The perfect storm hit the shores of U.S. retailers and apparel companies over the last few months. Just as consumer demand appears to be waning from the pandemic fueled consumption boom, retailers are finding themselves stuck with unusually large inventories and rising costs on account of higher interest rates and a tight labor market. The silver lining for them is that the U.S. Dollar Index which benchmarks the U.S. dollar against a benchmark of six major currencies, had come down during the last three months after showing tremendous strength for the better part of the last two years. Shipping rates have also come down, although congestion at ports has resulted in additional demurrage charges for some retailers.
Two apparel related companies that I follow including VF Corp (VFC) and G-III Apparel Group (GIII) have been hit hard by these macroeconomic factors. Over the last year, VF Corp has lost nearly two-thirds of its value and G-III is down nearly 50%. VF is the world’s larges apparel and footwear company that owns brands like Vans, The North Face, Timberland, Dickies and Supreme. The company generated nearly $12 billion in revenue TTM, sports net margins of 3.6% and trades at a forward P/E of 29.
G-III on the other hand has both owned as well as licensed brands like Calvin Klein and Tommy Hilfiger that it licenses from PVH (PVH). G-III generated over $3 billion in revenue TTM, sports net margins of 5.66% and trades at a forward P/E of just 4.38. While the decline in VF was gradual throughout this year, G-III was hit hard on December 1st when the company lost nearly 45% of its value in a single day before rebounding a little in the ensuing days.
G-III investors were unhappy about the company missing its bottom line expectations and guiding to lower full year fiscal 2023 earnings of $2.90 to $3.00 per share from prior guidance of $3.60 to $3.70 per share. A big part of the drop in the stock price was however driven by news that the company is going to lose its licenses for Calvin Klein and Tommy Hilfiger starting in December 2023 for Tommy Jeans and December 2029 for both Calvin Klein and Tommy Hilfiger Women’s suits. A vast majority of the category license expirations will occur between December 2025 and December 2027 as you can see from the table below.
The company downplayed the importance of these expirations by claiming that the Calvin Klein and Tommy business is only a 10% operating margin business and that they are developing other internal brands like Donna Karan. A quick Google Trends comparison shows that despite being an aging brand, Calvin Klein still has 25 times the brand recognition of Donna Karan. Moreover, after excluding extraordinarily good results for fiscal 2022 (ending January 2022) as a result of the pandemic, operating margins at G-III have mostly been in the 8% range. This implies that the 10% operating margin business from the licensed brands, which represents nearly $1.5 billion of revenue, generates higher margins than the other half of G-III’s unaffected business.