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Hit by China Tariffs, G-III Raises Prices and Gets Vendor Concessions

Fresh off landing the Calvin Klein Jeans for women license this week, G-III issued fresh guidance that takes into account tariffs on imports from China.

In a Nutshell: G-III Apparel Group Ltd., which makes and markets apparel and accessories under owned-brands that include DKNY, Donna Karan, Vilebrequin, G. H. Bass, Andrew Marc, Marc New York, Eliza J and Jessica Howard, delivered gains in net sales and income in its fiscal year first quarter.

G-III, which also has fashion licenses under the Calvin Klein, Tommy Hilfiger, Karl Lagerfeld Paris, Kenneth Cole, Cole Haan, Guess, Vince Camuto, Levi’s and Dockers brands, including this week’s inking of a licensing deal with PVH Corp. for Calvin Klein Jeans for women, reaffirmed guidance for the fiscal year ending Jan. 31, 2020.

For fiscal 2020, the company is now forecasting net sales of approximately $3.28 billion and net income between $163 million and $168 million. This compared to net sales of $3.08 billion in fiscal 2019 and net income of $24.1 million.

The company said the guidance “incorporates the impact on certain of the company’s products of the current 25 percent tariffs imposed on nearly $200 billion of total goods imported from China into the U.S.” However, the company said it has not factored any future increases in tariffs on additional goods imported from China into the U.S. in its fiscal 2020 guidance.

What the company will be incorporating, however, is price increases.

Morris Goldfarb, G-III’s chairman and CEO, discussing the impact of tariffs with analysts, said, “We estimate that the incremental 15 percent increase in tariffs for the remainder of fiscal 2020 will increase our cost by approximately $6 million. We’ve been seeking to diversify our sourcing network by arranging to move some production out of China and also succeeded in obtaining price concessions from our Chinese vendors. In addition, we’ve obtained price increases from some of our customers here in the U.S.”

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A report last month from Moody’s said profits for companies that sell a greater percentage of imported Chinese goods in the U.S. could be under pressure. It cited G-III, which the report said generated around 86 percent of its fiscal 2019 revenue in the U.S. and sourced around 61.5 percent from China, noting that such companies will see margin pressure until they can implement ways to address the higher costs, such as moving production or cutting costs.

As for potential further tariff increases, Goldfarb said G-III has had discussions with vendors and retailers, and while there will likely be further disruption, “all parties are willing to share in the increases costs.”

G-III projected full-year adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for fiscal 2020 between $307 million and $313 million compared to adjusted EBITDA of $269.4 million in fiscal 2019.

For the second quarter ending July 31, the company forecast net sales of approximately $660 million and net income between $8 million and $13 million. This forecast compares to net sales of $624.7 million and net income of $10.1 million reported in the second quarter of fiscal 2019.

Sales: Net sales in the first quarter ended April 30 increased 3.6 percent to $633.6 million from $611.7 million in the same period last year.

Earnings: The company reported net income for the quarter rose 21.2 percent to $12 million compared to $9.9 million in the prior-year period. Gross profit ticked up 0.6 percent to $236.06 million in the period, while operating profit was up 10.7 percent to $25.56 million.

CEO’s Take: “We are pleased to have reported first quarter net income per diluted share that was at the high end of our expectations. Our results were once again fueled by strong performance in our wholesale business led by our five global power brands–DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld,” Goldfarb said. “We know disruption in the retail industry has never been greater, but we remain confident in our ability to adapt to unique challenges. We are well positioned for a solid year and I am confident we are poised to achieve significant growth over the next several years.”