Good day, and thank you for standing by. Welcome to the G-III Apparel Group Fourth 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, Neal Nackman, CFO. Please go ahead.

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 Web site. 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. I want to start by thanking the G-III team for their dedication and hard work last year. I am proud of their expertise, entrepreneurial spirit, and ability to move quickly, working as a team across functions to capture opportunities in a dynamic environment. G-III has a proven track record of successfully evolving over the years to drive our business and meet the needs of our customers in an ever-changing landscape. Once thought of solely as a leather coat business, we've become a highly diversified apparel company. I'm extremely proud of the G-III we've built, and am looking forward to sharing with you two of our newest growth initiatives. This past year, we made significant progress on our strategic priorities. Despite a challenging operating environment, across our brands, we successfully shifted our category focus based on market demand. We expanded our portfolio with the Karl Lagerfeld acquisition, which also grew our European business and brought in new international expertise, and we advanced our digital capabilities. Now, let's review our full-year and fourth quarter fiscal 2023 results. Net sales for the full fiscal year was $3.23 billion, up 17% from $2.77 billion last year. Full fiscal year non-GAAP net income per diluted share was $2.85, compared to last year's $4.20. Adjusting for higher than planned taxes, we would have met our non-GAAP EPS guidance for the year. For the fiscal 2023 fourth quarter, net sales reached $854 million, an increase of 14% from $748 million last year. Fourth quarter non-GAAP net income per diluted share was $0.41 compared to last year's $1.06. This past year, we experienced unique supply chain disruptions that impacted our bottom line performance. Today, port congestion has meaningfully eased, lead times from factories to our warehouses have decreased,…

Thank you, Morris. With respect to our results of operations, the comments I'm about to make are on a non-GAAP basis. Net sales for the fourth quarter ended January 31, 2023 increased approximately 14% to $854 million from $748 million in the same period last year. Included in our sales for this quarter were $61 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 fourth quarter. Net sales of our wholesale segment increased approximately 14% to $822 million from $719 million last year. Net sales of our Retail segment were $49 million for the fourth quarter compared to net sales of $45 million in the previous year's fourth quarter. Our gross margin percentage was 33% in the fourth quarter of fiscal 2023, compared to 33.7% in the previous year's fourth quarter. The reduction in gross margin percentage is attributable to the decrease in gross margin percentage in our Wholesale segment. The Wholesale segment gross margin percentage was 31.4%, compared to 31.9% in the prior-year. As we have stated before, the acquired Karl Lagerfeld business operates at a higher gross margin percentage than the previously existing Wholesale segment. Their inclusion in the quarter resulted in increased gross margin percentages by approximately 270 basis points. Accordingly, excluding the Karl Lagerfeld business, gross margins are down approximately 320 basis points. While we are currently seeing relief in inflationary pressures in product and transit costs, we are still working our way through higher costs from earlier in the year. The principal reason for the decline in gross margin percentage is from a combination of higher discounting and inflationary pressures. In addition, our warehouse continued to work through the higher…

Thank you, Neal. And thank you all for joining us today. We have proven, time and again, over the years that we have been able to quickly pivot to deliver results. We feel good about the opportunities for growth ahead of G-III, including global expansion of DKNY, and the recently acquired Karl Lagerfeld brand, our new initiatives with Donna Karan and Nautica, and our plans across our entire portfolio, along with our focus on developing new initiatives. We have a strong foundation for success in place, and I'm confident in our team's ability to drive our business forward and deliver for our shareholders. I'd like to thank our entire organization and all our stakeholders for their continued support. Operator, we're now ready to take some questions.

Thank you. [Operator Instructions] We have a question from Edward Yruma from Piper Sandler. Your line is open.

Hey, guys, good morning. Thanks for taking the question. I guess, first, Morris, would love to click down a little bit on Nautica, seems like some exciting news there. Can you talk a little bit about kind of how big the brand is relative to the CK and Hilfiger brands? As you think about the positioning of the brand relative to maybe where CK and Hilfiger were historically, how do you think this slots in? And then Neal, just a couple of quick follow-ups, I guess maybe a little more color on the tax expenses. And I think you guys made some comments about a digital acquisition. Would love any more color on that? Thank you.

Thanks for your question, Ed. Nautica today is an important brand in Authentic's portfolio. I'm not at liberty to discuss the scale of it, that's really Authentic's privilege to do. I'll tell you that it's not very large on the women's side of it, which is our opportunity. When we took on Calvin Klein it was virtually a men's brand. Tommy was skewed toward the men's side of the business. And our forte is women's. So, we're very comfortable in the brand tucking in more toward Tommy's sort of attitude. It's an incredibly well-recognized brand throughout the world. We're capable of making the appropriate product for it. We have the sourcing in place, we have design in place, we have distribution in place, and I think the odds are stacked in our favor to make this a very, very important brand in our portfolio. So, we're excited by the opportunity. And, uniquely, most of the category sat in the hands of SPARC, which is an arm of Authentic, and we were able to aggregate multiple categories that we will launch as appropriate for our relationship for PVH. So, the first launch will be the jeans launch, which we're developing as we speak. We'll ship product the beginning of calendar 2024. And we've got support from our existing partners and or retail partners, so no reason that this brand can't be a significant piece of G-III's business.

Thanks, Ed. This is Neal. With respect to your questions for me, on the tax expense, and just to recap, through the third quarter we were anticipating an effective tax rate at about 23.3%. We ended the year, on a non-GAAP basis, with an effective tax rate at about 26.6%. We're forecasting about a 27% tax rate go-forward. The refinements in the fourth quarter really were about in three general areas. First, most significantly, related to the acquisition. Secondly, there was some restructuring that was done that caused some extra taxes, and lastly, just year-end adjustments that impacted the final results. With respect to our digital investment, this is actually the second smaller investment that we've made. We've made these investments to kind of facilitate getting a little bit smarter. These are companies that we have some interactions with. We're able to learn from some of the best-in-class processes that they are doing on the digital side, and there are some other opportunities that we have with these entities.

I guess for clarity sake, we probably should define at this point our investments. We have an investment in a pure play aggregator of digital businesses, composed in there is four unique situations, all are profitable. And strategically, we're sourcing product for them as well. So, sort of it is strategic relationship as well as, call it, a learning experience, as Neal described. And the other one is we own a stake in [Saks OFF Fifth's] (ph) digital business, as was negotiated with Saks a couple of years ago, it's almost two years at this point. So, we own a stake in that, and that's tucked into that dollar value as well.

Thanks so much.

Thank you. [Operator Instructions] Our next question comes from Paul Kearney with Barclays. Your line is open.

Hi, everyone. Good morning. Thanks for taking my questions. I guess first, can you quantify the size of the pull-forward of sales into Q4 from Q1? And then second, good progress on the inventory, the sequential move from Q3 to Q4. Can you help us think about when you see inventory growth being fully rebalanced with sales growth, and just the timing about this year? Thanks.

Sure. Thanks for your question, Paul. It's hard to specifically identify the exact items. Our challenge, from the fourth quarter, was again to try to take advantage of opportunities, reduce inventory that provided relief to the warehouse operation. It also enables us to convert that inventory into cash quicker. I think if you were just thinking about, generally, a size parameter, I think if you looked at the size of our excess, we really were on plan essentially in the fourth quarter. And if you thought about the beat, it would have been reasonably a large portion of our sales beat that would have been associated with that pull-forward. With respect to your second question on inventory levels, we're carrying inventory, some of it is seasonal in our outerwear area, and that is why I refer back to the third quarter where I really expect it will get to a more normalized inventory level. Historically, we would turn inventories around four times a year. We really have always been a relatively quick turn in terms of inventory. Again, the production calendar has really stretched that out. We needed to do that for a whole host of reasons which we thought was prudent during this past year. And we'll work our way through it. You'll see sequential decreases compared to the prior year. But in fairness, we're up against now with very large inventory increases this past year. But in terms of getting to a normalized inventory that start to look a lot closer to a four times turn, we expect that to be at the end of the third quarter.

Paul, our order book supports the projected shippings that we have. We have a pretty strong order book. The bulk of it supports moving our existing inventory, which is something we're very happy with. So, we should be able to rationalize our inventory levels by the end of the year. There's, I guess, a price to pay for holding all that inventory. Part of it is our freight costs associated with those inventory and with that inventory level; they're old freight costs where we were paying as much as $17,000 or $18,000 a container. So, that resides in our inventory. The new deliveries are somewhere around $3,200 a container, so there's a vast difference to old margin versus new margin. And we're trying to make the best sense of it so we can. So, we'll call this a little bit of a cleaning up year. We had more issues than we expected last year in logistics, they came at us every which way, caused by the environment, caused by cancellations, caused by retailers appropriately managing their business and taking the pain off of their shoulders. So, it all fell on us, and we are who we are. We'll get over it, and then we'll get back to a normalized G-III in the near future.

Thank you.

Thank you. We have a question from Jay Sole with UBS. Your line is open.

Hi, this is Mauricio Serna from UBS. I was calling -- I wanted to ask a couple questions. Sorry, and I don't know if you already talked about this, I just was able to join now. Maybe you could talk about like what are you thinking about the quarterly cadence for the year just looking at the implied 1Q sales? I think you implied a high teens decline, but you're guiding to flat sales. So, how are you thinking about the sales progression throughout the year? And if you could also elaborate a little bit more on what you're seeing on the potential growth or the potential long-term revenues that you could generate from -- with Nautica now, and with the new strategy on Donna Karan? Thank you.

So, the volatility in comps this year versus last year, part of it was a unique anomaly. If you go back a year ago, our business was off the charts. Anything that we had had a home, we were able to ship inventory, and inventory was in high demand, and deliveries were late, retailers were not canceling late deliveries, they continued to take them in which caused some of the problem through the course of the year. So, we had open windows, we had sufficient inventory, and we shipped -- if you go back to the prior year, you go back to the pre-pandemic, last year was more than 20% greater than the pre-pandemic years. So, we're back to a cadence that's similar to pre-pandemic. We're managing to the inventories that retailers are trying to maintain. There's a high level of focus, as we all know. Retailers have had an overabundance of inventory, and have been busy rightsizing their inventory levels as we are. So, the first quarter this year is close to flat to pre-pandemic, but this year being fiscal 2024 will be close to pre-pandemic levels. And we see the year balancing out where we believe that our business will be pretty much flat to this past year. So, our Q3 and Q4 shipping levels will be accelerated to last year. And at that point we believe that we'll have right-sized the inventory, we'll have right-sized real estate as we make adjustments in the real estate that we hold. And it'll take us a few months to put our business where it needs to be operating with a couple of new brands, going toward eliminating a couple of old brands, and trying to maintain SG&A that's appropriate for our business. So, we're okay with where we are. We've…

Got it, thanks a lot.

Thank you for your question, Mauricio.

Thank you.

Our next question comes from Noah Zatzkin from KeyBanc. Your line is open.

Hi, thanks for taking my questions. Just on Donna Karan, I was just hoping you could maybe expand a bit, maybe as it relates to where the business stands today. So, if you could just remind us how large that business is today, general channel positioning, the number of doors it's in, and then how you expect it to evolve off its current base? And then just on the model, on incremental costs associated with the higher inventory levels that's contemplated in guidance, hoping you could help quantify the impact of that, ideally from an EPS perspective, but just generally how we should think about the cadence of that impact as you continue to rightsize the inventory position through the first three quarters? Thank you.

Thank you, Noah. Donna Karan and DKNY were acquired at the same time. They're two separate brands. Most of the world doesn't really recognize that DKNY is a derivative or owned by Donna Karan. We realized that early. And we decided to launch DKNY, in 2017, to serve our channel of distribution which, as you know, is Macy's, Dillard's, it's the department store sector. We didn't position it as luxury. We took it down a notch from where LVMH had had it. And it worked incredibly well for us. When we took it on we were criticized for paying too much money for a brand that provided no profits. So, we didn't look at the profit as we bought the brand. Fortunately for us, we recognized that there was always a potential that our licensor would take back his brands, and we needed stuff of our own. So, we plugged in the plan that spoke to our strengths with a great brand, more so than the brand than where it was positioned. And quickly, we found that we made an amazing decision. It worked well. And today, I'd say we're in a comfortable level because of that acquisition. Alongside of that acquisition came Donna Karan and we were in a thought process of creating a halo brand out of Donna Karan, and doing pretty much what many companies do. They take the halo piece, and create derivatives out of it in the future. And the halo generally is an expense; it's not a profit-making situation. So, we looked at it. We had out thoughts. We interviewed marquee designers in our industry, and thought about spending $20 million-$25 million a year on creating the halo. We stepped back and said, "No, we don't need that halo, we'll just softly launch Donna Karan," brought down from designer to -- the opening price points for Saks and Bloomingdale's and Nordstrom's, and we've kept it alive in a small scale with the knowledge that if something happened with Calvin Klein, it would be a great brand to supplement our business and position a notch lower than it is now. So, that is the strategy. We have the tools to not only maintain our business; we have the tools to grow our business. And we have the appetite to even be more aggressive and acquire additional or license additional products to again show our stakeholders what they've invested in, and how aggressive and productive this company can be. We're not sitting in defensive mode; we're aggressive in how we're positioning our business. We believe and we know we're one of the premiere suppliers of product to the department store sector in the United States. We plan on maintaining that status, and we plan on growing in various other ways. It's a hungry, aggressive team that is driven by success.

And Noah, with respect to the warehousing and logistical challenges, just to give you a little more color throughout the last year and just sort of re-explain what happened last year. Again, the single largest hit we had really was in the third quarter of last year. And that had to deal with the demurrage expenses we described which was getting inventory off the ports in the situation where we really had significant inventories in our existing warehouses. So, that item should prove to be a pretty good boost for us as we don't incur those costs again in this current third quarter. With respect to the other parts of having higher inventory, it really impacts us both in cost of goods sold as well as in SG&A. We run what's been designed as a flexible warehousing scenario where we use third-party warehouse providers. Those expenses we put into the SG&A line item. We do run about one-third of our own warehousing. Those expenses we put into our cost of goods sold. And to the extent that inventory levels are high. And so, it's reached very high level within existing building that we run, you really run into operational efficiencies in all aspects of the operation receiving shipping as well as picking in the warehouse operation. In addition to that, you run into additional storage cost. So, what we expect as we go into next year is that we will still have high inventory levels for the first quarter. Still have somewhat high inventories in the second. We really don't start to eat into those -- the inventory carry over levels until the third quarter. And so, we'll have additional charges in the first-half of the year as it relates to these warehousing expenses. And then, of course, in the third quarter, we'll start to see that mitigate and get the benefit of not having those demurrage charges. Fourth quarter should be a much more normalized event for us.

Got it. Very helpful. Thanks.

Thank you. And our last question -- one moment. Our last question comes from Dana Telsey from Telsey Group. Your line is open.

Hi, good morning, everyone. Morris, as you think about the portfolio that you have at G-III and the next evolution of the business, what do you think out there in terms of attracting whether it's new licensing opportunities, new brand partners? The mix of whether it's international or domestic? What are you seeing out there? I know it's only been -- what is it? Three months so since we heard the news about Tommy and Calvin. But if you architect the next evolution, what's coming your way? What do you think that's in the portfolio structure that continues to drive sales and margins? Thank you.

Great question. Thank you -- thanks, Dana. Number one, it's only been three months. And then, it's not as if we -- it was a planned event. It came a little bit as a last minute shocker as one might say. But again, as I described, G-III format, I guess we move on. And we move quickly. You might imagine that when the industry realized that we had a couple of open lanes coming, we got some amazing calls and amazing opportunities. Some of them are still under consideration. Some are eliminated because they don't fit our profile. Some just don't work in our eyes. So, take that as one lane of opportunity. And the other, we have been taking about expanding our global reach by aggressively building our business globally. So, the minute this occurred we retooled -- we went to Dubai. We went to Eastern Europe. We made different alliances or additional alliances than we have had historically. They don't all come to prosperity overnight. It takes little while. But as we mentioned in a scripted form, there are 25 new stores planned for Europe. That's an aggressive number for franchising and pretty much a new initiative, a new focus. So, there will be many hundreds of additional stores opened. We have spoken about opportunities that we found in licensing, hotels, and communities that are going to be important to us as we go forward. The names that we have are well-suited for luxury housing or luxury hospitality. And we have been sold out. And we have made three deals with fourth coming onboard as well; all in different parts of the world, all with a good deal of money behind them. So, we're happy with what's opening up for us. And, there is a long way to go. As I said, this is not defense time. This is offense. We've got -- we are sighting opportunities. We have support of our retail community. We are pretty good vendor who -- our retailers have prospered with our efforts. And, I think a brand is part of what you buy when you make an acquisition of product. And the other is the integrity and the quality of product and design of product that's delivered. So, I think our retailers are comfortable that we provide sufficient comfort that what we take on will prosper. It's worth an opportunity. So, we have that opportunity. And we think we can grow significantly in our world in coming years.

Thank you.

Thank you, Dana. Thanks for your question.

So, with that, I wish you all a great day, and thanks for speaking with us, and more to come.

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