Clothier G-III Apparel (NASDAQ:GIII) reports Q1 2007 earnings results tomorrow. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? The sole analyst following G-III rates it a buy.
  • Revenues. This analyst believes sales grew 9% this quarter, to $15 million ...
  • Earnings. And that the company's net loss widened to $0.70 per share.

What management says:
In 2005, G-III acquired all of outerwear-maker Marvin Richards, and certain assets of outerwear-maker Winlit, helping the company achieve its goal of becoming, in the words of CEO Morris Goldfarb, "an all-season diversified apparel company." The downside to this, near-term at least, is that the company's losses will rise in the early part of this year. As related in G-III's earnings report on fiscal 2006: "The first quarter historically results in seasonal losses. The higher projected first-quarter loss this year [compared to last year] is due primarily to the inclusion of the results of the companies we acquired in July 2005, as well as higher interest expenses and depreciation and amortization costs relating to the acquisitions."

As a result, G-III projected an earnings range that suggests the analysts may be too optimistic. The company itself warned investors to look for anything between $0.70 and $0.74 in losses in Q1 2007. Its full-year profit should be at least flat with fiscal 2006's $0.58 per share, and could mark a small improvement to as much as $0.62 per share.

What management does:
Fiscal 2006, by the way, was a watershed for G-III, in which the company demonstrated the power of a modest increase in margins to magnify profitability in the low-margin retailing sector. Eighteen months ago, G-III was netting just a tenth of a penny on every dollar's worth of clothing sold. Bump that up to the modest 2.2% it's been earning recently, and the company becomes 22 times more profitable.

Margins %

10/04

1/05

4/05

7/05

10/05

1/06

Gross

24.5

24.6

24.5

24.3

25.6

26.2

Op.

1.0

1.8

2.0

2.5

5.2

5.2

Net

0.1

0.3

0.4

1.0

2.4

2.2

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Even so, this Fool can't help noticing how very few cash profits actually resulted from the company's accounting success in fiscal 2006. Although G-III reported earning $7.1 million in profits under generally accepted accounting principles, it generated less than a third of that amount in free cash flow -- just $2.3 million.

How can the company begin to close that, er, gap between GAAP and real cash profits? It could start by improving its bill collection. Over the last six months, G-III's sales have rocketed -- up 66% versus the previous year's period. Inventories have grown less quickly, at just 34%, suggesting that demand for the company's products is strong. The kink in G-III's armor is accounts receivable, which outgrew sales 74% to 66%. If we see the A/R number decline tomorrow, G-III's future could be bright indeed.

Competitors

Customers

Licensors

Columbia Sportswear (NASDAQ:COLM)

Gottschalks (NYSE:GOT)

Kenneth Cole (NYSE:KCP)

Nike (NYSE:NKE)

Hartmarx (NYSE:HMX)

Phillips-Van Heusen (NYSE:PVH)

Columbia Sportswear is a Motley Fool Hidden Gems pick. Discover Tom Gardner's full list of stellar small caps with a free 30-day guest pass.

Fool contributor Rich Smith does not own shares of any company named above.