G-III Apparel - Great Results, Fresh Highs, Appeal Remains

| About: G-III Apparel (GIII)
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Summary

G-III Apparel posts very solid results, pushing shares to fresh all time highs.

The company deserves a premium valuation given the very strong operational performance displayed for over the past decade.

I like shares on dips despite the multi-year bull run as a premium valuation is warranted following a very strong operational performance over the past decade.

The G-III Apparel Group (NASDAQ:GIII) reported a very strong set of third quarter results. The strong numbers were being accompanied by a hike in the full year outlook, conforming that the pace of organic growth of the business remains at double-digit numbers.

Given the very impressive track record of the business, after the company has ten-folded its sales in as many years, I like the business currently trading at a modest premium versus the rest of the market. The company managed to grow its operations while preserving balance sheet integrity. As a result, I am a buyer on significant dips following the jump in the shares.

Recap Of The Quarter

G-III reported a 21% jump in third quarter revenues which came in at $812.3 million. This very impressive growth rate has been aided by the acquisition of G.H. Bass which added $66 million in sales for the quarter. Adjusting for this deal, organic sales growth came in at 12% on an annual basis. Reported growth was stronger than anticipated, with analysts anticipating sales of $802.2 million.

Gross margins for the business came in at 36.3% of sales which marks a big 240 basis point improvement compared to last year. Operating expenses of 21.7% of sales rose by 290 basis points as well, outdoing most of the gross margin gains. The different margin structure of G.H. Bass played a role in the changes in the cost structure.

Operating margins of 13.9% of sales remain very healthy despite being down 80 basis points versus last year as depreciation charges jumped up as well. The impressive jump in sales outweighed the operating margin pressure, net resulting in growth in earnings. Note that the company benefited from a $12 million one-time benefit as well during the quarter.

As a result net earnings jumped by 35.2% to $80.6 million, driven by sales growth, the one-time gain and a more favorable tax rate. The total outstanding share base rose by nearly 10% over this time period, following an offering of shares this summer, limiting earnings per share growth to 23.9% with earnings coming in at $3.53 per share.

Adjusting for the big one-time gain reported this year, earnings came in at $3.09 per share on a non-GAAP basis, up from the $2.88 per share reported last year. Analysts anticipated that earnings would rise by just a penny to $2.89 per share.

Raising The Guidance

With just one quarter to go this year, G-III is raising the full year guidance quite aggressively. Sales are now seen at around $2.13 billion, some $20 million more than estimated before.

Net earnings are seen between $4.65 and $4.80 per share, a $0.65 per share increase compared to the previous guidance. Adjusted earnings are seen between $4.20 and $4.35 per share, reflecting the one time gain reported in this past quarter. Analysts have not expected G-III to raise its revenue guidance, on average anticipating non-GAAP earnings of just $4.10 for the quarter.

Based on the performance so far this year, fourth quarter sales are seen around $528 million with GAAP earnings seen between $0.61 and $0.76 per share. This guidance calls for sales growth of 11-12% on an annual basis, as earnings per share are seen up 10-11%.

Fair Valuation, Solid Balance Sheet

Despite the deal which G-III made, the balance sheet remains quite healthy. The company ended the quarter with $49 million in cash and equivalents as a total debt load of $154 million results in a net debt position of $105 million. This debt position is very much manageable, especially in relation to anticipated adjusted EBITDA of $179 million forecasted this year, resulting in a leverage ratio of just 0.6 times.

With nearly 23 million shares outstanding, and those shares jumping towards levels around $92 following the earnings release, equity in G-III is valued at little over $2.1 billion which including the net debt position yields a valuation of the entire enterprise of around $2.2 billion. This values the business at exactly 1 times anticipated sales, roughly 11-12 times EBITDA and earnings at 21 times non-GAAP earnings. Note that non-GAAP earnings are actually a better reflection of the real profitability of the business this year, as it excludes the one-time gain recorded this past quarter.

Silent Grower

G-III does not provide a great deal of information in its regular quarterly earnings report, nor does it posts major investor presentations on its website throughout the year.

Despite the low profile, G-III has seen astonishing growth having grown the business from roughly $200 million in sales in 2005 to more than $2.1 billion at the moment. At the same time, G-III managed to boost gross margins by nearly 10 percent points to levels in the mid-thirties allowing earnings to grow even faster.

This spectacular growth has been achieved with the total shareholder base only doubling over this time period, allowing for great growth on a per share basis, while preserving the balance sheet integrity. Strong organic growth, as well as multiple acquisitions such as that of G.H. Bass, Vilebrequin, Wilson Leather, Andrew Marc as well as Jessica Howard and Eliza J. since 2007 have been underlying this growth.

With these acquisitions and its own offerings G-III now sells apparel from strong brands like Calvin Klein, Guess, Tommy Hilfiger as well as Levi's, among many others.

This growth has paid off enormously for investors who have held on to their holding during the crisis. Shares fell from $20 per share in 2007 to lows of just $4 during the crisis, only to steadily rise to current levels around the $90 mark.

Final Thoughts

Given the performance as described in the past paragraph it is hard to see what is not to like about G-III. The past performance in terms of both dealmaking as well as organic growth has been even better than excellent, creating huge returns for investors along the way.

Shareholders have rightfully awarded the company a modest premium valuation at roughly 21 times earnings. Combined with balance sheet integrity this creates real appeal in my eyes, making me a buyer on any significant post-earnings dip in the mid eighties.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.