The term loan and SGL upgrades both reflect the reduced reliance on its more senior asset-based revolving credit facility (not rated by Moody’s) as a result of improved performance, free cash flow and debt reduction. The company has significantly paid down borrowings used to fund the 2016 acquisition of Donna Karan, and thus has reduced overall peak borrowings under the facility. The affirmation of the Ba3 CFR reflects the continued solid performance and credit metrics since the acquisition of Donna Karan International Inc. in December 2016.
Upgrades
- Senior Secured Term Loan, Upgraded to Ba3 (LGD4) from B1 (LGD4)
- Speculative Grade Liquidity Rating to SGL-2 from SGL-3
Affirmations
- Probability of Default Rating, Affirmed Ba3-PD
- Corporate Family Rating, Affirmed Ba3
Outlook Actions
- Outlook Remains Stable
Ratings Rationale
G-III’s Ba3 Corporate Family Rating reflects its solid market position, well-known brands, broad product offering and track record of growth, both organically and through new licenses and acquisitions. The December 2016 acquisition of Donna Karan expanded the company’s portfolio of owned brands and provides potential profitable growth opportunities. Leverage, as measured by lease-adjusted debt-to-EBITDAR, stood at 2.7x as of July 31, 2018, having improved significantly since the acquisition due to both earnings growth and debt reduction. Liquidity is good, supported by the expectation that balance sheet cash, cash flow and excess revolver capacity will cover highly seasonal working capital needs and capital expenditures over the next twelve months.
G-III’s credit profile is constrained by the company’s ongoing reliance on licensed brands for more half of its sales and the relatively short terms of contracts within the licensed portfolio. Calvin Klein, its largest licensed brand and longest current contract, expires in five years. In addition, as an apparel wholesaler/retailer, G-III’s business risk is high due to the potential for performance volatility related to fashion risk or changes in consumer spending, significant wholesale customer concentration or, more recently, increased tariffs on products sourced from China and sold into the United States. Execution risk is also high as the company works to sustainably improve its Bass and Wilson’s retail businesses while further integrating Donna Karan business, all in a very challenging industry environment.
The ratings could be upgraded over time if the company sustainably expands revenue and EBITA margins and maintains conservative financial policies. Quantitatively, an upgrade would require average lease-adjusted debt/EBITDA sustained below 3.5 times and EBITA/interest expense above 3.5 times.
The ratings could be downgraded if operating performance materially declines, if liquidity were to deteriorate through increased revolver borrowing or negative free cash flow or if financial policy became more aggressive, such as through large debt-financed acquisitions. Failure to renew major licenses or sustainably reduce leverage ahead of major license expirations could also lead to a ratings downgrade. Specific metrics include average lease-adjusted debt/EBITDA sustained above 4.5 times or EBITA/interest expense below 2.5 times.
G-III is a leading manufacturer and distributor of apparel and accessories under licensed brands, owned brands and private label brands. G-III’s owned brands include Donna Karan, DKNY, Vilebrequin, G. H. Bass, Andrew Marc, Marc New York, Eliza J and Jessica Howard. G-III has fashion licenses under the Calvin Klein, Tommy Hilfiger, Karl Lagerfeld Paris, Kenneth Cole, Cole Haan, Guess?, Vince Camuto, Ivanka Trump, Kensie, Levi’s and Dockers brands. Through the company’s team sports business, G-III has licenses with the National Football League, National Basketball Association, Major League Baseball, National Hockey League and over 150 U.S. colleges and universities. G-III also operates retail stores under the DKNY, Wilsons Leather, G. H. Bass, Vilebrequin, Calvin Klein Performance and Karl Lagerfeld Paris names. Revenue for the twelve month period ended July 31, 2018 approached $3 billion.
