Guess?, Inc.

Good day, everyone, and welcome to the guest's fourth quarter fiscal 2022 earnings conference call. I would like to turn the call over to Fabrice Benrouch, Vice President of Finance and Investor Relations.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us today. On the call today with me are Carlos Albirini, Chief Executive Officer, and Kelly 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 and the war in Ukraine. 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 earnings release. Now I will turn it over to Carlos.

Thank you, Fabrice. Good afternoon, everyone, and thank you for joining us today. This is a very difficult time for all of us. The current situation in Ukraine is heartbreaking and very hard to process. Our hearts go out to all those being impacted by this horrific violence. While our opportunity to help is limited, at GES we have been doing everything we can to assist in the humanitarian efforts there. In addition to our charitable efforts, our team in Poland is supplying refugees with housing, food, blankets, and other necessities, and we are very grateful that we have extraordinary people with big hearts that respond strongly and adapt to crises like this one. Regarding our business in Russia, we have a joint venture structure there, so we are not a 100% direct operations. We are actively discussing and negotiating actions with our Russian partner. For the time being, we are suspending deliveries and investments into Russia and closing our direct e-commerce business. We will continue to monitor the situation with our partner as we move forward. As part of our announcements today, we shared that Katie Anderson will be leaving guests to pursue another opportunity as CFO of a privately held company. Katie is very excited about her new role, and we fully support her decision and wish her the very best in this new chapter of her career. We want to thank Katie for all her contributions to GES during the last two and a half years that she was with us. To support GES during this transition period, I'm very pleased to report that Dennis Seeker will return to GES as Interim Chief Financial Officer. Dennis spent over six years as Chief Financial Officer of Guest between 2006 and 2012, and he brings significant experience and strong leadership capabilities to the role. Many of us know Dennis well. He is highly respected within our organization and understands our business. We are confident that this will be a seamless transition, and I want to welcome Dennis back to the team. As many of the global functions are being consolidated in Switzerland following our IP migration, we'll be launching a search for a permanent CFO based in Switzerland. Now onto our performance. I'm very pleased to report strong fourth quarter results where we met our top line and exceeded our bottom line expectations. This caps an outstanding year for our company. For the year, we reached a 12% adjusted operating margin and exceeded $310 million in adjusted operating profit, more than doubling our pre-pandemic levels in fiscal year 2020 for both measures. We ended the year with a strong balance sheet and a return on invested capital of 26 percent, the highest it has been in 10 years. We also returned capital to our shareholders via our increased dividend, as well as the repurchase of over $50 million in shares in Q4. This means that we have repurchased $378 million of our shares over the last three years at an average price of $16.41, representing 28% of the outstanding. And today, we announced that our board has approved an increase of our share repurchase authorization to $300 million, and our intention to enter into a $175 million accelerated share repurchase program as we continue this commitment to return value to our shareholders. Our strong performance this year is a clear testament to the strength and capabilities of our people across the world. Paul and I, once again, want to congratulate our entire team of associates who work together relentlessly and fiercely to make this company better every single day, no matter how challenging the circumstances. We have an amazing team and culture here at Guess, and we could not be prouder of what we have accomplished together. Let me now give you some color on our fourth quarter and full year results by segment. Our retail business in the Americas had another remarkable quarter, driven by both positive comps and significant margin expansion. This business closed the year with earnings from operations of $125 million, over five times that of pre-pandemic levels, and we believe that there is more growth to come as we drive top line here with a much more profitable model. Our wholesale business in the Americas also had another strong quarter of growth, closing the year up 170% in operating profit to last year and 51% to LOI. Our European business performed well despite a significant impact from Omicron variant in that region. While retail sales were challenged by restrictions and consumer sentiment surrounding the COVID surge, wholesale and e-commerce showed meaningful growth. The spring-summer order book, which shifts in the fourth quarter of last year and the first quarter of this year, was up 12% versus LOI. And I'm happy to report that this momentum continued with our order book for fall-winter 2022, which finished up 14% versus last year and will ship in the second and third quarters of this year. Altogether, operating profit for the Europe segment was $175 million, which is 162% higher than the prior year and 30% higher than LLY. Our Asia segment continued to be impacted by the COVID situation and government restrictions in several countries, including China, Japan, and Taiwan. But even with sales down 30% to LLY for the year, The segment performed significantly better from a bottom line perspective than LLY as it is healthier because of the actions that we took. And lastly, our licensing business had a terrific year with sales up 31% to last year and 13% to LLY in spite of shipping challenges due to supply chain disruptions. Let's talk about product. Paul and the entire creative team have delivered and their vision is extraordinary. I'm really encouraged by the product trends that we saw over the fourth quarter, which showed strength in our key focus categories, showcasing that our strategies are working. This quarter, we had strong performance in both women's and men's outerwear and activewear, including our new athleisure line. Our men's business continues to outperform. In women's, knit tops and denim, which represent over 40% of the business, outperformed other categories, In addition, we saw traction in footwear, watches, and our high-end Marciano assortment. Demand for handbags has been solid, but lack of inventory due to supply chain delays in this category impacted that business in the fourth quarter. Our overall trends clearly indicate the customer is venturing out of their home and enjoying more social interactions. Guess is a true lifestyle brand. and we are confident that our product lines are well positioned to capitalize on this return to pre-pandemic life. Regarding the supply chain, we have been successfully navigating this dynamic and challenging global environment and are confident that we will have the appropriate inventory to support our businesses here. We ended the year with inventories up 19% to last year and the LLY period. We have a higher portion of product in transit, and placed orders earlier to mitigate delay risk. We are very happy with the makeup of what we own and have strategically planned our buys to include more timeless assortments like essentials, which gives us the capacity to support higher demand without taking significant inventory risk. We are seeing some signs of decreased congestion on the ports, but have built our plans assuming prices will remain elevated for the remainder of the year. Now, I will walk you through the transformation of our business model that we successfully executed over the last two years. Then, I will take you through the building blocks for our future growth. We have elevated the guests and Marciano brands, redefined the company's global e-commerce strategy, optimized our store footprint, enhanced supply chain, and driven efficiencies across the business. I'm going to summarize this most for you. as I believe understanding the drivers behind the margin expansion demonstrates its true sustainability. I will of course start with the elevation of the brand, which has been led by Paul and the product and creative teams and has produced incredible results for us this year. We have elevated the quality and sustainability of our product and upgraded our marketing and visual merchandising. For the first time in the company's history, we completed the launch of a global product line for all categories. This allowed us not only to maintain consistency of our product worldwide, but also streamline our vendor base from over 500 suppliers three years ago to around 100 today, and reduce SKU development by over 40% during that time. We were able to eliminate overhead, increase SKU productivity, and drive down our costs with higher volume buys. Over the last few years, we have done a lot of work on driving IMU growth, including moving sourcing to lower-cost regions and consolidating vendors. We have strategically aligned our prices with the perceived value of the product and the competitive environment, resulting in AUR growth of over 15% in both North America and Europe. As a result, IMU expansion contributed roughly 250 basis points of margin this year versus the pre-pandemic LRY period in spite of investments that we are making in both sustainability and the enhanced quality of our products. We have adjusted our buying strategies to maximize full-price selling, resulting not only in a cleaner and more upscale image of our brand, but also a margin pickup of nearly 200 basis points this year. For example, the portion of our sales sold at full price last year in North America increased 11% versus the pre-pandemic LLY period, In North America, we integrated our G-Buy guest brand into our factory business, reducing costs and driving productivity, resulting in an improvement in store contribution of almost three times versus LOI. In our retail channel, we closed underperforming stores, representing 16% of our store base, including highly unprofitable flagship locations, eliminating roughly $20 million of operating losses. We renegotiated over 490 leases, leaving us with much better terms for our existing stores. These initiatives drove around 120 basis points of efficiencies in our occupancy rate. And lastly, we streamlined our organizational structure with globalizing functions, allowing us to reduce costs and increase accountability. This business model transformation has built a strong base for sustainable and profitable growth as we move the business into its next phase of growth. I would classify last year as a baseline year, where we suppressed demand by decreasing promotions and increasing prices and faced challenges, including significant decreases in customer traffic due to COVID and lack of product availability as a result of supply chain disruptions. This gives us a great opportunity to build the top line from here. Let me walk you through some of the key initiatives for this year that will drive our growth and the future of our brand. The upgrades that we have made to our brand have positioned us very well in the marketplace. Our wholesale partners are embracing our product and buying more. The customer in our stores is doing the same. We have cleaned up our store portfolio to eliminate unproductive stores and concentrate our retail operations in the stores in which we see growth opportunities. In addition, to align our store image with the elevated branding, we have embarked on a remodeling program that will ultimately touch over 600 stores, with around 230 remodels completed so far. Including our new stores, this will represent almost 80% of our entire fleet of stores in Europe and North America. We have also reimagined our assortment For example, for our Guess North America business, just a year ago, 75% of our denim assortment was represented by skinny jeans. With additional styles like flare, bootleg, straight leg, and the mom jean, skinny jeans now would represent only 50% of our assortment going forward. Our handbags have no competition in the market, given the unique quality, styling, and colors that we offer at our price point. Dresses have always been a key driver for our women's business. In the past, we were focused primarily on fashion and prints, but now we also have a foundation of essential dresses that are doing very well. This combination is powerful for expanding this important category. Our outerwear collection for women, men, and kids is incredible and is selling very well. Outerwear is another key category for us, with high price points to build spend and increased store productivity and profitability. These are just some examples of levers that will continue to fill our comp growth and our wholesale business this year and into the future. Digital has been a priority for us. So let me talk a bit about our progress for that business. As you might recall, in 2020, we finished the rollout of our new, faster, and more user-friendly e-commerce platform. which helped us to deliver 15% growth in e-commerce sales this past fiscal year in Europe and North America. In late 2021, we launched our new CRM platform in Europe, 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. Our customer database in Europe grew by almost 20% last year, The customers in our database represent roughly one-third of our sales, spending 20% more per transaction and engaging more across categories than our generic customers. We can now facilitate multi-step journeys powered by AI tools to optimize communication using various levels of customer data. This includes optimal times to send messages when the customer is more likely to engage, as well as segmentation tools to predict content which will most likely resonate with the customer and the customer's sensitivity to various discounts. These tools will allow us to further drive engagement and spend from these already valuable customers. We have been testing this platform in three pilot markets in Europe and engagement with communications has increased 40% versus the benchmark. We are quickly learning the capabilities of the tool in Europe which will enable us to drive quick wins in North America when we roll this out here later this year. Using these tools, paired with the elevation of our product, our stores, and our online platforms, we will focus on driving customer lifetime value and retention rates and lowering customer acquisition costs. This represents a significant go-forward growth opportunity for our company. We continue to believe in the importance of our stores as the customer is increasingly engaging with brands on an omnichannel level. We opened 87 new stores last year and are planning to open 50 to 60 new stores this year. We have substantial white space for stores in many of our markets, as well as the opportunity for specialty concepts like accessories, activewear, Marciano, kids, and our Gen Z concept guest originals. Current market dynamics are allowing us to open shorter-term pop-up stores providing us with a cost-effective way to test markets and concepts. In addition to completing the omnichannel experience, our stores showcase the lifestyle attributes of our brand and drive new customer acquisition. And with the work that we have done to optimize our margins, stores represent a profitable and synergistic path for future growth. Sustainability continues to be a top priority at Guess. We released our sustainability report last summer with ambitious goals to empower our people and protect our planet. GES is the first in fashion and one of the first in the world to have its report undergo reasonable level assurance review with the examination led by big four assurance provider KPMG. We have ambitious environmental goals and in Q4, we made our first ever purchase of renewable energy solar and wind in the Americas, Europe, and Asia, equivalent to power approximately 20% of our stores globally. We also continue to strengthen diversity and inclusion. In 2022, GES has made diversity and inclusion training mandatory for U.S. associates, and we are working to expand this abroad. Currently, 40% of our senior executive leaders are female, and over 70% of our managers are female. In fiscal year 2021, we achieved gender pay parity at the U.S. corporate headquarters and will continue to monitor and report on this metric globally as we are committed to maintaining equal pay for equal work at guest. We also incorporate diversity and inclusion values into our performance review metrics across the organization. Now, I want to give you some context around our expectations for this fiscal year. I will start with the macro environment, where we see both opportunities and challenges in fiscal 2023. We believe consumer demand will remain strong as wages continue to rise and people return to life outside the home post-pandemic. For this year, we see a recovery in store traffic, particularly in regions which have been slower to rebound from the pandemic like Europe. We expect that international tourism will provide renewed business across regions, particularly in the back half of the year. At the same time, we'll continue to be impacted by supply chain disruptions, including the recent COVID surge in China, and we'll face more uncertainty and volatility given the potential global impacts of the war in Ukraine. We are confident in our plans to capture the demand and navigate through the challenges in fiscal 2023. We are expecting sales growth of up low single digits versus fiscal year 22 for total revenue of almost $2.7 billion. As you may recall, last year's first quarter was materially impacted by COVID-related store closures, especially in Europe and Canada. For fiscal 2023, we do expect stores to be open, which will benefit this year's revenues by roughly $60 million or 2% of revenue growth. We are also planning for positive comp store sales. The elevation of the brand has fueled higher AURs through higher prices and lower promotions. We expect AUR to help drive positive store comp sales in fiscal 2023, especially in the front half of the year as fiscal 2022 benefited from it in the back half. As mentioned earlier, we also expect tourism to start recovering in the back half of the year and drive higher traffic into our stores. Turning to wholesale, as I previously mentioned, this business has momentum. In Europe, our order books for spring, summer, and fall-winter 2022 are up double digits, with the growth in that channel being driven by higher average buys from our wholesale partners. Finally, we still believe that our e-commerce business has the potential to continue to grow as we augment our customer analytic capabilities. We will have a healthy business in fiscal year 23, with high margins and lower promotions. We expect operating margin to be around 10.5%, almost double pre-pandemic levels, but less than this past fiscal year, mostly driven by cost pressures and product costs and logistics and wages, especially in the first half of the year. Katie will take you through the details here in a few minutes. Regarding fiscal 2024, we are still confident in our goals to reach sales of $2.8 billion and a 12% operating margin. We believe that many of the headwinds that we are facing this year, like elevated freight costs, will normalize and we will realize the benefits of both sales leverage and additional operational efficiencies in the longer term. In closing, the last two years with the global pandemic were very challenging for the world, for our industry, and for our company. COVID impacted the way we live, the way we work, the way we prioritize life, and for sure, the way we shop. Paul and I are very proud of how our team and our company responded to this crisis to transform our business, leaving no stone unturned. We executed well and adapted with agility and courage to make guests better, not just for the next quarter or the next year, but for the next generation. Today, I believe our company is better positioned than ever with a business model that delivers sustainable double-digit operating margins and high return on invested capital. Today, our guest brand enjoys strong momentum and is capitalizing on its elevated position globally. Today, we have significant opportunities to grow our business profitably. And today, we have a strong team that is highly engaged and greatly inspired to take guests to the next level of growth and profitability, no matter what challenges lie ahead. And this is a team that is highly committed to delivering inspiring product to our customers and extraordinary value to all our shareholders today and for many years to come. With that, let me pass it to Katie to review our financials in more detail. Katie.