Good day, and thank you for standing by, and welcome to the G-III Apparel Group Third 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, Company's CFO, Neal Nackman, 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 statement. 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 are last year's GAAP and 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, everyone, for joining us. In the third quarter, we delivered topline results that met our expectations. Our strategy continues to deliver on key priorities to drive profitable growth for our shareholders despite increasing macroeconomic headwinds, which softened consumer demand as the quarter progressed. Net sales for the third quarter were $1.08 billion, an increase of 6.2% compared to last year's third quarter net sales of $1.02 billion. Non-GAAP net income per diluted share was $1.35 in the current period compared to $2.18 in the third quarter last year. During the quarter, our higher inventory levels were due to our accelerated production calendar, which was in anticipation of longer supply chain lead times. As these lead times improve, we will continue to adjust our production and receipt calendars. Our inventory consists of current purchases and is guided by our order book. As expected, our overall inventory position is now enabling us to immediately service the reorders for coats, dresses and other in-demand categories. During the quarter, our higher inventory levels resulted in storage and processing complications within our distribution centers that were above our expectations. This, alongside with port congestion, resulted in significant one-time charges of approximately $0.40 per diluted share in the third quarter. These charges, along with elevated warehousing costs, contributed to our earnings being lower than our guidance for the quarter. We've secured additional third-party warehousing space, which should eliminate almost all of these charges in the future. Currently, third-party warehouses make up approximately 70% of our total warehousing space. Now I'd like to discuss the extensions of our licensing agreements with the Calvin Klein and Tommy Hilfiger brands. They're an important part of our business. In our 8-K filed last night, we announced staggered extensions by category beginning in January of…

Thank you, Morris. Net sales for the third quarter ended October 31, 2022, increased approximately 6% to $1.08 billion from $1.02 billion in the same period last year. Included in our sales for this quarter were $55 million in sales of the Karl Lagerfeld business, which became a wholly owned subsidiary on May 31, 2022. Accordingly, the results of the Karl Lagerfeld business were included in our results for the entire third quarter. Net sales of our Wholesale segment increased approximately 5.5% to $1.07 billion from $1.01 billion last year. Net sales of our Retail segment were $29 million for the third quarter compared to net sales of $26 million in last year's third quarter. Our gross margin percentage was 32% in the third quarter of fiscal 2023 compared to 34.2% in the previous year's third quarter. The reduction in gross margin percentage is attributable to the decrease in the gross margin percentage in our Wholesale segment. The Wholesale segment gross margin percentage was 30.7% compared to 33% in last year's comparable quarter. Our elevated inventory levels resulted in storage and processing capacity pressures within our distribution centers. We have been seeking and have now procured additional third-party warehouse capacity to handle our higher inventory levels. Going into the third quarter, we were not able to secure additional warehouse space in the time frame we had planned. Several negotiations took longer than expected, and in certain situations, we did not want to enter into expensive long-term commitments for such capacity. The lack of additional space in our warehouses, along with port congestion and the logistical challenges related to trucking, all contributed to us incurring approximately $27 million of demurrage charges in the third fiscal quarter, resulting in a one-time 250 basis point negative impact to our gross margin percentage. Demurrage…

Thank you, Neal, and thank you all for joining us today. Our team remains steadfast and is focused on executing our strategy for long-term value creation. We continue to actively work on new initiatives to evolve our business for the future and as always, deliver for our shareholders. Our diversification is a testament to the stable business model and solid foundation we've created, enabling us to navigate any environment. As we continue in the fourth quarter, our order book is strong, and we are delivering on the balance of the holiday season. I'd like to thank our entire G-III organization and all our stakeholders for their continued support, and wish everyone a happy holiday season. Operator, we are now ready to take some questions.

And thank you. [Operator Instructions] And our first question comes from Edward Yruma from Piper Sandler. Your line is now open.

Hey. Good morning, guys. Thanks for taking the question. I guess first, Morris, on the quarter in terms of some of the demurrage costs, just so we understand a little bit better. So is there any impact to quality of the inventory? Were there any flow issues associated with it? And then I guess as a broader, longer-term question, Morris, how do you think we should – how should we think about the longer-term organic growth profile and profitability profile of the remaining businesses once the previous licenses are complete? Thank you.

Thank you, Ed. Thanks for your question. The demurrage and supply chain issues and quality of the inventory certainly deserves a solid response. If anything, our inventory is in tremendous shape. We implemented new quality control systems overseas that further enhance our quality of product. In difficult times, COVID times, we found it difficult to transport inspectors from one location to another, which were normally done pre-COVID. And we put on the ground solid inspectors to make sure that we got what we bought at the very least, in most cases, better than what we anticipated. So no issue on quality. The integrity of the inventory, number one, it's all new. It's freshly produced. It's freshly delivered. It's wrapped and ready to go. And it was anticipated on arriving early with no interference on container space, transportation times and anticipated delays at the port. So it worked better than we had anticipated. What had occurred is we misplanned our warehousing capacity. We searched for warehouses for the better part of six months, either warehouses that we would take control of or partnered with third-party providers. There are several deals, no less than four deals that were at the finish line, ready to be signed that fell apart. Unique situations in different parts of the country. So the lack of capacity caused some unexpected – a tremendous amount of unexpected demurrage and container charges. So that's really the inventory issue. It's storage. It's not the scale of the inventory. The inventory was bought with good and appropriate intent. It flowed faster than anticipated. The time on the water accelerated, which further exacerbated our situation. But it's all great inventory that was anticipated for this time period. There's early spring inventory that sits there that's ready to go when the door is open at our retailers. There's all current inventory. Our levels of dated inventory, inventory that's greater than a year old, is at a record low. So there is not troubled inventory. This isn't inventory that's sitting in the store that is anticipated to move only when it's marked down. This is full price, great quality, anticipated and planned inventory. So I'm more disappointed in our miss in planning housing and moving the inventory than I am at the inventory level. And Neal…

Yes. With respect to the operating margin going forward, look, we've commented on this before. The brand that we own traditionally will run an operating margin that we would expect to be in the 15% to 20% zone. Our blend is down in the high – in the low double digits, around 10%. And of course, that's after we pay a royalty. So to the extent that we can continue to move the portfolio into brands that we own, we will continue to have elevated operating margins. And certainly, about a third of the portfolio today is owned. So we're getting – we're seeing that benefit. We still have some more room to go with the recent acquisition of the Karl Lagerfeld European business. I think we'll continue to see elevated operating margins on that business as we go forward, and that's where we stand.

So coupled with that, addressing the organic opportunities, as you know, we bought DKNY and Donna Karan. We brought DKNY to market in record time. It's one of the most relevant brands to our sector today. We bought it...

End of 2016.

2016 and with virtually no distribution in North America and created just an amazing brand out of it or reinforced the presence, the earlier presence of the brand. What we have on the shelf that we are now activating is Donna Karan. Donna Karan, there are very few brands in North America certainly that are known by their first name. There's Ralph. There's Calvin. There's Tommy, and there's Donna, and there's not very much more. So Donna is an incredibly well-recognized brand. We were not certain where we would market that brand. And this current situation has brought us to bringing Donna Karan to market in the same sector that we best operate in. So you'll have more news to follow. This is the situation that just was signed on Tuesday. Negotiations started over two years ago and not our doing, but the culmination that just got done on Tuesday in a form that was acceptable for us for the period of time. We have transition time. As I stated, there's no concern about the next three years. We're a responsive company, and we signed on Tuesday. On Wednesday, we started to work and get everything into play. So you can expect quick movement. You can expect marketing. We don't have a challenge of talent. We have the best talent in the industry housed here. We do not expect to make any changes. This is the operating army that we have that knows what to do. We execute quickly. We take on challenges, and we pivot when the world tells us to pivot. So this is pivot time. This is the troops that are armed and ready to go.

Thanks so much.

And thank you. [Operator Instructions] And our next question comes from Will Gaertner from Wells Fargo. Your line is now open.

Hey, guys. Good morning. Thanks for taking my question. Just a quick one. Can you guys remind us on the split of Karl between wholesale versus retail, what that split is?

Well, on the acquired business, we're about 60% DTC. So that's full price outlets and the e-com business. That's where the European-based business runs. Domestically, we are probably one-third of the business forecasted would be our outlet business.

Got you. And just...

If the split that you might be asking for is regions, geographic regions, it's equally split pretty much from Europe and North America.

Got you. And just with the licenses rolling off over the next couple of years, how are you thinking about investment in that business and production all of that? How is that sort of – can you just frame out how you're thinking about that over the next couple of years?

So it's business as usual. These are brands that we are challenged to protect and reinforce retail presence in, and we continually plan on doing that. So what's essential in protecting the positioning, we will absolutely do. We have been guardians of the brand for over 15 years. We've done a flawless job in building it. It's something that this team is extremely proud of, deservedly so. And now we will not do damage to the brand as we transition the brand.

Fair enough. I will pass it on. Thank you.

And thank you. [Operator Instructions] And our next question comes from Jay Sole from UBS. Your line is now open.

Hi. Good morning. This is Mauricio Serna on behalf of Jay Sole, and thanks for taking our question. I guess I wanted to ask about Karl Lagerfeld, the performance in the third quarter. You called out $55 million in revenue. Just was wondering if that was within your expectation or was that actually above that? And also the number that you mentioned, $30 million of incremental SG&A, is that for the quarter or the year? Just wanted to make sure I understood that. And lastly, if you could remind us roughly how much do Calvin Klein and Tommy Hilfiger represent of your EBITDA, that will be very helpful. Thank you.

Sure. Thanks. Thank you for your question. The Karl Lagerfeld European business operated slightly ahead of our expectations, more bottom line than topline. Their op margins are right around the 10% level at this point. And we see that with some good potential to improve go forward. The SG&A that I called out, the $30 million, that was just in the third quarter. And then with respect to the Calvin businesses and the Tommy businesses, it's about $1.5 billion of total business. And we really view that as an operating margin at about 10%.

Thank you very much.

And thank you. [Operator Instructions] And our next question comes from Paul Kearney from Barclays. Your line is now open.

Hey, guys. Thanks for taking my question. Two parts. So can you just talk about the cadence of the licensing expiring? So we have the multiyear period, but is it...

Paul, you're not coming through. Paul, I'm sorry.

You hear me now?

Yes, that's much better, please.

Sorry about that. Can you talk about the cadence of the licensing expiration? So we have the dates, but just in terms of sales size, is it equally weighted or is it more weighted towards the end? That's one. And then two, if you were looking to potentially fill that business with new license agreements, is that something that you have capacity to do before those expire? Or should we be looking at it as you have to kind of bring on new business as the other ones go out? Thanks.

So the earliest, call it, retirement date, is a denim license with Tommy Hilfiger, which is insignificant in scale, and we have it replaced. Our ability to replace brands through license or acquisition is pretty vast. There are several non-competes that led – we've agreed to and that for strategic reasons, I prefer not to disclose. But there's a huge world out there, and the limitation is no more than three or four brands. And the capability that we have can bring on brands immediately. And the deal that we have is we can operate them simultaneously if they're not deemed to be competitive. The ones that are competitive, the situation is we can agree to them. And we can launch them as we exit the PVH deal. And I'll give Neal the opportunity to respond on the depth of the calendar and the influence on our business.

Yes. So Paul, thanks for the question. The 8-K that was filed, indicates all of the specific dates that fall off. We've mentioned that for the next three years, we're essentially intact. And you can see which businesses fall off, and then you can see the periods. Our plan is to replace these businesses. So rather than getting to the specifics of how much dollars is going to fall off when, that's really not the way we're looking at it just yet. So I'd rather not be focused on that. Our concept is to replace these sales.

Thank you.

And thank you. [Operator Instructions] And our last question is going to come from Noah Zatzkin from KeyBanc Capital Markets. Your line is now open.

Hi. Thanks for taking my questions. I guess first, just how do you see the promotional environment playing out relative to three months ago when you were looking out versus your expectations then? And then if you could just provide a little bit of color around the order book. And then lastly, just on the license expirations, just to dig in a bit more. If we think about the business in 2024, 2025, 2026, are you planning the business for steady growth continuing through 2023 onwards via replacement and owned opportunities? Or are you contemplating kind of choppiness as the licenses roll off? Just any color on the kind of trajectory over the next five years or so would be helpful. Thank you.

So Noah, let me try to respond to your question. As far as promotions, there are far less promotions and promotional activity than we anticipated. The retail sell-throughs are pretty strong surprisingly. The retailers are holding price in our sector, and there are no major giveaways. We are in the mid-tier department store business and not a major provider to the next tier of business. So promotions are not aggressive. As far as – I'll leave one open for Neal, but let me respond to the choppiness of the license. I can give you a story that really relates to my last response. We can operate multiple brands in classifications. So while we're exiting, it wouldn't be unique for us to sign on other brands or deliver other situations that would not grow our business for the next three, four years. The question is – the bigger question is the permanence and how effectively we replace the scale of the business that we will be giving up. And we're pretty comfortable that we have a replacement formula, which we'll disclose to the marketplace in the coming months. As I said, this is all new. Not totally unexpected. So formulating a strategy is a work in progress that we will bring to you in the coming months. But we're energized. As I said before, we're ready to go. We have found the most difficult component in building a new brand is finding the right people. We have that done. We have the right people. There is not one bit of change that needs to be made. Scouting for talent in this environment that's acclimated to the culture that we have, that will remain the same, and it will be reinforced with brand ownership. We have a tremendous advantage. It was much more difficult in creating and blending a culture when we acquired DKNY. This one, believe it or not, this is an easier process. Our talent, our capital, everything we need is in place to just march forward and do well for ourselves and for the shareholder and certainly for our employees, who have been incredibly loyal to our company. So we're armed and ready.

And Noah, with respect to the order book, it's coming along. Certainly the fourth quarter is very much intact. Our first quarter spring book, we're actively working. We are seeing that retailers' appetites again, continue to be closer to buy time. So there is certainly some pressure there. And candidly, if you look at the past few years, you've got some very hard compares with respect to COVID, the turn on and off of ordering cycles. But we're very comfortable with what's being developed now, and we'll continue to develop that spring order book into summer.

Thank you, Noah. Thanks for your question.

Thank you.

Thank you. And I am showing no further questions.

Thank you, operator, and thank you for being part of our call. And hopefully, we've explained some of the sensitivity in our business. And wishing you a happy holiday. Thank you all.

This concludes today's conference call. Thank you for participating. You may now disconnect.