G-I I I (NASDAQ:GIII) Apparel Group ("G-I I I") is a designer, manufacturer, and marketer of men's and women's apparel. While not a household name, the numerous brands G-111 works with very much are, including Calvin Klein and Tommy Hilfiger. G-I I I was founded in the 1950s and today is one of the larger companies in the apparel industry with more than $2 billion of annual sales and a remarkable track record.
Perhaps the aspect that attracted us most to G-111 is its increasingly strong opportunities for growth. In particular, it was recently awarded the license for the Tommy Hilfiger North America women's line. Hilfiger's licensor, PVH Corp., awarded G-I II the license in recognition of the strong growth G-111 has been able to generate for Calvin Klein. PVH awarded the Klein licenses to G-Illover the last decade, and if past is prologue, Hilfiger could be a billion dollar sales opportunity for G-I II. G-I II has also added other prominent brands to its portfolio, including Karl Lagerfeld and G.H. Bass, some licensed and some fully owned. Company management believes Lagerfeld and Bass alone represent an opportunity to grow G-Illsales about a billion dollars over the coming years. Simultaneously, e-commerce represents a large opportunity for G-111as it is very actively expanding business through the websites of department stores and Amazon, unlike many of its apparel peers.
In addition to G-I1 l's outlook for growth, we would highlight management's strength, long tenure and extraordinary track record. The Goldfarb family, founders of G-111, is one of the largest shareholders and continues to lead the company. In an industry where outperformance over the long-term is rare, G-Illand its management team have developed a reputation for superior design and merchandise quality at compelling price points, with best-in-class sourcing from around the world. Along the way, it has stayed disciplined, maintaining a strong balance sheet. This has resulted in exceptional compounding of the company's book value over time at annualized rates around 20%.
With the tough year many department stores have had, it is noteworthy that G-111continues to perform remarkably well within stores with its products. That said, we believe the tough apparel landscape broadly has weighed on G-I I l's share price this year and helped create the opportunity for our investment. While the cyclical pressures in the broader apparel sector will likely not quickly abate, we took the opportunity to meet with management recently and concluded that at the undemanding valuation of 9-10x EBIT, this was a very attractive long-term opportunity for the Fund.
Subsequent to our initial investment in G-111, the company announced the acquisition of another iconic brand, Donna Karan and DKNY. While the acquisition and associated first year earnings per share dilution caught some investors by surprise and resulted in selling, we took the opportunity to continue to slowly build our position on the weakness. We believe the Donna Karan acquisition has extended G- Ill's sales growth trajectory well beyond Tommy Hilfiger and Karl Lagerfeld and provided a greater likelihood of G-III's ability to compound value over the long-term despite the current retail sector softness.
From Third Avenue Management (Trades, Portfolio)'s Small Cap Value Fund third quarter 2016 commentary.
