Q2 2023 G-III Apparel Group Ltd Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Good day and thank you for standing by welcome to the G. III apparel group second quarter fiscal 2023 earnings conference 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 will need to press star one on your telephone. Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today CFO Neal Nachman. Please go ahead.
Thank you good morning, and thanks for joining us.
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.
We're 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.
In addition, during the call we will refer to non-GAAP net income non-GAAP net income per diluted share and adjusted EBITDA, which are all non-GAAP financial measures. We have provided reconciliations of these non-GAAP financial measures to GAAP measures in our press release, which is also available on our website.
So disclosed in our press release for your reference our last year's GAAP to non-GAAP results by quarter.
I will now turn the call over to our chairman and Chief Executive Officer Morris Goldfarb.
Thank you Neil.
Thanks, Thank you everybody for joining us.
In the second quarter, we saw a strong demand for our brands and met our topline expectations. We continue to manage the business prudently with a keen eye towards gaining market share and building on our strengths while further expanding our global reach.
We remain confident in our strategy as the overall fundamentals of our business are incredibly solid.
G. III has a culture of entrepreneurship and agility and flexibility with a world class leadership team and proven track record of navigating through tough environment.
Despite solid top line performance, we were not immune to inflationary pressures and elevated costs in areas, such as warehousing transportation and raw materials, which led to bottom line net income per diluted share below our guidance.
Given the challenging environment that is rapidly develop along with our retail partners being more cautious on the timing of inventory, we're taking a more conservative view for the balance of the year and adjusting our guidance Accordingly, Neil will provide more details on this shortly.
Now turning to the quarter's results, where we continued to see significant year over year sales growth of our power brands DKNY, Donna Karan Karl Lagerfeld, Calvin Klein and Tommy Hilfiger, we experienced growth across almost all categories with particular strength in dresses.
It is in Korea, where and robust growth in handbags.
Our merchant and sales team has responded to the decline in athleisure and a shift in demand towards more polished and dressy categories.
They pivoted our assortments early in the year as consumers return to in person activities and to work with.
We continue to evaluate.
And align our forward production to deliver the right merchandize across categories with the right price points for the given time.
Net sales for the second quarter was $605 million, an increase of 25% compared to last year's second quarter net sales of $483 million.
non-GAAP net income per diluted share was 39.
In the current period compared to 41 in the second quarter last year.
Before I.
Provide an update on our key priorities I want it.
I want to address our inventory levels.
Coming out of the pandemic last year, we were in a historically low level position and did not have adequate inventory to drive that business.
As of the end of the second quarter. This year, our inventory is up a 108% compared to last year's smaller base.
A better indicator would be to compare our wholesale level.
Wholesale inventory levels to the pre pandemic second quarter levels in fiscal 2020 to which we are approximately at 38%.
Excluding in transit our inventory was up only 6%.
The in transit increase is due to a concerted effort to pull forward production by 60 days.
More to mitigate supply chain disruptions.
The majority of this inventory is comprised of in demand categories like outerwear dresses footwear and the newly launched <unk> category, which did not exist pre pandemic.
Further at leisure a down trending category had an insignificant impact on inventory growth to pre pandemic levels.
We had planned for the decline in demand.
Looking ahead to the important fall season.
Order book remains incredibly strong and we're in a good position to ship with inventory in the right categories.
We are working closely with our retail partners to balance the timing of after debt of our product to have the right assortment on the floor at the right time.
Now I'll update you on the progress, we're making against our key priorities.
Our first priority is to drive our power brands across categories with a focus on our own brands I am pleased to report. This was another solid quarter in our wholesale business. We saw notable strength across our power brands DKNY Donna Karan Karl Lagerfeld Calvin.
Client and Tommy Hilfiger.
We have developed solid businesses in our key owned brands, enabling them to realize significant growth with a strong runway ahead.
We acquired DKNY in 2016 and launched the brand under our ownership in 2017.
Since then we expect to double net sales to approximately $600 million this year.
We have expanded distribution across 55 countries through approximately 1300 retail partner doors globally, including Premier Department stores and digital pure plays sites.
Our team has increased global direct to consumer distribution to approximately 250 partner in company owned stores and owned digital platforms.
Our licensing division has extended the brand with partnerships and over 20 lifestyle categories.
The total DKNY business combined with our licensing royalty income has created a highly profitable brand.
Operating above our Companys average operating margins.
Continued growth in the brand is expected to enable us to further expand margins.
Our marketing efforts have created a highly engaged social following for DKNY that has consistently delivered consumer engagement.
And fall and our fall campaign, which celebrates self expression with diverse influences that inspire customers through high impact global outdoor placements in key cities and digital media.
In 2016, we launched Karl Lagerfeld, Paris brand.
Introducing it to North America, and this year, we expect to grow net sales to over $200 million.
The brand as distribution in approximately 450 retail partner doors, including Premier Department stores and digital pure plays sites.
Additionally, we have established strong direct to consumer distribution with over 20 stores and one digital platforms.
This fall Karl Lagerfeld will launch the gender neutral.
<unk> loves Carl capsule collection.
In September designed in collaboration with the actress and model and Actavis carried the olivine.
It will deliver significant brand visibility in New York during fashion week, with a Soho pop up shop, and immersive <unk> campaign in times square robust digital and outdoor media and Influencer partnerships.
Following New York, the capsule launch with events in Milan, Dubai, and it will wrap up in Paris.
Taken together, we are proud of our accomplishments with these two key owned brands and believe there is significant runway ahead for both DKNY and Karl Lagerfeld Paris.
Our licensed brands for which we have distribution rights for North America, only our Calvin Klein and Tommy Hilfiger.
Just a reminder for those licensed brands, we pay significant licensing fees as opposed to collecting those fees from our own brands.
For the quarter, we continued to drive sales for both brands with Calvin Klein growing 14% and Tommy Hilfiger growing 5% as compared to last year.
Our retail partners have responded well to our collections, which are resonating with consumers in store and online.
Our second priority is to expand our portfolio through ownership of brands and their licensing opportunities.
During the second quarter, we completed our previously announced acquisition of the remaining 81% interest in Karl Lagerfeld.
This further expands <unk> global presence and ownership within our portfolio.
Karl Lagerfeld brand product is sold primarily outside of North America at a higher price point with an elevated product offering and higher and higher and distribution across premium to department stores.
Whereas the Karl Lagerfeld, Paris brand, which we created for North America is an approachable fashion brand at a more moderate price point that is distributed through better department stores.
This acquisition adds a fully owned brand to our portfolio. The total Karl Lagerfeld business is now approaching annual revenues of approximately $400 million.
Leveraging our operational expertise, we expect to unlock additional growth opportunities through continued expansion into new categories.
And look at new geographies as well.
Teams are working to bring Karl Lagerfeld.
The United States with a number of premium department stores.
And to take the Karl Lagerfeld, Paris brand abroad.
Other initiatives, including increasing our direct to consumer Omnichannel sales and a focus on growing the number of wholesale partners and licenses for the brand.
Importantly, we see a net sales potential of approximately $1 billion for us or in excess of $2 billion in retail sales.
We continue to evaluate ownership opportunities, where they may make sense in the future as we think about the makeup of that portfolio and where we can bring value to leverage our expertise to drive brand growth.
Our licensing business remains a key profit driver for G III and broadens our reach to more consumers in a capital light way.
It Leverages the global appeal of our own brands with category expansions and exciting partnerships with new customer experiences.
We continue to look for opportunities to expand our licensing business with best in class category partners.
This year, we expect to generate approximately $65 million in annual royalty income.
DKNY and Donna Karan.
Both have well established iconic fragrance businesses through global licenses this quarter enterprise, whom began distribution of our new fragrance license and began distribution as our new fragrance licensee.
We believe <unk> is well positioned to expand our fragrance business for both of these brands.
We've made progress with licensing deals for our recently acquired European luxury brands Sonya Ricky al.
Which are centrally embodies Parisian fashion.
During the quarter, we finalized several key agreements for children's wear shoes, and jewelry and are working on other partnerships.
Licensing is expected to be instrumental in supporting our global growth plan for <unk>.
Additionally, several unique partnerships are expected to build global brand excitement for Ville broken and Karl Lagerfeld, creating new customer experiences.
With our partners Karl Lagerfeld has recently launched its first ever hotel and to open its doors in Macau.
<unk> residential villas are being developed in my base.
This month, we're set to close on the purchase of our first ever <unk> Beach club and con, creating an immersive customer experience with a differentiated marketing opportunity that is being designed to lend itself to franchising the concept.
Okay.
Our next priority is to extend our reach by expanding our European based brand portfolio.
With the inclusion of Karl Lagerfeld, Europe , and our results this quarter.
We've expanded our global reach Neil will provide you with an update on the financial performance.
For DKNY, we're pleased with our international wholesale business, which we expect will generate greater than $165 million in sales this year.
That's a growth of approximately 250% from fiscal 2018, our first full year of owning the brand.
In the second quarter net sales for DKNY international business, almost doubled compared to last year as we continue to grow and expand our European operations.
In total our distribution partners operate 230, freestanding stores and concessions globally.
Over the summer <unk> registered another solid quarter with strong double digit growth compared to pre pandemic levels and is on track to have its best year in sales and profitability.
We also have a slate of product launches and collaborations.
This quarter, the <unk> launch and the innovative swimsuit.
The swimsuit line, incorporating <unk> fabrics and collaborations with artists and brands like Palm Angels.
Since we acquired the brand we've grown <unk> store store footprint to 180 company and partner operated stores and almost 600 doors in Premier Department stores and vacation destinations with a product available in 130 and 113 country.
Yes.
We're pleased with its trajectory and believe it can generate $200 million in sales.
Over the past year, the European team has been working on the relaunch of Sonya Ricky al.
This fall, we will introduce a new collection with a focus on knits and accessories categories. The brand thats been known for.
<unk> is also working to expand the brands footprint through a number of distribution channels.
We believe there continues to be a meaningful opportunity to expand DKNY, Karl Lagerfeld, Bill Burke and <unk> globally and is developing an infrastructure leveraging our leadership talent and creating synergies to build the solid foundation that is expected to fuel these busy.
Mrs.
Our third priority is to maximize omnichannel opportunities and leverage data.
Elevating our digital experience and capabilities is an important part of our agenda.
We are working to drive the demand on our own retail partners digital platforms and have expanded our pure play presence, which has resulted in strong growth for pre pandemic levels.
That was traffic migrating back to brick and mortar we're ensuring that we're meeting the consumer in their preferred channel of shopping.
Our new DKNY and Karl Lagerfeld websites have improved.
I'll have improved technical operations to allow seamless navigation and offer an immersive brand content, which are designed to drive performance heading into the holiday season.
The site also enable us to leverage sales tools like virtual selling CRM and loyalty programs.
Across our own brands, we continue our brand marketing and data driven strategies as we build out updated lifecycle and retention marketing campaigns, we've experienced significant value in our CRM and loyalty technology instruments.
Lagerfeld Europe as a strong and growing digital business part of the growth is expected to come from converting the website from an outside outsourced model to running it in house.
This will enable the expansion of product offerings.
Operational efficiency and furthering its global brand reach.
Team completed the conversion of the German Austrian and Dutch sites on the in house platform.
A full transition across Europe is expected in the next couple of months in time for the holiday season.
And our own retail operations, we're very pleased with the performance of our Karl Lagerfeld, Paris business, which grew 80% in North America, Despite continuing challenges in tourism.
This growth was driven by new stores, which are off to a good start as well as strong performance in digital and our existing store fleet.
Our DKNY comparisons were slightly negative in the quarter predominantly due to the European outlets, which continue to see significantly lower tourism, particularly from China.
We remain focused on driving omnichannel growth wherever the consumer chooses to shop.
In conclusion.
We have brands that are in demand and we continue to execute across all aspects of the product lifecycle. During this dynamic environment.
We are prudently incorporated a more conservative outlook for the balance of the year.
Our strategy and overall fundamentals of our business are incredibly strong we remain confident in our ability to deliver our revised full year expectations.
I'll now pass the call to Neal for a discussion of our second quarter financial results as well as guidance for our third quarter and full year fiscal 2023.
Thank you Morris net sales for the second quarter ended July 31, 2022 increased approximately 25% to $605 million from $483 million in the same period last year included.
Included in our sales for this quarter was $17 million for the one month of the Karl Lagerfeld acquisition.
Net sales of our wholesale operations segment increased approximately 26% to $588 million from $467 million.
Net sales of our retail operations segment were $31 million for the second quarter up 14% compared to net sales of $27 million in last year's second quarter.
Our gross margin percentage was 37, 8% in the second quarter of fiscal 2023 compared to 39, 9% in the previous year's second quarter.
Gross margin percentage in the second quarter was expected to be lower than the same period last year as the significant increases in transportation costs did not significantly impact us until the third quarter of last year.
In the current quarter, we incurred higher freight costs and other inflationary costs, which were only partially offset by the price increases we implemented for this year.
The wholesale operations segment gross margin percentage was 36, 2% compared to 38, 3% in last year's comparable quarter.
The gross margin percentage in our retail operation segment was 51, 6% compared to 51, 9%.
SG&A expenses were $191 million, excluding approximately $5 million in onetime expenses associated with the Karl Lagerfeld acquisition non-GAAP SG&A was $186 million was 37% of net sales in this quarter compared to $147 million.
Was 34% of net sales in last year's second quarter.
Included in other expenses and income is a non-GAAP gain of $31 million related to the fair value of our minority ownership in Karl Lagerfeld prior to the acquisition.
GAAP net income for the second quarter was $36 million or <unk> 74 per diluted share and non-GAAP net income per diluted share was $19 million or <unk> 39.
Per share.
This compares to non-GAAP net income of $20 million or <unk> 41 in last year's second quarter.
A full reconciliation of our GAAP to non-GAAP results are included in our press release issued this morning.
Turning to the balance sheet as Morris discussed previously our inventory was up.
108% to last year.
Which was a historically low base due to the supply chain issues and strong demand during last year.
Better comparison would be to consider wholesale inventory levels to the pre pandemic second quarter in which we are up approximately 38% driven almost entirely by in transit inventory.
In transit inventories are up as a result of the increased shipping times higher freight costs and the pull forward of the production calendar.
From a category perspective, approximately 75% of the increase in our inventory comes from in demand product categories like outerwear dresses footwear and the newly added jeans category.
Having this inventory flowing into our warehouses for outerwear, which is a seasonally larger category for the third quarter is a strength.
We're already seeing we are already seeing the benefit with outerwear shipping off to a good start.
Additional increases in inventory were aligned with the greater demand in dresses occasion wear and the expansion of footwear as well as genes, which we launched during the pandemic and had no pre pandemic sales or inventory.
As Mark indicated we feel good about our inventory composition and our <unk>.
Order book remains incredibly strong.
We ended the quarter in a net debt position of $425 million compared to $8 million in the prior year.
This increase is predominantly related to the Karl Lagerfeld acquisition in the quarter, which we funded with cash on hand, as well as the increase in our inventory position.
We also repurchased approximately 800000 shares of our stock for $17 million.
We had cash and availability under our credit agreement of over $730 million at the close of the quarter we.
We believe that our liquidity and financial position provide us the flexibility to take advantage of acquisition opportunities and invest in our future growth.
As for our guidance as Morris indicated the environment. We operate in continues to be dynamics. Accordingly, we are taking a more conservative outlook for the balance of the year and providing revising our guidance to include the expected impact from inflationary pressures on consumers and incremental costs associated with the current supply chain conditions.
Including the timing of receipts.
For the full fiscal year 2023, we now expect net sales of approximately 315 billion and net income of between 182 and $187 million or between $3 69, and $3 79 per diluted share.
This compares to net sales of $2 77 billion and net income of $200 million were $4 <unk> per diluted share last year.
This guidance is inclusive of approximately $130 million in net sales and net income of approximately <unk> 10 per diluted share in connection with the acquisition of the Karl Lagerfeld brand for the seven months of ownership in this fiscal year.
On a non-GAAP basis, we expect net income for fiscal 2023 of between 177 and $182 million or between $3 60 and.
$3 70 per share.
non-GAAP results exclude the $31 million gain on the fair value of our minority ownership in the Karl Lagerfeld prior to the acquisition $16 $7 million of expenses related to the Karl Lagerfeld transaction and noncash imputed interest expense of approximately $6 $9 million.
The aggregate effect of these exclusions is equal to a negative <unk> <unk> per diluted share.
This guidance compares to non-GAAP net income of $208 million or $4 20 per diluted share for fiscal 2022.
non-GAAP results for fiscal 2020 to exclude noncash imputed interest expense of $6 4 million, one time expenses of $2 $1 million related to the Karl Lagerfeld transaction and net asset impairment.
On lease terminations of $1 5 million.
The aggregate effect of these exclusions was equal to <unk> 15 per diluted share in fiscal 2022.
Full year fiscal 2023, adjusted EBITDA is expected to be between 318 and $323 million compared to.
Adjusted EBITDA of $350 million in fiscal 2022.
For the third quarter of fiscal year 2023, we expect net sales of approximately $1 7 billion compared to $1 2 billion in the same period last year.
Net income for the third quarter of fiscal 2023 is expected to be in the range of $83 million to $88 million or $1 70, and $1 80 per diluted share.
This compares to net income of $107 million with $2 16 per diluted share in last year's third quarter.
non-GAAP net income for the third quarter of fiscal 2023 is expected to be between 87% to $92 million or between $1 80, and $1 90 per diluted share.
non-GAAP results exclude expenses of $3 $4 million related to the Karl Lagerfeld transaction and noncash imputed interest expense of approximately $1 $8 million.
This guidance compares to non-GAAP net income of $108 million with $2 18 per diluted share for fiscal 2022 <unk>.
non-GAAP results for fiscal 2022 excludes noncash imputed interest expense of $1 $6 million.
The effect of these exclusions was equal to <unk> <unk> per diluted share in the third quarter of fiscal 2023, and <unk> <unk> per diluted share in last year's third quarter.
Let me add some context around modeling other line items, we acquired Karl Lagerfeld business will be included for a full six months in the back half of the year and is expected to increase our gross margins and SG&A percentages as it is a higher direct to consumer penetration.
Accordingly, our gross margin percentage of sales in the back half of the year will be higher than last than the last year's gross margin percentages for.
For the full year, we expect SG&A to Delever with the inclusion of the acquired Karl Lagerfeld business. Additionally, we are now anticipating higher warehousing costs.
We are anticipating interest expense to be approximately $55 million, which includes approximately $7 million of non-GAAP noncash imputed interest.
We are estimating a tax rate of 26% for the balance of the year.
We have not anticipated any potential share repurchases in our guidance.
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.
G. III has power comes from the significant diversification, we've developed across multiple facets of our business.
Including our portfolio globally globally recognized brands.
Our base of distribution partners, and our dominance and producing a broad range of product categories.
Our diversification combined with our well developed design sourcing and production infrastructure and high performing teams create.
Creates a versatile and balanced business model.
We believe we have a significant runway for growth.
Our sales opportunities have just out power brands alone DKNY, Donna Karan Karl Lagerfeld, Calvin Klein and Tommy Hilfiger remain very powerful.
We are financially strong and can use our balance sheet to capitalize on opportunities. We remain focused on our strategic priorities to deliver continued long term profitable growth, which includes driving our power brands across categories further expanding our portfolio through ownership.
<unk> brands in their licensing opportunities.
Extending our reach by developing a European based brand portfolio Matt.
Maximizing our omnichannel opportunities and leveraging data and continuing to innovate to stay relevant for our customers.
Like to thank our entire G III organization and all our stakeholders for their continued support.
Operator, we're now ready to take some questions.
Certainly as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.
No Matt.
And our first question will come from Edward <unk> of Piper Sandler.
Hey, good morning, guys.
Hey, good morning, guys. Thanks for taking the questions I guess first just to unpack the guidance revision a little bit.
How much of it I know you said gross margins are up because of lager.
Lagerfeld, but are you assuming higher market allowance kind of how does that fold into gross.
And then Morris wanted to step back a little bit and talk about outerwear. I know you had some encouraging commentary I guess what are you seeing in terms of potential markdowns in this space.
Wayne was inventory from last year.
And as you think about the reorder business I guess kind of how are you positioned thank you.
Yeah.
With respect to gross margins.
We are taking a more conservative view into the back half.
As I mentioned, the inflationary pressures on the consumers, we expect to put pressure on our top line sales, obviously, that's less significant than really the impact on the gross margins.
In addition, the inventory increases that we've got we will be putting some pressure on the second half.
Gross margin percentage as we have warehousing and receipt costs that'll be good.
Expect them to be higher.
In regards to your question on outerwear.
As you know outerwear is our middle name.
Started as pure as a pure play outerwear company, we know how to manage through the outerwear sector. It's the most profitable segment of our business and generally it's the highest margin performer for our retail partners as well.
If you measure the level of inventory that we brought in.
Today, it feels as if it's substantial and it is.
The biggest piece of it as outerwear.
We know how to manage through inventory issues, we started out the year incredibly clean.
During the pandemic, we were able to.
Monetize.
A good deal of our data inventory, where in a fabulous position as it relates to old inventory.
Our coda inventory is all new fresh.
With.
Solid bookings attached to it with some support inventory that we believe we can manage through for the year.
That I believe will be a highlight for the year. When we report the year end earnings I think we'll be in a position to report back to you.
Assuming.
That.
Nature has aligned with us in.
Assuming that the consumer is out there and there is not another war somewhere in the world.
We're prepared for just an amazing outerwear a year.
Thanks, so much.
Thank you Ed Thanks for your question.
Thank you one moment.
And our next question will come from will Garner of Wells Fargo. Your line is open.
Hey, guys. Thanks for thanks for taking my question.
Could you guys just.
I think to add this is for Neal.
Could you guys speak more on the cadence of gross margin now stands at <unk> <unk>.
Do you expect improvement.
From <unk> and <unk> can you just kind of.
Take that out for us.
Yes.
Unlike the first half of the year, where we really had.
Good margins, but we really up against great margins in the prior year. The prior year did not have.
The traffic cost increases and source freight is concerned we really started to experience that in the back half more robustly of last year. So we do expect that.
As a result of that compare as a result of adding in the Karl Lagerfeld transaction, which I mentioned increases our gross margins. We really will have a turn in terms of the consolidated gross margin it will be positive to the prior year as opposed to being negative for the first half.
As it relates to Q3 and Q4 there'll be increases in both eyes.
Lee lean to the fourth quarter being slightly heavier.
But only marginally so.
Great and just one more for me.
It looks like you took down guidance for Carl I think you said it was going to be at $140 million.
It looks like you're taking kind of a 130 <unk> just curious.
What happened there.
But what had happened was we had a plan for opening additional stores.
We were cautious on.
On the store expansion, so a big part of that.
Is the reconsideration of.
Opening stores and the timing of when we'll open stores.
Understood. Thank you I'll pass it along.
One moment.
And our next question.
Will come from Jay sole.
USB Your line is open.
Great. Thank you so much.
I have a two part question first last quarter.
My sense was that you felt like when you walk through department stores, the department stores were not.
Moving inventory fast enough not reducing markdowns quick enough.
Fast forward now I mean, how do you feel like.
Department stores position us towards the environment.
The actions being appropriately taken its toll, but Florida is it faster and then secondly, just on September one have you seen.
Thus far in September and most recently what are the trends by market.
Thanks for your question Jay.
Yes.
Yeah.
I believe that the department stores.
Again to take the appropriate inventories to move.
Season season goods.
They were my view they were.
Late in cleansing, the floor and making space for new inventory, but as that began to happen new inventory was shipped.
<unk>.
On the floor and selling quite let me call it briskly.
Jim.
And the floor appearance is much more current so I believe we're in a much better place.
Relates to presentation and performance on the department store floor.
We will begin to see that.
We've gotten reorders as new product new product hit the floor, we were a little bit anxious to get all the hard work and.
In production and design showcased on the floor and it was delayed a little bit but as as it gone on the floor.
We're floating.
The performance.
As it relates to the.
The beginning I guess it more relates to the beginning of Q3.
Than it did for Q2.
Got it okay. Thank you so much.
Thanks for your question Jay.
One moment.
And our next question will come from Paul Cooney our bar.
Please your line is open.
Alright, Thank you for taking my question.
My question is on the gross margin guide for the back half forgotten.
Clarification, excluding Karl Lagerfeld, what's your expectation for kind of the organic gross margin and then also what are you assuming for increased levels of promotion across the industry.
Yeah, Paul Thank you for the question.
With respect to if you excluded the KLA transaction.
Would have been still up against the prior year, but generally flat for the second half.
If you combine Q3, and Q4 and there is a little and there is a little bit.
Of a change there in terms of the cadence.
In terms of promotion Ality, we've not anticipated significant amounts of promotion ality for the back half of the year. We believe that our inventory is very good value that our brands are in good stead as Morris mentioned earlier.
If the consumer is not strong we have if the consumer is strong we've got support inventory forward and if it's not we'll feel comfortable carrying over some of the more.
Long live styles that we have.
There will be a level of promotion as we always discuss it.
On the retail floor.
And.
It's not a forever situation.
It's inventory that still resides that needs to be moved.
And the prudent retailer, we'll move that inventory.
And adjust for the.
In demand fashion product that is really the right product is never a hardship and selling.
And we start out with reasonable margins are retailers are.
I have enjoyed better margins than they have in many years, so I'm not I'm not anticipating a.
Disaster on moving inventory at all.
Both the retailer and the supplier is going to be in good shape and at the end there'll be a happy consumer as well.
Thanks, a quick follow up.
Just to level set our expectations.
<unk>.
When.
What do you envision inventory looking like at the end of the year when do you envision it normalizing to be more in line with sales.
Yes.
The main drivers of the increase is this in transit.
As significantly in transit inventory and production calendars had been moved up and I expect that that will stay for quite some period of time, the guess as to when in transit inventories get better is really anybody's guess, we're seeing improvements in a lot of that infrastructure now so I think as that as that continues to.
I think our compares will be better I am still expecting pretty fairly elevated inventory levels for both Q3, and Q4 and again it will be significantly driven by the in transit figures.
So we can't forget about the state of our order book as it relates to inventory and the flow of inventory.
We have a very solid order book that keeps growing every day.
So it's the way we plan our business.
We accelerated receipts by.
At least 60 days in some countries greater than that more like 75 days.
So there is kind of a spin on inventory levels. It's not it's not a number that can really be comped through pre pandemic.
During the pre pandemic.
We were bringing in inventory and we restructured is.
Quick response type retailer that doesn't exist anymore. So we changed our model, we're always considering our auto book when we anticipate inventory so we're a little skewed.
You need to comp when you evaluate the <unk>.
Our levels of inventory you need to comp.
The order book aligned with the inventory status and when we look at the back end of the year.
It flows into into fiscal 2024, we are beginning to buy and receive.
Product that won't be shipped until Q1 of 2024.
So it's a moving target.
<unk>.
Not that difficult for us to rationalize and we're comfortable with the inventory levels.
Thank you best of luck.
Thank you thanks for your question.
Thank you.
And our next question will.
Will come from Noah.
Zach Ken.
The Keybanc your line is open.
Hi, guys. Thanks for taking my question I was just hoping if you could provide any color on the revenue guidance as it relates to your order book for the rest of the year.
As well as how any cancellations are shaking out her checkout versus expectations baked into prior guidance.
Any color on how the brands are kind of performing internationally versus domestically.
And how that's progressing would be helpful. Thank you.
So our order book is.
About 94% to plan.
Which really encompasses the cancellations that we got through Q2 those are those are behind us.
We manage through the adjustments we made some of them were.
Some adjustments were cancellations some adjustments, we're moving deliveries into another quarter.
So we managed through it and don't anticipate a crisis.
Crisis going forward on <unk>.
Cancellations.
We have.
We have partners both on the supply side and on the retail side.
That depend on our existence and there is a sensitivity to.
You can't kill a supplier and it goes both ways it goes retailer toward us and ourselves toward our vendor base.
So there is.
There's almost an acknowledgment that.
<unk>.
It needs to be worked collaboratively to get through a difficult year.
And the brand performance internationally.
<unk> has done great on the wholesale side.
We have grown our business and we've more than doubled our size in a couple of years.
And it's just the beginning we made some changes in our.
Milan office.
That will be announced in the next day or two.
And the Karl Lagerfeld business, which we've just acquired as a solid footprint with an amazing team.
That continues to grow and prosper and with the appropriate.
Financing.
G III as a bank.
They're they're geared for growth.
The demand is much better known in Europe than it is in the United States.
It's got a luxury.
Air to it.
And it's got a distinct fashion that the consumer identifies with.
So those attributes.
Going to help dramatically in the growth of Europe , and a long side of <unk>, although not a giant.
Piece of our business, it's an important piece its great margin.
It's.
Our management team as well that is.
Well versed on the European market most of the management team of.
<unk>.
Comes out of our Mezz they were senior people at our Mezz that took the challenge to build this brand and they've done just a miraculous job.
As you heard it's expanding into unique type of licenses, whether it's hotels or villages or.
We are building out our first platform of the <unk> club, which is not a major investment, but it's a unique situation.
It's in Con and vet.
<unk>.
Very important location.
And we were able to brand.
The club, which is unique for con branding is.
Branding on the beach is not typical so with that we build our first club with the intent to franchise to the rest of the world. We do not want to be club owners of club operators, but it was essential that we build the first the first one and there is a second one coming that is.
Kind of a hybrid that will it be in Michael Dell's.
Bulk of Beach club.
So we are doing unique things that add spirit too.
To Europe .
And it feeds into the U S as well <unk>.
To be worthy, but we're excited about.
Where we're where we are.
Where we are positioned for for Europe , and the rest of the world.
In the U S. The brands.
As we've stated in the retail customers, we have will contest to where we are as good as it gets on the women's side of the business.
I believe we might be considered the largest wholesale provider to the department store sector.
And nothing seems too.
Led me to believe that should change.
We need as I said earlier.
We do need the stars aligned there's so much that's gone on in the world.
Wanna be repetitious, we've heard it on every call we read it in the front page of every magazine and newspaper.
Yes.
Research it.
We're well aware of what's gone on.
And I think.
I think we've done an amazing job.
Weaving through it and.
Having this spirit that.
We're going to grow and prosper going forward. This is this is a difficult year clearly.
So again I apologize for the worthiness.
Yes.
It's an important.
Important piece of my life.
Not as either.
Thank you very much.
Operator, we have time for one more question.
Okay.
Thank you all thanks for interrupting your day to listen to our story.
And talk to you next quarter.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation.
Have a wonderful day.
The conference will begin shortly to raise.
Johan during Q&A, you can dial star one one.
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Paul.
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The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Paul.
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The conference will begin shortly.
As Johan during Q&A, you can dial star one one.
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Yes.
Yes.
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Paul.
Sure.
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Sure.
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<unk>.
Yes.
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Thanks.
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The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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