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.
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 our other reports filed under the Securities
Exchange Act of 1934, as amended, in its press releases and in other documents.
Except for historical information contained herein, certain matters discussed in
this Quarterly Report, including statements concerning the potential actions and
impacts related to the COVID-19 pandemic; statements concerning our future
outlook; statements concerning our expectations, goals, future prospects, global
cost reduction opportunities, profitability efforts, capital allocation plans,
cash needs and current business strategies and strategic initiatives; and
statements expressing optimism or pessimism about future opportunities are
forward-looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements, which are frequently indicated by terms such as "expect," "could,"
"will," "should," "goal," "strategy," "believe," "estimate," "continue,"
"outlook," "plan," "create," "see," and similar terms, are only expectations,
and involve known and unknown risks and uncertainties, which may cause actual
results in future periods to differ materially from what is currently
anticipated. 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 us and its partners;
our ability to successfully negotiate rent relief or other lease-related terms
with our landlords; our ability to maintain adequate levels of liquidity;
changes to estimates related to impairments, inventory and other reserves,
including the impact of the CARES Act, 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, income tax and other regulatory proceedings;
risks related to the complexity of 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 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 income tax or tariff policy,
including changes to tariffs on imports into the U.S.; accounting adjustments to
our unaudited financial statements identified during the completion of our
annual independent audit of financial statements and financial controls or from
subsequent events arising after issuance of this release; risk of future
non-cash asset impairments, including goodwill, right-of-use lease assets and/or
other
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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 income tax rates and economic and market
conditions in the various countries in which we operate. In addition to these
factors, the economic, technological, managerial, and other risks identified in
our most recent annual report on Form 10-K, under "Part II, Item 1A. Risk
Factors" contained herein, and other filings with the Securities and Exchange
Commission, including but not limited to the risk factors discussed therein,
could cause actual results to differ materially from current expectations. The
current global economic climate, length and severity of the COVID-19 pandemic,
and uncertainty surrounding potential changes in U.S. policies and regulations
may amplify many of these risks. We undertake no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
COVID-19 Business Update
The coronavirus (or "COVID-19") pandemic is continuing to impact the Company's
businesses. During the first quarter of fiscal 2022, the Company experienced
significantly higher net revenue compared to the first quarter of fiscal 2021
(when government-mandated store closures were much more widespread) but lower
net revenue compared to the pre-pandemic first quarter of fiscal 2020 as it
remained challenged by lower demand, temporary store closures and capacity
restrictions. In light of the current environment, we continue to strategically
manage expenses in order to protect profitability.
In late fiscal 2021, the Company incurred a new round of government-mandated
temporary store closures, mostly in Europe. The number of temporarily closed
stores ebbed and flowed during the first quarter of fiscal 2022 based on local
conditions. The overall impact resulted in stores being closed for less than 20%
of the total days during the first quarter of fiscal 2022, primarily in Europe
and Canada. As of May 1, 2021 80% of our stores were open, with the majority of
closed stores located primarily in Europe and Canada. As of May 19, 2021 nearly
95% of our stores were open.
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. The Company's Americas Retail, Americas
Wholesale, Europe and Licensing reportable segments are the same as their
respective operating segments. Certain components of the Company's Asia
operating segment are separate operating segments based on region, which have
been aggregated into the Asia reportable segment for disclosure purposes.
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
Company believes this segment reporting reflects how its business segments are
managed and how each segment's performance is evaluated by the Company's chief
operating decision maker to assess performance and make resource allocation
decisions. 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
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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)
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 three months of fiscal 2022, the average U.S. dollar rate was
weaker against the Euro, Canadian dollar, Chinese yuan, Mexican peso, Japanese
Yen and Korean won, and stronger against the Russian Ruble and Turkish lira
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 an
unfavorable impact on earnings from operations for the three months ended May 1,
2021 compared to the same prior-year period.
If the U.S. dollar strengthens in fiscal 2022 relative to the respective fiscal
2021 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 2022, 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 2021 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 2022,
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 and updated in March 2021, 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 several years. These
priorities are: (i) brand relevancy; (ii) product excellence; (iii) customer
centricity; (iv) global footprint; 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
also plan to elevate our brand and improve the quality of our products. We will
continue to use unique go-to-market strategies and execute celebrity and
influencer partnerships and collaborations as we believe that they are critical
to engage more effectively with a younger and broader audience.
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Product Excellence. We believe product is a key factor of success in our
business. We strive to design and make great products and 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.
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.
Functional Capabilities. We expect to drive material operational improvements in
the next four years to leverage and support our global business more
effectively, primarily in the areas of logistics, sourcing, product development
and production, inventory management, and overall infrastructure.
Capital Allocation
We plan to continue to prioritize capital allocation toward investments that
support growth and infrastructure, while remaining highly disciplined in the way
we allocate capital across projects, including new store development, store
remodels, technology and logistics 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
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 (including as a
result of pandemic-related closures) 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 the significant and varying temporary store closures and various
other restrictions during the COVID-19 pandemic, both in fiscal 2021 and 2022,
the Company believes that comparable store sales during these periods are not as
meaningful to the evaluation of the Company's results as they would be during
more normalized periods.
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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 three months ended May 1, 2021
had the same number of days as the three months ended May 2, 2020.
Executive Summary
Overview
Net earnings attributable to Guess?, Inc. increased 107.6% to $12.0 million, or
diluted earnings of $0.18 per common share, for the quarter ended May 1, 2021,
compared to net loss attributable to Guess?, Inc. of $157.7 million, or diluted
loss of $2.40 per common share, for the quarter ended May 2, 2020.
During the quarter ended May 1, 2021, the Company recognized $0.4 million of
asset impairment charges; $2.1 million net gains on lease modifications; $1.1
million of certain professional services and legal fees and related net credits;
$2.8 million of amortization of debt discount related to the Company's
convertible senior notes; and $0.1 million in additional tax expense from
certain discrete tax adjustments (or a combined $1.9 million, or $0.03 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 $13.9 million and adjusted diluted
earnings were $0.21 per common share for the quarter ended May 1, 2021. During
the quarter ended May 2, 2020, the Company recognized $53.0 million of asset
impairment charges; $0.5 million of net losses on lease terminations; $0.3
million of certain professional services and legal fees and related net credits;
$0.2 million of separation charges; $2.6 million of amortization of debt
discount related to the Company's convertible senior notes; and a benefit of
$7.9 million from certain discrete tax adjustments (or a combined $38.8 million,
or $0.59 per share, negative impact after considering the related tax benefit of
these adjustments of $9.8 million). Excluding the impact of these items,
adjusted net loss attributable to Guess?, Inc. was $118.9 million and adjusted
diluted loss was $1.81 per common share for the quarter ended May 2, 2020.
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 May 1, 2021
compared to the same prior-year period are presented below followed by a more
comprehensive discussion under "Results of Operations":
Operations
•Total net revenue increased 99.8% to $520.0 million for the quarter ended
May 1, 2021, from $260.3 million in the same prior-year quarter. In constant
currency, net revenue increased by 90.3%.
•Gross margin (gross profit as a percentage of total net revenue) increased
27.5% to 40.7% for the quarter ended May 1, 2021, from 13.2% in the same
prior-year period.
•Selling, general and administrative ("SG&A") expenses as a percentage of total
net revenue ("SG&A rate") decreased 19.1% to 35.9% for the quarter ended May 1,
2021, compared to 55.0% in the same prior-year period. SG&A expenses increased
30.3% to $186.7 million for the quarter ended May 1, 2021, from $143.3 million
in the same prior-year period.
•During the quarter ended May 1, 2021, the Company recognized asset impairment
charges of $0.4 million, compared to $53.0 million in the same prior-year
period.
•Operating margin increased 67.5% to 5.1% for the quarter ended May 1, 2021,
compared to negative 62.4% in the same prior-year period, driven primarily by
overall leveraging of expenses. Lower asset impairment charges favorably
impacted operating margin by 20.3% during the quarter ended May 1, 2021 compared
to the same prior-year period. Earnings from operations were $26.6 million for
the quarter ended May 1, 2021, compared to losses from operations of $162.5
million in the same prior-year period.
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•Other expense, net (including interest income and expense), was $8.3 million
for the quarter ended May 1, 2021, compared to $24.4 million in the same
prior-year period.
•The effective income tax rate was an expense of 29.8% for the quarter ended
May 1, 2021, compared to a benefit of 14.1% in the same prior-year period. The
Company's effective income tax rate for the quarter ended May 2, 2020 included
the favorable impact from certain discrete income tax adjustments totaling $7.9
million.
Key Balance Sheet Accounts
•The Company had $395.1 million in cash and cash equivalents and $0.2 million in
restricted cash as of May 1, 2021, compared to $419.4 million in cash and cash
equivalents and $0.2 million in restricted cash at May 2, 2020.
•As of May 1, 2021, the Company had $56.0 million in outstanding borrowings
under its term loans and $5.1 million in outstanding borrowings under its credit
facilities compared to $193.7 million in outstanding borrowings under its credit
facilities and $24.7 million in outstanding borrowings under its term loans as
of May 2, 2020.
•There were no share repurchases during the quarters ended May 1, 2021 and
May 2, 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 $66.8 million, or 27.9%, to $306.3 million as of May 1, 2021
compared to $239.5 million at May 2, 2020. On a constant currency basis,
accounts receivable increased by $45.7 million, or 19.1%, when compared to
May 2, 2020.
•Inventory increased by $12.4 million, or 3.1%, to $404.9 million as of May 1,
2021, from $392.5 million at May 2, 2020. On a constant currency basis,
inventory decreased by $15.7 million, or 4.0%, when compared to May 2, 2020.
Global Store Count
In the first quarter of fiscal 2022, together with our partners, we opened 34
new stores worldwide, consisting of ten stores in Europe and the Middle East and
24 stores in Asia and the Pacific. Together with our partners, we closed 24
stores worldwide, consisting of ten stores in Asia and the Pacific, seven stores
in Europe and the Middle East, five stores in the U.S., and two stores in
Canada.
We ended the first quarter of fiscal 2022 with 1,580 stores and 362 concessions
worldwide, comprised as follows:
                                                                        Stores                                                                Concessions
Region                                       Total            Directly-Operated           Partner Operated            Total           Directly-Operated           Partner Operated
United States                                   246                   244                          2                      1                     -                          1
Canada                                           74                    74                          -                      -                     -                          -
Central and South America                       105                    70                         35                     29                    29                          -
Total Americas                                  425                   388                         37                     30                    29                          1
Europe and the Middle East                      728                   511                        217                     45                    45                          -
Asia and the Pacific                            427                   142                        285                    287                    92                        195
Total                                         1,580                 1,041                        539                    362                   166                        196

Of the total 1,580 stores, 1,316 were GUESS? stores, 171 were GUESS? Accessories stores, 58 were G by GUESS (GbG) stores and 35 were MARCIANO stores.

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Results of Operations
Three Months Ended May 1, 2021 and May 2, 2020
Consolidated Results
Net Revenue. Net revenue increased by $259.8 million, or 99.8%, to $520.0
million for the quarter ended May 1, 2021, from $260.3 million for the quarter
ended May 2, 2020. In constant currency, net revenue increased by 90.3%, driven
by lower comparable sales driven by reduced store traffic and temporary store
closures resulting from the COVID-19 pandemic in the same prior-year period and,
to a lesser extent, a shift in European wholesale shipments into fiscal 2022.
Currency translation fluctuations relating to our foreign operations favorably
impacted net revenue by $24.8 million, compared to the same prior-year period.
Gross Margin. Gross margin increased 27.5% to 40.7% for the quarter ended May 1,
2021, compared to 13.2% in the same prior-year period, of which 21.0% was due to
lower occupancy rate and 650 basis points was due to higher product margins. The
lower occupancy rate resulted primarily from leveraging occupancy costs due
mainly to the impact of prior-year temporary store closures in Americas Retail
and, to a lesser extent, a shift in European wholesale shipments into fiscal
2022. The product margins were higher as the prior year's quarter included
significant inventory reserves.
Gross Profit. Gross profit increased by $177.3 million, or 518.1%, to $211.6
million for the quarter ended May 1, 2021, compared to $34.2 million in the same
prior-year period. The increase in gross profit, which included the favorable
impact of currency translation, was due primarily to the favorable impact on
gross profit from higher revenue, as well as lower occupancy costs. Currency
translation fluctuations relating to our foreign operations favorably impacted
gross profit by $8.1 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
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 19.1% to 35.9% for the quarter
ended May 1, 2021, from 55.0% in the same prior-year period, driven by
leveraging of expenses due to higher European wholesale revenues and, to a
lesser extent, temporary store closures in Americas Retail in the same
prior-year period.
SG&A Expenses. SG&A expenses increased by $43.4 million, or 30.3%, to $186.7
million for the quarter ended May 1, 2021, from $143.3 million in the same
prior-year period. The increase, which included the unfavorable impact of
currency translation, was driven primarily by higher variable expenses in the
current year quarter as well as lower payroll and overall discretionary expenses
due to significant COVID-19 impacts in the same prior-year period. Currency
translation fluctuations relating to our foreign operations unfavorably impacted
SG&A expenses by $9.0 million.
Asset Impairment Charges. During the quarter ended May 1, 2021, the Company
recognized minimal impairment of certain operating lease right-of-use ("ROU")
assets and $0.4 million of impairment charges of property and equipment related
to certain retail locations compared to impairments of $28.2 million of certain
operating lease ROU assets and $24.8 million of property and equipment during
the quarter ended May 2, 2020, resulting from lower revenue and future cash flow
projections from the ongoing effects of the COVID-19 pandemic. Currency
translation fluctuations relating to our foreign operations had minimal
unfavorable impact on asset impairment charges.
Operating Margin. Operating margin increased 67.5% to 5.1% for the quarter ended
May 1, 2021, compared to negative 62.4% in the same prior-year period, driven
primarily by overall leveraging of expenses and, to a
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lesser extent, lower asset impairment charges. Lower asset impairment charges
favorably impacted operating margin by 20.3% during the quarter ended May 1,
2021 compared to the same prior-year period. Excluding the impact of lower asset
impairment charges, net gains on lease modifications compared to net losses on
lease modifications, and increased expenses related to certain professional
services and legal fees and related net credits, the Company's operating margin
would have increased 46.7% 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 $189.1
million, or 116.4%, to $26.6 million for the quarter ended May 1, 2021, compared
to a loss from operations of $162.5 million in the same prior-year period.
Currency translation fluctuations relating to our foreign operations unfavorably
impacted earnings from operations by $0.7 million.
Interest Expense, Net. Interest expense, net, was $5.6 million for the quarter
ended May 1, 2021, compared to $4.9 million for the quarter ended May 2, 2020.
Other Expense, Net. Other expense, net, was $2.7 million for the quarter ended
May 1, 2021, compared to $19.6 million in the same prior-year period. The change
was driven primarily by market volatility which resulted in lower net unrealized
losses on the translation of foreign currency balances compared to higher net
unrealized losses in the quarter ended May 2, 2020.
Income Tax Expense (Benefit).  Income tax expense for the quarter ended May 1,
2021 was $5.5 million, or a 29.8% effective tax rate, compared to income tax
benefit of $26.4 million, or a 14.1% 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 three months ended May 2, 2020, the Company recognized a tax benefit
of approximately $11.8 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. This benefit was
partially offset by a valuation allowance of $3.7 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. Excluding the impact of these items,
the increase in the effective tax rate was due primarily to a change in the mix
of statutory earnings for the three months ended May 1, 2021, compared to the
same prior-year period.
Net Earnings (Loss) Attributable to Noncontrolling Interests. Net earnings
(loss) attributable to noncontrolling interests were $0.9 million and $(2.9)
million, net of taxes, for the quarters ended May 1, 2021 and May 2, 2020,
respectively.
Net Earnings (Loss) Attributable to Guess?, Inc. Net earnings (loss)
attributable to Guess?, Inc. were $12.0 million for the quarter ended May 1,
2021, compared to $(157.7) million in the same prior-year period. Diluted
earnings per share ("EPS") were $0.18 for the quarter ended May 1, 2021,
compared to diluted loss per share of $2.40 in the same prior-year period. The
Company estimates a positive impact from its share buybacks and currency of
$0.01 and $0.09, respectively, on diluted EPS in the first quarter of fiscal
2022. During the quarter ended May 1, 2021, the Company recognized $0.4 million
of asset impairment charges; $2.1 million net gains on lease modifications; $1.1
million of certain professional services and legal fees and related net credits;
$2.8 million of amortization of debt discount related to the Company's
convertible senior notes; and $0.1 million in additional tax expense from
certain discrete tax adjustments (or a combined $1.9 million, or $0.03 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 $13.9 million and adjusted diluted
earnings were $0.21 per common share for the quarter ended May 1, 2021. The
Company estimates its share buybacks and currency had a positive impact of $0.01
and $0.09, respectively, on adjusted diluted EPS in the first quarter of fiscal
2022. During the quarter ended May 2, 2020, the Company recognized $53.0 million
of asset impairment charges; $0.5 million of net losses on lease terminations;
$0.3 million of certain professional services and legal fees and related net
credits; $0.2 million of separation charges; $2.6 million of amortization
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of debt discount related to the Company's convertible senior notes; and a
benefit of $7.9 million from certain discrete tax adjustments (or a combined
$38.8 million, or $0.59 per share, negative impact after considering the related
tax benefit of these adjustments of $9.8 million). Excluding the impact of these
items, adjusted net loss attributable to Guess?, Inc. was $118.9 million and
adjusted diluted loss was $1.81 per common share for the quarter ended May 2,
2020. References to financial results excluding the impact of these items are
non-GAAP measures and are addressed below under "Non-GAAP Measures."
Information by Business Segment
The following table presents our net revenue and earnings (loss) from operations
by segment for the three months ended May 1, 2021 and May 2, 2020 (dollars in
thousands):
                                                     Three Months Ended
                                              May 1, 2021         May 2, 2020           $ Change             % Change
Net revenue:
Americas Retail                              $ 155,535           $   74,584           $  80,951                  108.5  %
Americas Wholesale                              45,430               25,875              19,555                   75.6  %
Europe                                         241,852              106,473             135,379                  127.1  %
Asia                                            55,660               40,385              15,275                   37.8  %
Licensing                                       21,525               12,934               8,591                   66.4  %
Total net revenue                            $ 520,002           $  260,251           $ 259,751                   99.8  %
Earnings (loss) from operations:
Americas Retail                              $  20,274           $  (36,673)          $  56,947                 (155.3  %)
Americas Wholesale                              11,555                1,624               9,931                  611.5  %
Europe                                           4,198              (44,406)             48,604                 (109.5  %)
Asia                                            (1,808)             (22,777)             20,969                  (92.1  %)
Licensing                                       19,431               10,094               9,337                   92.5  %
Total segment earnings (loss) from
operations                                      53,650              (92,138)            145,788                 (158.2  %)
Corporate overhead                             (28,776)             (16,921)            (11,855)                  70.1  %

Asset impairment charges                          (441)             (52,972)             52,531                  (99.2  %)
Net gains (losses) on lease modifications        2,145                 (456)              2,601                 (570.4  %)
Total earnings (loss) from operations        $  26,578           $ (162,487)          $ 189,065                 (116.4  %)

Operating margins:
Americas Retail                                   13.0  %             (49.2  %)
Americas Wholesale                                25.4  %               6.3  %
Europe                                             1.7  %             (41.7  %)
Asia                                              (3.2  %)            (56.4  %)
Licensing                                         90.3  %              78.0  %
Total Company                                      5.1  %             (62.4  %)


Americas Retail
Net revenue from our Americas Retail segment increased by $81.0 million, or
108.5%, to $155.5 million for the quarter ended May 1, 2021, from $74.6 million
in the same prior-year period. In constant currency, net revenue increased by
105.9%, due primarily to lower comparable sales driven by reduced store traffic
and temporary store closures resulting from the COVID-19 pandemic in the same
prior-year period. Comparable store sales (including e-commerce) increased 6% in
U.S. dollars and 5% in constant currency compared to the same prior-year period.
The inclusion of our e-commerce sales increased the comparable sales percentage
by 16% 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 37 net stores during the quarter ended May 1, 2021 compared to the
same prior-year period, resulting in a 7.7% net decrease in average square
footage. Currency translation fluctuations relating to our non-U.S. retail
stores and e-commerce sites favorably impacted net revenue by $2.0 million.
Operating margin increased 62.2% to 13.0% for the quarter ended May 1, 2021,
from negative 49.2% in the same prior-year quarter, driven primarily by
leveraging of expenses as well as lower markdowns.
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Earnings from operations from our Americas Retail segment increased by $56.9
million, or 155.3%, to $20.3 million for the quarter ended May 1, 2021, from
loss from operations of $36.7 million in the same prior-year period. The
increase is due primarily to the favorable impact on earnings from higher
revenue and leveraging of expenses.
Americas Wholesale
Net revenue from our Americas Wholesale segment increased by $19.6 million, or
75.6%, to $45.4 million for the quarter ended May 1, 2021, from $25.9 million in
the same prior-year period. In constant currency, net revenue increased by
71.0%, driven primarily by increased demand in our U.S. wholesale business.
Currency translation fluctuations relating to our non-U.S. wholesale businesses
favorably impacted net revenue by $1.2 million.
Operating margin increased 19.1% to 25.4% for the quarter ended May 1, 2021,
compared to 6.3% in the same prior-year quarter, due mainly to lower markdowns
and leveraging of expenses.
Earnings from operations from our Americas Wholesale segment increased by $9.9
million, or 611.5%, to $11.6 million for the quarter ended May 1, 2021, from
$1.6 million in the same prior-year period. The increase reflects the favorable
impact on earnings from higher revenue.
Europe
Net revenue from our Europe segment increased by $135.4 million, or 127.1%, to
$241.9 million for the quarter ended May 1, 2021, compared to $106.5 million in
the same prior-year period. In constant currency, net revenue increased by
110.0%, driven primarily by a shift in wholesale shipments into fiscal 2022.
Comparable store sales (including e-commerce) increased 44% in U.S. dollars and
32% in constant currency compared to the same prior-year period. The inclusion
of our e-commerce sales increased the comparable sales percentage by 43% in U.S.
dollars and 38% in constant currency. As of May 1, 2021, the Company directly
operated 511 stores in Europe compared to 517 stores at May 2, 2020, excluding
concessions, which represents a 1.2% decrease over the same prior-year period.
Currency translation fluctuations relating to our European operations favorably
impacted net revenue by $18.2 million.
Operating margin increased 43.4% to 1.7% for the quarter ended May 1, 2021,
compared to negative 41.7% in the same prior-year quarter, driven by overall
leveraging of expenses due to a shift in wholesale shipments.
Earnings from operations from our Europe segment increased by $48.6 million, or
109.5%, to $4.2 million for the quarter ended May 1, 2021, compared to loss from
operations of $44.4 million in the same prior-year period, driven primarily by
the favorable impact on earnings from higher revenue and overall leveraging of
expenses. Currency translation fluctuations relating to our European operations
unfavorably impacted earnings from operations by $1.4 million.
Asia
Net revenue from our Asia segment increased by $15.3 million, or 37.8%, to $55.7
million for the quarter ended May 1, 2021, from $40.4 million in the same
prior-year period. In constant currency, net revenue increased by 29.3%, due
primarily to lower comparable sales driven by reduced store traffic resulting
from the COVID-19 pandemic in the same prior-year period. Comparable store sales
(including e-commerce) increased 32% in U.S. dollars and 23% in constant
currency. The inclusion of the Company's e-commerce sales decreased the
comparable sales percentage by 11% in U.S. dollars and constant currency.
Currency translation fluctuations relating to our Asian operations favorably
impacted net revenue by $3.4 million.
Operating margin increased 53.2% to negative 3.2% for the quarter ended May 1,
2021, from negative 56.4% in the same prior-year quarter, as the prior year's
quarter included significant inventory reserves and the current quarter
benefited from leveraging of expenses.
Loss from operations from our Asia segment was $1.8 million for the quarter
ended May 1, 2021, compared to loss from operations of $22.8 million in the same
prior-year period. The decrease was due to
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significant inventory reserves in the prior year quarter and the leveraging of
expenses in the current year quarter.
Licensing
Net royalty revenue from our Licensing segment increased by $8.6 million, or
66.4%, to $21.5 million for the quarter ended May 1, 2021, from $12.9 million in
the same prior-year period, due primarily to higher demand and strong
performance in handbags, fragrance, and footwear.
Earnings from operations from our Licensing segment increased by $9.3 million,
or 92.5%, to $19.4 million for the quarter ended May 1, 2021, from $10.1 million
in the same prior-year period. The increase was mainly due to leveraging of
expenses.
Corporate Overhead
Unallocated corporate overhead increased by $11.9 million to $28.8 million for
the quarter ended May 1, 2021, compared to $16.9 million in the same prior-year
period. The increase was due to lower expenses in the prior year quarter mainly
related to expense savings in response to the pandemic and lower
performance-based compensation.
Non-GAAP Measures
The financial information presented in this Quarterly Report includes non-GAAP
financial measures, such as adjusted results and constant currency financial
information. For the three months ended May 1, 2021 and May 2, 2020, the
adjusted results exclude the impact of certain professional service, legal fees
and related net credits, certain separation charges, asset impairment charges,
net (gains) losses on lease modifications, non-cash amortization of debt
discount on the Company's convertible senior notes, the related income tax
impacts of these adjustments as well as certain discrete income tax adjustments,
where applicable. These non-GAAP measures are provided in addition to, and not
as alternatives for, the Company's reported GAAP results.
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 has excluded these items from its adjusted financial measures primarily
because it believes these items are not indicative of the underlying performance
of its business and the adjusted financial 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). A reconciliation of reported GAAP results to comparable
non-GAAP results is provided in the accompanying tables.
The adjusted measures for the three months ended May 1, 2021 exclude the impact
of $0.4 million of asset impairment charges; $2.1 million net gains on lease
modifications; $1.1 million of certain professional services and legal fees and
related net credits; $2.8 million of amortization of debt discount on the
Company's convertible senior notes; and $0.1 million in additional tax expense
from certain discrete tax adjustments. The asset impairment charges related
primarily to 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 net credits were primarily due to amounts which the Company
otherwise would not have incurred as part of its business operations. These
items resulted in a combined $1.9 million negative impact (after considering the
related tax benefit of $0.4 million), or an unfavorable $0.03 per share impact
during the three months ended May 1, 2021. Net earnings attributable to
Guess?, Inc. were $12.0 million and diluted earnings were $0.18 per common share
for the three months ended May 1, 2021. Excluding the impact of these items,
adjusted net earnings attributable to Guess?, Inc. were $13.9 million and
adjusted diluted earnings were $0.21 per common share for the three months ended
May 1, 2021.
The adjusted measures for the three months ended May 2, 2020 exclude the impact
of $53.0 million of asset impairment charges; $0.5 million of net losses on
lease terminations; $0.3 million of certain professional services and legal fees
and related net credits; $0.2 million of separation charges; $2.6 million of
amortization
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of debt discount on the Company's convertible senior notes; and a benefit of
$7.9 million 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 due to
the ongoing effects of the COVID-19 pandemic. The net losses on lease
terminations related primarily to the early termination of certain lease
agreements. Certain professional service and legal fees and related net credits
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 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 three
months ended May 2, 2020, the Company recognized a tax benefit of approximately
$11.8 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. This benefit was partially
offset by a valuation allowance of $3.7 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. These items resulted in a combined $38.8 million
negative impact (after considering the related tax benefit of $9.8 million), or
an unfavorable $0.59 per share impact during the three months ended May 2, 2020.
Net loss attributable to Guess?, Inc. was $157.7 million and diluted loss was
$2.40 per common share for the three months ended May 2, 2020. Excluding the
impact of these items, adjusted net loss attributable to Guess?, Inc. was $118.9
million and adjusted diluted loss was $1.81 per common share for the three
months ended May 2, 2020.
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 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 three months
ended May 1, 2021, we relied primarily on trade credit, available cash, real
estate and other operating leases, finance leases, proceeds from
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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 modification 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. 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.
Our outstanding convertible senior notes may be converted at the option of the
holders as described in "Part I, Item 1, Financial Statements - Note 10 -
Convertible Senior Notes and Related Transactions" of this Form 10-Q and in
"Note 10 - Convertible Senior Notes and Related Transactions" of the
Consolidated Financial Statements included in our Annual Report on Form 10-K. As
of May 1, 2021, none of the conditions allowing holders of the convertibles
notes to convert had been met. If our trading price exceeds 130% of the
conversion price of the convertible notes for at least 20 trading days during
the 30 consecutive trading-day period ending on, and including, September 30,
2021, holders of the convertible notes would have the right to convert their
convertible notes during the calendar quarter beginning October 1, 2021. Upon
conversion, we will pay or deliver, as the case may be, cash, shares of our
common stock or a combination of cash and shares of our common stock, at our
election, in the manner and subject to the terms and conditions provided in the
indenture governing the convertible notes. The convertible note hedge
transaction we entered into in connection with our issuance of the convertible
notes is expected generally to reduce the potential dilution upon conversion of
the convertible notes and/or offset any cash payments we are required to make in
excess of the principal amount of convertible notes that are converted, as the
case may be. We expect to settle the principal amount of our outstanding
convertible senior notes in 2024 in cash and any excess in shares.
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.
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.
It is not practicable to estimate the amount of tax that might be payable if
these earnings were repatriated due to the complexities associated with the
hypothetical calculation. As of May 1, 2021, the Company had cash and cash
equivalents of $395.1 million, of which approximately $101.0 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 January 30, 2021 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.
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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. Throughout the COVID-19 pandemic, we have suspended rental payments
and/or paid reduced rental amounts with respect to our retail stores that were
closed or experiencing drastically reduced customer traffic as a result of the
COVID-19 pandemic. Over the last year, we have successfully negotiated with
several landlords, including some of our larger landlords and have received rent
abatement benefits as well as new lease terms for some of our affected leases.
The Company continues to engage in discussions with additional affected
landlords in an effort to achieve appropriate rent relief and other lease
concessions and, in some cases, to terminate existing leases. In some instances,
where negotiations with landlords have proven unsuccessful, the Company is
engaged in litigation related to rent obligations both during the COVID-19
pandemic and through the term of the lease.
Three Months Ended May 1, 2021 and May 2, 2020
The Company has presented below the cash flow performance comparison of the
three months ended May 1, 2021, compared to the three months ended May 2, 2020.
Operating Activities
Net cash used in operating activities was $53.6 million for the three months
ended May 1, 2021, compared to $61.6 million for the three months ended May 2,
2020, or an improvement of $7.9 million. This improvement was driven primarily
by higher cash flows generated from net earnings, partially offset by
unfavorable changes in working capital.
Investing Activities
Net cash used in investing activities was $7.8 million for the three months
ended May 1, 2021, compared to $5.7 million for the three months ended May 2,
2020. Net cash used in investing activities for the three months ended May 1,
2021 related primarily to capital expenditures incurred on leasehold
improvements, investments in technology infrastructure and, to a lesser extent,
existing store remodeling programs and international retail expansion.
The increase in cash used in investing activities was driven primarily by higher
strategic investments in technology and retail remodels during the three months
ended May 1, 2021 compared to the same prior-year period. During the three
months ended May 1, 2021, the Company opened 11 directly-operated stores
compared to five directly-operated stores that were opened in the same
prior-year period.
Financing Activities
Net cash used in financing activities was $9.7 million for the three months
ended May 1, 2021, compared to net cash provided by financing activities of
$210.1 million for the three months ended May 2, 2020. Net cash used in
financing activities for the three months ended May 1, 2021 related primarily to
payment of dividends and repayments on borrowings and finance lease obligations,
partially offset by proceeds from borrowings.
The change in cash provided by (used in) financing activities was driven
primarily by lower proceeds received from borrowings and higher payment of
dividends during the three months ended May 1, 2021 compared to the same
prior-year period.
Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash
During the three months ended May 1, 2021, changes in foreign currency
translation rates decreased our reported cash, cash equivalents and restricted
cash balance by $2.8 million. This compares to a decrease of $8.0 million in
cash, cash equivalents and restricted cash driven by changes in foreign currency
translation rates during the three months ended May 2, 2020.
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Working Capital
As of May 1, 2021, the Company had net working capital (including cash and cash
equivalents) of $497.5 million, compared to $470.0 million at January 30, 2021
and $388.2 million at May 2, 2020.
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 $66.8 million,
or 27.9%, to $306.3 million as of May 1, 2021, from $239.5 million at May 2,
2020. On a constant currency basis, accounts receivable increased by $45.7
million, or 19.1%, when compared to May 2, 2020. As of May 1, 2021,
approximately 48% of our total net trade receivables and 60% 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 increased by $12.4 million, or 3.1%, to $404.9 million
as of May 1, 2021, from $392.5 million at May 2, 2020. On a constant currency
basis, inventory decreased by $15.7 million, or 4.0%, when compared to May 2,
2020, driven primarily by improved inventory management.
Capital Expenditures
Gross capital expenditures totaled $9.1 million, before deducting lease
incentives of $1.1 million, for the three months ended May 1, 2021. This
compares to gross capital expenditures of $6.0 million, before deducting lease
incentives of $0.4 million for the three months ended May 2, 2020.
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 May 27, 2021, 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 June 25, 2021 to shareholders of record as of the close of business on June
9, 2021.
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
There were no shares repurchased under the Company's share repurchase program
during the three months ended May 1, 2021. As of May 1, 2021, 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
As a non-qualified pension plan, no dedicated funding of the Company's
Supplemental Executive Retirement Plan ("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.
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The cash surrender values of the insurance policies were $71.6 million and $72.1
million as of May 1, 2021 and January 30, 2021, respectively, and 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 minimal unrealized losses and $3.1 million unrealized losses in other
expense during the three months ended May 1, 2021 and May 2, 2020, respectively.
The projected benefit obligation was $52.1 million and $52.3 million as of
May 1, 2021 and January 30, 2021, 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 $0.5 million and $0.6 million were made during the three months
ended May 1, 2021 and May 2, 2020, respectively.
Contractual Obligations and Commitments
As of May 1, 2021, there were no 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 January 30,
2021. 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" for further information on
these arrangements.
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 January 30, 2021 filed with the SEC on April 9, 2021. There
have been no significant changes to our critical accounting policies during the
three months ended May 1, 2021.
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 recorded for the three months ended May 1,
2021 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 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
January 30, 2021.
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.
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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. 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 three months ended May 1, 2021, the total foreign currency
translation adjustment decreased stockholders' equity by $2.2 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 losses of $4.1 million and $10.5 million were
included in the determination of net earnings (loss) for the three months ended
May 1, 2021 and May 2, 2020, 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 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 three months ended May 1, 2021, the Company purchased U.S. dollar
forward contracts in Europe totaling US$40.0 million that were designated as
cash flow hedges. As of May 1, 2021, the Company had forward contracts
outstanding for its European operations of US$126.0 million to hedge forecasted
merchandise purchases, which are expected to mature over the next 15 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 May 1, 2021, accumulated other comprehensive income (loss) related to
foreign exchange currency contracts included a net unrealized loss of
approximately $2.3 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.
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As of May 1, 2021, the net unrealized loss of the remaining open forward
contracts recorded in the Company's condensed consolidated balance sheet was
approximately $1.3 million.
At January 30, 2021, the Company had forward contracts outstanding for its
European operations of US$100.0 million that were designated as cash flow
hedges. At January 30, 2021, the net unrealized loss of these open forward
contracts recorded in the Company's condensed consolidated balance sheet was
approximately $3.3 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 three months
ended May 1, 2021, the Company recorded a net gain of $0.1 million for its euro
dollar foreign exchange currency contracts not designated as hedges, which has
been included in other income (expense). As of May 1, 2021, the Company had euro
foreign exchange currency contracts to purchase US$19.0 million expected to
mature over the next one month. As of May 1, 2021, the net unrealized loss of
these open forward contracts recorded in the Company's condensed consolidated
balance sheet was approximately $0.9 million.
At January 30, 2021, the Company had euro foreign exchange currency contracts to
purchase US$19.0 million. At January 30, 2021, the net unrealized loss of these
open forward contracts recorded in the Company's condensed consolidated balance
sheet was approximately $1.2 million.
Sensitivity Analysis
As of May 1, 2021, 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$145.0 million, the fair value of the
instruments would have decreased by $16.1 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 $13.2 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 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
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
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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 May 1, 2021, accumulated other comprehensive income (loss) related to the
interest rate swap agreement included a net unrealized loss of $0.5 million net
of tax, which will be recognized in interest expense 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 May 1, 2021, the net unrealized loss
of the interest rate swap recorded in the Company's condensed consolidated
balance sheet was approximately $0.7 million. As of January 30, 2021, the net
unrealized loss of the interest rate swap recorded in the Company's condensed
consolidated balance sheet was approximately $1.0 million.
Sensitivity Analysis
As of May 1, 2021, the Company had borrowings under its credit facility
arrangements of $5.1 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 had a significant effect on interest expense for the three months ended
May 1, 2021.
As of May 1, 2021, the Company also had indebtedness related to term loans of
$56.0 million, finance lease obligations of $22.4 million and its Mortgage Debt
of $18.3 million. The term loans provide for annual interest rates ranging
between 0.5% to 2.2%. 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.
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 May 1, 2021 and January 30, 2021, 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
first quarter of fiscal 2022 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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