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 OctoberJuly 31, 20222023
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)
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 1, 2022,September 5, 2023, there were 47,488,99945,721,002 shares of issuer’s common stock, par value $0.1 per share, outstanding.
TABLE OF CONTENTS
| Page No. | ||
| | ||
| | ||
| 3 | ||
| 4 | ||
| | 5 | |
| 6 | ||
| 7 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| |
|
| ||
|
| ||
| | | |
| | ||
|
| ||
| 34 | ||
| 34 | ||
|
|
7
2
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, | |||
| | 2022 | | 2021 | | 2022 | |||
|
| (Unaudited) |
| (Unaudited) |
| | | ||
| | (In thousands, except per share amounts) | |||||||
ASSETS | | | | | | | | | |
Current assets | | | | | | | | | |
Cash and cash equivalents | | $ | 150,719 | | $ | 279,564 | | $ | 465,984 |
Accounts receivable, net of allowance for doubtful accounts of $18.3 million, $17.4 million and $17.4 million, respectively | | | 881,135 | | | 844,382 | | | 605,512 |
Inventories | | | 900,987 | | | 448,991 | | | 512,155 |
Prepaid income taxes | | | 1,110 | | | 994 | | | 14,502 |
Prepaid expenses and other current assets | | | 50,594 | | | 53,532 | | | 54,704 |
Total current assets | | | 1,984,545 | | | 1,627,463 | | | 1,652,857 |
Investments in unconsolidated affiliates | | | 25,870 | | | 61,413 | | | 65,503 |
Property and equipment, net | | | 54,185 | | | 49,948 | | | 48,805 |
Operating lease assets | | | 216,663 | | | 176,530 | | | 169,595 |
Other assets, net | | | 54,206 | | | 60,405 | | | 54,992 |
Other intangibles, net | | | 34,585 | | | 32,208 | | | 31,361 |
Deferred income tax assets, net | | | 8,973 | | | 4,682 | | | 3,559 |
Trademarks | | | 607,526 | | | 450,252 | | | 453,329 |
Goodwill | | | 303,668 | | | 265,116 | | | 262,527 |
Total assets | | $ | 3,290,221 | | $ | 2,728,017 | | $ | 2,742,528 |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | |
Current liabilities | | | | | | | | | |
Current portion of notes payable | | $ | 91,613 | | $ | 4,063 | | $ | 4,237 |
Accounts payable | | | 223,154 | | | 233,893 | | | 236,921 |
Accrued expenses | | | 150,349 | | | 141,456 | | | 128,124 |
Customer refund liabilities | | | 99,528 | | | 81,271 | | | 86,788 |
Current operating lease liabilities | | | 50,645 | | | 45,117 | | | 42,763 |
Income tax payable | | | 26,956 | | | 38,974 | | | 9,995 |
Other current liabilities | | | 933 | | | 2,228 | | | 1,977 |
Total current liabilities | | | 643,178 | | | 547,002 | | | 510,805 |
Notes payable, net of discount and unamortized issuance costs | | | 787,892 | | | 513,466 | | | 515,344 |
Deferred income tax liabilities, net | | | 34,894 | | | 21,306 | | | 40,010 |
Noncurrent operating lease liabilities | | | 185,171 | | | 147,688 | | | 142,868 |
Other noncurrent liabilities | | | 16,787 | | | 11,558 | | | 13,118 |
Total liabilities | | | 1,667,922 | | | 1,241,020 | | | 1,222,145 |
| | | | | | | | | |
Redeemable noncontrolling interests | | | 41 | | | 758 | | | 471 |
| | | | | | | | | |
Stockholders' Equity | | | | | | | | | |
Preferred stock; 1,000 shares authorized; no shares issued | | | — | | | — | | | — |
Common stock - $0.01 par value; 120,000 shares authorized; 49,396, 49,396 and 49,396 shares issued, respectively | | | 264 | | | 264 | | | 264 |
Additional paid-in capital | | | 465,230 | | | 450,768 | | | 456,329 |
Accumulated other comprehensive loss | | | (42,744) | | | (11,428) | | | (14,529) |
Retained earnings | | | 1,245,061 | | | 1,068,575 | | | 1,117,005 |
Common stock held in treasury, at cost - 1,907, 827 and 1,480 shares, respectively | | | (45,553) | | | (21,940) | | | (39,157) |
Total stockholders' equity | | | 1,622,258 | | | 1,486,239 | | | 1,519,912 |
Total liabilities, redeemable noncontrolling interests and stockholders' equity | | $ | 3,290,221 | | $ | 2,728,017 | | $ | 2,742,528 |
| | | | | | | | | |
| | July 31, | | July 31, | | January 31, | |||
| | 2023 | | 2022 | | 2023 | |||
|
| (Unaudited) |
| (Unaudited) |
| | | ||
| | (In thousands, except per share amounts) | |||||||
ASSETS | | | | | | | | | |
Current assets | | | | | | | | | |
Cash and cash equivalents | | $ | 197,735 | | $ | 150,977 | | $ | 191,652 |
Accounts receivable, net of allowance for doubtful accounts of $18,491, $18,067 and $18,297, respectively | | | 519,361 | | | 488,523 | | | 674,963 |
Inventories | | | 804,858 | | | 1,040,814 | | | 709,345 |
Prepaid income taxes | | | 8,588 | | | 1,142 | | | 5,886 |
Prepaid expenses and other current assets | | | 72,143 | | | 83,954 | | | 70,654 |
Total current assets | | | 1,602,685 | | | 1,765,410 | | | 1,652,500 |
Investments in unconsolidated affiliates | | | 27,089 | | | 26,117 | | | 24,467 |
Property and equipment, net | | | 53,791 | | | 54,421 | | | 53,742 |
Operating lease assets | | | 229,723 | | | 209,000 | | | 239,665 |
Other assets, net | | | 56,051 | | | 55,462 | | | 52,644 |
Other intangibles, net | | | 33,613 | | | 35,427 | | | 34,842 |
Deferred income tax assets, net | | | 26,432 | | | 9,405 | | | 26,389 |
Trademarks | | | 632,669 | | | 622,182 | | | 628,156 |
Goodwill | | | — | | | 304,930 | | | — |
Total assets | | $ | 2,662,053 | | $ | 3,082,354 | | $ | 2,712,405 |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | |
Current liabilities | | | | | | | | | |
Current portion of notes payable | | $ | 62,732 | | $ | 80,109 | | $ | 135,518 |
Accounts payable | | | 294,287 | | | 438,167 | | | 169,508 |
Accrued expenses | | | 146,933 | | | 130,806 | | | 115,586 |
Customer refund liabilities | | | 56,223 | | | 56,384 | | | 89,760 |
Current operating lease liabilities | | | 54,563 | | | 49,734 | | | 52,917 |
Income tax payable | | | 8,844 | | | 12,642 | | | 14,875 |
Other current liabilities | | | 430 | | | 1,544 | | | 905 |
Total current liabilities | | | 624,012 | | | 769,386 | | | 579,069 |
Notes payable, net of discount and unamortized issuance costs | | | 403,304 | | | 495,668 | | | 483,840 |
Deferred income tax liabilities, net | | | 45,858 | | | 36,447 | | | 44,783 |
Noncurrent operating lease liabilities | | | 192,981 | | | 179,247 | | | 204,974 |
Other noncurrent liabilities | | | 14,929 | | | 17,396 | | | 15,141 |
Total liabilities | | | 1,281,084 | | | 1,498,144 | | | 1,327,807 |
| | | | | | | | | |
Redeemable noncontrolling interests | | | (1,146) | | | 209 | | | (850) |
| | | | | | | | | |
Stockholders' Equity | | | | | | | | | |
Preferred stock; 1,000 shares authorized; no shares issued | | | — | | | — | | | — |
Common stock - $0.01 par value; 120,000 shares authorized; 49,396, 49,396 and 49,396 shares issued, respectively | | | 264 | | | 264 | | | 264 |
Additional paid-in capital | | | 448,762 | | | 461,621 | | | 468,712 |
Accumulated other comprehensive loss | | | (4,603) | | | (16,226) | | | (11,653) |
Retained earnings | | | 1,003,618 | | | 1,183,958 | | | 983,944 |
Common stock held in treasury, at cost - 3,675, 1,909 and 2,680 shares, respectively | | | (65,926) | | | (45,616) | | | (55,819) |
Total stockholders' equity | | | 1,382,115 | | | 1,584,001 | | | 1,385,448 |
Total liabilities, redeemable noncontrolling interests and stockholders' equity | | $ | 2,662,053 | | $ | 3,082,354 | | $ | 2,712,405 |
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, | | Nine Months Ended October 31, | | Three Months Ended July 31, | | Six Months Ended July 31, | ||||||||||||||||
| | 2022 |
| 2021 |
| 2022 |
| 2021 | | 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
| | (Unaudited) | | (Unaudited) | ||||||||||||||||||||
| | (In thousands, except per share amounts) | | (In thousands, except per share amounts) | ||||||||||||||||||||
Net sales | | $ | 1,078,299 | | $ | 1,015,392 | | $ | 2,372,300 | | $ | 2,018,383 | | $ | 659,761 | | $ | 605,244 | | $ | 1,266,350 | | $ | 1,294,001 |
Cost of goods sold | | | 733,672 | | | 667,882 | | | 1,552,708 | | | 1,282,526 | | | 383,108 | | | 376,318 | | | 739,897 | | | 819,036 |
Gross profit | | | 344,627 | | | 347,510 | | | 819,592 | | | 735,857 | | | 276,653 | | | 228,926 | | | 526,453 | | | 474,965 |
Selling, general and administrative expenses | | | 239,893 | | | 182,360 | | | 616,351 | | | 470,803 | | | 239,207 | | | 191,012 | | | 467,168 | | | 376,420 |
Depreciation and amortization | | | 7,270 | | | 7,024 | | | 20,021 | | | 21,166 | | | 5,959 | | | 6,656 | | | 12,535 | | | 12,751 |
Asset impairment, net of gain on lease terminations | | | 250 | | | — | | | 212 | | | — | ||||||||||||
Operating profit | | | 97,214 | | | 158,126 | | | 183,008 | | | 243,888 | | | 31,487 | | | 31,258 | | | 46,750 | | | 85,794 |
Other (loss) income | | | (2,795) | | | 898 | | | 24,823 | | | 4,693 | ||||||||||||
Other income | | | 192 | | | 30,325 | | | 1,165 | | | 27,618 | ||||||||||||
Interest and financing charges, net | | | (16,052) | | | (12,354) | | | (40,805) | | | (36,932) | | | (9,492) | | | (12,550) | | | (21,642) | | | (24,753) |
Income before income taxes | | | 78,367 | | | 146,670 | | | 167,026 | | | 211,649 | | | 22,187 | | | 49,033 | | | 26,273 | | | 88,659 |
Income tax expense | | | 17,521 | | | 40,198 | | | 39,489 | | | 59,692 | | | 5,951 | | | 12,968 | | | 6,896 | | | 21,968 |
Net income | | | 60,846 | | | 106,472 | | | 127,537 | | | 151,957 | | | 16,236 | | | 36,065 | | | 19,377 | | | 66,691 |
Less: Loss attributable to noncontrolling interests | | | (257) | | | (202) | | | (519) | | | (206) | | | (202) | | | (254) | | | (297) | | | (262) |
Net income attributable to G-III Apparel Group, Ltd. | | $ | 61,103 | | $ | 106,674 | | $ | 128,056 | | $ | 152,163 | | $ | 16,438 | | $ | 36,319 | | $ | 19,674 | | $ | 66,953 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO G-III APPAREL GROUP, LTD.: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income per common share | | $ | 1.29 | | $ | 2.20 | | $ | 2.68 | | $ | 3.14 | | $ | 0.36 | | $ | 0.76 | | $ | 0.43 | | $ | 1.39 |
Weighted average number of shares outstanding | | | 47,488 | | | 48,567 | | | 47,832 | | | 48,474 | | | 45,714 | | | 47,999 | | | 45,996 | | | 48,007 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Diluted: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income per common share | | $ | 1.26 | | $ | 2.16 | | $ | 2.62 | | $ | 3.07 | | $ | 0.35 | | $ | 0.74 | | $ | 0.42 | �� | $ | 1.36 |
Weighted average number of shares outstanding | | | 48,475 | | | 49,458 | | | 48,866 | | | 49,499 | | | 46,570 | | | 49,019 | | | 46,992 | | | 49,061 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 60,846 | | $ | 106,472 | | $ | 127,537 | | $ | 151,957 | | $ | 16,236 | | $ | 36,065 | | $ | 19,377 | | $ | 66,691 |
Other comprehensive income: | | | | | | | | | | | | | ||||||||||||
Other comprehensive income (loss): | | | | | | | | | | | | | ||||||||||||
Foreign currency translation adjustments | | | (26,473) | | | (4,402) | | | (28,111) | | | (9,340) | | | 2,359 | | | 2,493 | | | 7,074 | | | (1,637) |
Other comprehensive loss: | | | (26,473) | | | (4,402) | | | (28,111) | | | (9,340) | ||||||||||||
Other comprehensive income (loss) | | | 2,359 | | | 2,493 | | | 7,074 | | | (1,637) | ||||||||||||
Comprehensive income | | $ | 34,373 | | $ | 102,070 | | $ | 99,426 | | $ | 142,617 | | $ | 18,595 | | $ | 38,558 | | $ | 26,451 | | $ | 65,054 |
Comprehensive loss attributable to noncontrolling interests: | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | (257) | | | (202) | | | (519) | | | (206) | | | (202) | | | (254) | | | (297) | | | (262) |
Foreign currency translation adjustments | | | (45) | | | — | | | (104) | | | 6 | | | (26) | | | (62) | | | (24) | | | (60) |
Comprehensive loss attributable to noncontrolling interests | | | (302) | | | (202) | | | (623) | | | (200) | | | (228) | | | (316) | | | (321) | | | (322) |
Comprehensive income attributable to G-III Apparel Group, Ltd. | | $ | 34,071 | | $ | 101,868 | | $ | 98,803 | | $ | 142,417 | | $ | 18,367 | | $ | 38,242 | | $ | 26,130 | | $ | 64,732 |
The accompanying notes are an integral part of these statements.
4
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Accumulated | | | | | Common | | | | ||
| | | | | Additional | | Other | | | | | Stock | | | ||||
| | Common | | Paid-In | | Comprehensive | | Retained | | Held In | | | ||||||
|
| Stock |
| Capital |
| Loss |
| Earnings |
| Treasury |
| Total | ||||||
| | (Unaudited) | ||||||||||||||||
| | (In thousands) | ||||||||||||||||
Balance as of July 31, 2022 | | $ | 264 | | $ | 461,621 | | $ | (16,226) | | $ | 1,183,958 | | $ | (45,616) | | $ | 1,584,001 |
Equity awards exercised/vested, net | | | — | | | (63) | | | — | | | — | | | 63 | | | — |
Share-based compensation expense | | | — | | | 3,672 | | | — | | | — | | | — | | | 3,672 |
Other comprehensive loss, net | | | — | | | — | | | (26,518) | | | — | | | — | | | (26,518) |
Net income attributable to G-III Apparel Group, Ltd. | | | — | | | — | | | — | | | 61,103 | | | — | | | 61,103 |
Balance as of October 31, 2022 | | $ | 264 | | $ | 465,230 | | $ | (42,744) | | $ | 1,245,061 | | $ | (45,553) | | $ | 1,622,258 |
| | | | | | | | | | | | | | | | | | |
Balance as of July 31, 2021 | | $ | 264 | | $ | 447,476 | | $ | (7,026) | | $ | 961,901 | | $ | (22,003) | | $ | 1,380,612 |
Equity awards exercised/vested, net | | | — | | | (63) | | | — | | | — | | | 63 | | | — |
Share-based compensation expense | | | — | | | 3,354 | | | — | | | — | | | — | | | 3,354 |
Taxes paid for net share settlements | | | — | | | 1 | | | — | | | — | | | — | | | 1 |
Other comprehensive loss, net | | | — | | | — | | | (4,402) | | | — | | | — | | | (4,402) |
Net income attributable to G-III Apparel Group, Ltd. | | | — | | | — | | | — | | | 106,674 | | | — | | | 106,674 |
Balance as of October 31, 2021 | | $ | 264 | | $ | 450,768 | | $ | (11,428) | | $ | 1,068,575 | | $ | (21,940) | | $ | 1,486,239 |
| | | | | | | | | | | | | | | | | | |
Balance as of January 31, 2022 | | $ | 264 | | $ | 456,329 | | $ | (14,529) | | $ | 1,117,005 | | $ | (39,157) | | $ | 1,519,912 |
Equity awards exercised/vested, net | | | — | | | (10,226) | | | — | | | — | | | 10,226 | | | — |
Share-based compensation expense | | | — | | | 28,917 | | | — | | | — | | | — | | | 28,917 |
Taxes paid for net share settlements | | | — | | | (9,790) | | | — | | | — | | | — | | | (9,790) |
Other comprehensive loss, net | | | — | | | — | | | (28,215) | | | — | | | — | | | (28,215) |
Repurchases of common stock | | | — | | | — | | | — | | | — | | | (16,622) | | | (16,622) |
Net income attributable to G-III Apparel Group, Ltd. | | | — | | | — | | | — | | | 128,056 | | | — | | | 128,056 |
Balance as of October 31, 2022 | | $ | 264 | | $ | 465,230 | | $ | (42,744) | | $ | 1,245,061 | | $ | (45,553) | | $ | 1,622,258 |
| | | | | | | | | | | | | | | | | | |
Balance as of January 31, 2021 | | $ | 264 | | $ | 448,417 | | $ | (2,094) | | $ | 916,683 | | $ | (27,029) | | $ | 1,336,241 |
Equity awards exercised/vested, net | | | — | | | (5,089) | | | — | | | — | | | 5,089 | | | — |
Share-based compensation expense | | | — | | | 11,773 | | | — | | | — | | | — | | | 11,773 |
Taxes paid for net share settlements | | | — | | | (4,333) | | | — | | | — | | | — | | | (4,333) |
Cumulative effect of change in accounting principle | | | — | | | — | | | — | | | (271) | | | — | | | (271) |
Other comprehensive loss, net | | | — | | | — | | | (9,334) | | | — | | | — | | | (9,334) |
Net income attributable to G-III Apparel Group, Ltd. | | | — | | | — | | | — | | | 152,163 | | | — | | | 152,163 |
Balance as of October 31, 2021 | | $ | 264 | | $ | 450,768 | | $ | (11,428) | | $ | 1,068,575 | | $ | (21,940) | | $ | 1,486,239 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Accumulated | | | | | Common | | | | ||
| | | | | Additional | | Other | | | | | Stock | | | ||||
| | Common | | Paid-In | | Comprehensive | | Retained | | Held In | | | ||||||
|
| Stock |
| Capital |
| Loss |
| Earnings |
| Treasury |
| Total | ||||||
| | (Unaudited) | ||||||||||||||||
| | (In thousands) | ||||||||||||||||
Balance as of April 30, 2023 | | $ | 264 | | $ | 472,474 | | $ | (6,936) | | $ | 987,180 | | $ | (72,535) | | $ | 1,380,447 |
Equity awards vested, net | | | — | | | (15,940) | | | — | | | — | | | 15,940 | | | — |
Share-based compensation expense | | | — | | | 3,001 | | | — | | | — | | | — | | | 3,001 |
Taxes paid for net share settlements | | | — | | | (10,773) | | | — | | | — | | | — | | | (10,773) |
Other comprehensive income, net | | | — | | | — | | | 2,333 | | | — | | | — | | | 2,333 |
Repurchases of common stock | | | — | | | — | | | — | | | — | | | (9,331) | | | (9,331) |
Net income attributable to G-III Apparel Group, Ltd. | | | — | | | — | | | — | | | 16,438 | | | — | | | 16,438 |
Balance as of July 31, 2023 | | $ | 264 | | $ | 448,762 | | $ | (4,603) | | $ | 1,003,618 | | $ | (65,926) | | $ | 1,382,115 |
| | | | | | | | | | | | | | | | | | |
Balance as of April 30, 2022 | | $ | 264 | | $ | 460,999 | | $ | (18,657) | | $ | 1,147,639 | | $ | (31,953) | | $ | 1,558,292 |
Equity awards vested, net | | | — | | | (2,959) | | | — | | | — | | | 2,959 | | | — |
Share-based compensation expense | | | — | | | 4,696 | | | — | | | — | | | — | | | 4,696 |
Taxes paid for net share settlements | | | — | | | (1,115) | | | — | | | — | | | — | | | (1,115) |
Other comprehensive income, net | | | — | | | — | | | 2,431 | | | — | | | — | | | 2,431 |
Repurchases of common stock | | | — | | | — | | | — | | | — | | | (16,622) | | | (16,622) |
Net income attributable to G-III Apparel Group, Ltd. | | | — | | | — | | | — | | | 36,319 | | | — | | | 36,319 |
Balance as of July 31, 2022 | | $ | 264 | | $ | 461,621 | | $ | (16,226) | | $ | 1,183,958 | | $ | (45,616) | | $ | 1,584,001 |
| | | | | | | | | | | | | | | | | | |
Balance as of January 31, 2023 | | $ | 264 | | $ | 468,712 | | $ | (11,653) | | $ | 983,944 | | $ | (55,819) | | $ | 1,385,448 |
Equity awards vested, net | | | — | | | (15,993) | | | — | | | — | | | 15,993 | | | — |
Share-based compensation expense | | | — | | | 6,838 | | | — | | | — | | | — | | | 6,838 |
Taxes paid for net share settlements | | | — | | | (10,795) | | | — | | | — | | | — | | | (10,795) |
Other comprehensive income, net | | | — | | | — | | | 7,050 | | | — | | | — | | | 7,050 |
Repurchases of common stock | | | — | | | — | | | — | | | — | | | (26,100) | | | (26,100) |
Net income attributable to G-III Apparel Group, Ltd. | | | — | | | — | | | — | | | 19,674 | | | — | | | 19,674 |
Balance as of July 31, 2023 | | $ | 264 | | $ | 448,762 | | $ | (4,603) | | $ | 1,003,618 | | $ | (65,926) | | $ | 1,382,115 |
| | | | | | | | | | | | | | | | | | |
Balance as of January 31, 2022 | | $ | 264 | | $ | 456,329 | | $ | (14,529) | | $ | 1,117,005 | | $ | (39,157) | | $ | 1,519,912 |
Equity awards vested, net | | | — | | | (10,163) | | | — | | | — | | | 10,163 | | | — |
Share-based compensation expense | | | — | | | 25,245 | | | — | | | — | | | — | | | 25,245 |
Taxes paid for net share settlements | | | — | | | (9,790) | | | — | | | — | | | — | | | (9,790) |
Other comprehensive loss, net | | | — | | | — | | | (1,697) | | | — | | | — | | | (1,697) |
Repurchases of common stock | | | — | | | — | | | — | | | — | | | (16,622) | | | (16,622) |
Net income attributable to G-III Apparel Group, Ltd. | | | — | | | — | | | — | | | 66,953 | | | — | | | 66,953 |
Balance as of July 31, 2022 | | $ | 264 | | $ | 461,621 | | $ | (16,226) | | $ | 1,183,958 | | $ | (45,616) | | $ | 1,584,001 |
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, | | Six Months Ended July 31, | ||||||||
|
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||
| | (Unaudited, in thousands) | | (Unaudited, in thousands) | ||||||||
Cash flows from operating activities | | | | | | | | | | | | |
Net income attributable to G-III Apparel Group, Ltd. | | $ | 128,056 | | $ | 152,163 | | $ | 19,674 | | $ | 66,953 |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | ||||||
Depreciation and amortization | | | 20,021 | | | 21,166 | | | 12,535 | | | 12,751 |
Loss on disposal of fixed assets | | | 127 | | | 55 | | | 319 | | | 33 |
Non-cash operating lease costs | | | 38,264 | | | 31,635 | | | 29,815 | | | 24,233 |
Gain on lease terminations | | | (38) | | | — | ||||||
Asset impairment | | | 250 | | | — | ||||||
Dividend received from unconsolidated affiliate | | | — | | | 1,376 | ||||||
Equity gain in unconsolidated affiliates | | | (817) | | | (2,783) | ||||||
Equity gain (loss) in unconsolidated affiliates | | | 978 | | | (980) | ||||||
Change in fair value of equity securities | | | 1,182 | | | (1,206) | | | (1,009) | | | 1,718 |
Share-based compensation | | | 28,917 | | | 11,773 | | | 6,838 | | | 25,245 |
Deferred financing charges and debt discount amortization | | | 7,629 | | | 7,212 | | | 4,549 | | | 5,057 |
Deferred income taxes | | | (1,347) | | | 1,747 | | | 1,031 | | | (226) |
Non-cash gain on fair value of prior minority ownership of Karl Lagerfeld | | | (30,925) | | | — | | | — | | | (30,925) |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable, net | | | (248,280) | | | (351,683) | | | 155,602 | | | 145,134 |
Inventories | | | (355,313) | | | (32,488) | | | (95,513) | | | (496,351) |
Income taxes, net | | | 29,444 | | | 52,229 | | | (8,733) | | | 15,009 |
Prepaid expenses and other current assets | | | 5,274 | | | 9,071 | | | (321) | | | (5,767) |
Other assets, net | | | (718) | | | 1,003 | | | (3,883) | | | (307) |
Customer refund liabilities | | | 12,740 | | | (18,085) | | | (33,537) | | | (30,404) |
Operating lease liabilities | | | (38,312) | | | (34,720) | | | (30,242) | | | (23,547) |
Accounts payable, accrued expenses and other liabilities | | | (11,484) | | | 136,147 | | | 154,376 | | | 182,480 |
Net cash used in operating activities | | | (415,330) | | | (15,388) | ||||||
Net cash provided by (used in) operating activities | | | 212,479 | | | (109,894) | ||||||
| | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | |
Operating lease assets initial direct costs | | | (85) | | | — | | | (52) | | | (87) |
Investment in e-commerce retailer | | | (25,000) | | | (25,000) | | | — | | | (25,000) |
Investment in equity interest of private company | | | (3,600) | | | — | ||||||
Investment in equity securities | | | (22,378) | | | — | | | — | | | (22,378) |
Sale of equity securities | | | 22,434 | | | — | ||||||
Capital expenditures | | | (14,803) | | | (13,004) | | | (11,117) | | | (8,526) |
Acquisition of KLH, net of cash acquired | | | (168,592) | | | — | | | — | | | (168,592) |
Acquisition of other foreign business, net of cash acquired | | | (2,701) | | | — | ||||||
Investment in brand acquisition | | | — | | | (13,266) | ||||||
Net cash used in investing activities | | | (211,125) | | | (51,270) | | | (14,769) | | | (224,583) |
| | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | |
Repayment of borrowings - revolving facility | | | (172,513) | | | — | | | (85,400) | | | (8,647) |
Proceeds from borrowings - revolving facility | | | 512,748 | | | — | | | 5,313 | | | 57,946 |
Repayment of borrowings - LVMH Note | | | (75,000) | | | — | ||||||
Repayment of borrowings - foreign facilities | | | (28,512) | | | (277) | | | (75,116) | | | (600) |
Proceeds from borrowings - foreign facilities | | | 36,863 | | | 100 | | | 72,773 | | | 581 |
Purchase of treasury shares | | | (16,622) | | | — | | | (26,100) | | | (16,622) |
Taxes paid for net share settlements | | | (9,790) | | | (4,333) | | | (10,795) | | | (9,790) |
Net cash provided by (used in) financing activities | | | 322,174 | | | (4,510) | ||||||
Net cash (used in) provided by financing activities | | | (194,325) | | | 22,868 | ||||||
| | | | | | | | | | | | |
Foreign currency translation adjustments | | | (10,984) | | | (1,202) | | | 2,698 | | | (3,398) |
Net decrease in cash and cash equivalents | | | (315,265) | | | (72,370) | ||||||
Net increase (decrease) in cash and cash equivalents | | | 6,083 | | | (315,007) | ||||||
Cash and cash equivalents at beginning of period | | | 465,984 | | | 351,934 | | | 191,652 | | | 465,984 |
Cash and cash equivalents at end of period | | $ | 150,719 | | $ | 279,564 | | $ | 197,735 | | $ | 150,977 |
| | | | | | | | | | | | |
Supplemental disclosures of cash flow information | | | | | | | | | | | | |
Cash payments: | | | | | | | | | | | | |
Interest, net | | $ | 38,391 | | $ | 36,954 | | $ | 16,052 | | $ | 18,576 |
Income tax payments, net | | $ | 4,643 | | $ | 5,370 | | $ | 6,278 | | $ | 6,733 |
Stock received from licensing agreement | | $ | — | | $ | 4,831 |
The accompanying notes are an integral part of these statements.
6
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NoteNOTE 1 – Basis of PresentationBASIS 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 forunder several product categories.
The Company consolidates the accounts of its wholly-owned and majority-owned subsidiaries. Fabco Holding B.V. (“Fabco”) is a Dutch joint venture limited liability company that is 75% owned by the Company and is treated as a consolidated majority-owned subsidiary. Sonia Rykiel is a wholly-owned operating subsidiary. Karl Lagerfeld Holding B.V. (“KLH”) is a Dutch limited liability company that was 19% owned by the Company through May 30, 2022 and was accounted for during that time using the equity method of accounting. Effective May 31, 2022, the Company acquired the remaining 81% interest in KLH that it did not previously own and, as a result, KLH began being treated as a consolidated wholly-owned subsidiary. KL North America B.V. (“KLNA”) is a Dutch joint venture limited liability company that was 49% owned by the Company and 51% indirectly owned by KLH through May 30, 2022 and was accounted for during that time using the equity method of accounting. Effective May 31, 2022, KLNA became an indirect wholly-owned subsidiary of the Company as a result of the Company’s acquisition of the remaining 81% interest in KLH it did not previously own. All material intercompany balances and transactions have been eliminated. The results of KLH are included in the Company’s consolidated financial statements beginning May 31, 2022.
KLH, Vilebrequin International SA (“Vilebrequin”), a Swiss corporation that is wholly-owned by the Company, KLH, Fabco Holding B.V. (“Fabco”) and Sonia Rykiel which the Company purchased in October 2021, report results on a calendar year basis rather than on the January 31 fiscal year basis used by the Company. Accordingly, the results of KLH, Vilebrequin, KLH, Fabco and Sonia Rykiel are 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-monthsix-month period ended OctoberJuly 31, 2022,2023, the results of KLH, Vilebrequin, Fabco and Sonia Rykiel are included for the nine-monthsix-month period ended SeptemberJune 30, 2022.2023. For the three and nine month periodsyear ended September 30, 2022,January 31, 2023, the results of KLH, which includes KLNA, are included for the period from July 1, 2022 through September 30, 2022 and June 1, 2022 through September 30, 2022, respectively.December 31, 2022. The results of the Company’s previous 49% ownership interest in KLNA and 19% ownership interest in KLH are included for the period from FebruaryJanuary 1, 2022 through May 30, 2022. The Company’s retail operations segment reports on a 52/53-week53 week fiscal year. For fiscal 20232024 and 2022,2023, the three and nine-monthsix-month periods for the retail operations segment were each 13-week and 39-week26-week periods, respectively, and ended on OctoberJuly 29, 2023 and July 30, 2022, and October 30, 2021, respectively.
The results for the three and ninesix months ended OctoberJuly 31, 20222023 are not necessarily indicative of the results expected for the entire fiscal year, given the seasonal nature of the Company’s business and the effects of the COVID-19 pandemic on the Company’s business. The accompanying financial statements included herein are unaudited. All adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim period presented have been reflected.
The accompanying financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 20222023 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 the 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.
7
NoteNOTE 2 – Allowance for Doubtful AccountsALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company’s financial instruments consist of trade receivables arising from revenue transactions in the ordinary course of business. The Company considers its trade receivables to consist of two portfolio segments: wholesale and retail trade
7
receivables. Wholesale trade receivables result from credit the Company has extended to its wholesale customers based on pre-defined criteria and are generally due within 30 to 60 days. Retail trade receivables primarily relate to amounts due from third-party credit card processors for the settlement of debit and credit card transactions and are typically collected within 3 to 5 days.
The Company’s accounts receivable and allowance for doubtful accounts as of OctoberJuly 31, 2022, October2023, July 31, 20212022 and January 31, 20222023 were:
| | | | | | | | | | | | | | | | | | |
| | October 31, 2022 | | July 31, 2023 | ||||||||||||||
|
| Wholesale |
| Retail |
| Total |
| Wholesale |
| Retail |
| Total | ||||||
| | (In thousands) | | (In thousands) | ||||||||||||||
Accounts receivable, gross | | $ | 898,383 | | $ | 1,010 | | $ | 899,393 | | $ | 536,711 | | $ | 1,141 | | $ | 537,852 |
Allowance for doubtful accounts | | | (18,192) | | | (66) | | | (18,258) | | | (18,428) | | | (63) | | | (18,491) |
Accounts receivable, net | | $ | 880,191 | | $ | 944 | | $ | 881,135 | | $ | 518,283 | | $ | 1,078 | | $ | 519,361 |
| | | | | | | | | | | | | | | | | | |
| | October 31, 2021 | | July 31, 2022 | ||||||||||||||
| | Wholesale |
| Retail |
| Total | | Wholesale |
| Retail |
| Total | ||||||
| | (In thousands) | | (In thousands) | ||||||||||||||
Accounts receivable, gross | | $ | 860,245 | | $ | 1,586 | | $ | 861,831 | | $ | 505,635 | | $ | 955 | | $ | 506,590 |
Allowance for doubtful accounts | | | (17,412) | | | (37) | | | (17,449) | | | (18,001) | | | (66) | | | (18,067) |
Accounts receivable, net | | $ | 842,833 | | $ | 1,549 | | $ | 844,382 | | $ | 487,634 | | $ | 889 | | $ | 488,523 |
| | | | | | | | | | | | | | | | | | |
| | January 31, 2022 | | January 31, 2023 | ||||||||||||||
| | Wholesale |
| Retail |
| Total | | Wholesale |
| Retail |
| Total | ||||||
| | (In thousands) | | (In thousands) | ||||||||||||||
Accounts receivable, gross | | $ | 620,737 | | $ | 2,166 | | $ | 622,903 | | $ | 692,033 | | $ | 1,227 | | $ | 693,260 |
Allowance for doubtful accounts | | | (17,307) | | | (84) | | | (17,391) | | | (18,237) | | | (60) | | | (18,297) |
Accounts receivable, net | | $ | 603,430 | | $ | 2,082 | | $ | 605,512 | | $ | 673,796 | | $ | 1,167 | | $ | 674,963 |
The allowance for doubtful accounts for wholesale trade receivables is estimated based on several factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations (such as in the case of bankruptcy filings (including potential bankruptcy filings), extensive delay in payment or substantial downgrading by credit rating agencies), a specific reserve for bad debt is recorded against amounts due from that customer to reduce the net recognized receivable to the amount reasonably expected to be collected. For all other wholesale customers, an allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the end of the reporting period for financial statements, assessments of collectability based on historical trends and an evaluation of the impact of economic conditions. The Company considers both current and forecasted future economic conditions in determining the adequacy of its allowance for doubtful accounts.
The allowance for doubtful accounts for retail trade receivables is estimated at the credit card chargeback rate applied to the previous 90 days of credit card sales. In addition, the Company considers both current and forecasted future economic conditions in determining the adequacy of its allowance for doubtful accounts.
8
The Company had the following activity in its allowance for credit losses:
| | | | | | | | | | | | | | | | | | |
|
| Wholesale |
| Retail |
| Total |
| Wholesale |
| Retail |
| Total | ||||||
| | (In thousands) | | (In thousands) | ||||||||||||||
Balance as of January 31, 2023 | | $ | (18,237) | | $ | (60) | | $ | (18,297) | |||||||||
Provision for credit losses, net | | | (192) | | | (3) | | | (195) | |||||||||
Accounts written off as uncollectible | | | 1 | | | — | | | 1 | |||||||||
Balance as of July 31, 2023 | | $ | (18,428) | | $ | (63) | | $ | (18,491) | |||||||||
| | | | | | | | | | |||||||||
Balance as of January 31, 2022 | | $ | (17,307) | | $ | (84) | | $ | (17,391) | | $ | (17,307) | | $ | (84) | | $ | (17,391) |
Provision for credit losses, net | | | (935) | | | 18 | | | (917) | | | (737) | | | 18 | | | (719) |
Accounts written off as uncollectible | | | 50 | | | — | | | 50 | | | 43 | | | — | | | 43 |
Balance as of October 31, 2022 | | $ | (18,192) | | $ | (66) | | $ | (18,258) | |||||||||
Balance as of July 31, 2022 | | $ | (18,001) | | $ | (66) | | $ | (18,067) | |||||||||
| | | | | | | | | | | | | | | | | | |
Balance as of January 31, 2021 | | $ | (17,429) | | $ | (30) | | $ | (17,459) | |||||||||
Balance as of January 31, 2022 | | $ | (17,307) | | $ | (84) | | $ | (17,391) | |||||||||
Provision for credit losses, net | | | (54) | | | (7) | | | (61) | | | (1,002) | | | 24 | | | (978) |
Accounts written off as uncollectible | | | 71 | | | — | | | 71 | | | 72 | | | — | | | 72 |
Balance as of October 31, 2021 | | $ | (17,412) | | $ | (37) | | $ | (17,449) | |||||||||
| | | | | | | | | | |||||||||
Balance as of January 31, 2021 | | $ | (17,429) | | $ | (30) | | $ | (17,459) | |||||||||
Provision for credit losses, net | | | (103) | | | (54) | | | (157) | |||||||||
Accounts written off as uncollectible | | | 225 | | | — | | | 225 | |||||||||
Balance as of January 31, 2022 | | $ | (17,307) | | $ | (84) | | $ | (17,391) | |||||||||
Balance as of January 31, 2023 | | $ | (18,237) | | $ | (60) | | $ | (18,297) |
NoteNOTE 3 – InventoriesINVENTORIES
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 and 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.
The inventory return asset, which consists of the amount of goods that are anticipated to be returned by customers, was $17.1$8.5 million, $13.9$9.3 million and $18.9$19.2 million as of OctoberJuly 31, 2022, October2023, July 31, 20212022 and January 31, 2022,2023, respectively. The inventory return asset is recorded within prepaid expenses and other current assets on the condensed consolidated balance sheets.
Inventory held on consignment by the Company’s customers totaled $6.5$7.9 million, $5.6$5.7 million and $4.5$6.6 million at OctoberJuly 31, 2022, October2023, July 31, 20212022 and January 31, 2022,2023, respectively. Consignment inventory is held by the Company’s customers. The Company reflects this inventory on its condensed consolidated balance sheets.
NoteNOTE 4 – Fair Value of Financial InstrumentsFAIR 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. |
9
The following table summarizes the carrying values and the estimated fair values of the Company’s debt instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Carrying Value | | Fair Value | | | | Carrying Value | | Fair Value | ||||||||||||||||||||||||||||
| | |
| October 31, | | October 31, | | January 31, |
| October 31, | | October 31, | | January 31, | | |
| July 31, | | July 31, | | January 31, |
| July 31, | | July 31, | | January 31, | ||||||||||||
Financial Instrument | | Level | | 2022 | | 2021 | | 2022 | | 2022 | | 2021 | | 2022 | | Level | | 2023 | | 2022 | | 2023 | | 2023 | | 2022 | | 2023 | ||||||||||||
| | | | (In thousands) | | | | (In thousands) | ||||||||||||||||||||||||||||||||
Secured Notes | | 1 | | $ | 400,000 | | $ | 400,000 | | $ | 400,000 | | $ | 379,000 | | $ | 400,000 | | $ | 422,020 | | 1 | | $ | 400,000 | | $ | 400,000 | | $ | 400,000 | | $ | 393,000 | | $ | 394,000 | | $ | 380,000 |
Revolving credit facility | | 2 | | | 340,235 | | | — | | | — | | | 340,235 | | | — | | | — | | 2 | | | — | | | 51,614 | | | 80,087 | | | — | | | 51,614 | | | 80,087 |
Note issued to LVMH | | 3 | | | 119,415 | | | 112,613 | | | 114,255 | | | 118,173 | | | 107,983 | | | 110,123 | | 3 | | | 49,105 | | | 117,665 | | | 121,202 | | | 48,391 | | | 114,796 | | | 119,426 |
Unsecured loans | | 2 | | | 10,446 | | | 8,444 | | | 8,367 | | | 10,446 | | | 8,444 | | | 8,367 | | 2 | | | 9,913 | | | 7,969 | | | 10,866 | | | 9,913 | | | 7,969 | | | 10,866 |
Overdraft facilities | | 2 | | | 3,664 | | | 2,841 | | | 2,903 | | | 3,664 | | | 2,841 | | | 2,903 | | 2 | | | 2,202 | | | 3,233 | | | 3,657 | | | 2,202 | | | 3,233 | | | 3,657 |
Foreign credit facility | | 2 | | | 10,416 | | | — | | | — | | | 10,416 | | | — | | | — | | 2 | | | 8,213 | | | 391 | | | 7,792 | | | 8,213 | | | 391 | | | 7,792 |
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 fair value of the Company’s secured notes is based on their current market price as of OctoberJuly 31, 2022.2023. 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 in the original principal amount of $125 million (the “LVMH Note”) issued to LVMH Moet Hennessy Louis Vuitton Inc. (“LVMH”) in connection with the acquisition of DKNY and Donna Karan was recorded on the balance sheet at a discount of $40.0 million in accordance with ASC 820 – Fair Value Measurements(“ASC 820”). For purposes of this fair value disclosure, the Company based its fair value estimate for the LVMH Note on the initial fair value as determined at the date of the acquisition of DKNY and Donna Karan and records the amortization using the effective interest method over the term of the LVMH Note. The Company repaid $75.0 million of the principal amount of the LVMH Note on June 1, 2023.
The fair value of the LVMH Note was considered a Level 3 valuation in the fair value hierarchy.
Non-Financial Assets and Liabilities
The Company’s non-financial assets that are measured at fair value on a nonrecurring basis include long-lived assets, which consist primarily of property and equipment and operating lease assets. The Company reviews these assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable. For assets that are not recoverable, an impairment loss is recognized equal to the difference between the carrying amount of the asset or asset group and its estimated fair value. For operating lease assets, the Company determines the fair value of the assets by discounting the estimated market rental rates over the remaining term of the lease. These fair value measurements are considered level 3 measurements in the fair value hierarchy. During the fourth quarter of fiscal 2022,2023, the Company recorded a $1.5$2.7 million impairment charge primarily related to leasehold improvements, furniture and fixtures and operating lease assets at certain DKNY, Karl Lagerfeld Paris and Vilebrequin stores as a result of the performance atof these stores.
NoteNOTE 5 – LeasesLEASES
The Company leases retail stores, warehouses, distribution centers, office space and certain equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
Most leases are for a term of one to ten years. Some leases include one or more options to renew, with renewal terms that can extend the lease term from one to ten years. Several of the Company’s retail store leases include an option to terminate the lease based on failure to achieve a specified sales volume. The exercise of lease renewal options is generally at the Company’s sole discretion. The exercise of lease termination options is generally by mutual agreement between the Company and the lessor.
10
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.
The Company’s operating lease assets and liabilities as of OctoberJuly 31, 2022, October2023, July 31, 20212022 and January 31, 20222023 consist of the following:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Leases | | Classification | | October 31, 2022 | | October 31, 2021 | | January 31, 2022 | | Classification | | July 31, 2023 | | July 31, 2022 | | January 31, 2023 | ||||||
| | | | (In thousands) | | | | (In thousands) | ||||||||||||||
Assets | | | | | | | | | | | | | | | | | | | | | | |
Operating | | Operating lease assets | | $ | 216,663 | | $ | 176,530 | | $ | 169,595 | | Operating lease assets | | $ | 229,723 | | $ | 209,000 | | $ | 239,665 |
| | | | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | |
Current operating | | Current operating lease liabilities | | $ | 50,645 | | $ | 45,117 | | $ | 42,763 | | Current operating lease liabilities | | $ | 54,563 | | $ | 49,734 | | $ | 52,917 |
Noncurrent operating | | Noncurrent operating lease liabilities | | | 185,171 | | | 147,688 | | | 142,868 | | Noncurrent operating lease liabilities | | | 192,981 | | | 179,247 | | | 204,974 |
Total lease liabilities | | | | $ | 235,816 | | $ | 192,805 | | $ | 185,631 | | | | $ | 247,544 | | $ | 228,981 | | $ | 257,891 |
The Company’s operating lease assets and operating lease liabilities increased during fiscal 2023 primarily due to the acquisition of KLH. The Company recorded lease costs of $17.1$18.3 million and $46.1$36.9 million during the three and ninesix months ended OctoberJuly 31, 2022, respectively.2023. The Company recorded lease costs of $14.0$14.9 million and $41.1$29.0 million during the three and ninesix months ended OctoberJuly 31, 2021, respectively.2022. Lease costs are recorded within selling, general and administrative expenses in the Company’s condensed consolidated statements of operations and comprehensive income. The Company recorded variable lease costs and short-term lease costs of $6.1$5.5 million and $16.7$11.5 million for the three and ninesix months ended OctoberJuly 31, 2022, respectively.2023. The Company recorded variable lease costs and short-term lease costs of $2.8$5.5 million and $6.2$10.6 million for the three and ninesix months ended OctoberJuly 31, 2021, respectively.2022. Short-term lease costs are immaterial.
As of OctoberJuly 31, 2022,2023, the Company’s maturity of operating lease liabilities in the years ending up to January 31, 20272028 and thereafter are as follows:
| | | | | | |
Year Ending January 31, | | Amount | | Amount | ||
| | (In thousands) | | (In thousands) | ||
2023 | | $ | 17,526 | |||
2024 | | | 63,708 | | $ | 35,619 |
2025 | | | 55,124 | | | 71,325 |
2026 | | | 44,808 | | | 58,290 |
2027 | | | 34,691 | | | 45,480 |
After 2027 | | | 75,086 | |||
2028 | | | 36,938 | |||
After 2028 | | | 58,013 | |||
Total lease payments | | $ | 290,943 | | $ | 305,665 |
Less: Interest | | | 55,127 | | | 58,121 |
Present value of lease liabilities | | $ | 235,816 | | $ | 247,544 |
As of OctoberJuly 31, 2022,2023, there are no material leases that are legally binding but have not yet commenced.
As of OctoberJuly 31, 2022,2023, the weighted average remaining lease term related to operating leases is 5.55.1 years. The weighted average discount rate related to operating leases is 7.7%8.4%.
Cash paid for amounts included in the measurement of operating lease liabilities is $47.6was $39.3 million and $44.5$30.0 million during the ninesix months ended OctoberJuly 31, 20222023 and October 31, 2021,2022, respectively. Right-of-use assets obtained in exchange for lease obligations were $96.7$18.1 million and $24.6$69.9 million during the ninesix months ended OctoberJuly 31, 20222023 and October 31, 2021,2022, respectively.
11
NoteNOTE 6 – Karl Lagerfeld AcquisitionKARL LAGERFELD ACQUISITION
On April 29, 2022, the Company entered into a share purchase agreement (the “Purchase Agreement”) with a group of investors pursuant to which the Company agreed to acquire on the terms set forth and subject to the conditions set forth in the Purchase Agreement, the remaining 81% interest in KLH that it did not already own, for an aggregate consideration
11
consideration of €193.4 million (approximately $216.8$207.6 million) in cash, after taking into account certain adjustments. The acquisition closed on May 31, 2022. The Company funded the purchase price from cash on hand.
On May 31, 2022, the effective date of the acquisition, the Company’s previously held 19% investment in KLH and 49% investment in KLNA were remeasured at fair value using a market approach based on the purchase price of the acquisition and a discount for lack of control related to the Company’s previously held minority investment in KLH. As a result of this remeasurement, a non-cash gain of $30.9$27.1 million was recorded as of the effective date of the acquisition.
The addition of KLHKarl Lagerfeld to the Company’s portfolio of owned brands advances several of its strategic initiatives, including increasing its direct ownership of brands and their licensing opportunities and further diversifying its global presence. This acquisition offers additional opportunities to expand the Company’s international growth by further developing its European-based brands, which also include Vilebrequin and Sonia Rykiel. The Company believes that KLH’sKarl Lagerfeld’s existing digital channel presence provides an opportunity for the Company to enhance its omni-channel business and further accelerate its digital initiatives.
Purchase Price Consideration
The purchase price of $216.8$207.6 million, after taking into account certain adjustments, was paid from cash on hand. The purchase price has been revised to include adjustments in accordance with the Purchase Agreement.
The initial purchase price and the valuation of the prior minority ownership for the acquisition of KLH is as follows (in thousands):
| | | | | ||
Cash disbursed for the acquisition of KLH | | $ | 168,592 | | $ | 168,592 |
Plus: cash acquired | | 38,499 | | 38,499 | ||
Plus: aggregate adjustments to purchase price | | | 9,729 | | | 516 |
Initial purchase price | | 216,820 | | 207,607 | ||
Plus: fair value of prior minority ownership | | | 102,858 | | | 102,858 |
Total consideration | | $ | 319,678 | | $ | 310,465 |
12
Allocation of the Purchase Price Consideration
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
| | | | | ||
(In thousands) | | | | | ||
Cash and cash equivalents | | $ | 38,499 | | $ | 38,499 |
Accounts receivable, net | | 27,331 | | 28,449 | ||
Inventories | | 33,489 | | 33,489 | ||
Prepaid income taxes | | 1,100 | | 1,100 | ||
Prepaid expenses and other current assets | | 3,347 | | 3,347 | ||
Property, plant and equipment, net | | 11,545 | | 11,545 | ||
Operating lease assets | | 55,753 | | 55,753 | ||
Goodwill | | 45,894 | | 84,336 | ||
Trademarks | | 178,823 | | 178,823 | ||
Customer relationships | | 4,294 | | 4,294 | ||
Investments in unconsolidated affiliates | | 1,381 | ||||
Deferred income taxes | | 9,183 | | 5,131 | ||
Other long-term assets | | | 2,237 | | | 2,237 |
Total assets acquired | | $ | 412,876 | | $ | 447,003 |
Notes payable | | 3,606 | | 3,606 | ||
Accounts payable | | 8,057 | | 9,175 | ||
Accrued expenses | | 15,261 | | 15,261 | ||
Operating lease liabilities | | 58,942 | | 58,942 | ||
Income taxes payable | | 2,099 | | 2,099 | ||
Deferred income taxes | | 42,222 | ||||
Other long-term liabilities | | | 5,233 | | | 5,233 |
Total liabilities assumed | | $ | 93,198 | | $ | 136,538 |
Total fair value of acquisition consideration | | $ | 319,678 | | $ | 310,465 |
12
During the quarteryear ended OctoberJanuary 31, 2022,2023, the Company recorded adjustments to the fair values of assets acquired and liabilities assumed at the date of acquisition based on additional information obtained. The Company recorded an additional $2.8$36.9 million in both total assets and total liabilities, primarily related to goodwill, deferred tax assets and liabilities, operating lease assets, inventories, allowance for doubtful accounts goodwill,receivable, net, accounts payable, customer relationships and operating lease liabilities.
The Company recognized goodwill of approximately $45.9$84.3 million in connection with the acquisition of KLH. The goodwill was assigned to the Company’s wholesale operations reporting unit. The Company intends to makemade an election under Internal Revenue Code Section 338(g) to amortize the total goodwill and intangible assets over a 15 year period for income tax purposes in the United States.
The fair values assigned to identifiable intangible assets acquired were based on assumptions and estimates made by management using unobservable inputs reflecting the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability based on the best information available. The fair values of the trademarks were determined using the relief from royalty method and the fair value of the customer relationships were determined using an income approach. The Company classifies these intangibles as Level 3 fair value measurements. Identifiable intangible assets acquired include the following (in thousands):
| | | | | | |
| | | | | Weighted Average | |
| | Fair Value | | Amortization Period | ||
Trademarks | | $ | 178,823 | | | — |
Customer relationships | | | 4,294 | | | 8 |
| | $ | 183,117 | | | — |
The Company recognized approximately $5.4$5.6 million of acquisition related costs that were expensed in fiscal 20222023 and fiscal 2023.2022. The fiscal 20222023 and fiscal 20232022 acquisition and integration costs arewere recorded within selling, general and administrative expenses in the Company’s condensed consolidated statements of operations and comprehensive income for the fiscal yearyears ended January 31, 20222023 and for the nine months ended October 31, 2022, respectively.
13
The estimates of fair value of assets acquired and liabilities assumed are preliminary and subject to change based on completionhave been finalized as of certain working capital adjustments and the tax implications of the Company’s purchase price allocation. The purchase price allocation for acquired companies can be modified for up to one year from the date of acquisition.
Net Sales, Operating Income and Pro Forma Impact of the Transaction
The amount of net sales and operating income of KLH since the acquisition date included in the condensed consolidated statements of operations and comprehensive income for the three months ended OctoberMay 31, 2022 were $51.9 million and $4.0 million, respectively. The amount of net sales and operating income of KLH since the acquisition date included in the condensed consolidated statements of operations comprehensive income for the nine months ended October 31, 2022 were $69.2 million and $5.1 million, respectively.
The following table reflects the unaudited pro forma consolidated results of operations of the Company for the periods presented, as though the acquisition of KLH had occurred on February 1, 2021.
| | | | | | | | | | | | |
| | Three Months Ended October 31, | | Nine Months Ended October 31, | ||||||||
| | 2022 | | 2021 | | 2022 | | 2021 | ||||
| | (unaudited, in thousands, except per share amounts) | ||||||||||
Net sales | | $ | 1,078,299 | | $ | 1,054,143 | | $ | 2,441,024 | | $ | 2,127,604 |
Net income | | | 63,729 | | | 105,240 | | | 105,428 | | | 168,397 |
Earnings per share: | | | | | | | | | | | | |
Basic | | | 1.33 | | | 2.17 | | | 2.20 | | | 3.48 |
Diluted | | | 1.30 | | | 2.13 | | | 2.15 | | | 3.40 |
The pro forma adjustments are based upon available information and certain assumptions that the Company considers reasonable. The unaudited pro forma condensed combined financial data is based on preliminary estimates and assumptions set forth in the accompanying notes. Pro forma adjustments are necessary to reflect (i) the changes in depreciation and amortization expense resulting from fair value adjustments to intangible assets, (ii) amortization of the inventory fair value adjustment, (iii) expenses for incentive compensation arrangements acquired as part of the acquisition agreement, (iv) elimination of royalty expenses related to the Company’s license agreement with KLNA, (v) the taxation of G-III’s and KLH’s combined income as a result of the acquisition, as well as the tax effects related to such pro forma adjustments, (vi) the $30.9 million gain recorded to remeasure to fair value the previously held investments in KLH and KLNA as though the gain was recorded on February 1, 2021 and (vii) adjustments for accounting policy changes to conform to G-III’s presentation. The pro forma results do not include any realized or anticipated cost synergies or other effects of the integration of KLH. Accordingly, such pro forma amounts are not indicative of the results that actually would have occurred had the acquisition been completed on February 1, 2021, nor are they indicative of the future operating results of the combined company.
2023.
Note 7 – Intangible Assets
Intangible assets consist of:
| | | | | | | | | | | |
| | | | | | | | | | | |
October 31, 2022 |
| Estimated Life |
| Gross Carrying Amount |
| Accumulated Amortization | | Net Carrying Amount | |||
| | | | (In thousands) | |||||||
Finite-lived intangible assets | | | | | | | | | | | |
Licenses | | 14 years | | $ | 18,414 | | $ | (16,808) | | $ | 1,606 |
Trademarks | | 8-12 years | | | 2,194 | | | (2,194) | | | — |
Customer relationships | | 15-17 years | | | 51,847 | | | (21,973) | | | 29,874 |
Other | | 5-10 years | | | 7,444 | | | (4,339) | | | 3,105 |
Total finite-lived intangible assets | | | | $ | 79,899 | | $ | (45,314) | | $ | 34,585 |
Indefinite-lived intangible assets | | | | | | | | | | | |
Goodwill | | | | | | | | | | | 303,668 |
Trademarks | | | | | | | | | | | 607,526 |
Total indefinite-lived intangible assets | | | | | | | | | | | 911,194 |
Total intangible assets, net | | | | | | | | | | $ | 945,779 |
14
| | | | | | | | | | | |
| | | | | | | | | | | |
October 31, 2021 |
| Estimated Life |
| Gross Carrying Amount |
| Accumulated Amortization | | Net Carrying Amount | |||
| | | | (In thousands) | |||||||
Finite-lived intangible assets | | | | | | | | | | | |
Licenses | | 14 years | | $ | 19,481 | | $ | (17,088) | | $ | 2,393 |
Trademarks | | 8-12 years | | | 2,194 | | | (2,194) | | | — |
Customer relationships | | 15-17 years | | | 48,291 | | | (19,632) | | | 28,659 |
Other | | 5-10 years | | | 8,526 | | | (7,370) | | | 1,156 |
Total finite-lived intangible assets | | | | $ | 78,492 | | $ | (46,284) | | $ | 32,208 |
Indefinite-lived intangible assets | | | | | | | | | | | |
Goodwill | | | | | | | | | | | 265,116 |
Trademarks | | | | | | | | | | | 450,252 |
Total indefinite-lived intangible assets | | | | | | | | | | | 715,368 |
Total intangible assets, net | | | | | | | | | | $ | 747,576 |
| | | | | | | | | | | |
| | | | | | | | | | | |
January 31, 2022 |
| Estimated Life |
| Gross Carrying Amount |
| Accumulated Amortization | | Net Carrying Amount | |||
| | | | (In thousands) | |||||||
Finite-lived intangible assets | | | | | | | | | | | |
Licenses | | 14 years | | $ | 19,334 | | $ | (17,113) | | $ | 2,221 |
Trademarks | | 8-12 years | | | 2,194 | | | (2,194) | | | — |
Customer relationships | | 15-17 years | | | 48,240 | | | (20,224) | | | 28,016 |
Other | | 5-10 years | | | 8,534 | | | (7,410) | | | 1,124 |
Total finite-lived intangible assets | | | | $ | 78,302 | | $ | (46,941) | | $ | 31,361 |
Indefinite-lived intangible assets | | | | | | | | | | | |
Goodwill | | | | | | | | | | | 262,527 |
Trademarks | | | | | | | | | | | 453,329 |
Total indefinite-lived intangible assets | | | | | | | | | | | 715,856 |
Total intangible assets, net | | | | | | | | | | $ | 747,217 |
Amortization expense
Amortization expense with respect to finite-lived intangibles amounted to $1.0 million and $2.7 million for the three and nine months ended October 31, 2022, respectively. Amortization expense with respect to finite-lived intangibles amounted to $0.9 million and $2.8 million for the three and nine months ended October 31, 2021, respectively. Amortization expense with respect to finite-lived intangibles amounted to $3.7 million for the year ended January 31, 2022.
The estimated amortization expense with respect to intangibles to be recorded for the next five years is as follows:
| | | |
Year Ending January 31, |
| Amortization Expense | |
| | (In thousands) | |
2023 | | $ | 1,275 |
2024 | | | 3,921 |
2025 | | | 3,869 |
2026 | | | 3,811 |
2027 | | | 3,579 |
Intangible assets with finite lives are amortized over their estimated useful lives and measured for impairment when events or circumstances indicate that the carrying value may be impaired.
15
Change in Goodwill
Changes in the amounts of goodwill for the nine months ended October 31, 2022 and the year ended January 31, 2022 are summarized by reportable segment as follows (in thousands):
| | | | | | | | | |
|
| Wholesale |
| Retail |
| Total | |||
January 31, 2021 | | $ | 263,135 | | | — | | $ | 263,135 |
Acquisition of Sonia Rykiel | | | 1,518 | | | — | | | 1,518 |
Currency translation | | | (2,126) | | | — | | | (2,126) |
January 31, 2022 | | | 262,527 | | | — | | | 262,527 |
Acquisition of Karl Lagerfeld | | | 45,894 | | | — | | | 45,894 |
Acquisition of other foreign business | | | 3,523 | | | — | | | 3,523 |
Currency translation | | | (8,276) | | | — | | | (8,276) |
October 31, 2022 | | $ | 303,668 | | $ | — | | $ | 303,668 |
Impairment
Goodwill represents the excess of the purchase price and related costs over the value assigned to net tangible and identifiable intangible assets of businesses acquired and accounted for under the purchase method. The Company reviews and tests its goodwill and intangible assets with indefinite lives for impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may be impaired. The Company performs its goodwill test as of January 31 of each year using a qualitative evaluation or a quantitative test using an income approach through a discounted cash flow analysis methodology. The discounted cash flow approach requires that certain assumptions and estimates be made regarding industry economic factors and future profitability. The Company also performs its annual test for intangible assets with indefinite lives as of January 31 of each year using a qualitative evaluation or a quantitative test using a relief from royalty method, another form of the income approach. The relief from royalty method requires assumptions regarding industry economic factors and future profitability.
The Company performed its annual tests of its wholesale reporting unit and its indefinite-lived trademarks as of January 31, 2022 and determined that no impairment existed at that date. The result of the Company’s annual test determined that the estimated fair value of its wholesale reporting unit and its indefinite-lived trademarks were substantially in excess of their carrying values.
The Company’s indefinite-lived trademark balance is primarily composed of the Donna Karan/DKNY trademark that was acquired in fiscal 2017 and the Karl Lagerfeld trademark that was acquired in fiscal 2023.
The fair value of the Company’s goodwill and indefinite-lived intangible assets are considered a Level 3 valuation in the fair value hierarchy.
Note 8NOTE 7 – Net Income per Common ShareNET INCOME PER COMMON SHARE
Basic net income per common share has been computed using the weighted average number of common shares outstanding during each period. Diluted net income per share, when applicable, is computed using the weighted average number of common shares and potential dilutive common shares, consisting of unvested restricted stock unit awards and stock options outstanding during the period. Approximately 310,600106,000 and 258,600312,500 shares of common stock have been excluded from the diluted net income per share calculation for the three and ninesix months ended OctoberJuly 31, 2022, respectively.2023. Approximately 68,800301,300 and 18,300205,400 shares of common stock have been excluded from the diluted net income per share calculation for the three and ninesix months ended OctoberJuly 31, 2021.2022. All share-based payments outstanding that vest based on the achievement of performance conditions, and for which the respective performance 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 July 31, | | Six Months Ended July 31, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
| | (In thousands, except share and per share amounts) | ||||||||||
Net income attributable to G-III Apparel Group, Ltd. | | $ | 16,438 | | $ | 36,319 | | $ | 19,674 | | $ | 66,953 |
Basic net income per share: | | | | | | | | | | | | |
Basic common shares | | | 45,714 | | | 47,999 | | | 45,996 | | | 48,007 |
Basic net income per share | | $ | 0.36 | | $ | 0.76 | | $ | 0.43 | | $ | 1.39 |
| | | | | | | | | | | | |
Diluted net income per share: | | | | | | | | | | | | |
Basic common shares | | | 45,714 | | | 47,999 | | | 45,996 | | | 48,007 |
Dilutive restricted stock unit awards and stock options | | | 856 | | | 1,020 | | | 996 | | | 1,054 |
Diluted common shares | | | 46,570 | | | 49,019 | | | 46,992 | | | 49,061 |
Diluted net income per share | | $ | 0.35 | | $ | 0.74 | | $ | 0.42 | | $ | 1.36 |
1613
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, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
| | (In thousands, except share and per share amounts) | ||||||||||
Net income attributable to G-III Apparel Group, Ltd. | | $ | 61,103 | | $ | 106,674 | | $ | 128,056 | | $ | 152,163 |
Basic net income per share: | | | | | | | | | | | | |
Basic common shares | | | 47,488 | | | 48,567 | | | 47,832 | | | 48,474 |
Basic net income per share | | $ | 1.29 | | $ | 2.20 | | $ | 2.68 | | $ | 3.14 |
| | | | | | | | | | | | |
Diluted net income per share: | | | | | | | | | | | | |
Basic common shares | | | 47,488 | | | 48,567 | | | 47,832 | | | 48,474 |
Dilutive restricted stock unit awards and stock options | | | 987 | | | 891 | | | 1,034 | | | 1,025 |
Diluted common shares | | | 48,475 | | | 49,458 | | | 48,866 | | | 49,499 |
Diluted net income per share | | $ | 1.26 | | $ | 2.16 | | $ | 2.62 | | $ | 3.07 |
Note 9NOTE 8 – Notes PayableNOTES PAYABLE
Long-term debt consists of the following:
| | | | | | | | | | | | | | | | | | |
|
| October 31, 2022 |
| October 31, 2021 |
| January 31, 2022 |
| July 31, 2023 |
| July 31, 2022 |
| January 31, 2023 | ||||||
| | (In thousands) | | (In thousands) | ||||||||||||||
Secured Notes | | $ | 400,000 | | $ | 400,000 | | $ | 400,000 | | $ | 400,000 | | $ | 400,000 | | $ | 400,000 |
Revolving credit facility | | | 340,235 | | | — | | | — | | | — | | | 51,614 | | | 80,087 |
LVMH Note | | | 125,000 | | | 125,000 | | | 125,000 | | | 50,000 | | | 125,000 | | | 125,000 |
Unsecured loans | | | 10,446 | | | 8,444 | | | 8,367 | | | 9,913 | | | 7,969 | | | 10,866 |
Overdraft facilities | | | 3,664 | | | 2,841 | | | 2,903 | | | 2,202 | | | 3,233 | | | 3,657 |
Foreign credit facility | | | 10,416 | | | — | | | — | | | 8,213 | | | 391 | | | 7,792 |
Subtotal | | | 889,761 | | | 536,285 | | | 536,270 | | | 470,328 | | | 588,207 | | | 627,402 |
Less: Net debt issuance costs (1) | | | (4,671) | | | (6,369) | | | (5,944) | | | (3,397) | | | (5,095) | | | (4,246) |
Debt discount | | | (5,585) | | | (12,387) | | | (10,745) | | | (895) | | | (7,335) | | | (3,798) |
Current portion of long-term debt | | | (91,613) | | | (4,063) | | | (4,237) | | | (62,732) | | | (80,109) | | | (135,518) |
Total | | $ | 787,892 | | $ | 513,466 | | $ | 515,344 | | $ | 403,304 | | $ | 495,668 | | $ | 483,840 |
(1) | Does not include debt issuance costs, net of amortization, totaling |
Senior Secured Notes
In August 2020, the Company completed a private debt offering of $400 million aggregate principal amount of its 7.875% Senior Secured Notes due 2025 (the “Notes”). The terms of the Notes are governed by an indenture (the “Indenture”), among the Company, the guarantors party thereto and U.S. Bank, National Association, as trustee and collateral agent (the “Collateral Agent”). The net proceeds of the Notes were used (i) to repay the $300 million that was outstanding under the Company’s prior term loan facility due 2022 (the “Term Loan”), (ii) to pay related fees and expenses and (iii) for general corporate purposes.
The Notes bear interest at a rate of 7.875% per year payable semi-annually in arrears on February 15 and August 15 of each year.
The Notes are unconditionally guaranteed on a senior-priority secured basis by the Company’s current and future wholly-owned domestic subsidiaries that guarantee any of the Company’s credit facilities, including the Company’s ABL facility (the “ABL Facility”) pursuant to the ABL Credit Agreement, or certain future capital markets indebtedness of the Company or the guarantors.
17
The Notes and the related guarantees are secured by (i) first priority liens on the Company’s Cash Flow Priority Collateral (as defined in the Indenture), and (ii) a second-priority lien on the Company’s ABL Priority Collateral (as defined in the Indenture), in each case subject to permitted liens described in the Indenture.
In connection with the issuance of the Notes and execution of the Indenture, the Company and the Guarantors entered into a pledge and security agreement (the “Pledge and Security Agreement”), among the Company, the Guarantors and the Collateral Agent.
The Notes are subject to the terms of the intercreditor agreement which governs the relative rights of the secured parties in respect of the ABL Facility and the Notes (the “Intercreditor Agreement”). The Intercreditor Agreement restricts the actions permitted to be taken by the Collateral Agent with respect to the Collateral on behalf of the holders of the Notes. The Notes are also subject to the terms of the LVMH Note subordination agreement which governs the relative rights of the secured parties in respect of the LVMH Note, the ABL Facility and the Notes.
The Company may redeem some or all of the Notes at any time and from time to time at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
14
If the Company experiences a Change of Control (as defined in the Indenture), the Company is required to offer to repurchase the Notes at 101% of the principal amount of such Notes plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.
The Indenture contains covenants that, among other things, limit the Company’s ability and the ability of its restricted subsidiaries to incur or guarantee additional indebtedness, pay dividends or make other restricted payments, make certain investments, incur restrictions on the ability of the Company’s restricted subsidiaries that are not guarantors to pay dividends or make certain other payments, create or incur certain liens, sell assets and subsidiary stock, impair the security interests, transfer all or substantially all of the Company’s assets or enter into merger or consolidation transactions, and enter into transactions with affiliates. The Indenture provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among others, nonpayment of principal or interest, breach of other agreements in the Indenture, failure to pay certain other indebtedness, failure of certain guarantees to be enforceable, failure to perfect certain collateral securing the Notes, failure to pay certain final judgments, and certain events of bankruptcy or insolvency.
The Company incurred debt issuance costs totaling $8.5 million related to the Notes. In accordance with ASC 835, the debt issuance costs have been deferred and are presented as a contra-liability, offsetting the outstanding balance of the Notes, and are amortized over the remaining life of the Notes.
Second Amended and Restated ABL Credit Agreement
In August 2020, the Company’s subsidiaries, G-III Leather Fashions, Inc., Riviera Sun, Inc., CK Outerwear, LLC, AM Retail Group, Inc. and The Donna Karan Company Store LLC (collectively, the “Borrowers”), entered into the second amended and restated credit agreement (the “ABL Credit Agreement”) with the Lenders named therein and with JPMorgan Chase Bank, N.A., as Administrative Agent. The ABL Credit Agreement is a five year senior secured credit facility subject to a springing maturity date if, subject to certain conditions, the LVMH Note is not refinanced or repaid prior to the date that is 91 days prior to the date of any relevant payment thereunder. The ABL Credit Agreement provides for borrowings in the aggregate principal amount of up to $650 million. The Company and certain of its subsidiaries G-III Apparel Canada ULC, Gabrielle Studio, Inc., Donna Karan International Inc. and Donna Karan Studio LLC (the “Guarantors”), are Loan Guarantors under the ABL Credit Agreement.
The ABL Credit Agreement refinanced, amended and restated the Amended Credit Agreement, dated as of December 1, 2016 (as amended, supplemented or otherwise modified from time to time prior to August 7, 2020, the “Prior Credit Agreement”). The Prior Credit Agreement provided for borrowings of up to $650 million. The ABL Credit Agreement extended the maturity date of this facility from December 2021 to August 2025, subject to a springing maturity date if, subject to certain conditions, the LVMH Note is not refinanced or repaid prior to the date that is 91 days prior to the date of any relevant payment thereunder.
18
Amounts available under the ABL Credit Agreement are subject to borrowing base formulas and overadvances as specified in the ABL Credit Agreement. Borrowings bearoriginally bore interest, at the Borrowers’ option, at LIBOR plus a margin of 1.75% to 2.25% or an alternate base rate margin of 0.75% to 1.25% (defined as the greatest of (i) the “prime rate” of JPMorgan Chase Bank, N.A. from time to time, (ii) the federal funds rate plus 0.5% and (iii) the LIBOR rate for a borrowing with an interest period of one month) plus 1.00%, with the applicable margin determined based on Borrowers’ availability under the ABL Credit Agreement. In April 2023, the Company amended the ABL Credit Agreement to replace LIBOR with the Adjusted Term Secured Overnight Financing Rate (“SOFR”) as a successor rate. All other material terms and conditions of the ABL Credit Agreement were unchanged. Borrowings under the amended ABL Credit Agreement now bear interest, at the Borrower’s option, at the alternate base rate (defined as, for a given day, the greatest of (i) the “prime rate” in effect on such day, (ii) the NYFRB Rate (as defined in the amendment) in effect on such day plus 0.5% and (iii) the Adjusted Term SOFR (defined as an interest rate per annum equal to the Term SOFR for such interest period plus 0.10%) for a one-month interest period as published two business days prior to such day plus 1%) plus an applicable spread or the Adjusted Term SOFR Rate plus an applicable spread. The Company applied certain provisions and practical expedients of ASC 848 – Reference Rate Reform related to the transition from LIBOR to SOFR.
The ABL Credit Agreement is secured by specified assets of the Borrowers and the Guarantors. In addition to paying interest on any outstanding borrowings under the ABL Credit Agreement, 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
15
a tiered rate equal to 0.50% per annum on the average daily amount of the available commitments when the average usage is less than 50% of the total available commitments and decreases to 0.35% per annum on the average daily amount of the available commitments when the average usage is greater than or equal to 50% of the total available commitments. As of October 31, 2022, interest under the ABL Credit Agreement was being paid at an average rate of 4.91% per annum.
The revolving credit facility contains covenants that, among other things, restrict the Company’s ability to, subject to specified exceptions, 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 OctoberJuly 31, 2022,2023, the Company was in compliance with these covenants.
As of OctoberJuly 31, 2022,2023, the Company had $340.2 million ofno borrowings outstanding under the ABL Credit Agreement. The ABL credit agreement also includes amounts available for letters of credit. As of OctoberJuly 31, 2022,2023, there were outstanding trade and standby letters of credit amounting to $6.5$3.7 million and $3.4$2.9 million, respectively.
At the date of the refinancing of the Prior Credit Agreement, the Company had $3.3 million of unamortized debt issuance costs remaining from the Prior Credit Agreement. The Company extinguished and charged to interest expense $0.4 million of the prior debt issuance costs and incurred new debt issuance costs totaling $5.1 million related to the ABL Credit Agreement. The Company has a total ofrecorded $8.0 million of debt issuance costs related to the ABL Credit Agreement. As permitted under ASC 835, the debt issuance costs have been deferred and are presented as an asset which is amortized ratably over the term of the ABL Credit Agreement.
LVMH Note
As a portion of the consideration for the acquisition of Donna Karan International (“DKI”), the Company issued to LVMH a junior lien secured promissory note in the principal amount of $125.0 million that bears interest at the rate of 2% per year. $75.0 million of the principal amount of the LVMH Note is due and payablewas repaid on June 1, 2023 and therefore has been recorded within the current portion of notes payable on the condensed consolidated balance sheets and $50.0 million of such principal amount is due and payable on December 1, 2023. The LVMH Note is classified in current portion of notes payable in the Company’s condensed consolidated balance sheets as of July 31, 2023 and January 31, 2023. $75.0 million of the LVMH Note is classified in current portion of notes payable in the Company’s condensed consolidated balance sheet as of July 31, 2022.
ASC 820 requires the noteLVMH Note to be recorded at fair value at issuance. As a result, the Company recorded a $40.0 million debt discount upon issuance of the LVMH Note. This discount is being amortized as interest expense using the effective interest method over the term of the LVMH Note.
Unsecured Loans
Several of the Company’s foreign entities borrow funds under various unsecured loans of which a portion is to provide funding for operations in the normal course of business while other loans are European state backed loans as part of COVID-19 relief programs. In the aggregate, the Company is currently required to make quarterly installment payments of principal in the amount of €0.4€0.6 million under these unsecured loans. Interest on the outstanding principal amount of the unsecured loans accrues at a fixed rate equal to 0% to 5.0% per annum, payable on either a quarterly or monthly basis. As of OctoberJuly 31, 2022,2023, the Company had an aggregate outstanding balance of €10.7€9.1 million ($10.49.9 million) under these unsecured loans.
19
Overdraft Facilities
During fiscal 2022,2021, T.R.B International SA (“TRB”) entered into several overdraft facilities that allow for applicable bank accounts to be in a negative position up to a certain maximum overdraft. TRB entered into an uncommitted overdraft facility with HSBC Bank allowing for a maximum overdraft of €5 million. Interest on drawn balances accrues at a rate equal to the Euro Interbank Offered Rate (“EURIBOR”) plus a margin of 1.75% per annum, payable quarterly. The facility may be cancelled at any time by TRB or HSBC Bank. As part of a COVID-19 relief program, TRB and its subsidiaries have also entered into several state backed overdraft facilities with UBS Bank in Switzerland for an aggregate of CHF 4.7
16
million at varying interest rates of 0% to 0.5%. As of OctoberJuly 31, 2022,2023, TRB had an aggregate of €3.7€2.0 million ($3.72.2 million) drawn under these facilities.
Foreign Credit Facility
KLH has a credit agreement with ABN AMRO Bank N.V. with a credit limit of €15.0 million which is secured by specified assets of KLH. Borrowings bear interest at the Euro Interbank Offered Rate (“EURIBOR”)EURIBOR plus a margin of 1.7%. As of OctoberJuly 31, 2022,2023, KLH had €10.6€7.5 million ($10.48.2 million) of borrowings outstanding under this credit facility.
Note 10NOTE 9 – Revenue RecognitionREVENUE RECOGNITION
Disaggregation of Revenue
In accordance with ASC 606 – Revenue from Contracts with Customers, the Company discloses its revenues by segment. Each segment presents its own characteristics with respect to the timing of revenue recognition and the type of customer. In addition, disaggregating revenues using a segment basis is consistent with how the Company’s Chief Operating Decision Maker manages the Company. The Company has identified the wholesale operations segment and the retail operations segment as distinct sources of revenue.
Wholesale Operations Segment. Wholesale revenues include sales of products to retailers under owned, licensed and private label brands, as well as sales related to the Vilebrequin and Karl Lagerfeld businesses, including from retail stores operated by Vilebrequin and Karl Lagerfeld, other than sales of product under the Karl Lagerfeld Paris brand from the Company’s retail stores and digital outlets. 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 consideration arising from implicit or explicit obligations. Wholesale revenues also include revenues from license agreements related to the DKNY, Donna Karan, Karl Lagerfeld, G.H. Bass, Andrew Marc, Karl Lagerfeld, Vilebrequin and Sonia Rykiel trademarks owned by the Company. As of OctoberJuly 31, 2022,2023, 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-operatedCompany-operated stores and product sales through the Company’s digital channels for the DKNY, Donna Karan, G.H. Bass, Karl Lagerfeld Paris, Andrew MarcG.H. Bass and Wilsons Leather businesses. Retail stores primarily consist of DKNY and Karl Lagerfeld Paris retail stores, substantially all of which are operated as outlet stores. Retail operations segment revenues are recognized at the point of sale when the customer takes possession of the goods and tenders payment. Digital revenues primarily consist of sales to consumers through the Company’s digital platforms. Digital 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 $3.3$4.6 million, $3.8$4.0 million and $5.1 million at OctoberJuly 31, 2022, October2023, July 31, 20212022 and January 31, 2022,2023, respectively. The Company recognized $2.7$2.8 million in revenue for the three months ended OctoberJuly 31, 20222023 related to contract liabilities that existed at July 31, 2022.April 30, 2023. The Company recognized $3.2$4.2 million in revenue for the ninesix months ended OctoberJuly 31, 20222023 related to contract liabilities
20
that existed at January 31, 2022.2023. There were no contract assets recorded as of OctoberJuly 31, 2022, October2023, July 31, 20212022 and January 31, 2022.2023. Substantially all of the advance payments from licensees as of OctoberJuly 31, 20222023 are expected to be recognized as revenue within the next twelve months.
Note 11 – Segments
The Company’s reportable segments are business units that offer products through different channels of distribution. 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 and Karl Lagerfeld businesses, other than sales of the Karl Lagerfeld Paris brand from retail stores and digital outlets. Wholesale revenues also include revenues from license agreements related to our owned trademarks including DKNY, Donna Karan, Vilebrequin, Karl Lagerfeld, G.H. Bass, Andrew Marc and Sonia Rykiel. The retail operations segment consists primarily of direct sales to consumers through Company-operated stores, which consists primarily of DKNY and Karl Lagerfeld Paris stores, as well as the digital channels for DKNY, Donna Karan, Karl Lagerfeld Paris, G.H. Bass, Andrew Marc and Wilsons Leather. Substantially all DKNY and Karl Lagerfeld Paris stores are operated as outlet stores.
The following segment information is presented for the three and nine month periods indicated below:
| | | | | | | | | | | | |
| | Three Months Ended October 31, 2022 | ||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||
| | (In thousands) | ||||||||||
Net sales | | $ | 1,069,574 | | $ | 28,762 | | $ | (20,037) | | $ | 1,078,299 |
Cost of goods sold | | | 740,734 | | | 12,975 | | | (20,037) | | | 733,672 |
Gross profit | | | 328,840 | | | 15,787 | | | — | | | 344,627 |
Selling, general and administrative expenses | | | 216,916 | | | 22,977 | | | — | | | 239,893 |
Depreciation and amortization | | | 6,224 | | | 1,046 | | | — | | | 7,270 |
Asset impairment | | | 250 | | | — | | | — | | | 250 |
Operating profit (loss) | | $ | 105,450 | | $ | (8,236) | | $ | — | | $ | 97,214 |
| | | | | | | | | | | | |
| | Three Months Ended October 31, 2021 | ||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||
| | (In thousands) | ||||||||||
Net sales | | $ | 1,013,440 | | $ | 26,164 | | $ | (24,212) | | $ | 1,015,392 |
Cost of goods sold | | | 678,959 | | | 13,135 | | | (24,212) | | | 667,882 |
Gross profit | | | 334,481 | | | 13,029 | | | — | | | 347,510 |
Selling, general and administrative expenses | | | 162,357 | | | 20,003 | | | — | | | 182,360 |
Depreciation and amortization | | | 6,089 | | | 935 | | | — | | | 7,024 |
Operating profit (loss) | | $ | 166,035 | | $ | (7,909) | | $ | — | | $ | 158,126 |
| | | | | | | | | | | | |
| | Nine Months Ended October 31, 2022 | ||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||
| | (In thousands) | ||||||||||
Net sales | | $ | 2,338,435 | | $ | 87,758 | | $ | (53,893) | | $ | 2,372,300 |
Cost of goods sold | | | 1,564,595 | | | 42,006 | | | (53,893) | | | 1,552,708 |
Gross profit | | | 773,840 | | | 45,752 | | | — | | | 819,592 |
Selling, general and administrative expenses | | | 548,411 | | | 67,940 | | | — | | | 616,351 |
Depreciation and amortization | | | 17,304 | | | 2,717 | | | — | | | 20,021 |
Asset impairment, net of gain on lease terminations | | | 250 | | | (38) | | | — | | | 212 |
Operating profit (loss) | | $ | 207,875 | | $ | (24,867) | | $ | — | | $ | 183,008 |
2117
| | | | | | | | | | | | |
| | Nine Months Ended October 31, 2021 | ||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||
| | (In thousands) | ||||||||||
Net sales | | $ | 1,991,967 | | $ | 72,869 | | $ | (46,453) | | $ | 2,018,383 |
Cost of goods sold | | | 1,293,086 | | | 35,893 | | | (46,453) | | | 1,282,526 |
Gross profit | | | 698,881 | | | 36,976 | | | — | | | 735,857 |
Selling, general and administrative expenses | | | 416,982 | | | 53,821 | | | — | | | 470,803 |
Depreciation and amortization | | | 18,388 | | | 2,778 | | | — | | | 21,166 |
Operating profit (loss) | | $ | 263,511 | | $ | (19,623) | | $ | — | | $ | 243,888 |
NOTE 10 – SEGMENTS
The Company’s reportable segments are business units that offer products through different channels of distribution. The Company has two reportable segments: wholesale operations and retail operations. The wholesale operations segment includes sales of products to retailers under owned, licensed and private label brands, as well as sales related to the Vilebrequin and Karl Lagerfeld businesses, including from retail stores operated by Vilebrequin and Karl Lagerfeld, other than sales of product under the Karl Lagerfeld Paris brand from the Company’s retail stores and digital outlets. Wholesale revenues also include revenues from license agreements related to the DKNY, Donna Karan, Karl Lagerfeld, Vilebrequin, G.H. Bass, Andrew Marc and Sonia Rykiel trademarks owned by the Company. The retail operations segment consists primarily of direct sales to consumers through Company-operated stores, which consists primarily of DKNY and Karl Lagerfeld Paris stores, as well as the digital channels for DKNY, Donna Karan, Karl Lagerfeld Paris, G.H. Bass and Wilsons Leather. Substantially all DKNY and Karl Lagerfeld Paris stores are operated as outlet stores.
The following segment information is presented for the three and six month periods indicated below:
| | | | | | | | | | | | |
| | Three Months Ended July 31, 2023 | ||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||
| | (In thousands) | ||||||||||
Net sales | | $ | 639,184 | | $ | 34,341 | | $ | (13,764) | | $ | 659,761 |
Cost of goods sold | | | 379,884 | | | 16,988 | | | (13,764) | | | 383,108 |
Gross profit | | | 259,300 | | | 17,353 | | | — | | | 276,653 |
Selling, general and administrative expenses | | | 216,489 | | | 22,718 | | | — | | | 239,207 |
Depreciation and amortization | | | 5,027 | | | 932 | | | — | | | 5,959 |
Operating profit (loss) | | $ | 37,784 | | $ | (6,297) | | $ | — | | $ | 31,487 |
| | | | | | | | | | | | |
| | Three Months Ended July 31, 2022 | ||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||
| | (In thousands) | ||||||||||
Net sales | | $ | 587,955 | | $ | 31,112 | | $ | (13,823) | | $ | 605,244 |
Cost of goods sold | | | 375,090 | | | 15,051 | | | (13,823) | | | 376,318 |
Gross profit | | | 212,865 | | | 16,061 | | | — | | | 228,926 |
Selling, general and administrative expenses | | | 169,677 | | | 21,335 | | | — | | | 191,012 |
Depreciation and amortization | | | 5,666 | | | 990 | | | — | | | 6,656 |
Operating profit (loss) | | $ | 37,522 | | $ | (6,264) | | $ | — | | $ | 31,258 |
| | | | | | | | | | | | |
| | Six Months Ended July 31, 2023 | ||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||
| | (In thousands) | ||||||||||
Net sales | | $ | 1,226,086 | | $ | 64,558 | | $ | (24,294) | | $ | 1,266,350 |
Cost of goods sold | | | 732,354 | | | 31,837 | | | (24,294) | | | 739,897 |
Gross profit | | | 493,732 | | | 32,721 | | | — | | | 526,453 |
Selling, general and administrative expenses | | | 420,578 | | | 46,590 | | | — | | | 467,168 |
Depreciation and amortization | | | 10,772 | | | 1,763 | | | — | | | 12,535 |
Operating profit (loss) | | $ | 62,382 | | $ | (15,632) | | $ | — | | $ | 46,750 |
| | | | | | | | | | | | |
| | Six Months Ended July 31, 2022 | ||||||||||
|
| Wholesale |
| Retail |
| Elimination (1) |
| Total | ||||
| | (In thousands) | ||||||||||
Net sales | | $ | 1,268,859 | | $ | 58,997 | | $ | (33,855) | | $ | 1,294,001 |
Cost of goods sold | | | 823,860 | | | 29,031 | | | (33,855) | | | 819,036 |
Gross profit | | | 444,999 | | | 29,966 | | | — | | | 474,965 |
Selling, general and administrative expenses | | | 331,495 | | | 44,925 | | | — | | | 376,420 |
Depreciation and amortization | | | 11,080 | | | 1,671 | | | — | | | 12,751 |
Operating profit (loss) | | $ | 102,424 | | $ | (16,630) | | $ | — | | $ | 85,794 |
18
The total net sales by licensed and proprietary product sales for each of the Company’s reportable segments are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
|
| October 31, 2022 |
| October 31, 2021 |
| October 31, 2022 |
| October 31, 2021 |
| July 31, 2023 |
| July 31, 2022 |
| July 31, 2023 |
| July 31, 2022 | ||||||||
| | (In thousands) | | (In thousands) | ||||||||||||||||||||
Licensed brands | | $ | 669,408 | | $ | 661,148 | | $ | 1,403,142 | | $ | 1,265,544 | | $ | 338,656 | | $ | 317,081 | | $ | 636,661 | | $ | 733,732 |
Proprietary brands | | | 400,166 | | | 352,292 | | | 935,293 | | | 726,423 | | | 300,528 | | | 270,874 | | | 589,425 | | | 535,127 |
Wholesale net sales | | $ | 1,069,574 | | $ | 1,013,440 | | $ | 2,338,435 | | $ | 1,991,967 | | $ | 639,184 | | $ | 587,955 | | $ | 1,226,086 | | $ | 1,268,859 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Licensed brands | | $ | — | | $ | — | | $ | — | | $ | 45 | | $ | — | | $ | — | | $ | — | | $ | — |
Proprietary brands | | | 28,762 | | | 26,164 | | | 87,758 | | | 72,824 | | | 34,341 | | | 31,112 | | | 64,558 | | | 58,997 |
Retail net sales | | $ | 28,762 | | $ | 26,164 | | $ | 87,758 | | $ | 72,869 | | $ | 34,341 | | $ | 31,112 | | $ | 64,558 | | $ | 58,997 |
The total assets for each of the Company’s reportable segments, as well as assets not allocated to a segment, are as follows:
(1) | The Company acquired the remaining interests in KLH (the Karl Lagerfeld branded product) that it did not already own as of May 31, 2022. Net sales of Karl Lagerfeld product were included in licensed brands net sales of the wholesale operations segment through May 31, 2022. Subsequent to May 31, 2022, net sales of Karl Lagerfeld product are included in proprietary brands net sales of the wholesale operations segment. |
| | | | | | | | | |
|
| October 31, 2022 |
| October 31, 2021 |
| January 31, 2022 | |||
| | (In thousands) | |||||||
Wholesale | | $ | 2,257,232 | | $ | 1,461,600 | | $ | 2,073,834 |
Retail | | | 121,632 | | | 111,875 | | | 111,517 |
Corporate | | | 911,357 | | | 1,154,542 | | | 557,177 |
Total assets | | $ | 3,290,221 | | $ | 2,728,017 | | $ | 2,742,528 |
Note 12NOTE 11 – Stockholders’ EquitySTOCKHOLDERS’ EQUITY
For the three months ended OctoberJuly 31, 2022,2023, the Company issued no shares of common stock and utilized 2,366601,970 shares of treasury stock in connection with the vesting of equity awards. For the three months ended OctoberJuly 31, 2021,2022, the Company issued no shares of common stock and utilized 2,366111,583 shares of treasury stock in connection with the vesting of equity awards. For the ninesix months ended OctoberJuly 31, 2022,2023, the Company issued no shares of common stock and utilized 385,485603,971 shares of treasury stock in connection with the vesting of equity awards. For the ninesix months ended OctoberJuly 31, 2021,2022, the Company issued no shares of common stock and utilized 191,837383,119 shares of treasury stock in connection with the vesting of equity awards.
Note 13NOTE 12 – Canadian Customs Duty ExaminationCANADIAN CUSTOMS DUTY EXAMINATION
In October 2017,accordance with a favorable ruling by the Canadian International Trade Tribunal, in fiscal 2023, G-III Canada received a refund from the Canada Border Service Agency (“CBSA”) issued an audit report to G-III Apparel Canada ULC (“G-III Canada”), a wholly-owned subsidiary of the Company, challenging the valuation used by G-III Canada for certain goods imported into Canada between February 1, 2014 and October 27, 2017. The CBSA requested that G-III Canada reassess its customs entries for that period and change the valuation method used to pay duties with respect to goods imported in the future. As a result of this reassessment, in March 2018, G-III Canada provided a bond to the CBSA in the amount of CAD$26.91.5 million ($20.91.1 million) representing customs duty and interest through December 31, 2017 that was claimed to be owed to the CBSA.
22
Beginning February 1, 2018, the Company began paying duties based on the new valuation method. Cumulative amounts paid and deferred through October 31, 2022, related to the higher dutiable values, were CAD$15.8 million ($11.6 million).
G-III Canada filed a Notice of Appeal with the Canadian International Trade Tribunal (the “Tribunal”) appealing the CBSA decision. A hearing on the appeal was held on December 7, 2021. On August 22, 2022, the Tribunal ruled in favor of G-III Canada and G-III Canada’s appeal has been allowed by the Tribunal. The decision was not appealed by the CBSA.
As a result, G-III Canada will continue to declare dutiable values utilizing its pre-audit methodology, with the addition of a dutiable design assist (“design assist”). The Tribunal ruling requires the CBSA to issue a CAD$1.8 million ($1.3 million) refund,, including interest and net of thea dutiable design assist, for amounts paid by G-III Canada to the CBSA between February 1, 2014 and January 31, 2018. G-III Canada is in the process of filinghas filed adjustment requests with the CBSA for the period from February 1, 2018 to January 31, 2022 to amend declared dutiable values. These amendments are expected to result in a refund of duty and interest from the CBSA of approximately CAD$13.013.5 million ($9.510.2 million) after deductions for the design assist andplus related interest. The bond issued by G-III Canada in March 2018 is inThese amounts are recorded within other assets, net on the process of being released back to the Company.condensed consolidated balance sheets.
NOTE 13 – RELATED PARTY TRANSACTION
In June 2023, the Company entered into a stock sale and purchase agreement (the “Agreement”) with Sammy Aaron, the Company’s Vice Chairman and President and a Director of the Company. Pursuant to the Agreement, the Company purchased from Mr. Aaron 208,943 shares of its common stock for $4.1 million at a price equal to the closing price of the Company’s shares on the date of the Agreement.
NoteNOTE 14 – Recent Adopted and Issued Accounting PronouncementsRECENT ADOPTED AND ISSUED ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Guidance
There was no accounting guidance adopted during the three months ended OctoberJuly 31, 2022.2023.
Issued Accounting Guidance Being Evaluated for Adoption
In March 2020, the Financial Accounting Standards Board issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and in January 2021, issued ASU 2021-01, “Reference Rate Reform: Scope”. Both of these updates aim to ease the potential burden in accounting for reference rate reform. These updates provide optional expedients and exceptions, if certain criteria are met, for applying accounting principles generally accepted in the United States to contract modifications, hedging relationships and other transactions affected by the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). The amendments were effective upon issuance and allow companies to adopt the amendments on a prospective basis through December 31, 2022. The Company has reviewed all recently issued accounting pronouncements and concluded that they were either not applied this ASUapplicable or not expected to any existing contracts inhave a significant impact to the current year. As of October 31, 2022, the Company had availability of approximately $290 million under its revolving credit facility. The interest rate under this facility is indexed to LIBOR. As such, the revolving credit facility is likely to be impacted when LIBOR quotations cease to be available. The Company is evaluating the impact that the guidance will have on its condensed consolidated financial statements and related disclosures and currently does not expect that any impact would be material.statements.
2319
NOTE 15 – SUBSEQUENT EVENTS
On August 9, 2023, the Company entered into a new employment agreement with Morris Goldfarb, its Chairman and Chief Executive Officer. The employment agreement included provisions, among others, that (i) changed the structure of Mr. Goldfarb’s annual cash incentive that are designed to align with current market practice and reduce the size of the annual cash incentive, (ii) changed the mix of annual cash compensation and annual equity grants in a manner that increases the weighting of equity compared to cash and encourages long-term performance and shareholder value creation, and (iii) in recognition of the significant reduction in the annual cash incentive agreed to by Mr. Goldfarb, provide for a grant of 700,000 performance share units (PSUs) that may be earned over three years if certain stock price and relative total shareholder return targets are achieved.
On August 29, 2023, the Company entered into a new employment agreement with Sammy Aaron, its Vice Chairman and President. The employment agreement included provisions, among others, that (i) changed to the structure of Mr. Aaron’s annual cash incentive that are designed to align with current market practice and to reduce the size of the annual cash incentive, (ii) changed the mix of annual cash compensation and annual equity grants in a manner that increases the weighting of equity compared to cash and encourages long-term performance and shareholder value creation and (iii) in recognition of the significant reduction in the annual cash incentive agreed to by Mr. Aaron, provides for a special bonus of $2,000,000 and a retention bonus of $1,000,000.
20
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, 20232024 is referred to as “fiscal 2023.2024.”
KLH, Vilebrequin, KLH, Fabco and Sonia Rykiel report results on a calendar year basis rather than on the January 31 fiscal year basis used by G-III. Accordingly, the results of KLH, Vilebrequin, KLH, Fabco and Sonia Rykiel are and will be, included in ourthe financial statements for the quarter ended or ending closest to G-III’s fiscal quarter end. For example, with respect to our results for the nine-monthsix-month period ended OctoberJuly 31, 2022,2023, the results of KLH, Vilebrequin, Fabco and Sonia Rykiel are included for the nine-monthsix-month period ended SeptemberJune 30, 2022 and for KLH for the period from the date of acquisition to September 30, 2022.2023. We accounted for our investment in each of KLH and KLNA using the equity method of accounting through May 30, 2022. As ofEffective May 31, 2022, KLH is accounted for as our consolidated wholly-owned subsidiary and KLNA is an indirect wholly-owned subsidiary of ours. Our retail operations segment uses a 52/53-week fiscal year. For fiscal 20232024 and 2022,2023, the three and nine-month periodsix-month periods for the retail operations segment were each 13-week and 39-week26-week periods, respectively, and ended on OctoberJuly 29, 20222023 and OctoberJuly 30, 2021,2022, respectively.
Various statements contained in this Form 10-Q, in future filings by us with the SEC, in our press releases and in oral statements made from time to time by us or on our behalf constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as “anticipate,” “estimate,” “expect,” “will,” “project,” “we believe,” “is or remains optimistic,” “currently envisions,” “forecasts,” “goal” and similar words or phrases and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from the future results, performance or achievements expressed in or implied by such forward-looking statements. Forward-looking statements also include representations of our expectations or beliefs concerning future events that involve risks and uncertainties, including, but not limited to, the following:
● | the |
● |
● | any adverse change in our relationship with PVH Corp. and its Calvin Klein or Tommy Hilfiger brands would have a material adverse effect on our results of operations; |
● | our dependence on the strategies and reputation of our licensors; |
● | risks relating to our wholesale operations including, among others, maintaining the image of our proprietary brands, business practices of our customers that could adversely affect us and retail customer concentration; |
● | risks relating to our retail operations segment; |
● | our ability to achieve operating enhancements and cost reductions from our retail operations; |
● | dependence on existing management; |
● | our ability to make strategic acquisitions and possible disruptions from acquisitions, including our |
● | need for additional financing; |
● | seasonal nature of our business and effect of unseasonable or extreme weather on our business; |
● | possible adverse effects from disruptions to the worldwide supply chain; |
● | price, availability and quality of materials used in our products; |
● | the need to protect our trademarks and other intellectual property; |
● | risk that our licensees may not generate expected sales or maintain the value of our brands; |
● | the impact of the current economic and credit environment on us, our customers, suppliers and vendors, including without limitation, the effects of inflationary cost |
● | effects of war, acts of terrorism, natural disasters or public health crises could adversely affect our business and results of operations, including the war in Ukraine; |
21
● | the global health crisis caused by COVID-19 has had, and the current and uncertain future outlook with respect to COVID-19 and its variants will likely continue to have, adverse effects on our business, financial condition and results of operations; |
● | our dependence on foreign manufacturers; |
24
● | risks of expansion into foreign markets, conducting business internationally and exposures to foreign currencies; |
● | risks related to the |
● | the need to successfully upgrade, maintain and secure our information systems; |
● | increased exposure to consumer privacy, cybersecurity and fraud concerns, including as a result of the remote working environment; |
● | possible adverse effects of data security or privacy breaches; |
● | the impact on our business of the imposition of tariffs by the United States government and the escalation of trade tensions between countries; |
● | changes in tax legislation or exposure to additional tax liabilities could impact our business; |
● | the effect of regulations applicable to us as a U.S. public company; |
● | focus on corporate responsibility issues by stakeholders; |
● | potential effect on the price of our stock if actual results are worse than financial forecasts or if we are unable to provide financial forecasts; |
● | fluctuations in the price of our common stock; |
● | impairment of our |
● | risks related to our indebtedness. |
Any forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. A detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations is described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended January 31, 2022.2023. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Overview
G-III designs, sources and markets an extensive range of apparel, including outerwear, dresses, sportswear, swimwear, women’s suits and women’s performance wear, as well as women’s handbags, footwear, small leather goods, cold weather accessories and luggage. G-III has a substantial portfolio of more than 30 licensed and proprietary brands, anchored by fiveour global power brands: DKNY, Donna Karan, Karl Lagerfeld, Calvin Klein and Tommy Hilfiger and Karl Lagerfeld.Hilfiger. We are not only licensees, but also brand owners, and we distribute our products through multiple channels.
Our own proprietary brands include DKNY, Donna Karan, Karl Lagerfeld, Karl Lagerfeld Paris, Vilebrequin, G.H. Bass, Eliza J, Jessica Howard, Andrew Marc, Marc New York, Wilsons Leather and Sonia Rykiel. We sell products underhave an extensive portfolio of well-known licensed brands, including Calvin Klein, Tommy Hilfiger, Nautica, Halston, Levi’s, Guess?, Kenneth Cole, Cole Haan, Vince Camuto, Dockers and Dockers.Champion. Through our team sports business, we have licenses with the National Football League, National Basketball Association, Major League Baseball, National Hockey League and over 150 U.S. colleges and universities. We also source and sell products to major retailers under their private retail labels.
Our products are sold through a cross section of leading retailers such as Macy’s, including its Bloomingdale’s division, Dillard’s, Hudson’s Bay Company, including theirits Saks Fifth Avenue division, Nordstrom, Kohl’s, TJX Companies, Ross Stores, Burlington and Burlington.Costco. We also sell our products using digital channels through retail partners such as macys.com, nordstrom.com and dillards.com, each of which has a substantial online business. In addition, we sell to leading online retail partners such as Amazon, Fanatics, Zalando and Zappos.
We also distribute apparel and other products directly to consumers through our own DKNY, Karl Lagerfeld, Karl Lagerfeld Paris and Vilebrequin retail stores, as well as through our digital channels for the DKNY, Donna Karan, Karl Lagerfeld, Karl Lagerfeld Paris, Vilebrequin, G.H. Bass, Andrew Marc, Wilsons Leather and Sonia Rykiel businesses.
22
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
25
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 believe that consumers prefer to buy brands they know, and we have continually sought to 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 have increased the portfolio of brands we offer through licenses, acquisitions and joint ventures. We focus our efforts on the sale of products under our five power brands. Effective May 31, 2022, we own three of our power brands (DKNY, Donna Karan and Karl Lagerfeld) and license two of our power brands (Calvin Klein and Tommy Hilfiger). It is our objective to continue to expand our product offerings and we are continually discussing new licensing opportunities with brand owners and seeking to acquire established brands.
Recent Developments
Calvin KleinRepositioning and Tommy Hilfiger License ExtensionsExpansion of Donna Karan
On November 30, 2022,We acquired the DKNY and Donna Karan brands, two of the most iconic American fashion brands, in December 2016. We initially repositioned and relaunched DKNY and have successfully grown the brand to approximately $600.0 million in annual net sales. We are now focused on the repositioning and expansion of the Donna Karan brand for Spring 2024. The new Donna Karan will be a modern system of dressing created to appeal to a woman’s senses on every level, addressing her full lifestyle needs. Our Donna Karan product is expected to be distributed in better department stores, digital channels and our own Donna Karan website in North America and internationally. Donna Karan is widely considered a top fashion brand and is recognized as one of the most famous designer names in American fashion. We believe that the strength of the Donna Karan brand, along with our success with the DKNY brand, demonstrates the potential for our new Donna Karan products.
License Agreement for Nautica Brand
In March 2023, we announced the extension of licenses for Calvin Klein and Tommy Hilfiger products. The following chart sets forth the new extension term, any potential renewal term or the existing current termentered into a long-term license with Authentic Brands Group for the Calvin Klein and Tommy Hilfiger license agreements. This chart updates the chart containedNautica brand in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022.North America.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We are dependent on sales of licensed products for a substantial portion of our revenues. Net sales ofplan to produce products under the Calvin KleinNautica brand across a number of categories starting with a full women’s jeanswear collection and Tommy Hilfiger brands constituted approximately 48.2% of our net salesthen expanding in a phased approach into additional categories including sportswear, suit separates and dresses. The new five-year license agreement, effective beginning in January 2024, includes three extensions, for five years each. First deliveries are expected to begin in January 2024. The product is expected to be distributed in better department stores, digital channels and Nautica’s stores and website in North America, as well as in franchised stores globally. We believe that significant opportunity exists in the nine months ended October 31, 2022, approximately 50.7%better women’s apparel space in categories where we have strong expertise. The Nautica brand joins our portfolio of our net salessome of the largest American brands in fiscal 2022the world.
License Agreement for Halston Brand
In May 2023, we entered into a global twenty-five year master license with Xcel Brands, Inc. to design and approximately 53.5%produce all categories of our net sales in fiscal 2021.men’s and women’s product for the Halston brand.
The amendmentsagreement provides for an initial term of five years, followed by a twenty-year period, as well as a purchase option at the end of the twenty-five year term. First deliveries of Halston product are expected to begin in the fall of 2024. Our Halston product is expected to be distributed globally through better department stores and digital channels. We believe that significant opportunity exists in the better women’s apparel space where G-III has significant expertise. The Halston brand joins G-III’s portfolio of some of the largest American brands in the world.
License Agreement for Champion Brand
In September 2023, we entered into a license agreementswith HanesBrands Inc. to design and produce a men’s and women’s outerwear collection for these products provide for staggered extensions by category that expire beginning December 31, 2024 and continuing through December 31, 2027. PVH Corp., the owner of these two brands, has indicated that it intends to produce these products itself once the license agreements expire. Unless we are able to increase the sales of our other products, acquire new businesses and/or enter into other license agreements covering different products, the inability to renew the Calvin Klein and Tommy Hilfiger license agreements would cause a significant decreasetheir Champion brand in our net sales and have a material adverse effect on our results of operations.North America.
2623
We continueThe agreement provides for an initial term of five years, effective beginning in January 2024, with a five year renewal option based on achieving sales targets. First deliveries of Champion product are expected for the Fall 2024 season. Our Champion product is expected to strategize near-term growth initiatives across our current owned and licensed brands including category, geographicalbe distributed through better department stores and digital expansion. Additionally, we are directing resources toward new growth areas, including building our own brands, broadening our European business, developing new licensing opportunitieschannels in North America. Our collections will feature quality heritage pieces that complement and continuing to seek to acquire new businesses.
Karl Lagerfeld Acquisition
On May 31, 2022, we acquired from a group of investors the remaining 81% in interests in KLH that we did not already own, for an aggregate consideration of €202.0 million ($216.8 million) in cash, after taking into account certain adjustments. We funded the purchase price from cash on hand. See Note 6 – Karl Lagerfeld Acquisition in the accompanying Notes to Condensed Consolidated Financial Statements for more information.
The addition of the iconic Karl Lagerfeld fashion brand to the G-III portfolio of owned brands advances several of our strategic initiatives, including increasing the direct ownership of brands, capitalizing on their licensing opportunities and further diversifying our global presence. This acquisition represents a significant opportunity to expand our international growth by further developing our European-based brands, which also include Vilebrequin and Sonia Rykiel.enhance Champion’s principles. We believe that Karl Lagerfeld’s existing digital channel presence could enable us to enhance our omni-channel business and further accelerate our digital initiatives. The influential legacy of the Karl Lagerfeld brand embodies a creative expression thatthis license aligns with G-III’s core competencies in outerwear and will fit seamlessly into our goal to provide innovative products for our customers.well-developed outerwear divisions.
Segments
We report based on two segments: wholesale operations and retail operations.
Our wholesale operations segment includes sales of products to retailers under owned, licensed and private label brands, as well as sales related to the Karl Lagerfeld and Vilebrequin businesses, including from retail stores operated by Vilebrequin and Karl Lagerfeld, businesses, other than sales of product under the Karl Lagerfeld Paris brand from our retail stores and digital outlets. Wholesale revenues also include royalty revenues from license agreements related to our owned trademarks including DKNY, Donna Karan, Karl Lagerfeld, Vilebrequin, Sonia Rykiel, G.H. Bass, Andrew Marc, Vilebrequin and Andrew Marc.Sonia Rykiel.
Our retail operations segment consists primarily of direct sales to consumers through our company-operated stores and product sales through digital channels. Our company-operated stores consists primarily of DKNY and Karl Lagerfeld Paris stores, as well as theour digital channels for the DKNY, Donna Karan, Karl Lagerfeld Paris, G.H. Bass Andrew Marc and Wilsons Leather. Substantially allLeather businesses. Our company-operated stores primarily consist of DKNY and Karl Lagerfeld Paris retail stores, substantially all of which are operated as outlet stores.
Trends Affecting Our Business
Industry Trends
Significant trends that affect the apparel industry include retail chains closing unprofitable stores, an increased focus by retail chains and others on expanding digital sales and providing convenience-driven fulfillment options, the continued consolidation of retail chains and the desire on the part of retailers to consolidate vendors supplying them.
We sell our products online through retail partners such as macys.com, nordstrom.com and dillards.com, each of which has a substantial online business. As sales of apparel through digital channels continue to increase, we are developing additional digital marketing initiatives on both our web sites and third party web sites and through social media. We are investing in digital personnel, marketing, logistics, planning, distribution and other strategic opportunities to expand our digital footprint. Our digital business consists of our own web platforms at www.dkny.com, www.donnakaran.com, www.ghbass.com, www.vilebrequin.com, www.andrewmarc.com, www.wilsonsleather.com, www.soniarykiel.com, www.karllagerfeldparis.com and www.karl.com. In addition, we sell to leading online retail partners such as Amazon, Fanatics, Zalando and Zappos and have made minority investments in two different e-commerce retailers.
A number of retailers have experienced financial difficulties, which in some cases have 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
27
financial difficulty that could result in higher reserves for doubtful accounts or increased write-offs of accounts receivable. We attempt to mitigate credit risk from our customers by closely monitoring accounts receivable balances and shipping levels, as well as the ongoing financial performance and credit standing of customers.
Retailers are seeking to differentiate 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. Exclusive brands are only made available to a specific retailer, and thus customers loyal to their brands can only find them in the stores of that retailer.
We have attempted to respond to general trends in our industry by continuing to focus on selling products with recognized brand equity, by attention to design, quality and value and by improving our sourcing capabilities. We have also responded with the strategic acquisitions made by us, such as our recent purchase of the interests not owned by us that resulted in Karl Lagerfeld becoming our wholly-owned subsidiary, and new license agreements entered into by us, such as our recent license agreements for the Nautica, Halston and Champion brands, that added to our portfolio of licensed and proprietary
24
brands and helped diversify our business by adding new product lines and expanding distribution channels. We believe that our broad distribution capabilities help us to respond to the various shifts by consumers between distribution channels and that our operational capabilities will enable us to continue to be a vendor of choice for our retail partners.
Inflation and Interest Rates
Inflationary pressures have impacted the entire economy, including our industry. We are experiencing increased costs in many aspects of our business, including our freight costs as discussed below under “Supply Chain”. We have implemented price increases on many of our products. Our price increases are an effort to mitigate the effect of higher costs, although, the impact of price increases on consumer demand and on our business and results of operations is uncertain. We expect inflationary pressures to continue to impact our business throughout fiscal 2023 and fiscal 2024. Recent historic high rates of inflation, including increased fuel and food prices, hashave led to a softening of consumer demand and increased promotional activity in ourthe apparel categories we sell and may lead to further challenges to growincrease our sales. Ongoing inflation may also negatively impact our cost structure and labor costs in the future.
The Federal Reserve recently raised interest rates multiple times in fiscal 2023, as well as thus far in fiscal 2024, in response to concerns about inflation and it may raise them againcontinue to do so in the future.remainder of fiscal 2024. Higher interest rates may increase the costscost of our borrowing under our revolving credit facility, may increase economic uncertainty and may negatively affect consumer spending. Volatility in interest rates may adversely affect our business or our customers. If the equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult to obtain in a timely manner or on favorable terms.terms, or at all.
Foreign currency fluctuation
Our consolidated operations are impacted by the relationships between our reporting currency, the U.S. Dollar, and those of our non-United States subsidiaries whose functional/local currency is other than the U.S. Dollar, primarily the Euro. We continue to expect volatilityVolatility in the global foreign currency exchange rates which may have a negative impact on the reported results of certain of our non-United States subsidiaries in the future, when translated to the U.S. Dollar.
Supply Chain
NumerousIn fiscal 2022 and 2023, there were numerous factors disrupting the shipping industry havethat negatively affected transit times from our overseas suppliers, as well as our ability to ensure that we arewere able to import our product in a manner that allows for timely delivery to our customers. Congestion at ports of origin
More recently, shipping costs and ports of entrytransit times have caused significant changesreturned to levels comparable to, and in some cases lower than, pre-pandemic time periods. We continue to monitor the itineraries of our steamship carriers. Truck driver shortages, shortages of truck equipment such as the chassistransportation market for circumstances that the containers are transported on,may cause delays and the inability of ports to provide reliable pick uptimes, have also negatively impactedimpact our ability to timely receive goods. In addition, issues with respect to labor contracts for workers at certain ports on the west coast of the United States have also resulted in shifting delivery of goods to ports on the east coast of the United States which has caused increased delays at certain east coast ports.
Our shipping costs have increased as a result of higher contractual shipping rates resulting from increased demand for container space and the need to purchase additional container space on the secondary market at spot rates. While increased
28
spot rates have moderated, they are still higher than pre-pandemic levels. Our ability to secure container space has improved, however, ports around the world continue to experience congestion, slowing transit times of product through ports of origin and ports of entry which negatively affects our ability to timely receive and deliver product to our retail partners and customers.in a timely manner.
As a result of supply chain disruptions, in fiscal 2023, we have accelerated production schedules to allow for more lead time and to accommodate the anticipated extended transit times from our overseas suppliers in an effort to import our product in a manner that allows for timely delivery to our customers. As a result, our inventory levels arewere higher than in the comparable period of prior years.
Similar to companiesElevated inventory levels and disruptions in the apparel and other industries that rely on the importation of merchandise, we have accelerated production of our products, primarily in response to supply chain disruptions. This has led to elevated inventory levels, resulting in storage and process capacity pressures within our distribution centers. We sought additional warehouse capacity to facilitate our higher inventory levels but had not been able to secure sufficient additional warehouse space to accommodate the higher inventory levels prior to the end of our third fiscal quarter. This was primarily due to negotiations we expected to complete that were either delayed or were terminated as we did not want to enter into expensive long-term commitments for such capacity.
The elevated inventory levels, lack of additional space in our warehouses, port congestion and the logistical challenges related to trucking allshipping industry contributed to us incurring significant demurrage charges in our third fiscal quarter. Demurrage charges are charges paid to steamship carriers for freight remaining in the terminal for longer periods than initially agreed upon. Port congestion and trucking conditions are slowly improving. In addition,2023. We believe we have procured additional warehouse space and expecttaken sufficient measures to significantly reduceensure that we do not again incur these charges in our demurrage charges. We are still expectingcurrent fiscal year, including reducing product buys to have significantaccount for current inventory levels, at leastadjusting our production schedules and contracting with vendors to provide storage options domestically and overseas, if needed. We experienced inventory levels that were higher than normal through the first half of fiscal 2024. As a result, we expect our warehouse operations may bewere less efficient and we expectcontinued to incur additional labor and storage costs related to our inventory. inventory in the first half of fiscal 2024. In the third and fourth quarters of fiscal 2024, we expect our inventory levels to return to more normalized levels and our warehouse capacity to be sufficient for our needs which is expected to bring these costs in line with historical norms.
We have recently executedsecured new contracts with two of our long-term steamship carrier partners and are continuingfinalizing a third in an effort to pursue new carrier relationshipsmitigate our risk should rates increase. We are presently seeking to secure space needed for additional cargo capacity. We believe that ourpeak shipping periods through existing carriers will be ablecontracts and to manage demand in a more efficient manner for the balance of fiscal 2023 and, as a result, our reliance on theleverage favorable spot market rates from secondary market will be reduced. We are actively managing shipments based on delivery dates to better utilize contracted cargo space and attempt to reduce our reliance on the secondary market.providers.
Excess Inventory in the Marketplace
Higher marketplace inventories and a rapidly changing economic environment have caused retailers to rationalize their inventory levels. As a result, retailers have increased promotional activity to reduce their inventory. While we have planned for a certain amount25
Impact of COVID-19
The continued impact of the COVID-19 pandemic on our business operations remains uncertain and cannot be predicted. The extent to which COVID-19 impacts our results will depend on continued developments in the United States and around the world in the public and private responses to the pandemic.COVID-19. New information may emerge concerning the severity of the outbreak and the spread of variants of the COVID-19 virus in locations that are important to our business. Actions taken to contain COVID-19 or its variants, or treat itstheir impact, may change or become more restrictive if additional waves of infections occur. We continue to monitor the latest developments regarding the impacts of COVID-19 pandemic and have incorporated certain assumptions regarding the duration, severity and global macroeconomic impact of the pandemic into our financial outlook. The impact of COVID-19 on our business and operating results could differ materially from these assumptions based on a number of factors largely outside of our control.
War in Ukraine
The current war in Ukraine and the continued threat of terrorism, heightened security measures and military action in response to acts of terrorism or civil unrest has disrupted commerce and intensified concerns regarding the United States and world economies. Less than 1% of our revenue in fiscal 20222023 was generated in Russia and Ukraine. As such, we do not expect that the war in Ukraine will have a direct material negative impact on our results of operations in fiscal 2023.
29
However, the imposition of additional sanctions by the United States and/or foreign governments, as well as the sanctions already in place, could lead to restrictions related to sales and our supply chain for which the financial impact is uncertain. In addition, the war has also led to, and may lead to further, broader unfavorable macroeconomic implications, including unfavorable foreign exchange rates, increases in fuel prices, food shortages, a weakening of the European economy, lower consumer demand and volatility in financial markets. These implications of the war in Ukraine could have a material adverse effect on our business and our results of operations.
Results of Operations
Three months ended OctoberJuly 31, 20222023 compared to three months ended OctoberJuly 31, 20212022
Net sales for the three months ended OctoberJuly 31, 20222023 increased to $1.08 billion$659.8 million from $1.02 billion$605.2 million in the same period last year. Net sales of our segments are reported before intercompany eliminations.
Net sales of our wholesale operations segment increased to $1.07 billion$639.2 million for the three months ended OctoberJuly 31, 20222023 from $1.01 billion$588.0 million in the comparable period last year. This increase is primarily theWe recognized an additional $37.7 million of net sales as a result of the inclusion of the results of KLH for all of the threecurrent period compared to one month in the same period which added $51.9 millionlast year. Additionally, the increase in net sales toof our wholesale operations segment. Additionally,segment was also the result of a $10.9 million increase in net sales of Calvin Klein licensed products increased by $8.0 million. The increase in sales of Calvin Klein products was primarily related to women’s suits and dresses.our Levi’s outerwear products.
Net sales of our retail operations segment increased to $28.8$34.3 million for the three months ended OctoberJuly 31, 20222023 from $26.2$31.1 million in the same period last year. This increase is primarily due to an increase in our store count. The number of retail stores operated by us was 59 at both July 31, 2023 and 2022. The increase in sales in our retail operations segment was primarily the result of increased from 56 at October 31, 2021sales of our Karl Lagerfeld Paris products associated with our conversion of DKNY stores to 60 at October 31, 2022.Karl Lagerfeld Paris stores.
Gross profit was $344.6$276.7 million, or 32%41.9% of net sales, for the three months ended OctoberJuly 31, 2022,2023, compared to $347.5$228.9 million, or 34.2%37.8% of net sales, in the same period last year. The gross profit percentage in our wholesale operations segment was 30.7%40.6% in the three months ended OctoberJuly 31, 20222023 compared to 33.0%36.2% in the same period last year. The gross profit percentage inaddition of the results of KLH for all of the current year period was negatively impacted by $26.7 million in demurrage charges due to our inability to pick up freight from port terminals in a timely manner compared to an insignificant amount of demurrage chargesone month in the same period last year.year resulted in an increase of approximately 1.5% in the gross profit percentage of our wholesale operations segment as this business operates with a higher gross profit percentage than our other businesses in the wholesale operations segment. The gross profit percentage in the current year period was also negativelypositively impacted by slightly higher promotional activity, inflationary pressure on product costsprices to our customers and increasedlower freight costs partially offset bycompared to the implementation of price increases by us.same period last year. The gross profit percentage in our retail operations segment was 54.9%50.5% for the three months ended OctoberJuly 31, 20222023 compared to 49.8%51.6% for the same period last year. The gross profit percentage in the current year period was positively impacted by a reduction in promotional activity.
Selling, general and administrative expenses increased to $239.9$239.2 million in the three months ended OctoberJuly 31, 20222023 from $182.4$191.0 million in the same period last year. TheWe recognized an additional $28.7 million of expenses due to the inclusion of the results of KLH for all of the three monthscurrent period ended OctoberJuly 31, 2022 represented $28.8 million of this increase.2023 as compared to one month in the same period last year. The remainder of the increase in expenses was primarily due to an increase of $18.6$12.2 million in compensation expense,
26
primarily from increased salary and bonus expense accruals, and $4.6 million in third-party warehouse and facility expenses primarily related to higher inventory levels and a $3.5 million increase in advertising expenses related to digital and brand promotional activities.during the period.
Depreciation and amortization was $7.3$6.0 million for the three months ended OctoberJuly 31, 20222023 compared to $7.0$6.7 million in the same period last year. This increasedecrease primarily results from the inclusion of the results of KLH for the three month period which increased depreciation and amortization by $1.1 million, partially offset by lower depreciation and amortization as a result of a reduction in capital expenditures in recent years.years, partially offset by an increase of $0.8 million of depreciation and amortization expense due to the inclusion of the results of KLH for all of the current period compared to one month in the same period last year.
Other lossincome was $2.8$0.2 million in the three months ended OctoberJuly 31, 20222023 compared to other income of $0.9$30.3 million for the same period last year. Other lossincome in the prior period resulted from a gain of $30.9 million during the three months ended July 31, 2022 as a result of the remeasurement of our previously held 19% investment in KLH and 49% investment in KLNA as of the effective date of the acquisition by us of the interests in KLH that we did not previously own. Other income in the current period consisted of $4.0$0.7 million of foreign currency income during the three months ended July 31, 2023 compared to $2.0 million of foreign currency losses during the three months ended October 31, 2022 compared to $1.1 million during the same period last year. In addition, we recorded $0.2 million of losses from unconsolidated affiliates during the three months ended October 31, 2022 compared to $0.5 million in income from unconsolidated affiliates in the same period last year.
Interest and financing charges, net, for the three months ended OctoberJuly 31, 20222023 were $16.1$9.5 million compared to $12.4$12.6 million in the same period last year. The increasedecrease in interest and financing charges was primarily due to higher average borrowings on our revolving credit facilitya $1.8 million increase in
30
investment income from having a larger cash position in the current year period. There were no borrowings outstanding under our revolving credit facility incompared to the same period last year.prior year and recording lower interest of $0.9 million related to the LVMH Note as we repaid $75 million of the principal amount of this Note on June 1, 2023.
Income tax expense was $17.5$6.0 million for the three months ended OctoberJuly 31, 20222023 compared to $40.2$13.0 million for the same period last year. Our effective tax rate decreasedincreased to 22.4%26.8% in the current year’s quarter from 27.4%26.4% in last year’s comparable quarter. This decrease is primarily due to changes in the mix of tax jurisdictions where taxable income is generated during the three months ended October 31, 2022.
NineSix months ended OctoberJuly 31, 20222023 compared to ninesix months ended OctoberJuly 31, 20212022
Net sales for the ninesix months ended OctoberJuly 31, 2022 increased2023 decreased to $2.37$1.27 billion from $2.02$1.29 billion in the same period last year. Net sales of our segments are reported before intercompany eliminations.
Net sales of our wholesale operations segment increaseddecreased to $2.34$1.23 billion for the ninesix months ended OctoberJuly 31, 20222023 from $1.99$1.27 billion in the comparable period last year. This increase isdecrease was primarily the result of a $98.2 million increasedecrease in net sales of Calvin Klein and Tommy Hilfiger licensed products a $40.9 million increaseand in net sales of our DKNY and Donna Karan products anddue to a $35.6moderation in consumer demand. This decrease was partially offset by the addition of $98.6 million increase in net sales of Karl Lagerfeld Paris products. The increase in sales of Calvin Klein products was primarily relateddue to dresses, women’s suits and men’s and women’s outerwear. The increase in sales of DKNY and Donna Karan products was primarily related to dresses, sportswear and luggage. The increase in sales of Karl Lagerfeld Paris products was primarily related to handbags, men’s outerwear and shoes. Additionally, the inclusion of the results of KLHthe Karl Lagerfeld business for four monthsall of the current period compared to one month in the same period added $69.2 million in net sales to our wholesale operations segment. last year.
Net sales of our retail operations segment increased to $87.8$64.6 million for the ninesix months ended OctoberJuly 31, 20222023 from $72.9$59.0 million in the same period last year. This increase is primarily due to an increase in our store count. The number of retail stores operated by us was 59 at both July 31, 2023 and 2022. The increase in sales in our retail operations segment was primarily the result of increased from 56 at October 31, 2021sales of our Karl Lagerfeld Paris products associated with our conversion of DKNY stores to 60 at October 31, 2022.Karl Lagerfeld Paris stores.
Gross profit was $819.6$526.5 million, or 34.5%41.6% of net sales, for the ninesix months ended OctoberJuly 31, 2022,2023, compared to $735.9$475.0 million, or 36.5%36.7% of net sales, in the same period last year. The gross profit percentage in our wholesale operations segment was 33.0%40.3% in the ninesix months ended OctoberJuly 31, 20222023 compared to 35.1% in the same period last year. The addition of the results of KLH for all of the current period compared to one month in the same period last year resulted in an increase of approximately 1.8% in the gross profit percentage of our wholesale operations segment as this business operates with a higher gross profit percentage than our other businesses in the wholesale operations segment. The gross profit percentage in the current year period was negativelyalso positively impacted by $30.8 million in demurrage charges dueslightly higher prices to our inability to pick upcustomers and lower freight from port terminals in a timely mannercosts compared to an insignificant amount of demurrage charges in the same period last year. Additionally, the gross profit percentage in the current year period was negatively impacted by higher promotional activity, inflationary pressure on product costs and increased freight costs, partially offset by the implementation of price increases by us. The gross profit percentage in our retail operations segment was 52.1%50.7% for the ninesix months ended OctoberJuly 31, 20222023 compared to 50.7%50.8% for the same period last year. The gross profit percentage in the current year period was positively impacted by a reduction in promotional activity.
Selling, general and administrative expenses increased to $616.4$467.2 million in the ninesix months ended OctoberJuly 31, 20222023 from $470.8$376.5 million in the same period last year. TheWe recognized an additional $64.8 million of expenses due to the inclusion of the results of KLH for all of the nine monthscurrent period ended OctoberJuly 31, 2022 represented $39.2 million2023 as compared to one month in the same period last year.
27
The remainder of the increase in expenses was primarily due to increasesan increase of (i) $26.6$15.6 million in compensation expense, primarily from increased salary expenses, (ii) $35.8and bonus expense accruals, and an increase of $10.6 million in third-party warehouse and facility expenses and (iii) $18.1 million in advertisingprimarily related to digital and brand promotional activities. In addition, professional fees increased $4.2 million primarilyhigher inventory levels. This increase was partially offset by reduced royalty advertising expenses which decreased due to expenses associated with the acquisitionlower net sales of KLH.licensed product.
Depreciation and amortization was $20.0$12.5 million for the ninesix months ended OctoberJuly 31, 20222023 compared to $21.2$12.8 million in the same period last year. This decrease primarily relates toresults from lower depreciation and amortization as a result of a reduction in capital expenditures in recent years, partially offset by an increase of $2.1 million of depreciation and amortization resulting fromexpense due to the acquisitioninclusion of KLH.the results of KLH for all of the current period compared to one month in the same period last year.
Other income was $24.8$1.2 million in the ninesix months ended OctoberJuly 31, 20222023 compared to $4.7other income of $27.6 million for the same period last year. Other income in the currentprior period consisted ofresulted from a gain of $30.9 million during the ninesix months ended OctoberJuly 31, 2022 as a result of the remeasurement of our previously held 19% investment in KLH and 49% interestinvestment in KLNA as of the effective date of the acquisition by us of the remaining interests in KLH.KLH that we did not previously own. Other lossincome in the current period consisted of $9.4$1.1 million of foreign currency income during the six months ended July 31, 2023 compared to $5.4 million of foreign currency losses during the nine months ended October 31, 2022 compared to $1.6 million during the same period last year. Additionally, we recorded $0.8 million in income from unconsolidated affiliates during the nine months ended October 31, 2022 compared to $2.8 million in the same period last year.
31
Interest and financing charges, net, for the nine months ended October 31, 2022 were $40.8 million compared to $36.9 million for the same period last year. The increase was due to higher average borrowings on our revolving credit facility in the current year period. We had no borrowings outstanding under our revolving credit facility in the same period last year.
Interest and financing charges, net, for the six months ended July 31, 2023 were $21.6 million compared to $24.8 million in the same period last year. The decrease in interest and financing charges was primarily due to a $2.6 million increase in investment income from having a larger cash position in the current year compared to the prior year and recording lower interest of $0.8 million related to the LVMH Note as we repaid $75 million of the principal amount of this Note on June 1, 2023.
Income tax expense was $39.5$6.9 million for the ninesix months ended OctoberJuly 31, 20222023 compared to $59.7$22.0 million for the same period last year. Our effective tax rate decreasedincreased to 23.6%26.2% in the current year’s period from 28.2%24.8% in last year’s comparable period. This decrease in the effective tax rate is primarilyperiod due to a $1.3 million tax benefit related to the exclusion from taxable incomeforeign tax credit that was recorded during the first quarter of the gain on the remeasurement of the fair value of our previously held 19% investment in KLH and 49% interest in KLNA.prior year.
Liquidity and Capital Resources
Cash Availability
We rely on our cash flows generated from operations, in most periods, cash and cash equivalents and the borrowing capacity under our revolving credit facility to meet the cash requirements of our business. The cash requirements of our business are primarily related to the seasonal buildup in inventories, compensation paid to employees, payments to vendors in the normal course of business, capital expenditures, interest payments on debt obligations and income tax payments. A principal payment of $75 million was made on June 1, 2023 with respect to the LVMH Note with the remaining principal amount of $50 million due and payable on December 1, 2023. We have also used cash to make minority investments in private companies and to acquire the remaining portion of the Karl Lagerfeld business.repurchase our shares.
As of OctoberJuly 31, 2022,2023, we had cash and cash equivalents of $150.7$197.7 million and availability under our revolving credit facility of approximately $290$640 million. As of OctoberJuly 31, 2022,2023, we were in compliance with all covenants under our debt agreements.senior secured notes and revolving credit facility.
Senior Secured Notes
In August 2020, we completed a private debt offering of $400 million aggregate principal amount of our 7.875% Senior Secured Notes due 2025 (the “Notes). The terms of the Notes are governed by an indenture, dated as of August 7, 2020 (the “Indenture”), among us, the guarantors party thereto and U.S. Bank, National Association, as trustee and collateral agent (the “Collateral Agent”). The net proceeds of the Notes were used (i) to repay the $300 million that was outstanding under our prior term loan facility due 2022 (the “Term Loan”), (ii) to pay related fees and expenses and (iii) for general corporate purposes.
The Notes bear interest at a rate of 7.875% per year payable semi-annually in arrears on February 15 and August 15 of each year.
28
The Notes are unconditionally guaranteed on a senior-priority secured basis by our current and future wholly-owned domestic subsidiaries that guarantee any of our credit facilities, including our ABL facility (the “ABL Facility”) pursuant to the ABL Credit Agreement, or certain future capital markets indebtedness of ours or the guarantors.
The Notes and the related guarantees are secured by (i) first priority liens on our Cash Flow Priority Collateral (as defined in the Indenture), and (ii) a second-priority lien on our ABL Priority Collateral (as defined in the Indenture), in each case subject to permitted liens described in the Indenture.
In connection with the issuance of the Notes and execution of the Indenture, we and the Guarantors entered into a pledge and security agreement (the “Pledge and Security Agreement”), among us, the Guarantors and the Collateral Agent.
The Notes are subject to the terms of the intercreditor agreement which governs the relative rights of the secured parties in respect of the ABL Facility and the Notes (the “Intercreditor Agreement”). The Intercreditor Agreement restricts the actions permitted to be taken by the Collateral Agent with respect to the Collateral on behalf of the holders of the Notes. The Notes are also subject to the terms of the LVMH Note subordination agreement which governs the relative rights of the secured parties in respect of the LVMH Note, the ABL Facility and the Notes.
32
We may redeem some or all of the Notes at any time and from time to time at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
If we experience a Change of Control (as defined in the Indenture), we are required to offer to repurchase the Notes at 101% of the principal amount of such Notes plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.
The Indenture contains covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to incur or guarantee additional indebtedness, pay dividends or make other restricted payments, make certain investments, incur restrictions on the ability of our restricted subsidiaries that are not guarantors to pay dividends or make certain other payments, create or incur certain liens, sell assets and subsidiary stock, impair the security interests, transfer all or substantially all of our assets or enter into merger or consolidation transactions, and enter into transactions with affiliates. The Indenture provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among others, nonpayment of principal or interest, breach of other agreements in the Indenture, failure to pay certain other indebtedness, failure of certain guarantees to be enforceable, failure to perfect certain collateral securing the Notes, failure to pay certain final judgments, and certain events of bankruptcy or insolvency.
We incurred debt issuance costs totaling $8.5 million related to the Notes. In accordance with ASC 835, the debt issuance costs have been deferred and are presented as a contra-liability, offsetting the outstanding balance of the Notes, and are amortized over the remaining life of the Notes.
Second Amended and Restated ABL Credit Agreement
In August 2020, our subsidiaries, G-III Leather Fashions, Inc., Riviera Sun, Inc., CK Outerwear, LLC, AM Retail Group, Inc. and The Donna Karan Company Store LLC (collectively, the “Borrowers”), entered into the second amended and restated credit agreement (the “ABL Credit Agreement”) with the Lenders named therein and with JPMorgan Chase Bank, N.A., as Administrative Agent. The ABL Credit Agreement is a five year senior secured credit facility subject to a springing maturity date if, subject to certain conditions, the LVMH Note is not refinanced or repaid prior to the date that is 91 days prior to the date of any relevant payment thereunder. The ABL Credit Agreement provides for borrowings in the aggregate principal amount of up to $650 million. We and certain of our subsidiaries G-III Apparel Canada ULC, Gabrielle Studio, Inc., Donna Karan International Inc. and Donna Karan Studio LLC (the “Guarantors”), are Loan Guarantors under the ABL Credit Agreement.
The ABL Credit Agreement refinanced, amended and restated the Amended Credit Agreement, dated as of December 1, 2016 (as amended, supplemented or otherwise modified from time to time prior to August 7, 2020, the “Prior Credit Agreement”). The Prior Credit Agreement provided for borrowings of up to $650 million. The ABL Credit Agreement extended the maturity date of this facility from December 2021 to August 2025, subject to a springing maturity date if, subject to certain conditions, the LVMH Note is not refinanced or repaid prior to the date that is 91 days prior to the date of any relevant payment thereunder.
29
Amounts available under the ABL Credit Agreement are subject to borrowing base formulas and overadvances as specified in the ABL Credit Agreement. Borrowings bearoriginally bore interest, at the Borrowers’ option, at LIBOR plus a margin of 1.75% to 2.25% or an alternate base rate margin of 0.75% to 1.25% (defined as the greatest of (i) the “prime rate” of JPMorgan Chase Bank, N.A. from time to time, (ii) the federal funds rate plus 0.5% and (iii) the LIBOR rate for a borrowing with an interest period of one month) plus 1.00%, with the applicable margin determined based on Borrowers’ availability under the ABL Credit Agreement. In April 2023, we amended the ABL Credit Agreement to replace LIBOR with Adjusted Term Secured Overnight Financing Rate (“SOFR”) as a successor rate. All other material terms and conditions of the ABL Credit Agreement were unchanged. Borrowings under the amended ABL Credit Agreement now bear interest, at the Borrower’s option, at the alternate base rate (defined as, for a given day, the greatest of (i) the “prime rate” in effect on such day, (ii) the NYFRB Rate (as defined in the amendment) in effect on such day plus 0.5% and (iii) the Adjusted Term SOFR (defined as an interest rate per annum equal to the Term SOFR for such interest period plus 0.10%) for a one-month interest period as published two business days prior to such day plus 1%) plus an applicable spread or the Adjusted Term SOFR Rate plus an applicable spread. We applied certain provisions and practical expedients of ASC 848 – Reference Rate Reform related to the transition from LIBOR to SOFR. We do not expect a material change to our interest expense or results of operations as a result of transitioning the reference rate used in our ABL Credit Agreement from LIBOR to SOFR.
The ABL Credit Agreement is secured by specified assets of the Borrowers and the Guarantors. In addition to paying interest on any outstanding borrowings under the ABL Credit Agreement, we are 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 tiered rate equal to 0.50% per annum on the average daily amount of the available commitments when the average usage is less than 50% of the total available commitments and decreases to 0.35% per annum on the average daily amount of the available commitments when the average usage is greater than or equal to 50% of the total available commitments. As of October 31, 2022, interest under the ABL Credit Agreement was being paid at an average rate of 4.91% per annum.
33
The revolving credit facility contains covenants that, among other things, restrict our ability to, subject to specified exceptions, 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 us 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.months. As of OctoberJuly 31, 2022, the Company was2023, we were in compliance with these covenants.
As of OctoberJuly 31, 2022,2023, we had $340.2 million ofno borrowings outstanding under the ABL Credit Agreement, all of which are classified as long-term liabilities.Agreement. The ABL Credit Agreement also includes amounts available for letters of credit. As of OctoberJuly 31, 2022,2023, there were outstanding trade and standby letters of credit amounting to $6.5$3.7 million and $3.4$2.9 million, respectively.
At the date of the refinancing of the Prior Credit Agreement, we had $3.3 million of unamortized debt issuance costs remaining from the Prior Credit Agreement. We extinguished and charged to interest expense $0.4 million of the prior debt issuance costs and incurred new debt issuance costs totaling $5.1 million related to the ABL Credit Agreement. We have a total ofrecorded $8.0 million of debt issuance costs related to our ABL Credit Agreement. As permitted under ASC 835, the debt issuance costs have been deferred and are presented as an asset which is amortized ratably over the term of the ABL Credit Agreement.
Reference Rate Reform
The interest rate under our revolving credit facility is indexed to LIBOR. LIBOR quotations could cease as of December 31, 2022. We have discussed alternatives to LIBOR with the administrative agent under our ABL Credit Agreement and we expect that if LIBOR can no longer be used as the reference rate, we will be able to use an alternative such as the Secured Overnight Financing Rate, known as SOFR. We do not expect a material change to our interest expense or results of operations if LIBOR is no longer available as a reference rate under our ABL Credit Agreement.
LVMH Note
We issued to LVMH, as a portion of the consideration for the acquisition of DKI, a junior lien secured promissory note in favor of LVMH in the principal amount of $125 million (the “LVMH Note”) that bears interest at the rate of 2% per year. $75 million of the principal amount of the LVMH Note is due and payablewas repaid on June 1, 2023 and therefore has been recorded within current portion of notes payable on the condensed consolidated balance sheets and $50 million of such principal amount is due and payable on December 1, 2023. The LVMH Note is classified in current portion of notes payable in our Company’s condensed consolidated balance sheet as of July 31, 2023 and January 31, 2023. $75.0 million of the LVMH Note is classified in current portion of notes payable in our condensed consolidated balance sheet as of July 31, 2022.
Based on an independent valuation, it was determined that the LVMH Note should be treated as having been issued at a discount of $40 million in accordance with ASC 820 — Fair Value Measurements. This discount is being amortized as interest expense using the effective interest method over the term of the LVMH Note.
30
In connection with the issuance of the LVMH Note, LVMH entered into (i) a subordination agreement providing that our obligations under the LVMH Note are subordinate and junior to our obligations under the revolving credit facility and Term Loan and (ii) a pledge and security agreement with us and our subsidiary, G-III Leather, pursuant to which we and G-III Leather granted to LVMH a security interest in specified collateral to secure our payment and performance of our obligations under the LVMH Note that is subordinate and junior to the security interest granted by us with respect to our obligations under the revolving credit facility and Term Loan.
Unsecured Loans
Several of our foreign entities borrow funds under various unsecured loans of which a portion is to provide funding for operations in the normal course of business while other loans are European state backed loans as part of COVID-19 relief programs. In the aggregate, the Company iswe are currently required to make quarterly installment payments of principal in the amount of €0.4 million.€0.6 million under these unsecured loans. Interest on the outstanding principal amount of the unsecured loans accrues at a fixed rate equal to 0% to 5.0% per annum, payable on either a quarterly or monthly basis. As of OctoberJuly 31, 2022,2023, the Company had an aggregate outstanding balance of €10.7€9.1 million ($10.49.9 million) under these unsecured loans.
34
Overdraft Facilities
During fiscal 2021, TRB entered into several overdraft facilities that allow for applicable bank accounts to be in a negative position up to a certain maximum overdraft. TRB entered into an uncommitted overdraft facility with HSBC Bank allowing for a maximum overdraft of €5 million. Interest on drawn balances accrues at a fixed rate equal to the Euro Interbank Offered Rate (“EURIBOR”) plus a margin of 1.75% per annum, payable quarterly. The facility may be cancelled at any time by TRB or HSBC Bank. As part of a COVID-19 relief program, TRB and its subsidiaries have also entered into several state backed overdraft facilities with UBS Bank in Switzerland for an aggregate of CHF 4.7 million at varying interest rates of 0% to 0.5%. As of OctoberJuly 31, 2022,2023, TRB had an aggregate €3.7of €2.0 million ($3.72.2 million) drawn under these facilities.
Foreign Credit Facility
KLH has a credit agreement with ABN AMRO Bank N.V. with a credit limit of €15.0 million which is secured by specified assets of KLH. Borrowings bear interest at the Euro Interbank Offered Rate (“EURIBOR”)EURIBOR plus a margin of 1.7%. As of OctoberJuly 31, 2022,2023, KLH had €10.6€7.5 million ($10.48.2 million) of borrowings outstanding under this credit facility.
Outstanding Borrowings
Our primary operating cash requirements are to fund our seasonal buildup in inventories and accounts receivable, primarily during the second and third fiscal quarters each year. Due to the seasonality of our business, we generally reach our peak borrowings under our 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 and cash generated from operations.
We had $340.2 million ofno borrowings outstanding under our revolving credit facility at OctoberJuly 31, 2023 and $51.6 million outstanding at July 31, 2022, and no borrowings outstanding at October 31, 2021.respectively. We had $400 million in borrowings outstanding under the Notes at OctoberJuly 31, 20222023 and OctoberJuly 31, 2021,2022, respectively. Our contingent liability under open letters of credit was approximately $9.9$6.7 million and $17.1$11.3 million at OctoberJuly 31, 20222023 and 2021,2022, respectively. In addition to the amounts outstanding under these two loan agreements, at OctoberJuly 31, 20222023 and 2021,2022, we had $50 million and $125 million of face value principal amount outstanding under the LVMH Note.Note, respectively. As of OctoberJuly 31, 20222023 and 2021,2022, we had an aggregate of €10.7€9.1 million ($10.49.9 million) and €7.3€7.6 million ($8.48.0 million) outstanding under the Company’s various unsecured loans. As of OctoberJuly 31, 20222023 and 2021,2022, we had €3.7€2.0 million ($3.72.2 million) and €2.5€3.1 million ($2.83.2 million) outstanding under Vilebrequin’sour various overdraft facilities. As of OctoberJuly 31, 2023 and 2022, we had €10.6€7.5 million ($10.48.2 million) and €0.4 million ($0.4 million) outstanding under KLH’s foreign credit facility.
Share Repurchase Program
In March 2022,August 2023, our Board of Directors authorized an increase in the number of shares covered by our share repurchase program to an aggregate amount of 10,000,000 shares. Prior to this increase, we had 6,813,851 authorized shares under
31
this program. Pursuant to this program, during the ninesix months ended OctoberJuly 31, 2022,2023, we acquired 811,8741,598,568 of our shares of common stock for an aggregate purchase price of $16.6$26.1 million. The timing and actual number of shares repurchased, if any, will depend on a number of factors, including market conditions and prevailing stock prices, and are subject to compliance with certain covenants contained in our loan agreement. Share repurchases may take place on the open market, in privately negotiated transactions or by other means, and would be made in accordance with applicable securities laws. As of December 1, 2022,September 5, 2023, we had 9,188,126 authorized shares remaining under this program and 47,488,99945,721,002 shares of common stock outstanding.
Cash from Operating Activities
We used $415.3generated $212.5 million in cash from operating activities during the ninesix months ended OctoberJuly 31, 2022,2023, primarily as a result of increasesour net income of $355.3$19.7 million, in inventories, $248.3a decrease of $155.6 million in accounts receivable and an increase of $154.4 million in accounts payable and accrued expenses. We also generated cash from operating activities as a result of non-cash gaincharges relating primarily to depreciation and amortization of $30.9$12.5 million on our 19% investment in KLH and 49% investment in KLNA.share-based compensation of $6.8 million. These items were offset, in part, by our net incomean increase of $128.1$95.5 million in inventories and non-cash charges consisting primarilya decrease of $28.9$33.5 million relating to share-based compensation and depreciation and amortization of $20.0 million.in customer refund liabilities.
The changes in operating cash flow items varied to some extent fromare consistent with our seasonal patterns in prior years. While inventories normally increasepattern of building up inventory for the fall shipping season resulting in the first nine months of our fiscal year, they increased more than normal due to an accelerationincreases in our production schedule in an attempt to mitigate the potential effects of supply chain disruptionsinventory and to accommodate the
35
anticipated extended transit times experienced by our overseas suppliers. Accountsaccounts payable. Our accounts receivable increasedand customer refund liabilities decreased because we experience higherlower sales levels in our first and second quarters than in our third and fourth quarters.
Cash from Investing Activities
We used $211.1$14.8 million of cash in investing activities during the ninesix months ended OctoberJuly 31, 2022, primarily as a result of cash paid, net of cash acquired, of $168.6 million for the acquisition to KLH.2023. We also used cash for a $25.0 million minority investment in an e-commerce retailer. In addition, we had $14.8$11.1 million in capital expenditures primarily related to infrastructure and information technology expenditures and additional fixturing costs at department stores. In addition, we used $3.6 million for an investment in the equity of a private company.
Cash from Financing Activities
Net cash providedused by financing activities was $322.2$194.3 million during ninesix months ended OctoberJuly 31, 20222023 primarily as a result of repayments of borrowings of $512.7$85.4 million under our ABL Credit Agreement, partially offset by repaymentsborrowings of $172.5$5.3 million under that Agreement. This borrowing was also offset, in part, by $16.6Agreement, as well as the $75.0 million principal repayment of the LVMH Note. In addition, we used $26.1 million of cash used to repurchase 811,8741,598,568 shares of our common stock under our share repurchase program and $9.8$10.8 million for taxes paid in connection with net share settlements of stock grants that vested.
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, 20222023 are those that depend most heavily on these judgments and estimates. As of OctoberJuly 31, 2022,2023, there have been no material changes to our critical accounting policies.
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, 2022.2023.
32
Item 4. Controls and Procedures.
As of the end of the period covered by this report, our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, and thus, are effective in making known to them material information relating to G-III required to be included in this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the period covered by the Quarterly Report that have materially affected, or are reasonably likely to materially affect, these internal controls.
On May 31, 2022, we acquired KLH. See Note 6 – Karl Lagerfeld Acquisition in the accompanying Notes to our Condensed Consolidated Financial Statements in this Quarterly Report and Note 15 – Karl Lagerfeld Acquisition in the accompanying Notes to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended January 31, 2023 for further information on our acquisition of KLH.
36
Wethe internal controls environment for KLH and are currently in the process of integrating the internal controls and procedures of KLH intocompleting our internal controls over financial reporting. As provided under the Sarbanes-Oxley Act of 2002 and the applicable rules and regulations of the SEC, weeffectiveness testing. We will include the internal controls and procedures of KLH in our annual assessment of the effectiveness of our internal control over financial reporting for our 2024 fiscal year.
PART II – OTHER INFORMATION
Item 1A. Risk Factors.
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors contained in “Item 1A.-Risk Factors” in our Annual Report on Form 10-K for the year ended January 31, 20222023 (the “Annual Report”), which could materially affect our business, financial condition and/or future results. As of OctoberJuly 31, 2022,2023, there have been no material changes in our risk factors from those set forth in the Annual Report, except for the risk factor set forth below, which serves as an update to the comparable risk factor contained in our Annual Report. The risks described in the Annual Report and in this Quarterly Report on Form 10-Q are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or future results.
Any adverse change in our relationship with PVH Corp. and its Calvin Klein or Tommy Hilfiger brands would have a material adverse effect on our results of operations.
We have license agreements relating to a variety of products sold under the Calvin Klein and Tommy Hilfiger brands, both of which are owned by PVH. Net sales of products under the Calvin Klein and Tommy Hilfiger brands constituted approximately 48.2% of our net sales in the nine months ended October 31, 2022, approximately 50.7% of our net sales in fiscal 2022 and approximately 53.5% of our net sales in fiscal 2021.
On November 30, 2022, we announced the extension of licenses for Calvin Klein and Tommy Hilfiger products. The amendments to the license agreements for Calvin Klein and Tommy Hilfiger products provide for staggered extensions by category that expire beginning December 31, 2024 and continuing through December 31, 2027. See “Calvin Klein and Tommy Hilfiger License Extensions” under “Recent Developments” in Item 2 of this Form 10-Q.
PVH has indicated that it intends to produce these Calvin Klein and Tommy Hilfiger products itself once these license agreements expire. Unless we are able to increase the sales of our other products, acquire new businesses and/or enter into other license agreements covering different products, the inability to renew the Calvin Klein and Tommy Hilfiger license agreements would cause a significant decrease in our net sales and have a material adverse effect on our results of operations.
3733
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information with respect to the Company’s common stock that the Company repurchased during the three months ended July 31, 2023. Included in this table are shares withheld during May 2023 and June 2023 to satisfy tax withholding requirements in connection with stock awards.
| | | | | | | | | | |
Date Purchased | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share (1) | | Total Number of Share Purchased as Part of Publicly Announced Program (2) (3) | | Maximum Number of Shares that may yet be Purchased Under the Program (2) | ||
May 1 - May 31, 2023 | | 138 | | $ | 16.21 | | — | | | 7,288,148 |
June 1 - June 30, 2023 | | 996,120 | | | 19.86 | | 456,995 | | | 6,831,153 |
July 1 - July 31, 2023 | | 17,302 | | | 18.71 | | 17,302 | | | 6,813,851 |
| | 1,013,560 | | $ | 19.29 | | 474,297 | | | 6,813,851 |
(1) | Included in this table are 539,263 shares withheld during the three-month period ended July 2023 in connection with the settlement of vested restricted stock units to satisfy tax withholding requirements. Our 2015 Long-Term Incentive Plan provides that shares withheld are valued at the closing price per share on the date withheld. |
(2) | In August 2023, our Board of Directors reapproved our previously authorized share repurchase program and increased the number of shares remaining under that program from 6,813,851 to 10,000,000 shares. This program has no expiration date. Repurchases under the program may be made from time to time through open market purchases, accelerated share repurchase programs, privately negotiated transactions or other methods, as we deem appropriate. |
(3) | In June 2023, the Company entered into a stock sale and purchase agreement (the “Agreement”) with Sammy Aaron, the Company’s Vice Chairman and President and a Director of the Company. Pursuant to the Agreement, the Company purchased 208,943 shares of its common stock for $4.1 million at a price equal to the closing price of the Company’s shares on the date of the Agreement. |
Item 5. Other Information
During the three months ended July 31, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
34
Item 6. Exhibits.
3.1 | Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, dated July 2, 2008). |
3.1(a) | |
3.1(b) | |
3.1(c) | |
3.2 | |
31.1 | |
31.2 | |
32.1* | |
32.2* | |
101.INS | iXBRL Instance Document. |
101.SCH | iXBRL Schema Document. |
101.CAL | iXBRL Calculation Linkbase Document. |
101.DEF | iXBRL Extension Definition. |
101.LAB | iXBRL Label Linkbase Document. |
101.PRE | iXBRL Presentation Linkbase Document. |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* This certification is deemed furnished, and not filed, for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
3835
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| G-III APPAREL GROUP, LTD. | |
Date: | By: | /s/ Morris Goldfarb |
Morris Goldfarb | ||
Chief Executive Officer | ||
Date: | By: | /s/ Neal S. Nackman |
Neal S. Nackman | ||
Chief Financial Officer |
3936