exhibits	30

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	October 31,		October 31,		January 31,
	2019		2018		2019
	(Unaudited)		(Unaudited)
	(In thousands, except per share amounts)
ASSETS
Current assets
Cash and cash equivalents	$	55,801	$	66,080	$	70,138
Accounts receivable, net of allowance for doubtful accounts		899,029		819,636		502,133
Inventories		650,633		616,162		576,383
Prepaid income taxes		2,942		—		8,308
Prepaid expenses and other current assets		77,328		82,933		96,933
Total current assets		1,685,733		1,584,811		1,253,895
Investments in unconsolidated affiliates		62,231		67,874		66,587
Property and equipment, net		90,830		89,658		86,407
Operating lease assets		293,819		—		—
Other assets, net		34,389		35,109		35,459
Other intangibles, net		39,297		43,409		42,404
Deferred income tax assets, net		25,135		28,336		22,427
Trademarks		437,247		440,505		439,742
Goodwill		259,926		261,366		261,137
Total assets	$	2,928,607	$	2,551,068	$	2,208,058
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Income tax payable	$	32,029	$	25,194	$	8,859
Accounts payable		215,217		224,826		225,499
Accrued expenses		137,402		137,878		102,841
Customer refund liabilities		260,040		235,400		243,589
Current operating lease liabilities		66,850		—		—
Current portion of notes payable		655		—		—
Other current liabilities		1,056		—		—
Total current liabilities		713,249		623,298		580,788
Notes payable, net of discount and unamortized issuance costs		674,741		694,277		386,604
Deferred income tax liabilities, net		14,300		15,276		15,128
Noncurrent operating lease liabilities		260,010		—		—
Other noncurrent liabilities		6,005		37,262		36,529
Total liabilities		1,668,305		1,370,113		1,019,049

Stockholders' Equity
Preferred stock; 1,000 shares authorized; no shares issued		—		—		—
Common stock - $0.01 par value; 120,000 shares authorized; 49,395, 49,356 and, 49,387 shares issued, respectively		264		264		264
Additional paid-in capital		457,278		461,457		464,112
Accumulated other comprehensive loss		(23,060)		(15,566)		(15,194)
Retained earnings		867,850		734,800		758,881
Common stock held in treasury, at cost - 1,570, 0 and 678 shares, respectively		(42,030)		—		(19,054)
Total stockholders' equity		1,260,302		1,180,955		1,189,009
Total liabilities and stockholders' equity	$	2,928,607	$	2,551,068	$	2,208,058

The accompanying notes are an integral part of these statements.

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G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


	Three Months Ended October 31,				Nine Months Ended October 31,
	2019		2018		2019		2018
	(Unaudited)
	(In thousands, except per share amounts)
Net sales	$	1,128,403	$	1,072,982	$	2,405,847	$	2,309,423
Cost of goods sold		729,384		690,882		1,538,995		1,461,252
Gross profit		399,019		382,100		866,852		848,171
Selling, general and administrative expenses		246,580		232,052		644,887		632,983
Depreciation and amortization		9,701		10,033		28,963		28,868
Gain on lease terminations		(124)		—		(2,346)		—
Operating profit		142,862		140,015		195,348		186,320
Other income (loss)		677		176		(722)		(303)
Interest and financing charges, net		(12,518)		(12,323)		(33,623)		(32,153)
Income before income taxes		131,021		127,868		161,003		153,864
Income tax expense		35,634		33,843		42,454		39,877
Net income	$	95,387	$	94,025	$	118,549	$	113,987

NET INCOME PER COMMON SHARE:
Basic:
Net income per common share	$	2.00	$	1.91	$	2.45	$	2.32
Weighted average number of shares outstanding		47,768		49,231		48,333		49,176

Diluted:
Net income per common share	$	1.97	$	1.86	$	2.42	$	2.26
Weighted average number of shares outstanding		48,356		50,494		49,056		50,345

Net income	$	95,387	$	94,025	$	118,549	$	113,987
Other comprehensive income:
Foreign currency translation adjustments		(6,212)		(1,979)		(7,866)		(10,044)
Other comprehensive loss		(6,212)		(1,979)		(7,866)		(10,044)
Comprehensive income	$	89,175	$	92,046	$	110,683	$	103,943

The accompanying notes are an integral part of these statements.

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G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended October 31,
	2019		2018
	(Unaudited)
	(In thousands)
Cash flows from operating activities
Net income	$	118,549	$	113,987
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		28,963		28,868
Loss on disposal of fixed assets		1,343		154
Non-cash operating lease costs		55,048		—
Gain on lease terminations		(2,346)		—
Dividend received from unconsolidated affiliate		1,960		1,470
Equity (gain)/loss in unconsolidated affiliates		(2,248)		1,421
Share-based compensation		13,657		14,876
Deferred financing charges and debt discount amortization		6,586		7,481
Changes in operating assets and liabilities:
Accounts receivable, net		(396,895)		(525,331)
Inventories		(74,250)		(63,312)
Income taxes, net		28,614		20,507
Prepaid expenses and other current assets		19,278		(33,958)
Other assets, net		(382)		(4,569)
Customer refund liabilities		16,450		168,954
Operating lease liabilities		(61,063)		—
Accounts payable, accrued expenses and other liabilities		26,567		33,345
Net cash used in operating activities		(220,169)		(236,107)

Cash flows from investing activities
Operating lease assets initial direct costs		(2,014)		—
Capital expenditures		(31,903)		(19,516)
Investment in unconsolidated affiliate		—		(9,951)
Net cash used in investing activities		(33,917)		(29,467)

Cash flows from financing activities
Repayment of borrowings - revolving facility		(1,536,448)		(1,454,510)
Proceeds from borrowings - revolving facility		1,816,328		1,752,106
Repayment of borrowings - unsecured term loan		(338)		—
Proceeds from borrowings - unsecured term loan		3,380		—
Proceeds from exercise of equity awards		116		56
Purchase of treasury shares		(35,216)		—
Taxes paid for net share settlements		(8,367)		(4,843)
Net cash provided by financing activities		239,455		292,809

Foreign currency translation adjustments		294		(6,931)
Net (decrease)/increase in cash and cash equivalents		(14,337)		20,304
Cash and cash equivalents at beginning of period		70,138		45,776
Cash and cash equivalents at end of period	$	55,801	$	66,080

Supplemental disclosures of cash flow information
Cash payments:
Interest, net	$	25,822	$	26,071
Income tax payments, net	$	13,975	$	20,041

The accompanying notes are an integral part of these statements.

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G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

As used in these financial statements, the term “Company” or “G-III” refers to G-III Apparel Group, Ltd. and its subsidiaries. The Company designs, sources and markets an extensive range of apparel, including outerwear, dresses, sportswear, swimwear, women’s suits and women’s performance wear, as well as women’s handbags, footwear, small leather goods, cold weather accessories and luggage. The Company also operates retail stores and licenses its proprietary brands under several product categories.

The Company consolidates the accounts of its wholly-owned and majority-owned subsidiaries. KL North America B.V. (“KLNA”) and Fabco Holding B.V. (“Fabco”) are Dutch joint venture limited liability companies that are 49% owned by the Company. Karl Lagerfeld Holding B.V. (“KLH”) is a Dutch limited liability company that is 19% owned by the Company. These investments are accounted for using the equity method of accounting. All material intercompany balances and transactions have been eliminated.

Vilebrequin International SA (“Vilebrequin”), a Swiss corporation that is wholly-owned by the Company, KLH, KLNA and Fabco 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 nine-month period ended October 31, 2019, the results of Vilebrequin, KLH, KLNA and Fabco are included for the nine-month period ended September 30, 2019. The Company’s retail operations segment reports on a 52/53-week fiscal year. The Company’s three and nine-month periods ended October 31, 2019 and 2018 were each a 13-week fiscal quarter and 39-week period, respectively, for the retail operations segment. For fiscal 2020 and 2019, the three and nine-month periods for the retail operations segment ended on November 2, 2019 and November 3, 2018, respectively.

The results for the three and nine months ended October 31, 2019 are not necessarily indicative of the results expected for the entire fiscal year, given the seasonal nature of the Company’s business. The accompanying financial statements included herein are unaudited. All adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim period presented have been reflected.

The accompanying financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2019 filed with the Securities and Exchange Commission (the “SEC”).

Assets and liabilities of the Company’s foreign operations, where the functional currency is not the U.S. 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.

Note 2 – Inventories

Wholesale inventories, which comprise a significant portion of the Company’s inventory, are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Retail inventories are valued at the lower of cost or market as determined by the retail inventory method. Vilebrequin inventories are stated at the lower of cost (determined by the weighted average method) or net realizable value. Substantially all of the Company’s inventories consist of finished goods.

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The inventory return asset, which consists of the amount of goods that are anticipated to be returned by customers, represented $41.9 million, $37.5 million and $42.4 million as of October 31, 2019, October 31, 2018 and January 31, 2019 respectively. The inventory return asset is recorded within prepaid expenses and other current assets.

Inventory held on consignment by the Company’s customers totaled $11.0 million, $7.3 million and $4.9 million at October 31, 2019, October 31, 2018 and January 31, 2019, respectively. Consignment inventory is stored at the facilities of the Company’s customers. The Company reflects this inventory on its condensed consolidated balance sheets.

Note 3 – Fair Value of Financial Instruments

Generally Accepted Accounting Principles establish a three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy for a particular asset or liability depends on the inputs used in its valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally-derived (unobservable). A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

●

Level 1 — inputs to the valuation methodology based on quoted prices (unadjusted) for identical assets or liabilities in active markets.

●

Level 2 — inputs to the valuation methodology based on quoted prices for similar assets or liabilities in active markets for substantially the full term of the financial instrument; quoted prices for identical or similar instruments in markets that are not active for substantially the full term of the financial instrument; and model-derived valuations whose inputs or significant value drivers are observable.

●

Level 3 — inputs to the valuation methodology based on unobservable prices or valuation techniques that are significant to the fair value measurement.

The following table summarizes the carrying values and the estimated fair values of the Company’s debt instruments:


		Carrying Value						Fair Value
		October 31,		October 31,		January 31,		October 31,		October 31,		January 31,
Financial Instrument	Level	2019		2018		2019		2019		2018		2019
		(In thousands)
Term loan	2	$	300,000	$	300,000	$	300,000	$	300,000	$	300,000	$	300,000
Revolving credit facility	2		279,880		309,599		—		279,880		309,599		—
Note issued to LVMH	3		100,623		95,345		96,618		100,825		95,345		88,608
Unsecured loan	2		2,948		—		—		2,948		—		—

The Company’s debt instruments are recorded at their carrying values in its condensed consolidated balance sheets, which may differ from their respective fair values. The carrying amount of the Company’s variable rate debt approximates the fair value, as interest rates change with the market rates. Furthermore, the carrying value of all other financial instruments potentially subject to valuation risk (principally consisting of cash, accounts receivable and accounts payable) also approximates fair value due to the short-term nature of these accounts.

The 2% note issued to LVMH Moet Hennessy Louis Vuitton Inc. (“LVMH”) in connection with the acquisition of Donna Karan International (“DKI”) was issued at a discount of $40.0 million in accordance with Accounting Standards Codification (“ASC”) 820 – Fair Value Measurements. For purposes of this fair value disclosure, the Company based its fair value estimate for the note issued to LVMH on the initial fair value as determined at the date of the acquisition of DKI and records the amortization using the effective interest method over the term of the note.

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Non-Financial Assets and Liabilities

The Company’s non-financial assets, which primarily consist of operating lease assets, goodwill, other intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial instruments are assessed for impairment and, if applicable, written down to and recorded at fair value, considering external market participant assumptions. During the first quarter of fiscal 2020, the Company recorded an impairment of $9.6 million, net of tax, in connection with the adoption of ASC 842 – Leases (“ASC 842”) that was recognized through retained earnings.

Note 4 – Leases

On February 1, 2019, the Company adopted ASC 842 using the optional transition method to apply the standard as of the effective date and, therefore, the standard has not been applied retroactively to the comparative periods presented in its financial statements. The Company has elected the transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and initial direct costs. The hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of right-of-use assets, has not been elected. Further, the Company elected the short-term lease exception policy, permitting it to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component.

The Company determines whether an arrangement is, or contains, a lease at contract inception. The Company leases certain retail stores, warehouses, distribution centers, office space and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.

Total rent payable is recorded during the lease term, including rent escalations in which the amount of future rent is certain or fixed on the straight-line basis over the term of the lease (including any rent holiday periods beginning upon control of the premises and any fixed payments stated in the lease). For leases with an initial term greater than 12 months, a lease liability is recorded on the balance sheet at the present value of future payments discounted at the incremental borrowing rate (discount rate) corresponding with the lease term. An operating lease asset is recorded based on the initial amount of the lease liability, plus any lease payments made to the lessor before or at the lease commencement date and any initial direct costs incurred, less any tenant improvement allowance incentives received. The difference between the minimum rents paid and the straight-line rent (deferred rent) is reflected within the associated operating lease asset.

The lease classification evaluation begins at the commencement date. The lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain or the failure to exercise such option would result in an economic penalty. All retail store, warehouse, distribution center and office leases are classified as operating leases. The Company does not have any finance leases. Operating lease expense is generally recognized on a straight-line basis over the lease term.

Certain leases contain provisions that require contingent rent payments based upon sales volume (variable lease cost). Contingent rent is accrued each period as the liabilities are incurred.

Most leases are for a term of one to ten years. Some leases include one or more options to renew, with renewal terms that can extend the lease term from one to ten years. Several of the Company’s retail store leases include an option to terminate the lease based on failure to achieve a specified sales volume. The exercise of lease renewal options is generally at the Company’s sole discretion. The exercise of lease termination options is generally by mutual agreement between the Company and the lessor.

Certain of the Company’s lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.

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The Company’s lease assets and liabilities as of October 31, 2019 consist of the following:



Leases	Classification	October 31, 2019
		(In thousands)
Assets
Operating	Operating lease assets	$	293,819
Total lease assets		$	293,819

Liabilities
Current operating	Current operating lease liabilities	$	66,850
Noncurrent operating	Noncurrent operating lease liabilities		260,010
Total lease liabilities		$	326,860

The Company’s leases do not provide the rate of interest implicit in the lease. Therefore, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. For transition purposes, the incremental borrowing rate on February 1, 2019 was used for operating leases that commenced prior to that date.

The Company recorded lease costs of $24.4 million and $74.3 million during the three and nine months ended October 31, 2019, respectively. Lease costs are recorded within selling, general and administrative expenses in the Company’s condensed consolidated statements of income and comprehensive income. The Company recorded variable lease costs and short-term lease costs of $4.4 million and $11.9 million for the three and nine months ended October 31, 2019, respectively. Short-term lease costs are immaterial.

As of October 31, 2019, the Company’s maturity of operating lease liabilities in the years ending up to January 31, 2024 and thereafter are as follows:


Year Ending January 31,	Amount
	(In thousands)
2020	$	20,031
2021		89,483
2022		75,858
2023		66,550
2024		53,197
After 2024		97,891
Total lease payments	$	403,010
Less: Interest		76,150
Present value of lease liabilities	$	326,860

As of October 31, 2019, there are no material leases that are legally binding but have not yet commenced.

As of October 31, 2019, the weighted average remaining lease term related to operating leases is 5.3 years. The weighted average discount rate related to operating leases is 7.8%.

Cash paid for amounts included in the measurement of operating lease liabilities is $75.9 million as of October 31, 2019. Right-of-use assets obtained in exchange for lease obligations were $21.3 million as of October 31, 2019.

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Note 5 – Net Income per Common Share

Basic net income per common share has been computed using the weighted average number of common shares outstanding during each period. Diluted net income per share is computed using the weighted average number of common shares and potential dilutive common shares, consisting of unvested restricted stock unit awards and unexercised stock options outstanding during the period. Approximately 846,200 and 344,000 unvested shares of common stock have been excluded from the diluted net income per share calculation for the three months ended October 31, 2019 and 2018, respectively. Approximately 680,700 and 330,000 unvested shares of common stock have been excluded from the diluted net income per share calculation for the nine months ended October 31, 2019 and 2018, respectively. All share-based payments outstanding that vest based on the achievement of performance and/or market price conditions, and for which the respective performance and/or market price conditions have not been achieved, have been excluded from the diluted per share calculation.

The following table reconciles the numerators and denominators used in the calculation of basic and diluted net income per share:


	Three Months Ended October 31,				Nine Months Ended October 31,
	2019		2018		2019		2018
	(In thousands, except per share amounts)
Net income	$	95,387	$	94,025	$	118,549	$	113,987
Basic net income per share:
Basic common shares		47,768		49,231		48,333		49,176
Basic net income per share	$	2.00	$	1.91	$	2.45	$	2.32

Diluted net income per share:
Basic common shares		47,768		49,231		48,333		49,176
Diluted restricted stock unit awards and stock options		588		1,263		723		1,169
Diluted common shares		48,356		50,494		49,056		50,345
Diluted net income per share	$	1.97	$	1.86	$	2.42	$	2.26

Note 6 – Notes Payable

Long-term debt consists of the following:


	October 31, 2019		October 31, 2018		January 31, 2019
	(In thousands)
Term loan	$	300,000	$	300,000	$	300,000
Revolving credit facility		279,880		309,599		—
Note issued to LVMH		125,000		125,000		125,000
Unsecured loan		2,948		—		—
Subtotal		707,828		734,599		425,000
Less: Net debt issuance costs ⁽¹⁾		(8,055)		(10,667)		(10,014)
Debt discount		(24,377)		(29,655)		(28,382)
Current portion of long-term debt		(655)		—		—
Total	$	674,741	$	694,277	$	386,604

(1)

Does not include debt issuance costs, net of amortization, totaling $5.2 million, $7.7 million and $7.1 million as of October 31, 2019, October 31, 2018 and January 31, 2019, respectively, related to the revolving credit facility. These debt issuance costs have been deferred and are classified in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets in accordance with Accounting Standards Update (“ASU”) 2015-15.

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Term Loan

In connection with the acquisition of DKI, the Company borrowed $350.0 million under a senior secured term loan facility (the “Term Loan”). On December 1, 2016, the Company prepaid $50.0 million in principal amount of the Term Loan. The Term Loan will mature in December 2022.

Interest on the outstanding principal amount of the Term Loan accrues at a rate equal to the London Interbank Offered Rate (“LIBOR”), subject to a 1% floor, plus an applicable margin of 5.25% or an alternate base rate (defined as the greatest of (i) the “prime rate” as published by the Wall Street Journal from time to time, (ii) the federal funds rate plus 0.5% or (iii) the LIBOR rate for a borrowing with an interest period of one month) plus 4.25%, per annum, payable in cash. As of October 31, 2019, interest under the Term Loan was being paid at an average rate of 7.62% per annum.

The Term Loan is secured by certain assets of the Company and certain of its subsidiaries. The Term Loan is required to be prepaid with the proceeds of certain asset sales if such proceeds are not applied as required by the Term Loan within specified deadlines. The Term Loan contains covenants that, among other things, restrict the Company’s ability, subject to certain 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. This loan also includes a mandatory prepayment provision based on excess cash flow as defined in the term loan agreement. A first lien leverage covenant requires the Company to maintain a level of debt to EBITDA at a ratio as defined in the term loan agreement. As of October 31, 2019, the Company was in compliance with these covenants.

Revolving Credit Facility

Upon closing of the acquisition of DKI, the Company’s prior credit agreement was refinanced and replaced by a $650 million amended and restated credit agreement (the “revolving credit facility”). Amounts available under the revolving credit facility are subject to borrowing base formulas and over advances as specified in the revolving credit facility agreement. Borrowings bear interest, at the Company’s option, at LIBOR plus a margin of 1.25% to 1.75% or an alternate base rate (defined as the greatest of (i) the “prime rate” of JPMorgan Chase Bank, N.A. from time to time, (ii) the federal funds rate plus 0.5% or (iii) the LIBOR rate for a borrowing with an interest period of one month) plus a margin of 0.25% to 0.75%, with the applicable margin determined based on the availability under the revolving credit facility agreement. As of October 31, 2019, interest under the revolving credit agreement was being paid at an average rate of 3.30% per annum. The revolving credit facility has a five-year term ending December 1, 2021. In addition to paying interest on any outstanding borrowings under the revolving credit facility, the Company is required to pay a commitment fee to the lenders under the credit agreement with respect to the unutilized commitments. The commitment fee accrues at a rate equal to 0.25% per annum on the average daily amount of the available commitments.

As of October 31, 2019, the Company had $279.9 million of borrowings outstanding under the revolving credit facility, all of which are classified as long-term liabilities. As of October 31, 2019, there were outstanding trade and standby letters of credit amounting to $3.6 million and $3.4 million, respectively.

The revolving credit facility contains covenants that, among other things, restrict the Company’s ability, subject to specified exceptions, to incur additional debt; incur liens; sell or dispose of certain assets; merge with other companies; liquidate or dissolve the Company; acquire other companies; make loans, advances, or guarantees; and make certain investments. In certain circumstances, the revolving credit facility also requires the Company to maintain a fixed charge coverage ratio, as defined in the agreement, not less than 1.00 to 1.00 for each period of twelve consecutive fiscal months of the Company. As of October 31, 2019, the Company was in compliance with these covenants.

LVMH Note

As part of the consideration for the acquisition of DKI, the Company issued to LVMH a junior lien secured promissory note in the principal amount of $125.0 million (the “LVMH Note”) that bears interest at the rate of 2% per year. $75.0 million of the principal amount of the LVMH Note is due and payable on June 1, 2023 and $50.0 million of such principal amount is due and payable on December 1, 2023. Accounting Standards Codification (“ASC”) 820 - Fair Value Measurements requires the note to be recorded at fair value at issuance. As a result, the Company recorded a $40.0 million debt discount. This discount is being amortized as interest expense using the effective interest method over the term of the LVMH Note.

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Unsecured Loan

On April 15, 2019, T.R.B. International SA (“TRB”), a subsidiary of Vilebrequin, borrowed €3.0 million under an unsecured loan with Banque du Leman S.A (the “Unsecured Loan”). The Unsecured Loan matures on April 15, 2024. During the term of the Unsecured Loan, TRB is required to make quarterly installment payments of €0.2 million. Interest on the outstanding principal amount of the Unsecured Loan accrues at a fixed rate equal to 1.50% per annum, payable quarterly in cash.

Note 7 – Revenue Recognition

Disaggregation of Revenue

In accordance with ASC 606 – Revenue from Contracts with Customers, the Company has elected to disclose its revenues by segment. Each segment has its own characteristics with respect to the timing of revenue recognition and the type of customer. In addition, disaggregating revenues using a segment basis is consistent with how the Company’s Chief Operating Decision Maker manages the Company. The Company has identified the wholesale operations segment and the retail operations segment as distinct sources of revenue.

Wholesale Operations Segment. Wholesale revenues include sales of products to retailers under owned, licensed and private label brands, as well as sales related to the Vilebrequin business. Wholesale revenues from sales of products are recognized when control transfers to the customer. The Company considers control to have been transferred when the Company has transferred physical possession of the product, the Company has a right to payment for the product, the customer has legal title to the product and the customer has the significant risks and rewards of the product. Wholesale revenues are adjusted by variable considerations arising from implicit or explicit obligations. Wholesale revenues also include royalty revenues from license agreements related to our owned trademarks including DKNY, Donna Karan, Vilebrequin, G.H. Bass and Andrew Marc. As of October 31, 2019, revenues from license agreements represented an insignificant portion of wholesale revenues.

Retail Operations Segment. Retail store revenues are generated by direct sales to consumers through company-operated stores and product sales through the Company’s owned websites for the DKNY, Donna Karan, Wilsons, G.H. Bass, Andrew Marc and Karl Lagerfeld Paris businesses. Retail stores primarily consist of Wilsons Leather, G.H. Bass and DKNY retail stores, substantially all of which are operated as outlet stores, as well as a small number of Karl Lagerfeld Paris and Calvin Klein Performance stores. Retail operations segment revenues are recognized at the point of sale when the customer takes possession of the goods and tenders payment. E-commerce revenues primarily consist of sales to consumers through the Company’s e-commerce platforms. E-commerce revenue is recognized when a customer takes possession of the goods. Retail sales are recorded net of applicable sales tax.

Contract Liabilities

The Company’s 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 $5.4 million, $4.2 million and $6.4 million at October 31, 2019, October 31, 2018 and January 31, 2019, respectively. The Company recognized $4.5 million in revenue for the three months ended October 31, 2019 related to contract liabilities that existed at July 31, 2019. The Company recognized $5.5 million in revenue for the nine months ended October 31, 2019 related to contract liabilities that existed at January 31, 2019. There were no contract assets recorded as of October 31, 2019, October 31, 2018 and January 31, 2019. Substantially all of the advance payments from licensees as of October 31, 2019 are expected to be recognized as revenue within the next twelve months.

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Note 8 – Segments

The Company has two reportable segments: wholesale operations and retail operations. The wholesale operations segment includes sales of products under the Company’s owned, licensed and private label brands, as well as sales related to the Vilebrequin business. Wholesale revenues also include royalty revenues from license agreements related to our owned trademarks including DKNY, Donna Karan, Vilebrequin, G.H. Bass and Andrew Marc. The retail operations segment consists primarily of direct sales to consumers through Company-operated stores, consisting primarily of Wilsons Leather, G.H. Bass and DKNY stores, substantially all of which are operated as outlet stores, as well as a smaller number of Karl Lagerfeld Paris and Calvin Klein Performance stores. This segment also includes sales through Company-owned websites for the DKNY, Donna Karan, Wilsons, G.H. Bass, Andrew Marc and Karl Lagerfeld Paris businesses.

The following segment information is presented for the three and nine-month periods indicated below:


	Three Months Ended October 31, 2019
	Wholesale		Retail		Elimination ⁽¹⁾		Total
	(In thousands)
Net sales	$	1,067,858	$	89,671	$	(29,126)	$	1,128,403
Cost of goods sold		713,063		45,447		(29,126)		729,384
Gross profit		354,795		44,224		—		399,019
Selling, general and administrative expenses		190,166		56,414		—		246,580
Depreciation and amortization		7,748		1,953		—		9,701
Gain on lease terminations		—		(124)		—		(124)
Operating profit (loss)	$	156,881	$	(14,019)	$	—	$	142,862


	Three Months Ended October 31, 2018
	Wholesale		Retail		Elimination ⁽¹⁾		Total
	(In thousands)
Net sales	$	1,005,358	$	110,934	$	(43,310)	$	1,072,982
Cost of goods sold		677,011		57,181		(43,310)		690,882
Gross profit		328,347		53,753		—		382,100
Selling, general and administrative expenses		166,423		65,629		—		232,052
Depreciation and amortization		7,709		2,324		—		10,033
Operating profit (loss)	$	154,215	$	(14,200)	$	—	$	140,015


	Nine Months Ended October 31, 2019
	Wholesale		Retail		Elimination ⁽¹⁾		Total
	(In thousands)
Net sales	$	2,227,404	$	255,282	$	(76,839)	$	2,405,847
Cost of goods sold		1,480,678		135,156		(76,839)		1,538,995
Gross profit		746,726		120,126		—		866,852
Selling, general and administrative expenses		478,964		165,923				644,887
Depreciation and amortization		23,033		5,930				28,963
Gain on lease terminations		—		(2,346)				(2,346)
Operating profit (loss)	$	244,729	$	(49,381)	$	—	$	195,348


	Nine Months Ended October 31, 2018
	Wholesale		Retail		Elimination ⁽¹⁾		Total
	(In thousands)
Net sales	$	2,077,628	$	322,115	$	(90,320)	$	2,309,423
Cost of goods sold		1,381,342		170,230		(90,320)		1,461,252
Gross profit		696,286		151,885		—		848,171
Selling, general and administrative expenses		439,014		193,969		—		632,983
Depreciation and amortization		22,192		6,676		—		28,868
Operating profit (loss)	$	235,080	$	(48,760)	$	—	$	186,320

(1)Represents intersegment sales to the Company’s retail operations segment.

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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:


	October 31, 2019		October 31, 2018		January 31, 2019
	(In thousands)
Wholesale	$	2,342,209	$	2,155,840	$	1,834,610
Retail		348,898		224,593		190,996
Corporate		237,500		170,635		182,452
Total assets	$	2,928,607	$	2,551,068	$	2,208,058

Note 9 – Stockholders’ Equity

The changes in stockholders’ equity for the three and nine months ended October 31, 2019 and 2018 are as follows (in thousands):


					Accumulated				Common
			Additional		Other				Stock
	Common		Paid-In		Comprehensive		Retained		Held In
	Stock		Capital		Loss		Earnings		Treasury		Total
Balance as of July 31, 2019	$	264	$	456,195	$	(16,848)	$	772,463	$	(44,254)	$	1,167,820
Equity awards exercised/vested, net		—		(2,224)		—		—		2,224		—
Share-based compensation expense		—		4,308		—		—		—		4,308
Taxes paid for net share settlements		—		(1,001)		—		—		—		(1,001)
Other comprehensive gain, net		—		—		(6,212)		—		—		(6,212)
Net income		—		—		—		95,387		—		95,387
Balance as of October 31, 2019	$	264	$	457,278	$	(23,060)	$	867,850	$	(42,030)	$	1,260,302

Accumulated

Common

Additional

Other