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G-III Apparel Will No Longer Sell Calvin Klein and Tommy Hilfiger After 2027

G-III Apparel Group, Ltd. is slowly winding down its licensing partnership with the Calvin Klein and Tommy Hilfiger brands as parent company PVH Corp. looks to bring two of its most iconic labels fully back in-house.

Although the companies just announced an extension to most of their current license agreements pertaining to the women’s North America wholesale business, the new agreements are designed to help G-III transition to focus more on its remaining owned and licensed brands.

Most of the Calvin Klein licensing deals were initially set to expire at the end of 2023, while the Tommy Hilfiger product agreement was slated to finish at the end of 2024 and 2025. Both the Calvin Klein and Tommy Hilfiger agreements will now have staggered expirations, depending on the category, from 2025 through 2027.

In a statement, PVH said it intends to work in close partnership with G-III over the next several years to ensure an “uninterrupted and responsible transition” for consumers and wholesale partners for both brands.

The DKNY and Karl Lagerfeld owner’s stock was rocked by the news, as well as a downgrade of its expected full-year earnings outlook, falling more than 42 percent in trading Thursday.

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In a Nutshell: In its Form 8-K filing, G-III Apparel indicated that the company is dependent on sales of licensed products for a “substantial” portion of our revenues. And while the company also licenses merchandise from popular brands like Kenneth Cole, Cole Haan, Guess, Vince Camuto, Levi’s and Dockers, the two PVH labels make up nearly half of G-III revenue.

Net sales of products under the Calvin Klein and Tommy Hilfiger brands constituted 48.2 percent of net sales in the nine months ended Oct. 31, 2022, and 50.7 percent of net sales in the prior fiscal year.

According to CEO and chairman Morris Goldfarb, G-III does not expect a significant reduction in net sales, net income and cash generation from these businesses for the next three years.

Goldfarb said in the company’s earnings call that the fashion house was seeking new growth opportunities, including acquiring new businesses, broadening its European operations and category expansion. For example, Karl Lagerfeld Europe recently introduced a full jeans category into its collection, with the brand planning on expanding into North America in fall 2023. The brand is also on track to open 12 company- and partner-operated stores and shop-in-shops in the current fiscal year.

Upon acquiring the entirety of the Karl Lagerfeld business this summer and accelerating its production calendar to counteract longer supply chain lead times, merchandise piled up at the apparel design, sourcing and manufacturing firm. Inventories doubled at a 100.7 percent clip to $901 million from $449 million at the end of the prior-year third quarter.

Gross margin was 32 percent in the third quarter, down approximately 220 basis points (2.2 percentage points) from 34.2 percent in the previous year’s quarter.

Neal Nackman, chief financial officer of G-III Apparel Group, said in the earnings call that the margin decline was mostly a result of storage and processing capacity pressures within its distribution centers due to the elevated inventory levels.

“Going into the third quarter, we were not able to secure additional warehouse space in the timeframe we had planned,” said Nackman. “Several negotiations took longer than expected, and in certain situations, we did not want to enter into expensive long-term commitments for such capacity.”

But Nackman said the company has now since procured additional third-party warehouse capacity to handle higher inventory levels.

“The lack of additional space in our warehouses, along with port congestion and the logistical challenges related to trucking, all contributed to us incurring approximately $27 million of the newest charges in the third fiscal quarter,” Nackman said, noting that the charges were largely unexpected demurrage and container costs.

G-III expects the additional warehousing space should eliminate almost all the newer charges in the future, according to Nackman.

For the remainder of its fiscal 2023, G-III Apparel Group expects net sales of approximately $3.15 billion, maintaining the outlook it had previously revised to in September. This would mark a 13.7 percent sales increase for the full year from last year’s $2.77 billion.

But earnings were a different story, with net income now forecast between $147 million and $152 million, or between $3 and $3.10 per diluted share. Prior estimates had net income tapped at $182 million and $187 million, or between $3.69 and $3.79 per diluted share. This is the second time the company has downgraded its earnings expectations. Net income totaled $200.6 million, or $4.05 per diluted share, last year.

The fashion portfolio is projecting full-year adjusted EBITDA for fiscal 2023 between $265 million and $270 million, down from previous forecasts of $318 million to $323 million. Adjusted EBITDA was $350.2 million in fiscal 2022. 

As of Oct. 31, cash and cash equivalents totaled $150.7 million, down from last year’s $279.5 million.

Net Sales: Net sales for the third quarter increased 6.2 percent to $1.08 billion from $1.02 billion in the prior year’s quarter.

Net sales of the wholesale segment increased approximately 5.5 percent to $1.07 billion from $1.01 billion last year. Net sales of the retail segment were $29 million for the third quarter, compared to net sales of $26 million in last year’s third quarter.

G-III did not break out sales across its portfolio of proprietary brands, which include Vilebrequin, G.H. Bass, Eliza J, Jessica Howard, Andrew Marc, Marc New York and Sonia Rykiel.

Goldfarb said the proprietary brands are the company’s most profitable sales channel, because G-III does not pay royalty fees and the brands provide “highly accretive licensing royalty income.”

Net Earnings: Net income attributable to G-III Apparel Group, Ltd. was $61.1 million, on $1.26 per diluted share. Net income declined from $106.7 million, or $2.16 per diluted share, in the prior year’s quarter.

Adjusted net income attributable to the fashion company totaled $65.6 million, down from the $107.9 million generated in the year-ago period. Most of the adjustments come from $3.8 million in expenses related to the Karl Lagerfeld acquisition.

CEO’s Take: Despite the warehousing and logistics challenges in the quarter, Goldfarb said there were no issues related to the inventory’s quality and integrity.

“[The problem was] the storage—not the scale—of the inventory. It flowed faster than anticipated. The time on the water accelerated, which further exacerbated our situation. But it’s all great inventory that was anticipated for this time period,” Goldfarb said. “There’s early spring inventory that sits there that’s ready to go when the doors open at a retailer. Our levels of dated inventory that’s greater than a year old is at a record low, so there is not troubled inventory. This isn’t the inventory that’s sitting in the store that is anticipated to sell only when it’s marked down.”