Guess?, Inc.

Good day, everyone, and welcome to the Guest Third Quarter Fiscal 2022 Earnings Conference Call. I would like to turn the call over to Fabrice Benrouch, Vice President of Finance and Investor Relations. Sir, you may begin.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us today. On the call today with me are Carlos Alverini, Chief Executive Officer, and Katie Anderson, Chief Financial Officer. During today's call, the company will be making formal booking statements including comments regarding future plans, strategic initiatives, capital allocation, and short- and long-term outlooks, 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 price release, and the company's quarterly and annual reports side 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 earnings release. Before turning the call to Carlos, I would like to mention that we will be participating in a five-step chat at the virtual Morgan Stanley Global Consumer Conference on Wednesday, December 1st at 9.55 a.m. Eastern. The Fiosat chat will also be available via live webcast. Details on how to connect to the live webcast will be available on our investor website at investors.gas.com. We hope to see you there. Now to Carlos.

Thank you, Fabrice. Good afternoon, everyone, and thank you for joining us today. I am very pleased to report another strong performance this quarter, which exceeded our expectations for revenue growth operating margin expansion and bottom line results. Revenues increased 13% for the quarter versus last year. An adjusted operating profit reached $70 million, delivering an adjusted operating margin of almost 11% and adjusted earnings per share of 62 cents versus 58 cents last year and 22 cents in the pre-pandemic third quarter. This performance was driven by the hard work, vision, and dedication of our teams around the world, the business transformation that we have executed, and the amazing product and strong momentum of the guest brand. Paul and I want to thank our teams for their strong contributions, particularly during these challenging times. We are very proud of all of you. I strongly believe our company is positioned better than ever to extend its distribution gain market share, and increase profitability. We have a strong balance sheet and solid cash generation power to support our business growth and return excess cash to our shareholders. Our board's commitment is evident with the previously announced and still unused $200 million share repurchase authorization and today's approval to double our dividend. We firmly believe our stock is trading below its intrinsic value and plan to execute share repurchases opportunistically. Over the last two years, we have successfully executed a full transformation of our business. And what better proof that our strategy is working than our results this fiscal year, where we are guiding to double our operating margin and profit from pre-pandemic levels. The first piece of this transformation is the elevation of our brand, including launching our first global line, elevating the quality and sustainability of our product, upgrading our marketing and visual merchandising, optimizing full-price selling, remodeling our store fleet, and enriching the customer experience. Paul has led this critical initiative, and together with the product and creative teams, they have been doing an incredible job. The second piece of the transformation is the reset of our business model. We have optimized our distribution in both retail and wholesale by removing unproductive stores and accounts, reducing our product offering to result in a simpler business with more productive SKUs from our global line. We have also remained laser-focused on margin expansion with improvements coming from IMU optimization, lower occupancy, and cost reductions. including the consolidation of certain functions in Europe. As a natural extension of these efforts, during the third quarter, we completed an intra-entity transfer of certain intellectual property rights from the U.S. to Switzerland, more closely aligning our IP rights with our business operations. We are operating in a more capital-efficient way, turning inventory faster with less non-productive assets. This transformation has repositioned this company's ability to deliver strong growth, significant profitability, and superior shareholder returns into the future. Sustainability remains a key focus for our brand, and we are committed to being part of the solution to climate change. We have aggressive internal targets to reduce corporate greenhouse gas emissions by 50% and supply chain emissions by 30% by 2030. and to achieve net zero by 2050. In fact, last month, we signed an open letter to G20 leaders calling for policies that align with these goals. We also supported the United Nations Conference of Youth to ensure the collective youth voice on climate negotiations is heard. We are actively working on a climate action roadmap that includes store efficiency measures, investment in renewables, and changes to the way that we create and produce our product. I couldn't be prouder of our leadership in this very important area. Let me add some color to our third quarter results. Our retail and wholesale businesses in North America have remarkable performance in the period, with significant increases in operating profit and margin expansion. Our licensing business also reported a strong quarter all driven by the strong momentum our brand is enjoying in the marketplace. Our Europe segment performed well, positively impacted by a shift in business to LRY due to the timing of inventory receipts. And I am proud to say that we closed the spring-summer order book for our European wholesale business this quarter with orders up 12% to LRY. And our sales campaign for the pre-fall winter season is looking promising for double-digit growth as well. These results clearly signal that we are continuing to gain market share. Our Asia segment had a challenging quarter and continued to be impacted by the COVID situation and government restrictions in several countries, including China, Japan, and Taiwan. I am really encouraged by the momentum that we saw in the third quarter in our top line, which, of course, starts with our brand and our product. We had strong performance in dresses, sweaters, outerwear, and denim, as well as our high-end Marciano brand. North America saw a pop in knit tops, while Europe remained strong in athleisure. Our men's business outperformed in North America, and in accessories, sales of handbags and watches were solid in both regions. I believe the strength that we have been seeing in categories like denim, Marciano, handbags, Dresses and outerwear bodes well for the future, as these provide us key levers to drive sensor sales growth. Guess is a true lifestyle brand and is poised to capitalize on current consumer trends. Casualization is here to stay, which will help fuel continued growth in categories like denim. We have a diversified denim offering with silhouettes including skinny, straight leg, mom jean, and mini flare, and see this as a key opportunity for future growth. At the same time, we see consumers returning to social activities and fashion-oriented products, which is still in other key areas of our business, like dresses and Marziano. Regarding our store fleet, we opened 55 new stores so far this year, most of which were pop-ups. with new guest and factory stores, but also specialty concepts like accessories, activewear, Marciano, kits, and our Gen Z concept guest originals. We continue to believe that we have substantial white space for new stores in many of our markets, and stores are a key pillar to represent the lifestyle attributes of our brand, provide a tool for new customer acquisition, and complete the omnichannel experience. In connection with the elevation of our brand, we embarked on a remodeling program that will ultimately touch roughly 630 stores. Including new stores, this will represent 80% of our entire fleet in Europe and North America by the end of next year. We continue to invest in technology, including upgrades to our store infrastructure to drive efficiencies and enhance the customer experience. Our e-commerce business continues to grow, with sales in North America and Europe in the third quarter up 15% to last year and 37% to LOI. This is a source of both revenue and profitability growth for our brand, and it represents a material go-forward opportunity for us. And we continue to make progress on our customer centricity initiatives, including omnichannel capabilities and advanced data analytics and customer segmentation. In Europe, We are rolling out omnichannel and ship-from-store capabilities in all countries, and we have launched a new gift card application for the holiday. Regarding customer analytics, we have nearly 6 million contactable customers in our databases in North America and Europe, and have added 1 million new customers this year so far. Over 85% of these customers provide us with their mobile phone number. and over 20% with their home address, so we can leverage SMS marketing and mailers. As part of the Customer 360 project, we recently launched our CRM platform, which gives us a 360-degree view of our customer and enables us to improve the way we segment and personalize our communication, marketing, and promotional strategies. This is fully implemented in Europe, and early results are very promising. The same application will be implemented in North America next year, will continue to drive innovation in this area, and fund investments in technology and customer analytics. Regarding inventory and the supply chain, it will come as no surprise that our product development cycle has been impacted by the unprecedented challenges that the world is facing on the supply and logistics side. Our team is doing an incredible job mitigating these challenges to the extent possible. Our work to consolidate our vendors, going from over 500 to around 135, as well as the execution of the global line, which reduces SKUs by over 40%, has enabled us to leverage higher volumes to push through production. We have ordered product in advance to allow for extended lead times, and our inventory levels at the end of Q3 reflect this. We maintain a globally diversified sourcing strategy, which has helped us to limit impacts when areas experience disruptions. We are also moving roughly 10% of our apparel sourcing to locations that are closer to the final distribution to cut down on transit times and costs, as well as exploring alternative shipping methods like trains to move product faster between China and Europe. And we are surgically investing in air transportation when it makes sense to get our product in time to sell. This year, we have gone to about a 7% usage of air freight versus a prior year average of about 3%. In addition, as with the rest of the industry, we are experiencing increases in raw material costs like cotton. We have contracts for certain raw materials that cover us into Q3 next year and simultaneously are looking at alternative options like recycled cotton made of post-consumer waste product. All of this is obviously resulting in elevated costs, which we have built into our outlooks. Importantly, we have been successful in increasing prices, with AURs at 15 to 20%, alongside our elevation in product quality to mitigate the impact these cost increases are having on our profitability. As of the end of Q3, we had over $100 million of inventory in transit, representing almost 25% of our total ownership. compared to 12% in pre-pandemic Q3. A lot of this product will support our post-holiday business, primarily to service our European wholesale business, and our on-hand inventory today is completely aligned with our demand expectations for the upcoming holiday season. I feel strongly about our plans for the holiday business. We have a lot of newness coming to stores, Our assortment and the elevated quality of our product is clearly resonating with our customers, as evident by our strong start to the fourth quarter. In North America, traffic is gaining momentum recently, and we are experiencing good conversion and strong AURs. Recent improvements in trends in our tourist locations suggest that we are gaining a boost from the change in travel restrictions implemented in the U.S. earlier this month. In Europe, We have also seen positive sequential momentum in sales comps at the start of the quarter, driven by material increases in traffic as AUR also remains strong. As we have done all year, we plan to continue to be less promotional than in the past, especially with store-wide level discounts. We are increasing marketing to fuel customer acquisition. We are expanding the use of direct mail and catalog pieces, planning to send out 1.2 million pieces during the quarter, as well as increasing our investment in digital marketing to drive traffic to our sites. We have bought key products featured in our marketing campaigns in significant depth. We have also added video capabilities to show product attributes more effectively. When you put it all together, we see Topline growing in excess of 20% in the fourth quarter period versus last year, and operating profit exceeding $100 million. This represents an increase in both the top and bottom line to our previous outlook for the year, and Katie will give us more power on this in a few minutes. Looking past this year, we remain confident in our longer-term goals to reach revenue of $2.8 billion and operating margins of 12% in fiscal year 2024. In closing, let me just say that I could not be prouder of what our team has accomplished in the last two and a half years since I've been back. We have highly dedicated people who share an incredible passion to pursue our purpose. And on this team, when we commit to something, we deliver. We committed to elevating our brand. We are delivering. I think Paul and our product teams have done extraordinary work with this. And today, we have one line of product for the entire world across all categories. and our products are the best they have been in our company's history, highly elevated, of great quality, and very consistent with the DNA of the guest brand. We committed to transforming the business. We are delivering. We have re-architected every aspect of our business model, including our store portfolio, digital business, sourcing and logistics operations and systems infrastructure. We also committed to expanding our margins, and we are delivering here, too. We now expect to reach an 11% operating margin this year, double our margin of two years ago and well ahead of our initial plans. While these are all significant accomplishments, I strongly believe that the best is yet to come for us. We are at an inflection point, I guess, and I'm very confident our business is well positioned to generate superior returns in the future and our results will be here to prove it. You have our commitment. With that, let me pass it to Katie to review our financials in more detail. Katie?