For years, G-III Apparel (NASDAQ:GIII) has been a wholesale-based retailer that was known for focusing mostly on outerwear. The company, though, has been building up their business over the past several years by adding a dress business, retail stores, sportswear, and more. As of recent, the company has made three acquisitions to enter the direct retail department, and we believe that the company is continuing to add value. Moving forward, we believe that analysts and investors are not focusing enough on the company's acquisition of Wilsons, G.H. & Bass, and Vilebrequin. Currently, the company is cheap with a 17.5 prce-to-earnings ratio. Industry averages, though, near 24 for the apparel manufacturing industry.
What are investors missing? We believe they are not properly understanding the potential value of the volume growth and margin expansion that these retailers provide. The mispricing that we see for the company is based on the fact that the market appears to be giving little value to these acquistions.
We set out to find out just how much these acquisitions could offer, priced them using raw research and company facts, and then compared them to current pricing.
In 2008, G-III purchased the e-commerce and outlet portions of Wilsons The Leather Experts for $22.3M. The company bought 116 outlet stores at the time and e-commerce assets. The company's acquisition was expected to be able to vertically integrate their business. Since then, the company has acquired two other retail names with Vilebrequin and G.H. & Bass.
With the Wilsons Leather acquisition, the company not only can take over a similar business that uses leather to make outerwear and accessories, but it allows them to also bring their other brands that they sell wholesale to stores into direct retail locations. Additionally, Wilsons gives them an e-commerce channel that is direct as well, which is extremely important moving forward to allow for G-III to grow their online presence.
We believe that the market does not realize the full potential of what Wilsons as well as two other acquisitions means for G-III. A recent move by GIII suggests that they are taking Wilsons another step. The company noted in their last earnings call that they are interested in more full price retail as well. The company has noted they see potential in these stores, but the market does not seem to also realize this potential. This is likely due to the fact that the company has never been a retail-based firm as well as there is no proof that the company can make this plan a success. Yet, the prospects are enticing.
At these full price stores, the company can feature goods from Wilsons, but they will also be able to sell their full-price outerwear from Andrew Marc, Calvin Klein, and Kenneth Cole. They can feature their growing sportswear business and even feature their added dress business. Not only is G-III horizontally integrated to offer apparel that works for many client groups, but also they are vertically integrating to offer multiple revenue channels. The opportunity is significant moving forward, and the company has already noted that the full price retail locations were performing at much better rates than outlet stores:
We've got 6 opened, and we believe we'll be north of 15 before year-end. The 6 are performing better than the outlets in square footage performance, and we believe there's a huge opportunity on getting back into traditional mall locations.
How many of these types of stores does the company want to do? They believe that they can open around 300 stores. It should take 5-10 years to get that many stores open, but the stores are going to be big money makers because the company notes "they have the formula right."
That's all great. Let's run the numbers, rather than just talk about how great it can be. For this section, we took the current stores and we examined the square footage of them. We believe that these first stores are likely fairly average for what we can expect. We took this raw data and multiplied it by the store estimates as well as the current pricing per square foot.
The company has noted that the stores are performing slightly above their outlets ($350 per square foot). Let's assume a rate of just $375 per square foot. The company, currently, has six of these stores. They usually have square footage between 3,500 and 4,000 square feet. 3750 x 375 x 300 = $470M. The Wilsons Leather plan is a nearly $500M per year revenue plan. It should take 5-7 years to build out, and the company is using this holiday season to fine-tune the stores. This growth can provide alone 5% CAGR in growth for the company.
We will flesh out this in total after looking at the other two retail opportunities.
G.H. Bass & Co. and Vilebrequin
The great thing about this vertical integration move and acceleration by G-III is that they are not just doing it with Wilsons Leather. Just last week, PVH (NYSE:PVH) sold G.H. Bass & Co. to G-III Apparel. The transaction was about $50M. Currently, Bass is an upper level footwear producer that focuses on leathers and dress shoes. The key, though, is that Bass has an e-commerce and retail store focus. They operate 160 outlet stores in addition. We see this acquisition as very similar to Wilsons. PVH sold off Bass because it did not focus on their "lifestyle apparel business." In general, the business is not very profitable, and PVH did not believe it was part of their business moving forward as the style is more preppy and traditional. We see GIII being able to do a very similar type of integration. The company can use Bass outlets to shed inventory and integrate stores with other clothing besides shoes. Further, Bass gives GIII its first shoe retail company. Building up their lineup of items is going to only help this vertical integration. The prospects are unknown for Bass at this time, but we believe that over the next 12-24 months, GIII will lay out a plan of action to help bring it to a very successful level.
Vilebrequin was another similar action taken by the company. GIII bought Vilebrequin last August. The company is a luxury swimwear brand that focuses mostly on men. The company has plans to develop a women's line, increase stores, and gives them another great place to cross-market brands. Further, Vilebrequin has an e-commerce site. The company will be launching a marketplace feature on the site by the end of the year.
The company is already seeing great results on their investment. They saw non-licensed net sales grow nearly 50% in their latest quarter. Further, gross margins for non-licensed products jumped to 35% from 26% in the latest quarter as well. The opportunities with Vilebrequin are also very enticing. In the company's latest conference call, they noted some of these opportunities:
We will have flip-flops in all our stores by November of this year. We feel strongly about the development of the footwear business. We have a small initiative on women's swim and, call it Aerie [ph] swim, that's working…Our individual store growth, stores that we own, company-owned stores, that's moving quite rapidly. We're pleased with the new store openings…Our U.S. growth, we've opened 5 stores this year. We're in negotiations for several more leases. And our wholesale business is growing. We're developing new fixturing for our department stores. Saks has done a very nice job, Bloomingdales has done well. Barneys is -- repositioned us, and Bergdorf Goodman is doing a new buildout for us as well. So we've got a great deal of opportunity. We've -- we're really working our e-commerce site, that's about -- say about 60 days away from being operative. And business is good. Our comp sales globally are high single-digits and in an area where we're just learning the business.
What we see with Vilebrequin is the company building out their clothing offerings, while at the same-time moving away from licensed products and honing in on retail. The company is also getting e-commerce exposure that was earlier impossible for their licensed brands.
The Mispriced Growth Potential
So, what does this all mean? Non-licensed revenue is going to be rising and fast. The company had barely any non-licensed revenue even three years ago. Now, non-licensed revenue is at $70M, which is about 25% of the company's revenue. We believe that this can grow by a very high amount over the next five years. We estimated that Wilsons could add $500M by 2017. Vilebrequin can definitely offer around $150M by that time, and Bass could be around $100M. We are looking at potentially $750M in non-licensed revenue in 2017, which is about 3x higher than in 2012.
Is the market pricing that currently?
Let's say licensed revenue, which is currently growing at over 12% per year, does not even grow at all by 2017. That would put total revenue at about $1.8B, and this is a low estimate for even non-licensed growth. With a net margin at 5%, estimating for a rise as expenses drop and retail stores make higher margins, net income would be at $90M. That puts EPS at 4.5, dropping P/E to 11.5. Current P/E is sitting at 17.5 and the industry average is 23.8. Even if we assume, GIII maintains their already discounted P/E, the company has 50%+ potential over the next four years at least. That is assuming no growth in licensed revenue and conservative estimates for their non-licensed plans.
In our price target where we assume more growth and project out for the company to closer to $2B in revenue and $170M in operating income for 2017 (still conservative), we come up with a 3-month price target of $56. When we project out to 2018 for our 2014 price target, we come up with a price target of $65. Therefore, we see a 15-month potential upside of 30%.
So, as we can see, the market is missing the boat on this retail opportunity. Many investors likely do not understand the implications of what G-III is attempting to do. The margin prospects and growth prospects have not been factored yet likely due to these brands being less popular names and not having similar impact as Calvin Klein, Cole Haan, Marc Jacobs, etc. Yet, as we have shown, even in the most conservative of models, this opportunity is grossly undervalued.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no business relationship with any company whose stock is mentioned in this article. The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.