Ladies and gentlemen, thank you for standing by, and welcome to the G-III Apparel Group Second Quarter Fiscal 2022 Earnings Call. [Operator Instructions] I would now like to turn the call over to your host, Neal Nackman, CFO. You may begin.

Good morning, and thank you 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; Neal Nackman, our Chief Financial Officer; Jeff Goldfarb, Executive Vice President; Wayne Miller, Senior Strategic Advisor; and Priya Trivedi, Senior Vice President of Investor Relations. For our second quarter of fiscal 2022, we delivered outstanding results with our top and bottom lines exceeding our guidance. Our earnings recovery is well ahead of our initial expectations and our world-class teams are doing an incredible job navigating through the challenges that come our way. This past quarter, we saw continued strength in casual categories. Casual dressing has become ingrained in our way of life and consumers are now looking for a well-rounded wardrobe, ranging from lounge at home to a more sophisticated relaxed look. Additionally, these categories offer growth opportunities, including expansion into the outdoor and sports market. We were also pleased to see an increased penetration of sales in our broader lifestyle categories, including dresses, more polished sportswear and wear-to-work clothing with momentum still building. Strength in our shoes and handbag categories also continues. G-III is well positioned with our diversified product categories that range across our globally recognized power brands, DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld Paris to meet the increasing demand for our products. Our order book is in a strong position and approaching our pre-pandemic levels. This is a clear indication that G-III continues to gain market share. Although the emergence of the Delta variant has resulted in some new uncertainties, we feel very good about our overall business. Putting it all together, we have the confidence to raise our full year fiscal 2022 top and bottom line guidance. Neal will provide you with the details shortly. Now let's review the second quarter fiscal…

Thank you, Morris. Net sales for the second quarter ended July 31, 2021, increased approximately 63% to $483 million from $297 million in the same period last year and were above our guidance of $460 million. Net sales of our wholesale operations segment increased approximately 75% to $467 million from $267 million last year. Net sales of our retail operations segment were $27 million for the second quarter, lower than the previous year's net sales of $35 million. This decrease is a result of the restructuring of our retail segment, in which we closed the Wilsons Leather and G.H. Bass store operations last year. Sales at our DKNY and Karl Lagerfeld businesses were up significantly compared to the prior year, which was impacted by the pandemic. Our gross margin percentage was 39.9% in the second quarter of fiscal 2022 compared to 45.3% in last year's second quarter. Last year's gross margins included benefits from COVID-related adjustments. I will discuss those momentarily. This quarter's gross margin is up compared to the gross margin percentage of 36% in the second quarter 2 years ago. Wholesale operations segment gross margins -- gross margin percentage was 38.3% compared to 46.3% in last year's comparable quarter and 32.8% in the comparable quarter of 2 years ago. Wholesale gross margin percentages in this year benefited from clean inventories at retail, resulting in less promotional activity, combined with price increases. This improved gross margin has been achieved despite increasing freight costs which we experienced throughout the quarter. We anticipate increasing freight costs for the remainder of the year, which will have more of an impact on gross margins in the second half of the year. Last year's gross margins included significant onetime benefits from the reversal of previously anticipated markdown accruals that were no longer necessary due…

Thank you, Neal, and thank you all for joining us today. G-III has a long history of successfully managing through challenging times. The strength of our business is built on the 4 fundamental pillars. The first is our portfolio of brands led by our globally recognized power brands, DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld Paris. The second is our expertise and dominance in a diversified range of lifestyle categories. The third is our well-established and diversified group of retail partners for many of whom we are a key vendor. And finally, and most importantly, a world-class team that has significant experience and expertise in all phases of our business. I've never been more confident than I am today in the ability of our teams to navigate successfully through this pandemic and beyond. These pillars provide us with significant organic growth ahead. As I noted on our last call, we see the annual net wholesale potential for our 5 power brands: DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld alone at $4 billion. We're in a strong financial position which we believe will fund our growth domestically and internationally and position us to take advantage of opportunities that may arise. On behalf of the entire G-III organization, I'd like to thank all of our stakeholders for their continued support. Operator, we're now ready to take some questions.

[Operator Instructions] Your first question comes from Ed Yruma with KeyBanc.

Congrats on seeing the improvements in the business. I guess just a couple of quick ones for me. I think first on markdown reserves. Obviously, I think both a function of your product selling through well and the industry inventory being tight. I'm sure that's favorable for you. How should we think about that in kind of the short to medium term? Will this favorability continue? And then kind of zooming out a little bit more, so you mentioned both denim and athleisure. How should we think about the growth opportunities in both of those businesses?

Thank you, Ed. I'm going to let Neal answer the markdown reserves, and I'll respond to the denim question.

Yes. So Ed, look, it's been a very positive environment for us. We definitely expect that to continue in the near term and probably in the midterm as well. The demand that is out there is incredibly strong, and we do expect that to continue. And that bodes very well for our markdown position.

As it relates to denim performance, we've been in the performance business for a while primarily with Calvin Klein. We started that business, I would say, about 12 years ago, maybe 11 or 12 years ago. As lululemon emerged, we grasped it. It was an opportunity that we went through PVH with. And PVH was happy to give us the category, and we got to work building it. And today, it's one of the larger athleisure performance businesses in our industry. Coupled with the power brands that we've described, pretty much every one of them has the opportunity to share space and as it expands with Calvin Klein. We've built a pretty well-developed Tommy Hilfiger business in record time in athleisure. We then went to DKNY, which is in the early stages of development, yet it hit a significant goal in sales this year. And then we're pursuing opportunities with Karl Lagerfeld as well in athleisure type product. So there's a lot of room to grow. The brands are incredibly important. We've proved that out. And where they hang in categories, they generally dominate. So we've gotten real estate expansion. We've got opportunities that these brands sit side-by-side in retail venues and with merchandise assortments that are definitively different. Each brand has a DNA -- specific DNA. So they don't tend to look as if they homogenize their dedicated designers and salespeople that develop all of this. Denim is no different. Denim came late to the party. After the acquisition of the denim business from Warnaco by PVH, there was an effort to build that brand in-house by PVH. It took several years for them to recognize that maybe the women's side of it was better suited for us. We took it on and in record time, again, taking this on just pre-pandemic, we've developed one of the larger denim businesses, as I described, uniquely merchandised. And again, taking the learnings out of CK, we applied them to Tommy Hilfiger and currently to DKNY. So there's plenty of room to grow all the brands in the denim business. And we're going through a denim cycle as we speak. So it's -- we're very aggressive, very confident that there'll be significant growth to come.

Our next question comes from Erinn Murphy with Piper Sandler.

Nice to see the improvements. My first question is just on the Delta variant. Is it impacting consumer demand currently? And if so, kind of what regional differences are you seeing in the business today?

We don't believe it's impacting consumer demand. We believe that the consumer is finding the safer, more comfortable methods of shopping, whether it's digital, in-store, whether it's pickup at the door, whether it's virtual. So demand is certainly there. The traffic within brick-and-mortar is down, is clearly down. The consumer is cautious in most cases. And we believe that this, too, shall end and the world will come back. Brick-and-mortar will improve. The tourists will come back. So there's great opportunity when this all calms down.

Got it. And then second question is just on the order book, Morris. I think you said it was nearing pre-pandemic levels. Just to clarify, is that for fall/winter? And then any early insights on how spring/summer is trending? Just particularly curious how retailers are ordering as we think about lapping stimulus and just some of the earlier benefits that we saw here in 2021.

Thanks, Erinn. The order book includes fall holiday as well as spring bookings. It does not include summer. And the order book is quite strong, much better than we had imagined. And as Neal said, we've kind of discounted the order book to accommodate for potential problems through supply chain. So we're even conservative at looking at our order book.

Okay. And sorry, if I could just sneak in one more on the supply chain. Can you just remind us what percent of your product is made in Southern Vietnam? And what type of workarounds are you doing right now with just some of the countries in Southeast Asia that are still seeing either factory shutdowns or rolling challenges with labor?

We -- in all of Vietnam, we're about 32% of our production. In Southern Vietnam, we're about 10% of our production. And when we see that or we hear that Vietnam is on a total shutdown, there are many factories that are opening in self-contained units where the people are in dormitories. They don't get to leave. They get to produce. So it's not -- there is no total shutdown. It is an encumbrance. It is a problem, but it's -- again, as we speak to the pandemic, it will also get resolved. There's talk of timing being -- maybe I just heard this morning, September 6, I guess, which is next week, early next week. There'll be added information as to when Vietnam will open. And it feels like it will open soon.

Next question comes from Susan Anderson with B. Riley.

Nice job on the quarter. It's good to see the improvement there. I was wondering if you could talk about the order book. I think you mentioned it was approaching pre-pandemic levels. Is that for the back half of this spring? And then also, I'm just curious by the 3 biggest brands, CK, Tommy and DKNY, if those are all approaching pre-pandemic levels. And then also just the composition, is it getting back towards more dressier? Are you still seeing more demand for casual?

So Susan, the order book, as I said, does include fall holiday as well as spring. And the 3 power brands that you cited, DKNY, Calvin Klein and Tommy Hilfiger, are pretty much all aligned. The smaller brands, the ones that haven't matured as well as CK, have greater growth percentage than the CK piece, but they're all in great shape. There's not one brand that's a problem for us.

Great. And just the mix of casual to dressy, are you seeing that shift at all in terms of what the retailers are wanting?

There's an evolution. Clearly, the casual piece of the business was the driver during the pandemic. And the growth right now, the piece that we were not well enough prepared for, the dress business, the suit business, that's come on very strong. So there's a chase to accommodate the demand for the dressier category. And as much as we stayed current, we designed and we produced, being a prudent supplier, we couldn't -- when there was no dress business, we couldn't be incredibly aggressive on it. We are as aggressive as a prudent manufacturer could be. So we're now challenged with providing and servicing the demand that there is out there, and we think we can accomplish it.

Great. And then just really quick on Karl. It sounds like there's significant door expansion this fall and spring. I guess how are you thinking about that brand and the revenue potential longer term? And is that basically just kind of replacing what you used to have at Lord & Taylor? Or could it be bigger than that through Macy's?

We believe it -- I think I cited a $0.5 billion brand for us on the wholesale side when we acquired a percentage of North America. We own roughly 50% of North America, and we own 20-some-odd percent of the globe. And the strategy was -- that was virtually -- there were virtually no sales in North America. We brought it here with the intent of building it. The pandemic got in the way. Lord & Taylor got in the way. The Bay in Canada was closed for a good part of the year. The Bay was our second largest account. So we retooled, and Macy's is putting it aggressively. Amazon is buying it. We have pure-play digital sales. Our own internal digital business is growing. So this was really out there. The acquisition was made, quite honestly, to replace Jones New York, not anything else that we did. Jones New York was closing down. There was great retail space open on the department store floor. And we made deals with Dillard's, Lord & Taylor, The Bay, and moved into some of the space that -- this great space, this great real estate that was in place for years. There was Jones, and it took off nicely. The interruption really was Lord & Taylor. And the ability of producing smaller units became a little complicated, and Macy's is supporting cutting tickets that are significant. And I see no reason that this brand doesn't bypass $0.5 billion in the next few years. We're on a great track.

[Operator Instructions] Our last question comes from Jay Sole with UBS.

Great. I just want to ask about sell-through in terms of what you see this year and if it strikes you as unusual just with pent-up demand. I mean I know you're not giving guidance for next year. But it certainly seems like with the guidance indicating that sales growth trends are going to improve sequentially as we go through the rest of the year versus 2Q '19, it sort of suggests that this whole year hasn't just been about stimulus. But can you just give us your perspective on that issue, like what you see there from consumer? I mean is what we're seeing so unnatural that it's going to be hard to lap next year? Anything you can provide would be really helpful.

Well, surely, receiving a check from the government makes you feel comfortable in going into a store and accelerating and maybe increasing your buy for apparel or some of the product that makes you feel good in difficult times. But we're seeing demand that far outreaches that. This is about fashion. This is about function. It's about utility. It's about lifestyle change. We're hitting pretty much all ways of life, and there will be some change. There certainly will be companies that will support work from home, and that in itself will constitute a change in demand for certain classification. But it will increase demand for other classifications, the casual piece, the canvas shoe piece. We pretty much hit all the silos of fashion, fashion and function. And we're good at -- we've become proficient and good at every sector. So it's not very concerning to us. We're an agile company. I'm not sure I care very much if there's a transition from a dress to a skirt or transition from a fleece to a knit. That doesn't really concern me to any incredible degree. We source well. We're entrenched in pretty much anywhere there is apparel production, and we've changed our model no less than a dozen times. If you date back to where this company started, we were merely a leather coat company that started in 1956. And through the '90s, all we did were leather jackets. So we've come a long way. We still do a little bit of leather jackets, but we've gone to where the customer has gone, and we'll continue to do that.

Got it. And then maybe, Neal, if I can follow up, if I can just ask you a little bit about your gross margin within the guidance for Q3 and Q4. How do you see the gross margin playing out given there's pretty big upside in gross margin this quarter versus 2Q of '19?

Yes, Jay. The -- we are thinking that we're going to have a little bit more pressure compared to 2LY in the third quarter. And that's really a function of freight cost increases. And while we're increasing prices, we're probably a little more hampered in doing that in the third quarter than we'll be able to do in the fourth quarter. So I think as you're modeling out, you'd want to keep the third quarter tighter to where we were 2LY. And when you get into the fourth quarter, specifically on the wholesale segment, we expect that to come back to some very strong gross margin percentages, more like what we've seen in the first half of the year.

Thank you, Jay. And thank you all for...

Pardon me for interruption. We did have one other question -- one other question in queue for questions. Do you want to go and take that one?

Sure.

It's from Erinn Murphy with Piper Sandler.

It's me again. Sorry, just 2 follow-ups since it looks like there's some time. I guess if we look deeper into '22, can you share a little bit more about what you're seeing with input costs on the raw material side? And then relatedly, Morris, you did talk about outerwear that you're seeing some good pricing and you're taking price. How much are you taking from a price perspective in outerwear? And is that more than offsetting any pressure on the input cost side?

I'll respond to the last question first. It is offsetting some of the cost increases, and it really depends on the channel of distribution. We're sensitive to what it takes to move our product. So we don't overtly take major increases that will inhibit the sale of the product. But I would say we're north of 5% and maybe approaching 10% in many areas, which certainly offsets the cost of getting the product to the consumer that we're incurring. And the -- go ahead, Neal.

Yes. Relative to future input costs, Erinn, we're certainly going to see and expect to have increases there. And we're going to continue to manage the business as we've done this year with the freight cost. So to the extent that, that becomes obvious, and right now, it does feel like that's the way we'll be increasing prices to offset that as well.

Clearly, there's been a global inflation, and we are paying more for piece goods going forward. But there are factories that we've traded with for decades that work closely with us. They understand the need to be competitive. The work that we do to understand what the right price points are, are instrumental in how the piece goods manufacturers deliver product. So it's a collaboration. It's not -- again, our vendors don't flagrantly just lash out numbers and say, "This is what you've got to pay today." It's a slow evolution. And quite honestly, it needs to be accepted by the consumer. And without the end user accepting price points, there's no use in buying piece goods, producing garments or designing garments. And we're testing all of that right now. The price points have been accepted. The maintained margins both for us and even more so for the retailer are better than they've ever been. The sell-throughs are better than they've ever been. So we see a bright world coming.

Great. Thanks for letting me follow up.

Thank you, Erinn. Thanks for your questions. So with that, I wish you all a great Labor Day, and thanks for hearing our story. Have a good day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.