Guess?, Inc.

Good day, everyone, and welcome to the guest third quarter fiscal 2021 earnings conference call. On the call are Carlos Almarini, Chief Executive Officer, and Katie Anderson, Chief Financial Officer. During today's call, the company will be making forward-looking statements, including comments regarding future plans, strategic initiatives, capital allocation, and short- and long-term outlook, including potential impacts from the coronavirus pandemic. The company's actual results may differ materially from current expectations based on risk factors included in today's press release and the company's quarterly and annual reports filed with the SEC. Comments will also reference certain non-GAAP or adjusted measures. GAAP reconciliations and descriptions of these measures can be found in today's earning release. Now I would like to turn the call over to Carlos.

Thank you, Operator. Good afternoon, and thank you all for joining us today. First, I hope you are all safe and healthy in light of the current challenges. At Guess, we continue to control what we can control and to make the health and well-being of our teams, our customers, and the communities we serve our highest priority. Fortunately, with good planning and careful execution, we have been able to protect our people effectively. I'm very pleased to report that our team continues to excel in this environment. At times like these, resilience The ability to adapt, fast decision-making, and strong execution are proving critical to win, and our team has exhibited every one of these traits at every turn. This crisis continues to test us all, and now, with second waves in multiple places, it is clear that we are not running a sprint, but a marathon. We continue to stay focused on servicing our customers well, managing our cost structure tightly, optimizing margins, and controlling our inventories, balance sheet, and liquidity. On behalf of Paul and myself, I want to thank every member of our team. You are doing a great job, and you make us very proud. I will now spend a few minutes on our results for the third quarter, and then I will touch on how we are approaching the holiday selling season. After that, I will comment on our strategic business planning process and highlight key accomplishments for the period. I am pleased to report that we had a very good third quarter where we exceeded our top line expectations and delivered a very strong bottom line, reporting adjusted earnings per share of 58 cents versus 22 cents last year. In the quarter, we more than doubled our adjusted operating profit and achieved an adjusted operating margin of 9.7 percent, which represents a 600 basis points expansion versus last year. It's worth noting that we delivered strong earnings on an 8 percent decrease in revenues for the period. In a very challenging environment, we achieved very solid gross margin performance and delivered healthy operating margin expansion in most of our businesses. The most significant improvement was driven by our business in Europe, which benefited from increased wholesale revenues. We enabled the increased revenues when we elongated the fall winter season shipping window and canceled the development of the pre-spring summer line. This proved to be a great strategy and represented a revenue increase in the period for Europe of about $50 million. Total Q3 revenues for Europe increased 16 percent, and operating profit exceeded $51 million, delivering a margin expansion of 900 basis points for the period. As we continue to focus on key product categories that represent the foundation of our business for women and men, we are pleased with our progress to optimize our assortments by channel and product presentation in stores and online. During the quarter, essentials, activewear, denim, accessories, and shoes outperformed the overall business. We managed our balance sheet well and ended the period with cash and equivalents of $365 million and inventory is 24% below last year's levels. As we look into the holiday season, we believe that we are well positioned with our product, our marketing plans, and our team's preparedness across the globe. Let me give you some color of what we are experiencing in our business now, and then Katie will quantify the financial impact of each factor. Starting with retail, customer traffic into our stores continues to be challenged by the pandemic. especially during traditionally high traffic periods like Black Friday. That said, those customers coming into the stores have a higher intention to purchase, and this has consistently resulted in higher conversion rates. Temporary government mandated shutdowns are also impacting several markets, especially in Europe and Canada, where we have significant businesses. We are pleased to see that our e-commerce business is accelerating partially offsetting the negative store trends. Regarding our wholesale business in Europe, as I mentioned, we made the decision to cancel the development of the pre-spring-summer line to consolidate the development of spring-summer products into one main collection versus two in the past. This change will result in a smaller percentage of the shipments of that main collection occurring in the fourth quarter than compared to last year. with the majority of the shipments to be completed in Q1 of next year. In connection with this, we recently closed the spring-summer sales campaign, which delivered orders that were only slightly below the two collections combined in the previous year. These results exceeded our expectations and demonstrate the great momentum that the brand is enjoying with our wholesale customers across Europe. I believe that many of our wholesale customers are concentrating their buys within fewer, stronger, highly reliable brands, and we are clearly one of those preferred brands, so we are getting a bigger share of their buys. We continue to plan our business based on expected demand and size our inventories and expenses accordingly. We are confident in our assortments and our product ownership and have been pleased to see that the level of promotional activity in the marketplace remains moderate. As we said in our previous call, we are in the process of updating our strategic business plan, and we will schedule an event to share our plan at a later date. Let me just confirm today that we still believe that the opportunities we had identified to expand operating margins by 500 basis points are still intact. For now, I will update you on the progress that we are making on some of our key initiatives and how we are leveraging the crisis to accelerate change. I will speak specifically about the elevation of our brand, our customer centricity initiative, and our organizational development strategy. Elevating the customer's perception of our brand starts with our product. Product in our business has always been and continues to be king. Offering a consistent line of product across all markets is a very ambitious goal when you have a global presence that reaches nearly 100 countries. I am thrilled to report that, for the first time ever, we now have one global line of products across all categories, including women's and men's apparel, at leisure, lingerie, all accessories including handbags, footwear, kits, Marciano for women's and men's, and jewelry. Having one global line will enable us to represent our guest brand consistently across all markets and significantly reduce product development costs throughout our supply chain. Hundreds of styles per season, which in the past were developed in each region, are now represented by one common line for all markets. Just as an example, the new line development for the next pre-fall winter season for guest apparel resulted in a style reduction of 38%, and this is after expanding the offering with multiple colors per style for e-commerce that represented a 7% increase of product choices online. I think that Paul and the product teams in all of our regions did an incredible job to make this happen. It took strong vision, tremendous courage, and great teamwork to achieve this and deliver a line of product that can serve all global markets effectively. To elevate the brand takes a strong commitment to raise the quality of everything we do. This commitment starts with the quality of our products. In order to accomplish this, we reviewed every product, challenged the styling, guest DNA alignment, the quality and sustainability of fall fabrics and materials, make and fit, perceived value, and price. Today, we have a line that speaks to a larger audience with consistent styling between genders, solidly grounded in the guest DNA, offering a strong point of view and differentiation in the marketplace. We have beautiful products offering our customers tremendous value for the price and quality of each item. I strongly believe that our product strategy will contribute to profitable market share gains. We continue to make great progress with our sustainability goals. In fact, PR News recently named guests the winner for Best Sustainability CSR Report 2020. We were honored to be recognized alongside iconic global brands like PepsiCo and Johnson & Johnson. Our commitment to elevate the quality of everything we do is also impacting other areas of the business, including the customer experience in stores, our websites, digital media, and marketing campaigns. The visual merchandising presentation in stores has been completely transformed in the last eight months. The focus assortment and boutique feeling that you experience when you walk into our stores now represent a stark contrast to what we had a year ago. I just visited stores in Italy a few weeks ago, and was very impressed with the overall experience. As we have reduced the product density in stores to provide for a more sophisticated presentation, the product shines on the shelves, and the environment is very easy to shop in, with the emphasis placed on the product, not on the price or discounts. As an example, for next summer in Europe, we plan an SKU reduction in stores of about 35%, and an SKU expansion online of 9%. We plan to run the business with an omnichannel customer focus, regardless of where the customer chooses to shop and engage with our brand. Our goal is to leverage our entire assortment and inventory ownership with omnichannel capabilities, such as buy online, ship from store, or buy in store from our larger assortment online and ship from the e-commerce warehouse. These capabilities are available in the Americas today and will be fully implemented in Europe next year. Next is our initiative about customer centricity, which we introduced last year. As you know, since the pandemic began, we have been working hard to accelerate the implementation of our plan. We are pleased to report that we have completed the implementation of the Salesforce platform in the US and Canada and all over Europe except for Russia, which is scheduled for next February. We are very pleased with the speed and overall performance of the platform, and are confident it enables a significantly faster and improved customer experience, better conversion and engagement, and it will contribute to significant growth of our digital business. We also made significant progress with our Customer 360 project. This suite has also been developed by Salesforce and is an integrated tool to optimize customer data capture, journey engagement, personalized marketing, and results analysis. We have already implemented the customer service and marketing cloud solutions, which are part of the suite, and we are currently working on the social studio application. We plan to complete the full implementation of the Customer 360 solution by the end of next year. The third initiative relates to our global organizational development strategy. We plan to optimize performance management and accountabilities. We'll be eliminating redundancies across our global organization leveraging technology to do a lot more with less in every area of our operation. Our goal is to complete the implementation of this project by the end of next year as well. In closing, since GEST started 40 years ago, the company has always adapted its business very effectively to the challenges presented by the market, the environment, and new customer preferences. Throughout its entire history, This company has evolved successfully time and time again. I strongly believe that today presents our company with yet another opportunity to transform our business and increase our earnings power. I also believe that we have the team to accomplish this, and I look forward to the years of growth to come. With that, let me pass it to Katie.

Thank you, Carlos. Good afternoon, everyone. So today is my one-year anniversary at Guest. Exactly a year ago, we were presenting our strategic business plan to you. Little did I know then that we were going to have the year that would follow. Today, I am very proud to report our results for the third quarter, which I believe demonstrate the power of agile planning and solid execution. In the midst of a very challenging environment, we delivered substantial sequential improvement in sales, exceeding our expectations, significantly expanded operating margins, and tightly managed inventory and working capital. We are extremely happy with our liquidity position, which is especially strong given the extraordinary circumstances that we have faced so far this year. This is evidence that we've been able to adjust our cost structure and capital spending to partially offset the deceleration in demand that our industry has experienced throughout the pandemic. But as importantly as knowing what to cut is knowing when and where to invest to fuel future growth in the company while maintaining liquidity and profitability. We continue to support our efforts in digital and omnichannel initiatives, as well as investments to support long-term cost savings. And we continue to return value to our shareholders. Our board has approved the payment of the cash dividend again this quarter. As I said last time we spoke, our long-term capital allocation strategy has not changed. Now let me take you through some of the details on our performance for the quarter. Let's start with sales. Third quarter revenues were $569 million, down 8% in U.S. dollars and 10% in constant currency. The biggest driver in our improvement versus last quarter was wholesale in Europe, which was up 39% in constant currency versus last year. As Carlos mentioned, we elongated the fall winter season shipping window and canceled the development of the pre-spring summer line, which resulted in higher revenues this quarter versus last year. In retail, store comps in the U.S. and Canada were down 23% in constant currency in line with Q2, as momentum in the US was offset by softening in Canada due to traffic declines as a result of the pandemic. Europe and Asia both showed an improvement in store sales this quarter. Store comps were down 18% in Europe in constant currency, where strong momentum was tempered in the last week of the quarter by shutdowns due to the second wave of the pandemic. Store comps were down 17% in Asia in constant currency, driven by strengthening in China and Korea. Across the globe, we continue to see traffic declines partially offset by significantly higher conversion with our tourist-centric stores experiencing a tougher recovery. Our e-commerce business in North America and Europe was up 19% for the quarter, an improvement from up 9% in Q2, driven by momentum in Europe. Our Americas wholesale business was down 34% in constant currency, still under pressure from the deceleration in demand but improving each quarter. Licensing revenues also improved versus Q2, down 12% in Q3. Gross margin for the quarter was 42.1%, 480 basis points higher than prior year. Our product margin increased by 200 basis points this quarter, primarily as a result of higher IMU as well as lower promotions. Occupancy rate decreased 280 basis points as a result of business mix and rent relief. This quarter we booked roughly $8 million in rent credits for fully negotiated rent relief deals, mostly in Europe. We continue discussions with our landlords and will realize any additional credits as the negotiations are finalized and signed. Adjusted SG&A for the quarter was $184 million compared to $206 million in the prior year, a decrease of $22 million. We continue to benefit from changes to our expense structure particularly more streamlined hourly labor staffing at the store level, corporate headcount and travel reductions, and lower professional fees. In addition, there were some one-time benefits from government subsidies and decreased advertising in the period versus last year, but these were offset by higher variable costs associated with wholesale shipments. Adjusted operating profit for the third quarter was $55 million, 140% more than the operating profit in Q3 last year of $23 million. Our third quarter adjusted tax rate was 16%, down from 24% last year, driven by the mix of statutory earnings. Inventories were $393 million, down 24% in U.S. dollars and 25% in constant currency versus last year. We ended the third quarter with $365 million in cash versus $110 million in the prior year, and we had an incremental $260 million in borrowing capacity. Capital expenditures for the first nine months of the year were $12 million, significantly lower than what we spent in the same period of the prior year. Free cash flow for the first nine months of the year was an inflow of $83 million, an increase of $162 million versus an outflow of $79 million last year. This year we benefited from lower capital expenditures, extended payment terms with our vendors, and unpaid rent to landlords while we finalized negotiations. In addition, last year's outflow included the non-recurring payment of the $46 million European Commission fine. Given the continued level of uncertainty in the current environment, we are not going to provide formal guidance. However, let me walk you through how we are thinking about the fourth quarter. We expect fourth quarter revenues to be down in the low to mid-20s the prior year. As Carlos mentioned, there are three main factors driving this decrease. As the pandemic persists worldwide, we expect the continued pressure on customer traffic to negatively impact store sales. At the same time, the momentum in our e-commerce business will partially offset this decline. We expect the net effect of these two trends to represent approximately half of the revenue decline in the fourth quarter. Our businesses in Europe and Canada are currently being impacted by government-mandated store closures. While at the height of the closures in November, we had over 200 stores closed, More than half of these have reopened, and we expect further openings in the coming days. These temporary closures, as well as some permanent closures, are expected to represent a quarter of the decline. The last quarter of the revenue decrease is the result of the shift of wholesale shipments in Europe for the spring-summer collection into next year. In terms of profit, gross margin in the fourth quarter is expected to be slightly down to last year, as IMU improvement is expected to be more than offset by due leverage on lower sales. Given the expected level of revenue, the seasonality of our business, as well as the mix, we expect SG&A as a percent of sales to de-lever by approximately 400 basis points versus the prior year. In closing, I'm very pleased with how our company continues to navigate this crisis. We have proven that our brand is relevant and resilient. We continue to showcase our team's ability to manage the business through a very fluid situation. And while we realize that our path to growth may not be linear over the next few months, given the uncertainty around the global health crisis, we are as confident as ever in our long-term strategic initiatives. With that, I will conclude the company's remarks, and let's open up the call for your questions.