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Why G-III Apparel Group Plunged 40.4% in May

By Steve Symington – Jun 4, 2019 at 5:00PM

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On the eve of its next quarterly report, here's what G-III investors need to know about last month's drop.

What happened

Shares of G-III Apparel Group (GIII -0.29%) dropped 40.4% in May, according to data from S&P Global Market Intelligence, after multiple analysts downgraded the clothing company on tariff concerns.

Investors should note the broader markets also fell hard -- with the S&P 500 slumping nearly 7% last month, for example -- on trade war and macroeconomic worries. But G-III fared much worse than most throughout the month as Wall Street voiced its caution.

Stock market arrow chart indicating losses.


So what

On May 14, Piper Jaffray's Erinn Murphy reduced her rating on G-III stock to "neutral" from "overweight," lowering her per-share price target to $35 from $43 in the process (and for what it's worth, shares trade at around $27 as of this writing). To explain her relative bearishness, Murphy noted a large amount of G-III's goods are produced in China, where recently increased tariffs are poised to reduce earnings by an estimated 10% to 30% -- or more if retail partners prove unable to pass some of that cost onto consumers -- in the second half of this year.

Around the same time, Cowen analyst John Kernan listed G-III as one of several companies that could suffer a "major disruption" to earnings stemming from tariffs on apparel and footwear imported into the U.S. from China. Kernan added that supply chain diversification to sources outside of China will likely be slow.

Now what

To be fair, G-III was operating from a position of strength prior to last month. Shares rallied 11% in a single day in March after the company not only crushed expectations with its fiscal fourth-quarter report but also followed with promises of higher profits going forward.

During the subsequent conference call, G-III chairman and CEO Morris Goldfarb even noted that despite a highly promotional retail environment, he was "very comfortable" G-III remains in "growth mode regardless of some of the influences that surround us that I can't control -- whether it's a tariff issue, [or] it's an economic issue that might drive the economy to make our consumer choose differently."

I suppose we'll see whether that comfort was disrupted -- and whether last month's steep decline was merited -- when G-III releases fiscal first-quarter 2020 results tomorrow morning (June 5, 2019). But given Wall Street's skepticism in the meantime, it was hard to blame traders for bidding down the stock so hard.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of G-III Apparel Group. The Motley Fool has a disclosure policy.

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