Buy This Stock That Could Pop 10% Next Week On Earnings

Earnings announcements for investors are like Santa Claus and birthday parties for kids, a lot of anticipation and full of surprises. Four times a year, publicly traded companies unwrap their quarterly finances for Wall Street to admire or criticize.

Each week this column will identify companies scheduled to release their quarterly report cards. The idea is to highlight stocks with the potential to pop or drop as investors react to results.

G-III Apparel Group, Ltd. (NASDAQ: GIII) –delivers ratios investors love.

G-III Apparel Group, Ltd. designs, manufactures, and markets women’s and men’s apparel. The company markets its apparel under brands you might recognize, such as ck Calvin Klein, Guess, Guess?, Kenneth Cole NY, Levi’s, and Tommy Hilfiger to name a few.GIII also has licenses with the National Football League, Major League Baseball, National Basketball Association, and National Hockey League.

Tentatively, I expect GIII to report 4th quarter results on March 22nd. Analysts believe the textile maker will earn $0.43 per share on sales of $573.01 million. Earnings-per-share (EPS) are projected to be lower than last year’s $0.49, but sales should best last year’s $514.32 million.

According to my calculations, G-III Apparel will earn $0.46 per share, a $0.03 bullish earnings surprise. Additionally, the Consumer Goods company generates an Earnings Power score of 10 (max score is 12.)

(Earnings Power is based on academic research. The study examined  hundreds of financial ratios and determined that 12  are highly correlated with the bottom line i.e. predicting profits/losses. The final score measures changes in underlying fundamentals such as quarterly sales vs. inventory, assets and liabilities versus sales growth, return on assets,  long and short-term debt, recent earnings revisions, income before extraordinary items and a few more, but you probably get the picture by now. Companies with higher scores are considered healthier than those generating lower scores.)

A high Earnings Power score is not surprising as the clothes maker bypassed Wall Street’s consensus 11 consecutive quarters and 12 of the last 13.Better than expected bottom lines have been a boon for investors too. The stock price popped 10 of the last 13 quarters. On average, the 10 earnings-driven price spikes propelled GIII shares higher by 10.88% in the three days before and after the news.

On the rare occasion Wall Street frowns on results, the stock’s price fell by an average of -4.14%. Those are ratios investors have to love; three-point-three pops for every drop, and more than two-for-one reward versus risk. Over the long run, trading G-III Apparel’s earnings is very profitable, provided these relationships hold.

Turning to the company’s financial statements, there are more ratios for investors to love. Our quality of earning check shows a company that’s getting healthier, which should add to its Earnings Power.

First off, management is cutting the cost of sales as a percentage of sales. In the 3rdquarter, this line item gobbled up less of total sales than in the last quarter and compared to last year. Falling costs mean more money drops down to the bottom line to earnings.

Selling general and administrative expenses (SG&A) are also trending in shareholder’s favor. Three months ago, SG&A was 21% of revenue. It stood at 21.71% a year ago and 29.86% six months back. As a caveman might say, “costs down, sales up, good.”

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Lower cost of sales and SG&A means GIII’s operating profit margin climbed 9.87% year-over-year (YoY) and a whopping 247% quarter-over-quarter (QoQ).

The only minor yellow-flag we see is inventory, increasing slightly YoY. However, inventory build is less than half of revenue growth projections which could lead to pricing power.

Finally, the virtual world can give us some clues on sales, too. Google Trends tracks searches and allows users to compare timeframes. Studies show there is a high correlation between searches and sales. The more that consumers look things up online, the higher sales should be, and vice-versa.

Calvin Klein is G-III Apparel’s workhorse line. Like Mary and her little lambs, where Calvin Klein’s sales go, GIII’s profits are sure to go. Once again, we find bullish news for investors. Google searches for the keyword “Calvin Klein” are up 10% YoY, which is in-line with Wall Street’s sales forecast.

Putting it all together, strong Earnings Power, higher sales with lower costs, higher margins, increased web searches, and G-III Apparel’s recent earning history could make our $0.46 per share estimate seem conservative.

If that’s the case, then GIII’s price performance in the days surrounding earnings could make investors feel like it is Christmas in March.