G-III Apparel Group Ltd. (GIII) is a diversified distributor of apparel and accessories in the US. The company’s range includes suits, jackets, dresses, coats, sportswear, performance wear, luggage, handbags, leather goods, footwear, eyewear, and watches. Some of its brands include Andrew Marc, Jessica Howard, Eliza J, and Black Rivet. It also holds licenses to produce apparel under Calvin Klein, Guess?, Tommy Hilfiger, Levis, Dockers, Jessica Simpson, and Sean John among others. The company also holds sports licenses with the NFL, NBA, NHL, MLB, and others.
GIII was founded in New York in 1956 by Aaron Goldfarb, and his son Morris Goldfarb is now the current CEO. The company went public in 1989. Throughout the last 10 years in particular, GIII has undergone aggressive expansion including expanding its licenses and acquiring the other businesses. The company has proven itself capable of buying businesses at a reasonable price and integrating new businesses into its existing. This skillset will serve them well as they continue to seek acquisitions to complement its organic growth. The company has zero debt of any kind, and current assets of $379M including cash of $10M. Its strong balance sheet puts the company in a great position to take advantage of any acquisition opportunity that they uncover.
The big disappointment from the Quality Rating table is GIII’s Free Cash Flows. A Value Investor is unlikely to consider investing in a company that doesn’t generate good Free Cash Flows. Looking at the financials closer, in its fiscal year ending Jan 31st 2011, GIII reported a Free Cash Flow of negative $-48M, against a reported net income of $57M. The biggest changes were the change in inventory which we’ll give them the benefit of the doubt on – we will interpret that as positive in that they are growing, and the inventories they need to purchase to meet demand keeps rising. The other biggest change was the accounts receivable which has gone from negative $4M in FY 2010 to negative $65M in FY 2011. This increase in accounts receivable is huge – perhaps prior to FY 2011 the company did not offer its products on credit, and the change in strategy has only just started in FY 2011. Accounts payable is also increasing, so perhaps it is just a sign of the times for the business – more things are sold and bought on credit. But regardless, GIII’s lack of Free Cash Flow is a serious concern. To the end of July 2011, GIII’s Free Cash Flow is even worse, raising a big red flag on the consideration of GIII as an investment. Without generating cash the company cannot grow, let alone buy-back shares, or pay dividends. By having a negative Free Cash Flow, the company is draining its lifeblood.
The above graph indicates that for an investor interested in a position in GIII, now looks to be a reasonable opportunity from a purely Margin of Safety point of view.
Drivers of Future Growth
Growth is expected in part through expansion of its existing product range. Recently GIII expanded its license with Calvin Klein to include handbags and other accessories, and intends to continue to build on its extensive licenses. In 2008 the company acquired Wilsons Leather and in doing so branched into retail for the first time. To further expand on its retail business the company is moving into owning and operating footwear and accessory retail outlet stores and is planning to open a number of these stores under the name “Vince Camuto”. The roll out of these stores will begin in early 2012 and 10 stores are expected to open in 2012.
97% of sales of G-III are made in the US. The company is now marketing its products in Canada and Europe, and huge scope for growth exists through geographic expansion of sales.
The business is divided into 3 segments – wholesale licensed apparel which makes up around 68% of revenue, wholesale non-licensed apparel and retail operations. Its retail operations are still small, but expansion is underway and GIII will continue to focus on growth in this arena.
GIII is heavily exposed to the cost of raw materials required to make their apparel and accessories, but being a large, well-diversified player with infrastructure around the world (GIII utilizes independent manufactures in China, Vietnam, India, Indonesia, Thailand, Sri Lanka, Taiwan, Central and South America, Pakistan, Bangladesh and the US) the company is in a better position than most of its competitors to withstand cost pressures.
GIII has performed reasonably well and does appear to have a bright future, but investors may wish to sit on the sidelines and monitor the company for the time being while the company gets its accounts receivables, and ultimately Free Cash Flows in order. An investor will want to see a higher Margin of Safety than that currently on offer also.