G-III Apparel Group (GIII, Financial) distributes private-label and brand-name clothing and has roots dating back to 1956. The company has an impressive roster of licensed brands from Levi’s to Nine West, Calvin Klein and Cole Haan, as well as the U.S. major sports leagues and more than 100 U.S. colleges and universities.
G-III growth has been stellar in the last 15 years.
- Revenue up over 1,000%
- Income up over 4,700%
- Book Value up over 600%
G-III financials are strong.
- Total Revenue: $2.34 billion
- Gross Profit: $838 million
- Net Income: $96 million
G-III margins are strong.
- Gross Margins of 35%
- Return on Equity of 14%
- Return on Assets of 10%
However, its stock is off 43% in the last 3 months after reporting disappointing numbers for the second quarter, and the company now expects fiscal 2016 sales to be $2.48 billion and earnings per share to be in a range of $2.16 to $2.26.
The catalyst for future growth is G-III’s $650 million acquisition plan for Donna Karan from Moet Hennessy Louis Vuitton (MIL:LVMH, Financial). The financing is already in place, including a credit facility for $525 million and a term loan of $450 million. Donna Karan carries a steep revenue multiple for a company that is losing money with significant debt position and uncertainty about the recovery plan for the business. Of course, those are just the analysts talking, and only time will tell if G-III will be able to integrate Donna Karan accordingly. Management expects the deal to close by late 2016 or early 2017 and for sales to come in at $750 million in 2019 with an operating profit over $100 million.
At these rates, the acquisition looks like the right thing long term. Still, short sellers have stepped in to build a 16% position in the float, pushing the total market capitalization down to $1.3 billion. A few guru investors have tip-toed into the stock with Joel Greenblatt (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) being the biggest names. So, from a weighting standpoint, it might make sense to do the same with your own portfolio.
If successful with Donna Karan, G-III could see its revenue rise past $3 billion with earnings coming in north of $250 million. Even with the added debt to the balance sheet, by the end of 2019, EPS could rise to $3.50, pushing the stock past $50 a share.
There’s not a lot of hype or sizzle with this company, and it could take some time and setbacks for the company to fully realize the potential of Donna Karan. That may put pressure on shares in the short term, but over the long term this should equate to higher earnings, book values and ultimately, share price.
Disclosure: I do not have a position in GIII.
Start a free 7-day trial of Premium Membership to GuruFocus.
