Guess? Inc (GES) 2022 Q2 法說會逐字稿

Good day, everyone, and welcome to the Guess? Second Quarter Fiscal 2022 Earnings Conference Call. I would like to turn the call over to Fabrice Benarouche, Vice President of Finance and Investor Relations.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. On the call today with me are Carlos Alberini, Chief Executive Officer; and Katie Anderson, Chief Financial Officer.

During today's call, the company will be making forward-looking statements, including comments regarding future plans, strategic initiatives, capital allocation and short- and long-term outlook, including potential impacts from the coronavirus pandemic. The company's actual results may differ materially from current expectations based on risk factors included in today's press release and the company's quarterly and annual reports filed with the SEC. Comments will also reference certain non-GAAP or adjusted measures. GAAP reconciliations and descriptions of these measures can be found in today's earnings release.

Before turning the call to Carlos, I would like to mention that we will be participating in the fireside chat at the Goldman Sachs Annual Global Retailing Conference on Friday, September 10 at 3:20 p.m. Eastern. We hope to see you there.

Now to Carlos.

Thank you, Fabrice. Good afternoon, everyone, and thank you for joining us today. We are very proud of our team and our accomplishments. We just closed a great quarter, and we plan to review what drove our performance in detail. But most importantly, I want to share with you where we are today and how we see the future, both short and long term.

Let me start with our results. For the second quarter, we reported adjusted earnings from operations of $89 million. This compares to adjusted operating earnings of $48 million for the LLY period, exceeding our prepandemic performance by 85%. This was well ahead of our expectations. We reported revenues of $629 million, 58% over last year and 8% below the LLY period. The entire decline to LLY was due to a timing shift of European wholesale shipments into Q3 and permanent store closures, which are accretive to operating profit. This is in spite of being significantly less promotional during the period in all of our direct-to-consumer businesses.

For the quarter, we delivered a 14% adjusted operating margin. We expanded our operating margin by over 700 basis points from 7% in the LLY period. The star of this quarter was the North America retail segment that reported an operating profit of $38 million versus $6 million in the LLY period, an almost 540% increase. Our wholesale and licensing businesses also outperformed, and Europe and Asia delivered roughly flat operating performance to the LLY period.

Paul and I continue to be thrilled with our team's performance all over the world. Adjusting and reacting seamlessly to the fluidity of the current environment. We want to give a huge shout out to our leadership team and all our associates and thank everyone for their big efforts and great contributions during these unprecedented times. We are happy to see demand recovering and stores reopened across the globe. We still see the pandemic's impact on customer traffic and on the supply chain globally. The labor market has also been impacted as companies are challenged to rehire workers leading to labor shortages and higher wages. At Guess?, we remain laser focused on what we can control.

As a global brand, we have adapted quickly to the changing levels of demand and restrictions across our markets. We are sizing our inventory buys accordingly, adjusting prices to the perceived value of our products, strategically managing promotional activity and increasing labor rates to attract and retain top talent. We continue to keep costs very tight by eliminating redundancies and increasing efficiencies. We have been relentless in mitigating supply chain disruptions. We are strategically partnering with our vendors to accelerate deliveries when feasible, changing countries of origin when appropriate to increase speed to market and investing in faster transportation modes when it makes sense. Our strategy is working and our results reflect this.

I am proud to share with you that we published our latest sustainability report this summer focused on our 3 pillars to operate with integrity, empower our people and protect the environment. Some highlights include reaching gender pay parity, increasing our Eco Smart GUESS denim penetration to 20% and receiving approval in our ambitious science-based targets for greenhouse gas reductions. We are confident in our actions here. In fact, we successfully passed a reasonable assurance review by a big 4 firm, making Guess? the first in fashion to subject our ESG data to such a high level of rigor. We have increased our environmental quality score with the Independent Shareholder Services to a 1 out of 10, the highest rating possible as a result of this work.

Let me now spend a few minutes talking about what's going on in the different regions and channels of our business. In North America, traffic has improved sequentially each quarter, but remains well below historical levels. And we continue to see higher conversion rates and higher average spend. We are in the midst of back-to-school, and we have solid demand for denim, activewear and knits. In addition, we are seeing sequential sales growth for our dresses category, which was positive to LLY for the first time since the pandemic began. Both our Guess? and Marciano brands are experiencing increases in sales of dressy apparel and accessories as the customer is returning to social life. We have also been successful with our handbags and wear-now products, and our men's business has been particularly strong.

In Europe, we had a stronger start to the second quarter, which leveled off as the Delta variant spread in many countries there. Activewear continued to outperform in this region, both for women and men. And we saw a substantial pop in denim in Q2 as well as improved demand for dresses and outerwear. We are encouraged by the progress that most countries in Europe have made with vaccination levels, and we remain optimistic about the recovery of this region in the second half of the year.

In Asia, our customer traffic is the most challenged due to the virus, and the trends remained relatively consistent in Q2 versus Q1. The product categories that have performed better in this environment include sweaters, denim and outerwear. While we have made good progress in several areas of the operation, our challenges with top line performance remain. We are reassessing our team, and we are making leadership changes to reorganize the business today.

Our e-commerce business grew 11% in North America and Europe for the quarter versus last year. Growth here was more moderate than prior quarters as we were a lot less promotional. I'm pleased that we continue to significantly improve profitability in this channel. In the back half of the year, we will be strategically investing more in marketing to support further growth in this business.

Our European wholesale business is performing well. We are currently shipping our Fall/Winter season which had orders up high single digits. As I mentioned, some of the products are delayed coming in, so they will ship in Q3 versus Q2. The Spring/Summer season campaign is underway, and we estimate that the order book will be higher than LLY with strong growth, particularly in our kids and footwear collections.

We are also very pleased with our Americas Wholesale business, which grew 19% in sales and 54% in operating profit versus LLY. Denim had a great quarter and delivered strong performance at Macy's. We're also having success in apparel for both men and women, and accessories, particularly handbags.

Our global licensing business also recorded significant revenue growth of 18% versus the LLY period. We have a big business here primarily driven by handbags, eyewear, footwear and fragrances.

Regarding our strategic plan, I want to spend a few minutes updating you on our progress with our brand elevation and customer-centricity initiatives. I will start with our brand elevation strategy, which touches almost every aspect of our business. Paul has been driving this very ambitious initiative with our product and creative teams. His strong leadership and the work that the teams put into this to transform our model have been extraordinary, and many major milestones have already been conquered.

Most significantly, the taste, styling and quality of our products have been elevated. And for the first time, we are providing a global assortment that achieved a consistent representation of our brand. We are focused on higher quality and sustainability across the board. In addition, the new assortments have been priced based on the products perceived value. Our visual merchandising and the images and photography in all the new marketing campaigns, catalogs and websites have been optimized to showcase our brand more effectively. And our product development, marketing, visual merchandising and buying are integrated more closely than ever before. This means that as we identify our biggest product stories, these flow through to our campaigns, store windows and floor presentations and websites. We buy deep in these key styles to increase full price selling and maximize sales.

The last important step for elevating the brand is to improve the customer experience across the Guess? ecosystem, including our stores, our website, wholesale distribution and through our licensees. We are mobilizing our field and business units to address this, and we plan to upgrade our technology and tools to deliver superior service to our customers. Some examples of this upgrade in store technology include enhanced WiFi networks, expanded payment methods and mobile checkout. These projects should be complete by the end of next year.

Regarding customer centricity, let me start with our customer base. As you know, we resonate across 3 distinct customer groups: heritage, millennial and Generation Z, and we develop our product assortment to support the unique lifestyle needs of these customers. With Gen Z specifically, we have a separate strategy, including differentiated product development, marketing and customer engagement. This is our brand partnerships group led by Nicolai Marciano. Product collaborations and events drive this business. We had great success here prepandemic with key collaborations such as J Balvin. But as you can imagine, the pandemic impacted our ability to execute these event-driven marketing campaigns. Now we are able to restart these collaborations. In fact, this past weekend, we had a successful event with Babylon, an influential skate and street wear label on our campus in L.A., where we hosted over 6,000 people over 3 days.

Regarding our digital business, we continue to make progress in optimizing our user online experience via the e-commerce platform that we implemented last year. For example, in Europe, we are seeing improved conversion rates, especially from mobile, which represents over 80% of our traffic. Our average web session duration increased over 20%, bounce rate decreased 10% and loading time versus our previous platform is 70% faster. And during the quarter, we implemented some upgrades to the platform, resulting in an increase in our add-to-basket sessions of over 30%. We continue to work on implementing omnichannel capabilities in Europe as well as upgrade North America's current capabilities. We plan to complete this project by midyear next year.

The last pillar of our customer-centricity strategy relates to customer data capture, segmentation and analytics. We have built out a high-performance platform, but we are still operating on extremely limited capacity to process and utilize our customer data. We are now working on a platform, which includes powerful tools to fuel data collection, consumer insight analysis, personalized marketing and clienteling. We can use these tools to maximize sales from our existing customer base as well as efficiently target new customers. This implementation is underway and will be completed by next year. This will be a game changer, allowing us to use our data to unlock a ton of value.

Now let me talk about our outlook. When I came back in early 2019, we identified several opportunities for value creation. At the time, the most significant of these were in margin expansion. We laid out a plan to increase operating margin by about 450 basis points to 10% in 5 years. We used the pandemic as an accelerator to transform our business. And not only are we expecting to reach our 10% target this year, but we are now increasing our operating margin target to 12% by fiscal year 2024 when we plan to deliver $2.8 billion in revenue. I'm excited to share with you that this would yield a return on invested capital of over 30%.

I'm confident in this outlook, and this is why. We see clear opportunities for revenue growth, from category expansions in areas like denim, Marciano, handbags, dresses and outerwear to new store development to digital sales growth. Our margin expansion has come from concrete changes to our business model, including IMU improvement, store portfolio optimization and cost reductions. And while we are currently operating in what might be an abnormally low promotional period industry-wide, this company will never go back to the levels of promotional activity that it had prepandemic.

Our balance sheet is in a very good position, which allows us to fund our business needs as well as return value to shareholders. We announced today that our Board has authorized a share repurchase program of $200 million.

In closing, when I was invited to come back to Guess?, I came back with high expectations. I knew that the company had an amazing global brand with tremendous potential, and I felt that I could contribute to realize that potential. But like Steve Jobs said, I couldn't connect the dots looking forward, and I had to trust my gut. When I look back at what happened in the last 2.5 years, I couldn't be more proud of what we have accomplished in the face of a pandemic, of my partnership with Paul and of the transformation of our business into a company with an elevated global brand and a strong business model. This is a company that is poised to gain significant market share. A company ready to deliver high return on invested capital, fueled by high margins and a capital-light model. A company with an amazing team ready to take the business to the next level of growth and profitability. Today, I am thrilled to connect the dots looking backward, and I couldn't be happier I trusted my gut to come back to my home.

With that, let me pass it to Katie to review our financials in more detail. Katie?

Thank you, Carlos. Good afternoon, everyone. I want to start with something you can't see in the numbers. Of course, I'm thrilled that we almost doubled operating profit from prepandemic levels this quarter, even in the midst of a challenging environment. But first, I want to mention how proud I am to be part of this team at Guess?. It's a team that works hard and works smart to execute our strategy and achieve our goals. I wanted to express my deepest thanks to my colleagues and all our associates for their unrelenting efforts during these unprecedented times.

Now let me take you through the details on the quarter. Second quarter revenues were $629 million, up 58% to last year in U.S. dollars and 51% in constant currency. We were down 8% compared to LLY. This was slightly short of our expectations as a result of timing in our European wholesale business worth about 4% to LLY, where delays in product receipts moved some shipments a few weeks into the third quarter. Overall, the 8% revenue decline to LLY was driven by the impact of permanent store closures worth roughly 5% of revenue and the shift in wholesale shipments in Europe. I want to note that our promotions were well below prepandemic levels across all of our direct-to-consumer businesses, which is impacting our sales levels versus LLY, but significantly driving our profit.

Let me get into a bit more detail on sales performance by segment. In Americas retail, revenues were down 6% versus LLY, better than our expectations. This decline was entirely driven by permanent store closures, which were worth about 8% of the sales to LLY. Store comps in the U.S. and Canada were up 5% in constant currency. Same-store sales were solid positive in the U.S., but the recovery in Canada is moving a bit more slowly. Although traffic is still materially negative, from Q1 to Q2 we saw improved trends there. Our conversion remains high and AUR increased substantially in Q2 with strategic price increases and more full-price selling.

The gap between the performance of our tourist-centric stores and non-tourist-centric stores is still wide, but narrowed significantly in Q2 versus Q1. This suggests that at least domestic travel is picking up, but total travel still remains significantly below historical levels. In fact, our non-tourist stores in the U.S. and Canada had positive double-digit same-store sales growth this quarter. The profitability that we have brought to the segment is super exciting and worth noting. Operating margin in Q2 was 20% versus only 3% 2 years ago, and operating profit is 6x what it was in LLY, even on lower sales. This is an incredible base of which to grow in North America.

In Europe, revenues were down 5% versus LLY. Our retail business continues to be pressured by pandemic-related traffic declines. Store comps for Europe were down 20% in constant currency, impacted by negative traffic. However, this was partially offset by solid conversion rates and significant AUR increases. Absent the shift in shipment timing that we mentioned earlier, our European wholesale business continues to show healthy trends with an order book above prepandemic levels.

In Asia, revenue was down 43% to LLY. Almost half of this decline was driven by permanent store closures. Our store comps were down 30% in constant currency with negative sales comps in South Korea and China, more moderate than other areas in the region, like Japan, Taiwan and Hong Kong/Macau, where they are struggling more with the pandemic.

Our Americas wholesale sales were up 19% to LLY. We are happy with our momentum in this business. Operating margin expanded almost 600 basis points to LLY here, resulting in a lift of over 50% for operating profit in this segment.

Licensing revenues also outperformed and were up 18% to LLY in Q2, driven by strong performance in our perfume and footwear. And as you know, this is an extremely high margin business, which delivered a 92% operating margin this quarter.

Total company gross margin for the quarter was 46.8%, almost 800 basis points higher than 2 years ago. Our product margin increased 370 basis points this quarter versus LLY, primarily as a result of lower promotions and higher IMU. Occupancy rate decreased 420 basis points. This quarter, we booked over $7 million in rent credits for fully negotiated rent relief deals, mostly in Europe. The remainder of the decrease is attributable to lower rents and permanently closed stores.

Adjusted SG&A for the quarter was $206 million compared to $218 million 2 years ago, a decrease of $12 million or 6%. We continue to benefit from changes to our expense structure and a decrease in expenses related to permanent store closures versus LLY. In addition, there was a onetime benefit of about $4 million from government subsidies, mainly in Europe, which was partially offset by higher variable expenses related to the growth of our e-commerce business. Adjusted operating profit for the second quarter was $89 million versus $48 million in Q2 2 years ago.

Our balance sheet continues to strengthen. I will take you through some details comparing now to last year, not LLY. We ended the second quarter with $459 million in cash, $131 million higher than last year's balance at the end of Q2. Inventories were $430 million, up 3% in U.S. dollars and 1% in constant currency versus last year. Inventory management has been a key capability for us, and we continue to act swiftly and strategically here. We feel good about our inventory position and believe we have the right assortment to satisfy customer demand.

Year-to-date, capital expenditures were $22 million, up from $10 million in the prior year, but significantly below prepandemic levels. We generated $18 million of free cash flow in the first half of the year. Our ability to generate cash gives us the runway to invest in our business as well as return value to shareholders. We announced today that our Board of Directors has authorized a new $200 million share repurchase program. This new program includes the $48 million remaining under the company's previously authorized repurchase program, and we will use it opportunistically.

So now let's talk about our go-forward expectations. The current environment is still uncertain, so we will not provide formal guidance, but I will walk you through how we are thinking about both the short- and longer-term future. Again, I'm going to anchor our commentary to LLY. We are maintaining our revenue expectations for the full year at down mid-single digits. We expect the third quarter to be slightly negative to flat with help from shifted wholesale shipments from Q2. In terms of profit, adjusted operating margin for the third quarter is expected to be about 250 basis points better than LLY. Gross margin is expected to expand by around 600 basis points to LLY, driven primarily by lower occupancy costs, lower promotions and improved IMUs. We anticipate that the adjusted SG&A rate will be up 350 basis points as cost savings are offset by business mix and reinvestments in business expansion initiatives, including marketing.

As with the rest of the industry, we are seeing some cost pressures, particularly in freight and labor, which are built into these numbers. For the full fiscal year 2022, we are raising our expectations for operating margin and profit. We now expect operating margin to reach approximately 10% for the year versus adjusted operating margin of 5.6% in LLY. This represents margin expansion of roughly 450 basis points to our prepandemic business, despite a lower revenue base. And we are confident in our ability to sustain these profitability levels as well as deliver top line growth. As a result, we are raising our operating margin target in our long-term plan to reach 12% by fiscal year 2024. With revenues in that year expected to hit $2.8 billion, consistent with our previous goal, this implies an operating income of $335 million in fiscal year 2024, $185 million more than adjusted operating profit in fiscal year 2020.

Adjusted EPS is expected to be around $3.50 per share versus $1.45 in fiscal year 2020. This would be a record level of adjusted EPS for the company. Our team is motivated, and I'm proud to say that we are running this company for the future, not just the now.

With that, I will conclude the company's remarks, and let's open up the call for your questions.

(Operator Instructions) And I see we have our first question from Susan Anderson with B. Riley.

Congrats on a really nice quarter. I was wondering if -- I guess I'm curious how much is being driven by the initiatives that were in place pre-COVID versus things that happened during COVID, such as the inventory levels driving the lower promotions and the higher merch margin? And then also, as we look out to 2024 and the 12% op margin goal, can you maybe talk a little bit about the puts and takes that will get to the 12%?

Yes. Thank you, Susan. Yes, we are very pleased with our performance this quarter. When you look at what made it happen, I think that we were very, very focused on all the things that we had going, coming out of our strategic planning process back in 2019. And fortunately, we were able to really accomplish even more than what we had originally planned in many areas like product cost, the implementation of the global line to be able to be completely consistent across the world. The sourcing strategy that we had in place, that was also part of our initial plan. And we did a lot more than those original initiatives.

And I would say that probably the biggest move here has been the elevation of our brand and just going to a completely different business model. There is almost no promotional activities. We are trying to really stay with a value-based pricing model, and that is very challenging to do. But I think that Paul and the creative teams and the product teams have worked kind of tirelessly to really accomplish this on a product-by-product basis. And I think that they have done an incredible job. And this strategic value price model, I think, is something that is completely sustainable and it's going take us to a completely different place and how the brand is perceived by our customers.

We've reduced promotional activity everywhere. And we have a big opportunity in the rest of the business model with occupancy. I think that, that was definitely something that we had in the plan, but we have done a lot more than what we had originally planned during the pandemic. We have renegotiated 400 leases. And obviously, the results are a lot more positive than what we had originally expected. We have done a lot on the expense side of the business as well, increasing efficiencies. A lot of this work is still ongoing. We are not done with that, but we feel that we are on a good path to be able to benefit from that, especially next year and going forward.

And I think that with respect to 2024, just that we are very, very happy with the 12%. We think that this is kind of like we have very clear line of sight to that. Maybe, Katie, do you want to fill in with the 12% operating margin?

Yes, sure. So Susan, the bridge from 10% to 12%, about half of that is coming from sales leverage. So as we said, we're still confident in the $2.8 billion top line in fiscal 2024. And half of the margin expansion is coming from that. And the other half from further efficiencies that just take more time. And these are more back-end loaded in the next few years. So when I think about, okay, how does that play over the next couple of years, I'd say, like 1/3 of the expansion next year and then 2/3 in fiscal 2024 and coming both from gross margin and SG&A.

Great. That's really helpful. And then if I could just add one follow-up on Europe. So it looks like it was the only region that was down. And I think you had mentioned that it was solely given the shift of wholesale orders from second quarter in the third quarter. And I'm not sure, did you quantify that? Or if not, how much was that? And then also, I'm curious when the stores did open in Europe, did you see a pickup in sales in Europe as this opened up last quarter?

Yes. So let me start and Katie will chime in as well. Our business in Europe is managing very, very well. We did have significant issues with all the Delta variant and how that impacted the entire territory. So the restrictions and in many cases, stores being closed in several countries, that was a challenge. And I think what we had shared with you during our previous call that the business has started in a very, very strong way. But then we saw the business leveling off during the quarter, and I'm talking about the direct-to-consumer business, especially in retail stores.

So it has been challenging with traffic. Our wholesale business, I think, is very, very healthy. And in spite of all the issues with the virus, the market continues to see Guess? as a great brand, and we are seeing investments from our customers -- retail customers in the wholesale business to doubling down with us in making significantly more investments with the brand. So we are seeing that business to continue to grow. And that is true for the season that we closed, plus the season that is in the works right now, which is Spring/Summer.

And the great thing about retail is that during the last few days, I know it's only a few days, but it's -- they are important days because the clearance period in Europe is closing, and we are seeing that the business is starting to pick up. This is when people come back from vacations, and they are getting ready for back-to-school as well. So we're excited about that. Again, it's kind of early to tell, but we have a lot of confidence in Europe as a business, as a region for us. As you know, it's more than 50% of our business, very critical. And the second half of the year is very important in terms of both top line and profitability. Katie?

Yes, sure. So Susan, I'll start with the shift in wholesale. So that was about $25 million. So we had that shift. But as Carlos said, the order book is still up. And then I'll just add, in the retail business in Europe, the traffic was a little bit lower than North America, the conversion is high, AURs up in the mid-teens. And again, as Carlos said, we're seeing some green shoots over the last few days.

And I think the important thing here, too, is that a lot of this, we are doing strategically because we decided to not participate in aggressive promotions. And even the way we bought the product is in a way that is a lot more uptight than the way the company was being serviced before. So of course, if you stop promoting, you are going to see some type of impact on the top line, but we are very happy, and you can see the results in our bottom line. Just this is all resetting a new baseline for this company in terms of selling at full price and we couldn't be more excited about that because we think that going forward, we're going to see the benefits time in and time out.

And more importantly, it's how the customer perceives the brand. The brand that if you don't buy it today, you may not find that product. So that is very critical in our entire business model and formula.

We have our next question from Janine Stichter with Jefferies.

I wanted to ask about the 3Q sales guide, flat to down slightly with the benefit of the Europe shipment timing. Is there anything else to read into there? I'm just curious if you're seeing any impact from the Delta variant in the U.S. specifically?

We are having a tough with the audio here. Can you repeat the question, sorry?

Sure. Let me try [one other thing]. Can you hear me better now?

Yes.

Yes, it's better.

Can you hear me better now?

Yes.

Yes.

Okay. Great. I just wanted to ask about the 3Q sales guide for flat to down slightly with the benefit of the Europe shipment. Just want to see if there's anything else that you would call out other than obviously some uncertainty with Delta in Europe, anything you're seeing from the variant in the U.S.?

And then more broadly, if you think about that $2.8 billion revenue target, how to think about the timing of the return to growth? And maybe talk a little bit more about some of the marketing investments that you spoke to in the back half of the year, how you see that playing into a point where the brand can return to growth versus 2 years ago?

Okay. Katie, why don't you [go with the Q3].

Yes, sure. So Q3, I mean, really, the -- we had a shift, this wholesale shift out of Q2 into Q3. So we're still maintaining our full year down mid-single, but next quarter is going to benefit from that. And I just want to remind you that last year, we changed the cadence of the wholesale business in Europe. So we extended our shipments for Fall/Winter into Q3, and this shift was a lot bigger than the shift that we're seeing this year. So that's why we're expecting our results in the third quarter to be below prior year, but above LLY.

So for the full year, Janine, we're saying -- we're thinking mid-single digit decline to LLY revenue. And there's some puts and takes, e-commerce is up, traffic is down with the pandemic, but really, the crux of the change is the permanent store closures. So that's worth about 5% of sales. So about $125 million in sales, and we'll pick up $15 million of operating profit here. And on an annualized basis, that's $140 million of sales and $20 million of operating profit. So once we go through all the puts and takes, for the year we're thinking the core business is pretty flat.

Janine, with respect to your question about revenue and the $2.8 billion, we have a lot of confidence in this number. When you think about where we plan to land at the end of this year with the color that we gave today about being down mid-single digits, the implied growth rate that we are baking into the $2.8 billion, you're talking about a 5% CAGR. And when we think about the fact that we are resetting the business line on revenues this year because of not being promotional, and we haven't been promotional in the entire year, we feel that, that number is more than achievable.

If you think about the big drivers, the first one is same-store sales growth and the existing distribution that we have in stores. We see a great opportunity for category expansion in areas like denim, Marciano, handbags, dresses, outerwear and that is just to name a few. We have a lot of very, very great opportunities with multiple product categories right now, and we are seeing that the business is picking up when we present the new product. So very excited about that. Even Brand Partnerships, we think that there are big opportunities with product capsules and collaborations as we used to do prepandemic, and we think that there is a big opportunity in multiple markets with that.

Then on a second big level is about new store development. We think that there are significant opportunities now in the market. There's a lot of space available, and brands are becoming very attractive again. We think that stores are the best vehicle for us to showcase our assortment and experience the brand, and we feel that this is a key pillar for our omnichannel ecosystem. So we are super excited about starting to reopen stores. In fact, this year globally (inaudible) we're going to be opening in the next few months, and we have opened some of them.

Many of these are pop-up locations. We are going to test some new concepts. I'm talking about Marciano stores, accessory stores, athleisure stores. And we are very excited about this because we think that the risk is very minimum, and the opportunities are very high. We are going with very limited lease terms, but with the opportunity to be able to renew or solidify the lease terms if the stores work well for us.

We have room for growth in many countries. Just -- there are a few examples. Russia is a good one. We have roughly 50 stores right now, and it's a huge market. Germany, we only have 28 stores there. So a big opportunity for further growth. China, of course, a big country and a big market, and we have closed a lot of stores, but we are now left with about 100 stores. France, 42 stores. And even in U.S. and Canada, we are seeing that in many of the markets where we used to have a strong store presence and now we are gone and we see opportunities to go back. And so we have a pretty good idea of what to expect from those locations.

We are also thinking about the whole idea of continuing to gain market share in wholesale. We have talked about this in Europe quite a bit, but we are seeing it also in the Americas. And we see that the licensing channels will have a very similar opportunity to gain market share because the brand has so much strength and momentum.

And then last but not least, probably it should be at the top of this list for us, is e-commerce. Our e-commerce business is a big opportunity. It continues to be. We are retooling the entire platform, both the platform that we put in place last year is working very well for us in both North America and Europe. And we see a big opportunity with customer analytics. And as you know, we have been working on this nonstop. Omnichannel capabilities in Europe were nonexistent and now we are rolling them out. And all this should be complete by next year. So we fully expect that by fiscal year 2024 we'll be reaping the benefits of this.

So overall, we see a lot of opportunities, and these numbers may prove conservative. But the great thing is that even with low numbers, we can see a great opportunity for return on invested capital growth. This number was 12% before. We're talking about over 30% in fiscal year 2024, and that is great.

And the last question you had was about advertising and marketing. Last year, we stopped investing in non-digital completely. We plan to resume all this year both here in North America and in Europe. The brand is in a very good position to make investments, to showcase the assortment. We want to invest in Brand Partnership events. We just did 1 this past week and it was a huge success. Over 6,000 people came here. And it's the type of customer events that really drives that younger customer closer to the brand.

We are spending more money in direct mail. We are seeing great success with this. So we are expanding not only the number of pieces that we send out, but also the frequency and how far we go with customers that we have in the customer base. And we are seeing great traction with that. We are advertising in multiple magazines in Europe. You will not believe this, but there are over 120 magazines where you're going to see Guess? ads this season.

And also, we just completed the cloud solutions from Salesforce for Customer 360 implementation. This is giving us the ability to deploy much more personalized and more efficient marketing. So we have a lot of ideas where to spend money, and we think that this is going to be a huge investment for the brand. One of the high priorities here is that we did so much with the product. The product looks amazing, but now we have to show it. And that's why we think that the investment in marketing is absolutely appropriate, and we are excited to see how the customer responds. So far, the early signs have been very positive.

We have our next question from Omar Saad with Evercore ISI.

This is Warren Cheng on the line for Omar. I had a question on some of the initiatives you're doing on lower promotions and also investing in quality and taste and styling. What impact is that having on the customer -- the new customers coming into the brand? On the existing customers? Are there any demographic changes that you can see with the customer data that you can share with us?

Yes, it's maybe a little early to see just a direct reflection. We are seeing new customers coming into our CRM base, both in North America and Europe. The success has been more pronounced in Europe in terms of seeing a number of customer acquisitions. But that being said, we think that probably even more telling is how our existing customers are responding to our assortments, and the success is pretty evident. We are seeing that all the key styles that we identified as opportunities for us to really increase quality, increase styling or improve styling just do a big job with sustainability and tell the customers about that all.

All these products are resonating with customers in a big way. The Marciano brand, for example, just we did a lot to change the ultimate use on wearing of the product for different occasions. The customer is responding extremely well to that. We have a whole new line of essentials. Paul has done an incredible job, reskewing and redeveloping the entire assortment for all the brands and all the product categories, by the way, just I mentioned apparel, but we're seeing the same type of impact on accessories, our line of handbags. He always challenges the entire team here to look for other brands that have something comparable in terms of offering.

And the answer is always the same. No, we cannot find anybody that has this type of style, this type of quality, this type of details at this price. So I feel that the results are very obvious on how the customer is responding and that is probably the most important thing for us. The new customers are -- will continue to come as the product is superior.

We have our next question from Dana Telsey with Telsey Advisory Group.

Two questions. As you think about Asia, what's the game plan for Asia going forward? I think you had mentioned you're kind of changing the team around. So just wondering the game plan there, and what you see as the path to return to growth. And then on the product margin piece, which I believe increased around 370 basis points, how much higher do you have in the IMU to go? Does it differ by category? And how are you planning promotions for the back half of the year? Will it still be very limited to none?

Thank you, Dana. Well, let me start with the answering your Asia question. Just -- let me just say that our business there is -- in Asia is concentrated in 3 big parts in addition to our Southeast Asia business that is with a partner. But we have a meaningful business in Japan. We have a big business in Korea and, of course, our business in China. And in Japan, I think we know how to win. We have done it before in 2019, I think, was our top year that we were just working with the younger consumer and using special collaborations and capsules and very similar to what Brand Partnerships does here in North America and globally and with great success, and we think that we are going to go back and continue to really focus on that type of business model.

Korea has always been very successful for us. It used to be a licensed business, and now we run our own. We have a great team there, they have done a great job and it's very profitable. And we continue to refine the model. We -- the underwear business was licensed out a couple of years ago, and that's working well. We are taking over some of the business that was in the hands of franchisees and very successfully, too. And we continue to optimize the cost structure.

And then China. China has been a challenge for us. We continue to believe in the market in a big way. The Chinese market is a great market for a brand like ours, and our brand is relevant there. We have a material young customer base. The market size itself is, I'm not saying anything here new, but $14 trillion in GDP, very, very significant. The middle class is probably the biggest in the world. And there is a lot of market share that we think we could take in our space.

We have worked on like 5 different areas to address this. The first one is product. And I think we have done a great job. The team has done a great job working on elevating the brand there as well, improving the product assortment. We had a team from North America who is helping that team over there. And we continue to run the business with a lot less clearance and focused more on a full price model.

The second big thing is about the store portfolio optimization. We talked about this. We closed nearly 70 stores in China over the last 18 months. And we think that the franchisee model can help us to really leverage expertise from local players, which in many different regions of the market, I think, will be very, very helpful for us to be successful.

The third big thing is about marketing, and frankly, we have tried several things. We now believe that localized campaigns and leveraging local celebrities and social influencers is the way to go. It is just very difficult and very costly to do it, but we are working on that. We think that the GUESS Originals capsules model here also work, especially with a younger consumer, of course.

The fourth big thing is about e-commerce, and this has been challenging for us, too, because we decided to be a lot less promotional. And all the business that we had, for the most part, required a high level of discounting, which we do not want to support going forward. So this has impacted our e-commerce business.

And the last big thing is about the team, and you asked about this, we have done a lot of reorganization during the last few weeks. The leader that was leading this team for personal reasons wanted to go back to Europe, and we are supporting that. And we have a search out to really look for a great leader to run the team and run the business going forward. So that's where we are. And we have a lot of confidence that we are on the right path.

We have our next question from Janet Kloppenburg with JJK Research.

Wait. Just hold on. I wanted to answer.

Hold on a second.

I just wanted to answer Dana's question on IMU, sorry, before we go on. So you asked how much do we have left. We've had a lot of progress here over the last 2 years. And it's really all across the board. You asked about categories, it's really all across the board, but mostly in apparel. And as we go forward, and we talked about the going from the 10% to the 12%, the 200 basis points being half leverage, half efficiencies so there's some IMU in there, but we've done a lot over the last 2 years.

And then in terms of promotions, no, we don't plan higher promotions in the back half of the year. Carlos has talked a lot about how we've elevated our brands, and we're strategically managing these promotions down.

Okay, now we can go to the next question.

We have our next question from Janet Kloppenburg with JJK Research.

Congratulations on the progress on the improved outlook. It's very exciting. Carlos, this is sort of a big picture question, but you've done a lot to elevate the merchandising and the marketing for Guess?. And I was just wondering, as we look forward now and hopefully coming out of COVID, how confident you are on the team that you'll have consistency in the merchandising assortments and that you won't fall back to promotions? It's tricky for everyone. Everyone is saying they're going to be more disciplined and they're not going to promote, but we all know if something goes awry with the assortment, that can change.

So I wondered if you could talk a little bit about your confidence there and perhaps about what the categories or pillars of strength that help us understand that the consistency in productivity improvements can continue? And then secondly, I wondered about the supply chain problems we're seeing worldwide. And how long you think these may last, with respect to what's going on in Southeast Asia and other important sourcing markets?

Yes. Thank you, Janet. It's good to hear your voice. I -- let me start. I really think that we are off to a completely new race here at Guess?. I think that definitely the issues that are characterizing the environment right now may be somewhat abnormal. But we are going to play the game in exactly the same way that we are playing it now, which is we are not going after more sales and more sales if that is going to impact our ability to keep full price selling in line.

So I think that the trick here, the key is to really make sure that we never buy more than what we expect based on a reasonable sell-through for product at full price. So then we can always maintain this type of low promotional environment. But at the end of the day, just it all goes back to product. If the product is great, then this is a lot easier to do. If the product is something that people want, that the customer is really excited to get, if the product has the quality that, that customer expects, the styling, the fits are right.

And I think that -- you asked about the team, I think we have an incredible team. And I think that, that is completely apparent in every area that touches product. We have a lot of the design is happening with a very collaborative way. And again, Paul is at the front of this and has been driving the teams to really work together in a way that I have never seen it at Guess? before. And this doesn't have borders. This is between regions, and everybody is working together in a very collaborative way and it's showing in the product.

So to me, just when you -- and we try to do this internally, okay, just what are the biggest opportunities. It's hard to pinpoint what -- which are the biggest opportunities because we have so many because the product is looking so great in every category. I'm talking about not only what we do internally but what's happening with our licensee partners who are doing an incredible job, just we are seeing significant momentum in watches. Who would have thought that we would see watches coming back after everything that we experienced with Apple Watch and everything else.

We are seeing significant momentum in eyewear. We are seeing significant momentum with footwear. We are just -- we feel that the product is superior. And we think that we are into something that if we control what we can control internally, which is how we buy, how we present the product, how we showcase it, we have big opportunities with omnichannel. These are things that other companies already have that we are just developing. So a lot of opportunity for us.

And then with respect to supply chain, it's hard to say how long this is going to last. I was hoping when this whole thing started that it was going to be a matter of a couple of months, 3 months. Our product is running about 4 weeks late. And there are some cases where we are just in a more challenging situation than that. What we are hearing from our teams is that at least just think that these conditions are going to prevail for the rest of the year and in many cases, going into next year. Obviously, you read The Wall Street Journal today with Vietnam and 3% of the population vaccinated, it's a very challenging situation for all those, but our team has done a great job in moving around, even sourcing when we saw that there were concerns about being able to keep our production needs up.

And we have done that relatively successfully. Just you heard that we had -- we couldn't ship everything that was there needed to be shipped in the second quarter, and that is moving into the third. And we are trying to manage the business knowing that things are running a lot slower and being smart because we could air everything, but who can afford that? So we have been careful in how we spend our money and trying to meet our customers' expectations in every case.

(Operator Instructions) And I see no further questions. I will now turn the call over to Carlos Alberini for closing remarks.

Yes. Thank you, operator. Well, thank you very much, everybody, for participating today. We are excited about our momentum, but more importantly, we are excited about our future. We think that we have a brilliant future in front of us. We have tremendous opportunities in front to create significant value, and we couldn't be more excited. The team is super excited. Paul and I are super excited.

So please remember that we will be at the Goldman Sachs Conference, and we would love to see you there. Have a great rest of the week and good night, everyone. Thank you.

And thank you. Ladies and gentlemen, this concludes our conference. Thank you for participating. You may now disconnect.