GES
#Thank you, <UNK>.
First, let me say how excited I am to be here, and how honored I am that <UNK>, Maurice and the Board of Directors have placed such faith in me to nominate me the first CEO in Guess.
's history that does not bear the <UNK> name.
I accepted the position because I love and believe in the power of the Guess.
brand, because I cherish the opportunity to work alongside <UNK> in writing the next chapter of this Company, and because, frankly, everywhere I look in this Company, I see opportunity.
I am very happy about the future of Guess.
.
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 second quarter was $18 million.
Diluted earnings per share was $0.21 compared to diluted earnings per share of $0.26 in last year's second quarter, and includes the negative impact of roughly $0.10 due to foreign currency movement.
Earnings per share declined 19% including the negative foreign currency impact of roughly 38%.
Second-quarter revenues were $546 million, down 1% in constant currency and down 10% in US dollars versus prior year.
Total Company gross margin increased 70 basis points to 36.3% primarily due to higher initial markups in Europe and America's retail, lower markdowns in America's retail, partially offset by the impacts of currency.
SG&A as a percentage of sales increased by 80 basis points versus prior year.
Expenses in the quarter include charges for legal matters that negatively impacted earnings per share by roughly $0.05 and was not contemplated in our previous guidance.
SG&A dollars still finished roughly in line with expectations when we guided the quarter, as we incurred lower expenses in other areas to offset these charges.
Operating earnings for the second quarter was $26 million.
Our operating margin decreased 10 basis points to 4.8% including the negative impacts of foreign currency of 170 basis points and charges related to legal matters of 130 basis points.
Other net income was $4 million and mostly consisted of net unrealized gains and realized gains on foreign currency hedges.
Our effective second-quarter tax rate was 37%, up from 35% in the prior year's second quarter due to the mix of earnings distributions between different taxable jurisdictions.
Before we move to segment performance, please note that we renamed the North America retail and North America wholesale segments as Americas retail and Americas wholesale to reflect the growing representation of business from Central and South American countries in the segment in addition to US, Canada and Mexico.
Revenue for the Americas retail segment decreased 2% in constant currency and 5% in US dollars.
Within the quarter, we saw definite sequential improvement both in traffic and comp versus Q1 and finished the quarter with comps flat in constant currency and down 3% in US dollars.
This performance was despite continued softness due to significantly lower traffic to our tourist stores.
E-commerce, which continues to be one of our top priorities, had yet another strong quarter and delivered top-line growth of 20% in the quarter, marking the 16th consecutive quarter of growth in the US and Canada.
In terms of product we were pleased by the overall performance of our womens' category, as we posted positive comps in constant currency.
An improved trend in denim and strength in dresses and woven tops drove the women's performance.
On the accessory side, we saw footwear and bags continue to comp positively but watches remain soft.
From a brand perspective, we continue to be pleased with the performance of the <UNK> product line which achieved double-digit comps for the quarter, and are happy with the sequential improvement in the performance of the Guess.
brand.
In Europe, second-quarter revenues were up 4% in constant currency and down 15% in US dollars.
The quarter benefited from a $15 million early timing of shipments versus expectations.
This timing difference resulted in a $0.05 favorable impact on earnings per share for the quarter compared to our expectations.
Retail comps were roughly flat for the quarter.
This was slightly below our expectations as we had a slowdown of traffic and comp in the earlier part of July but saw a strong recovery of trend in the last week of the same month.
From a country perspective, we continue to be pleased with the performance in Italy, Iberia and Germany, as all these markets grew in the quarter.
In Asia, second-quarter revenues were down 6% in constant currency and down 12% in US dollars.
We were encouraged by the improving performance in mainland China where we achieved double-digit comps in our retail stores.
However, this was more than offset by weakness in Hong Kong and Macau due to the decline in tourist traffic as well as softness in Korea in the aftermath of the MERS crisis.
In America's wholesale, which includes our businesses in the US and Canada, as well as in Mexico and Brazil, second-quarter revenues were down 9% in constant currency and down 15% in US dollars.
The decline in constant currency for the segment was primarily driven by softness in our US wholesale business.
Royalty generated from sales by our licensee partners were down 5% at $25 million, driven by softness in watches and bags.
Moving on to the balance sheet, accounts receivable was roughly flat in constant currency and down 15% in US dollars.
Inventories were $335 million, down 3% in constant currency and down 15% in US dollars versus last year.
We ended the quarter with cash and short-term investments of $471 million compared to last year's $467 million.
Free cash flow for the six months was $32 million, compared to a use of $2 million in the prior-year first six months.
This improvement was driven by changes in working capital and lower capital expenditures.
In summary, with six months of the year behind us, both including and excluding the impact of currency, we have been able to improve our gross margins and operating margin on the P&L while improving our free cash flow.
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 September 25, 2015 to shareholders of record at the close of business on September 9, 2015.
With that, I will pass the call over to <UNK> who will take you through the outlook for the third-quarter and full FY16.
First of all, thank you very much.
Regarding your question, I think being present in 90 countries and also with global, I will consider Guess.
similar to Inditex in this respect, that it is a truly global company.
So, I see opportunities in several countries where we are not really present at this moment, such as, for example, China, such as Russia, such as Turkey.
We have a presence, but we don't have an important presence.
I believe that there is a customer there for Guess.
and there's a customer, as well, that can be very appealing to the Guess.
family.
This is one of the opportunity, but I see, as well, opportunity, for example, in China, as I mentioned before.
China, for example, we can grow a lot our business in the next coming years.
As I mentioned in my speech, we will try in more than five years to do at least $700 million in total in Asia.
Then, a part of that, I see opportunities, as well, on improving the supply chain.
I see opportunities, as well, on people, on the talent inside the organization and hiring the right people, as well, from the outside to improve our operations and our way of doing business.
In US, I think for all our formats, Guess.
, GUESS Factory, G by GUESS and <UNK>, I believe there is plenty of opportunity for development not only from a real estate point of view but also from a product point of view.
This is something that we are addressing at this moment.
And we believe, as I mentioned on my speech, it's about basically everyone concentrate ---+ the operational people concentrate on sales and in product.
This is what we are going to try to do and how I think that we can have a lot of opportunities in the US market.
First of all, of course, we will try to concentrate or trying to improve our supply chain.
As a preview, I can give you some measures that I will consider for future development of our supply chain.
First of all will be the replenishment.
We will try to improve our replenishment inside the stores.
We will try to, as well, improve our suppliers' proximity to our main markets, which at this moment are the US or North America and Europe.
And then suppliers that will be, for example, in Mexico, even in the US for the North American business.
And in Europe, we'll try to reinforce the suppliers in the Mediterranean area and Turkey, as well ---+ Mediterranean, Turkey, and Eastern European countries for supply in our second-largest market, which is Europe.
Then, also, we will try to reinforce the fabric, kind of creating a fabric platform.
And then, also, we will reinforce the open to buy.
As important measures that are going to cover for the next coming days and coming weeks, is to improve our supply chain.
Regarding the flat organization that you were mentioning before, without any doubt I'm coming from a very flat organization and I'm going to try to, as I mentioned, as well, in my paper, is I'm going to try to improve that flat organization that we are having at this moment at Guess.
, centralizing all our functions in LA and the other two centers of responsibilities at this moment that we have, one in Europe and one in Asia that will be the executors of that strategy.
This is <UNK>.
Just the second part of the question that you were talking about on the European wholesale shipments, as we talked about in the prepared remarks, about $15 million shifted out of Q3 into Q2, and that effectively will manifest in Q3.
There's nothing else that's very material that is in our guidance.
And regarding timing that you were mentioning, as you may know, I'm coming from an Inditex background so I will try to do it right now.
It's not possible to do it right now but definitely you will hear from us in the coming few weeks and few months.
This is <UNK>.
I think you were asking about double-digit comps in Europe, and that's the trend we've had so far in the third quarter.
Remember, this is a markdown period so it's not surprising that it's going to be a bit more promotional.
We are a bit more promotional than last year because we have a bit more inventory that actually carried through from the sales period in July.
That's why the margins have been impacted, because we are a bit more promotional.
But it's quite normal.
<UNK>, this is <UNK>.
You were a little bit difficult to catch but I think you are asking about gross margin cadence in the guidance that we have included.
So, let me just give you what we've actually talked about in the prepared remarks and give you a bit more color on that.
In the third quarter, we actually are coming up against currency headwinds.
There's a little bit of promotional activity in Europe that we talked about, as well, that is affecting us, and that's why we think that the gross margins should be slightly down in the third quarter.
However, as we've talked about on previous calls, on the full year, we still expect our gross margins to improve, driven by the improvement in markdown rate as we actually get into the back half of the year, the better average unit costs that we're going to be able to leverage in the back half of the year, and the strategic price increases that we're going to be doing towards the back half of the year.
This is, of course, offset partially by the currency and is quite material as a headwind, especially as we're moving into the back half of the year.
