This is a third article about the search for corporations with no debt, high predictability and a reasonable valuation (based on the PEG ratio) using the All-In-One stock screener.
Previous articles focused on Dril-Quip Inc. (DRQ, Financial) and T. Rowe Price Group Inc. (TROW, Financial). In this profile and analysis, we examine G-III Apparel Group Ltd. (GIII, Financial).
You may not know the name, but there’s a good possibility you’re wearing something sourced or sold by G-III. This New York company began life as an outerwear wholesaler but in recent years has grown rapidly by licensing high profile apparel brands such as Calvin Klein and Tommy Hilfiger. It’s also moved into retailing by acquiring the Wilsons Leather and G.H. Bass chains.
It is an interesting name right now because of the growing gap between its share price (on the green line) and its EBITDA (on the blue line):
History
1956: Aron Goldfarb sets up an outerwear company in New York City’s Garment District.
1972: Under son Morris Goldfarb, the company begins diversifying by expanding its sourcing; G-III is one of the first American firms to import outerwear from South Korea.
1981: The company sets up its first division, Siena Leather Limited, a luxury leather sportswear company that distributes to high-end department stores.
1989: Goes public on NASDAQ, symbol GIII; begins intensifying expansion work.
1990s: Rapid growth, which includes the production of licensed merchandise for the National Football League; also partners with brands such as Kenneth Cole, Nine West and Cole Haan; establishes partnerships with National Basketball Association, Major League Baseball and more than 100 colleges and universities.
2005: Acquires competitors Marvin Richards and Winlit, which brings in, among other assets, licensing for Calvin Klein.
2007: Acquires Jessica Howard and Eliza J, which gives it a significant place in the dress market.
2008: Buys Andrew Marc, a nationally recognized aspirational luxury outerwear company.
2008: Enters retail by purchasing the Wilsons Leather retail outlet chain.
2012: Acquires Vilebrequin, a leading global provider of swimwear, accessories and resortwear.
2013: Buys G.H. Bass, a heritage footwear brand that first created the penny loafer.
2016: Purchases Donna Karan International Inc., parent of the Donna Karan and DKNY brands.
History is based on information at the company’s website.
Comments: A 60-year-old company with a strong history of both internal growth and growth through acquisitions. With this growth, and particularly its acquisitions, it has expanded well beyond its original footprint.
G-III’s business
In its 10-K for the fiscal year that ended Jan. 31 the company described itself this way:
“G-III designs, manufactures and markets an extensive range of apparel, including outerwear, dresses, sportswear, swimwear, women’s suits and women’s performance wear as well as women’s handbags, footwear, small leather goods, cold weather accessories and luggage. We sell our products under our own proprietary brands, licensed brands and private retail labels.” (Unless otherwise noted, all operating information in this article comes from G-III’s 10-K for fiscal 2016).
That list can be broken down into two categories: Wholesale, which represented about 79% of sales in fiscal 2016, and Retail, which represented about 21% in fiscal 2016.
Wholesale operations include sales of products licensed by G-III from third parties; big names in this category include Calvin Klein, Tommy Hilfiger, Dockers and Karl Lagerfeld as well as three professional sports leagues and more than 100 colleges and universities.
Wholesale also includes the sale of proprietary brands; the company says, “Over the years, we developed or acquired brands such as G-III Sports by Carl Banks, Eliza J, Jessica Howard and Black Rivet. Most recently, we acquired G.H. Bass, a well-known heritage brand, and Vilebrequin, which provides us with a premiere brand selling status products worldwide.”
On the retail side, G-III operates 367 retail stores in 43 states and Puerto Rico:
- 199 Wilsons Leather stores.
- 163 G.H. Bass brand stores.
- Five stores operate under the licensed Calvin Klein Performance brand.
In addition, G-III also arranges production from independent manufacturers in China, Vietnam, Indonesia, India, Bangladesh and Central and South America. Vilebrequin’s products are made in Bulgaria, Tunisia and Morocco
It sells mainly to department, specialty and mass merchant retail stores in the U.S. It has about 2,800 customers, ranging from national and regional chains to small specialty stores. Its 10 largest customers accounted for 63.5% of sales in fiscal 2016; the single biggest company, Macy’s (M, Financial) (including Bloomingdale’s), accounted for almost 21% of net sales.
Comments: Although the company has broadened its operations and markets over the years, it is still a mainly wholesale operation with this segment accounting for almost 80% of sales and revenue, and a domestically based company. Future acquisitions may change this profile in the years ahead.
Revenue
For fiscal 2016, G-III posted revenue of $2.34 billion. Of that amount, about 80% came from wholesale operations and about 20% from retail operations.
This chart shows how revenue has grown over the past 10 years:
This table from the 10-K shows that almost all of the company’s revenue continues to originate in the U.S.:
Comments: G-III has grown its revenue rapidly over the past decade, in large part because of the many acquisitions it has made. While it continues to diversify its sources of revenue, domestic sales continue to provide the lion’s share.
Competition
G-III says it has numerous competitors for product sales, including:
- Brand owners.
- Distributors that import products from abroad.
- Domestic retailers with established foreign manufacturing capabilities.
On the retail side, its stores must compete in a number of channels:
- Other outlet stores.
- Department stores.
- Specialty stores.
- Warehouse clubs.
- Ecommerce retailers.
Product sales are affected by style, price, quality, brand reputation and general fashion trends.
Comments: The apparel industry has no shortage of competitors as the lists above show. We would expect tough competition for both wholesale (licensing) and retail operations.
Moat
In its 10-K for 2016, the company says it has a number of competitive strengths:
- Broad portfolio of recognized brands: Forty licensed and proprietary brands, including Calvin Klein, Tommy Hilfiger, Karl Lagerfeld, Guess?, Kenneth Cole, Cole Haan, Dockers and Levi’s.
- Diversified distribution base: Able to sell at multiple price points and across multiple channels of distribution; customers include Macy’s, TJX Companies (TJX, Financial), Ross Stores (ROST, Financial), Lord & Taylor, Dillard’s (DDS, Financial), the Bon-Ton Stores, Nordstrom (JWN, Financial), Saks Fifth Avenue and JCPenney (JCP, Financial) as well as membership clubs such as Costco (COST, Financial) and Sam’s Club.
- Superior design, sourcing and quality control: The company has in-house design and merchandising teams that design almost all of its licensed, proprietary and private label products.
- Leadership position in the wholesale business: G-III says it is "widely recognized within the apparel industry for our high-quality and well-designed products."
- Experienced management team: Each executive officer has more than 30 years of apparel experience; Chairman, CEO and President Morris Goldfarb has been with the company more than 40 years.
Comments: The company has several competitive advantages that should allow it to hold its existing market share as it continues to expand within and beyond it current markets.
Growth
G-III has outlined its growth strategy in the 10-K:
- Execute diversification initiatives: It says it is “continually seeking opportunities to produce products for all seasons.”
- Continue to grow the apparel business: The company believes it can continue to benefit from the growth of Calvin Klein brand awareness and loyalty; the Andrew Marc acquisition has added two new, well-known brands; and it has recently added licenses for womenswear, outerwear and dresses under the Tommy Hilfiger brand.
- Add new product categories: Additions include new categories such as dresses, sportswear, women’s suits, women’s performance wear, footwear and men’s and women’s swimwear. License expansions include women’s handbags, small leather goods, cold weather accessories and luggage.
- Seek attractive acquisitions: The company says, “We continually review acquisition opportunities. We believe that our existing infrastructure and management depth will enable us to complete additional acquisitions in the apparel industry.”
Comments: Essentially, the company plans to keep doing more of the same, and since more of the same has worked well in the past, it would be logical to continue.
Other
G-III is incorporated in Delaware and headquartered in New York City.
Goldfarb, age 65, is the son of the company founder. The three other executive officers are under age 60.
G-III had 7,693 employees as of Jan. 31.
The company’s fiscal year begins on Feb. 1 and ends on Jan. 31.
Ownership
Five of the gurus followed by GuruFocus have holdings in G-III. The biggest commitment is that of RS Investment Management (Trades, Portfolio) with 953,136 shares. Chuck Royce (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) are the second- and third-largest shareholders among the gurus.
Institutional investors and insiders have big stakes in this company as this image from GuruFocus shows:
Goldfarb has the largest insider holding with 3,677,699 shares.
Comments: A high level of ownership by institutional investors and a strong showing by Goldfarb.
G-III by the numbers
Note: The company underwent a two-for-one stock split on May 1, 2015.
Comments: The company has a market cap of just under $2 billion and is poised to move up into the mid-cap world; the current share price is closer to the 52-week low than 52-week high; return on equity (ROE) is respectable but not compelling; it does not pay a dividend; and it issued new shares in 2015, giving it a negative share buyback ratio.
Financial strength
G-III Apparel Group receives an excellent score for financial strength and a middling score for profitability and growth:
As we see, the company has no long-term debt.
ROIC (return on invested capital) is roughly seven times as great as its WACC (weighted average cost of capital).
Revenue growth has been strong and steady as this chart shows:
EBITDA (earnings before interest, taxes, depreciation and amortization) has kept pace with revenue growth:
And EPS, while bumpier, has also risen with revenue and EBITDA:
Comments: While the share price has been mostly down for the past year, revenue, earnings and earnings per share have all shown strong growth.
Valuation
G-III earns a 4.5-Star rating for its predictability, its ability to consistently increase its earnings.
Here’s a look at its EBITDA over the past five years:
For fiscal 2017, earnings are expected to keep growing. This guidance comes from the First Quarter Fiscal 2017 Results:
“The company also continues to project adjusted EBITDA for fiscal 2017 to increase between 9% and 12%, to between approximately $228 million and $236 million. Adjusted EBITDA for fiscal 2016 was $210.1 million.”
Within that context, and the current share price of $42.68 (at the close of trading on Aug. 22), we look at the valuations generated by GuruFocus:
- Median P/S (price-to-sales) Value: $27.97.
- Peter Lynch Fair Value: $ 41.91.
- DCF Fair Value Calculator: $ 25.26.
G-III’s PEG ratio, which is its price-to-earnings (P/E) divided by the growth rate of its earnings, comes in at 1.26, which puts it at the lower end of the fair value range (anything below 1.0 is considered undervalued, any score between 1.0 and 1.99 is considered fair valued, and anything 2.0 or higher is considered overvalued).
One of the more interesting perspectives on this stock is to look at its P/E ratio over time. Here’s a chart showing the past five years of P/E:
And, in conjunction with that, here’s another look at the EBITDA (blue) and share price (green) chart:
As we can see and would expect, the P/E has fallen off as the gap between EBITDA and the share price widens.
Comments: While several valuation metrics suggest otherwise, G-III is undervalued because of the growing rift between earnings and the share price as well as the relatively low P/E. In addition, this is a high predictability stock, and that does not seem to have factored into the sales price over the past year.
Conclusion
G-III Apparel Group is a solid, growing company. We found it in our ongoing search for high predictability names with no debt and a PEG valuation of less than 1.5.
Sooner or later, we would expect that predictable earnings power to be rewarded with a higher share price. For long-term, focused value investors looking for a small-cap, this company has promise.
While there’s a lot to like about the company, there is no compelling reason for other investors to buy right now. Other debt-free stocks with reasonable valuations –Â such as T. Rowe Price, for example –Â might be more rewarding.
Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to buy any in the foreseeable future.
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