Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES.
As of January 31, 2021, our management, including the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, and thus, are effective in making known to them material information relating to G-III required to be included in this Report.
Changes in Internal Control over Financial Reporting
During our last fiscal quarter, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria on Internal Control — Integrated Framework (2013) , issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on its assessment, management has concluded that we maintained effective internal control over financial reporting as of January 31, 2021, based on criteria in Internal Control — Integrated Framework (2013) , issued by the COSO.
Our independent auditors, Ernst & Young LLP, a registered public accounting firm, have audited and reported on our consolidated financial statements and the effectiveness of our internal control over financial reporting. The reports of our independent auditors appear on pages F-2 and F-3 of this Form 10-K and express unqualified opinions on the consolidated financial statements and the effectiveness of our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
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Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
We have adopted a code of ethics and business conduct, or Code of Ethics and Conduct, which applies to all of our employees, our principal executive officer, principal financial officer, principal accounting officer controller and persons performing similar functions. Our Code of Ethics and Conduct is located on our Internet website at www.g-iii.com under the heading “Corporate Governance.” Any amendments to, or waivers from, a provision of our Code of Ethics and Conduct that apply to our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions will be disclosed on our Internet website within five business days following such amendment or waiver. The information contained on or connected to our Internet website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report we file with or furnish to the Securities and Exchange Commission.
The information required by Item 401 of Regulation S-K regarding directors is contained under the heading “Proposal No. 1 — Election of Directors” in our definitive Proxy Statement (the “Proxy Statement”) relating to our Annual Meeting of Stockholders to be held on or about June 10, 2021, to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 with the Securities and Exchange Commission, and is incorporated herein by reference. For information concerning our executive officers, see “Business — Information About Our Executive Officers” in Item 1 in this Form 10-K.
The information required by Item 405 of Regulation S-K is contained under the heading “Delinquent Section 16(a) Reports” in our Proxy Statement and is incorporated herein by reference. The information required by Items 407(c)(3), (d)(4), and (d)(5) of Regulation S-K is contained under the heading “Corporate Governance” in our Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item 11 is contained under the headings “Executive Compensation” and “Compensation Committee Report” in our Proxy Statement and is incorporated herein by reference.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Security ownership information of certain beneficial owners and management as called for by this Item 12 is incorporated by reference to the information set forth under the heading “Beneficial Ownership of Common Stock by Certain Stockholders and Management” in our Proxy Statement.
Equity Compensation Plan Information
The following table provides information as of January 31, 2021, the last day of fiscal 2021, regarding securities issued under G-III’s equity compensation plans that were in effect during fiscal 2021.
Number of Securities
Remaining Available for
Number of Securities to
Weighted Average
Future Issuance Under
be Issued Upon Exercise
Exercise Price of
Equity Compensation
of Outstanding Options,
Outstanding Options,
Plans (Excluding Securities
Warrants and Rights
Warrants and Rights
Reflected in Column (a))
Plan Category
(a)
(b)
(c)
Equity compensation plans approved by security holders
1,878,343
(1)
$
23.63
(2)
1,811,490
(3)
Equity compensation plans not approved by security holders
—
—
—
Total
1,878,343
(1)
$
23.63
(2)
1,811,490
(3)
(1) Includes outstanding awards of 1,860,098 shares of Common Stock issuable upon vesting of restricted stock units (‘‘RSUs’’) and stock options for 18,245 shares of common stock. Outstanding stock options have a weighted average exercise price of $23.63 and a weighted average remaining term of 1.5 years.
(2) RSUs are excluded when determining the weighted average exercise price of outstanding stock options.
(3) Under our 2015 Long-Term Incentive Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item 13 is contained under the headings “Certain Relationships and Related Transactions” and “Corporate Governance” in our Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item 14 is contained under the heading “Principal Accounting Fees and Services” in our Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
1. Financial Statements.
2. Financial Statement Schedules.
The Financial Statements and Financial Statement Schedules are listed in the accompanying index to consolidated financial statements beginning on page F-1 of this report. All other schedules, for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are shown in the financial statements or are not applicable and therefore have been omitted.
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Table of Contents
Exhibits:
The following exhibits filed as part of this report or incorporated herein by reference are management contracts or compensatory plans or arrangements: Exhibits 10.1, 10.1(a), 10.1(b), 10.1(c), 10.1(d), 10.6, 10.6(a), 10.6(b), 10.7, 10.7(a), 10.7(b), 10.7(c), 10.8, 10.9, 10.9(a), 10.9(b), 10.9(c), 10.9(d), 10.12, 10.13, 10.13(a), 10.14, 10.15 and 10.16.
Incorporated by Reference
Exhibit No.
Document
Form
File No.
Date Filed
2.1
Stock Purchase Agreement, dated as of July 22, 2016, by and between G-III Apparel Group, Ltd. (“G-III”) and LVMH Moet Hennessy Louis Vuitton Inc. (“LVMH”) (including the exhibits thereto).
8-K
000-18183
7/28/2016
2.1(a)
Amendment No. 1 to Stock Purchase Agreement, dated November 30, 2016, by and between G-III and LVMH.
8-K
000-18183
12/6/2016
3.1
Certificate of Incorporation.
8-K
000-18183
7/2/2008
3.1(a)
Certificate of Amendment of Certificate of Incorporation, dated June 8, 2006.
10-Q (Q2 2007)
000-18183
9/13/2006
3.1(b)
Certificate of Amendment of Certificate of Incorporation, dated June 7, 2011.
8-K
000-18183
6/9/2011
3.1(c)
Certificate of Amendment of Certificate of Incorporation, dated June 30, 2015.
8-K
000-18183
7/1/2015
3.2
By-Laws, as amended, of G-III.
8-K
000-18183
3/15/2013
4.1
Promissory Note, dated December 1, 2016, from G-III to LVMH.
8-K
000-18183
12/6/2016
4.1(a)
Indenture, dated as of August 7, 2020, among G-III Apparel Group, Ltd., the guarantors party thereto and U.S. Bank, National Association, as trustee and collateral agent, relating to the 7.875% Senior Secured Notes due 2025.
8-K
000-18183
8/7/2020
4.2
Description of Securities
10-K (2020)
000-18183
3/30/2020
10.1
Employment Agreement, dated February 1, 1994, between G-III and Morris Goldfarb.
10-K/A (2006)
000-18183
5/8/2006
10.1(a)
Amendment, dated October 1, 1999, to the Employment Agreement, dated February 1, 1994, between G-III and Morris Goldfarb.
10-K/A (2006)
000-18183
5/8/2006
10.1(b)
Amendment, dated January 28, 2009, to Employment Agreement, dated February 1, 1994, between G-III and Morris Goldfarb.
8-K
000-18183
2/3/2009
10.1(c)
Letter Amendment, dated March 13, 2013, to Employment Agreement, dated February 1, 1994, between G-III and Morris Goldfarb.
8-K
000-18183
3/15/2013
10.1(d)
Letter Amendment, dated April 28, 2014, to Employment Agreement, dated February 1, 1994, between G-III and Morris Goldfarb.
8-K
000-18183
5/14/2015
10.2
Second Amended and Restated ABL Credit Agreement, dated as of August 7, 2020, among G-III Leather Fashions, Inc., Riviera Sun, Inc., CK Outerwear, LLC, AM Retail Group, Inc. and The Donna Karan Company Store LLC, as Borrowers, the other Borrowers party thereto, the Loan Guarantors party thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., as the Administrative Agent.
8-K
000-18183
8/7/2020
10.3
Lease, dated June 1, 1993, between 512 Seventh Avenue Associates (“512”) and G-III Leather Fashions, Inc. (“G-III Leather”) (34th and 35th floors).
10-K/A (2006)
000-18183
5/8/2006
10.3(a)
Lease amendment, dated July 1, 2000, between 512 and G-III Leather (34th and 35th floors).
10-K/A (2006)
000-18183
5/8/2006
10.3(b)
Second Amendment of Lease, dated March 26, 2010, between 500-512 Seventh Avenue Limited Partnership, the successor to 512 (collectively, “512”) and G-III Leather (34th and 35th floors).
10-Q (Q3 2011)
000-18183
12/10/2010
10.4
Lease, dated January 31, 1994, between 512 and G-III (33rd floor).
10-K/A (2006)
000-18183
5/8/2006
10.4(a)
Lease amendment, dated July 1, 2000, between 512 and G-III (33rd floor).
10-K/A (2006)
000-18183
5/8/2006
10.4(b)
Second Amendment of Lease, dated March 26, 2010, between 512 and G-III Leather (33rd floor).
10-Q (Q3 2011)
000-18183
12/10/2010
10.4(c)
Second Amendment of Lease, dated March 26, 2010, between 512 and G-III Leather (10th floor).
10-Q (Q3 2011)
000-18183
12/10/2010
10.4(d)
Third Amendment of Lease, dated March 26, 2010, between 512 and G-III Leather (21st, 22nd, 23rd, 24th and 36th floors).
10-Q (Q3 2011)
000-18183
12/10/2010
10.4(e)
Sixth Amendment of Lease, dated May 23, 2013, by and between G-III Leather Fashions, Inc. as Tenant and 500-512 Seventh Avenue Limited Partnership as Landlord, (2nd Floor (including mezzanine), 21st, 22nd, 23rd, 24th, 27th, 29th, 31st, 36th and 40th Floors).
10-Q (Q1 2014)
000-18183
6/10/2013
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Table of Contents
Incorporated by Reference
Exhibit No.
Document
Form
File No.
Date Filed
10.4(f)
Seventh Amendment of Lease dated April 25, 2014, by and between G-III Leather Fashions, Inc. as Tenant and 500-512 Seventh Avenue Limited Partnership as Landlord (2nd Floor (including mezzanine), 21st, 22nd, 23rd, 24th, 27th, 29th, 31st, 36th, 39th and 40th Floors).
10-Q (Q1 2015)
000-18183
6/5/2014
10.4(g)
Eighth Amendment Of Lease, dated June 16, 2017, by and between G-III Leather Fashions, Inc. as Tenant and 500-512 Seventh Avenue Limited Partnership as Landlord* (2nd Floor (including mezzanine), 3rd, 4th, 5th, 21st, 22nd, 23rd, 24th, 27th, 28th, 29th, 30th, 31st, 36th, 39th and 40th Floors)
10-K (2018)
000-18183
4/2/2018
10.4(h)
Ninth Amendment of Lease, dated May 14, 2018, by and between G-III Leather Fashions, Inc. as Tenant and 500-512 Seventh Avenue Limited Partnership as Landlord, (2nd Floor (including mezzanine), 3rd, 4th, 5th, 21st, 22nd, 23rd, 24th, 26th, 27th, 28th, 29th, 30th, 31st, 36th, 39th and 40th Floors at 512 Seventh Avenue and 2nd and Part of 3rd at 500 Seventh Avenue).
10-Q (Q1 2019)
000-18183
6/11/2018
10.5
Lease, dated February 10, 2009, between IRET Properties and AM Retail Group, Inc.
10-Q (Q3 2011)
000-18183
12/10/2010
10.6
G-III 2005 Amended and Restated Stock Incentive Plan, (the “2005 Plan”).
8-K
000-18183
3/15/2013
10.6(a)
Form of Option Agreement for awards made pursuant to the 2005 Plan.
10-K (2009)
000-18183
4/16/2009
10.6(b)
Form of Restricted Stock Agreement for restricted stock awards made pursuant to the 2005 Plan.
8-K
000-18183
6/15/2005
10.7
G-III 2015 Long-Term Incentive Plan, as amended.
8-K
000-18183
6/13/2019
10.7(a)
Form of Restricted Stock Unit Agreement for April 26, 2018 restricted stock unit grants.
8-K
000-18183
4/30/2018
10.7(b)
Form of Performance Share Unit Agreement for April 17, 2019 performance share unit grants.
8-K
000-18183
4/23/2019
10.7(c)
Form of Restricted Stock Unit Agreement for April 27, 2020 restricted stock unit grants.
10-Q (Q1 2021)
000-18183
6/9/2020
10.8
Form of Executive Transition Agreement, as amended.
8-K
000-18183
2/16/2011
10.9
Employment Agreement, dated as of July 11, 2005, by and between Sammy Aaron and G-III.
10-Q (Q3 2011)
000-18183
12/10/2010
10.9(a)
Amendment, dated October 3, 2008, to Employment Agreement, dated as of July 11, 2005, by and between Sammy Aaron and G-III.
8-K
000-18183
10/6/2008
10.9(b)
Amendment, dated January 28, 2009, to Employment Agreement, dated as of July 11, 2005, by and between Sammy Aaron and G-III.
8-K
000-18183
2/3/2009
10.9(c)
Letter Amendment, dated March 13, 2013, to Employment Agreement, dated as of July 11, 2005, by and between Sammy Aaron and G-III.
8-K
000-18183
3/15/2013
10.9(d)
Letter Amendment, dated April 28, 2014, to Employment Agreement, dated as of July 11, 2005, by and between Sammy Aaron and G-III.
8-K
000-18183
4/30/2014
10.10 (a)
Lease agreement dated June 29, 2006 between The Realty Associates Fund VI, LP and G-III.
10-Q (Q2 2007)
000-18183
9/13/2006
10.10 (b)
First Amendment of Lease, dated July 31, 2012, by and between Centerpoint Herrod, LLC, as successor in interest to The Realty Associates Fund VI, LP, and G-III.
10-K (2019)
000-18183
3/28/2019
10.11
Lease Agreement, dated December 21, 2009 and effective December 28, 2009, by and between G-III, as Tenant, and Granite South Brunswick LLC, as Landlord.
10-Q (Q3 2011)
000-18183
12/10/2010
10.11(a)
First Amendment of Lease, dated September 16, 2020, by and between G-III Apparel Group, Ltd. as Tenant and Granite South Brunswick LLC as Landlord .
10-Q (Q3 2021)
000-18183
12/10/2020
10.12
Form of Indemnification Agreement.
10-Q (Q3 2011)
000-18183
12/10/2010
10.13
Employment Agreement, made as of January 9, 2013, between G-III and Wayne S. Miller.
8-K
000-18183
1/14/2013
10.13(a)
Amendment to Employment Agreement and Executive Transition Agreement, dated as of December 9, 2016, between G-III and Wayne S. Miller.
8-K
000-18183
12/14/2016
10.14
Employment Agreement, dated as of December 9, 2016, between G-III and Jeffrey D. Goldfarb.
8-K
000-18183
12/14/2016
10.15
Amendment to Executive Transition Agreement, dated as of December 9, 2016, between G-III and Jeffrey D. Goldfarb.
8-K
000-18183
12/6/2016
10.16
Severance Agreement, dated as of December 9, 2016, between G-III and Neal Nackman.
8-K
000-18183
12/14/2016
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Table of Contents
Incorporated by Reference
Exhibit No.
Document
Form
File No.
Date Filed
10.17
Lease, dated August 1, 2006, between 240 West 40th LLC. and G-III Leather Fashions, Inc.
10-K (2017)
000-18183
4/3/2017
10.18
Lease, dated December 7, 2011, between 400 Commerce Boulevard LLC. and G-III Leather Fashions, Inc.
10-K (2017)
000-18183
4/3/2017
21*
Subsidiaries of G-III.
—
—
—
23.1*
Consent of Independent Registered Public Accounting Firm, Ernst & Young LLP.
—
—
—
31.1*
Certification by Morris Goldfarb, Chief Executive Officer of G-III Apparel Group, Ltd., pursuant to Rule 13a – 14(a) or Rule 15d – 14(a) of the Securities Exchange Act of 1934, as amended, in connection with G-III Apparel Group, Ltd.’s Annual Report on Form 10-K for the fiscal year ended January 31, 2020.
—
—
—
31.2*
Certification by Neal S. Nackman, Chief Financial Officer of G-III Apparel Group, Ltd., pursuant to Rule 13a – 14(a) or Rule 15d – 14(a) of the Securities Exchange Act of 1934, as amended, in connection with G-III Apparel Group, Ltd.’s Annual Report on Form 10-K for the fiscal year ended January 31, 2020 .
—
—
—
32.1**
Certification by Morris Goldfarb, Chief Executive Officer of G-III Apparel Group, Ltd., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with G-III Apparel Group, Ltd.’s Annual Report on Form 10-K for the fiscal year ended January 31, 2020.
—
—
—
32.2**
Certification by Neal S. Nackman, Chief Financial Officer of G-III Apparel Group, Ltd., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with G-III Apparel Group, Ltd.’s Annual Report on Form 10-K for the year ended January 31, 2020.
—
—
—
101.INS*
iXBRL Instance Document.
—
—
—
101.SCH*
iXBRL Schema Document.
—
—
—
101.CAL*
iXBRL Calculation Linkbase Document.
—
—
—
101.DEF*
iXBRL Extension Definition.
—
—
—
101.LAB*
iXBRL Label Linkbase Document.
—
—
—
101.PRE*
iXBRL Presentation Linkbase Document.
—
—
—
104*
Cover Page Interactive Data File (embedded within the Inline XBRL document)
—
—
—
* Filed herewith.
** Exhibits 32.1 and 32.2 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibits shall not be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
Exhibits have been included in copies of this Report filed with the Securities and Exchange Commission. We will provide, without charge, a copy of these exhibits to each stockholder upon the written request of any such stockholder. All such requests should be directed to Investor Relations, G-III Apparel Group, Ltd., 512 Seventh Avenue, 31st floor, New York, New York 10018.
ITEM 16. FORM 10-K SUMMARY.
Not applicable.
67
Table of Contents
EXHIBIT INDEX
21
Subsidiaries of G-III.
23.1
Consent of Independent Registered Public Accounting Firm, Ernst & Young LLP.
31.1
Certification by Morris Goldfarb, Chief Executive Officer of G-III Apparel Group, Ltd., pursuant to Rule 13a – 14(a) or Rule 15d – 14(a) of the Securities Exchange Act of 1934, as amended, in connection with G-III Apparel Group, Ltd.’s Annual Report on Form 10-K for the fiscal year ended January 31, 2021.
31.2
Certification by Neal S. Nackman, Chief Financial Officer of G-III Apparel Group, Ltd., pursuant to Rule 13a – 14(a) or Rule 15d – 14(a) of the Securities Exchange Act of 1934, as amended, in connection with G-III Apparel Group, Ltd.’s Annual Report on Form 10-K for the fiscal year ended January 31, 2021.
32.1
Certification by Morris Goldfarb, Chief Executive Officer of G-III Apparel Group, Ltd., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with G-III Apparel Group, Ltd.’s Annual Report on Form 10-K for the fiscal year ended January 31, 2021.
32.2
Certification by Neal S. Nackman, Chief Financial Officer of G-III Apparel Group, Ltd., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with G-III Apparel Group, Ltd.’s Annual Report on Form 10-K for the fiscal year ended January 31, 2021.
101.INS
iXBRL Instance Document.
101.SCH
iXBRL Schema Document.
101.CAL
iXBRL Calculation Linkbase Document.
101.DEF
iXBRL Extension Definition.
101.LAB
iXBRL Label Linkbase Document.
101.PRE
iXBRL Presentation Linkbase Document.
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
68
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
G-III APPAREL GROUP, LTD.
By:
/s/ Morris Goldfarb
Morris Goldfarb,
Chief Executive Officer
March 26, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Morris Goldfarb
Director, Chairman of the Board and Chief Executive Officer (principal executive officer)
March 26, 2021
Morris Goldfarb
/s/ Neal S. Nackman
Chief Financial Officer (principal financial and accounting officer)
March 26, 2021
Neal S. Nackman
/s/ Sammy Aaron
Director, Vice Chairman and President
March 26, 2021
Sammy Aaron
/s/ Thomas J. Brosig
Director
March 26, 2021
Thomas J. Brosig
/s/ Alan Feller
Director
March 26, 2021
Alan Feller
/s/ Jeffrey Goldfarb
Director
March 26, 2021
Jeffrey Goldfarb
/s/ Victor Herrero
Director
March 26, 2021
Victor Herrero
/s/ Robert L. Johnson
Director
March 26, 2021
Robert L. Johnson
/s/ Jeanette Nostra
Director
March 26, 2021
Jeanette Nostra
/s/ Laura Pomerantz
Director
March 26, 2021
Laura Pomerantz
/s/ Willem van Bokhorst
Director
March 26, 2021
Willem van Bokhorst
/s/ Cheryl Vitali
Director
March 26, 2021
Cheryl Vitali
/s/ Richard White
Director
March 26, 2021
Richard White
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Table of Contents
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
(Item 15(a)) G-III Apparel Group, Ltd. and Subsidiaries
Page
Reports of Independent Registered Public Accounting Firm
F-1
Consolidated Balance Sheets
F-4
Consolidated Statements of Income and Comprehensive Income
F-5
Consolidated Statements of Stockholders’ Equity
F-6
Consolidated Statements of Cash Flows
F-7
Notes to Consolidated Financial Statements
F-8
SCHEDULE II — Valuation and Qualifying Accounts
S-1
All other schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, accordingly, are omitted.
F-0
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of G-III Apparel Group, Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of G-III Apparel Group, Ltd. and subsidiaries (the Company) as of January 31, 2021 and 2020, the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended January 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 26, 2021 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-02
As discussed in Note A to the consolidated financial statements, the Company changed its method for accounting for leases as a result of the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the related amendments effective February 1, 2019.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Wholesale revenue variable consideration
Description of the Matter
As described in Note A and Note C to the consolidated financial statements, wholesale revenue is adjusted by variable consideration arising from implicit or explicit obligations. The reserves for variable consideration are recorded as customer refund liabilities and totaled $99.4 million as of January 31, 2021.
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Auditing the Company's measurement of variable consideration related to non-contractual markdowns and returns from wholesale customers is especially challenging because the method of calculation involves subjective management assumptions about estimates of the expected markdowns and returns. For example, in addition to historical experience, estimates of future markdown allowances and returns from wholesale customers are adjusted to reflect management’s assumptions about performance of the Company’s merchandise, specific known events and industry trends (including the effects of the global pandemic). Changes in the assumptions can have a material effect on the amount of variable consideration recognized.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's process for estimating variable consideration. For example, we tested controls over management’s review of the significant assumptions underlying the estimates of the refund liabilities for markdown allowances and returns from wholesale customers.
To test the Company’s measurement of variable consideration related to wholesale customers, our audit procedures included, among others, evaluating the Company’s methodology for calculating future markdown allowances, evaluating the significant assumptions described above and testing the completeness and accuracy of the underlying data used in management's analyses. We compared the significant assumptions used by management to current market and economic trends, historical results and other relevant factors. Further, we performed sensitivity analyses to evaluate the changes in variable consideration that would result from changes in the significant assumptions. In addition, we performed a retrospective review of actual customer chargebacks for markdowns and returns to evaluate the historical accuracy of the Company’s estimates.
Valuation of indefinite-lived trademarks
Description of the Matter
At January 31, 2021, the carrying value of the Company’s indefinite-lived trademarks was approximately $443.6 million. As discussed in Notes A and H to the consolidated financial statements, indefinite-lived trademarks are assessed for impairment on an annual basis, or whenever impairment indicators exist.
Auditing certain of the Company’s indefinite-lived trademark impairment assessments was complex and judgmental due to the significant estimation required to determine the fair value of the indefinite-lived trademarks. In particular, the fair value estimates were sensitive to significant assumptions such as the revenue growth rate, royalty rate and discount rate, which are affected by expectations about future market or economic conditions (including the effects of the global pandemic).
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s indefinite-lived trademark impairment review process. Our procedures included testing controls over management’s review of the significant assumptions described above.
To test the estimated fair value of the indefinite-lived trademarks, we performed audit procedures that included, among others, assessing the methodology used to determine the fair value, testing the significant assumptions discussed above and testing the completeness and accuracy of the underlying data used by the Company. We compared the significant assumptions used by management to historical results, current industry, market and economic trends and other relevant factors. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of the significant assumptions to evaluate the changes in the fair value of the indefinite-lived trademarks that would result from changes in the assumptions. We also involved our internal valuation specialists to assist in our evaluation of the valuation methodology and significant assumptions used by the Company in developing the fair value estimates.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2000.
New York, New York
March 26, 2021
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of G-III Apparel Group, Ltd.
Opinion on Internal Control Over Financial Reporting
We have audited G-III Apparel Group, Ltd and subsidiaries’ internal control over financial reporting as of January 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, G-III Apparel Group, Ltd. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of January 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of January 31, 2021 and 2020, the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended January 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated March 26, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
New York, New York
March 26, 2021
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G-III Apparel Group, Ltd. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
January 31,
January 31,
2021
2020
(In thousands, except per share amounts)
ASSETS
Current assets
Cash and cash equivalents
$
351,934
$
197,372
Accounts receivable, net of allowance for doubtful accounts of $ 17.5 million and $ 0.7 million, respectively
492,698
530,137
Inventories
416,503
551,918
Prepaid income taxes
26,102
8,566
Prepaid expenses and other current assets
56,803
80,695
Total current assets
1,344,040
1,368,688
Investments in unconsolidated affiliates
63,523
61,987
Property and equipment, net
57,064
76,023
Operating lease assets
186,070
270,032
Other assets, net
38,785
32,629
Other intangibles, net
35,059
38,363
Deferred income tax assets, net
5,098
18,135
Trademarks
443,612
438,658
Goodwill
263,135
260,622
Total assets
$
2,436,386
$
2,565,137
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of notes payable
$
4,402
$
673
Accounts payable
139,183
204,786
Accrued expenses
102,787
101,838
Customer refund liabilities
99,355
233,418
Current operating lease liabilities
43,560
63,166
Income tax payable
11,853
8,468
Other current liabilities
862
1,611
Total current liabilities
402,002
613,960
Notes payable, net of discount and unamortized issuance costs
507,950
396,794
Deferred income tax liabilities, net
20,353
7,952
Noncurrent operating lease liabilities
161,668
249,040
Other non-current liabilities
7,208
6,719
Total liabilities
1,099,181
1,274,465
Redeemable noncontrolling interests
964
—
Stockholders' Equity
Preferred stock; 1,000 shares authorized; no shares issued and outstanding
—
—
Common stock - $ 0.01 par value; 120,000 shares authorized; 49,396 and 49,396 shares issued, respectively
264
264
Additional paid-in capital
448,417
452,142
Accumulated other comprehensive loss
( 2,094 )
( 18,008 )
Retained earnings
916,683
893,138
Common stock held in treasury, at cost - 1,019 and 1,386 shares, respectively
( 27,029 )
( 36,864 )
Total stockholders' equity
1,336,241
1,290,672
Total liabilities, redeemable noncontrolling interests and stockholders' equity
$
2,436,386
$
2,565,137
The accompanying notes are an integral part of these statements.
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G-III Apparel Group, Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended January 31,
2021
2020
2019
(In thousands, except per share amounts)
Net sales
$
2,055,146
$
3,160,464
$
3,076,208
Cost of goods sold
1,310,704
2,042,524
1,969,099
Gross profit
744,442
1,117,940
1,107,109
Selling, general and administrative expenses
605,102
832,180
834,763
Depreciation and amortization
38,625
38,735
38,819
Asset impairments, net of gain on lease terminations
17,873
19,371
2,813
Operating profit
82,842
227,654
230,714
Other income (loss)
3,238
( 1,149 )
( 2,960 )
Interest and financing charges, net
( 50,354 )
( 44,407 )
( 43,924 )
Income before income taxes
35,726
182,098
183,830
Income tax expense
12,203
38,261
45,763
Net income
23,523
143,837
138,067
Less: Loss attributable to noncontrolling interests
( 22 )
—
—
Net income attributable to G-III Apparel Group, Ltd.
$
23,545
$
143,837
$
138,067
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO G-III APPAREL GROUP, LTD.:
Basic:
Net income per common share
$
0.49
$
2.98
$
2.81
Weighted average number of shares outstanding
48,242
48,209
49,140
Diluted:
Net income per common share
$
0.48
$
2.94
$
2.75
Weighted average number of shares outstanding
48,781
48,895
50,274
Net income
$
23,523
$
143,837
$
138,067
Other comprehensive loss:
Foreign currency translation adjustments
( 15,885 )
( 2,814 )
( 9,672 )
Other comprehensive loss
( 15,885 )
( 2,814 )
( 9,672 )
Comprehensive income
7,638
141,023
128,395
Comprehensive income attributable to noncontrolling interests:
Net loss
( 22 )
—
—
Foreign currency translation adjustments
( 29 )
—
—
Comprehensive income attributable to noncontrolling interests
( 51 )
—
—
Comprehensive income attributable to G-III Apparel Group, Ltd.
$
7,587
$
141,023
$
128,395
The accompanying notes are an integral part of these statements.
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G-III Apparel Group, Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated
Common
Additional
Other
Stock
Common
Paid-In
Comprehensive
Retained
Held In
Stock
Capital
Loss
Earnings
Treasury
Total
(In thousands)
Balance as of January 31, 2018
$
245
$
451,844
$
( 5,522 )
$
674,542
$
( 420 )
$
1,120,689
Equity awards exercised/vested, net
19
( 1,595 )
—
—
1,677
101
Share-based compensation expense
—
19,694
—
—
—
19,694
Taxes paid for net share settlements
—
( 5,738 )
—
—
—
( 5,738 )
Other comprehensive loss, net
—
( 93 )
( 9,672 )
—
—
( 9,765 )
Repurchases of common stock
—
—
—
—
( 20,311 )
( 20,311 )
Cumulative effect of adoption of ASC 606
—
—
—
( 53,728 )
—
( 53,728 )
Net income
—
—
—
138,067
—
138,067
Balance as of January 31, 2019
264
464,112
( 15,194 )
758,881
( 19,054 )
1,189,009
Equity awards exercised/vested, net
—
( 17,290 )
—
—
17,406
116
Share-based compensation expense
—
17,559
—
—
—
17,559
Taxes paid for net share settlements
—
( 12,239 )
—
—
—
( 12,239 )
Other comprehensive loss, net
—
—
( 2,814 )
—
—
( 2,814 )
Repurchases of common stock
—
—
—
—
( 35,216 )
( 35,216 )
Cumulative effect of adoption of ASC 842
—
—
—
( 9,580 )
—
( 9,580 )
Net income
—
—
—
143,837
—
143,837
Balance as of January 31, 2020
264
452,142
( 18,008 )
893,138
( 36,864 )
1,290,672
Equity awards exercised/vested, net
—
( 9,538 )
—
—
9,835
297
Share-based compensation expense
—
6,137
—
—
—
6,137
Taxes paid for net share settlements
—
( 324 )
—
—
—
( 324 )
Other comprehensive gain, net
—
—
15,914
—
—
15,914
Net income attributable to G-III Apparel Group, Ltd.
—
—
—
23,545
—
23,545
Balance as of January 31, 2021
$
264
$
448,417
$
( 2,094 )
$
916,683
$
( 27,029 )
$
1,336,241
The accompanying notes are an integral part of these statements.
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G-III Apparel Group, Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended January 31,
2021
2020
2019
(In thousands)
Cash flows from operating activities
Net income attributable to G-III Apparel Group, Ltd.
$
23,545
$
143,837
$
138,067
Adjustments to reconcile net income to net cash provided by operating activities, net of assets and liabilities acquired:
Depreciation and amortization
38,625
38,735
38,819
Loss on disposal of fixed assets
1,079
2,500
128
Non-cash operating lease costs
71,368
73,273
—
Gain on lease terminations
( 2,541 )
( 2,415 )
—
Asset impairments
20,414
21,787
2,813
Dividend received from unconsolidated affiliate
2,695
3,675
—
Equity (gain)/loss in unconsolidated affiliates
( 601 )
( 3,200 )
1,543
Share-based compensation
6,137
17,559
19,694
Deferred financing charges and debt discount amortization
10,014
10,491
10,052
Extinguishment of deferred financing costs
6,503
—
—
Deferred income taxes
24,844
319
5,404
Non-cash gains recorded in conjunction with Fabco acquisition
( 2,693 )
—
—
Changes in operating assets and liabilities:
Accounts receivable, net
38,900
( 28,003 )
( 207,877 )
Inventories
143,525
24,465
( 23,568 )
Income taxes, net
( 13,795 )
( 621 )
( 3,866 )
Prepaid expenses and other current assets
24,514
15,929
( 47,959 )
Other assets, net
( 663 )
( 731 )
( 6,237 )
Customer refund liabilities
( 136,436 )
( 10,172 )
177,144
Operating lease liabilities
( 86,448 )
( 79,843 )
—
Accounts payable, accrued expenses and other liabilities
( 94,228 )
( 18,564 )
( 328 )
Net cash provided by operating activities
74,758
209,021
103,829
Cash flows from investing activities
Operating lease assets initial direct costs
( 4,093 )
( 2,104 )
—
Capital expenditures
( 16,035 )
( 37,990 )
( 29,205 )
Investment in unconsolidated affiliate
—
—
( 9,951 )
Return of capital from unconsolidated affiliate
—
—
1,470
Proceeds from sale of a retail store
—
—
354
Net cash used in investing activities
( 20,128 )
( 40,094 )
( 37,332 )
Cash flows from financing activities
Repayment of borrowings - revolving credit facility
( 1,291,424 )
( 2,388,766 )
( 2,315,935 )
Proceeds from borrowings - revolving credit facility
1,291,424
2,388,766
2,303,932
Repayment of borrowings - unsecured term loan
( 300,530 )
( 504 )
—
Proceeds from borrowings - unsecured term loan
8,883
3,362
—
Proceeds from borrowings - senior secured notes
400,000
—
—
Payment of financing costs
( 13,551 )
—
—
Proceeds from exercise of equity awards
297
115
101
Purchase of treasury shares
—
( 35,216 )
( 20,311 )
Taxes paid for net share settlements
( 324 )
( 12,239 )
( 5,738 )
Net cash provided by (used in) financing activities
94,775
( 44,482 )
( 37,951 )
Foreign currency translation adjustments
5,157
2,789
( 4,184 )
Net increase (decrease) in cash and cash equivalents
154,562
127,234
24,362
Cash and cash equivalents at beginning of year
197,372
70,138
45,776
Cash and cash equivalents at end of year
$
351,934
$
197,372
$
70,138
Supplemental disclosures of cash flow information
Cash payments:
Interest, net
$
16,418
$
34,311
$
35,807
Income tax payments, net
1,971
39,020
44,045
The accompanying notes are an integral part of these statements.
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2021, 2020 and 2019
NOTE A — SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
1. Business Activity and Principles of Consolidation
As used in these financial statements, the term “Company” or “G-III” refers to G-III Apparel Group, Ltd. and its subsidiaries. The Company designs, sources 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. The Company also operates retail stores and licenses its proprietary brands under several product categories.
The Company consolidates the accounts of all its wholly-owned and majority-owned subsidiaries. Fabco Holding B.V. (“Fabco”) is a Dutch joint venture limited liability company that was 49% owned by the Company through November 30, 2020. Effective December 1, 2020, the Company increased its ownership interest in Fabco to 75 % (see Note P – Fabco) and Fabco is treated as a consolidated majority-owned subsidiary. KL North America B.V. (“KLNA”) is a Dutch joint venture limited liability company that is 49 % owned by the Company. Karl Lagerfeld Holding B.V. (“KLH”) is a Dutch limited liability company that is 19 % owned by the Company. These investments are accounted for using the equity method of accounting. All material intercompany balances and transactions have been eliminated.
Vilebrequin International SA (“Vilebrequin”), a Swiss corporation that is wholly-owned by the Company, KLH, KLNA and Fabco report results on a calendar year basis rather than on the January 31 fiscal year basis used by the Company. Accordingly, the results of Vilebrequin, KLH, KLNA and Fabco are, and will be, included in the financial statements for the year ended or ending closest to the Company’s fiscal year. For example, with respect to the Company’s results for the year ended January 31, 2021, the results of Vilebrequin, KLH, KLNA and Fabco are included for the year ended December 31, 2020. The Company’s retail operations segment reports results on a 52/53-week fiscal year. The Company’s years ended January 31, 2021, 2020 and 2019 were all 52-week fiscal years for the retail operations segment. For fiscal 2021, 2020 and 2019, the retail operations segment year end was January 30, 2021, February 1, 2020 and February 2, 2019, respectively.
Liquidity and Impact of COVID-19
The Company relies on its cash flows generated from operations and the borrowing capacity under its credit facilities to meet the cash requirements of its business. The primary cash requirements of its business are the seasonal buildup in inventory, compensation paid to employees, payments to suppliers in the normal course of business, capital expenditures, maturities of debt and related interest payments and income tax payments. The COVID-19 pandemic resulted in a sharp decline in net sales in the first, second and, to a lesser extent, third and fourth quarters of fiscal 2021. It also resulted in the Company recognizing a net loss in the first and second quarters and a significant reduction in net income in the third and fourth quarters compared to prior years. The Company is focused on preserving its liquidity and managing its cash flow during these unprecedented conditions. The Company had taken preemptive actions to enhance its ability to meet its short-term liquidity needs, including, but not limited to, reducing payroll costs through employee furloughs, job eliminations, salary reductions, reductions in marketing and other discretionary spending, deferring certain lease payments and deferral of capital projects. During the quarter ended October 31, 2020, certain furloughed employees were reinstated and salaries that had been reduced were increased to their pre-pandemic levels. The Company has received royalty relief from certain licensors.
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of January 31, 2021, the Company had cash and cash equivalents of $ 351.9 million and availability under its revolving credit facility in excess of $ 450.0 million. The Company believes it has adequate cash flows to meet the cash requirements of its business. As of January 31, 2021, the Company was in compliance with all covenants under its debt agreements.
2. Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
3. Revenue Recognition
Wholesale revenue is recognized when control transfers to the customer. The Company considers control to have been transferred when the Company has transferred physical possession of the product, the Company has a right to payment for the product, the customer has legal title to the product and the customer has the significant risks and rewards of the product. Wholesale revenues are adjusted by variable considerations arising from implicit or explicit obligations. Variable consideration includes trade discounts, end of season markdowns, sales allowances, cooperative advertising, return liabilities and other customer allowances. The Company estimates the anticipated variable consideration and records this estimate as a reduction of revenue in the period the related product revenue is recognized.
Variable consideration is estimated based on historical experience, current contractual and statutory requirements, specific known events and industry trends. The reserves for variable consideration are recorded as customer refund liabilities. Historical return rates are calculated on a product line basis. The remainder of the historical rates for variable consideration are calculated by customer by product lines.
The Company recognizes retail sales when the customer takes possession of the goods and tenders payment, generally at the point of sale. Digital revenues from customers through the Company’s digital platforms are recognized when the customer takes possession of the goods. The Company’s sales are recorded net of applicable sales taxes.
Both wholesale revenues and retail store revenues are shown net of returns, discounts and other allowances.
Licensing revenue is recognized at the higher of royalty earned or guaranteed minimum royalty.
4. Accounts Receivable
In the normal course of business, the Company extends credit to its wholesale customers based on pre-defined credit criteria. Accounts receivable are net of an allowance for doubtful accounts. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligation (such as in the case of bankruptcy filings, extensive delay in payment or substantial downgrading by credit sources), a specific reserve for bad debts is recorded against amounts due to reduce the net recognized receivable to the amount reasonably expected to be collected. For all other wholesale customers, an allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the financial statements, assessments of collectability based on historical trends and an evaluation of the impact of economic conditions.
On February 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which had no material impact on the Company’s financial statements. The Company’s financial instruments consist of trade receivables arising from revenue transactions in the ordinary course of business. The Company considers its trade receivables to consist of two portfolio segments: wholesale and retail trade receivables. Wholesale trade receivables result from credit the Company has extended to its wholesale customers based on pre-defined criteria and are generally due within 30 to 60 days. Retail trade receivables
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
primarily relate to amounts due from third-party credit card processors for the settlement of debit and credit card transactions and are typically collected within 3 to 5 days. See Note D – Allowance For Doubtful Accounts.
5. Inventories
Wholesale inventories are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value, which comprises a significant portion of the Company’s inventory. Retail inventories are valued at the lower of cost or market as determined by the retail inventory method. Vilebrequin inventories are stated at the lower of cost (determined by the weighted average method) or net realizable value.
6. Goodwill and Other Intangibles
Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations accounted for under the purchase method of accounting. Goodwill is subject to annual impairment tests using a qualitative evaluation or a quantitative test using an income approach through a discounted cash flow analysis methodology. The discounted cash flow approach requires that certain assumptions and estimates be made regarding industry economic factors and future profitability. Intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests using a qualitative evaluation or a quantitative test using a relief from royalty method, another form of the income approach. The relief from royalty method requires assumptions regarding industry economic factors and future profitability. Other intangibles with finite lives, including license agreements, trademarks and customer lists are amortized on a straight-line basis over the estimated useful lives of the assets (currently ranging from 5 to 17 years ). Impairment charges, if any, on intangible assets with finite lives are recorded when indicators of impairment are present and the discounted cash flows estimated to be derived from those assets are less than the carrying amounts of the assets.
7. Leases
On February 1, 2019, the Company adopted ASC Topic 842 – Leases (“ASC 842”) using the optional transition method to apply the standard as of the effective date. The Company determines if an arrangement is, or contains, a lease at contract inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. For leases with an initial term greater than 12 months, a lease liability is recorded on the balance sheet at the present value of future payments discounted at the incremental borrowing rate (discount rate) corresponding with the lease term. An operating lease asset is recorded based on the initial amount of the lease liability, plus any lease payments made to the lessor before or at the lease commencement date and any initial direct costs incurred, less any tenant improvement allowance incentives received. The difference between the minimum rents paid and the straight-line rent (deferred rent) is reflected within the associated operating lease asset. The Company has elected to account for lease and non-lease components as a single component.
The lease classification evaluation begins at the commencement date. The lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain or the failure to exercise such option would result in an economic penalty. All of the Company’s leases are classified as operating leases.
On April 10, 2020, the Financial Accounting Standards Board (“FASB”) issued a Staff Q&A to respond to frequently asked questions about accounting for lease concessions related to the effects of the COVID-19 outbreak. Consequently, for lease concessions related to the effects of the COVID-19 outbreak, an entity will not have to analyze each lease to determine whether the enforceable rights and obligations for concessions exist in the contract and can elect to apply or not apply the lease modification guidance to those leases. Entities may make the elections for any lessor-provided concessions related to the effects of the outbreak (e.g., deferrals of lease payments, lease payment forgiveness, cash payments made to the lessee or reduced future lease payments) as long as the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. The Company has elected to not apply the lease modification guidance for
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contracts with COVID-19 related rent concessions. As of January 31, 2021, the Company has $ 3.4 million of deferred lease payments recorded within accounts payable on its consolidated balance sheets.
8. Depreciation and Amortization
Property and equipment are recorded at cost. Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the life of the lease or the useful life of the improvement, whichever is shorter.
9. Impairment of Long-Lived Assets
All property and equipment and other long-lived assets are reviewed for potential impairment when events or changes in circumstances indicate that the asset’s carrying value may not be recoverable. If such indicators are present, it is determined whether the sum of the estimated undiscounted future cash flows attributable to such assets is less than the carrying value of the assets. A potential impairment has occurred if projected future undiscounted cash flows are less than the carrying value of the assets.
In fiscal 2021, the Company recorded a $ 20.1 million impairment charge related to the operating lease assets, leasehold improvements and furniture and fixtures at certain Wilsons Leather and G.H. Bass stores, primarily due to the retail restructuring, as well as at certain DKNY and Vilebrequin stores as a result of the performance at these stores.
In fiscal 2020, the Company recorded a $ 21.8 million impairment charge primarily related to leasehold improvements, furniture and fixtures and operating lease assets at certain of its Wilsons Leather, G.H. Bass and DKNY stores as a result of the performance at these stores.
In fiscal 2019, the Company recorded a $ 2.8 million impairment charge related to leasehold improvements and furniture and fixtures at certain of our Wilsons Leather, G.H. Bass and DKNY stores as a result of the performance at these stores.
10. Income Taxes
The Company accounts for income taxes and uncertain tax positions in accordance with ASC Topic 740 — Income Taxes (“ASC 740”). Income taxes are accounted for under the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the tax bases of assets and liabilities and their financial reporting amounts using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a return, as well as guidance on de-recognition, classification, interest and penalties and financial statement reporting disclosures. It is also the Company's policy to provide for uncertain tax positions and the related interest and penalties based upon management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent the Company prevails in matters for which a liability for an unrecognized tax benefit is established, or is required to pay amounts in excess of the liability, or when other facts and circumstances change, the Company's effective tax rate in a given financial statement period may be materially affected.
The Tax Cuts and Jobs Act of 2017 (“TCJA”) provides for a reduced corporate income tax rate of 21 % and requires that certain income earned by foreign subsidiaries, known as global intangible low-tax income (“GILTI”), must be included in the gross income of their U.S. shareholder. For fiscal 2021, the Company has elected to treat the tax effect of GILTI as a
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current period expense. For the current and future tax years, the Company expects other TCJA tax implications to be immaterial.
The United States government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020, which includes various income tax provisions aimed at providing economic relief. One of those provisions allows any loss generated in 2020 to be carried back to each of the 5 taxable years preceding the taxable year of such a loss. The Company has elected to use this relief and will carry back the 2020 net operating loss to a tax year with a 35% federal rate. Additionally, the CARES Act permits Qualified Improvement Property to qualify for 15-year depreciation and therefore be also eligible for 100 percent first-year bonus depreciation. The Company has elected to take 100% bonus depreciation for all qualified improvement property.
11. Net Income Per Common Share
Basic net income per common share has been computed using the weighted average number of common shares outstanding during each period. Diluted net income per share is computed using the weighted average number of common shares and potential dilutive common shares, consisting of unvested restricted stock unit awards and stock options outstanding during the period. Approximately 182,000 , 692,000 and 336,000 shares for the years ended January 31, 2021, 2020 and 2019, respectively, have been excluded from the diluted net income per share calculation. In addition, all share-based payments outstanding that vest based on the achievement of performance and/or market price conditions, and for which the respective performance and/or market price conditions have not been achieved, have been excluded from the diluted per share calculation. The Company issued 0 , 8,851 and 168,179 shares of common stock in connection with the exercise or vesting of equity awards during the years ended January 31, 2021, 2020 and 2019, respectively. In addition, the Company re-issued 367,290 , 619,651 and 150,809 treasury shares in connection with the vesting of equity awards in fiscal 2021, 2020 and 2019, respectively.
The following table reconciles the numerators and denominators used in the calculation of basic and diluted net income per share:
Year Ended January 31,
2021
2020
2019
(In thousands, except per share amounts)
Net income attributable to G-III Apparel Group, Ltd.
$
23,545
$
143,837
$
138,067
Basic net income per share:
Basic common shares
48,242
48,209
49,140
Basic net income per share
$
0.49
$
2.98
$
2.81
Diluted net income per share:
Basic common shares
48,242
48,209
49,140
Dilutive restricted stock unit awards and stock options
539
686
1,134
Diluted common shares
48,781
48,895
50,274
Diluted net income per share
$
0.48
$
2.94
$
2.75
12. Equity Award Compensation
ASC Topic 718, Compensation — Stock Compensation , requires all share-based payments to employees, including grants of restricted stock unit awards and employee stock options, to be recognized as compensation expense over the service period (generally the vesting period) based on their fair values.
The Company accounts for forfeited awards as they occur as permitted by ASC 718. Ultimately, the actual expense recognized over the vesting period will be for those shares that vested. Restricted stock units (“RSU’s”) are time based awards that do not have market or performance conditions and generally (i) cliff vest after three years or (ii) vest over a
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three year period. Performance based restricted stock units (“PRSU’s”) granted to executives prior to fiscal 2020 include (i) market price performance conditions that provide for the award to vest only after the average closing price of the Company’s stock trades above a predetermined market level and (ii) another performance condition that requires the achievement of an operating performance target. PRSU’s generally vest over a two to five year period. Performance stock units (“PSU’s”) were granted to executives in fiscal 2020 and vest after a three year performance period during which certain earnings before interest and taxes and return on invested capital performance standards must be satisfied for vesting to occur. PSU’s are also subject to a lock up period that prevents the sale, contract to sell or transfer of shares for two years subsequent to the date of vesting. RSU’s and employee stock options are expensed on a straight-line basis. PRSU’s are expensed under the requisite acceleration method. PSU’s are expensed under the requisite acceleration method and based on an estimated percentage of achievement of certain pre-established goals.
It is the Company’s policy to grant stock options at prices not less than the fair market value on the date of the grant. Option terms, vesting and exercise periods vary, except that the term of an option may not exceed ten year s.
Also, excess tax benefits arising from the lapse or exercise of an equity award are no longer recognized in additional paid-in capital. The assumed proceeds from applying the treasury stock method when computing net income per share is amended to exclude the amount of excess tax benefits that would be recognized in additional paid-in capital.
13. Cost of Goods Sold
Cost of goods sold includes the expenses incurred to acquire, produce and prepare inventory for sale, including product costs, warehouse staff wages, freight in, import costs, packaging materials, the cost of operating the overseas offices and royalty expense. Gross margins may not be directly comparable to those of the Company’s competitors, as income statement classifications of certain expenses may vary by company. Additionally, costs expected to be incurred when products are returned should be accrued for upon the sale of the product as a component of cost of goods sold.
14. Shipping and Handling Costs
Shipping and handling costs consist of warehouse facility costs, third party warehousing, freight out costs, and warehouse supervisory wages and are included in selling, general and administrative expenses. Shipping and handling costs included in selling, general and administrative expenses were $ 111.8 million, $ 138.8 million and $ 125.9 million for the years ended January 31, 2021, 2020 and 2019, respectively.
15. Advertising Costs
The Company expenses advertising costs as incurred and includes these costs in selling, general and administrative expenses. Advertising paid as a percentage of sales under license agreements are expensed in the period in which the sales occur or are accrued to meet guaranteed minimum requirements under license agreements. Advertising expense was $ 55.3 million, $ 94.7 million and $ 87.8 million for the years ended January 31, 2021, 2020 and 2019, respectively. Prepaid advertising, which represents advance payments to licensors for minimum guaranteed payments for advertising under the Company’s licensing agreements, was $ 8.0 million and $ 8.7 million at January 31, 2021 and 2020, respectively.
16. Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. In determining these estimates, management must use amounts that are based upon its informed judgments and best estimates. The Company continually evaluates its estimates, including those related to customer allowances and discounts, product returns, bad debts, inventories, equity awards, income taxes,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
carrying values of intangible assets and long-lived assets including right of use assets. Estimates are based on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.
17. Fair Value of Financial Instruments
GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy for a particular asset or liability depends on the inputs used in its valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally-derived (unobservable). A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1 — inputs to the valuation methodology based on quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — inputs to the valuation methodology based on quoted prices for similar assets or liabilities in active markets for substantially the full term of the financial instrument; quoted prices for identical or similar instruments in markets that are not active for substantially the full term of the financial instrument; and model-derived valuations whose inputs or significant value drivers are observable.
Level 3 — inputs to the valuation methodology based on unobservable prices or valuation techniques that are significant to the fair value measurement.
The following table summarizes the carrying values and the estimated fair values of the Company’s debt instruments:
Carrying Value
Fair Value
January 31,
January 31,
January 31,
January 31,
Financial Instrument
Level
2021
2020
2021
2020
(In thousands)
Secured Notes
2
$
400,000
$
—
$
400,000
$
—
Term loan
2
—
300,000
—
300,000
Note issued to LVMH
3
107,869
102,009
101,810
95,126
Unsecured loans
2
9,119
2,860
9,119
2,860
Overdraft facilities
2
3,007
—
3,007
—
The Company’s debt instruments are recorded at their carrying values in its consolidated balance sheets, which may differ from their respective fair values. The carrying amount of the Company’s variable rate debt approximates the fair value, as interest rates change with the market rates. Furthermore, the carrying value of all other financial instruments potentially subject to valuation risk (principally consisting of cash, accounts receivable and accounts payable) also approximates fair value due to the short-term nature of these accounts. On August 7, 2020, the Company refinanced its term loan and revolving credit facility. See Note I – Notes Payable and Other Liabilities.
The 2 % note in the principal amount of $ 125 million (the “LVMH Note”) issued to LVMH Moet Hennessy Louis Vuitton Inc. (“LVMH”) in connection with the acquisition of DKI was issued at a discount of $ 40.0 million in accordance with ASC 820 — Fair Value Measurements . For purposes of this fair value disclosure, the Company based its fair value estimate for the LVMH Note on the initial fair value as determined at the date of the acquisition of DKI and records the amortization using the effective interest method over the term of the LVMH Note.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value of the LVMH Note was considered a Level 3 valuation in the fair value hierarchy.
Non-Financial Assets and Liabilities
The Company’s non-financial assets that are measured at fair value on a nonrecurring basis include long-lived assets, which consist primarily of property and equipment and operating lease assets. The Company reviews these assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. For impaired assets, an impairment loss is recognized equal to the difference between the carrying amount of the asset or asset group and its estimated fair value. For operating lease assets, the Company determines the fair value of the assets by discounting the estimated market rental rates over the remaining term of the lease. These fair value measurements are considered level 3 measurements in the fair value hierarchy. During fiscal 2021, the Company recorded a $ 20.1 million impairment charge primarily related to operating lease assets, leasehold improvements and furniture and fixtures at certain Wilsons Leather and G.H. Bass stores, primarily due to the retail restructuring, as well as at certain DKNY and Vilebrequin stores as a result of the performance at these stores. During fiscal 2020, the Company recorded a $ 21.8 million impairment charge primarily related to leasehold improvements, furniture and fixtures and operating lease assets at certain Wilsons Leather, G.H. Bass and DKNY stores as a result of the performance at these stores. In addition, during fiscal 2020, the Company recorded an impairment of $ 9.6 million, net of tax, in connection with the adoption of ASC 842 – Leases (“ASC 842”) that was recognized through retained earnings.
18. Foreign Currency Translation
Certain of the Company’s international subsidiaries use different functional currencies, which are, for the most part, the local currency. In accordance with the authoritative guidance, assets and liabilities of the Company’s foreign operations are translated from foreign currency into U.S. dollars at period-end rates, while income and expenses are translated at the weighted average exchange rates for the period. The related translation adjustments are reflected as a foreign currency translation adjustment in accumulated other comprehensive loss within stockholders’ equity.
19. Effects of Recently Adopted and Issued Accounting Pronouncements
Recently Adopted Accounting Guidance
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This pronouncement changed how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU 2016-13 replaced the “incurred loss” model with an “expected loss” model. Under the “incurred loss” model, a loss (or allowance) was recognized only when an event had occurred (such as a payment delinquency) that caused the entity to believe that a loss was probable (i.e., that it had been “incurred”). Under the “expected loss” model, an entity recognizes a loss (or allowance) upon initial recognition of the asset that reflects all future events that may lead to a loss being realized, regardless of whether it is probable that the future event will occur. The “incurred loss” model considered past events and current conditions, while the “expected loss” model includes expectations for the future which have yet to occur. The Company adopted ASU 2016-16 as of February 1, 2020. The adoption of this standard did not result in a material change to the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” which made a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement among or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. The amendments in ASU 2018-13 modified the disclosure requirements with respect to fair value measurements based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. The amendments to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs
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used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty have been applied prospectively in the initial fiscal year of adoption. All other amendments have been applied retrospectively to all periods presented in the initial year of adoption. The Company adopted the standard effective February 1, 2020. The adoption of this standard did not result in a material change to the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is A Service Contract, which addresses the accounting for implementation costs incurred in a cloud computing arrangement (“CCA”) that is a service contract. ASU 2018-15 aligned the accounting for costs incurred to implement a CCA that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, ASU 2018-15 amended ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a CCA that is considered a service contract. The Company adopted the standard effective February 1, 2020. The adoption of this standard did not result in a material change to the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (“ASC 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The standard is intended to provide optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria that reference LIBOR or another rate that is expected to be discontinued. The guidance was effective upon issuance, and may be applied prospectively through December 31, 2022. The adoption of this standard did not result in a material change to the Company’s consolidated financial statements.
Accounting Guidance Issued Being Evaluated for Adoption
The Company has reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to the consolidated financial statements.
NOTE B — RETAIL RESTRUCTURING
In June 2020, the Company commenced the restructuring of its retail operations segment including the closing of the Wilsons Leather, G.H. Bass and Calvin Klein Performance stores. In connection with the restructuring of the retail operations segment, the Company incurred an aggregate charge of approximately $ 100 million related to store operating costs, landlord termination fees, severance costs, store liquidation and closing costs, write-offs related to right-of-use assets and legal and professional fees. The Company’s cash portion of this charge was approximately $ 65 million.
Restructuring charges are recorded within selling, general and administrative expenses in the Company’s consolidated statements of income and comprehensive income. The following is a reconciliation of the accrual for the period ended January 31, 2021:
Severance and Benefit Costs
Store Closing Costs
Total
(In thousands)
Balance at January 31, 2020
$
—
$
—
$
—
Amounts charged to expense
1,257
961
2,218
Cash payments
( 1,103 )
( 280 )
( 1,383 )
Balance at January 31, 2021
$
154
$
681
$
835
The remaining severance and benefit costs and store closing costs are expected to be paid during the first two quarters of fiscal 2022.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE C — REVENUE RECOGNITION
On February 1, 2018, the Company adopted ASC 606 using the modified retrospective method as of January 31, 2018. The Company recognized a cumulative effect adjustment to the opening balance of stockholders’ equity at February 1, 2018 that reduced stockholders’ equity by $ 53.7 million, net of tax, as a result of the adoption of ASC 606.
Wholesale revenue is recognized upon the transfer of goods to customers in an amount that reflects the expected consideration to be received in exchange for these goods. The difference between the amount initially billed and the amount collected represents variable consideration. Variable consideration includes trade discounts, end of season markdowns, sales allowances, cooperative advertising, return liabilities and other customer allowances. The Company estimates the anticipated variable consideration and records this estimate as a reduction of revenue in the period the related product revenue is recognized.
The liability recorded in connection with variable consideration has been classified as a current liability under “Customer refund liabilities” in the Consolidated Balance Sheet. Additionally, the Company classifies cooperative advertising as a reduction of net sales in the Consolidated Statements of Income and Comprehensive Income. Costs expected to be incurred when products are returned should be accrued for upon the sale of the product as a component of cost of goods sold.
Disaggregation of Revenue
In accordance with ASC 606, the Company elected to disclose its revenues by segment. Each segment presents its own characteristics with respect to the timing of revenue recognition and the type of customer. In addition, disaggregating revenues using a segment basis is consistent with how the Company’s Chief Operating Decision Maker manages the Company. The Company identified the wholesale operations segment and the retail operations segment as distinct sources of revenue.
Wholesale Operations Segment. Wholesale revenues include sales of products to retailers under owned, licensed and private label brands, as well as sales related to the Vilebrequin business. Wholesale revenues from sales of products are recognized when control transfers to the customer. The Company considers control to have been transferred when the Company has transferred physical possession of the product, the Company has a right to payment for the product, the customer has legal title to the product and the customer has the significant risks and rewards of the product. Wholesale revenues are adjusted by variable considerations arising from implicit or explicit obligations. Wholesale revenues also include revenues from license agreements related to the DKNY, Donna Karan, G.H. Bass, Andrew Marc and Vilebrequin trademarks owned by the Company. As of January 31, 2021, revenues from license agreements represented an insignificant portion of wholesale revenues.
Retail Operations Segment. Retail store revenues are generated by direct sales to consumers through company-operated stores and product sales through the Company’s digital channels for the DKNY, Donna Karan, G.H. Bass, Karl Lagerfeld Paris, Andrew Marc and Wilsons Leather businesses. Prior to completion of the restructuring in fiscal 2021, retail stores primarily consisted of Wilsons Leather, G.H. Bass, DKNY and Karl Lagerfeld Paris retail stores, substantially all of which are operated as outlet stores. Our Wilsons Leather and G.H. Bass stores were closed as a result of the restructuring. Retail operations segment revenues are recognized at the point of sale when the customer takes possession of the goods and tenders payment. Digital revenues primarily consist of sales to consumers through the Company’s digital platforms. Digital revenue is recognized when a customer takes possession of the goods. Retail sales are recorded net of applicable sales tax.
Variable Consideration . The difference between the amount initially billed and the amount collected represents variable consideration. The Company may provide customers with discounts, rebates, credit returns and price reductions. The Company may also contribute to customers’ promotional activities or incur charges for compliance violations. These adjustments to the initial selling price often occur after the sales process is completed.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company identified the following elements of variable consideration:
Markdowns . Markdown allowances consist of accommodations in the form of price reductions to wholesale customers for purchased merchandise. In general, markdowns are granted to full price customers, such as department stores. Markdowns may vary year-over-year and are granted based on the performance of Company merchandise at a customer’s retail stores.
Term Discounts. Term discounts represent a discount from the initial wholesale sales price to certain wholesale customers consistent with customary industry practice.
Sales Allowances . Sales allowances are reductions of the selling price agreed upon with wholesale customers. Sales allowances may be contractual or may be granted on a case-by-case basis. Non-contractual sales allowances may be granted in connection with billing adjustments and, in some cases, for product related issues.
Advertising Allowances . Advertising allowances consist of the Company’s financial participation in the promotional efforts of its wholesale customers. Wholesale customers may charge back a portion of the advertising expense incurred against open invoices. Advertising programs are generally agreed upon at the beginning of a season.
Other Allowances . General allowances consist of price reductions granted to a wholesale customer and may relate to the Company’s participation in costs incurred by the customer during the sales process, as well as price differences, shortages and charges for operational non-compliance.
Return of Merchandise . For wholesale customers, the Company may make accommodations for returns of merchandise that is underperforming at a customer’s retail stores. For retail customers, as a matter of Company policy, whether merchandise is purchased at the Company’s stores or on its digital platforms, the consumer generally has up to 90 days to return merchandise from the date of purchase.
Variable consideration is estimated based on historical experience, current contractual and statutory requirements, specific known events and industry trends. The reserves for variable consideration are recorded under customer refund liabilities. As of January 31, 2021 and 2020, customer refund liabilities amounted to $ 99.4 million and $ 233.4 million, respectively. Historical return rates are calculated on a product line basis. The remainder of the historical rates for variable consideration are calculated by customer by product lines.
Contract Liabilities
The Company’s contract liabilities, which are recorded within accrued expenses in the accompanying Consolidated Balance Sheets, primarily consist of gift card liabilities and advance payments from licensees. In some of its retail concepts, the Company also offers a limited loyalty program where customers accumulate points redeemable for cash discount certificates that expire 90 days after issuance. Total contract liabilities were $ 5.9 million at January 31, 2021 and 2020. The Company recognized $ 4.5 million in revenue for the year ended January 31, 2021 which related to contract liabilities that existed at January 31, 2020. There were no contract assets recorded as of January 31, 2021 and January 31, 2020. Substantially all of the advance payments from licenses as of January 31, 2021 are expected to be recognized as revenue within the next twelve months.
NOTE D — ALLOWANCE FOR DOUBTFUL ACCOUNTS
On February 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which had no material impact on the Company’s financial statements. The Company’s financial instruments consist of trade receivables arising from revenue transactions in the ordinary course of business. The Company considers its trade receivables to consist of two portfolio segments: wholesale and retail trade receivables. Wholesale trade receivables result from credit the Company has extended
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to its wholesale customers based on pre-defined criteria and are generally due within 30 to 60 days. Retail trade receivables primarily relate to amounts due from third-party credit card processors for the settlement of debit and credit card transactions and are typically collected within 3 to 5 days.
The Company’s accounts receivable and allowance for doubtful accounts as of January 31, 2021 were:
January 31, 2021
Wholesale
Retail
Total
(In thousands)
Accounts receivable, gross
$
509,010
$
1,147
$
510,157
Allowance for doubtful accounts
( 17,429 )
( 30 )
( 17,459 )
Accounts receivable, net
$
491,581
$
1,117
$
492,698
The allowance for doubtful accounts for wholesale trade receivables is estimated based on several factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations (such as in the case of bankruptcy filings (including potential bankruptcy filings), extensive delay in payment or substantial downgrading by credit rating agencies), a specific reserve for bad debts is recorded against amounts due from that customer to reduce the net recognized receivable to the amount reasonably expected to be collected. For all other wholesale customers, an allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the end of the reporting period for financial statements, assessments of collectability based on historical trends and an evaluation of the impact of economic conditions. The Company considers both current and forecasted future economic conditions in determining the adequacy of its allowance for doubtful accounts.
The allowance for doubtful accounts for retail trade receivables is estimated at the credit card chargeback rate applied to the previous 90 days of credit card sales. In addition, the Company considers both current and forecasted future economic conditions in determining the adequacy of its allowance for doubtful accounts.
During the year ended January 31, 2021, the Company recorded a $ 16.7 million increase in its allowance for doubtful accounts primarily due to allowances recorded against the outstanding receivables of certain department store customers that have publicly announced bankruptcy filings or possible bankruptcy filings. The Company had the following activity in its allowance for credit losses for the year ended January 31, 2021:
January 31, 2021
Wholesale
Retail
Total
(In thousands)
Balance as of January 31, 2020
$
( 628 )
$
( 82 )
$
( 710 )
Provision for credit losses
( 16,934 )
52
( 16,882 )
Accounts written off as uncollectible
133
—
133
Balance as of January 31, 2021
$
( 17,429 )
$
( 30 )
$
( 17,459 )
NOTE E — INVENTORIES
Wholesale inventories, which comprise a significant portion of the Company’s inventory, are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Retail inventories are valued at the lower of cost or market as determined by the retail inventory method. Vilebrequin inventories are stated at the lower of cost (determined by the weighted average method) or net realizable value. Substantially all of the Company’s inventories consist of finished goods.
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The inventory return asset, which consists of the amount of goods that are anticipated to be returned by customers, represented $ 22.5 million and $ 31.0 million at January 31, 2021 and 2020, respectively. The inventory return asset is recorded within prepaid expenses and other current assets as of January 31, 2021 and 2020.
Inventory held on consignment by the Company’s customers totaled $ 3.5 million and $ 9.1 million at January 31, 2021 and 2020, respectively. Consignment inventory is stored at the facilities of the Company’s customers. The Company reflects this inventory on its consolidated balance sheets.
NOTE F — PROPERTY AND EQUIPMENT
Property and equipment consist of:
January 31,
Estimated life
2021
2020
(In thousands)
Machinery and equipment
5 years
$
1,724
$
1,867
Leasehold improvements
3 - 13 years
74,598
75,808
Furniture and fixtures
3 - 10 years
100,572
109,284
Computer equipment and software
2 - 5 years
40,255
41,040
217,149
227,999
Less: accumulated depreciation
( 160,085 )
( 151,976 )
$
57,064
$
76,023
The Company wrote off fixed assets of $ 0.4 million and $ 5.4 million, net of accumulated depreciation, for the years ended January 31, 2021 and 2020. Depreciation expense was $ 34.0 million, $ 33.8 million and $ 33.9 million for the years ended January 31, 2021, 2020 and 2019, respectively. For the year ended January 31, 2021, the Company recorded a $ 0.8 million impairment charge related to leasehold improvements and furniture and fixtures of certain Wilsons Leather and G.H. Bass stores, primarily due to the retail restructuring, as well as at certain DKNY stores as a result of the performance of these stores. For the year ended January 31, 2020, the Company recorded a $ 11.5 million impairment charge related to leasehold improvements and furniture and fixtures of certain Wilsons Leather, G.H. Bass and DKNY stores as a result of the performance of these stores. For the year ended January 31, 2019, the Company recorded a $ 2.8 million impairment charge related to leasehold improvements and furniture and fixtures of certain Wilsons Leather, G.H. Bass and Vilebrequin stores as a result of the performance of these stores.
The Company evaluates long-lived assets, which consist primarily of property and equipment and operating lease assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the evaluation process, the Company first compares the carrying value of the asset to the estimated future cash flows (undiscounted and without interest charges plus proceeds expected from disposition, if any). If the estimated undiscounted cash flows are less than the carrying value of the asset, the Company needs to determine the fair value of the assets. The Company compares the carrying value of the asset or asset group to its estimated fair value. If the fair value is less than the carrying value, the Company recognizes an impairment charge. The carrying amount of the asset or asset group is reduced to the estimated fair value based on a discounted cash flow valuation. Assets to be disposed of are reported at the lower of the carrying amount of the asset or fair value less costs to sell. The Company reviews retail store assets for potential impairment based on historical cash flows, lease termination provisions and forecasted future retail store operating results. If the Company recognizes an impairment charge for a depreciable long-lived asset, the adjusted carrying amount of the asset becomes its new cost basis and will be depreciated (amortized) over the remaining useful life of that asset.
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE G — LEASES
On February 1, 2019, the Company adopted ASC 842 using the optional transition method to apply the standard as of the effective date and, therefore, the standard has not been applied retroactively to the comparative periods presented in its financial statements. The Company has elected the transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and initial direct costs. Further, the Company elected the short-term lease exception policy, permitting it to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component.
The Company determines whether an arrangement is, or contains, a lease at contract inception. The Company leases certain retail stores, warehouses, distribution centers, office space and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
Total rent payable is recorded during the lease term, including rent escalations in which the amount of future rent is certain or fixed on the straight-line basis over the term of the lease (including any rent holiday periods beginning upon control of the premises and any fixed payments stated in the lease). For leases with an initial term greater than 12 months, a lease liability is recorded on the balance sheet at the present value of future payments discounted at the incremental borrowing rate (discount rate) corresponding with the lease term. An operating lease asset is recorded based on the initial amount of the lease liability, plus any lease payments made to the lessor before or at the lease commencement date and any initial direct costs incurred, less any tenant improvement allowance incentives received. The difference between the minimum rents paid and the straight-line rent (deferred rent) is reflected within the associated operating lease asset.
The lease classification evaluation begins at the commencement date. The lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain or the failure to exercise such option would result in an economic penalty. All retail store, warehouse, distribution center and office leases are classified as operating leases. The Company does not have any finance leases. Operating lease expense is generally recognized on a straight-line basis over the lease term.
Certain leases contain provisions that require contingent rent payments based upon sales volume (variable lease cost). Contingent rent is accrued each period as the liabilities are incurred.
Most leases are for a term of one to ten years . Some leases include one or more options to renew , with renewal terms that can extend the lease term from one to ten years . Several of the Company’s retail store leases include an option to terminate the lease based on failure to achieve a specified sales volume. The exercise of lease renewal options is generally at the Company’s sole discretion. The exercise of lease termination options is generally by mutual agreement between the Company and the lessor.
Certain of the Company’s lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s lease assets and liabilities as of January 31, 2021 and 2020 consist of the following:
Leases
Classification
January 31, 2021
January 31, 2020
(In thousands)
Assets
Operating
Operating lease assets
$
186,070
$
270,032
Total lease assets
$
186,070
$
270,032
Liabilities
Current operating
Current operating lease liabilities
$
43,560
$
63,166
Noncurrent operating
Noncurrent operating lease liabilities
161,668
249,040
Total lease liabilities
$
205,228
$
312,206
The Company’s operating lease assets and operating lease liabilities significantly declined during fiscal 2021 due to the restructuring of the retail operations segment, partially offset by other leasing activity. As a result of this restructuring, the Company closed its Wilsons Leather, G.H. Bass and Calvin Klein Performance stores during fiscal 2021. In addition, during fiscal 2021 the Company recorded a $ 19.4 million impairment charge related to the operating lease assets at certain Wilsons Leather and G.H. Bass stores, primarily due to the retail restructuring, as well as at certain DKNY and Vilebrequin stores as a result of the performance at these stores. During fiscal 2020, the Company recorded a $ 9.9 million impairment charge related to the operating lease assets at certain of our Wilsons Leather, G.H. Bass and DKNY stores as a result of the performance of these stores. The Company determines the fair value of operating lease assets by discounting the estimated market rental rates over the remaining term of the lease.
The Company’s leases do not provide the rate of interest implicit in the lease. Therefore, the Company uses its incremental borrowing rate based on the information available at commencement date of each lease in determining the present value of lease payments. For transition purposes, the incremental borrowing rate on February 1, 2019 was used for operating leases that commenced prior to that date.
The Company recorded lease costs of $ 92.4 million and $ 98.4 million during the years ended January 31, 2021 and 2020, respectively. Lease costs are recorded within selling, general and administrative expenses in the Company’s consolidated statements of income and comprehensive income. The Company recorded variable lease costs and short-term lease costs of $ 6.7 million and $ 16.8 million for the years ended January 31, 2021 and 2020, respectively. Short-term lease costs are immaterial.
As of January 31, 2021, the Company’s maturity of operating lease liabilities in the years ending up to January 31, 2026 and thereafter are as follows:
Year Ending January 31,
Amount
(In thousands)
2022
$
58,045
2023
51,312
2024
38,408
2025
31,315
2026
24,837
After 2026
55,362
Total lease payments
$
259,279
Less: Interest
54,051
Present value of lease liabilities
$
205,228
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of January 31, 2021, there are no material leases that are legally binding but have not yet commenced.
As of January 31, 2021, the weighted average remaining lease term related to operating leases is 5.7 years. The weighted average discount rate related to operating leases is 8.3 %.
Cash paid for amounts included in the measurement of operating lease liabilities is $ 108.9 million and $ 100.8 million as of January 31, 2021 and 2020, respectively. Right-of-use assets obtained in exchange for lease obligations were $ 56.6 million and $ 27.0 million during the years ended January 31, 2021 and 2020, respectively.
NOTE H — INTANGIBLE ASSETS
Intangible assets consist of:
January 31, 2021
Estimated Life
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
(In thousands)
Finite-lived intangible assets
Licenses
14 years
$
19,884
$
( 16,959 )
$
2,925
Trademarks
8 - 12 years
2,194
( 2,194 )
—
Customer relationships
15 - 17 years
48,430
( 17,843 )
30,587
Other
5 - 10 years
8,624
( 7,077 )
1,547
Total finite-lived intangible assets
$
79,132
$
( 44,073 )
$
35,059
Indefinite-lived intangible assets
Goodwill
263,135
Trademarks
443,612
Total indefinite-lived intangible assets
706,747
Total intangible assets, net
$
741,806
January 31, 2020
Estimated Life
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
(In thousands)
Finite-lived intangible assets
Licenses
14 years
$
19,258
$
( 16,107 )
$
3,151
Trademarks
8 - 12 years
2,194
( 2,194 )
—
Customer relationships
15 - 17 years
48,214
( 14,831 )
33,383
Other
5 - 10 years
7,757
( 5,928 )
1,829
Total finite-lived intangible assets
$
77,423
$
( 39,060 )
$
38,363
Indefinite-lived intangible assets
Goodwill
260,622
Trademarks
438,658
Total indefinite-lived intangible assets
699,280
Total intangible assets, net
$
737,643
Amortization expense
Amortization expense with respect to finite-lived intangibles amounted to $ 4.3 million, $ 4.5 million and $ 4.6 million for the years ended January 31, 2021, 2020 and 2019, respectively.
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The estimated amortization expense with respect to intangibles for the next five years is as follows:
Year Ending January 31,
Amortization Expense
(In thousands)
2022
$
3,643
2023
3,301
2024
3,074
2025
3,035
2026
3,028
Intangible assets with finite lives are amortized over their estimated useful lives and measured for impairment when events or circumstances indicate that the carrying value may be impaired.
Change in Goodwill
Changes in the amounts of goodwill for each of the years ended January 31, 2021 and 2020 are summarized by reportable segment as follows (in thousands):
Wholesale
Retail
Total
January 31, 2019
$
261,137
—
261,137
Currency translation
( 515 )
—
( 515 )
January 31, 2020
260,622
—
260,622
Currency translation
2,513
—
2,513
January 31, 2021
$
263,135
$
—
$
263,135
Impairment
Goodwill represents the excess of the purchase price and related costs over the value assigned to net tangible and identifiable intangible assets of businesses acquired and accounted for under the purchase method. The Company reviews and tests its goodwill and intangible assets with indefinite lives for impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may be impaired. The Company performs its goodwill test as of January 31 of each year using a qualitative evaluation or a quantitative test using an income approach through a discounted cash flow analysis methodology. The discounted cash flow approach requires that certain assumptions and estimates be made regarding industry economic factors and future profitability. The Company also performs its annual test for intangible assets with indefinite lives as of January 31 of each year using a qualitative evaluation or a quantitative test using a relief from royalty method, another form of the income approach. The relief from royalty method requires assumptions regarding industry economic factors and future profitability.
Due to the impact of the COVID-19 pandemic on the Company’s operations, the Company performed a quantitative test of its goodwill as of April 30, 2020 using an income approach through a discounted cash flow analysis methodology. The Company also performed quantitative tests of each of its indefinite-lived intangible assets using a relief from royalty method. There were no impairments identified as of April 30, 2020 as a result of these tests.
The continued impact of the COVID-19 pandemic could give rise to global and regional macroeconomic factors that could impact the Company’s assumptions relating to future net sales, discount rates, tax rates or royalty rates and may result in future impairment charges for indefinite-lived intangible assets.
The fair value of the Company’s goodwill and indefinite-lived intangible assets are considered a Level 3 valuation in the fair value hierarchy.
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE I — NOTES PAYABLE AND OTHER LIABILITIES
Long-term debt
Long-term debt consists of the following:
January 31, 2021
January 31, 2020
(in thousands)
Secured Notes
$
400,000
$
—
Term loan
—
300,000
Revolving credit facility
—
—
Note issued to LVMH
125,000
125,000
Unsecured loan
9,119
2,860
Overdraft facilities
3,007
—
Subtotal
537,126
427,860
Less: Net debt issuance costs (1)
( 7,643 )
( 7,402 )
Debt discount
( 17,131 )
( 22,991 )
Current portion of long-term debt
( 4,402 )
( 673 )
Total
$
507,950
$
396,794
(1) Does not include the debt issuance costs, net of amortization, totaling $ 7.2 million and $ 4.6 million as of January 31, 2021 and 2020, respectively, related to the revolving credit facility. The debt issuance costs have been deferred and are classified in assets in the accompanying Consolidated Balance Sheets in accordance with ASC 835.
Senior Secured Notes
On August 7, 2020, the Company completed a private debt offering of $ 400 million aggregate principal amount of its 7.875 % Senior Secured Notes due 2025 (the “Notes”). The terms of the Notes are governed by an indenture (the “Indenture”), among the Company, the guarantors party thereto and U.S. Bank, National Association, as trustee and collateral agent (the “Collateral Agent”). The net proceeds of the Notes have been used (i) to repay the Company’s prior term loan facility due 2022, (ii) to pay related fees and expenses and (iii) for general corporate purposes.
The Notes bear interest at a rate of 7.875 % per year payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2021 .
The Notes are unconditionally guaranteed on a senior-priority secured basis by the Company’s current and future wholly-owned domestic subsidiaries that guarantee any of the Company’s credit facilities, including the Company’s ABL facility (the “ABL Facility”) pursuant to the second amended and restated credit agreement (the “ABL Credit Agreement”), or certain future capital markets indebtedness of the Company or guarantors.
The Notes and the related guarantees are secured by (i) first priority liens on the Company’s Cash Flow Priority Collateral (as defined in the Indenture), and (ii) a second-priority lien on the Company’s ABL Priority Collateral (as defined in the Indenture), in each case subject to permitted liens described in the Indenture.
In connection with the issuance of the Notes and execution of the Indenture, the Company and the Guarantors entered into a pledge and security agreement (the “Pledge and Security Agreement”), among the Company, the Guarantors and the Collateral Agent.
The Notes are subject to the terms of the intercreditor agreement which governs the relative rights of the secured parties in respect of the ABL Facility and the Notes (the “Intercreditor Agreement”). The Intercreditor Agreement restricts the actions permitted to be taken by the Collateral Agent with respect to the Collateral on behalf of the holders of the Notes.
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Notes are also subject to the terms of the seller note subordination agreement which governs the relative rights of the secured parties in respect of the Seller Note (as defined therein), the ABL Facility and the Notes.
At any time prior to August 15, 2022, the Company may redeem some or all of the Notes at a price equal to 100 % of the principal amount of the Notes redeemed plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date plus a “make-whole” premium, as described in the Indenture. On or after August 15, 2022, the Company may redeem some or all of the Notes at any time and from time to time at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, at any time prior to August 15, 2022, the Company may redeem up to 40 % of the aggregate principal amount of the Notes with the proceeds of certain equity offerings at the redemption price set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, at any time prior to August 15, 2022, during any twelve month period, the Company may redeem up to 10 % of the aggregate principal amount of the Notes at a redemption price equal to 103 % of the principal amount of the Notes redeemed plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
If the Company experiences a Change of Control (as defined in the Indenture), the Company is required to offer to repurchase the Notes at 101 % of the principal amount of such Notes plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.
The Indenture contains covenants that, among other things, limit the Company’s ability and the ability of its restricted subsidiaries to incur or guarantee additional indebtedness, pay dividends or make other restricted payments, make certain investments, incur restrictions on the ability of the Company’s restricted subsidiaries that are not guarantors to pay dividends or make certain other payments, create or incur certain liens, sell assets and subsidiary stock, impair the security interests, transfer all or substantially all of the Company’s assets or enter into merger or consolidation transactions, and enter into transactions with affiliates. The Indenture provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among others, nonpayment of principal or interest, breach of other agreements in the Indenture, failure to pay certain other indebtedness, failure of certain guarantees to be enforceable, failure to perfect certain collateral securing the Notes failure to pay certain final judgments, and certain events of bankruptcy or insolvency.
The Company incurred debt issuance costs totaling $ 8.5 million related to the Notes that will be amortized over the term of the Notes. In accordance with ASC 835, the debt issuance costs have been deferred and are presented as a contra-liability, offsetting the outstanding balance of the Notes, and are amortized over the remaining life of the Notes.
Term Loan
The Company had previously borrowed $ 350.0 million under a senior secured term loan facility (the “Term Loan”) that was scheduled to mature in December 2022. In fiscal 2017, the Company prepaid $ 50.0 million in principal amount of the Term Loan, reducing the principal balance of the Term Loan to $ 300.0 million.
On August 7, 2020, the Company used a portion of the proceeds from the issuance of the Notes to repay the outstanding principal balance of $ 300.0 million under the Term Loan facility. At the date of repayment, the Company had unamortized debt issuance costs of $ 6.1 million associated with the Term Loan. These debt issuance costs were fully extinguished and charged to interest expense in the Company’s results of operations.
Second Amended and Restated ABL Credit Agreement
On August 7, 2020, the Company’s subsidiaries, G-III Leather Fashions, Inc., Riviera Sun, Inc., CK Outerwear, LLC, AM Retail Group, Inc. and The Donna Karan Company Store LLC (collectively, the “Borrowers”), entered into the ABL Credit Agreement with the Lenders named therein and with JPMorgan Chase Bank, N.A., as Administrative Agent. The ABL
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Credit Agreement is a five year senior secured credit facility subject to a springing maturity date if, subject to certain conditions, the LVMH Note is not refinanced or repaid prior to the date that is 91 days prior to the date of any relevant payment thereunder. The ABL Credit Agreement provides for borrowings in the aggregate principal amount of up to $ 650 million. The Company and its subsidiaries, G-III Apparel Canada ULC, Gabrielle Studio, Inc., Donna Karan International Inc. and Donna Karan Studio LLC (the “Guarantors”), are Loan Guarantors under the ABL Credit Agreement
The ABL Credit Agreement refinances, amends and restates the Amended Credit Agreement, dated as of December 1, 2016 (as amended, supplemented or otherwise modified from time to time prior to August 7, 2020, the “Prior Credit Agreement”), by and among the Borrowers and the Loan Guarantors (each as defined therein) party thereto, the lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., in its capacity as the administrative agent thereunder. The Prior Credit Agreement provided for borrowings of up to $ 650 million and was due to expire in December 2021. The ABL Credit Agreement extends the maturity date to August 2025, subject to a springing maturity date if, subject to certain conditions, the LVMH Note is not refinanced or repaid prior to the date that is 91 days prior to the date of any relevant payment thereunder.
Amounts available under the ABL Credit Agreement are subject to borrowing base formulas and overadvances as specified in the ABL Credit Agreement. Borrowings bear interest, at the Borrowers’ option, at LIBOR plus a margin of 1.75 % to 2.25 % or an alternate base rate margin of 0.75 % to 1.25 % (defined as the greatest of (i) the “prime rate” of JPMorgan Chase Bank, N.A. from time to time, (ii) the federal funds rate plus 0.5 % and (iii) the LIBOR rate for a borrowing with an interest period of one month) plus 1.00 %, with the applicable margin determined based on Borrowers’ availability under the ABL Credit Agreement. The ABL Credit Agreement is secured by specified assets of the Borrowers and the Guarantors. In addition to paying interest on any outstanding borrowings under the ABL Credit Agreement, the Company is required to pay a commitment fee to the lenders under the credit agreement with respect to the unutilized commitments. The commitment fee accrues at a tiered rate equal to 0.50 % per annum on the average daily amount of the available commitments when the average usage is less than 50% of the total available commitments and decreases to 0.35 % per annum on the average daily amount of the available commitments when the average usage is greater than or equal to 50% of the total available commitments.
The revolving credit facility contains covenants that, among other things, restrict the Company’s ability, subject to specified exceptions, to incur additional debt; incur liens; sell or dispose of certain assets; merge with other companies; liquidate or dissolve the Company; acquire other companies; make loans, advances, or guarantees; and make certain investments. In certain circumstances, the revolving credit facility also requires the Company to maintain a fixed charge coverage ratio, as defined in the agreement, not less than 1.00 to 1.00 for each period of twelve consecutive fiscal months of the Company. As of January 31, 2021, the Company was in compliance with these covenants.
As of January 31, 2021, the Company had no borrowings outstanding under the ABL Credit Agreement. As of January 31, 2021, interest under the ABL Credit Agreement was being paid at an average rate of 2.04 % per annum. The ABL Credit Agreement also includes amounts available for letters of credit. As of January 31, 2021, there were outstanding trade and standby letters of credit amounting to $ 6.6 million and $ 3.9 million, respectively.
At the date of the refinancing of the Prior Credit Agreement, the Company had $ 3.3 million of unamortized debt issuance costs remaining from the Prior Credit Agreement. The Company extinguished and charged to interest expense $ 0.4 million of the prior debt issuance costs and incurred new debt issuance costs totaling $ 5.1 million related to the ABL Credit Agreement. The Company has a total of $ 8.0 million debt issuance costs related to its ABL Credit Agreement. As permitted under ASC 835, the debt issuance costs have been deferred and are presented as an asset which is to be subsequently amortized ratably over the term of the ABL Credit Agreement.
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
LVMH Note
As a portion of the consideration for the acquisition of DKI, the Company issued to LVMH a junior lien secured promissory note in the principal amount of $ 125.0 million that bears interest at the rate of 2 % per year. $ 75.0 million of the principal amount of the LVMH Note is due and payable on June 1, 2023 and $ 50.0 million of such principal amount is due and payable on December 1, 2023 .
In connection with the issuance of the LVMH Note, LVMH entered into (i) a subordination agreement providing that the Company’s obligations under the LVMH Note are subordinate and junior to the Company’s obligations under the revolving credit facility and the Term Loan, and (ii) a pledge and security agreement with the Company and its subsidiary, G-III Leather Fashions, Inc., pursuant to which the Company and G-III Leather Fashions, Inc. granted to LVMH a security interest in specified collateral to secure the Company’s payment and performance of the Company’s obligations under the LVMH Note that is subordinate and junior to the security interest granted by the Company with respect to the Company’s obligations under the revolving credit facility agreement and Term Loan.
ASC 820 requires the note to be recorded at fair value at issuance. As a result, the Company recorded a $ 40.0 million debt discount. This discount is being amortized as interest expense using the effective interest method over the term of the LVMH Note.
Unsecured Loans
During fiscal 2020 and fiscal 2021, T.R.B International SA (“TRB”), a subsidiary of Vilebrequin, borrowed funds under several unsecured loans. A portion of the unsecured loans were to provide funding for operations in the normal course of business, while other unsecured loans were various European state backed loans as part of COVID-19 relief programs. In the aggregate, TRB is currently required to make quarterly installment payments of € 0.2 million under these loans. Interest on the outstanding principal amount of the unsecured loans accrues at a fixed rate equal to 0 % to 2.0 % per annum, payable on either a quarterly or monthly basis. Certain unsecured loans will require monthly installment payments beginning in fiscal 2022 and fiscal 2024. The unsecured loans have maturity dates ranging from September 15, 2024 through October 22, 2026. As of January 31, 2021, TRB had an aggregate outstanding balance of € 7.4 million under these various unsecured loans.
Overdraft Facilities
During fiscal 2021, TRB entered into several overdraft facilities that allow for applicable bank accounts to be in a negative position up to a certain maximum overdraft. TRB entered into an uncommitted overdraft facility with HSBC Bank allowing for a maximum overdraft of € 5 million. Interest on drawn balances accrues at a rate equal to the Euro Interbank Offered Rate plus a margin of 1.75 % per annum, payable quarterly. The facility may be cancelled at any time by TRB or HSBC Bank. As part of a COVID-19 relief program, TRB and its subsidiaries have also entered into several state backed overdraft facilities with UBS Bank in Switzerland for an aggregate of CHF 4.7 million at varying interest rates of 0 % to 0.5 %. As of January 31, 2021, TRB had an aggregate of € 2.5 million drawn under these various facilities.
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Future Debt Maturities
As of January 31, 2021, the Company’s mandatory debt repayments mature in the years ending up to January 31, 2026 or thereafter.
Year Ending January 31,
Amount
(In thousands)
2022
$
4,402
2023
1,718
2024
126,822
2025
2,147
2026 and thereafter
402,037
Accrued expenses
Accrued expenses consist of the following:
January 31, 2021
January 31, 2020
(in thousands)
Accrued bonuses
$
23,851
$
40,980
Other accrued expenses
78,936
60,858
Total
$
102,787
$
101,838
NOTE J — INCOME TAXES
The income tax provision is comprised of the following:
Year Ended January 31,
2021
2020
2019
(In thousands)
Current
Federal
$
( 15,828 )
$
22,471
$
23,463
State and city
( 491 )
4,856
5,907
Foreign
3,803
10,615
10,989
( 12,516 )
37,942
40,359
Deferred
Federal
22,770
8,250
4,419
State and city
3,364
315
191
Foreign
( 1,415 )
( 8,246 )
794
24,719
319
5,404
Income tax expense
$
12,203
$
38,261
$
45,763
Income before income taxes
United States
$
37,727
$
138,292
$
137,748
Non-United States
( 2,001 )
43,806
46,082
$
35,726
$
182,098
$
183,830
The United States government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020, which includes various income tax provisions aimed at providing economic relief. One of those provisions allows any loss generated in 2020 to be carried back to each of the 5 taxable years preceding the taxable year of such a loss. The Company has elected to use this relief and will carry back the 2020 net operating loss to a tax year with a 35%
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
federal rate. Additionally, the CARES Act permits Qualified Improvement Property to qualify for 15-year depreciation and therefore be also eligible for 100 percent first-year bonus depreciation. The Company has elected to take 100 % bonus depreciation for all qualified improvement property.
During the fourth quarter of fiscal 2020, the United States Treasury issued final regulations related to certain aspects of the TCJA. The tax implications of the final regulations were not material to the Company’s consolidated financial statements as the majority of the TCJA tax implications were recorded in fiscal years prior to the year ended January 31, 2021.
Effective January 1, 2018, TCJA subjects a U.S. parent company to current tax on its GILTI. At January 31, 2021, there was no net tax impact to the Company for GILTI.
The significant components of the Company’s net deferred tax asset at January 31, 2021 and 2020 are summarized as follows:
2021
2020
(In thousands)
Deferred income tax assets:
Compensation
$
2,673
$
8,379
Inventory
6,780
4,498
Provision for bad debts and sales allowances
18,531
34,197
Supplemental employee retirement plan
584
511
Net operating loss
12,703
4,877
Operating lease liability
35,658
67,044
Foreign tax credit carryforward
4,962
—
Other
3,792
1,148
Gross deferred income tax assets
85,683
120,654
Less: valuation allowance
( 13,272 )
( 4,929 )
Net deferred income tax assets
72,411
115,725
Deferred income tax liabilities:
Depreciation and amortization
( 41,185 )
( 33,539 )
Intangibles
( 14,271 )
( 13,602 )
Operating lease asset
( 30,182 )
( 55,801 )
Prepaid expenses and other
( 2,028 )
( 2,600 )
Total deferred income tax liabilities
( 87,666 )
( 105,542 )
Net deferred tax (liabilities) assets
$
( 15,255 )
$
10,183
The total undistributed earnings of the Company’s foreign subsidiaries are approximately $ 80.0 million for the fiscal year ended January 31, 2021. Upon distribution of those earnings in the form of dividends, the Company does not anticipate any material tax costs. As such, no deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of undistributed foreign earnings. Those earnings are considered indefinitely reinvested. Even though the undistributed earnings can be distributed back generally without U.S. federal income tax as a result of the one-time transition tax under the TCJA regime, the Company does not expect to change its indefinite reinvestment categorization with respect to those earnings.
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a reconciliation of the statutory federal income tax rate to the effective rate reported in the financial statements for the years ended January 31:
2021
2020
2019
Provision for Federal income taxes at the statutory rate
21.0
%
21.0
%
21.0
%
State and local income taxes, net of Federal tax benefit
( 0.6 )
1.9
2.4
Permanent differences resulting in Federal taxable income
12.8
5.9
6.6
Foreign tax rate differential
( 0.3 )
( 3.8 )
0.5
Share-based payments
12.5
( 0.8 )
( 0.6 )
Foreign tax credit
( 7.3 )
( 3.5 )
( 5.5 )
Valuation allowance
13.7
0.9
0.2
Net operating loss carryback
( 18.6 )
—
—
Other, net
1.0
( 0.6 )
0.3
Actual provision for income taxes
34.2
%
21.0
%
24.9
%
The Company’s effective tax rate increased 13.2 % percent in fiscal 2021 compared to fiscal 2020. This increase in the Company’s effective tax rate is primarily the result of the Company’s significant reduction in pretax book income in relation to its tax expense. The Company’s effective tax rate decreased 3.9 % percent in fiscal 2020 as compared to fiscal 2019. The decrease in the tax rate is primarily attributable to the Swiss tax reform that was enacted in May 2019.
Valuation allowances represent deferred tax benefits where management is uncertain if the Company will have the ability to recognize those benefits in the future. During the year ended January 31, 2021, the Company recorded an additional valuation allowance of $ 8.3 million against its deferred tax assets for its standalone state tax losses and foreign retail losses.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits (excluding interest and penalties) is as follows:
2021
2020
2019
(In thousands)
Balance at February 1,
$
2,111
$
—
$
82
Additions for tax positions of prior years
182
2,111
—
Lapses of statues of limitations
—
—
( 82 )
Balance at January 31,
$
2,293
$
2,111
$
—
The Company accounts for uncertain income tax positions in accordance with ASC 740 — Income Taxes . The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of January 31, 2021, there was an increase in the unrecognized tax position reserve of $ 0.2 million related to recent state and local tax return filings.
The Company’s policy on classification is to include interest in interest and financing charges, net and penalties in selling, general and administrative expenses in the accompanying Consolidated Statements of Income and Comprehensive Income. The Company and certain of its subsidiaries are subject to U.S. Federal income tax as well as the income tax of multiple state, local, and foreign jurisdictions.
Of the major jurisdictions, the Company and its subsidiaries are subject to examination in the United States and various foreign jurisdictions for fiscal year 2014 and forward. The Company is currently under audit examination by New York, New Jersey and Canada for fiscal years 2014 through 2018. The Company believes that it is reasonably possible there will be no change to its unrecognized income tax position reserves during the next twelve months due to the applicable statues of limitations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE K — COMMITMENTS AND CONTINGENCIES
License Agreements
The Company has entered into license agreements that provide for royalty payments based on net sales of licensed products. The Company incurred royalty expense (included in cost of goods sold) of $ 116.8 million, $ 178.8 million and $ 165.7 million for the years ended January 31, 2021, 2020 and 2019, respectively. Contractual advertising expense, which is included in selling, general and administrative expenses and is normally based on a percentage of net sales associated with certain license agreements, was $ 29.5 million, $ 48.3 million and $ 46.2 million for the years ended January 31, 2021, 2020 and 2019, respectively. Based on minimum net sales requirements, future minimum royalty and advertising payments required under these agreements are:
Year Ending January 31,
Amount
(In thousands)
2022
107,199
2023
91,225
2024
89,474
2025
31,540
2026
25,618
Thereafter
—
$
345,056
Legal Proceedings
In the ordinary course of business, the Company is subject to periodic claims, investigations and lawsuits. Although the Company cannot predict with certainty the ultimate resolution of claims, investigations and lawsuits, asserted against the Company, it does not believe that any currently pending legal proceeding or proceedings to which it is a party could have a material adverse effect on its business, financial condition or results of operations.
Canadian Customs Duty Examination
In October 2017, the Canada Border Service Agency (“CBSA”) issued a final audit report to G-III Apparel Canada ULC (“G-III Canada”), a wholly-owned subsidiary of the Company. The report challenged the valuation used by G-III Canada for certain goods imported into Canada. The period covered by the examination is February 1, 2014 through October 27, 2017, the date of the final report. The CBSA has requested G-III Canada to reassess its customs entries for that period using the price paid or payable by the Canadian retail customers for certain imported goods rather than the price paid by G-III Canada to the vendor. The CBSA has also requested that G-III Canada change the valuation method used to pay duties with respect to goods imported in the future.
In March 2018, G-III Canada provided a bond to guarantee payment to the CBSA for additional duties payable as a result of the reassessment required by the final audit report. The Company secured a bond in the amount of CAD$ 26.9 million ($ 20.9 million) representing customs duty and interest through December 31, 2017 that is claimed to be owed to the CBSA. In March 2018, the Company amended the duties filed for the month of January 2018 under the new valuation method. This amount was paid to the CBSA. Beginning February 1, 2018, the Company began paying duties based on the new valuation method. There were no amounts paid and deferred during the year ended January 31, 2021 related to the higher dutiable values, however, the Company paid interest in the amount of CAD$ 1.0 million ($ 0.8 million) on the additional duties for the period January 15, 2018 through November 25, 2020, the date of the CBSA’s final decision as discussed below. Cumulative amounts paid and deferred through January 31, 2021, related to the higher dutiable values, were CAD$ 14.4 million ($ 11.6 million).
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Effective June 1, 2019, G-III commenced paying based on the dutiable value of G-III Canada’s imports based on the pre-audit levels. G-III continued to defer the additional duty paid through the month of May 2019 pending the final outcome of the appeal.
The CBSA has issued its final decision denying the appeal filed by G-III Canada with the President’s Office of the CBSA. G-III Canada has filed a Notice of Appeal with the Canadian International Trade Tribunal (the “Tribunal”) further appealing the CBSA decision. The Tribunal has confirmed receipt of the Notice of Appeal. The deadline for filing the case brief and evidence is April 13, 2021 and a hearing date has been set for August 10, 2021.
G-III Canada, based on the advice of counsel, believes it has positions that support its valuations for duty as declared and therefore its ability to receive a refund of amounts claimed to be owed to the CBSA on appeal and intends to vigorously contest the findings of the CBSA.
NOTE L — STOCKHOLDERS’ EQUITY
Share Repurchase Program
The Company’s Board of Directors has authorized a share repurchase program of 5,000,000 shares. The timing and actual number of shares repurchased, if any, will depend on a number of factors, including market conditions and prevailing stock prices, and are subject to compliance with certain covenants contained in the loan agreement. Share repurchases may take place on the open market, in privately negotiated transactions or by other means, and would be made in accordance with applicable securities laws.
No shares of common stock were acquired pursuant to this program during fiscal 2021. During fiscal 2020, pursuant to this program, the Company acquired 1,327,566 of its shares of common stock for an aggregate purchase price of $ 35.2 million. During fiscal 2019, the Company acquired 723,072 of its shares of common stock for an aggregate purchase price of $ 20.3 million.
Long-Term Incentive Plan
As of January 31, 2021, the Company had 1,811,490 shares available for grant under its long-term incentive plan. The plan provides for the grant of equity and cash awards, including restricted stock awards, stock options and other stock unit awards to directors, officers and employees. RSU’s generally (i) cliff vest after three years or (ii) vest over a three year period. PRSU’s granted to executives prior to fiscal 2020 include (i) market price performance conditions that provide for the award to vest only after the average closing price of the Company’s stock trades above a predetermined market level and (ii) another performance condition that requires the achievement of an operating performance target. PSU’s granted to executives in fiscal 2020 vest after a three year performance period during which certain earnings before interest and taxes and return on invested capital performance standards must be satisfied for vesting to occur. PSU’s are also subject to a lock up period that prevents the sale, contract to sell or transfer of shares for two years subsequent to the date of vesting. It is the Company’s policy to grant stock options at prices not less than the fair market value on the date of the grant. Option terms, vesting and exercise periods vary, except that the term of an option may not exceed ten year s.
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted Stock Units and Performance Based Restricted Stock Units
Restricted Stock Units
Performance Based Restricted Stock Units
Weighted Average
Weighted Average
Awards
Grant Date
Awards
Grant Date
Outstanding
Fair Value
Outstanding
Fair Value
Unvested as of January 31, 2018
327,014
$
30.59
1,445,563
$
29.26
Granted
137,723
$
38.32
391,530
$
30.23
Vested
( 159,663 )
$
30.38
( 292,266 )
$
25.91
Cancelled
( 23,249 )
$
29.69
( 5,033 )
$
27.10
Unvested as of January 31, 2019
281,825
$
34.56
1,539,794
$
30.15
Granted
142,594
$
37.74
332,651
$
35.77
Vested
( 168,781 )
$
32.32
( 810,655 )
$
24.58
Cancelled
( 12,695 )
$
35.09
( 3,080 )
$
42.41
Unvested as of January 31, 2020
242,943
$
37.95
1,058,710
$
36.15
Granted
1,280,664
$
10.25
—
$
—
Vested
( 107,917 )
$
37.96
( 279,053 )
$
32.43
Cancelled
( 22,422 )
$
39.41
( 312,827 )
$
42.41
Unvested as of January 31, 2021
1,393,268
$
12.47
466,830
$
34.17
Restricted Stock Units
Restricted stock units (“RSU’s”) are time based awards that do not have market or performance conditions and (i) cliff vest after three year s or (ii) vest over a three year period. The grant date fair value for RSU’s are based on the quoted market price on the date of grant. Compensation expense for RSU’s is recognized in the consolidated financial statements on a straight-line basis over the service period based on their grant date fair value.
Performance Based Restricted Stock Units
Performance based restricted stock units consist of both performance based restricted stock units (“PRSU’s”) and performance stock units (“PSU’s”).
PRSU’s were granted to executives prior to fiscal 2020 and included (i) market price performance conditions that provide for the award to vest only after the average closing price of the Company’s stock trades above a predetermined market level and (ii) another performance condition that requires the achievement of an operating performance target. PRSU’s generally vest over a two to five year period. For restricted stock units with market conditions, the Company estimates the grant date fair value using a Monte Carlo simulation model. This valuation methodology utilizes the closing price of the Company’s common stock on grant date and several key assumptions, including expected volatility of the Company’s stock price, and risk-free rates of return. This valuation is performed with the assistance of a third party valuation specialist. PRSU’s are expensed over the service period under the requisite acceleration method.
PSU’s were granted to executives in fiscal 2020 and vest after a three year performance period during which certain earnings before interest and taxes and return on invested capital performance standards must be satisfied for vesting to occur. PSU’s are also subject to a lock up period that prevents the sale, contract to sell or transfer shares for two years subsequent to the date of vesting. PSU’s are expensed over the service period under the requisite acceleration method and based on an estimated percentage of achievement of certain pre-established goals.
The Company accounts for forfeited awards as they occur as permitted by ASC 718. Ultimately, the actual expense recognized over the vesting period will be for those shares that vest.
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company recognized $ 6.1 million, $ 17.6 million and $ 19.7 million in share-based compensation expense for the years ended January 31, 2021, 2020 and 2019, respectively, related to restricted stock unit grants. At January 31, 2021, 2020 and 2019, unrecognized costs related to the restricted stock units totaled $ 12.9 million, $ 18.7 million and $ 19.4 million, respectively. The total fair value of awards for which restrictions lapsed was $ 5.0 million, $ 31.0 million and $ 17.5 million as of January 31, 2021, 2020 and 2019, respectively.
Stock Options
2021
2020
2019
Weighted
Weighted
Weighted
Average
Average
Average
Shares
Exercise
Shares
Exercise
Shares
Exercise
Stock options outstanding at beginning of year
39,311
$
18.51
55,311
$
15.70
62,666
$
11.50
Exercised
( 21,066 )
$
14.07
( 13,200 )
$
8.71
( 15,600 )
$
6.55
Granted
—
$
—
—
$
—
8,245
$
30.32
Cancelled or forfeited
—
$
—
( 2,800 )
$
9.20
—
$
—
Stock options outstanding at end of year
18,245
$
23.63
39,311
$
18.51
55,311
$
15.70
Exercisable
18,245
$
23.63
35,188
$
17.12
47,066
$
13.14
The following table summarizes information about stock options outstanding:
Number
Weighted
Weighted
Number
Weighted
Outstanding as of
Average
Average
Exercisable as of
Average
January 31,
Remaining
Exercise
January 31,
Exercise
Range of Exercise Prices
2021
Contractual Life
Price
2021
Price
$ 18.11 - $ 30.32
18,245
1.50
$
23.63
18,245
$
23.63
18,245
18,245
Stock Options
Compensation expense for employee stock options is recognized in the consolidated financial statements over the service period (generally the vesting period) based on their fair value. Stock options are valued using the Black-Scholes option pricing model. The Black-Scholes model requires subjective assumptions regarding dividend yields, expected volatility, expected life of options and risk-free interest rates. These assumptions reflect management’s best estimates. Changes in these inputs and assumptions can materially affect the estimate of fair value and the amount of our compensation expenses for stock options. No stock options were granted during the years ended January 31, 2021 and January 31, 2020. The Company granted 8,245 stock options during the year ended January 31, 2019.
The Company accounts for forfeited awards as they occur as permitted by ASC 718. Ultimately, the actual expense recognized over the vesting period will be for those shares that vest.
The weighted average remaining term for stock options outstanding was 1.5 years at January 31, 2021. The aggregate intrinsic value at January 31, 2021 was $ 0.1 million for stock options outstanding and $ 0.1 million for stock options exercisable. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of the Company’s common stock as of January 31, 2021, the reporting date.
Proceeds received from the exercise of stock options were $ 0.3 million and $ 0.1 million during the years ended January 31, 2021 and 2020, respectively. The intrinsic value of stock options exercised was $ 0.1 million and $ 0.3 million for the years ended January 31, 2021 and 2020, respectively. A portion of this amount is currently deductible for tax purposes.
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company recognized $ 0.1 million and $ 0.1 million in compensation expense for the years ended January 31, 2021 and 2020, respectively, related to stock options. The Company recognized a nominal amount in compensation expense for the year ended January 31, 2019.
NOTE M — CONCENTRATION
Two customers in the wholesale operations segment accounted for approximately 20.9 % and 12.9 %, respectively, of the Company’s net sales for the year ended January 31, 2021. Two customers accounted for 26.3 % and 13.2 % of the Company’s net sales for the year ended January 31, 2020. Two customers accounted for 24.8 % and 12.4 % of the Company’s net sales for the year ended January 31, 2019. Four customers in the wholesale operations segment accounted for approximately 19.8 %, 19.5 %, 15.1 % and 10.1 %, respectively, of the Company’s net accounts receivable as of January 31, 2021. Three customers in the wholesale operations segment accounted for approximately 25.7 %, 17.0 % and 10.0 %, respectively, of the Company’s net accounts receivable as of January 31, 2020.
NOTE N — EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan (the “GIII Plan”) and trust for non-union employees. The Plan provides for a Safe Harbor (non-discretionary) matching contribution of 100 % of the first 3 % of the participant’s contributed pay plus 50 % of the next 2 % of the participant’s contributed pay. The Company made matching contributions of $ 1.5 million, $ 4.7 million and $ 3.8 million for the years ended January 31, 2021, 2020 and 2019, respectively. Effective May 2020, the Company temporarily suspended 401(k) matching contributions due to the COVID-19 pandemic.
NOTE O — SEGMENTS
The Company’s reportable segments are business units that offer products through different channels of distribution. The Company has two reportable segments: wholesale operations and retail operations. The wholesale operations segment includes sales of products under the Company’s owned, licensed and private label brands, as well as sales related to the Vilebrequin business. Wholesale revenues also include revenues from license agreements related to our owned trademarks including DKNY, Donna Karan, Vilebrequin, G.H. Bass and Andrew Marc. The retail operations segment consists primarily of direct sales to consumers through Company-operated stores, which, prior to the completion of the retail restructuring in fiscal 2021, consisted primarily of Wilsons Leather, G.H. Bass, DKNY and Karl Lagerfeld Paris stores, substantially all of which are operated as outlet stores. Sales through the Company’s owned digital channels, with the exception of Vilebrequin, are also included in the retail operations segment. As a result of the restructuring of the Company’s retail operations, the Company closed its Wilsons Leather and G.H. Bass retail stores during fiscal 2021. After completion of the restructuring, the Company’s retail operations segment consists of DKNY and Karl Lagerfeld Paris stores, as well as the digital channels for DKNY, Donna Karan, Karl Lagerfeld Paris, G.H Bass, Andrew Marc and Wilsons Leather.
The following segment information, in thousands, is presented for the fiscal years ended:
January 31, 2021
Wholesale
Retail
Elimination (1)
Total
Net sales
$
1,916,763
170,421
( 32,038 )
$
2,055,146
Cost of goods sold
1,229,548
113,194
( 32,038 )
1,310,704
Gross profit
687,215
57,227
—
744,442
Selling, general and administrative expenses
444,549
160,553
—
605,102
Depreciation and amortization
31,998
6,627
—
38,625
Asset impairments, net of gain on lease terminations
1,010
16,863
—
17,873
Operating profit (loss)
$
209,658
$
( 126,816 )
$
—
$
82,842
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
January 31, 2020
Wholesale
Retail
Elimination (1)
Total
Net sales
$
2,862,889
$
385,910
$
( 88,335 )
$
3,160,464
Cost of goods sold
1,925,062
205,797
( 88,335 )
2,042,524
Gross profit
937,827
180,113
—
1,117,940
Selling, general and administrative expenses
604,377
227,803
—
832,180
Depreciation and amortization
30,806
7,929
—
38,735
Asset impairments
412
18,959
—
19,371
Operating profit (loss)
$
302,232
$
( 74,578 )
$
—
$
227,654
January 31, 2019
Wholesale
Retail
Elimination (1)
Total
Net sales
$
2,716,958
$
476,764
$
( 117,514 )
$
3,076,208
Cost of goods sold
1,837,335
249,278
( 117,514 )
1,969,099
Gross profit
879,623
227,486
—
1,107,109
Selling, general and administrative expenses
570,290
264,473
—
834,763
Depreciation and amortization
29,644
9,175
—
38,819
Asset impairments
—
2,813
—
2,813
Operating profit (loss)
$
279,689
$
( 48,975 )
$
—
$
230,714
(1) Represents intersegment sales to the Company’s retail operations segment .
The Company allocates overhead to its business segments on various bases, which include units shipped, space utilization, inventory levels, and relative sales levels, among other factors. The method of allocation has been applied consistently on a year-to-year basis.
The total assets for each of the Company’s reportable segments, as well as assets not allocated to a segment, are as follows:
January 31,
January 31,
2021
2020
(In thousands)
Wholesale
$
1,844,682
$
1,912,175
Retail
85,625
272,832
Corporate
506,079
380,130
Total Assets
$
2,436,386
$
2,565,137
The total net sales and long-lived assets by geographic region are as follows:
2021
2020
2019
Long-Lived
Long-Lived
Long-Lived
Geographic Region
Net Sales
Assets
Net Sales
Assets
Net Sales
Assets
United States
$
1,755,791
$
834,181
$
2,774,492
$
964,476
$
2,656,479
$
762,444
Non-United States
299,355
258,165
385,972
231,973
419,729
191,719
$
2,055,146
$
1,092,346
$
3,160,464
$
1,196,449
$
3,076,208
$
954,163
Capital expenditures for locations outside of the United States totaled $ 3.0 million, $ 4.6 million and $ 4.3 million for the years ended January 31, 2021, 2020 and 2019, respectively.
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE P — FABCO HOLDING B.V.
In August 2017, the Company entered into a joint venture agreement with Amlon Capital B.V. (“Amlon”), a private company incorporated in the Netherlands, to produce and market women’s and men’s apparel and accessories pursuant to a long-term license for DKNY and Donna Karan in the People’s Republic of China, including Macau, Hong Kong and Taiwan. The Company owned 49 % of the joint venture through November 30, 2020, with Amlon owning the remaining 51 %. During the fourth quarter of fiscal 2021, the Company acquired an additional ownership interest for nominal consideration that increased its ownership interest in Fabco to 75 % effective December 1, 2020, with Amlon owning the remaining 25 % (the “Fabco Acquisition”). The joint venture was funded with $ 25 million of equity to be used to strengthen the DKNY and Donna Karan brands and accelerate the growth of the business in the region. Of this amount, the Company contributed an aggregate $ 10.0 million. Beginning January 1, 2018, this joint venture is the exclusive seller of women’s and men’s apparel, handbags, luggage and certain accessories under the DKNY and Donna Karan brands in the territory.
Fabco is accounted for as a consolidated majority-owned subsidiary on the consolidated financial statements as of January 31, 2021. The investment in Fabco was previously accounted for under the equity method of accounting on the consolidated balance sheets at January 31, 2020.
On the effective date of the Fabco Acquisition, the previously held investment was remeasured at fair value and a $ 1.0 million gain was recorded.
The Fabco Acquisition was accounted for under the acquisition method of accounting. Accordingly, the purchase price was allocated to the acquired assets based on their estimated fair values. In connection with the acquisition, during the year ended January 31, 2021, the Company recorded a $ 1.7 million pretax bargain purchase gain. The Company was able to realize a gain because Fabco was in need of capital to continue its operations and was unable to secure sufficient capital in the time frame it required. The Company has assessed the identification of and valuation assumptions surrounding the assets acquired and the consideration transferred and has determined that the recognition of a bargain purchase gain is appropriate. The operating results for Fabco are included in the Company’s consolidated financial statements from the effective date of the Fabco Acquisition.
The noncontrolling interest is classified as temporary equity in the mezzanine section of the balance sheet between liabilities and permanent equity. The temporary equity designation is due to a put feature that is outside of the Company’s control.
NOTE Q — EQUITY INVESTMENTS
Investment in Karl Lagerfeld Holding B.V.
In February 2016, the Company acquired a 19 % minority interest in KLH, the parent company of the group that holds the worldwide rights to the Karl Lagerfeld brand. The Company paid 32.5 € million (equal to $ 35.4 million at the date of the transaction) for this interest. This investment was intended to expand the partnership between the Company and the owners of Karl Lagerfeld brand and extend their business development opportunities on a global scale. The investment in KLH, which is being accounted for under the equity method of accounting, is reflected in Investment in Unconsolidated Affiliates on the Consolidated Balance Sheets at January 31, 2021 and 2020.
Investment in KL North America
In June 2015, the Company entered into a joint venture agreement with Karl Lagerfeld Group BV (“KLBV”). The Company paid KLBV $ 25.0 million for a 49 % ownership interest in KLNA. KLNA holds brand rights to all Karl Lagerfeld trademarks, including the Karl Lagerfeld Paris brand the Company currently uses, for all consumer products (except eyewear, fragrance, cosmetics, watches, jewelry, and hospitality services) and apparel in the United States, Canada and
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Mexico. The investment in KLNA, which is being accounted for under the equity method of accounting, is reflected in Investment in Unconsolidated Affiliates on the Consolidated Balance Sheets at January 31, 2021 and 2020.
NOTE R — RELATED PARTY TRANSACTIONS
Transactions with Fabco
Prior to December 1, 2020, G-III owned a 49 % ownership interest in Fabco and was considered a related party of Fabco (see Note N). The Company sells inventory to Fabco and granted Fabco’s subsidiary the right to use certain Donna Karan and DKNY trademarks. In fiscal 2021 and 2020, the Company sold $ 2.7 million and $ 4.4 million in inventory to Fabco, respectively. The Company recorded $ 0.9 million of licensing revenue from Fabco during the period of the year prior to Fabco becoming a consolidated majority-owned subsidiary of the Company. The Company recorded $ 3.1 million and $ 2.2 million of licensing revenue from Fabco during the years ended January 31, 2020 and 2019, respectively. As of January 31, 2020, Fabco prepaid $ 0.5 million to the Company for minimum royalties and marketing fees relating to the first quarter of 2020 and has a $ 0.1 million payable balance relating to inventory purchased from the Company and its subsidiaries.
Transactions with KL North America
G-III owns a 49 % ownership interest in KLNA and is considered a related party of KLNA (see Note Q). The Company entered into a licensing agreement to use the brand rights to certain Karl Lagerfeld trademarks held by KLNA. The Company incurred royalty and advertising expense of $ 3.5 million, $ 6.8 million and $ 6.4 million for the years ended January 31, 2021, 2020 and 2019, respectively.
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G-III Apparel Group, Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE S — QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the fiscal years ended January 31, 2021 and 2020 are as follows (in thousands, except per share amounts):
Quarter Ended
April 30,
July 31,
October 31,
January 31,
2020
2020 (1)
2020
2021 (2)
Net sales
$
405,131
$
297,212
$
826,561
$
526,242
Gross profit
124,401
134,693
297,755
187,593
Net income attributable to G-III Apparel Group, Ltd.
( 39,295 )
( 14,976 )
63,174
14,642
Net income attributable to G-III Apparel Group, Ltd. per common share
Basic
$
( 0.82 )
$
( 0.31 )
$
1.31
$
0.30
Diluted
$
( 0.82 )
$
( 0.31 )
$
1.29
$
0.30
Quarter Ended
April 30,
July 31,
October 31,
January 31,
2019
2019
2019
2020 (3)
Net sales
$
633,552
$
643,892
$
1,128,403
$
754,617
Gross profit
236,064
231,769
399,019
251,088
Net income
12,043
11,119
95,387
25,288
Net income per common share
Basic
$
0.25
$
0.23
$
2.00
$
0.53
Diluted
$
0.24
$
0.23
$
1.97
$
0.52
(1) During the second quarter of fiscal 2021, the Company recorded a $ 19.8 million impairment charge primarily related to operating lease assets, leasehold improvements, furniture and fixtures and store related intangible assets at certain Wilsons Leather and G.H. Bass stores primarily due to the retail restructuring, and certain DKNY and Vilebrequin stores as a result of the performance at these stores.
(2) During the fourth quarter of fiscal 2021, the Company recorded a $ 0.7 million impairment charge primarily related to operating lease assets, leasehold improvements, furniture and fixtures and store related intangible assets at certain DKNY and Vilebrequin stores as a result of the performance at these stores.
(3) During the fourth quarter of fiscal 2020, the Company recorded a $ 21.8 million impairment charge primarily related to leasehold improvements, furniture and fixtures and operating lease assets at certain Wilsons Leather, G.H. Bass and DKNY stores as a result of the performance at these stores.
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SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
Years ended January 31, 2021, 2020 and 2019
Balance at
ASC 606
Charges to
Balance at
Beginning
Transition
Cost and
End of
Description
of Period
Adjustment
Expenses
Deductions (1)
Period
(In thousands)
Year ended January 31, 2021
Deducted from asset accounts
Allowance for doubtful accounts
$
710
$
—
$
16,882
$
133
$
17,459
Reserve for returns
46,489
—
41,348
47,133
40,704
Reserve for sales allowances (2)
186,929
—
101,337
229,615
58,651
$
234,128
$
—
$
159,567
$
276,881
$
116,814
Year ended January 31, 2020
Deducted from asset accounts
Allowance for doubtful accounts
$
924
$
—
$
( 72 )
$
142
$
710
Reserve for returns
62,278
—
56,440
72,229
46,489
Reserve for sales allowances (2)
181,312
—
422,628
417,011
186,929
$
244,514
$
—
$
478,996
$
489,382
$
234,128
Year ended January 31, 2019
Allowance for doubtful accounts
$
2,093
$
—
$
( 140 )
$
1,029
$
924
Reserve for returns
61,179
—
57,777
56,678
62,278
Reserve for sales allowances (2)
102,144
66,617
375,118
362,567
181,312
$
165,416
$
66,617
$
432,755
$
420,274
$
244,514
(1)
Accounts written off as uncollectible, net of recoveries.
(2)
See Note A in the accompanying Notes to Consolidated Financial Statements for a description of sales allowances.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.