Welcome to the G-III Apparel Group Third Quarter Fiscal 2018 Earnings Conference Call. My name is Elaine, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Neal Nackman, Chief Financial Officer. Sir, 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 the 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 to 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. With me today are Sammy Aaron, our Vice Chairman and President; Wayne Miller, our Chief Operating Officer; Neal Nackman, our Chief Financial Officer; and Jeff Goldfarb, Executive Vice President. We are pleased with our third quarter results which surpassed our plan. Our results were led by a double-digit increase in sales in our wholesale business and improved results in our own retail stores. Overall, we are positioned for a good fourth quarter as our products continue to sell well in stores throughout the country. This is our key quarter for outerwear. We have great product that is selling at a very good pace as the weather seems to playing to our advantage this year. The early cold snap across most of the country helped to drive sell-through with healthy margins at retail. Overall, we’re on pace to sustain good outerwear margins and to capture reorder opportunities through the remainder of the year. That said, the most excitement in our business continues to revolve around each of our power brands, Calvin Klein, DKNY, Donna Karan, Tommy Hilfiger and Karl Lagerfeld. Before I get into some of the brand level detail, I’d like to first provide an overview of our business with some highlights from our third quarter financial performance. Net sales in the third quarter were up 16%, to a recorded $1,025 million, compared to last year’s third quarter of $883 million. Our diluted net income per share in the third quarter was up 10% to a $1.65 compared to a $1.50 of last year. We’re pleased with this better than expected performance. Given the strong quarter and a good near-term outlook, we are increasing our full year projections. Each of our power brands is showing market-leading levels of performance. Our ability to…

Thanks, Morris. Net sales for the third quarter ended October 31, 2017 increased 16% to $1.02 billion from $883 million in the same period last year. Net sales of our DKNY and Donna Karan brands added approximately $88 million of sales in the quarter. Excluding the DKNY, Donna Karan sales, net sales for the quarter were approximately 6% higher than last year. Net sales of our wholesale operation segment increased 22% to $967 million from 794. Net sales from our DKNY and Donna Karan product lines accounted for $87 million of this increase. Net sales of our wholesale operation segment excluding DKNY and Donna Karan, increased by 11% in the quarter. Net sales of our wholesale segment also increased as a result of increases in net sales of our Tommy Hilfiger licensed products, which is now shipping product in all categories; our Calvin Klein and Karl Lagerfeld licensed products, and in our Andrew Marc line of products. Net sales of our retail operations segment increased 11% to $119 million from $107 million, due to the inclusion of net sales of $18 million from our new DKNY stores, offset in part by a decrease in net sales at our G. H. Bass store chain. Wilsons Leather same-store sales increased by 2.4% compared to the same period in the prior year. G. H. Bass same-store sales decreased by 2.6% compared to the same period in the prior year. We operated 35 fewer stores at the end of the third quarter compared to the previous year. Our gross profit percentage was 38.1% in the three-month period ended October 31, 2017 compared to 36.4% in the prior year’s period. The gross profit percentage in our wholesale operations segment was 34.1% compared to 34.4% in last year’s quarter. The gross profit percentage in our retail…

Thank you for joining us today. We’ve demonstrated that we have a growth strategy that works. I know you’ve heard me say many times that G-III is a special company. I think being a consistent winner and a tough retail environment makes it worth mentioning again. G-III is an outstanding organization. Our strategy is pretty straight forward. We aim to own and align with great brands, control our distribution well, approach every relationship as a partnership, and above all, deliver to the consumer truly outstanding and compelling product. These simple commitments drive results. And we’ll continue to illuminate our path to success. We’ve made smart bets, and we think the odds are in our favor. Our agility, our creativity and the spirit of entrepreneurship are essential to how we run our organization. Thank you for the support you’ve shown us. And we’re now ready to take your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Ed Yruma with KeyBanc Capital.

Hi. Good morning, guys. Thanks for taking my question. Congrats on a very nice quarter. Two quick ones for me. I guess, first, as it relates to Tommy Hilfiger, it looks like you’re going to come in line or above what was a very aggressive plan. How should we think about the longer term growth, as the Hilfiger opportunity in the white space? And then, second, you talked about initial learnings of Donna Karan, kind of what’s working and what’s not, and how should we think about your ability to reflect some of those changes, as you continue to build the business early next year? Thank you.

Thank you, Ed. So, Tommy Hilfiger, we’ve basically achieved everything we said we were going to. And what has really kicked in to make us comfortable that growth is only at the early stage for us is all the amazing marketing that PVH has done with Tommy, it just never stops. There’s always something new on the horizon, the opportunities grow, the demand for the brand has never been greater. And we believe that we’re just at the early stage of development and positioning of the brand. I think there is an amazing amount of growth left in Tommy. It’s a credit to great product that we do. The understanding of what’s needed at retail on the women side of it, and the wonderful job that -- as I’ve said, PVH has done. With DKNY and Donna Karan, as always, when we launch something new, we make some early mistakes that we respond to immediately; some are costly, some are neutral. And I think we’ve done a great job in positioning the brand. And again, we certainly made some mistakes. We have several initiatives working simultaneously. One needs to understand that we barely own the brand for 12 months. I think this is our anniversary, just about now. And we’ve launched two power brands, Donna Karan and DKNY. We’ve crossed borders that we’ve never really operated in. We’re in Europe; we’re in Asia; we have partners throughout the world. These are jobs and locations that were never needed at G-III. So, there is a learning curve, and we’ve learned quickly what’s good and what is not. And fortunately, for us, the learnings were not costly. We responded. We see huge opportunities in Europe. We took Europe on alone. We retained a good deal of the management staff, and we’ve integrated…

Thanks much.

The next question is from Chethan Mallela with Barclays.

Hi. Good morning. First, I just want to start with a quick housekeeping question on DKI sales, which I believe you said were $88 million in the third quarter. Are you still expecting to deliver $200 million in sales from that business overall for the back half of the year? And then, can you give a sense of the quarterly sales breakdown between the DKI and the Donna Karan brands, and just how in terms of your aggregate growth expectations for DKI overall you’re thinking about those two brands contributing over the next couple of years?

Yes. So, with respect to the DKI sales second half, we are still feeling very much on target with our plans. We’re probably off slightly as far as 200 million. But as you can see, Chethan, our operating losses are fairly comparable to what we said before. So, we’re probably just a little bit off of the sales figures that we had initially stated, nothing dramatic, and we still feel that the launch is very much in line with our original plans. We’re really not at this point going to be breaking out the DKNY versus the DKI sales. And in terms of the prospective size of the business we had previously been out there with figures in the $500 million to $700 million range. We still feel very bullish about where the business goes and the size of the brand and -- certainly in the long run, we feel it’s significantly larger than even that.

We believe quite honestly, the early stage of development on those brands is $5 million to $7 million. This initiative in north of five years, let’s say, it’s five to six years; I would personally been disappointed if we didn’t break through a $1 billion.

And then, just one quick follow-up on tourism. I know that that had been weighing on your retail performance over the past couple of years and I think Wilsons maybe to a larger extent than G. H. Bass. Could you just talk about how much of the sequential improvement we’ve seen in your comps is the return of international tourists and just how you’re thinking about tourism going forward for that segment?

So, the repurposing of some of our brands really addressed part of the tourist issues. The best centers in the country were our poorest performers. We depended on tourism and a little bit of the past, there was demand for the Wilsons brand in places like Woodbury Commons, in Orlando, in Las Vegas and Sawgrass. And we saw a lesser demand for Bass and Wilsons in current years. So, in repurposing, we chose Karl Lagerfeld as the key repurpose vehicle for us. Karl is an iconic figure, known all over the world. Some might say he is the epitome of designers in the entire world. He is that iconic figure. So, we repurposed the stores. And as I said earlier in my commentary, we took stores that were negative contributors and we’re on our path to showing positive contribution. So, that’s an incredible swing. It doesn’t -- I’m talking about even getting to breakeven because we had stores that were losing close to a $1 million each on the turnaround, the repurposing concept. So, tourism really isn’t back to any degree. We’ve just addressed it in a different way. We’ve taken our biggest losers which were the tourists draw centers and gave them what they needed, what they wanted. And it’s growing every day. We see better sales, our margins are exceptionally strong, and it’s a brand that will continue to expand in appropriate cities.

The next question is from Erinn Murphy with Piper Jaffray.

Just a couple of questions. I mean, just first, I guess, Neal for you, talking about the profitability of the year. You obviously raised your EPS outlook. But it seems like the DKNY net losses have widened. I think in the second quarter, you are talking the operating losses annualized around $12 million and now at $16 million. So, I’m just curious, what the major changes are there. And then, how are you thinking about, maybe this is for both you and Morris, the pathway to profitability of the DKNY brand?

So, Erinn on the specific question, the 12 to 16 is the operating loss impact. Like as I mentioned, we had some softness in sales in the third quarter. There was also some -- a little bit of softness in terms of SG&A, and the net was about $4 million change to the actual operating loss on the Donna Karan, not very extreme. It was slightly offset by some reductions in depreciation and amortization where we actually have refined the allocation of the initial purchase. So, we have the benefit of that, which is why the total DK loss including the depreciation and amortization is very similar to where we were before. But that was the shift; it was a relatively small shift.

Erinn, what we’ve also done is we modified our method of distributing in Asia. We formed a partnership and we permitted some early terminations of distributors, which impacted our cash flow for the short term. It will be far better in the future, but for the short term, we gave some relief to some partners that felt it was the wrong vehicle for their new model and business in China.

And regarding your second question, as far as the pathway to profitability, and this is a story very much for us of growing sales volume. Of course, we’re making good strides in terms of licensing income as well. But, this is a revenue story for us. You can see we’ve got a lot of the expense structure in place. This first half of the year, we actually did not even -- we were not in a position to distribute our own product. So, that is now started. We expect that that will be in place for full year next year. And we will continue to leverage the SG&A that essentially we’ve established now.

So, just I want to make sure I understand that. I know you’re not guiding to sales for DKNY for next year yet, it’s still too premature, but directionally, if it’s still very much volume focused into next year, should we think about it being contributing to the bottom line by next year?

Well, I would certainly think that from an operating standpoint that that would be the case.

And then, maybe, Morris, for you. You talked about in your prepared remarks that you’re starting to work a little bit deeper with some other pure play e-com partners. Can you just expand upon your strategy there? What kind of key partners you’re working with or what are some of the opportunities you see, whether it’s by brand or by product category? Thank you.

So, it is primarily by brand, but it has elements that contribute to it by product category. What I meant by it is we are very conscious and very respectful by what’s been created by Amazon. And we’re clearly a part of that. We choose our brands appropriately, some are Amazon type brands and some are we try to keep away from Amazon. And we have another initiative with Amazon, which is a comprehensive effort of doing private label with them in an assortment of their brands in select categories. We’ve built a really special business which Stitch Fix. That’s a different pure play business, an online pure play business. Many of our brands are now selling Stitch Fix, and it’s a business that has hit out charts in sales volume. And then, there are some other pure play retail that we’re very active with. Team license business takes a very respectful form of business with…

Fanatics

Fanatics, I’m sorry. Fanatics is an online business that basically manages a good deal of the team licensed product. So, we work closely with them. There is some unique product that’s produced for them that’s not available to anybody else as well. So, we’re very active in it. Our online business, as I said earlier, the biggest piece of it is contributing to the department store business where their online business is important to us. It’s a big percentage of what we consider brick and mortar and appropriately.

Got it. Thank you, guys.

Thank you, Erinn.

The next question is from John Kernan with Cowen.

Good morning, Morris and Neal. Thanks for taking my questions.

Thank you, John.

I wanted to talk about the wholesale business excluding Donna Karan. I think clearly growing double digits still. Obviously, Tommy and Karl Lagerfeld have been very accretive to that growth trend. Just wondering what you think the sustainability type of top-line is into next year and what your outlook is for the fourth quarter for that wholesale piece of the business, if you look past just the Donna Karan contribution. Thank you.

Yes. So, the main growth that we have in the core business is the Tommy Hilfiger business. We’ve sized that business at about $1 billion; the new women’s categories are probably in the $200 million range. So, that’s a very good large source of growth for us. We think Karl Lagerfeld has got -- while we’ve doubled it this year, is probably the next bit of white space that we’ve got. We continue to say that and have seen this year that our Calvin Klein growth is mid to high single digits this year, there is still plenty of growth. Certainly, the newer categories that we entered into, the handbags and the sportswear are the categories that probably from a percentage growth standpoint are still richer than some of the more mature categories. We continue to see a mid to high single digit growth trajectory for the core business.

Okay. That’s helpful. And then, just if you look into next year, the $500 million to $700 million in revenues for Donna Karan, just wondering how you see -- it’s a fairly wide range, so I’m just wondering how you feel right now as you look at orders and the new categories you’re launching? How you feel about both the high and low end of that range, right now?

John, number one, the 5 to 7 is not next year; that’s not what we stated, and it’s -- should only happen. There will be some great growth but we won’t hit 700, nor will we hit 500 next year. I think we’re talking about the three-year horizon before we reach it. And there is a great comfort level that it will be achieved. We have so much more to work with, we have so much more help, we have the entire world, we have distributors, we have franchisees, we have unlimited licensing opportunities, there is a horizon that’s got a rainbow at the end. It’s a great story. We’re very proud of the acquisition. It will turn out to be one of the best things that this Company has ever done. So, we believe the opportunity really exists and we’re going to prove it out.

Okay, thank you. And then, just one final follow-up question on the retail part of the business. Can you just talk about what percentage of the losses right now in the retail segment are coming from the certain part of your doors that are unprofitable? Are there Wilsons and Bass stores that are profitable? And once you get out of these leases going into 2019, there could be a fairly sizeable improvement in the retail segment profitability?

Yes. John, there’re certainly those stores that are profitable, and of course a significant number that are not. And that’s the mix in the portfolio that we always deal with.

So, we dealt with the biggest losers first. We took, as I’ve said a little bit earlier, we took the tourist locations which are the best centers and the most expensive centers to be in where we were losing anywhere from let’s 600,000 a door to about a 1 million a door. And we converted, I think, it’s eight of them, into the very least breakeven; that’s very significant. We didn’t renew leases that expired. We are in the middle of negotiating a reasonable solution to a biggest losing store. And it’ll have an early termination and it might involve a conversion for a couple of years that we might remain on with it. So, we’re very happy with the progress. There are some good surprises that we’ve encountered. And we have yet to really deal with buying our way out of leases. If it doesn’t get significantly better for first quarter, we’ll pursue that and we consider buying our way out of some of the -- in the leases that we don’t see daylight in. But the mission is to cure the retail problem; that is one of the primary missions that this Company has today.

Got it. And then, just for the fourth quarter, should we assume a similar level of profitability improvement? I think Neal, I think you said $6 million year over year improvement from Q3 last year. So, is that the type of profit improvement we should see in the fourth quarter?

John, without getting too granular on the forecast, we’re actually expecting a larger than that increase in the core Wilsons and Bass business.

[Operator Instructions] The next question is from Eric Tracy with Buckingham Research.

Hi, guys. Good morning and congrats. I guess, if we think about framing the Donna Karan opportunity in the $500 million to $700 million range, I felt like it was primarily domestic North America driven. It seems like Europe and/or Asia are now incorporated in that. And so, is that more a function of just the kind of incremental opportunity, you see in those markets or is there anything, you’re pulling back from the North America side, just trying to frame the regional opportunity.

Well, we generally speak, Eric, it’s generally been North America. But, what we are seeing is an amazing opportunity, even more so in bottom-line contribution and top-line contribution. Our margins in Europe are significantly better than they are in the states. And our expansion into China through a joint venture should also give us improvement in bottom-line, maybe even more or so than the top-line initiative that you’re asking about. So, it’s clearly an opportunity that we haven’t dealt with. Being primarily the Americas, we’ve always thought that way. And we knew there was an opportunity, we thought it would take a little longer to get there; we’re getting there quickly.

And then, just as it relates to the inventory exiting 3Q, maybe just sort of speak to the composition. I’m assuming there is a level of kind of core type of -- be it outerwear or seasonal product, and given the kind of start to the season and ability to chase, but maybe just speak to composition and the inventory?

The inventory, fourth quarter is an important period of time. There is inventory that is brought for Donna Karan and Tommy to support fourth quarter and the beginnings of first quarter shipping. So, you see an impact in our inventory level that is, because of the addition of couple of other brands. Some surprises in converting stores, left us at the end of third quarter was a little bit more inventory at retail than we’d like to have. The Wilsons stores that were converted to Karl Lagerfeld very quickly left a little bit of residual inventory that we worked through. It’s been cured quite honestly into the first three weeks of fourth quarter. So, the inventory levels are very, very much in line. I don’t think they’ve ever been better, quite honestly.

The next question is from Jim Duffy from Stifel.

Hi. This is Peter McGoldrick on for Jim. I wanted to ask, as it pertains to the power brands, can you break down the gross contribution between floor space gains, like-for-like sales at retail, potential door growth in ecommerce and how do you see that unfolding going forward?

Peter, historically, we’ve never done that. And I think we’ll continue to be in that same posture. All I can tell you is that we are growing significantly. As there has been some dilution in suppliers, we believe, we picked up market share in all of that brands. That’s what makes us unique. There is not one driver. We have an absolute fleet that is taking market share from other suppliers in our industry. I couldn’t point to one and tell you is disproportionate to the other.

And then, with the cold snap helping sell throughs at the beginning of holiday, how do you characterize retailer open-to-buy and what extent is that contemplated in the 4Q guide?

Clearly, as our inventory in categories like outerwear and cold weather type categories depletes, there is less of an opportunity to fill some of those orders that are in demand. And what is actually very good for us is that the off-price channel does not have an opportunity to buy industry product and pack it away for the coming year. So, they’re open to buy for calendar 2018, it should be more significant than it was in 2017. So, we see a unique position for categories that have sold through incredibly well. And the door count in the New York price channel as we all read is increasing. So, between the door count, the lack of appropriate inventory, I think that bodes well for who some of us are and now we service the off price channel. And the department store has well benefits because there is less promotional product to open the season with the new off price channel. So, I think I see in core logic, I would tell you that it feels that it’s positioned well for the future.

And we have no further questions at this time. I’d like to turn the call back to Morris Goldfarb for final remarks.

I thank you all for spending the morning with us. And we hope never to disappoint you, and thank you. Have a good day.