Guess? Inc (GES) 2021 Q3 法說會逐字稿

Good day, everyone, and welcome the Guess? Third Quarter Fiscal 2021 Earnings Conference Call. On the call 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 impact 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. Now I would like to turn the call over to Carlos.

Thank you, operator. Good afternoon, and thank you all for joining us today. First, I hope you are all safe and healthy in light of the current challenges. At Guess?, we continue to control what we can control and to make the health and well-being of our teams, our customers and the communities we serve, our highest priority. Fortunately, with good planning and careful execution, we have been able to protect our people effectively. I'm very pleased to report that our team continues to excel in this environment. At times like this, resilience, the ability to adapt, fast decision-making and strong execution are proving critical to win, and our team has exhibited every one of these traits at every turn. This crisis continues to test us all and now with second waves in multiple places, it is clear that we are not running a sprint but a marathon. We continue to stay focused on servicing our customers well, managing our cost structure tightly, optimizing margins and controlling our inventories, balance sheet and liquidity.

On behalf of Paul and myself, I want to thank every member of our team. You are doing a great job, and you make us very proud. I will now spend a few minutes on our results for the third quarter, and then I will touch on how we are approaching the holiday selling season. After that, I will comment on our strategic business planning process and highlight key accomplishments for the period. I'm pleased to report that we had a very good third quarter, where we exceeded our top line expectations and delivered a very strong bottom line, reporting adjusted earnings per share of $0.58 versus $0.22 last year. In the quarter, we more than doubled our adjusted operating profit and achieved an adjusted operating margin of 9.7%, which represents a 600 basis points expansion versus last year.

It's worth noting that we delivered strong earnings on an 8% decrease in revenues for the period. In a very challenging environment, we achieved a very solid gross margin performance and delivered healthy operating margin expansion in most of our businesses. The most significant improvement was driven by our business in Europe, which benefited from increased wholesale revenues. We enabled the increased revenues when we elongated the Fall/Winter season shipping window and canceled the development of the pre-Spring/Summer line.

This proved to be a great strategy and represented a revenue increase in the period for Europe of about $50 million. Total Q3 revenues for Europe increased 16%, and operating profit exceeded $51 million, delivering a margin expansion of 900 basis points for the period. As we continue to focus on key product categories that represent the foundation of our business for women's and men's, we are pleased with our progress to optimize our assortments by channel and product presentation in stores and online.

During the quarter, essentials, activewear, denim, accessories and shoes outperformed the overall business. We managed our balance sheet well and ended the period with cash and equivalents of $365 million, and inventory is 24% below last year's levels.

As we look into the holiday season, we believe that we are well-positioned with our product, our marketing plans and our team's preparedness across the globe.

Let me give you some color of what we are experiencing in our business now, and then Katie will quantify the financial impact of each factor. Starting with retail, customer traffic into our stores continues to be challenged by the pandemic, especially during traditionally high-traffic periods like Black Friday. That said, those customers coming into the stores have a higher intention to purchase and this has consistently resulted in higher conversion rates.

Temporary government-mandated shutdowns are also impacting several markets, especially in Europe and Canada where we have significant businesses. We are pleased to see that our e-commerce business is accelerating, partially offsetting the negative store trends. Regarding our wholesale business in Europe, as I mentioned, we've made the decision to cancel the development of the pre-Spring/Summer line to consolidate the development of Spring/Summer products into one main collection versus 2 in the past.

This change will result in a smaller percentage of the shipments of that main collection occurring in the fourth quarter that compared to last year, with the majority of the shipments to be completed in Q1 of next year. In connection with this, we recently closed the Spring/Summer sales campaign, which delivered orders that were only slightly below the 2 collections combined in the previous year. These results exceeded our expectations and demonstrate the great momentum that the brand is enjoying with our wholesale customers across Europe.

I believe that many of our wholesale customers are concentrating their buys within fewer, stronger, highly reliable brands, and we are clearly one of those preferred brands. So we are getting a bigger share of their buys. We continue to plan our business based on expected demand and size our inventories and expenses accordingly. We are confident in our assortments and our product ownership and have been pleased to see that the level of promotional activity in the marketplace remains moderate. As we said in our previous call, we are in the process of updating our strategic business plan, and we will schedule an event to share our plan at a later date.

Let me just confirm today that we still believe that the opportunities we had identified to expand operating margins by 500 basis points are still intact. For now, I will update you on the progress that we are making on some of our key initiatives, and how we are leveraging the crisis to accelerate change. I will speak specifically about the elevation of our brand, our customer centricity initiative and our organizational development strategy. Elevating the customers' perception of our brand starts with our product. Product in our business has always been and continues to be king. Offering a consistent line of product across all markets is a very ambitious goal when you have a global presence that reaches nearly 100 countries. I am thrilled to report that for the first time ever, we now have one global line of products across all categories, including Women's and Men's Apparel; Athleisure; Lingerie; all Accessories, including Handbags; Footwear; Kids; Marciano for Women's and Men's; and ewelry. Having one global line will enable us to represent our Guess? brand consistently across all markets and significantly reduce product development costs throughout our supply chain.

Hundreds of styles per season, which in the past were developed in each region, are now represented by one common line for all markets. Just as an example, the new line development for the next pre-Fall/Winter season for Guess? A pparel resulted in a style reduction of 38% and this is after expanding the offering with multiple colors per style for e-commerce that represented a 7% increase of product choices online. I think that Paul and the product teams in all of our regions did an incredible job to make this happen. It took strong vision, tremendous courage and great teamwork to achieve this and deliver a line of product that can serve all global markets effectively.

To elevate the brand takes a strong commitment to raise the quality of everything we do. This commitment starts with the quality of our products. In order to accomplish this, we reviewed every product, challenged the styling, Guess? DNA alignment, the quality and sustainability of all fabrics and materials, make and fit, perceived value and price. Today, we have a line that speaks to a larger audience with consistent styling between genders, solidly grounded in the Guess? DNA, offering a strong point of view and differentiation in the marketplace. We have beautiful products, offering our customers tremendous value for the price and quality of each item.

I strongly believe that our product strategy will contribute to profitable market share gains.

We continue to make great progress with our sustainability goals. In fact, PRNews recently named Guess? the winner for best Sustainability/CSR Report 2020. We were honored to be recognized alongside iconic global brands like PepsiCo and Johnson & Johnson. Our commitment to elevate the quality of everything we do is also impacting other areas of the business, including the customer experience in stores, our websites, digital media and marketing campaigns.

The visual merchandising presentation in stores has been completely transformed in the last 8 months. The focus assortments and boutique feeling that you experience when you walk into our stores now represent a stark contrast to what we had a year ago.

I just visited stores in Italy a few weeks ago and was very impressed with the overall experience. As we have reduced the product density in stores to provide for a more sophisticated presentation, the product shines on the shelves, and the environment is very easy to shop in, with the emphasis placed on the product, not on the price or discounts. As an example, for next summer in Europe, we plan an SKU reduction in stores of about 35% and an SKU expansion online of 9%. We plan to run the business with an omnichannel customer focus regardless of where the customer chooses to shop and engage with our brand. Our goal is to leverage our entire assortment and inventory ownership with omnichannel capabilities, such as buy online, ship from store or buy in store from our larger assortment online and ship from the e-commerce warehouse. These capabilities are available in the Americas today and will be fully implemented in Europe next year.

Next is our initiative about customer centricity, which we introduced last year. As you know, since the pandemic began, we have been working hard to accelerate the implementation of our plan. We are pleased to report that we have completed the implementation of the Salesforce platform in the U.S. and Canada and all over Europe, except for Russia, which is scheduled for next February. We are very pleased with the speed and overall performance of the platform and are confident it enables a significantly faster and improved customer experience, better conversion and engagement, and it will contribute to significant growth of our digital business. We also made significant progress with our Customer 360 project. This suite has also been developed by Salesforce and is an integrated tool to optimize customer data capture, journey engagement, personalized marketing and results analysis. We have already implemented the customer service and marketing cloud solutions, which are part of the suite, and we are currently working on the social studio application. We plan to complete the full implementation of the Customer 360 solution by the end of next year.

The third initiative relates to our global organizational development strategy. We plan to optimize performance management and accountabilities. We'll be eliminating redundancies across our global organization, leveraging technology to do a lot more with less in every area of our operation. Our goal is to complete the implementation of this project by the end of next year as well.

In closing, since Guess? started 40 years ago, the company has always adapted its business very effectively to the challenges presented by the market, the environment and new customer preferences. Throughout its entire history, this company has evolved successfully time and time again. I strongly believe that today presents our company with yet another opportunity to transform our business and increase our earnings power. I also believe that we have the team to accomplish this, and I look forward to the years of growth to come. With that, let me pass it to Katie.

Thank you, Carlos. Good afternoon, everyone. So today is my 1-year anniversary at Guess?. Exactly a year ago, we were presenting our strategic business plan to you. Little did I know then that we were going to have the year that would follow. Today, I am very proud to report our results for the third quarter, which I believe demonstrate the power of agile planning and solid execution. In the midst of a very challenging environment, we delivered substantial sequential improvement in sales, exceeding our expectations, significantly expanded operating margins and tightly managed inventory and working capital.

We are extremely happy with our liquidity position, which is especially strong given the extraordinary circumstances that we have faced so far this year. This is evidence that we've been able to adjust our cost structure and capital spending to partially offset the deceleration in demand that our industry has experienced throughout the pandemic. But as importantly as knowing what to cut is knowing when and where to invest to fuel future growth in the company while maintaining liquidity and profitability. We continue to support our efforts in digital and omnichannel initiatives as well as investments to support long-term cost savings, and we continue to return value to our shareholders.

Our Board has approved the payment of a cash dividend again this quarter. As I said last time we spoke, our long-term capital allocation strategy has not changed.

Now let me take you through some of the details on our performance for the quarter. Let's start with sales. Third quarter revenues were $569 million, down 8% in U.S. dollars and 10% in constant currency. The biggest driver in our improvement versus last quarter was wholesale in Europe, which was up 39% in constant currency versus last year. As Carlos mentioned, we elongated the Fall/Winter season shipping window and canceled the development of the pre-Spring/Summer line, which resulted in higher revenues this quarter versus last year. In retail, store comps in the U.S. and Canada were down 23% in constant currency, in line with Q2 as momentum in the U.S. was offset by softening in Canada due to traffic declines as a result of the pandemic. Europe and Asia both showed an improvement in store sales this quarter. Store comps were down 18% in Europe in constant currency, where strong momentum was tempered in the last week of the quarter by shutdowns due to the second wave of the pandemic.

Store comps were down 17% in Asia in constant currency, driven by strengthening in China and Korea. Across the globe, we continue to see traffic declines, partially offset by significantly higher conversion with our tourist-centric stores experiencing a tougher recovery. Our e-commerce business in North America and Europe was up 19% for the quarter, an improvement from up 9% in Q2, driven by momentum in Europe. Our Americas wholesale business was down 34% in constant currency, still under pressure from the deceleration in demand but improving each quarter. Licensing revenues also improved versus Q2, down 12% in Q3. Gross margin for the quarter was 42.1%, 480 basis points higher than prior year. Our product margin increased by 200 basis points this quarter, primarily as a result of higher IMU as well as lower promotions. Occupancy rate decreased 280 basis points as a result of business mix and rent relief. This quarter, we booked roughly $8 million in rent credits for fully negotiated rent relief deals, mostly in Europe. We continue discussions with our landlords, and we'll realize any additional credits as the negotiations are finalized and signed.

Adjusted SG&A for the quarter was $184 million compared to $206 million in the prior year, a decrease of $22 million. We continue to benefit from changes to our expense structure, particularly more streamlined hourly labor staffing at the store level, corporate headcount and travel reductions and lower professional fees. In addition, there were some onetime benefits from government subsidies and decreased advertising in the period versus last year, but these were offset by higher variable costs associated with wholesale shipments. Adjusted operating profit for the third quarter was $55 million, 140% more than the operating profit in Q3 last year of $23 million. Our third quarter adjusted tax rate was 16%, down from 24% last year, driven by the mix of statutory earnings. Inventories were $393 million, down 24% in U.S. dollars and 25% in constant currency versus last year. We ended the third quarter with $365 million in cash versus $110 million in the prior year, and we had an incremental $260 million in borrowing capacity.

Capital expenditures for the first 9 months of the year were $12 million, significantly lower than what we spent in the same period of the prior year. Free cash flow for the first 9 months of the year was an inflow of $83 million, an increase of $162 million versus an outflow of $79 million last year. This year, we benefited from lower capital expenditures, extended payment terms with our vendors and unpaid rent to landlords while we finalize negotiations.

In addition, last year's outflow included the nonrecurring payment of the $46 million European Commission fine. Given the continued level of uncertainty in the current environment, we are not going to provide formal guidance. However, let me walk you through how we are thinking about the fourth quarter. We expect fourth quarter revenues to be down in the low to mid-20s to prior year. As Carlos mentioned, there are 3 main factors driving this decrease. As the pandemic persists worldwide, we expect the continued pressure on customer traffic to negatively impact store sales. At the same time, the momentum in our e-commerce business will partially offset this decline.

We expect the net effect of these 2 trends to represent approximately half of the revenue decline in the fourth quarter. Our businesses in Europe and Canada are currently being impacted by government-mandated store closures. While at the height of the closures in November, we had over 200 stores closed, more than half of these have reopened, and we expect further openings in the coming days. These temporary closures as well as some permanent closures are expected to represent 1/4 of the decline.

The last quarter of the revenue decrease is the result of the shift of wholesale shipments in Europe for the Spring/Summer collection into next year. In terms of profit, gross margin in the fourth quarter is expected to be slightly down to last year as the IMU improvement is expected to be more than offset by deleverage on lower sales. Given the expected level of revenue, the seasonality of our business as well as the mix, we expect SG&A as a percent of sales to delever by approximately 400 basis points versus the prior year.

In closing, I'm very pleased with how our company continues to navigate this crisis. We have proven that our brand is relevant and resilient. We continue to showcase our team's ability to manage the business through a very fluid situation. And while we realize that our path to growth may not be linear over the next few months, given the uncertainty around the global health crisis, we are as confident as ever in our long-term strategic initiatives. With that, I will conclude the company's remarks, and let's open up the call for your questions.

(Operator Instructions) Our first question comes from Susan Anderson from B. Riley FBR.

Nice job managing through the quarter in a tough environment. I was wondering if you could maybe give some color on just kind of the trends you saw from October to November. I mean, it definitely sounds like Europe slowed because of the shutdowns there, but maybe in the Americas, what you saw? And then any color you could also give that you saw over the Black Friday week, both online and in stores?

Yes. I think -- no, definitely, it's -- this is we are in the middle of a very, very significant time for us. As you know, we have several important weeks in front of us and here is where we have the biggest volumes, and this is true both in Americas and also in Europe as well. So what we saw in October was very, very strong for some times. We saw an opportunity to increase business from where we were. Comps were down 18% in Europe for Q3. That was better than the decline that we had experienced in Q2.

And then going into Americas, the comps were pretty consistent with what we had seen in Q2, down 23%. But we felt that the business was course-correcting even when traffic was still challenged as a result of the pandemic. In Asia, we had comps down 17%, and that was much better than the 26% decline that we saw in Q2. Going into Thanksgiving in the month of November, things changed. We had a very good start in November.

As you may remember, we had planned to extend the holiday selling season and try to be more aggressive in the front end with a lot of marketing and visual and trying to invite the customers in and that worked. I mean, we had some very good, strong weeks leading into Thanksgiving and then Thanksgiving was a lot more challenging with -- well, first of all, with all the closures, shorter hours. And then Thanksgiving or Black Friday was very challenging. Katie, do you want to talk about the numbers?

Yes, sure. So Susan, what we're seeing is as we come into this high-volume period, it's really -- we were -- and I'll talk about the U.S. and Canada first. We were kind of tracking pretty steady, a little bit better than we were doing in Q3 with the 23%, except for the super high-volume days. So we're seeing that the consumer is acting as you would think they would in a pandemic, which is traffic is, in general, meaningfully down, but then also they're avoiding crowds. So in these super high-volume days, like, for example, Black Friday or the Saturday after that, that's where we broke the trend and things were softer than what we were seeing before. So we have -- in Europe, it's kind of the same there. Their holiday season is a little more leveled. But still on these busy days, that's where we're breaking the trend. But in Europe, we kind of saw steady going in through November until the last week of -- or sorry, into October until the last week of the quarter when we had the shutdown.

And I would add, Susan, that we were very fortunate that we started seeing some significant acceleration in our e-commerce business as we saw the weaknesses on brick-and-mortar and that was something that we consider as a good goal for us. And fortunately, we are seeing that our business in the third quarter in e-comm was significantly better than it was in the second quarter, and we were up about 19%, and that was driven primarily by Europe, which had a great third quarter.

But then going into the fourth quarter, in November, we have seen acceleration from those levels on both regions, and we are pleased we see a lot of opportunity. Also keep in mind that we went through a very challenging time when we converted the entire platform of e-commerce for both regions. That's not a small project. Frankly, the teams did a phenomenal job with this. The project was finished on time. And the most exciting thing about this is that we are seeing an incredible improvement in performance from -- with this platform versus the legacy platform. We are talking about just loading time of the home page of 3.5x faster.

We're seeing a 23% increase in conversion rates. We are seeing a lot of more engagement and more time spent on the site as a result of all this. So we are very excited, and we think that now that all this -- that big challenge is behind us, we have a big opportunity in front of us with e-commerce.

Well, that's great to hear. I guess just one follow-up on the profitability side, very nice profitability in the quarter. It sounds like fourth quarter may be a little lower because of the expense deleverage on the lower sales. But I guess I'm curious just in terms of the profits, how much of that is sustainable longer term? And then how much of it is -- will you be layering more costs back on as the sales kind of get back up to speed?

Yes, let me start. Just -- obviously, the third quarter was somewhat unusual because of a lot of the increase in revenues relative to what we were expecting came through the wholesale business in Europe. And that was a very profitable increment to our top line, and that allowed us to leverage our cost structure much more efficiently and drove a lot of additional profitability. Definitely, we are looking at the fourth quarter in a different way.

On one hand, we have all the store closures that just represented more than 200 stores at some point, but we are looking at a very different picture now. And then we have this change that we made to our business at wholesale, where we decided to cancel the pre-Spring/Summer collection so then we could give time to the Fall/Winter collection to sell through. And frankly, that worked.

But now obviously, we are not going to ship as much of that Spring/Summer collection during the fourth quarter, and that is impacting how the top line is going to behave. And of course, a lot of the cost structure is what it is. So in the fourth quarter, it's going to be very difficult for us to lever when you have that set of circumstances. And the good news about this is that all that revenue base that we would be losing in the fourth quarter is not lost because the line has done very well, as I said in my prepared remarks.

Just we are barely down to the 2 collections that we had last year. So we feel that this is a huge success story. And again, that revenue base is not going away, but it's going to be reported or shipped in the first quarter of next year. Katie?

Yes. So Susan, we gained 200 basis points in product margin this past quarter, mostly IMU. And then we also, as Carlos said, had some leverage with our business mix on the occupancy line. We also had $8 million of rent relief in this quarter. Most of that's from Europe. It's worth about 140 basis points. And again, looking into Q4, we don't -- we're not going to see that -- we're not expecting that type of expansion. We anticipate further IMU improvements. But as Carlos mentioned, with the pressure on the sales in that quarter, we're going to have deleverage.

Okay. That's really helpful. Good luck this holiday season.

Our next question comes from Janine Stichter from Jefferies & Company.

Congrats on all the progress. I want to ask about the global product line. It seems like that's a pretty big accomplishment getting that completed. I want to hear more about the benefits you expect to see from that, both visually in terms of global presentation and then also on the IMU side, how you feel about driving efficiencies just as you're able to consolidate your buys?

Great. Yes. No, you just hit exactly on the key points. Just we think that the most important thing about this is just to present the brand on a consistent basis across the entire globe. And that is such a hard thing to do. We feel that we are finally there. We feel that the product is amazing, and it's great to even see our own people, our own teams in the different territories and regions and our own customers, even our wholesale customers, when we did a big presentation in Lugano very recently, just seeing everybody embracing the line for their own markets.

Of course, there are going to be specific needs, and we plan to embrace those needs as well and try to really adapt certain pieces or certain parts of the line. For that reason, we have kept some capsules of design teams in different places, just to, again, augment what that core line mainline is going to be. We think that in addition to that, the opportunity to really make the whole product development process much more efficient is just phenomenal. We have already benefited in IMU opportunities. We have made a big effort in the last few years, just trying to increase IMU very successfully and in many cases, we were using similar fabrics.

We were trying to really leverage the different vendor relationships that we had. And I think I mentioned in a previous call that we had already consolidated our vendor base pretty dramatically and that was by just using common vendors for both regions, especially Europe and the Americas, but now we have one line. That means that we can go to each of those vendors and really go with a much larger volume to really place big orders, and that will result in significant reductions in cost. So that's another big opportunity.

And then when you look at internally what it takes to develop a line, I think I mentioned in my prepared remarks that we saw a significant reduction in SKU development just because instead of doing the same thing twice, now you're going with just one SKU or one style. And when you do that, obviously, the cost of development throughout the supply chain also come down significantly. So I'm not in a position to tell you, okay, what is the number here.

But everywhere we are looking, there are significant savings opportunities in addition to being able to position the line and the brand in a much solid tone with the customers. And the receptivity, just how people have received this, has been incredible even during a time where the businesses are challenging. And we see that many of our wholesale customers are buying more even when you consider that the pandemic is creating significant pressure on demand.

But it's very clear to us that they are buying more from what we have. And as a result, we are taking share and that's feeling very, very good today, and I think it will have a big opportunity once we are on the other side of this because I think that those partnerships are going to continue to grow.

When I think of the plan you laid out last December, I think a big piece of the margin improvement was coming from the logistics side. Maybe just update us on where you are in terms of logistics improvement, I think, both in Europe and then anything that's going on globally?

Yes. You may recall, when I came back to the company, the company was going through some challenging times on logistics, especially in Europe. There had been a whole reset of the network, and there were several areas that were difficult there. And one of my top priorities when I started was to address that. Fortunately, the team did a great job on this as well, and we were able to reduce the cost pretty significantly. We have renegotiated all those contracts that were so painful to us back then.

And then one of the goals was to reduce the size of the network. So we thought that we had too much capacity and it was dispersed in several facilities. So we were able to close one of them in Venlo, the Netherlands, and it was an expensive facility. And we were able to absorb the quantities that were being processed by that facility through the other facility that we already had there. And very, very successfully, we transferred that facility to a third party, and we were able to really do that without absorbing any liabilities or the lease was taken over.

The assets were paid for -- are being paid for, and we consider that a big success. And then we are also opening a new facility. For now, it's temporary, but we are considering this new market as a long-term opportunity in Poland. And labor rates are significantly lower there, and we are going to be servicing our e-commerce business from there or part of it, and we are very excited about the opportunities that, that new initiative is presenting.

So then you look at the Americas, I think we have some opportunities to automate some things, especially in Canada, and we will probably invest some money into this in the next couple of years. We look forward to sharing more of the plans when we have that event when we share our strategy with you.

Our next question comes from Omar Saad from Evercore ISI.

Very, very nice quarter. Carlos, I wanted to dig -- of course, great job. Carlos, I wanted to talk to you a little bit more about the Europe strength. It was really, really big numbers there. I know things have shut down a bit since, but maybe you could dive in a little bit. What's at the root of the demand? It sounded like some of it is in the wholesale channel. Are you seeing kind of consumer social activity be the underlying driver? And then I think, linked to that, how does the news of the vaccine affect your outlook, especially given Guess? is positioned as such an important fashion brand, and it's kind of historically tied to going out and being social. Maybe you can talk about those 2 kind of somewhat related topics?

Yes. Omar, well, I mean, Europe, as you know, has become our biggest business, and we love to win there, of course. And we consider the territory very critical to our long-term strategy. But also, we see a lot of white space still in the territory, so we are very excited. We are relatively mature if you look at the Southern countries, but we have a lot of opportunity, and we have been winning in the Eastern countries and many other areas when you look towards the North from those -- the Mediterranean Basin.

And I think that the business is very well-balanced. We have a very strong retail base, and we have a super strong wholesale base. Wholesale, I think, is probably 8 consecutive seasons of growth and outstanding sell-through performance there. They were on fire. They have been and of course, we have a very mature network with more than 8,000 doors. So the distribution is very wide and very successful. Obviously, everybody is feeling the pain here through the pandemic, but our business did not fall nearly as much as we had originally anticipated.

On one hand, I talked about elongating the season, but the other thing that was very successful is that they did have reorders and lower returns, and there were no cancellations. So all this really resulted in a much better, stronger business. We -- after the lockdown, we are seeing that some of the direction that we are taking is right on for what the market needs. More timeless type of product, being careful with how we value the product and giving more for their money, the quality that we are putting into the product, it's all resonating with those customers.

We have a strong focus on athleisure. This is a category that we didn't even have a season ago, and we just saw that 7% of the adult apparel sales was athleisure, so you can see what type of success we are having. Then denim carryover, this is a new program. We are using something called close to what you are familiar with as a never-out-of-stock type of program, and this is working very well. 60% of our total denim sales are coming from that. Our handbags are just second to none. There is nothing in the marketplace that compares to what we have, the product we have at the prices we have.

And then we have a very strong line of men's in accessories and footwear, for example. So all this is driving a lot of the success. When you talk about customers, I mean, we were having a very good trend in the third quarter at retail. And then obviously, the second wave really impacted us tremendously. We think that this is completely temporary. And we think that, that customer is just waiting. And of course, yes, they celebrate socializing and everything else, but I think that, that once people feel better about the virus, we are going to renew that momentum very quickly. I have no doubt.

So I'm very, very excited about that, and I think that people are loving the product and that is showing online. So it's not that we are dead because of this, not just we are seeing a big opportunity here to compensate for some of that loss of business. And the business online in Europe is up significantly, so we're very excited.

That's great. Really helpful color. Does the vaccine affect how you plan for next year, and how you think about the wearing occasions that drive a lot of your brand?

I mean, it's very tough to start thinking, okay, when is the vaccine going to be ready? And then based on that, we are going to plan our business. Frankly, we are staying on what we can control. It's very hard to say when will we enter this post-COVID world. But in the meantime, we see like 3 big priorities for us. One is the product strategy; two, is how do we approach each of the business models that we have, e-comm, primarily, but we think that we are doing everything in line with that priority. Wholesale and even stores, we think that we have done a great job in looking at the cost structure of the stores and trying to really level set and start from a zero-based type of budgeting process. And as a result of that, I think we are operating our stores much more efficiently and at a lower cost. And then the third big thing is about our organization and what do we do to support the business. And that starts with the team, but it follows with how we get organized to do more with less and use technology in our advantage, and I think we are doing a lot of that. I think I mentioned that we plan to have that project finished by the end of next year, and we're working hard on this.

With a quarter like that during the pandemic, who needs a vaccine? Congratulations.

Well, thank you, Omar. We want the vaccine, though.

(Operator Instructions) Our next question comes from Janet Kloppenburg from JJK Research Associates, Inc.

Congrats on a nice quarter. I just wondered, thinking ahead to the vaccine and the recovery, Carlos, are you seeing any encouraging signs in Asia with respect to dress or special occasion or even wear-to-work products that might be rearing its head a little bit? I'm just wondering if we could look forward to that in Europe and North America going forward?

Yes. Janet, we are pleased with the performance that we had in -- especially in China but also in Korea. Korea had a very good period, and we are very pleased because the second quarter was pretty tough for us and first quarter too. But China is remarkable because we have a very young customer base there. We think that the brand resonates with the customer there, and we thought that we could do a lot of things internally to improve the business. And we put a team to work together with a local team, especially on product, and I think that they have done a remarkable job. And as a result of all this, we are seeing a lot of turn on the business, and we couldn't be more excited. Traffic had a peak performance during Golden Week. And we -- and our performance bottom line also has shown significant improvement as well. So we are happy.

When you look at the product, we went back to our core line, and we try to really be very careful with not overbuying and having the brand well-represented in that market. And guess what? It worked. So we just -- obviously, we have a good business in dresses, and there are some categories that you would consider at least more dressy than just athleisure, which seems to be the only thing that has sold very well in the other markets while the pandemic is there.

But I think that overall, in our case, it's not necessarily leveraging those types of products as much as representing the core brand in the right way. And then looking at all the basics for the business, we are doing, I think, a great job in presenting the product, and the stores look great. I think that the team is very, very engaged and always shows tremendous energy there. They know the markets very well.

And then we did a lot of work to really clean the portfolio, just eliminating or closing stores that were not in line with the brand or that were not profitable. So we are down to 102 stores. And we believe that, that is a good place. We're also working with the franchisees to represent us in several more secondary cities, and we have already a few relationships and we plan to have a few more by the end of the year.

Our next question comes from Dana Telsey from Telsey Advisory Group.

As you think about the expenses and preparing for holiday and beyond, what are you seeing in terms of shipping, freight surcharges? Obviously, we've heard of increases there. How are you planning for that? And are there any offsets on the expense line that we should be looking for as you continue to reinvigorate the business?

Yes. Dana, I'm going to just touch on some of the comments or the question, and then Katie can probably talk about the leverage in the fourth quarter. But we have done a lot of work on expenses this year. I mean, this is probably what every company has done this year, but we have really tried to go to the lower level of expenses in every single area to protect the bottom line, not knowing exactly what demand and the top line was going to look like for any of the periods.

But with that said, it gave us an opportunity to really go that much and create a much more efficient and lower cost structure in several areas, and we are discovering that we can operate really well with a much leaner organization. When we look at holidays, that was a tricky thing because we wanted to make sure that we had enough resources to support the business.

You asked about freight. Freight is -- especially inbound freight has been just very, very expensive. And of course, we have been very picky with where we accelerate freight in, just depending on product categories that we thought it was worth paying the extra premiums that the market was demanding. But then just with respect to shipping costs and so forth, I think we are in pretty good shape. We have great relationships with our partners in that area. And what we did was to negotiate capacity ahead of time, and that is working well for us. Katie?

Yes. So Dana, as you know, we pulled a lot of expenses out of SG&A throughout the year and we'll continue to manage that really, really tightly. As we come into this high-volume fourth quarter, we're going to get some deleverage on the SG&A margin just because of the fixed component that SG&A has, but we'll continue to see progress on the expense line.

And we have no further questions in queue. At this time, I will turn the call back over to Carlos.

Thank you. Well, thank you all for your participation today. I'm really grateful that we have the opportunity, the determination and also the support to make our company better as a result of these very challenging times. We'll keep you updated on our progress, and we want to wish you all a very happy holidays and a prosperous new year, and thank you again for participating today.

Thank you, ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.