GES
#Good afternoon, everyone.
As you saw in our earnings release today, we reported that our revenue growth, adjusted first quarter operating margin and adjusted earnings per share all finished better than the high end of our guidance.
We are pleased that our first quarter results showed a continuing trend of strong international results because our European and Asian regions performed well while we made progress on reducing our store footprint in the Americas retail business.
Again, it is important to note that as of last year, the U.S. represents only 38% of our global business and is expected to be smaller as we shrink our footprint there.
Let me start by discussing Europe.
Revenues for the quarter grew 23% in U.S. dollar and 29% in constant currency, showing continued momentum from successful implementation of our strategic initiative to elevate the quality of our sales and merchandising organization.
The growth was driven by new store openings, comps including e-commerce up 5% in U.S. dollar and up 11% in constant currency, as well as wholesale revenue growth.
We are especially pleased with the performance of our European wholesale business.
The recently closed Fall/Winter 2017 order book is showing a low double-digit constant currency increase, a significant acceleration from the previous 2 seasons, which were up in the low-single digits.
This increase was driven primarily by improvement in same-door sales, as we are beginning to see evidence that the strong comp performance in our directly operated retail stores over the past few seasons is reflecting in our wholesale channel as well.
This is a result of our strategic initiative to revitalize the wholesale channel by applying the same principles that are driving our retail channel.
During the quarter, we opened 18 directly operated stores in the region on a net basis.
We added new stores to our fleet in Italy, France, Spain, Portugal, U.K., Germany, Belgium, Sweden, Turkey and Poland.
Based on the strong performance of the stores we have opened so far, we have decided to accelerate our store openings in Europe from 60 to 70 stores this fiscal year.
Most importantly, the adjusted operating margin of the European segment improved 890 basis points in the quarter, continuing the margin improvement that we have seen for 4 consecutive quarters now.
Moving to Asia,first quarter revenues were up 17% in U.S. dollar and 16% in constant currency.
Revenue growth in the region was driven by store openings, comps including e-commerce up 4% in U.S. dollar and 2% in constant currency.
This includes a strong performance in Greater China, despite the negative timing impact of an earlier Chinese New Year that benefited the fourth quarter of last year.
Very importantly, the adjusted operating margins of the Asia segment improved 60 basis points in the quarter, marking the second consecutive quarter where we have experienced margin improvement in Asia.
With the evidence of consistent revenue growth and improving profitability, we are beginning to reap the returns of our investment in the infrastructure we built in Asia.
I believe that we are executing well on our strategic initiative to build a major business in Asia.
Finally, some color on the Americas, which includes the U.S., Canada, Mexico and Brazil.
This is certainly the region where we face structural challenges, like many in the industry, and we are taking proactive steps to address them.
Americas Retail revenues and comparable sales, including e-commerce, for the quarter decreased 15% in U.S. dollar and in constant currency.
This decline was driven by steep declines in traffic and, to a lesser extent, by lower average unit retail prices as well as softness in our e-commerce business.
We made progress on our store closure plan in U.S. and Canada and closed 14 stores in the quarter.
We remain on target to close 60 stores this year.
In addition, as more than half of our leases will expire or have kick-out clauses in the next 3 years, we have a lot of flexibility to continue with the closure past this year to further improve profitability.
If the structural changes in the retail environment do not improve materially, our store count in the U.S. and Canada in 3 to 4 years will be below 300 stores.
Americas Wholesale revenue grew 6% in U.S. dollar and 8% in constant currency, driven by growth in both the U.S. and Mexico in the quarter, partially assisted by the timing of some shipments.
I am very pleased at the relative stabilization of the wholesale channel in the past couple of quarters and believe we remain on track with our projections for the year.
Before I conclude my remarks, I want to give you some more color on 3 important topics: number one, progress on our supply chain initiative; number two, actions we are taking to enhance the strength of our brand globally; and number three, actions to grow our digital footprint and engage our current and future customers.
Supply chain: We are executing on our supply chain initiative globally to drive IMU by way of product cost improvement.
The estimated cost savings from this initiative is expected to be USD 24 million this year.
Enhancing the strength of the brand: If there is one word Guess.
has been associated with is sexy.
Sexy is being more broadly interpreted where anyone can be sexy.
Authenticity is in and being real is more important than being perfect.
It's all about building a connection with your audience based on honesty and directness.
People aren't just buying a product.
They are buying a mindset and an experience.
Millennial and Gen Z consumer is seeking purpose-driven brands whose values align with their own.
As always, we are adapting to this changing environment.
Actions to grow our digital footprint: Transition all our websites to become state-of-the-art responsive sites, enhancing user experience by reducing the numbers of navigation steps and increasing the speed of the website in moving from the landing page to the final purchase.
Develop customer experience enhancing loyalty programs with mobile app integration to provide maximum value to the mobile connected shopper.
Upgrade omnichannel capabilities with robust buy online, pick up in store integration and 'shop local' technology.
Continue to partner with marketplaces like Tmall, JD and vip.com in China; Zalando and Otto in Europe; and Amazon in the U.S. and Canada.
Finally, I want to tell you that in the first quarter, we repurchased 1.5 million shares of our stock for $18 million.
As I said before, we have the financial wherewithal to finance our company's aggressive growth in Europe and in Asia, to pay a healthy dividend to our shareholders and opportunistically buy back shares.
I strongly believe in the future of the company, and that's why I continue to reinvest all my Guess.
dividends in purchasing Guess.
stock.
<UNK>.
Thank you, <UNK>, and good afternoon.
During this conference call, our comments reference certain non-GAAP adjusted measures.
Please refer to today's earnings release for GAAP reconciliations or descriptions of such measures.
First quarter revenues were $459 million, up 2% in U.S. dollars and 4% in constant currency versus prior year.
I would like to highlight that this was the third consecutive quarter of revenue growth, and revenues finished above the high end of our guidance.
Total company gross margin decreased 30 basis points to 31.5%, as higher IMUs were more than offset by the negative impact of occupancy deleverage.
SG&A as a percentage of sales decreased by 40 basis points, mainly driven by overall leveraging.
During the first quarter of fiscal 2018, we recorded asset impairment charges of $2.8 million related to store impairments, primarily in the Americas.
Adjusted operating loss for the first quarter was $23 million.
Adjusted operating margin finished up 10 basis points at negative 5%, including the negative impact of foreign currency of roughly 30 basis points.
Please refer to our press release from today for additional information on operating margins by segment.
Our first quarter adjusted tax rate was 3%, down from 19% last year.
Adjusted diluted loss per share finished above the high end of our guidance at $0.24.
This compares to adjusted diluted loss per share of $0.23 in last year's first quarter.
The net favorable impact of currency on loss per share in the quarter was roughly $0.03, in line with our guidance.
Moving on to the balance sheet.
Accounts receivable was up 9% in U.S. dollars and 13% in constant currency.
Inventories were $403 million, up 12% in U.S. dollars and 16% in constant currency versus last year, marking a sequential improvement versus the prior quarter.
The increase in inventory is driven entirely by Europe and Asia to support the revenue growth plans, including some timing of receipts for new store openings.
We have significantly reduced receipts of inventory in North America as we reduce our footprint in this region.
Free cash flow was negative $49 million, essentially flat with the prior year.
We ended the quarter with cash and cash equivalents of $316 million compared to last year's $427 million.
Cash, less debt, at the end of the first quarter was $293 million compared to $400 million last year.
Moving on to the guidance.
I should point out that our outlook for the second quarter of fiscal 2018 and the full year of fiscal 2018 does not assume any restructuring or additional asset impairment charges.
Also, guidance for revenues and comp sales for the total company and by segment is included in the supplemental table attached to our earnings release.
Excluding currency impacts, the top end of our guidance for the year reflects 7% adjusted EPS growth and operating margin improvement of 20 basis points, as strength in the Europe and Asia business is expected to more than offset the weakness in the Americas Retail segment.
For the second quarter of fiscal 2018, we expect revenues for the quarter to be up 3.5% to 5.5% in constant currency, driven by expected strong growth in Europe and Asia, partially offset by an expected decline in Americas Retail.
At prevailing exchange rates, we estimate that currency will be roughly a 1.5 percentage point headwind on consolidated revenue growth for the quarter.
Our gross margin is expected to be up slightly due to the IMU improvement from our supply chain initiatives.
The SG&A rate is expected to be up compared to last year, primarily due to deleverage in the Americas and some unfavorable timing of expenses.
We are planning an operating margin for the quarter between 2.2% and 3%, including the impact of currency headwind of roughly 50 basis points.
Earnings per share is planned in the range of $0.08 per share to $0.11 per share and does not assume any further share repurchases.
Currency is expected to be a $0.04 negative impact on earnings per share in the quarter.
Excluding currency impacts, the top end of our guidance for the quarter reflects flat adjusted EPS and operating margin improvement of 50 basis points for the quarter.
Our tax rate for the second quarter is estimated to be 40%.
We expect consolidated revenues for the year to be up between 4% and 5.5% in constant currency.
It should be noted that we expect an increase in revenues even after closing many stores in the Americas.
At prevailing exchange rates, we estimate that currency will be roughly 0.5 percentage point headwind on consolidated revenue growth for the year.
For the full year, we expect gross margins to be up due to improved IMUs in both the Americas and Europe.
The SG&A rate is expected to be up for the year due to deleverage in the Americas business and a reset of incentive compensation.
Our tax rate for the year is estimated to be 40%.
We are planning an adjusted operating margin between 2.3% and 3%, including the impact of currency headwind of roughly 10 basis points, and our guidance assumes foreign currencies remain roughly at prevailing rates.
Adjusted earnings per share is planned in the range of $0.34 and $0.44 per share, as we are raising estimates from our prior guidance of $0.28 to $0.40 per share for the year.
The earnings per share guidance includes a currency headwind of roughly $0.03 per share.
CapEx for the year is expected to range from $85 million to $95 million as we continue to invest in our retail expansion in Europe and Asia and our technology infrastructure to support that long-term growth.
The Board of Directors has approved a quarterly dividend of $0.225 per share payable to shareholders of record at the close of business on June 7, 2017.
In conclusion, we are very pleased with our start to the year and expect our Europe and Asia businesses to continue growing sales and profit margins for the remainder of the year while we shrink our footprint in the Americas as we seek to restore profitability in that business.
With that, I will conclude the company's remarks and open the call up for your questions.
Randy, so I think we're really pleased with where things are going with Europe and Asia, obviously, because we've had a few consecutive quarters of sequential margin improvement.
And as we said on the prepared remarks, we expect this sequential improvement to continue during the remainder of the year.
So we expected this to be a driver of long-term operating margin in the total company as we drive towards our long-term operating margin goal of 7.5%.
The problem, honestly, as you can see, has been the impact of the Americas business on our total operating margin.
And the deleverage that we're experiencing with the negative comps have definitely put pressure on the margins of the total company.
However, I think we're taking profitability improvement measures, whether it's IMU improvement, whether it's looking at opportunities to close stores like we are doing very aggressively right now.
And we're looking at cost structure improvements as well, whether it's rent reductions or reducing our structural costs that support the Americas Retail business as quickly as we can.
But I think the key would be to stabilize the comp degradation that's been happening.
And as soon as we can actually get, 1 of 2 things to happen, the stabilization of the comps in the Americas or shrink the business in relative terms to a much smaller level than it is right now of the total company, the operating margins of the total company will really be ---+ strongly on their path to expansion toward the 7.5% margin goal we have.
Yes.
I think let me take the first part of the question, which was really the share of the U.S. in the total portfolio.
Rather than getting into a specific number, I'd just say you're in the ballpark in terms of the share of the U.S. significantly reducing compared to where it is right now.
So let's say, 1/4 as a around number would be a rather right proportion over time, but not immediately but over time.
And I think in terms of long-term operating margin, if we're thinking about 7.5% for the total company, it's obviously going to come with stronger margins in Europe and Asia, which are already expanding right now relative to where they are.
And the European historical margins are unlikely to get back to their peak levels, which was probably in the early 20s.
This is because that was a wholesale-driven business at that time, and now we're more of a retail and wholesale balanced business.
But it should definitely improve from where it is right now.
And so overall, we would expect the European and the Asian businesses to be a higher ---+ more profitable margin businesses.
And I think the Americas, we will be looking to drive it towards a profitability level that we can sustain going forward.
Randy, I want to add something on that one.
Regarding the 38% that the ---+ of our total sales in the U.S., I think that we are in 90 markets.
And having 1 market with 38% of the sales is something that we should improve and having much more equal market share of each of the markets.
So when I arrived, I think it was above 40%.
Right now we are in 38% for the last fiscal year '17.
And we will continue, I think, as this trend looks like it's going to go down and basically try to be much more balanced in terms of market representation for our brand.
<UNK>, what is very important is what I was saying ---+ what we have said in the press release that it is crucial to stay connected with our customer and their aspirations.
And this is essential for us.
I mean, we are not changing any brand perception or whatever.
What we are seeing is reality.
I think we have to continue doing what we were doing for the last 35 years.
We are a sexy company.
We will continue being a sexy company.
And basically, what we started to do at the ---+ 2 years ago is to have a much more comprehensive collection, where we have ---+ basically, our collection will be much more outfitted and also much more in terms of ---+ we'll have the core value product and also we'll have some directional pieces.
Directional pieces means trendy pieces that we should not miss as we are as well a fashion company.
So I think that basically what we are going to continue is we have a strong value ---+ a core value proposition, which is sexy, to be very edgy and to continue being trendy.
Yes.
The point is a little bit coming back to Randy's question is that ---+ I mean, at the end of the day here, we have 2 markets, 2 main markets, which is U.S. and Canada.
And we are closing particular stores in these 2 particular markets because maybe, at this moment, with all these structural challenges, we need to do that.
But if, for example, Europe as we consider as a market, I mean, we have more than 20 markets.
And we have great potential.
And I think we were underdeveloped on some of the markets.
Like, for example, I think we have a lot of potential in Russia.
We have a lot of potential in Poland.
We have a lot of potential in Eastern European countries as well also in Turkey, where we are underpenetrated.
So I think that we don't have to think about Europe as a market.
We have to see Europe as, I'll call, a bunch of markets that we have a lot of potential and maybe that in the past we didn't really see that potential.
And regarding Asia, I think we have 2 main markets.
One, which is Korea, which we have a big, strong presence, a lot of relevance.
And also we have China.
And in China, basically, it's 1 market.
And out of these 35 new openings, most of those openings will be in China.
So in terms of store openings, we will ---+ for this fiscal year '18, the #1 country in opening stores will be China, much more than Europe per each market.
And at the same time, let me tell you one other thing regarding China is that we have to always take into consideration the extreme or the huge potential that we have with the e-commerce and also with our partners in marketplace, which is mainly Tmall, JD.com and vip.com.
And I think we are seeing a lot of potential and we are seeing kind of substantial growth in these 3 marketplaces.
So <UNK>, I think on Asia, we're really pleased with what we've been seeing in the last couple of quarters.
You saw Q4 was very strong.
It was benefited a little bit by the timing of Chinese New Year, and we saw margin expansion in Q4 last year.
And this quarter, it's actually especially pleasing that we managed to get margin expansion despite the negative impact of the timing of Chinese New Year.
So we feel pretty good that we're on a consistent path to improving margins, and this momentum should be building as we're going through the next 3 quarters of the year as well.
And that's why we said we expect to see expanding margins for the balance of the year, too.
And longer term, I think I said it to Randy in the earlier comments as well, we expect both the Asian and the European segments to be definitely the most profitable segments in our business going forward.
Yes.
That's what I said in the prepared remarks, and I'm confirming that.
I think it's going to get probably more and more difficult as we lap the previous margin expansions, but ---+ and so Europe started a bit earlier because I think on the second half of last year, we had pretty good margin expansion.
So as we move into the second half, the level of expansion may be more challenged, but the direction is what we are expecting to be positive as we go through.
Basically, let me answer you the question about the real estate.
I think we are seeing some opportunities at this moment, but what is important is what I said in my remarks is that, I mean, half of our fleet will be either with a lease expiration or a kick-out clause in the next coming ---+ in the next 3 years.
So I think we have plenty of opportunity to close stores.
And also what is important to say is that we are giving you a number in terms of in 3, 4 years, we could be in around 300 stores between U.S. and Canada.
Of course, I think with the landlords, what we are trying to do is working with them, trying that they understand the reality of the market and the structural challenges that we are facing, not only us, I think most of the industry and trying to work with them on a win-win situation and trying to understand how we can try to find a solution with ---+ to the situation we have at this moment.
So I think on the wholesale question that you asked, <UNK>, we're really pleased with what we're seeing in the wholesale business overall.
But specifically, on Europe, I think it's really gratifying to see the acceleration that we saw on the Fall/Winter '17 order book.
We've been saying for a while that the performance in our retail store should be a leading indicator of what's going to happen in the wholesale channel as well.
And sure enough, I think it's ---+ we saw some improving momentum and stabilization in the past couple of seasons and now a good acceleration in the low double-digit increase for the Fall/Winter '17 book.
So ---+ and this was actually driven by same-door buys, which is really the equivalent of comps in retail stores.
So it's showing that the productivity of our wholesale customers is improving, their profitability is improving.
And therefore, that's more a sustainable model for them and for us as we go forward.
Then I think I'll switch to the Americas.
And Americas is a tale of 2 different markets.
So there's the United States, which is a meaningful piece of our wholesale business in the Americas, but Canada and Mexico are also fairly important.
And what we've seen is Canada had very strong performance last year.
We were very pleased with it.
And I think we're expecting Canada to be very ---+ to be good this year as well and pretty stable.
Mexico, this particular quarter, was also very strong.
And we are very happy with our partners, our joint venture partners over there that we've had for over 10 years.
And the performance of that business also is quite strong.
So it really depends on which market you're talking about on wholesale.
But overall, we're pleased with the fact that the channels actually beginning to do better than where it was previously.
I think if there are no other questions at this time, we can close the call.
Thank you.
