G-III Apparel’s Stock Slides as Firm Reshuffles the Portfolio Without Hilfiger and Klein Licenses
Shares of G-III Apparel Group dropped sharply during Thursday’s session as the firm prepares to rearrange its portfolio.
The company — parent company to a handful of brands, including DKNY, Karl Lagerfeld, Vilebrequin, Cole Haan and more, as well as major license deals — said Wednesday that licenses for Tommy Hilfiger and Calvin Klein’s women’s North American wholesale business would transition back to PVH Corp. by the end of 2027. PVH plans to bring the licenses in-house after the expiration date.
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Some critics fear the shuffle could cut G-III’s revenue potential in half. But Morris Goldfarb, chairman and chief executive officer of the firm, defined the company’s position.
“Just to be clear, we do not expect significant reductions in sales, net income and cash generation from these businesses for the next three years,” Goldfarb said on Thursday morning’s conference call with analysts. “These agreements will allow us time to accelerate our long-term strategic priorities. And we will continue to direct resources toward our growth areas, including further leaning into building our own brands, continuing to acquire new businesses, expanding our private label business and developing appropriate licensing opportunities.
“Three of our recently acquired or launched brands — DKNY, Karl Lagerfeld Paris in North America and the remaining global Karl Lagerfeld business — have added $1 billion in annual sales to our business,” he continued. “We see even greater growth ahead with these businesses and the rest of our own portfolio, including Donna Karan, Vilebrequin and Sonia Rykiel.”
But investors weren’t convinced. Shares of G-III closed down 44.66 percent Thursday $11.97 apiece. That followed Wednesday evening’s stock drop of more than 22 percent during after-hours trading, after the company revealed quarterly earnings of $61.1 million, down from nearly $107 million a year ago. Year-over-year, the company’s stock has lost 59.2 percent of its value.
“While revenues and [earnings per share] are likely not going to be impacted by the transition in the [near term], this will be a material drag on top and bottom line if this [revenue] stream is not replaced (i.e. with another license, acquisition, etc.) over the next several years,” Will Gaertner, a financial analyst at WellsFargo, wrote in a note. “While we believe management are superior operators, the backdrop for G-III will remain difficult over the next six to 12 months as they prepare to reset the business.”
Wells Fargo rated G-III’s stock “equal weight” and lowered its price target from $20 to $17 a share.
The license deals were just one of the headwinds the company faced in the most recent quarter. Excess inventory left G-III with a glut of product and nowhere to store it. Port congestion, expensive warehouse fees and trucking costs also cut into earnings in the form of a one-time demurrage fee of $27 million.
Neal Nackman, the firm’s chief financial officer, told analysts that the majority of those fees were paid to steamship carriers for delays in freight pick ups. Elevated freight prices, an earlier-than-normal production calendar and nowhere to store the excess inventory also cut into the bottom line.
“Looking ahead, we expect to continue to have elevated warehouse costs associated with higher inventory levels through the second quarter of next year,” Nackman said. “We have already and will continue to temper our buying into next year to also take account of our inventory levels. We also expect that the addition of the Karl Lagerfeld business in our results of operations will increase the percentage of net sales represented by SG&A expenses as the Karl Lagerfeld business model includes a higher amount of direct-to-consumer business, which has a higher SG&A rate.”
The firm has secured third-party warehousing space, “which should eliminate almost all of these charges in the future,” Nackman said.
Goldfarb added: “We experienced some one-time logistical challenges that negatively impacted our results in the third quarter, which we believe are mostly behind us.”
The CEO pointed out a number of other tailwinds.
“We have expanded our pure-play presence and developed strong capabilities to drive demand on our retail partners’ digital platforms, with strong double-digit sales growth led by Amazon and our largest retail partner Macy’s,” he said. “We have also increased sales with Zalando, Fanatics, Nordstrom and Hudson’s Bay. We have started to develop our vendor-direct shipping capabilities, which provide additional opportunities to grow our digital business.”
And despite a highly promotional retail environment for most of the firm’s competitors, Goldfarb said G-III has not had to rely on markdowns so far this holiday shopping season.
“As far as promotions, there are far less promotions and promotional activity than we anticipated,” Goldfarb said. “The retail sell-throughs are pretty strong, surprisingly. The retailers are holding price in our sector and there are no major giveaways. We are in the mid-tier department store business and not a major provider to the next tier of business. So promotions are not aggressive.”
