G-III Apparel Group Ltd. lowered its full-year guidance due to the impact of new tariffs but shares rose strongly as the tariff charge was less than feared.
The company, which owns a sizeable sports licensing business but whose main business is Calvin Klein, Tommy Hilfiger and Donna Karen apparel, updated its guidance as it reported second-quarter results that came in line with results.
In afternoon trading on Thursday, shares of G-III were up $4.38, or 23.3 percent, to $23.2.
G-III said that in total, the fourth tranche of tariffs is estimated to cost the company approximately $12 million for this fiscal year.
For the year, the company now expects:
- Net sales of approximately $3.30 billion, slightly ahead of previous guidance calling for sales of approximately $3.28 billion. In the year-ago period, sales were $3.08 billion.
- Net income between $154 million and $159 million, or $3.10 and $3.20 per share, down from previous guidance of $163 million and $168 million, or $3.19 to $3.29. Net income was $138.1 million, or $2.75, in fiscal 2019.
- Non-GAAP net income between $156 million and $161 million, or $3.15 to $3.25, down from previous guidance of $167 million and $172 million, or $3.25 and $3.35. Non-GAAP net income was $143.9 million, or $2.86, for fiscal 2019.
- Adjusted EBITDA for fiscal 2020 between $295 million and $300 million, down from previous guidance of adjusted EBITDA between $307 million and $313 million. Adjusted EBITDA was $269.4 million in fiscal 2019.
On a conference call with analysts, CEO Morris Goldfarb indicated the company is taking numerous steps to mitigate the impact of tariffs.
First, G-III has already been reducing its exposure to China. Production in China will be down to less than 50 percent this year, down from 80 percent sourced from China four years ago.
“Most importantly, we’ve done so with the comfort of knowing that we are in the right countries with the right partners,” said Goldfarb. “We believe we have significant additional sourcing opportunities outside of China over the next several years.”
To directly address the new tariffs, G-III has strategically accelerated inventory receipts from suppliers and that’s reflected in inventories being ahead 24 percent at the quarter’s close. Goldfarb also said he recently met with several of the company’s largest Chinese vendors “who continue to be extremely supportive in sharing the tariff cost implemented today.”
As a result, the accelerated shipments and expected vendor support are expected to minimize the impact of tariffs this fiscal year.
Goldfarb added, “Looking ahead to next year, while the effect of trade negotiations and tariffs between the U.S. and China remains uncertain, we expect to be able to mitigate the impact of tariffs through continued expansion of our sourcing alternatives, obtaining further price concessions from our vendor partners in China and implementing selective wholesale price increases where we deem appropriate.”
In the second quarter, sales increased 3.1 percent to $643.9 million. Sales were below guidance calling for revenue of approximately $660.0 million. The shortfall reflects a continued poor performance at its retail segment, which includes the Bass and Wilsons chains.
GAAP net income for the quarter reached $11.1 million, or 23 cents per share, compared to $10.1 million, or 20 cents, in the prior year’s comparable period. Results were in line with guidance calling for net earnings in the range of $8.0 million and $13.0 million, or 15 to 25 cents.
Non-GAAP net income per share was 23 cents for the quarter compared to 22 cents in the same period last year and in line with guidance between 17 and 27 cents.
Net sales of Wholesale Operation segment increased 8.1 percent to $589 million from $545 million. The Tommy Hilfiger, DKNY and Calvin Klein brands were the main drivers of this increase.
Highlights included a “very strong start” for the new women’s CK Jeans license with PVH. Goldfarb expects the business will drive $250 million in annual sales over the next several years. Tommy Hilfiger saw a greater than 30 percent sales increase year over year in the quarter and was helped by broad-based gains. The Tommy Hilfiger Sportswear business will expand distribution at Dillard’s and Nordstrom’s this fall. The Tommy Hilfiger jeans business is expected to benefit from the launch of a new collection targeting more casual and younger customers.
The DKNY Donna Karan brands grew more than 20 percent in the quarter and is gaining traction internationally.
G-III officials didn’t provide details on the performance of the team licensed business, which includes Touch by Alyssa Milano, Hands High, Starter, G-III for Her and G-III Sports by Carl Banks.
Net sales of its Retail Operations segment for the quarter were $84 million, down 21.5 percent. Same-store sales were down 21 percent at Wilsons and 16 percent for G.H. Bass but showed an increase of 3 percent at DKNY. Net sales of the Retail Operations segment were negatively affected by the decrease of approximately 55 stores year over year due to store closings.
Goldfarb said that by the end of the year, the company will have eliminated over 140 stores, down from over 350 stores at the year’s start. The closings will represent an approximately a 40 percent decrease with Bass and Wilsons stores. In July, G-III engaged outside advisors to assist with the retail restructuring. Goldfarb added, “For the second half of the year, we anticipate performance benefits at DKNY and Karl Lagerfeld stores as a result of improved product and store design. We remain committed to eliminating the losses in our own retail operations as swiftly and as efficiently as possible.”
For the third quarter ending October 31, the company is forecasting sales of approximately $1.17 billion and net income between $90.0 million and $95.0 million, or between $1.85 and $1.95 per share. This forecast compares to net sales of $1.07 billion and net income of $94.0 million, or $1.86, a year ago. Non-GAAP net income is projected between $1.87 and $1.97 per share compared to $1.88 in the third quarter last year.
Photo courtesy DKNY
