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EX-31.1 - EX-31.1 - G III APPAREL GROUP LTD /DE/giii-20181031ex31161e749.htm

 

 

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 October 31, 2018

 

or

 

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)


 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 December 3, 2018, there were 49,355,587 shares of issuer’s common stock, par value $0.01 per share, outstanding.

 

 

 

 


 

TABLE OF CONTENTS

 

 

    

Page No.

Part I 

FINANCIAL INFORMATION

 

 

Item 1. 

Financial Statements

 

 

 

Condensed Consolidated Balance Sheets – October 31, 2018, October 31, 2017 and January 31, 2018

 

3

 

Condensed Consolidated Statements of Income and Comprehensive Income - For the Three and Nine Months Ended October 31, 2018 and 2017 (Unaudited)

 

4

 

Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended October 31, 2018 and 2017 (Unaudited)

 

5

 

Notes to Condensed Consolidated Financial Statements

 

6

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 6. 

Exhibits

 

30

 

 

2


 

PART I – FINANCIAL INFORMATION

 

Item 1.          Financial Statements.

 

G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

October 31,

 

October 31,

 

January 31,

 

 

 

2018

 

2017

 

2018

 

 

    

(Unaudited)

    

(Unaudited)

    

 

 

 

 

 

(In thousands, except per share amounts)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

66,080

 

$

68,229

 

$

45,776

 

Accounts receivable, net of allowance for doubtful accounts

 

 

819,636

 

 

601,179

(1)

 

294,430

(1)

Inventories

 

 

616,162

 

 

592,822

 

 

553,323

 

Prepaid income taxes

 

 

 —

 

 

 —

 

 

15,058

 

Prepaid expenses and other current assets

 

 

82,933

 

 

34,841

 

 

51,014

 

Total current assets

 

 

1,584,811

 

 

1,297,071

 

 

959,601

 

Investments in unconsolidated affiliates

 

 

67,874

 

 

60,642

 

 

62,422

 

Property and equipment, net

 

 

89,658

 

 

98,522

 

 

97,857

 

Other assets, net

 

 

35,109

 

 

33,883

 

 

32,478

 

Other intangibles, net

 

 

43,409

 

 

47,076

 

 

46,405

 

Deferred income tax assets, net

 

 

28,336

 

 

16,169

 

 

11,439

 

Trademarks

 

 

440,505

 

 

441,490

 

 

442,265

 

Goodwill

 

 

261,366

 

 

264,200

 

 

262,710

 

Total assets

 

$

2,551,068

 

$

2,259,053

 

$

1,915,177

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

Income tax payable

 

$

25,194

 

$

22,949

 

$

19,748

 

Accounts payable

 

 

224,826

 

 

216,860

 

 

232,364

 

Accrued expenses

 

 

137,878

 

 

128,891

 

 

95,055

 

Customer refund liabilities

 

 

235,400

 

 

 —

 

 

 —

 

Total current liabilities

 

 

623,298

 

 

368,700

 

 

347,167

 

Notes payable, net of discount and unamortized issuance costs

 

 

694,277

 

 

726,608

 

 

391,044

 

Deferred income tax liabilities, net

 

 

15,276

 

 

16,325

 

 

15,888

 

Other non-current liabilities

 

 

37,262

 

 

40,488

 

 

40,389

 

Total liabilities

 

 

1,370,113

 

 

1,152,121

 

 

794,488

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

Preferred stock; 1,000 shares authorized; no shares issued

 

 

 —

 

 

 —

 

 

 —

 

Common stock - $0.01 par value; 120,000 shares authorized; 49,356, 49,196 and 49,219 shares issued, respectively

 

 

264

 

 

247

 

 

245

 

Additional paid-in capital

 

 

461,457

 

 

447,555

 

 

451,844

 

Accumulated other comprehensive loss

 

 

(15,566)

 

 

(15,499)

 

 

(5,522)

 

Retained earnings

 

 

734,800

 

 

675,084

 

 

674,542

 

Common stock held in treasury, at cost - 0, 115 and 106 shares, respectively

 

 

 —

 

 

(455)

 

 

(420)

 

Total stockholders' equity

 

 

1,180,955

 

 

1,106,932

 

 

1,120,689

 

Total liabilities and stockholders' equity

 

$

2,551,068

 

$

2,259,053

 

$

1,915,177

 


(1)

Also, net of accrued returns and sales discounts

 

The accompanying notes are an integral part of these statements.

3


 

G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended October 31,

 

Nine Months Ended October 31,

 

    

2018

    

2017

    

2018

    

2017

 

 

 

 

 

(As Adjusted)

 

 

 

 

(As Adjusted)

 

 

(Unaudited)

 

 

(In thousands, except per share amounts)

Net sales

 

$

1,072,982

 

$

1,024,993

 

$

2,309,423

 

$

2,092,040

Cost of goods sold

 

 

690,882

 

 

633,897

 

 

1,461,252

 

 

1,296,239

Gross profit

 

 

382,100

 

 

391,096

 

 

848,171

 

 

795,801

Selling, general and administrative expenses

 

 

232,052

 

 

242,740

 

 

632,983

 

 

636,000

Depreciation and amortization

 

 

10,033

 

 

6,906

 

 

28,868

 

 

27,480

Operating profit

 

 

140,015

 

 

141,450

 

 

186,320

 

 

132,321

Other income (loss)

 

 

176

 

 

(2,072)

 

 

(303)

 

 

(2,935)

Interest and financing charges, net

 

 

(12,323)

 

 

(11,431)

 

 

(32,153)

 

 

(31,266)

Income before income taxes

 

 

127,868

 

 

127,947

 

 

153,864

 

 

98,120

Income tax expense

 

 

33,843

 

 

46,322

 

 

39,877

 

 

35,454

Net income

 

$

94,025

 

$

81,625

 

$

113,987

 

$

62,666

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

$

1.91

 

$

1.67

 

$

2.32

 

$

1.29

Weighted average number of shares outstanding

 

 

49,231

 

 

48,846

 

 

49,176

 

 

48,729

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

$

1.86

 

$

1.65

 

$

2.26

 

$

1.27

Weighted average number of shares outstanding

 

 

50,494

 

 

49,528

 

 

50,345

 

 

49,410

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

94,025

 

$

81,625

 

$

113,987

 

$

62,666

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1,979)

 

 

4,182

 

 

(10,044)

 

 

12,223

Other comprehensive income (loss)

 

 

(1,979)

 

 

4,182

 

 

(10,044)

 

 

12,223

Comprehensive income

 

$

92,046

 

$

85,807

 

$

103,943

 

$

74,889

 

The accompanying notes are an integral part of these statements.

4


 

G-III APPAREL GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

Nine Months Ended October 31,

 

    

2018

    

2017

 

 

(Unaudited)

 

 

(In thousands)

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

113,987

 

$

62,666

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

28,868

 

 

27,480

Loss on disposal of fixed assets

 

 

154

 

 

2,832

Dividend received from equity investment

 

 

1,470

 

 

 —

Equity loss in unconsolidated affiliates

 

 

1,421

 

 

540

Share-based compensation

 

 

14,876

 

 

15,362

Deferred financing charges and debt discount amortization

 

 

7,481

 

 

8,185

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

(525,331)

 

 

(336,818)

Inventories

 

 

(63,312)

 

 

(108,284)

Income taxes, net

 

 

20,507

 

 

29,573

Prepaid expenses and other current assets

 

 

(33,958)

 

 

12,314

Other assets, net

 

 

(4,569)

 

 

8,455

Customer refund liabilities

 

 

168,954

 

 

 —

Accounts payable, accrued expenses and other liabilities

 

 

33,345

 

 

32,103

Net cash used in operating activities

 

 

(236,107)

 

 

(245,592)

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Capital expenditures

 

 

(19,516)

 

 

(21,428)

Investment in unconsolidated affiliate

 

 

(9,951)

 

 

(49)

Net cash used in investing activities

 

 

(29,467)

 

 

(21,477)

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Repayment of borrowings - revolving facility

 

 

(1,454,510)

 

 

(1,242,194)

Proceeds from borrowings - revolving facility

 

 

1,752,106

 

 

1,500,721

Proceeds from exercise of equity awards

 

 

56

 

 

1,532

Taxes paid for net share settlements

 

 

(4,843)

 

 

(6,114)

Net cash provided by financing activities

 

 

292,809

 

 

253,945

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(6,931)

 

 

1,396

Net increase (decrease) in cash and cash equivalents

 

 

20,304

 

 

(11,728)

Cash and cash equivalents at beginning of period

 

 

45,776

 

 

79,957

Cash and cash equivalents at end of period

 

$

66,080

 

$

68,229

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

Cash payments:

 

 

 

 

 

 

Interest, net

 

$

26,071

 

$

24,664

Income tax payments, net

 

$

20,041

 

$

4,564

 

The accompanying notes are an integral part of these statements.

5


 

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 several of its proprietary brands under various product categories.

The Company consolidates the accounts of all its wholly-owned subsidiaries. KL North America BV (“KLNA”) and Fabco Holding B.V. (“Fabco”) are Dutch limited liability companies that are joint ventures 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, KLNA, Fabco and KLH 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, KLNA, Fabco and KLH are, and will be, included in our financial statements for the quarter ended or ending closest to G-III’s fiscal quarter. For example, with respect to our results for the nine-month period ended October 31, 2018, the results of Vilebrequin, KLNA, Fabco and KLH are included for the nine-month period ended September 30, 2018. The Company’s retail operations segment uses a 52/53‑week fiscal year. The Company’s three and nine-month periods ended October 31, 2018 and 2017 were a 13‑week fiscal quarter and a 39‑week fiscal period, respectively, for both periods for the retail operations segment. For fiscal 2019 and 2018, the three and nine month periods for the retail operations segment ended on November 3, 2018 and October 28, 2017, respectively.

The results for the three and nine-month periods ended October 31, 2018 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, 2018 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 income within stockholders’ equity.

Certain reclassifications have been made to the Condensed Consolidated Statements of Income and Comprehensive Income as a result of the Company’s reclassifying the impact of certain components of foreign currency gain (loss) from cost of goods sold and interest expense to other income (loss).

 

 

Note 2 – Revenue Recognition

On February 1, 2018, the Company adopted Accounting Standard Codification Topic 606 (“ASC 606”) using the modified retrospective method as of January 31, 2018. The Company recognized a cumulative effect adjustment to the opening balance of stockholders’ equity at February 1, 2018 that reduced stockholders’ equity by $53.7 million, net of tax, as a result of the adoption of ASC 606.

6


 

Prospectively, the adoption of ASC 606 primarily affects the timing of recognition of certain adjustments that are recorded in net sales for the wholesale operations segment. Under ASC 606, revenue is recognized upon the transfer of goods to customers in an amount that reflects the expected consideration to be received in exchange for these goods. The difference between the amount initially billed and the amount collected represents variable consideration. Variable consideration includes trade discounts, end of season markdowns, sales allowances, cooperative advertising, return liabilities and other customer allowances. Under ASC 606, the Company estimates the anticipated variable consideration and records this estimate as a reduction of revenue in the period the related product revenue is recognized. Prior to adopting ASC 606, certain components of variable consideration were recorded at a later date when the liability was known or incurred.

The adoption of ASC 606 also resulted in prospectively changing the presentation of certain items on the Condensed Consolidated Balance Sheets and the Condensed Consolidated Statements of Income and Comprehensive Income. Under the prior guidance, the liability recorded in connection with variable consideration was recorded as a reduction to accounts receivable. With the adoption of ASC 606, these amounts have been classified as a current liability under “Customer refund liabilities” in the Condensed Consolidated Balance Sheet. Additionally, the Company now classifies cooperative advertising as a reduction of net sales in the Condensed Consolidated Statements of Income and Comprehensive Income. Previously, cooperative advertising was recorded in selling, general and administrative expenses. ASC 606 requires that costs expected to be incurred when products are returned should be accrued for upon the sale of the product as a component of cost of goods sold. These restocking costs were previously recognized when incurred and recorded in selling, general and administrative expenses.

The following tables summarize the impact of adopting ASC 606 on the Company’s Condensed Consolidated Balance Sheet as of October 31, 2018 and the Company’s Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended October 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

October 31, 2018

 

 

(In thousands)

 

    

As Reported

    

Without Adoption
of ASC 606

    

Impact of Adoption
of ASC 606

Assets

 

 

 

 

 

 

 

 

 

Accounts receivable

 

$

819,636

 

$

646,333

 

$

173,303

Inventories

 

 

616,162

 

 

653,664

 

 

(37,502)

Prepaid expenses and other current assets

 

 

82,933

 

 

48,991

 

 

33,942

Deferred income tax assets, net

 

 

28,336

 

 

11,792

 

 

16,544

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Accrued expenses

 

 

137,878

 

 

136,627

 

 

1,251

Customer refund liabilities

 

 

235,400

 

 

 —

 

 

235,400

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

734,800

 

 

785,164

 

 

(50,364)

 

 

7


 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended October 31, 2018

 

 

(In thousands, except per share amounts)

 

    

As Reported

    

Without Adoption
of ASC 606

    

Impact of  Adoption
of ASC 606

Net sales

 

$

1,072,982

 

$

1,081,879

 

$

(8,897)

Cost of goods sold

 

 

690,882

 

 

690,367

 

 

515

Selling, general and administrative expenses

 

 

232,052

 

 

240,916

 

 

(8,864)

Operating profit

 

 

140,015

 

 

140,563

 

 

(548)

Income tax expense

 

 

33,843

 

 

34,039

 

 

(196)

Net income

 

 

94,025

 

 

94,377

 

 

(352)

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

Basic

 

 

1.91

 

 

1.92

 

 

(0.01)

Diluted

 

 

1.86

 

 

1.87

 

 

(0.01)

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended October 31, 2018

 

 

(In thousands, except per share amounts)

 

    

As Reported

    

Without Adoption
of ASC 606

    

Impact of Adoption
of ASC 606

Net sales

 

$

2,309,423

 

$

2,322,675

 

$

(13,252)

Cost of goods sold

 

 

1,461,252

 

 

1,458,494

 

 

2,758

Selling, general and administrative expenses

 

 

632,983

 

 

653,602

 

 

(20,619)

Operating profit

 

 

186,320

 

 

181,711

 

 

4,609

Income tax expense

 

 

39,877

 

 

38,632

 

 

1,245

Net income

 

 

113,987

 

 

110,623

 

 

3,364

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

Basic

 

 

2.32

 

 

2.25

 

 

0.07

Diluted

 

 

2.26

 

 

2.20

 

 

0.06

 

The adoption of ASC 606 had no net impact on the Company’s cash flows from operations.

Disaggregation of Revenue

In accordance with ASC 606, 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 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 also include revenues from license agreements related to trademarks owned by the DKNY, Donna Karan, G.H. Bass, Andrew Marc and Vilebrequin businesses. Wholesale revenues 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. As of October 31, 2018, 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.

8


 

Variable Consideration. The difference between the amount initially billed and the amount collected represents variable consideration. The Company may provide customers with discounts, rebates, credit returns and price reductions. The Company may also contribute to customers’ promotional activities or incur charges for compliance violations. These adjustments to the initial selling price often occur after the sales process is completed.

The Company identified the following elements of variable consideration:

Markdowns. Markdown allowances consist of accommodations in the form of price reductions to wholesale customers for purchased merchandise. In general, markdowns are granted to full price customers, such as department stores. Markdowns may vary year-over-year and are granted based on the performance of Company merchandise at customer retail stores.

Term Discounts. Term discounts represent a discount from the initial wholesale sales price to certain wholesale customers consistent with customary industry practice.

Sales Allowances. Sales allowances are reductions of the selling price agreed upon with wholesale customers. Sales allowances may be contractual or may be granted on a case-by-case basis. Non-contractual sales allowances may be granted in connection with billing adjustments and, in some cases, for product related issues.

Advertising Allowances. Advertising allowances consist of the Company’s financial participation in the promotional efforts of its wholesale customers. Wholesale customers may charge back a portion of the advertising expense incurred against open invoices. Advertising programs are generally agreed upon at the beginning of a season.

Other Allowances. General allowances consist of price reductions granted to a wholesale customer and may relate to the Company’s participation in costs incurred by the customer during the sales process, as well as price differences, shortages and charges for operational non-compliance.

Return of Merchandise. For wholesale customers, the Company may make accommodations for returns of merchandise that is underperforming at a customer’s retail stores. For retail customers, as a matter of Company policy, whether merchandise is purchased at the Company’s stores or on its e-commerce platforms, the consumer has up to 90 days to return merchandise from the date of purchase.

Variable consideration is estimated based on historical experience, current contractual and statutory requirements, specific known events and industry trends. The reserves for variable consideration are recorded under customer refund liabilities. As of October 31, 2018, customer refund liabilities amounted to $235.4 million. Customer refund liabilities were recorded as a reduction to accounts receivable as of January 31, 2018 and October 31, 2017. Historical return rates are calculated on a product line basis. The remainder of the historical rates for variable consideration are calculated by customer by product lines.

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 runs a limited loyalty program where customers accumulate points redeemable for cash discount certificates that expire 90 days after issuance. Total contract liabilities were $4.2 million and $6.0 million at October 31, 2018 and January 31, 2018, respectively. The Company recognized $2.8 million in revenue for the three months ended October 31, 2018, which related to contract liabilities that existed at July 31, 2018. The Company recognized $4.9 million in revenue for the nine months ended October 31, 2018, which related to contract liabilities that existed at January 31, 2018. There were no contract assets recorded as of October 31, 2018 and January 31, 2018. Substantially all of the advance payments from licensees as of October 31, 2018 are expected to be recognized as revenue within the next twelve months.

 

9


 

Note 3 – Inventories

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

The inventory return asset, which consists of the amount of goods that are anticipated to be returned by customers, represented $37.5 million, $39.4 million and $40.8 million as of October 31, 2018, January 31, 2018 and October 31, 2017, respectively. The inventory return asset is recorded within prepaid expenses and other current assets as of October 31, 2018 and within inventories as of January 31, 2018 and October 31, 2017.

Note 4 – Fair Value of Financial Instruments

GAAP establishes 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

 

 

 

    

October 31,

 

October 31,

 

January 31,

    

October 31,

 

October 31,

 

January 31,

Financial Instrument

 

Level

 

2018

 

2017

 

2018

 

2018

 

2017

 

2018

 

 

 

 

(In thousands)

Term loan

 

2

 

$

300,000

 

$

300,000

 

$

300,000

 

$

300,000

 

$

300,000

 

$

300,000

Revolving credit facility

 

2

 

 

309,599

 

 

349,648

 

 

12,003

 

 

309,599

 

 

349,648

 

 

12,003

Note issued to LVMH

 

3

 

 

95,345

 

 

90,239

 

 

91,667

 

 

95,345

 

 

90,239

 

 

91,667

 

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. For purposes of this fair value disclosure, the Company based its fair value estimate for the LVMH Note (as defined in Note 6) on the initial fair value as determined at the date of the acquisition of Donna Karan International (“DKI”) and records the amortization using the effective interest method over the term of the LVMH Note.

10


 

Non-Financial Assets and Liabilities

The Company’s non-financial assets, which primarily consist of 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. No events or circumstances indicate an impairment has been identified subsequent to the Company’s January 31, 2018 impairment testing.

 

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, when applicable, is computed using the weighted average number of common shares and potential dilutive common shares, consisting of unvested restricted stock awards and stock options outstanding during the period. Approximately 344,000 and 1,000,000 shares of common stock have been excluded from the diluted net income per share calculation for the three months ended October 31, 2018 and 2017, respectively. Approximately 330,000 and 1,100,000 shares of common stock have been excluded from the diluted net income per share calculation for the nine months ended October 31, 2018 and 2017, 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 October 31,

 

Nine Months Ended October 31,

 

    

2018

    

2017

    

2018

    

2017

 

 

(In thousands, except per share amounts)

Net income

 

$

94,025

 

$

81,625

 

$

113,987

 

$

62,666

Basic net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic common shares

 

 

49,231

 

 

48,846

 

 

49,176

 

 

48,729

Basic net income per share

 

$

1.91

 

$

1.67

 

$

2.32

 

$

1.29

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic common shares

 

 

49,231

 

 

48,846

 

 

49,176

 

 

48,729

Diluted restricted stock awards and stock options

 

 

1,263

 

 

682

 

 

1,169

 

 

681

Diluted common shares

 

 

50,494

 

 

49,528

 

 

50,345

 

 

49,410

Diluted net income per share

 

$

1.86

 

$

1.65

 

$

2.26

 

$

1.27

 

 

11


 

Note 6 – Notes Payable

Long-term debt consists of the following:

 

 

 

 

 

 

 

 

 

 

 

    

October 31, 2018

    

October 31, 2017

    

January 31, 2018

 

 

(In thousands)

Term loan

 

$

300,000

 

$

300,000

 

$

300,000

Revolving credit facility

 

 

309,599

 

 

349,648

 

 

12,003

Note issued to LVMH

 

 

125,000

 

 

125,000

 

 

125,000

Subtotal

 

 

734,599

 

 

774,648

 

 

437,003

Less: Net debt issuance costs (1)

 

 

(10,667)

 

 

(13,279)

 

 

(12,626)

Debt discount

 

 

(29,655)

 

 

(34,761)

 

 

(33,333)

Total

 

$

694,277

 

$

726,608

 

$

391,044


(1)

Does not include debt issuance costs, net of amortization, totaling $7.7 million, $10.1 million and $9.5 million as of October 31, 2018, October 31, 2017 and January 31, 2018, respectively, related to the revolving credit facility. These debt issuance costs have been deferred and are classified within prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets in accordance with Accounting Standards Update (“ASU”) 2015‑15.

 

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 is payable on maturity 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 October 31, 2018, interest under the Term Loan was being paid at an average rate of 7.36% 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 agreement prior to specified deadlines. The Term Loan contains covenants that restrict the Company’s ability to, among other things, incur additional debt, sell or dispose certain assets, make certain investments, incur liens and enter into acquisitions. This loan also includes a mandatory prepayment provision based on excess cash flow as defined in the agreement. A first lien leverage covenant requires the Company to maintain a level of debt to EBITDA over the term of the agreement at a ratio as set forth in the agreement. As of October 31, 2018, the Company was in compliance with these covenants.

Revolving Credit Facility

Upon closing of the acquisition of DKI, the Company’s previous 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 October 31, 2018, interest under the revolving credit agreement was being paid at an average rate of 3.71% 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 unutilized commitments.

12


 

As of October 31, 2018, the Company had $309.6 million of borrowings outstanding under the revolving credit facility, all of which are classified as long-term liabilities. As of October 31, 2018, there were outstanding trade and standby letters of credit amounting to $8.6 million and $3.4 million, respectively.

LVMH Note

As part of the consideration for the acquisition of DKI, the Company issued to LVMH Moet Hennessy Louis Vuitton Inc. (“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 debt discount in the amount of $40.0 million. This discount is being amortized as interest expense using the effective interest method over the term of the LVMH Note.

 

Note 7 – 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 sales also include revenues from license agreements related to trademarks owned by the DKNY, Donna Karan, G.H. Bass, Andrew Marc and Vilebrequin businesses. The retail operations segment consists primarily of Wilsons Leather, G.H. Bass and DKNY stores, as well as a limited 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 information is presented for the three and nine-month periods indicated below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended October 31, 2018

 

    

Wholesale

    

Retail

    

Elimination (1)

    

Total

 

 

(In thousands)

Net sales

 

$

1,005,358

 

$

110,934

 

$

(43,310)

 

$

1,072,982

Cost of goods sold

 

 

677,011

 

 

57,181

 

 

(43,310)

 

 

690,882

Gross profit

 

 

328,347

 

 

53,753

 

 

 —

 

 

382,100

Selling, general and administrative expenses

 

 

166,423

 

 

65,629

 

 

 —

 

 

232,052

Depreciation and amortization

 

 

7,709

 

 

2,324

 

 

 —

 

 

10,033

Operating profit (loss)

 

$

154,215

 

$

(14,200)

 

$

 —

 

$

140,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended October 31, 2017

 

    

Wholesale

    

Retail

    

Elimination (1)

    

Total

 

 

(In thousands)

Net sales (2)

 

$

966,820

 

$

118,709

 

$

(60,536)

 

$

1,024,993

Cost of goods sold (3)

 

 

636,636

 

 

57,797

 

 

(60,536)

 

 

633,897

Gross profit

 

 

330,184

 

 

60,912

 

 

 —

 

 

391,096

Selling, general and administrative expenses

 

 

174,679

 

 

68,061

 

 

 —

 

 

242,740

Depreciation and amortization

 

 

6,790

 

 

116

 

 

 —

 

 

6,906

Operating profit (loss)

 

$

148,715

 

$

(7,265)

 

$

 —

 

$

141,450

 

13


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended October 31, 2018

 

    

Wholesale

    

Retail

    

Elimination (1)

    

Total

 

 

(In thousands)

Net sales

 

$

2,077,628

 

$

322,115

 

$

(90,320)

 

$

2,309,423

Cost of goods sold

 

 

1,381,342

 

 

170,230

 

 

(90,320)

 

 

1,461,252

Gross profit

 

 

696,286

 

 

151,885

 

 

 —

 

 

848,171

Selling, general and administrative expenses

 

 

439,014

 

 

193,969

 

 

 —

 

 

632,983

Depreciation and amortization

 

 

22,192

 

 

6,676

 

 

 —

 

 

28,868

Operating profit (loss)

 

$

235,080

 

$

(48,760)

 

$

 —

 

$

186,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended October 31, 2017

 

    

Wholesale

    

Retail

    

Elimination (1)

    

Total

 

 

(In thousands)

Net sales (2)

 

$

1,887,902

 

$

324,329

 

$

(120,191)

 

$

2,092,040

Cost of goods sold (3)

 

 

1,251,372

 

 

165,058

 

 

(120,191)