G III Apparel Group Earnings 2019-07-31

GIII 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2019


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-18183

G-III APPAREL GROUP, LTD.

(Exact name of registrant as specified in its charter)


Delaware		41-1590959
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

512 Seventh Avenue, New York, New York		10018
(Address of principal executive offices)		(Zip Code)

(212) 403-0500

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	GIII	The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of September 3, 2019, there were 47,745,045 shares of issuer’s common stock, par value $0.01 per share, outstanding.

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TABLE OF CONTENTS

		Page No.
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets – July 31, 2019, July 31, 2018 and January 31, 2019	3
	Condensed Consolidated Statements of Income and Comprehensive Income (Loss) - For the Three and Six Months Ended July 31, 2019 and 2018 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows - For the Six Months Ended July 31, 2019 and 2018 (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27

Part II	OTHER INFORMATION
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 6.	Exhibits	29

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	July 31,		July 31,		January 31,
	2019		2018		2019
	(Unaudited)		(Unaudited)
	(In thousands, except per share amounts)
ASSETS
Current assets
Cash and cash equivalents	$	39,568	$	42,306	$	70,138
Accounts receivable, net of allowance for doubtful accounts		464,663		447,576		502,133
Inventories		842,136		678,571		576,383
Prepaid income taxes		12,500		6,962		8,308
Prepaid expenses and other current assets		93,353		100,688		96,933
Total current assets		1,452,220		1,276,103		1,253,895
Investments in unconsolidated affiliates		63,773		59,048		66,587
Property and equipment, net		85,548		92,133		86,407
Operating lease assets		309,421		—		—
Other assets, net		35,681		34,242		35,459
Other intangibles, net		40,444		44,193		42,404
Deferred income tax assets, net		25,253		28,360		22,427
Trademarks		439,409		440,878		439,742
Goodwill		260,687		261,677		261,137
Total assets	$	2,712,436	$	2,236,634	$	2,208,058
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Income tax payable	$	6,966	$	—	$	8,859
Accounts payable		346,642		301,427		225,499
Accrued expenses		89,137		95,464		102,841
Customer refund liabilities		179,078		204,360		243,589
Current operating lease liabilities		74,297		—		—
Current portion of notes payable		683		—		—
Other current liabilities		425		—		—
Total current liabilities		697,228		601,251		580,788
Notes payable, net of discount and unamortized issuance costs		553,118		494,206		386,604
Deferred income tax liabilities, net		15,019		15,393		15,128
Noncurrent operating lease liabilities		272,632		—		—
Other noncurrent liabilities		6,619		38,567		36,529
Total liabilities		1,544,616		1,149,417		1,019,049

Stockholders' Equity
Preferred stock; 1,000 shares authorized; no shares issued		—		—		—
Common stock - $0.01 par value; 120,000 shares authorized; 49,394, 49,238 and, 49,387 shares issued, respectively		264		263		264
Additional paid-in capital		456,195		460,000		464,112
Accumulated other comprehensive loss		(16,848)		(13,587)		(15,194)
Retained earnings		772,463		640,774		758,881
Common stock held in treasury, at cost - 1,649, 59 and 678 shares, respectively		(44,254)		(233)		(19,054)
Total stockholders' equity		1,167,820		1,087,217		1,189,009
Total liabilities and stockholders' equity	$	2,712,436	$	2,236,634	$	2,208,058

The accompanying notes are an integral part of these statements.

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G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)


	Three Months Ended July 31,				Six Months Ended July 31,
	2019		2018		2019		2018
	(Unaudited)
	(In thousands, except per share amounts)
Net sales	$	643,892	$	624,698	$	1,277,444	$	1,236,441
Cost of goods sold		412,123		393,154		809,611		770,370
Gross profit		231,769		231,544		467,833		466,071
Selling, general and administrative expenses		196,448		198,860		398,307		400,931
Depreciation and amortization		9,789		9,455		19,262		18,835
Gain on lease terminations		(1,393)		—		(2,222)		—
Operating profit		26,925		23,229		52,486		46,305
Other loss		(751)		(28)		(1,399)		(479)
Interest and financing charges, net		(10,785)		(10,210)		(21,105)		(19,830)
Income before income taxes		15,389		12,991		29,982		25,996
Income tax expense		4,270		2,914		6,820		6,034
Net income	$	11,119	$	10,077	$	23,162	$	19,962

NET INCOME PER COMMON SHARE:
Basic:
Net income per common share	$	0.23	$	0.20	$	0.48	$	0.41
Weighted average number of shares outstanding		48,450		49,169		48,619		49,148

Diluted:
Net income per common share	$	0.23	$	0.20	$	0.47	$	0.40
Weighted average number of shares outstanding		49,116		50,415		49,436		50,272

Net income	$	11,119	$	10,077	$	23,162	$	19,962
Other comprehensive income:
Foreign currency translation adjustments		1,573		(11,501)		(1,654)		(8,065)
Other comprehensive income (loss)		1,573		(11,501)		(1,654)		(8,065)
Comprehensive income (loss)	$	12,692	$	(1,424)	$	21,508	$	11,897

The accompanying notes are an integral part of these statements.

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G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended July 31,
	2019		2018
	(Unaudited)
	(In thousands)
Cash flows from operating activities
Net income	$	23,162	$	19,962
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		19,262		18,835
Loss on disposal of fixed assets		1,230		145
Non-cash operating lease costs		36,729		—
Gain on lease terminations		(2,222)		—
Dividend received from unconsolidated affiliate		1,960		—
Equity (gain)/loss in unconsolidated affiliates		(867)		1,817
Share-based compensation		9,349		9,440
Deferred financing charges and debt discount amortization		4,577		4,984
Changes in operating assets and liabilities:
Accounts receivable, net		37,470		(153,396)
Inventories		(265,753)		(125,638)
Income taxes, net		(5,987)		(11,646)
Prepaid expenses and other current assets		3,321		(53,396)
Other assets, net		(1,164)		(2,427)
Customer refund liabilities		(64,512)		137,767
Operating lease liabilities		(38,300)		—
Accounts payable, accrued expenses and other liabilities		108,838		68,074
Net cash used in operating activities		(132,907)		(85,479)

Cash flows from investing activities
Operating lease assets initial direct costs		(1,940)		—
Capital expenditures		(17,531)		(11,455)
Net cash used in investing activities		(19,471)		(11,455)

Cash flows from financing activities
Repayment of borrowings - revolving facility		(942,973)		(899,720)
Proceeds from borrowings - revolving facility		1,102,973		999,143
Repayment of borrowings - unsecured term loan		(170)		—
Proceeds from borrowings - unsecured term loan		3,407		—
Proceeds from exercise of equity awards		116		56
Purchase of treasury shares		(35,216)		—
Taxes paid for net share settlements		(7,366)		(1,098)
Net cash provided by financing activities		120,771		98,381

Foreign currency translation adjustments		1,037		(4,917)
Net decrease in cash and cash equivalents		(30,570)		(3,470)
Cash and cash equivalents at beginning of period		70,138		45,776
Cash and cash equivalents at end of period	$	39,568	$	42,306

Supplemental disclosures of cash flow information
Cash payments:
Interest, net	$	15,735	$	16,648
Income tax payments, net	$	12,791	$	18,465

The accompanying notes are an integral part of these statements.

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G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

As used in these financial statements, the term “Company” or “G-III” refers to G-III Apparel Group, Ltd. and its subsidiaries. The Company 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. The Company also operates retail stores and licenses its proprietary brands under several product categories.

The Company consolidates the accounts of its wholly-owned and majority-owned subsidiaries. KL North America B.V. (“KLNA”) and Fabco Holding B.V. (“Fabco”) are Dutch joint venture limited liability companies that are 49% owned by the Company. Karl Lagerfeld Holding B.V. (“KLH”) is a Dutch limited liability company that is 19% owned by the Company. These investments are accounted for using the equity method of accounting. All material intercompany balances and transactions have been eliminated.

Vilebrequin International SA (“Vilebrequin”), a Swiss corporation that is wholly-owned by the Company, KLH, KLNA and Fabco report results on a calendar year basis rather than on the January 31 fiscal year basis used by the Company. Accordingly, the results of Vilebrequin, KLH, KLNA and Fabco are, and will be, included in the financial statements for the quarter ended or ending closest to the Company’s fiscal quarter end. For example, with respect to the Company’s results for the six-month period ended July 31, 2019, the results of Vilebrequin, KLH, KLNA and Fabco are included for the six-month period ended June 30, 2019. The Company’s retail operations segment reports on a 52/53-week fiscal year. The Company’s three and six-month periods ended July 31, 2019 and 2018 were each a 13-week fiscal quarter and 26-week period, respectively, for the retail operations segment. For fiscal 2020 and 2019, the three and six-month periods for the retail operations segment ended on August 3, 2019 and August 4, 2018, respectively.

The results for the three and six-month periods ended July 31, 2019 are not necessarily indicative of the results expected for the entire fiscal year, given the seasonal nature of the Company’s business. The accompanying financial statements included herein are unaudited. All adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim period presented have been reflected.

The accompanying financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2019 filed with the Securities and Exchange Commission (the “SEC”).

Assets and liabilities of the Company’s foreign operations, where the functional currency is not the U.S. Dollar (reporting currency), are translated from foreign currency into U.S. dollars at period-end rates, while income and expenses are translated at the weighted-average exchange rates for the period. The related translation adjustments are reflected as a foreign currency translation adjustment in accumulated other comprehensive loss within stockholders’ equity.

Note 2 – Inventories

Wholesale inventories, which comprise a significant portion of the Company’s inventory, are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Retail inventories are valued at the lower of cost or market as determined by the retail inventory method. Vilebrequin inventories are stated at the lower of cost (determined by the weighted average method) or net realizable value. Substantially all of the Company’s inventories consist of finished goods.

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The inventory return asset, which consists of the amount of goods that are anticipated to be returned by customers, represented $24.8 million, $36.2 million and $42.4 million as of July 31, 2019, July 31, 2018 and January 31, 2019 respectively. The inventory return asset is recorded within prepaid expenses and other current assets.

Inventory held on consignment by the Company’s customers totaled $3.9 million, $3.7 million and $4.9 million at July 31, 2019, July 31, 2018 and January 31, 2019, respectively. Consignment inventory is stored at the facilities of the Company’s customers. The Company reflects this inventory on its Condensed Consolidated Balance Sheets.

Note 3 – Fair Value of Financial Instruments

Generally Accepted Accounting Principles establish a three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy for a particular asset or liability depends on the inputs used in its valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally-derived (unobservable). A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

●

Level 1 — inputs to the valuation methodology based on quoted prices (unadjusted) for identical assets or liabilities in active markets.

●

Level 2 — inputs to the valuation methodology based on quoted prices for similar assets or liabilities in active markets for substantially the full term of the financial instrument; quoted prices for identical or similar instruments in markets that are not active for substantially the full term of the financial instrument; and model-derived valuations whose inputs or significant value drivers are observable.

●

Level 3 — inputs to the valuation methodology based on unobservable prices or valuation techniques that are significant to the fair value measurement.

The following table summarizes the carrying values and the estimated fair values of the Company’s debt instruments:


		Carrying Value						Fair Value
		July 31,		July 31,		January 31,		July 31,		July 31,		January 31,
Financial Instrument	Level	2019		2018		2019		2019		2018		2019
		(In thousands)
Term loan	2	$	300,000	$	300,000	$	300,000	$	300,000	$	300,000	$	300,000
Revolving credit facility	2		160,000		111,426		—		160,000		111,426		—
Note issued to LVMH	3		99,266		94,100		96,618		96,437		85,000		88,608
Unsecured loan	2		3,243		—		—		3,243		—		—

The Company’s debt instruments are recorded at their carrying values in its condensed consolidated balance sheets, which may differ from their respective fair values. The carrying amount of the Company’s variable rate debt approximates the fair value, as interest rates change with the market rates. Furthermore, the carrying value of all other financial instruments potentially subject to valuation risk (principally consisting of cash, accounts receivable and accounts payable) also approximates fair value due to the short-term nature of these accounts.

The 2% note issued to LVMH Moet Hennessy Louis Vuitton Inc. (“LVMH”) in connection with the acquisition of Donna Karan International (“DKI”) was issued at a discount of $40.0 million in accordance with Accounting Standards Codification (“ASC”) 820 – Fair Value Measurements. For purposes of this fair value disclosure, the Company based its fair value estimate for the note issued to LVMH on the initial fair value as determined at the date of the acquisition of DKI and records the amortization using the effective interest method over the term of the note.

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Non-Financial Assets and Liabilities

The Company’s non-financial assets, which primarily consist of operating lease assets, goodwill, other intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial instruments are assessed for impairment and, if applicable, written down to and recorded at fair value, considering external market participant assumptions. During the first quarter of fiscal 2020, the Company recorded an impairment of $9.6 million, net of tax, in connection with the adoption of ASC 842 – Leases (“ASC 842”) that was recognized through retained earnings.

Note 4 – Leases

On February 1, 2019, the Company adopted ASC 842 using the optional transition method to apply the standard as of the effective date and, therefore, the standard has not been applied retroactively to the comparative periods presented in its financial statements. The Company has elected the transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and initial direct costs. The hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of right-of-use assets, has not been elected. Further, the Company elected the short-term lease exception policy, permitting it to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component.

The Company determines whether an arrangement is, or contains, a lease at contract inception. The Company leases certain retail stores, warehouses, distribution centers, office space and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.

Total rent payable is recorded during the lease term, including rent escalations in which the amount of future rent is certain or fixed on the straight-line basis over the term of the lease (including any rent holiday periods beginning upon control of the premises and any fixed payments stated in the lease). For leases with an initial term greater than 12 months, a lease liability is recorded on the balance sheet at the present value of future payments discounted at the incremental borrowing rate (discount rate) corresponding with the lease term. An operating lease asset is recorded based on the initial amount of the lease liability, plus any lease payments made to the lessor before or at the lease commencement date and any initial direct costs incurred, less any tenant improvement allowance incentives received. The difference between the minimum rents paid and the straight-line rent (deferred rent) is reflected within the associated operating lease asset.

The lease classification evaluation begins at the commencement date. The lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain or the failure to exercise such option would result in an economic penalty. All retail store, warehouse, distribution center and office leases are classified as operating leases. The Company does not have any finance leases. Operating lease expense is generally recognized on a straight-line basis over the lease term.

Certain leases contain provisions that require contingent rent payments based upon sales volume (variable lease cost). Contingent rent is accrued each period as the liabilities are incurred.

Most leases are for a term of one to ten years. Some leases include one or more options to renew, with renewal terms that can extend the lease term from one to ten years. Several of the Company’s retail store leases include an option to terminate the lease based on failure to achieve a specified sales volume. The exercise of lease renewal options is generally at the Company’s sole discretion. The exercise of lease termination options is generally by mutual agreement between the Company and the lessor.

Certain of the Company’s lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.

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The Company’s lease assets and liabilities as of July 31, 2019 consist of the following:



Leases	Classification	July 31, 2019
		(In thousands)
Assets
Operating	Operating lease assets	$	309,421
Total lease assets		$	309,421

Liabilities
Current operating	Current operating lease liabilities	$	74,297
Noncurrent operating	Noncurrent operating lease liabilities		272,632
Total lease liabilities		$	346,929

The Company’s leases do not provide the rate of interest implicit in the lease. Therefore, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. For transition purposes, the incremental borrowing rate on February 1, 2019 was used for operating leases that commenced prior to that date.

The Company recorded lease costs of $24.9 million and $49.9 million during the three and six months ended July 31, 2019, respectively. Lease costs are recorded within selling, general and administrative expenses in the Company’s condensed consolidated statements of income and comprehensive income. The Company recorded variable lease costs and short-term lease costs of $2.7 million and $5.0 million for the three and six months ended July 31, 2019, respectively. Short-term lease costs are immaterial.

As of July 31, 2019, the Company’s maturity of operating lease liabilities in the years ending up to January 31, 2024 and thereafter are as follows:


Year Ending January 31,	Amount
	(In thousands)
2020	$	49,670
2021		88,868
2022		75,281
2023		66,147
2024		52,795
After 2024		95,291
Total lease payments	$	428,052
Less: Interest		81,123
Present value of lease liabilities	$	346,929

As of July 31, 2019, there are no material leases that are legally binding but have not yet commenced.

As of July 31, 2019, the weighted average remaining lease term related to operating leases is 5.3 years. The weighted average discount rate related to operating leases is 7.8%.

Cash paid for amounts included in the measurement of operating lease liabilities is $51.9 million as of July 31, 2019. Right-of-use assets obtained in exchange for lease obligations were $15.6 million as of July 31, 2019.

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Note 5 – Net Income per Common Share

Basic net income per common share has been computed using the weighted average number of common shares outstanding during each period. Diluted net income per share is computed using the weighted average number of common shares and potential dilutive common shares, consisting of unvested restricted stock unit awards and unexercised stock options outstanding during the period. Approximately 794,400 and 327,000 unvested shares of common stock have been excluded from the diluted net income per share calculation for the three months ended July 31, 2019 and 2018, respectively. Approximately 606,500 and 322,000 unvested shares of common stock have been excluded from the diluted net income per share calculation for the six months ended July 31, 2019 and 2018, respectively. All share-based payments outstanding that vest based on the achievement of performance and/or market price conditions, and for which the respective performance and/or market price conditions have not been achieved, have been excluded from the diluted per share calculation.

The following table reconciles the numerators and denominators used in the calculation of basic and diluted net income per share:


	Three Months Ended July 31,				Six Months Ended July 31,
	2019		2018		2019		2018
	(In thousands, except per share amounts)
Net income	$	11,119	$	10,077	$	23,162	$	19,962
Basic net income per share:
Basic common shares		48,450		49,169		48,619		49,148
Basic net income per share	$	0.23	$	0.20	$	0.48	$	0.41

Diluted net income per share:
Basic common shares		48,450		49,169		48,619		49,148
Diluted restricted stock unit awards and stock options		666		1,246		817		1,124
Diluted common shares		49,116		50,415		49,436		50,272
Diluted net income per share	$	0.23	$	0.20	$	0.47	$	0.40

Note 6 – Notes Payable

Long-term debt consists of the following:


	July 31, 2019		July 31, 2018		January 31, 2019
	(In thousands)
Term loan	$	300,000	$	300,000	$	300,000
Revolving credit facility		160,000		111,426		—
Note issued to LVMH		125,000		125,000		125,000
Unsecured loan		3,243		—		—
Subtotal		588,243		536,426		425,000
Less: Net debt issuance costs ⁽¹⁾		(8,708)		(11,320)		(10,014)
Debt discount		(25,734)		(30,900)		(28,382)
Current portion of long-term debt		(683)		—		—
Total	$	553,118	$	494,206	$	386,604

(1)

Does not include debt issuance costs, net of amortization, totaling $5.8 million, $8.3 million and $7.1 million as of July 31, 2019, July 31, 2018 and January 31, 2019, respectively, related to the revolving credit facility. These debt issuance costs have been deferred and are classified in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets in accordance with Accounting Standards Update (“ASU”) 2015-15.

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Term Loan

In connection with the acquisition of DKI, the Company borrowed $350.0 million under a senior secured term loan facility (the “Term Loan”). On December 1, 2016, the Company prepaid $50.0 million in principal amount of the Term Loan. The Term Loan will mature in December 2022.

Interest on the outstanding principal amount of the Term Loan accrues at a rate equal to the London Interbank Offered Rate (“LIBOR”), subject to a 1% floor, plus an applicable margin of 5.25% or an alternate base rate (defined as the greatest of (i) the “prime rate” as published by the Wall Street Journal from time to time, (ii) the federal funds rate plus 0.5% or (iii) the LIBOR rate for a borrowing with an interest period of one month) plus 4.25%, per annum, payable in cash. As of July 31, 2019, interest under the Term Loan was being paid at an average rate of 7.73% per annum.

The Term Loan is secured by certain assets of the Company and certain of its subsidiaries. The Term Loan is required to be prepaid with the proceeds of certain asset sales if such proceeds are not applied as required by the Term Loan within specified deadlines. The Term Loan contains covenants that, among other things, restrict the Company’s ability, subject to certain 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. This loan also includes a mandatory prepayment provision based on excess cash flow as defined within the agreement. A first lien leverage covenant requires the Company to maintain a level of debt to EBITDA at a ratio as defined over the term of the agreement. As of July 31, 2019, the Company was in compliance with these covenants.

Revolving Credit Facility

Upon closing of the acquisition of DKI, the Company’s prior credit agreement was refinanced and replaced by a $650 million amended and restated credit agreement (the “revolving credit facility”). Amounts available under the revolving credit facility are subject to borrowing base formulas and over advances as specified in the revolving credit facility agreement. Borrowings bear interest, at the Company’s option, at LIBOR plus a margin of 1.25% to 1.75% or an alternate base rate (defined as the greatest of (i) the “prime rate” of JPMorgan Chase Bank, N.A. from time to time, (ii) the federal funds rate plus 0.5% or (iii) the LIBOR rate for a borrowing with an interest period of one month) plus a margin of 0.25% to 0.75%, with the applicable margin determined based on the availability under the revolving credit facility agreement. As of July 31, 2019, interest under the revolving credit agreement was being paid at an average rate of 3.68% per annum. The revolving credit facility has a five-year term ending December 1, 2021. In addition to paying interest on any outstanding borrowings under the revolving credit facility, the Company is required to pay a commitment fee to the lenders under the credit agreement with respect to the unutilized commitments. The commitment fee accrues at a rate equal to 0.25% per annum on the average daily amount of the available commitments.

As of July 31, 2019, the Company had $160.0 million of borrowings outstanding under the revolving credit facility, all of which are classified as long-term liabilities. As of July 31, 2019, there were outstanding trade and standby letters of credit amounting to $10.0 million and $3.4 million, respectively.

The revolving credit facility contains covenants that, among other things, restrict the Company’s 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 the Company 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 July 31, 2019, the Company was in compliance with these covenants.

LVMH Note

As part of the consideration for the acquisition of DKI, the Company issued to LVMH a junior lien secured promissory note in the principal amount of $125.0 million (the “LVMH Note”) that bears interest at the rate of 2% per year. $75.0 million of the principal amount of the LVMH Note is due and payable on June 1, 2023 and $50.0 million of such principal amount is due and payable on December 1, 2023. Accounting Standards Codification (“ASC”) 820 - Fair Value Measurements requires the note to be recorded at fair value at issuance. As a result, the Company recorded a $40.0 million debt discount. This discount is being amortized as interest expense using the effective interest method over the term of the LVMH Note.

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Unsecured Loan

On April 15, 2019, T.R.B. International SA (“TRB”), a subsidiary of Vilebrequin, borrowed €3.0 million under an unsecured loan with Banque du Leman S.A (the “Unsecured Loan”). The Unsecured Loan matures on April 15, 2024. During the term of the Unsecured Loan, TRB is required to make quarterly installment payments of €0.2 million. Interest on the outstanding principal amount of the Unsecured Loan accrues at a fixed rate equal to 1.50% per annum, payable in cash.

Note 7 – Revenue Recognition

Disaggregation of Revenue

In accordance with ASC 606 – Revenue from Contracts with Customers, the Company elected to disclose its revenues by segment. Each segment has its own characteristics with respect to the timing of revenue recognition and the type of customer. In addition, disaggregating revenues using a segment basis is consistent with how the Company’s Chief Operating Decision Maker manages the Company. The Company has identified the wholesale operations segment and the retail operations segment as distinct sources of revenue.

Wholesale Operations Segment. Wholesale revenues include sales of products to retailers under owned, licensed and private label brands, as well as sales related to the Vilebrequin business. Wholesale revenues from sales of products are recognized when control transfers to the customer. The Company considers control to have been transferred when the Company has transferred physical possession of the product, the Company has a right to payment for the product, the customer has legal title to the product and the customer has the significant risks and rewards of the product. Wholesale revenues are adjusted by variable considerations arising from implicit or explicit obligations. Wholesale revenues also include royalty revenues from license agreements related to our owned trademarks including DKNY, Donna Karan, Vilebrequin, G.H. Bass and Andrew Marc. As of July 31, 2019, revenues from license agreements represented an insignificant portion of wholesale revenues.

Retail Operations Segment. Retail store revenues are generated by direct sales to consumers through company-operated stores and product sales through the Company’s owned websites for the DKNY, Donna Karan, Wilsons, G.H. Bass, Andrew Marc and Karl Lagerfeld Paris businesses. Retail stores primarily consist of Wilsons Leather, G.H. Bass and DKNY retail stores, substantially all of which are operated as outlet stores, as well as a small number of Karl Lagerfeld Paris and Calvin Klein Performance stores. Retail operations segment revenues are recognized at the point of sale when the customer takes possession of the goods and tenders payment. E-commerce revenues primarily consist of sales to consumers through the Company’s e-commerce platforms. E-commerce revenue is recognized when a customer takes possession of the goods. Retail sales are recorded net of applicable sales tax.

Contract Liabilities

The Company’s contract liabilities, which are recorded within accrued expenses in the accompanying Condensed Consolidated Balance Sheets, primarily consist of gift card liabilities and advance payments from licensees. In some of its retail concepts, the Company also offers a limited loyalty program where customers accumulate points redeemable for cash discount certificates that expire 90 days after issuance. Total contract liabilities were $6.6 million, $5.2 million and $6.4 million at July 31, 2019, July 31, 2018 and January 31, 2019, respectively. The Company recognized $4.4 million in revenue for the three months ended July 31, 2019 related to contract liabilities that existed at April 30, 2019. The Company recognized $5.2 million in revenue for the six months ended July 31, 2019 related to contract liabilities that existed at January 31, 2019. There were no contract assets recorded as of July 31, 2019, July 31, 2018 and January 31, 2019. Substantially all of the advance payments from licensees as of July 31, 2019 are expected to be recognized as revenue within the next twelve months.

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Note 8 – Segments

The Company has two reportable segments: wholesale operations and retail operations. The wholesale operations segment includes sales of products under the Company’s 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 Donna Karan, DKNY, Vilebrequin, G.H. Bass and Andrew Marc. The retail operations segment consists primarily of the Wilsons Leather, G.H. Bass and DKNY stores, substantially all of which are operated as outlet stores, as well as a smaller number of Karl Lagerfeld Paris and Calvin Klein Performance stores. Sales through the Company’s owned websites, with the exception of Vilebrequin, are also included in the retail operations segment.

The following segment information is presented for the three and six-month periods indicated below:


	Three Months Ended July 31, 2019
	Wholesale		Retail		Elimination ⁽¹⁾		Total
	(In thousands)
Net sales	$	588,601	$	83,706	$	(28,415)	$	643,892
Cost of goods sold		395,728		44,810		(28,415)		412,123
Gross profit		192,873		38,896		—		231,769
Selling, general and administrative expenses		141,540		54,908		—		196,448
Depreciation and amortization		7,763		2,026		—		9,789
Gain on lease terminations		—		(1,393)		—		(1,393)
Operating profit (loss)	$	43,570	$	(16,645)	$	—	$	26,925


	Three Months Ended July 31, 2018
	Wholesale		Retail		Elimination ⁽¹⁾		Total
	(In thousands)
Net sales	$	544,597	$	106,662	$	(26,561)	$	624,698
Cost of goods sold		362,756		56,959		(26,561)		393,154
Gross profit		181,841		49,703		—		231,544
Selling, general and administrative expenses		136,178		62,682		—		198,860
Depreciation and amortization		7,348		2,107		—		9,455
Operating profit (loss)	$	38,315	$	(15,086)	$	—	$	23,229


	Six Months Ended July 31, 2019
	Wholesale		Retail		Elimination ⁽¹⁾		Total
	(In thousands)
Net sales	$	1,159,240	$	165,610	$	(47,406)	$	1,277,444
Cost of goods sold		767,308		89,709		(47,406)		809,611
Gross profit		391,932		75,901		—		467,833
Selling, general and administrative expenses		288,797		109,510		—		398,307
Depreciation and amortization		15,284		3,978		—		19,262
Gain on lease terminations		—		(2,222)		—		(2,222)
Operating profit (loss)	$	87,851	$	(35,365)	$	—	$	52,486


	Six Months Ended July 31, 2018
	Wholesale		Retail		Elimination ⁽¹⁾		Total
	(In thousands)
Net sales	$	1,072,270	$	211,181	$	(47,010)	$	1,236,441
Cost of goods sold		704,331		113,049		(47,010)		770,370
Gross profit		367,939		98,132		—		466,071
Selling, general and administrative expenses		272,591		128,340		—		400,931
Depreciation and amortization		14,483		4,352		—		18,835
Operating profit (loss)	$	80,865	$	(34,560)	$	—	$	46,305

(1)Represents intersegment sales to the Company’s retail operations segment.

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The total assets for each of the Company’s reportable segments, as well as assets not allocated to a segment, are as follows:


	July 31, 2019		July 31, 2018		January 31, 2019
	(In thousands)
Wholesale	$	2,109,198	$	1,880,348	$	1,834,610
Retail		362,595		205,268		190,996
Corporate		240,643		151,018		182,452
Total assets	$	2,712,436	$	2,236,634	$	2,208,058

Note 9 – Stockholders’ Equity

The changes in stockholders’ equity for the three and six months ended July 31, 2019 and 2018 are as follows (in thousands):


					Accumulated				Common
			Additional		Other				Stock
	Common		Paid-In		Comprehensive		Retained		Held In
	Stock		Capital		Loss		Earnings		Treasury		Total
Balance as of April 30, 2019	$	264	$	456,835	$	(18,421)	$	761,344	$	(13,196)	$	1,186,826
Equity awards exercised/vested, net		—		(4,082)		—		—		4,158		76
Share-based compensation expense		—		5,122		—		—		—		5,122
Taxes paid for net share settlements		—		(1,680)		—		—		—		(1,680)
Other comprehensive gain, net		—		—		1,573		—		—		1,573
Repurchases of common stock		—		—		—		—		(35,216)		(35,216)
Net income		—		—		—		11,119		—		11,119
Balance as of July 31, 2019	$

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$20.25	49	$991

10-Q	2019-07-31	Quarter: 2019-07-31
10-Q	2019-04-30	Quarter: 2019-04-30
10-K	2019-01-31	Annual: 2019-01-31
10-Q	2018-10-31	Quarter: 2018-10-31
10-Q	2018-07-31	Quarter: 2018-07-31
10-Q	2018-04-30	Quarter: 2018-04-30
10-K	2018-01-31	Annual: 2018-01-31
10-Q	2017-10-31	Quarter: 2017-10-31
10-Q	2017-07-31	Quarter: 2017-07-31
10-Q	2017-04-30	Quarter: 2017-04-30
10-K	2017-01-31	Annual: 2017-01-31
10-Q	2016-10-31	Quarter: 2016-10-31
10-Q	2016-07-31	Quarter: 2016-07-31
10-Q	2016-04-30	Quarter: 2016-04-30
10-K	2016-01-31	Annual: 2016-01-31
10-Q	2015-10-31	Quarter: 2015-10-31
10-Q	2015-07-31	Quarter: 2015-07-31
10-Q	2015-04-30	Quarter: 2015-04-30
10-K	2015-01-31	Annual: 2015-01-31
10-Q	2014-10-31	Quarter: 2014-10-31
10-Q	2014-07-31	Quarter: 2014-07-31
10-Q	2014-04-30	Quarter: 2014-04-30
10-K	2014-01-31	Annual: 2014-01-31

8-K	2019-09-05	Earnings, Exhibits
8-K	2019-06-13	Shareholder Vote, Exhibits
8-K	2019-06-05	Earnings, Exhibits
8-K	2019-04-17	Enter Agreement, Officers, Exhibits
8-K	2019-03-21	Earnings, Exhibits
8-K	2018-12-06	Earnings, Exhibits
8-K	2018-09-06	Earnings, Exhibits
8-K	2018-06-14	Shareholder Vote
8-K	2018-06-05	Other Events, Exhibits
8-K	2018-06-05	Earnings, Exhibits
8-K	2018-04-26	Enter Agreement, Officers, Exhibits
8-K	2018-03-22	Earnings, Exhibits

VFC	VF	32,252
UA	Under Armour	7,687
GES	Guess?	1,298
VRA	Vera Bradley	359
JILL	J.Jill	87
JRSH	Jerash	79
TLF	Tandy Leather Factory	40
CHKE	Cherokee	10
NAKD	Naked Brand Group Limited	0
GOOS	Canada Goose Holdings	0

EX-31.1	giii-20190731xex311dbf52e.htm
EX-31.2	giii-20190731xex31253a3fe.htm
EX-32.1	giii-20190731xex321975b83.htm
EX-32.2	giii-20190731xex322321010.htm