Welcome to the G-III Apparel Group Fourth Quarter and Full Year 2017 Earnings Conference Call. My name is Nicole, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Neal Nackman, Chief Financial Officer. Mr. Nackman, you may begin.

Thank you. Before we begin, I would like to remind participants that certain statements made on today's call and in the Q&A session may constitute forward-looking statements within the meaning of federal securities laws. Forward-looking statements are not guarantees, and actual results may differ materially from those expressed or implied in forward-looking statements. Important factors that could cause actual results of operations or the financial condition of the company to differ are discussed in the documents filed by the company with the SEC. The company undertakes no duty to update any forward-looking statements. In addition, during the call, we will refer to non-GAAP net income, non-GAAP net income per share and adjusted EBITDA, which are all non-GAAP financial measures. We have provided reconciliations of these non-GAAP financial measures to GAAP measures in our press release and on our website. I will now turn the call over to our Chairman and Chief Executive Officer, Morris Goldfarb.

Good morning, and thank you for joining us to discuss our fourth quarter and full year results. With me today on the call are Sammy Aaron, our Vice Chairman and President; Wayne Miller, our Chief Operating Officer; Neal Nackman, our Chief Financial Officer; and Jeff Goldfarb, our Executive Vice President and Director of Strategic Planning. In addition to reviewing our results, we will discuss our view of the market, detail key strategic initiatives underway and provide our fiscal 2018 guidance. Let's start with financial highlights from the fourth quarter and full year. Total sales for the full year were $2.4 billion, up 2% from last year. Our fourth quarter sales were up 14% to $603 million from $527 million last year. Achieving revenue growth this past year has been challenging across the industry. A second consecutive year of soft retail traffic and unseasonably warm weather, combined with accelerated consumer migration to e-commerce, all caused pressure on traditional retailers this past year. Our own retail businesses had negative comp sales, including during the holiday season. In wholesale, our continued growth and success was in all categories other than coats. Our GAAP net income for the full year was $52 million or $1.10 per diluted share compared to $114 million or $2.46 per diluted share last year. Our non-GAAP net income for the full year was $57 million or $1.42 per diluted share compared to $114 million or $2.44 per diluted share last year. Our fourth quarter GAAP net loss was $0.42 per share compared to net income of $0.17 per diluted share last year. Our fourth quarter non-GAAP loss was $0.16 compared to a net income of $0.17 per diluted share last year. Neal will provide the detail with respect to the specific acquisition-related items and the retail asset impairment charge…

First, with regard to the fourth quarter results. Net sales for the fourth quarter, ended January 31, 2017, increased 14% to $603 million from $527 million. We were approximately $25 million short of our previous forecast, primarily due to less-than-anticipated wholesale shipping related to the initial launches of Tommy Hilfiger product. Net sales of our wholesale operation segment increased 19.5% to $476 million from $399 million. Increases in our Calvin Klein handbags and sportswear categories and the new launches of Karl Lagerfeld and Tommy Hilfiger as well as the inclusion of net sales from the Donna Karan wholesale business were the main drivers of our improvement compared to the prior year. Our fourth quarter results include the operations of Donna Karan commencing with the completion of the acquisition on December 1, 2016. Net sales and licensing revenue included from Donna Karan were $17 million in the wholesale operation segment. Net sales of our retail operation segment decreased 2% to $172 million from $175 million, primarily due to same-store sales decreases of 10% for our Wilsons stores and 4% for our G.H. Bass stores. Net sales included from Donna Karan were $12 million in the retail operation segment. Our gross margin percentage was 32.8% compared to 33.9% in the prior year's fourth quarter. The gross margin percentage in our wholesale operation segment was 26% compared to 24.7% in last year's quarter. The Donna Karan licensing revenues are included in our wholesale operation segment, which contributed to the increased gross margin percentage. Excluding the Donna Karan business, our gross margin in the segment improved slightly to 25% from 24.7% in the prior year's quarter. The gross margin percentage in our retail operation segment was 41.8% compared to 45.9% in the prior year's quarter. Gross margin decreased in both our Bass and Wilsons…

Thank you, Neal. We believe we have what is needed to prosper in a disrupted retailing environment. We have great design and merchandise planning, efficient sourcing, responsive customer service, expense management, financial discipline, careful inventory management. All of these elements are essential to driving sales and profit. Our power brands, Calvin Klein, Tommy Hilfiger, Karl Lagerfeld, Vilebrequin and now DKNY and Donna Karan, these are special lifestyle brands known in the world over. These 5 brands comprise the foundation that will drive our growth over the long term. Having these brands in our portfolio is a testament to the abilities and dedication of our team to the strong relationships we have developed over many years. Our strategic focus on proprietary access to a diversified set of power brands is the critical element of our go-forward strategy. To be this well diversified with this caliber of brands at this degree of scale positions us to offer our customers an unmatched value proposition with differentiated product in every major category for each major retailer. The upcoming year should reflect organic and acquired growth in our wholesale businesses, reduced losses in our retail businesses and the turning point in the financial results of our newly acquired Donna Karan business. Thank you, operator. We're now ready for some questions.

[Operator Instructions] Our first question comes from Ed Yruma from KeyBanc Capital.

I guess, first, could you give a little bit more color on the change in the EBIT guidance at Donna Karan? I know you said it was due to the legacy pricing. But if you can give a little more color as to why there was such a delta and then kind of contextualize it with the longer-term guidance you gave for DK. Does that materially change when you expect the business to become profitable?

Yes, Ed. We're -- as I mentioned, we took sales down about $40 million from our original forecast. That's really the main driver. I think that our first half, I think we saw the business tail off larger than we had originally expected. So our first half was probably weaker than we would have expected. Our second half is really where we expect it to be. The performance of this business in the second half really jumps to about what G-III would expect for any one of our wholesale operating businesses, and it's very strong. In terms of going forward into the future, it's a little early for us to give you specific guidance on the second year. But we continue to feel very strong about where this business is after 3 years and the profitability, which we've put in that mid-15% type operating margin ranges.

Ed, to add to Neal's comments, we had some issues with some of our distributors. One of them changed their model. They no longer function as a distributor. They prefer a management model. And on a go-forward basis, the purchases are not what was anticipated or even contractual. We've renegotiated an exit for our distributor. And the other part of it is most of the other distributors because of, as Neal said, legacy pricing, were over-inventoried and have tempered their buys for the early segments of the year simply because of space and the need to liquidate their existing inventory. But their visits to New York and their view of what we're doing going forward is quite exciting, and they're very, very supportive in this new initiative, in this new pricing policy.

Great. And a follow-up, if I may. Could you contextualize with the retail business now, how much kind of structural profitability lift you should get from the store closures you've announced? And kind of what's baked into this fiscal year's guidance in terms of improvement in the overall retail business?

Yes, Ed. The losses on the closed store businesses are probably about $2 million or $3 million. The -- we're probably looking for improvement to the magnitude of around $15 million to $20 million in terms of the operating loss from the current year. And that's going to be, again, significantly driven by the expense reductions that we've got. We are still, as I mentioned, planning low single-digit comp for both businesses. We are looking for a little bit of a margin improvement based upon some of the things that we're doing in terms of product and people in the store.

And our next question comes from Eric Beder from Wunderlich.

Can you talk about how the Macy's business changes what you were going to do strategically with the Donna Karan business? What should be the biggest brand here now when you go forward?

They'll both be great brands. We have a contractual commitment from Macy's that pretty much achieves what we were setting out to do with the entire company. What we have done is we've worked tirelessly. Sammy Aaron and his team of people have built 2 collections, rather than just 1, to bring to market. One is the Macy's initiative. We clearly know what that means, the potential of it. We know how to manage the business jointly with Macy's. The excitement that's in the air for the last 2 weeks, forget about all the pain that went on prior to that, is absolutely great. I encourage you to come visit and see what we've developed in the short period of time. So Macy's is easy to calculate. The -- all the other department stores have come in and shopped what Donna Karan represents. And they're beginning to [ rate ] very, very aggressively. And it's a global initiative. It's not just a U.S. initiative. There's excitement for Mexico, for Canada, for Europe, for China. So the scale of this will be significant. It may take a little bit longer. When I say a little bit, I'm not talking about years. I'm talking about months. Unfortunately, our report card comes out every quarter. And if this business tips the quarter into the following year, it's not a terrible thing, the way I look at the future of this acquisition. It's on the right path. We've done all the right things for it, and we have support and need from the retail community to support something new. And this is it.

Okay. And changing gears a little bit. What are you seeing from the initial Tommy Hilfiger sportswear rollout? And how should we be thinking about that opportunity for this year and beyond, I mean, entire -- for the entire company?

We continue to describe the Tommy Hilfiger initiative as one of our power brands. It's certainly PVH's power brand. We're going to match up to it on the women's side the same thing -- same way that we did with Calvin Klein. Anything that I've said the day we took this over remains the same. We're on a good path. We have good retail selling. We've brought product to market, again, in record time, it's what we do best, at the right price. We were pushed back a little bit unexpectedly because we needed to give PVH the appropriate time to liquidate their inventory, which is their issue, and it bleeded a little bit into our first quarter. Other than that, we are thrilled with the license, and we're on plan to make the numbers that I've stated in the past. Nothing has changed.

And our next question comes from Erinn Murphy from Piper Jaffray.

Sorry if I missed this, but I just want to clarify. Morris, are you guys thinking now about fiscal '19, that kind of $550 million in revenue and $55 million in EBIT for DKNY? Is that effectively pushed out, just given the kind of change in how you're thinking about DKNY this year? And then when we think about the longer-term potential, how should we be thinking about the licensing, the retail and the wholesale opportunity to hit your long-term plans for this brand?

So to respond to you on -- we're okay with the guidance that we've given on $550 million for 2019. As I said, we are launching 2 brands. They're global, and we believe we can get there. We're working on repairing the retail pieces of DKNY. For the first time, we're witnessing reasonable selling with better product or more appropriate product for outlets being shipped. So we believe we can change that. The reception that we're getting from every retailer that has shopped, either DKNY or Donna Karan, as I said before, I'm not sure you caught it, was excellent. The attitude in the showroom from the retailers is positive as I could imagine. So we're very pleased with the direction of it. Our licensing income is growing. We just did a great photo shoot with Emily Ratajkowski. And Emily supported an initiative that we have with Hanes. The -- Emily, as some of you know, is an incredible model with -- I guess, I'm told she has 12 million Instagram followers. On our shoot, we got 3 million direct impressions. And I'm not sure what this means, but she has -- we got 900 million global impressions. So the numbers that I would focus at would be the 3 million direct impressions and the 12 million Instagram followers. So we're thrilled with the shoot. It's beginning to make a difference for Hanes in their intimate business. And we're working aggressively and doing another shoot with -- hopefully, with Emily. And so the marketing, the improvement in licensing and the confidence level that we're getting from the distributors globally is going to push this business forward in the appropriate manner.

Okay. And then the $55 million EBIT for fiscal '19, is that still on the table then, given the revenue is? Or is that what we should think about as kind of paring down a little bit?

I think you might pare it down a little bit. Again, that might be what I'm describing as the bleed into the following quarter. We're working incredibly hard. We're doing -- we're hitting all the targets. But as you take over a brand, a company that has been developed for 15 years with a different culture, there are some unexpected delays. But this is the absolute, right acquisition for this company. As I said earlier, maybe you missed that as well, the worst thing that happens is, we push back a quarter. We're not at all concerned about the validity of the acquisition.

Okay. And then just last question, maybe for Neal. On the outerwear order book for fiscal '18, where is that trending now? And then what's embedded for the total category in the guidance?

Right. So Erinn, the full year, we're anticipating a low single-digit positive increase for outerwear. We've got about 55% of the order book in at this time. And our order book is consistent with our projections at this point as far as the forecasted revenues.

And our next question comes from John Kernan from Cowen.

So Neal, I wonder if we could back up to the wholesale business, excluding Donna Karan, and what's embedded in your guidance this year, both from a sales -- more importantly, from an operating margin standpoint? I'm trying to figure out what you're embedding from a profitability improvement in that business segment.

So John, if we exclude the Donna Karan business, the G-III core -- let's go with the core business, would be up mid- to high single digits for next year. I would expect that the -- that we will be somewhat neutral on gross margin, somewhat neutral on SG&A expenses and have, again, high operating -- high single-digit operating margin performance for the core business.

Okay. That's helpful. Morris, I guess one of the things we continue to hear is that department stores are kind of in the early innings of door closure cycles. Can you just talk about where you think the total department store footprint is going? You seem to be upping kind of your exposure to that channel. So I'm just trying to understand where you thematically think this channel is going in terms of its overall brick-and-mortar footprint.

John, we all read the same papers, and we agree there are concerns about the scale of the brick-and-mortar business and the effect of the online business to brick-and-mortar. We have a big bet on brick-and-mortar that has, as its partner, an online presence. Almost every retailer we trade with has an online presence. Our largest, Macy's, has -- I'm told they are the third largest online provider of apparel. So it's not just brick-and-mortar. Short of that, there's -- whether it's The Bay or whether it's Dillard's, they all have sites that are growing. They have not conceded the online business to Amazon. The battle is fierce. The store closures, for me, represent stores that need to be closed. They're not the premier profit-making stores that are going away. There are stores that have been opened for many decades that don't belong there. So we're not -- we do an assessment every time we see a group of stores closing. We try to rationalize the significance to our business. And we looked at Macy's and we found that the store closures that they had announced, we independently looked at it and we found that it was about 3% -- it affected about 3% of our sales on existing situations. So if -- that went to 0. But there's a view that the online business in those regions would grow, so we're not sure that it has any effect. We -- there will be consolidations. The specialty store sector announces store closures as we did today. And there'll be either repurposed for another use or maybe another concept. But we're not giving up on brick-and-mortar at all. It's an important part of our business. And as you see today, we've made a big bet on Macy's and all our other department stores in the country.

Understood. That's helpful to get your perspective. And Neal, just one final question. Your cash balance this year, I guess given the losses in the first half of the year, do you expect any additional debt needs in calendar '17?

No, John. The revolver we have is up to $650 million. It's more than ample to support the business operation. And while we probably slipped a little bit in terms of our anticipated cash, the company's leverage is still very modest for our -- for what we see as still tremendous growth opportunity and tremendous improvement in cash flow going forward.

Did you mention CapEx, Neal, just one final?

I did, John. It was $26 million for last year. I would expect now...

Okay. It's similar for this year.

Yes. I would expect somewhere in the $25 million to $30 million range again for this year.

[Operator Instructions] Our next question comes from David Glick from Buckingham Research.

Morris and Neal, just a question about beyond 2017. I think investors were assuming that calendar '17 was going to be a transition year and that the guidance could reflect that, obviously, DKNY was more dilutive than we all expected. But I think there was an expectation that you guys could make at least $2 in calendar '18 or you call it fiscal '19. When you look at your guidance this year, ex DKNY, it's about $1.90. You're at the midpoint. Is it reasonable to think that while you may not make your original plans for next year in DKNY that the business after this coming year could at least be earnings-neutral as you transition the business?

Yes, absolutely, David. Our business is really in good shape. The pieces that we are working on repairing are very clear. Our retail business, our coat business is in good shape. It's -- we're rightsizing some of the brands. We're combining some of the divisions. We're going to operate much more efficiently. And we're fine. We make money in our outerwear business, and we're targeted to make more in the future. The strength of the power brands and the focus of the power brands will probably tip some of the business toward the major brands versus some of the secondary brands. But that would be the only change in outerwear. And if we look at our biggest bet, which is Donna Karan and DKNY, it is the future of this business. We believe that we've balance the business appropriately between owned and licensed brands. We've solidified the future of the business for the next generation with a balance of licensed and owned brands. So we are comfortable that '19 will be an excellent year for us. The -- we've just given ourselves the ability of marketing toward Europe and Hong Kong with a couple of great brands. Most of what we hear in growth and prosperity in our universe of apparel is targeted toward Europe and China. We've had very little of our own that we could market there. Today, we have pretty much control of our own destiny without a licensed store dividing the world for us by store distribution and by continent distribution. So this is -- other than the earnings that we're showing you today, this is the best period of G-III. It's hard work. It's people that are so committed to what they are doing. It's unimaginable to see the effort that has been put into Donna Karan and DKNY and maintaining the rest of our businesses. But it is -- it's a great day. I wish I didn't have to give you these earnings. It would be a little bit better. But we are good. So I was a little wordy, but you gave me an opening to brag about what we're doing. Thank you.

Okay. So to be clear, you think you can wipe out that dilution in the outyear for DKNY?

Yes.

And we have no further questions at this time. I'd like to turn the call back over to management for any additional or final remarks.

Thank you. Thanks for listening to our story, and thank you for remaining shareholders of our company.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.