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(Exact name of registrant as specified in its charter)
iDelaware
i95-3679695
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
iStrada Regina 44
iBioggio,
iSwitzerlandiCH-6934
(Address of principal executive offices and zip code)
+i41i91 809 5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
symbol(s)
Name of each exchange on which registered
iCommon Stock, par value $0.01 per share
iGES
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesx No o
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesx No o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of
the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No x
As of August 26, 2022, the registrant had
i54,437,964 shares of Common Stock, $0.01 par value per share, outstanding.
Current portion of borrowings and finance lease obligations
$
ii37,996/
$
ii43,379/
Accounts
payable
i340,943
i325,797
Accrued
expenses and other current liabilities
i211,247
i253,182
Current
portion of operating lease liabilities
i170,133
i195,516
Total
current liabilities
i760,319
i817,874
Convertible
senior notes, net
i298,521
i270,595
Long-term
debt and finance lease obligations
i99,287
i60,970
Long-term
operating lease liabilities
i552,190
i582,757
Other
long-term liabilities
i153,904
i160,289
Total
liabilities
i1,864,221
i1,892,485
Redeemable
noncontrolling interests
i10,277
i9,500
Commitments
and contingencies (Note 13)
i
i
Stockholders’
equity:
Preferred stock, $ii.01/
par value. Authorized ii10,000,000/
shares; iiiino///
shares issued and outstanding
i—
i—
Common
stock, $ii.01/ par value. Authorized ii150,000,000/
shares; issued ii142,771,946/ shares; outstanding i54,437,964
and i62,697,032 shares as of July 30, 2022 and January 29, 2022, respectively
Guess?, Inc. (the “Company” or “GUESS?”) designs,
markets, distributes and licenses a leading lifestyle collection of contemporary apparel and accessories for men, women and children that reflect the American lifestyle and European fashion sensibilities. The Company’s designs are sold in GUESS? owned stores, to a network of wholesale accounts that includes better department stores, selected specialty retailers and upscale boutiques and through the Internet. GUESS? branded products, some of which are produced under license, are also sold internationally through a series of retail store licensees and wholesale distributors.
iInterim
Financial Statements
In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheets as of July 30, 2022 and January 29, 2022, and the condensed consolidated statements of income, comprehensive income, cash flows and stockholders’ equity for the three and six months ended July 30, 2022 and July 31, 2021. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. Generally Accepted
Accounting Principles (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations and cash flows for the three and six months ended July 30, 2022 are not necessarily indicative of the results of operations to be expected for the full fiscal year.
These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended January 29, 2022.
i
Fiscal
Periods
The three and six months ended July 30, 2022 had the same number of days as the three and six months ended July 31, 2021. All references herein to “fiscal 2022” and “fiscal 2021” represent the results of the 52-week fiscal year ended January 29, 2022 and January 30, 2021, respectively. All references herein to “fiscal 2023” represent the 52-week fiscal year ending January 28, 2023.
i
COVID-19
Business Update
The COVID-19 pandemic is continuing to negatively impact certain regions of the Company’s business, especially in Asia where the Company’s operations for the quarter ended July 30, 2022 were impacted by capacity restrictions and temporary store closures. Overall, this resulted in the closure of a limited number of its directly operated stores as of July 30, 2022, mostly in Asia, the impact of which was minimal to the Company’s three and six months ended July 30, 2022 results.
The
COVID-19 pandemic has also contributed to disruptions in the overall global supply chain, contributing to industry-wide higher product and freight costs. The Company has been working actively to mitigate these headwinds to the extent possible through a number of global supply chain initiatives.
In light of the fluid nature of the pandemic, the Company continues to carefully monitor global and regional developments and respond appropriately. The Company also continues to strategically manage expenses in order to protect profitability and to mitigate, to the extent possible, the effect of the supply chain disruptions.
The accounting policies of the Company are set forth in further detail in Note 1 to the Company's Consolidated Financial Statements contained in the Company’s fiscal 2022 Annual Report on Form 10-K. The Company includes herein certain updates to those policies.
i
Use
of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosed in the accompanying notes. Significant areas requiring the use of management estimates relate to the allowances for doubtful accounts, sales return and markdown allowances, gift card and loyalty accruals, valuation of inventories, share-based compensation, income taxes, recoverability of deferred income taxes, unrecognized income tax benefits, the useful life of assets for depreciation and amortization, evaluation of asset impairment (including goodwill and long-lived assets, such as property and equipment and operating lease right-of-use (“ROU”) assets), pension obligations, workers’ compensation and medical self-insurance expense and accruals, litigation reserves
and restructuring expense and accruals. These estimates and assumptions may change as a result of the impact of global economic conditions, such as the uncertainty regarding the COVID-19 pandemic, the Russia-Ukraine conflict, and global inflationary pressures. Actual results could differ from those estimates. Revisions in estimates could materially impact the results of operations and financial position.
As discussed, the COVID-19 pandemic has negatively impacted the Company’s business. The Company’s operations could continue to be impacted in ways the Company is not able to predict today due to the evolving situation. While the
Company believes it has made reasonable accounting estimates based on the facts and circumstances available as of the reporting date, to the extent there are differences between these estimates and actual results, the Company’s results of operations and financial position could be materially impacted.
i
Revenue Recognition
The
Company recognizes the majority of its revenue from its direct-to-consumer (brick-and-mortar retail stores and concessions as well as e-commerce) and wholesale distribution channels at a point in time when it satisfies a performance obligation and transfers control of the product to the respective customer.
The Company also recognizes royalty revenue from its trademark license agreements. The Company’s trademark license agreements represent symbolic licenses that are dependent on the Company’s continued support over the term of the license agreement. The amount of revenue that is recognized from the licensing arrangements is based on sales-based royalty and advertising
fund contributions as well as specific fixed payments, where applicable. The Company’s trademark license agreements customarily provide for a multi-year initial term ranging from three to iten years and may contain options to renew prior to expiration for an additional multi-year period. The unrecognized portion of upfront payments is included in deferred royalties in accrued expenses and other long-term liabilities depending on the short or long-term nature of the payments to be recognized. As of July 30,
2022, the Company had $i5.0 million and $i12.4 million of deferred royalties related to these upfront payments included
in accrued expenses and other current liabilities and other long-term liabilities, respectively. This compares to $i5.1 million and $i14.3 million of deferred royalties related to these upfront payments included
in accrued expenses and other current liabilities and other long-term liabilities, respectively, at January 29, 2022. During the three and six months ended July 30, 2022, the Company recognized $i3.3 million and $i6.7
million in net royalties related to the amortization of deferred royalties, respectively. During the three and six months ended July 31, 2021, the Company recognized $i3.6 million and $i7.1
million in net royalties related to the amortization of deferred royalties, respectively.
Refer to Note 8 for further information on disaggregation of revenue by segment and country.
i
Allowance for Doubtful Accounts
In the normal course of business, the Company grants credit directly to
certain wholesale customers after a credit analysis is performed based on financial and other criteria. Accounts receivable are recorded net of an
allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses that may result from the inability of its wholesale customers and licensing partners to make their required payments. The
Company bases its allowances on analysis of the aging of accounts receivable at the date of the financial statements, assessments of historical and current collection trends, evaluation of the impact of current and future forecasted economic conditions and whether the Company has obtained credit insurance or other guarantees. Management performs regular evaluations concerning the ability of its customers and records a provision for doubtful accounts based on these evaluations.
As of July 30, 2022, approximately i52%
of the Company’s total net trade accounts receivable and i63% of its European net trade receivables were subject to credit insurance coverage, certain bank guarantees or letters of credit for collection purposes. The Company’s credit insurance coverage contains certain terms and conditions specifying
deductibles and annual claim limits. Management evaluates the creditworthiness of the counterparties to the credit insurance, bank guarantees, and letters of credit and records a provision for the risk of loss on these instruments based on these evaluations as considered necessary.
The Company’s credit losses for the periods presented were not significant compared to sales and did not significantly exceed management’s estimates. Refer to Note 5 for further information on the Company’s allowance for doubtful accounts.
i
Recently
Adopted Accounting Guidance
Convertible Instruments and Contracts in an Entity’s Own Equity
The Company adopted guidance to simplify the accounting for convertible instruments and contracts in an entity’s own equity and the diluted earnings per share computations for these instruments on January 30, 2022, using the modified retrospective transition method. The cumulative effect of the accounting change increased the carrying amount of the i2.00%
convertible senior notes due 2024 (the “Notes”) by $i27.5 million, reduced deferred income tax liabilities by $i6.2 million, reduced additional paid-in capital by $i43.1 million
and increased retained earnings by $i21.8 million, with no restatement of prior periods. Refer to Note 3 for the impact on the earnings per share calculation and Note 10 for the impact on the Notes.
Modifications or Exchanges of Freestanding Equity-Classified Written Call Options
The Financial Accounting Standards Board (“FASB”) issued authoritative guidance as to how
an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified in equity after modification or exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). The Company adopted this guidance on January 30, 2022 which had no
impact on the Company’s consolidated financial statement presentation or disclosures.
Recently Issued Accounting Guidance
Reference Rate Reform
The FASB issued guidance to provide temporary optional expedients to ease the potential burden in accounting for reference rate reform. This guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to certain criteria, referencing LIBOR or another reference rate expected to be discontinued. The FASB issued subsequent amendments to further clarify the scope of optional expedients and exceptions to derivatives affected
by the transition. The guidance is intended to help stakeholders during the global market-wide reference rate transition period.
The Company identified and will modify, if necessary, its loans and other financial instruments with attributes directly or indirectly influenced by LIBOR. The Company determined, of its current LIBOR
references
as outlined in Note 9 Borrowings and Finance Lease Obligations, Note 15 Fair Value Measurements, and Note 16 Derivative Financial Instruments, only the obligations under Mortgage Debt, credit facilities, and Interest Rate Swap Agreements are impacted by this guidance. The Company does not expect this guidance to have a material impact on its consolidated financial position, results of operations or cash flows.
(2) iiLease
Accounting/
The Company primarily leases its showrooms, advertising, licensing, sales and merchandising offices, remote distribution and warehousing facilities and retail and factory outlet store locations under operating lease agreements expiring on various dates through January 2039. The Company also leases some of its equipment, as well as computer hardware and software, under operating and finance lease agreements expiring on various dates through July 2027.
The Company’s lease agreements
primarily provide for lease payments based on a minimum annual rental amount, a percentage of annual sales volume, periodic adjustments related to inflation or a combination of such lease payments. Certain retail store leases provide for lease payments based upon the minimum annual rental amount and a percentage of annual sales volume, generally ranging from i3% to i28%,
when specific sales volumes are exceeded. The Company’s retail concession leases also provide for lease payments primarily based upon a percentage of annual sales volume, which averages approximately i32%.
In addition to the amounts as disclosed below, the Company has estimated additional operating lease commitments of approximately
$i22.5 million for leases where the Company has not yet taken possession of the underlying asset as of July 30, 2022. As such, the related operating lease ROU assets and operating lease liabilities have not been recognized in the Company’s condensed consolidated balance sheet as of July 30,
2022.
i
The components of leases are (in thousands):
Jul 30, 2022
Jan
29, 2022
Assets
Balance Sheet Location
Operating
Operating lease right-of-use assets
$
i651,925
$
i685,799
Finance
Property
and equipment, net
i20,692
i21,898
Total
lease assets
$
i672,617
$
i707,697
Liabilities
Balance
Sheet Location
Current:
Operating
Current portion of operating lease liabilities
$
i170,133
$
i195,516
Finance
Current
portion of borrowings and finance lease obligations
1During
the three and six months ended July 30, 2022 and July 31, 2021, net gains on lease modifications related primarily to the early termination of lease agreements for certain of the Company’s retail locations. Operating lease costs for these retail locations prior to the early termination were included in cost of product sales.
2During the three and six months ended July 30, 2022, variable lease costs included certain rent concessions of approximately $i2.2 million
and $i3.5 million, respectively, received by the Company, primarily in Europe, related to the COVID-19 pandemic. During the three and six months ended July 31, 2021, variable lease costs included certain rent concessions of approximately $i5.8 million
and $i11.9 million, respectively, received by the Company, primarily in Europe, related to the COVID-19 pandemic.
iiMaturities
of the Company’s operating and finance lease liabilities as of July 30, 2022 are (in thousands):
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
$
i116,202
$
i115,264
New
operating ROU assets obtained in exchange for lease liabilities
$
i91,331
$
i63,238
/
Impairment
During
each of the three and six months ended July 30, 2022 and July 31, 2021 there were immaterial ROU asset impairment charges recorded primarily related to Europe. The asset impairment charges were determined based on the excess of carrying value over the fair value of the ROU assets. The Company uses estimates of market participant rents to calculate fair value of the ROU assets. Refer to Note 15 for more information on the Company’s impairment testing.
(3)iEarnings
per Share
On January 30, 2022, the Company adopted the authoritative guidance which simplifies the accounting for convertible instruments and contracts in an entity’s own equity using the modified retrospective method. Following adoption, diluted earnings per share related to the Notes is calculated using the if-converted method. The number of dilutive shares is based on the initial conversion rate associated with the Notes.
Prior to adoption, the Company applied the treasury stock method when calculating the potential dilutive effect of the Notes, if any. As the
Company expects to settle the principal amount of its outstanding Notes in cash and any excess in shares, only the amounts in excess of the principal amount were considered in diluted earnings per share, if applicable. Refer to Note 1 and Note 10 for more information regarding the Notes.
In addition, the Company granted certain nonvested stock units, subject to certain performance-based or market-based vesting conditions, as well as continued service requirements through the respective vesting periods. These nonvested stock units are included in the computation of diluted net earnings per common share attributable to common stockholders only to the extent the underlying performance-based or market-based vesting conditions are satisfied as of the end of the reporting period, or would be considered satisfied if the end of the reporting period
was the end of the related contingency period, and the results would be dilutive under the treasury stock method.
The
computation of basic and diluted net earnings per common share attributable to common stockholders is (in thousands, except per share data):
Three Months Ended
Six Months Ended
Jul
30, 2022
Jul 31, 2021
Jul 30, 2022
Jul 31, 2021
Net earnings attributable to Guess?, Inc.
$
i23,962
$
i61,062
$
i31,932
$
i73,068
Less
net earnings attributable to nonvested restricted stockholders
i264
i699
i264
i775
Net
earnings attributable to common stockholders
i23,698
i60,363
i31,668
i72,293
Add
interest expense related to the Notes
i988
i—
i1,925
i—
Net
earnings attributable to common stockholders used in diluted computations
$
i24,686
$
i60,363
$
i33,593
$
i72,293
Weighted
average common shares used in basic computations
i56,954
i64,336
i59,003
i64,185
Effect
of dilutive securities:
Stock options and restricted stock units
i1,528
i1,738
i1,623
i1,748
The
Notes
i11,817
i—
i11,817
i—
Weighted
average common shares used in diluted computations
i70,299
i66,074
i72,443
i65,933
Net
earnings per common share attributable to common stockholders:
Basic
$
i0.42
$
i0.94
$
i0.54
$
i1.13
Diluted
$
i0.35
$
i0.91
$
i0.46
$
i1.10
/
During
the three months ended July 30, 2022 and July 31, 2021, equity awards granted for i1,209,255 and i272,705
shares, respectively, of the Company’s common stock and for the six months ended July 30, 2022 and July 31, 2021, equity awards granted for i1,294,538 and i326,474
shares, respectively, of the Company’s common stock were outstanding but were excluded from the computation of diluted weighted average common shares and common equivalent shares outstanding because the assumed proceeds, as calculated under the treasury stock method, resulted in these awards being antidilutive. For the three and six months ended July 30, 2022, the Company excluded ii594,985/
nonvested stock units which were subject to the achievement of performance-based or market-based vesting conditions from the computation of diluted weighted average common shares and common equivalent shares outstanding because these conditions were not achieved as of July 30, 2022. For the three and six months ended July 31, 2021, there were ii695,566/
nonvested stock units subject to the achievement of performance-based or market-based vesting conditions that were excluded from the computation of diluted weighted average common shares and common equivalent shares outstanding as the respective conditions were not achieved as of July 31, 2021.
Warrants to purchase approximately ii11.6/
million shares of the Company’s common shares at an initial strike price of $ii46.88/
per share were outstanding as of July 30, 2022 and July 31, 2021. These warrants were excluded from the computation of diluted earnings per share since the warrants’ adjusted strike price was greater than the average market price of the Company’s common stock during the three and six months ended July 30, 2022 and July 31, 2021.
(4)iStockholders'
Equity
Share Repurchase Program
During fiscal 2022, the Board of Directors terminated its previous 2012 $i500 million share repurchase program (the “2012 Share Repurchase Program”) and authorized a new $i200 million
share repurchase program (the “2021 Share Repurchase Program”). On March 14, 2022, the Board of Directors expanded its repurchase authorization under the 2021 Share Repurchase Program by $i100 million. Repurchases may be made on the open market or in privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or other available
means. There is no minimum or maximum number of shares to be repurchased under the program and the program may be discontinued at any time, without prior notice.
On March 18, 2022, pursuant to existing share repurchase authorizations, the Company entered into an accelerated share repurchase agreement (the “2022 ASR Contract”) with a financial institution (the “2022 ASR Counterparty”) to repurchase an aggregate of $i175.0 million
of the Company’s common stock. Under the 2022 ASR Contract, the Company made a payment of $i175.0 million to the 2022 ASR Counterparty and received an initial delivery of approximately i3.3 million
shares of common stock on March 21, 2022. The Company received a final settlement of an additional i5.2 million shares under the 2022 ASR Contract on June 24, 2022.
During the three and six months ended July
30, 2022, the Company repurchased i5,196,027 and i8,985,603 shares,
respectively, of the Company’s common stock under the Company’s 2021 Share Repurchase Program at an aggregate cost of $i105.0 million and $i186.7
million, respectively, which is inclusive of the shares repurchased under the 2022 ASR Contract. There were iino/
shares repurchased under the 2012 Share Repurchase Program during the three and six months ended July 31, 2021. As of July 30, 2022, the Company had remaining authority under the 2021 Share Repurchase Program to purchase $i62.3 million of its common stock.
Dividends
i
The
following sets forth the cash dividend declared per share:
Three Months Ended
Six Months Ended
Jul 30, 2022
Jul 31, 2021
Jul
30, 2022
Jul 31, 2021
Cash dividend declared per share
$
i0.2250
$
i0.1125
$
i0.4500
$
i0.2250
/
In
accordance with the terms of the indenture governing the Notes, the Company has adjusted the conversion rate and the conversion price of the Notes for quarterly dividends exceeding $i0.1125 per share.
For each of the periods presented, dividends
paid also included the impact from vesting of restricted stock units that are considered non-participating securities and are only entitled to dividend payments once the respective awards vest.
Decisions on whether, when and in what amounts to continue making any future dividend distributions will remain at all times entirely at the discretion of the Company’s Board of Directors, which reserves the right to change or terminate the Company’s dividend practices at any time and for any reason without prior notice. The payment of cash dividends in the future will be based upon a number of business, legal and other considerations, including the Company’s cash flow from operations,
capital expenditures, debt service and covenant requirements, cash paid for income taxes, earnings, share repurchases, economic conditions and U.S. and global liquidity.
Accounts receivable is summarized as follows (in thousands):
Jul 30, 2022
Jan 29,
2022
Trade
$
i267,202
$
i299,160
Royalty
i36,538
i33,790
Other
i6,491
i6,945
i310,231
i339,895
Less
allowances
i8,572
i11,039
$
i301,659
$
i328,856
/
Accounts
receivable consists of trade receivables relating primarily to the Company’s wholesale business in Europe and, to a lesser extent, to its wholesale businesses in the Americas and Asia, royalty receivables relating to its licensing operations, credit card and retail concession receivables related to its retail businesses and certain other receivables. Other receivables generally relate to amounts due to the Company that result from activities that are not related to the direct sale of the Company’s products or collection of royalties.
(6)iInventories
i
Inventories
consist of the following (in thousands):
Jul 30, 2022
Jan 29, 2022
Raw materials
$
i3,187
$
i1,228
Work
in progress
i3
i3
Finished
goods
i532,340
i461,064
$
i535,530
$
i462,295
/
The
balances include an allowance to write down inventories to the lower of cost or net realizable value of $i30.7 million and $i31.8 million as of July 30,
2022 and January 29, 2022, respectively.
Income tax expense for the interim periods is computed using the income tax rate estimated to be applicable for the full fiscal year, adjusted for discrete items. The Company’s effective income tax rate was an expense of i35.8% for the six months ended July 30, 2022 compared to i23.3%
for the six months ended July 31, 2021. The change in the effective income tax rate was primarily due to a decrease in earnings, which included losses in certain tax jurisdictions for which the Company did not recognize an income tax benefit, in fiscal 2023 compared to the same prior-year period.
Intra-Entity Transaction
During the third quarter of fiscal 2022, the Company completed an intra-entity transfer of intellectual property rights from a U.S. entity to a wholly-owned Swiss subsidiary, more closely aligning the Company’s intellectual property rights with its business operations.
This transaction resulted in a taxable gain in the U.S. The U.S. taxable gain generated by this intercompany transfer of intellectual property was primarily offset by the recognition of a deferred income tax asset in the Swiss subsidiary.
Unrecognized Income Tax Benefit
From time-to-time, the Company is subject to routine income and other income tax audits on various income tax matters around the world in the ordinary course of business. As of July 30, 2022, no major income tax audits were ongoing.
As of July 30, 2022 and January 29, 2022, the
Company had $i60.3 million and $i57.5 million, respectively,
of aggregate accruals for uncertain income tax positions, including penalties and interest. This includes an accrual of $ii19.9/ million
for the estimated transition tax (excluding interest) related to the 2017 Tax Cuts and Jobs Act (the “Tax Reform”) and $ii20.6/ million
for the intra-entity transfer of intellectual property rights from a U.S. entity to a wholly-owned Swiss subsidiary, substantially offset by the related deferred income tax benefit recorded by the Swiss subsidiary. The Company reviews and updates the estimates used in the accrual for uncertain income tax positions, as appropriate, as more definitive information or interpretations become available from income taxing authorities, and on the completion of income tax audits, the receipt of assessments, expiration of statutes of limitations, or occurrence of other events.
During the second quarter of fiscal 2021, the Company became aware of a foreign withholding income tax regulation that could be interpreted to apply to certain of its previous transactions. The
Company currently does not expect its exposure, if any, will have a material impact on its condensed consolidated financial position, results of operations or cash flows.
Indefinite Reinvestment Assertion
The Company has historically considered the undistributed earnings of its foreign subsidiaries to be indefinitely reinvested. As a result of the Tax Reform, the Company had a substantial amount of previously taxed earnings that could be distributed to the U.S. without additional U.S. taxation. The Company continues to evaluate its plans
for reinvestment or repatriation of unremitted foreign earnings and regularly reviews its cash positions and determination of indefinite reinvestment of foreign earnings. If the Company determines that all or a portion of such foreign earnings are no longer indefinitely reinvested, the Company may be subject to additional foreign withholding taxes and U.S. state income taxes, beyond the one-time transition tax. As of July 30, 2022, the Company determined that approximately $i18.3 million
of such foreign earnings are no longer indefinitely reinvested. The incremental tax cost to repatriate these earnings to the U.S. is immaterial. The Company intends to indefinitely reinvest the remaining earnings from the Company’s foreign subsidiaries for which a deferred income tax liability has not already been recorded. It is not practicable to estimate the amount of tax that might be payable if these earnings were repatriated due to the complexities associated with the hypothetical calculation.
The Company’s businesses are grouped into ifive
reportable segments for management and internal financial reporting purposes: Americas Retail, Americas Wholesale, Europe, Asia, and Licensing. The Company’s Americas Retail, Americas Wholesale, Europe and Licensing reportable segments are the same as their respective operating segments. Certain components of the Company’s Asia operating segment are separate operating segments based on region, which have been aggregated into the Asia reportable segment for disclosure purposes.
Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before corporate performance-based compensation costs, asset impairment charges, net gains (losses) on lease modifications, restructuring charges and certain non-recurring credits
(charges), if any. The Company believes this segment reporting reflects how its business segments are managed and how each segment’s performance is evaluated by the Company’s chief operating decision maker to assess performance and make resource allocation decisions.
i
Net revenue and earnings (loss) from operations are summarized
(in thousands):
1During
the three and six months ended July 30, 2022, the Company recognized asset impairment charges related primarily to property and equipment of certain retail locations resulting from under-performance and expected store closures. During the three and six months ended July 31, 2021, the Company recognized asset impairment charges related primarily to certain operating lease ROU assets and property and equipment of certain retail stores resulting from lower revenue and future cash flow projections from the ongoing effects of the COVID-19 pandemic and expected store closures. Refer to Note 2 and Note 15 for more information regarding these asset impairment charges.
/
2 During
the three and six months ended July 30, 2022 and July 31, 2021, the Company recorded net gains on lease modifications related primarily to the early termination of certain lease agreements.
The
below presents information regarding geographic areas in which the Company operated. Net revenue is classified primarily based on the country where the Company’s customer is located (in thousands):
Three Months Ended
Six
Months Ended
Jul 30, 2022
Jul 31, 2021
Jul 30, 2022
Jul 31, 2021
Net revenue:
U.S.
$
i159,134
$
i180,265
$
i328,261
$
i337,331
Italy
i72,695
i64,803
i129,061
i112,356
Germany
i49,063
i52,204
i84,904
i86,882
Canada
i43,982
i34,425
i84,560
i61,065
Spain
i36,674
i31,737
i66,787
i57,244
South
Korea
i28,125
i26,802
i64,009
i54,611
Other
countries
i228,249
i216,455
i427,413
i395,679
Total
product sales
i617,922
i606,691
i1,184,995
i1,105,168
Net
royalties
i24,768
i21,933
i51,168
i43,458
Net
revenue
$
i642,690
$
i628,624
$
i1,236,163
$
i1,148,626
/
Due
to the seasonal nature of the Company’s business segments, the above net revenue and operating results are not necessarily indicative of the results that may be expected for the full fiscal year.
(9)iBorrowings and Finance Lease Obligations
i
Borrowings
and finance lease obligations are summarized (in thousands):
Jul 30, 2022
Jan 29, 2022
Term loans
$
i36,362
$
i48,253
Finance
lease obligations
i21,661
i22,943
Mortgage
debt
i17,524
i17,860
Borrowings
under credit facilities
i58,261
i12,201
Other
i3,475
i3,092
i137,283
i104,349
Less
current installments
i37,996
i43,379
Long-term
debt and finance lease obligations
$
i99,287
$
i60,970
/
Term
Loans
As a precautionary measure to ensure financial flexibility and maintain maximum liquidity in response to the COVID-19 pandemic, the Company entered into term loans with certain banks primarily in Europe during fiscal 2021. These loans are primarily unsecured, have remaining terms ranging from one to ithree years and incur interest at annual rates ranging between i1.3%
to i2.2%. As of July 30, 2022 and January 29, 2022, the Company had outstanding borrowings of $i36.4
million and $i48.3 million under these borrowing arrangements, respectively.
Finance Lease Obligations
During fiscal 2018, the Company relocated its European distribution center to the Netherlands. The finance lease primarily provides for monthly minimum lease payments through May 2027 with an effective interest rate of approximately i6%.
The Company has also entered into finance leases for equipment used in its European distribution centers. These finance lease obligations totaled $i16.4 million and $i19.6
million as of July 30, 2022 and January 29, 2022, respectively.
The Company also has smaller finance leases related primarily to computer hardware and software. As of July 30, 2022 and January 29, 2022, these finance lease obligations totaled $i5.2 million and $i3.4
million, respectively.
During fiscal 2017, the Company entered into a iten-year
$i21.5 million real estate secured loan (the “Mortgage Debt”) which is secured by the Company’s U.S. distribution center based in Louisville, Kentucky. The Mortgage Debt requires the Company to comply with a fixed charge coverage ratio on a trailing four-quarter basis if consolidated cash, cash equivalents, short-term investment balances and availability under borrowing arrangements fall below certain levels. In addition, the Mortgage
Debt contains customary covenants, including covenants that limit or restrict the Company’s ability to incur liens on the mortgaged property and enter into certain contractual obligations. Upon the occurrence of an event of default under the Mortgage Debt, the lender may terminate the Mortgage Debt and declare all amounts outstanding to be immediately due and payable. The Mortgage Debt specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults.
Credit Facilities
2021 Credit Facility
During fiscal 2021, the
Company entered into an amendment of its senior secured asset-based revolving credit facility with Bank of America, N.A. and other lenders (as amended, the “2021 Credit Facility”). The 2021 Credit Facility provides for a borrowing capacity in an amount up to $i120 million, including a Canadian sub-facility up to $i20
million, subject to a borrowing base. Based on applicable accounts receivable and inventory balances as of July 30, 2022, the Company could have borrowed up to $i110 million under the 2021 Credit Facility. The 2021 Credit Facility has an option to expand the borrowing capacity by up to $i180
million subject to certain terms and conditions, including the willingness of existing or new lenders to assume such increased amount. The 2021 Credit Facility is available for direct borrowings and the issuance of letters of credit, subject to certain letters of credit sublimits, and may be used for working capital and other general corporate purposes. As of July 30, 2022, the Company had $i9.6 million in outstanding standby letters
of credit, ino outstanding documentary letters of credit and ino outstanding borrowings under the 2021 Credit Facility. As of January 29, 2022, the
Company had $i10.1 million in outstanding standby letters of credit, ino outstanding documentary letters of credit and ino
outstanding borrowings under the 2021 Credit Facility.
The 2021 Credit Facility requires the Company to comply with a fixed charge coverage ratio on a trailing four-quarter basis if a default or an event of default occurs under the 2021 Credit Facility or generally if borrowings exceed i80% of the borrowing base. In addition, the 2021 Credit Facility contains customary covenants, including covenants
that limit or restrict the Company and certain of its subsidiaries’ ability to: incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, merge or consolidate and enter into certain transactions with affiliates. Upon the occurrence of an event of default under the 2021 Credit Facility, the lenders may cease making loans, terminate the 2021 Credit Facility and declare all amounts outstanding to be immediately due and payable. The 2021 Credit Facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults, and material judgment defaults. The 2021 Credit
Facility allows for both secured and unsecured borrowings outside of the 2021 Credit Facility up to specified amounts.
Long-Term 2022 Credit Facility
On May 5, 2022, Guess Europe Sagl, a wholly owned subsidiary of the Company, entered into a credit agreement (the “Credit Agreement”) for a €i250 million revolving
credit facility (the “2022 Credit Facility”) with an initial ifive-year term. The Company has an option to extend the maturity date by up to itwo years and an option to expand the 2022 Credit Facility by up to €i100 million,
subject to certain conditions. At closing, there were ino direct borrowings under the 2022 Credit Facility. The Company terminated certain European short-term borrowing arrangements totaling €i120 million
with various banks in Europe concurrently with the closing of the Credit Agreement.
Borrowings under the 2022 Credit Facility bear interest based on the daily balance outstanding at the Euro Interbank Offered Rate (EURIBOR) plus an applicable margin (varying from i0.85%
to i1.20%), provided that EURIBOR may not be less than i0.0%. The 2022 Credit Facility carries a commitment fee equal to the available but unused borrowing capacity multiplied by i35%
of an applicable margin (varying from i0.85% to i1.20%).
The Company is also required to pay a utilization fee on the total amount of the loans outstanding under the 2022 Credit Facility at rates varying from i0.10% to i0.20%,
depending on the balance outstanding. The applicable margins are calculated quarterly and vary based on the leverage ratio of the guarantor and its subsidiaries as set forth in the Credit Agreement.
The Credit Agreement contains various annual sustainability key performance targets, the achievement of which would result in an adjustment to the interest margin ranging from a plus i5
basis points to a minus i5 basis points per year. The Credit Agreement includes a financial covenant requiring a maximum leverage ratio of the guarantor and its subsidiaries. In addition, the Credit Agreement includes customary representations and warranties, affirmative and negative covenants and events of default. As of July 30,
2022, the Company had ino outstanding standby letters of credit, ino outstanding
documentary letters of credit, $i51.1 million in outstanding borrowings and $i204.5 million available for future borrowings under the 2022 Credit Facility.
Other
Credit Facilities
The Company, through its China subsidiary, maintains a short-term uncommitted bank borrowing agreement that provides for a borrowing capacity up to $i30 million, primarily for working capital purposes. The Company had $i5.6
million and $i12.2 million in outstanding borrowings under this agreement as of July 30, 2022 and January 29, 2022, respectively.
The Company, through its Japan subsidiary, maintains a short-term uncommitted bank borrowing agreement that provides for a borrowing capacity up to $i3.8 million,
primarily for working capital purposes. The Company had $i1.5 million outstanding borrowings under this agreement as of July 30, 2022 and ino
outstanding borrowings as of January 29, 2022.
From time-to-time, the Company will obtain other financing in foreign countries for working capital to finance its local operations.
(10)Convertible Senior Notes and Related Transactions
i2.00%
Convertible Senior Notes due 2024
In April 2019, the Company issued $i300 million principal amount of the Notes in a private offering. In connection with the issuance of the Notes, the Company entered into an indenture (the “Indenture”)
with respect to the Notes with U.S. Bank N.A., as trustee (the “Trustee”). The Notes are senior unsecured obligations of the Company and bear interest at an annual rate of i2.00% payable semi-annually in arrears on April 15 and October 15 of each year. The Notes will mature on April 15, 2024, unless earlier repurchased or converted in accordance with their terms.
The Notes are convertible in
certain circumstances into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election, at an initial conversion rate of 38.7879 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $i25.78
per share, subject to adjustment upon the occurrence of certain events. In accordance with the terms of the indenture governing the Notes, the Company has adjusted the conversion rate and the conversion price of the Notes for quarterly dividends exceeding $i0.1125 per share (currently
$i25.39). Prior to November 15, 2023, the Notes are convertible only upon the occurrence of certain events and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the Notes.
Following certain corporate events described in the Indenture that occur prior to the maturity date, the conversion
rate will be increased for a holder who elects to convert its Notes in connection with such corporate event in certain circumstances. The Notes are not redeemable prior to maturity, and no sinking fund is provided
for the Notes. As of July 30, 2022, none of the conditions allowing holders of the Notes to convert had been met. The Company expects to settle the principal
amount of the Notes in 2024 in cash and any excess in shares.
On January 30, 2022, the Company adopted the authoritative guidance which simplifies the accounting for convertible instruments and contracts in an entity’s own equity using the modified retrospective method. Prior to adoption, the Company separated the Notes into liability and equity components. The liability component was recorded at fair value. The equity component represented the difference between the proceeds from the issuance of the Notes and the fair value of the liability component. The equity component was not subject to remeasurement as long as the
equity component continued to meet the conditions for equity classification. The excess of the liability component over its carrying amount (“debt discount”) was being amortized to interest expense over the term of the Notes. During the three and six months ended July 31, 2021, the Company recorded $i2.8 million and $i5.6
million, respectively, of interest expense related to the amortization of the debt discount. As a result of the adoption of the authoritative guidance on January 30, 2022, the Company derecognized the remaining unamortized debt discount on the Notes and recorded iino/ interest
expense related to the amortization of the debt discount during the three and six months ended July 30, 2022. Refer to Note 1 for further information regarding this recently adopted guidance.
Debt issuance costs were comprised of $i3.8 million of discounts and commissions payable to the initial purchasers and third-party offering costs of approximately $i1.5 million.
Debt issuance costs were recorded as a contra-liability and are presented net against the Notes balance on the Company’s condensed consolidated balance sheets. These costs are being amortized to interest expense over the term of the Notes.
i
The Notes consist of the following (in thousands):
1Due
to adoption of the authoritative guidance, unamortized debt discount was derecognized on January 30, 2022.
2As a result of adoption of the authoritative guidance on January 30, 2022, the equity component was eliminated and recorded as an adjustment to retained earnings. As of July 30, 2022, the balance is associated with convertible bond hedge issuance costs and deferred income taxes, which are not impacted by the adoption. As of January 29, 2022, the balance was included in paid-in capital within stockholders’ equity on the condensed consolidated balance sheets and is net of debt issuance costs and deferred taxes.
/
As
of July 30, 2022 and January 29, 2022, the fair value of the Notes, net of unamortized debt discount and debt issuance costs, was approximately $i301.6 million and $i303.1
million, respectively. The fair value of the Notes is determined based on inputs that are observable in the market and have been classified as Level 2 in the fair value hierarchy.
Convertible Bond Hedge and Warrant Transactions
In connection with the offering of the Notes, the Company entered into convertible note hedge transactions whereby the Company had the option to purchase a total of approximately i11.6
million shares of its common stock at an initial strike price of approximately $i25.78 per share, in each case subject to adjustment in certain circumstances. The total cost of the convertible note hedge transactions was $i61.0 million.
In addition, the Company sold warrants whereby the holders of the warrants had the option to purchase a total of approximately i11.6 millionshares of the Company’s common stock at an initial strike price of $i46.88per share. The Company received $i28.1 million in cash proceeds from the sale of these warrants. Both the number
of
shares underlying the convertible note hedges and warrants and the strike price of the instruments are subject to customary adjustments. In accordance with the terms of the convertible note hedge confirmations and warrant confirmations, respectively, the Company has adjusted the strike prices with respect to the convertible note hedges and the warrants for quarterly dividends exceeding $i0.1125 per share
(currently $i46.16). Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset dilution from the conversion of the Notes to the extent the market price per share of the Company’s common stock exceeds the adjusted strike price of the convertible note hedges. The warrant transaction may have a dilutive effect with respect to the Company’s common stock
to the extent the market price per share of the Company’s common stock exceeds the adjusted strike price of the warrants. The convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period.
As of July 30, 2022, there was ino deferred income
tax liability in connection with the debt discount. As of January 29, 2022, the Company had a deferred income tax liability of $i6.2 million in connection with the debt discount included in deferred income tax assets on the Company’s condensed consolidated balance sheet. As of both July 30,
2022 and January 29, 2022, the Company had a deferred income tax asset of $ii6.9/
million in connection with the convertible note hedge transactions. The net deferred income tax impact was included in deferred income tax assets on the Company’s condensed consolidated balance sheets.
(11)iShare-Based Compensation
i
The
following summarizes the share-based compensation expense recognized under all of the Company’s stock plans (in thousands):
Three Months Ended
Six Months Ended
Jul
30, 2022
Jul 31, 2021
Jul 30, 2022
Jul 31, 2021
Stock options
$
i712
$
i907
$
i1,312
$
i1,814
Stock
awards/units
i5,852
i3,837
i9,224
i6,910
Employee
Stock Purchase Plan
i63
i58
i143
i138
Total
share-based compensation expense
$
i6,627
$
i4,802
$
i10,679
$
i8,862
/
Unrecognized
compensation cost related to nonvested stock options and nonvested stock awards/units totaled approximately $i2.2 million and $i33.1
million, respectively, as of July 30, 2022. This cost is expected to be recognized over a weighted average period of i1.7 years.
Grants
On June 3, 2022, the Company made a grant
of i451,830 nonvested stock units to certain of its executive employees. These nonvested stock units are subject to certain performance-based or market-based vesting conditions.
Annual Grants
On May 10, 2022, the
Company made an annual grant of i503,960 nonvested stock awards/units to its employees.
Performance-Based Awards
The Company has granted certain nonvested stock units subject to performance-based vesting conditions
to select executive officers. Each award of nonvested stock units generally has an initial vesting period from the date of the grant through either (i) the end of the first fiscal year or (ii) the first anniversary of the date of grant, followed by annual vesting periods which may range from two-to-ithree years.
The Company has granted certain nonvested stock units subject to market-based vesting conditions to select executive officers. These market-based awards include (i) units where the number of shares that may ultimately vest will equal i0% to i150%
of the target number of shares, subject to the performance of the Company’s total stockholder return (“TSR”) relative to the TSR of a select group of peer companies over a ithree-year period and (ii) units scheduled to vest based on the attainment of certain absolute stock price levels over a ifour-year
period. Vesting is also subject to continued service requirements through the vesting date.
i
The following summarizes the activity for nonvested market-based units during the six months ended July 30, 2022:
On
April 22, 2022, the Company’s stockholders approved an amendment and restatement of the Guess?, Inc. 2004 Equity Incentive Plan (the “2004 Plan”). The amendment and restatement of the 2004 Plan (a) increased the aggregate number of shares of the Company’s common stock available for award grants under the 2004 Plan by i680,000
shares (from i29,100,000 shares to i29,780,000
shares), (b) changed the ratio at which a “Full-Value Award” (any award granted under the 2004 Plan other than a stock option or stock appreciation right) counts against the total share limit under the 2004 Plan from i3.54 shares for every one share actually issued in connection with such award to i1.6
shares for every one share actually issued in connection with such award, (c) extended the Company’s ability to grant new awards under the 2004 Plan through March 26, 2032, and (d) made members of the Company’s Board of Directors who are not employees of the Company or any of its subsidiaries eligible to receive award grants under the 2004 Plan.
(12)iRelated
Party Transactions
The Company and its subsidiaries periodically enter into transactions with other entities or individuals that are considered related parties, including certain transactions with entities owned by, affiliated with, or for the respective benefit of, Paul Marciano, who is an executive and member of the Board of the Company, and Maurice Marciano, who is also a member of the Board, and certain of their children (the “Marciano Entities”).
Leases
The Company leases warehouse
and administrative facilities, including the Company’s North American corporate headquarters in Los Angeles, California, from partnerships affiliated with the Marciano Entities and
certain of their affiliates. There were ifour
of these leases in effect as of July 30, 2022 with expiration or option exercise dates ranging from calendar years 2023 to 2030.
Aggregate lease costs recorded under these ifour related party leases were approximately $i4.5
million and $i4.3 million for the six months ended July 30, 2022 and July 31, 2021, respectively. The Company believes the terms of the related party leases have not been significantly affected by the fact the Company
and the lessors are related.
Aircraft Arrangements
The Company periodically charters aircraft owned by the Marciano Entities through informal arrangements with the Marciano Entities and independent third-party management companies contracted by such Marciano Entities to manage their aircraft. The total fees paid under these arrangements for the six months ended July 30, 2022 and July 31, 2021 were approximately $i1.0
million and $i1.9 million, respectively.
Minority Investment
The Company owns a i30%
interest in a privately held men’s footwear company (the “Footwear Company”) in which the Marciano Entities also own a i45% interest. In December 2020, the Company provided the Footwear Company with a revolving credit facility for $i2.0
million, which provides for an annual interest rate of i2.75% and matures in November 2023. As of both July 30, 2022 and January 29, 2022, the Company had a note receivable of $ii0.2/
million included in other assets in its condensed consolidated balance sheets related to outstanding borrowings by the Footwear Company under this revolving credit facility.
In May 2022, the Company entered into a Fulfillment Services Agreement with the Footwear Company under which the Company will provide certain fulfillment services for the Footwear Company’s U.S. wholesale and e-commerce businesses from the Company’s U.S distribution center on a cost-plus i5%
basis. In June 2022, the Company (through a wholly-owned Swiss subsidiary) entered into a Distributorship Agreement with the Footwear Company under which the Company was designated as the exclusive distributor (excluding e-commerce) for the Footwear Company in the European Union and other specified countries. The Distributorship Agreement provides for (i) the Company to receive a i35%
discount from the Footwear Company’s wholesale prices, (ii) no minimum sales requirements or advertising spending requirements for the Company; (iii) an initial i15 month term with annual renewals thereafter and (iv) other standard terms and conditions for similar arrangements. During the three months ended July 30, 2022, there were ino
fees paid with respect to the U.S. fulfillment services and under $i5,000 in amounts paid related to the distributorship arrangements.
Vendor Purchases
The Company purchases faux fur products from a privately-held fashion accessories company (the “Fashion Company”). Mr. Maurice Marciano,
Mr. Paul Marciano and Mr. Carlos Alberini own on a combined basis i20% of the outstanding common equity interests in the Fashion Company (with the Marcianos jointly owning i16%
and Mr. Alberini owning i4%). The total payments made by the Company to the Fashion Company were approximately $i1.5
million and $i0.4 million for the six months ended July 30, 2022 and July 31, 2021, respectively. The Company believes that the price paid by the Company for the Fashion Company’s products and the terms of the transactions between the
Company and the Fashion Company have not been affected by this passive investment of Messrs. Marcianos and Mr. Alberini in the Fashion Company.
(13) iCommitments and Contingencies
Investment Commitments
As of July 30, 2022, the
Company had an unfunded commitment to invest €i11.0 million ($i11.2 million) in a private equity fund. Refer to Note 15 for further information.
The Company is involved in legal proceedings, arising both in the ordinary course of business and otherwise, including the proceedings described below as well as various other claims and other matters incidental to the Company’s business. Unless otherwise stated, the resolution of any particular proceeding is not currently expected to have a material adverse impact on the Company’s financial position, results of operations or cash flows.
Even if such an impact could be material, the Company may not be able to estimate the reasonably possible loss or range of loss until developments in the proceedings have provided sufficient information to support an assessment.
The Company has received customs tax assessment notices from the Italian Customs Agency (“ICA”) regarding its customs tax audit of ione
of the Company’s European subsidiaries for the period from July 2010 through December 2012. Such assessments totaled €i9.8 million ($i10.0
million), including potential penalties and interest. The Company strongly disagreed with the ICA’s positions and therefore filed appeals with the Milan First Degree Tax Court (“MFDTC”). Those appeals were split into a number of different cases that were then heard by different sections of the MFDTC. The MFDTC ruled in favor of the Company on all of these appeals. The ICA subsequently appealed €i9.7
million ($i9.9 million) of these favorable MFDTC judgments with the Appeals Court. To date, €i8.5 million
($i8.7 million) have been decided in favor of the Company and €i1.2
million ($i1.2 million) have been decided in favor of the ICA. The Company believes that the unfavorable Appeals Court ruling is incorrect and inconsistent with the prior rulings on similar matters by both the MFDTC and other judges within the Appeals Court, and has appealed the decision to the Supreme Court. The ICA has appealed most of the favorable Appeals Court rulings to the Supreme Court. To date, of the cases that have been appealed to the Supreme Court, €i0.4
million ($i0.4 million) have been decided in favor of the Company based on the merits of the case and €i1.1
million ($i1.1 million) have been remanded back to the lower court for further consideration. There can be no assurances the Company will be successful in the remaining appeals. It also continues to be possible that the Company will receive similar or even larger assessments for periods subsequent to December 2012 or other claims or charges
related to the matter in the future. Although the Company believes that it has a strong position and will continue to vigorously defend this matter, it is unable to predict with certainty whether or not these efforts will ultimately be successful or whether the outcome will have a material impact on the Company’s financial position, results of operations or cash flows.
On January 19, 2021, a former model for the Company filed an action against the Company’s Chief Creative Officer and the
Company in the California Superior Court in Los Angeles (Jane Doe v. Paul Marciano, et al.). The complaint asserted several claims based on allegations that the former model was treated improperly by Mr. Paul Marciano and retaliated against by the Company. The complaint sought an unspecified amount of general damages, medical expenses, lost earnings, punitive damages and attorneys’ fees. As described in more detail below, the Company and Mr. Paul Marciano entered into a settlement agreement in August 2022 with the plaintiff in the January 2021 action, resolving the January 2021 action.
In March and April 2021, the Company received separate communications from two other
individuals containing similar allegations against Mr. Paul Marciano and the Company. Each individual who contacted the Company in March 2021 and April 2021 was represented by the same attorney who represented the plaintiff in the January 2021 action. Though no complaint was filed with respect to the allegations in the March 2021 letter and Mr. Paul Marciano and the Company disputed each of those allegations fully, in order to avoid the cost of litigation and without admitting liability or fault, the Company and Mr. Paul Marciano entered into a settlement agreement with the individual who sent the March 2021 letter, resolving the claims
for an aggregate total amount of $i300,000 in July 2021.
On October 22, 2021, the individual who sent the April 2021 letter filed an action against Mr. Paul Marciano and the Company in the United States District Court for the Central District of California (Jane Doe 3 v. Paul Marciano, et al.). The complaint asserted a claim under the Trafficking Victims Protection Act based on allegations
that the individual was treated improperly by Mr. Paul Marciano. The complaint sought an unspecified amount of compensatory damages, punitive damages and attorneys’ fees. Though Mr. Paul Marciano and the Company also disputed these claims fully, in order to avoid the cost of litigation and without
admitting liability or fault, the Company
and Mr. Paul Marciano entered into a settlement agreement with the individual who sent the April 2021 letter and filed the October 2021 action, resolving the claims for an aggregate total amount of $i120,000 in March 2022.
On March 16, 2022, the plaintiff in the January 2021 action and another former model for the Company filed an action against those individuals who were on the
Company’s Board of Directors in January 2019 (the “Defendants”) in the California Superior Court in Los Angeles (Jane Doe 1 and Jane Doe 2 v. Maurice Marciano, et al.). The complaint asserted that the Defendants aided and abetted the alleged improper behavior of Mr. Paul Marciano described in the January 2021 action and discomfort felt by the other individual during interactions with Mr. Paul Marciano described in the March 2022 action. The complaint sought an unspecified amount of general damages and attorneys’ fees and sought an order for the Defendants to remove Mr. Paul Marciano from the Board of Directors and relieve him of his day-to-day duties at the Company. The individual plaintiffs in the March 2022 action were represented by the same attorney who represented the plaintiffs in the January 2021 and October 2021 actions.
Though
Mr. Paul Marciano and the Company disputed in full each of the allegations in the January 2021 action, and the Defendants in the March 2022 action disputed in full each of the allegations therein, in order to avoid the cost of litigation and without admitting liability or fault, the Company and Mr. Paul Marciano entered into settlement agreements in August 2022 for an aggregate total amount of $i1,000,000
with the plaintiffs in the March 2022 action, resolving the January 2021 action and their individual claims in the March 2022 action.
All previously pending claims of individuals alleging personal mistreatment by Mr. Paul Marciano have now been resolved.
Redeemable Noncontrolling Interests
The Company is party to a put arrangement with respect to the common securities that represent the remaining noncontrolling interest for its majority-owned subsidiary, Guess Brasil Comércio e Distribuição S.A. (“Guess Brazil”). The put arrangement for Guess Brazil, representing i40%
of the total outstanding equity interest of that subsidiary, may be exercised at the discretion of the noncontrolling interest holder by providing written notice to the Company every third anniversary beginning in March 2019, subject to certain time restrictions. The redemption value of the Guess Brazil put arrangement is based on a multiple of Guess Brazil’s earnings before interest, taxes, depreciation and amortization subject to certain adjustments and is classified as a redeemable noncontrolling interest outside of permanent equity in the Company’s condensed consolidated balance sheet. The carrying value of the redeemable noncontrolling interest related to Guess Brazil was $i0.5
million and $i0.4 million as of July 30, 2022 and January 29, 2022, respectively.
The Company is also party to a put arrangement with respect to the securities that represent the remaining noncontrolling interest for its majority-owned
Russian subsidiary, Guess? CIS, LLC (“Guess CIS”), which was established through a majority-owned joint venture during fiscal 2016. The put arrangement for Guess CIS, representing i30% of the total outstanding equity interest of that subsidiary, may be exercised at the discretion of the noncontrolling interest holder by providing written notice to the Company during the period after December 28, 2020, the
fifth anniversary of the agreement, through December 31, 2025. The redemption value of the Guess CIS put arrangement is based on a multiple of Guess CIS’s earnings before interest, taxes, depreciation and amortization subject to certain adjustments and is classified as a redeemable noncontrolling interest outside of permanent equity in the Company’s condensed consolidated balance sheet. The carrying value of the redeemable noncontrolling interest related to Guess CIS was $i9.8
million and $i9.1 million as of July 30, 2022 and January 29, 2022, respectively. The parties are evaluating the potential purchase of the i30%
interest held by the noncontrolling interest holder in light of the various sanctions recently imposed by the United States and European governments with respect to Russia, including the U.S. ban on new investment in Russia. The Company’s European subsidiary, Guess Europe SAGL has also counter guaranteed up to $i900,000 of Guess CIS’s obligations under its local Russian guarantee line, as required by certain lease agreements.
The redeemable noncontrolling interests of the Guess Brazil and Guess CIS put arrangements are recorded at the greater of their carrying values, adjusted for their share of the allocation of income or loss, dividends and foreign currency translation adjustments, or redemption values. During the six months ended July 30, 2022 and July 31, 2021, the Company had iino/
redeemable noncontrolling interest redemption value adjustment.
i
A reconciliation of the total carrying amount of redeemable noncontrolling interests is (in thousands):
Six Months Ended
Jul
30, 2022
Jul 31, 2021
Beginning balance
$
i9,500
$
i3,920
Foreign
currency translation adjustment
i777
i154
Ending
balance
$
i10,277
$
i4,074
/
(14)iDefined
Benefit Plans
Supplemental Executive Retirement Plan
The Company’s Supplemental Executive Retirement Plan (“SERP”) provides select employees who satisfy certain eligibility requirements with certain benefits upon retirement, termination of employment, death, disability or a change in control of the Company, in certain prescribed circumstances. As a non-qualified pension plan, no dedicated funding of the SERP is required; however, the Company has made periodic payments into insurance policies held in a rabbi trust to fund the expected obligations arising under the non-qualified SERP. The cash surrender
values of the insurance policies were $i66.4 million and $i70.9 million as of July 30, 2022 and
January 29, 2022, respectively, and were included in other assets in the Company’s condensed consolidated balance sheets. As a result of changes in the value of the insurance policy investments, the Company recorded unrealized losses of $i0.2 million and $i3.5 million
in other income and expense during the three and six months ended July 30, 2022, respectively, and unrealized gains of $ii2.2/
million in other income and expense during the three and six months ended July 31, 2021. The projected benefit obligation was $i49.3 million and $i49.4
million as of July 30, 2022 and January 29, 2022, respectively, and was included in accrued expenses and other current liabilities and other long-term liabilities in the Company’s condensed consolidated balance sheets depending on the expected timing of payments. SERP benefit payments of $i0.5 million and $i1.0
million were made during the three and six months ended July 30, 2022, respectively. SERP benefit payments of $i0.5 million and $i1.0
million were made during the three and six months ended July 31, 2021, respectively.
Foreign Pension Plans
In certain foreign jurisdictions, primarily in Switzerland, the Company is required to guarantee the returns on Company-sponsored defined contribution plans in accordance with local regulations. The Company’s contributions must be made in an amount at least equal to the employee’s contribution. Minimum employee contributions are based on the respective employee’s age, salary and gender.
As of July 30, 2022 and January 29,
2022, the foreign pension plans had a total projected benefit obligation of $i41.4 million and $i42.7 million, respectively, and plan assets
held in independent investment fiduciaries of $i36.9 million and $i38.0 million, respectively. The net liability
of $i4.5 million and $i4.7 million
was included in other long-term liabilities in the Company’s condensed consolidated balance sheets as of July 30, 2022 and January 29, 2022, respectively.
The
components of net periodic defined benefit pension cost related to the Company’s defined benefit plans are (in thousands):
SERP
Foreign Pension Plans
Total
Three
Months Ended Jul 30, 2022
Service cost
$
i—
$
i741
$
i741
Interest
cost
i334
i55
i389
Expected
return on plan assets
i—
(i67)
(i67)
Net
amortization of unrecognized prior service credit
i—
(i22)
(i22)
Net
amortization of actuarial losses
i—
i12
i12
Net
periodic defined benefit pension cost
$
i334
$
i719
$
i1,053
Six
Months Ended Jul 30, 2022
Service cost
$
i—
$
i1,516
$
i1,516
Interest
cost
i667
i112
i779
Expected
return on plan assets
i—
(i137)
(i137)
Net
amortization of unrecognized prior service credit
i—
(i45)
(i45)
Net
amortization of actuarial losses
i17
i25
i42
Net
periodic defined benefit pension cost
$
i684
$
i1,471
$
i2,155
Three
Months Ended Jul 31, 2021
Service cost
$
i—
$
i793
$
i793
Interest
cost
i288
i19
i307
Expected
return on plan assets
i—
(i52)
(i52)
Net
amortization of unrecognized prior service credit
i—
(i17)
(i17)
Net
amortization of actuarial losses
i20
i86
i106
Net
periodic defined benefit pension cost
$
i308
$
i829
$
i1,137
Six
Months Ended Jul 31, 2021
Service cost
$
i—
$
i1,583
$
i1,583
Interest
cost
i577
i38
i615
Expected
return on plan assets
i—
(i104)
(i104)
Net
amortization of unrecognized prior service credit
i—
(i34)
(i34)
Net
amortization of actuarial losses
i40
i171
i211
Net
periodic defined benefit pension cost
$
i617
$
i1,654
$
i2,271
/
(15)iFair
Value Measurements
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e. interest rates, yield curves, etc.) and inputs that are derived
principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3—Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs are based on the best information available, including the Company’s own data.
Foreign
exchange currency contracts may be entered into by the Company to hedge the future payment of inventory and intercompany transactions by non-U.S. subsidiaries. Periodically, the Company may also use foreign exchange currency contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries. The fair values of the
Company’s foreign exchange currency contracts are based on quoted foreign exchange forward rates at the reporting date. The fair values of the Company’s interest rate swaps are based upon inputs corroborated by observable market data. Deferred compensation obligations to employees are adjusted based on changes in the fair value of the underlying employee-directed investments. Fair value of these obligations is based upon inputs corroborated by observable market data.
The Company included €i3.7
million ($i3.8 million) and €i3.6 million ($i4.0
million) in other assets in the Company’s condensed consolidated balance sheets related to its investment in a private equity fund as of July 30, 2022 and January 29, 2022, respectively. The Company uses net asset value per share as a practical expedient to measure the fair value of this investment and has not included this investment in the fair value hierarchy as disclosed above. As of July 30, 2022, the Company had an unfunded commitment to invest an additional €i11.0
million ($i11.2 million) in the private equity fund.
The fair values of the Company’s debt instruments (see Note 9) are based on the amount of future cash flows associated with each instrument discounted using the Company’s incremental borrowing rate. As of July 30, 2022 and January 29,
2022, the carrying value was not materially different from fair value, as the interest rates on the Company’s debt approximated rates currently available to the Company. The fair value of the Company’s Notes (see Note 10) is determined based on inputs that are observable in the market and have been classified as Level 2 in the fair value hierarchy.
The carrying amount of the Company’s remaining financial instruments, which principally include cash and cash equivalents, trade receivables, accounts payable and accrued expenses, approximates fair value due to the relatively short maturity
of such instruments.
Long-Lived Assets
Long-lived assets, such as property and equipment and operating lease ROU assets, are reviewed for impairment quarterly or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The majority of the Company’s long-lived assets relate to its retail operations, which consist primarily of regular retail and flagship locations. The Company considers each individual regular retail location as an asset group for impairment testing, which is the lowest level at which individual cash flows can be identified. The Company also evaluates impairment
risk for retail locations that are expected to be closed in the foreseeable future. The Company has flagship locations that are used as a regional marketing tool to build brand awareness and promote the Company’s current product. Provided the flagship locations continue
to meet the appropriate criteria, impairment for these locations
is tested at a reporting unit level similar to goodwill since they do not have separately identifiable cash flows.
An asset is considered to be impaired if the Company determines that the carrying value may not be recoverable based upon its assessment of the asset’s ability to continue to generate earnings from operations and positive cash flow in future periods or if significant changes in the Company’s strategic business objectives and utilization of the assets occurred. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows adjusted for lease payments, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the estimated fair value. The
Company uses estimates of market participant rents to calculate fair value of ROU assets and discounted future cash flows of the asset group to quantify fair value for other long-lived assets. These nonrecurring fair value measurements are considered Level 3 inputs as defined above. The impairment loss calculations require management to apply judgment in estimating future cash flows and the discount rates that reflect the risk inherent in future cash flows. Future expected cash flows for assets in regular retail locations are based on management’s estimates of future cash flows over the remaining lease period or expected life, if shorter. For expected location closures, the Company will evaluate whether it is necessary to shorten the useful life for any of the assets within the respective asset group. The
Company will use this revised useful life when estimating the asset group’s future cash flows. The Company considers historical trends, expected future business trends and other factors when estimating the future cash flow for each regular retail location. The Company also considers factors such as the following: the Russia-Ukraine conflict, including the sanctions and trade restrictions imposed on Russia in response to the conflict; the local environment for each regular retail location, including mall traffic and competition; the Company’s ability to successfully implement strategic initiatives; and the ability to control variable costs such as cost of sales and payroll and, in some cases, renegotiate lease costs.
As discussed further in Note 1, the COVID-19 pandemic negatively impacted the Company’s financial results during the three and six months ended July 30, 2022 and July 31, 2021, and could continue to impact the Company’s operations in ways the Company is not able to predict today due to the evolving situation. The Company has made reasonable assumptions and judgments to determine the fair value of the assets tested based on the facts and circumstances that were available as of the reporting date. If actual results are not consistent with
the assumptions and judgments used in estimating future cash flows and asset fair values, there may be additional exposure to future impairment losses that could be material to the Company’s results of operations.
The Company recorded asset impairment charges of $i1.9 million and $i3.5
million during the three and six months ended July 30, 2022, respectively. The Company recognized $i1.8 million and $i3.4
million in impairment of property and equipment related to certain retail locations primarily in Europe and Asia driven by under-performance and expected store closures during the three and six months ended July 30, 2022, respectively. This compares to asset impairment charges of $i1.5 million and $i1.9
million during the three and six months ended July 31, 2021, respectively. The Company recognized $i1.5 million and $i1.9
million in impairment of property and equipment related to certain retail locations primarily in Europe and Asia during the three and six months ended July 31, 2021, respectively. The Company recognized immaterial impairment on ROU assets primarily in Europe during the three and six months ended July 30, 2022 and July 31, 2021. Refer to Note 2 for further information on impairment charges recognized on operating lease ROU assets.
Goodwill
Goodwill is tested annually for impairment or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the
asset’s fair value. This determination is made at the reporting unit level which may be either an operating segment or one level below an operating segment if discrete financial information is available. Two or more reporting units within an operating segment may be aggregated for impairment testing if they have similar economic characteristics.
The COVID-19 pandemic continued to impact the Company’s businesses during the first six months of fiscal 2023. During the three months ended July 30, 2022, the Company assessed qualitative factors and
The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company has entered into certain forward contracts to hedge the risk of foreign currency rate fluctuations. The Company has elected to apply the hedge accounting rules in accordance with authoritative
guidance for certain of these hedges.
The Company’s primary objective is to hedge the variability in forecasted cash flows due to the foreign currency risk. Various transactions that occur primarily in Europe, Canada, South Korea, China, Hong Kong and Mexico are denominated in U.S. dollars, British pounds and Russian roubles and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their functional currencies. These types of transactions include U.S. dollar-denominated purchases of merchandise and U.S. dollar- and British pound-denominated intercompany liabilities. In addition, certain operating expenses, tax liabilities and pension-related liabilities are denominated in Swiss francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency. Further,
there are certain real estate leases that are denominated in a currency other than the functional currency of the respective entity that entered into the agreement (primarily Swiss francs, Russian roubles and Polish zloty). As a result, the Company may be exposed to volatility related to unrealized gains or losses on the translation of present value of future lease payment obligations when translated at the exchange rate as of a reporting period-end. The Company enters into derivative financial instruments, including forward exchange currency contracts, to offset some, but not all, of the exchange risk on certain of these anticipated foreign currency transactions.
Periodically,
the Company may also use foreign exchange currency contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries.
Interest Rate Swap Agreements
The Company is exposed to interest rate risk on its floating-rate debt. The Company has entered into interest rate swap agreements for certain of these agreements to effectively convert its floating-rate debt to a fixed-rate basis. The principal
objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts. Refer to Note 9 for further information.
The impact of the credit risk of the counterparties to the derivative contracts
is considered in determining the fair value of the foreign exchange currency contracts and interest rate swap agreements. As of July 30, 2022, credit risk has not had a significant effect on the fair value of the Company’s foreign exchange currency contracts and interest rate swap agreements.
U.S. dollar forward contracts
are used to hedge forecasted merchandise purchases over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges, are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in cost of product sales in the period that approximates the time the hedged merchandise inventory is sold.
The Company has also used U.S. dollar forward contracts to hedge the net investments of certain of the Company’s international subsidiaries
over specific months. Changes in the fair value of these U.S. dollar
forward contracts, designated as net investment hedges, are recorded in foreign currency translation adjustment as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are not recognized in earnings (loss) until the sale or liquidation of the hedged net investment.
The
Company also has foreign exchange currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of foreign exchange currency contracts not designated as hedging instruments are reported in net earnings (loss) as part of other income (expense).
Interest Rate Swap Agreements
Interest rate swap agreements are used to hedge the variability of the cash flows in interest payments associated with the Company’s floating-rate debt. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of accumulated other comprehensive
income (loss) within stockholders’ equity and are amortized to interest expense over the term of the related debt.
Periodically, the Company may also enter into interest rate swap agreements that are not designated as hedging instruments for accounting purposes. Changes in the fair value of interest rate swap agreements not designated as hedging instruments are reported in net earnings (loss) as part of other income (expense).
Summary of Derivative Instruments
i
The
fair value of derivative instruments in the condensed consolidated balance sheets is (in thousands):
Foreign Exchange Currency Contracts Designated as Cash Flow Hedges
During the six months ended July 30, 2022, the Company purchased U.S. dollar forward contracts in Europe totaling US$i198.0
million that were designated as cash flow hedges. As of July 30, 2022, the Company had forward contracts outstanding for its European operations of US$i249.0 million to hedge forecasted merchandise purchases, which are expected to mature over the next i17
months.
As of July 30, 2022, accumulated other comprehensive income (loss) related to foreign exchange currency contracts included a $i13.8
million net unrealized gain, net of tax, of which $i11.6 million will be recognized in cost of product sales over the following 12 months, at the then current values on a pre-tax basis, which can be different than the current quarter-end values.
At January 29, 2022, the Company had forward contracts
outstanding for its European operations of US$i146.0 million that were designated as cash flow hedges.
Interest Rate Swap Agreement Designated as Cash Flow Hedge
As of July 30, 2022, accumulated other comprehensive income (loss) related to the interest rate swap agreement included a net unrealized gain of $ii0.4/
million, net of tax, which will be recognized in interest expense over the following 12 months, at the then current values on a pre-tax basis, which can be different than the current quarter-end values.
i
The following summarizes the gains (losses) before income taxes recognized on derivative instruments designated as cash flow hedges in OCI and net earnings (in thousands):
Gains
(Losses)Recognized in OCI
Location of Gains (Losses) Reclassified from Accumulated OCI into Earnings
Gains (Losses) Reclassified from Accumulated OCI into Earnings
The following summarizes the gains before income taxes recognized on derivative instruments not designated as hedging instruments in other income (expense) (in thousands):
On August 24, 2022, the Company announced a regular quarterly cash dividend of $i0.225 per share on the Company’s common stock. The cash dividend will be paid on September 23, 2022 to shareholders
of record as of the close of business on September 7, 2022. As a result of this dividend declaration and in accordance with the terms of the indenture governing the Notes, the Company will adjust the conversion rate (which is expected to increase) and the conversion price (which is expected to decrease) of the Notes effective as of September 6, 2022. A corresponding adjustment is expected to be made to the strike prices with respect to the convertible note hedges and the warrants entered into by the Company in connection with the offering of the Notes, each of which will be decreased in accordance with the terms of
the convertible note hedge confirmations and warrant confirmations, respectively.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
Unless
the context indicates otherwise, when we refer to “we,”“us,”“our” or the “Company” in this Form 10‑Q, we are referring to Guess?, Inc. (“GUESS?”) and its subsidiaries on a consolidated basis.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be contained in our other reports filed under the Securities Exchange Act of 1934, as amended, in our press releases and in other documents.
Except for historical information contained herein, certain matters discussed
in this Quarterly Report, including statements concerning the impacts of the COVID-19 pandemic, the conflict in Ukraine and other events impacting the markets in which we operate; statements concerning our future outlook, including with respect to the third quarter and full year of fiscal 2023; statements concerning our expectations, goals, future prospects, and current business strategies and strategic initiatives; and statements expressing optimism or pessimism about future operating results and growth opportunities 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,”“could,”“will,”“should,”“goal,”“strategy,”“believe,”“estimate,”“continue,”“outlook,”“plan,”“create,”“see,” 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 or political conditions, including inflation and other events that could negatively impact consumer confidence and discretionary consumer spending; sanctions and export controls targeting Russia and other impacts related to the war in Ukraine; impacts related to the COVID-19 pandemic or other public health crises; risks relating to our indebtedness; changes to estimates related to impairments, inventory and other reserves, which were made using the best information available at the time; 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; the high concentration of our Americas Wholesale business; risks related to the costs and timely delivery of merchandise to our distribution facilities, stores and 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 successfully enhance our global omni-channel capabilities; our ability to expand internationally and operate in regions where we have less experience, including through joint ventures; risks relating to our $300 million 2.00% convertible senior notes due 2024 (the “Notes”), including our ability to settle the liability in cash; disruptions
at our distribution facilities; our ability to attract and retain management and other key personnel; obligations or changes in estimates arising from new or existing litigation, income tax and other regulatory proceedings; risks related to the income tax treatment of our third quarter fiscal 2022 intra-entity transfer of intellectual property rights from certain U.S. entities to a wholly-owned Swiss subsidiary; catastrophic events or natural disasters; changes in U.S. or foreign income tax or tariff policy, including changes to tariffs on imports into the U.S.; 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 Quarterly Report; risk of future non-cash asset impairments, including goodwill, right-of-use lease assets and/or other store asset impairments; violations of, or changes to, domestic
or international laws and regulations; risks associated with the acts or omissions of our licensees and 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; risks associated with our ability to properly collect, use, manage and secure consumer and employee data; risks associated with our vendors’ ability to maintain the
strength and security of information technology systems; changes
in economic, political, social and other conditions affecting our foreign operations and sourcing, including the impact of currency fluctuations, global income tax rates and economic and market conditions in the various countries in which we operate; impacts of inflation and further inflationary pressures; fluctuations in quarterly performance; slowing in-person customer traffic; increases in labor costs; increases in wages; risks relating to activist investor activity; and the significant voting power of our family founders. In addition to these factors, the economic, technological, managerial, and other risks identified in “Part I, Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K, “Part II, Item 1A. Risk Factors” herein 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, the impact of the COVID-19 pandemic, and uncertainty surrounding potential changes in U.S. policies and regulations may amplify many of these risks. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
COVID-19 Business Update
The COVID-19 pandemic is continuing to negatively impact certain regions of our business, especially in Asia where our operations for the quarter ended July 30, 2022 were impacted by capacity restrictions and temporary store closures. Overall, this resulted in the closure of less than 1% of our directly operated stores as of July 30, 2022, mostly in Asia, the impact of which was minimal to our
three and six months ended July 30, 2022 results.
The COVID-19 pandemic has also contributed to disruptions in the overall global supply chain, contributing to industry-wide higher product and freight costs. We have been working actively to mitigate these headwinds to the extent possible through a number of global supply chain initiatives.
In light of the fluid nature of the pandemic, we continue to carefully monitor global and regional developments and respond appropriately. We also continue to strategically manage expenses in order to protect profitability and to mitigate, to the extent possible, the effect of supply chain disruptions.
Business Segments
Our businesses are grouped into five reportable segments for management and internal financial
reporting purposes: Americas Retail, Americas Wholesale, Europe, Asia, and Licensing. Our Americas Retail, Americas Wholesale, Europe and Licensing reportable segments are the same as their respective operating segments. Certain components of our Asia operating segment are separate operating segments based on region, which have been aggregated into the Asia reportable segment for disclosure purposes.
Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before corporate performance-based compensation costs, asset impairment charges, net gains (losses) on lease modifications, restructuring charges and certain non-recurring credits (charges), if any. We believe this segment reporting reflects how our business segments are managed and how each segment’s performance is evaluated by our chief operating decision maker to assess performance and make resource allocation decisions.
Information regarding these segments is summarized in “Part I, Item 1. Financial Statements – Note 8 – Segment Information.”
Products
We derive our net revenue from the sale of GUESS?, G by GUESS (GbG), GUESS Kids and MARCIANO apparel and our licensees’ products through our worldwide network of directly-operated and licensed retail stores, wholesale customers and distributors, as well as our online sites. We also derive royalty revenue from worldwide licensing activities.
Foreign Currency Volatility
Since the majority of our international operations are conducted in currencies other than the U.S. dollar (primarily the British pound, Canadian dollar, Chinese yuan, euro, Japanese yen, Korean won, Mexican peso,
Polish zloty, Russian rouble and Turkish lira), currency fluctuations can have a significant impact on the translation of our international revenues and earnings (loss) into U.S. dollars.
Some of our transactions, primarily those in Europe, Canada, South Korea, China, Hong Kong and Mexico, are denominated in U.S. dollars, Swiss francs, British pounds and Russian roubles, exposing them to exchange rate fluctuations when these transactions (such as inventory purchases or periodic lease payments) are converted to their functional currencies. As a result, fluctuations in exchange rates can impact the operating margins of our foreign operations and reported earnings (loss), and are largely dependent on the transaction
timing and magnitude during the period that the currency fluctuates. When these foreign exchange rates weaken versus the U.S. dollar at the time the respective U.S. dollar denominated payment is made relative to the payments made in the comparable period, our product margins have been and could continue to be unfavorably impacted.
In addition, there are certain real estate leases denominated in a currency other than the functional currency of the respective entity that entered into the agreement (primarily Swiss francs, Russian roubles and Polish zloty). As a result, we may be exposed to volatility related to unrealized gains or losses on the translation of present value of future lease payment obligations when translated at the exchange rate as of a reporting period-end.
During the first six months of fiscal 2023, the average U.S. dollar rate was stronger against the euro, British
pound, Turkish lira, Polish Slotzy, Canadian dollar, Japanese yen, Korean won, and Chinese yuan and weaker against the Russian rouble and Mexican peso, compared to the average rate in the same prior-year period. This had an overall unfavorable impact on the translation of our international revenues and on earnings from operations for the three and six months ended July 30, 2022 compared to the same prior-year periods.
For the remainder of fiscal 2023, if the U.S. dollar remains relatively strong against fiscal 2022 foreign exchange rates, foreign exchange could negatively impact our revenues and operating results, as well as our international cash and other balance sheet items, particularly in Canada, Europe (primarily the euro, Turkish lira, British Pound and Russian rouble) and Mexico. Alternatively, if the U.S. dollar weakens relative to the respective fiscal 2022 foreign
exchange rates, our revenues and operating results, as well as our other cash balance sheet items, could be positively impacted by foreign currency fluctuations during the remainder of fiscal 2023, particularly in these regions. At roughly prevailing exchange rates, we do expect currencies to continue to represent a significant headwind to revenues, operating profit and margin for the remainder of the fiscal year.
We enter into derivative financial instruments to offset some, but not all, of the exchange risk on foreign currency transactions. For additional discussion regarding our exposure to foreign currency risk, forward contracts designated as hedging instruments and forward contracts not designated as hedging instruments, refer to “Item
3. Quantitative and Qualitative Disclosures About Market Risk.”
Inflation Impacts
Our financial results have been and may continue to be impacted by inflationary pressures affecting our overall cost structure, including transportation, employee compensation, raw materials and other costs. We estimate certain of our costs are impacted by inflation and other factors as follows:
Transportation. Our inbound and outbound transportation costs vary by the method of shipping, including air, ocean and ground. Each of these methods may be impacted by various factors, including inflation and other considerations, such as an imbalance between the overall freight capacity on the marketplace and demand. The increase in our transportation costs was primarily attributable to higher inbound freight costs.
Employee
Compensation. We have been impacted by the ongoing shortage of available qualified candidates for employment, as well as increases in compensation to attract and retain employees. We continue to evaluate our compensation and benefit offerings to be competitive with the current market and
evaluate strategies to be more effective and efficient at all levels within the organization, including how to best serve our customers.
Raw Materials.
The costs of raw materials for our products have increased, both as a result of inflation and our ongoing initiatives to improve the quality and sustainability of our products. In addition, because a significant portion of our products are manufactured in other countries, declines in the relative value of local currencies versus the U.S. dollar have exacerbated many of these pricing pressures.
We seek to minimize the impact of inflation by continuously optimizing our supply chain, including logistics, as well as efficiently managing our workforce. It is difficult to determine the portion of cost increases solely attributable to inflation versus other factors, such as the cost of improvements to our products and imbalances in the supply chain.
These increased costs have negatively impacted our margins and expenses. Continued inflationary and other pressures could further impact our
gross margin and selling, general and administrative expenses as a percentage of net sales if the sales price of our products does not increase with higher costs. Furthermore, prolonged inflationary conditions could have an adverse impact on consumer discretionary spending, which could negatively impact our sales and results in the future. In addition, inflation could materially increase the interest rates on any future debt we may incur.
We expect inflationary pressures will persist in the near term. The extent to which such pressures may impact our business depends on many factors, including our customers’ ability and willingness to accept price increases, our ability to improve our margins, and potential downward pricing pressures if our competitors do not also raise their prices. Please refer to “Part II, Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K for further information on the potential
impacts and risk associated with inflation.
Russia-Ukraine Conflict
We are currently operating in Russia through our wholesale and retail channels and we have immaterial wholesale operations through local wholesale partners in Belarus and Ukraine. Our operations in Russia are operated primarily through Guess? CIS, LLC (“Guess CIS”), a majority-owned Russian subsidiary in which we had a 70% interest as of July 30, 2022 and January 29, 2022. Guess CIS currently operates 43 retail stores in Russia and acts as a distributor for our wholesale partners in Russia. We also operate in Russia through other local wholesale partners and by selling directly to retail customers through our European online store. Prior to February 2022, we also sold directly to retail customers in Ukraine
and Belarus through our European online store.
Our operations in Russia, Belarus and Ukraine represented less than 3% of the Company’s total revenue for the year ended January 29, 2022 and for the six months ended July 30, 2022, with our operations in Russia comprising over 90% of this total revenue. As of July 30, 2022, our total assets in Russia, all of which are held by Guess CIS, represented less than 2% of our total assets, consisting primarily of leasehold right of use assets, store inventory, furnishings and fixtures, and receivables. We only maintain inventory in Russia in an amount sufficient for operating our Russian retail stores. We do not maintain inventory or hold any other significant
assets in Belarus or Ukraine. We do not rely, directly or indirectly, on goods sourced in Russia, Belarus or Ukraine. Other than such labor and services necessary to conduct our direct operations in Russia in the ordinary course of business, we do not rely, directly or indirectly, on services sourced in Russia, Belarus or Ukraine.
There has been no material impact to our existing operations as a result of the ongoing conflict in Ukraine, although we are limited in our ability to expand our business in Russia due to the U.S. ban on new investments in Russia described below under “―Impact of Sanctions and Trade Restrictions.” With respect to our supply and distribution channels, we have experienced increased costs and transit times associated with deliveries related to our Russia operations, due in part to new procedures and sanctions screening implemented in response to the conflict in Ukraine and the imposition
of related sanctions. These costs and delays have not materially impacted our business or results of operations. Additionally, retail deliveries for online orders to Ukraine and Belarus have been suspended since February 2022 due to increased logistics costs and other
difficulties in delivering to these regions. While we intend to re-open online orders to Ukraine and Belarus when appropriate, the suspension of these shipments has not had, and is not anticipated to have, a material impact on our business
or results of operations. Our wholesale partner in Ukraine partially suspended its operations at the outset of the conflict; however, sales were re-opened in July 2022, and our business and results of operations were not materially impacted.
In connection with our investment in Guess CIS, we are party to a put arrangement with respect to the securities that represent the remaining noncontrolling interest for Guess CIS. The put arrangement provides the noncontrolling interest holder of Guess CIS, a non-sanctioned Russian citizen, the right to compel the Company, through a wholly-owned European subsidiary, to purchase the remaining 30% of the total outstanding equity interest of Guess CIS at its discretion by providing written notice to the Company during the
period after December 28, 2020, the fifth anniversary of the agreement, through December 31, 2025. The redemption value of the Guess CIS put arrangement is based on a multiple of Guess CIS’s earnings before interest, taxes, depreciation and amortization, subject to certain adjustments. The carrying value of the redeemable noncontrolling interest related to the put arrangement was $9.8 million as of July 30, 2022. In addition, pursuant to an agreement entered into in 2018, the Company’s European subsidiary, Guess Europe SAGL has also counter guaranteed up to $900,000 of Guess CIS’s obligations under its local Russian guarantee line, as required by certain lease agreements.
Impact of Sanctions
and Trade Restrictions
Our Russian operations are subject to various sanctions and export control measures targeting Russia, Belarus, and the Russian-controlled regions of Ukraine (Crimea, Donetsk, and Luhansk). These measures include: (i) blocking sanctions prohibiting dealings with various Russian senior government officials, and companies in various sectors important to the Russian economy, including major Russian financial institutions; (ii) expanded sectoral sanctions related to designated Russian entities’ ability to raise capital; (iii) the disconnection of certain Russian and Belarusian banks from the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) financial messaging network; (iv) a ban on new investment in Russia; (v) a ban on the provision of certain accounting, trust formation and management consulting services; (vi) bans on the import into the United States of certain Russian origin
products, including various energy products; (vii) bans on the conduct of business or investment activity in the Russian-controlled Crimea, Donetsk and Luhansk regions of Ukraine; and (viii) restrictions on the export of various products to Russia and Belarus, including certain dual-use industrial and commercial products, and luxury goods. Additionally, certain logistics operators have imposed bans on direct air deliveries to Russia and restrictions on land deliveries to and from Russia, Belarus and Ukraine, none of which have had a material impact on our operations to date. We assessed the applicability of these sanctions and trade restrictions based on internal assessments of relevant regulations and concluded our existing operations in Russia and Belarus have not been materially affected by these sanctions and trade restrictions, although we are limited from further expansion of our business in Russia. All of our deliveries (both wholesale and retail) undergo sanctions
screening, including screening for maximum product value of €300 per item and prevention of shipments to sanctioned final recipients.
Our assessment of the impact of the various sanctions and export control measures targeting Russia, Belarus and the Russian-controlled regions of Ukraine is subject to the following uncertainties and assumptions:
•The duration and extent of the armed conflict in Ukraine;
•The
impact of sanctions and trade restrictions targeting Russia and Belarus, and the possibility that such sanctions or trade restrictions may be expanded, or new sanctions or trade restrictions may be imposed;
•Significant exchange rate fluctuation related to the Russian rouble during the first months of the conflict and the possibility of significant exchange rate volatility in the future;
•Potential disruptions of normal cashflow resulting from the removal of Russian and Belarusian banks from the SWIFT financial messaging network and regulations of the Russian and Belarusian governments;
•Disruptions of transport access to and from Russia, Belarus or Ukraine; and
•The suspension of our online retail shipments
to Belarus and Ukraine.
We continue to assess all of our operations in Russia to ensure compliance with applicable sanctions, including most notably the U.S. ban on new investment in Russia.
See Part II, Item 1A. Risk Factors—Our business may also be affected by existing or future sanctions and export controls targeting Russia and other responses to Russia's invasion of Ukraine for additional information.
We are actively monitoring the situation in Ukraine. While the extent to which the Company’s future operations in Russia, Belarus and Ukraine will be impacted by the ongoing conflict is impossible to predict, the impact is not expected to be material to the
Company’s results of operations, financial condition or cash flows.
Strategy
In March 2021, Carlos Alberini, our Chief Executive Officer, shared his updated strategic vision and implementation plan for execution, which included several key priorities to drive revenue and operating profit growth. These priorities are: (i) brand relevancy and brand elevation; (ii) product excellence; (iii) customer centricity; (iv) global footprint; and (v) functional capabilities; each as further described below:
Brand Relevancy and Brand Elevation. We continue to optimize our brand architecture to be relevant with our three target consumer groups: Heritage, Millennials, and Generation Z. We have developed and launched one global line of product for
all categories. We elevated our brand and improved the quality and sustainability of our products, allowing us to realize more full-priced sales and rely less on promotional activity. We continue to use unique go-to-market strategies and execute celebrity and influencer partnerships and collaborations as we believe that they are critical to engage more effectively with a younger and broader audience.
Product Excellence. We believe product is a key factor of success in our business. We strive to design and make great products and will extend our product offering to provide our customers with products for the different occasions of their lifestyles. We will seek to better address local product needs.
Customer Centricity. We continue to place the customer at the center of everything we do. We plan to implement processes and platforms
to provide our customers with a seamless omni-channel experience and expand our digital business.
Global Footprint. We continue to expand the reach of our brands by optimizing the productivity and profitability of our current footprint and expanding our distribution channels.
Functional Capabilities. We continue to drive operational improvements to leverage and support our global business more effectively, primarily in the areas of logistics, sourcing, product development and production, inventory management, and overall infrastructure.
We plan to continue to prioritize capital allocation toward investments that support growth and infrastructure, while remaining highly disciplined in the way we allocate capital across projects, including new store development, store remodels, technology and logistics investments and others. When we prioritize investments, we will focus on their strategic significance and their return on invested capital expectations. We also plan to manage product buys and inventory ownership rigorously and optimize overall working capital management consistently. In addition, we plan to continue to return value to shareholders through dividends and share repurchases.
During fiscal 2022, the Board of Directors terminated our previous 2012 $500 million share repurchase program (which had $47.8 million capacity remaining) and authorized a new $200 million share repurchase program. On March
14, 2022, the Board of Directors expanded the repurchase authorization by $100.0 million, leaving an available capacity of $249.0 million at that time. On March 18, 2022, in connection with this expanded authorization, we entered into an accelerated share repurchase agreement (the "2022 ASR Contract) with a financial institution (in such capacity, the "2022 ASR Counterparty") to repurchase an aggregate $175.0 million of our common stock. Under the 2022 ASR Contract, we made a payment of $175.0 million to the 2022 ASR Counterparty and received an initial delivery of approximately 3.3 million shares of our common stock on March 21, 2022. We received a final settlement of an additional
5.2 million shares under the 2022 ASR Contract on June 24, 2022. Refer to “Part I, Item 1. Financial Statements – Note 4 – Stockholders' Equity” for further information on the 2022 ASR Contract. During the six months ended July 30, 2022, we also repurchased approximately 0.5 million shares of our common stock in open market transactions totaling $11.7 million.
Comparable Store Sales
We report National Retail Federation calendar comparable store sales on a quarterly basis for our retail businesses which include the combined results from our brick-and-mortar retail stores and our e-commerce sites.
We also separately report the impact of e-commerce sales on our comparable store sales metric. As a result of our omni-channel strategy, our e-commerce business has become strongly intertwined with our brick-and-mortar retail store business. Therefore, we believe that the inclusion of e-commerce sales in our comparable store sales metric provides a more meaningful representation of our retail results.
Sales from our brick-and-mortar retail stores include purchases that are initiated, paid for and fulfilled at our retail stores and directly-operated concessions as well as merchandise that is reserved online but paid for and picked up at our retail stores. Sales from our e-commerce sites include purchases that are initiated and paid for online and shipped from either our distribution centers or our retail stores as well as purchases that are initiated in a retail store, but due to inventory availability at the retail store, are
ordered and paid for online and shipped from our distribution centers or picked up from a different retail store.
Store sales are considered comparable after the store has been open for 13 full fiscal months. If a store remodel results in a square footage change of more than 15%, or involves a relocation or a change in store concept, the store sales are removed from the comparable store base until the store has been opened at its new size, in its new location or under its new concept for 13 full fiscal months. Stores that are permanently closed or temporarily closed (including as a result of pandemic-related closures) for more than seven days in any fiscal month are excluded from the calculation in the fiscal month that they are closed. E-commerce sales are considered comparable after the online site has been operational in a country for 13 full fiscal months and exclude any related revenue from shipping fees. These criteria
are consistent with the metric used by management for internal reporting and analysis to measure performance of the store or online sites. Definitions and calculations of comparable store sales used by us may differ from similarly titled measures reported by other companies.
We operate on a 52/53-week fiscal year calendar which ends on the Saturday nearest to January 31 of each year. The six months ended July
30, 2022 had the same number of days as the six months ended July 31, 2021.
Executive Summary
Overview
Net earnings attributable to Guess?, Inc. decreased 60.8% to $24.0 million, or diluted net earnings per share (“EPS”) of $0.35 per common share, for the quarter ended July 30, 2022, compared to $61.1 million, or diluted EPS of $0.91 per common share, for the quarter ended July 31, 2021.
During the quarter ended July 30, 2022, we recognized $1.9
million in asset impairment charges; $0.9 million in net gains on lease modifications; $1.3 million for certain professional service and legal fees and related (credits) costs; and $2.8 million for certain discrete income tax adjustments (or a combined $1.1 million positive impact after considering the related income tax benefit of $0.6 million); and we excluded the dilutive share impact of the Notes in our adjusted diluted EPS (or a combined $0.04 negative per share impact). Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. was $22.9 million and adjusted diluted EPS was $0.39 per common share for the quarter ended July 30, 2022.
During the quarter ended July 31, 2021, we recognized $1.5 million in asset impairment charges; $0.4 million in net gains on lease modifications; $0.1 million for
certain professional services and legal fees and related (credits) costs; $2.8 million of amortization of debt discount related to our Notes; and $0.1 million for certain discrete income tax adjustments (or a combined $3.0 million, or $0.05 per share, negative impact after considering the related income tax benefit of these adjustments of $1.0 million). Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. was $64.1 million and adjusted diluted EPS was $0.96 per common share for the quarter ended July 31, 2021. References to financial results excluding the impact of these items are non-GAAP measures and are addressed below under “Non-GAAP Measures.”
Highlights of our performance for the quarter ended July 30, 2022 compared to the same prior-year quarter are presented below, followed by
a more comprehensive discussion under “Results of Operations”:
Operations
• Total net revenue increased 2.2% to $642.7 million for the quarter ended July 30, 2022, compared to $628.6 million in the same prior-year quarter. In constant currency, net revenue increased by 11.8%.
• Gross margin (gross profit as a percentage of total net revenue) decreased 470 basis points to 42.1% for the quarter ended July 30, 2022, compared to 46.8% in the same prior-year quarter.
• Selling, general and administrative (“SG&A”) expenses as a percentage of total net revenue (“SG&A rate”) increased 80 basis points to 33.6% for the quarter ended July 30,
2022, compared to 32.8% in the same prior-year quarter. SG&A expenses increased 5.1% to $216.0 million for the quarter ended July 30, 2022, compared to $205.6 million in the same prior-year quarter.
• During the quarter ended July 30, 2022, we recognized $1.9 million of asset impairment charges, compared to $1.5 million in the same prior-year quarter.
• During the quarter ended July 30, 2022, we recorded $0.9 million net gains on lease modifications, compared to $0.4 million in the same prior-year quarter.
• Operating margin decreased 560 basis points to 8.3% for the quarter ended July 30, 2022, compared to 13.9% in the same
prior-year quarter. The decrease in operating margin was mainly driven by 200 basis points from higher markdowns, 110 basis points from lower rent relief and government subsidies, 110 basis points from currency headwinds and 70 basis points from higher store labor costs in Americas Retail and Europe. Earnings from operations decreased 38.8% to $53.4 million for the quarter ended July 30, 2022, compared to $87.4 million in the same prior-year quarter.
• Other
expense, net, totaled $9.1 million for the quarter ended July 30, 2022, compared to $1.0 million in the same prior-year quarter.
• The effective income tax rate increased by 12.2% to 34.1% for the quarter ended July 30, 2022, compared to 21.9% in the same prior-year quarter.
Key Balance Sheet Accounts
•We had $174.4 million in cash and cash equivalents and no restricted cash as of July 30, 2022 compared to $458.9 million in cash and cash equivalents and $0.2 million in restricted cash at July 31, 2021.
◦As of July 30,
2022, we had $36.4 million in outstanding borrowings under our term loans and $58.3 million in outstanding borrowings under our credit facilities compared to $55.0 million in outstanding borrowings under our term loans and no outstanding borrowings under our credit facilities as of July 31, 2021.
◦During the six months ended July 30, 2022, we made a payment of $175.0 million for share repurchases under the 2022 ASR Contract. During the six months ended July 31, 2021, there were no share repurchases.
•Accounts receivable consists of trade receivables relating primarily to our wholesale
business in Europe and, to a lesser extent, to our wholesale businesses in the Americas and Asia, royalty receivables relating to our licensing operations, credit card and retail concession receivables related to our retail businesses and certain other receivables. Accounts receivable increased by $1.7 million, or 0.6%, to $301.7 million as of July 30, 2022 compared to $299.9 million at July 31, 2021. On a constant currency basis, accounts receivable increased by $44.8 million, or 14.9%, when compared to July 31, 2021.
•Inventory increased by $105.2 million, or 24.5%, to $535.5 million as of July 30, 2022, from $430.3 million at July 31, 2021. On a constant
currency basis, inventory increased by $164.6 million, or 38.3%, when compared to July 31, 2021. The increase was mainly driven by our initiative to mitigate supply chain disruptions by ordering products earlier.
Global Store Count
During the quarter ended July 30, 2022, together with our partners, we opened 27 new stores worldwide, consisting of 18 stores in Europe and the Middle East, five stores in Asia and the Pacific, and four stores in the Americas. Together with our partners, we closed 34 stores worldwide, consisting of 18 stores in Europe and the Middle East, 11 stores in Asia and the Pacific, and five stores in the Americas.
We ended the second quarter of fiscal 2023 with stores and concessions worldwide comprised as follows:
Stores
Concessions
Region
Total
Directly-Operated
Partner Operated
Total
Directly-Operated
Partner Operated
United States
243
243
—
—
—
—
Canada
73
73
—
—
—
—
Central and South America
102
68
34
29
29
—
Total
Americas
418
384
34
29
29
—
Europe and the Middle East
795
560
235
51
51
—
Asia
and the Pacific
418
120
298
254
113
141
Total
1,631
1,064
567
334
193
141
Of
the total stores, 1,347 were GUESS? stores, 186 were GUESS? Accessories stores, 59 were G by GUESS (GbG) stores and 39 were MARCIANO stores.
The following presents our condensed consolidated statements of income (in thousands, except per share data):
Three
Months Ended
Jul 30, 2022
Jul 31, 2021
$ change
% change
Net revenue
$
642,690
100.0
%
$
628,624
100.0
%
$
14,066
2.2
%
Cost
of product sales
372,189
57.9
%
334,538
53.2
%
37,651
11.3
%
Gross profit
270,501
42.1
%
294,086
46.8
%
(23,585)
(8.0
%)
Selling,
general and administrative expenses
216,043
33.6
%
205,617
32.8
%
10,426
5.1
%
Asset impairment charges
1,919
0.3
%
1,501
0.2
%
418
27.8
%
Net
gains on lease modifications
(907)
(0.1
%)
(420)
(0.1
%)
(487)
116.0
%
Earnings from operations
53,446
8.3
%
87,388
13.9
%
(33,942)
(38.8
%)
Interest
expense, net
(2,776)
(0.4
%)
(5,548)
(0.9
%)
2,772
(50.0
%)
Other expense, net
(9,053)
(1.4
%)
(1,001)
(0.1
%)
(8,052)
804.4
%
Earnings
before income tax expense
41,617
6.5
%
80,839
12.9
%
(39,222)
(48.5
%)
Income tax expense
14,177
2.2
%
17,692
2.9
%
(3,515)
(19.9
%)
Net
earnings
27,440
4.3
%
63,147
10.0
%
(35,707)
(56.5
%)
Net earnings attributable to noncontrolling interests
3,478
0.6
%
2,085
0.3
%
1,393
66.8
%
Net
earnings attributable to Guess?, Inc.
$
23,962
3.7
%
$
61,062
9.7
%
(37,100)
(60.8
%)
Net
earnings per common share attributable to common stockholders:
Basic
$
0.42
$
0.94
$
(0.52)
Diluted
$
0.35
$
0.91
$
(0.56)
Effective
income tax rate
34.1
%
21.9
%
Net Revenue. Net revenue increased by $14 million, or 2%, compared to the same prior-year quarter. In constant currency, net revenue increased by 12%. Roughly 50% of the increase was driven by higher wholesale shipments. Additionally, net new store openings,
operation of stores this quarter that had been temporarily closed in the same prior-year quarter and positive store comp sales each contributed to roughly 15% of the increase. Currency translation fluctuations relating to our non-U.S. operations unfavorably impacted net revenue by $60.2 million compared to the same prior-year quarter.
Gross Margin. Gross margin decreased by 4.7% for the quarter ended July 30, 2022 compared to the same prior-year quarter, driven by a 390 basis point decrease in product margin and an 80 basis point increase in occupancy rate. The lower product margin was due to an unfavorable 200 basis point impact from higher markdowns and an unfavorable 110 basis point impact from currency impact. The higher occupancy rate was due to a 70 basis point unfavorable impact from lower rent relief and a 60 basis point unfavorable impact from
higher store occupancy costs, partially offset by favorable leveraging of expenses from higher revenues.
Gross Profit.Gross profit decreased $24 million for the quarter ended July 30, 2022 compared to the same prior-year quarter. The decrease in gross profit was driven by $26 million of unfavorable impact from currency translation, $13 million due to higher markdowns, $5 million from unfavorable currency transactional impacts, $5 million due to lower rent relief and $4 million higher store occupancy expense, partially offset by $35 million of favorable impact due to higher revenues in constant currency.
Distribution costs include labor, inbound freight charges, purchasing costs and related overhead. Distribution costs related to supplying inventory to store locations within our retail business are included in cost of product sales. We also include net royalties received on our inventory purchases of licensed product as a reduction to cost of product sales. We generally exclude wholesale-related distribution costs from gross margin, including them instead in SG&A expenses. Additionally, we include retail store occupancy costs in cost of product sales. As a result, our gross margin may not be comparable to that of other entities. To ensure expenses are separated appropriately, we track activities at each distribution center location and record the costs
associated with our shipments of goods either as cost of sales or as selling, general and administrative expenses, accordingly.
SG&A Rate. Our SG&A rate increased 0.8% for the quarter ended July 30, 2022 from the same prior-year quarter. The unfavorable change in SG&A rate was mainly driven by 70 basis points related to higher labor in Americas Retail and Europe and a 40 basis point unfavorable impact from lower government subsidies. These unfavorable impacts were partially offset by leveraging of expenses from higher revenues.
SG&A Expenses. SG&A expenses increased $10 million for the quarter ended July 30, 2022 from the same prior-year quarter. The increase in SG&A expenses, which included a favorable impact
from currency translation, was mainly driven by $7 million of higher store selling expenses in Americas Retail and Europe and $3 million of lower government subsidies. Currency translation fluctuations relating to our foreign operations favorably impacted SG&A expenses by $18 million.
Asset Impairment Charges. During the quarters ended July 30, 2022 and July 31, 2021, we recognized $1.9 million and $1.5 million, respectively, of property and equipment and operating lease right-of-use assets impairment charges related to certain retail locations resulting from under-performance and expected store closures.
Net Gains on Lease Modifications. During the quarters ended July 30, 2022
and July 31, 2021, we recorded net gains on lease modifications of $0.9 million and $0.4 million, respectively, related primarily to the early termination of lease agreements for certain retail locations.
Operating Margin. Operating margin decreased 5.6% for the quarter ended July 30, 2022 compared to the same prior-year quarter. The decrease in operating margin was due to unfavorable impacts of 200 basis points from higher markdowns, 110 basis points from lower rent relief and government subsidies, 110 basis points from currency translation fluctuations and 70 basis points from higher store labor costs in Americas Retail and Europe. Excluding the impact of higher asset impairment charges, certain professional service and legal fees and related (credits) costs and net gains on lease modifications, our
operating margin would have decreased 5.4% compared to the same prior-year quarter.
Earnings from Operations. Earnings from operations decreased by $34 million for the quarter ended July 30, 2022 compared to the same prior-year quarter. Currency translation fluctuations relating to our foreign operations unfavorably impacted earnings from operations by $8 million.
Other Expense, Net. Other expense, net for the quarter ended July 30, 2022 was $9 million compared to $1 million in the same prior-year quarter. The change was primarily due to higher net unrealized and realized losses from foreign currency exposures compared to the same prior-year quarter.
Income Tax Expense. Income
tax expense for the quarter ended July 30, 2022 was $14 million, or a 34.1% effective income tax rate, compared to $18 million, or a 21.9% effective income tax rate in the same prior-year quarter. Generally, income tax expense for the interim periods is computed using the income tax rate estimated to be applicable for the full fiscal year, adjusted for discrete items, which is subject to ongoing review and evaluation by management. The change in the effective income tax rate was primarily due to a decrease in earnings, which included losses in certain tax jurisdictions for which the Company did not recognize an income tax benefit, in fiscal 2023 compared to the same prior-year period.
Net Earnings Attributable to Guess?, Inc. Net earnings attributable to Guess?, Inc. decreased $37 million for the quarter ended July 30, 2022 compared to the same prior-year quarter. Diluted EPS decreased $0.56 for the quarter ended July 30, 2022 compared to the same prior-year quarter. We estimate a net positive impact of $0.06 from our adoption of the accounting guidance related to our Notes and share buybacks and a negative impact from currency of $0.17 on diluted EPS in the quarter ended July 30, 2022 when compared to the same prior-year quarter.
Refer
to “Non-GAAP Measures” for an overview of our non-GAAP, or adjusted, financial results for the quarters ended July 30, 2022 and July 31, 2021. Excluding the impact of these non-GAAP items, adjusted net earnings attributable to Guess?, Inc. decreased $41 million and adjusted diluted EPS decreased $0.57 for the quarter ended July 30, 2022 compared to the same prior-year quarter. We estimate a net positive impact from our share buybacks of $0.05 and a negative impact from currency of $0.19 on adjusted diluted EPS in the quarter ended July 30, 2022 when compared to the same prior-year quarter.
Information by Business Segment
The following presents our net revenue and earnings (loss)
from operations by segment (in thousands):
Three Months Ended
Jul 30, 2022
Jul 31, 2021
$
change
% change
Net revenue:
Americas Retail
$
181,655
$
186,297
$
(4,642)
(2.5
%)
Americas
Wholesale
50,195
49,858
337
0.7
%
Europe
336,707
322,723
13,984
4.3
%
Asia
49,365
47,813
1,552
3.2
%
Licensing
24,768
21,933
2,835
12.9
%
Total
net revenue
$
642,690
$
628,624
14,066
2.2
%
Earnings (loss) from operations:
Americas Retail
$
23,921
$
37,916
(13,995)
(36.9
%)
Americas
Wholesale
11,442
12,944
(1,502)
(11.6
%)
Europe
34,538
51,417
(16,879)
(32.8
%)
Asia
(3,300)
(4,847)
1,547
(31.9
%)
Licensing
21,206
20,154
1,052
5.2
%
Total
segment earnings from operations
87,807
117,584
(29,777)
(25.3
%)
Corporate overhead
(33,349)
(29,115)
(4,234)
14.5
%
Asset
impairment charges
(1,919)
(1,501)
(418)
27.8
%
Net gains on lease modifications
907
420
487
116.0
%
Total
earnings from operations
$
53,446
$
87,388
(33,942)
(38.8
%)
Operating margins:
Americas
Retail
13.2
%
20.4
%
Americas Wholesale
22.8
%
26.0
%
Europe
10.3
%
15.9
%
Asia
(6.7
%)
(10.1
%)
Licensing
85.6
%
91.9
%
Total
Company
8.3
%
13.9
%
Americas Retail
Net revenue from our Americas Retail segment decreased by $5 million, or 2% for the quarter ended July 30, 2022 from the same prior-year quarter. In constant currency, net revenue decreased by 2% compared to the same prior-year quarter. The decrease in net revenue was driven by unfavorable impacts of $8 million from negative comparable sales, $3 million from lower e-commerce sales and $1 million from net permanent store closures. This was
partially offset by favorable impacts of $8 million from the operation of stores this quarter that had been temporarily closed in the same prior-year quarter. Comparable sales (including e-
commerce) decreased 6% in U.S. dollars and 5% in constant currency compared to the same prior-year quarter. The inclusion of our e-commerce sales decreased the comparable sales percentage by 1% in U.S. dollars and a minimal impact in constant currency. As of July 30,
2022, we directly operated 384 stores in the Americas compared to 389 stores at July 31, 2021, excluding concessions, which represents a 1% decrease from the same prior-year quarter. Currency translation fluctuations relating to our non-U.S. retail stores and e-commerce sites had an unfavorable impact on net revenue of $1.8 million.
Operating margin decreased 7.2% for the quarter ended July 30, 2022 from the same prior-year quarter. Approximately 350 basis points of the decrease was driven by higher markdowns, 300 basis points was due to the unfavorable impact of negative comps, 140 basis points was due to higher store labor costs and 130 basis points was due to lower COVID-19 relief compared to the same prior-year quarter. This was partially offset by 230 basis points of favorable impact from higher initial markups.
Earnings
from operations from our Americas Retail segment decreased by $14 million, or 37% for the quarter ended July 30, 2022 from the same prior-year quarter. The decrease was driven by a $6 million decrease from higher markdowns, a $4 million decrease from lower revenue, a $2 million decrease from higher store labor costs, and a $2 million decrease from lower COVID-19 relief. This was partially offset by a $4 million increase driven by higher initial markups.
Americas Wholesale
Net revenue from our Americas Wholesale segment increased by $0.3 million, or 1% for the quarter ended July 30, 2022 from the same prior-year quarter. In constant currency, net revenue increased by 2%. The increase in net revenues was driven by $6 million of favorable impact from higher shipments in our Central and
South American business, mainly driven by increased sales in Mexico. This was partially offset by a $6 million unfavorable impact from our U.S. wholesale business. Currency translation fluctuations relating to our non-U.S. wholesale businesses had an unfavorable impact on net revenue of $1 million.
Operating margin decreased 3.2% for the quarter ended July 30, 2022 compared to the same prior-year quarter. The decrease in operating margin was mainly driven by higher markdowns.
Earnings from operations from our Americas Wholesale segment decreased by $2 million, or 12% for the quarter ended July 30, 2022 from the same prior-year quarter, mainly driven by $2 million of higher markdowns.
Europe
Net
revenue from our Europe segment increased by $14 million, or 4% for the quarter ended July 30, 2022 compared to the same prior-year quarter. In constant currency, net revenue increased by 21%. The increase in net revenue was mainly driven by $36 million higher wholesale revenue, $15 million from positive comparable store sales and $8 million in net new store openings, partially offset by $52 million of unfavorable currency translation fluctuations. Comparable sales (including e-commerce) decreased 4% in U.S. dollars and increased 10% in constant currency compared to the same prior-year quarter. The inclusion of our e-commerce sales negatively impacted the comparable sales percentage by 1% in U.S. dollars and and 2% in constant currency. As of July 30, 2022, we directly operated 560 stores in Europe compared to 524 stores at July 31,
2021, excluding concessions, which represents a 7% increase from the same prior-year quarter.
Operating margin decreased 5.6% for the quarter ended July 30, 2022 compared to the same prior-year quarter. The decrease in operating margin was almost entirely driven by a lower product margin. The decrease in product margin was mainly driven by a 210 basis point impact from currency translation fluctuations, a 170 basis point impact from lower initial markups and a 120 basis point impact from higher markdowns.
Earnings from operations from our Europe segment decreased by $17 million, or 33% for the quarter ended July 30, 2022 compared to the same prior-year quarter. The decrease in operating profit was mainly driven by $13 million of unfavorable currency impacts, including $8 million
of unfavorable translation impact, $6 million of lower initial markups and $4 million due to higher markdowns, partially offset by the favorable impact of higher revenues.
Net revenue from our Asia segment increased by $2 million, or 3% for the quarter ended July 30, 2022 from the same prior-year quarter. In constant currency, net revenue increased by 15%. The increase in net revenue was driven by $3
million due to positive comparable store sales, $3 million in higher revenues in Australia, and $1 million from higher revenue in South Korea as a result of the direct operation of certain new stores in South Korea, which we recently acquired from our wholesale partners. This was partially offset by $6 million of unfavorable currency translation impact. Comparable sales (including e-commerce) decreased 2% in U.S. dollars and increased 10% in constant currency compared to the same prior-year quarter. The inclusion of our e-commerce sales negatively impacted the comparable sales percentage by 4% in U.S. dollars and 3% in constant currency.
Operating margin increased 3.4% for the quarter ended July 30, 2022 from the same prior-year quarter, mainly driven by leveraging of expenses.
Loss from operations from our Asia segment decreased
by $2 million, or 32% for the quarter ended July 30, 2022 compared to the same prior-year quarter, mainly driven by higher revenues. Currency translation fluctuations relating to our Asia operations favorably impacted the loss from operations by $0.2 million.
Licensing
Net royalty revenue from our Licensing segment increased by $3 million, or 13% for the quarter ended July 30, 2022 from the same prior-year quarter, mainly driven by higher royalties in our handbag category.
Earnings from operations from our Licensing segment increased by $1 million, or 5% for the quarter ended July 30, 2022 from the same prior-year quarter. The increase was driven by the favorable impact to earnings from
higher revenues.
Corporate Overhead
Unallocated corporate overhead increased by $4 million, or 15% for the quarter ended July 30, 2022 compared to the same prior-year quarter, primarily due to higher personnel expenses and certain professional service and legal fees and related (credits) costs.
The following presents our condensed consolidated statements of income (in thousands, except per share data):
Six
Months Ended
Jul 30, 2022
Jul 31, 2021
$ change
% change
Net revenue
$
1,236,163
100.0
%
$
1,148,626
100.0
%
$
87,537
7.6
%
Cost
of product sales
718,513
58.1
%
642,982
56.0
%
75,531
11.7
%
Gross profit
517,650
41.9
%
505,644
44.0
%
12,006
2.4
%
Selling,
general and administrative expenses
425,874
34.4
%
392,301
34.1
%
33,573
8.6
%
Asset impairment charges
3,463
0.3
%
1,942
0.2
%
1,521
78.3
%
Net
gains on lease modifications
(1,508)
(0.1
%)
(2,565)
(0.2
%)
1,057
(41.2
%)
Earnings from operations
89,821
7.3
%
113,966
9.9
%
(24,145)
(21.2
%)
Interest
expense, net
(5,295)
(0.4
%)
(11,100)
(1.0
%)
5,805
(52.3
%)
Other expense, net
(25,505)
(2.1
%)
(3,702)
(0.4
%)
(21,803)
589.0
%
Earnings
before income tax expense
59,021
4.8
%
99,164
8.6
%
(40,143)
(40.5
%)
Income tax expense
21,127
1.7
%
23,147
2.0
%
(2,020)
(8.7
%)
Net
earnings
37,894
3.1
%
76,017
6.6
%
(38,123)
(50.2
%)
Net earnings attributable to noncontrolling interests
5,962
0.5
%
2,949
0.2
%
3,013
102.2
%
Net
earnings attributable to Guess?, Inc.
$
31,932
2.6
%
$
73,068
6.4
%
(41,136)
(56.3
%)
Net
earnings (loss) per common share attributable to common stockholders:
Basic
$
0.54
$
1.13
$
(0.59)
Diluted
$
0.46
$
1.10
$
(0.64)
Effective
income tax rate
35.8
%
23.3
%
Net Revenue. Net revenue increased by $88 million or 8%, compared to the same prior-year period. In constant currency, net revenue increased by 16%. Roughly 40% of the increase was driven by higher wholesale revenue, 30% from the operation of stores in the current year period that had been temporarily closed in the same prior-year period, slightly over 10% from net new store openings and less than 10% from
positive store comparable sales.
Gross Margin. Gross margin decreased 2.1% for the six months ended July 30, 2022 compared to the same prior-year period. The decrease in gross margin was driven entirely by lower product margin. The product margin decrease was driven by 100 basis points due to higher markdowns, 90 basis points of unfavorable currency impacts and 60 basis points of lower initial markups. Overall, occupancy rate remained relatively flat, driven by lower COVID relief compared to the same prior-year period, offset by leveraging of expenses.
Gross Profit.Gross profit increased $12 million for the six months ended July 30, 2022 compared to the same prior-year period. The increase in gross profit was
driven by $92 million due to higher net revenue in constant currency, partially offset by $43 million of unfavorable currency translational impact, $12 million of higher
markdowns, $9 million of lower COVID relief compared to the prior year, $7 million of unfavorable transactional currency impact and $7 million of lower initial markups.
Distribution costs include labor, inbound freight charges, purchasing costs and related overhead. Distribution costs related
to supplying inventory to store locations within our retail business are included in cost of product sales. We also include net royalties received on our inventory purchases of licensed product as a reduction to cost of product sales. We generally exclude wholesale-related distribution costs from gross margin, including them instead in SG&A expenses. Additionally, we include retail store occupancy costs in cost of product sales. As a result, our gross margin may not be comparable to that of other entities. To ensure expenses are separated appropriately, we track activities at each distribution center location and record the costs associated with our shipments of goods either as cost of sales or as selling, general and administrative expenses, accordingly.
SG&A Rate. Our SG&A rate increased 0.3% for the six months ended July 30, 2022 from
the same prior-year period. The unfavorable change in SG&A rate was due to a 100 basis point impact from higher store selling expenses and a 30 basis point impact from higher expenses related to certain professional service and legal fees and related (credits) costs, partially offset by higher revenues.
SG&A Expenses. SG&A expenses increased by $34 million for the six months ended July 30, 2022 from the same prior-year period. The increase in SG&A expenses, which included a favorable impact from currency translation, was mainly driven by $25 million of higher store selling expenses in Americas Retail and Europe and $4 million of higher expenses related to certain professional service and legal fees and related (credits) costs. Currency translation fluctuations relating to our foreign operations
favorably impacted SG&A expenses by $28 million.
Asset Impairment Charges. During the six months ended July 30, 2022 and July 31, 2021, we recognized $3.5 million and $1.9 million, respectively, of property and equipment and operating lease right-of-use assets impairment charges related to certain retail locations resulting from under-performance and expected store closures.
Net Gains on Lease Modifications. During the six months ended July 30, 2022 and July 31, 2021, we recorded net gains on lease modifications of $1.5 million and $2.6 million, respectively, related primarily to the early termination of lease agreements for certain
retail locations.
Operating Margin. Operating margin decreased 2.6% for the six months ended July 30, 2022 compared to the same prior-year period. The decrease in operating margin was driven by a 110 basis point impact from currency impacts, a 100 basis point impact from higher markdowns, a 100 basis point impact from higher store labor costs, and a 90 basis point impact from lower rent relief and government subsidies, partially offset by leveraging of expenses from higher revenues. Higher expenses related to certain professional service and legal fees and related (credits) costs unfavorably impacted operating margin by 30 basis points. Excluding the impact of higher asset impairment charges and certain professional service and legal fees and related (credits) costs and lower net gains on lease modifications, our operating margin would have decreased
2.1% compared to the same prior-year period.
Earnings from Operations. Earnings from operations decreased by $24 million for the six months ended July 30, 2022 compared to the same prior-year period. Currency translation fluctuations relating to our foreign operations unfavorably impacted earnings from operations by $14 million.
Other Expense, Net. Other expense, net for the six months ended July 30, 2022 was $26 million compared to $4 million in the same prior-year period. The change was primarily due to higher net unrealized and realized losses from foreign currency exposures and, to a lesser extent, net unrealized losses on our Supplemental Executive Retirement Plan (“SERP”) related assets compared
to net unrealized gains in the same prior-year period.
Income Tax Expense. Income tax expense for the six months ended July 30, 2022 was $21 million, or a 35.8% effective income tax rate, compared to income tax expense of $23 million, or a 23.3% effective income tax rate, in the same prior-year period. Generally, income tax expense for the interim periods is computed
using the income
tax rate estimated to be applicable for the full fiscal year, adjusted for discrete items, which is subject to ongoing review and evaluation by management. The change in the effective income tax rate was primarily due to a decrease in earnings, which included losses in certain tax jurisdictions for which the Company did not recognize an income tax benefit, in fiscal 2023 compared to the same prior-year period.
Net Earnings Attributable to Guess?, Inc. Net earnings attributable to Guess?, Inc. decreased $41 million for the six months ended July 30, 2022 compared to the same prior-year period. Diluted EPS decreased $0.64 for the six months ended July 30, 2022 compared to the same prior-year period. We estimate a net positive
impact from our adoption of new accounting guidance related to our Notes and share buybacks of $0.09 and a negative impact from currency of $0.31 on diluted EPS in the six months ended July 30, 2022 when compared to the same prior-year period.
Refer to “Non-GAAP Measures” for an overview of our non-GAAP, or adjusted, financial results for the six months ended July 30, 2022 and July 31, 2021. Excluding the impact of these non-GAAP items, adjusted net earnings attributable to Guess?, Inc. decreased $40 million and adjusted diluted EPS decreased $0.55 for the six months ended July 30, 2022 compared to the same prior-year period. We estimate a net positive impact from our share buybacks of $0.06 and a net negative impact from
currency of $0.33 on adjusted diluted EPS in the six months ended July 30, 2022 when compared to the same prior-year period.
Information by Business Segment
The following presents our net revenue and earnings (loss) from operations by segment (in thousands):
Six
Months Ended
Jul 30, 2022
Jul 31, 2021
$ change
% change
Net revenue:
Americas
Retail
$
348,140
$
341,832
$
6,308
1.8
%
Americas Wholesale
118,552
95,288
23,264
24.4
%
Europe
612,716
564,575
48,141
8.5
%
Asia
105,587
103,473
2,114
2.0
%
Licensing
51,168
43,458
7,710
17.7
%
Total
net revenue
$
1,236,163
$
1,148,626
87,537
7.6
%
Earnings (loss) from operations:
Americas Retail
$
38,187
$
58,190
(20,003)
(34.4
%)
Americas
Wholesale
28,839
24,499
4,340
17.7
%
Europe
52,428
55,615
(3,187)
(5.7
%)
Asia
(6,787)
(6,655)
(132)
2.0
%
Licensing
45,650
39,585
6,065
15.3
%
Total
segment earnings from operations
158,317
171,234
(12,917)
(7.5
%)
Corporate overhead
(66,541)
(57,891)
(8,650)
14.9
%
Asset
impairment charges
(3,463)
(1,942)
(1,521)
78.3
%
Net gains on lease modifications
1,508
2,565
(1,057)
(41.2
%)
Total
earnings (loss) from operations
$
89,821
$
113,966
(24,145)
(21.2
%)
Operating margins:
Americas Retail
11.0
%
17.0
%
Americas
Wholesale
24.3
%
25.7
%
Europe
8.6
%
9.9
%
Asia
(6.4
%)
(6.4
%)
Licensing
89.2
%
91.1
%
Total
Company
7.3
%
9.9
%
Americas Retail
Net revenue from our Americas Retail segment increased by $6 million, or 2% for the six months ended July 30, 2022 compared to the same prior-year period. In constant currency, net revenue increased by 2% compared to the same prior-year period. The increase in net revenue was driven by $17 million from the
operation of stores during the current year period that had been temporarily closed in the same prior-year period. This was partially offset by $4 million for each of lower e-commerce sales and negative comparable sales, and $2 million of net permanent store closures. Comparable sales (including e-commerce) decreased 2% in U.S. dollars and constant currency compared to the same prior-year period. The inclusion of our e-commerce sales decreased the comparable sales percentage by 1% in U.S. dollars and constant currency. As of July 30, 2022, we directly operated 384 stores in the Americas compared to 389 stores at July 31, 2021, excluding concessions, which represents
a 1% decrease from the same prior-year period. Currency translation fluctuations relating to our non-U.S. retail stores and e-commerce sites had an unfavorable impact on net revenue of $2 million.
Operating margin decreased 6.0% for the six months ended July 30, 2022 compared to the same prior-year period. Approximately 270 basis points of the decrease was driven by higher store labor costs, 260 basis points was due to higher markdowns, 140 basis points was due to lower rent relief and lower government subsidies and 120 basis points was due to negative store comparable sales. This was partially offset by higher initial markups.
Earnings from operations from our Americas Retail segment decreased $20 million for the six months ended July 30, 2022 compared to the same prior-year period.
Higher store labor costs drove $9 million of the decrease, $9 million was due to higher markdowns, $5 million was due to lower rent relief and government subsidies and $4 million was due to negative comparable store sales. This was partially offset by higher initial markups.
Americas Wholesale
Net revenue from our Americas Wholesale segment increased by $23 million, or 24% for the six months ended July 30, 2022 from the same prior-year period. Approximately 45% of the increase was driven by our Mexico wholesale business, 40% from our U.S. wholesale business and 10% from our Canada wholesale business. Currency translation fluctuations relating to our non-U.S. wholesale businesses had an unfavorable impact on net revenue of $0.5 million.
Operating margin decreased
1.4% for the six months ended July 30, 2022 from the same prior-year period. The decrease in operating margin was driven by 280 basis points from higher markdowns and 90 basis points from lower government subsidies, partially offset by leverage from higher revenues.
Earnings from operations from our Americas Wholesale segment increased by $4 million for the six months ended July 30, 2022 from the same prior-year period. Approximately $9 million of the increase is due to higher revenue, partially offset by $3 million due to higher markdowns and $1 million from lower government subsidies.
Europe
Net revenue from our Europe segment increased by $48 million, or 9% for the six months ended July
30, 2022 from the same prior-year period. In constant currency, net revenue increased by 23%. The increase was driven by $48 million of higher wholesale shipments, $46 million from the operation of stores in the current year period that had been temporarily closed in the same prior-year period, $18 million of positive store comparable sales and $15 million of net new store openings, partially offset by $82 million of unfavorable currency translation impact. Comparable sales (including e-commerce) decreased 5% in U.S. dollars and increased 8% in constant currency compared to the same prior-year period. The inclusion of our e-commerce sales decreased the comparable sales percentage by 2% in U.S. dollars and 3% in constant currency. As of July 30, 2022, we directly operated 560 stores in Europe compared to 524 stores at July 31, 2021, excluding concessions, which represents
a 7% increase from the same prior-year period.
Operating margin decreased 1.3% for the six months ended July 30, 2022 from the same prior-year period. The decrease in operating margin was driven by 270 basis points from lower initial markups, 230 basis points from unfavorable currency impacts and 100 basis points from lower rent relief and government subsidies, partially offset by favorable leverage from higher revenues.
Earnings
from operations from our Europe segment decreased by $3 million, or 6% for the six months ended July 30, 2022 compared to the same prior-year period. The decrease in operating profit was mainly driven by $22 million of unfavorable currency impacts, including a $14 million unfavorable translation impact, a $16 million decrease in initial markups and a $6 million decrease in rent relief and lower government subsidies, partially offset by the favorable impact of higher revenues.
Asia
Net revenue from our Asia segment increased by $2 million, or 2% for the six months ended July 30, 2022 compared to the same prior-year period. In constant currency, net revenue increased by 11%. The increase in net revenue was driven
by $9 million from the impact of the direct operation of certain new stores in South Korea, which we recently acquired from our wholesale partners, and $4 million from our Australia wholesales business, partially offset by $10 million from the negative impact of the COVID-19 pandemic in China. Comparable sales (including e-commerce) decreased 6% in U.S. dollars and increased 2% in constant currency compared to the same prior-year period. The inclusion of our e-commerce sales negatively impacted the comparable sales percentage by 2% in U.S. dollars and constant currency. Currency translation fluctuations relating to our Asian operations unfavorably impacted net revenue by $9 million.
Operating margin for the six months ended July 30, 2022 remained flat compared to the same prior-year period.
Loss
from operations from our Asia segment increased by $0.1 million, or 2% for the six months ended July 30, 2022 from the same prior-year period. While we experienced approximately $5 million in lower profit in China due to the impact of the COVID-19 pandemic, this was largely offset by approximately $1 million favorable impact from each of our businesses in South Korea, Australia, and Singapore. Currency translation fluctuations relating to our Asia operations unfavorably impacted the loss from operations by $0.1 million.
Licensing
Net royalty revenue from our Licensing segment increased by $8 million, or 18% for the six months ended July 30, 2022 compared to the same prior-year period, mainly driven by higher royalties
in our handbag category.
Earnings from operations from our Licensing segment increased by $6 million, or 15% for the six months ended July 30, 2022 compared to the same prior-year period. The increase was driven by the favorable impact to earnings from higher revenues.
Corporate Overhead
Unallocated corporate overhead increased by $9 million, or 15% for the six months ended July 30, 2022 from the same prior-year period, due to an increase of $4 million in expenses related to certain professional service and legal fees and related (credits) costs, an increase of $3 million due to higher personnel and performance based compensation and an increase of $1 million in advertising costs.
Non-GAAP
Measures
The financial information presented in this Quarterly Report includes non-GAAP financial measures, such as adjusted results and constant currency financial information. For the three and six months ended July 30, 2022 and July 31, 2021, the adjusted results exclude the impact of certain professional service and legal fees and related (credits) costs, asset impairment charges, net gains on lease modifications, non-cash amortization of debt discount on our Notes, the related income tax impacts of these adjustments, the impact from changes in the income tax law on deferred income taxes in certain tax jurisdictions, net income tax settlements and adjustments to specific uncertain income tax positions, as well as certain discrete income tax adjustments related primarily to an intra-entity transfer of intellectual property
rights to a wholly-owned Swiss subsidiary, in each case where applicable. These non-GAAP measures are provided in addition to, and not as alternatives for, our reported GAAP results.
These items affect the comparability of our reported results. The financial results are also presented on a non-GAAP basis, as defined in Section 10(e) of Regulation S-K of the SEC, to exclude the effect of these items. We have excluded these items from our adjusted financial measures primarily because we believe these
items are not indicative of the underlying performance of our business and the adjusted financial information provided is useful for investors to evaluate the comparability of our operating results and our future outlook (when reviewed in conjunction with our GAAP financial statements).
A reconciliation of reported GAAP results to comparable non-GAAP results follows (in thousands, except per share data):
Three
Months Ended
Six Months Ended
Jul 30, 2022
Jul 31, 2021
Jul 30, 2022
Jul 31, 2021
Reported GAAP net earnings attributable to Guess?, Inc.
$
23,962
$
61,062
$
31,932
$
73,068
Certain
professional service and legal fees and related (credits) costs1
1,260
109
5,677
1,187
Asset impairment charges2
1,919
1,501
3,463
1,942
Net
gains on lease modifications3
(907)
(420)
(1,508)
(2,565)
Amortization of debt discount4
—
2,781
—
5,562
Discrete
income tax adjustments5
(2,772)
81
416
228
Income tax impact from adjustments6
(589)
(1,036)
(1,870)
(1,471)
Total
adjustments affecting net earnings attributable to Guess?, Inc.
(1,089)
3,016
6,178
4,883
Adjusted net earnings attributable to Guess?, Inc.
$
22,873
$
64,078
$
38,110
$
77,951
Net
earnings per common share attributable to common stockholders:
GAAP diluted7
$
0.35
$
0.91
$
0.46
$
1.10
Adjusted diluted7
$
0.39
$
0.96
$
0.62
$
1.17
Weighted
average common shares outstanding attributable to common stockholders:
1 Amounts
recorded represent certain professional service and legal fees and related (credits) costs which we otherwise would not have incurred as part of our business operations.
2 Amounts represent asset impairment charges related primarily to impairment of property and equipment and operating lease right-of-use assets related to certain retail locations resulting from under-performance and expected store closures.
3 Amounts recorded represent net gains on lease modifications related primarily to the early termination of certain lease agreements.
4 In April 2019, we issued $300 million principal amount of the Notes in a private offering. Prior to adoption of ASU 2020-06, we separated the Notes into liability (debt) and equity (conversion option) components. The
debt discount, which represented an amount equal to the fair value of the equity component, was amortized as non-cash interest expense over the term of the Notes. We adopted ASU 2020-06 under the modified retrospective method as of January 30, 2022. Upon adoption, the equity component was eliminated in the current period and recorded as an adjustment to retained earnings. Prior periods are not affected.
5 Amounts represent discrete income taxes related primarily to the adjustments from an intra-entity transfer of intellectual property rights to a wholly-owned Swiss subsidiary, impacts from cumulative valuation allowances and the income tax benefits from an income tax rate change due to net operating loss carrybacks.
6 The income tax effect of certain professional service and
legal fees and related (credits) costs, asset impairment charges, net gains on lease modifications and the amortization of debt discount was based on the our assessment of deductibility using the statutory income tax rate (inclusive of the impact of valuation allowances) of the tax jurisdiction in which the charges were incurred.
7 Prior to adoption of ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40), for GAAP purposes, we incurred dilution above the initial strike price of our Notes of $25.78. At July 31, 2021, there was no dilution related to the Notes for the period.
We adopted ASU 2020-06 under the modified
retrospective method as of January 30, 2022. Upon adoption, we prospectively utilize the if-converted method to calculate GAAP diluted EPS. For GAAP purposes, we incur dilution of our Notes based on the initial conversion rate associated with the Notes. For the three and six months ended July 30, 2022, shares used in computing diluted EPS increased by 11.8 million shares due to the change from the treasury stock method to the if-converted method. Diluted net income per share for the three and six months ended July 30, 2022 is calculated based on GAAP net income and diluted weighted-average shares of 70.3 million and 72.4 million, respectively, which also includes the potentially dilutive effect of our stock options, restricted stock units and the Notes.
For adjusted diluted shares, we exclude the dilutive impact of the Notes at stock prices below $46.88, based on the bond hedge contracts in place that will deliver shares to offset dilution. At stock prices in excess of $46.88, we would have an obligation to deliver additional shares in excess of the dilution protection provided by the bond hedges.
Our discussion and analysis herein also includes certain constant currency financial information. Foreign currency exchange rate fluctuations affect the amount reported from translating our 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. We provide 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 and earnings (loss)from operations on a constant currency basis, operating 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. To calculate balance sheet amounts on a constant currency basis, the current period balance sheet amount is translated into U.S. dollars at the exchange rate in effect at the comparable prior-year period end. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different from the functional currency of that entity when exchange rates fluctuate. The constant
currency information presented may not be comparable to similarly titled measures reported by other companies.
In calculating the estimated impact of currency fluctuations (including translational and transactional impacts) on other measures such as earnings (loss) per share, we estimate gross margin (including the impact of foreign exchange currency contracts designated as cash flow hedges for anticipated merchandise purchases) and expenses using the appropriate prior-year rates, translate the estimated foreign earnings (loss) at the comparable prior-year rates and exclude the year-over-year earnings impact of gains or losses arising from balance sheet remeasurement and foreign exchange currency contracts not designated as cash flow hedges for
merchandise purchases.
Liquidity and Capital Resources
We use our liquidity globally primarily to fund our working capital, occupancy costs, interest payments on our debt, remodeling and rationalization of our retail stores, shop-in-shop programs, concessions, systems, infrastructure, compensation expenses, other existing operations, expansion plans, international growth and potential acquisitions and investments. If we experience a sustained decrease in consumer demand, we may require access to additional credit, which may not be available to us on commercially acceptable terms, or at all. Generally, our working capital needs are highest during the late summer and fall as our inventories increase before the holiday selling period. In addition, in the U.S., we
need liquidity to fund share repurchases and payment of dividends to our stockholders.
During the six months ended July 30, 2022, we relied primarily on trade credit, available cash, real estate and other operating leases, finance leases, proceeds from our credit facilities and term loans and internally generated funds to finance our operations. We anticipate we will be able to satisfy our ongoing cash requirements for the foreseeable future, including at least the next 12 months, for working capital, capital expenditures, payments on our debt, finance leases and operating leases, as well as lease modification payments, potential acquisitions and investments, expected income tax payments, and share repurchases and dividend payments to stockholders, primarily with cash flow from operations and existing cash balances as supplemented by borrowings under our existing credit facilities
and proceeds from our term loans, as needed. If we experience a sustained decrease in consumer demand related to the COVID-19 pandemic or to economic, political or other conditions or events, we may require access to additional credit, which may not be available to us on commercially acceptable terms or at all. (Such arrangements are described further in “Part I, Item 1. Financial Statements – Note 9 – Borrowings and Finance Lease Obligations” in the Form 10-Q.)
Due to the seasonality of our business and cash needs, we may increase borrowings under our established credit facilities from time-to-time during the next 12 months and beyond. On May 5, 2022, we entered into a €250 million revolving credit facility through a European subsidiary, which replaced certain European short-term borrowing arrangements. Refer to “Part I, Item 1. Financial Statements – Note 9 - Borrowings
and Finance Lease Obligations” for further information.
We expect to settle the principal amount of our outstanding Notes in 2024 in cash and any excess in shares. Our outstanding Notes may be converted at the option of the holders as described in “Part I, Item 1. Financial Statements – Note 10 – Convertible Senior Notes and Related Transactions” of this Form 10-Q and in “Note 10 – Convertible Senior Notes and Related Transactions” of the Consolidated Financial Statements included
in our Annual Report on Form 10-K. As of July 30, 2022, none of the conditions allowing holders of the Notes to convert had been met. Pursuant to one of these conditions, if our stock trading price exceeds 130% of the conversion price of the Notes (currently $25.39) for at least 20 trading days during the 30 consecutive trading-day period ending on, and including, the last trading day of any calendar quarter, holders of the Notes would have the right to convert their convertible notes during the next calendar quarter. In accordance with the terms of the indenture governing the Notes, we have adjusted the conversion rate and the conversion price of the Notes for quarterly dividends exceeding $0.1125 per share. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and
shares of our common stock, at our election, in the manner and subject to the terms and conditions provided in the indenture governing the Notes. The convertible note hedge transaction we entered into in connection with our issuance of the Notes is expected generally to reduce the potential dilution upon conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of the Notes that are converted, as the case may be.
We have historically considered the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested. As a result of the 2017 Tax Cuts and Jobs Act, we had a substantial amount of previously taxed earnings that could be distributed to the U.S. without additional U.S.
taxation. We continue to evaluate our plans for reinvestment or repatriation of unremitted foreign earnings and regularly review our cash positions and determination of indefinite reinvestment of foreign earnings. If we determine that all or a portion of such foreign earnings are no longer indefinitely reinvested, we may be subject to additional foreign withholding taxes and U.S. state income taxes, beyond the one-time transition tax. As of July 30, 2022, we determined that approximately $18.3 million of such foreign earnings are no longer indefinitely reinvested. The incremental tax cost to repatriate these earnings to the U.S. is immaterial. We intend to indefinitely reinvest the remaining earnings from the our foreign subsidiaries for which a deferred income tax liability has not already been recorded. It is not practicable to
estimate the amount of income tax that might be payable if these earnings were repatriated due to the complexities associated with the hypothetical calculation.
As of July 30, 2022, we had cash and cash equivalents of $174.4 million, of which approximately $27.9 million was held in the U.S. Excess cash and cash equivalents, which represent the majority of our outstanding balance, are held primarily in overnight deposit and short-term time deposit accounts and money market accounts. Please refer to “Forward-Looking Statements” discussed above and “Part I, Item 1A. Risk Factors” contained in our most recent Annual Report on Form 10-K for the fiscal year ended January 29, 2022 for a discussion of risk factors which could reasonably be likely to result in a decrease of internally generated funds available to finance
capital expenditures and working capital requirements.
COVID-19 Impact on Liquidity
Refer to the “COVID-19 Business Update” section and in “Part 1, Item 1. Financial Statements - Note 1 - Basis of Presentation” for a discussion of the impact from the COVID-19 pandemic on our financial performance and our liquidity.
In light of store closures and reduced traffic in stores, we have taken certain actions with respect to certain of our existing leases, including engaging with landlords to discuss rent deferrals as well as other rent concessions. We suspended rental payments and/or paid reduced rental amounts with respect to certain of our retail stores that were closed or experiencing drastically reduced customer traffic as a result of the COVID-19 pandemic. We also have successfully negotiated with several
landlords, including some of our larger landlords and received rent abatement benefits as well as new lease terms for some of our affected leases. In some instances, where negotiations with landlords proved unsuccessful, we were engaged in litigation related to rent obligations both during the COVID-19 pandemic and through the term of the lease.
Net cash provided by operating activities was $1.5 million for the six months ended July 30, 2022, compared to $43.0 million for the same prior-year period, or a deterioration of $41.5 million. This deterioration was driven primarily by lower cash flows generated from net earnings and unfavorable changes in working capital, partially offset by a favorable impact from net income adjusted for noncash items. The unfavorable changes in working capital were due primarily to higher inventory levels as we placed orders earlier in order to mitigate some of the supply chain disruptions.
Investing Activities
Net cash used in investing activities was $51.2 million for the six months ended July 30, 2022, compared to $20.8 million for the
same prior-year period. Net cash used in investing activities for the six months ended July 30, 2022 related primarily to investments in existing store remodeling programs and retail expansion and, to a lesser extent, technology and other infrastructure.
The increase in cash used in investing activities was driven primarily by higher retail remodel and expansion costs and higher investments in technology and other infrastructure during the six months ended July 30, 2022 compared to the same prior-year period. During the six months ended July 30, 2022, we opened 36 directly-operated stores compared to 33 directly-operated stores that were opened in the same prior-year period.
Financing Activities
Net
cash used in financing activities was $181.1 million for the six months ended July 30, 2022, compared to $26.6 million for the same prior-year period. Net cash used in financing activities for the six months ended July 30, 2022 related primarily to our entrance into the 2022 ASR Contract to repurchase an aggregate of $175.0 million of our common stock, repayments on borrowings and finance lease obligations and payment of dividends, partially offset by proceeds from borrowings.
Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash
During the six months ended July 30, 2022, changes in foreign currency translation rates decreased
our reported cash, cash equivalents and restricted cash balance by $10.3 million compared to a decrease of $5.7 million during the same prior-year period. Refer to “Foreign Currency Volatility” for further information on fluctuations in exchange rates.
Working Capital
As of July 30, 2022, we had net working capital (including cash and cash equivalents) of $338.7 million compared to $466.2 million at January 29, 2022 and $548.7 million at July 31, 2021.
Our primary working capital needs are for the current portion of lease liabilities, accounts receivable and inventory. The accounts receivable balance consists of trade receivables relating primarily to our wholesale business in Europe
and, to a lesser extent, to our wholesale businesses in the Americas and Asia, royalty receivables relating to our licensing operations, credit card and retail concession receivables related to our retail businesses and certain other receivables. Accounts receivable increased by $1.7 million, or 0.6%, to $301.7 million as of July 30, 2022, from $299.9 million at July 31, 2021. On a constant currency basis, accounts receivable increased by $44.8 million, or 14.9%, when compared to July 31, 2021. As of July 30, 2022, approximately 52% of our total net trade receivables and 63% of our European net trade receivables were subject to credit insurance coverage, certain bank guarantees or letters of credit for collection purposes. Our credit insurance coverage contains certain terms
and conditions specifying deductibles and annual claim limits. Inventory increased by $105.2 million, or 24.5%, to $535.5 million as of July 30, 2022, from $430.3 million at July 31, 2021. On a constant currency basis, inventory increased by $164.6 million, or 38.3%, when compared to July 31, 2021, driven primarily by management initiatives to mitigate supply chain disruptions, including accelerating product orders.
Gross capital expenditures totaled $51.2 million, before deducting lease incentives of $0.8 million, for the six months ended July 30, 2022. This compares to gross capital expenditures of $21.6 million, before deducting lease incentives of $1.5 million, for the same prior-year period.
We will periodically evaluate strategic acquisitions and alliances and pursue those we believe will support and contribute to our overall growth initiatives.
Dividends
On August 24, 2022, we announced a regular quarterly cash dividend of $0.225 per share on our common stock. The cash dividend will be paid on September 23, 2022 to shareholders of record
as of the close of business on September 7, 2022. In accordance with the terms of the indenture governing the Notes, we will adjust the conversion rate (which is expected to increase) and the conversion price (which is expected to decrease) of the Notes effective as of September 6, 2022.
Decisions on whether, when and in what amounts to continue making any future dividend distributions will remain at all times entirely at the discretion of our Board of Directors, which reserves the right to change or terminate our dividend practices at any time and for any reason without prior notice. The payment of cash dividends in the future will be based upon a number of business, legal and other considerations, including our cash flow from operations,
capital expenditures, debt service and covenant requirements, cash paid for income taxes, earnings, share repurchases, economic conditions and U.S. and global liquidity.
Share Repurchases
During fiscal 2022, the Board of Directors terminated its previous 2012 $500 million share repurchase program and authorized a new $200 million share repurchase program. On March 14, 2022, the Board of Directors expanded its repurchase authorization by $100.0 million. Repurchases may be made on the open market or in privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or other available means. There is no minimum or maximum number of shares to be repurchased under the program and the program may be discontinued at any time, without prior notice.
On March
18, 2022, pursuant to existing share repurchase authorizations, we entered into the 2022 ASR Contract with the 2022 ASR Counterparty to repurchase an aggregate of $175.0 million of our common stock. Under the 2022 ASR Contract, we made a payment of $175.0 million to the 2022 ASR Counterparty and received an initial delivery of approximately 3.3 million shares of common stock on March 21, 2022. We received a final settlement of an additional 5.2 million shares under the 2022 ASR Contract on June 24, 2022.
During the three and six months ended July
30, 2022, we repurchased 5,196,027 and 8,985,603 shares, respectively, of our common stock under our 2021 Share Repurchase Program at an aggregate cost of $105.0 million and $186.7 million, respectively, which is inclusive of the shares repurchased under the 2022 ASR Contract. As of July 30, 2022, we had remaining authority under the 2021 Share Repurchase Program to purchase $62.3 million of our common stock. There were no shares repurchased under our 2012 Share Repurchase Program during the three and six months ended July 31, 2021.
Borrowings and Finance Lease Obligations and Convertible Senior Notes
Refer to “Part I, Item 1. Financial Statements – Note 9 – Borrowings and Finance Lease
Obligations” and “Part I, Item 1. Financial Statements – Note 10 – Convertible Senior Notes and Related Transactions” in this Form 10-Q for disclosures about our borrowings and finance lease obligations and convertible senior notes.
Supplemental Executive Retirement Plan
As a non-qualified pension plan, no dedicated funding of our SERP is required; however, we have made periodic payments into insurance policies held in a rabbi trust to fund the expected obligations arising under the non-qualified SERP.
The cash surrender values of the insurance policies were $66.4 million and $70.9 million as of July 30, 2022 and January 29, 2022, respectively, and were included in other assets in our condensed consolidated
balance sheets. As a result of changes in the value of the insurance policy investments, we recorded unrealized losses of $0.2 million and $3.5 million in other income and expense during the three and six months ended July 30, 2022, respectively, and unrealized gains of $2.2 million in other income and expense during the three and six months ended July 31, 2021. The projected benefit obligation was $49.3 million and $49.4 million as of July 30, 2022 and January 29, 2022, respectively, and was included in accrued expenses and other long-term liabilities in our
condensed consolidated balance sheets depending on the expected timing of payments. SERP benefit payments of $0.5 million and $1.0 million were made during the three and six months ended July 30, 2022, respectively. SERP benefit payments of $0.5 million and $1.0 million were made during the three and six months ended July 31, 2021, respectively.
Material Cash Requirements
As of July 30, 2022, there were no material changes to our material cash requirements from known contractual and other obligations, including commitments for capital expenditures, outside the ordinary course of business compared to the disclosures
included under “Liquidity and Capital Resources - Material Cash Requirements” in Item Part II, Item 7 in our Form 10-K for the fiscal year ended January 29, 2022. Refer to “Part I, Item 1. Financial Statements – Note 9 – Borrowings and Finance Lease Obligations” and “Part I, Item 1. Financial Statements – Note 10 – Convertible Senior Notes and Related Transactions” for further information on these arrangements.
Application of Critical Accounting Policies and Estimates
Our critical accounting policies reflecting our estimates and judgments are described in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022 filed with the SEC
on March 24, 2022. There have been no significant changes to our critical accounting policies other than the January 30, 2022 adoption of ASU 2020-06 which impacted the accounting and financial statement presentation of our Notes and our calculation of diluted earnings per common share. Refer to “Part I, Item 1. Financial Statements – Note 3 - Earnings per Share” and “Part I, Item 1. Financial Statements – Note 10 -Convertible Senior Notes and Related Transactions” for further information.
Recently Issued Accounting Guidance
Refer to “Part I, Item 1. Financial Statements – Note 1 – Basis of Presentation” for disclosures about recently issued accounting guidance.
ITEM
3.Quantitative and Qualitative Disclosures About Market Risk.
Exchange Rate Risk
More than two-thirds of product sales recorded for the six months ended July 30, 2022 were denominated in currencies other than the U.S. dollar. Our primary exchange rate risk relates to operations in Europe, Canada, South Korea, China, Hong Kong and Mexico. Changes in currencies affect our earnings in various ways. For further discussion on currency-related risk, please refer to our risk factors under “Part I, Item 1A. Risk Factors” contained in our most recent Annual Report on Form 10-K for the fiscal year ended January 29, 2022.
Foreign Currency Translation Adjustment
The local selling
currency is typically the functional currency for all of our significant international operations. In accordance with authoritative guidance, assets and liabilities of our foreign operations are translated from foreign currencies into U.S. dollars at period-end rates, while income and expenses are translated at the weighted average exchange rates for the period. The related translation adjustments are reflected as a foreign currency translation adjustment in accumulated other comprehensive income (loss) within stockholders’ equity. In addition, we record foreign currency translation adjustments related to our noncontrolling interests within stockholders’ equity. Accordingly, our reported other comprehensive income (loss) could be unfavorably impacted if the U.S. dollar strengthens, particularly against the British pound,
Canadian dollar, Chinese yuan, euro, Japanese yen, Korean won, Mexican peso, Polish zloty, Russian rouble and Turkish lira. Alternatively, if the U.S. dollar weakens relative to those currencies, our reported other comprehensive income (loss) could be favorably impacted. Our foreign currency translation adjustments recorded in other comprehensive income (loss) are significantly impacted by net assets denominated in euros.
Periodically, we may also use foreign exchange currency contracts to hedge the translation and economic exposures related to our net investments in certain of our international subsidiaries.
Changes in the fair values of these foreign exchange currency contracts, designated as net investment hedges, are recorded in foreign currency translation adjustment as a component of accumulated other comprehensive income (loss) within stockholders’ equity.
During the six months ended July 30, 2022, the total foreign currency translation adjustment decreased stockholders’ equity by $28.8 million, driven primarily by the strengthening of the U.S. dollar against the euro.
Foreign Currency Transaction Gains and Losses
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency, including gains and losses on foreign
exchange currency contracts (see below), are included in the condensed consolidated statements of income (loss). Net foreign currency transaction losses of $20.3 million and $8.2 million were included in the determination of net earnings for the six months ended July 30, 2022 and July 31, 2021, respectively.
We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Various transactions that occur primarily in Europe, Canada, South Korea, China, Hong Kong and Mexico are denominated in U.S. dollars, British
pounds and Russian roubles and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their functional currencies. These types of transactions include U.S. dollar-denominated purchases of merchandise and U.S. dollar- and British pound-denominated intercompany liabilities. In addition, certain operating expenses, tax liabilities and pension-related liabilities are denominated in Swiss francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency. Further, there are certain real estate leases that are denominated in a currency other than the functional currency of the respective entity that entered into the agreement (primarily Swiss francs, Russian roubles and Polish zloty). As a result, we may be exposed to volatility related to unrealized gains or losses on the translation of present value of future lease payment obligations when translated at the exchange rate as of
a reporting period-end. We are also subject to certain translation and economic exposures related to our net investment in certain of our international subsidiaries. We enter into derivative financial instruments to offset some, but not all, of our exchange risk. In addition, some of the derivative contracts in place will create volatility during the fiscal year as they are marked-to-market according to the accounting rules and may result in revaluation gains or losses in different periods from when the currency impact on the underlying transactions are realized.
Foreign Exchange Currency Contracts Designated as Cash Flow Hedges
During
the six months ended July 30, 2022, we purchased U.S. dollar forward contracts in Europe totaling US$198.0 million that were designated as cash flow hedges. As of July 30, 2022, we had forward contracts outstanding for our European operations of US$249.0 million to hedge forecasted merchandise purchases, which are expected to mature over the next 17 months. Our foreign exchange currency contracts are recorded in our condensed consolidated balance sheet at fair value based on quoted market rates. Changes in the fair value of the U.S. dollar forward contracts,
designated as cash flow hedges for forecasted merchandise purchases, are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in cost of product sales in the period that approximates the time the hedged merchandise inventory is sold.
As of July 30, 2022, accumulated other comprehensive income (loss) related to foreign exchange currency contracts included a $13.8 million net unrealized gain, net of tax, of which $11.6 million will be recognized in
cost
of product sales over the following 12 months, at the then current values on a pre-tax basis, which can be different than the current quarter-end values.
As of July 30, 2022, the net unrealized gain of the remaining open forward contracts recorded in our condensed consolidated balance sheet was approximately $9.1 million.
At January 29, 2022, we had forward contracts outstanding for our European operations of US$146.0 million that were designated as cash flow hedges. At January 29, 2022, the net unrealized gain of these open forward contracts
recorded in our condensed consolidated balance sheet was approximately $6.0 million.
Foreign Exchange Currency Contracts Not Designated as Hedging Instruments
We also have foreign exchange currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of foreign exchange currency contracts not designated as hedging instruments are reported in net earnings (loss) as part of other income (expense). For the six months ended July 30, 2022, we recorded a net gain of $3.1 million for our euro dollar foreign exchange currency
contracts not designated as hedges, which has been included in other income (expense). As of July 30, 2022, we had euro foreign exchange currency contracts to purchase US$47.5 million expected to mature over the next 15 months. As of July 30, 2022, the net unrealized gain of these open forward contracts recorded in our condensed consolidated balance sheet was approximately $3.2 million.
At January 29, 2022, we had euro foreign exchange currency contracts
to purchase US$19.0 million. At January 29, 2022, the net unrealized gain of these open forward contracts recorded in our condensed consolidated balance sheet was approximately $1.1 million.
Sensitivity Analysis
As of July 30, 2022, a sensitivity analysis of changes in foreign currencies when measured against the U.S. dollar indicates that, if the U.S. dollar had uniformly weakened by 10% against all of the U.S. dollar denominated foreign exchange derivatives totaling US$296.5 million, the fair value of the instruments would have decreasedby $32.9 million. Conversely, if the U.S. dollar uniformly strengthened by 10% against all of the U.S. dollar
denominated foreign exchange derivatives, the fair value of these instruments would have increased by $27.0 million. Any resulting changes in the fair value of the hedged instruments may be partially offset by changes in the fair value of certain balance sheet positions (primarily U.S. dollar denominated liabilities in our foreign operations) impacted by the change in the foreign currency rate. The ability to reduce the exposure of currencies on earnings depends on the magnitude of the derivatives compared to the balance sheet positions during each reporting cycle.
Interest Rate Risk
We are exposed to interest rate risk on our floating-rate debt. We have entered into interest rate swap agreements for certain of these agreements to effectively convert our floating-rate debt to a fixed-rate basis. The principal objective of these contracts
is to eliminate or reduce the variability of the cash flows in interest payments associated with our floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. We have elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts.
In April 2019, we issued $300 million principal amount of the Notes in a private offering. The fair value of the Notes is subject to interest rate risk, market risk and other factors due to a conversion feature. The fair value of the Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines. The interest and market value changes affect the fair value of the Notes but do not impact our financial position, cash flows or results of operations
due to the fixed nature of the debt obligation. Additionally, we carry the Notes at face value, less any unamortized discount of debt issuance costs on our balance sheet and we present the fair value for disclosure purposes only.
Interest Rate Swap Agreement Designated as Cash Flow Hedge
The fair value of the interest rate swap agreement is based upon inputs corroborated by observable market data. Changes in the fair value of the interest rate swap agreement,
designated as a cash flow hedge to hedge the variability of cash flows in interest payments associated with our floating-rate real estate secured loan (the “Mortgage Debt”), are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are amortized to interest expense over the term of the related debt.
As of July 30, 2022, accumulated other comprehensive income (loss) related to the interest rate swap agreement included a net unrealized gain of $0.4 million net of tax, which will be recognized in interest expense over the following 12 months, at the then current values on a pre-tax basis, which can be different than the current quarter-end values. As of July 30, 2022, the net unrealized gain of the interest rate swap recorded in our condensed consolidated balance sheet was
approximately $0.6 million. As of January 29, 2022, the net unrealized loss of the interest rate swap recorded in our condensed consolidated balance sheet was approximately $0.1 million.
Sensitivity Analysis
As of July 30, 2022, we had indebtedness related to term loans of $36.4 million, finance lease obligations of $21.7 million and the Mortgage Debt of $17.5 million. The term loans provide for annual interest rates ranging between 1.3% to 2.2%. The finance lease obligations are based on fixed interest rates derived from the respective agreements. The Mortgage Debt is covered by a separate interest rate swap agreement with a swap fixed interest rate of approximately 3.06% that matures in January 2026. The interest rate swap agreement is designated as a cash flow hedge and converts
the nature of our Mortgage Debt from LIBOR floating-rate debt to fixed-rate debt.
The fair values of our debt instruments are based on the amount of future cash flows associated with each instrument discounted using our incremental borrowing rate. As of July 30, 2022 and January 29, 2022, the carrying value was not materially different from fair value, as the interest rates on our debt approximated rates currently available to us. The fair value of our Notes is determined based on inputs that are observable in the market and have been classified as Level 2 in the fair value hierarchy.
ITEM 4. Controls and Procedures.
Under
the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the quarterly period covered by this report.
There was no change in our internal control over financial reporting during the second quarter of fiscal 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Refer to “Part I, Item 1. Financial Statements – Note 13 – Commitments and Contingencies” in this Form 10-Q for disclosures about our legal and other proceedings.
ITEM 1A. Risk Factors.
Other than the risk factor noted below, there have not been any material changes in the Risk Factors
as previously disclosed in our Annual Report on Form 10-K for the year ended January 29, 2022 filed with the SEC on March 24, 2022.
Our business may also be affected by existing or future sanctions and export controls targeting Russia and other responses to Russia's invasion of Ukraine.
As a result of Russia's invasion of Ukraine, the United States, the United Kingdom and the European Union, among others, have developed coordinated sanctions and export control measures targeting Russia, Belarus, and the Russian-controlled regions of Ukraine (Crimea, Donetsk, and Luhansk). These measures include: (i) blocking sanctions prohibiting dealings with various Russian senior government officials, and companies in various sectors important to the Russian economy, including major Russian financial
institutions; (ii) expanded sectoral sanctions related to designated Russian entities’ ability to raise capital; (iii) the disconnection of certain Russian and Belarusian banks from the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) financial messaging network; (iv) a ban on new investment in Russia; (v) a ban on the provision of certain accounting, trust formation and management consulting services; (vi) bans on the import into the United States of certain Russian origin products, including various energy products; (vii) bans on the conduct of business or investment activity in the Russian-controlled Crimea, Donetsk and Luhansk regions of Ukraine; and (viii) restrictions on the export of various products to Russia and Belarus, including certain dual-use industrial and commercial products, and luxury goods. Additionally, certain logistics operators have imposed bans on direct air deliveries to Russia and restrictions on land deliveries to
and from Russia, Belarus and Ukraine, none of which have had a material impact on our operations to date.
We are currently operating in Russia through wholesale and retail channels, and we have immaterial wholesale operations through local wholesale partners in Belarus and Ukraine. Our operations in Russia are operated primarily through Guess CIS, a majority-owned Russian subsidiary in which we had a 70% interest as of July 30, 2022 and January 29, 2022. Guess CIS currently operates 43 retail stores in Russia and acts as a distributor for our wholesale partners in Russia. We also operate in Russia through other local wholesale partners and by selling directly to retail customers through our European online store. Prior to February 2022, we also sold directly to retail customers in Ukraine and Belarus through our European online
store. The local distributor through which we operate in Ukraine does not operate in the Russian-controlled Crimea, Donetsk, or Luhansk regions of Ukraine.
Our operations in Russia, Belarus, and Ukraine represented less than 3% of the Company’s total revenue for the year ended January 29, 2022 and for the six months ended July 30, 2022, with our operations in Russia comprising over 90% of this total revenue. As of July 30, 2022, our total assets in Russia, all of which are held by Guess CIS, represented less than 2% of our total assets, consisting primarily of leasehold right of use assets, store inventory, furnishings and fixtures and receivables. We only maintain inventory in Russia in an amount
sufficient for operating our Russian retail stores. We do not maintain inventory or hold any other significant assets in Belarus or Ukraine.
The imposition of the current or possible future additional export controls and economic sanctions on transactions with Russia and Russian entities could limit or prevent us from (i) operating all or a portion of our business in Russia, (ii) performing under existing contracts involving our Russia business (including with respect to our Russian joint venture and the potential purchase by us of the remaining 30% interest held by our joint venture partner) or (iii) pursuing new business opportunities or maintaining adequate insurance coverage to protect our products and facilities in Russia. Additionally, the conflict in Ukraine could disrupt the
operations of our distributor in that region and surrounding regions. Any of the foregoing could adversely affect our business, supply chain, partners or customers. In addition, the conflict between Russia and Ukraine could lead to disruption, instability and volatility in global markets and industries that could negatively impact our operations. The scope of the impact of sanctions, export controls and the ongoing conflict in Ukraine is impossible to predict at this time, and could have an adverse impact on our business.
Future changes to U.S. income tax or trade policies impacting multi-national companies could materially affect our financial condition and results of operations.
A
significant portion of our product sales are generated outside of the U.S. In fiscal 2022, approximately 71% of our consolidated net product sales was generated by sales from outside of the U.S. In the long-term, we anticipate these international revenues will continue to grow as a percentage of our total business. The current political landscape has introduced greater uncertainty with respect to future income tax and trade regulations for U.S. companies with significant business and sourcing operations outside the U.S.
During fiscal 2022, we sourced most of our finished products with partners and suppliers outside the U.S. and we continued to design and purchase fabrics globally, with most coming from China. The ongoing economic conflict between the U.S. and China has resulted in increased tariffs being imposed on goods we import from China. We have been reducing our dependency on China sourcing, particularly for our U.S.
business, and mitigating potential tariffs’ risks without compromising the quality of our products, while improving costs. However, we cannot predict whether, and to what extent, there may be changes to international trade agreements, such as those with China, or whether quotas, duties, tariffs, exchange controls or other restrictions will be changed or imposed by the U.S. or by other countries. If we or our vendors or product licensees are unable to obtain raw materials or finished goods from the countries where we or they wish to purchase them, either because of such regulatory changes or for any other reason, or if the cost of doing so should increase, it could have a material adverse effect on our results of operations and financial condition.
As a result of Russia's invasion of Ukraine, the United States, the United Kingdom and the European Union, among others, have developed coordinated sanctions and export control measures
targeting Russia, Belarus, and the Russian-controlled regions of Ukraine (Crimea, Donetsk, and Luhansk). While these sanctions and export control measures have not significantly disrupted our sales in these regions, if the disruptions continue over a prolonged period, or if additional export controls or economic sanctions on transactions with Russia and Russian entities are imposed in the future our sales in these regions and our results of operations could be adversely impacted. For further information regarding the risks we face relating to Russia’s invasion of Ukraine, refer to “-Our business may also be affected by new sanctions and export controls targeting Russia and other responses to Russia's invasion of Ukraine.”
1 During fiscal 2022, the Board of Directors terminated our previous 2012 $500 million share repurchase program (which had $47.8 million capacity remaining) and authorized a new $200 million share repurchase program. On March 14, 2022, the Board of Directors
expanded the repurchase authorization by $100 million, leaving an available capacity of $249.0 million at that time.
On March 18, 2022, pursuant to existing stock repurchase authorizations, we entered into an accelerated share repurchase agreement (the “2022 ASR Contract”) with a financial institution (the ”2022 ASR Counterparty”) to repurchase an aggregate of $175.0 million of our common stock. Under the terms of the 2022 ASR Contract, we made a payment of $175.0 million and received an initial delivery of 3.3 million shares on March 21, 2022, representing approximately 40% ($70 million) of the total shares expected to be repurchased
under the 2022 ASR Contract. The Company received a final settlement of an additional 5.2 million shares under the ASR on June 24, 2022, which is included in the number of shares purchased and average purchase price paid per share. Refer to “Part I, Item 1. Financial Statements – Note 4 – Stockholders' Equity” for further information.
Repurchases may be made on the open market or in privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or other available means. There is no minimum or maximum number of shares to be repurchased under the program and the program may be discontinued at any time, without prior notice.
2 Consists
of shares surrendered to, or withheld by, us in satisfaction of employee tax withholding obligations that occur upon vesting of restricted stock awards granted under our 2004 Equity Incentive Plan, as amended.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
