Description

Investment Viewpoint: G-III Apparel Group, Ltd. (GIII) is a global leader in the design, sourcing, manufacturing, and marketing of a wide range of apparel categories. GIII has a portfolio of more than 30 licensed and proprietary brands highlighted by five global power brands: DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger, and Karl Lagerfeld Paris. It sells products through several leading retailers such as Macy’s, TJX Companies, and Amazon. In addition, they sell products directly through their own DKNY and Karl Lagerfeld stores as well as through digital channels for a number of their brands.

GIII currently trades at a P/E ratio of ~6x, which is a significant discount to its peers and its historical average. Pre-covid, GIII traded for an average of ~17x earnings while PVH, its closest comp traded for an average of 14x. We feel 14-17x earnings is appropriate given GIIIs decade-long double-digit growth rate in EPS as well as its 26% ROTE. At 15x earnings and $4.20 in EPS, GIII would be a $63 stock, 150% upside from today’s levels. GIII’s recent acquisition of Karl Lagerfeld further supports our thesis. GIII paid 9.2x EBIT for Karl Lagerfeld, using that multiple for GIII on 2022 EBIT yields a $61 stock, showing that the private markets are continuing to value apparel businesses correctly despite the public markets being significantly off. GIII is priced nearly for bankruptcy despite having a healthy balance sheet and a long-term track record of growth.

Over the last year, we have seen the consumer retail sector experience dynamic shifts in market sentiment from a bullish return to relative normalcy following the pandemic to severe pessimism due to commodity inflation, supply chain obstacles, and a looming recession leading to more negative outlooks. Despite this, we have strong reason to believe there is still a significant upside for GIII over the next five years.

The company’s experienced management team has spent decades building close relationships throughout its supply chain and its portfolio of globally recognized brands will be in high demand in any environment. In the long-term, we believe GIII will continue its strong wholesale performance while expanding its international business and achieving greater profitability. This will happen in a less challenging apparel environment that will allow for significant multiple expansion.  Our optimistic case assumes the business continues to grow over the next 3-5 years and the multiple expands back to historical levels. Under this scenario, we believe earnings can grow to ~$6.50 in 5 years and the shares re-rate back to ~15x, which suggests that GIII could be a $100 stock at this time.

As illustrated below, the shares of GIII are trading at a P/E of ~6x and an EV/EBITDA multiple of ~4x, which is well below their historical pre-pandemic multiples of ~17x and ~9x respectively.

Over the last decade, CEO Morris Goldfarb has grown the company at a double-digit clip and has proven his ability to allocate capital effectively and build a successful portfolio of brands. Since FY2012, Goldfarb has led the company to a CAGR in revenue of 8.4% including the disruptions of the pandemic, and a CAGR of 12.5% between FY12 and FY20 (i.e., pre-pandemic).

In light of the recent acquisition of Karl Lagerfeld with wholesale operations in over 60 countries in which GIII previously did not have a significant presence as well as their expertise in sourcing and distribution, we see no reason that this trend will change coming out of the pandemic. This is further reinforced by management disclosing that it believes the Karl Lagerfeld brand alone to have over $1 billion in global net revenue potential in the long-term.

GIII’s Relative Valuation Discount To Its Comps Unwarranted; Upward Re-Rating Opportunity: When considering the historical multiples that GIII has traded at, we do not see why GIII should not re-rate its current multiples at much higher levels. The expertise of the company and its relationships with different retailers across its distribution network (e.g., Macy’s, TJ Maxx, etc.) have not changed, and its portfolio has only become stronger. As of Q3 FY22, management believes the five power brands of DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger, and Karl Lagerfeld Paris have a combined sales potential of $4 billion relative to the $2.8 billion they recorded in 2021. Management stated that both Karl Lagerfeld and DKNY independently can reach $1 billion in sales with better margins and better products within the next few years. Moreover, with a recent re-basing initiative that improved profitability by exiting poorly performing retail locations and by focusing more on higher-margin DTC channels, the company has demonstrated its ability to maintain its existing operations while seeking new opportunities for growth.

As illustrated below, GIII is valued at a significant discount compared with its closest comps on a P/E and EV/EBITDA basis.

As illustrated below, GIII was priced in close proximity to its closest comps on both a P/E and EV/EBITDA basis pre-pandemic.

When considering the potential for growth internationally and the efforts of the company to maintain profitability, we believe it is difficult to justify the dramatically lower P/E and EV/EBITDA multiples of GIII when compared to its peers. Given these overly punitive multiple ratings for GIII and the management guidance of between $4.20 and $4.30 in EPS in FY23, we see enormous upside potential in GIII in both the medium and long-term if its P/E multiple can expand to its peer group average, or even further to its 5-year historical levels of approximately 16x-17x EPS. Additionally, we believe the Karl Lagerfeld acquisition will lead to earnings increases of roughly $0.30 to EPS, which would bring our estimate for annual EPS closer to the $4.50 per share mark, which would further accentuate the upside in valuation even in conservative cases, where the core company could underperform.

Looking closely at the historical EPS for GIII, we see that the company is generating much higher earnings post-pandemic, yet the shares are still trading significantly below their pre-pandemic earnings.

GIII’s EPS are now tracking ~38% above pre-pandemic levels.

While EBITDA & EPS are up 19% & 38% from pre-pandemic levels, the shares are trading ~40% below pre-pandemic levels.

Company Background: The history of GIII starts in 1956 when Aron Goldfarb founded G&N Sportswear, a women’s leather outerwear company, in New York City. The current CEO and chairman, Morris Goldfarb, joined his father in 1972. In 1974, G&N Sportswear was reorganized as G-III Leather Fashions, which grew to become one of the largest wholesalers of leather apparel in the United States over the next 25 years. The company completed a successful initial public offering as G-III Apparel Group, Ltd. In 1989. Since going public, GIII has expanded its array of products and brands and has grown to nearly $2.8 billion in sales in its most recent fiscal year. The products GIII offers cover ready-to-wear clothing, swimwear, luggage, footwear, active and performance wear, outerwear, handbags, and other accessories.

The five power brands in GIII’s portfolio are globally recognized brands that have allowed GIII to become a leader in a wide range of apparel categories. Calvin Klein leads GIII’s portfolio of licensed brands with over $1 billion in sales followed by Tommy Hilfiger with $500 million. In 2021, sales of all licensed products accounted for $1.9 billion or 67.2% of net sales in. Their licensing agreements GIII is typically required under its license agreements to make royalty and advertising payments that are often based on a percentage of net sales of the licensed products. In addition, GIII is generally required to meet minimum net sales and royalty numbers under these agreements. Over the last two decades, GIII has fostered durable relationships with each of its licensors, which have manifested themselves in growing offerings under the licenses (e.g., the Calvin Klein license later leading to GIII acquiring licenses for Calvin Klein Jeans), thus demonstrating a high degree of stability and safety for the future with respect to their licensing agreements.

Owned-Brand Portfolio Analysis: GIII’s proprietary brands are led by DKNY and Donna Karan, which combine for approximately $500 million in sales. Sales of proprietary branded products generate higher operating margins because GIII is not required to pay licensing fees on these sales. Conversely, licensing of its proprietary brands allows GIII to generate an additional revenue stream without an associated cost of goods sold. Additionally, GIII does not have any distribution channel or marketing restrictions to navigate with its own brands. The marketing that it does for these brands will contribute to long-term shareholder value by building brand equity.

In the last month, the company acquired the Karl Lagerfeld brand to extend its high-end, designer offerings. Under this brand, GIII has gained access to its business in apparel, accessories, footwear, fragrances, eyewear, and home furnishings. Additionally, Karl Lagerfeld brings GIII its brand extensions in the forms of Hotel Karl Lagerfeld, luxury villas, and a variety of entertainment media. In acquiring this brand, GIII invested in expanding its international presence with Karl Lagerfeld’s strong wholesale distribution and digital presence in over 60 countries. The combined global brand of Karl Lagerfeld represents an approximate $375 million in annual revenue with $175 million from North America and the remaining $200 million from the rest of the world. With Karl Lagerfeld being a growing brand, GIII aims to leverage this acquisition to fuel organic top-line growth over the next several years with targets of expanding revenue from the brand to $1 billion in the long-term. While the brand was purchased at over 9x operating income, we believe that the earnings accretion Karl Lagerfeld will bring to GIII is about $0.30 per share.

Outside of the Karl Lagerfeld brand, GIII wholesales its products to approximately 1,200 customers which are mostly made up of department, specialty, and mass merchant retail stores in the United States. Macy’s, TJX companies, and Ross Stores are GIII’s three largest customers accounting for 23.9%, 14.8%, and 12.7%, respectively, for a total of 51.4% of net sales in 2021. GIII’s ten largest customers accounted for 78% of net sales in 2021. Of its nearly $2.8 billion of net sales in its last fiscal year, 98% of sales came from its the wholesale segment, which ultimately contributed 108% of GIII’s FY21 operating income (retail operates at a loss). Consequently, we can see that wholesale has and will continue to be the backbone of GIII’s operations.

Brand Strategy: We spoke with Donna Karan’s former VP of Sales, who explained how GIII’s collaborative approach to retail relationships is a key to its success. GIII evaluates sales and margins of several of its partners daily to work with them in determining how much of each category they need and when they need it. This allows them to be agile and change strategies as needed to drive sales. As an example, she estimated GIII’s percentage of its dress business has grown 3-fold since it became a focus in 2018. A particular area of collaboration that our expert pointed to would be their digital channels. By leveraging the consumer shift towards e-commerce through mobile applications and brand websites, GIII can further capitalize on the brand value of some of its largest proprietary and licensed brands, which have an enormous collective presence.

The most important of GIII’s brands are the five power brands: DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger, and Karl Lagerfeld Paris. The power brands come from both their proprietary and licensed portfolios, where Calvin Klein is the strongest brand followed by Tommy Hilfiger, which both lead GIII’s licensed brands. With the dominance of GIII’s licensed brands in mind, it is important to note that these brands seek out and depend on GIII to sustain their own success through the manufacturing and sourcing expertise that GIII brings to the table. Through operating their own, successful proprietary brands—most notably DKNY and Donna Karan—GIII has demonstrated its superiority in handling both the manufacturing and sourcing processes in a manner that makes globally recognized brands want to license with them. This is a positive indicator for GIII’s future in securing lucrative licensing agreements in the future and succeeding with their own brands.

GIII Apparel Group’s Brand Portfolio: The proprietary brands of GIII include: DKNY, Karl Lagerfeld Paris, Donna Karan, Vilebrequin, G.H. Bass, Bass Outdoor, Sonia Rykel, Andrew Marc, Wilsons Leather, Eliza J, and Jessica Howard.

The licensed brands of GIII include: Calvin Klein, Tommy Hilfiger, G-III Sports, Cole Haan, Dockers, Guess, Kenneth Cole, Levi’s, Vince Camuto, Margaritaville.

In summary of the licensed brands, we note the following:

• The Calvin Klein brand license was acquired in 2005 and expanded to include Calvin Klein Jeans in 2015 with net sales of over $1 billion.
• The Tommy Hilfiger brand was first licensed in 2015 and expanded to include Tommy Hilfiger womenswear in 2016 with over $500 million in net sales.
• The Dockers brand licensed was acquired in 2008 and is a brand division of Levi Strauss & Co., which has been a core driver of khaki and pants sales for GIII.
• The GIII Sports by Carl Banks brand has produced licensed apparel for the NFL, NHL, NBA, MLB, and several colleges/universities for over 20 years.
• The GUESS license was acquired in 2005 has been a core licensed brands of GIII, which represents their more adventurous and trendsetting apparel portfolio segment.
• The Levi’s license was acquired alongside the Dockers brand license in 2008 to expand GIII’s denim and pants offerings.
• The Kenneth Cole license is one of GIII’s longest standing agreements as it was formed in the 1990s to provide apparel and footwear offerings.
• The Vince Camuto brand license was acquired in 2011 and is one of the more premium apparel offerings of the GIII portfolio.
• The Cole Haan brand was licensed in 2000 to expand on GIII’s outwear offerings and is one of GIII’s strongest brand relationships alongside Kenneth Cole.
• The Margaritaville brand was very recently licensed in 2021, which has provided hospitality and other business exposures for the GIII portfolio outside of its apparel offerings.

Recent History: Towards the end of CY2021, GIII began a re-basing initiative to improve profitability and develop a leaner set of retail locations. By closing stores with low profitability and focusing more on the DTC channels of several of its brands, the company was able to improve EBIT margins to the double-digit range. Moreover, while closing a portion of its stores, the company was able to remain roughly flat on a year-over-year sales basis, which is a positive indicator for the future growth of the company overall. This is because the company demonstrates its ability to grow organically through its existing locations without relying on unit-growth to expand its top line. Consequently, we see GIII is poised for improved profitability and growth moving forward.

Another recent development of GIII was their investment in the Sonia Rykiel owned brand. This is part of a larger strategy of expanding internationally, which has since been reinforced with their acquisition of Karl Lagerfeld Paris. Given that nearly all of their net sales in 2021 were sourced from the US, this stands as a significant opportunity for growth with many untapped markets across the world. With the new pushes behind the Sonia Rykiel brand and the existing international presence of the Karl Lagerfeld brand, GIII is positioning itself for strong top-line growth through global channels that it previously did not access.

With 2022 being an uncertain environment with supply chain costs elevated, potential COVID outbreaks which could disrupt supply chains further, and a looming recession. Still, GIII is better positioned to handle these challenges than other apparel companies as GIII’s brand portfolio allows them to better handle inflation with diversified offerings across a wide range of price points, demographics, and regions. By covering a multitude of price points and demographics, GIII reduces over-exposure to customer segments that will be more adversely affected by the recession and can rely on its less price-sensitive customers to adjust for inflationary obstacles. Another consistent concern is that fashion changes quickly. However, GIII has an enormous catalog of offerings and the expertise to align its focus with the consumer; evidence of this can be seen with management disclosing that their order books are larger than ever.

Over the long term, the company will expand profitability and continue to grow retail internationally. Additionally, certain categories have plenty of room for growth domestically. We can see dressier and occasion-based apparel are experiencing a demand acceleration with returns to in-person events post-pandemic, which its premium brands with footwear and handbags offerings—notably DKNY, Calvin Klein, and Karl Lagerfeld—are primed to capitalize on. When considering that the economic environment will improve as inflation decreases, supply chain costs come down, COVID disruptions become less frequent, we can see that GIII is very well positioned for growth and success in the future.

Risk Considerations: For GIII, we see the primary risks to be the potential for a macroeconomic slowdown and/or new COVID spikes to reduce consumer demand, changes in licensing relationships, and volatility in distribution channels. Any macroeconomic slowing will likely impact overall consumer demand for apparel and impact GIII commensurate with its peers. However, recent indications are that household balance sheets are healthy, and with increases in employment and wages consumer discretionary spending could see minimal impact unless the economy enters a prolonged recession. With respect to COVID, we believe that GIII has suitably adapted its digital channels to handle disruptions to brick-and-mortar demand. Further, changes in agreements with licensed brands and distributors (e.g., Macy’s, TJ Maxx, etc.) seem unlikely given the long history of mutual benefits between GIII and these companies and the stability of operations that GIII provides. Still, some of GIII’s newer licensed brands (e.g., Margaritaville) could see volatility as both the licensor and GIII have not yet developed a durable relationship. With these considerations in mind, we still believe there is tremendous upside for GIII in the medium- and long-term, which is not offset by the risks we have outlined.

Catalyst

• Executing on growing each of its major power brands to managements TAM's.
• Delivering strong revenues & profitability that meet or exceed management's guidance.
• Estimates incorporating the contribution from Karl Lagerfeld.
• Better recognition of the company's multiple disparities with comps and prior history.
• Upward sell-side analyst rating revisions.