Morris Goldfarb - Chairman and CEO Neal Nackman - CFO.

Edward Yruma - KeyBanc Erinn Murphy - Piper Jaffray John Kernan - Cowen Chethan Mallela - Barclays Susan Anderson - B. Riley Dana Telsey - Telsey Advisory Group Rick Patel - Needham & Company.

Good morning and welcome to the G-III Apparel Group Third Quarter Fiscal 2019 Earnings Conference Call. My name is Sheryl, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

[Operator Instructions] Please note that this conference call is being recorded. I will now turn the call over to Neal Nackman, the Company’s CFO. Sir, you may begin..

Thank you. Good morning and thank you for joining us. Before we begin, I would like to remind participants that certain statements made on today’s call and in the Q&A session may constitute forward-looking statements within the meaning of federal securities laws.

Forward-looking statements are not guarantees and actual results may differ materially from those expressed or implied in forward-looking statements. Important factors that could cause actual results of operations or the financial condition of the company to differ are discussed in the documents filed by the company with the SEC.

The company undertakes no duty to update any forward-looking statements. In addition, during the call, we will refer to non-GAAP net income, non-GAAP net income and loss per share and adjusted EBITDA, which are all non-GAAP financial measures.

We have provided reconciliations of these non-GAAP financial measures to GAAP measures in our press release, which is also available on our website. I will now turn the call over to our Chairman and Chief Executive Officer, Morris Goldfarb..

Good morning and thank you for joining us. With me today are Sammy Aaron, our Vice Chairman and President; Wayne Miller, our Chief Operating Officer; Neal Nackman, our Chief Financial Officer; and Jeff Goldfarb, our Executive Vice President.

We're pleased to report continued growth and momentum in our business for the third quarter, as we exceeded our income and earnings per share guidance. In our largest quarter of the year, we had a year-over-year net sales increase of 5%.

The strong momentum in our wholesale business continued, as it was responsible for all of the growth in the quarter. Our Wilsons ambassadors had started off slowly in August and September and then had marked improvement in October.

Based on our overall third quarter performance and continued confidence in our business, we are increasing our guidance for the full fiscal 2019 year. This guidance includes double digit growth in net sales, an approximately 30% increase in adjusted EBITDA and a greater than 60% growth in non-GAAP net income per share.

We continue to leverage our five global power brands, DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger, and Karl Lagerfeld. We work hard to develop well designed, differentiated and brand relevant products for a competitive and broad range of distribution channels at appropriate price points.

This is truly at the heart of G-III’s success and what makes us a supplier of choice to our retail partners. Our results for the third quarter were once again fueled by strength across our wholesale business, which met our top line forecasts and exceeded our bottom line expectations.

A few financial highlights for the third quarter, net sales were up 5% to $1.07 billion, a $48 million increase compared to last year and a record for the third quarter. Our third quarter non-GAAP net income per diluted share was $1.88, an increase of 13% as compared to $1.67 per share in last year's third quarter.

Now, for some details on our results. Our own [ph] retail business missed its plan for the quarter. The Wilsons business had a high single digit comparable sales decline in the quarter, although we did experience an improvement in business with the arrival of seasonal temperatures in the month of October.

We believe that our product is well positioned for the important holiday season. Bass posted a mid single digit comp decline in the quarter. The Bass business improved sequentially each month in the quarter, as the new fall apparel assortment arrived.

The shift in product mix we embarked on last quarter with a higher penetration of apparel inventory appears to be working and is expected to drive increased sales and gross margins and lead to more productive inventory turns. We continue to rationalize our store portfolio and are on track to have closed approximately 105 stores over the two years.

We expect to end this year with approximately 245 Bass and Wilsons stores compared to the 350 in operation at the beginning of fiscal 2018. We've closed 71 of the approximately 105 targeted locations.

The nine high profile outlet centers that we repurposed to Karl Lagerfeld Paris stores experienced solid performance in the quarter and we converted two additional stores in San Francisco and Palm Springs. Results for our own retail businesses are not satisfactory to us.

We're pushing forward on our goal of reducing losses and continue to review all options for these businesses. In the quarter, we registered double-digit comp sales gains in our DKNY outlet stores.

We acquired the business in December 2016 and we're pleased with customer reaction to significant improvements that we're making to the DKNY product mix in the stores. As I highlighted last quarter, we want to make certain we have the appropriate product assortment and economic model in place before converting or opening additional DKNY stores.

We continue to believe that additional DKNY and Karl Lagerfeld Paris stores provide an opportunity for us to reshape and rebalance an overall smaller fleet of stores over time. As I said earlier, our wholesale business had another stellar quarter.

Our Calvin Klein business performed well in the third quarter, led by strength in sportswear, outerwear and dresses. We've got some really incredible businesses with this brand, which continues to be in strong demand by consumers throughout North America. We registered another quarter of strong performance from our Tommy Hilfiger business.

This business generated in excess of 50% sales growth compared to last year, spread across a number of categories, which includes sportswear, outerwear and dresses. We've done a great job in developing a diverse set of product lines over the last two years and have built a profitable business, approaching $400 million in annual sales.

We accomplished this by leveraging our competencies in managing and building brands, while attracting some of the best talent in the industry. It is also important to give credit to our partner, PVH, for their superior marketing and management of the Tommy Hilfiger brand.

Tommy Hilfiger continues to represent a significant runway for future growth for us. The momentum at our Karl Lagerfeld business is very good and we had another outstanding quarter with net sales up more than 30%. The business saw healthy increases, led by sportswear, outerwear, handbags and shoes.

We're excited about the success of this brand that we introduced to the North American market. Last quarter, Karl Lagerfeld launched the first worldwide collaboration with Kaia Gerber. The launch was supported through digital marketing and public relations efforts.

The excitement around the launch and the events for this Karl Lagerfeld program created a strong awareness for the consumer to seek out Karl Lagerfeld Paris brand. Out traffic to the KarlLagerfeldParis.com website during the third quarter was almost 80% higher than last year.

The third quarter also marked the one year anniversary of the launch of G-III’s design product for our own DKNY and Donna Karan brands. Our strong brand development and execution capabilities continued and these businesses delivered approximately 40% year-over-year growth, driven by strength in sportswear, dresses, outerwear and footwear.

Beginning with spring 2019, we will now be offering DKNY and Donna Karan to all better department stores in North America. We’re also extremely excited about this global reach of our DKNY and Donna Karan brands and [Technical Difficulty].

As an example, our joint venture in China now has approximately 50 points of sale and we look forward to this business growing and becoming profitable over the coming years. Licensing for the DKNY and Donna Karan brands represents another important profitability driver.

Introduction of additional lifestyle product categories allow us to expand global brand awareness and introduce the brand to a broader consumer base. This quarter, we signed a license for fashion jewelry in international markets outside of North America with the best-in-class partner, Swarovski.

Swarovski’s dedication to creating beautiful and attainable luxury accessories make them an ideal partner for DKNY’s international launch into fashion jewelry. We expect licensing revenue to grow at a strong rate over the next several years, as we continue to develop both the DKNY and Donna Karan brands.

As brand owners, we understand the importance of relevant brand marketing. We were very pleased with DKNY fall ad campaign which results -- provided the brand with strong visibility. Our digital media placements are performing well with a broad audience of consumers.

For this holiday season, DKNY will continue with its marketing efforts behind its 100% DKNY campaign. We released news ads in November, kicking off a digital and outdoor media strategy to keep DKNY top of mind during the shopping season. As we move forward, our marketing team will work to create new and innovative ways to exchange with our customers.

Corporate wide, the digital channel is a focus for G-III, as we seek to capture an ever growing market share of online purchases, whether it be on our own brand websites or those of our retail partners.

As an example, our DKNY co-op marketing with Macy's continues to evolve, leveraging the strength of Macy's multimedia marketing mix across all of our DKNY product categories. Our team works closely with Macy's to fine tune our efforts to curate and drive DKNY search results and effect higher conversion.

The efforts supported by our strong product execution capabilities and successful marketing campaigns have shown incredible results. We've seen almost a 250% lift in DKNY searches on the Macy's.com website. Now, for an update on outerwear. Outerwear is an important driver of our third quarter business.

We dominate this category and we've shipped some great product to our retail partners. We experienced great sales with strength across the board, especially with Calvin Klein, Tommy Hilfiger, DKNY, Karl Lagerfeld Paris and Levi's.

Lastly, Vilebrequin, our status swimwear and resort brand registered a solid third quarter performance, with positive mid single digit comparable store sales growth. Importantly, the performance was strong across all regions, including Europe, the United States and Asia.

In the third quarter, we drove brand awareness in key European and US cities through the opening of pop-up stores in Paris, London, Ibiza, Porto Cervo and Los Angeles. The pop-up location successfully expanded the Vilebrequin brand reach and drove incremental Volume. We're continuing to expand the brand in mainland China and the Middle East.

Our industry is affected by the tariff environment and G-III is no exception. The tariffs imposed on China imports to date primarily impacted our handbag and leather outerwear categories. These categories are a much smaller part of our business and represents approximately 7% of our total net sales.

We have longstanding relationships with a diverse base of vendors, both in China and many other countries and have already strategically started diversifying our entire sourcing network, including apparel. We also believe the strength of our brands will allow us to selectively increase selling points.

Taken together, we believe these initiatives will significantly offset the impact of the existing tariffs and have minimal impact on our financial results. We've built G-III to be a very entrepreneurial and nimble company that can move and adapt quickly. We've proven our ability to succeed in difficult times and will do whatever is needed to succeed.

I’ll now turn the call over to Neal to provide additional detail of our financial performance for the quarter and our guidance for the year..

Thank you, Morris. Net sales for the third quarter ended October 31, 2018 increased approximately 5% to $1.07 billion from $1.02 billion in the same period last year. Net sales of our wholesale operations segment increased 4% to $1.01 billion from $967 million. DKNY and Tommy Hilfiger brands were the main drivers of this increase.

Wholesale sales growth, particularly for our Calvin Klein brand, were impacted unfavorably by the bankruptcy of Bon-Ton stores with the largest impact occurring in the third quarter. Net sales of our retail operation segment were approximately 7% lower compared to last year at $111 million.

We reported same store sales decreases of approximately 9% for our Wilsons stores, 7% for our G.H. Bass stores and a same store sales increase of 13% at our DKNY stores. Net sales of our retail operations segment were also negatively affected by the decrease in the number of stores operated by us.

Our gross margin percentage was 35.6% in the third quarter of fiscal 2019, compared to 38.2% in the prior year’s period. The gross margin percentage in our wholesale operations segment was 32.7% compared to 34.2% in last year's quarter.

This percentage decrease in gross margins in our wholesale operations segment was primarily the result of unfavorable product mix, the reclassification of co-operative advertising expenses from SG&A to a reduction of net sales as a result of the adoption of ASC 606 and an expected decrease in DKNY and Donna Karan brand gross margins in the quarter.

The gross margin percentage in our retail operations segment was 48.5% compared to 51.3% in the prior year’s quarter. Similar to the first two quarters, gross margins for our DKNY stores were lower in the quarter this year as compared to the prior year.

Gross margins for DKNY in the prior year reflected the benefit of the reversal of valuation reserves as a result of acquisition accounting. The gross margin percentage for our Wilsons stores was also lower than last year, mostly as a result of higher promotions.

Total SG&A expenses decreased to 232 million in the quarter from 243 million in the same period last year. Due to the adoption of ASC 606, $11 million of co-operative advertising expenses in the quarter are now treated as a reduction in net sales. Prior to this year, these expenses were part of SG&A as just discussed.

As expected, we are seeing the benefit of leveraging our SG&A base, primarily as a result of DKNY and Tommy Hilfiger revenue growth. Net income for the third quarter of this fiscal year was $94 million or $1.86 per diluted share compared to $82 million or $1.65 per share in last year's quarter.

Non-GAAP net income per diluted share was $1.88 for the quarter compared to a $1.67 per share in the prior year. Non-GAAP net income per share excludes non-cash imputed interest expense related to the acquisition of Donna Karan International of $1.2 million this quarter and $1.4 million in last year's third quarter.

Looking at our balance sheet, accounts receivable increased to $820 million from $601 million at the end of the prior year’s third quarter.

This increase is predominately related to the company's adoption of ASC 606, which requires that liabilities recorded in connection with variable consideration, which were previously reported as an offset to accounts receivable now be reflected as short term liabilities.

Excluding the impact of the new classification, accounts receivable would have been up 7%, which is consistent with our sales growth. Inventory classifications have also been impacted by the implementation of ASC 606 and now exclude anticipated return to inventory. On a comparable basis, inventory increased approximately 12% to $616 million.

This increase is aligned with our forecasted sales growth. We spent approximately $20 million on capital expenditures this year. We had long term debt outstanding of approximately 694 million at the end of the current quarter compared to 727 million at the end of the same quarter last year.

In addition, our cash balances at the end of the quarter were $66 million this year compared to $68 million in the previous year.

Regarding our guidance, for the fiscal year ending January 31, 2019, we are raising our guidance and now forecasting net sales of approximately $3.08 billion and net income between $132 million and $137 million, or between $2.59 and $2.69 per diluted share compared to our previous guidance of net sales of approximately $3.06 billion, net income between $125 million and $130 million or between $2.45 and $2.55 per diluted share.

This compares to net sales of $2.81 billion and net income of $62 million or $1.25 per diluted share in fiscal 2018. We expect non-cash imputed interest expense for fiscal 2019 of approximately $5 million or $0.08 per diluted share.

On an adjusted basis, excluding non-cash imputed interest, we expect non-GAAP net income for fiscal 2019 of between $136 million and $141 million or between $2.67 and $2.77 per diluted share, compared to our previous guidance of non-GAAP net income between $129 million and $134 million or between $2.52 and $2.62 per diluted share.

This compares to non-GAAP net income of $79 million or $1.60 per diluted share in fiscal 2018. We are now forecasting projected full year adjusted EBITDA for fiscal 2019 of between $262 million and $269 million compared to our previous forecast of between $250 million and $260 million. This compares to adjusted EBITDA of $201 million in fiscal 2018.

With respect to our retail operations, we are now forecasting mid single digit comparative store sales declines for Wilsons and G.H. Bass in the fourth quarter. As a result, we now anticipate that our losses from these two chains for fiscal 2019 will be approximately the same as last year. That concludes my comments.

I will now turn the call back to Morris for closing remarks..

Thank you, Neal. Our five power brands continue to propel us forward. The DKNY and Donna Karan brands are a key cornerstone in driving future growth and profitability for our company. Our wholesale business is off to a great start in the fourth quarter and we feel good about how we are positioned to finish the year.

Our designers and merchants stand out as the most creative and innovative in the fashion industry and they continue to develop the best product in the market.

Our experienced and talented teams of merchandise coordinators have made a significant difference in our ability to service our customers, while maintaining and bringing products to the selling floor in a timely and efficient manner.

We’ve positioned ourselves to be among the most important resources for our retail partners and we'll explore and develop the many opportunities for growth in the US and throughout the world. I'd like to thank our shareholders, partners and stakeholders for their support and wish you all a happy holiday season. Thank you, operator.

We’re now ready to take some questions..

[Operator Instructions] And our first question comes from Edward Yruma from KeyBanc..

Hi. Good morning and congrats on a nice quarter. In terms of the retail business, I know there were -- weather may have been a challenge earlier in the quarter.

I know that you said that transit improved, but if I take the year in its entirety based on your new guidance, clearly, the retail losses haven't come down the way you might have initially expected.

I guess thinking holistically, what’s your openness to accelerating the store closures beyond what you kind of illustrated, what are the steps that you’re taking to reduce the losses in the retail business for 2019? And then as a follow-up, I think you mentioned that DKNY will be offered at all better department stores.

I know that wasn’t exclusive at Macy’s, I wondered if you could dig in a little bit there on kind of the decision to offer it more broadly and how we should think about the growth profile going forward? Thank you..

Thanks, Ed. Clearly, retail has not performed, it’s not a secret. It's the first thing we talk about. We're attempting many different efforts in trying to solve the problem. Clearly, we're on a path of closing underperforming doors. We're negotiating with our landlords.

We've made product mix changes, we're making management changes and quite honestly, we're on it, it's not moving as fast as we would like, but we are clearly on a path. It is a focus for G-III. It's not one of those situations that you put to the side and say, we'll deal with it later.

We're dealing with it now and we're looking at all alternatives and we constantly meet with developers, with strategists on how to create greater demand within our stores other than giving away the product, that's an easy solution, but we're on it and we will cure it. So that would be your retail question.

Is there a follow-up on that, Ed? Are you okay?.

Yeah. Just -- and then a follow-up on DKNY please..

So DKNY initially, the support that we needed to acquire the brand clearly came from Macy's. The Macy's stepped up and guaranteed significant numbers for us to be able to acquire the company and rationalize the scale. We’ve achieved what we committed to with Macy's. They have in turn accomplished everything that they committed to G-III.

And today, in many discussions with Macy's, I think we mutually believe that an exclusive product sometimes -- an exclusive brand sometimes doesn't need to be. The greater exposure and the appropriate distribution helps Macy's.

So, we’re carefully distributing it in channels that are at least at the same level as Macy's and we jointly believe that they can grow beyond their commitment to G-III on an exclusive. So this took a lot of time to negotiate through and we're both in agreement that it's the best path for the brand..

So maybe just as a quick follow-up to that, does that change some of the longer-term guidance you had laid out from the DKNY, both from an EBIT perspective as well as from a top line perspective? Thanks so much..

It might, the jury is still out, it doesn't change anything on the downside. The opportunity is on the upside for greater distribution and as we distribute the product, clearly, it won't be massive, the first season, but it will be significant as we perform. So we believe, if anything, there is significant upside opportunity..

Our next question comes from Erinn Murphy from Piper Jaffray..

I guess my first question, Morris, is for you. You guys took up the sales guidance for the year, so obviously feel pretty good about where you stand in the fourth quarter.

Can you just share a little bit more about what you're seeing in terms of reorders, particularly in the seasonal product?.

Yes. Seasonal product being outwear is exceptionally good. We had a decent year last year and this year is an excellent year. Our inventory levels have come down significantly. Had we taken a bigger risk on owning inventory, it all would have been sold.

So we're in great shape and growth for Q4 will be evident, as we disclosed at the end of Q4 on the outwear side. But beyond that, all that categories are doing well. Our dress business is fabulous, performance business, our footwear business is very good.

There's not a category or classification of product that I could point to that I would tell you we're struggling with. I'd like to see handbags a little bit better, but it's okay. It’s not a terrible business for us.

So what we're doing right now, our initiative and we call out our five power brands fairly regularly, we're kind of clearing house on the non-essential pieces of our business and little of that is showing up in a miss in margin, as we clean house, but our five power brands are doing well. They're making plan and in most cases, they're beating plan.

So I believe that Q4 will be a strong quarter for us, as Neal has guided you through and no issues at all. Our inventory levels are coming down. The dated inventory that sometimes we’re troubled with for the size of our business, has come down somewhat significantly and we’re overall in great shape..

Okay. That’s good to hear.

And then just a follow-up for Neal, just a clarification on the third quarter sales, how big was Bon-Ton in the third quarter? I think, you were referencing before an 80 million headwind for the year, but just curious on the third quarter component? And then on the gross margin in the third quarter, down 250 basis points, you mentioned a lot of moving parts, Morris has referenced some of the product mix as well.

So just curious, can you just quantify some of the buckets between promotional activity, the accounting changes and then product mix on the gross margin?.

Sure, Erinn. So top line Bon-Ton, we thought was in the -- around $55 million impact again. When we view the Bon-Ton impact, there's both the direct sales to Bon-Ton and then the related off-price sales that we would be able to ship as a result of those full price sales.

So we still think it's around a $55 million impact to the quarter, which would have been very significant to the operating profit as well. As we’ve mentioned, we’ve got a lot of fixed costs in terms of when you lose an account and you lose top line sales, there – it is very highly profitable to us.

So, I think it would have been a totally different structure, of course, it's something that happened and we will live with and we've got to go forward from here and we'll show strong growth from here. Turning back to the question, as far as gross margin dilution, we've given out the co-op number.

That approaches about 100 basis points, just in itself, in terms of the reclass, just a little more granularity in terms of DKNY and Donna Karan, we launched those businesses in the third quarter of last year. And as a result of that, inventory really didn't exist prior to that.

So if you think about the markdown cadence that that business would have been on, this year, it's a more normal cadence. There's a full set of inventory in the channel. Last year, we were really just launching. So that was probably one of the more significant pieces of a decrease in the business.

When I turn and look at the rest of our wholesale business, we run 40 to 50 different business units. We've got all sorts of different programs going on. Some are slightly higher, some are slightly lower.

I think the main takeaway to have as far as our wholesale business is that we're running the wholesale business at comparable to slightly increase gross margins and that's the way we planned it and the way we build it. We were slightly stronger in the first half.

We’re slightly weaker in this quarter and the full year again, wholesale margins are well in shape. We do a great job of really any headwinds that have come. We've had some freight headwinds this year. We've traditionally got pressure in terms of labor pressure.

But our merchants and our divisional leaders do a great job of pricing product right and maintaining margins..

And so just a clarification, the fourth quarter, the gross margin should not be down as bad as we saw in the third quarter?.

The short answer is yes..

Our next question comes from John Kernan from Cowen..

Morris, can you talk about the performance of Calvin Klein in the quarter. Obviously affected by Bon-Ton, but if we look at maybe the wholesale growth ex-Donna Karan, maybe a little bit slower than it had been running in the first half of the year and you did give us some pretty robust numbers for Tommy.

So I'm just wondering what you saw from Calvin Klein during the quarter?.

Today, Calvin Klein is our trophy piece. It’s our largest piece of business. Dollar increases in Calvin Klein greater than anything, we have percentage increases or not. We have a business that's about $1 billion or north of $1 billion and matching percentages to that versus Tommy or Karl Lagerfeld or DKNY is a tough mission.

Calvin is, today, I view Calvin as the best performing brand in retail. It does incredibly well. I can only speak to really the women's piece of the business and I can speak to the American pieces of the business and the outerwear piece of the business that we have in both genders. There's nothing better.

I wish I could find another Calvin Klein for long term growth. The brand is still an aspirational brand and we believe there is plenty of runway left to continue to grow this. There are pieces we'd like to see perform a little bit better.

As I said, our handbag business, we were repositioning the types of handbags we're making, we’re restructuring the build outs and we're going to grow that as well. That is the piece that I'd like to see a little bit better, but beyond that, we lead the charge in almost every category.

If you're in New York, I’d encourage you to go to Herald Square and see what our build-out just in the sportswear pad looks like. It is amazing. There are so many different classifications of products that are housed there and the prices range from very affordable to very aspirational.

We have – today, in that department, we even have a $2000 Shearling jacket that's housed there and it’s selling. So no issue with the brand for us and our high demand sell throughs are good and no issue at all..

And then a follow-up for Neal, can you just give us an update on Donna Karan profitability. Where you expected to finish this year? What you think you can track towards next year potentially? And I think you said on the second quarter call, a little over $400 million in sales for Donna Karan this year.

Are you still standing by those numbers?.

John, we were -- just over 400, around the $410 million numbers, I believe what we threw out in the previous quarter and we're really at about the same place. Our operating profits are probably up just slightly from where I was before, but still in the low -- maybe low now to mid single digit percentage level for the business this year.

Going forward, just to give you a sense to really give you specific figures, but the concept here was that the additional sales would be highly accretive to the bottom line and that's continued -- that's what we would continue to expect is very strong gross margins on this business as we don't pay a royalty.

And the variable expenses are not probably that much different than the core business, but I think starting with the fact our gross margins are higher, the incremental dollars for us are high, we did comment on licensing income and potential there, those are pure profit dollars for us for the most part.

So we see very strong growth for 2019 and of course this incremental profitability is really the most important part of it..

And then just one quick follow-up, help for a commentary on stores and store closures this year, can you just remind us how many more leases would be coming due in coming years?.

I think the big reduction in real estate just due to attrition in leases is two years away. The normal reduction of leases being 10% to 15% annually, but there a big batch in a couple of years, but that doesn't mean we stand still and just watch it evaporated, so on pace, don't assume that is the issue..

Our next question comes from Chethan Mallela from Barclays..

So I wanted to follow up on the earlier comment about tariffs and specifically diversifying your supply base away from China across a number of different categories. I know that's something you've been pretty successful with in recent years.

Is there a way to quantify, maybe where you're trying to sourcing sort of stance right now versus what we might have seen in the 10-K. And are you seeing any willingness from your factory partners in China that you're still working with to share some of the tariff burden in the accessories and outerwear categories..

So thank you for your question. If you know the history of this company, you can date it back to, not that long ago, almost all of our production was done in New York City. We moved out of need, the product mix was complex. We moved first to Taiwan, then we moved 100% of our production into South Korea.

We moved from South Korea to Indonesia and Outer Mongolia. Those were my two primary sourcing countries and then we moved into China.

And China, after a period of time, and the size of their population and their economic strategy of trying to draw in as much currency as they could, kind of created a drag for us and we produced the bulk of our production in China.

As we developed our product mix, our collections, we strayed -- we are an important factor today in Indonesia that was built over the last, we left Indonesia in -- about 15 years ago and we're back aggressively. We started the charge into Indonesia about three years ago. Today, we’re a major factor there. We’re one of the larger producers in Vietnam.

We’re in Cambodia to supplement a little bit of our handbag business. We made a statement earlier that we’re impacted by tariffs in leather handbags and leather apparel because of China. We're moving pretty much all of our leather apparel into India and we've always had a foothold in India.

I could go down a list of – I prefer not to, because it's a little bit of our competitive advantage and I've spent, alongside of the key senior executives in our company, spent the last few months travelling all over the world to find suitable substitutions for what we're doing in China.

So, it was a great exercise, whether tariffs come or not, we have found competitive countries to produce in that are going to enhance our margins. Some of them are duty free, forget about just avoiding the increase, some of them are capable of producing large sums of product for us that will have no duty attached to it.

Then, we can't forget the fact that we're growing our business in Europe that really is not a China issue. So the product that we export from China into the European market will have no impact on tariff increases. And to respond to your question about partners, yeah, we definitely have a concerned production, providing -- provider situation in China.

All of our vendors are not sure of what the future looks like and have assured us that they will share in the problem. They do not want us to walk away. Their margins and their contribution to our lack of margin in some cases, there's going to be fairly aggressive.

They've assured us that they're there all along the way and some of the retailers that we trade with that we counseled as we were buying product recently, also agreed to share in the increases that we might impose on pricing. So this isn't the standalone.

Everybody has basically agreed to contribute to the problem or contribute to lessening the burden of the problem on one factor, you can't shift it all on the vendor, the vendor being the origin of the product. You can shift it all on us and we can’t shift it to the retailer and assume that the consumer is going to eat it all. So, we're there.

It's a partnership situation that's been well thought out, that it’s top of mind and I think we will be fine..

Great. Thanks so much. That was really helpful. And just a quick follow-up on the retail store base, can you just remind us of how much of the Wilsons and G.H. Bass store base is profitable on a four wall basis..

It's probably a little more than a third of the chain..

Our next question comes from Susan Anderson from B. Riley..

Good morning, nice job on the quarter. I guess a follow-up on DKNY, particularly given now the expanded door growth. I guess, I was wondering if you could give some more color on maybe the drivers between new doors, additional space within existing doors and then also new product rollout.

I guess, where is the bulk of the growth you see coming from over the next few years..

So usually, the growth comes from greater depth within a classification. We generally grow our space, whether it's dresses, sportswear, footwear, regardless of the area. First, there's a testing phase and if you're hearing me say, we're going to have broader distribution and that's going to impact us overnight, it won't.

We are expanding our distribution to more customers, but the real growth will be expanding the breadth of the product that sits in Macy's. Macy's is very supportive of it.

Door count within Macy's increases and the classifications that outperform the department get additional space and in many cases DKNY is a brand that is outperforming in the departments that it sits in. So I would look for accretive growth within the doors, the greatest piece of the business will be the accretive growth within the doors that we sit.

And over time, the expansion of door count will make its mark..

And then I guess one follow-up on the retail business too. I think you add it's more apparel to the stores this quarter. It seems like that probably didn't perform as well as you had hoped. So I guess curious about what your thoughts are on keeping the apparel in the stores, as we look into next year..

So, Susan, your reference is to G.H. Bass where we've changed the mix of footwear to more apparel. Yes, you'll see -- we're testing different methods of retailing. You'll find some stores that will be pure footwear stores.

You'll find some stores that will, but you won't find any pure apparel stores, you'll find stores that are skewed more to apparel than footwear. You'll find stores that have an elimination of many accessories that are not achieving what we thought they would. You’ll find stores that have a reduced mix of luggage.

Our luggage business is tough and it takes up an awful lot of room and it's, in many cases, it's not pretty. It doesn't merchandise well within our assortments and as we eliminate luggage from the stores that don't require or do not sell enough of the luggage, we're going to have a more attractive store for a customer to walk in.

There will be greater clarity of what we sell and I believe it's going to make a big difference and that's going in to play, as we speak. You won't see that today, you'll see greater depth in apparel today, but you won't see all the other initiatives that we're about to implement..

And then was there any products, I guess, within Bass or Wilsons that did perform well or everything was pretty much in line with what the average was?.

We spent a fair amount of time at Wilsons. I would tell you, Wilsons did not do incredibly well, because we sacrificed part of the year in moving inventory that should have been marked down prior. We took the hit this year and there's a margin impact, because of it.

We sacrificed part of the spring season and we brought in our fall product a little bit late. The call outs for what is performing, down culture performing very well. We even have a well business that's okay. There is a good outerwear business. It's hard to pick a classification of outerwear that is not performing.

We have penetration of about 17% or 18% in women's leather apparel and about 30% in men's leather apparel. The product is selling well, but there are opportunities today, as leather prices are down, to buy more competitively and thus transfer much more compelling leather product to the consumer.

So we’re happy that our ability to now create new product at promotional prices in probably the highest ticket in the store, which is leather. So – and Wilsons is known to be a leather store. So there is an opportunity there and again Wilsons will go through the same product change as Bass. We're eliminating.

I would say, about 70% of our stores will not be carrying luggage any longer. We found that 20% of the stores, this is usually the case, 20% of the stores are doing about 85% of the total business.

So we will eliminate the stores that really shouldn't be carrying the product and that will make a big difference and will open up space for better turning product and it will give us an opportunity to showcase existing products in a much better form than we have been doing historically.

We don't want -- what we tend to do mistakenly is create more of a variety store than is necessary. We need to specialize and show the consumer that we're best in the category and there's a reason for our existence and that's the effort that we're going to go through now.

We've put on a new product person who came from Abercrombie and lands in and we believe he's going to make a big difference in our choices in product for Wilsons..

Our next question comes from Dana Telsey from Telsey Advisory Group..

Good morning, everyone and nice to see the progress. As you think about the DKNY international business, that always has been seen as a long term opportunity.

How do you think about 2019, because I think at one point, there was discussion about something in Europe with some of the retailers there for spring in ’19? And then Neal, just some clarification on the loss for Bass and Wilsons, how do you think about that. I think, it was originally expected to be $10 million.

How do you see it as compared to last year?.

So Dana, I'll take the first part. Our European business is quite good. As we've all seen, the business in the UK is a little bit upside down. There have been a couple of bankruptcies, a couple of companies that are on the verge of bankruptcies. We have Brexit, we have lots of issues that exist in the UK.

So we haven't normalized our business there, but it is growing and we're going to play an important part in Europe in maybe a unique form.

The model that we have here, which is classification driven and has an element of support in inventory and backup inventory, we’re indoctrinating the European market to buy efficiently and understand that we do have support inventory that we will have some support inventory to service their needs as the sellthroughs increase and we're seeing that -- we're seeing it happen.

We had lots of concerns, we took a brand that was positioned at a much higher retail level. Fabrics were different. It was owned by LVMH and image was incredibly important and price points, retaining a high price points, higher luxury price point was key for Europe.

What we've done and what we're continuing to do is take the Calvin model that is so successful here, it's not just slapping a label on product, calling it DKNY and working aggressive margins and prospering uniquely as a vendor. We're pricing products affordably. The margins are a little bit better in Europe as expected.

And we're going to give the retailer in Europe the same advantages that we provide for the retailers here. So we're aggressive in that initiative. We've sent some of our New York talent to Milan where our base is for distribution, for selling distribution is and we have taught some of the LVMH staff the G-III way and it is working.

There's excitement within our own staff. There is excitement within the retailers and there's a lot more to come, as Europe stabilizes for us..

And Dana, as far as the retail, in Bass and Wilsons, we lost approximately $25 million last year. We now expect that we’ll anniversary that figure.

On a year-to-date basis, we're actually probably slightly up compared to last year, but as I mentioned in my speech that we've taken the comps down to a mid single digit negative comp, so the fourth quarter will actually, right now, our expectation is to perform worse than we did last year and therefore we should be in approximately the same place that we were last year.

I just wanted to clarify one point I just made before. The stores, on a trailing 12 month basis that are running positive or about 65% the stores that are on a trailing 12 that are running negative is about one third of the chain. I may have said that reverse before..

And our final question comes from Rick Patel from Needham & Company..

Just a question on outerwear, so I think you entered the back half, expecting this category to be slightly down for the season. Given the strength that you're seeing, do you now expect it will be higher and how should we think about how much you can chase into the fourth quarter, if demand continues to be strong..

Rick, the business will be slightly higher and that's not caused by demand or sell-through. That's caused by inventory levels.

It’s no longer possible to chase that business, where we've shipped an incredible amount of product, we're light on inventory and pretty soon, we start shipping our spring outerwear, which is not intended to sell in any great form as the weather is cold. So there will be an increase, but not a blow away.

We don't have the inventory to really support a blow away outerwear and outerwear quarter..

And as you close distribution points on the retail side, especially at Wilsons, how should we think about how you're going to manage some of your excess inventory going forward? I'm just curious if you’ll have to be more conservative with some of your upfront orders or you’ll need to rely more on off price and what does that mean for retail gross margins, I’m sorry, for gross margins in general?.

So, Rick, your question is targeted towards the retailer majority that's not selling through?.

I believe you sell some of your excess wholesale inventory through the retail channel, so just curious how that dynamic plays out?.

No. That is not our model. Retail is a standalone that assorts its own purchases. It's not a liquidation center for our inventory that sits to support wholesale. Wholesale is an assist for retail, retail is not an assist for wholesale..

Thank you. Thanks for listening to our story. I wish you all a great holiday season and thanks for staying on. Have a good day..

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect..