Q2 2022 G-III Apparel Group Ltd Earnings Call

September 2, 2021

[music].

Ladies and gentlemen, thank you for standing behind locked with the G. III apparel group second quarter fiscal 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you to press star one on your telephone.

You require any further assistance. Please press star zero I would now like to turn the call over to your host Neal Nachman CFO you may begin.

Good morning, and thank you for joining us before.

Before we begin I would like to remind participants that certain statements made on today's call and in the Q&A session may constitute forward looking statements within the meaning of the federal Securities laws.

Forward looking statements are not guarantees and actual results may differ materially from those expressed or implied in forward looking statements.

Important factors that could cause actual results of operations or the financial condition of the company to differ are discussed in the documents filed by the company with the SEC.

The company undertakes no duty to update any forward looking statements I will now turn the call over to our chairman and Chief Executive Officer Morris Goldfarb.

Good morning, and thank you for joining us.

Also joining me today are Sammy Aaron our Vice Chairman and President Neil Mcmahon, our Chief Financial Officer.

Jeff Goldfarb Executive Vice President.

Wayne Miller senior strategic adviser and Korea, <unk> Senior Vice President of Investor Relations.

For our second quarter of fiscal 2022, we delivered outstanding results with our top and bottom line is exceeding our guidance.

Our earnings recovery is well ahead of our initial expectations and our world class teams are doing an incredible job navigating through the challenges that come our way.

This past quarter, we saw continued strength in casual categories.

Casual dressing has become ingrained in our way of life and consumers are now looking for a well rounded wardrobe.

Ranging from lounge at home to a more sophisticated relaxed look.

Additionally, these categories offer growth opportunities, including expansion into the outdoor and sports market.

We were also pleased to see an increased penetration of sales in a broader lifestyle categories, including dresses more polished sportswear and wear to work clothing with momentum still building.

Strength in our shoes and handbags categories also continues.

<unk> is well positioned with our diversified product categories that range across a globally recognized power brands DKNY, Donna Karan Calvin Klein, Tommy Hilfiger, and Karl Lagerfeld, Paris to meet the increasing demand for our products.

Our order book is in a strong position and approaching our pre pandemic levels.

This is a clear indication that G. III continues to gain market share.

Although the emergence of the Delta variance has resulted in some new uncertainties, we feel very good about our overall business.

Putting it all together, we have the confidence to raise our full year fiscal 2022 top and bottom line guidance.

Neil will provide you with the details shortly.

Now lets review the second quarter of fiscal 2022 results.

Net sales for the second quarter were $483 million, an increase of 63% compared to last year's second quarter net sales of $297 million and above our guidance.

The increase in our second quarter net sales was driven by our wholesale segment.

Net sales for the quarter were $467 million up 75% compared to $267 million in last year's second quarter.

Second quarter net income was 39 cents per diluted share compared to a net loss of 31 per share in the second quarter last year and net income of 23 per diluted share in the second quarter two years ago.

This year's second quarter net income per share was more than double the high end of our guidance range.

As we communicated during our last earnings call freight challenges had emerged across all industries we.

We have a well developed supply chain infrastructure, which is a core competency of ours and a competitive advantage.

Further the strength of our global power brands allows us to selectively raise prices to offset higher costs.

We see this in our results, where despite higher transportation cost strategic price increases combined with decreased promotional activity have enabled us to increase gross margins.

Our second quarter gross margin percentage improved by almost 400 basis points as compared to a pre pandemic level two years ago.

Let's take you through some of our category highlights.

With regards to athleisure and sportswear, our merchants are designing and expanding our collections to capitalize on the consumers' increasing demand for a well rounded casual wardrobe.

Whether it's to stay at home workout spend time outdoors participate in sports are socialize or wear to work.

Looking ahead for the second half of the year.

We're incorporating wider functionality in fabrics and fits to cater to these broader lifestyles.

We're adding collections focused on specific sports activities and high performance fitness.

The new classifications, such as fitness Tech Tees and shorts.

We're also increasing the assortments of woven bottoms for more polished casual apps.

The jeans category remains a bright spot in only two years jeans has evolved into a key growth category for us.

We offer a robust line built around dressing and a gene.

Our collections across our brands stand out on the denim floor as theyre skewed toward types, such as fashion and novelty tees woven tops layering pieces, including sweatshirts.

Lease and light jackets, and even some casual dresses.

This offers customers a great range of options to where with their genes.

As for the genes themselves, we're expanding our curated selection to include the most updated trends in fits and and washes and a wide range of sizes.

We could not be happier with the way we've built these businesses, which are positioned to capitalize on the resurgence in denim.

Outerwear is an important category in our outerwear offerings are well aligned with the shift in the market toward an outdoor active lifestyle.

Outerwear is.

Good example of a category, where we've been able to raise our prices with clean inventories across channels. This is shaping up to be a good outerwear season.

This past quarter, we saw the trend for dresses in Korea were significantly accelerate and less demand remains strong dress.

Dresses, including social on occasion dresses recovered incredibly well as events were scheduled and the consumer look to refresh their wardrobe to where does this special occasion.

As consumers have been returning to work, we've seen solid demand for Korea, where such as dresses structured pads and Blazers.

Looking ahead, our merchants anticipate this demand and developed new collections for the fall and holiday seasons.

Handbags for DKNY, Calvin Klein, and Karl Lagerfeld, Paris, and footwear for DKNY and Karl Lagerfeld Paris.

Our additional growth categories at G III.

With each passing season, we're improving the line architecture scaling our capabilities, adding retail space and gaining market share.

This was another strong quarter for these accessory categories with less promotional activity and higher AUR.

For our own brand DKNY, we remain on track to almost double the footwear distribution by the end of next year to over 300 Department stores here in the U S.

Internationally DKNY has approximately 850 doors.

Each of the handbag and footwear categories, we see tremendous opportunity to grow the footwear and handbag business.

As for Karl Lagerfeld. After the completion of a very successful first season launch of its sportswear line at 75, Macy's doors, we are on track to triple the distribution of a sportswear line to 250 doors by the end of the year and launch a new dress line.

75 doors this coming spring.

The Karl Lagerfeld, Paris, footwear, and handbag businesses will soon be in over 100 doors by this fall and is expected to grow to a 170 doors by spring of 2022.

Altogether. The brand is currently distributed in over 400 doors here in North America.

At its peak only two years ago, Karl Lagerfeld, Paris generated wholesale net sales of $110 million had limited distribution and Lord and Taylor was one of its largest retailers.

In spite of the closing of all of the Lord <unk> Taylor doors during the pandemic last year.

We're pleased with how well we've extended the brand there.

This year, we expect the brand to generate net sales in excess of its previous peak levels.

The quick turnaround is truly a testament to the value of <unk> business model.

Digital sales of our products continue to accelerate.

On our retail partner sites and on our own sites.

<unk> of our product increased over 70% from two years ago.

China digital sales are now more productive than store sales.

<unk> digital sites.

We're also up almost 70% to two years ago.

We're keenly focused on capturing and accelerating digital growth to become a best in class Omnichannel organization.

With new digital management in place we're focused on the following priorities.

As indicated in last quarter's call. This fall, we're launching our upgraded and re platform the websites for DKNY and Karl Lagerfeld, Paris with improved technical operations designed to allow seamless navigation of these sites.

The sites will offer immersive brand content intended to engage consumers and facilitate conversion.

The sites will also enable us to leverage sales tools like virtual selling which is starting to become a meaningful contributor to physical store sales.

Yeah.

Technological and operational capabilities, we are investing in data analytics capabilities to better understand our consumers across channels to engage.

With them and deliver relevant shopping experiences.

Our current retail partners are making significant investments to improve their own e-commerce sites, and we're collaborating with them to better leverage their enhanced platforms.

We're also building out our global retail presence and pure play retailers sites.

On our own sites with.

With the implementation of our new CRM tool and loyalty programs, we're gaining valuable customer insights. We're also partnering with <unk>.

Logistics provider to enhance our direct to consumer capabilities.

In marketing, we continue to invest in various digital marketing programs to drive traffic.

Traffic engagement and sales.

<unk> this year, we're increasing our digital marketing spend by over 30% compared to last year.

Further using these additional data insights we're improving our return on these investments.

Our DKNY brand is about to launch its fall brand campaign, bringing to life and inclusive cast of authentic individuals that celebrates self expression and being true to oneself.

The campaign has been developed with extended social content and a digital first approach to promote our direct to consumer strategy with the redesigned DKNY site plan to come later this fall.

We will also step up our digital marketing and media efforts for the Karl Lagerfeld, Paris brand this fall to reach a broader audience across distribution channels.

We're focused on expanding our international business in China, DKNY has had a strong quarter with sales more than doubling as compared to two years ago.

As I mentioned earlier the penetration of digital sales is now higher than store sales.

The DKNY European business was originally more skewed toward accessories, and we've expanded the business to include DKNY lifestyle categories.

This past quarter, our DKNY business in Europe was up approximately 20% compared to two years ago, and it's exciting to see acceleration in the apparel categories.

<unk> also had a good quarter with its limited edition 50th anniversary collection doing well the <unk>.

Unique thing about this brand is that it can operate efficiently and are relatively small store footprint.

We're actively looking to expand the portfolio of stores for this status swimwear brand, which offers us another growth opportunity.

The brand also has an impressive lineup of collaborations planned this year.

In addition to our previously announced collaborations we're also launching a limited edition capsule collection space Gemex Ville broken in connection with the release of space, Jim The space Jam two movie.

We're just beginning to tap our international opportunities, we have talented and experienced management teams great partners in a strong financial position to help us achieve this growth.

Trends in our retail business are improving although traffic has remained challenged and below two years ago.

We continue to experience strong shopper conversion higher AUR is in dollars.

Per transaction as well as margin expansion.

We were pleased to see positive comparable store sales of Karl Lagerfeld, Paris as compared to two years ago.

A strong signal that this brand is gaining traction with consumers.

DKNY comparable sales trends as compared to two years ago are also improving although are still impacted by the European and Canadian stores that were shut down for parts of the quarter.

Yes.

For the second half of the year, we're taking advantage of opportunities presented to us as a result of the current retail environment by adding 12, new stores in prime locations with advantageous economics 10 for Karl Lagerfeld, Paris, and two for DKNY.

We expect to end the year with 38 DKNY in 'twenty III, Karl Lagerfeld, Paris stores.

As we thoughtfully expand the omnichannel footprint of our brands to meet consumers in the shopping channel of their choice, we expect to be able to further leverage our expense base.

Throughout the pandemic, we've demonstrated our agility as we navigated through challenges and remain focused on delivering positive results.

We're encouraged by the strong consumer demand, we are seeing which puts us and our industry on a solid path to recovery. This is further reflected in our strong order book.

While uncertainties remain based on our confidence in the strength of our business, we are raising our guidance for the full 2022 fiscal year.

We expect full fill skill fiscal year net sales to be approximately $9.0 billion.

Adjusting for the retail closures net sales and net income per diluted share are approaching pre pandemic levels of two years ago.

I'll now pass the call to Neal for a discussion of our second quarter financial results as well as the guidance for our third and full fiscal year 2022.

Thank you Morris.

Net sales for the second quarter ended July 31, 2021 increased approximately 63% to $483 million from $297 million in the same period last year, well above our guidance of $460 million.

Net sales of our wholesale operations segment increased approximately 75% to $467 million from $267 million last year.

Net sales of our retail operations segment were $27 million for the second quarter lower than the previous year's net sales of $35 million.

This decrease is a result of the restructuring of our retail segment in which we close the wilsons leather and GH bass store operations last year.

At our DKNY and Karl Lagerfeld businesses were up significantly compared to the prior year, which was impacted by the pandemic.

Our gross margin percentage was 39, 9% in the second quarter of fiscal 2022 compared to 45, 3% in last year's second quarter.

Last year's gross margins included benefits from Covid related adjustments.

I will discuss those momentarily.

This quarter's gross margin is up compared to the gross margin percentage of 36% in the second quarter two years ago.

Wholesale operations segment gross margins gross margin percentage was 38, 3% compared to 46, 3% in last year's comparable quarter and 32, 8% in the comparable quarter of two years ago.

Wholesale gross margin percentages in this year benefited from clean inventories at retail, resulting in less promotional activity combined with price increases.

This improved gross margin has been achieved despite increasing freight costs, which we experienced throughout the quarter.

We anticipate increasing freight costs for the remainder of the year, which will have more of an impact on gross margins in the second half of the year.

Last year's gross margins included significant one time benefits from the reversal of previously anticipated markdown accruals that were no longer necessary due to the reduction in sales to our retail customers as well as a reversal of a portion of previously accrued royalty expense associated with royalty relief that was pre.

<unk> by licensed stores.

The gross margin percentage in our retail operations segment was 51, 9% compared to 32, 5% in the previous year's quarter and 46, 5% two years ago.

Last year's percentage was negatively impacted by the reduction of our net sales caused by COVID-19 related closures of our retail stores and the restructuring of our retail operations segment, which resulted in the liquidation of inventory in connection with closing stores.

The increase compared to two years ago is attributable to better merchandising unless in a less promotional environment for our DKNY and Karl Lagerfeld businesses.

SG&A expenses were $147 million in this quarter compared to $122 million in last year's second quarter and $196 million in the comparable quarter two years ago.

The increase in expenses compared to last year was primarily due to an increase in compensation expense related to bonus accruals and salaries.

Due to the pandemic the prior year's period had no bonus accrual and salary expense declined as a result of employee furloughs and salary reductions.

Net income for the second quarter was $19 million or <unk> 39 per diluted share compared to a net loss of $15 million or <unk> 31 per share in last year's second quarter and included direct losses from Wilsons and bass store operations of $26 million was <unk> 52 per share.

Net income for the second quarter, two years ago was $11 million or 23 per share and included direct losses from Wilsons and bass store operations of $6 million was <unk> 13 per share.

Looking at our balance sheet.

Receivable were $385 million compared to $277 million at the end of the second quarter of the previous year.

Inventory decreased to $499 million from $575 million at the end of the second quarter of the previous year.

We ended the quarter in an improved net debt position of $8 million compared to $156 million as of the second quarter of the prior year.

We have cash and availability under our credit agreement of over $900 million.

We believe that our liquidity and financial position leaves us well positioned to fund, our domestic and international growth and take advantage of potential acquisition opportunities.

As for our guidance as Morris indicated we feel good about our business, giving us confidence to raise our previously provided guidance.

Our guidance.

Does include the impact from the current supply chain conditions and delays in receipts. However, our guidance does not contemplate any pandemic related impacts that were not already aware of we had not anticipated new store closures or the impact of tighter government restrictions that could arise.

For the full fiscal year ending January 31, 2022, we now expect net sales of approximately $9.0 billion compared to $8.0 billion last year.

Adjusting for the closed wilsons leather and GH bass store sales of $252 million two years ago. The current guidance leaves us approximately 7% below our pre pandemic sales level.

Net income for this upcoming full fiscal year is expected to be between $320 million or between $13.0, and $23.0 per diluted share.

This compares to net income of $24 million or <unk> 48 per diluted share in fiscal year, 2021, and $144 million or $96.0 per diluted share in fiscal year 2020.

For the third quarter of the current 2022 fiscal year, we expect net sales of approximately $1 billion in net income between 80, and $90 million or $66.0, and $76.0 per diluted share.

This compares to net sales of $827 million and net income of $63 million or $30.0 per diluted share in the previous year's third quarter.

For your reference disclosed in our press release issued this morning is the impact by quarter for the last two fiscal years of the Wilsons leather and GH bass store operations.

That concludes my comments I will now turn the call back to Morris for closing remarks.

Thank you Neil.

And thank you all for joining US today <unk> has a long history of successfully managing through challenging times.

The strength of revenue business is built on the four fundamental pillars.

The first is our portfolio of brands led by our globally recognized power brands DKNY.

Donna Karan Calvin Klein, Tommy Hilfiger, and Karl Lagerfeld Paris.

The second is our expertise and dominance in a diversified range of lifestyle categories.

The third is our well established and diversified group of retail partners for many of whom we are a key vendor.

And finally, and most importantly, our world class team that has significant experience and expertise in all phases of our business.

And never been more and more confident that I am today and the ability of our teams to navigate successfully through this pandemic and beyond.

These pillars provide us with significant organic growth ahead.

As I noted on our last call we see the annual net wholesale potential for our five power brands DKNY, Donna Karan Calvin Klein, Tommy Hilfiger, and Karl Lagerfeld alone at $4 billion.

We are in a strong financial position, which we believe will fund our growth domestically and internationally and position us to take advantage of opportunities that may arise.

On behalf of the entire G. III organization I'd like to thank all of our stakeholders for their continued support.

Operator, we're now ready to take some questions.

Ladies and gentlemen, this couple of question or comment at this time. Please press. The Star then the one key on you touched on the telephone.

If your question has been answered income with results from the queue. Please press the pound key.

Our first question comes from Ed <unk> with Keybanc.

Hey, good morning, guys and congrats on seeing the improvements in the business I guess, just a couple quick ones for me I think first on markdown reserves obviously.

Both a function of your product selling through well and the industry inventory being tight I'm sure. That's favorable for you how should we think about that and kind of the short to medium term will this favorability continue and then kind of zooming out a little bit Morris you mentioned, both denim and at leisure how should we think about the growth opportunities in both of those businesses. Thank you.

Yeah.

Thank you Ed I'm going to let Neil answer.

<unk>.

Markdown reserves and I'll respond to the denim question, yes.

Yes, so look it's been a very positive environment for us we definitely we definitely expect that to continue in the near term and probably in the in the midterm as well the demand is out there is incredibly strong.

And we do expect that to continue and that bodes very well for our for our markdown position.

As it relates to denim performance.

We've been in the performance business for.

For a while primarily with <unk>.

Calvin Klein, we started that business I would say about 12.12 years ago maybe.

Maybe 11 or 12 years ago.

Lulu Lemon emerged.

We regret that it was an opportunity that we went to PVH with PVA and PVH was.

Happy to give us the category.

And we got to work building it.

And today, it's one of the larger at leisure performance businesses in our industry.

Coupled with the power brands that we've described pretty much every one of them has the opportunity to share space.

As it expands with Calvin Klein, we built.

A pretty well developed.

Tommy Hilfiger business.

And in record time.

And at Leisure, We then went to DKNY, which is.

In the early stages of development.

Significant.

Significant goal in sales this year.

And then.

We are pursuing opportunities with Karl Lagerfeld as well in athleisure type product. So there is there's a lot of room to grow.

The brands are incredibly important we've proved that out and where they hang in categories that generally dominate.

So we've gotten real estate expansion, we've got opportunities that these brands sit side by side and retail venues and we merchandise assortments that are definitively different each brand has.

G&A is specific DNA.

So they don't they don't tend to look as if they are <unk>.

They are dedicated designers and salespeople that develop all of this.

Denim is no different denim came late to the party.

After the.

Acquisition of <unk>.

Denim business from <unk>.

Warnaco by PVH.

There was an effort to build that brand in house by PVH.

Look several years for them to recognize that maybe the the women's side of it was better suited for us.

We took it on and in record time again, taking this on just pre pandemic.

We have developed one of the larger.

Denim businesses as I described uniquely merchandize.

And.

<unk>, taking the learnings out of CK, we applied them to Tommy Hilfiger and.

Currently to DKNY, so there's plenty of room to grow all of the brands in the denim business and we're going through a denim cycle as we speak so we're very.

Three aggressive very confident that there'll be a.

Significant growth to come.

Thanks, so much guidance.

Thanks, Ed.

Our next question comes from Erinn Murphy with Piper Sandler.

Great. Thanks, good morning.

The improvement.

My first question is just on the Delta variance.

Passing consumer demand currently and if so kind of what regional differences are you seeing in the business today.

We don't believe it's impacting consumer demand, we believe that the consumers finding.

The safer.

More and more comfortable methods of shopping weather.

Digital.

In store, whether it's pickup door, whether it's virtual so demand is certainly there the traffic within brick and mortar.

Is down is clearly down the.

Consumer is cautious.

In most cases, and we believe that.

This too shall end in the world will come back.

Brick and mortar will improve the tourist will come back. So there is there is.

Great opportunity when this oil calms down.

Got it. Thank you and then second question is just around the corner by corner I think you've got it with nearing pre pandemic levels just to clarify is that for fall winter.

Any early insights on how spring summer is trending.

Can I ask how retailers are ordering as we think about lapping.

And just some of that earlier benefits can be thought hearing in 2021. Thanks so much.

Thanks Aaron.

The order book includes.

Fall holiday.

As well as <unk>.

Greg.

<unk> bookings it does not include summer.

And the order book is quite strong much better than we had imagined.

And as Neil said.

Kind of discounted the order book.

Two.

To accommodate for potential problems through supply chain.

So we're even conservative looking at our order book.

Okay, and sorry, if I could just sneak in one more on the supply chain can you just remind us what percent of your product is made in southern Vietnam and what type of work around are you doing right now with some of the countries in southeast Asia that had held theme either.

Factory shutdowns are rolling challenges with labor. Thank you.

We and all of the Aetna and we're about.

32%.

Our production.

Southern.

In southern Vietnam, we're about 10% of our production.

And.

When we see that.

Or we hear that Vietnam is done on a turtle a total shutdown.

There are many factories that are opening.

In self contained units where the people are in dormitories.

They don't they don't get to leave they get to produce.

It's not there is no total shutdown. It is it is an encumbrance.

It is a problem but.

Yes.

It again as we speak to the pandemic.

Ed.

And I'll also get resolved.

There is talk of.

Timing being.

Maybe.

I just heard this morning.

September six I guess, which is next week early next week.

There'll be.

Added information as to when Vietnam will open and it feels like it will open soon.

Thank you so much.

Thank you Erin.

Our next question comes from Susan Anderson with B Riley.

Good morning, nice job on the quarter, it's good to see that improvement there.

I was wondering if you could talk about the order book I think you mentioned David pricing pre pandemic levels is that for the back half for the spring and then also I'm just curious by the three biggest brands CK Tommy.

DKNY.

They're all approaching.

To make levels and then also just the competition is it getting back towards more dressy or are you still seeing.

More demand for casual.

So Susan.

To book as I said.

That does include the <unk>.

Fall holiday as well as spring.

And the.

The three power brands that you cited the DKNY.

Evan Kleiman, Tommy Hilfiger are pretty much all aligned.

The the.

Smaller brands.

The ones that had matured as as well as.

CK.

Have greater growth percentage than the CK piece, but theyre all in great shape Theres not one brand that's a problem for us.

Great and just the mix of casual and dressy or are you seeing that shift at all in terms of what retailers are wanting.

There is an evolution clearly the casual piece of the business was the driver during the pandemic and the growth right now.

The piece that we were not well enough prepared for we the dress business is soup business.

That's come on very strong so there's there's a chase to accommodate the demand for the for the Dressier category and as much as we've stayed current we design than we produce.

And being a prudent supplier we couldnt when there was no dress business, we couldnt be incredibly aggressive on it.

Aggressive as a prudent manufacturer could be so.

We're now challenged with providing in servicing the demand that there is out there and we think we can accomplish it.

Great and then just really quick on Karl it sounds like there's significant door expansion. This fall and spring I guess, how are you thinking about that brand and the revenue potential longer term and.

That basically just kind of replacing what you used to have that Lord and Taylor or could it be bigger than that through macys.

We believe it.

I think I cited.

5 billion dollar brand for us on the wholesale side when we acquired.

Our percentage of North America, we own.

Roughly 50% of North America, and we own 20, some odd percent of the <unk>.

And the strategy was there was virtually no there were virtually no sales in North America, we brought it here with the intent of building it.

The pandemic got it and the way Lord <unk> Taylor got it in a way.

The Bay in Canada was closed for for a good part of the year The Bay was our.

Second largest account so we retooled.

Macy's is putting it aggressively Amazon is buying it.

Pure play digital sales our own internal digital business is growing.

So this was really out there to the acquisition was made quite honestly the replace.

Jones, New York not anything else that we did Jones, New York was.

Was closing down.

There was great retail space open.

<unk> open.

On the department store floor.

And we made deals with.

With Dillard's, Lord <unk> Taylor the Bay.

And.

Moved into some of the space that this great space, Great real estate that was in place for years, where it was.

<unk> and <unk>.

It took off nicely the interruption really was Lord <unk> Taylor and the ability of producing smaller units became a little complicated and Macy's is supporting cutting tickets that are significant and I see no reason that this brand doesn't bypass that have a.

<unk>.

Next few years.

We're on a great path.

Thanks for all the details get back in the back half.

Thank you Susan Thanks for your question.

Thanks, again, ladies and gentlemen, if you have a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone.

Our last question comes from Jay sole with UBS.

Great. Thank you so much margin shall I ask you about.

Sell through it in terms of what you see this year and if it strikes you as unusual just pent up demand I mean guidance youre, not giving guidance for next year, but it's certain.

It seems like with the guidance.

<unk> sales growth trends are going to improve sequentially as we go through the rest of the year versus to Q2, Q19, it sort of suggests that the whole.

This whole year Hasnt, just been about stimulus, but can you just give us your perspective on that issue like what you see different consumer I mean, here's what we're seeing strong natural that's going to be hard to lap next year and anything you can provide would be really helpful.

Surely.

Receiving a check from the government.

Makes you feel comfortable in going into a store and accelerating and maybe increasing your.

Europe by four apparel or.

Some of the product that makes you feel good and difficult times.

But.

We're seeing demand that far out reaches that this is.

This is about fashion. This is about function, it's about utility it's about lifestyle change.

We're hitting.

Pretty much all <unk>.

All ways of life.

And.

There will be some change.

There certainly will be companies that will support work from home and that in itself will.

Will constitute.

A change in demand for certain classification, but it will increase demand for for other classifications the casual piece.

The canvas shoe piece.

Sure.

<unk>.

We pretty much hit all the silos of fashion fashion and function.

And we're good at we've become proficient.

Patient and good at every sector. So it's not.

Not very concerning to US we are an agile company.

I'm not sure I care very much.

If there is a transition from addressed to a skirt or transition from.

From.

Fleece to a net.

That doesn't really concern me.

And.

Two any incredible degree we source well.

We're entrenched and pretty much anywhere there is apparel production.

And.

We've changed our model no less than a dozen times a few days back to where this company started we were merely a leather coat company.

That started in $75.0 and through the nineties.

We did were leather jackets.

So we've come a long way.

Still do a little bit of leather jackets, but we've gone to where the customer has gone and we will continue to do that.

Got it. Thank you and then maybe if I can follow up if I can just ask you talked a bit about your gross margin within the guidance for Q3.

Thank you for how do you see the gross margin playing out given your there's pretty big upside in gross margin this quarter versus <unk>.

Yeah Jay.

We're thinking that we're going to have a little bit more pressure compared to two worldwide in the third quarter.

And Thats really a function of freight cost increases and while we are increasing prices were probably a little more hampered in doing that in the third quarter. Then we'll be able to do in the fourth quarter. So I think as you're modeling out you would want to keep the third quarter tied it to where we were to ally and when you get into the fourth quarter, specifically on the wholesale segment.

We expect that come back to some very strong gross margin percentages.

More like what we've seen in the first half of the year.

Got it okay. Thank you so much.

Thank you Jay and thank you all.

Rocco.

We did have one other question one other question to you for questions you want to take that one.

Sure.

Alright from Erinn Murphy with Piper Sandler.

Hey, It's me again, sorry, just to follow up it looks like there.

For some time.

I guess as we look deeper into 'twenty, two can you share a little bit more about what youre seeing with input cost on the raw material side.

And then Relatedly Morris you did talk about outerwear that youre seeing some guidance right thing and you're taking price. How much are you taking from a price perspective, and outerwear and is that more than offsetting any pressure on the input cost guidance. Thanks. So much.

Our response to the last question first it is offsetting some of the cost increases.

<unk>.

It really depends on the channel of distribution were sensitive to what it takes to move our products. So we don't overtly.

Take major increases that will that will inhibit the sale of the product.

But I would say, we're north of 5% and maybe approaching 10% in many areas, which certainly offsets.

The cost of getting the product to the consumer that we're incurring.

And.

The.

Relative to future input cost Sharon, we're certainly going to see in <unk>.

To have increases there and we're going to continue to manage the business as we've done this year with the freight cost so to the.

That becomes obvious and right now it does feel like that's the way, we'll be increasing prices to offset that as well.

Clearly there is.

Brendan level.

Global inflation, and we are paying more for four piece goods going forward, but there are factories that we've traded with for decades.

Work closely with us they understand the need to be competitive in the <unk>.

Work that we do to understand what the right price points are.

Are instrumental in how the piece goods manufacturers deliver product. So it's a collaboration it's not again.

<unk> don't Flagrantly, just lash out numbers and say this is what you've got to pay today, it's a slower it's a slow evolution.

And quite honestly it needs to be accepted by the consumer.

And.

With that.

<unk> end user accepting price points. There is no use in buying piece goods producing garments are designing garments.

And we're testing all of that right now the price the price points have been accepted.

The maintain margins.

Both for us and even more so for the retailer are better than they've ever been the sell throughs are better than they've ever been.

So.

We see.

We see a bright world coming.

Great. Thanks for letting me follow up.

Thank you erinn thanks for your questions.

So with that I wish you all a great labor day and.

Thanks for hearing our story have a good day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

[music].

Ladies and gentlemen, thank you for standing by and walk through the G. III apparel group second quarter fiscal 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to turn the call.

All over to your host Neal Nachman CFO you may begin.

Good morning, and thank you for joining us.

Forward looking statements are not guarantees and actual results may differ materially from those expressed or implied in forward looking statements.

Important factors that could cause actual results of operations or the financial condition of the company to differ are discussed in the documents filed by the company with the SEC.

The company undertakes no duty to update any forward looking statements I will now turn the call over to our chairman and Chief Executive Officer Morris Goldfarb.

Good morning, and thank you for joining us.

Also joining me today are Sammy Aaron our Vice Chairman and President Neil Mcmahon, our Chief Financial Officer.

Jeff Goldfarb Executive Vice President.

<unk> Miller senior strategic adviser and Korea, Trivially Senior Vice President of Investor Relations.

Second quarter of fiscal 2022, we delivered outstanding results with our top and bottom line is exceeding our guidance.

Our earnings recovery is well ahead of our initial expectations and our world class teams are doing an incredible job navigating through the challenges that come our way.

This past quarter, we saw continued strength in casual categories.

Casual dressing has become ingrained in our way of life and consumers are now looking for a well rounded wardrobe.

Ranging from lounge at home to a more sophisticated relax look.

Additionally, these categories offer growth opportunities, including expansion into the outdoor and sports market.

We were also pleased to see an increased penetration of sales in a broader lifestyle category.

Including dresses more polished sportswear and wear to work clothing with momentum still building.

Strength in our shoes and handbags categories also continues.

G III is well positioned with our diversified product categories that range across a globally recognized power brands.

N Y Donna Karan, Calvin Klein, Tommy Hilfiger, and Karl Lagerfeld, Paris to meet the increasing demand for our products.

Our order book is in a strong position and approaching our pre pandemic levels.

This is a clear indication that G. III continues to gain market share.

Although the emergence of the Delta variant has resulted in some new uncertainties, we feel very good about our overall business.

Putting it altogether, we have the confidence to raise our full year fiscal 2022 top and bottom line guidance.

Neil will provide you with the details shortly.

Now lets review the second quarter of fiscal 2022 results.

Net sales for the second quarter were $483 million, an increase of 63% compared to last year's second quarter net sales of $297 million and above our guidance.

The increase in our second quarter net sales was driven by our wholesale segment.

Net sales for the quarter were $467 million up 75% compared to $267 million in last year's second quarter.

Second quarter net income was 39 cents per diluted share compared to a net loss of 31 cents per share in the second quarter last year and net income of 23 per diluted share in the second quarter two years ago.

This year's second quarter net income per share was more than double the high end of our guidance range.

As we communicated during our last earnings call freight challenges had emerged across all industries we.

We have a well developed supply chain infrastructure, which is a core competency of ours and a competitive advantage.

Further the strength of our global power brands allows us to selectively raise prices to offset higher costs.

We see this in our results, where despite higher transportation cost strategic.

Strategic price increases combined with decreased promotional activity have enabled us to increase gross margins.

Our second quarter gross margin percentage improved by almost 400 basis points as compared to a pre pandemic level two years ago.

Now, let's take you through some of our category highlights.

With regards to athleisure and sportswear.

Merchant are designing and expanded our collection is to capitalize on the consumers' increasing demand for a well rounded casual wardrobe.

Whether it's to stay at home workout spend time outdoors participate in sports are socialize or wear to work.

Looking ahead for the second half of the year, we're incorporating wider functionality in fabrics and fits to cater to these broader lifestyles.

We're adding collection is focused on specific sports activities and high performance fitness with new classifications, such as fitness Tech Tees and shorts.

We're also increasing the assortments of woven bottoms for more polished casual outfits.

The jeans category remains.

Bright spot in only two years <unk> has evolved into a key growth category for us.

For a robust line built around addressing any gene.

Our collections across our brand stand out on the denim floor as theyre skewed toward tasks, such as fashion and novelty Tees woven tops layering pieces, including sweat shirts, fleece and life changes and even some casual dresses.

This offers customers a great range of options to where with their genes.

As for the genes themselves, we're expanding a curated selection to include the most updated trends in fits and in watches and a wide range of sizes.

We could not be happier with the way we've built these businesses, which are positioned to capitalize on the resurgence in denim.

Outerwear is an important category in our outerwear offerings are well aligned with the shift in the market toward an outdoor active lifestyle.

Outerwear is good example of a category, where we've been able to raise their prices.

With clean inventories across channels. This is shaping up to be a good outerwear season.

This past quarter, we saw the trend for dresses in Korea were significantly accelerated and this demand remains strong.

Dresses, including social on occasion dresses recovered incredibly well as events were scheduled and the consumer look to refresh their wardrobe to weather this special occasion.

As consumers have been returning to work we've seen solid demand for our career, where such as dresses structured pads and Blazers.

Looking ahead, our merchants anticipate this demand and developed new collections for the fall and holiday seasons.

And bags for DKNY, Calvin Klein, and Karl Lagerfeld, Paris, and footwear for DKNY and Karl Lagerfeld Paris.

Our additional growth categories at G III.

With each passing season, we're improving the line architecture scaling our capabilities, adding retail space and gaining market share.

This was another strong quarter for these accessory categories with less promotional activity and higher AUR.

For our own brand DKNY, we remain on track to almost double the footwear distribution by the end of next year to over 300 Department stores here in the U S.

Internationally DKNY has approximately 850 doors.

Each of the handbag and footwear categories.

We see tremendous opportunity to grow the footwear and handbag business.

Yes.

As for Karl Lagerfeld. After the completion of a very successful first season launch of its spud to airline at 70 size Macy's doors, we are on track to triple the distribution of our sportswear lines of 250 doors by the end of the year and launch a new dress line and 75.

Doors this coming spring.

The Karl Lagerfeld, Paris, footwear, and handbag businesses will soon be in over 100 doors by this fall and is expected to grow to 170 doors by spring of 2022.

Altogether. The brand is currently distributed in over 400 doors here in North America.

At its peak only two years ago, Karl Lagerfeld, Paris generated wholesale net sales of $110 million had limited distribution and Lord and Taylor was one of its largest retailers.

In spite of the closing of all of the Lord <unk> Taylor doors during the pandemic last year.

We're pleased with how well we've extended the brand.

This year, we expect the brand to generate net sales in excess of its previous peak levels.

The quick turnaround is truly a testament to the value of <unk> business model.

Digital sales of our products continue to accelerate.

On our retail partner sites and on our own sites sales of that product increased over 70% from two years ago.

China digital sales are now more productive than store sales.

<unk> digital sites were also up almost 70% to two years ago.

We're keenly focused on capturing and accelerating digital growth to become a best in class Omni channel organization.

With new digital management in place we're focused on the following priorities.

As indicated in last quarter's call. This fall we are launching our upgraded and re platform the websites for DKNY and Karl Lagerfeld, Paris with improved technical operations designed to allow seamless navigation of these sites.

The sites will offer immersive brand content intended to engage consumers and facilitate conversion.

The sites will also enable us to leverage sales tools like virtual selling which is starting to become a meaningful contributor to physical store sales.

Technological and operational capabilities, we are investing in data analytics capabilities to better understand our consumers across channels to engage more meaningfully with them and deliver relevant shopping.

<unk>.

Our current retail partners are making significant investments to improve their own e-commerce sites, and we're collaborating with them to better leverage their enhanced platforms.

We're also building out our global retail presence and pure play retailers sites.

And our own sites with.

With the implementation of our new CRM tool and loyalty programs, we're gaining valuable customer insights. We're also partnering with Joe This.

Logistics provider to enhance our direct to consumer capabilities.

In marketing, we continue to invest in various digital marketing programs to drive traffic.

Traffic engagement and sales.

Accordingly, this year were increasing our digital marketing spend by over 30% compared to last year.

Further using these additional data insights we're improving our return on these investments.

Our DKNY brand is about to launch its fall brand campaign, bringing to life and inclusive cast of authentic individuals that celebrates self expression and being true to one cells.

The campaign has been developed with extended social content and a digital first approach to promote our direct to consumer strategy with the redesigned DKNY site.

<unk> to come later this fall.

We will also step up our digital marketing and media efforts for the Karl Lagerfeld, Paris brand this fall to reach a broader audience.

For us distribution channels.

We're focused on expanding our international business in China, DKNY has had a strong quarter with sales more than doubling as compared to two years ago.

As I mentioned earlier the penetration of digital sales is now higher than store sales. The DKNY European business was originally more skewed toward accessories, and we've expanded the business to include DKNY lifestyle categories.

This past quarter, our DKNY business in Europe was up approximately 20% compared to two years ago, and it's exciting to see acceleration in the apparel categories.

Deborah can.

Also had a good quarter with its limited edition 50th anniversary collection doing well.

The unique thing about this brand is that it can operate efficiently and are relatively small store footprint.

We're actively looking to expand the portfolio of stores for this status swimwear brand, which offers us another growth opportunity.

The brand also has an impressive lineup of collaborations planned this year.

In addition to our previously announced collaborations we're also launching a limited edition capsule collection.

Space <unk> Ville broken in connection with the release of space, Jim The space Jam two movie.

We're just beginning to tap our international opportunities, we have talented and experienced management team has great partners in a strong financial position to help us achieve this growth.

Trends in our retail business are improving although traffic has remained challenged and below two years ago.

We continue to experience strong shopper conversion higher AUR and dollars per transaction as well as margin expansion.

We were pleased to see positive comparable store sales of Karl Lagerfeld, Paris as compared to two years ago.

<unk> signal that this brand is gaining traction with consumers.

DKNY comparable sales trends as compared to two years ago are also improving.

Although we are still impacted by the European and Canadian stores that were shut down for parts of the quarter.

Then for Karl Lagerfeld, Paris, and two for DKNY.

We expect to end the year with 38 DKNY in 'twenty III, Karl Lagerfeld, Paris stores.

As we thoughtfully expand the omnichannel footprint of our brands to meet consumers in the shopping channel of their choice, we expect to be able to further leverage our expense base.

Throughout the pandemic, we've demonstrated our agility as we navigated through challenges and remain focused on delivering positive results.

We're encouraged by the strong consumer demand, we are seeing which puts us and our industry on a solid path to recovery. This is further reflected in our strong order book.

While uncertainties remain based on our confidence in the strength of our business, we are raising our guidance for the full 2022 fiscal year.

We expect full fiscal.

Fiscal year net sales.

To be approximately $9.0 billion.

Adjusting for the retail closures net sales and net income per diluted share approaching pre pandemic levels of two years ago.

I'll now pass the call to Neal for a discussion of our second quarter financial results as well as the guidance for our third and full fiscal year 2022.

Thank you Morris.

Net sales for the second quarter ended July 31, 2021 increased approximately 63% to $483 million from $297 million in the same period last year, we were above our guidance of $460 million.

Net sales of our wholesale operation segment increased approximately 75% to $467 million from $267 million last year.

Net sales of our retail operations segment were $27 million for the second quarter lower than the previous year's net sales of $35 million.

This decrease is a result of the restructuring of our retail segment in which we close the wilsons leather and GH bass store operations last year sales at our DKNY and Karl Lagerfeld businesses were up significantly compared to the prior year, which was impacted by the pandemic.

Our gross margin percentage was 39, 9% in the second quarter of fiscal 2022 compared to <unk> 45, 3% in last year's second quarter.

Last year's gross margins included benefits from Covid related adjustments I.

I will discuss those momentarily.

This quarter's gross margin is up compared to the gross margin percentage of 36% in the second quarter two years ago.

Wholesale operations segment gross margins gross margin percentage was 38, 3% compared to 46, 3% in last year's comparable quarter and 32, 8% in the comparable quarter of two years ago.

Wholesale gross margin percentages in this year benefited from clean inventories at retail, resulting in less promotional activity combined with price increases.

This improved gross margin has been achieved despite increasing freight costs, which we experienced throughout the quarter.

We anticipate increasing freight costs for the remainder of the year, which will have more of an impact on gross margins in the second half of the year.

<unk> licensed stores.

The gross margin percentage in our retail operations segment was 51, 9% compared to 32, 5% in the previous year's quarter and 46, 5% two years ago.

The increase compared to two years ago is attributable to better merchandising unless in a less promotional environment for our DKNY and Karl Lagerfeld businesses.

SG&A expenses were $147 million in this quarter compared to $122 million in last year's second quarter and $196 million in the comparable quarter two years ago.

The increase in expenses compared to last year was primarily due to an increase in compensation expense related to bonus accruals and salaries.

Due to the pandemic the prior year's period had no bonus accrual and salary expense declined as a result of employee furloughs and salary reductions.

Net income for the second quarter, two years ago was $11 million or 23 per share and included direct losses from Wilsons and bass store operations of $6 million was <unk> 13 per share.

Looking at our balance sheet accounts receivable were $385 million compared to $277 million at the end of the second quarter of the previous year.

Inventory decreased to $499 million from $575 million at the end of the second quarter of the previous year.

We ended the quarter in an improved net debt position of $8 million compared to $156 million as of the second quarter of the prior year.

We have cash and availability under our credit agreement of over $900 million we've.

We believe that our liquidity and financial position leaves us well positioned to fund, our domestic and international growth and take advantage of potential acquisition opportunities.

As for our guidance as Morris indicated we feel good about our business, giving us confidence to raise our previously provided guidance.

Our guidance.

For the full fiscal year ending January 31, 2022, we now expect net sales of approximately $9.0 billion compared to $8.0 billion last year the.

Adjusting for the closed wilsons leather and GH bass store sales of $252 million two years ago. The current guidance leaves us approximately 7% below our pre pandemic sales level.

Net income for this upcoming full fiscal year is expected to be between $320 million or between $3 <unk> and $23.0 per diluted share.

This compares to net income of $24 million or <unk> 48 per diluted share in fiscal year, 2021, and $144 million or $96.0 per diluted share in fiscal year 2020.

For the third quarter of the current 2022 fiscal year, we expect net sales of approximately $1 billion in net income between 80, and $90 million or $66.0, and $76.0 per diluted share.

This compares to net sales of $827 million and net income of $63 million or $30.0 per diluted share in the previous year's third quarter.

For your reference disclosed in our press release issued this morning is the impact by quarter for the last two fiscal years of the Wilsons leather and GH bass store operations.

That concludes my comments I will now turn the call back tomorrow for closing remarks.

Thank you Neil.

And thank you all for joining us today G. III has a long history of successfully managing through challenging times.