On Wednesday, Guggenheim maintained a Buy rating on G-III Apparel Group (NASDAQ:GIII) and increased its price target to $38 from $36. The firm's analyst cited the company's strong third-quarter performance, where G-III Apparel reported an adjusted diluted earnings per share (EPS) of $2.59, surpassing the estimated $2.26. Despite net sales of $1.09 billion falling slightly short of the $1.10 billion estimate, the company experienced notable growth.
G-III Apparel's third quarter saw a 1.8% increase in net sales, although the demand for outerwear was negatively affected by unseasonably warm weather in the U.S. However, as temperatures dropped leading into the holiday season, trends across the company's brands and channels improved significantly. The company also reported substantial growth in North American traffic and conversion due to marketing investments, which enhanced direct-to-consumer (DTC) and e-commerce performance.
The analyst highlighted the impressive over 30% combined growth of G-III's key owned brands, including DKNY, Karl Lagerfeld, Donna Karan, and Vilebrequin, during the quarter.
As G-III transitions away from its Tommy Hilfiger and Calvin Klein licensing agreements, the owned brands are seen as part of a $5 billion long-term opportunity. The company's strategy includes reducing Tommy Hilfiger and Calvin Klein penetration to around 30% this year, down from 50% two years ago, with an expected similar top-line impact next year of approximately $200 million.
G-III's gross margin for the third quarter contracted 80 basis points to 39.8%, which was still better than the 39.0% forecasted due to the higher penetration of owned brands. The company's inventory levels were reported to be down by 10%, positioning it well for the upcoming holiday season.
While Guggenheim remains cautious due to the challenging consumer environment and the impact of the weather, the firm has adjusted its profitability estimates upwards for G-III Apparel. The new EPS estimates for fiscal years 2025 and 2026 are now $4.15 and $4.20, respectively, up from the previous $4.00 and $4.05.
The analyst concluded by expressing optimism about the progress G-III Apparel and its management team are making on the business plan, despite the material impact and risks associated with the reacquisition of the Tommy and Calvin licenses over the next few years.
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