Sunday, September 15, 2013

G-III Apparel Group: A Unique Opportunity In Apparel

G-III Apparel Group (GIII) continues its trend of beating earnings estimates. Ok, ok, we're being modest, they've been crushing earnings. In the July ended quarter, GIII beat earnings consensus by 70%, and in the previous quarter, the company smashed earnings by 200%.

After the strong 1Q performance, the stock is now up over 55% year to date. What's most impressive is that analysts are expecting continued robust earnings growth. Even if the company manages to meet EPS expectations (versus the previous trend of impressive beats) the upside is still over $60 per share.

GIII also happens to be one of the only remaining, reasonably priced, apparel companies left in the buyout frenzied market. The opportunities in the niche apparel markets are drying up quickly, which is a positive, as we think the limited supply will lead to higher buyout prices. We see GIII going for as much as $70 per share in a buyout scenario.

Quick overview

GIII got its start back in the late 1950s when Holocaust survivor, Aron Goldfarb, immigrated to the U.S., settling in NYC and starting up his outerwear company. Today, the company designs, manufactures and markets apparel and accessories for men and women. The company's categories include outerwear, dresses, swimwear, sportswear, women's suits, luggage, women's handbags, small leather goods and cold weather accessories. Its wholly-owned brands include Andrew Marc, Wilsons, and Vilebrequin.

The real beauty here is that GIII is a manufacturer of both licensed and owned branded apparel, as well as having a suite of retail outlets.

Source: GIII 10-Q

For its licensed brands, the company has relationships with Calvin Klein, Guess?, NFL, NBA, MLB, NHL, Cole Haan, Dockers, Jessica Simpson, Kenneth Cole, Levi's, Tommy Hilfiger, Ivanka Trump and many others. The company operates retail stores under the Wilsons Leather, Vilebrequin, Calvin Kle! in Performance and Andrew Marc names.

The latest

For fiscal 1Q, net sales increased 21% to $304.2 million, which came in better than expected by $16.3 million. EPS came in at $0.17 per share and beat estimates by $0.07, and last year's 1Q by $.10 a share. GIII raised its outlook for fiscal year 2014, now expecting sales for the full year to be about $1.61 billion and EPS of $3.30 on the low end. These EPS and sales figures will set five-year highs.

(click to enlarge)

Source: GIII

EBITDA for the full year is forecasted to grow 16% to 19% and come in between $132.3 million and $135.4 million. For fiscal 2Q, the company is forecasting net sales of approximately $620.0 million compared to $543.5 million in last year's 2Q. EPS is expected to come in at between $2.52 and $2.62 compared to $2.37 last year.

Company Tailwinds

A major tailwind for the company is margin improvement. In 2Q, gross margin rose almost 3 percentage points from 29.8% to 32.7%. The company has done a great job keeping costs down as revenues have grown. What's more is that its target is to get its operating margin to double digits, compared to the 7.2% for the trailing twelve months.

Wilsons Leather continues to be an exceptional performer for the company. When GIII bought Wilsons, sales per square foot averaged $250 and the stores were losing money. Now the business is generating sales of $350 a square foot and still growing. In 2Q of this year, comparable sales rose 13.7% and this is on top of a 12.7% gain last year.

GIII is expanding the Wilsons brand with 15 new full price stores that will be open before the Christmas holiday shopping season. These new stores will be differentiated from traditional Wilsons stores with their product mix, product quality, price points and in their overall look and feel.

GIII continues to see strong performance in its Calvin Klein licensed products.! The segm! ent of the Calvin Klein division that GIII is most excited about is the sportswear segment. In 2Q, sales rose 50% compared to last year. The company has been very successful in increasing the brand's penetration and exposure. Calvin Klein sportswear is now sold at 890 doors compared to 662 doors last year. In addition to sportswear, the following performed well during 2Q:

The Calvin Klein dress business continues to perform well in department stores. The dresses are sold at over 1,200 doors.Calvin's Klein's women's suits and separates grew by 70% over last year. The company was able to grow door count to 1,100 compared to only 800 last year.Calvin Klein handbag sales rose 40% over last year with improved margins.Calvin Klein Performance wholesale business grew 20% over last year. The door count is up to 1,100 compared to 1,000 last year.GIII continues to grow its partnership with the owner of the Calvin Klein brand - PVH (PVH).

Worth noting is that the average remaining tenure for the Calvin Klein licenses is eight to nine years. Other tailwinds for GIII include:

The team sports business is now a $100 million business and was nonexistent 5 years ago. Sales makeup is 50% sportswear and 50% coats. We see this business continuing to grow as the overall popularity of sports teams continues.Dresses from Eliza J continue to be a top seller at Nordstrom's (JWN) and other high-end retailers.Ivanka Trump showrooms will be opening in Q4. The line will be launching dresses, suit separates and swimwear.The biggest business for GIII remains outerwear and the company started shipping product at the end of Q2. GIII has approximately 30 licensed, owned and private label brands and a covers the entire spectrum of retailers from mass market to luxury.Vilebrequin was acquired in August of last year and the addition helped grow non-licensed revenues to $70 million in Q2 compared to $48 million last year without Vilebrequin. Vilebrequin sells swimwear, resort wear and related accessories through a network of company! -owned an! d franchised shops. To grow Vilebrequin, the company will be adding footwear to its shops, in particular flip-flops in all of the stores by November. The company is planning to grow Vilebrequin's presence in the U.S. and has been adding buildouts in key department stores. Furthermore, Vilebrequin's e-commerce site should be live in the next 60 days.

GIII's entry into the footwear market is well in line with its long-term plans to become a men's and women's head-to-toe apparel maker.

Investment Thesis

Even though GIII shares are up 57% year to date, we think the stock is still undervalued and has more room to run. In looking at GIII and other apparel manufacturing companies we see:

Source: Yahoo! Finance

From the table, GIII is the cheapest among the four. That's where we see the market as still mispricing GIII and the room for further upside. The company also has a very strong balance sheet, with only around $20M in long-term debt, and the remaining debt being seasonal.

If we narrow these comps down to some of GIII's fellow small-cap apparel peers, we see just how cheap the stock is. GIII trades at an 8.4x EV/EBITDA multiple, while QuikSilver (ZQK) trades at 16.2x, Iconix Brand (ICON) at 11.5x and Jones New York (JNY) 8.8x.

From an industry consolidator to being a victim of industry consolidation?

It all started back in '05 when GIII acquired Marvin Richards and Winlit on the same day. '07 brought about the acquisition of Jessica Howard and Eliza J., '08 saw the purchase of Andrew Marc and Wilsons Leather. The Wilsons Leather team helped propel GIII into the retail industry, including opening additional Wilsons Leather stores, as well as Andrew Marc outlets and Calvin Klein Performance stores.

2011 marked GIII's foray into the designing and manufacturing of sportswear under the Kensie name, and then in 2012 it acquired Vilebrequin, marking GIII's entry into the swimwear and resort wear.

Through the years, GIII was a serial acquirer, but the industry dynamics have changed, and we've seen the M&A market really start to heat up in the small-cap apparel market.

In May True Religion (TRGL) announced a buyout offer from TowerBrook Capital for $826 million. Also in May, Rue21 decided to sell itself to Apax Partners for $2.2 billion. Before that, in March, Hot Topic (HOTT) announced that Sycamore Partners was buying out it out for $600 million.

With the buyout premiums in place, the companies now trade at the following price to sales multiples:

If private equity likes RUE enough to buy the company at 1.1x sales, then they'll love GI! II. Over ! the past three years RUE has had an average 3% free cash flow yield, with its trailing twelve month FCF yield being less than 1%. Compare this to the $3.50 in FCF per share GIII has generated over the TTM, which is a free cash flow yield of 6.7%.

If private equity wants to snatch up GIII, we believe they will easily have to pay 0.8x sales, given the company's FCF generation, strong liquidity position and 15% return on equity.

That's over 30% upside. On the other hand, with the company's unique set up (manufacturing licensed and non-licensed brands, while also having retail stores) a 1.1x multiple wouldn't be unreasonable -- 80% upside.

Even without a buyout there's still value to be had

Assuming the rebounding economy can further drive apparel stocks higher, GIII should be one of the biggest benefactors of this. Its 2.4 beta will help. Year to date, GIII is already pulling away from the apparel industry.

(click to enlarge)

Let's take a look at how things might pan out for GII over the next year and a half -- assuming we don't see a buyout. Analysts expect 2015 EPS (ending Jan.) to come in at $3.90, and with a 16x P/E there's around 18% upside. But with the potential of a big beat, or a big miss, we ran a sensitivity analysis that shows if earnings miss 20% on the downside, the downside to the stock's price is only 6%, yet, if earnings beat 20% on the upside, the stock could be up 40% in less than 18 months.

(click to enlarge)

Bottom Line

One of the main things we like about GIII is its strong insider ownership. Management owns over 32% of the stock with CEO Morris Goldfarb accounting for most of that with 2.7 million shares. Joining management with notable owne! rship int! erest are small-cap focused hedge fund, Royce & Associates, with 2.3 million shares and the value-oriented Scopia Capital fund, owning 1.9 million shares.

This strong ownership should continue to support the company's hope to offer products in every major apparel category. As well, given the company's unique business model, strong free cash flow, minimal debt and expanding margins, the company would be highly attractive to a major apparel company or private equity.

Analysts are also bullish, with 8 of the 9 analysts following the stock having a "buy" rating. The average price target is $60, with the lowest target being $55. We see a buyout price of around $70, and in the worst case, with no buyout, our target price is $62.

Source: G-III Apparel Group: A Unique Opportunity In Apparel

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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GIII

VFC

PVH

RL

Market Cap

$1.09B

$21.07B

$10.55B

$14.91B

Trailing P/E

18.69

19.07

30.81

20.82

Forward P/E

13.75

15.58

15.55

16.45

PEG Ratio

1.09

1.59

1.47

1.70

Price/Sales

0.76

1.92

1.61

2.14

Price/Book

2.53

4.07

2.55

3.99

EV/Sales

0.69

2.01

2.17

1.99

EV/EBITDA

8.43

12.14

14.59

10.20

Cash

$20.62M

$320.11M

$746.28M

$1.35B

Debt

$95.32M

$1.88B

$4.48B

$271.00M