Good day and thank you for standing by. Welcome to the G-III Apparel Group Second Quarter Fiscal 2023 Earnings Conference 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 hand the conference over to your speaker today CFO, Neal Nackman. Please go ahead.

Thank you. Good morning, and 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. In addition, during the call, we will refer to non-GAAP net income, non-GAAP net income per diluted 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, which is also available on our website. Also disclosed in our press release for your reference on last year's GAAP to non-GAAP results by quarter. I will now turn the call over to our Chairman and Chief Executive Officer, Morris Goldfarb.

Thank you, Neal, and thank you everybody for joining us. In the second quarter, we saw a strong demand for our brands and met our top line expectations. We continue to manage the business prudently with a keen eye towards gaining market share and building on our strengths, while further expanding our global reach. We remain confident in our strategy as the overall fundamentals of our business are incredibly solid. G-III has a culture of entrepreneurship, agility and flexibility with a world-class leadership team and proven track record of navigating through tough environments. Despite solid top line performance, we were not immune to inflationary pressures and elevated costs in areas such as warehousing, transportation and raw materials, which led to bottom line net income per diluted share below our guidance. Given the challenging environment that has rapidly developed, along with our retail partners being more cautious on the timing of inventory, we're taking a more conservative view for the balance of the year and adjusting our guidance accordingly. Neal will provide more details on this shortly. Now turning to the quarter's results, where we continue to see significant year-over-year sales growth of our power brands, DKNY, Donna Karan, Karl Lagerfeld, Calvin Klein and Tommy Hilfiger. We experienced growth across almost all categories, with particular strength in dresses and career wear and robust growth in handbags. Our merchant and sales teams responded to the decline in athleisure and a shift in demand towards more polished and dressy categories. They pivoted our assortments early in the year as consumers return to in-person activities and to work. We continue to evaluate and align our forward production to deliver the right merchandise across categories with the right price points for the given time. Net sales for the second quarter was $605 million, an increase…

Thank you, Morris. Net sales for the second quarter ended July 31, 2022, increased approximately 25% to $605 million from $483 million in the same period last year. Included in our sales for this quarter were $17 million for the one month of the Karl Lagerfeld acquisition. Net sales of our wholesale operations segment increased approximately 26% to $588 million from $467 million. Net sales of our retail operations segment were $31 million for the second quarter, up 14% compared to net sales of $27 million in last year's second quarter. Our gross margin percentage was 37.8% in the second quarter of fiscal 2023 compared to 39.9% in the previous year's second quarter. Gross margin percentage in the second quarter was expected to be lower than the same period last year as the significant increases in transportation costs did not significantly impact us until the third quarter of last year. In the current quarter, we incurred higher freight costs and other inflationary costs, which were only partially offset by the price increases we implemented for this year. The wholesale operation segment gross margin percentage was 36.2% compared to 38.3% in last year's comparable quarter. The gross margin percentage in our retail operations segment was 51.6% compared to 51.9%. SG&A expenses were $191 million. Excluding approximately $5 million in one-time expenses associated with the Karl Lagerfeld acquisition, non-GAAP SG&A was $186 million or 30.7% of net sales in this quarter compared to $147 million or 30.4% of net sales in last year's second quarter. Included in other expenses and income is a non-GAAP gain of $31 million related to the fair value of our minority ownership in Karl Lagerfeld prior to the acquisition. GAAP net income for the second quarter was $36 million or $0.74 per diluted share and non-GAAP net…

Thank you, Neal, and thank you all for joining us today. G-III's power comes from the significant diversification we've developed across multiple facets of our business, including our portfolio of globally-recognized brands, our base of distribution partners and our dominance in producing a broad range of product categories. Our diversification, combined with our well-developed design, sourcing and production infrastructure and high-performing teams, creates a versatile and balanced business model. We believe we have a significant runway for growth. The sales opportunities of just our power brands alone, DKNY, Donna Karan, Karl Lagerfeld, Calvin Klein and Tommy Hilfiger, remain very powerful. We're financially strong and can use our balance sheet to capitalize on opportunities. We remain focused on our strategic priorities to deliver continued long-term profitable growth, which includes driving our power brands across categories, further expanding our portfolio through ownership of brands and their licensing opportunities, extending our reach by developing our European-based brand portfolio, maximizing our omnichannel opportunities and leveraging data and continuing to innovate to stay relevant for our customers. I'd like to thank our entire G-III organization and all our stakeholders for their continued support. Operator, we are now ready to take some questions.

Certainly. [Operator Instructions] And our first question will come from Edward Yruma of Piper Sandler. Edward your line is [Multiple Speakers]

Hey, good morning guys. Thanks for taking the question. I guess first just to unpack the guidance vision a little bit. How much of it -- I know you said gross margins are up because of Lagerfeld, but are you assuming higher market allowance, kind of, how does that fold into gross? And then Morris, I want to step back a little bit and talk about outerwear, I know you had some encouraging commentary. I guess what are you seeing in terms of potential markdowns in this space? How clean was inventory from last year? And as you think about the reorder business, I guess, kind of how are you positioned? Thank you.

Neal?

Yes. And so with respect to gross margins, we are taking a more conservative view into the back half. As I mentioned, the inflationary pressures on the consumers, we expect to put pressure on our top line sales. Obviously, that's less significant than really the impact on the gross margins. And in addition, the inventory increases that we've got will be putting some pressure on the second half gross margin percentage as we have warehousing and receipt costs that will be -- that we're expecting to be higher.

Ed and regards to your question on outerwear, as you know, outerwear is our middle name. We started as a pure play outerwear company. We know how to manage through the outerwear sector. It's the most profitable segment of our business and generally it's the highest margin performer for our retail partners as well. So if you measure the level of inventory that we brought in that today feels as if it's substantial and it is. The biggest piece of it is outerwear. We know how to manage through inventory issues. We started out the year incredibly clean during the pandemic we were able to monetize a good deal of our dated inventory. We're in a fabulous position as it relates to old inventory. So our quota inventory is all new fresh with solid bookings attached to it with some support inventory that we believe we can manage through for the year, that I believe will be a highlight for the year when we report the year-end earnings, I think we'll be in a position to report back to you assuming that the nature is aligned with us and assuming that the consumer is out there and there is not another war somewhere in the world. We're prepared for just an amazing outerwear year.

Thanks so much.

Thank you, Ed. Thanks for your question.

Thank you, one moment. And our next question will come from Will Gartner of Wells Fargo. Will your line is open.

Hey, guys. Thanks for taking my question. Could you guys just speak to -- this is for Neal. Could you guys speak more on the cadence of gross margin and as you enter 3Q and 4Q? Do you expect improvement from 3Q into 4Q? Can you just kind of frame that out for us?

Yes. Well the -- unlike the first half of the year where we really had good margins, but we were really up against great margins in the prior year, the prior year did not have the traffic cost increases in source freight is concerned. We really started to experience that in the back half more robustly of last year. So we do expect that as a result of that compare, as a result of adding in the Karl Lagerfeld transaction, which I mentioned, increases our gross margins. We really will have a turn in terms of the consolidated gross margin and will be positive to the prior year as opposed to being negative for the first half. As it relates to Q3 and Q4, there'll be increases in both I'd probably lean to the fourth quarter being slightly heavier, but only marginally so.

Great. And just one more for me, it looks like you took down guidance for Karl, I think you said there was going to be at $140 million in res, I mean, it looks like you are taking time of $130 million? Just curious what happened there?

But what had happened was we had a plan for opening additional stores and we were cautious on the store expansion. So a big part of that is the reconsideration of opening stores and the timing of when we'll open stores.

Understood. Thank you. I'll pass it along.

One moment. And our next question will come from Jay Sole of UBS. Your line is open.

Great. Thank you so much. Morris, I have a two part question. First, last quarter, my sense was that you felt like when you walk through department stores, the department stores were not moving inventory fast enough, not reducing markdowns quick enough. A feedback forward to now, I mean, how do you feel like the department store's position is towards the environment? And are actions being appropriately taken? Is it still a little bit slower out there? Is it faster? And then secondly, just on September, what have you seen thus far in September? And most recently, what are the trends been like?

Thanks for your question, Jay. Yes, I believe that department stores have begun to take the appropriate inventories to move seasoned goods. They were my view. They were late in cleansing the floor and making space for new inventory. But as that began to happen, new inventory was shipped. It's on the floor and selling quite -- let me call it briskly, and the floor appearance is much more current. So I believe we're in a much better place as it relates to presentation and performance on the department store floor and I think we'll begin to see that. We've gotten reorders as new product hit the floor. We were a little bit anxious to get all the hard work and in production and design showcased on the floor. And it was delayed a little bit, but as it got on the floor, I think we're uploading the performance as it relates to the beginning -- I guess it more relates to the beginning of Q3 than it did for Q2.

Got it. Okay. Thank you so much.

Thanks for your question, Jay.

One moment. And our next question will come from Paul Kearney of Barclays. Your line is open.

Hey, thanks for taking my questions. My question is on the gross margin guide for the back half again. And just a clarification, excluding Karl Lagerfeld, what's your expectation for kind of the organic gross margin? And then also what are you assuming for increased levels of promotion across the industry? Thanks.

Yes, Paul. Thank you for the question. With respect to -- if you excluded the KLD transaction, we would have been still up against the prior year, but certainly flat for the second half. If you combine Q3 and Q4 and then there's a little bit of a change there in terms of the cadence. In terms of promotionality, we've not anticipated significant amounts of promotionality for the back half of the year. We believe that our inventory is very good value that our brands are in good stead. As Morris mentioned earlier, if the consumer is not strong, we have -- if the consumer is strong, we've got support inventory forward. And if it's not, we'll feel comfortable carrying over some of the more long lived styles that we have.

There will be a level of promotion and as we always discuss that on the retail floor. And I know, it's not a forever situation, it's inventory that still resides, that needs to be moved and the prudent retailer will move that inventory and adjust for the in-demand fashion product that is really the right product is never a hardship in selling. And we start out with reasonable margins. Our retailers have enjoyed better margins than they have in many years. So I'm not anticipating a disaster on moving inventory at all. I think both the retailer and the supplier are going to be in good shape. And at the end, they'll be a happy consumer as well.

Thanks. And quick follow-up, just to level set our expectations when do you -- what do you envision inventory looking like at the end of the year? When do you envision it normalizing to be more in line with sales? Thanks.

Yes. We're again the main driver to the increase is this in-transit -- is significantly in-transit inventory. The production calendars have been moved up and I expect that, that will stay for quite some period of time. The guess as to when in-transit inventories get better is really anybody's guess. We're seeing improvements in a lot of that infrastructure now. So I think is that continues to improve. I think our compares will be better. I am still expecting pretty fairly elevated inventory levels for both Q3 and Q4. And again, it'll be significantly driven by the in-transit figures.

We can't forget about the state of our order book as it relates to inventory and the flow of inventory. We have a very solid order book that keeps growing every day. So it's the way we plan our business. We accelerated receipts by at least 60-days in some countries greater than that, more like 75-days. So there's kind of a spin on [Technical Difficulty] inventory levels. It's not a number that can really be comped to pre-pandemic. During the pre-pandemic, we were bringing in inventory and we were structured as quick response type retailer that doesn't exist anymore, so the pre-pandemic. We were bringing in inventory and we were structured as a quick response type retailer that doesn't exist anymore. So we changed our model, we're always considering our order book when we anticipate inventory. So we're a little skewed. You need to comp when you evaluate our levels of inventory, you need to comp the order book aligned with the inventory status. And when we look at the back end of the year, it flows into fiscal 2024. We're beginning to buy and receive product that won't be shipped until Q1 of 2024. So it's a moving target, it’s one that's not that difficult for us to rationalize and we're comfortable with the inventory levels.

Thank you. Best of luck.

Thank you. Thanks for your question.

Thank you. And our next question will come from Noah Zatzkin of KeyBanc. Your line is open.

Hi, guys. Thanks for taking my question. I was just hoping if you could provide any color on the revenue guidance as it relates to your order book for the rest of the year, as well as how any cancellations, kind of, are shaking out or shake out versus expectations baked into prior guidance? And then any color on how the brands are, kind of, performing internationally versus domestically? And how that's progressing would be helpful? Thank you.

So our order book is about 94% to plan, which really encompasses the cancellations that we got through Q2. Those are behind us. We managed through the adjustments we made, some of them were -- some adjustments were cancellations, some adjustments were moving deliveries into another quarter. So we managed through it and don't anticipate a crisis going forward on cancellations. We have partners both on the supply side and on the retail side that depend on our existence and there's a sensitivity to -- you can't kill a supplier and it goes both ways, it goes the retailer toward us and ourselves toward our vendor base. So there's almost an acknowledgment that needs to be worked collaboratively to get through a difficult year. And the brand performance internationally, DKNY has done great on the wholesale side. We've grown our business and we've more than doubled our size in a couple of years. And it's just the beginning we've made some changes in our Milan office that will be announced in the next day or two. And the Karl Lagerfeld business, which we just acquired has a solid footprint with an amazing team that continues to grow and prosper and with the appropriate financing, call it, G-III's bank, they're geared for growth. The demand is much better known in Europe than it is in the United States. It's got a luxury air to it and it's got a distinct fashion that the consumer identifies with. So those attributes are going to help dramatically in the growth of Europe. And alongside of Vilebrequin although not a giant piece of our business, it’s an important piece, it’s great margin, it’s a management team, as well that is well versed on the European market. Most of the management team of Vilebrequin comes out…

Not at all. Thank you very much.

Operator, we have time for one more question. Okay, so --

I’m sorry. No questions.

Thank you all. Thanks for interrupting your data listen to our story and talk to you next quarter.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.