G-III APPAREL GROUP, LTD. Unless the context otherwise requires, "G-III," "us," "we" and "our" refer to
Various statements contained in this Form 10-Q, in future filings by us with the
the global health crisis caused by the COVID-19 pandemic has had, and the
? current and uncertain future outlook of the outbreak will likely continue to
have, adverse effects on our business, financial condition and results of
operations;
the failure to maintain our material license agreements could cause us to lose
? significant revenues and have a material adverse effect on our results of
operations;
? our dependence on the strategies and reputation of our licensors;
any adverse change in our relationship with PVH and its
? Hilfiger brands would have a material adverse effect on our results of
operations;
risks relating to our wholesale operations including, among others, maintaining
? the image 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 the
restructuring of our retail operations;
? dependence on existing management;
? our ability to make strategic acquisitions and possible disruptions from
acquisitions;
? risks of operating through joint ventures;
? need for additional financing;
? seasonal nature of our business and effect of unseasonable or extreme weather
on our business;
? possible adverse effect of problems with our logistics and distribution
systems;
? 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;
? effects of war, acts of terrorism, natural disasters or public health crises
could adversely affect our business and results of operations;
? our dependence on foreign manufacturers;
? risks of expansion into foreign markets, conducting business internationally
and exposures to foreign currencies;
? risks related to the recent adoption of a national security law in
? the need to successfully upgrade, maintain and secure our information systems;
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? 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
government and the escalation of trade tensions between countries;
? risks related to the audit by the
? changes in tax legislation or exposure to additional tax liabilities could
impact our business;
? the effect of regulations applicable to us as a
? 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 goodwill, trademarks or other intangibles may require us to
record charges against earnings; and
? 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
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 five global power brands:
Our own proprietary brands include
Our products are sold through a cross section of leading retailers such as
Macy's, Dillard's, Hudson's Bay Company, including their
We also distribute apparel and other products directly to consumers through our
own
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
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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, two of which we own and three of which we license. 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.
Change in Accounting Principle
Effective
We have determined that it is impractical to apply this change in accounting
principle retrospectively due to a lack of available information. We have
instead applied the change prospectively as of
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
Vilebrequin business. Wholesale revenues also include royalty revenues from
license agreements related to our owned trademarks including
Our retail operations segment consists primarily of direct sales to consumers
through our company-operated stores and through digital channels. In fiscal
2021, we restructured our retail operations, including the closure of our
Wilsons Leather,
Trends Affecting Our Business Impact of COVID-19 Pandemic
The COVID-19 pandemic has affected businesses around the world for over a year. Federal, state and local governments and private entities mandated various restrictions, including closing of retail stores and restaurants, travel restrictions, restrictions on public gatherings, stay at home orders and advisories, and quarantining of people who may have been exposed to the virus. The response to the COVID-19 pandemic negatively affected the global economy, disrupted global supply chains, and created significant disruption of the financial and retail markets, including a disruption in consumer demand for apparel and accessories.
The COVID-19 pandemic continues to impact the global economy. In the first quarter of fiscal 2022, consumer demand increased year-over-year, but remained below pre-pandemic levels. Even as businesses have reopened as governmental restrictions were loosened with respect to stay at home orders and various restrictions on the operation of retail businesses, the ultimate economic impact of the COVID-19 pandemic is uncertain. We expect that our business operations and results of operations, including our net sales, earnings and cash flows, will continue to be adversely impacted in fiscal 2022 as
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compared to our results of operations prior to the COVID-19 pandemic. We expect significant improvements in our results of operations for fiscal 2022 as compared to fiscal 2021.
The continued impact of COVID-19 remains uncertain and cannot be predicted. The
extent to which COVID-19 impacts our results will depend on continued
developments in the public and private responses to the pandemic and the success
and efficacy of efforts in
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. In addition, consumer shopping preferences have continued to shift from physical stores to online shopping and retail traffic remains under pressure.
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 digital sales of apparel continue to increase, we are developing additional
digital marketing initiatives on our web sites and through social media. We are
investing in digital personnel, marketing, logistics, planning and distribution
to help us expand our online opportunities going forward. 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 and
www.wilsonsleather.com. We also sell
A number of retailers are experiencing 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 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.
Consumers have shifted their apparel purchases based on their adjusted lifestyle needs resulting from changes to the work environment and leisure activities caused by the COVID-19 pandemic. We revised our product offerings in response to this shift toward casual and comfortable work-from-home clothing, as well as to activewear and leisure attire. We continue to revise our product lines to satisfy the needs of our retail customers and consumers. We are seeing significant acceleration in demand for day and occasion dresses, as well as career wear such as suit separates. We are working diligently to satisfy this demand from our retail partners and consumers.
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 and new license agreements entered into by us that added to our portfolio of licensed and proprietary 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.
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Inbound Freight
The effects of the COVID-19 pandemic on the shipping industry have adversely affected our ability to ensure that we are able to import our product in a manner that allows for timely delivery to our customers. Demand for container space has increased, as availability of container space has been reduced. This has caused contractual shipping rates to increase. Our shipping costs have also increased as we purchased needed container space on the secondary market at higher spot rates. If we are unable to secure container space on a vessel due to the limited availability, we may experience delays in shipping product from our overseas suppliers to our customers. Ports around the world are experiencing congestion, slowing transit times of product through ports of entry which affects our ability to timely receive and deliver product to our customers. Our longstanding relationships with our steamship carriers have facilitated our ability to secure space on vessels as demand for apparel increases, although at rates that are significantly higher than in the past. We believe that the strength of our portfolio of global power brands will allow us to selectively raise prices to largely offset higher freight costs.
Results of Operations
Three months ended
Net sales for the three months ended
Net sales of our wholesale operations segment increased to
Net sales of our retail operations segment decreased to
Gross profit was
Selling, general and administrative expenses decreased to
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2021. These decreases were partially offset by a net
Depreciation and amortization was
Other income was
Interest and financing charges, net, for the three months ended
Income tax expense was
Liquidity and Capital Resources
Cash Availability
We rely on our cash flows generated from operations, cash and cash equivalents and the borrowing capacity under our revolving credit facility to meet the cash requirements of our business. The primary 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, maturities of debt and related interest payments and income tax payments.
As of
Senior Secured Notes
In
The Notes bear interest at a rate of 7.875% per year payable semi-annually in
arrears on
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.
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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 seller note subordination agreement which governs the relative rights of the secured parties in respect of the Seller Note (as defined therein), the ABL Facility and the Notes.
At any time prior to
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
Second Amended and Restated ABL Credit Agreement
In
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The ABL Credit Agreement refinances, amends and restates the Amended Credit
Agreement, dated as of
Amounts available under the ABL Credit Agreement are subject to borrowing base
formulas and overadvances as specified in the ABL Credit Agreement. Borrowings
bear 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
The revolving credit facility contains covenants that, among other things,
restrict our ability, subject to specified exceptions, to 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. As of
As of
At the date of the refinancing of the Prior Credit Agreement, we had
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
Based on an independent valuation, it was determined that the LVMH Note should
be treated as having been issued at a discount of
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
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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
During fiscal 2020 and fiscal 2021, T.R.
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 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
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 no borrowings outstanding under our revolving credit facility at
We had cash and cash equivalents of
Share Repurchase Program
Our Board of Directors authorized a share repurchase program in the aggregate
amount of 5,000,000 shares. 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. No shares were repurchased
during the three months ended
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Cash from Operating Activities
We generated
The decrease in accounts payable and accrued expenses is primarily attributable to vendor payments related to inventory purchases and the payment of year-end bonuses in our first fiscal quarter. Our customer refund liabilities and inventory decreased because we experience lower sales level in our first and second quarters than in our third and fourth quarters.
Cash from Investing Activities
We used
Cash from Financing Activities
Net cash provided by financing activities was
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
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