Guess?, Inc. : Reports Fourth Quarter Results

Guess?, Inc. (NYSE: GES) today reported unaudited financial results for its fourth quarter and fiscal year ended February 3, 2018.

Victor Herrero, Chief Executive Officer, commented, “I am pleased to report that the overall results of the fourth quarter finished above the high-end of our expectations, with higher sales, higher adjusted operating profit and higher adjusted earnings per share. This quarter concludes a year where we saw revenue increase, operating profit growth, adjusted operating margin expansion and adjusted EPS growth of 52%. I believe that this year marks the beginning of a turnaround for the Company.”

Mr. Herrero concluded, “I am convinced that maintaining the focus on the strategic initiatives I outlined on my arrival at the Company in August 2015 is now clearly showing in our financial results. And looking forward to fiscal 2019, we expect to make continued progress on this front. I still see a lot of opportunities left in Europe and Asia, where we will continue to allocate capital for superior returns and where we plan to continue growing sales in double digits while also expanding margins. We will keep working on improving the profitability of the Americas by executing on our cost reduction and margin improvement initiatives. This is truly a very exciting time for our Company as a lot of opportunities are in front of us.”

This press release contains certain non-GAAP, or adjusted, financial measures. References to “adjusted” results exclude the impact of (i) net (gains) losses on lease terminations, (ii) asset impairment charges, (iii) restructuring charges, (iv) a restructuring related exit tax charge, (v) a gain from the sale of a minority interest investment, (vi) the related tax effects of these adjustments, (vii) tax impacts resulting from the enactment of the 2017 Tax Cuts and Jobs Act (the “Tax Reform”) and (viii) a non-cash valuation allowance established on certain deferred tax assets, where applicable. A reconciliation of reported GAAP results to comparable non-GAAP results is provided in the accompanying tables and discussed under the heading “Presentation of Non-GAAP Information” below.

As further discussed below, during the fourth quarter of fiscal 2018, the Company reclassified certain royalties received from net revenue to cost of product sales. Accordingly, amounts presented related to net royalties, net revenue and cost of product sales for the twelve months ended February 3, 2018 as well as the three and twelve months ended January 28, 2017 have been adjusted to conform to the current period presentation. This reclassification had no impact on previously reported earnings from operations, net earnings, net earnings per share or cash flows.

Fourth Quarter Fiscal 2018 Results

For the fourth quarter of fiscal 2018, the Company recorded GAAP net earnings of $1.0 million, an 84.2% decrease from $6.6 million for the fourth quarter of fiscal 2017. GAAP diluted earnings per share decreased 87.5% to $0.01 for the fourth quarter of fiscal 2018, from $0.08 in the prior-year quarter. The Company estimates the positive impact of currency on diluted earnings per share in the fourth quarter of fiscal 2018 was approximately $0.04 per share. The Company’s fourth quarter of fiscal 2018 results included 14 weeks, while the fourth quarter of fiscal 2017 results included 13 weeks.

For the fourth quarter of fiscal 2018, the Company recorded adjusted net earnings of $51.3 million, a 40.2% increase compared to $36.6 million for the fourth quarter of fiscal 2017. Adjusted diluted earnings per share increased 44.2% to $0.62, compared to $0.43 for the prior-year quarter.

Net Revenue. Total net revenue for the fourth quarter of fiscal 2018 increased 17.5% to $792.2 million, compared to $674.0 million in the prior-year quarter. In constant currency, net revenue increased by 10.2%.

• Americas Retail revenues decreased 6.1% in U.S. dollars and 7.2% in constant currency. Retail comp sales including e-commerce decreased 4% in U.S. dollars and 5% in constant currency.
• Americas Wholesale revenues increased 3.8% in U.S. dollars and 0.9% in constant currency.
• Europe revenues increased 39.7% in U.S. dollars and 24.1% in constant currency. Retail comp sales including e-commerce increased 18% in U.S. dollars and 6% in constant currency.
• Asia revenues increased 40.2% in U.S. dollars and 33.1% in constant currency. Retail comp sales including e-commerce increased 14% in U.S. dollars and 8% in constant currency.
• Licensing revenues increased 11.4% in U.S. dollars and constant currency.

Operating Earnings. GAAP operating earnings for the fourth quarter of fiscal 2018 increased 225.9% to $68.4 million (including a $7.1 million favorable currency translation impact), compared to $21.0 million in the prior-year quarter. GAAP operating margin in the fourth quarter increased 550 basis points to 8.6%, compared to 3.1% in the prior-year quarter, driven primarily by lower asset impairment charges. The positive impact of currency on operating margin for the quarter was roughly 80 basis points.

For the fourth quarter of fiscal 2018, adjusted operating earnings increased 31.2% to $70.7 million, compared to $53.9 million in the prior-year quarter. Adjusted operating margin was 8.9%, an increase of 90 basis points compared to the same prior-year quarter, driven primarily by overall leveraging of expenses, partially offset by higher performance-based compensation costs.

• Operating margin for the Company’s Americas Retail segment increased 620 basis points to 6.0% in the fourth quarter of fiscal 2018, compared to negative 0.2% in the prior-year quarter. This increase was driven primarily by cost reductions due primarily to store closures and negotiated rent reductions, higher initial markups and lower markdowns, partially offset by the negative impact on the fixed cost structure resulting from negative comparable sales.
• Operating margin for the Company’s Americas Wholesale segment decreased 290 basis points to 14.2% in the fourth quarter of fiscal 2018, from 17.1% in the prior-year quarter, driven primarily by lower gross margins and overall deleveraging of expenses.
• Operating margin for the Company’s Europe segment decreased 10 basis points to 15.9% in the fourth quarter of fiscal 2018, from 16.0% in the prior-year quarter, due primarily to higher distribution costs resulting from the relocation of the Company’s European distribution center, partially offset by overall leveraging of expenses and higher initial markups.
• Operating margin for the Company’s Asia segment increased 470 basis points to 8.4% in the fourth quarter of fiscal 2018, compared to 3.7% in the same prior-year quarter, driven primarily by overall leveraging of expenses.
• Operating margin for the Company’s Licensing segment decreased 26.9% to 87.7% in the fourth quarter of fiscal 2018, from 114.6% in the prior-year quarter.

Other Income (Expense), Net. Other net expense was $0.1 million in the fourth quarter of fiscal 2018, which primarily includes net unrealized and realized mark-to-market revaluation losses on foreign exchange currency contracts, partially offset by unrealized gains on non-operating assets and net unrealized mark-to-market revaluation gains on foreign currency balances, compared to other net income of $4.5 million in the prior-year quarter.

Income Taxes. On December 22, 2017, the Tax Reform was enacted into law and contains several key tax provisions that affected the Company, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the U.S. corporate income tax rate from 35% to 21%. Our GAAP results for the fourth quarter of fiscal 2018 include the impact of a $47.9 million charge related to the Tax Reform, or an unfavorable $0.58 per share impact. This is comprised of a $24.9 million charge for the provisional re-measurement of certain deferred taxes and related amounts and a provisional charge of $23.0 million to income tax expense for the estimated effects of the transitional tax on the deemed repatriation of foreign earnings. These provisional amounts will be finalized in fiscal 2019 as the Company completes its analysis of the impact of the Tax Reform. Our GAAP results for the fourth quarter of fiscal 2017 included the impact of a valuation allowance established on certain deferred tax assets of $6.8 million, a portion of which was generated from asset impairment charges recorded during the fourth quarter of fiscal 2017.

The Company’s GAAP effective tax rate increased to 95.5% for the fourth quarter of fiscal 2018, compared to 65.6% in the prior-year quarter. The Company’s adjusted effective tax rate decreased to 24.7% for the fourth quarter of fiscal 2018, from 33.4% in the prior-year quarter.

Fiscal Year 2018 Results

For the fiscal year ended February 3, 2018, the Company recorded GAAP net loss of $7.9 million, compared to GAAP net earnings of $22.8 million for the fiscal year ended January 28, 2017. GAAP diluted loss per share was $0.11 in fiscal 2018, compared to GAAP diluted earnings per share of $0.27 in the prior year. The Company estimates the positive impact of currency on diluted loss per share for the fiscal year ended February 3, 2018 was approximately $0.02 per share. The Company’s fiscal 2018 results included 53 weeks, while fiscal 2017 results included 52 weeks.

For the fiscal year ended February 3, 2018, the Company recorded adjusted net earnings of $58.4 million, a 50.6% increase compared to $38.8 million for the fiscal year ended January 28, 2017. Adjusted diluted earnings per share increased 52.2% to $0.70 in fiscal 2018, compared to $0.46 for the prior year.

Net Revenue. Total net revenue for fiscal 2018 increased 7.9% to $2.36 billion, compared to $2.19 billion in the prior year. In constant currency, net revenue increased by 5.3%.

• Americas Retail revenues decreased 10.9% in U.S. dollars and 11.4% in constant currency. Retail comp sales including e-commerce decreased 9% in U.S. dollars and 10% in constant currency.
• Americas Wholesale revenues increased 2.8% in U.S. dollars and 2.0% in constant currency.
• Europe revenues increased 26.7% in U.S. dollars and 20.6% in constant currency. Retail comp sales including e-commerce increased 11% in U.S. dollars and 6% in constant currency.
• Asia revenues increased 24.3% in U.S. dollars and 22.1% in constant currency. Retail comp sales including e-commerce increased 8% in U.S. dollars and 5% in constant currency.
• Licensing revenues increased 1.2% in U.S. dollars and constant currency.

Operating Earnings. GAAP operating earnings for fiscal 2018 increased 187.0% to $65.2 million (including an $8.1 million favorable currency translation impact), compared to $22.7 million in the prior year. GAAP operating margin for fiscal 2018 increased 180 basis points to 2.8%, compared to 1.0% in the prior year, driven primarily by overall leveraging of expenses, higher initial mark-ups and lower asset impairment charges, partially offset by the negative impact on the fixed cost structure resulting from negative comparable sales in Americas Retail and higher performance-based compensation costs. The positive impact of currency on operating margin for fiscal 2018 was roughly 30 basis points.

For fiscal 2018, adjusted operating earnings increased 36.1% to $85.0 million, compared to $62.5 million in the prior year. Adjusted operating margin was 3.6%, an increase of 70 basis points compared to the prior year, driven primarily by overall leveraging of expenses and higher initial mark-ups in Europe, partially offset by the negative impact on the fixed cost structure resulting from negative comparable sales in Americas Retail and higher performance-based compensation costs.

• Operating margin for the Company’s Americas Retail segment improved 30 basis points to negative 2.1% in fiscal 2018, compared to negative 2.4% in the prior year. This improvement was driven primarily by cost reductions due primarily to store closures and negotiated rent reductions and higher initial markups, partially offset by the negative impact on the fixed cost structure resulting from negative comparable store sales.
• Operating margin for the Company’s Americas Wholesale segment increased 20 basis points to 16.7% in fiscal 2018, compared to 16.5% in the prior year. The increase in operating margin was due to higher gross margins, partially offset by overall deleveraging of expenses.
• Operating margin for the Company’s Europe segment increased 150 basis points to 8.7% in fiscal 2018, compared to 7.2% in the prior year, due to higher initial mark-ups and the favorable impact on the fixed cost structure resulting from overall leveraging of expenses, partially offset by higher distribution costs resulting from the relocation of the Company’s European distribution center.
• Operating margin for the Company’s Asia segment increased 560 basis points to 4.6% in fiscal 2018, compared to negative 1.0% in the prior year. The increase in operating margin was driven primarily by overall leveraging of expenses.
• Operating margin for the Company’s Licensing segment decreased 450 basis points to 107.3% in fiscal 2018, from 111.8% in the prior year.

Other Income, Net. Other net income was $3.4 million for fiscal 2018, which primarily includes unrealized gains on non-operating assets and net unrealized mark-to-market revaluation gains on foreign currency balances, partially offset by net realized and unrealized mark-to-market revaluation losses on foreign exchange currency contracts, compared to $30.9 million for the prior year. For the fiscal year ended January 28, 2017, other net income included a realized gain of $22.3 million from the sale of a minority interest investment. The gain from the sale of the minority interest investment has been excluded for purposes of calculating adjusted financial measures for fiscal 2017. A reconciliation of reported GAAP results to comparable non-GAAP results is provided in the accompanying tables and discussed under the heading “Presentation of Non-GAAP Information” below.

Income Taxes. On December 22, 2017, the Tax Reform was enacted into law and contains several key tax provisions that affected the Company, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the U.S. corporate income tax rate from 35% to 21%. Our GAAP results for fiscal 2018 include the impact of a $47.9 million charge related to the Tax Reform, or an unfavorable $0.58 per share impact. This is comprised of a $24.9 million charge for the provisional re-measurement of certain deferred taxes and related amounts and a provisional charge of $23.0 million to income tax expense for the estimated effects of the transitional tax on the deemed repatriation of foreign earnings. These provisional amounts will be finalized in fiscal 2019 as the Company completes its analysis of the impact of the Tax Reform. Our GAAP results for fiscal 2017 included the impact of a valuation allowance established on certain deferred tax assets of $6.8 million, a portion of which was generated from asset impairment charges recorded during fiscal 2017.

The Company’s GAAP effective tax rate increased to 105.6% for fiscal 2018, compared to 52.6% in the prior year. The Company’s adjusted effective tax rate decreased to 30.7% for fiscal 2018, compared to 41.7% in the prior year.

Dividends

The Company’s Board of Directors has approved a quarterly cash dividend of $0.225 per share on the Company’s common stock. The dividend will be payable on April 20, 2018 to shareholders of record at the close of business on April 4, 2018.

Reclassification of Prior Period Financial Statements

In connection with our implementation of the new revenue standard for fiscal 2019, we determined that conclusions reached under existing revenue standards as to the appropriate classification of payments received by us related to the Company’s purchases of licensed inventory products was not correct. While the Company has concluded that the impact of these reclassification errors on the Company’s previously-issued consolidated financial statement is not material, the Company has determined to revise its comparable periods when presented herein and in future filings. During the fourth quarter of fiscal 2018, the Company reclassified certain royalties received from net revenue to cost of product sales.

For fiscal 2018, the historical quarterly periods ended April 29, 2017, July 29, 2017, October 28, 2017, which are not presented herein as comparisons, the reclassification would have reduced net revenue and cost of product sales by $4.2 million, $5.4 million, and $5.2 million, respectively, impacting the cumulative twelve months ended February 3, 2018 presented by $14.8 million. The comparative periods for the three and twelve months ended January 28, 2017 have been reduced by $5.3 million and $18.9 million, respectively, to conform to the current period presentation. This reclassification had no impact on previously reported earnings from operations, net earnings, net earnings per share or cash flows.

Outlook

The Company’s expectations and outlook for the first quarter and fiscal year ending February 2, 2019 are as follows:

On a segment basis, the Company expects the following ranges for percentage changes for comparable store sales including e-commerce (“comps”) and net revenue in U.S. dollars and constant currency compared to the same prior-year period:

Presentation of Non-GAAP Information

The financial information presented in this release includes non-GAAP financial measures such as adjusted results, constant currency financial information and free cash flow measures. For the three and twelve months ended February 3, 2018, the adjusted results exclude the impact of net losses on lease terminations, asset impairment charges and the tax impacts of these adjustments, as well as the tax impacts resulting from the enactment of the Tax Reform, where applicable. For the three and twelve months ended January 28, 2017, the adjusted results exclude the impact of asset impairment charges, a gain from the sale of a minority interest investment, restructuring charges, a restructuring related exit tax charge, net gains on lease terminations and the tax effects of these adjustments, as well as the impact of a non-cash valuation allowance established on certain deferred tax assets, where applicable. These non-GAAP measures are provided in addition to, and not as alternatives for, the Company’s reported GAAP results.

The Company has excluded these items from its adjusted financial measures primarily because it believes that the adjusted financial information provided is useful for investors to evaluate the comparability of the Company’s operating results and its future outlook (when reviewed in conjunction with the Company’s GAAP financial statements). A reconciliation of reported GAAP results to comparable non-GAAP results is provided in the accompanying tables.

This release also includes certain constant currency financial information. Foreign currency exchange rate fluctuations affect the amount reported from translating the Company’s foreign revenue, expenses and balance sheet amounts into U.S. dollars. These rate fluctuations can have a significant effect on reported operating results under GAAP. The Company provides constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates. To calculate net revenue, comparable store sales and earnings (loss) from operations on a constant currency basis, actual or forecasted results for the current-year period are translated into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate. However, in calculating the estimated impact of currency on our earnings (loss) per share for our actual and forecasted results, the Company estimates gross margin (including the impact of merchandise-related hedges) and expenses using the appropriate prior-year rates, translates the estimated foreign earnings at the comparable prior-year rates, and excludes the year-over-year earnings impact of gains or losses arising from balance sheet remeasurement and foreign currency contracts not designated as merchandise hedges. The constant currency information presented may not be comparable to similarly titled measures reported by other companies.

The Company also includes information regarding its free cash flows in this release. The Company calculates free cash flows as cash flows from operating activities less purchases of property and equipment. Free cash flow measure is not intended to be an alternative to cash flows from operating activities as a measure of liquidity, but rather provides additional visibility to investors regarding how much cash is generated for discretionary and non-discretionary items after deducting purchases of property and equipment. Free cash flow information presented may not be comparable to similarly titled measures reported by other companies. A reconciliation of reported GAAP cash flows from operating activities to the comparable non-GAAP free cash flow measure is provided in the accompanying tables.

Investor Conference Call

The Company will hold a conference call at 4:45 pm (ET) on March 21, 2018 to discuss the news announced in this press release. A live webcast of the conference call will be accessible at www.guess.com via the “Investor Relations” link. The webcast will be archived on the website for 30 days.

About Guess?

Guess?, Inc. designs, markets, distributes and licenses a lifestyle collection of contemporary apparel, denim, handbags, watches, footwear and other related consumer products. Guess? products are distributed through branded Guess? stores as well as better department and specialty stores around the world. As of February 3, 2018, the Company directly operated 1,011 retail stores in the Americas, Europe and Asia. The Company’s licensees and distributors operated 652 additional retail stores worldwide. As of February 3, 2018, the Company and its licensees and distributors operated in approximately 100 countries worldwide. For more information about the Company, please visit www.guess.com.

Forward-Looking Statements

Except for historical information contained herein, certain matters discussed in this press release or the related conference call and webcast, including statements concerning the Company’s expectations, future prospects, business strategies and strategic initiatives; statements expressing optimism or pessimism about future operating results or events and projected sales (including comparable sales), earnings, capital expenditures, operating margins, cost savings and cash needs; and guidance for the first quarter and full year of fiscal 2019, including the impact of the new revenue recognition standard, are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are frequently indicated by terms such as “expect,” “will,” “should,” “goal,” “strategy,” “believe,” “estimate,” “continue,” “outlook,” “plan” and similar terms, are only expectations, and involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from what is currently anticipated. Factors which may cause actual results in future periods to differ materially from current expectations include, among others: our ability to maintain our brand image and reputation; domestic and international economic conditions, including economic and other events that could negatively impact consumer confidence and discretionary consumer spending; changes in the competitive marketplace and in our commercial relationships; our ability to anticipate and adapt to changing consumer preferences and trends; our ability to manage our inventory commensurate with customer demand; risks related to the timing and costs of delivering merchandise to our stores and our wholesale customers; unexpected or unseasonable weather conditions; our ability to effectively operate our various retail concepts, including securing, renewing, modifying or terminating leases for store locations; our ability to successfully and/or timely implement our growth strategies and other strategic initiatives; our ability to expand internationally and operate in regions where we have less experience, including through joint ventures; our ability to successfully or timely implement plans for cost reductions; our ability to complete the transfer of our European distribution center without incurring additional shipment delays and/or increased costs; our ability to attract and retain key personnel; changes to our short or long-term strategic initiatives; obligations arising from new or existing litigation, tax and other regulatory proceedings (including the European Commission proceeding initiated during the second quarter of fiscal 2018 to investigate whether the Company breached certain European Union competition rules); risks related to the complexity of the Tax Reform and our ability to accurately interpret and predict its impact on our cash flows and financial condition; significant changes in our provisional estimates of the Tax Reform; changes in U.S. or foreign tax or tariff policy including with respect to apparel and other accessory merchandise; accounting adjustments to our unaudited financial statements identified during the completion of our annual independent audit of financial statements and financial controls or from subsequent events arising after issuance of this release; risk of future store asset and/or goodwill impairments or restructuring charges; our ability to adapt to new regulatory compliance and disclosure obligations; risks associated with our foreign operations, such as violations of laws prohibiting improper payments and the burdens of complying with a variety of foreign laws and regulations (including global data privacy regulations); risks associated with the acts or omissions of our third party vendors, including a failure to comply with our vendor code of conduct or other policies; risks associated with cyber attacks and other cyber security risks; and changes in economic, political, social and other conditions affecting our foreign operations and sourcing, including the impact of currency fluctuations, global tax rates and economic and market conditions in the various countries in which we operate. In addition to these factors, the economic, technological, managerial, and other risks identified in the Company’s most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission, including but not limited to the risk factors discussed therein, could cause actual results to differ materially from current expectations. The current global economic climate and uncertainty surrounding potential changes in U.S. policies and regulations under the new administration may amplify many of these risks. Additional information with respect to known and unknown risks will also be set forth in the Company’s annual report on Form 10-K for the year ended February 3, 2018, which will be filed with the Securities and Exchange Commission in the first quarter of fiscal 2019. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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