GES
#Thank you.
Good afternoon, and thank you for joining us today.
We are pleased to report that our first-quarter earnings per share was $0.04, which was above the high end of our guidance.
Earning and operating margin were above the guidance we gave three months ago, we also expanded operating margin since last year, which is one of my key priorities.
Before I update you on the progress of our strategic initiative, let me talk about the business.
In our North America retail business, the early part of the quarter was impacted by the disruption of the west coast port issue, and extreme weather in all East Coast and Canada.
Despite these two headwinds, we did not see a deterioration of the trends compared to the first quarter and finished the quarter with comps down 4% in constant currency, and down 6% in US dollars.
E-commerce, which is one of our top priorities had another strong quarter, and delivered top line growth of 14% in the quarter, marking the 15th consecutive quarter of growth.
In terms of product, we were pleased with the performance of the <UNK> product.
We finished the quarter with comps up in the middle single digits, despite the definite disruption to product flow from the coast port delay.
We were also pleased by the overall performance of our women's business as trend has improved in the first quarter, driven by dresses, denim, and wovens tops.
Going in Q2, we are seeing the continuation of the first-quarter trends in our women's business.
We believe that the design change we have made are really starting to show results.
On the accessory side, we saw footwear continue to comp positively, but we did see a slowdown in bags again as the port delay disrupted our deliveries.
However, as the new product reaches stores, we are seeing a return to positive comp trends for handbags again.
Europe, our retail stores performed well and delivered positive comps in the low single-digit in the quarter.
Our product plan is clearly resonating with our customers, as we were able to deliver this result despite soft traffic.
We're also encouraged by the trend so far in Q2, with comps in the middle single digits.
I've just returned from Spain, Portugal, and Italy last week, and was very pleased with what I saw during my trip with the products, the street had more activity but also the need of more product in the stores due to high sell through.
However, Europe continued to be the biggest source of our foreign exchange headwind, with the steep decline in the value of the euro against the US dollar and the Swiss franc, and that is beyond our control.
Moving to our guidance for the fiscal year, we are pleased to be able to raise both the low end and top end of the guidance for the year based on our first-quarter performance.
We will provide detail on this later during the call.
We're encouraged by the overall performance of our business so far this year, and believe this reflects the progress we have made in our four strategic initiatives outlined in last call.
First, omnichannel, as we said, we expect double-digit growth for the year in e-commerce, and are on track to achieve that in North America and Europe.
Second, integration of <UNK> in GUESS.
stores, the process here is ongoing, and we're on track to double the number of stores with GUESS.
and <UNK> Presents by the end of the fiscal year.
The integration enabled us to expand the distribution of <UNK> line, and provides an upgrade and natural extension of the product offering within our GUESS.
stores.
We plan to close up to 60 stores in North America this year, and have already closed 11 of these in the first quarter.
Finally, improve profitability of the Company.
This continues to be a key priority of mine, as well as the management team.
<UNK> will provide more detail on the first-quarter financial performance later, but excluding the impact of currency, we already have made progress in Q1, where we were able to deliver operating margin level above our initial expectation above last year.
In conclusion, I'm encouraged by the performance of the business so far this year.
I strongly believe this is the result of the product change we have made in the last few months, as well as a clear focus by management team to execute the strategy.
I'm confident these are the right steps to increase the long-term value of the brand, and we will discuss more on the Q&A.
With that, I will pass to <UNK> to discuss the financials.
Thank you, <UNK>, and good afternoon.
During this conference call, our comments may reference certain non-GAAP measures.
Please refer to today's earnings release for GAAP reconciliations or descriptions of such measures.
Moving on to the results, net earnings for the first quarter were $3 million, and diluted earnings per share was $0.04, compared to diluted loss per share of $0.03 in last year's first quarter.
The impact of currency on our earnings per share in the first quarter was less than $0.01.
First-quarter revenues was $479 million, 8% lower than the prior year, and relatively flat in constant currency.
Total Company gross margin increased 90 basis points to 34.6%, due to less markdowns and higher IMU in North America retail, partially offset by impacts of negative comparable store sales and currency headwind.
SG&A as a percentage of sales improved by 40 basis points versus prior year, mainly driven by a favorable segment mix.
SG&A was slightly lower than expectations, due to timing with the later part of the year.
Operating earnings for the first quarter was $4 million.
Our operating margin increased 130 basis points to 0.9%.
Foreign currency negatively impacted operating margins by 40 basis points.
Other net income was $3 million and mostly consisted of net unrealized gains and realized gains in other assets.
Our effective first-quarter tax rate was 41.5%, and up from 32% in the prior year's first quarter due to the mix of earnings distributions between different taxable jurisdictions.
Moving to segment performance, in North America retail, first-quarter revenues dropped 6% to $214 million, including the unfavorable impact of the weaker Canadian dollar compared to the first quarter of last year.
Negative comps in brick-and-mortar stores were partially offset by 14% growth in our e-commerce business.
Overall, comp store sales including e-commerce declined 6% in the US and Canada, and 4% in constant currency.
E-commerce sales improved overall comps by 2 percentage points.
Operating loss improved by $1 million to a loss of $7 million, and operating margin improved 30 basis points to negative 3.4%.
Compared to last year's quarter, gross margins were higher, primarily due to less markdowns, higher IMU, and lower occupancy costs, partially offset by negative comparable store sales and currency headwind.
The gross margin expansion was partially offset by a higher SG&A rate, due to negative comparable-store sales.
During the quarter, we closed 11 stores, ending the period with 470 stores.
In Europe, first-quarter revenues were $137 million, down 14% in US dollars, and up 8% in constant currency.
The constant currency revenue increase was driven by a shift of wholesale shipments from the fourth quarter of last year, as well as productivity improvement in our retail stores.
Operating loss improved by $3 million to a loss of $4 million, including the favorable foreign currency translation impact.
Operating margin increased by 150 basis points to negative 2.7%.
The increase in operating margin was primarily driven by the shift of wholesale shipments into the first quarter.
In Asia, revenues in the first quarter declined 9% to $64 million, and declined 6% in constant currency, mainly driven by negative comps.
Operating earnings increased 38% to $5 million, and operating margin increased 240 basis points to 7.2%.
The increase in operating margin was primarily driven by lower SG&A expense, due to the phasing out of the G by GUESS.
business in Korea.
In North America wholesale, which includes our businesses in the US and Canada, as well as in Mexico and Brazil, first-quarter revenues were down 5% compared to the prior year at $37 million and up 1% in constant currency, driven by a shift in the timing of shipments.
Operating profit decreased by 13% to $7 million, and operating margin decreased 160 basis points to 18.1%, primarily due to the unfavorable impacts of business mix and currency on gross margin.
Royalties generated from sales by our licensee partners were up 1% at $26 million.
Now, moving on to the balance sheet, accounts receivable in US dollars was 10% lower than last year at $196 million, and was impacted by the strengthening of the US dollar compared to the euro.
In constant currency, accounts receivable was up 5%, driven by the shift in timing of European wholesale shipments.
Inventories were down 12% versus last year at $327 million.
In constant currency, inventory was down 2%.
We ended the quarter with cash and short-term investments of $459 million, compared to last year's $478 million.
Free cash flow for the first quarter was a use of $2 million, compared to a use of $17 million in the prior-year first quarter, driven by changes in working capital, higher earnings, and lower capital expenditures compared to the same quarter last year.
In summary, excluding the impact of currency, we had a quarter where we were able to improve our gross margins, SG&A rate, and operating margin on the P&L while improving our free cash flow.
As <UNK> mentioned earlier in his remarks, this reflects a key priority for the management team, which is improving profitability.
We are pleased with our start to the year, and will continue to maintain the focus on all these metrics through the year.
Additionally, our Board of Directors has approved a quarterly cash dividend of $0.225 per share on the Company's common stock.
The dividend will be payable on July 3, 2015 to shareholders of record at the close of business on June 17, 2015.
With that I will pass the call over to <UNK> will take you through the outlook for the second quarter and full FY16.
Yes, this is <UNK>.
That event just finished last, two days ago so it's our first time, and it was a good event all over Europe.
We just came last weekend in Los Angeles and Las Vegas, but unfortunately, I was not able to attend there.
For family reasons.
But we don't know yet about the impact.
In Italy we see, I just came back from Italy last week and I have to tell you that I was quite pleased about what I see right now.
In fact across the country in Italy, our stores have been positive.
The last 2.5 years were not exactly easy for us in Italy.
Now I am very encouraged by what I see.
<UNK>, this is <UNK>, and just to follow up on what <UNK> was talking about and what was happening in North America, in Europe also in Q1, traffic was a definite headwind for us.
The great news for us though was AURs were up pretty significantly, and also our conversions improved.
And between those two factors, we were more than able to offset the traffic headwinds that we saw, and we were up in the low single digits, and up in almost all the markets except a couple.
So what we have saw was the only markets that declined were France which was down in the mid-single digits, and Italy was down in the low single digits, with Italy having a stacked comp because of very difficult compares last year, which were still positive.
So we're pleased with what we're seeing in Europe so far in retail.
And I think moving on to your next question on operating margins, I think what you have seen so far in the first quarter is the results of all the initiatives we have started talking about since the back half of last year, to tighten up on our inventories, manage our product margins very closely, tighten our operating expenses, and that's what you've seen an operating margin expansion in the first quarter.
And from a free cash flow perspective, this is a really good quarter for us.
We've actually improved over last year by $15 million.
So as we go forward, just remember exchange is going to be a headwind, and that can impact our operating margins, and we have called this out in our guidance, and we'll talk more about it later.
This is <UNK> again.
For FY16, we have announced that we're going to be closing between 50 and 60 stores this year, and the store closures really are more heavily back-end loaded.
And so what we did say also when our previous calls was, it really goes across all the different concepts, and the criteria we are using is whether stores are unprofitable or no longer in brand-appropriate locations.
Exactly.
So I think those are the drivers of how we decide what stores to close, and that's the visibility we have so far this year.
Hi <UNK>, this is <UNK>.
From a profitability perspective, of the unproductive stores compared to the other ones, I think what we're looking at is taking the total flexibility in our portfolio because we have almost half our stores coming up over the next three years.
And what we did say was look, in the next one year, 50 to 60 stores are coming up with the productivity of those stores wasn't meeting our financial requirements and we were exiting those stores.
Closing these stores will be margin accretive, but remember that these stores are being closed more towards the back end of this year.
So the impact on this year is quite limited, but it's already in our guidance.
More of impact will come in the coming fiscal year, but we're not ready to give guidance for next year yet.
Yes <UNK>, if I'm not mistaken, you are referring to our expense timing in what your question refers to.
What we're saying is there was some timing benefit in Q1.
Some of that's going to impact us in Q2, and that's reflected in our guidance, but the way I would really think about SG&A is across the full-year, and across the full year, we are roughly flat from an SG&A perspective on a rate perspective.
If can add on that, this is <UNK>.
The two categories we discuss is footwear, footwear for women has been picking up across the board in every region.
And watches remain soft in general, over the last few quarters now.
So we are seeing, we're looking for some stability in watches, but it's still kind of soft.
