Good day and thank you for standing by. Welcome to the G-III Apparel Group First Quarter Fiscal 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the call over to your speaker today Neal Nackman, Company's CFO. Please go ahead.

Thank you. Good morning. Thanks for joining us. 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. I will now turn the call over to our Chairman and Chief Executive Officer, Morris Goldfarb.

Good morning and thank you for joining us. Also joining me today are Sammy Aaron, our Vice Chairman and President; Wayne Miller, our Chief Operating Officer; Neal Nackman, our Chief Financial Officer; Jeff Goldfarb, Executive Vice President; and Priya Trivedi, Vice President of Investor Relations. We are pleased to end the first quarter of fiscal 2022 with strong outperformance in our results, which gives us confidence that we and our industry are well on our way to recovery. In reflecting upon last year and the very difficult challenges posed by the global pandemic, it is impressive to see how effectively we navigated through this period. More importantly, we've emerged a stronger and leaner company in a solid financial position, which affords us with a significant flexibility to invest in our growth. Our past success, financial strength, and future growth are built upon four fundamental pillars. The first is our incredible portfolio of globally recognized lifestyle brands anchored by DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger, and Karl Lagerfeld. These brands have a proven record of longevity, relevance, and appeal to consumers throughout the world. Our second pillar is our expertise and dominance in a diversified range of lifestyle categories including sportswear, outerwear, dresses, athleisure, jeans, suit separates, handbags, and footwear. Our third pillar is our diversified base of retail partners who operate across a wide range of distribution channels and for many of whom we are a key vendor. Finally, our fourth pillar of success and maybe the most important is the world-class team we've built here at G-III, many of them with significant industry experience and expertise. Leveraging these four pillars enables us to create product at the right price points in a broad range of categories, which are able to meet the needs of a wide demographic of…

Thank you, Morris. Net sales for the first quarter ended April 30, 2021, increased approximately 28% to $520 million from $405 million in the same period last year, and above our guidance of $460 million. Net sales of our wholesale operations segment increased approximately 35% to $512 million from $379 million last year and decreased approximately 10% from $571 million two years ago. Net sales of our retail operations segment for the quarter were $19 million, approximately 43% lower than last year's sales of $34 million. The restructuring of our retail segment was completed last year. We have included the prior two years results for Wilson's Leather and G.H. Bass store operations in our press release issued this morning. Our gross margin percentage was 37.6% in the first quarter of fiscal 2022 as compared to 30.7% in the prior year's period. This increase in gross margin was primarily driven by the gross margin percentage in our wholesale operations segment, which was 36.3% compared to 29.6% in last year's quarter. Wholesale gross margin percentages in this year benefited from clean inventories at retail, resulting in less promotional activity. Further, last year's gross margins were negatively impacted by the pandemic onset, which resulted in the recognition of certain fixed costs, primarily higher effective royalty rates over the reduced sales base. The gross margin percentage in our retail operations segment was 50.3% compared to 35.9% in the prior year's quarter. We continue to reap the benefits of stringent cost controls. SG&A expenses decreased by 8% to $141 million in this quarter compared to $155 million in the same period last year. Cost reduction efforts undertaken in response to the pandemic and the reduction in our store base were offset partially by increased expenses associated with the increase in sales and profitability in the…

Thank you, Neil. G-III is a stronger, leaner and agile organization with a strong portfolio of global power brands, DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld. As the world reopens, we are in a strong financial position, which we believe will allow us to fund our growth domestically and internationally and enable us to take advantage of opportunities that arise. Our employees are the heart and soul of G-III, and I'm incredibly proud and grateful for their hard work. The entrepreneurial culture we've built over the decades continues to fuel and elevate our position in the marketplace. Before ending, I want to highlight the progress we've made on our corporate social responsibility initiatives last year. I discussed Vilbrequin's extensive efforts last quarter. In addition to those, we are laying the groundwork to formalize, enhance and scale our social and environmental programs throughout our organization. We continued our commitment to funding our nonprofit partners and made strides in our focus on diversity. We recently posted our 2021 CSR letter to our IR website. I encourage you to take a look for more details on our efforts. On behalf of the entire G3 organization, I'd like to thank all of our stakeholders for their continued support. Operator, we're now ready to take some questions.

Thank you. [Operator Instructions] Our first question comes from Edward Yruma with KeyBanc. Your line is open.

Good morning, guys. Congrats on the accelerating momentum. I guess two questions for me. First, Morris, I know at this time last year, you really were able to work cooperatively with your vendor base as you kind of deferred some orders. I guess, how has that positioned you this year in terms of being able to get access to factories and kind of this reramp process? And Neal, just a follow-up, wondering if you can give us a little more color on SG&A going forward. I know there have been a lot of moving pieces. You guys were very aggressive in reducing SG&A last year, and what has to come back as the business continues to grow?

Good morning and thanks for your question. I think we all recognize that interruption sometimes is an impediment to the future of your business. We, believe it or not, never interrupted our commitment to our vendor base. We were very communicative. We let them know where we were at every step of the way. We shared the burden of losses and cancellations. And at the end of the day, we kept them pretty much all intact. They were producing throughout the pandemic. We wound up taking, I would bet, more than 90% of the orders that we’ve placed. We paid promptly. And fortunately, we're in a financial position to be able to do that. And the industry didn't operate in a like form. So, the advantage of being obvious, dominant, and financially capable gave us the ability of garnering some manufacturing bases that we didn't have before. So, we're in good shape on our supply chain. As I stated earlier, the wildcard is a little bit of how we respond to container shipments, and even in that case, the fact that we cooperated with our vendor base, they are fighting for containers on the production side of the world alongside of us, and we're succeeding. We're doing well on getting everything that we need, and our steamship companies as well, because of the level of cooperation we gave to them responsive to our needs. So, we're one of those companies that recognizes that a vendor base is as important as your customers in this space [ph].

Yes. And as far as the SG&A, maybe it's a good time to give a little bit of a reminder what happened to us last year because that's really the baseline for what we're looking at this year. In terms of last year, the most significant thing we did was with respect to our employees. We had furloughs that started in April of last year. They ran until October of last year. We also had cuts in terms of wages to the management team. Ultimately, we had a reduction in force when we brought people back. So, the reduction in forces will be permanent for us at this point. We do expect that as the business continues to grow, we'll probably bring people back on, but I don't expect a strong impact of that for this year. The second largest item that we cut was on the advertising front, significantly cut that back last year, all discretionary spending, and certainly the spending that related to contractual advertising that we do for our licensors. So that will come back as Morris mentioned in his speech. In the second half, we'll start to spend more on our discretionary advertising with DKNY and Karl Lagerfeld. And of course, the contractual amounts will expand as sales increase. Probably, the single largest good guide we've got coming into this year is that last year we did have bad debt expenses that were quite significant. They were about $14 million throughout the year. The biggest charge of that was in the first quarter of last year, and so we're certainly thinking that, that's behind us. And then the last significant item in terms of the prior year's SG&A was the retail closures where Wilsons and Bass are now closed. So, as we look at this year, the first quarter's SG&A was strongly leveraged. I think as you go throughout the year, we'll see more of a flattening if you think about the full year in terms of SG&A leverage, but we're very comfortable with where the SG&A structure is. We really feel like we're quite a bit leaner at the moment, and that should bode well for us.

Thank you. Our next question comes from Erinn Murphy with Piper Sandler. Your line is open.

Thank you. Good morning. Morris, a question for you on some of the green shoots you're seeing in categories like denim and dresses and sportswear. How are you positioned in these categories into fall of this year? And then with the retailers that you're working with, are they moving into chase mode with some of these categories?

Good morning, Erinn. Thank you for the question. We're positioned okay on an inventory level. I wish we had far more inventory. The market opened up faster than we had anticipated, and some of the resource countries that we're engaged with are limited in potential. A big piece of our production for denim is coming out of Jordan, and Jordan has seen some pandemic issues. And quite honestly, the impediment to growing the business more rapidly is getting supply. Demand is high and supply for the moment is limited. We're working on it, and it's a great opportunity for the future. So, as I stated, pretty much all our brands are producing denim apparel. It's not just denim, but it's all the components that relate to the jean, and sales are great. But the good part, I don't want you the good part, I don't want you to really focus on denim alone. All our businesses have opened up. Our dress business is tracking at north of pre-pandemic numbers for the last month or so. So, we're chasing supply, and we believe the world is back. People are going out. People are partying. They're not just wearing their fleece leisure wear. They're wearing denim, and they're wearing [indiscernible] and they're wearing stretch fabrics, and they're wearing [indiscernible] product. So, I would say we're in a mode where we believe the world is really back. Our handbag business is showing diversity and demand, and even our footwear business, it's not all canvas footwear any longer.

Great. That's encouraging to hear. And then, I guess, two quick ones on the model, Neal, for you. Is there any timing shift between Q1 and Q2 this year just related to some of the port challenges or logistical challenges? I think pre-pandemic Q2 used to be higher than Q1 revenue. So just trying to understand the disconnect in the guidance you provided this morning? And then secondly, on the model, Q1 gross margin was up versus '19. Is that sustainable to continue to see gross margin expansion over 2019? Thank you so much.

Yes, Erinn, with respect to timing on Q1 and Q2, I think that what we're seeing is a very strong Q1, probably pulling a little bit from Q2, but still a very strong increases in this Q2 compared to last year. Of course, last year was really the most significant decrease as a result of the pandemic. We're also factoring in for Q2 this year, what we anticipate will be some freight challenges. We've done very well with those so far, but we've certainly got our eye on that. I think as it relates to gross margin compared to the prior year -- to the two prior years ago. Our view is that we are going to see increases in the gross margin percentage. We expect to be less promotional. We mentioned taking up prices. So, we are expecting that we'll have a continuation. I don't think it will be as robust as what you saw in the first quarter, but we do expect increases in the gross margin percentage.

Thank you. Our next question comes from Susan Anderson with B. Riley. Your line is open.

Good morning. Nice job on the quarter and it's great to see the acceleration in the business. I'm curious, it sounds like you do wish that you had more inventory. So curious what you're hearing from your wholesale partners and particularly, in terms of the outlook for the rest of the year and the fall orders? Are you seeing them increase those orders? And if so, I guess, at this point in time, can you fulfill more demand coming into the back half?

Thank you, Susan. One of our core competencies is really having this unique ability of chasing product. We have a diverse team of people living offshore, concentrating on the specifics of sourcing more better product. And we're succeeding, in some cases, and other cases, we're not. There's an inability of chasing product when factories have factories have closed. So we're bringing back some production to China. We made solid base in China, which work to our advantage. And as areas like Vietnam has limited capacity, capacity compared to China. We're electing to bring back some of our production to China, where the ability of sourcing more product competitively exists. So demand is high. We'll succeed and we believe will succeed in bringing in sufficient product. Our retailers are looking for more product than they had originally planned for. But we're a company that gambles, to some degree, because of the nature of our brands, on the level of inventories. So, we're able to accommodate the needs. And a good scenario would be that we end up the year with far less inventory than last year and sell it into the channels that we service.

Great. That's helpful. And then just in terms of the digital business for DKNY and Karl, maybe if you can talk a little bit about the performance there in the quarter? I think they were both revamped. So curious how those are performing versus your expectations? And then where you're at with the investment in those two digital businesses?

So, not to distort the level of visions that we do there, they're both the DKNY and Lagerfeld are in the early stage of development. We're aggressive in our spending, both for talent and systems as well as logistics. So there's nothing that I can tell you other than percentage increases that would excite you. Basically, the message would come back to us a year from now and that'd be something that moves the charts on the earnings stream on digital. Contrast to our own, the retailers that we service all have a matured digital base. And as much as our largest account has about a 40% penetration in digital and that business is great. That business is performing with a minimum of 30% comp to last year -- 30% up comp to last year. And not that we're late on the digital side, but you need to recognize that some of our brands Calvin Klein and Tommy Hilfiger, specifically, we license those brands, and we do not have the right to build our own digital sites. So with the acquisition of DKNY and Karl Lagerfeld and Vilebrequin, we finally have some massive opportunities on global brands that would create consumer interest, and they are creating consumer interest. And with that in place, we chose to invest in the talent pool and the systems that I described. So, we're looking to some great stories in the coming years on our digital expansion.

Thank you. Our next question comes from Jim Duffy with Stifel. Your line is open.

Thank you. Good morning guys. A good start to the year. Congratulations on progress. Hey, Neal, I wanted to follow up on the question on SG&A. Can you speak about the seasonality of SG&A, as we think about it relative to fiscal '20, fiscal '19 patterns? And how the closure of the retail stores may impact that?

Yes, sure. There's no real change, Jim. If you think about the -- where we were just in terms of extracting out the retail, you did have a seasonality there that was more fourth quarter based. But as far as the SG&A on the wholesale side of the business, I don't see any change in from a seasonality standpoint.

Okay. Even as you seemingly kind of ramp back investments as you talked about the leverage that you saw in the first quarter narrowing over the course of the year?

Look, we'll definitely have increases as a result of primarily the furlough staff, and we'll have some small increases as a result of advertising. But I think if you're going back to 20Y, the seasonality there on the wholesale side of the business should be fairly similar.

Got it. And then with respect to incentive comp, we're getting a good look at that in the 1Q report, I presume. And so there's no escalation of that over the course of the year?

Well, no, I think as it relates to compared to the prior year, you'll see escalations in that throughout the year. Again, if you go back to 20Y you should be fairly consistent there.

Okay. And then last one for me, I just wanted to ask about those categories where you see more pricing power and opportunity and what types of price increases you're talking about?

Thank you for your question, Jim. Quite honestly, our first view is the pricing increases that we can obtain and not affect retail performance. We're sensitive to our stores primarily we're out of business if they're out of business. So it's not totally elastic. It's got some mobility, part of which is we produce great product, we sell it at a very fair price, and we have great brands. So there's a little room to offset the potential increases in containers and possible increases on some production costs. But it's not monumental, and we've tested it. It works. We're getting $5 more at retail, which is a big deal when you produce millions of units of product. Our ability to do that is we dominate certain areas. The dress business is key. We're two of the largest producers of dresses in the country with all our brands. The coat business is very much the same way. So the opportunity is there to move a price point up. It's not unlimited. And we -- again, the primary concern is the retail ability of what we put out there. It doesn't do any good to sell into a very high retail and have the retailers suffer a markdown at the end of the season.

Thank you. Our last question comes from Jay Sole with UBS. Your line is open.

Thank you so much. So I have a question on revenue, just at a high level, and thank you for the table on the Wilson's Leather and J.H. Bass impact on 2019 -- calendar 2019 in the press release this morning. But if you take out the sales from those two brands, it looks like your guidance implied sales are going to EBITDA down about 12% versus calendar '19. Can you just talk through -- are there any structural changes, maybe like store closures from some of your retail partners or some other aspect of the business that means that like getting back to 2019 levels? It would be hard to get all the way back there. Otherwise, what do you think it will take to get back to that $2.9 billion range that you did in fiscal 20 ex Wilson leather and G.H Bass?

So Jay, it's Morris. It's very hard to replace stores that are out of business. You can't bring them up to 2019 scale. One of our largest customers was Lord & Taylor, that's basically gone. There's nothing we can do to bring their business back to '19 numbers, Century '21 and another one. There's a host of Stein Mart, you had another 1. These are -- these numbers reach a couple of hundred million dollars in sales. It doesn't happen overnight that you replace them, but we're creating other silos of business that should surpass 2019 numbers in the short period of time. We're aggressive on doing private label development for some of the mass tier distributors who are out there looking at acquisitions that are likely to move the needle to some regard. And we're producing better product and responding quicker and turning our inventory and the retailers' inventory faster and better. So we might achieve another turn in inventory to attain top line. The classification of jeans is likely to impact our growth as well. So there are elements. We're kind of a unique company. We bifurcate brands by categories, and we produce most of them. We're now looking to maybe accomplish the same thing on the men's side of fashion. So, it wouldn't be a surprise if we took the model that we created over decades in women's and transposed it into the men's sector. And that's an opportunity that I hesitate to give you the number. But we're a growth company. Our highest internally and management are about growth. We're entrepreneurial, we're aggressive, and we're calculated. So you're likely to see some changes in future that benefit and our company and playing out of the acquisition of Karl Lagerfeld is another feature of relevance. We bought the brand to service some retailers that are no longer in business, and we've decided collaboratively with Macy's to enter into Macy's with the brand in both men's and ladies, and that's going to be a big picture development at G-III as well.

Got it. So I can just follow-up on that. That's very helpful. Thank you for that information. You talked about a couple of hundred million that are maybe not in the sales structure because of Lord & Taylor and some of the other ways that the retail landscape has changed. Is there a lot of deleverage on those sales? And at the same time, for all the initiative that you're talking about, that's some very exciting, are there a lot of investment dollars going into them? Because if you add back the $0.65 from Wilson Leather and G.H. Bass that was a negative in 2019, the Company would have done $3.84 in earnings. And this year, the guidance is for $265 million at the midpoint. So, what is it just that there's -- the business has got a little smaller because the pandemic and it's just going to grow and there's some investments as you evolve into sort of the next chapter? Or what's going to take to get back to that 2019 level of earnings?

I think a lot of what I described gets you there without an incredible amount of CapEx. The thing that we need to remember, the top line included retail which no longer is in our portfolio. We had another couple of hundred million dollars of retail that went away as we closed Wilsons and Bass. And we're now very -- as I said before, we're a calculated company. We've got retail that will grow with three venues: Bill Bracken, DKNY and Karl Lagerfeld. Karl Lagerfeld is in the early stage of direct-to-consumer. We only have, I believe, its 11 stores with leases outstanding. We should be reaching 25 to 30 stores within the next, I'd say, the next 18 months. And DKNY as our business gets better. Our product is product is performing exceptionally well at wholesale. We're transposing the learnings into retail, and that will grow to be a significant chain as well. We're not sure of opportunities for growth. I stated in my script, the brands that we have, the power brands alone can contribute $4 billion of wholesale sales into our portfolio.

Jay, this is Neil. Just a follow-up in terms of leverage and margin, keep in mind, too, we've done some permanent reductions in force. So that helps us in terms of the deleverage on the lost sales. From an operating margin standpoint, we believe that the fiscal '19, while that was very strong for the wholesale, there's actually still opportunity even on the wholesale side of our business. The DKNY business that is now part of that operation will be a higher operating margin business than the balance of our structure. So, we actually do continue to see improvements in the operating margins and leverage despite what could be some short-term challenges with the lost sales.

Operator, I believe that concludes our questions. And I thank all our stakeholders and everybody on this call for taking the time and continuing your interest in our company. Have a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.