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Can G-III Apparel Drive More Momentum With a Retail Land Grab?

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G-III Apparel Group (NASDAQ: GIII  ) isn't exactly a household name, although its products are probably in the average investor's closet, including Marc New York apparel and Bass shoes. The company has found great success over the years as a wholesale manufacturer of licensed brands, especially from its growing relationship with PVH's Calvin Klein label. 

However, G-III has switched tactics a bit lately, betting big on retail with its November purchase of shoemaker G.H. Bass, a transaction that doubled its overall retail store footprint. So, after a solid share price advance over the past year, does G-III have more upside for investors?

What's the value?
Despite a relatively anonymous corporate identity, G-III has built one of the top licensed-apparel operations, manufacturing a diverse product assortment from more than 30 licensors, which it sells to roughly 2,900 retail buyers. G-III's size and experience in the wholesale segment allows it to be a valuable business partner to licensed-brand owners, creating opportunities in additional product categories that further increase its production efficiency. However, the company seems to realize the risk of relying on third-party brands for a majority of its sales, a situation that has likely motivated its recent brand-acquisition activities.

In fiscal year 2013, G-III has reported strong financial results, with a top-line gain of 21.6%, aided by sales strength across its business units. G-III has continued to benefit from the popularity of the Calvin Klein brand as well as from its own ability to secure licenses for additional product lines from the brand's owner, including the forthcoming introduction of swimwear in the spring of 2014. More important, G-III's growing retail segment seems to be finally approaching an inflection point, with an improved profit level that should gain further traction from the addition of Bass' 160 stores.

Avoiding a quagmire
Of course, a larger retail presence is no guarantee of continued success for G-III, as judged by the troubles of some of its like-minded competitors, like Guess? (NYSE: GES  ) . The luxury-apparel designer has been on an aggressive store-development binge over the past few years, especially in the Eastern European and Asia-Pacific regions, with the intention of lowering its reliance on its wholesale customer base.

Guess?' results, though, have been less than noteworthy lately, including a contraction of its revenue and operating income in FY 2014, due primarily to weakness in its large North American and Western European markets. The company's retail operation has been a particularly poor performer, with negative comparable-store sales, which has forced management into a comprehensive review of its retail footprint. 

Fortunately, Guess?' relatively large licensing segment provides it with a steady stream of stable cash flow, buying the company time to turn around its retail segment's fortunes.

Also struggling in the competitive retail environment is The Jones Group (NYSE: JNY  ) , the owner of a motley assortment of apparel brands, led by its Jones New York and Anne Klein nameplates. Like Guess?, Jones Group has built a sizable global footprint of retail stores in order to offset its reliance on its department-store partners, which still account for roughly half of its overall sales.

Unfortunately, Jones Group's retail operations have been a perennial source of losses for the company, especially in the domestic market, a trend that finally forced management into action with the introduction of a downsizing initiative in 2012.  However, the delayed restructuring action seems to have been too little too late, as the retail segment's inventory-stocking needs continue to be a drain on the company's operating cash flow, leading to a current weak financial position. 

Not surprisingly, Jones Group found itself essentially needing to take a buyout offer from retail-focused investment firm Sycamore Partners in mid-December, which will hopefully allow it to restructure its operations away from the public glare.

The bottom line
G-III's ability to correctly forecast apparel-fashion trends has led to a solidly profitable licensed-apparel business, as well as a strong multiyear run for its stock price. However, the company might have some tougher sledding ahead as it tries to find a similar level of success in the retail space, an area that has been a quagmire for some of its competitors. As such, investors might want to wait for share-price weakness on any market sell-off prior to adding a position.

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