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G-III Apparel Group, Ltd. (NASDAQ:GIII)

F3Q09 Earnings Call

December 9, 2008 4:30 pm ET

Executives

Neal S. Nackman - Chief Financial Officer, Treasurer

Morris Goldfarb - Chairman of the Board, Chief Executive Officer

Wayne S. Miller - Chief Operating Officer, Secretary

Sammy Aaron - Vice Chairman

James Palczynski - Investor Relations

Analysts

Eric Beder - Brean Murray, Carret & Co.

Jody Kane - Sidoti & Company

Jim Duffy - Thomas Weisel Partners

Mimi Bartel - Telsey Advisory Group

Todd Slater - Lazard Capital Markets

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the G-III Apparel Group Limited third quarter earnings call 2009. (Operator Instructions) I would like to turn the conference over to Mr. Neal Nackman, Chief Financial Officer of G-III Apparel Group. Please go ahead, sir.

Neal S. Nackman

Thank you. Good afternoon, everybody. Before we get started, I want to remind you of the company’s Safe Harbor language. Some statements made today on the call are forward-looking statements as that term is defined under the federal securities laws. Forward-looking statements are subject to risks, uncertainties, and factors which include but are not limited to reliance on licensed products, reliance on foreign manufacturers, the nature of the apparel industry, including changing customer demands and taste, customer concentration, seasonality, customer acceptance of new products, weakness in the retail sector, risks related to the operation of the retail chain, the impact of competitive products and pricing, dependence upon existing management, possible business disruptions from acquisitions, weak economic conditions, and the turmoil in the credit and financial markets, as well as other risks detailed in the company’s filings with the Securities and Exchange Commission. The company assumes no obligation to update information in this call.

I will now turn the call over to our Chairman and Chief Executive Officer, Morris Goldfarb.

Morris Goldfarb

Good afternoon and thank you for joining us to review our third quarter. With me today are Wayne Miller, our Chief Operating Officer; Neal Nackman, our Chief Financial Officer; and Sammy Aaron, our Vice Chairman.

Our results over the last nine months of this fiscal year illustrate that our business is strong and has performed well. Over that same time period, we’ve also completed two acquisitions that are enabling us to further diversify our business and to create new substantial opportunities for growth.

In general, we continue to be proud of what we are accomplishing and optimistic about the potential of the business opportunities in front of us.

The third quarter is the most important to our annual financial results and I am pleased to tell you that we executed well. Net sales for the third quarter were $351.6 million, up 29.6% compared to the same period last year. The increase was driven primarily by contributions from Andrew Mark and Wilson’s outlet retail businesses that we acquired during the past year, as well as strong increases from our Calvin Klein, Guess, and Kenneth Cole business.

Net income per share for the quarter was $1.68, up 19.1% compared to the $1.41 from the year-ago quarter. Given that is both our largest licensed business and the top performing brand in our mix, I will start by updating you with respect to Calvin Klein. The business has been excellent across nearly every category. This certainly has something to do with the brand’s position in the market. Calvin Klein is well-suited to compete in this kind of environment.

The strong fashion heritage of this brand, combined with high quality and extremely competitive price points, is going to work in our advantage across a number of categories. The status level is associated with this pure American brand is very high. Both our men’s and women’s Calvin outerwear businesses are healthy. Calvin Klein dresses continue to be a significant area of growth for us and we are very excited to be pushing forward with our Bata women’s sportswear initiative. We will begin shipping in February and we expect to launch the Calvin Klein sportswear collection in approximately 200 doors.

We’ve been very grateful for the level of support shown to this initiative from retailers and we expect rapid door growth.

Across our Calvin Klein business portfolio, we are investing in our design capabilities and we are working closely with suppliers to improve our margins by sourcing opportunistically.

Philip Van Heusen has proven to be an ideal partner for us. A big credit for our success is also clearly due to the organization and the group of licensees that they have assembled and we are aware that the Calvin Klein related businesses has been evidence in strength at retail despite the highly challenging environment.

In summary, I believe there is growth available for our Calvin Klein business in every category.

We’ve also been pleased with many of our other branded businesses. In the outerwear category, Guess has produced excellent results for us, with its net sales increasing about 50% year-to-date compared to last year. This is a clearly differentiated brand with a solid core customer base and it continues to have significant growth opportunities for us.

Our Kenneth Cole business is also strong once again this year. The line is well designed and we are pleased by the continued demand we are seeing for the product. John John’s has performed well, given the tough market for this type of product. While the outerwear business is up a little compared to last year, the urban market in general has been exceptionally difficult and yet we’ve been able to diversify the business and continue to see good sell-throughs. This performance has really validated our efforts.

Our Cole Haan performance is another testament to our ability to manage a brand successfully in a difficult market. This brand, which is in the [high-hit] luxury tier of distribution, has performed to our plan. We executed this business well and it demonstrates that an appropriately designed and marketed line can transcend the trend at retail. This business continues to develop and we believe it will grow in stature and importance to the luxury market.

We are making adjustments to our consolidated business, particularly from a process and infrastructure standpoint, to offset the impact of the tough environment. Since the beginning of our third fiscal quarter, excluding our newly added retail operation, we’ve reduced our annual run-rate for payroll by 10%. We are also in the process of creating a more efficient structure for our operations that will reduce our space requirements. We expect to derive further savings from this effort next year.

Of more immediate impact was our decision towards the close of first quarter to reduce our buys for fill-in business in the fourth quarter. We reacted quickly once the depth of the problems in the marketplace became apparent. While we decided to give up some top line opportunity, this was clearly the right move and we believe this has reduced our inventory risk.

I want to be clear -- at the same time as we are seeking efficiencies and protecting our business, we are continuing to invest in growth. We have built a significant infrastructure for Calvin Klein sportswear initiative that includes designer salespeople and merchandising staff.

We’ve been carrying these expenses with no associated revenues but expect the business to justify this ramp-up as we begin to see net sales in the first quarter of our next fiscal year.

Similar to Calvin Klein sportswear, Jessica Simpson dresses are an investment for us right now. This business will begin to ship next year as well. We are pushing forward with the Ellen Tracy dress line. Ellen Tracy is a great and trusted brand that’s positioned well for providing value to our customers.

Clearly we expect that the retail environment will be difficult and in the fourth quarter we’ll probably evidence that. The fourth quarter traditionally has a much larger percentage of reorder business which will be challenged this year. Additionally, we expect our recently acquired Wilson’s outlet retail business and our Andrew Mark business to reflect market conditions.

Given the timing of these acquisitions, we’ve not yet had the opportunity to implement the additional efficiencies and improvements that each business requires. Andrew Mark will have a tough holiday as the luxury sector is under particular pressure and we were not able to significantly affect the design or merchandising of this business for the holiday season. We are reacting with markdowns and plan to keep our inventory clean. Going forward, we expect to expand our product mix, remerchandise the line to better address key price points, look to generate licensing income, and expand the profile of the brand with new partners.

We remain confident that this acquisition will generate considerable long-term value for our business and for our shareholders.

For our first holiday season with the Wilson’s outlet stores, this will be difficult as well. As we have stated, improving the performance of this concept is largely about improving the assortment and incorporating the right brands into the mix. Again, due to timing, we were not able to achieve these improvements this year. Although comparable store sales at Wilson’s outlets are lower than we planned, conversion rates have been stable. We think that the liquidation of the Wilson’s mall stores that were not purchased by us confused the customer for the concept this holiday season.

These will not be issues that affect us again and we believe that next year we will see significantly better performance from our stores. Additionally, we believe we can leverage the retail infrastructure we now have to further develop the Andrew Mark brand and business. Although we will be watching capital expenditures carefully and we will deploy capital only with clear return objectives, we are continuing with plans to test an Andrew Mark outlet concept.

One of our greatest strengths as an organization is how well we manage a diverse portfolio of businesses. Even in the marketplace like the one we have today, which I think all of us agree is the worst we have seen in our lifetimes, we have an ability to seek out and take advantage of [inaudible] strength to drive our business forward.

In the very short term, we are planning to be aggressive with respect to ensuring that we end this season with as clean an inventory as possible. We expect our fourth quarter margin to reflect this but we expect to be in a relatively good inventory position by year-end. We have an excellent portfolio of brands and businesses, we know how to reduce business risk and plan efficiently, and we are increasingly diversified. We have a very talented team of employees and they are an important partner to retailers at every tier of distribution.

We will remain vigilant and focused on driving and protecting our profitability.

Thank you. I will now turn the call over to Neal Nackman, our Chief Financial Officer, to review the financial results of the quarter in great detail.

Neal S. Nackman

Thank you, Morris. First for the quarter’s review -- net sales for the quarter were $351.6 million, up approximately 29.6% compared to $271.2 million last year. Net sales of licensed apparel in the quarter increased to $229.1 million from $193 million and net sales of non-licensed apparel in the quarter increased to $98 million from $78.2 million in the prior year. Net sales for our retail segment were approximately $24.4 million, primarily from the Wilson’s outlet stores which we acquired in July 2008. The increase in our net sales of licensed apparel in the quarter was primarily attributable to sales of Dockers and Levis product under new licenses acquired with the purchase of Andrew Mark in February 2008 and a liberal increase in our Calvin Klein products, including the CK performance division, which began shipping in the fourth quarter last year, and an increase in Guess outerwear.

The increase in net sales of non-licensed apparel was primarily attributable to the Andrew Mark division acquired in February 2008 and accordingly, there are no sales of Andrew Mark product in the prior year. This increase was offset in part by a decrease in our other non-licensed outerwear programs.

Our net income for the quarter increased to $28.8 million, or $1.58 per diluted share, compared to net income of $23.8 million, or $1.41 per diluted share in the same period last year. Our gross margin percentage increased to 32% in the quarter compared to 29.6% last year. The gross margin percentage in our license segment increased slightly to 32% this year, as compared to 31.5% in the prior year. The gross margin percentage in a non-licensed segment increased to 29.2% from 25% in last year’s quarter. The increase in the gross profit percentage in our non-licensed apparel segment is primarily attributable to the margins in our Andrew Mark division.

Gross margin in the new retail segment was 43.6%. SG&A expenses increased $22.4 million to $58.9 million for the quarter, from $36.5 million in the prior year third quarter. This quarter’s expense increases are primarily attributable to SG&A expenses associated with the companies we acquired. We [inaudible] the Wilson’s outlet business or Andrew Mark last year.

Turning to the nine-month period, for the first nine months of fiscal 2009, we reported net sales of $540.5 million, up 38.5%, compared to $390.2 million last year. Net sales of licensed apparel increased to $338.7 million from $274.9 million, and net sales of non-licensed apparel increased to $159.8 million from $115.3 million in the prior year period. Net sales in our retail segment were approximately $32 million for the nine-month period this year.

Increased license sales were most favorably impacted by an increase in sales of Calvin Klein licensed product, sales from our Dockers and Levis license acquired in February 2008, and an increase in net sales of Guess outerwear.

Calvin Klein products increases were stronger in the women’s outerwear and dress categories but also reflect the increases from the new performance products. Non-licensed sales increased primarily as a result of the acquired businesses, sales from the Andrew Mark, which was acquired during this year, and incremental sales from the Jessica Howard division, which were only reflected in [inaudible] results after the acquisition in May 2007.

Net income increased to $18.1 million, or $1.07 per diluted share in the first nine months of fiscal 2009, compared to net income of $16.4 million, or $0.99 per diluted share in last year’s comparable period.

Gross margin percentages for the year-to-date nine-month period increased to 29.4% from 28.1% in the same period last year, or were impacted by the same factors previously mentioned for the quarter. SG&A expenses for the nine months increased $43.6 million to $118.6 million from $75 million in the prior year. This increase is attributable primarily to expenses associated with the [CK business] we acquired in 2008.

We expect that our SG&A will continue to increase during the remainder of the year as a result of the Andrew Mark and Wilson’s acquisition.

We have a strong balance sheet, solid availability, and a supportive bank group. We are comfortable with our inventory position, which reflects a 5% increase over the prior year after excluding the acquired retail and Andrew Mark inventories.

Lastly, with respect to our full year revised guidance, we are expecting to achieve approximately $715 million in net sales, down from our prior guidance of $730 million. Our revised sales guidance equates to a 37.8% increase over the prior year. [inaudible] forecasted range between $40.5 million and $43.5 million, or an increase of 7% to 15% from the prior year. This is down from our prior guidance of $54 million to $65.5 million.

We are currently forecasting net income per diluted share of $0.95 to $1.05, down from our prior guidance of $1.35 to $1.40 for the current fiscal year ending January 31, 2009. Our reduced guidance is attributable primarily to weakness in the consumer environment, a drop in consumer demand, and increased promotional activity in both the luxury and outlet business will lead to lower sales and margin than we originally anticipated. In addition, [inaudible] activity at retail have caused a [inaudible] in [reorder visits] across some of our divisions.

A reconciliation of EBITDA to our GAAP net income is included in our press release, which is posted on our website.

I will now turn the call back over to Morris for some closing comments.

Morris Goldfarb

Thank you, Neal. I know we all can appreciate that in some ways, these are unprecedented times with a great deal of uncertainty. However, we believe that [lasting] organizational improvement can result from a strong response to market challenges. We are a proactive and forward-thinking organization with a great deal of talent and opportunity. We expect that our high level of diversification will help protect our business and provide for growth opportunities regardless of the character of the market in general.

It is important to recognize that this kind of market environment can prompt significant changes in the competitive landscape. We believe that there will be consolidation by retailers, competitors, and suppliers. We believe that we will ultimately benefit from this consolidation in the form of increased market share and a wide availability of business opportunities.

This is the time when strong companies distinguish themselves. We are one of those and we intend to demonstrate it.

Thank you for being with us today and we are now open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll hear first from Eric Beder with Breen Murray.

Eric Beder - Brean Murray, Carret & Co.

Good afternoon. Could you talk a little bit about where we are with the other big rollouts for 2009, the Calvin Klein active wear and the Jessica Simpson rollout?

Morris Goldfarb

The sportswear collection at Calvin Klein is being received very, very well. As most of you know, this was in the hands of [Kellwood] last year and what we have done is we believe we have corrected the design, corrected the pricing, and have a wide response from retailers. It’s actually quite good. There are retailers that have been sitting on the sidelines for several seasons that are back with us buying the line. We have approximately 200 doors that we are launching with and our bookings are ahead of plan.

The Jessica Simpson [inaudible] business is actually okay. It’s not as -- quite honestly, it’s not anticipated to be as exciting as Calvin Klein. It’s a niche business and it integrates quite well with some of our other pieces. It’s not costing us an incredible amount of business -- amount of money to be in this business and this is an example of how we are levering our labor pool and real estate, as well as our sourcing capabilities.

We will be shipping Jessica Simpson in February and it’s been pretty well-received. We think we will be happy with it. It’s not going to change the course of the world for us. It doesn’t have the same impact as Calvin Klein but we are in approximately 125 doors to start, which is more than acceptable.

Eric Beder - Brean Murray, Carret & Co.

Okay, and in terms of Wilson’s leather, how has the response been to some of the brand [inaudible] you put in and where do you expect to further penetrate that going forward?

Morris Goldfarb

Well, the problem that we have incurred with Wilson’s is number one it’s lost its identity, partly due to the fact that as we were building the outlets in the last few months, they -- unanticipated, they shut down all their mall locations. So there’s some confusion as to whether the outlets are the same as mall. We never acquired the mall locations. Our intent was to build outlets and have it as an independent retail on the G-III. The product that is currently in the Wilson’s outlet is not planned product. We have no time to manufacture and distribute product, as we finally consummated our deal in I guess late July and scrambled to get inventory in. So it is at best, it’s a patchwork job that is in the process of being corrected.

Part of the problem at Wilson’s is the consumer has known Wilson’s forever and is accustomed to walking in and finding an affordable leather jacket, a handbag, an accessory, and we have confused them for the short-term. There’s a breadth of product that is not as focused as it needs to be and we are conscious of it. We are working on it and we believe even in a tough environment that we are likely to face for next year that our Wilson’s business will improve significantly.

Eric Beder - Brean Murray, Carret & Co.

Okay. Thank you.

Operator

We’ll hear next from Jody Kane with Sidoti & Company.

Jody Kane - Sidoti & Company

Thanks. Neal, if you could just talk a little bit about the gross margin for this quarter -- about 32%. Could you just break out what that was and how you see it going forward?

Neal S. Nackman

I think that what I indicated before, Jody, is that the margin at one point in the quarter was -- at the retail segment, the retail was 43.6%, the non-license segment was 29.2%, and the license business was 31.9%. And we really expect that prospectively, we are going to continue to see lift in the gross margin from the Wilson’s business. [inaudible] on our earlier calls [that we got] 200 basis points. It’s probably down to about 150 basis points, and then the rest of the year, we’ll see the same thing that we’ve seen so far, which is a pretty steady lift in license, a good percentage of flattened license margins and an up-tick in the non-license sector.

Jody Kane - Sidoti & Company

And as you start to work through the Wilson’s business, should that gross margin go higher or is that 43% about as good as it gets?

Neal S. Nackman

I think prospectively, we will -- we certainly had planned for that to be higher this year and prospectively we expected that margin will be higher in that business segment.

Jody Kane - Sidoti & Company

All right. Can you talk a little bit about the DNA for the end of the year, where you are expecting it to be?

Neal S. Nackman

We have -- we are proposing that it will be about $7.1 million for the full year.

Jody Kane - Sidoti & Company

All right, great. And then on the balance sheet, the debt is significantly higher, the short-term debt or revolving debt is significantly higher this time than last time. Are we going to see the same decline or the same sort of level of decline as we move into the end of the year, even this quarter, to pay down some of that?

Neal S. Nackman

The debt is up from last year about $170 million against last year’s $70 million. The debt is up because of the two acquisitions and then in addition to that, our business has grown, so we will and do expect that seasonal debt, it grows really with the growth of our receivables and our inventory, and similar to what happened last year, we will have a pay-down of net debt in year-end. And that in fact that pay down this year will be greater as we move from Q3 to Q4. That will be a greater reduction in debt going into Q4 than what we saw last year, but we will reduce that debt significantly into -- by year-end.

Jody Kane - Sidoti & Company

And just finally, would you be prepared to give us sort of a range of where you expect inventory to be at the end of the year?

Neal S. Nackman

I would tell you that the inventory level will see still a slight increase to last year involving an anticipation of really an increase in business that we expect to have in Q1 of next year.

Jody Kane - Sidoti & Company

Great. Thanks.

Operator

(Operator Instructions) We’ll hear next from Jim Duffy with Thomas Weisel.

Jim Duffy - Thomas Weisel Partners

Thank you. Neal, a couple of questions for you on the balance sheet -- can you give us the receivables and the payables?

Neal S. Nackman

Sure. Accounts receivable at October 31 are about $218 million, and the accounts payable and the included expenses are about $87 million.

Jim Duffy - Thomas Weisel Partners

Okay, and then did you say inventories ex the acquisitions were up 5%?

Neal S. Nackman

That’s right, Jim.

Jim Duffy - Thomas Weisel Partners

That’s the right number? Okay. And then in terms of the revolver balance at year-end, you said you expect to pay it down from where it is now. What level should we expect to see it at.

Neal S. Nackman

We expect that to be down at least $140 million from this period in time.

Jim Duffy - Thomas Weisel Partners

Okay. And then looking at your senior leverage ratio, have you guys have conversations with the lending group to try to restructure? It looks like some of the covenants may even be antiquated relative to what your business model is now, relative to what it was maybe when you signed up for the revolver?

Neal S. Nackman

No, we haven’t had any conversations like that. The two covenants that we have really are they are somewhat consistent with really the way the company has always operated. There’s a senior debt-to-EBITDA coverage, which was similar to what we used to have, which was a [clean-up] to cash coverage, so that just limits our total debt -- that’s similar to what we have always had and we don’t anticipate any problem with that.

The second covenant is a [inaudible] ratio [with a continue to warrant] [inaudible] EBITDA as covering the interest taxes and our capital expenditures at an appropriate level and we’ve had no problem at all with that covenant either.

Jim Duffy - Thomas Weisel Partners

Okay. And then are we getting to the point in fiscal 2010 where you may be likely to break out Calvin Klein as a percent of your overall business?

Neal S. Nackman

We’re not there yet. It’s something that we will probably evaluate when we get to our year-end reporting with our 10-K, but we’re not there at this point.

Jim Duffy - Thomas Weisel Partners

And then with regard to license agreements, given some of the pressure that we are seeing from the economic environment, are there a number of license agreements that aren’t hitting the minimums?

Morris Goldfarb

Who knows? Quite honestly, all our minimums are more than covered. We are quite comfortable with our businesses. The troubled pieces of our business, I think we’ve described earlier the Andrew Mark business, as well as the Wilson business. Other than that, we are pretty much operating on all burners in a very, very tough environment.

Jim Duffy - Thomas Weisel Partners

Okay, and then final question, what are the channels that you will use, likely use for the liquidation of inventory in the fourth quarter?

Morris Goldfarb

When it comes to our licensed product, there are strict guidelines as to how we can move that inventory and it’s your usual categories -- it’s [inaudible], it’s a little bit of [Rock Star], depending on the brand. Nothing has changed. What’s changing a little bit is our own outlet stores.

Jim Duffy - Thomas Weisel Partners

Okay. Thank you and good luck.

Operator

We’ll hear next from Mimi Bartel with Telsey Advisory Group.

Mimi Bartel - Telsey Advisory Group

Thank you. Could you just talk a little bit -- is the [coat] business still 70% to 75% of the business, and is the goal still to reset 50-50?

Morris Goldfarb

Our coat business is approximately 70% of our overall business. The coat business is ending up as a strong piece of our business, but depending on where the market really takes us, we have an opportunity to build the Calvin Klein sportswear business into a very, very large business and that all by itself can take down the percentage of business we do relative to the whole. Our dress businesses are doing exceptionally well, so that also is bringing down the percentage but our outerwear business is on growth mode. I don’t believe we’d give up any volume or as stated, our brands are all doing well, our private label is doing well in the coat area and it’s still a nice growth area. But the faster growing pieces of our business will be sportswear, dresses, so it’s just a healthier business than it’s ever been.

Mimi Bartel - Telsey Advisory Group

Okay, great and then --

Morris Goldfarb

As far as seasonality is concerned, we’re very, very satisfied as to the progress we are making.

Mimi Bartel - Telsey Advisory Group

Okay, great. And just on the Wilson’s business, obviously everybody is sort of struggling from a traffic perspective and we are starting to hear about pushing back on realtors, mall developers. Have you guys had an opportunity to sit down and kind of talk about rent expense or think about that, just in terms of the outlook there?

Morris Goldfarb

All of our locations are outlet locations. They are not traditional regional malls and our real estate department is aggressive in trying to renegotiate situations and better the terms that we currently have. As leases end, our terms become a little bit better.

Mimi Bartel - Telsey Advisory Group

Okay, great. Thank you.

Operator

We’ll take a follow-up question from Eric Beder with Brean Murray.

Eric Beder - Brean Murray, Carret & Co.

Just a quick one -- could you talk a little bit about the changes that we are going to see in Andrew Mark in ’09 and how that’s going to affect the business?

Morris Goldfarb

When we acquired Andrew Mark, it was very clear to us that from a design point of view, a price point of view, and an organizational point of view, they were on the wrong path. So what we did is we -- I guess we altered the organization to a major expense and what we are in the process of doing was rebuilding the collection. It’s impossible to go back to accounts that had written the collection on a go forward basis and tell them guess what, we were wrong. We want to readjust it and we want you to rewrite orders in different fashion. So the season was really cooked. We did the best we could do to adjust the factories that the product was being produced in. We altered some of the fit that we felt was inappropriate but the basic fashion was what we inherited.

So we’ve been aggressive in trying to reformat the business. The price points at Mark’s New York are changing. The business at Andrew Mark is [marquee] for us. It’s going to stay consistent with the original DNA, which was their prior to the ownership that we bought it from. We are trying to keep it pure. We are in the middle of negotiations for another licensing agreement, so hopefully within the next 30 to 60 days, we will announce another license. We are changing our sourcing structure. We believe there are some benefits in margin that are quite significant, and we hopefully will either launch Andrew Mark outlet store in a new location or convert one of the Wilson’s locations into an Andrew Mark store to test the concept.

So we are still very aggressive with that brand. We believe there’s a future for GIII owning a brand that is built with good integrity and is a long-term benefit for it. This was a difficult year for the luxury tier. The stores that are most important for Andrew Mark are Neiman Marcus, Saks, and Bloomingdales. And if there is a sector that we all know is the most difficult, that’s it.

So all said, I think that we proved out that we can even address that sector with good product, with good price points and make it work. We do it with Cole Haan and clearly we believe that we can do it with Andrew Mark.

Eric Beder - Brean Murray, Carret & Co.

Okay, great. Thank you.

Operator

We’ll take another follow-up from Jody Kane with Sidoti & Company.

Jody Kane - Sidoti & Company

Thanks. Morris, did you say that you are incurring the expense, design rational expense for some of the Calvin Klein business, the Jessica Simpson business, and the Ellen Tracy business, and you will only see revenues start to flow through it next year?

Morris Goldfarb

Yes, the -- since our signing of Andrew Mark -- I’m sorry, not Andrew Mark, the Calvin Klein sportswear business, we have been very busy traveling, designing, hiring, allocating space, and recruiting space and there’s a possibility that we get a little bit of product in for fourth quarter. That’s doubtful. The benefits should start to come in first quarter but we are incurring the cost in fiscal 2009 of building the collection and all the associated expenses with that. And with Jessica Simpson very much the same way, to a lesser economic strain and Ellen Tracy is something that we’ve been keeping all year, so that wouldn’t appear to be [at any great] expense to that at all.

Jody Kane - Sidoti & Company

And just finally, did you say you were going to pay down debt by $140 million or it’s just going to be $140 million?

Neal S. Nackman

We are going to pay it down by $140 million.

Jody Kane - Sidoti & Company

Okay, so it should end the year --

[Multiple Speakers]

Neal S. Nackman

Jody, I’m sorry, our current debt is well below 140.

Jody Kane - Sidoti & Company

Okay.

Neal S. Nackman

So you had the quarter end was 170 and our current debt is south of 120, so we shouldn’t have difficulty in getting to the [inaudible].

Unidentified Participant

$140 million pay-down but --

Neal S. Nackman

-- million dollar pay-down from the 170.

Jody Kane - Sidoti & Company

Perfect. Thank you very much.

Operator

We’ll hear next from Todd Slater with Lazard Capital.

Todd Slater - Lazard Capital Markets

Thanks very much. Morris, recognizing that none of us have ever seen this type of environment before, I’m just wondering what you anticipate will be your biggest challenges for 2009?

Morris Goldfarb

You know, that’s a real hard one to anticipate. I could tell you that I’m happy with where we are. When you go to battle in this environment and you’ve got the best soldiers in the industry, I think you win. I can’t forecast what the economy will -- I can’t forecast what consumer buying habits will change to. What I can tell you that we will be there and we will be there in force. We described all the reasons for it. We have the financial viability to sustain tough business. We have great brands and these great brands are proving themselves out in this environment. The misses that we really have are almost predictable. They are newly acquired properties that we did not have the time to turn around and bring into the G-III fold. The Andrew Mark piece was a hurt, or will be hurt for the year, as well as the Wilson’s, and both for different reasons. But there’s not been an acquisition that we have made that has not turned good, and I feel comfortable that both of these acquisitions are great for the future of our company -- again, for different reasons. So we are positioned with retail outlets, we are positioned with great brands, we’re positioned as the go-to resource for private label development. We seem to be a wonderful partner for the retailer for all of these reasons. There’s going to be a reduction in factories overseas. The important ones are aligning themselves with us. They also see a weakness in our world and they want to be ensured that a company like ourselves support them in the form that they need to be supported.

So we’ve made more trips than you can imagine to the Orient in the last three months to ensure the fact that our vendor base stays at our side and does what is required for the long-term benefit of business in the apparel sector. So I can’t really tell you that what we are in control of concerns me. We’ve got it. What I can’t control, I guess I don’t know and therefore it doesn’t concern me. So we are reducing our headcount. We are conscious of what the world is like today. We are all great operators. The leadership of this company doesn’t invest in the company -- they invest financially. They invest their blood and they all come through acquisitions, they all come from I guess self-taught, self-learned operations and they have all seen trouble times. They know what it’s like to make payroll, they know what it’s like to cut back and they know what it’s like to survive. And we have [inaudible] of that -- I’ve gone through difficult times in my career. This is my 37th anniversary in this company and I’ve gone through many different cycles. You’re betting on somebody that knows it, somebody that understands it and yet I can’t predict what the environment is going to be.

Todd Slater - Lazard Capital Markets

Okay, fair enough and just speaking of Asia, since you mentioned having been there recently several times --

Morris Goldfarb

Not me -- every leader in our company has been there to make sure that their sector of business is protected.

Todd Slater - Lazard Capital Markets

Sure. Okay, so is there an opportunity for a lower sourcing cost, given what is going on with factories and raw material costs and so on and so forth?

Morris Goldfarb

There is. We are taking advantage of some of those situations, so it’s a wonderful thing that there is -- there’s price advantage but it’s hard to take advantage of it when you are trying to insulate yourself from severe markdowns in inventory. There are several areas of our business that have a competence level and we as a group fear that they should buy early and take advantage of it. And there’s another sector that’s more reactionary and therefore I guess time will tell if there’s a benefit.

Todd Slater - Lazard Capital Markets

Okay, great. Fair enough and all the best.

Morris Goldfarb

Thank you.

Operator

And we have no further questions from the phone audience at this time. I will turn the conference back over to our speakers for any additional or closing remarks.

Morris Goldfarb

Thank you for being with us this afternoon and we look forward to a different year. We will talk to you at the end of next quarter.

Operator

That does conclude today’s conference call. We’d like to thank you all for your participation. Have a great day.

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Source: G-III Apparel Group F3Q09 (Qtr End 10/31/08) Earnings Call Transcript
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