G III Apparel Earnings 2020-04-30

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

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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 April 30, 2020


☐	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 June 4, 2020, there were 48,052,834 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 – April 30, 2020, April 30, 2019 and January 31, 2020	3
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) - For the Three Months Ended April 30, 2020 and 2019 (Unaudited)	4
	Condensed Consolidated Statements of Stockholders’ Equity – April 30, 2020 and April 30, 2019 (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows - For the Three Months Ended April 30, 2020 and 2019 (Unaudited)	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29

Part II	OTHER INFORMATION
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 6.	Exhibits	34

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	April 30,		April 30,		January 31,
	2020		2019		2020
	(Unaudited)		(Unaudited)
	(In thousands, except per share amounts)
ASSETS
Current assets
Cash and cash equivalents	$	616,183	$	48,312	$	197,372
Accounts receivable, net of allowance for doubtful accounts of $10.4 million, $0.9 million and $0.7 million, respectively		421,143		478,371		530,137
Inventories		500,410		538,955		551,918
Prepaid income taxes		9,724		9,369		8,566
Prepaid expenses and other current assets		66,594		96,545		80,695
Total current assets		1,614,054		1,171,552		1,368,688
Investments in unconsolidated affiliates		58,299		63,361		61,987
Property and equipment, net		72,918		89,848		76,023
Operating lease assets		251,565		320,169		270,032
Other assets, net		32,691		35,663		32,629
Other intangibles, net		37,321		41,486		38,363
Deferred income tax assets, net		34,548		25,212		18,135
Trademarks		437,643		438,675		438,658
Goodwill		259,922		260,578		260,622
Total assets	$	2,798,961	$	2,446,544	$	2,565,137
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of notes payable	$	512	$	—	$	673
Accounts payable		114,750		172,806		204,786
Accrued expenses		60,523		78,619		101,838
Customer refund liabilities		157,886		210,310		233,418
Current operating lease liabilities		63,632		74,761		63,166
Income tax payable		9,115		3,588		8,468
Other current liabilities		116		147		1,611
Total current liabilities		406,534		540,231		613,960
Notes payable, net of discount and unamortized issuance costs		900,682		411,087		396,794
Deferred income tax liabilities, net		7,797		14,777		7,952
Noncurrent operating lease liabilities		231,323		286,663		249,040
Other noncurrent liabilities		6,391		6,960		6,719
Total liabilities		1,552,727		1,259,718		1,274,465

Stockholders' Equity
Preferred stock; 1,000 shares authorized; no shares issued		—		—		—
Common stock - $0.01 par value; 120,000 shares authorized; 48,052, 49,393 and, 49,396 shares issued, respectively		264		264		264
Additional paid-in capital		449,840		456,835		452,142
Accumulated other comprehensive loss		(22,034)		(18,421)		(18,008)
Retained earnings		853,843		761,344		893,138
Common stock held in treasury, at cost - 1,344, 470 and 1,386 shares, respectively		(35,679)		(13,196)		(36,864)
Total stockholders' equity		1,246,234		1,186,826		1,290,672
Total liabilities and stockholders' equity	$	2,798,961	$	2,446,544	$	2,565,137

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 OPERATIONS AND COMPREHENSIVE INCOME (LOSS)


	Three Months Ended April 30,
	2020		2019
	(Unaudited)
	(In thousands, except per share amounts)
Net sales	$	405,131	$	633,552
Cost of goods sold		280,730		397,488
Gross profit		124,401		236,064
Selling, general and administrative expenses		154,620		201,859
Depreciation and amortization		9,867		9,473
Loss (gain) on lease terminations		3,187		(829)
Operating profit (loss)		(43,273)		25,561
Other loss		(2,056)		(648)
Interest and financing charges, net		(10,379)		(10,320)
Income (loss) before income taxes		(55,708)		14,593
Income tax expense (benefit)		(16,413)		2,550
Net income (loss)	$	(39,295)	$	12,043

NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Net income (loss) per common share	$	(0.82)	$	0.25
Weighted average number of shares outstanding		48,025		48,781

Diluted:
Net income (loss) per common share	$	(0.82)	$	0.24
Weighted average number of shares outstanding		48,025		49,774

Net income (loss)	$	(39,295)	$	12,043
Other comprehensive income:
Foreign currency translation adjustments		(4,026)		(3,227)
Other comprehensive loss		(4,026)		(3,227)
Comprehensive income (loss)	$	(43,321)	$	8,816

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 STOCKHOLDERS’ EQUITY



					Accumulated				Common
			Additional		Other				Stock
	Common		Paid-In		Comprehensive		Retained		Held In
	Stock		Capital		Loss		Earnings		Treasury		Total
	(Unaudited)
	(In thousands)
Balance as of January 31, 2020	$	264	$	452,142	$	(18,008)	$	893,138	$	(36,864)	$	1,290,672
Equity awards exercised/vested, net		—		(1,185)		—		—		1,185		—
Share-based compensation expense		—		(811)		—		—		—		(811)
Taxes paid for net share settlements		—		(306)		—		—		—		(306)
Other comprehensive loss, net		—		—		(4,026)		—		—		(4,026)
Net loss		—		—		—		(39,295)		—		(39,295)
Balance as of April 30, 2020	$	264	$	449,840	$	(22,034)	$	853,843	$	(35,679)	$	1,246,234

Balance as of January 31, 2019	$	264	$	464,112	$	(15,194)	$	758,881	$	(19,054)	$	1,189,009
Equity awards exercised/vested, net		—		(5,818)		—		—		5,858		40
Share-based compensation expense		—		4,227		—		—		—		4,227
Taxes paid for net share settlements		—		(5,686)		—		—		—		(5,686)
Other comprehensive loss, net		—		—		(3,227)		—		—		(3,227)
Cumulative effect of adoption of ASC 842		—		—		—		(9,580)		—		(9,580)
Net income		—		—		—		12,043		—		12,043
Balance as of April 30, 2019	$	264	$	456,835	$	(18,421)	$	761,344	$	(13,196)	$	1,186,826

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


	Three Months Ended April 30,
	2020		2019
	(Unaudited)
	(In thousands)
Cash flows from operating activities
Net income (loss)	$	(39,295)	$	12,043
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		9,867		9,473
Loss on disposal of fixed assets		180		1,154
Non-cash operating lease costs		17,443		20,284
Loss (gain) on lease terminations		3,187		(829)
Dividend received from unconsolidated affiliate		1,960		1,960
Equity (gain) loss in unconsolidated affiliates		580		(358)
Share-based compensation		(811)		4,227
Deferred financing charges and debt discount amortization		2,704		2,596
Deferred income taxes		(16,415)		6
Changes in operating assets and liabilities:
Accounts receivable, net		108,994		23,762
Inventories		51,508		37,428
Income taxes, net		(422)		(6,302)
Prepaid expenses and other current assets		13,900		224
Other assets, net		(1,046)		(1,195)
Customer refund liabilities		(75,532)		(33,279)
Operating lease liabilities		(13,129)		(21,544)
Accounts payable, accrued expenses and other liabilities		(136,769)		(74,979)
Net cash used in operating activities		(73,096)		(25,329)

Cash flows from investing activities
Operating lease assets initial direct costs		(1,918)		—
Capital expenditures		(6,391)		(13,291)
Net cash used in investing activities		(8,309)		(13,291)

Cash flows from financing activities
Repayment of borrowings - revolving facility		(355,477)		(482,496)
Proceeds from borrowings - revolving facility		855,477		505,005
Repayment of borrowings - unsecured term loan		(118)		—
Proceeds from borrowings - unsecured term loan		1,832		—
Proceeds from exercise of equity awards		—		40
Taxes paid for net share settlements		(306)		(5,686)
Net cash provided by financing activities		501,408		16,863

Foreign currency translation adjustments		(1,192)		(69)
Net increase (decrease) in cash and cash equivalents		418,811		(21,826)
Cash and cash equivalents at beginning of period		197,372		70,138
Cash and cash equivalents at end of period	$	616,183	$	48,312

Supplemental disclosures of cash flow information
Cash payments:
Interest, net	$	6,839	$	7,542
Income tax payments, net	$	653	$	8,844

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 for 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 three-month period ended April 30, 2020, the results of Vilebrequin, KLH, KLNA and Fabco are included for the three-month period ended March 31, 2020. The Company’s retail operations segment reports on a 52/53-week fiscal year. The Company’s three-month periods ended April 30, 2020 and 2019 were each 13-week fiscal quarters for the retail operations segment. For fiscal 2021 and 2020, the three-month period for the retail operations segment ended on May 2, 2020 and May 4, 2019, respectively.

The results for the three months ended April 30, 2020 are not necessarily indicative of the results expected for the entire fiscal year, given the seasonal nature of the Company’s business and the significant effects of the COVID-19 pandemic on 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, 2020 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.

Accounting Policies

On April 10, 2020, the Financial Accounting Standards Board (“FASB”) issued a Staff Q&A to respond to frequently asked questions about accounting for lease concessions related to the effects of the COVID-19 outbreak. Consequently, for lease concessions related to the effects of the COVID-19 outbreak, an entity will not have to analyze each lease to determine whether the enforceable rights and obligations for concessions exist in the contract and can elect to apply or not apply the lease modification guidance to those leases. Entities may make the elections for any lessor-provided concessions related to the effects of the outbreak (e.g., deferrals of lease payments, cash payments made to the lessee, or reduced future lease payments) as long as the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. The Company has elected to not apply the lease modification guidance for contracts with COVID-19 related rent concessions. As of April 30, 2020, the Company has $6.8 million of deferred lease payments recorded within accounts payable on its condensed consolidated balance sheets.

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Liquidity and Impact of COVID-19

The Company relies on its cash flows generated from operations and the borrowing capacity under its credit facilities to meet the cash requirements of its business. The primary cash requirements of its business are the seasonal buildup in inventory, compensation paid to employees, payments to suppliers in the normal course of business, capital expenditures, maturities of debt and related interest payments and income tax payments. The rapid expansion of the COVID-19 pandemic resulted in a sharp decline in net sales and earnings in the first quarter of fiscal 2021, which had a corresponding impact on the Company’s liquidity. The Company is focused on preserving its liquidity and managing its cash flow during these unprecedented conditions. The Company has taken preemptive actions to enhance its ability to meet its short-term liquidity needs, including, but not limited to, reducing payroll costs through employee furloughs and salary reductions, reduction of all discretionary spending, deferring certain lease payments, deferral of capital projects and drawing down on its revolving credit facility. In addition, the Company is closely monitoring its inventory needs and is working with its suppliers to curtail, or cancel, production of product that the Company believes will not be able to be sold in season. The Company has also been working with its suppliers and licensors to negotiate extended payment terms in order to preserve capital.

In March 2020, in response to the uncertainty of the circumstances surrounding the COVID-19 outbreak, the Company borrowed an aggregate of $500 million under its revolving credit facility as a precautionary measure, to provide the Company with additional financial flexibility to manage its business during the unknown duration and impact of the COVID-19 pandemic. In May and June 2020, the Company repaid an aggregate of $500 million of its borrowings under the revolving credit facility as financial markets stabilized. As of April 30, 2020, the Company was in compliance with all covenants under its term loan and revolving credit facility.

Note 2 – Allowance for Doubtful Accounts

On February 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which had no material impact on the Company’s financial statements. The Company’s financial instruments consist of trade receivables arising from revenue transactions in the ordinary course of business. The Company considers its trade receivables to consist of two portfolio segments: wholesale and retail trade receivables. Wholesale trade receivables result from credit the Company has extended to its wholesale customers based on pre-defined criteria and are generally due within 30 to 60 days. As a result of the COVID-19 pandemic, certain of the Company’s wholesale customers have asked for extended payment terms. Retail trade receivables primarily relate to amounts due from third-party credit card processors for the settlement of debit and credit card transactions and are typically collected within 3 to 5 days. The Company’s accounts receivable and allowance for doubtful accounts as of April 30, 2020 were:


	April 30, 2020
	Wholesale		Retail		Total
	(In thousands)
Accounts receivable, gross	$	428,762	$	2,828	$	431,590
Allowance for doubtful accounts		(10,419)		(28)		(10,447)
Accounts receivable, net	$	418,343	$	2,800	$	421,143

The allowance for doubtful accounts for wholesale trade receivables is estimated based on several factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligation (such as in the case of bankruptcy filings (including potential bankruptcy filings), extensive delay in payment or substantial downgrading by credit rating agencies), a specific reserve for bad debts is recorded against amounts due to reduce the net recognized receivable to the amount reasonably expected to be collected. For all other wholesale customers, an allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the end of the reporting period for financial statements, assessments of collectability based on historical trends and an evaluation of the impact of economic conditions. The Company considers both current and forecasted future economic conditions in determining the adequacy of its allowance for doubtful accounts.

The allowance for doubtful accounts for retail trade receivables is estimated as the credit card chargeback rate applied to the previous 90 days of credit card sales. In addition, the Company considers both current and forecasted future economic conditions in determining the adequacy of its allowance for doubtful accounts.

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During the three months ended April 30, 2020, the Company recorded a $9.7 million increase in its allowance for doubtful accounts primarily due to allowances recorded against the outstanding receivables of certain department store customers that have publicly announced bankruptcy filings or possible bankruptcy filings. The Company had the following activity in its allowance for credit losses for the three months ended April 30, 2020:


	April 30, 2020
	Wholesale		Retail		Total
	(In thousands)
Beginning balance	$	(628)	$	(82)	$	(710)
Provision for credit losses		(9,791)		54		(9,737)
Ending balance	$	(10,419)	$	(28)	$	(10,447)

Note 3 – 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.

The inventory return asset, which consists of the amount of goods that are anticipated to be returned by customers, represented $21.3 million, $35.5 million and $31.0 million as of April 30, 2020, April 30, 2019 and January 31, 2020 respectively. The inventory return asset is recorded within prepaid expenses and other current assets on the condensed consolidated balance sheets.

Inventory held on consignment by the Company’s customers totaled $6.6 million, $3.8 million and $9.1 million at April 30, 2020, April 30, 2019 and January 31, 2020, 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 4 – 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.

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


		Carrying Value						Fair Value
		April 30,		April 30,		January 31,		April 30,		April 30,		January 31,
Financial Instrument	Level	2020		2019		2020		2020		2019		2020
		(In thousands)
Term loan	2	$	300,000	$	300,000	$	300,000	$	300,000	$	300,000	$	300,000
Revolving credit facility	2		500,000		22,509		—		500,000		22,509		—
Note issued to LVMH	3		103,438		97,938		102,009		109,910		90,065		95,126
Unsecured loans	2		4,504		—		2,860		4,504		—		2,860

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.

The fair value of the note issued to LVMH was considered a Level 3 valuation in the fair value hierarchy.

Non-Financial Assets and Liabilities

The Company’s non-financial assets that are measured at fair value on a nonrecurring basis include long-lived assets, which consist primarily of property and equipment and operating lease assets. The Company reviews these assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable. For impaired assets, an impairment loss is recognized equal to the difference between the carrying amount of the asset or asset group and its estimated fair value. For operating lease assets, the Company determines the fair value of the assets by discounting the estimated market rental rates over the remaining term of the lease. These fair value measurements are considered level 3 measurements in the fair value hierarchy. 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 5 – Leases

The Company leases retail stores, warehouses, distribution centers, office space and certain 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.

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 April 30, 2020, April 30, 2019 and January 31, 2020 consist of the following:



Leases	Classification	April 30, 2020		April 30, 2019		January 31, 2020
		(In thousands)
Assets
Operating	Operating lease assets	$	251,565	$	320,169	$	270,032
Total lease assets		$	251,565	$	320,169	$	270,032

Liabilities
Current operating	Current operating lease liabilities	$	63,632	$	74,761	$	63,166
Noncurrent operating	Noncurrent operating lease liabilities		231,323		286,663		249,040
Total lease liabilities		$	294,955	$	361,424	$	312,206

The Company recorded lease costs of $22.4 million and $25.0 million during the three months ended April 30, 2020 and 2019, respectively. Lease costs are recorded within selling, general and administrative expenses in the Company’s condensed consolidated statements of operations and comprehensive income (loss). The Company recorded variable lease costs and short-term lease costs of $3.4 million and $3.3 million for the three months ended April 30, 2020 and 2019, respectively. Short-term lease costs are immaterial.

As of April 30, 2020, the Company’s maturity of operating lease liabilities in the years ending up to January 31, 2025 and thereafter are as follows:


Year Ending January 31,	Amount
	(In thousands)
2021	$	63,890
2022		76,088
2023		66,758
2024		52,732
2025		42,709
After 2025		58,068
Total lease payments	$	360,245
Less: Interest		65,290
Present value of lease liabilities	$	294,955

As of April 30, 2020, there are no material leases that are legally binding but have not yet commenced.

As of April 30, 2020, the weighted average remaining lease term related to operating leases is 5.1 years. The weighted average discount rate related to operating leases is 7.9%.

Cash paid for amounts included in the measurement of operating lease liabilities is $23.4 million and $26.4 million during the periods ended April 30, 2020 and 2019, respectively. Right-of-use assets obtained in exchange for lease obligations were $4.6 million and $1.8 million as of April 30, 2020 and 2019, respectively.

Note 6 – Goodwill and Intangible Assets

As of April 30, 2020, there is $259.9 million of goodwill and $437.6 million of indefinite-lived trademarks recorded on the Company’s condensed consolidated balance sheet. The Company reviews and tests its goodwill and intangible assets with indefinite lives for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may be impaired. Due to the impact of the COVID-19 pandemic on the Company’s operations, the Company performed a quantitative test of its goodwill as of April 30, 2020 using an income approach through a discounted cash flow analysis methodology. The discounted cash flow approach requires that certain assumptions and estimates be made regarding industry economic factors and future profitability. The Company also performed quantitative tests of each of its indefinite-lived intangible assets using a relief from royalty method, another form of the income approach. The relief from royalty method requires assumptions regarding industry economic factors and future profitability. There were no impairments identified as of April 30, 2020 as a result of these tests.

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While no impairment was identified as of the test date, $370.0 million of the Company’s indefinite-lived trademarks could be deemed to have a risk of future impairment as there is limited excess fair value over the carrying value of these assets at April 30, 2020. The continued impact of the COVID-19 pandemic could give rise to global and regional macroeconomic factors that could impact the Company’s assumptions relating to net sales growth rates, discount rates, tax rates or royalty rates and may result in future impairment charges for indefinite-lived intangible assets.

The fair value of the Company’s goodwill and indefinite-lived intangible assets are considered a Level 3 valuation in the fair value hierarchy.

Note 7 – Net Income (Loss) per Common Share

Basic net income (loss) per common share has been computed using the weighted average number of common shares outstanding during each period. Diluted net income per share, when applicable, is computed using the weighted average number of common shares and potential dilutive common shares, consisting of unvested restricted stock unit awards and stock options outstanding during the period. Approximately 355,900 shares of common stock have been excluded from the diluted net income per share calculation for the three months ended April 30, 2019. 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 (loss) per share:


	Three Months Ended April 30,
	2020		2019
	(In thousands, except per share amounts)
Net income (loss)	$	(39,295)	$	12,043
Basic net income (loss) per share:
Basic common shares		48,025		48,781
Basic net income (loss) per share	$	(0.82)	$	0.25

Diluted net income (loss) per share:
Basic common shares		48,025		48,781
Dilutive restricted stock unit awards and stock options		—		993
Diluted common shares		48,025		49,774
Diluted net income (loss) per share	$	(0.82)	$	0.24

Note 8 – Notes Payable

Long-term debt consists of the following:


	April 30, 2020		April 30, 2019		January 31, 2020
	(In thousands)
Term loan	$	300,000	$	300,000	$	300,000
Revolving credit facility		500,000		22,509		—
Note issued to LVMH		125,000		125,000		125,000
Unsecured loans		4,504		—		2,860
Subtotal		929,504		447,509		427,860
Less: Net debt issuance costs ⁽¹⁾		(6,748)		(9,360)		(7,402)
Debt discount		(21,562)		(27,062)		(22,991)
Current portion of long-term debt		(512)		—		(673)
Total	$	900,682	$	411,087	$	396,794

(1)

Does not include debt issuance costs, net of amortization, totaling $3.9 million, $6.4 million and $4.6 million as of April 30, 2020, April 30, 2019 and January 31, 2020, 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 ASU 2015-15.

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Term Loan

The Company borrowed $350.0 million under a senior secured term loan facility (the “Term Loan”) that matures in December 2022. The Company prepaid $50.0 million in principal amount of the Term Loan, reducing the principal balance of the Term Loan to $300.0 million. The Term Loan is guaranteed by certain of the Company’s subsidiaries.

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 April 30, 2020, interest under the Term Loan was being paid at a weighted average rate of 6.66% 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 in the term loan agreement. A first lien leverage covenant requires the Company to maintain a level of debt to EBITDA at a ratio as defined in the term loan agreement. As of April 30, 2020, the Company was in compliance with these covenants.

Revolving Credit Facility

The Company has a $650 million credit agreement (the “revolving credit facility”) under which amounts available 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. 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.

The revolving credit facility is secured by specified assets of the Company and certain of its subsidiaries.

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 April 30, 2020, the Company was in compliance with these covenants.

As of April 30, 2020, the Company had $500 million of borrowings outstanding under the revolving credit facility, all of which are classified as long-term liabilities. This borrowing was a precautionary measure in response to the uncertainty of the circumstances surrounding the COVID-19 outbreak. The Company subsequently repaid an aggregate of $500 million of its borrowing under the revolving credit facility in May and June 2020.

As of April 30, 2020, interest under the revolving credit agreement was being paid at an average rate of 2.13% per annum. The revolving credit facility also includes amounts available for letters of credit. As of April 30, 2020, there were outstanding trade and standby letters of credit amounting to $10.5 million and $5.2 million, respectively.

LVMH Note

As a portion 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.

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ASC 820 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.

Unsecured Loans

On April 15, 2019, T.R.B. International SA (“TRB”), a subsidiary of Vilebrequin, borrowed €3.0 million under an unsecured loan (the “2019 Unsecured Loan”). During the term of the 2019 Unsecured Loan, TRB is required to make quarterly installment payments of €0.2 million. Interest on the outstanding principal amount of the 2019 Unsecured Loan accrues at a fixed rate equal to 1.50% per annum, payable quarterly. The 2019 Unsecured Loan originally matured on April 15, 2024. Due to the COVID-19 outbreak, the bank agreed to amend the 2019 Unsecured Loan to suspend the March and June 2020 quarterly installment payments and add these payments to the balance due at the end of the loan term. The 2019 Unsecured Loan now matures on September 15, 2024.

On February 3, 2020, TRB borrowed €1.7 million under another unsecured loan (the “2020 Unsecured Loan”). During the term of the 2020 Unsecured Loan, TRB is required to make quarterly installment payments of €0.1 million. Interest on the outstanding principal amount of the 2020 Unsecured Loan accrues at a fixed rate equal to 1.50% per annum, payable quarterly. The 2020 Unsecured Loan originally matured on March 31, 2025. Due to the COVID-19 outbreak, the bank agreed to amend the 2020 Unsecured Loan to suspend the June 2020 quarterly installment payment and add this payment to the balance due at the end of the loan term. The 2020 Unsecured Loan now matures on June 30, 2025.

Note 9 – 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 presents 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 revenues from license agreements related to the DKNY, Donna Karan, G.H. Bass, Andrew Marc and Vilebrequin trademarks owned by the Company. As of April 30, 2020, 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. 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.

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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 $4.1 million, $6.3 million and $5.9 million at April 30, 2020, April 30, 2019 and January 31, 2020, respectively. The Company recognized $3.5 million in revenue for the three months ended April 30, 2020 related to contract liabilities that existed at January 31, 2020. The Company recognized $4.3 million in revenue for the three months ended April 30, 2019 related to contract liabilities that existed at January 31, 2019. There were no contract assets recorded as of April 30, 2020, April 30, 2019 and January 31, 2019. Substantially all of the advance payments from licensees as of April 30, 2020 are expected to be recognized as revenue within the next twelve months.

Note 10 – Segments

The Company’s reportable segments are business units that offer products through different channels of distribution. 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 revenues from license agreements related to our owned trademarks including DKNY, Donna Karan, Vilebrequin, G.H. Bass and Andrew Marc. The retail operations segment consists primarily of direct sales to consumers through Company-operated stores, consisting primarily of Wilsons Leather, G.H. Bass and DKNY stores, substantially all of which are operated as outlet stores. Sales through Company-owned websites, with the exception of Vilebrequin, are also included in the retail operations segment.

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


	Three Months Ended April 30, 2020
	Wholesale		Retail		Elimination ⁽¹⁾		Total
	(In thousands)
Net sales	$	378,871	$	33,908	$	(7,648)	$

Price	24.69	EPS	3
Shares	49	P/E	8
MCap	1,211	P/FCF	-6
Net Debt	619	EBIT	191
TEV	1,830	TEV/EBIT	10
TTM 2019-10-31, in MM, except price, ratios

10-Q	2020-04-30	Filed 2020-06-09
10-K	2020-01-31	Filed 2020-03-30
10-Q	2019-10-31	Filed 2019-12-06
10-Q	2019-07-31	Filed 2019-09-06
10-Q	2019-04-30	Filed 2019-06-10
10-K	2019-01-31	Filed 2019-03-28
10-Q	2018-10-31	Filed 2018-12-06
10-Q	2018-07-31	Filed 2018-09-06
10-Q	2018-04-30	Filed 2018-06-11
10-K	2018-01-31	Filed 2018-04-02
10-Q	2017-10-31	Filed 2017-12-08
10-Q	2017-07-31	Filed 2017-09-08
10-Q	2017-04-30	Filed 2017-06-09
10-K	2017-01-31	Filed 2017-04-03
10-Q	2016-10-31	Filed 2016-12-06
10-Q	2016-07-31	Filed 2016-09-01
10-Q	2016-04-30	Filed 2016-06-02
10-K	2016-01-31	Filed 2016-03-29
10-Q	2015-10-31	Filed 2015-12-04
10-Q	2015-07-31	Filed 2015-09-03
10-Q	2015-04-30	Filed 2015-06-05
10-K	2015-01-31	Filed 2015-03-30
10-Q	2014-10-31	Filed 2014-12-09
10-Q	2014-07-31	Filed 2014-09-08
10-Q	2014-04-30	Filed 2014-06-05
10-K	2014-01-31	Filed 2014-03-31
10-Q	2013-10-31	Filed 2013-12-09
10-Q	2013-07-31	Filed 2013-09-09
10-Q	2013-04-30	Filed 2013-06-10
10-K	2013-01-31	Filed 2013-04-12
10-Q	2012-10-31	Filed 2012-12-10
10-Q	2012-07-31	Filed 2012-09-10
10-Q	2012-04-30	Filed 2012-06-07
10-K	2012-01-31	Filed 2012-04-11
10-Q	2011-10-31	Filed 2011-12-09
10-Q	2011-07-31	Filed 2011-09-08
10-Q	2011-04-30	Filed 2011-06-09
10-K	2011-01-31	Filed 2011-04-14
10-Q	2010-10-31	Filed 2010-12-10
10-Q	2010-07-31	Filed 2010-09-09
10-Q	2010-04-30	Filed 2010-06-07
10-K	2010-01-31	Filed 2010-04-15

8-K	2020-07-30	Other Events, Exhibits
8-K	2020-07-28	Regulation FD, Other Events, Exhibits
8-K	2020-06-11
8-K	2020-06-04
8-K	2020-03-31
8-K	2020-03-24
8-K	2020-03-19
8-K	2019-12-04
8-K	2019-09-05
8-K	2019-06-13
8-K	2019-06-05
8-K	2019-04-17
8-K	2019-03-21
8-K	2018-12-06
8-K	2018-09-06
8-K	2018-06-14
8-K	2018-06-05
8-K	2018-06-05
8-K	2018-04-26
8-K	2018-03-22

EX-10.1	giii-20200430xex10d1.htm
EX-31.1	giii-20200609xex311.htm
EX-31.2	giii-20200609xex312.htm
EX-32.1	giii-20200609xex321.htm
EX-32.2	giii-20200609xex322.htm

GIII 10Q Quarterly Report

G III Apparel Earnings 2020-04-30