Guess?, Inc. Reports Second Quarter Results

LOS ANGELES –

Guess?, Inc. (NYSE: GES) today reported financial results for its second quarter ended August 3, 2019.

Carlos Alberini, Chief Executive Officer, commented, “I am very pleased with our second quarter financial performance, which delivered strong operating profit growth. This performance exceeded our expectations and was driven by a solid top line increase, strong margin performance and effective expense management. During the quarter we increased revenues by 6% in U.S. dollars and 9% in constant currency. Overall, our direct-to-consumer businesses, which include stores and e-commerce, performed in line with our expectations in all regions and our wholesale businesses in the Americas and Europe delivered a very strong performance compared to our expectations. Based on our second quarter performance, our strong inventory position and our expectations for the Fall and Holiday seasons, we are raising our guidance for the full year.”

Mr. Alberini concluded, “As we previously communicated, our team is finalizing our strategic business planning process and we plan to share our findings and key strategic initiatives by the end of October. I look forward to sharing these findings and I couldn’t be more excited to update you on our Company’s opportunities for global growth, profit improvement and value creation.”

Adjusted Amounts

This press release contains certain non-GAAP, or adjusted, financial measures. References to “adjusted” results exclude the impact of (i) asset impairment charges, (ii) net gains on lease terminations, (iii) certain professional service and legal fees and related costs, (iv) non-cash debt discount amortization on our convertible senior notes and (v) the related tax effects of the foregoing items as well as adjustments to uncertain tax positions excluded from results in prior years, in each case 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.

Share Repurchases. The Company has used substantially all of the net proceeds from its $300 million 2% convertible senior notes due 2024 issued during the first quarter of fiscal 2020 (after the related hedge and warrant transactions) to repurchase shares of its common stock. During the three months ended May 4, 2019, the Company used $170 million of such proceeds to enter into an accelerated share repurchase program (“ASR”), pursuant to which it received up-front approximately 5.2 million shares (representing approximately $102 million (or 60%) of the $170 million notional amount of the ASR), with the remaining portion expected to be completed by the beginning of September 2019. During the six months ended August 3, 2019, the Company also repurchased approximately 5.8 million shares of its common stock in open market and privately negotiated transactions totaling $110.6 million, of which approximately 0.7 million shares of its common stock were repurchased at an aggregate cost of $11.0 million during the three months ended August 3, 2019 and approximately 5.1 million shares of its common stock were repurchased at an aggregate cost of $99.6 million during the three months ended May 4, 2019. Combined, these transactions resulted in the repurchase of approximately 11.0 million shares for $212.6 million during the six months ended August 3, 2019, with the remaining portion of the ASR to be determined based on the average volume-weighted price of the Company’s shares during the term of the ASR (less an agreed discount).

Second Quarter Fiscal 2020 Results

For the second quarter of fiscal 2020, the Company recorded GAAP net earnings of $25.3 million, a 0.8% decrease compared to $25.5 million for the second quarter of fiscal 2019. GAAP diluted earnings per share increased 12.9% to $0.35 for the second quarter of fiscal 2020, compared to $0.31 for the prior-year quarter. The Company estimates that the share buybacks offset by the convert transaction had a net positive impact of $0.01 on diluted earnings per share and currency had a negative impact of $0.05 on diluted earnings per share in the second quarter of fiscal 2020.

For the second quarter of fiscal 2020, the Company recorded adjusted net earnings of $27.4 million, a 6.9% decrease compared to $29.5 million for the second quarter of fiscal 2019. Adjusted diluted earnings per share increased 5.6% to $0.38, compared to $0.36 for the prior-year quarter. The Company estimates that the share buybacks offset by the convert transaction had a net positive impact of $0.03 on adjusted diluted earnings per share in the second quarter of fiscal 2020.

Net Revenue. Total net revenue for the second quarter of fiscal 2020 increased 5.8% to $683.2 million, compared to $645.9 million in the prior-year quarter. In constant currency, net revenue increased by 8.8%.

• Americas Retail revenues increased 0.9% in U.S. dollars and 1.2% in constant currency. Retail comp sales including e-commerce increased 2% in U.S. dollars and constant currency.
• Americas Wholesale revenues increased 22.3% in U.S. dollars and 22.4% in constant currency.
• Europe revenues increased 9.1% in U.S. dollars and 14.1% in constant currency. Retail comp sales including e-commerce decreased 3% in U.S. dollars and increased 1% in constant currency.
• Asia revenues increased 0.6% in U.S. dollars and 5.2% in constant currency. Retail comp sales including e-commerce decreased 13% in U.S. dollars and 8% in constant currency.
• Licensing revenues decreased 5.9% in U.S. dollars and constant currency.

Operating Earnings. GAAP earnings from operations for the second quarter of fiscal 2020 increased 44.2% to $46.0 million (including a $2.0 million unfavorable currency translation impact), compared to $31.9 million in the prior-year quarter. GAAP operating margin in the second quarter improved 180 basis points to 6.7%, compared to 4.9% in the prior-year quarter, driven primarily by higher initial markups in Europe and Americas Retail, lower logistics costs and leveraging of expenses in Europe and lower expenses related to certain professional service and legal fees and related costs, partially offset by higher advertising expenses, and wage pressures and higher markdowns in Americas Retail. The negative impact of currency on operating margin for the quarter was approximately 10 basis points.

For the second quarter of fiscal 2020, adjusted earnings from operations increased 29.8% to $47.9 million, compared to $36.9 million in the same prior-year quarter. Adjusted operating margin increased 130 basis points to 7.0%, compared to the same prior-year quarter, driven primarily by higher initial markups in Europe and Americas Retail, lower logistics costs and leveraging of expenses in Europe, partially offset by higher advertising expenses, and wage pressures and higher markdowns in Americas Retail.

• Operating margin for the Company’s Americas Retail segment increased 20 basis points to 3.0% in the second quarter of fiscal 2020, compared to 2.8% in the prior-year quarter, driven primarily by the favorable impact from higher initial markups and positive comparable sales, partially offset by wage pressures and higher markdowns.
• Operating margin for the Company’s Americas Wholesale segment increased 460 basis points to 20.1% in the second quarter of fiscal 2020, compared to 15.5% in the prior-year quarter, due primarily to higher initial markups and lower markdowns.
• Operating margin for the Company’s Europe segment increased 540 basis points to 15.2% in the second quarter of fiscal 2020, compared to 9.8% in the prior-year quarter, driven primarily by higher initial markups, lower logistics costs and leveraging of expenses.
• Operating margin for the Company’s Asia segment deteriorated 780 basis points to negative 5.8% in the second quarter of fiscal 2020, from 2.0% in the prior-year quarter, driven primarily by overall deleveraging of expenses and higher markdowns.
• Operating margin for the Company’s Licensing segment decreased 470 basis points to 83.8% in the second quarter of fiscal 2020, compared to 88.5% in the prior-year quarter.

Other expense, net, was $6.4 million for the second quarter of fiscal 2020, a deterioration of $7.7 million, compared to other income, net, of $1.4 million in the same prior-year quarter. This change was driven primarily by our proportionate share of net losses related to our minority investment in a privately-held apparel company as well as unrealized losses on non-operating assets compared to unrealized gains in the same prior-year period, and lower net unrealized and realized mark-to-market gains on revaluation of foreign exchange currency contracts.

Six-Month Period Results

For the six months ended August 3, 2019, the Company recorded GAAP net earnings of $3.9 million, an 8.4% decrease from $4.3 million for the six months ended August 4, 2018. GAAP diluted earnings per share was flat at $0.05 for the six months ended August 3, 2019, compared to the same prior-year period. The Company estimates that the convert transaction offset by the share buybacks had a net unfavorable impact on diluted earnings per share of $0.04 and currency had a negative impact of $0.05 on GAAP diluted earnings per share for the six months ended August 3, 2019.

For the six months ended August 3, 2019, the Company recorded adjusted net earnings of $7.8 million, a 32.9% decrease compared to $11.6 million for the six months ended August 4, 2018. Adjusted diluted earnings per share decreased 28.6% to $0.10, from $0.14 for the same prior-year period. The Company estimates that the convert transaction offset by the share buybacks had a net unfavorable impact of $0.01 on adjusted diluted earnings per share in the first half of fiscal 2020.

Net Revenue. Total net revenue for the first six months of fiscal 2020 increased 4.5% to $1.22 billion, compared to $1.17 billion in the same prior-year period. In constant currency, net revenue increased by 8.6%.

• Americas Retail revenues increased 1.9% in U.S. dollars and 2.5% in constant currency. Retail comp sales including e-commerce increased 3% in U.S. dollars and constant currency.
• Americas Wholesale revenues increased 17.6% in U.S. dollars and 18.7% in constant currency.
• Europe revenues increased 6.4% in U.S. dollars and 13.3% in constant currency. Retail comp sales including e-commerce decreased 2% in U.S. dollars and increased 4% in constant currency.
• Asia revenues increased 1.0% in U.S. dollars and 5.9% in constant currency. Retail comp sales including e-commerce decreased 14% in U.S. dollars and 9% in constant currency.
• Licensing revenues decreased 5.4% in U.S. dollars and constant currency.

Operating Earnings. GAAP operating earnings for the first six months of fiscal 2020 increased 207.7% to $21.5 million (including a $0.1 million unfavorable currency translation impact), compared to $7.0 million in the same prior-year period. GAAP operating margin in the first six months of fiscal 2020 increased 120 basis points to 1.8%, compared to 0.6% in the same prior-year period, driven primarily by the favorable impact from higher initial markups in Europe and Americas Retail and lower expenses related to certain professional service and legal fees and related costs, partially offset by higher advertising expenses. The impact of currency on operating margin for the first six months of fiscal 2020 was minimal.

For the six months ended August 3, 2019, adjusted earnings from operations increased 55.2% to $25.5 million, compared to $16.4 million for the six months ended August 4, 2018. Adjusted operating margin was 2.1% for the six months ended August 3, 2019, an increase of 70 basis points compared to the same prior-year period, driven primarily by the favorable impact from higher initial markups in Europe and Americas Retail, partially offset by higher advertising expenses.

• Operating margin for the Company’s Americas Retail segment increased 110 basis points to 1.1% in the first six months of fiscal 2020, compared to relatively breakeven in the same prior-year period, driven primarily by the favorable impact from higher initial markups and positive comparable sales, partially offset by wage pressures and higher markdowns.
• Operating margin for the Company’s Americas Wholesale segment increased 330 basis points to 18.4% in the first six months of fiscal 2020, compared to 15.1% in the same prior-year period. The increase in operating margin was due primarily to higher initial markups, lower markdowns and overall leveraging of expenses.
• Operating margin for the Company’s Europe segment increased 440 basis points to 6.4% in the first six months of fiscal 2020, compared to 2.0% in the same prior-year period. This increase was driven primarily by higher initial markups and leveraging of expenses due primarily to higher sales.
• Operating margin for the Company’s Asia segment deteriorated 810 basis points to negative 4.7% in the first six months of fiscal 2020, from 3.4% in the same prior-year period, driven primarily by overall deleveraging of expenses and higher markdowns.
• Operating margin for the Company’s Licensing segment decreased 220 basis points to 86.2% in the first six months of fiscal 2020, from 88.4% in the same prior-year period.

Other expense, net, was $4.3 million for the first six months of fiscal 2020, a deterioration of $3.0 million, compared to $1.3 million in the same prior-year period. The deterioration was due primarily to lower net unrealized and realized mark-to-market gains on revaluation of foreign exchange currency contracts and our proportionate share of net losses related to our minority investment in a privately-held apparel company, partially offset by higher unrealized gains on non-operating assets and lower net unrealized mark-to-market revaluations losses on foreign currency balances.

Dividends

The Company’s Board of Directors has approved a quarterly cash dividend of $0.1125 per share on the Company’s common stock. The dividend will be payable on September 27, 2019 to shareholders of record at the close of business on September 11, 2019.

Outlook

The Company’s expectations for the third quarter ending November 2, 2019 and its updated outlook for the fiscal year ending February 1, 2020 are as follows:

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A reconciliation of the Company’s outlook for GAAP operating margin to adjusted operating margin and GAAP earnings per share to adjusted earnings per share for the third quarter ending November 2, 2019 and the fiscal year ending February 1, 2020 is as follows:

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