Wednesday, January 12, 2005

GIII Apparel: Trading below Net Current Asset Value
We've been off on a real estate tangent, but some of you have been asking for more research on the 5 NCAV companies we wrote about on December 10th. Here is the first of those reports.

GIII Apparel
Ticker: GIII
Current Price: $7.82
Market Cap: $56.47 million
Net Current Asset Value: $61.9
2004 sales: $224 million
2004 net income: $8.4 million
P/E: 78
Book value per share: $9.59

The Company
G-III Apparel Group Ltd, is a small, New York based manufacturer, importer and marketer of outerwear and sportswear. The company has licenses to produce products under several well-known fashion labels, including Kenneth Cole New York, Jones New York, Timberland, and Blass to name a few. The company also has a license with the National Football League. There are two business segments, licensed apparel, and non-licensed apparel. In 2004, licensed products represented 78 percent of revenue.

The Industry
The apparel business is highly competitive, and is affected by fashion trends, style, price and quality. The company itself is subject to the expiration of licensing agreements. This company is a small fish in a big sea.

Recent Financial Results
The company earned $8.38 million in fiscal year 2004 (ended in Jan, 2004), or $1.14 per share, on sales of $224 million, for a net profit margin of 3.7 percent. Third quarter 2005 sales, (ended 10/04) were down 9.2 percent to $114.9 million, from $125.5 million from the same period last year. Sales of licensed apparel fell $25 million to $71.4 million, while sales of non-licensed apparel increased $14.3 million to $43.5 million. Net income fell 15 percent to $9.9 million or $1.33 per share, from $11.38 million, and $1.50.

The stock currently trades at 78 times trailing 12 month earnings. The company has been lowering earnings guidance, expecting anywhere from $.18-$.23 for the year ended January, 2005. At the low end of guidance, this implies a P/E of 43, or 34 at the high end. There is no analyst coverage for this company, but some institutional ownership.

What is interesting about this company is that it currently trades below its net current asset value. Finding a profitable company these days that does is a rarity.

The NCAV story (mkt cap as of tk, all other data as of latest reported quarter)
Market Cap
Current Assets: 130.2
Current liab: 67.9
Long term liab: .4
NCAV: 61.9
Market Cap 56.5
Mkt Cap/NCAV: .91

Quality of Assets
The company has $3 million in cash, but the bulk of current assets is comprised of accounts receivable ($81.7) and inventories ($37.1). The quality of current assets is not great, however, given the companies business, that’s to be expected. When we speak of quality in the context of NCAV companies, we are not judging the actual assets themselves, but rather the composition of current assets. For NCAV companies, cash and marketable securities are preferable to inventories and receivables. The former has a fixed value, the latter accounts don’t. Inventories may be worth cents on the dollar, and are expensive to store, while receivables need to be collected in order to be converted into cash, and there are no guarantees that can be done.

The company has no long-term debt, but $36.2 million in short term debt (in the form of a working capital line of credit), which is how the company funds operations. There are no other material long term liabilities.

As of 9/30/04, insiders controlled 3.805 million, or 52.7 percent of shares. Co-Chairman/CEO Morris Goldfarb owned nearly 38 percent of shares, while Co-Chairman Aron Goldfarb owned about 13 percent. The most recently reported insider transactions were acquisitions, the result of option exercises.

While the company has been lowering guidance, and operates in a tremendously competitive marketplace where the majority of sales(and profit)is booked in one quarter, the fact remains that shares are cheap. The company is trading well below its NCAV, and trades at less than 5 times cashflow. On an earnings basis, the story is much less compelling. This company would make an interesting acquisition candidate, and perhaps that is how shareholder value will eventually be unlocked. Of course, given their relative stakes in the company, that decision is up to the Goldfarb’s.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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