General
Unless the context indicates otherwise, when we refer to "we," "us," "our" or the "Company" in this Form 10-Q, we are referring to Guess?, Inc. ("GUESS?") and its subsidiaries on a consolidated basis. Important Factors Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q, including documents incorporated by reference herein, contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be contained in the Company's other reports filed under the Securities Exchange Act of 1934, as amended, in its press releases and in other documents. In addition, from time-to-time, the Company, through its management, may make oral forward-looking statements. These statements relate to expectations, analyses and other information based on current plans, forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our goals, future prospects, global cost reduction opportunities and profitability efforts, capital allocation plans, cash needs and current business strategies and strategic initiatives. These forward-looking statements are identified by their use of terms and phrases such as "anticipate," "believe," "continue," "could," "create," "estimate," "expect," "goal," "intend," "may," "outlook," "pending," "plan," "predict," "project," "see," "should," "strategy," "will," "would," and other similar terms and phrases, including references to assumptions. Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed. These forward-looking statements may include, among other things, statements or assumptions relating to: our expected results of operations; the accuracy of data relating to, and anticipated levels of, future inventory and gross margins; anticipated cash requirements and sources; our convertible senior notes issued inApril 2019 , including our ability to settle the liability in cash; cost containment efforts; estimated charges; plans regarding store openings, closings, remodels and lease negotiations; effects of doing business outside ofthe United States , including, without limitations, exchange rate fluctuations, inflation, changes to import duties, tariffs and quotas, political and economic instability and terrorism; effects of the pending exit of theUnited Kingdom from theEuropean Union ; plans to improve the efficiency and effectiveness of the Company's European distribution centers; plans regarding business growth, international expansion and capital allocation; plans regarding supply chain efficiencies and global planning and allocation; e-commerce, digital and omni-channel initiatives; business seasonality; results and risks of current and future legal proceedings; industry trends; consumer demands and preferences; competition; currency fluctuations and related impacts; estimated tax rates, including the impact of the 2017 Tax Cuts and Jobs Act ("Tax Reform"), future clarifications and legislative amendments thereto, as well as our ability to accurately interpret and predict its impact on our cash flows and financial condition; results of tax audits and other regulatory proceedings; the impact of recent accounting pronouncements; raw material and other inflationary cost pressures; consumer confidence; and general economic conditions. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances. Such statements involve risks and uncertainties, which may cause actual results to differ materially from those set forth in these statements. Important factors that could cause or contribute to such differences include those discussed under "Part I, Item 1A. Risk Factors" contained in the Company's most recent Annual Report on Form 10-K for the fiscal year endedFebruary 2, 2019 , under "Part II, Item 1A. Risk Factors" contained herein and in our other filings made from time-to-time with theSecurities and Exchange Commission ("SEC") after the date of this report. Business Segments The Company's businesses are grouped into five reportable segments for management and internal financial reporting purposes: Americas Retail,Americas Wholesale,Europe ,Asia and Licensing. Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before corporate performance-based compensation costs, asset impairment charges, net gains (losses) on lease terminations, restructuring charges and certain non-recurring charges, if any. The Americas Retail segment includes the Company's retail and e-commerce operations in theAmericas . The Americas Wholesale segment includes the 36
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Company's wholesale operations in theAmericas . TheEurope segment includes the Company's retail, e-commerce and wholesale operations inEurope and theMiddle East . TheAsia segment includes the Company's retail, e-commerce and wholesale operations inAsia and the Pacific. The Licensing segment includes the worldwide licensing operations of the Company. The business segment operating results exclude corporate overhead costs, which consist of shared costs of the organization, asset impairment charges, net gains (losses) on lease terminations, restructuring charges and certain non-recurring charges, if any. Corporate overhead costs are presented separately and generally include, among other things, the following unallocated corporate costs: accounting and finance, executive compensation, corporate performance-based compensation, facilities, global advertising and marketing, human resources, information technology and legal. Information regarding these segments is summarized in "Part I, Item 1. Financial Statements - Note 8 - Segment Information." Products We derive our net revenue from the sale of GUESS?, G by GUESS (GbG), GUESS Kids and MARCIANO apparel and our licensees' products through our worldwide network of directly-operated and licensed retail stores, wholesale customers and distributors, as well as our online sites. We also derive royalty revenue from worldwide licensing activities. Foreign Currency Volatility Since the majority of our international operations are conducted in currencies other than theU.S. dollar (primarily the Canadian dollar, Chinese yuan, euro, Japanese yen, Korean won, Mexican peso, Russian rouble and Turkish lira), currency fluctuations can have a significant impact on the translation of our international revenues and earnings (loss) intoU.S. dollar amounts. Some of our transactions that occur primarily inEurope ,Canada ,South Korea ,China ,Hong Kong andMexico are denominated inU.S. dollars, Swiss francs, British pounds and Russian roubles, exposing them to exchange rate fluctuations when these transactions (such as inventory purchases or periodic lease payments) are converted to their functional currencies. As a result, fluctuations in exchange rates can impact the operating margins of our foreign operations and reported earnings (loss), and are largely dependent on the transaction timing and magnitude during the period that the currency fluctuates. In addition, we have certain real estate leases which are denominated in a currency other than the functional currency of the respective entity that entered into the agreement (primarily Swiss francs, Russian roubles and Polish zloty). As a result, the Company may be exposed to volatility related to unrealized gains or losses on the translation of present value of future lease payment obligations when translated at the exchange rate as of a reporting period-end. When these foreign exchange rates weaken versus theU.S. dollar at the time of the respectiveU.S. dollar denominated payment is made relative to the payments made in the comparable period, our margins could be unfavorably impacted. During the first nine months of fiscal 2020, the averageU.S. dollar rate was stronger against the Canadian dollar, Chinese yuan, euro, Korean won, Mexican peso, Russian rouble and Turkish lira and weaker against the Japanese yen compared to the average rate in the same prior-year period. This had an overall unfavorable impact on the translation of our international revenues and earnings from operations for the nine months endedNovember 2, 2019 compared to the same prior-year period. If theU.S. dollar strengthens relative to the respective fiscal 2019 foreign exchange rates, foreign exchange could negatively impact our revenues and operating results, as well as our international cash and other balance sheet items, during the remainder of fiscal 2020, particularly inCanada ,Europe (primarily the euro, Turkish lira and Russian rouble) andMexico . Alternatively, if theU.S. dollar weakens relative to the respective fiscal 2019 foreign exchange rates, our revenues and operating results, as well as our other cash balance sheet items, could be positively impacted by foreign currency fluctuations during the remainder of fiscal 2020, particularly in these regions. The Company enters into derivative financial instruments to offset some, but not all, of the exchange risk on foreign currency transactions. For additional discussion regarding our exposure to foreign currency risk, forward contracts designated as hedging instruments and forward contracts not designated as hedging instruments, refer to "Item 3. Quantitative and Qualitative Disclosures About Market Risk." 37
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Recent Developments OnFebruary 20, 2019 ,Carlos Alberini began his service as the Company's Chief Executive Officer and member of the Board, replacingVictor Herrero , who separated from the Company onFebruary 2, 2019 .Mr. Alberini previously served as President and Chief Operating Officer of the Company from 2000 to 2010. From 2010 until 2014,Mr. Alberini was Co-CEO of Restoration Hardware and at present, remains a Director on the Board of Restoration Hardware. From 2014 untilFebruary 2019 ,Mr. Alberini served as the Chairman and CEO ofLucky Brand .Mr. Alberini has finalized his strategic vision and implementation plan for execution with our leadership team and has identified several key priorities to drive revenue and operating profit growth over the next five years. These priorities are: (i) brand relevancy; (ii) customer centricity; (iii) global footprint; (iv) product excellence; and (v) functional capabilities; each as further described below: Brand Relevancy. We plan to optimize our brand architecture to be relevant with our three target consumer groups: Heritage, Millennials, and Generation Z. We will continue to execute celebrity and influencer partnerships and collaborations as we believe that they are critical to engage more effectively with a younger and broader audience. Customer Centricity. We intend to place the customer at the center of everything we do. We plan to implement processes and platforms to provide our customers with a seamless omni-channel experience. Global Footprint. We will continue to expand the reach of our brands by optimizing the productivity and profitability of our current footprint and expanding our distribution channels. Product Excellence. We will extend our product offering to provide our customers with products for the different occasions of their lifestyles. We will seek to better address local product needs. Functional Capabilities. We expect to drive material operational improvements in the next five years to leverage and support our global business more effectively, primarily in the areas of logistics, sourcing, product development and production, inventory management, and overall infrastructure. Capital Allocation We plan to continue to prioritize capital allocation toward investments that support growth and infrastructure, while remaining highly disciplined in the way we allocate capital across projects, including new store development, store remodels, technology investments and others. When we prioritize investments, we will focus on their strategic significance and their return on invested capital expectations. We also plan to manage product buys and inventory ownership rigorously and optimize overall working capital management consistently. During the first quarter of fiscal 2020, the Company announced that its Board of Directors reduced the future quarterly cash dividends that may be paid to holders of the Company's common stock, when, as and if any such dividend is declared by the Company's Board of Directors, from$0.225 per share to$0.1125 per share to redeploy capital and return incremental value to shareholders through share repurchases. InApril 2019 , the Company issued$300 million aggregate principal amount of 2.00% convertible senior notes due 2024 in a private offering. During the first quarter of fiscal 2020, the Company used$170 million of proceeds from its convertible senior notes to enter into an accelerated share repurchase program ("ASR"). The Company also repurchased shares of its common stock in open market and privately negotiated transactions totaling$110.6 million during the first nine months of fiscal 2020. The Company's investments in capital for the full fiscal year 2020 are planned between$63 million and$68 million . The planned investments in capital are related primarily to retail and e-commerce expansion inEurope andAsia , existing store remodeling programs as well as continued investments in technology to support our long-term growth plans. Comparable Sales The Company reportsNational Retail Federation calendar comparable sales on a quarterly basis for our retail businesses which include the combined results from our brick-and-mortar retail stores and our e-commerce sites. 38
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We also separately report the impact of e-commerce sales on our comparable sales metric. As a result of our omni-channel strategy, our e-commerce business has become strongly intertwined with our brick-and-mortar retail store business. Therefore, we believe that the inclusion of e-commerce sales in our comparable sales metric provides a more meaningful representation of our retail results. Sales from our brick-and-mortar retail stores include purchases that are initiated, paid for and fulfilled at our retail stores and directly-operated concessions as well as merchandise that is reserved online but paid for and picked-up at our retail stores. Sales from our e-commerce sites include purchases that are initiated and paid for online and shipped from either our distribution centers or our retail stores as well as purchases that are initiated in a retail store, but due to inventory availability at the retail store, are ordered and paid for online and shipped from our distribution centers or picked-up from a different retail store. Store sales are considered comparable after the store has been open for 13 full months. If a store remodel results in a square footage change of more than 15%, or involves a relocation or a change in store concept, the store sales are removed from the comparable store base until the store has been opened at its new size, in its new location or under its new concept for 13 full months. E-commerce sales are considered comparable after the online site has been operational in a country for 13 full months and exclude any related revenue from shipping fees. Definitions and calculations of comparable sales used by the Company may differ from similarly-titled measures reported by other companies. Other The Company operates on a 52/53-week fiscal year calendar, which ends on the Saturday nearest toJanuary 31 of each year. The nine months endedNovember 2, 2019 had the same number of days as the nine months endedNovember 3, 2018 . Executive Summary Overview Net earnings attributable to Guess?, Inc. increased 192.4% to$12.4 million , or diluted earnings of$0.18 per common share, for the quarter endedNovember 2, 2019 , compared to net loss attributable to Guess?, Inc. of$13.4 million , or diluted loss of$0.17 per common share, for the quarter endedNovember 3, 2018 . During the quarter endedNovember 2, 2019 , the Company recognized$1.8 million of asset impairment charges;$2.4 million of amortization of debt discount related to the Company's convertible senior notes; and a net credit of$1.4 million of certain professional services and legal fees and related credits (or a combined$2.5 million negative impact after considering the related tax benefit of these adjustments of$0.4 million ), or an unfavorable$0.04 per share impact. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were$14.9 million and adjusted diluted earnings were$0.22 per common share for the quarter endedNovember 2, 2019 . During the quarter endedNovember 3, 2018 , the Company recognized charges of$42.4 million related to theEuropean Commission fine;$1.3 million of asset impairment charges; and$0.1 million of certain professional services and legal fees and related costs (or a combined$24.0 million negative impact after considering the related tax benefit of these adjustments of$0.2 million and income tax benefits of$19.6 million related to changes in the provisional amounts recorded related to the Tax Reform), or an unfavorable$0.30 per share impact. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were$10.6 million and adjusted diluted earnings were$0.13 per common share for the quarter endedNovember 3, 2018 . References to financial results excluding the impact of these items are non-GAAP measures and are addressed below under "Non-GAAP Measures." 39
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Highlights of the Company's performance for the quarter endedNovember 2, 2019 compared to the same prior-year period are presented below, followed by a more comprehensive discussion under "Results of Operations": Operations • Total net revenue increased 1.7% to$615.9 million for the quarter endedNovember 2, 2019 , compared to$605.4 million in the same prior-year quarter. In constant currency, net revenue increased by 4.2%. • Gross margin (gross profit as a percentage of total net revenue) increased 90 basis points to 37.3% for the quarter endedNovember 2, 2019 , compared to 36.4% in the same prior-year period. • Selling, general and administrative ("SG&A") expenses as a percentage of total net revenue ("SG&A rate") increased 50 basis points to 33.3% for the quarter endedNovember 2, 2019 , compared to 32.8% in the same prior-year period. SG&A expenses increased 3.6% to$205.0 million for the quarter endedNovember 2, 2019 , compared to$197.9 million in the same prior-year period. • During the quarter endedNovember 3, 2018 , the Company recognized charges of €37.0 million ($42.4 million ) related to an estimated fine imposed on the Company by theEuropean Commission related to its inquiry concerning possible violations of certainEuropean Union competition rules by the Company. In December of fiscal 2019, theEuropean Commission concluded its investigation and imposed a cumulative fine of €39.8 million ($45.6 million ), which the Company paid in the first quarter of fiscal 2020. • During the quarter endedNovember 2, 2019 , the Company recognized asset impairment charges of$1.8 million , compared to$1.3 million in the same prior-year period. • Operating margin increased 730 basis points to 3.7% for the quarter endedNovember 2, 2019 , compared to negative 3.6% in the same prior-year period.The European Commission fine unfavorably impacted operating margin by 700 basis points during the quarter endedNovember 3, 2018 . Lower expenses related to certain professional service and legal fees and related (credits) costs favorably impacted operating margin by 40 basis points during the quarter endedNovember 2, 2019 compared to the same prior-year period. Higher asset impairment charges unfavorably impacted operating margin by 10 basis points during the quarter endedNovember 2, 2019 compared to the same prior-year period. Earnings from operations increased 205.3% to$22.6 million for the quarter endedNovember 2, 2019 , compared to loss from operations of$21.5 million in the same prior-year period. • Other expense, net (including interest income and expense), totaled$4.5 million for the quarter endedNovember 2, 2019 , compared to$5.8 million in the same prior-year period. • The effective income tax rate changed to 25.1% for the quarter endedNovember 2, 2019 , compared to 53.1% in the same prior-year period. During the quarter endedNovember 3, 2018 , the Company revised the provisional amounts previously recorded related to impact of the Tax Reform, and recorded income tax benefits of$19.6 million .
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