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01/11 17:58
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Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
The earnings call presents mixed signals: strong retail and digital sales growth, particularly in owned brands like Donna Karan and Karl Lagerfeld, contrasts with challenges in the wholesale segment due to expired licenses and tariff impacts. The Q&A reveals management's cautious optimism and strategic focus on owned brands, but also highlights uncertainties in guidance and gross margin recovery. Despite positive trends in certain areas, the lack of specific guidance and tariff pressures suggest a balanced outlook, leading to a neutral sentiment prediction for the stock price.
Net Sales Net sales for the third quarter were $989 million, compared to $1.09 billion in the same period last year, reflecting a decrease primarily due to lower sales from Calvin Klein and Tommy Hilfiger license businesses, which were impacted by expired licenses.
Gross Margin Gross margin was 38.6% in the third quarter of fiscal 2026, compared to 39.8% in the previous year's third quarter. The decline of 170 basis points was attributed to the impact of tariffs, although it outperformed expectations due to a stronger mix of full-price sales.
Net Cash Position The company ended the quarter with a net cash position of $174 million, compared to a net debt position of $119 million in the same period of the previous year. This improvement was achieved after repurchasing approximately $50 million worth of shares year-to-date.
Inventory Levels Inventory levels increased modestly by 3% to $547 million at the end of the quarter, compared to $532 million in the previous year. This was attributed to disciplined inventory management, with units down year-over-year.
Non-GAAP Net Income Non-GAAP net income for the third quarter was $83 million, or $1.90 per share, compared to $116 million, or $2.59 per share, in the previous year. The decline was primarily due to lower sales from expired licenses, but results were significantly better than expectations.
Retail Segment Sales Net sales of the retail segment were $46 million for the quarter, compared to $42 million in the prior year, despite operating fewer stores. The increase was driven by solid comp sales increases across North American DKNY and Karl Lagerfeld Paris stores, as well as strong sales growth on the Donna Karan website.
Wholesale Segment Sales Net sales of the wholesale segment were $977 million, compared to $1.07 billion last year. The decline was primarily due to lower sales from Calvin Klein and Tommy Hilfiger license businesses, which were impacted by expired licenses.
Donna Karan Brand Performance Donna Karan delivered impressive double-digit sales increases in North America, with expected growth of 40% in fiscal 2026. The brand's success was attributed to leveraging its iconic DNA, aspirational luxury positioning, and higher price points.
Karl Lagerfeld Brand Performance Karl Lagerfeld's global men's business posted close to 20% growth in the quarter, while Karl Lagerfeld jeans saw sales up over 30%. The brand's success was supported by impactful marketing campaigns and disciplined pricing strategies.
Digital Sales Digital sales in the quarter delivered nearly 20% growth, with Donna Karan leading the performance. This growth highlighted the significant value and long-term potential of the digital channel.
Donna Karan Weekend: Introduced in early November, offering a casual yet refined aesthetic. Early results show strong performance in dresses, denim, and knit sets.
Donna Karan Jewelry: Launched in mid-November exclusively on donnakaran.com, with plans to expand to department and specialty stores in spring 2026. Signature twisted cuff received the Accessories Council's 2025 award for design excellence.
Karl Lagerfeld Jeans: Internationally sold, resonating with younger consumers, and driving over 30% sales growth in Q3.
Converse Apparel: First shipments delivered strong results, reflecting consumer enthusiasm for the product.
International Expansion: Strategic investments and partnerships, including AWWG, aim to capture long-term growth opportunities. Focus on underpenetrated markets.
North America and Europe: Strong performance with double-digit growth in North America and high single-digit growth in Europe during the Black Friday period.
China: New license partner to reposition DKNY for growth in the Chinese market.
Digital Sales: Achieved nearly 20% growth, with Donna Karan leading the performance. Enhanced digital capabilities boosted traffic and conversion rates.
Inventory Management: Disciplined approach kept inventories nearly flat, up just 3% year-over-year despite tariffs.
Marketing Investments: Increased consumer engagement, with campaigns like DKNY's Fall 2025 generating 7.9 billion impressions and $15.9 million in earned media value.
Shift from PVH Licenses: Redeploying resources to accelerate growth in owned brands after the wind-down of Tommy Hilfiger and Calvin Klein licenses.
Dividend Program: Introduced first-ever dividend program, with an initial quarterly cash dividend of $0.10 per share.
Category Expansion: Extending into categories like fragrance, eyewear, and home, as well as experiential categories such as hospitality.
Tariffs: The company is facing significant impacts from tariffs, which have affected gross margins and profitability. The gross impact of tariffs is estimated at $135 million for fiscal 2026, with an unmitigated impact of $65 million. This has limited the company's ability to adjust pricing on inventory already sold to retailers, forcing them to absorb costs to remain competitive.
Decline in PVH Licensing Business: The unexpected decision by PVH to end the long-standing licensing partnership has led to a significant decline in sales from Calvin Klein and Tommy Hilfiger brands. These brands, which once generated over $1.5 billion in annual net wholesale sales, are expected to generate only $800 million this year, with further reductions anticipated in fiscal 2027.
Inventory Management Challenges: While inventory levels are being managed prudently, the company is facing challenges in maintaining flat inventory levels amid tariff pressures and a dynamic marketplace. Units are down year-over-year, and inventory management remains a critical focus area.
Economic and Consumer Environment Uncertainty: The company remains cautious about the global consumer environment, which could impact demand and sales performance. This uncertainty is reflected in their prudent approach to fiscal year guidance.
Gross Margin Decline: Gross margins have declined due to the impact of tariffs and the liquidation of certain branded products transitioning to license arrangements. The wholesale segment's gross margin dropped by 170 basis points compared to the previous year.
Softness in European and Caribbean Markets: Retail softness in Europe and the Caribbean has weighed on results for certain brands, such as Vilebrequin, despite growth in other regions like France.
Transition of G.H. Bass Brand: The transition of the G.H. Bass brand to a license arrangement has led to a decline in retail segment gross margins, reflecting liquidation efforts.
Fiscal Year 2026 Net Sales: Expected to be approximately $2.98 billion, a decrease of approximately 6% compared to last year.
Key Owned Brands Growth: DKNY, Donna Karan, Karl Lagerfeld, and Vilebrequin are expected to grow at a mid-single-digit rate this year.
Gross Margin Impact: Gross margins for fiscal 2026 are expected to decline approximately 200 basis points due to tariffs, with normalization and expansion anticipated in fiscal 2027 as lower-margin licenses are exited and higher-margin owned brands increase penetration.
Non-GAAP Net Income for Fiscal 2026: Expected to be between $125 million and $130 million, or diluted earnings per share between $2.80 and $2.90.
Adjusted EBITDA for Fiscal 2026: Expected to be between $208 million and $213 million, compared to $326 million in fiscal 2025.
Capital Expenditures: Expected to be approximately $40 million, primarily for shop-in-shop build-outs, leasehold improvements, and technology investments.
Tariff Impact: Gross impact of tariffs estimated at $135 million, with an unmitigated impact of approximately $65 million for fiscal 2026.
Donna Karan Brand Growth: Expected growth of 40% in fiscal 2026, driven by product expansion and strong consumer demand.
Karl Lagerfeld Brand Expansion: Plans for continued global visibility and market share growth, with significant untapped opportunities in Asia.
Digital Sales Growth: Digital sales delivered nearly 20% growth in the quarter, with Donna Karan showing significant value and long-term potential.
Dividend Program Introduction: The company has introduced its first-ever dividend program, with an initial quarterly cash dividend of $0.10 per share. The company intends to pay dividends quarterly in the future, subject to market conditions and Board approval.
Share Repurchase: The company repurchased approximately $50 million worth of shares year-to-date, ending the quarter in a net cash position of $174 million.
The earnings call presents mixed signals: strong retail and digital sales growth, particularly in owned brands like Donna Karan and Karl Lagerfeld, contrasts with challenges in the wholesale segment due to expired licenses and tariff impacts. The Q&A reveals management's cautious optimism and strategic focus on owned brands, but also highlights uncertainties in guidance and gross margin recovery. Despite positive trends in certain areas, the lack of specific guidance and tariff pressures suggest a balanced outlook, leading to a neutral sentiment prediction for the stock price.
The earnings call summary reveals several negative indicators: declining gross margins, reduced non-GAAP net income, and increased inventory levels due to tariffs. Although there are positive aspects such as growth in owned brands and a net cash position, the Q&A section highlights management's unclear guidance and challenges with tariffs and brand transitions. The market cap suggests a more pronounced reaction, leading to a likely negative stock price movement of -2% to -8% over the next two weeks.
Despite some positive aspects like improved liquidity and shareholder returns, the company's earnings call highlights several challenges, including supply chain disruptions, regulatory issues, and competitive pressures. The negative impact of exiting a major license business, coupled with weak guidance and uncertain tariff impacts, outweighs the positives. The cautious optimism in consumer spending and the lack of clarity on tariff mitigation further contribute to a negative outlook, likely resulting in a stock price decrease of -2% to -8% over the next two weeks.
The earnings call shows strong financial performance with record EPS growth, improved margins, and a robust cash position. Despite challenges like tariff risks and licensing revenue loss, the company has diversified sourcing and mitigated impacts. The positive outlook is reinforced by raised earnings guidance, successful brand launches, and share repurchases. Analysts' questions revealed confidence in management's strategies. With a market cap of $1.2 billion, the stock is likely to see a positive reaction, driven by strong earnings, optimistic guidance, and strategic initiatives.
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