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

F2Q09 Earnings Call

September 9, 2008 4:30 pm ET

Executives

Morris Goldfarb - Chairman, Chief Executive Officer

Neal Nackman - Chief Financial Officer, Treasurer

Wayne Miller - Chief Operating Officer, Secretary

Analysts

Analyst for Eric Beder - Brean Murray

Jody Kane - Sidoti & Company

Susan Sansbury - Miller Tabak

Todd Slater - Lazard Capital

Jim Duffy - Thomas Weisel Partner

Operator

Welcome to the G-III Apparel Group second quarter earnings 2009 conference. (Operator Instructions) I’d like to turn the conference over to Neal Nackman, Chief Financial Officer of G-III Apparel Group.

Neal Nackman

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 tastes, customer concentration, seasonality, customer acceptance of new products, weakness in the retail sector, risks related to the operation of a retail chain, the impact of competitive products and pricing, dependence upon existing management, as well as business disruption from acquisitions and general economic conditions, 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

With me today are Wayne Miller, our Chief Operating Officer and Neal Nackman our Chief Financial Officer. I will start with some of the financial highlights from the second quarter with Neal Nackman providing more details in a few minutes.

Net sales for the quarter were $113.5 million compared to $84 million in last year’s comparable quarter. The increase in net sales was due to the strength of our dress business and sales by our newly acquired Andrew Marc and Wilsons Outlet division. Our net loss for the quarter was $3.9 million compared to the year ago loss of $884,000.

This increase was primarily the result of the seasonal losses of the Andrew Marc business acquired in 2008 and the Wilsons Outlet Retail business acquired in July 2008. The loss was inline with our expectations. We’re excited about the strategic direction of our business. With the acquisition of Wilsons 116 outlet stores, we’ve realized one of our strategic milestones. Besides now having over $100 million outlet division Wilsons will be our foundation for future retail expansion.

The CEO that lead this change during it’s most successful years Joel Waller is now back to the home of Wilsons outlet stores. This acquisition fits directly into our core competencies and it will enable us to more quickly move forward with Andrew Marc retail size.

The purchase of Andrew Marc completes another of our long stated goals to own a brand, a multi-period national advertising campaign can be seen in both WGQ and the New York Times Style magazine. Our e-commerce website went live August 20, the time to take full advantage of our national campaign.

Our first license agreement was signed in June 2008 with the Camuto Group for Andrew Marc and Marc New York women’s footwear and this will launch in the fall of 2009. We believe that both Wilsons and Andrew Marc leverage our cost trends and better position us as a vertically integrated business providing us with new avenues for growth.

In addition to these acquisitions, we recently signed the women’s better sportswear license with Calvin Klein; this really maybe the largest opportunity yet with Calvin Klein. The strategic partnership we’ve developed with Calvin Klein and Phillips-Van Heusen is something that we’re really proud of. Calvin Klein is quite simply one of the world’s greatest brands. We currently produce outerwear for women’s and for men’s, dresses, women suits and women’s performance wear under the Calvin Klein brand.

We have proven that we can enter into new categories of products efficiently and we are confident we can execute in this same manner in the sportswear category. We’ve been able to utilize existing showroom space and again we were able to retain the best talent of the existing sportswear team to help in our transition and to startup this new category. A combination of the strength of the Calvin brand as well as designing and sourcing products and pricing it fairly for the consumer will be the right formula for success.

Lastly on the new initiatives for the current year, we are really excited about our newest tradition, Jessica Simpson dresses, license from the Camuto Group which will be in store for strength. The Camuto Group has done an incredible job in building the Jessica brand with huge successes in shoes, handbags and fragrance. The early response from our retail partners to our first dress line has been very positive and we believe we will be in a position to select the best stores to rapidly grow this business.

With respect to our core outerwear business, we’re excited about the up coming season. While we expect the challenging retail environment to continue, we received significant orders from all tiers of retail. We’re about 90% booked through our years plan and we’re positioned to achieve our years stated goal.

The consumer did buy in our products. We have the best brands including Calvin Klein, Andrew Marc, Guess, Kenneth Cole, Cole Haan and Sean John. Our concentrated focus by brand on appropriate design has always made us a leader of providing fashion. We execute at a high level in design, sourcing, manufacturing, quality control and in distribution. Our products were received early this year to enable us to meet the shipping requirement as we enter in the peak shipping season.

Not waiting to test the restrictions in China during the Olympics, we brought in our inventory at an accelerated pace. We planned the business at a detailed level with our major customers and while we’ve been very careful with our inventory plan. We think we have the right product, at the right quantities to create a successful season and to serve our customers as well.

If I look back at the last couple of years, we’ve done a great job and met or exceeded our plan despite some really challenging times. I’m really pleased to be in a position to reiterate our guidance for the year despite again what is a difficult consumer environment. This shows that we can plan effectively, offer the consumer great product, execute well for our customers and deliver good results to our shareholders.

I’ll now turn the call over to Neal Nackman, our Chief Financial Officer to review the quarter and provide some detail on our guidance.

Neal Nackman

First, for the quarterly review, net sales for the quarter were $113.5 million up 35% compared to $83.9 million last year. Net sales of licensed apparel in the quarter increased to $67.8 million from $52.1 million and net sales of non-licensed apparel in the quarter increased to $38 million from $32 million in the prior year. Net sales for our new retail segment were approximately $7 million from the Wilsons Outlet Stores which we acquired in July 8, 2008.

Similar to our first quarter, net sales of our expanded non-outerwear products offerings continue to show good increases in both the licenses and non-license segments. The increase in our net sales of licensed apparel in the quarter was primarily attributable to sales of our Calvin Klein dresses. In addition, we started shipping Ellen Tracy dresses and Dockers outerwear in this quarter and continue to ship Calvin Klein performance product, which started shipping in the fourth quarter of last year.

The increase in net sales of non-licensed apparel was primarily attributable to increased sales from our Jessica Howard dress division and our Andrew Marc division. The Jessica Howard acquisition was completed on May 24, 2007 and we only included sales from that date in last year’s comparable quarter. The acquisition of Andrew Marc was completed in February 2008 and accordingly there were no sales of Andrew Marc’s product in the prior year.

Our net loss for the quarter was $3.9 million or $0.23 per share compared to a net loss of $884,000 or $0.05 per share in the same period last year. The increased loss was primarily attributable to the seasonal loss was associated with the senior acquisition, Andrew Marc and the Wilsons outlet business.

On gross margin percentage decreased to 25.5% in the quarter compared to 26.1% last year. Gross margin percentages were down in both our licensed and non-licensed segments, with our licensed apparels percentage decreasing to 25.5% and 27.3% in last year’s quarter and our non-licensed apparel percentage decreasing to 22.2% in the quarter from 24.4% in the previous year’s period.

Gross margin in our retail segment was 42.9%. Gross margins in the licensed and non-licensed segments were negatively impacted by increased close out volume, softness in the women’s suit business and delay in shipping certain private label programs.

SG&A expenses increased $10.4 million to $32.5 million for the quarter from $22.1 million in the prior year second quarter. This quarter’s expense increases are primarily attributable through SG&A expenses associated with the companies we acquire. Again we did not own the Wilsons outlet business or Andrew Marc last year and owned Jessica Howard for less than a full quarter last year.

Turning to the six month period, for the first six months of fiscal 2009 we reported net sales of $189 million of 59% compared to $119 million last year. Net sales of licensed apparel increased to $109 million from $82 million and net sales of non-licensed apparel increased to $72 million from $37 million in the prior year’s period. Net sales in our retail segment were approximately $7.6 million for the six month period this year.

Increased sales in the first half were more favorably impacted by an increase in sales of Calvin Klein licensed product and sales from our Jessica Howard division. The Jessica Howard businesses were only own for a little more than two months in last year’s first half.

Our net loss of $10.7 million or $0.65 per share in the first six months of fiscal 2009 compares to a net loss of $7.3 million or $0.46 per share in last year’s comparable period. The increase loss is the result of the loss in the second quarter.

Gross margin percentages for the year-to-date six month period was the same as 24.6% and were impacted by the same factors previously mentioned for the quarter. SG&A expenses for the six months increased $21.2 million to $59.7 million from $38.5 million in the prior year. This increase is attributable primarily due to the experiences associated with the key business we acquired since May 2007.

We expect that our SG&A will continue to increase during the remainder of the year as a result of our Andrew Marc and Wilsons acquisition and too a much lesser extent the continued expansion of our business. Our balance sheet continues to be a source of strength of the company with a good capital base and a sound and supportive bank group.

Our inventory levels at July 31 were up approximately 59% which was a higher increase than normal and higher than our forecasted 35% in second half sales growth. The large increase is a result of (Inaudible) inline with projected higher August and September wholesales shipping in the acquisition of the retail inventory.

Lastly, with respect to our guidance; we’re expecting to achieve approximately $730 million in net sales volume, which equates to a 41% increase over the prior year, EBITDA’s forecasted range between $54 million to $55.5 million or an increase of 43% to 47% from the prior year.

We’re currently forecasting net income per diluted share of $1.35 to $1.40 or an increase of 29% to 33% for the current fiscal year ending February 31, 2009. 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 the Morris.

Morris Goldfarb

Thank you Neal and thank you to everyone on the call for your continuing interest in G-III. I believe we’re demonstrating to you that G-III is a special company. I’m very proud of the way our organization has responded to challenges we’ve faced and taken advantages of the opportunities to utilize future growth. We look forward to another strong year.

We’re now ready to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Eric Beder with Brean Murray.

Analyst for Eric Beder - Brean Murray

I have some questions; first of all for Wilsons Leather, how is the integration of that acquisition going?

Morris Goldfarb

The integration is going quite well. This is a different type of integration that we’re accustomed to. We recognized early prior to the acquisition that this is a retail venture requiring retail talent, retail distribution and retail systems and therefore there has been a greater retention of the systems personal and space as it relates to Wilsons. All said the integration and transition is going quite well.

Analyst for Eric Beder - Brean Murray

Another question more in the line of Jessica Simpson; how is the response for the dress line been for the Jessica Simpson dress line?

Morris Goldfarb

We pretty viewed the collection at MAGIC in Las Vegas 10 days ago and the response was excellent at the specialty store level. We received as many as 40 individual orders from the specialty stores and this week for the first time we presented to the department store groups and the reception is far greater than I had anticipated.

We had a wonderful meeting with the Dillard's group and there is a commitment to far more Dillard's than I intent to ship. I believe that our early shipping shift should be very well calculated. There is a risk in shipping a launch in great debt, but the good news is as the excitement is in the air Dillard’s, Lord and Taylor and Macy's had dealt and that’s all happened in the last 48 hours.

Analyst for Eric Beder - Brean Murray

In terms of Calvin Klein, how is the better women line improving?

Morris Goldfarb

Again the first viewing of the better sportswear line is no more than 48 hours and the early previews and the commitment by door count is far greater than I had originally anticipated, so that is the good news. Our challenge is to get the product produced in a timely fashion in quality form which is really our signature for business and we are honest, we are excited, we’ve got an invigorated team of people that came from Kellwood that are so energize, they are just amazing, it’s a beautiful site to see.

Analyst for Eric Beder - Brean Murray

Are you still looking for more acquisitions?

Morris Goldfarb

It is always our intention to expand our offerings, yet today I could comfortably tell you that this company has assets that could double the size of the company in several years as they mature. So, there is no need to acquire companies to grow, yet it’s just the profile of what we might be looking for, our balance sheet reports as to the luxury of the acquiring companies.

Analyst for Eric Beder - Brean Murray

Those of the Calvin Kline active wear, do you have any plans to expand beyond the department store channel?

Morris Goldfarb

The active wear component?

Analyst for Eric Beder - Brean Murray

Yes.

Morris Goldfarb

Yes, we do. We have a specialty store business, we have some tests in the sporting goods sector and we have several other initiatives that are a little pre-mature for me to discuss, but the short answer is yes, the product will be distributed broader than the department stores.

Analyst for Eric Beder - Brean Murray

Okay. In terms of inflation at the production level, are you seeing any and if you are, are you raising your prices?

Morris Goldfarb

We raise our prices as they need to be raised. We are in a competitive environment and we have a challenged consumer and today is not the day that we have the ability or the liberty to arbitrarily raise -- it may not be arbitrarily, it maybe out of need, but today is not the day that we can raise our prices. As this year it is not a problem, most of our commitments were made early. We have some advantageous pricing. We are in a competitive industry and fortunately for us we lead the industry and we don’t have a great deal of sensitivity to price fluctuations.

Analyst for Eric Beder - Brean Murray

Okay, one last question in terms of the spring dress season, how is Calvin Kline doing, is it still going strong?

Morris Goldfarb

Calvin Klein’s spring dress business is I believe out performing our department dramatically. I think I feel comfortable in telling you that it might be leading the departments, the classification dress department in the department stores. Again we will easily be their internal plan for the Calvin Klein dress business.

Operator

Our next question comes from Jody Kane with Sidoti & Company.

Jody Kane - Sidoti & Company

Can you talk a little bit about the gross margin for the new Calvin Klein business just based on what’s happened to this better women’s sportswear over the last couple of years and where it’s going? Where the gross margin is compared to your current margins or where it can go?

Neal Nackman

The gross margins, that’s kind of wildcard quite honestly. I can tell you where they can go. What we are doing is the background, how the acquisition occurred and the significance of the acquisition to us. It is not an acquisition by the way, it’s a licensing agreement.

The licensing agreement is not one that was transferred in it’s entirety from Calvin to G-III. It’s one that was negotiated in a modified form with modified guarantees. There is not a driver in the contract that forces us to do $100,000 million in volume and minimums are very achievable and therefore our strategic calculations on how to manage the business are different that what has enforced to do the manager business.

We are going out at prices that are less than Calvin has gone out and that could be as much as 20% less. Our buying is better, our evaluation of what pricing needs to be for the consumer is a little different what might have been evaluated and decided on at Calvin and our margins should be very much inline with what we are doing in dresses, boots and coats.

We’re not looking at this as a different business. The beauty of our business is we generally simplify it, we don’t overcomplicate our businesses. We provide great design, great product, we delivered it on time, we understand the consumer and the retail needs and that formula has helped us prosper for a long time and we believe that our operating profit will be positive to the larger size.

Jody Kane - Sidoti & Company

Are you bringing in any new design to the team or is it going to be primarily the same?

Morris Goldfarb

We’ve got great talent on board. The G-III talent as it relates to Calvin Klein, Sammy Aaron leads in charge, he’s done a wonderful job over the years and he has some great merchants that can help the acquired team from Kellwood in building the right product. We’ve just signed the agreement, but we’ve been negotiating through this for months and in the process through the G-III form we’ve been developing product.

So you might have seen that we just signed this agreement, but there is a complete collection that is showcased in our showrooms today, the showroom is complete, the samples are impeccable and the reception towards the samples, the collection and what we have in mind for the future has been excellent from the retailer.

Jody Kane - Sidoti & Company

One last question just on the Wilsons Store side; what products are going to be sold through? Is it going to be only the outerwear products or are you going to be able to sell some other products through this as well?

Morris Goldfarb

Well, the Wilsons stores historically have traded in handbags, accessories, travel items, leather cleaning products and all those components added as much as 50% of their overall business. Of course we feel that G-III clients supplying good product will be a combination of many things. It will be a combination of a private level opportunistic situation that exists both overseas and in our warehouse and some regular goods that are a combination of proprietary brands and licensed sanctioned brands.

Operator

Your next question comes from Susan Sansbury with Miller Tabak.

Susan Sansbury - Miller Tabak

On the inventories, can you share with us how much of the 59% increase reflects the timing shift, are you bringing in the goods early and how much reflects the acquisitions?

Morris Goldfarb

We can tell you clearly on the acquisition side of it. It is very clear what we have on the Wilsons side; we acquired a great deal of inventory in the acquisition and that number was approximately $20 million, so that accommodates of course 20% of our inventories, that’s a clear answer on Wilsons and as it relates to Andrew Marc and some of the new businesses totally …

Neal Nackman

The Andrew’s, in term of the percentage increase if you look at the total increase of about 50%, about 20% of that increase was attributable to the Wilsons business, the Andrew Marc business is probably about 17% of that business, but as I mentioned in my remarks if you look at the wholesale increase, which is about 40% and that’s pretty consistent with our sales expectations for the first two months of the third quarter. So, even though we did bring in goods early as a result of concerns over the time, the Olympics has actually has narrowed up with our anticipated sales growth as well.

Susan Sansbury - Miller Tabak

Okay, that’s what I was fishing for, thank you. Can you discuss the extent of the losses from the acquisitions or the amount of the dilutions in the acquisition in the second quarter or year-to-date?

Neal Nackman

Let me tell you, what we’ve said publicly about this before; the Wilsons acquisition we expect it to be accretive for the year. I think as we did the acquisition we implied that that was going to be a positive source to the tune of about a dime. We’ve mentioned before that the Andrew Marc business was also going to be accretive less so than that and clearly those two businesses did go as a significant portion of the losses in and of the second quarter and that’s because there was an off seasons for both of those businesses.

Susan Sansbury - Miller Tabak

Okay and then just finally going back to the Calvin Klein better women’s sportswear business, are you going to be in the same number of doors as Kellwood is or are you starting out at a lower base?

Morris Goldfarb

Uniquely, we will be in I believe many more doors than Kellwood. As there will be some contraction of door count in some of the accounts and there are opportunities where Kellwood clearly didn’t do any business in some of the accounts that we have significant commitments for today. So, on a door account I will tell you we will have an increased situation.

Susan Sansbury - Miller Tabak

Can you identify, who is the new account or accounts are?

Morris Goldfarb

I can tell you that clearly Dillard's is very much behind it; they have not had Calvin Klein’s sportswear for several seasons. I just left the meeting where it’s a very large commitment in door accounts from them. Bon-Ton will be carrying the products, they did not carry it in the past and the Macy’s doors some of them will be aggressive; some of them will wait and see how we perform. We believe our pricing will make a difference very, very quickly.

Susan Sansbury - Miller Tabak

Will that be in both Macy’s east and west?

Morris Goldfarb

I think so.

Operator

Your next question comes from Todd Slater with Lazard Capital.

Todd Slater - Lazard Capital

I’ll start with just the revenue assumption for the year; how much CK sportswear is assumed in that guidance?

Morris Goldfarb

Very little.

Todd Slater - Lazard Capital

To my thinking it’s got to be very little, is that because you’re being conservative or you’re really planning on shipping very, very little in the back half?

Morris Goldfarb

We just started to show the product. We have a team of people that have their visas and passports ready and for our correspondent to put it into a plan or even put it into a though process they need to come back and tell me how much products we can deliver in January. Clearly there’s no opportunity for October, November, December. A piece of it is in the tale end of our year.

Todd Slater - Lazard Capital

Okay great, understood. Okay, if my advanced math skills are working for me, the guidance for the year, it buys $2 a share I think in the second half; can you give us a sense of how this should fall between third and fourth quarters?

Neal Nackman

Hey Todd, we did not specifically come out with the third quarter, because we are comfortable with the street expectations for the third quarter and obviously that we’re comfortable for the fourth quarter as well.

Todd Slater - Lazard Capital

Okay so I’m just pulling that up now, that’s what at $1 dollars?

Neal Nackman

The third quarter street expectation was $353 million in sales and $1.74 for earnings per share.

Todd Slater - Lazard Capital

Okay, perfect and then gross margins obviously were negatively impacted by the free outage you mentioned; do your numbers have to assume the gross margins will cover and are up nicely.

Neal Nackman

I don’t think we’ll have the same kind of pressure we had in the first half. I don’t if I want to get specific to the specific, but obviously we are going to be impacted positively by the retail business, particularly when you exclude the retail business if you look at our margins for the full-year, we expect those to be up over the previous year.

Todd Slater - Lazard Capital

But what is it that gives you confidence that the same issues won’t affect you in the second half, or some of it anyway i.e., suites and increased close out or what have you?

Morris Goldfarb

Generally our first and second quarters are very profound that we liquidate products and we’re in our peak shipping cycle with premium margins at this point. So, I would say the back end of the year should be there.

Todd Slater - Lazard Capital

Okay, so any residual if the environment is materially weaker than we expect will really throw into lets say first half of ’09 in your close up period.

Morris Goldfarb

Nothing that’s not necessarily right. I mean there is a concept called Give Backs and Markdowns and Allowances that really falls into play and we never know the severity of that and its always a risk to our business. Historically, we’ve managed it incredibly will, but again we just never know.

What nice about our business is a fairly low balance, it’s not a department store, there is several tiers of distribution that we shipped that don’t require Give Backs. So, we’re comfortable, I think we’ve stated that and our bookings are 90% as stated planned, which at this time is quite good in this environment, I would say its excellent, but there is not a lot out there that poses more challenges than we believe we can move surpass.

Todd Slater - Lazard Capital

Okay and your markdown reserve accrual that you’re assuming in the back half, is that larger than it was last year, the same either in dollars or in percent terms; I mean how can you give us comfort if that’s a nicer sort of conservative reserve?

Neal Nackman

I think that as Morris mentioned 90% of our bookings are in, we’ve looked at the gross margins by division. We do try to anticipate where we had similar markdown rate to where we’ve been before, we don’t really accelerate that, but we also are influenced by the current state of affairs and the current bookings. So, as we said we’ve got a lot of the yearbook and we feel comfortable with our guidance.

Todd Slater - Lazard Capital

Could you guys give us a little more color on the private label delay issue, how sizable was this, how confident are you that the goods will ship and is that a third quarter shipping?

Neal Nackman

It was not that large, again you’re in a quarter that’s not that large for the year, but we did have some softness, it was not that large and those orders will ship, in fact might have shipped already in the month of August.

Todd Slater - Lazard Capital

That was just sort of the retailer saying, “well, guys give me a couple more weeks, ship that in July” or something like that?

Neal Nackman

There were several different programs with several different reasons.

Morris Goldfarb

One of which is shipping a little production into India out of China. So, we incurred some delays and we’ve gotten over it and it’s not significant.

Todd Slater - Lazard Capital

And then lastly, where did you now see the co-penetration by the end of this year. Sort of where has it been in the last 12 months and how is it evolving, how was your diversification revolving?

Morris Goldfarb

Well it was out in the stores last week and shops fairly intensely and actually I’ve got to tell you our penetration is great. We’re in every store with one brand, two brands, three brands, we’ve dominated this sector, our sell through’s have been very good. We’ve gotten great reorders from the department stores on Calvin Klein and Guess and we’ve gotten reorders that the clubs are reordering product. So, I will tell you that our penetration, our exposure, our performance is great. I think if I pass my subscriptions to the newspapers and turned off the TV I’d even be more aggressive.

Todd Slater - Lazard Capital

I think I misstated the question; perhaps if I rephrase it in terms of mix to your total business?

Morris Goldfarb

I think I miss answered your question; it wasn’t a bad response anyway. We still dominate that sector. I would you tell you that we’re still between 70% and 75% coat. Clearly some of the acquisition has accelerated that. Andrew Marc today is a coat business, it will no be a coat business down the road and….

Todd Slater - Lazard Capital

You mean it won’t be entirely a coat business down the road.

Morris Goldfarb

Yes exactly. So I would say within the next two years our goal would be of getting near the 50/50 range.

Operator

Your final question comes from Jim Duffy with Thomas Weisel Partner.

Jim Duffy - Thomas Weisel Partner

So, you had mentioned that your 90% booked for the outerwear season? Can you help us understand the dynamics for the remaining 10% and do you currently have the inventory for that, some pointer there will be helpful, thank you.

Morris Goldfarb

Number one, we’re not 90% booked for the outwear segment for that business, we’re in 90% booked for our internal plan of total business, so that’s number one.

We have as we stated earlier, we have a pretty good plan on obviously the inventories to take the plan and beat the plan and we have some contingency situations. Our dominance overseas can delay shipments. Our relationships with our factories can slowdown production of anticipated product and hold piece goods for a later date.

Most of our product is not specific for one season, it can be held and if you’re producing Calvin Klein you have to assume a good deal of the inventories in black and if we see a slowdown that anticipated inventory just over three orders can be held for next year. So, strategically we can play this one out really, really well.

Jim Duffy - Thomas Weisel Partner

It sounds like that 90% figure is ahead of where you were a year ago, is that fair.

Morris Goldfarb

It’s inline, it’s a much bigger business and the scary part was if you don’t achieve it in the business that is 35% to 40% larger than the year before, so on a percentage basis, the percentage is similar.

Jim Duffy - Thomas Weisel Partner

Okay and then Neal, where do you expect D&A for the year and can you give us a spilt between depreciation and amortization?

Neal Nackman

We’ve got the D&A forecast in the press release at $7 million and that is mostly amortization of acquired trademarks and down a little to the previous years.

Jim Duffy - Thomas Weisel Partner

Okay and then with regards to the retail accounting, it sounds like on the gross margins, you’re booking the occupancy expense in the SG&A, is that true?

Neal Nackman

Yes, that’s right.

Jim Duffy - Thomas Weisel Partner

And then, we’ve been in some of the Wilsons stores and it looks like you’re trying to purge through some of the other inventory, where are you in terms of repositioning the merchandizing on those stores?

Morris Goldfarb

We’re about a month away from being where we want to be. Your sense of what is going is correct and I would assume you were in the outlet stores and not at the mall stores.

Jim Duffy - Thomas Weisel Partner

Correct.

Morris Goldfarb

So your sense is right and part of the advantage was that we were able to and are able to purge through some of the inventory that was drilled on the wholesale side and so the advantage is there as we had anticipated when we made the decision to acquire.

Neal Nackman

I just want to clarify, on the occupancy, the store occupancy expenses are in SG&A.

Jim Duffy - Thomas Weisel Partner

Okay great and then with regards to the gross margins for the retail segment that you shared with us, I presume that’s weighted down by some of the efforts to purge the inventory, when you would expect it to be higher on a go-forward basis.

Neal Nackman

Yes, that’s correct.

Morris Goldfarb

Yes.

Jim Duffy - Thomas Weisel Partner

And then in terms of reporting for that segment, are you going to share comp-store sales figures with us for those stores?

Morris Goldfarb

No we are not.

Jim Duffy - Thomas Weisel Partner

Okay and then Morris you spoke in your prepared remarks about further retail expansion opportunity, can you give us a little sense about what your thinking might be there in some rough concepts that will be helpful thanks.

Morris Goldfarb

Clearly the accusation of Andrew Marc had a retail component in mind, we are consistent with that. If we had the appropriate inventory than we are at, currently we only have outerwear and that does not make a full store for us, but when we have our licensees on board and we have a breath of product, our goal is to open up several stores and the world of Andrew Marc will fold into our retail platform, the Wilson platform.

We have four stores that we recently signed leases for and they will initially continue to be Wilson stores, but we will convert them to Andrew Marc as soon as possible and we plan on taking several of the outlet stores in the appropriate areas and convert those to Andrew Marc and there is a desire to open up several down town locations to showcase what Andrew Marc should look like in retail venues.

It will be a marketing tool as well as stand alone retail and with that you’ll never know; in this retail environment opportunities will arise for retail accusations and we’ve not been strangers to that. If there is a retail opportunity that’s appropriate, we might consider that as well and we would utilize the retail systems, the retail management team that we’ve put together to oversee that sector. Let me not lead you to believe that I’ve identified one, that’s not the case.

Jim Duffy - Thomas Weisel Partner

Okay and then final question for you Morris, if you could just share with us what you see is the key success factors for the Calvin Klein sportswear and how quickly that will -- a, what the potential for that business could be and how quickly you think it could be realized?

Morris Goldfarb

The beauty of our contract with PVH is that it doesn’t need to be over night. The minimums that we have created with the kindness of PVH gives us luxury of doing it right, we don’t have to be a $100 million business tomorrow. With that said I think that we can be a $100 million business tomorrow. It’s a very, very large opportunity for us.

As I have said, the walkthroughs that we’ve had with retailers and the approximate door count that they’ve indicated to us leads us to believe that in two to three years this is a $200 million opportunity. We have a seasoned management that operates under the culture of G-III and we’ve exceeded it with the appropriate sportswear people to build the product. So I’m very, very proud of how fast this has evolved. It seems as if it’s almost kids wear.

If you came here we seem to have had a floor that we were transitioning from on closure of another sportswear collection, the urban piece that we had with Sean John, the space is perfect for Calvin Klein. The CapEx expenditure was south of -- I don’t want to discuss that, but it was very, very affordable done in record time and again through the out form we’re in business.

Jim Duffy - Thomas Weisel Partner

And then the last piece of that, the key success factors near-term?

Morris Goldfarb

Design, quality, simplicity, affordable pricing, the appropriate pricing and we have all of that; that is the culture that we operate under. It’s a formula that we used to launch Calvin Klein women’s suits, dresses and pretty much every business that we go into. We don’t over complicate it, we look at it pragmatically and we bring it to market in record time with no nonsense and that formula works for us.

The company is composed today of people that have been business for themselves in the apparel industry; they understand the significant of timing, savings, they know how to motivate and the process has been accomplished before and in the last two, three years we’ve achieved success in similar situations. So there should be no reason that this does not seen under our launch.

Operator

And that is our final question on our question roster.

Morris Goldfarb

Again I thank you very much for staying with us this afternoon and thank you all for your questions. Have a good day.

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