G-III Apparel Group has grown more cautious amid the inflationary pressures weighing on both its consumers and its own supply chain.
The multifaceted fashion mainstay — which owns DKNY, Donna Karan and Karl Lagerfeld and also has big licensed businesses with Calvin Klein and Tommy Hilfiger — showed many second-quarter gains, but missed profit expectations.
More importantly, G-III cut its profit outlook for the year, offering another sign of just how much the second half of 2022 will differ from the strong run fashion saw at the end of 2021.
Investors were cautious, but also seemed to take the update in stride, trading shares of the company down 5.6 percent to $18.73 on Wednesday.
G-III’s second-quarter net income increased 89 percent to $36.3 million, or 74 cents a diluted share, from $19.2 million, or 39 cents, a year earlier. However, the result was inflated by a number of items, including a $30.9 million gain in the fair value of G-III’s minority ownership of the Karl Lagerfeld brand, which the company acquired full control of in June.
Adjusted earnings per share for the quarter slipped to 39 cents, down from 41 cents a year ago and below the 47 cents Wall Street analysts projected.
Sales for the three months ended July 31 rose 25.3 percent to $605.2 million, up from $483.1 million a year earlier and above the $594.8 million analysts projected.
Morris Goldfarb, the company’s chairman and chief executive officer, who is used to navigating tough markets and recently marked his 50th anniversary at the company, said the deal for Lagerfeld expanded the companies’ reach and that its largest brands were seeing “significant year-over-year sales growth.”
“We are managing the business prudently with a keen eye toward gaining market share and building on our strengths while further expanding our global reach,” Goldfarb said. “Looking ahead, we are in a good position for the fall season and our order book remains strong.”
Even so, G-III is treading lightly.
“Given the challenging environment that has rapidly developed over the last few months, we are taking a more conservative view for the balance of the year,” Goldfarb said. “We have a strong track record of managing through difficult business conditions and remain confident in our strategy and in our ability to deliver on our updated full-year expectations, as the overall fundamentals of our business remain solid.”
G-III is now looking for adjusted earnings of $3.60 to $3.70 a diluted share this year, down from the $4.40 and $4.50 projected in mid June, shortly after the Lagerfeld deal was closed.
The company said that guidance anticipates the impact from “current levels of inflationary pressure on consumers and incremental costs associated with the supply chain conditions, including the timing of receipts of goods.”
Timing is always a key component in sourcing, but with the unusual stop and start that COVID-19 forced on the global supply chain, it’s only become more important now.
But while G-III inventories at the end of the quarter were up 108 percent from a year ago, Goldfarb told analysts on a conference call that timing and context were both important.
First, inventories were low a year ago with shipping slow and many factories under lockdown restrictions.
Goldfarb offered that wholesale inventories as a better comparison and said they were up about 38 percent from before the pandemic and that most of that was driven by goods that were in-transit. Excluding inventory still being shipped, inventory levels are up 6 percent from before the pandemic.
“The majority of this inventory [increase] is comprised of in-demand categories, like outerwear, dresses, footwear and the newly launched jeans category, which did not exist pre-pandemic,” Goldfarb said. “Further, athleisure, a down trending category, had an insignificant impact on inventory growth to pre-pandemic levels as we had planned for the decline in demand.”