GIII Apparel Group Deserves More Attention From Value Investors

This article was first published on my Seeking Alpha page on September 28. Despite the market correction in the following days, the GIII stock has rebounded, and I think it worth reposting here as the stock still has potentials.

Overview

GIII Apparel Group is a clothing company that designs, manufactures, and markets for some highly recognizable brands such as Guess, DKNY, Calvin Klein, Tommy Hilfiger, Levis, Kenneth Cole, Harley-Davidson, just to name a few. For this reason, the company is often referred to as a brand behind brands. Due to the COVID-19 pandemic, the company’s earnings per share (EPS) in the first two quarters were hit hard ($-0.75 and $-0.31, respectively). Consequently, its stock price plummeted from $34 at the beginning of the year to $14.3 as of September 23, 2020.

Despite poor price performance, not only is the fashion and apparel manufacturing industry expected to recover quickly in the near future, but also the stable and competent management of GIII can lead the company to survive the temporary market downturn. To investors, GIII shares are currently significantly undervalued compared to its competitors, which make it a good value investment opportunity. 

GIII logo

Industry Prospect 

The fashion and apparel industry has been significantly hit by the COVID-19 pandemic as consumers limit non-essential spending. Nonetheless, multiple market research studies have offered positive outlook for the industry. For instance, Euromonitor International indicates that the strong growth in China and India will contribute to a quick recovery of the industry. IBISWorld also forecasts strong growth in global apparel manufacturing in the next five years. In the US, a similar recovery can also be expected. As Robin Givhan said in an NPR interview, for people who work remotely, the “waist-up” dress style has blurred the boundary between their professional and personal life, and they have become increasingly tired of such style of life. A quantitative study conducted by Fidelity indicates that the consumer discretionary sector, to which apparel industry belongs, is one of the sectors that are likely to have a better-than-market performance when the economy transitions to a new business cycle.

Company Prospect

Given the positive industry outlook, recoveries can be expected for GIII’s short- and long-term earnings. In the short term, it is estimated (see Chart below) that the Q3 EPS of GIII would be $0.92 (with a confidence interval between $0.37 and $1.57) and Q4 EPS $0.39 (confidence interval: $0.09-$0.85), making its expected annual EPS $0.34. The annual EPS for 2021 is estimated to be $2.25 (confidence interval: $1.72-3.15).  

Estimated GIII Earnings per Share
Earnings per Share Estimates for GIII

Even though history does not necessarily predict future, the fact that Q3 has always been the best performing quarter of the company to some extent supplements the aforementioned short-term estimates. 

Mean EPSMedian EPS
Q1$-0.027$0.025
Q2$0.07$0.105
Q3$1.82$1.85
Q4$0.33$0.31
Table 1. GIII Quarterly EPS (2011-2020)

Another vote of confidence is casted by the institutional share owners, who own nearly 96% of the GIII shares. According to company filings, institutional ownership dropped by 4.84% in Q1, but has picked up by 0.35% in Q2. This shows recovery in the confidence of major investors.

Advantages of GIII over Competitors

  1. Competent Management

GIII has a stable and competent management. Its CEO, Morris Goldfarb, has been leading the company since 1974. Moreover, the management team has had a reliable track of record on earnings. In fact, prior to the unexpected pandemic, the company had had 4 years of rapid growth in earnings per share. 

YearGIII Annual Earnings per Share
20112.46
20122.86
20131.85
20142.2
20152.44
20161.41
20171.6
20182.87
20193.22
2020 (6 month)-1.06
GIII Annual Earnings per Share (2011 – 2020)

The competence of management can also be reflected in the company’s long-term performance in comparison with competitors. For instance, the chart below illustrates GIII’s advantageous 5-year growths in EPS, revenue, cash flow, and book value comparing to the industry averages and some of its competitors (PVH and VFC). It is reasonable to expect the same management team will continue to lead the company back onto the path of growth when the market recovers. 

GIII vs Industry Averages & Competitors

2. Low Debt

In her interview, Robin Givhan claimed that the companies that can survive this temporary downturn will be at a stronger position. Looking at GIII’s debt conditions, the company has lower total and long-term debt than competitors. One caveat is that GIII has a higher-than average current ratio (GIII ranks at 65th percentile in terms of current ratio in the industry).

GIIIIndustryPVHVFC
Long Term Debt/Equity (TTM)64.71%126.1%85.58%107%
Total debt/equity (TTM)70.48%137.59%97.34%125%
Total debt/ Assets (TTM)33.6%34.35%38.23%42.42%
Total Debt/Capital (TTM)33.96%51.42%NANA
Current ratio2.651.91.53.6
GIII and Competitors on Debt Indicators

3. Undervalued price

Not only has GIII had better record of long-term performance than its competitors, but also its stock price is undervalued. The table below shows that given the financial performances, GIII is relatively undervalued comparing to its competitors. In fact, in the Sprout Stocks Undervalued Index, GIII is ranked 51th most undervalued stock out of 371 consumer discretionary sector, and 8th most undervalued out of 39 companies in the textile, apparel and luxury good industry.

GIIITextile, Apparel & Luxury GoodsPVHVFC
PE (TTM)10.7488.29NA101.6
PE (5-year average)18.7536.7315.63NA
Price/Cash Flow (TTM)6.6152.16NA77.97
Price/Sales (TTM)0.274.590.572.86
Price/Book0.5511.7219.27
GIII and Competitors on Value Indicators

Conclusion

GIII is a good investment opportunity for value investors because 1) the fashion industry is expected to recover, 2) GIII has a competent management team that has managed to survive business cycles and grow the company, 3) the price of the company stock is relatively undervalued comparing to its competitors.