G-III Apparel Group

In the ever-changing world of fashion and textiles, it is very challenging for companies to maintain a competitive advantage and continually expand market share. In order to do so, companies must be responsive to their business environment, predict consumer behaviors, maintain diverse portfolios, and continually improve their operations. G-III Apparel Group is a successful, international manufacturer and marketer of a broad range of apparel: including outerwear, dresses, sportswear, swimwear, women’s suits, women’s performance wear, footwear, handbags, small leather goods, and cold weather accessories. Each of these are sold under their own proprietary brands, licensed brands, and private retail labels. Their most popular licensed brands include Calvin Klein, Kenneth Cole, Guess?, Tommy Hilfiger, and many others. Their brands are sold in a large number of leading retailers such as Macy’s, Nordstrom, JC Penney, Saks Fifth Avenue, and Bloomingdales. In addition to these brands, G-III has an extensive team sports portfolio and has licenses from the NFL, NBA, MLB, and NHL, and over one hundred colleges and universities. G-III has established itself as an accomplished leader in the textile industry.

At the heart of G-III’s success is a talented group of experienced management. Morris Goldfarb, Chairman and CEO, has been with the company for 40 years. Under his supervision, the company has grown from its infancy to the massive textile power it is today. Other officers have been with the company for an average of 12 years and each of them has over 30 years experience in the textile industry. Under this well-established management, the company has seen consistent 20% revenue growth for the past nine years and we believe they will likely continue to see this growth into the future. This shows that their experience is continuing to be a valuable asset to the company.

A diverse portfolio is incredibly important to the success of a textile business such as G-III. G-III stated that their “goal is to build an all-season diversified apparel company with a broad portfolio of brands that [they] can offer in multiple channels of retail distribution.” They intend to continue to expand their portfolio by seeking future acquisitions that add to their robust portfolio. G-III’s ability to acquire new subsidiaries and brands is one of its greatest strengths, having acquired seven companies in the last ten years. Among these acquisitions are G. H. Bass, Vilebrequin, Andrew Marc, Wilson’s Leather, Marvin Richards, and Jessica Howard.

While decreasing the risk associated with G-III’s business through diversification, this strength in acquisitions is particularly great because of the synergistic effect that occurs within businesses. With each acquisition, the company gains some of the operating strengths and best practices of their new subsidiaries. They can then utilize these new ideas, styles, market share, and managers to strengthen other aspects of their business.

Past acquisitions have expanded numerous product lines. The G. H. Bass acquisition in 2013, for example, added footwear to their portfolio and expanded their apparel and accessories divisions. G-III expects the addition of G. H. Bass to be a fruitful new line and intends to expand its distribution channels. G-III has also been continually growing its women’s wear divisions with the expansion of their license agreements with Calvin Klein, as well as the addition of the Ivanka Trump line which includes women’s sportswear, dresses, suits, and outerwear.

G-III also faces business specific risks that go beyond high competition, seasonality, and ability to keep up with trends. For example, their ten largest customers made up 58% of their 2015 sales. Having this high concentration on a small number of customers means that the loss of any one of these customers could have a materially adverse impact on G-III’s operation. Most notably, Macy’s accounts for approximately 17% of sales. Nonetheless, G-III has expanded distribution basis in order to mitigate this risk. Their top ten customers made up

61% of sales in 2014, and 63% in 2013. This continual decline will serve G-III in the long run. Additionally, the risk of the discontinuance of G-III’s license agreements with any of its major licensed brands could have a material adverse effect on G-III’s operations. Licensed brands make up a significant majority, 58%, of G-III sales. This represents a decline from 64% and 67% in previous years respectively. This shows continuing diversification of G-III’s portfolio and further mitigation of its risk. Most notably, the Calvin Klein name makes up a majority of licensed brand revenues and the discontinuance of this relationship, or those with other licensors, would have a material adverse effect on G-III. Nonetheless, G-III did renew, and expand, license agreements with Calvin Klein during 2015. The expansion of this relationship will be beneficial to G-III’s growth. Though these risks are important to note and are particularly important to G-III, we view the discontinuance of a relationship with its retailers and licensed brands to be unlikely due to the high integration between the brands. G-III is an integral partner with its important retailers and licensors, so a continuing relationship is critical to the success of both parties.

G-III recognizes Columbia Sportswear, Nike, and Coach as major competitors. While G-III generally experiences lower operating margins, ROE, and price to

earnings ratios than these competitors, this is due to several reasons. First, G-III relies on licensed brands, as opposed to its own proprietary brands, and this drives down margins due to license fees. This is in contrast to the business models of Columbia, Nike, and Coach. These competitors rely most heavily on their own proprietary brands for the majority of their sales. This means that they avoid the licensing fees associated with doing business in the licensed brand markets.

Investors have an excellent investment opportunity, given our valuation of GIII per share versus its current stock price of around $47.39. We believe the best strategy is to invest now before the stock price begins to rise. With a projected stock price at $55.95, using discounted future cash flows, investors could expect a 26% IRR within 12 months.

We are very confident in the assumptions that were used to generate our projected stock price. First, we used a sales growth rate of 20% per year. Although this number may seem high, it is consistent with previous year’s sales growth. This can be seen in the above graph with forecasted years starting in 2015. Additionally, we believe that G-III will be able to maintain its sales growth through the implementation of its acquisitions strategy, expanding its licensed brand relationships, and diversifying its distribution channels. Percentage of sales method was used for many relevant accounts such as cost of good sold, selling and general administrative expenses, property plant and equipment, and accrued expenses. Accounts receivable turnover was used in determination of future accounts receivable. G-III has continually made improvements to its turnover in previous years and we expect it to do the same in the future. Days in inventory was used for forecasted inventory valuations. G-III currently holds a significant amount of days inventory on hand and we believe that management will seek to improve in this area as well. Accounts payable was forecasted as a percent of inventories. G-III currently has no debt and, given that we did not forecast acquisitions, we assume that the company will not take on new debt. Given the previous assumptions, we forecasted significant amounts of excess cash. We assume that G-III will use this excess cash for future investment. It should also be noted that estimations projecting operational improvements were based upon previous data in order to ensure their reasonableness.

Currently, G-III is a well-diversified company, consisting of many well-known brands mentioned above. Their ultimate goal and growth strategy relies on their ability to keep diversifying their apparel products and offering all-season apparel to ensure a steady and consistent growth for the future. Calvin Klein performance sportswear and its continual success is one such example of how they will be able to achieve this goal. Additionally, G-III recognizes the need to expand and acquire well-known brands with both a large customer base and customer loyalty, as they are big factors affecting sales and profit. Another source of growth potential is expanding their product offering to include other items besides apparel. In the past year, they began licensing agreements with brand such as Calvin Klein and Tommy Hilfiger to include new items such as small leather goods and accessories (wallets, handbags,

purses, etc.). Finally, G-III recognizes the need to growth through acquisitions by acquiring similar product lines. Doing this will not only further increase their diversification and their product offerings but allow them to achieve greater economies of scale, increased profitably and stability for the future.