Don’t Rush Out To Buy G-III Apparel

There Is Risk In The Outlook For G-III Apparel 

G-III Apparel (NASDAQ: GIII) had a great Q1 but we see enormous risk in the outlook. While the company is well-positioned as a DTC and eCommerce merchant it is also heavily exposed to the wholesale market. After Target’s recent warning, we see a very large chance that orders for wholesale items will slow, and that will have an impact on both the top and bottom lines. The real risk is that Target’s warning is foreshadowing a tidal wave of contraction within the retail and discretionary universe that could weigh on share prices for an extended amount of time. When it comes to earnings and the earnings outlook, the outlook for earnings among Consumer Discretionary stocks is falling the hardest and we don’t see a bottom for it yet. 

The company CEO, Morris Goldfarb, issued a positive commentary with the release but we fear it may already be outdated. The company certainly saw robust demand for its products in Q1, we’re not so sure it will hold up in Q2 or the back-half of the year but we could be wrong. 

“Our strong momentum continued in the first quarter of fiscal 2023 exceeding both our top and bottom-line guidance, despite a challenging environment. Consumers are refreshing their wardrobes as they return to work and resume social activities, driving demand for our products,” Morris Goldfarb, G-III’s Chairman and Chief Executive Officer, said,

G-III Beats On The Top And Bottom Line 

G-III Apparel had a strong quarter driven by organic demand and the acquisition of Karl Lagerfeld earlier in the year. The company reported $688.8 million in net revenue for a gain of 32.5% that beat the Marketbeat.com consensus by 1530 basis points. The top-line strength was carried through to the bottom line as well, but there was some margin compression and we see the risk of further compression later in the year. The gross margin shrank by 180 bps, the operating margin by 110, to leave both the GAAP and adjusted earnings up versus last year. On a GAAP basis, the EPS is up $0.10 or 19% versus last year while the adjusted $0.72 is up $0.19 versus last year and beat by $0.14. 

The guidance is where the risk lies in this stock. The company raised its guidance for both the current quarter and the year but revenue is still expected to come in well below the analyst's consensus. The earnings guidance is more favorable and above consensus but assumes wholesale orders will remain strong and that discounting will not enter the picture. In our view, with gas prices at record levels and on the rise, discounting and slowing organic growth is something we expect to see more and more of. 

The Technical Outlook: G-III Apparel Moves Higher, Don’t Chase Prices 

The price action in G-III Apparel is moving higher in the wake of the Q1 report but we aren’t chasing this stock higher. The market is range bound and in the lower half of the range with the mid-point resistance just above current action. If G-III can get above the $29 level we might be interested but not really, a failure to move above that level will results in sideways trading within the lower end of the range at best and a move down to the bottom of the range or lower at worst.