G-III Apparel Group: On The Right Track

Summary

• G-III reported Q1 FY2021 earnings.
• G-III also announced a retail chain restructuring.
• This article covers the consequences from these two developments.
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In my previous article, titled "G-III Apparel Group Will Be A Coronavirus Winner", I explained why I expected G-III Apparel Group (NASDAQ:GIII) would emerge from the present coronavirus lockdowns as a (stock) winner.

That thesis was based on several solid pillars:

• GIII was reliant on the wholesale channel (91% of revenues) while having a low physical retail exposure (9%). This ensured low costs/cash burn "to stay shut".
• The company had valuable brands. This ensures comparatively high wholesale margins (in normal times).
• GIII had high cash levels. This together with a low cash burn ensured survival.

Since then, G-III has performed well, and today it reported Q1 FY2021 earnings, as well as a physical store restructuring.

These two developments again confirmed G-III remains on the right track. If anything, G-III looks even better now than before. Let me tell you why.

Q1 FY2021 Earnings

Q1 FY2021 earnings were predictably abysmal. It's to be remembered that most apparel retailers report quarterly earnings on a three-month period ending on April 30, instead of the typical ex-retail March 31 reporting. This means that apparel retailers caught more of the coronavirus lockdowns' impact during this period, whereas most other companies will catch the worst of it in their Q2 2020 reporting.

With this in mind, G-III reported a 36% year-on-year drop in revenues. Obviously, this is a large drop, but remember: The survival thesis was based on an impossibly apocalyptic -100% of revenue drop. G-III could survive that, so surely can also survive -36%.

G-III's cash position dropped from $646 million on March 24 to $616 million on April 30. This is a very manageable cash burn, as we had expected. Hence, there's full certainty that G-III will easily survive the current period.

Those are about the most relevant things to consider from the earnings report. A "rather small" revenue drop, and a perfectly manageable cash burn rate.

The Restructuring

The best news for G-III, though, didn't come from the earnings report. Instead, the company also reported it was going to restructure its retail chain operations.

This restructuring will consist of closing 199 stores from minor brands (Wilsons Leather and G.H. Bass) while keeping its Karl Lagerfeld and DKNY stores open (53 stores). In doing this, GIII is effectively getting rid of nearly 80% of its physical stores and will thus be an even purer wholesale operator (which already represented ~91% of the company's revenues during FY2020, to be remembered). This is an improvement versus our original thesis.

Obviously, closing that many stores will carry a cost. This physical store restructuring will imply a $100 million charge in Q2 FY2021, out of which $65 million will be cash. This shows confidence on the cash levels, and indeed is only possible because of such cash levels. This is something that other retailers find harder to do, given their much higher number of stores.

These costs, however, pale in comparison to the potential benefits. The restructuring seeks to bring the physical retail chain segment to profitability. Now consider the following:

• In FY2020, the retail chain segment had a $74.6 million operating loss. If a $65 million cash investment can restore profitability (after the coronavirus situation), this will be a large positive for overall profits.
• Indeed, $74.6 million was a full 32.8% headwind for operating profits (on just 9% of revenues!). Just removing this headwind could make operating profits 32.8% higher!!! (for the same level of activity as in FY2020):

Source: G-III FY2020 10-K

Hence, this restructuring move stands to be very positive for future profitability, after the coronavirus effects are fully gone.

As a curiosity, at $13.50, quite a bit higher than when I wrote my first article, if G-III manages to reach breakeven on its retail segment and recover the FY2020 activity levels, then:

• The stock would be trading for ~3.5x EV/EBITDAR, which is lower than when the stock was at $10.80.
• This valuation continues to be aggressively low even in the context of the depressed apparel retail sector. And I consider the G-III business model to be superior to the rest of the apparel retail sector.

Conclusion

In short, G-III's Q1 FY2021 earnings and its retail chain restructuring mean:

• G-III will survive the current crisis easily.
• G-III stands to be even more profitable after completing its retail chain restructuring.
• G-III remains very cheap even after the performance it already had.

Analyst’s Disclosure: I am/we are long GIII. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.