G-III’s Morris Goldfarb certainly isn’t going to make any impulsive decisions when it comes to China as its trade dispute with the U.S. drags on and apparel and footwear tariffs loom.
While the group, which produces a lot of its products in China, has made some adjustments to its supply chain in light of already imposed levies on handbags and leather goods, the veteran fashion executive isn’t ready to make any drastic changes just yet.
“We’re not that company that’s going to move out of China simply because there’s a tariff imposed,” Goldfarb said in an interview with WWD.
“We’ve spent 30 odd years developing the country in the factories, understanding the culture of the country and how to work appropriately and deliver a great product,” he explained. “You don’t simply move out and say we’re done and take your chances in a country that doesn’t have the experience in what you’re doing. You do it slowly. I’d rather work short margin than work in factories that aren’t familiar and with our needs and produce poor quality products. It’s not what we do.”
The uncertainty surrounding tariffs comes at a time when G-III is preparing to ramp up production, having this week finalized a deal with PVH Corp. to acquire the license to design, produce and distribute Calvin Klein’s women’s jeans for an initial term of five years. This business joins the other women’s Calvin Klein businesses that are already licensed to G-III by Calvin Klein Inc., including women’s ready-to-wear and accessories.
For now, the company, which also owns DKNY and produces Tommy Hilfiger and Karl Lagerfeld under license, is swallowing a multi-million-dollar hit from the 25 percent tariffs that President Donald Trump recently placed on handbags.
That category represented 7 percent of its annual net sales and G-III estimates that the 15 percent increase in tariffs for the remainder of fiscal 2020 will increase its costs by about $6 million.
In order to offset some of the cost, G-III obtained price increases from some of its retail customers in the U.S. — a move that other retailers, including Walmart Inc., have also said they will have to make.
As for the Trump administration’s proposed 25 percent tariffs for apparel and footwear, which could come into force at the end of the summer and significantly impact G-III, Goldfarb’s action plan is still a work in progress.
“Should there be another tariff imposed of 25 percent, I’m not sure how we’d handle that. Our vendors have assured us that they will take part of the tariff increase. Our retailers have suggested that they would absorb some and we would as well,” he said.
“We believe that our customer who is shopping in department stores is one who appreciates aspirational brands and is willing to pay more for our products,” he explained further during a call with investors earlier that day.
At this point, G-III would also get a “little more aggressive” about diversifying its supply chain, but it will be staged: “Today is not the day to call it quits [with China] after so much effort and so much skill went into developing it,” added Goldfarb.
As well as a business point of view, he’s also mindful about the social impact of any decision he makes as “once you’ve indicated that it’s terminal they start laying off their people, they start selling off their equipment and they’re basically done.”
But while G-III will feel the pain of more tariffs on Chinese imports, Goldfarb isn’t concerned about the levies that are due to hit Mexican goods on Monday as Trump cranks up the pressure on Mexico to stop illegal immigration at the southern border.
The company doesn’t produce anything in Mexico and although it does sell in that market, Goldfarb insisted that it shouldn’t impact G-III.
His comments came as the company unveiled first-quarter results.
Net sales for the quarter ended April 30 increased 3.6 percent to $633.6 million, from $611.7 million last year. This was below analysts’ expectations for $650 million, according to FactSet data.
Net income for the first quarter was $12 million, or 24 cents per diluted share, compared to $9.9 million, or 20 cents per diluted share in 2018.
For the 2020 fiscal year, it’s forecasting net sales of approximately $3.28 billion and net income between $163 million and $168 million, or between $3.19 and $3.29 per diluted share. This does not take into account the proposed 25 percent tariffs on apparel and footwear, which some analysts believe could come into force as early as the end of the summer.
G-III’s stock closed down 9.4 percent at $24.51.