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G-III Looks for Vendor Price Concessions to Limit Tariff Impact

G-III Apparel Group has instituted sourcing strategies it feels will mitigate the impact of tariffs through expansion of sourcing alternatives, obtaining price concessions from vendor partners in China and implementing selective wholesale price increases.

At the same time, G-III’s denim business is growing, with a new Calvin Klein Jeans license, a revamped Tommy Jeans collection and the launch of DKNY Jeans on the horizon.

Sourcing and tariffs

Speaking to analysts last week, Morris Goldfarb, chairman and CEO of G-III, said the company sourced about 80 percent of its production from China, and while overall business has grown dramatically, “we estimate production in China will be down to less than 50 percent this year.”

Goldfarb said G-III has “significant additional sourcing opportunities outside of China over the next several years.”

“For many years, we’ve emphasized our proficiency in our global sourcing capabilities and our strong vendor relationships,” Goldfarb told analysts. “As we’ve shifted production globally, we’ve historically moved with our longstanding vendors who’ve overseen new factory developments. We believe that consistent management oversight and expertise are essential regardless of the country of origin.”

As the risk of tariffs increased over the past six months, Goldfarb said G-III “strategically accelerated inventory receipts from our suppliers, which is reflected in our higher inventory balances as compared to the second quarter of last year.” After meeting with several of the firm’s largest Chinese vendors following the latest round of tariffs, which took effect on Sept. 1, Goldfarb said they’re “extremely supportive in sharing the tariff cost implemented today.”

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“Our ability to accelerate inventory receipts, as well as obtain vendor support are expected to minimize the impact of tariffs on our financial results for this fiscal year,” he said.

In addition to China, the company currently sources from Vietnam, Indonesia, Jordan and Caribbean-based countries.

“There is not a country that we are not well positioned in with significant talent sitting in all those countries,” said Goldfarb, adding that “we are poised to move anywhere that we need to move.”

However, he stressed, moving all production out of China “overnight” would make G-III a bad risk for investors.

“Once you get your production out of China, your terminal, you can’t bring it back. Those factories will go out of business,” he said.

If it becomes necessary for G-III to cut China sourcing further, to roughly 25 percent, “that would be primarily because of what we believe is a shoe issue,” Goldfarb said.

When it comes to price adjustments, the company has tested price adjustments in its own stores without much success.

“We took the promotional signage off of our DKNY stores, and our business is better….There is no resistance to price increase on good products,” he said. “Price is very helpful and you need to promote products or you need to dispose of products. But if you’re constantly delivering new fashion products, there is the ability of raising your prices. We don’t produce commodities. We don’t produce underwear. We don’t produce dress shirts as a commodity. We produce fashion apparel with primary brands. We have raised prices moderately where we believe it’s effective and our early indicators are that is working as well.”

Tariffs, according to G-III chief financial officer Neal Nackman, are expected to have about a $12 million impact that the company is absorbing for the second half.

Denim dynamic

Turning to wholesale business results, Goldfarb said the license from PVH Corp. to produce women’s CK Jeans “is off to a very strong start” and has “garnered significant interest and generated a strong initial order book.”

Shipments under the deal will begin for this holiday season. G-III believes it can build a substantial lifestyle women’s CK Jeans business that will grow to $250 million in annual sales over the next several years.

This fits with the company’s internal strategy to make denim a significant classification, according to Goldfarb. This includes the launch of CK jeans, the expansion of the Tommy jeans collection and the future rollout of DKNY jeans.

For Spring, Tommy Jeans will be housed in the jeans area in department stores and also in better specialty stores. Jeans with multiple fits and washes will be available, as well as tops that are softer, all meant to appeal to more casual and younger customers.

DKNY Jeans, Goldfarb said, has potential to be a $200 million to $250 million business possibility, and the entire classification could reach $500 million to $750 million in sales.

“These denim initiatives with some of the world’s most recognized brands will enable us to dominate the category,” he said. “This is exactly what we’ve accomplished in our other classifications such as outerwear dresses, performance and women’s suits.”

Retail woes

As for retail operations, Goldfarb said by the end of this year, G-III will have eliminated more than 140 stores, down from over 350 stores, which represents approximately a 40 percent decrease in Bass and Wilsons stores.

“We are being aggressive in finding a solution for the remainder of our own retail operations,” he said.

The company’s DKNY and Karl Lagerfeld stores reflected low-single-digit positive sales comps for the quarter, despite the reduced traffic in high volume tourist centers where many of these stores are located, Goldfarb noted.

“For the second half of the year, we anticipate performance benefits at DKNY and Karl Lagerfeld stores as a result of improved product and store design,” he said.