Guess' : GUESS INC Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

General

Unless the context indicates otherwise, when we refer to "we," "us," "our" or
the "Company" in this Form 10­Q, 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, potential actions and
impacts related to the coronavirus (or "COVID-19") pandemic, 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. Factors which may cause actual
results in future periods to differ materially from current expectations
include, among others: our ability to maintain our brand image and reputation;
domestic and international economic or political conditions, including economic
and other events that could negatively impact consumer confidence and
discretionary consumer spending; the continuation or worsening of impacts
related to the COVID-19 pandemic, including business, financial, human capital,
litigation and other impacts to the Company and its partners; our ability to
successfully negotiate rent relief or other lease-related terms with our
landlords; our ability to successfully negotiate or defer our vendor
obligations; our ability to maintain adequate levels of liquidity; changes to
estimates related to impairments, inventory and other reserves, including the
impact of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act
enacted in March 2020, which were made using the best information available at
the time; changes in the competitive marketplace and in our commercial
relationships; our ability to anticipate and adapt to changing consumer
preferences and trends; our ability to manage our inventory commensurate with
customer demand; risks related to the timing and costs of delivering merchandise
to our stores and our wholesale customers; unexpected or unseasonable weather
conditions; our ability to effectively operate our various retail concepts,
including securing, renewing, modifying or terminating leases for store
locations; our ability to successfully and/or timely implement our growth
strategies and other strategic initiatives; our ability to successfully
implement or update information technology systems, including enhancing our
global omni-channel capabilities; our ability to expand internationally and
operate in regions where we have less experience, including through joint
ventures; risks related to our convertible senior notes issued in April 2019,
including our ability to settle the liability in cash; our ability to
successfully or timely implement plans for cost reductions; our ability to
effectively and efficiently manage the volume and costs associated with our
European distribution centers without incurring shipment delays; our ability to
attract and retain key personnel; obligations or changes in estimates arising
from new or existing litigation, tax and other regulatory proceedings; risks
related to the complexity of the 2017 Tax Cuts and Jobs Act (the "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; the risk of economic uncertainty associated with the transition
period of the United Kingdom's departure from the European Union ("Brexit") or
any other similar referendums that may be held; the occurrence of unforeseen
epidemics, such as the COVID-19 pandemic; other catastrophic events; changes in
U.S. or foreign tax or tariff policy, including changes to tariffs on imports
into the U.S.; risk of future non-cash asset impairments, including goodwill,
right of-use lease
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assets and/or other store asset impairments; restructuring charges; our ability
to adapt to new regulatory compliance and disclosure obligations; risks
associated with our foreign operations, such as violations of laws prohibiting
improper payments and the burdens of complying with a variety of foreign laws
and regulations (including global data privacy regulations); risks associated
with the acts or omissions of our third party vendors, including a failure to
comply with our vendor code of conduct or other policies; risks associated with
cyber-attacks and other cyber security risks; risks associated with our ability
to properly collect, use, manage and secure consumer and employee data; risks
associated with our vendors' ability to maintain the strength and security of
information technology systems; and changes in economic, political, social and
other conditions affecting our foreign operations and sourcing, including the
impact of currency fluctuations, global tax rates and economic and market
conditions in the various countries in which we operate. These risks and
uncertainties are discussed in further detail under "Part I, Item 1A. Risk
Factors" contained in the Company's most recent Annual Report on Form 10-K for
the fiscal year ended February 1, 2020 and under "Part II, Item 1A. Risk
Factors" contained herein, as such risk factors may be updated in our other
filings made from time-to-time with the Securities and Exchange Commission
("SEC") after the date of this report. We do not intend, and undertake no
obligation, to update our forward-looking statements to reflect future events or
circumstances. If we do update or correct one or more of these statements,
investors and others should not conclude that we will make additional updates or
corrections.
COVID-19 Business Update
The COVID-19 pandemic, which is ongoing and dynamic in nature, has had and is
continuing to have a material impact on the Company's financial performance.
Since the start of the pandemic, the Company has experienced various temporary
retail store closures in key regions globally, including the closure of a
significant majority of its stores during the first quarter of fiscal 2021.
During the second quarter of fiscal 2021, the Company gradually reopened most of
its global fleet of stores. Toward the end of the third quarter of fiscal 2021,
the Company started to incur a new round of government-mandated temporary store
closures, resulting in the closure of just over 5% of our directly operated
stores as of October 31, 2020, mostly in Europe. That percentage increased to
slightly under 20% during the fiscal month of November, but recent store
re-openings have helped decrease the store closure percentage to just under 10%
as of November 29, 2020. The overall impact of these closures resulted in stores
being closed for over 25% of the total days during the nine months ended October
31, 2020. The store closure impact was minimal during the third quarter of
fiscal 2021. The Company will continue to reopen stores (and/or close again, if
appropriate) as governmental guidelines and local conditions permit or require,
taking an informed, measured approach based on numerous factors. The Company's
e-commerce sites have remained open in all regions throughout the pandemic. In
addition to the impact of store closures, retail stores that are open have and
continue to experience significant reductions in traffic and revenue. Many of
the Company's wholesale and licensing partners have also substantially reduced
their operations. The Company has brought back furloughed store associates and
support staff as stores reopen. The extent and duration of the global pandemic
remains uncertain and may continue to impact consumer purchasing activity in the
foreseeable future.
During the first nine months of fiscal 2021, in addition to the negative impact
from lower net revenue, the Company's operating results reflected asset
impairment charges as well as additional inventory valuation reserves and higher
allowances for markdowns and doubtful accounts due to the ongoing effects of the
COVID-19 pandemic. These charges were partially offset by lower SG&A expenses
driven primarily by expense savings, both one-time, such as furloughs and
temporary salary reductions, and permanent, such as headcount reductions and
lower discretionary spending. In addition, the Company benefited from various
government assistance programs related primarily to the recovery of employee
payroll costs as well as certain favorable tax treatments.
During the first nine months of fiscal 2021, the Company implemented a number of
measures to help mitigate the operating and financial impact of the pandemic,
including: (i) furloughing its U.S. and Canada store associates and significant
portions of its U.S. and Canada corporate and distribution center associates and
permanently reducing U.S. corporate headcount; (ii) implementing temporary
tiered salary reductions for management level corporate employees, including its
executive officers; (iii) deferring annual merit increases;
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(iv) executing substantial reductions in expenses, store occupancy costs,
capital expenditures and overall costs, including through reduced inventory
purchases; (v) working globally with country management teams to maximize the
Company's participation in all eligible government or other initiatives
available to businesses or employees impacted by the COVID-19 pandemic; (vi)
drawing down on certain credit facilities and entering into certain term loans
to ensure financial flexibility and maintain maximum liquidity; (vii) engaging
with landlords to negotiate rent deferrals or other rent concessions; (viii)
working with vendors to extend payment terms; and (ix) postponing its decision
related to the payment of its quarterly cash dividend.
During the second quarter of fiscal 2021, as the situation began to stabilize,
the Company repaid a significant portion of its previously drawn down credit
facilities, continued to bring back furloughed employees, eliminated the
temporary tiered salary reductions and invested in share repurchases to return
value to its shareholders. The Company also announced that it would resume
paying its quarterly cash dividend beginning in the third quarter of fiscal
2021, but decided to not declare any cash dividends for the first and second
quarters of fiscal 2021.
Although we are unable to determine with any degree of accuracy the length and
severity of the COVID-19 pandemic, we expect it will continue to have a material
impact on our consolidated financial position, consolidated results of
operations, and consolidated cash flows in the foreseeable future.
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 modifications, restructuring charges and certain non-recurring
credits (charges), if any. The Americas Retail segment includes the Company's
retail and e-commerce operations in the Americas. The Americas Wholesale segment
includes the Company's wholesale operations in the Americas. The Europe segment
includes the Company's retail, e-commerce and wholesale operations in Europe and
the Middle East. The Asia segment includes the Company's retail, e­commerce and
wholesale operations in Asia 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
modifications, restructuring charges and certain non-recurring credits
(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 the U.S. dollar (primarily the British pound, Canadian dollar,
Chinese yuan, euro, Japanese yen, Korean won, Mexican peso, Polish zloty,
Russian rouble and Turkish lira), currency fluctuations can have a significant
impact on the translation of our international revenues and earnings (loss) into
U.S. dollar amounts.
Some of our transactions that occur primarily in Europe, Canada, South Korea,
China, Hong Kong and Mexico are denominated in U.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)
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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. When these foreign
exchange rates weaken versus the U.S. dollar at the time the respective U.S.
dollar denominated payment is made relative to the payments made in the
comparable period, our product margins could be unfavorably impacted.
In addition, there are certain real estate leases that 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.
During the first nine months of fiscal 2021, the average U.S. dollar rate was
stronger against the Canadian dollar, Chinese yuan, Korean won, Mexican peso,
Russian rouble and Turkish lira and weaker against the euro and Japanese yen
compared to the average rate in the same prior-year period. This had an overall
favorable impact on the translation of our international revenues and loss from
operations for the nine months ended October 31, 2020 compared to the same
prior-year period.
If the U.S. dollar strengthens relative to the respective fiscal 2020 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 2021, particularly in Canada, Europe
(primarily with respect to the euro, Turkish lira and Russian rouble) and
Mexico. Alternatively, if the U.S. dollar weakens relative to the respective
fiscal 2020 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 2021, 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."
Strategy
In December 2019, Carlos Alberini, the Company's Chief Executive Officer, shared
his strategic vision and implementation plan for execution which included the
identification of 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.
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While we have been challenged with the extremely difficult situation presented
by the COVID-19 pandemic, we believe that the opportunities identified above
remain in place for the long-term and provide a solid roadmap to grow our
business, increase profitability over time and create significant value for our
shareholders. In the short-term, we remain focused on enhancing our omni-channel
platform centered around our consumer and accelerating efforts to gain
efficiencies across our global operations and rationalize our store portfolios,
measures which we believe will also maximize our liquidity to address the
current crisis.
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.
Comparable Store Sales
Except as described below in connection with the COVID-19 pandemic, the Company
reports National Retail Federation calendar comparable store 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. We also
separately report the impact of e-commerce sales on our comparable store 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
store 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
fiscal 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 fiscal
months. Stores that are permanently closed or temporarily closed for more than
seven days in any fiscal month are excluded from the calculation in the fiscal
month that they are closed. E-commerce sales are considered comparable after the
online site has been operational in a country for 13 full fiscal months and
exclude any related revenue from shipping fees. These criteria are consistent
with the metric used by management for internal reporting and analysis to
measure performance of the store or online sites. Definitions and calculations
of comparable store sales used by the Company may differ from similarly titled
measures reported by other companies.
As a result of significant temporary store closures resulting from the COVID-19
pandemic, the Company has not disclosed any comparable store sales measures when
discussing the results of operations for the nine months ended October 31, 2020.
We believe that comparable store sales measures for the nine months ended
October 31, 2020 are not meaningful to the evaluation of the Company's results
until the impact from the temporary store closures resulting from the COVID-19
pandemic has normalized.
Other
The Company operates on a 52/53-week fiscal year calendar, which ends on the
Saturday nearest to January 31 of each year. The nine months ended October 31,
2020 had the same number of days as the nine months ended November 2, 2019.
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Executive Summary
Overview
Net earnings attributable to Guess?, Inc. increased 112.3% to $26.4 million, or
diluted earnings of $0.41 per common share, for the quarter ended October 31,
2020, compared to net earnings attributable to Guess?, Inc. of $12.4 million, or
diluted earnings of $0.18 per common share, for the quarter ended November 2,
2019.
During the quarter ended October 31, 2020, the Company recognized $10.3 million
of asset impairment charges; minimal net gains on lease modifications; a net
credit of $0.2 million of certain professional services and legal fees and
related costs; $0.7 million of separation charges; $2.6 million of amortization
of debt discount related to the Company's convertible senior notes and $0.6
million in additional tax expense from certain discrete tax adjustments (or a
combined $11.0 million, or $0.17 per share, negative impact after considering
the related tax benefit of these adjustments of $3.1 million). Excluding the
impact of these items, adjusted net earnings attributable to Guess?, Inc. were
$37.4 million and adjusted diluted earnings were $0.58 per common share for the
quarter ended October 31, 2020. During the quarter ended November 2, 2019, the
Company recognized $1.8 million of asset impairment charges; a net credit of
$1.4 million of certain professional services and legal fees and related costs
and $2.4 million of amortization of debt discount related to the Company's
convertible senior notes (or a combined $2.5 million, or $0.04 per share,
negative impact after considering the related tax benefit of these adjustments
of $0.4 million). 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 ended November 2, 2019. References
to financial results excluding the impact of these items are non-GAAP measures
and are addressed below under "Non-GAAP Measures."
Highlights of the Company's performance for the quarter ended October 31, 2020
compared to the same prior-year period are presented below, followed by a more
comprehensive discussion under "Results of Operations":
Operations
•Total net revenue decreased 7.6% to $569.3 million for the quarter ended
October 31, 2020, from $615.9 million in the same prior-year quarter. In
constant currency, net revenue decreased by 10.1%.
•Gross margin (gross profit as a percentage of total net revenue) increased 480
basis points to 42.1% for the quarter ended October 31, 2020, from 37.3% in the
same prior-year period.
•Selling, general and administrative ("SG&A") expenses as a percentage of total
net revenue ("SG&A rate") decreased 80 basis points to 32.5% for the quarter
ended October 31, 2020, compared to 33.3% in the same prior-year period. SG&A
expenses decreased 9.9% to $184.7 million for the quarter ended October 31,
2020, from $205.0 million in the same prior-year period.
•During the quarter ended October 31, 2020, the Company recognized asset
impairment charges of $10.3 million, compared to $1.8 million in the same
prior-year period.
•Operating margin increased 410 basis points to 7.8% for the quarter ended
October 31, 2020, compared to 3.7% in the same prior-year period, driven
primarily by the benefit of higher wholesale revenue in Europe as we elongated
the fall-winter season's shipment window and, to a lesser extent, higher initial
markups in Europe and overall lower expenses, partially offset by the
unfavorable impact from negative comparable sales. Higher asset impairment
charges unfavorably impacted operating margin by 150 basis points during the
quarter ended October 31, 2020 compared to the same prior-year period. Lower net
credits related to certain professional service and legal fees and related costs
unfavorably impacted operating margin by 30 basis points during the quarter
ended October 31, 2020. Separation charges unfavorably impacted operating margin
by 10 basis points during the quarter ended October 31, 2020. Earnings from
operations were $44.5
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million for the quarter ended October 31, 2020, compared to $22.6 million in the
same prior-year period.
•Other expense, net (including interest income and expense), was $11.8 million
for the quarter ended October 31, 2020, compared to $4.5 million in the same
prior-year period.
•The effective income tax rate decreased to 15.7% for the quarter ended
October 31, 2020, compared to 25.1% in the same prior-year period. The Company's
effective tax rate for the quarter ended October 31, 2020 included the
unfavorable impact from certain discrete tax adjustments totaling $0.6 million.
Key Balance Sheet Accounts
•The Company had $365.3 million in cash and cash equivalents and $0.2 million in
restricted cash as of October 31, 2020, compared to $110.1 million in cash and
cash equivalents and $0.5 million in restricted cash at November 2, 2019.
•As of October 31, 2020, the Company had $51.9 million in outstanding borrowings
under its term loans and $9.2 million in outstanding borrowings under its credit
facilities to help ensure financial flexibility and liquidity in response to
uncertainty surrounding the COVID-19 pandemic.
•During the nine months ended October 31, 2020, the Company repurchased 4.0
million shares of its common stock for $38.9 million (including commissions).
During fiscal 2020, the Company used $170 million of proceeds from its offering
of convertible senior notes to enter into an accelerated share repurchase
program ("ASR Contract"), pursuant to which it received a total of approximately
10.6 million shares. The Company also repurchased shares of its common stock for
$118.1 million (including commissions) during fiscal 2020.
•Accounts receivable consists of trade receivables relating primarily to the
Company's wholesale business in Europe and, to a lesser extent, to its wholesale
businesses in the Americas and Asia, royalty receivables relating to its
licensing operations, credit card and retail concession receivables related to
its retail businesses and certain other receivables. Accounts receivable
increased by $0.2 million, or 0.1%, to $300.4 million as of October 31, 2020,
from $300.2 million at November 2, 2019. On a constant currency basis, accounts
receivable decreased by $5.5 million, or 1.8%, when compared to November 2,
2019.
•Inventory decreased by $126.7 million, or 24.4%, to $393.2 million as of
October 31, 2020, from $519.9 million at November 2, 2019. On a constant
currency basis, inventory decreased by $127.9 million, or 24.6%, when compared
to November 2, 2019.
Global Store Count
In the third quarter of fiscal 2021, together with our partners, we opened 17
new stores worldwide, consisting of ten stores in Europe and the Middle East,
six stores in Asia and the Pacific and one store in Central and South America.
Together with our partners, we closed 35 stores worldwide, consisting of 15
stores in Asia and the Pacific, ten stores in Europe and the Middle East, five
stores in the U.S., four stores in Central and South America and one store in
Canada.
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We ended the third quarter of fiscal 2021 with 1,604 stores and 368 concessions
worldwide, comprised as follows:
                                                                        Stores                                                                Concessions
Region                                       Total            Directly-Operated           Partner Operated            Total           Directly-Operated           Partner Operated
United States                                   254                   252                          2                      1                     -                          1
Canada                                           78                    78                          -                      -                     -                          -
Central and South America                       107                    72                         35                     27                    27                          -
Total Americas                                  439                   402                         37                     28                    27                          1
Europe and the Middle East                      742                   511                        231                     43                    43                          -
Asia and the Pacific                            423                   155                        268                    297                   109                        188
Total                                         1,604                 1,068                        536                    368                   179                        189


Of the total 1,604 stores, 1,325 were GUESS? stores, 178 were GUESS? Accessories
stores, 63 were G by GUESS (GbG) stores and 38 were MARCIANO stores.
Results of Operations
Three Months Ended October 31, 2020 and November 2, 2019
Consolidated Results
Net Revenue. Net revenue decreased by $46.7 million, or 7.6%, to $569.3 million
for the quarter ended October 31, 2020, from $615.9 million for the quarter
ended November 2, 2019. In constant currency, net revenue decreased by 10.1%,
driven primarily by the unfavorable impact on revenue due primarily to negative
comparable sales driven primarily by lower store traffic and, to a lesser
extent, lower wholesale shipments in Americas Wholesale resulting from lower
demand as a result of the COVID-19 pandemic. This was partially offset by the
benefit of higher European wholesale revenue as we elongated the fall-winter
season's shipment window. Currency translation fluctuations relating to our
foreign operations favorably impacted net revenue by $15.5 million, compared to
the same prior-year period.
Gross Margin. Gross margin increased 480 basis points to 42.1% for the quarter
ended October 31, 2020, compared to 37.3% in the same prior-year period, of
which 280 basis points was due to a lower occupancy rate and 200 basis points
due to higher product margins. The lower occupancy rate was driven primarily by
leveraging of occupancy costs due mainly to higher European wholesale revenue
and, to a lesser extent, the favorable impact from rent concessions granted
related to the COVID-19 pandemic primarily in Europe, partially offset by the
unfavorable impact from negative comparable sales. The higher product margins
were driven primarily by higher initial markups in Europe during the quarter
ended October 31, 2020, compared to the same prior-year period.
Gross Profit. Gross profit increased by $10.0 million, or 4.4%, to $239.5
million for the quarter ended October 31, 2020, compared to $229.5 million in
the same prior-year period. The increase in gross profit, which included the
favorable impact of currency translation, was due primarily to lower occupancy
costs and, to a lesser extent, higher overall product margins, partially offset
by the unfavorable impact on gross profit from lower revenue. Currency
translation fluctuations relating to our foreign operations favorably impacted
gross profit by $6.9 million.
The Company includes inbound freight charges, purchasing costs and related
overhead, retail store occupancy costs, including lease costs and depreciation
and amortization, and a portion of the Company's distribution costs related to
its retail business in cost of product sales. The Company also includes net
royalties received on the Company's inventory purchases of licensed product as a
reduction to cost of product sales. The Company's gross margin may not be
comparable to that of other entities since some entities include all of the
costs related to their distribution in cost of product sales and others, like
the Company, generally exclude wholesale-related distribution costs from gross
margin, including them instead in SG&A expenses. Additionally, some entities
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include retail store occupancy costs in SG&A expenses and others, like the
Company, include retail store occupancy costs in cost of product sales.
SG&A Rate. The Company's SG&A rate decreased 80 basis points to 32.5% for the
quarter ended October 31, 2020, from 33.3% in the same prior-year period. The
Company's SG&A rate included the unfavorable impact of 30 basis points from
lower net credits related to certain professional service and legal fees and
related costs which the Company otherwise would not have incurred as part of its
business operations and the unfavorable impact of 10 basis points from
separation charges. Excluding these items, the SG&A rate would have decreased by
120 basis points during the quarter ended October 31, 2020 compared to the same
prior-year period, driven by leveraging of expenses due to higher European
wholesale revenue and, to a lesser extent, lower store selling expenses in
Americas Retail, partially offset by the unfavorable impact from negative
comparable sales.
SG&A Expenses. SG&A expenses decreased by $20.3 million, or 9.9%, to $184.7
million for the quarter ended October 31, 2020, from $205.0 million in the same
prior-year period. The decrease, which included the unfavorable impact of
currency translation, was driven primarily by lower store selling expenses and,
to a lesser extent, lower overall discretionary expenses. Currency translation
fluctuations relating to our foreign operations unfavorably impacted SG&A
expenses by $5.1 million.
Asset Impairment Charges. During the quarter ended October 31, 2020, the Company
recognized $5.6 million in impairment of certain operating lease right-of-use
assets and $4.7 million in impairment of property and equipment related to
certain retail locations resulting from lower revenue and future cash flow
projections from the ongoing effects of the COVID-19 pandemic. This compares to
$1.3 million in impairment of property and equipment and $0.5 million in
impairment of certain operating lease right-of-use assets related to certain
retail locations resulting from under-performance and expected store closures
during the quarter ended November 2, 2019. Currency translation fluctuations
relating to our foreign operations unfavorably impacted asset impairment charges
by $0.2 million.
Operating Margin. Operating margin increased 410 basis points to 7.8% for the
quarter ended October 31, 2020, compared to 3.7% in the same prior-year period,
driven primarily by the benefit of higher wholesale revenue in Europe as we
elongated the fall-winter season's shipment window and, to a lesser extent,
higher initial markups in Europe and overall lower expenses, partially offset by
the unfavorable impact from negative comparable sales. Higher asset impairment
charges unfavorably impacted operating margin by 150 basis points during the
quarter ended October 31, 2020 compared to the same prior-year period. Lower net
credits related to certain professional service and legal fees and related costs
unfavorably impacted operating margin by 30 basis points during the quarter
ended October 31, 2020. Separation charges unfavorably impacted operating margin
by 10 basis points during the quarter ended October 31, 2020. Excluding the
impact of these items, the Company's operating margin would have increased 600
basis points compared to the same prior-year period. The negative impact of
currency on operating margin for the quarter was approximately 40 basis points.
Earnings from Operations.   Earnings from operations increased by $21.8 million,
or 96.3%, to $44.5 million for the quarter ended October 31, 2020, compared to
$22.6 million in the same prior-year period. Currency translation fluctuations
relating to our foreign operations favorably impacted earnings from operations
by $1.6 million.
Interest Expense, Net. Interest expense, net, was $5.2 million for the quarter
ended October 31, 2020, compared to $4.5 million for the quarter ended
November 2, 2019.
Other Expense, Net. Other expense, net, was $6.5 million for the quarter ended
October 31, 2020, compared to $0.1 million in the same prior-year period. The
change was driven primarily by market volatility which resulted in net
unrealized losses on the translation of foreign currency balances and, to a
lesser extent, net unrealized losses on our SERP-related assets, compared to net
unrealized gains in the same prior-year quarter. This was partially offset by
lower net losses related to one of our minority investments during the quarter
ended October 31, 2020, compared to the same prior-year quarter.
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Income Tax Expense.  Income tax expense for the quarter ended October 31, 2020
was $5.1 million, or a 15.7% effective tax rate, compared to $4.5 million, or a
25.1% effective tax rate, in the same prior-year period. Generally, income taxes
for the interim periods are computed using the tax rate estimated to be
applicable for the full fiscal year, adjusted for discrete items, which is
subject to ongoing review and evaluation by management. During the quarter ended
October 31, 2020, the Company recognized valuation allowances of $1.2 million
resulting from jurisdictions where there have been cumulative net operating
losses, limiting the Company's ability to consider other subjective evidence to
continue to recognize the existing deferred tax assets. This was partially
offset by a discrete tax benefit of approximately $0.7 million related to lower
forecasts for the current fiscal year which changes the estimate of the net
operating losses that the Company can carryback to tax years with a higher
federal corporate tax rate as allowed under the CARES Act. Excluding the impact
from these items, the change in the effective tax rate was due primarily to a
shift in the distribution of earnings among the Company's tax jurisdictions
during the quarter ended October 31, 2020, compared to the same prior-year
period.
Net Earnings Attributable to Noncontrolling Interests. Net earnings attributable
to noncontrolling interests were $1.2 million, net of taxes, for each of the
quarters ended October 31, 2020 and November 2, 2019.
Net Earnings Attributable to Guess?, Inc. Net earnings attributable to
Guess?, Inc. were $26.4 million for the quarter ended October 31, 2020, compared
to $12.4 million in the same prior-year period. Diluted earnings per share were
$0.41 for the quarter ended October 31, 2020, compared to $0.18 in the same
prior-year period. We estimate that the favorable impact from the Company's
share repurchases was $0.03 on diluted earnings per share for the quarter ended
October 31, 2020. We also estimate that the negative impact of currency on
diluted earnings per share for the quarter ended October 31, 2020 was
approximately $0.11 per share. During the quarter ended October 31, 2020, the
Company recognized $10.3 million of asset impairment charges; minimal net gains
on lease modifications; a net credit of $0.2 million of certain professional
services and legal fees and related costs; $0.7 million of separation charges;
$2.6 million of amortization of debt discount related to the Company's
convertible senior notes and $0.6 million in additional tax expense from certain
discrete tax adjustments (or a combined $11.0 million, or $0.17 per share,
negative impact after considering the related tax benefit of these adjustments
of $3.1 million). Excluding the impact of these items, adjusted net earnings
attributable to Guess?, Inc. were $37.4 million and adjusted diluted earnings
were $0.58 per common share for the quarter ended October 31, 2020. We estimate
that the favorable impact from the Company's share repurchases was $0.05 on
adjusted diluted earnings per share for the quarter ended October 31, 2020.
During the quarter ended November 2, 2019, the Company recognized $1.8 million
of asset impairment charges; a net credit of $1.4 million of certain
professional services and legal fees and related costs and $2.4 million of
amortization of debt discount related to the Company's convertible senior notes
(or a combined $2.5 million, or $0.04 per share, negative impact after
considering the related tax benefit of these adjustments of $0.4 million).
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 ended November 2, 2019. References to financial
results excluding the impact of these items are non-GAAP measures and are
addressed below under "Non-GAAP Measures."
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Information by Business Segment
The following table presents our net revenue and earnings (loss) from operations
by segment for the three months ended October 31, 2020 and November 2, 2019
(dollars in thousands):
                                                     Three Months Ended
                                              Oct 31, 2020          Nov 2, 2019          $ Change             % Change
Net revenue:
Americas Retail                              $    130,328          $ 177,824           $ (47,496)                (26.7  %)
Americas Wholesale                                 35,971             56,398             (20,427)                (36.2  %)
Europe                                            321,574            277,253              44,321                  16.0  %
Asia                                               61,978             82,261             (20,283)                (24.7  %)
Licensing                                          19,433             22,208              (2,775)                (12.5  %)
Total net revenue                            $    569,284          $ 615,944           $ (46,660)                 (7.6  %)
Earnings (loss) from operations:
Americas Retail                              $        473          $   1,601           $  (1,128)                (70.5  %)
Americas Wholesale                                  8,247             11,216              (2,969)                (26.5  %)
Europe                                             51,476             19,475              32,001                 164.3  %
Asia                                                1,415             (2,432)              3,847                 158.2  %
Licensing                                          18,228             19,372              (1,144)                 (5.9  %)
Total segment earnings from operations             79,839             49,232              30,607                  62.2  %
Corporate overhead                                (25,058)           (24,736)               (322)                  1.3  %

Asset impairment charges                          (10,335)            (1,847)             (8,488)                459.6  %
Net gains on lease modifications                       21                  -                  21
Total earnings from operations               $     44,467          $  22,649           $  21,818                  96.3  %

Operating margins:
Americas Retail                                       0.4  %             0.9  %
Americas Wholesale                                   22.9  %            19.9  %
Europe                                               16.0  %             7.0  %
Asia                                                  2.3  %            (3.0  %)
Licensing                                            93.8  %            87.2  %
Total Company                                         7.8  %             3.7  %


Americas Retail
Net revenue from our Americas Retail segment decreased by $47.5 million, or
26.7%, to $130.3 million for the quarter ended October 31, 2020, from $177.8
million in the same prior-year period. In constant currency, net revenue
decreased by 26.2%, due primarily to lower comparable sales driven primarily by
reduced store traffic resulting from the COVID-19 pandemic and, to a lesser
extent, the negative impact from permanent store closures. Comparable sales
(including e-commerce) decreased 21% in U.S. dollars and 20% in constant
currency compared to the same prior-year period. The inclusion of our e-commerce
sales increased the comparable sales percentage by 2% in U.S. dollars and
constant currency. Excluding the impact from the temporary store closures, the
store base for the U.S. and Canada decreased by an average of 32 net stores
during the quarter ended October 31, 2020 compared to the same prior-year
period, resulting in a 6.0% net decrease in average square footage. Currency
translation fluctuations relating to our non-U.S. retail stores and e-commerce
sites unfavorably impacted net revenue by $0.9 million.
Operating margin decreased 50 basis points to 0.4% for the quarter ended
October 31, 2020, from 0.9% in the same prior-year quarter, due to lower gross
margins and, to a lesser extent, a higher SG&A rate. The lower gross margins
were driven primarily by overall deleveraging of occupancy costs due primarily
to negative comparable sales, partially offset by lower lease costs. The higher
SG&A rate was driven primarily by overall deleveraging of expenses, partially
offset by lower store selling expenses due primarily to lower payroll costs.
Earnings from operations from our Americas Retail segment decreased by $1.1
million, or 70.5%, to $0.5 million for the quarter ended October 31, 2020, from
$1.6 million in the same prior-year period. The
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deterioration is due primarily to the unfavorable impact on earnings from lower
revenue, partially offset by lower store selling expenses and lower occupancy
costs.
Americas Wholesale
Net revenue from our Americas Wholesale segment decreased by $20.4 million, or
36.2%, to $36.0 million for the quarter ended October 31, 2020, from $56.4
million in the same prior-year period. In constant currency, net revenue
decreased by 34.2%, driven primarily by our U.S. wholesale business due mainly
to lower demand resulting from the COVID-19 pandemic. Currency translation
fluctuations relating to our non-U.S. wholesale businesses unfavorably impacted
net revenue by $1.2 million.
Operating margin increased 300 basis points to 22.9% for the quarter ended
October 31, 2020, compared to 19.9% in the same prior-year quarter, due
primarily to overall higher product margins.
Earnings from operations from our Americas Wholesale segment decreased by $3.0
million, or 26.5%, to $8.2 million for the quarter ended October 31, 2020, from
$11.2 million in the same prior-year period. The decrease reflects the
unfavorable impact on earnings from lower revenue.
Europe
Net revenue from our Europe segment increased by $44.3 million, or 16.0%, to
$321.6 million for the quarter ended October 31, 2020, compared to $277.3
million in the same prior-year period. In constant currency, net revenue
increased by 10.2%, driven primarily by the benefit of higher wholesale revenue
as we elongated the fall-winter season's shipment window, partially offset by
lower comparable sales driven by reduced store traffic resulting from the
COVID-19 pandemic. Comparable sales (including e-commerce) decreased 9% in U.S.
dollars and 13% in constant currency compared to the same prior-year period. The
inclusion of our e-commerce sales increased the comparable sales percentage by
6% in U.S. dollars and 5% in constant currency. As of October 31, 2020, we
directly operated 511 stores in Europe compared to 516 stores at November 2,
2019, excluding concessions, which represents a 1.0% decrease over the same
prior-year period. Currency translation fluctuations relating to our European
operations favorably impacted net revenue by $16.0 million.
Operating margin increased 900 basis points to 16.0% for the quarter ended
October 31, 2020, compared to 7.0% in the same prior-year quarter, due to higher
overall gross margins and, to a lesser extent, a lower SG&A rate. The higher
gross margins were driven primarily by higher initial markups and, to a lesser
extent, overall leveraging of occupancy costs due to higher wholesale revenue
and the favorable impact from certain rent concessions granted related to the
COVID-19 pandemic. The lower SG&A rate was due primarily to overall leveraging
of expenses resulting from higher wholesale revenue.
Earnings from operations from our Europe segment increased by $32.0 million, or
164.3%, to $51.5 million for the quarter ended October 31, 2020, compared to
$19.5 million in the same prior-year period, driven primarily by the favorable
impact on earnings from higher revenue. Currency translation fluctuations
relating to our European operations favorably impacted earnings from operations
by $2.4 million.
Asia
Net revenue from our Asia segment decreased by $20.3 million, or 24.7%, to $62.0
million for the quarter ended October 31, 2020, from $82.3 million in the same
prior-year period. In constant currency, net revenue decreased by 26.6%, due
primarily to the negative impact from permanent store closures and, to a lesser
extent, lower comparable sales driven by reduced store traffic resulting from
the COVID-19 pandemic. As of October 31, 2020, we and our partners operated 423
stores and 297 concessions in Asia, compared to 519 stores and 327 concessions
at November 2, 2019. As of October 31, 2020, we directly operated 155 stores and
109 concessions in Asia, compared to 219 directly-operated stores and 154
concessions at November 2, 2019. Comparable sales (including e-commerce)
decreased 15% in U.S. dollars and 18% in constant currency. The inclusion of our
e-commerce sales decreased the comparable sales percentage by 1% in U.S. dollars
and constant currency. Currency translation fluctuations relating to our Asian
operations favorably impacted net revenue by $1.6 million.
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Operating margin increased 530 basis points to 2.3% for the quarter ended
October 31, 2020, from negative 3.0% in the same prior-year quarter, driven by
higher gross margins and, to a lesser extent, a lower SG&A rate. The higher
gross margins were driven primarily by overall higher product margins. The lower
SG&A rate was driven primarily by the favorable impact of business mix.
Earnings from operations from our Asia segment was $1.4 million for the quarter
ended October 31, 2020, compared to loss from operations of $2.4 million in the
same prior-year period. The improvement was driven primarily by the favorable
impact on earnings from lower SG&A expenses and, to a lesser extent, lower
occupancy costs, partially offset by the unfavorable impact from lower revenue.
Licensing
Net royalty revenue from our Licensing segment decreased by $2.8 million, or
12.5%, to $19.4 million for the quarter ended October 31, 2020, from $22.2
million in the same prior-year period, due primarily to lower demand resulting
from the COVID-19 pandemic.
Earnings from operations from our Licensing segment decreased by $1.1 million,
or 5.9%, to $18.2 million for the quarter ended October 31, 2020, from $19.4
million in the same prior-year period. The decrease was driven by the
unfavorable impact to earnings from lower revenue.
Corporate Overhead
Unallocated corporate overhead increased by $0.3 million to $25.1 million for
the quarter ended October 31, 2020, compared to $24.7 million in the same
prior-year period.
Nine Months Ended October 31, 2020 and November 2, 2019
Consolidated Results
Net Revenue. Net revenue decreased by $607.8 million, or 33.1%, to $1.23 billion
for the nine months ended October 31, 2020, compared to $1.84 billion for the
nine months ended November 2, 2019. In constant currency, net revenue decreased
by 33.4%, driven primarily by the unfavorable impact on revenue due to temporary
store closures and lower store traffic and, to a lesser extent, lower wholesale
shipments resulting from lower demand as a result of the COVID-19 pandemic.
Currency translation fluctuations relating to our foreign operations unfavorably
impacted net revenue by $5.0 million, compared to the same prior-year period.
Gross Margin. Gross margin decreased 260 basis points to 34.3% for the nine
months ended October 31, 2020, from 36.9% in the same prior-year period, of
which 280 basis points was due to a higher occupancy rate, partially offset by
20 basis points due to higher product margins. The higher occupancy rate was
driven primarily by overall deleveraging of occupancy costs due mainly to lower
revenue resulting from the impact of the COVID-19 pandemic, partially offset by
the favorable impact from rent concessions granted related to the COVID-19
pandemic primarily in Europe. The higher product margins were driven primarily
by higher initial markups in Europe, partially offset by higher inventory
reserves in Asia during the nine months ended October 31, 2020, compared to the
same prior-year period.
Gross Profit. Gross profit decreased by $256.3 million, or 37.9%, to $420.8
million for the nine months ended October 31, 2020, from $677.1 million in the
same prior-year period. The decrease in gross profit, which included the
favorable impact of currency translation, was due primarily to the unfavorable
impact on gross profit from lower revenue, partially offset by lower occupancy
costs. Currency translation fluctuations relating to our foreign operations
favorably impacted gross profit by $5.5 million.
SG&A Rate. The Company's SG&A rate increased 480 basis points to 39.0% for the
nine months ended October 31, 2020, compared to 34.2% in the same prior-year
period. The Company's SG&A rate included the unfavorable impact of 30 basis
points from separation charges and the unfavorable impact of 10 basis from lower
net credits related to certain professional service and legal fees and related
costs which the Company otherwise would not have incurred as part of its
business operations. Excluding these items, the Company's SG&A rate would have
increased by 440 basis points during nine months ended October 31, 2020 compared
to
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the same prior-year period, driven by overall deleveraging of expenses due
mainly to lower revenue resulting from the impact of the COVID-19 pandemic,
partially offset by expense savings.
SG&A Expenses. SG&A expenses decreased by $149.5 million, or 23.8%, to $478.3
million for the nine months ended October 31, 2020, from $627.8 million in the
same prior-year period. The decrease, which included the unfavorable impact of
currency translation, was driven primarily by lower payroll costs and, to a
lesser extent, lower overall discretionary expenses. The lower payroll costs
were driven primarily by the impact of furloughs and, to a lesser extent,
government assistance programs related to the recovery of employee payroll
costs, temporary tiered salary reductions for management level corporate
employees that have since been restored and permanent headcount reductions.
Currency translation fluctuations relating to our foreign operations unfavorably
impacted SG&A expenses by $0.3 million.
Asset Impairment Charges. During the nine months ended October 31, 2020, the
Company recognized $42.1 million in impairment of certain operating lease
right-of-use assets and $33.2 million in impairment of property and equipment
related to certain retail locations resulting from lower revenue and future cash
flow projections from the ongoing effects of the COVID-19 pandemic. This
compares to $4.6 million in impairment of property and equipment and $0.5
million in impairment of certain operating lease right-of-use assets related to
certain retail locations resulting from under-performance and expected store
closures during the nine months ended November 2, 2019. Currency translation
fluctuations relating to our foreign operations favorably impacted asset
impairment charges by $1.4 million.
Net Gains on Lease Modifications. During the nine months ended October 31, 2020,
the Company recorded net gains on lease modifications of $0.5 million related
primarily to the early termination of lease agreements for certain of the
Company's retail locations. There were no net gains on lease modifications
recorded during the nine months ended November 2, 2019.
Operating Margin. Operating margin decreased 13.2% to negative 10.8% for the
nine months ended October 31, 2020, from 2.4% in the same prior-year period,
driven primarily by overall deleveraging of expenses due to the negative impact
from the COVID-19 pandemic on our global operations and, to a lesser extent,
higher asset impairment charges. Higher asset impairment charges negatively
impacted operating margin by 580 basis points during the nine months ended
October 31, 2020 compared to the same prior-year period. Separation charges
unfavorably impacted operating margin by 30 basis points during the nine months
ended October 31, 2020. Lower net credits related to certain professional
service and legal fees and related costs unfavorably impacted operating margin
by 10 basis points during the nine months ended October 31, 2020. Excluding the
impact of these items, the Company's operating margin would have decreased 700
basis points compared to the same prior-year period. The positive impact of
currency on operating margin for the first nine months of fiscal 2021 was
approximately 20 basis points.
Earnings (Loss) from Operations.   Loss from operations was $132.4 million for
the nine months ended October 31, 2020, compared to earnings from operations of
$44.2 million in the same prior-year period. Currency translation fluctuations
relating to our foreign operations favorably impacted loss from operations by
$6.7 million.
Interest Expense, Net. Interest expense, net, was $15.6 million for the nine
months ended October 31, 2020, compared to $10.0 million for the nine months
ended November 2, 2019. The increase in interest expense was due primarily to
higher amortization of debt discount and higher interest expense related to the
Company's convertible senior notes during the nine months ended October 31,
2020.
Other Expense, Net. Other expense, net, was $20.6 million for the nine months
ended October 31, 2020, compared to $4.3 million in the same prior-year period.
The change was due primarily to market volatility which resulted in higher
unrealized losses on the translation of foreign currency balances and, to a
lesser extent, lower net unrealized gains on our SERP-related assets, compared
to the same prior-year period. During the first nine months of fiscal 2021, the
Company also recognized net mark-to-market losses on revaluation of foreign
exchange currency contracts, compared to gains in the same prior-year period.
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Income Tax Expense (Benefit).  Income tax benefit for the nine months ended
October 31, 2020 was $14.9 million, or an 8.8% effective tax rate, compared to
income tax expense of $10.6 million, or a 35.7% effective tax rate, in the same
prior-year period. Generally, income taxes for the interim periods are computed
using the tax rate estimated to be applicable for the full fiscal year, adjusted
for discrete items, which is subject to ongoing review and evaluation by
management. During the nine months ended October 31, 2020, the Company
recognized a valuation allowance of $4.9 million resulting from jurisdictions
where there have been cumulative net operating losses, limiting the Company's
ability to consider other subjective evidence to continue to recognize the
existing deferred tax assets. This was partially offset by a tax benefit of
approximately $4.6 million from a tax rate change related to the ability to
carryback net operating losses to tax years with a higher federal corporate tax
rate as allowed under the CARES Act enacted in March 2020. Excluding the impact
of these items, the change in the effective tax rate was due primarily to a
shift in the distribution of earnings among the Company's tax jurisdictions
during the nine months ended October 31, 2020, compared to the same prior-year
period.
Net Earnings (Loss) Attributable to Noncontrolling Interests. Net loss
attributable to noncontrolling interests was $2.0 million, net of taxes, for the
nine months ended October 31, 2020, compared to net earnings attributable to
noncontrolling interests of $2.8 million, net of taxes, for the nine months
ended November 2, 2019.
Net Earnings (Loss) Attributable to Guess?, Inc. Net loss attributable to
Guess?, Inc. was $151.6 million for the nine months ended October 31, 2020,
compared to net earnings attributable to Guess?, Inc. of $16.4 million in the
same prior-year period. Diluted loss per share was $2.35 for the nine months
ended October 31, 2020, compared to diluted earnings per share of $0.22 in the
same prior-year period. We estimate that the unfavorable impact from the
Company's share repurchases and additional interest expense recognized related
to the offering of convertible senior notes had a net negative impact on diluted
loss per share of $0.35 for the nine months ended October 31, 2020. We also
estimate that the negative impact of currency on diluted loss per share for the
nine months ended October 31, 2020 was approximately $0.17 per share. During the
nine months ended October 31, 2020, the Company recognized $75.3 million of
asset impairment charges; $0.5 million of net gains on lease modifications; a
net credit of $0.1 million of certain professional services and legal fees and
related costs; $3.4 million of separation charges; $7.8 million of amortization
of debt discount related to the Company's convertible senior notes; and
$0.8 million in additional tax expense from certain discrete tax adjustments (or
a combined $69.5 million, or $1.08 per share, negative impact after considering
the related tax benefit of these adjustments of $17.3 million). Excluding the
impact of these items, adjusted net loss attributable to Guess?, Inc. was $82.2
million and adjusted diluted loss was $1.27 per common share during the nine
months ended October 31, 2020. We estimate that the unfavorable impact from
share repurchases and additional interest expense recognized related to the
offering of convertible senior notes had a net negative impact of $0.18 on
adjusted diluted loss per share for the nine months ended October 31, 2020.
During the nine months ended November 2, 2019, the Company recognized $5.1
million of asset impairment charges; a net credit of $0.7 million of certain
professional services and legal fees and related costs; and $5.1 million of
amortization of debt discount related to the Company's convertible senior notes
(or a combined $6.3 million, or $0.09 per share, negative impact after
considering the related tax benefit of these adjustments of $3.2 million).
Excluding the impact of these items, adjusted net earnings attributable to
Guess?, Inc. were $22.7 million and adjusted diluted earnings per share were
$0.31 per common share during the nine months ended November 2, 2019. References
to financial results excluding the impact of these items are non-GAAP measures
and are addressed below under "Non-GAAP Measures."
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Information by Business Segment
The following table presents our net revenue and earnings (loss) from operations
by segment for the nine months ended October 31, 2020 and November 2, 2019
(dollars in thousands):
                                                       Nine Months Ended
                                              Oct 31, 2020           Nov 2, 2019           $ Change               % Change

Net revenue:
Americas Retail                              $   314,977           $   553,213           $ (238,236)                   (43.1  %)
Americas Wholesale                                82,131               144,505              (62,374)                   (43.2  %)
Europe                                           633,898               827,817             (193,919)                   (23.4  %)
Asia                                             152,554               250,752              (98,198)                   (39.2  %)
Licensing                                         44,514                59,568              (15,054)                   (25.3  %)
Total net revenue                            $ 1,228,074           $ 1,835,855           $ (607,781)                   (33.1  %)
Earnings (loss) from operations:
Americas Retail                              $   (40,904)          $     5,746           $  (46,650)                  (811.9  %)
Americas Wholesale                                11,559                27,452              (15,893)                   (57.9  %)
Europe                                            27,865                54,742              (26,877)                   (49.1  %)
Asia                                             (24,729)              (10,435)             (14,294)                  (137.0  %)
Licensing                                         39,833                51,563              (11,730)                   (22.7  %)
Total segment earnings from operations            13,624               129,068             (115,444)                   (89.4  %)
Corporate overhead                               (71,167)              (79,777)               8,610                    (10.8  %)

Asset impairment charges                         (75,276)               (5,126)             (70,150)                 1,368.5  %

Net gains on lease modifications                     450                     -                  450

Total earnings (loss) from operations $ (132,369) $ 44,165

$ (176,534)                  (399.7  %)
Operating margins:
Americas Retail                                    (13.0  %)               1.0  %
Americas Wholesale                                  14.1  %               19.0  %
Europe                                               4.4  %                6.6  %
Asia                                               (16.2  %)              (4.2  %)
Licensing                                           89.5  %               86.6  %
Total Company                                      (10.8  %)               2.4  %


Americas Retail
Net revenue from our Americas Retail segment decreased by $238.2 million, or
43.1%, to $315.0 million for the nine months ended October 31, 2020, compared to
$553.2 million in the same prior-year period. In constant currency, net revenue
decreased by 42.6%, driven primarily by temporary store closures and, to a
lesser extent, lower store traffic resulting from the COVID-19 pandemic.
Excluding the impact from the temporary store closures, the store base for the
U.S. and Canada decreased by an average of 24 net stores during the nine months
ended October 31, 2020 compared to the same prior-year period, resulting in a
4.3% net decrease in average square footage. Currency translation fluctuations
relating to our non-U.S. retail stores and e-commerce sites unfavorably impacted
net revenue by $2.7 million.
Operating margin decreased 14.0% to negative 13.0% for the nine months ended
October 31, 2020, from 1.0% in the same prior-year period, due to lower gross
margins and, to a lesser extent, a higher SG&A rate. The lower gross margins
were driven primarily by overall deleveraging of occupancy costs due primarily
to the negative impact from temporary store closures and lower store traffic.
The higher SG&A rate was driven primarily by overall deleveraging of expenses,
partially offset by lower store selling expenses due to payroll savings
resulting from the temporary furlough of the Company's store associates in the
U.S. and Canada and lower overall payroll costs.
Loss from operations from our Americas Retail segment was $40.9 million for the
nine months ended October 31, 2020, compared to earnings from operations of $5.7
million in the same prior-year period. The deterioration is primarily due to the
unfavorable impact on earnings from lower revenue, partially offset by lower
store selling expenses and lower occupancy costs.
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Americas Wholesale
Net revenue from our Americas Wholesale segment decreased by $62.4 million, or
43.2%, to $82.1 million for the nine months ended October 31, 2020, from $144.5
million in the same prior-year period. In constant currency, net revenue
decreased by 40.8%, driven primarily by our U.S. wholesale business due mainly
to lower demand resulting from the COVID-19 pandemic. Currency translation
fluctuations relating to our non-U.S. wholesale businesses unfavorably impacted
net revenue by $3.4 million.
Operating margin decreased 490 basis points to 14.1% for the nine months ended
October 31, 2020, from 19.0% in the same prior-year period, due primarily to a
higher SG&A rate driven primarily by overall deleveraging of expenses resulting
from lower wholesale shipments.
Earnings from operations from our Americas Wholesale segment decreased by $15.9
million, or 57.9%, to $11.6 million for the nine months ended October 31, 2020,
from $27.5 million in the same prior-year period. The decrease reflects the
unfavorable impact on earnings from lower revenue.
Europe
Net revenue from our Europe segment decreased by $193.9 million, or 23.4%, to
$633.9 million for the nine months ended October 31, 2020, from $827.8 million
in the same prior-year period. In constant currency, net revenue decreased by
24.9%, driven primarily by temporary store closures and lower store traffic
resulting from the COVID-19 pandemic and, to a lesser extent, lower wholesale
shipments resulting from lower demand. Currency translation fluctuations
relating to our European operations favorably impacted net revenue by $12.0
million.
Operating margin decreased 220 basis points to 4.4% for the nine months ended
October 31, 2020, from 6.6% in the same prior-year period, driven by a higher
SG&A rate, partially offset by higher gross margins. The higher SG&A rate was
due primarily to overall deleveraging of expenses resulting from lower revenue.
The higher gross margins were driven primarily by the favorable impact from
certain rent concessions granted related to the COVID-19 pandemic and, to a
lesser extent, higher initial markups, partially offset by overall deleveraging
of occupancy costs due to lower revenue.
Earnings from operations from our Europe segment decreased by $26.9 million, or
49.1%, to $27.9 million for the nine months ended October 31, 2020, from $54.7
million in the same prior-year period. The decrease was driven primarily by the
unfavorable impact on earnings from lower revenue, partially offset by lower
occupancy costs and, to a lesser extent, lower SG&A expenses. Currency
translation fluctuations relating to our European operations favorably impacted
earnings from operations by $4.7 million.
Asia
Net revenue from our Asia segment decreased by $98.2 million, or 39.2%, to
$152.6 million for the nine months ended October 31, 2020, compared to $250.8
million in the same prior-year period. In constant currency, net revenue
decreased by 38.8%, driven primarily by lower store traffic and, to a lesser
extent, permanent store closures and temporary store closures resulting from the
COVID-19 pandemic. Currency translation fluctuations relating to our Asian
operations unfavorably impacted net revenue by $0.9 million.
Operating margin decreased 12.0% to negative 16.2% for the nine months ended
October 31, 2020, from negative 4.2% in the same prior-year period, driven by
lower gross margins and, to a lesser extent, a higher SG&A rate. The lower gross
margins were due primarily to the negative impacts from the COVID-19 pandemic
which resulted in higher inventory reserves. The higher SG&A rate was driven
primarily by overall deleveraging of expenses, partially offset by the favorable
impact of business mix.
Loss from operations from our Asia segment deteriorated by $14.3 million, or
137.0%, to $24.7 million for the nine months ended October 31, 2020, from $10.4
million in the same prior-year period. The deterioration was driven primarily by
the unfavorable impact on earnings from lower revenue and, to a lesser extent,
lower product margins, partially offset by lower SG&A expenses and, to a lesser
extent, lower occupancy costs. Currency translation fluctuations relating to our
Asian operations favorably impacted loss from operations by $1.0 million.
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Licensing
Net royalty revenue from our Licensing segment decreased by $15.1 million, or
25.3%, to $44.5 million for the nine months ended October 31, 2020, compared to
$59.6 million in the same prior-year period, due primarily to lower demand
resulting from the COVID-19 pandemic.
Earnings from operations from our Licensing segment decreased by $11.7 million,
or 22.7%, to $39.8 million for the nine months ended October 31, 2020, compared
to $51.6 million in the same prior-year period. The decrease was driven
primarily by the unfavorable impact to earnings from lower revenue.
Corporate Overhead
Unallocated corporate overhead decreased by $8.6 million to $71.2 million for
the nine months ended October 31, 2020, from $79.8 million in the same
prior-year period, due primarily to lower performance-based compensation and, to
a lesser extent, lower overall discretionary expenses.
Non-GAAP Measures
The Company's reported financial results are presented in accordance with GAAP.
The reported net earnings (loss) attributable to Guess?, Inc. and diluted
earnings (loss) per share for the three and nine months ended October 31, 2020
reflect the impact of asset impairment charges, net gains on lease
modifications, certain professional service and legal fees and related net
credits, certain separation charges, amortization of debt discount on the
Company's convertible senior notes and the tax effects of these adjustments as
well as certain discrete tax adjustments. The reported net earnings attributable
to Guess?, Inc. and diluted earnings per share for the three and nine months
ended November 2, 2019 reflect the impact of asset impairment charges, certain
professional service and legal fees and related net credits, amortization of
debt discount on the Company's convertible senior notes and the tax effects of
these adjustments as well as adjustments to uncertain tax positions excluded
from results in prior years. These items affect the comparability of the
Company's reported results. The financial results are also presented on a
non-GAAP basis, as defined in Section 10(e) of Regulation S-K of the SEC, to
exclude the effect of these items. The Company believes that these items are not
indicative of the underlying performance of its business and that the "non-GAAP"
or "adjusted" information provided is useful for investors to evaluate the
comparability of the Company's operating results and its future outlook when
reviewed in conjunction with the Company's GAAP financial statements. The
non-GAAP measures are provided in addition to, and not as alternatives for, the
Company's reported GAAP results.
The adjusted measures for the three months ended October 31, 2020 exclude the
impact of $10.3 million of asset impairment charges; minimal net gains on lease
modifications; a net credit of $0.2 million of certain professional services and
legal fees and related costs; $0.7 million of separation charges; $2.6 million
of amortization of debt discount on the Company's convertible senior notes and
$0.6 million in additional tax expense from certain discrete tax adjustments.
The asset impairment charges related to the impairment of certain operating
lease right-of-use assets and, to a lesser extent, impairment of property and
equipment related to certain retail locations resulting from lower revenue and
future cash flow projections from the ongoing effects of the COVID-19 pandemic.
Certain professional service and legal fees and related (credits) costs were
primarily due to amounts which the Company otherwise would not have incurred as
part of its business operations. The separation-related charges mainly related
to cash severance payments as a result of headcount reductions in response to
the pandemic. During the three months ended October 31, 2020, the Company
recognized valuation allowances of $1.2 million resulting from jurisdictions
where there have been cumulative net operating losses, limiting the Company's
ability to consider other subjective evidence to continue to recognize the
existing deferred tax assets. This was partially offset by a discrete tax
benefit of approximately $0.7 million related to lower forecasts for the current
fiscal year which changes the estimate of the net operating losses that the
Company can carryback to tax years with a higher federal corporate tax rate as
allowed under the CARES Act. These items resulted in a combined $11.0 million
negative impact (after considering the related tax benefit of $3.1 million), or
an unfavorable $0.17 per share impact during the three months ended October 31,
2020. Net earnings attributable to Guess?, Inc. were $26.4 million and diluted
earnings were $0.41 per common share for the three months ended October 31,
2020. Excluding the impact of
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these items, adjusted net earnings attributable to Guess?, Inc. were $37.4
million and adjusted diluted earnings were $0.58 per common share for the three
months ended October 31, 2020.
The adjusted measures for the nine months ended October 31, 2020 exclude the
impact of $75.3 million of asset impairment charges; $0.5 million of net gains
on lease modifications; a net credit of $0.1 million of certain professional
services and legal fees and related costs; $3.4 million of separation charges;
$7.8 million of amortization of debt discount related to the Company's
convertible senior notes; and $0.8 million in additional tax expense from
certain discrete tax adjustments. The asset impairment charges related to the
impairment of certain operating lease right-of-use assets and, to a lesser
extent, impairment of property and equipment related to certain retail locations
resulting from lower revenue and future cash flow projections from the ongoing
effects of the COVID-19 pandemic. The net gains on lease modifications related
primarily to the early termination of lease agreements for certain of the
Company's retail locations. The separation-related charges mainly related to
certain cash severance payments, partially offset by adjustments to non-cash
stock-based compensation expense related to our former Chief Executive Officer
resulting from changes in expected performance conditions of certain previously
granted stock awards that were no longer subject to service vesting requirements
after his departure. During the nine months ended October 31, 2020, the Company
recognized a valuation allowance of $4.9 million resulting from jurisdictions
where there have been cumulative net operating losses, limiting the Company's
ability to consider other subjective evidence to continue to recognize the
existing deferred tax assets. This was partially offset by a tax benefit of
approximately $4.6 million from a tax rate change related to the ability to
carryback net operating losses to tax years with a higher federal corporate tax
rate as allowed under the CARES Act enacted in March 2020. These items resulted
in a combined $69.5 million negative impact (after considering the related tax
benefit of $17.3 million), or an unfavorable $1.08 per share impact during the
nine months ended October 31, 2020. Net loss attributable to Guess?, Inc. was
$151.6 million and diluted loss was $2.35 per common share for the nine months
ended October 31, 2020. Excluding the impact of these items, adjusted net loss
attributable to Guess?, Inc. was $82.2 million and adjusted diluted loss was
$1.27 per common share for the nine months ended October 31, 2020.
The adjusted measures for the three months ended November 2, 2019 exclude the
impact of $1.8 million of asset impairment charges; a net credit of $1.4 million
of certain professional services and legal fees and related costs and $2.4
million of amortization of debt discount on the Company's convertible senior
notes. The asset impairment charges related primarily to the impairment of
property and equipment and, to a lesser extent, impairment of certain operating
lease right-of-use assets related to certain retail locations resulting from
under-performance and expected store closures. These items resulted in a
combined $2.5 million negative impact (after considering the related tax benefit
of $0.4 million), or an unfavorable $0.04 per share impact during the three
months ended November 2, 2019. Net earnings attributable to Guess?, Inc. were
$12.4 million and diluted earnings were $0.18 per common share for the three
months ended November 2, 2019. 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 three months ended November 2,
2019.
The adjusted measures for the nine months ended November 2, 2019 exclude the
impact of $5.1 million of asset impairment charges; a net credit of $0.7 million
of certain professional services and legal fees and related costs and $5.1
million of amortization of debt discount on the Company's convertible senior
notes. The asset impairment charges related primarily to the impairment of
property and equipment and, to a lesser extent, impairment of certain operating
lease right-of-use assets related to certain retail locations resulting from
under-performance and expected store closures. These items resulted in a
combined $6.3 million negative impact (after considering the related tax benefit
of $3.2 million), or an unfavorable $0.09 per share impact during the nine
months ended November 2, 2019. Net earnings attributable to Guess?, Inc. were
$16.4 million and diluted earnings were $0.22 per common share for the nine
months ended November 2, 2019. Excluding the impact of these items, adjusted net
earnings attributable to Guess?, Inc. were $22.7 million and adjusted diluted
earnings were $0.31 per common share for the nine months ended November 2, 2019.
Our discussion and analysis herein also includes certain constant currency
financial information. Foreign currency exchange rate fluctuations affect the
amount reported from translating the Company's foreign
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revenue, expenses and balance sheet amounts into U.S. dollars. These rate
fluctuations can have a significant effect on reported operating results under
GAAP. The Company provides constant currency information to enhance the
visibility of underlying business trends, excluding the effects of changes in
foreign currency translation rates. To calculate net revenue and earnings (loss)
from operations on a constant currency basis, operating results for the
current-year period are translated into U.S. dollars at the average exchange
rates in effect during the comparable period of the prior year. To calculate
balance sheet amounts on a constant currency basis, the current period balance
sheet amount is translated into U.S. dollars at the exchange rate in effect at
the comparable prior-year period end. The constant currency calculations do not
adjust for the impact of revaluing specific transactions denominated in a
currency that is different from the functional currency of that entity when
exchange rates fluctuate. The constant currency information presented may not be
comparable to similarly titled measures reported by other companies.
In calculating the estimated impact of currency fluctuations (including
translational and transactional impacts) on other measures such as earnings
(loss) per share, the Company estimates gross margin (including the impact of
foreign exchange currency contracts designated as cash flow hedges for
anticipated merchandise purchases) and expenses using the appropriate prior-year
rates, translates the estimated foreign earnings (loss) at the comparable
prior-year rates and excludes the year-over-year earnings impact of gains or
losses arising from balance sheet remeasurement and foreign exchange currency
contracts not designated as cash flow hedges for merchandise purchases.
Liquidity and Capital Resources
We need liquidity globally primarily to fund our working capital, occupancy
costs, interest payments on our debt, remodeling and rationalization of our
retail stores, shop-in-shop programs, concessions, systems, infrastructure,
other existing operations, expansion plans, international growth and potential
acquisitions and investments. In addition, in the U.S. we need liquidity to fund
share repurchases and payment of dividends to our stockholders. Generally, our
working capital needs are highest during the late summer and fall as our
inventories increase before the holiday selling period. During the nine months
ended October 31, 2020, we relied primarily on trade credit, available cash,
real estate and other operating leases, finance leases, proceeds from our credit
facilities and term loans and internally generated funds to finance our
operations. We anticipate that we will be able to satisfy our ongoing cash
requirements during the next 12 months for working capital, capital
expenditures, payments on our debt, finance leases and operating leases as well
as lease termination payments, potential acquisitions and investments, and share
repurchases and dividend payments to stockholders, primarily with cash flow from
operations and existing cash balances as supplemented by borrowings under our
existing Credit Facility in the U.S. and Canada as well as bank facilities in
Europe and China and proceeds from our term loans, as needed. As further noted
above under the "-COVID-19 Business Update" section, the Company has also
implemented a number of other measures to help preserve liquidity in response to
the COVID-19 pandemic. We expect to settle the principal amount of our
outstanding convertible senior notes in 2024 in cash and any excess in shares.
Such arrangements are described further in "Part I, Item 1. Financial Statements
- Note 9 - Borrowings and Finance Lease Obligations" and "Part I, Item 1.
Financial Statements - Note 10 - Convertible Senior Notes and Related
Transactions" of this Form 10-Q. Due to the seasonality of our business and cash
needs, we may increase borrowings under our established credit facilities from
time-to-time during the next 12 months. If we experience a sustained decrease in
consumer demand related to the COVID-19 pandemic, we may require access to
additional credit, which may not be available to us on commercially acceptable
terms or at all.
On March 27, 2020, the U.S. government enacted the CARES Act to provide economic
relief from the COVID-19 pandemic. Among other provisions, the CARES Act allows
for a full offset of taxable income in a five-year carryback period for net
operating losses, which will reduce current period tax expense and may result in
a refund of previously paid income tax amounts at higher historical tax rates.
During the nine months ended October 31, 2020, the Company recognized a tax
benefit of approximately $4.6 million related to this provision.
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In December 2017, the U.S. government enacted the Tax Reform, which
significantly changed the U.S. corporate income tax laws, including moving from
a global taxation regime to a territorial regime and lowering the U.S. federal
corporate income tax rate from 35% to 21%. The Tax Reform also required a
one-time mandatory transition tax on accumulated foreign earnings. Any income
tax payable related to the transition tax is due over an eight-year period
beginning in calendar 2018. The balance related to this transition tax included
in other long-term liabilities was $19.9 million (excluding related interest)
for each of the periods ended October 31, 2020 and February 1, 2020.
The Company has historically considered the undistributed earnings of its
foreign subsidiaries to be indefinitely reinvested. As a result of the Tax
Reform, the Company had a substantial amount of previously taxed earnings that
could be distributed to the U.S. without additional U.S. taxation. The Company
continues to evaluate its plans for reinvestment or repatriation of unremitted
foreign earnings and regularly reviews its cash positions and determination of
permanent reinvestment of foreign earnings. If the Company determines that all
or a portion of such foreign earnings are no longer indefinitely reinvested, it
may be subject to additional foreign withholding taxes and U.S. state income
taxes, beyond the Tax Reform's one-time transition tax. The Company intends to
indefinitely reinvest the remaining earnings from the Company's foreign
subsidiaries for which a deferred tax liability has not already been recorded.
As of October 31, 2020, the Company had cash and cash equivalents of $365.3
million, of which approximately $80.2 million was held in the U.S.
Excess cash and cash equivalents, which represent the majority of our
outstanding cash and cash equivalents balance, are held primarily in overnight
deposit and short-term time deposit accounts and money market accounts. Please
see "-Important Factors Regarding Forward-Looking Statements" discussed above,
"Part II, Item 1A. Risk Factors" in this Form 10-Q and "Part I, Item 1A. Risk
Factors" contained in the Company's most recent Annual Report on Form 10-K for
the fiscal year ended February 1, 2020 for a discussion of risk factors which
could reasonably be likely to result in a decrease of internally generated funds
available to finance capital expenditures and working capital requirements.
COVID-19 Impact on Liquidity
Refer to the "-COVID-19 Business Update" section above for a discussion of the
impact from the COVID-19 pandemic on our financial performance and our
liquidity.
In light of store closures and reduced traffic in stores, the Company has taken
certain actions with respect to certain of its existing leases, including
engaging with landlords to discuss rent deferrals as well as other rent
concessions. Since April 2020, we have suspended rental payments and/or paid
reduced rental amounts with respect to our retail stores that were closed or
were experiencing drastically reduced customer traffic as a result of the
COVID-19 pandemic. We are engaging in discussions with the affected landlords in
an effort to achieve appropriate rent relief and other lease concessions and, in
some cases, to terminate existing leases. However, there can be no assurances
related to the outcome of such negotiations.
Nine Months Ended October 31, 2020 and November 2, 2019
The Company has presented below the cash flow performance comparison of the nine
months ended October 31, 2020, compared to the nine months ended November 2,
2019.
Operating Activities
Net cash provided by operating activities was $98.4 million for the nine months
ended October 31, 2020, compared to net cash used in operating activities of
$28.0 million for the nine months ended November 2, 2019, or an improvement of
$126.4 million. This improvement was driven primarily by favorable changes in
working capital, partially offset by lower cash flows generated from net
earnings. The favorable changes in working capital were due primarily to the
extension of vendor payment terms on our accounts payable balances and the
suspension and/or reduction of our operating lease payments, which could be
temporary, as well as overall lower expenditures and improved inventory
management. In addition, during the nine months ended November 2, 2019, net cash
used in operating activities included the payment of the European Commission
fine of $45.6 million which was imposed and accrued in fiscal 2019.
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Investing Activities
Net cash used in investing activities was $14.6 million for the nine months
ended October 31, 2020, compared to $48.0 million for the nine months ended
November 2, 2019. Net cash used in investing activities for the nine months
ended October 31, 2020 related primarily to capital expenditures incurred on
investments in technology infrastructure and, to a lesser extent, existing store
remodeling programs and international retail expansion. In addition, purchases
of investments, settlements of forward exchange currency contracts and proceeds
from the sale of long-term assets are also included in cash flows used in
investing activities.
The decrease in cash used in investing activities was driven primarily by lower
spending on retail expansion during the nine months ended October 31, 2020
compared to the same prior-year period. During the nine months ended October 31,
2020, the Company opened 13 directly-operated stores compared to 60
directly-operated stores that were opened in the same prior-year period.
Financing Activities
Net cash used in financing activities was $4.5 million for the nine months ended
October 31, 2020, compared to net cash used in financing activities of $21.7
million for the nine months ended November 2, 2019. Net cash used in financing
activities for the nine months ended October 31, 2020 related primarily to
repurchases of shares of the Company's common stock. In addition, payment of
dividends, cash activity from the issuance of common stock under our equity
plans, payments related to finance lease obligations, net proceeds from
borrowings and net proceeds related to issuance of convertible senior notes and
related warrants are also included in cash flows from financing activities.
The decrease in cash used in financing activities was driven primarily by the
lower investments made in share repurchases and, to a lesser extent, lower
payment of dividends and higher net proceeds received from borrowings during the
nine months ended October 31, 2020 compared to the same prior-year period. This
was partially offset by net proceeds from the issuance of convertible senior
notes and related warrants during the nine months ended November 2, 2019.
Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash
During the nine months ended October 31, 2020, changes in foreign currency
translation rates increased our reported cash, cash equivalents and restricted
cash balance by $1.4 million. This compares to a decrease of $2.7 million in
cash, cash equivalents and restricted cash driven by changes in foreign currency
translation rates during the nine months ended November 2, 2019.
Working Capital
As of October 31, 2020, the Company had net working capital (including cash and
cash equivalents) of $397.5 million, compared to $425.8 million at February 1,
2020 and $340.8 million at November 2, 2019.
The Company's primary working capital needs are for the current portion of lease
liabilities, accounts receivable and inventory. The accounts receivable balance
consists of trade receivables relating primarily to the Company's wholesale
business in Europe and, to a lesser extent, to its wholesale businesses in the
Americas and Asia, royalty receivables relating to its licensing operations,
credit card and retail concession receivables related to its retail businesses
and certain other receivables. Accounts receivable increased by $0.2 million, or
0.1%, to $300.4 million as of October 31, 2020, from $300.2 million at
November 2, 2019. On a constant currency basis, accounts receivable decreased by
$5.5 million, or 1.8%, when compared to November 2, 2019. As of October 31,
2020, approximately 48% of our total net trade receivables and 61% of our
European net trade receivables were subject to credit insurance coverage,
certain bank guarantees or letters of credit for collection purposes. Our credit
insurance coverage contains certain terms and conditions specifying deductibles
and annual claim limits. Inventory decreased by $126.7 million, or 24.4%, to
$393.2 million as of October 31, 2020, from $519.9 million at November 2, 2019.
On a constant currency basis, inventory decreased by $127.9 million, or 24.6%,
when compared to November 2, 2019, driven primarily by improved inventory
management compared to the same prior-year period.
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Capital Expenditures
Gross capital expenditures totaled $12.4 million, before deducting lease
incentives of $1.2 million, for the nine months ended October 31, 2020. This
compares to gross capital expenditures of $49.0 million, before deducting lease
incentives of $5.0 million for the nine months ended November 2, 2019.
We will periodically evaluate strategic acquisitions and alliances and pursue
those that we believe will support and contribute to our overall growth
initiatives.
Dividends
On December 2, 2020, the Company announced a regular quarterly cash dividend of
$0.1125 per share on the Company's common stock. The cash dividend will be paid
on January 4, 2021 to shareholders of record as of the close of business on
December 16, 2020.
Decisions on whether, when and in what amounts to continue making any future
dividend distributions will remain at all times entirely at the discretion of
the Company's Board of Directors, which reserves the right to change or
terminate the Company's dividend practices at any time and for any reason
without prior notice. The payment of cash dividends in the future will be based
upon a number of business, legal and other considerations, including the
Company's cash flow from operations, capital expenditures, debt service and
covenant requirements, cash paid for income taxes, earnings, share repurchases,
economic conditions and U.S. and global liquidity.
Share Repurchases
On June 26, 2012, the Company's Board of Directors authorized a program to
repurchase, from time-to-time and as market and business conditions warrant, up
to $500 million of the Company's common stock. Repurchases under the program may
be made on the open market or in privately negotiated transactions, pursuant to
Rule 10b5-1 trading plans or other available means. There is no minimum or
maximum number of shares to be repurchased under the program, which may be
discontinued at any time, without prior notice. There were 4,000,000 shares
repurchased at an aggregate cost of $38.8 million under the program during the
nine months ended October 31, 2020. The shares were repurchased during the three
months ended August 1, 2020. During the nine months ended November 2, 2019, the
Company repurchased 16,412,609 shares under the program at an aggregate cost of
$280.5 million, which is inclusive of the shares repurchased under the ASR
Contract. The Company repurchased 10,264,052 shares at an aggregate cost of
$201.5 million during the three months ended May 4, 2019, 749,252 shares at an
aggregate cost of $11.0 million during the three months ended August 3, 2019 and
an additional 5,399,305 shares at an aggregate cost of $68.0 million during the
three months ended November 2, 2019. As of October 31, 2020, the Company had
remaining authority under the program to purchase $47.8 million of its common
stock.
Borrowings and Finance Lease Obligations and Convertible Senior Notes
See "Part I, Item 1. Financial Statements - Note 9 - Borrowings and Finance
Lease Obligations" and "Part I, Item 1. Financial Statements - Note 10 -
Convertible Senior Notes and Related Transactions" in this Form 10-Q for
disclosures about our borrowings and finance lease obligations and convertible
senior notes.
Supplemental Executive Retirement Plan
On August 23, 2005, the Board of Directors of the Company adopted a Supplemental
Executive Retirement Plan ("SERP") which became effective January 1, 2006. The
SERP provides select employees who satisfy certain eligibility requirements with
certain benefits upon retirement, termination of employment, death, disability
or a change in control of the Company, in certain prescribed circumstances.
As a non-qualified pension plan, no dedicated funding of the SERP is required;
however, the Company has made periodic payments into insurance policies held in
a rabbi trust to fund the expected obligations arising under the non-qualified
SERP. The amount of any future payments into the insurance policies, if any, may
vary depending on investment performance of the trust. The cash surrender values
of the insurance policies were $68.1 million and $67.7 million as of October 31,
2020 and February 1, 2020, respectively, and
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were included in other assets in the Company's condensed consolidated balance
sheets. As a result of changes in the value of the insurance policy investments,
the Company recorded unrealized gains (losses) of $(0.3) million and $1.7
million in other income (expense) during the three and nine months ended October
31, 2020, respectively, and unrealized gains of $2.0 million and $5.0 million in
other income during the three and nine months ended November 2, 2019,
respectively. The projected benefit obligation was $51.6 million and $51.9
million as of October 31, 2020 and February 1, 2020, respectively, and was
included in accrued expenses and other long-term liabilities in the Company's
condensed consolidated balance sheets depending on the expected timing of
payments. SERP benefit payments of $0.4 million and $1.3 million were made
during the three and nine months ended October 31, 2020, respectively. SERP
benefit payments of $0.4 million and $1.3 million were made during the three and
nine months ended November 2, 2019, respectively.
Contractual Obligations and Commitments
During the nine months ended October 31, 2020, the Company entered into certain
term loans to ensure financial flexibility and maintain maximum liquidity in
response to uncertainty surrounding the COVID-19 pandemic. See "Part I, Item 1.
Financial Statements - Note 9 - Borrowings and Finance Lease Obligations" for
further information on these arrangements. As of October 31, 2020, there were no
other material changes to our contractual obligations and commitments outside
the ordinary course of business compared to the disclosures included in our Form
10-K for the fiscal year ended February 1, 2020.
Wholesale Backlog
We generally receive orders for fashion apparel three to six months prior to the
time the products are delivered to our customers' stores. The backlog of
wholesale orders at any given time is affected by various factors, including
pricing, seasonality, cancellations, the scheduling of market weeks, and the
timing of the receipt and shipment of orders and may include orders for multiple
seasons. Accordingly, a comparison of backlogs of wholesale orders from
period-to-period is not necessarily meaningful and may not be indicative of
eventual actual shipments. This is particularly true in light of recent events
resulting from the COVID-19 pandemic, which we expect could continue to have a
material impact on our wholesale orders and backlog.
U.S. and Canada Backlog. Our U.S. and Canadian wholesale backlog as of November
30, 2020, consisting primarily of orders for fashion apparel, was $36.5 million
in constant currency, compared to $47.5 million at December 2, 2019, a decrease
of 23.3%.
Europe Backlog. As of November 29, 2020, the European wholesale backlog was
€321.9 million, compared to €296.0 million at December 1, 2019, an increase of
8.8%. The backlog as of November 29, 2020 is comprised primarily of sales orders
for the Spring/Summer 2021 and Fall/Winter 2021 seasons.
Application of Critical Accounting Policies and Estimates
Our critical accounting policies reflecting our estimates and judgments are
described in "Part II, Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations," in our Annual Report on Form 10-K for the
fiscal year ended February 1, 2020 filed with the SEC on April 1, 2020. There
have been no significant changes to our critical accounting policies during the
nine months ended October 31, 2020.
Recently Issued Accounting Guidance
See "Part I, Item 1. Financial Statements - Note 1 - Basis of Presentation and
New Accounting Guidance" for disclosures about recently issued accounting
guidance.
ITEM 3.Quantitative and Qualitative Disclosures About Market Risk.
Exchange Rate Risk
More than two-thirds of product sales and licensing revenue recorded for the
nine months ended October 31, 2020 were denominated in currencies other than the
U.S. dollar. The Company's primary exchange rate risk relates to operations in
Europe, Canada, South Korea, China, Hong Kong and Mexico. Changes in
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currencies affect our earnings in various ways. For further discussion on
currency-related risk, please refer to our risk factors under "Part I, Item 1A.
Risk Factors" contained in the Company's most recent Annual Report on Form 10-K
for the fiscal year ended February 1, 2020.
Foreign Currency Translation Adjustment
The local selling currency is typically the functional currency for all of the
Company's significant international operations. In accordance with authoritative
guidance, assets and liabilities of the Company's foreign operations are
translated from foreign currencies into U.S. dollars at period-end rates, while
income and expenses are translated at the weighted average exchange rates for
the period. The related translation adjustments are reflected as a foreign
currency translation adjustment in accumulated other comprehensive income (loss)
within stockholders' equity. In addition, the Company records foreign currency
translation adjustments related to its noncontrolling interests within
stockholders' equity. Accordingly, our reported other comprehensive income
(loss) could be unfavorably impacted if the U.S. dollar strengthens,
particularly against the British pound, Canadian dollar, Chinese yuan, euro,
Japanese yen, Korean won, Mexican peso, Polish zloty, Russian rouble and Turkish
lira. Alternatively, if the U.S. dollar weakens relative to those currencies,
our reported other comprehensive income (loss) could be favorably impacted. Our
foreign currency translation adjustments recorded in other comprehensive income
(loss) are significantly impacted by net assets denominated in euros.
Periodically, the Company may also use foreign exchange currency contracts to
hedge the translation and economic exposures related to its net investments in
certain of its international subsidiaries (see below). Changes in the fair
values of these foreign exchange currency contracts, designated as net
investment hedges, are recorded in foreign currency translation adjustment as a
component of accumulated other comprehensive income (loss) within stockholders'
equity.
During the nine months ended October 31, 2020, the total foreign currency
translation adjustment increased stockholders' equity by $13.3 million, driven
primarily by the weakening of the U.S. dollar against the euro.
Foreign Currency Transaction Gains and Losses
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency,
including gains and losses on foreign exchange currency contracts (see below),
are included in the condensed consolidated statements of income (loss). Net
foreign currency transaction gains (losses) of $(10.2) million and $3.1 million
were included in the determination of net earnings (loss) for the nine months
ended October 31, 2020 and November 2, 2019, respectively.
Foreign Exchange Currency Contracts
The Company operates in foreign countries, which exposes it to market risk
associated with foreign currency exchange rate fluctuations. Various
transactions that occur primarily in Europe, Canada, South Korea, China, Hong
Kong and Mexico are denominated in U.S. dollars, British pounds and Russian
roubles and thus are exposed to earnings risk as a result of exchange rate
fluctuations when converted to their functional currencies. These types of
transactions include U.S. dollar-denominated purchases of merchandise and U.S.
dollar- and British pound-denominated intercompany liabilities. In addition,
certain operating expenses, tax liabilities and pension-related liabilities are
denominated in Swiss francs and are exposed to earnings risk as a result of
exchange rate fluctuations when converted to the functional currency. Further,
there are certain real estate leases that 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. The Company
is also subject to certain translation and economic exposures related to its net
investment in certain of its international subsidiaries. The Company enters into
derivative financial instruments to offset some, but not all, of its exchange
risk. In addition, some of the derivative contracts in place will create
volatility during
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the fiscal year as they are marked-to-market according to the accounting
rules and may result in revaluation gains or losses in different periods from
when the currency impact on the underlying transactions are realized.
Foreign Exchange Currency Contracts Designated as Cash Flow Hedges
During the nine months ended October 31, 2020, the Company purchased U.S. dollar
forward contracts in Europe totaling US$85.0 million that were designated as
cash flow hedges. As of October 31, 2020, the Company had forward contracts
outstanding for its European operations of US$106.0 million to hedge forecasted
merchandise purchases, which are expected to mature over the next 14 months. The
Company's foreign exchange currency contracts are recorded in its condensed
consolidated balance sheet at fair value based on quoted market rates. Changes
in the fair value of the U.S. dollar forward contracts, designated as cash flow
hedges for forecasted merchandise purchases, are recorded as a component of
accumulated other comprehensive income (loss) within stockholders' equity and
are recognized in cost of product sales in the period that approximates the time
the hedged merchandise inventory is sold. Changes in the fair value of the U.S.
dollar forward contracts, designated as cash flow hedges for forecasted
intercompany royalties, are recorded as a component of accumulated other
comprehensive income (loss) within stockholders' equity and are recognized in
other income (expense) in the period in which the royalty expense is incurred.
As of October 31, 2020, accumulated other comprehensive income (loss) related to
foreign exchange currency contracts included a net unrealized loss of
approximately $0.9 million net of tax, which will be recognized in cost of
product sales over the following 12 months, at the then current values on a
pre-tax basis, which can be different than the current quarter-end values.
As of October 31, 2020, the net unrealized loss of the remaining open forward
contracts recorded in the Company's condensed consolidated balance sheet was
approximately $1.2 million.
At February 1, 2020, the Company had forward contracts outstanding for its
European operations of US$148.6 million that were designated as cash flow
hedges. At February 1, 2020, the net unrealized gain of these open forward
contracts recorded in the Company's condensed consolidated balance sheet was
approximately $4.0 million.
Foreign Exchange Currency Contracts Not Designated as Hedging Instruments
The Company has also foreign exchange currency contracts that are not designated
as hedging instruments for accounting purposes. Changes in fair value of foreign
exchange currency contracts not designated as hedging instruments are reported
in net earnings (loss) as part of other income (expense). For the nine months
ended October 31, 2020, the Company recorded a net loss of $3.1 million for its
euro dollar foreign exchange currency contracts not designated as hedges, which
has been included in other income (expense). As of October 31, 2020, the Company
had euro foreign exchange currency contracts to purchase US$38.0 million
expected to mature over the next seven months. As of October 31, 2020, the net
unrealized loss of these open forward contracts recorded in the Company's
condensed consolidated balance sheet was approximately $0.8 million.
At February 1, 2020, the Company had euro foreign exchange currency contracts to
purchase US$46.1 million. At February 1, 2020, the net unrealized gain of these
open forward contracts recorded in the Company's condensed consolidated balance
sheet was approximately $0.9 million.
Sensitivity Analysis
As of October 31, 2020, a sensitivity analysis of changes in foreign currencies
when measured against the U.S. dollar indicates that, if the U.S. dollar had
uniformly weakened by 10% against all of the U.S. dollar denominated foreign
exchange derivatives totaling US$144.0 million, the fair value of the
instruments would have decreased by $16.0 million. Conversely, if the U.S.
dollar uniformly strengthened by 10% against all of the U.S. dollar denominated
foreign exchange derivatives, the fair value of these instruments would have
increased by $13.1 million. Any resulting changes in the fair value of the
hedged instruments may be partially offset by changes in the fair value of
certain balance sheet positions (primarily U.S. dollar denominated liabilities
in our foreign operations) impacted by the change in the foreign currency rate.
The ability to reduce
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the exposure of currencies on earnings depends on the magnitude of the
derivatives compared to the balance sheet positions during each reporting cycle.
Interest Rate Risk
The Company is exposed to interest rate risk on its floating-rate debt. The
Company has entered into interest rate swap agreements for certain of these
agreements to effectively convert its floating-rate debt to a fixed-rate basis.
The principal objective of these contracts is to eliminate or reduce the
variability of the cash flows in interest payments associated with the Company's
floating-rate debt, thus reducing the impact of interest rate changes on future
interest payment cash flows. The Company has elected to apply the hedge
accounting rules in accordance with authoritative guidance for certain of these
contracts.
In April 2019, the Company issued $300 million principal amount of convertible
senior notes in a private offering. The fair value of the convertible senior
notes is subject to interest rate risk, market risk and other factors due to its
conversion feature. The fair value of the convertible senior notes will
generally increase as our common stock price increases and will generally
decrease as our common stock price declines. The interest and market value
changes affect the fair value of the convertible senior notes but do not impact
our financial position, cash flows or results of operations due to the fixed
nature of the debt obligation. Additionally, we carry the convertible senior
notes at face value, less any unamortized discount on our balance sheet and we
present the fair value for disclosure purposes only.
Interest Rate Swap Agreement Designated as Cash Flow Hedge
During fiscal 2017, the Company entered into an interest rate swap agreement
with a notional amount of $21.5 million, designated as a cash flow hedge, to
hedge the variability of cash flows in interest payments associated with the
Company's floating-rate real estate secured loan (the "Mortgage Debt"). This
interest rate swap agreement matures in January 2026 and converts the nature of
the Company's Mortgage Debt from LIBOR floating-rate debt to fixed-rate debt,
resulting in a swap fixed rate of approximately 3.06%. The fair value of the
interest rate swap agreement is based upon inputs corroborated by observable
market data. Changes in the fair value of the interest rate swap agreement,
designated as a cash flow hedge to hedge the variability of cash flows in
interest payments associated with the Company's floating-rate Mortgage Debt, are
recorded as a component of accumulated other comprehensive income (loss) within
stockholders' equity and are amortized to interest expense over the term of the
related debt.
As of October 31, 2020, accumulated other comprehensive income (loss) related to
the interest rate swap agreement included a net unrealized loss of $0.8 million
net of tax, which will be recognized in interest expense after the following 12
months, at the then current values on a pre-tax basis, which can be different
than the current quarter-end values. As of October 31, 2020, the net unrealized
loss of the interest rate swap recorded in the Company's condensed consolidated
balance sheet was approximately $1.1 million. As of February 1, 2020, the net
unrealized loss of the interest rate swap recorded in the Company's condensed
consolidated balance sheet was approximately $0.3 million.
Sensitivity Analysis
As of October 31, 2020, the Company had borrowings under its credit facility
arrangements of $9.2 million which are based on variable rates of interest.
Accordingly, changes in interest rates would impact the Company's results of
operations in future periods. A 100 basis point increase in interest rates would
not have a significant effect on interest expense for the nine months ended
October 31, 2020.
As of October 31, 2020, the Company also had indebtedness related to term loans
of $51.9 million, finance lease obligations of $22.2 million and its Mortgage
Debt of $18.7 million. The term loans provide for annual interest rates ranging
between 0.5% to 1.5%. The finance lease obligations are based on fixed interest
rates derived from the respective agreements. The Mortgage Debt is covered by a
separate interest rate swap agreement with a swap fixed interest rate of
approximately 3.06% that matures in January 2026. The interest rate swap
agreement is designated as a cash flow hedge and converts the nature of the
Company's Mortgage Debt from LIBOR floating-rate debt to fixed-rate debt.
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The fair values of the Company's debt instruments are based on the amount of
future cash flows associated with each instrument discounted using the Company's
incremental borrowing rate. As of October 31, 2020 and February 1, 2020, the
carrying value was not materially different from fair value, as the interest
rates on the Company's debt approximated rates currently available to the
Company. The fair value of the Company's convertible senior notes is determined
based on inputs that are observable in the market and have been classified as
Level 2 in the fair value hierarchy.
ITEM 4. Controls and Procedures.
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act
of 1934, as amended. Based on this evaluation, our principal executive officer
and our principal financial officer concluded that our disclosure controls and
procedures were effective as of the end of the quarterly period covered by this
report.
There was no change in our internal control over financial reporting during the
third quarter of fiscal 2021 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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