TL;DR This story all words and no pictures. If reading bothers you, well you've been warned.
Instead of trying to guess which way today's S&P arrow is headed, why not learn about some business you might buy two or three years from now?
That's what today's story is about. A business I learned a little about 3 years ago, in 2019. A few days ago the price cratered on news (Dec 1st), and I bought a small pile of shares along with a 2-week option. That company is called G-III. It's a “growth” stock, in the sense that it doesn't pay a dividend. Otherwise, it's growth story is underwhelming.
If I hadn't done the reading three years ago, this flash crash would have been just another blip on the radar. I wouldn't have given it a second glance.
These situations can represent bargains at the right price, and on December 1st, the market shit a giant brick about some consequential but overblown news. Someone, or multiple someones, panicked. G-III saw it's price cut almost in half, in a single trading day.
G-III is helmed by a guy named Goldfarb, whose son is in line to take over the operation. He's been at the helm forever, 2nd only to Warren Buffett in tenure length for publicly traded companies. It's a high-end fashion retailer, with owned brands such as DKNY, Donna Karan, and Karl Lagerfeld. They sell things like $600 dresses, $300 sweaters, and $800 cashmere coats. They also sell some cheaper stuff, like tops which only run $150.
The cheapest clothing on DKNY is $150.
So why did this stock shit the proverbial bed? They announced the licensing arrangements with Tommy Hilfiger and Calvin Klein will phase out over the next 3-4 years. To be certain, this is meaningful news. Those are big names and represent about 1/2 of G-III's revenue.
But here's the catch. They're licenses. The owners of the Hilfiger and Klein brands are making most of the profit on those sales, not G-III. As far as G-III is concerned, these are lower margin prospects than their own in-house brands.
Well, how do you value in-house brands? What are you, some kind of fashionista? Not remotely. That's exactly how I value them. I – the most unfashionable person you've likely ever met – have heard of these names. DKNY. Karl Lagerfeld. I'm not Parisian, where Lagerfeld is based. I'm french the way french fries are french. Yet I've heard of it. If I've heard of them – someone who shops thrift stores and considers $5 a bit much for secondhand pants – then they have significant name recognition.
G-III also services licenses for every major sports franchise in the US (NFL, NBA, MLB, NHL). This is another line of revenue which doesn't appear it will be impacted.
Now I could have rushed into the financials on December 1st when this knife is falling, but here's how doing your homework ahead of time helps.
I already knew the story and the financials, when I looked at this business 3 years ago.
G-III has a decent, balance sheet. Earnings growth is roughly 6.2% over the past decade on a 3 yr bookend measurement (2020-21-22 vs 2011-12-13). That's not exciting for a growth company. Revenue growth on the same metric is 8%. Again, big deal.
Operating margins sit around 7-8%. So if we expect half the revenue to drop off, and margins to improve slightly since they're now selling only in-house brands – 3 years from now – what do we expect?
The good news? They haven't had a negative year since 2009.
Napkin math? I expect $1.50-3/sh the next couple years and $1-2/sh going forward after the Hilfiger/Klein phase out. So what am I getting for $11.50 per share? Let's say $2.25 for 3 years and $1.50 for 3 years after that. That's $11.25. I got my money back in 6 years. That's a bear case. It's assuming they don't replace any of these licenses with other profit generating brand licenses. That's assuming both these brands do part ways with G-III. None of this is set in stone.
Beyond that, Goldfarb Sr. has hinted that brands spun-off will generally fetch significantly higher multiples than markets assign them in public companies. True or not, I don't know. But it's another avenue that could yield reward.
I knew enough about G-III to know it wasn't a great deal in the $20 range. I also knew I don't know shit about fashion, so unless it's extremely obvious I have no business getting involved.
Enter the screaming bargain. A 40+ percent drop in a stock price in a day requires a real catastrophe. This isn't a real catastrophe. It's not good news, to be certain. But it's not a catastrophe.
So what happens today? Some good news. Goldfarb bought $3 million of his own stock, on the open market – increasing his personal holdings 13.5%. His son (Goldfarb Jr.) bought better than 4% more for himself. This is a meaningful confirmation.
Selling by insiders has a million reasons. There is only one reason they buy.
The bull case is that the market is going to figure out this news is overblown and some humans will step in to take advantage of the fire sale. That's why I picked up the short dated option.
This is not a large position, because I don't have a ton of knowledge about the business or fashion generally. Position sizing matters. It is, however, in my eyes a screaming bargain.
Anyways, if you get tired of watching the squiggle of the S&P and trying to guess which way it's going, instead try reading up on a business or two each day. In a year, you can accumulate general knowledge of around 700 businesses with 20-30 minutes of effort each day.
This is what Buffett, Schloss, Ruane, Simpson, Lynch and the rest of the great investors were doing when they were young. It takes patience, but it still works just as well as it did 20, 40, 60 years ago.
Do your own research. I could be wrong.
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