Ladies and gentlemen, thank you for standing by, and welcome to the G-III Apparel Group Third Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference to your speaker today, Neal Nackman, Chief Financial Officer. Please go ahead, sir.

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; Wayne Miller, our Chief Operating Officer; Neal Nackman, our Chief Financial Officer; Jeff Goldfarb, our Executive Vice President; and Priya Trivedi, our Vice President of Investor Relations. During this past quarter, we realized significant sequential improvements in sales trends from our previous quarter. Retailers are figuring out how to manage through this pandemic and consumers are buying to their adjusted lifestyle needs. Our merchants early on were able to identify the meaningful shift in consumer demand towards casual and comfortable clothing, as well as outdoor active attire. As an agile organization, our personnel are empowered to act quickly to redistribute resources and allocate purchasing dollars, enabling us to have the right inventory at the right time for the right price. The distribution and logistics team have also been working tirelessly behind the scenes. They've done an incredible job keeping our warehouses operational throughout this difficult period of time. We're very fortunate to have an experienced and talented global team at G-III. They proactively met the challenges presented by this pandemic and continue to remain focused as we navigate through this unprecedented time. Even as this situation continues to evolve, we've elevated our position as a key supplier to our retailers and our power brands continue to gain market share. Now, let's review the financial results for our third fiscal quarter ended October 31. Net sales for the third quarter were $827 million, down 27% compared to last year's $1.13 billion. Net income per diluted share was $1.29 as compared to $1.97 last year.

Thank you, Morris. The results for our third quarter ended October 31, 2020 were significantly impacted by the ongoing effects of the pandemic. Let us begin with the retail segment. The restructuring of our retail operations, which includes the closing of all 110 Wilsons Leather and 89 G.H. Bass stores, is going as planned. In connection with this restructuring, we expect to incur aggregate net costs and charges of approximately $100 million. This $100 million operating loss is inclusive of allocated overhead, some of which will remain in order to support the ongoing retail operations. On a year-to-date basis, we have incurred direct four-wall costs and charges of approximately $74 million, which exclude any allocations. We have included some relevant breakout data for the four-wall retail operations in our earnings release issued this morning. For our third quarter results, net sales for the third quarter ended October 31, 2020 decreased approximately 27% to $827 million from $1.13 billion in the same period last year. Net sales of our wholesale operations segment decreased approximately 27% to $783 million from $1.07 billion. Net sales of our retail operations segment for the quarter were $58 million, approximately 35% lower compared to last year's sales of $90 million. Retail sales included $38 million and $60 million of sales for Wilsons Leather and G.H. Bass stores in the quarter ended October 31, 2020 and 2019 respectively.

Thank you, Neal, and thank you all for joining us today. This quarter was further validation that G-III's entrepreneurial culture, built over almost 50 years, can weather any challenge put in front of us. We took proactive measures early in the pandemic to strengthen our financial position and quickly collaborated with our retail and supply chain partners to align our businesses for future success. Our agility, combined with our wholesale expertise and strength across a broad range of apparel and accessory categories, has proven to be a winning formula. Our strong financial condition positions us well to further increase our market share, drive long-term growth, and take advantage of the right opportunities as they present themselves. 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.

Thank you. Our first question comes from Edward Yruma with KeyBanc. Your line is now open.

Yes. Hi, good morning. Thanks for taking the question. I guess, first part of a housekeeping question. Some really constructive commentary on athleisure and performance, I know you have it across multiple brands. How big is the business today and kind of how should we think about medium-term growth? And then as a follow-up, Morris, I know you're starting to think about kind of the second half of 2021 vaccine hopefully by then. How are you positioning your business against what could be much stronger apparel demand? Thank you.

Thank you, Ed. Thanks for the questions. This isn't really a topic of athleisure as a category, it's a lifestyle. Athleisure flows into almost everything that we do. There are elements of casual dressing, as I spoke to in our sportswear business, that emanate from the new consumer way of dressing or the current consumer way of dressing. So our entire product mix reflects what the consumer is looking for today. It's not simply the athleisure category. That said, our athleisure category is a significant part of our business. Calvin Klein is one of our largest pieces, followed by Tommy Hilfiger and DKNY, positioned in department stores. I would say, they could be classified as the largest piece of the department store athleisure offering. So, again, it's not a startup; it's fairly well-developed. What is likely to grow significantly in its second year of offering is the jean business. This is our first year in the jean business, which also reflects a casual lifestyle look, and we've penetrated the business aggressively with CK Jeans again followed by Tommy Hilfiger and DKNY, and we're beginning to make our mark in the jean business very quickly. You'll see us in all the retail venues that we serve. It's not limited to one retailer; it's fairly well distributed. And as I said earlier, we believe those three businesses can individually be $250 million in size. Regarding the second half of the year and our calendar 2021, there is a lot to learn. What we emphasize is that we are an agile organization. We kind of proved that out just recently. We believe we know where we're going for Q2 in product mix. We're aggressively designing and creating and building collections of products that are suitable for what the consumer is looking for. We have been under pressure with our social dresses and our dress business this year. They're highly profitable traditionally for us. We've altered the styling, and we believe we've corrected the path. Even the dress business will be much more casual for the back end of the year, as well as Q1 and Q2. So, we're addressing it with styling. We have a resource structure globally that is supporting all of our needs, and we are intact — we're an aggressive company that figures it out, and we've got a talent pool that is very much aligned with the home office and does the unimaginable to accomplish success. So I hope I answered a little bit of what you've asked.

Sure. Thank you. And maybe one other quick follow-up if I might sneak it in. We heard more retailers talk about why to lean on vendors for drop ship inventory. I know you do a little bit of that, but how comprehensive is your infrastructure to support the dot.coms of your retail partners? Thanks.

It is not comprehensive. We do it on a spot-by-spot basis. We are not structured for drop shipping, but we will be. We've hired talent, and we're searching for the appropriate real estate. We're putting systems in place to accommodate drop shipping to the direct consumer and taking some of that responsibility away from our department store partners, as well as in Amazon to some degree. Given the appropriate time and the investment we're making, we should become greater in that aspect of the business. It's an essential need; we recognize it, and we're all over it. We've staffed for it, and now we're searching for the appropriate distribution center that can accommodate it. Our distribution is, as you know, we started as a coat company; a lot of what we do is product that is shipped hanging, and it's a far cry from what needs to be done to efficiently handle the cost structure that entails drop shipping to the consumer. But we're on it. Come back to me in a year, and I'll have an answer for you that is a little different than today.

Thank you.

Thank you.

Thank you. Our next question comes from Erinn Murphy with Piper Sandler. Your line is now open.

Great, thanks. Good morning. Morris, it sounds like in the third quarter trend for outerwear were good; can you just speak a little bit more about what you're seeing and how did outerwear order books end up for the season?

So, we are — as you know, we are predominantly a wholesale company. Thus, our orders are written before the weather reacts. Our third quarter was good as far as shipping was concerned. Retail in Q3 — for most of Q3 in outerwear was good; the tail end of it slowed down, weather didn't cooperate, and the beginning of Q4 is not what we would like it to be. It's acceptable, but weather cures all those ills. The outerwear that we're producing is again — or produced is basically a derivative of the outdoor trends that people are looking for. There has been outdoor eating. People are spending more time in activities outdoors, and our outerwear reflects it. We produced an unimaginable amount of filled and unfilled breathable fabrics for our puffer jackets. Most of them had stretch in them. We have unique fabrics, unique to G-III that have sold incredibly well. Our fake fur business was quite good. Where we lack is where we were born, which was a leather business and some of the wool business that we were successful with years ago — that’s not in play right now. So it's mostly puffer and stretch fabrics that are driving our business.

Got it. And then, maybe just for Neal in the fourth quarter, would you think about sales down 30%? Is some of that just kind of what Morris was just speaking about, a slightly slower start to the sell-through season this fourth quarter? Just help us think about kind of the wholesale decline that's embedded in the fourth quarter guide?

Yes, Erinn. When we look at it, we didn't really see a huge decline from what we were anticipating to tell you the truth.

Okay.

I think it was — what we experienced was actually a stronger Q3, but really not necessarily a weaker Q4 than what we were expecting. I think Q3 was boosted by the shortfall of inventory at retails, which really helped in terms of our demand needs.

Okay. And then just last question, just on the SG&A front, you guys have been very disciplined this year, and I know there is another $28 million in cost savings that you're in the process of realizing. But how do you think about, as we go into next year, that kind of key areas of reinvestment for some of the savings that you've been able to ensue this year? Thank you.

Well, look we will have — we'll have a more normalized year, and yet it still won't be completely normalized, right. So the big savings that we had this year, we furloughed a significant number of people; we are taking pay cuts; we've now taken all the furloughed people back that started at the last month of the third quarter. So we will have that pressure on us in the fourth quarter, and we'll have some of that pressure going into next year. Marketing spends, we will start to do slowly as we see business continue to expand. Overall there'll be certainly still a slower business activity in the first half of the year. We get benefits throughout some of the — throughout some of the SG&A items as a result of that as well. But I think the big pressure spots, when we normalize, will be — and people will be in marketing, and let's not forget that we did have some pretty good pain points this year. We took a very large charge this year for bad debt expense, as a result of bankruptcies. We've taken some inventory reserve. So there'll be some offsets and natural offsets to some of the savings, but that's where the puts and takes that I see going into next year's SG&A.

Erinn, our headcount reduction is north of 400 people in North America, about a dozen people in Europe ultimately, and over 100 people in Southeast Asia. So, collectively there is a headcount reduction that's in place of over 500 people globally. So that's an area that we probably will expand on as we refine our business and we better understand these solutions to prosperity.

Great. Thank you, all.

Thank you, Erinn.

Thank you. Our next question comes from Heather Balsky with Bank of America. Your line is now open.

Hi, thank you. First question, I'd be curious to hear your perspective on the fourth quarter promotional environment, what you're seeing with regard to holiday, what that might need for the fourth quarter? And then as a separate question, just curious with Donna Karan being your remaining retail business, how you're thinking about that in 2021? And especially with some of the real estate opportunities that are opening up with stores closing, other competitors closing?

Thank you, Heather. It's quite strange one might think that this is a highly promotional period because of the pandemic, but quite honestly, we're seeing less promotions than we would have expected. There are retailers that are achieving success by driving bottom line rather than top line. And then there are others that are heavily inundated with inventory that needs to move because some of it's seasonal. But all-in-all, it's not incredibly promotional out there. The retailer is garnering acceptable return on their investment and on the inventory; so it's okay. As far as DKNY and the success, the beginning of success at retail, we are left with two primary brands that will expand over time. This is a good time to expand on real estate because the real estate offerings are abundant, and they're much more fair than they have been historically — at least that we might be able to sign is — could be a percentage lease with kick-outs. So we're not coupled with 10-year leases that we would have to buy our way out of — that we've learned our lesson from. We paid dearly for real estate mistakes just recently as we're closing Bass and Wilsons. We're not likely to go down that path again. We're fairly aggressive on some of the opportunities that are affording themselves in Europe. We're considering opening in — on the High Street areas of the U.K. with DKNY. There is great demand for it there. Our stores in — our store in the U.K. — we have an outlet center in the U.K., which is our single best store in the world; we have two other stores in Europe that are performing exceptionally well compared to North America. So we are likely to expand in Europe. We cannot expand Karl Lagerfeld in Europe, but we have a joint venture partner that's domiciled in Europe, and their region of expansion is the globe other than North America, ours is North America. So we are pursuing retail very, very cautiously and opportunistically. It's got to be a great offering for us to jump in and grab it. Thank you, Heather. Thanks for your question.

Thank you.

Thank you. Our next question comes from Jim Duffy with Stifel. Your line is now open.

Thank you. Good morning, everyone.

Good morning, Jim.

I want to dig into some on the SG&A line. Can you isolate the four-wall SG&A associated with the Wilsons and Bass stores that you expect to eliminate with 199 store closures?

Yes, Jim. If you look at the — well actually we give you a summary in the press release. I think if you look at the segment information, you will be able to get that better when we come out with the third quarter queue.

Okay. But we don't know what the gross margin on the Wilsons and Bass stores were versus the retail segment. So there is not sufficient disclosure to figure that out, Neal.

Let us look at that and see if we want to expand upon that, Jim.

And then, it looks like the retail profitability disclosures year-to-date suggest maybe you added back some profitability to the Wilsons and Bass stores in Q1 and Q2, because the previous disclosures along with what you have given for the third quarter don't total?

Yes, Jim, the big difference there is the tax rate. We've got a pretty high tax rate and we use the effective tax rates. So if you focus on the pre-tax numbers, you should see a steady increase to the operating losses over time. There was no add back.

Okay. I'll take a closer look at that. And then, I'm curious within the retail segment, what's the residual component of retail SG&A that will remain in the model for next year, you know that overhead plus the four-wall SG&A of the remaining stores?

Yes, I think in terms of — let me speak a little bit about the trapped overhead. We're thinking that this year we'll probably ran about $20 million of trapped overhead that we will have to continue to absorb. We're thinking that from a trend line is probably down to about $15 million today, and then we'll continue to look at that and probably hope to make some more improvements in that as we go into next year?

Okay, that's helpful. And then, I guess, building on Erinn's question with the remaining wholesale business, how much of that SG&A savings do you expect to be able to keep, you're mentioning the $28 million annualized savings from the headcount, the run rate SG&A for this year well below that in terms of savings. Just trying to understand how much of that comes back into the model?

So, keep in mind, the other part of our SG&A that does move is certainly the variable portion of it. And so as we have sales, we will have variable lift. That variable lift comes in the form of really advertising that we refer to as national advertising associated with our licensed businesses, and then, of course, our third-party shipping is in our selling and general expense category as well. So those are the two variable expense components that you'll see go up and down with sales for the most part. And then as I mentioned, we'll have increases back on the payroll side and then advertising will be the two main drivers of increase offset by some of these bad debt expenses that we've had in the periods.

Okay. Thanks for the detailed responses. One more for me and then I will move on. But looking back to the wholesale gross margin in fiscal '20 roughly 33%, would you expect to be able to improve on that based on category mix and brand mix as you look out to next year?

No, I think, Jim, that's a pretty good margin for us. And I think that this year we've gotten benefits in the wholesale gross margin as a result of these markdown reversals. So I think if you went back to the prior fiscal, that's probably where we will start to anniversary our gross margins. And those gross margins are fairly strong. Keep in mind, we've got licensing partners for about 60% of the business. So we operate at a pretty high gross margin when you add that back in, and I think that that's probably where you should think about our anniversarying us going forward.

Okay. Thanks for all the help, Neal.

Yes.

Thanks, Jim.

Thank you. Our next question comes from Jay Sole with UBS. Your line is now open.

Great. Thank you so much. Just wondering if you could give us a little bit more color on the 4Q you mentioned the sales picking down 30%, but as far as gross margin and SG&A, any puts and takes that we should be thinking about for those line items looking into the fourth quarter?

Yes, I think in terms of gross margin. Keep in mind, we are going to be at the last part of our Wilsons and Bass liquidation, so that will put a little bit of pressure on us. As you can expect, when the liquidations reach their end, you get lower gross margin achievement to get rid of your final product. I think in terms of the SG&A, the only thing to again keep in mind is that we did start furloughs — bringing people back from furlough. So we'll have that full impact for us in the fourth quarter as well. So while we did a very good job of really reducing SG&A almost completely in line with our wholesale sit with our total sales drop, we will have some deleverage pressure going into the fourth quarter on SG&A.

Got it. Okay, thank you so much.

Thank you. Our next question comes from Susan Anderson with B. Riley. Your line is now open.

Hi, good morning. Thanks for taking my question. I guess I wanted to touch a little bit more on the lifestyle or athleisure product that you've rolled out our increase in penetration. I guess I'm curious just relative to the average sales decline of 26%, how is that performing? Did you see any pockets of positive growth or close to positive growth? And then just on the dress side, it sounds like you've definitely casualized those dresses, but I guess are those dresses also down in penetration as a percent of the mix too for the back half? Thanks.

So, I'll hit the second comment first. Our dress business is down for the second half of the year, being calendar '20. Hopefully, we recover for '21. The common belief is the woman's wardrobe drove is getting old and she's going to go out there and aggressively buy dress as soon as she is able to commute to go out and have dinner and socialize with their family and friends. The common belief is the dress business comes back fast and furious. And so — and we believe that to be the case. As far as performance in athleisure — in our athleisure areas, they're performing significantly better than any other category that we have. So there is — we have our Calvin business that is for the last month is comping almost flat to last year. Had we been prepared with the level of inventories that we needed, we would have comped up. It wasn't about demand. It was more about supply. And for Q4, we believe that it will track in similar form. We're finding that take all three power brands, DKNY, CK, and Tommy and compare the active lifestyle piece to the rest of the company; we're tracking at missing by high-teens for the quarter comp to the 27% as comprehensive category mix.

Great, that's very helpful. And then, I'm curious, just for spring 2021, what you're seeing in terms of orders from your wholesale partners, I guess, particularly department stores, are you seeing any improvements at all from the second half?

Yes. We will see improvement. I would tell you that the order book looks like it's down about 20% for the spring book, and we're comfortable if that will show improvements certainly to this fiscal year, and that's the type of sequential improvements that we would hope to continue to see as the year rolls out.

Great, that's helpful. And then lastly, I just curious how you're thinking about the promotional environment for fourth quarter and over holiday, I guess, relative to last year, and then also what you saw on third quarter, which I guess sounded pretty tight, especially given products that were in high demand?

I guess it all depends on the effect of the pandemic. Clearly, we are all aware of the spike up that's occurred, which results in store closures. It extends the period of time that tourism is back in our world. So it's a hard one to forecast as far as the promotional level. There is a period of time, there is intense, and then there is reality. The intent is not to be highly promotional, but reality is. If there is no traffic and there is a need to create liquidity, the retailer will become highly promotional. We've seen it before, and we'll see it again. So it's a hard one to forecast. It's not based on fashion; it's probably not based so much on weather as it is the consumer desire to go out and shop and her ability to get everything she might want on the digital side of the world. That clearly has had an impact, but it doesn't cure all of it. So again, a little complicated of an answer. It's not a cut-and-dried one, but it's best that I can do for the moment.

Okay, great. Thanks so much for all the details, and good luck this holiday.

Thank you, Susan. Thanks for your questions.

Thank you. Our next question comes from Steve Marotta with C.L. King & Associates. Your line is now open.

Good morning, Morris and Neal. You mentioned digital penetration within the department store channel in the third quarter was 40%; that's up from 24% last year with the exception of increasing drop ship capabilities. How else can you support that department store digital effort?

We can support it by having replenishment inventory. This was kind of a chase year, but if it's a go-forward model, our responsibility in the mix will probably be to hold onto replenishment inventory, which is not something we would love to do, but it's a necessary evil or for our way of doing business. And marketing, which we're spending a good deal of money on both collaboratively with our retailers and independent of our retailers will help drive that digital business. So those are probably the solutions that I have for a greater penetration on the digital side of our business. And further to that, internationally, we are having success in the Middle East. We're having some successes in — although early stage for us, we're having a good deal of success in China, and we believe we can grow those businesses in those areas of the world where they do hit the charts in coming years. So the expansion of the globe would be another element of further success in digital.

Helpful. Thank you.

Thank you.

Thank you. And our last question comes from Dana Telsey with Telsey Advisory Group. Your line is now open.

Good morning, everyone. As you consider shipping and capacity or surcharges and the current situation, where do you stand on shipping and acquiring goods for the upcoming holiday season, and moving into 2021? Can you provide any updates on manufacturing in China and your position there? Thank you.

Thanks for your question, Dana. Shipping, it depends — it really depends on the day. If there's a hurricane, we lose a few containers as the container ship topples. If there is a pandemic and the ports are closed, we have backlog. There is high demand for container space, and we have been impacted from pretty much every area of the world, whether it's Vietnam, Jordan, this week, Bangladesh has got its displacement issues of our freight. So it is a challenge, where we're paying surcharges, we're doing what we need to do or what we can do. We're not in full control; there are times where we're provided with bill of ladings, and then we find that the freight was offboarded and is on a 10-day delay. This is a very, very unique year. So shipping is a problem. In spite of it, the third quarter was fairly good. I believe we can figure out the fourth quarter, but it's not a perfect world. If all the shipping routes and container ships were aligned and we got what we had planned on getting, it would be a better plan. So — and as far as our development of product and production in China, we're not really focused on it, quite honestly. It's come down significantly. We're focused on producing in the right countries the appropriate product; we've done a masterful job of bringing down our China production from possibly 85% of this company's production several years ago down to hovering around 30% today. So it's not a test of bringing — I'm not in politics, quite honestly, unless I have to be. We're in the business of providing products at an appropriate price with appropriate quality, and China has always been a good partner as it relates to that. There are areas that we have figured out that are more competitive than equal in quality and less in duty, and we've gone to those areas, but I'm not on a mission to stay clear of China. I'll stay clear of cotton mills that aren't compliant with what the world expects. We are very cautious as to where we produce, how we produce. We've got an office overseas, that's actually based in China, that is clearly focused on making China comply with everything that we ask for. So — and they do a really good job of it. So, again, bottom line, it's not a race to leave China from G-III.

Thank you.

Thank you, Dana. Thanks for your questions.

Operator, one more question. And — okay — operator, we are finished. Thank you.

Thank you.