S&P Global Ratings raised its debt ratings of G-III Apparel Group Ltd. to Stable from Negative as profit and free operating cash flow generation significantly outperformed its expectations in fiscal 2021.
S&P wrote in a press release, “G-III’s profitability and operating cash flow generation outperformed our expectations in the second half of last year, and we now expect leverage to be maintained below 2x. We expect the company to return to revenue growth in fiscal 2022, ending January 2022, as it lapsed the first half of 2020 when there were unprecedented retail store closures related to the pandemic. The company meaningfully improved its cost structure by rationalizing its retail segment faster than previous expectations. This enabled the company to maintain its adjusted EBITDA margin above 11 percent in fiscal 2021 despite our expectation for incremental promotional pressure in its wholesale segment as inventory levels normalize for the industry.
“The company’s fiscal 2021 performance was significantly affected by the retail shutdowns because of the pandemic, with revenue down approximately 35 percent from fiscal 2020, compared with the industry average of about 20 percent, according to Euromonitor; however, its gross margin and free operating cash flow generation exceeded our expectations. G-III took early actions in cutting out a significant portion of inventory purchases during the onset of the pandemic to preserve cash and was able to quickly pivot its fall and winter assortments to the casual apparel categories to meet the rapidly changing consumer demand. As a result, its 2020 holiday season was significantly less promotional than previously expected. The company generated approximately $50 million of free operating cash flow, its adjusted EBITDA margin only contracted by 100 basis points, and it ended the year with adjusted leverage of 1.6x. This compares with our previous expectation of significantly negative free operating cash flow generation and leverage above 5x because of the company’s distribution channel concentration in the secularly challenged U.S. department store and specialty retail sectors as well as its fashion oriented-product category with a sizable dress and office-wear offerings.
“G-III has proven itself to be an effective merchandiser in anticipating and meeting U.S. consumer demand. The company has a history of healthy growth in the very challenged U.S. department store (Macy’s accounts for over 25 percent of its overall revenue) and specialty retail distribution channels pre-pandemic. We believe this is attributable to its ability to design and make products that appeal to fashion-conscious consumers. Its licensing relationship with PVH Corp. for Calvin Klein and Tommy Hilfiger continues to perform, and we believe the 2019 agreements to add the jeanswear licenses for both brands helped with the company’s performance in 2020 as denim demands were healthier than previously expected with consumers pivoting to causal wear but was hit by sweatpants fatigue as the pandemic continued. In addition, the company’s owned brands, DKNY and Donna Karen, continue to gain distribution points because the revamped brands are resonating well with customers. We believe the brands are now profitable despite the challenges of the pandemic and should create a platform for the company to expand internationally and expand its own direct-to-consumer digital channels.
“We expect leverage to be managed over 2x in the long term as the company seeks to acquire more brands. At this time, due to the continued uncertainty in the U.S. apparel industry, we expect leverage will continue to be low for this year as the company manages its cash and liquidity positions conservatively. However, longer-term, we believe the company’s ambition to own brands and expand internationally is fueled by its demonstrated ability to turn around the DKNY and Donna Karen brands. As the company completed its retail footprint rationalization during the pandemic, ahead of the original plan, it is now more flexible to take on integrating another brand. As such, we believe leverage would likely increase above 2x should the right target materialize.
“The stable outlook reflects our expectation that despite a continuing weak retail environment and uncertainty regarding consumers’ mobility and willingness to spend, G-III’s adjusted leverage will remain below 2x this year, well below our 3x downgrade trigger, absent major shareholder returns or debt-funded acquisitions.”
Photo courtesy G-III Apparel