G-III fought a slowing sport fashion market and finished their fiscal 2005 Q2 with a net loss of $1.7 million, or a loss of 23 cents per share, compared to net income of $2.7 million or 37 cents per share in theyear-ago period.
Sales declined 3.1% to $43.9 million compared to $45.3 million last year. Much of the decrease in earnings was attributable to significant erosion in gross margin, which fell 1,060 basis points to 24.0% in Q2 2005 compared to 34.6% in Q2 2004.
In a conference call with analysts, Morris Goldfarb, chairman and CEO of G-III, said that this decline in margins was because last year allowed “higher than average” margins on sports fashion merchandise. The slow-down in this business has caused G-III to eliminate this entire arm of the company.
“The fashion side is pretty much gone. It doesnt really exist today,” said Goldfarb. He said they reduced headcount in the division last month and realigned the remaining people into other areas of the business.
Goldfarb did say that the core sports business was doing well, and he hopes this move away from fashion will remove them the company from the volatility of that market and provide more consistent earnings.
In addition to the declining sports fashion business, GIII took a hit to earnings from their sale of a manufacturing facility JV in China of which G-III owned 39%. The sale impacted earnings by $882,000 and the initial amount of the investment was $1.1 million. This was a cause for concern to analysts, with one commenting that he thought “it was kind of hard to lose money on a joint venture in China.” Goldfarb said that the motivations behind this exit were inventory management and greater efficiency through third party sourcing. G-III has no other JV manufacturing facilities in China, but still plans to use the factory for some of its sourcing needs.
