G-III Apparel Group Ltd. Issuer Credit Rating Raised To 'BB' On Stronger Sales And Credit Metrics; Outlook Stable

  • New York-based G-III Apparel Group Ltd. (G-III) has outperformed our expectations for its Tommy Hilfiger, DKI, and Karl Lagerfeld businesses. We have revised our forecast and now expect the company's financial leverage to decline to the high 1x area by the end of fiscal 2020, instead of our previous expectation of the low 2x area.
  • We have raised our issuer credit rating on G-III to 'BB' from 'BB-'.
  • At the same time, we raised our issue-level ratings on the company's senior secured credit facility to 'BB+' from 'BB'. The recovery rating on this debt remains '2'.
  • The stable outlook reflects our view that the company will maintain leverage of less than 2x absent any transformational acquisitions in the next 12-24 months. We expect G-III's credit metrics to continue to improve as its portfolio of brands continues to gain share in department stores, and its margins expand as the DKI business becomes margin accretive.
CHICAGO (S&P Global Ratings) April 2, 2019—S&P Global Ratings today took the 
rating actions listed above. The upgrade reflects the company's improving 
credit metrics, with forecasted leverage improving to the mid-to-high 1x area 
in the next 12 months from the mid 2x area a year ago. We expect the company's 
growth momentum to continue as its portfolio of brands, anchored by Tommy 
Hilfiger, Karl Lagerfeld, DKNY, and Donna Karen, continue to take share in the 
better department store channels. Additionally, the company has integrated the 
DKI acquisition and produced a successful first year collection. We expect the 
DKI platform to boost profits and generate international opportunities for 
G-III, as these brands are owned and not licensed.  

The stable outlook reflects our expectation that G-III will continue to 
deliver growth in its wholesale segment, especially with its top performing 
licensed brands, while expanding the scale of its DKI business and executing 
on further rationalization of its retail segment. As such, we project leverage 
to be less than 2x over the next 12 months, and would expect the company to 
rapidly deleverage if it were to make any acquisition such that resulting 
leverage was at or below 3x.

We could lower our ratings on G-III if it undertakes a large debt-funded 
acquisition such that leverage is sustained at more than 3x. We estimate that 
debt would increase by more than $400 million for a transformational 
acquisition depending on the incremental EBITDA from the transaction. We could 
also lower our ratings if sales and margins are negative impacted by a 
slowdown in U.S. consumer demand due to a weakening economy, key licensing 
agreement changes, or a higher than expected tariff on Chinese goods that 
results in debt leverage exceeding 3x. We estimate that EBITDA would need to 
decline by 35% from current levels for this to occur. 

Raising the ratings in the next 12-24 months is unlikely because we believe 
the company could make additional debt-funded acquisitions to supplement its 
organic growth. We could upgrade the company, however, if we become 
comfortable with G-III's financial policy and believe that it will reduce 
leverage to less than 2x within a year following any debt-financed 
acquisition. An upgrade would also be predicated on the company continuing to 
grow in the wholesale channel while expanding the profitability of its DKI 
business, sustaining leverage at less than 2x, and generating healthy free 
operating cash flow (FOCF). 
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