Guess?, Inc.

Good day and welcome to the Guest First Quarter Fiscal 2022 Earnings Conference Call. On the call are Carlos Albarini, 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 FCC. Comments will also reference certain non-GAAP or adjusted measures. GAAP reconciliations and descriptions of these measures can be found in today's earnings release. Now I would like to turn the call over to Carlos.

Thank you, operator. Good afternoon and thank you for joining us today. As you all know, the COVID situation around the world continues to be very fluid, depending on the specific countries, levels of vaccination, and other government actions. The US is clearly ahead of the curve, and the consumer is behaving strongly, exhibiting signs of a response to pent-up demand, being much more comfortable going out and shopping in stores, and very willing to spend in apparel and accessories. We have been observing this trend since mid-March when the stimulus checks were made available. Canada is still under various restrictions at present, and in Europe, most countries were in multiple degrees of lockdowns until recently, and we experienced significant store closures during the quarter as a result. The great news here is that most countries have now reopened, and so are our stores. We are thrilled with this development as our business is very large there. And while our Asia businesses were less impacted by lockdowns, the consumer seems less motivated to resume shopping in our stores at levels comparable to the pre-pandemic era. Let me get now into our results for the first quarter. We believe that the most relevant comparison to understand our relative performance this year is against our results for the pre-pandemic period. which is our fiscal year 2020. We will refer to this period as the LLY period during this call. We are extremely pleased with our fiscal 2022 first quarter performance, which exceeded our expectations for revenues and profitability across all channels. During the period, our revenues reached $520 million, doubling last year's results and were only 3% below revenues in the LLY period. During the quarter, we delivered a 5% adjusted operating margin, which is remarkable. The operating margin expansion was over 94 points versus LAY and was fueled by improvement in gross margin of almost 700 basis points and a lower SG&L rate of over 200 basis points. Adjusted operating profit was $26 million in Q1. which compares to an adjusted operating loss of $109 million last year as we faced the most challenging time of the pandemic. This also compares to an adjusted operating loss of $22 million in the LLY first quarter period, a $48 million improvement. In addition to the improvements in the macro environment that I mentioned, this performance, both top and bottom line, is a direct result of the transformational work that we have done at Guess over the last 15 months. This transformation touched every area of our business, including initiatives to elevate our brand and our product, the acceleration of our e-commerce business, the optimization of our global footprint and brand portfolio, the reorganization of our team globally, and the execution of significant cost reductions throughout our operations. This company has been relevant and thriving for 40 years because of its strong business sense and incredible foresight into the future of not only consumer preferences but also dynamic business models. The leadership and commitment to action of our co-founder and chief creative officer, Paul Marciano, has inspired yet another transformation for our company. On behalf of our entire team, I want to thank Paul for his relentless dedication to this company and for his vision, energy, and courage to always pursue excellence. To execute this transformation, it required great teamwork and an enormous effort from our associates all over the world. I want to express how proud we are of what our entire team has accomplished under very challenging circumstances. We want to thank them for their extraordinary efforts. I believe these results showcase four key implications for our go-forward business. First, after closing 140 retail locations and renegotiating over 340 store leases in the past 15 months, the company is operating with a new occupancy model. Many unprofitable locations have closed forever. Lease costs for most of the renegotiated leases are meaningfully lower. And in many cases, rents are now variable based on sales. This model is contributing to a lower occupancy cost structure across markets and is bringing profitability to the North America retail business that the company has not seen in years. Second, we have a healthier retail business with more full price selling and less promotional activity, which is delivering higher product margins. We are pricing our product based on perceived value, which in many cases is higher than the historical price for comparable products, and we are selling more of it at full price. These are structural changes to our retail business model, which will enable strong flow-through to profitability as we grow our sales. The third key implication relates to our e-commerce business. Our e-commerce business in North America and Europe grew 61% in Q1 and delivered a very high level of profitability. This is a key growth vehicle for our future. Fourth and last, the work that we have done to streamline our cost structure has resulted in a more efficient operating model and a lower SG&A load to support our business. So we now have the flexibility to strategically reinvest some of the savings in growth-driving initiatives like marketing and further development of omnichannel capabilities. Most of the transformational changes that we executed are permanent and will contribute to further operating margin expansion for our company. For the current fiscal year 2022, we now have a clear line of sight to a 300 basis point expansion of our operating margin compared to the LLY fiscal year 2020 period. which we closed with a 5.6% adjusted operating margin. Longer term, we expect this to result in the acceleration of at least one year to reach our 10% operating margin goal by fiscal year 2024 versus our original estimate of fiscal year 2025. As you can imagine, I'm very excited about this. Now, let me tell you about some of the trends that we saw in the business in the first quarter. In the U.S., customer traffic levels are still negative versus LLY, but have increased substantially, fueling our sales improvement, most likely a result of pent-up demand, stimulus checks, and vaccine roll-ups. We continue to see record levels of conversion and better full-price sell-throughs. It is clear that, along with the macro factors impacting our sales, the customer is responding well to our offering. So we see customers getting back out into our stores, and we are also seeing category performance trends that indicate that they are getting out of the house for multiple occasions. While our at-leisure and essential lines continue to perform well, we have seen a material uptake in our sales in dressier products, including denim, dresses, high heels, and our Marciano collections. In Europe, we are still dealing with significant government-mandated capacity constraints, which have resulted in a more muted traffic recovery at this point. However, conversion in that region has increased materially, driving the sales comp improvement. We continue to see stronger performance in categories like adhesion and handbags versus the dressier products in the U.S., where the vaccine rollout is much more advanced. Traffic is still under pressure as the consumer remains sensitive to the COVID situation, especially in Japan, where we are still seeing government-mandated lockdowns. The product categories that have performed better in this environment include dresses, outerwear, and denim. Our wholesale and global licensing businesses are performing very well, indicating that our product is resonating with our wholesale customers and our brand is gaining market share. In Europe, the fall-winter season that we recently closed had orders up single digits to last year with fewer accounts but higher average orders. And our licensing business grew over 14% in Q1 versus ROI. Feedback from our licensees and our brand has been super encouraging. We spoke in depth about our strategic business plan in March, including our six strategic objectives. They are... organization and culture, brand relevancy, product excellence, customer centricity, global footprint optimization, and functional capabilities. Today, I will touch on a few initiatives related to these objectives. Let me start with an update on the important topic of ESG. This summer, GES will publish its fourth sustainability report, which is prepared in accordance with GRI and SASB standards and is undergoing reasonable assurance procedures by KPMG. As you know, having our sustainability data assured and verified constitutes a leading practice in the industry. Regarding brand relevancy, as you know, we are currently focused on elevating our brand. Paul has been driving this game-changing initiative, including the development of our One Global the elevation of the styling of our assortment and the quality of our products, and how the brand is represented across all touch points globally. There is no one in the world that knows the guest brand better than Paul Marciano. Under his leadership, the product teams have worked really hard to improve the materials that we use, maintain our focus on sustainability, and increase perceived value for each item in our collections. And the results are amazing. I have said this before, we now have the best product I have seen in all my years as guests. Next, Paul and the creative teams are working on elevating the customer experience to our websites and in our stores. And we will be remodeling key stores where appropriate to elevate our image and maximize sales. Regarding our customer centricity initiative, our team is laser focused on the full implementation of the Salesforce Customer 360 Suite, that we have mentioned in the past. We have just completed the implementation of the marketing cloud solution and are now focusing on service cloud, which includes the integration of data to develop what I call one view of the customer. Next, I want to touch on our global footprint optimization. We have discussed the great strides that we have made this year in closing unprofitable stores, including flagships and renegotiating rents. At the same time, We have our eye out for strategic new store opportunities where the economics make sense. Current conditions in the real estate market are prime for us as a result of the massive levels of store closures that took place across the world over the last year. We are also testing some short-term pop-up models with different product capsules, like At Leisure, for example, using limited capex to expand our footprint and customer base and test future locations. In short, we believe in the power of the store portfolio as a key pillar of our omnichannel strategy, and we are investing in our growth. Our last strategic objective is regarding functional capabilities. During the quarter, we opened a new distribution facility in Poland to service our Eastern Europe e-commerce business. This initiative will result in significant savings related to processing and transportation costs, as well as improved service levels. In summary, we continue to make progress on the key initiatives of our strategic plan, and we can see the benefits already. So how are we approaching the rest of this year? We are optimistic about the market recovery based on our experience in the U.S., where vaccination levels are high and the consumer is willing and capable to spend more in our product categories. People are starting to go out, socialize, and attend events. And I cannot think of another brand better positioned for those occasions than our own. To capitalize on this opportunity, Paul plans to invest more aggressively in marketing and advertising for the upcoming seasons. We also want to prepare our business to respond to an increase in demand. We are maintaining flexibility with a capacity to buy additional inventory in key strategic categories like denim, handbags, essentials, and dresses. and we are focusing the additional buys on more season-less products. In addition, we are equipped to fast-track product to chase sales in the back half of the year. All in all, for the year, we are increasing our outlook on revenue for the year from down high single digits to down mid single digits. This may prove conservative if the changes in consumer demand in the U.S. are sustained and replicated in other countries. But at present, we believe it is more prudent to plan our business as if these developments are more temporary. In closing, I want to say that I have been very fortunate throughout my career, but only a few times I have felt that the company was truly at an inflection point. Today, I strongly believe that Guess is at an inflection point, and we are now set up to capitalize on the work that we have done. We have a powerful global brand that enjoys strong momentum in the market. We have amazing product across all categories. We have transformed the model into a dynamic business with significant digital acceleration and big opportunities to increase market share and expand margins. And Paul and I have a great leadership team that is highly committed to take the company to the next level of growth, profitability, and value creation. The stars are aligned. and I couldn't be more excited about our future. With that, let me pass it to Katie to review our financials and outlook in more detail. Katie?

Thank you, Carlos. Good afternoon, everyone. I'm excited about our financial performance this quarter, which truly exceeded our expectations by almost every measure. We saw sequential improvement in sales performance across our businesses, And the structural changes that we have made to our cost and margin model over the last 15 months allowed us to capitalize on this improvement in demand for our product in a big way. As a result, we delivered an adjusted operating profit in Q1 for the first time in six years, with every one of our segments delivering higher profit than pre-pandemic LLY. I could not be more proud of our results. Now let me take you through the details. First quarter revenues were $520 million, down 3% to LLY in U.S. dollars and 5% in constant currency. This performance exceeded our expectations, driven by sales momentum in our European wholesale and e-commerce channels, U.S. retail business, as well as our global licensing business. Overall, the decrease in revenue is attributable to permanent store closures and negative same-store sales as a result of pandemic-related traffic declines. I want to note that these permanent store closures are really accretive to profitability, representing about $10 million of incremental operating profit in the first quarter. Additionally, government restrictions for retail operations in Europe and Canada had a material negative impact on our sales, with these temporary store closures worth about 12% of sales versus LLY for the total company during the quarter. On the other hand, This quarter we benefited from an anticipated shift in European wholesale shipments from Q4 of last year, which is worth about the same amount. So overall, these two one-time factors offset each other. I'm happy to report that we continue to see sequential momentum in our e-commerce business, which was up 61% for the quarter in North America and Europe. This compares to 38% in Q4, 19% in Q3, and 9% in Q2. Let me get into a bit more detail on sales performance by segment. In America's retail, revenues were down 12%. The decline was driven almost entirely by temporary and permanent store closures. Store comps in the U.S. and Canada were down 1% in constant currency, a vast improvement to Q4, which was down 21%. Same-store sales were positive in the U.S., but Canada remains challenging as they struggle with the pandemic. The improvement in sales was driven mostly by improved traffic trends, while conversion and AUR remained high. Tourist-centric stores continued to underperform non-tourist-centric stores by a wide margin during the quarter. However, over the last few weeks, our tourist stores have picked up, indicating that at least domestic travel could be resuming. In Europe, revenues were up 15%. The wholesale business showed strong growth over LLY, benefiting from the shift in shipment timing. However, our retail business was negatively impacted by lockdowns and operating restrictions. Store comms for Europe were down 17% in constant currency, still muted by the increase in COVID levels in that region, but also an improvement to last quarter, which was down 26%. E-commerce sales continued to gain momentum. This channel is helping us to mitigate some of the headwinds caused by the COVID crisis now, but will also be a key enabler of growth for us in this segment in the future. In Asia, revenue was down 35%. This was driven by permanent store closures and negative store comps of down 25% in constant currency. Sales comps in South Korea and China were down in the high teens, However, other areas in the region, like Japan, were down over 50% as they continue to struggle with COVID outbreaks. Our America's wholesale sales were down 2% to LLY. This business has shown consistent improvement quarter to quarter. We are happy to see sales in this business back to pre-pandemic operating levels, but this time with much higher profitability. Licensing revenues also outperformed and were up 14% to LLY in Q1. driven by strong performance in handbags, fragrance, and footwear. Gross margin for the quarter was 40.7%, almost 700 basis points higher than two years ago. Our product margin increased 20 basis points this quarter versus LLY, primarily as a result of higher IMU, which increased 300 basis points, partially offset by business mix. Occupancy rate decreased 660 basis points. About half of the decrease is a result of business mix driven by the increase in wholesale, and the rest is attributable to permanent store closures, rent release, and lease renegotiations. This quarter we booked roughly $6 million in rent credits for fully negotiated rent release deals, mostly in Europe. There are still some negotiations with our landlords that are outstanding as we continue to extend our conversations to address the second round of temporary store closures. Adjusted FT&A for the quarter was $186 million compared to $204 million two years ago, a decrease of $19 million, or 9%, and better than our expectations. We continue to benefit from changes to our expense structure, lower advertising spend, and a decrease in expenses related to permanent store closures versus LLY. In addition, there was a benefit of about $7 million from government subsidies, mainly in Europe, which was partially offset by higher variable expenses related to the growth of our e-commerce system. Adjusted operating profit for the first quarter was $26 million versus an adjusted operating loss of $22 million in Q1 two years ago. Our first quarter adjusted tax rate was 28%, up from 11% two years ago, driven by the mix of statutory earnings. I'm really proud of the status of our balance sheet. I will take you through some details, comparing now to last year, not LLY. Inventories were $405 million, up 3% in U.S. dollars, and down 4% in constant currency versus last year. We feel good about our inventory position and believe we have the right assortment to satisfy demand throughout the year. We ended the first quarter with $395 million in cash. Cash was $419 million in the prior year. However, remember that we had proactively drawn down on our credit lines in Q1 and paid them back in Q2. On a net basis, we grew net cash by $115 million from the prior year. Our receivables were $306 million, up from $240 million last year. This increase is a result of the timing shift in the wholesale shipments into this quarter. We are, however, collecting from our accounts materially faster than last year, with DSO in Europe down about 20% this quarter. Our payables are up as a result of better payment terms with our vendors as well as a higher portion of fresh inventory on our books. Capital expenditures for the quarter were $9 million, up from $6 million in the prior year, as we begin to strategically reinvest in technology and select remodels. Free cash flow for the quarter was negative $65 million, an increase of $3 million versus negative $68 million last year. So now let's talk about next quarter and the rest of the year. The current environment is still uncertain, and as a result, we are not going to provide formal guidance, but I will walk you through how we are thinking about the near-term future. Again, I'm going to anchor our commentary on LLY. For both the second quarter and the full year, we are raising our revenue expectations from down high single digits to LLY to down mid-single digits. As permanent store closures and pandemic-related traffic declines are partially offset by continued momentum in our global e-commerce and wholesale businesses. Because of both the temporary and permanent store closures, we don't think sales comps are the best way to understand our retail performance. In addition, as you know, our business model has a few dimensions to it, which are moving in different directions. So I'm going to focus on total revenue by segment to break this down for you a bit. In America's retail, we continue to see performance roughly follow trends in Q1, and expect total revenue declines for Q2 and the rest of the year to be in line with our Q1 performance, which was down 12% versus LLY, primarily impacted by permanent store closures. In Europe, Q1 was impacted positively by the shift in wholesale and negatively by temporary store closures. These are now being lifted in many of the countries in which we operate, Germany being the biggest exception at the moment. We believe the stores will operate at higher levels of productivity than over the past year, but still below LLY. E-commerce will continue to grow, but at more modest levels, given that we are reopening the stores and lapping strong growth from last year. Together with our expectations for wholesale revenue cadence, we anticipate revenue in Q2 for our Europe segment to be roughly flat to LLY and grow modestly for the full year. In Asia, we are expecting a Q2 revenue decline similar to that of Q1, but the back half of the year will be slightly better as we anniversary softer performance in LLY. In America's wholesale, based on our current order book, Q2 will perform better than Q1 and revenue should be flat to LLY for the full year. Lastly, in licensing, we had a very strong first quarter, but we are modeling for the year to be down to LLY given the challenges in the wholesale business globally right now. As Carlos mentioned, this may prove to be conservative, but we want to keep inventories lean, and if demand exceeds our expectations, we know that we have the capabilities to react. In terms of profit, adjusted gross margin in the second quarter is expected to be around 400 basis points better than LLY, driven primarily by lower occupancy costs as well as improved IMUs and lower promotions. We anticipate that the adjusted SG&A rate will be up 150 basis points as cost savings are offset by lower sales levels and reinvestments in business expansion initiatives, including advertising. For the full fiscal year 2022, we expect operating margin to expand by approximately 300 basis points to LLY. This would bring operating margin for the year to around 8.6% versus LLY adjusted operating margin of 5.6%. In closing, it's truly an exciting time to be a guest. After over a year of navigating the company through an extremely turbulent time in our global history, the dust is finally settling. And even though the near-term macro environment may still be uncertain, I can see very clearly that our business is now primed to gain market share and bring those dollars to the bottom line with a more profitable model. Now we need to execute. I'm so thankful to be on this transformational journey with Paul and Carlos and part of this phenomenal global team, which I know can bring this company to the next level. With that, I will conclude the company's remarks, and let's open up the call for your questions.