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G-III Apparel Group Ltd  (NASDAQ:GIII)
Q4 2019 Earnings Conference Call
March 21, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Welcome to the G-III Apparel Group Fourth Quarter and Full Fiscal Year 2019 Earnings Conference Call. My name is Paulette, and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) Please note that this conference call is being recorded.

I will now turn the call over to Neal Nackman, the Company's CFO. Mr. Nackman, you may begin.

Neal S. Nackman -- Chief Financial Officer and Treasurer

Good morning, and thank you for joining us.

Before we begin, I would like to remind participants that certain statements made on today's call and in the Q&A session may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees, and actual results may differ materially from those expressed or implied in forward-looking statements. Important factors that could cause actual results of operations or the financial condition of the Company to differ are discussed in the documents filed by the Company with the SEC. The Company undertakes no duty to update any forward-looking statements.

In addition, during the call, we will refer to non-GAAP net income, non-GAAP net income per share and to adjusted EBITDA, which are all non-GAAP financial measures. We have provided reconciliations of these non-GAAP financial measures to GAAP measures in our press release, which is also available on our website.

I will now turn the call over to our Chairman and Chief Executive Officer, Morris Goldfarb.

Morris Goldfarb -- Chairman and Chief Executive Officer

Good morning, and thank you for joining us. With me today are Sammy Aaron, our Vice Chairman and President; Wayne Miller, our Chief Operating Officer; Neal Nackman, our Chief Financial Officer; and Jeff Goldfarb, our Executive Vice President.

We're pleased to report that we've completed a record year of net sales, EBITDA and non-GAAP net income per share. A first full year of having our own DKNY and Donna Karan product in stores was a big success. The sales growth in our business was led by DKNY, Tommy Hilfiger and Karl Lagerfeld. Calvin Klein, our largest and most profitable business, also had a very good year in spite of the loss of business due to the closing of Bon-Ton department stores.

We've built a strong foundation, anchored by our five power brands DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld. And I'm confident that we're well positioned for continued substantial organic growth into the future.

Now, let's look at the fourth quarter and full year results. We delivered fourth quarter net sales growth of approximately 7% to $767 million from $715 million last year. Fourth quarter non-GAAP net income was $0.55 per diluted share compared to $0.26 per diluted share in the fourth quarter last year.

For the full fiscal year, we grew net sales by 10% to $3.08 million from $2.81 billion in the prior year. Non-GAAP net income per diluted share increased 79% to $2.86 from the $1.60 in the prior year. Our adjusted EBITDA for the year increased to $269 million, an increase of 34% from the prior year.

Here are some details of our businesses, beginning with our retail business. On our last earnings call, we told you that we were very disappointed with the results of our own retail business and that all options were on the table. In January, we hired Fran Della Badia as President of our retail business to help transform this business. Fran is a smart and savvy retail merchant and has great retail experience, having spent 16 years at Coach ultimately as Head of all North American retail.

As a recap, at the end of fiscal year 2017, we had a total store fleet of 411 stores. We ended fiscal 2019 with approximately 308 stores, representing net closures of 103 stores. In the upcoming fiscal year, we are in the process of converting approximately 10 locations to DKNY stores. In this coming fiscal year, our plan also includes the closure of an additional 43 locations, which will leave us with a store fleet of approximately 265. This will include approximately 41 DKNY and 11 Karl Lagerfeld stores.

We are actively working toward additional conversions to DKNY and Karl Lagerfeld as we continue to see significant upside operating performance from both nameplates. We had double digit positive comp performance for the fourth quarter and full year in both our DKNY and Karl Lagerfeld stores.

We've taken a hard look at our back office support functions and have already eliminated approximately $5 million of annualized expenses and salaries from our retail operations. Fran and the merchant teams are very focused on merchandise offerings and are planning to make significant changes for the upcoming fall season.

Our goal is to significantly reduce the losses in our retail business this year. And we will take whatever steps are necessary to get there, including continued store closures, obtaining additional operating efficiencies and implementing further product design changes.

Now, let's turn to our Wholesale businesses. We've concluded fiscal 2019 with net sales of our Calvin Klein products in excess of $1 billion. We were pleased with the performance of this business throughout the year. As for the fourth quarter, Calvin Klein performed well and was led by dresses and men's and women's outerwear.

On the heels of more than doubling our Tommy Hilfiger business in fiscal 2018, we registered significant sales growth of 45% in fiscal 2019, annual net sales and now approximately $400 million. Tommy did well in the fourth quarter, with net sales growing by about 40%, led by dresses, sportswear, performance and outerwear.

These results illustrate the powerful combination of our strong execution and expertise in design, merchandising, sourcing and selling, combined with the marketing and brand management of our partners at PVH. Our product and distribution continues to broaden, allowing us to grow and expand the department store business more aggressively. We're excited about the meaningful opportunities to grow this business over the next several years.

Before I provide an update on our Karl Lagerfeld Paris business, let me take a moment to acknowledge the loss of one of the greatest fashion designers of our time, a true fashion icon and innovator Mr. Karl Lagerfeld. We at G III are proud to have known and worked with Karl. His loss has impacted so many across the globe. The powerful legacy and influence she leaves behind will live on. The Karl Lagerfeld Paris brand has always sought to convey Karl's design aesthetics and this will continue to be the core of the brand.

We capped off 2019 with fourth quarter net sales growth of 20% for Karl Lagerfeld, which was led by sportswear and handbags. For fiscal 2019, net sales grew more than 40%, are now in excess of $100 million. We are big believers in this brand, which we introduced to the North American market in the beginning of 2016. The momentum for Karl Lagerfeld continues and we see significant growth opportunities ahead for us over the next several years.

Now, an update on our own DKNY and Donna Karan businesses. Following our integration of the DKNY and Donna Karan brands and the successful launch of the wide range of categories, we're pleased to see that these businesses grew by over 50%, reaching $400 million in annual net sales for fiscal 2019.

Our fourth quarter business growth was led by handbags, shoes, sportswear and outerwear. This past year was the first full year of our brand repositioning and distribution, and we've learned much about how we can continue to build this business going forward.

On the international front with DKNY, we're building good businesses with our distribution partners in the Middle East, Russia, Southeast Asia and Korea. In China, a joint venture partner now has over 50 points of sale and continues to see meaningful growth opportunities. In Europe, we have over 700 points of sale in 36 countries and continue to expand our distribution into additional accounts.

We see licensing for both our DKNY and Donna Karan brands as not only as an important profit driver, but a great way to expand our global presence through the introduction of additional lifestyle product categories. We've added some great new licensing partners, such as Swarovski for fashion jewellery in international markets, and Marchon for sun and optical eyewear globally.

Just recently, we executed a license for DKNY men's underwear, lounge wear, swimwear and socks for Europe, the UK and Russia. Our team has done a great job leveraging the unique 100% DKNY campaign, which launched this past fall and holiday season. We will continue this campaign into the spring, with an updated and fresh approach highlighting new talent. Our goal for the season is to increase and elevate global awareness and share product offerings through our campaign and our editorial and brand feature coverage.

This spring DKNY campaign has just kicked off with high impact outdoor media units in key global cities, including New York City, London, Toronto, Dubai and Mexico City. We will continue to have print presence in core US and UK fashion and lifestyle publications and we will also include significant digital exposure.

DKNY now reaches over 5 million followers across all social media channels. We will continue to invest significantly in the marketing and advertising of DKNY over the next several years. Further, I'm excited to share the news of our collaboration of DKNY sport with the major sports leagues to launch DKNY's first ever women's co-branded product capsule this spring. This special co-branding opportunity with DKNY and the leagues expose us to a wider consumer audience. The distribution will include dkny.com, fanatics.com, the league's e-commerce sites, stadium stores and Macy's.

This past year, we've established a solid foundation for DKNY and Donna Karan, and we look forward to continued growth and success ahead. Our strategy for acquiring these well-known global power brands is really beginning to pay off.

Let me take a moment to talk about our outerwear business. While we've become more diversified and less seasonal with each passing year, outerwear remains a big category for us. We had another great season with broad-based performance, led by Calvin Klein, Tommy Hilfiger, Levi's, DKNY, Guess and Karl Lagerfeld. We look forward to a good outerwear season this upcoming fall.

Vilebrequin, our status swimwear brand, delivered a solid year, posting a mid-single digit comparable sales increase. Currently, combining our own locations with those operated by our distribution partners, the Vilebrequin brand has a presence at approximately 760 locations across 65 countries. We are expanding into key new cities, including Macao, Shanghai and Beijing. In addition, we continue to push for expanded wholesale distribution.

And lastly, with Vilebrequin, we're building and further developing our e-commerce business and a digital presence. Corporate wide, we're looking to capture an ever growing share of online purchases through our own sites, and more importantly, through the web sites of our retail partners, which is the biggest part of this business. Our online marketing and planning teams work very closely with digital teams of our retail partners to ensure that consumers are viewing our product in the best manner possible. We're also working to effect higher conversions through marketing, social influencers and other online drivers of sales. Overall, looking ahead to fiscal 2020 and beyond, we see a significant opportunity for us to continue to grow our business.

I now pass it to Neil for a detailed discussion of our fourth quarter and full year results.

Neal S. Nackman -- Chief Financial Officer and Treasurer

Thank you, Morris. Net sales for the fourth quarter ended January 31, 2019, increased approximately 7% to $767 million from $715 million in the same period last year. Net sales of our Wholesale Operations segment increased 13% to $639 million from $566 million. DKNY and Tommy Hilfiger brands were the main drivers of this increase.

Net sales of our Retail Operations segment for the quarter were $155 million, approximately 13% lower compared to last year's sales of $178 million. We reported same-store sales decreases of approximately 9% for our Wilsons stores, 2.6% for our G.H. Bass stores and the same store sales increase of 10% at our DKNY stores. Net sales of our Retail Operations segment were also negatively affected by the decrease in the number of stores operated by us.

Our gross margin percentage was 33.8% in the fourth quarter of fiscal 2019 compared to 36.2% in the prior year's period. The gross margin percentage in our Wholesale Operations segment was 28.7% compared to 29.6% in the prior year. This percentage decrease in gross margins in our Wholesale Operations segment was primarily the result of the reclassification of cooperative advertising expense, from SG&A to a reduction of net sales as a result of the application of the new accounting rules related to revenue recognition.

The gross margin percentage in our Retail Operations segment was 48.9% compared to 51.5% in the prior year's quarter. Similar to the rest of this year, gross margins for our DKNY stores were lower in the quarter this year as compared to the prior year. Gross margins for DKNY in the prior year reflected the benefit of the reversal of valuation reserves as a result of acquisition accounting. Going forward, in fiscal 2020, the gross margin for the DKNY retail operations will be on a comparable basis.

The gross margin percentage for our Wilsons stores was also lower than last year, mostly as a result of higher promotions. The gross margin in the quarter was lower than we had anticipated due to continued promotional pressure in our Retail Operations. In addition, the Wholesale segment provided higher markdown support than planned to ensure that our inventories are in good shape heading into the spring season.

SG&A expenses decreased to $202 million in the quarter from $219 million in the same period last year. Due to the revenue recognition reclassification, $5.4 million of cooperative advertising expenses in the quarter are now treated as a reduction in net sales. Prior to this year, these expenses were part of SG&A. Further, we are continuing to see the benefit of leveraging our SG&A base primarily as a result of DKNY and Tommy Hilfiger revenue growth.

Net income for the fourth quarter of this fiscal year was $24 million, or $0.48 per diluted share, compared to a net loss of $1 million, or $0.01 per share in last year's quarter. Non-GAAP net income per diluted share was $0.55 for the quarter compared to $0.26 per share in the prior year. Non-GAAP results exclude the impact of non-cash imputed interest, asset impairment charges, transitional expenses and one-time income tax charges related to the prior year's new tax act. The specific amounts are all included in the press release and our reconciliation of GAAP to non- GAAP results.

For the full fiscal year, net sales for fiscal 2019 increased approximately 10% to $3.08 billion from $2.81 billion last year. Net sales of our Wholesale Operations segment increased 11% to $2.72 billion from $2.45 billion. DKNY, Tommy Hilfiger and Karl Lagerfeld brands were the main drivers of this wholesale sales growth. The growth was adversely impacted by the bankruptcy of the Bon-Ton stores, with the largest effect occurring on sales of the Calvin Klein products.

Net sales in our Retail Operations segment were $466 million, approximately 5% lower compared to the previous year at $502 million. This decrease is largely due to sales reductions at both G.H. Bass and Wilsons. For the full year, comparable sales decreased by 1.6% at Wilsons and decreased 3.7% at G.H. Bass. DKNY comp sales increased 17% for the full year.

Net sales of our Retail Operations segment were also negatively affected by the decrease in the number of stores we operated. We operated 59 less stores at the end of fiscal 2019 compared to the end of fiscal 2018.

Our gross margin percentage was 36% for fiscal year 2019 compared to 37.6% in the prior year. The gross margin percentage in our Wholesale Operations segment was 32.4% compared to 32.8% in the previous year. This percentage decrease in gross margins in our Wholesale Operations segment includes the reclassification of cooperative advertising expense from SG&A to a reduction of net sales. The impact of this reclass was about a 70 basis point reduction to the current year's reported gross margin percentage.

The gross margin percentage in our Retail Operations segment was 47.7% compared to 49.9% in the prior year. As we've been discussing all year, gross margins for our DKNY stores will lower this year as compared to the prior year, primarily because the prior included the benefit of the reversal of valuation reserves as a result of acquisition accounting.

The gross margin percentage for our Bass and Wilsons stores were about flat to last year, where improvements in the first half of the year were offset by higher promotions in the second half of the year. Total SG&A expenses decreased to $835 million in the year from $855 million in the previous year.

Due to the revenue recognition reclassification, $28 million of coop advertising expenses are now treated as reduction in net sales. Again, prior to this year, these expenses were part of SG&A. As expected, we are seeing the benefit of leveraging our SG&A base primarily as a result of DKNY, Tommy Hilfiger and the Karl Lagerfeld revenue growth.

Net income for fiscal 2019 was $138 million, or $2.75 per diluted share, compared to $62 million, or $1.25 per share, in the previous year. Non-GAAP net income per diluted share for fiscal 2019 was $2.86 compared to a $1.60 in the prior year.

Looking at our balance sheet, accounts receivable increased to $502 million from $294 million at the end of the prior year. The new accounting rules require that liabilities recorded in connection with variable consideration, which were previously reported as an offset to accounts receivable, now be reflected as short term liabilities. Excluding the impact of the new classification, accounts receivable would have been up approximately 10%, which is consistent with our sales growth.

Inventory classifications have also been impacted by the implementation of the new accounting rules and now exclude anticipated returned inventory. On a comparable basis, inventory increased approximately 12% to $576 million. This increase is higher than our forecasted sales growth. Inventory levels at DKNY have grown consistent with the launch and development of the new product lines. In addition, we received inventory in advance this year and in anticipation of the earlier Chinese New Year.

We spent approximately $29 million on CapEx this year. We had long term debt outstanding of approximately $387 million at the end of the year compared to $391 million at the end of the previous year. In addition, our cash balances at the end of the year were $70 million this year compared to $46 million a year ago. Our cash balances were higher at year end even after we opportunistically utilized approximately $20 million to repurchase approximately 723,000 shares in December under our authorized share repurchase program.

As for our guidance, for the fiscal year ending January 31, 2020, we are forecasting net sales of approximately $3.28 billion compared to $3.08 billion in fiscal 2019. We expect net income to be between $162 million and $167 million, or between $3.18 and $3.28 per diluted share as compared to net income of $138 million, or $2.75 per diluted share in fiscal 2019.

On an adjusted basis, excluding non-cash imputed interest expense of $5.4 million, we are anticipating non-GAAP net income of between $167 million and $172 million, or between $3.25 and $3.35 per diluted share. This assumes a weighted average diluted share count to 51 million shares.

We are projecting full year adjusted EBITDA for fiscal 2020 of between $307 million and $313 million compared to adjusted EBITDA of $269 million in fiscal 2019. We anticipate reducing the retail losses in our Retail Operations segment by approximately $10 million in fiscal 2020. This assumes flat-to-low single digit comp increases at both Wilsons and Bass for the full year.

For DKNY retail operations, we are planning for a double digit comp increase. Total sales at DKNY retail are planned about (ph) flat to the prior year as the average comp store count is down. As for DKNY's wholesale and licensing operations, revenues are planned to grow by approximately 20%.

For our first fiscal quarter ending April 30, 2019, we are forecasting net sales -- sorry, April 30, 2020, we are forecasting net sales of approximately $650 million and net income between $7 million and $12 million or between $0.13 and $0.23 per diluted share. This compares to net sales of $612 million and net income of $10 million, or $0.20 per diluted share reported in the first quarter of fiscal 2019.

On an adjusted basis, we are forecasting non-GAAP net income between $8 million and $13 million, or between $0.15 and $0.25 per diluted share as compared to non-GAAP net income of $10.8 million, or $0.22 per diluted share in the previous year's quarter. As for our Retail Operations, we are assuming mid-single digit comparable sales declines for the combined Wilsons and Bass business and single digit comp sales increases at DKNY.

That concludes my comments. I will now turn the call back to Morris for closing remarks.

Morris Goldfarb -- Chairman and Chief Executive Officer

Thank you for joining us today. As I said at the beginning of this call, this was a record year for G-III. I'm proud of what our teams have accomplished by their focus, dedication, drive and their execution. We've further leveraged our five global power brands to deliver a year of results that exceeded our own expectations.

In an ever changing retail landscape, we continue to find ways to grow and position ourselves as an important global provider of fashion products. With the power brands that we have today, G-III can continue to achieve significant organic growth over the next several years. With the strength of our balance sheet, we can also capitalize on the right acquisition opportunity.

Thank you, and we're now ready to take your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Edward Yruma from KeyBanc Capital Markets. Please go ahead.

Edward James Yruma -- KeyBanc Capital Markets -- Analyst

Hi. Good morning. Thanks for taking my question. And congrats on a solid year. Just digging into the DKNY business a little bit, particularly as it relates to this upcoming fiscal year. Could you just maybe give an insight into how the business is performing at non-Macy's stores or how you expect it to perform? And then as a follow up for Retail, maybe highlight some of the changes that Fran has made and what the assumed improvement in profitability is for next year. Thank you.

Morris Goldfarb -- Chairman and Chief Executive Officer

Thanks for your question. It's Morris. The DKNY brand is performing very well. The fact that it's no longer just the Macy's exclusive is not bad news. Pretty much immediately as we began to offer the product to a broader department store base, we immediately got distribution for about 150 doors of one of our department store customers. In footwear we're beginning to get our sportswear and other apparel components blended into the department stores. So we believe it's actually good news. It's good news for Macy's. The fact that they're still very committed to the brand is twofold. It's good for us, it's good for them. The added exposure into full price department stores that don't always compete with Macy's, in many ways they enhance Macy's business, is a good opportunity for them to continue to grow the business.

The feature -- there was always a concern on the international basis as to how the brand is distributed in the United States. The world is a much smaller place today, and the fact that it's got broader distribution is good news internationally. Our customers in Europe appreciate that it is beyond the Macy's business and so do our Asian, both the Far East and Middle East customers see it the same way. So it's good news.

Your question as it relates to Fran, Fran has immediately driven herself into understanding all our businesses. She spearheads all retail except for Vilebrequin, and she's doing an amazing job in a short period of time. She's been to Minneapolis, I don't know, probably eight or 10 times in the last couple of months. As you know, Minneapolis is home base for Retail. She's got to know the leaders of our Retail. She's influenced some major changes on how we distribute products, how we buy a product, the choices that we make, the real estate that we occupy and it's a pleasure to work with her. And we're looking forward to some major changes in how Retail performs for G-III.

So, Fran has also instituted some major cost reductions in staffing, we've found over $5 million in cost savings almost immediately that go across all our brands. So today, I'd say, it was a good decision to hire Fran. Anything else I can respond to, Ed? Did I miss some question?

Edward James Yruma -- KeyBanc Capital Markets -- Analyst

Well, just -- maybe give a little detail on exactly how much of the guidance, how much profitability improvement guidance assumes?

Morris Goldfarb -- Chairman and Chief Executive Officer

On the Retail? On Retail, as Neal said, we're conservatively -- I'll add conservatively, projecting $10 million less in losses this year in Retail and that doesn't account for any real radical change that we might decide to take on one time hits.

Edward James Yruma -- KeyBanc Capital Markets -- Analyst

Got it. Thanks so much, guys.

Operator

And our next question comes from Erinn Murphy from Piper Jaffray. Please go ahead.

Erinn Elisabeth Murphy -- Piper Jaffray -- Analyst

Great. Thanks. Good morning. I guess, Morris, for you, I had a bigger picture question in terms of the North American environment today. As we've started out here in the spring, how are you feeling broadly about the environment from an inventory and a channel perspective, what are you seeing out there from a promotional perspective and our retailers, do they have the right amount of inventory receipts (ph) currently?

Morris Goldfarb -- Chairman and Chief Executive Officer

I can only speak to how inventory is managed as it relates to G-III and we've taken a position as we became a dominant provider to department stores that real estate is key and we have a never-ending battle for appropriate real estate at larger scale than we've ever had. Our presence in the individual departments that we service, it's real easy to see. If you walk into any department store, you say, oh, my God, G-III is all over the place, if you know our brands. And beyond being all over the place in a department store, the space that we're being allocated is much larger than it's ever been.

So that in itself requires more inventory to service, it leads us to present product better with better fixturings, better collateral data that influences the consumer. And we're getting the cooperation we need maybe simply because we perform better than most, and maybe better than all in many of the department stores. So the cooperation that we get on both sides, our own teams, as well as these department store teams that buy and make the choices, make me feel very comfortable that our business is still on a growth mode regardless of some of the influences that surround us that I can't control, whether it's a tariff issue, it's an economic issue that might drive the economy to make our consumer choose differently.

We take advantage of our relationships. We manage our business well. We provide really good margins for our retailer and at the same time, very acceptable margins for ourselves. So I think we're in a unique place. We manage our business for our customers differently than our competition does. We're not a vertical operation, where we create product for our own stores. That's a possibility for the future. We have a small group of stores that service DKNY, and right now we're at 32 stores, projecting to end the year -- the fiscal year that we're now in, with some number less than 45. And Karl Lagerfeld with about 11 and these are the growth pieces of our Retail. The Bass and the Wilsons businesses are viewed a little bit differently. We're trying to fix them, but if we can't, they may not be part of the future. So not being vertical makes us more dependent on our customers and makes us maybe a better partner for our customers because we need them and we make it work.

Erinn Elisabeth Murphy -- Piper Jaffray -- Analyst

Got it. Okay. Well, let me just ask a couple of other housekeeping questions then. On the outerwear season, you talked about it obviously being good in the fourth quarter and I think you said that you're expecting a good fiscal 2020 season. Maybe if you can share with us how retailers are thinking about the order book in 2020? And them. Neal, for you just two small ones on the model. Gross margin, what is embedded in your guidance for Q1 and the full year in gross margin? And then the Bon-Ton impact in Q4, how big was that? Thank you.

Morris Goldfarb -- Chairman and Chief Executive Officer

So, Erinn, as far as how our retailers are planning the coat gear for fiscal 2020. Most of our planning is flat, but that's usually the case when they come off a great year. They don't project out increases. They plan it conservatively. We are a resource that gets behind what we believe in, we believe in outerwear, we always, always, always make money in outerwear. Our margins are good. Retail margins in outerwear, if you pay attention to department store business, the best margins that we provide for our department store partners comes out of outerwear. They margin much better in outerwear than they do in sportswear, so when the opportunity arises and this season shows itself as possibly a good one, it may not be in the early part, but as we get into this season, they're very aggressive to support an outerwear business. So we're comfortable that there is still significant growth left in outerwear for the coming year.

Neal S. Nackman -- Chief Financial Officer and Treasurer

Erinn, as far as the modeling question on gross margins for the full year, we're seeing a fairly comparable gross margin on a consolidated basis to the prior year. It could be up a tick or two. In terms of the first quarter, we are seeing a little bit of gross margin percentage pressure in our Wholesale order book. We just think that's product mix at this point. As I said, for the full year, we're comfortable with maintaining gross margins. And that will be both at the Wholesale and Retail level. On the Bon-Ton Q4, approximately $20 million was in the prior year's fourth quarter.

Erinn Elisabeth Murphy -- Piper Jaffray -- Analyst

Got it. Okay. Sorry. And I Just want to follow up on the Q1 gross margin. You said it's mix of what you're seeing at Wholesale, or are there any higher markdown dollar reserves just given maybe the environment currently, just making sure I want to understand that piece on the fourth quarter gross margins?

Neal S. Nackman -- Chief Financial Officer and Treasurer

Yeah. I would tell that it's significantly product mix. There's probably some adjustments that we'll be making to our annual markdown provisions, but it's -- which could slightly negatively impact it as well.

Erinn Elisabeth Murphy -- Piper Jaffray -- Analyst

Thank you, guys.

Morris Goldfarb -- Chairman and Chief Executive Officer

Thanks, Erinn.

Operator

Our next question comes from John Kernan from Cowen. Please go ahead.

John Kernan -- Cowen -- Analyst

Good morning, everyone. Thanks for taking my question and congrats on a strong finish to the year.

Morris Goldfarb -- Chairman and Chief Executive Officer

Thanks, John.

John Kernan -- Cowen -- Analyst

Morris, can you talk about Donna Karan. It seems to be entering 2019 with strength. Can you just talk about your targets for that brand, both from a sales and profitability standpoint? Not just for this year, but longer term, help us think just overall about the top line opportunity and the margin opportunity, where you are now and where you think you can get to? Thanks.

Morris Goldfarb -- Chairman and Chief Executive Officer

Thanks, John. DKNY, when we bought it, we basically stated that the opportunities was well in excess of $1 billion of product that G-III alone could produce, forget about our licensing partners. I am not off that number. If anything, I believe it could be a greater number. We're first learning about the opportunities globally. We're very much in control of the North American market, but the globe has all of a sudden served up opportunities that G-III never had. And we're beginning to see the acceptance of the product mix that we created. We took the brand, we changed the profile and dynamics and the demographics of the brand internationally, and it's being accepted.

There were concerns in conservative areas of the world that some of the younger product that we are producing, the faster moving products, might not be well accepted at the price points that we were producing. And it turns out, they are incredibly well accepted. So as we begin to further penetrate those markets, I think the opportunity is huge. So, if I would say, it's safe to believe that we comfortably have over $1 billion business in the near future. Our licensing revenue continues to grow, and that in itself probably provides another $500 million to $700 million of product that gets released with our brands globally, which continues to further enhance the presence of the brand. And hopefully, it becomes one like Tommy Hilfiger or Calvin Klein, where it penetrates all departments, in all department stores, as well as the retail that we will expand.

Neal S. Nackman -- Chief Financial Officer and Treasurer

And John, just in terms of operating margins, look, we continue to think that this business should be the strongest, if not one of the strongest operating margin percentage businesses that we run. Again, we're not paying a royalty fee to anybody. That helps us out significantly. And then, in addition, as Morris just mentioned, we've got significant licensing income that comes in. So we still see that 15% to 20% operating margin as a goal. This past year, we were probably a low single digit positive operating margin business and we'll continue to see improvement on that.

John Kernan -- Cowen -- Analyst

And Neal, if I can ask you a follow-up question just on capital allocation, you were obviously opportunistic in the fourth quarter with the share buyback. How do we think about the balance sheet, the leverage ratio and where you want to take that this year and next? And then, within that, (Technical Difficulty) now in terms of valuations and opportunity? Thank you.

Neal S. Nackman -- Chief Financial Officer and Treasurer

John, sorry, the second part of your question, you broke up a little bit. The first part in terms of debt ratios, look, our average debt last year was about $450 million. We ran about $270 million of EBITDA. I think the Company, if there were any concerns with the acquisition and leverage that we took on, I think that those should certainly be waylaid at this point. The Company is in great situation in terms of the leverage. We generated good cash flow last year. We're expecting the free cash flow this year could be about $100 million. So I think we're in great shape from a balance sheet standpoint.

John Kernan -- Cowen -- Analyst

Got it. And then maybe just a quick follow up. What are the incremental opportunities for Tommy and Donna Karan outside of Macy's and (Technical Difficulty)?

Morris Goldfarb -- Chairman and Chief Executive Officer

So the Tommy brand is -- the Tommy Hilfiger brand is not a Macy's exclusive. We were distributing it to all the mid tier and better department stores throughout the country. And it is performing exceptionally well. Again, we broke it out in to classifications that never really existed on the department store floor or specialty chain floor. We have a dress area, we have a suit area, we have a coat area, we have sportswear, we have a performance area. We've pretty much bifurcated the brand and are doing exactly what we succeeded with Calvin Klein. It was not a model that we inherited. We inherited a relatively small, call it, non-performing piece that sat on the sportswear floor of Macy's. And PVH gave us the right to expand it into classifications. And collaboratively between PVH, Macy's and ourselves, we came to an agreement that it didn't have to be a Macy's exclusive and that also is working for all.

The scale of the business is changing, with over the last two years, we've doubled the size of the business. We started with an $80 million business. That's now about a $400 million business. So, we grew to $200 million. We grew from 2 to 4. And I don't know where to peg it at, but I can tell you that there is great opportunity. The marketing that PVH has been doing for Tommy is world-class. I don't think there's anything better out there and that's helping us expand the brand into areas that we didn't even expected to. So it's a great asset, we're fortunate to have it and it's an important component to our growth, both top line and bottom line for the future.

John Kernan -- Cowen -- Analyst

Excellent. Thank you. Best of luck, guys.

Morris Goldfarb -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Chethan Mallela from Barclays. Please go ahead.

Chethan Bhaskaran Mallela -- Barclays -- Analyst

Hi. Good morning. Can you provide a little context on how the Calvin Klein brand performed during the fourth quarter, excluding the impact from Bon-Ton, and just what you're assuming for that brand in fiscal '20? And just given some of the recent media reports, can you remind us if your plan was to potentially take on additional category licenses for this brand? And just from a capability standpoint, in the past when you've gained new licenses, how quickly you've historically been able to get product to market?

Morris Goldfarb -- Chairman and Chief Executive Officer

Well, I'll start with really your last piece, how fast we bring product to market. If you were listening to Tommy Hilfiger, we took on a business that was actually very small and brought it to a very significant business in a nanosecond. We're barely there for two years and we quadrupled the size of the business. We staffed it appropriately. We know how to source, we have an amazing production team, both domestically and internationally. Our domestic team governs how it's run. And our international team, they're not shy. They get into every country, every opportunity, whereas compliances can be on the quality of factories that we use and we get there. We get there more rapidly than anyone could actually believe.

Let's go to the Calvin Klein piece. I read the press the same way you do. There seems to be some feel that the brand has maxed out. You can't tell that by us, we don't believe that's the case at all. It's our best performing piece of the business. Our retailers basically print money with the asset. And when we believe we've grown to an unimaginable peak, what we believe is peak, we find that there is significant room both on, again, top line and bottom line. It's -- that brand is the best asset that our Company has. So there's virtually no concern unless something extraordinary occurs. Again, touching on what we can't control, which is the economy, how we trade in the world, or some unique situation that might occur specific to the brand beyond our control. But I think you would probably get the same answer if you polled our department stores as to how they feel about the brand. So great brand. We'd love to have another one just like it.

Chethan Bhaskaran Mallela -- Barclays -- Analyst

Great. Thanks. And then just a quick follow up on Wilsons. It seems like on both the comps and gross margins, that was maybe a little bit lighter than you anticipated during the fourth quarter. Can you just provide a little more detail on maybe where you saw some underperformance versus your internal models and then any plan changes for fiscal '20 that are supporting the return to I think a flat to low single digit comp outlook?

Neal S. Nackman -- Chief Financial Officer and Treasurer

Yeah. So, look, the Wilsons business has been going through product changes. It was more promotional than we expected. We've got -- we're actually anticipating with Fran's arrival and with new merchants that we've actually put in place in the Wilsons business, that we expect that we'll start to see an uptick in terms of comp performance more of that will be in the second half of next year.

Chethan Bhaskaran Mallela -- Barclays -- Analyst

Great. Thank you very much.

Operator

And our next question comes from Jim Duffy from Stifel. Please go ahead.

Jim Duffy -- Stifel -- Analyst

Thank you. Good morning. Congratulations to the team on crossing the $3 billion revenue mark. Few questions from me on the portfolio businesses. So, as the more strategic parts of your $2.5 billion Wholesale revenue business grow, are there any marginal businesses in that Wholesale revenue base that you guys view as not strategic, perhaps on a few margin drags, it could be candidates for de-emphasis or divestiture?

Morris Goldfarb -- Chairman and Chief Executive Officer

Yes, Jim. Number one, thanks for the congratulations on the $3 billion crossing. It didn't happen overnight by the way. This is my career, 46 years in the process. So we've now put another mark on the graph and you'll be impressed in another two or three years. So the divestitures of non-essential assets, as we call it, we always do that. We do housekeeping in areas of business that are not suitable for G-III any longer. This Company was built from the mid-'90s on through opportunity licenses, they could have been a celebrity, it could have been a second tier brand. And as we build the power brands, the $20 million, $30 million initiatives really don't work for us. So we've got very few of those left and where they work pretty much independently and they're accretive to our earnings, we keep them.

Sometimes, one is grateful that there is a license and you don't own all of the assets. So here when some of our licenses expire on these initiatives, we don't renew and we just move on. We manage our inventory to be able to slip right past it without taking a major hit on earnings. So that's always worked for us, I don't remember a solid call out for closing a division that no longer fit our profile. They are generally planned, you know you're going to do it over a two, three-year period, and you adjust for it and you move on and you either replace it. Sometimes you have an amazing management team that just needs another asset to manage and we've done that, and we continue to do that. So there's no concern that there's a group that goes away that's not performing.

Jim Duffy -- Stifel -- Analyst

Okay. And then, you spoke to balancing capacity. Any notable gaps in the portfolio where you would see it is strategic to pursue opportunities for acquisitions or would it be more opportunistic?

Morris Goldfarb -- Chairman and Chief Executive Officer

I think the world today makes you think broader than just the sector that you're in. So I don't discount anything, I don't discount entertainment, I don't discount hospitality, I don't discount music, I don't discount digital. It doesn't have to be a hard nosed apparel company to get our attention any longer. That's been part of our profile. We're not risk adverse. We're a little aggressive than most, and a little more aggressive than most, yet, we never bet the ranch. We take on what we believe we can afford. We are entrepreneurs at heart, quite honestly. I think if you were to take this whole management team and transplanted into a different business, you would also find a successful business. We are not -- we don't just have fashion in our blood. We have a clear, focused understanding of what it takes to run a business with appropriate partners. And that's why I believe we can take on any initiative.

Jim Duffy -- Stifel -- Analyst

Okay. And Neal, maybe this one is best directed to you. We understand the plans to turn the Retail business. With the $5 million run rate SG&A savings, the $10 million reduction in losses seems like a low hurdle if you can hold flat comps and dial back some of the promotional aspect. What do you see as prospects for gross margin in that Retail business as you look out across the year?

Neal S. Nackman -- Chief Financial Officer and Treasurer

Yeah. We're planning at this point to have pretty flat comps in the business. I think Morris mentioned that we're hoping that that plan that we've got is conservative, that with the expense cuts, we are getting out of stores. So we've got about $4 million to $5 million pickup on that. So we're really looking --and -- but keep in mind, we are going through a number of different changes with a new president and evaluating all the brands and transitioning to what we think is a stronger nameplate. So there's a lot of good lifting to get done this year, but it should be something we can achieve.

Jim Duffy -- Stifel -- Analyst

And does all of that $4 million to $5 million that you mentioned flow through or is there some planned reinvestment in SG&A in the Retail?

Neal S. Nackman -- Chief Financial Officer and Treasurer

Yeah. On the expense cuts, we're thinking that that is an expense cut savings. There's not a significant SG&A investment that we see.

Jim Duffy -- Stifel -- Analyst

Thank you, guys.

Morris Goldfarb -- Chairman and Chief Executive Officer

Thanks for your question, Jim.

Operator

And our next question comes from Rick Patel from Needham and Company. Please go ahead.

Rick Patel -- Needham and Company -- Analyst

Thank you. Good morning, everyone. And let me add my congratulations as well. I'm hoping you can dig into DKNY international a bit? Can you update us on how much international represented as a percentage of brand sales? And given the success that you're seeing, can you talk about the potential for a growth through directly operated stores? I think you have a number of them in the Vilebrequin concept. So curious if you can do that with DKNY as well.

Morris Goldfarb -- Chairman and Chief Executive Officer

So Rick, we have approximately 25% of our total sales that are outside of the United States with DKNY. And that's a combination of distributors as well as retail venues that we sell and setup shop-in-shops in. So it's a different balance than we acquired. When we acquired DKNY, it was primarily outside of the United States. We brought it primarily to the United States and now we're rebuilding and expanding the global posture of the brand. And that is a great opportunity for us, partly because margins outside of the United States that we garner on a sale are far better. So we like the continuation of expanding internationally.

And the other part where we have franchisees or distributors in regions, as they grow, they're buying the products, it's their responsibility to sell through the product, manage their fleet of stores. And it's a nice model to have. It's one that we've had with Vilebrequin for many years. Vilebrequin has approximately 85 company-owned stores. The bulk of the fleet is outside of the United States and they have a similar number in franchisees. And the franchise model is a great model. The product again is bought, the store design is given to the franchisee and they manage the area and generally they know the area better than a North American owner. If we are in Kuwait with a company-owned Vilebrequin store, I would say, we would not succeed as well as an owner that lives in Kuwait or one that lives in Russia. So it's a good model for -- it's a good path for us to follow.

Our business with Vilebrequin is strangely as small as it is. Vilebrequin is just over $100 million in total sales. It's an amazingly well recognized brand, it is in every luxury resort in the world, it's like a cookie cutter. You've seen one, you've basically seen them all. The product attracts you, the store design is simple, the size of the store is small and we've just gotten aggressive on opening up locations in China as China is accepting luxury and leisure, the way they do and they love their children and they particularly love their sons, and this is a father and son brand. So it's a great candidate for growth in China.

And we're seeing that. We are up in one location, we have one in -- we have one in Macao and we have three in Hong Kong, and there is Shanghai and Beijing that are soon to open. So the opportunity is very significant with this brand and the product extensions are what we're going to look forward to going forward. This brand is about status, it's about water, it's about sunshine, it's about a smile and a rainbow, and we're going to create product that's consistent with that blends with our swimwear.

Rick Patel -- Needham and Company -- Analyst

And a quick follow up question on outerwear. I think you mentioned that the order book would be flat -- is shaping up to be flat for this year, but it sounds like they are ready to supply resources if the season does shape up well. How are you planning inventories for outerwear as we think about this fall?

Morris Goldfarb -- Chairman and Chief Executive Officer

Well, we have probably the longest standing relationships we have in production are our outerwear suppliers. And those suppliers take a position on our behalf. So it's probably the best classification for this Company to chase. Our vendors have been with us, many of them have been with us for over 30 years. They've traveled from South Korea to China to Indonesia to Vietnam with us, where they set up production facilities. And we've never hurt them. We've never abandoned them. And because of that, they take our lead without a defined liability on our side.

So it's the best thing that we could do as far as having a little bit of risk for inventory that we do have and great partners that support the needs -- the quick response need for added inventory. And most of the production facilities that we're in for outerwear are not only dominated by us, a good deal of them are exclusive to us. So it's clear communication. It's where we have a sense that business is going to be good, we communicate that and the vendors take their risks accordingly. So, it's a --

Rick Patel -- Needham and Company -- Analyst

Thanks very much.

Morris Goldfarb -- Chairman and Chief Executive Officer

You are welcome.

Operator

I will now turn the call back to Morris Goldfarb.

Morris Goldfarb -- Chairman and Chief Executive Officer

Thank you for being with us today. Thanks for those of you that are consistent with us. Thanks for always being consistent and being tolerant of difficult years and better years. This is a better year, and I think we have many more to go. So, thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating and you may now disconnect.

Duration: 66 minutes

Call participants:

Neal S. Nackman -- Chief Financial Officer and Treasurer

Morris Goldfarb -- Chairman and Chief Executive Officer

Edward James Yruma -- KeyBanc Capital Markets -- Analyst

Erinn Elisabeth Murphy -- Piper Jaffray -- Analyst

John Kernan -- Cowen -- Analyst

Chethan Bhaskaran Mallela -- Barclays -- Analyst

Jim Duffy -- Stifel -- Analyst

Rick Patel -- Needham and Company -- Analyst

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