Good day and thank you for standing by. Welcome to the G-III Apparel Group First Quarter Fiscal 2024 Earnings Conference Call. [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 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. 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. We had a good start to the year. In the first quarter, our team worked hard to successfully navigate what remains a challenging environment where we exceeded both our top and bottom line guidance. For the first quarter of fiscal 2024, net sales were $607 million, above our guidance by approximately $45 million. Non-GAAP net income per diluted share was $0.13, exceeding the midpoint of our guidance by $0.23. As expected, gross margins were significantly better than last year’s first quarter. We made strong progress rightsizing our inventory position by reducing future buys to account for the product that we’re carrying. We sequentially decreased inventory from last quarter by $80 million and ended with balances up approximately 15% to last year or up 8%, excluding the acquired Karl Lagerfeld inventory. Further, as port congestion and lead times have normalized, we adjusted our warehouse space appropriately. Importantly, we expect this trend to continue throughout the year, driven by freight costs moderating and not needing to anniversary significant logistical costs, primarily incurred in last year’s third quarter. We ended the quarter in a strong financial position with approximately $800 million in cash and availability, including returning $17 million to our shareholders through stock repurchases. Our balance sheet continues to provide us with the flexibility to invest in future growth. Last quarter, we announced two new substantial opportunities, which include the Spring 2024 repositioning and global expansion of Donna Karan and a long-term license for Nautica in North America. We’ve already begun executing against them. Today, we are pleased to announce a new licensing agreement for the Halston brand as the third new initiative. We have entered into a 25-year agreement with Xcel Brands to design and produce all categories of product with…

Thank you, Morris. With respect to our results of operations, the comments I’m about to make on a non-GAAP basis. And again, a full reconciliation of our GAAP to non-GAAP results are included in our press release issued this morning. Net sales for the first quarter ended April 30, 2023, decreased approximately 12% to $606 million from $689 million in the same period last year and approximately $45 million above our guidance. Included in our sales for this quarter were $60 million in sales of the acquired 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 commencing with the last month of the prior year second quarter. Net sales of our Wholesale segment decreased approximately 14% to $587 million from $681 million last year. This segment now includes the acquired Karl Lagerfeld business results. Net sales of our Retail segment was $30 million for the first quarter compared to net sales of $28 million in last year’s first quarter. Our gross margin percentage was 41.2% in the first quarter of fiscal 2023 compared to 35.7% in the previous year’s first quarter. The Wholesale segment gross margin percentage was 39.9% compared to 34.1% in the prior year’s comparable quarter. As we have stated before, the acquired Karl Lagerfeld business operates at a higher gross margin percentage than the rest of our Wholesale segment. Their inclusion in the quarter resulted in an increased wholesale gross margin percentages of approximately 250 basis points. The remainder of the increase in gross margins is a result of a decrease in inflationary pressures in product and transit costs as well as increases in our prices. The gross margin percentage in our Retail Operations segment was 50.9% compared to 49.9% in…

Thank you, Neal, and thank you all for joining us today. G-III continues to successfully navigate what is – what has remained a challenging operating environment. We’re off to a good start in the new fiscal year. We remain focused on driving our key strategic priorities and continuing to develop new opportunities. We have the financial flexibility to invest in our business and take advantage of appropriate opportunities that may come our way. I’d like to thank our entire organization, our many partners, and 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 from Piper Sandler. Your line is open.

Hey, good morning, guys. Thanks for the time. I guess, first, Morris, on Halston, exciting news. Can you talk a little bit about the white space now that you have a couple of owned brands in that space and licensed brands, kind of how does it fit in relative to DKNY and Karl Lagerfeld? And then as a follow-up, Neal, I know you have lots of excess demurrage costs in the back half of last year, kind of are they already rolling off? And could you just maybe remind us the modeling purposes kind of when they were – when they fell in last year and how we should model appropriately this year? Thank you.

Thanks for your question, Ed. Halston, for us, is a brand that we will have full control of and basically servicing the demands of where the consumer wants to be. We’re developing a collection of a little bit more glamorous than we historically have done product. We’ve staffed it with talent that is premier in our organization. We didn’t have to go outside to find new talent. We have talent that follows basically the beat of G-III, does it well. Sourcing is not a problem, and we’re excited about the opportunity of building a global initiative with Halston. It’s a brand that very much is classified as an owned brand. And as much as we will share some licensing royalty with Xcel. They seem to be great partners, and we’ve got – we’ve got a strong plan for this in the coming years. The white space that your question refers to, in product, I assume you’re asking is more existing in our portfolio than out there in the world. It’s a brand that partners well with Lagerfeld. In a sense, they are contemporaries. One has got European appeal and the other is more of an American heritage brand that we’ve proved out to be quite proficient in developing brands such as Halston. We’re not so concerned about filling white space or we’re a little bit more concerned about filling our own space. And as most of you do know, we’re in a process of exiting both Tommy and Calvin. So this is a shore up to our assets. And as I said before, we’re excited by the opportunity and the great partners that we have.

Ed, on the logistical costs, we incurred about $40 million in total last year, about – just under $30 million was in the third quarter and about $10 million was in the fourth quarter. And you could pretty much exclude those figures almost entirely as we roll this year.

Thank you.

Thank you, Ed.

Thank you. [Operator Instructions] We have a question from Will Gaertner from Wells Fargo. Your line is open.

Hey, good morning, guys. Thanks for taking my question. Neal, maybe you could just talk a little bit about inventory levels that and Morris too, I guess, what you’re seeing at retail partners? Are they still heavy with inventory? Are they beginning to order or receipts coming back? And then secondly, maybe can you speak to the work stoppages in the West Coast ports and how that might impact your business? Thanks.

Thank you for your question, Will. The inventories are a major issue for our customers today. There is a clear focus on managing their inventory differently than they have historically. Turn on product is a focus there, which isn’t natural. If you’re not turning your inventory, you have no need to buy it. Fortunately, for us, we’re on the good side of that. Our inventory is turning well. Our inventory is in demand. We’ve – our fashion and our inventory is in demand. And what we’ve done is adjusted our inventory into the in demand categories that we have. We – we’re in a good position on the performance or athleisure side of our business. We have a fair amount of orders that go forward that support the initiative. The space is not being given up. There is an overabundance of product in the marketplace. We’re adjusting our flows to accommodate that. And the areas that are flourishing at retail are our specialty, suit separates and dresses are areas of demand that we dominate. So it’s not necessarily how the retailer is managing their inventory. It’s how we’re managing fashion and the right product for our retailers to create demand in our classifications. So we don’t see a problem. Our orders support that, reorders support that. But there is a focus on coming in with low inventories by quarter. We have done an amazing job of bringing down our inventory levels to at least what you’re seeing is Q1, which was not a problem quarter for us last year. Our problems came in Q2 and Q3. In spite of the fact that you’re seeing an 8% increase in inventory levels, it’s at a period of time that our inventory levels were not an issue at all. You’ll see major, major decreases in inventory levels for Q2 and Q3, which will enhance our cash, and it will mitigate some of the logistical issues that we had last year. So inventories are very much in control. As far as the West Coast, we’re not incurring any issues, not at all. Nothing forewarn that we have a potential issue. We’re flowing our inventory appropriately. We have inventory in-house to support a good percentage of what we need going forward. So there is no crisis on our horizon.

Thank you.

Thank you, Will.

Thank you. We have a question from Mauricio Serna Vega from UBS. Your line is open.

Great. Good morning. And thanks for taking my question. I just wanted to ask about the Halston brand agreement. So just following on the previous question, what kind of revenue potential do you see in the long-term from this brand? And also, I noticed like in another release, press release was mentioning that there was like an upfront payment in May 2023 for this an advanced payment. Is that like an amount? Could you share the figure for that and how meaningful it is for your guidance this year? And then lastly, on the gross margin, how should we think about the rate of expansion in upcoming quarters compared to what we saw in Q1? Thank you.

Thank you, Mauricio. Addressing the Halston question, I am not free to give you the cost of buying or giving enough payment to Xcel. It’s not my decision to – my own decision to give it to you. It was a minor payment in the scope of G-III. It doesn’t affect us in any way at all. It gives us freedom. It gives us growth. And if I were to put a target on it, I would tell you within 4 years, it’s a $250 million business. It is global. It is in demand. We didn’t just pick the brand without doing our diligence. We have customer support for it globally, quite honestly, I was a little surprised after the fact that it has the global appeal, particularly in Europe. So, we are excited by the opportunity. We have an added feature. We share licensing royalty and licensing income that comes to us when we license categories that we choose not to do or are not able to do for any reason. So, besides our own income, we get licensing income. And it’s long-term at a discounted royalty rate as well as a nominal purchase 25 years from now, should we care to purchase the company. It’s all – it’s not a major event from a financial output story. As far as gross margin, what we have told the Street and what we are experiencing is and you can see it. There is a margin enhancement when you get to ship your own brands without paying a serious royalty on it. The royalties all in that we pay for a product is somewhere between 10% and 12%. And eliminating that and spending our own money on advertising and maybe a little bit of added infrastructure, we still have a significant margin enhancement in our business by shipping our own brands versus licensed brands.

And Mauricio, just to help you with some of the phasing, we expect pretty strong increases compared to the prior year for the second and third quarter. And then of course, in the fourth quarter, that will probably tail up, but still be ahead of the prior year.

Great. Thank you very much. Congratulations on the results.

Thank you, Mauricio.

Thank you. [Operator Instructions] We have a question from Janet Joseph Kloppenburg from JJK Research Associates. Your line is open.

Good morning everyone and congratulations on a good quarter. I got on a little bit late, so forgive me if you have answered this. I was wondering with the addition of the Halston brand and the development of DK, and bringing on Nautica, if you now feel that the revenues that will eventually diminish from Tommy and Calvin have been recouped. I just wondered how that outlook looked. And I know Halston will be a license plan, and I wondered about the margin profile about and how it may impact your business next year. Thank you.

So Janet, the prior question, we addressed on Halston, and I will give it to you again.

Thank you. I am sorry for the repeat.

No, quite alright, I like telling the story. Halston is a great fit for us. It was not a major cash output, and it’s signed as a global initiative. It’s signed as a discounted royalty rate, and it’s signed as an opportunity to buy the brand at termination of the license which goes out, should we choose to go out. It’s got the kick-out periods, but should we have this brand in 25 years, we buy it or we buy the entire brand for a nominal amount. So, great acquisition for us, it fits into our portfolio. We know how to produce American heritage brands, and we have built-in demand for the brand. And we have built in space as we wind down our Calvin and Tommy licenses. And I believe within 4 years, this is a $0.25 billion business for us with enhanced margins.

Thank you. Okay. Could you also talk about the career wear business? It seems to be leading your strength. And if you look for that to continue for the remainder of the year, or if you think there will be some reversion back to casual? Thank you.

Yes. Good question. Career wear is performing very well. We dominate that sector at the wholesale level. Our business is very good. Our margins are good. Our inventories, if I were to cite an area where we have low, low inventories, it would be the career wear side of our business. Demand was high. Sell-throughs were very strong, and we see it continuing as it always has to the future. As far as the athleisure business, that’s not gone away. There was an overabundance of inventory in the marketplace. Everybody during pandemic decided that, that was the area to address. They either expanded their offerings, initiated new collections or bought brands and classifications that they thought they could build. So, all of a sudden from a small business, it became a giant business. So, now it’s correcting itself. It’s an important business. And as the inventory – the old inventory clears out, new offerings are given to the consumer, where we are just fine. We believe that, that business does come back, and it comes back appropriately. The woman is not giving up on athleisure apparel. It’s a way of life. So – and I don’t see that way of life changing at all. And it’s pretty much all demographics, and it’s pretty much every age. So, we have got the two initiatives that you speak about are both incredibly strong in different ways in different timeframes. Thank you, Janet. Thank you for your questions.

Thank you.

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

Hey good morning everyone. Thanks for taking my question. My first question is on kind of the SG&A cadence through the year. I think relative to where we had you and consensus was, 2Q looks a little higher than we were thinking. I am wondering just if there is anything behind why SG&A will be higher in 2Q, or how we should think about it through the year? And then second, as we lap the Karl Lagerfeld acquisition in this coming quarter, can you just give us a sense or just remind us the organic underlying growth of that business and how we should model that going forward? Thank you.

Yes. So Paul, as far as SG&A, pretty comfortable with the first quarter a little more advertising spend. So, I think maybe the models were a little bit light. But if you look compared to what we are doing in the first quarter for our volumes, nothing too unusual there. Like I have said, we will have challenges for the year in terms of even the core business with respect to warehousing costs and inflationary pressures in general. With respect to the Karl Lagerfeld acquired business, on a comp basis, we see nice double-digit growth in that business. And as Morris said in his prepared remarks, just lots of exciting things happening around that brand that will inure to the benefit in both the current year and the future year for that brand.

Thank you.

Thank you. [Operator Instructions] We have a question from Noah Zatzkin with KeyBanc Capital Markets. Your line is open.

Hi. Thanks for taking my questions. Now that you’ve got Nautica and Halston signed up, just wondering how you are thinking about additional opportunities moving forward? Would you look for an owned opportunity versus licensed? You are kind of agnostic there? And then second, just hoping you could speak to your level of comfortability with the order book today as it relates to the decision to raise full year guidance. Thanks.

Thanks for your question, Noah. We are consistent. And our first choice is to acquire brands, the features of owning brands are almost self-evident today. The risk of losing a license after you have developed it for the years that we have with Calvin and Tommy have taught us a lesson owning in this case is better than renting. The margin enhancements are incredibly important to us and being able to guide all our people as to where the brand goes, how it’s marketed, and the attributes that we care to impose in an owned brand are different than our ability to have an influence on licensed brands. So, we like – in this case, we like owning better than renting. As far as what are we out there looking for brands, we are. In the last few months, I have traveled the world to have meetings on opportunities that we believe are actionable. None has surfaced to a must buy today, but we do have the availability and bank support and as much as cost of money is a little richer than I would like to pay. If the opportunities are there, we have the ability of buying a major acquisition. So, we have not put that to the side because we have Nautica, Donna Karan and Halston, we are still searching for an important acquisition.

And then Noah, with respect to the order book that is coming along nicely, obviously this time of the year, we don’t have – we have not shown all of the seasons that we will ship during the year. So, probably about 75% of the year looks like it’s pretty well reflected, and we feel it’s pretty supportive of the – of our forecast.

Thanks a lot.

Thank you, Noah. And our last question?

Yes. Our last question comes – and one moment. Our last question comes from Dana Telsey from Telsey Advisory Group. Your line is open.

Hi. Good morning everyone. As you think about Karl Lagerfeld and the significant press that you have had over the past quarter, what – was there any additional contribution to revenues or margins that you saw as a result of it? And for the balance of the year, is there any additional uptick that we should be expecting from the Karl Lagerfeld brand as you move forward? And then, Morris, just your view on the wholesale channel right now, what you are seeing in terms of promotions and what the setup looks like for fall and for holiday would be helpful. Thank you.

Thanks for your question, Dana. We – as it relates to Karl, we have a spike in business. Margins were good going in. We have positioned the brand in an area where it just can’t get too deep into the customers’ wallet. It’s an affordable brand. It is not top tier luxury, yet we are – there is pricing power left in that brand. We have got great demand. I was amazed when I was giving a number yesterday that there were 5.1 billion eyeballs on the brand during the Met Gala. So, it’s clearly a brand building that you don’t get the immediate – I can’t tell you that we had an immediate impact that was as glorious as 5.1 billion eyeballs. But clearly, there are eyeballs that are now paying attention to it. So, the future is bright. The present business is very good. The future is better than the business today, although other business is at the top tier of what we are doing at G-III, both internationally as well as domestically. So, we are excited by the ownership of the brand. There is so much more to come, whether it’s retail, whether it’s wholesale distribution, whether it’s licensing and licensing and classifications that were unexpected. So, the calls and the curiosity of where to take this brand are just mind-boggling. So, we are more than thrilled to own it all. And as far as wholesale, wholesale is going through its difficult periods. There is a hate to do this and everybody says the same thing. Weather has had its impact for Q1. It was unseasonably cold. So, spring inventory didn’t move nearly at the rate that we all expected it to. I am expecting markdowns to be – I am not going to say aggressive, but there is a need to mark down product to make room for appropriate seasoned goods and the retailers are recognizing that. I don’t think you are going to see a crazy amount of markdown product. I think everybody for the last six months has been focused on inventory corrections. So, nobody is really top, top heavy on inventory. So, I think we are all okay and it takes a little time to course correct with all that’s going on in the world in the last couple of years. And I think we are on that path.

Thank you.

Thank you, Dana and thank you all and speak to you soon. Have a good day.

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