Guess? Inc (GES) 2020 Q3 法說會逐字稿

Good day, everyone, and welcome to the Guess?

Third Quarter Fiscal 2020 Earnings Conference Call.

On the call are Carlos Alberini, Chief Executive Officer; and Sandeep Reddy, Chief Financial Officer.

During today's call, the company will be making forward-looking statements, including comments regarding future plans, business and financial opportunities, strategic initiatives, capital allocation and short- and long-term financial outlook.

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.

Now I would like to turn the call over to Carlos.

Thank you, operator.

Good afternoon, and thank you all for joining us today.

We reported our third quarter results today, and we were very pleased to deliver operating earnings and earnings per share above the high end of our guidance for the period.

Adjusted operating earnings increased 4% versus last year, driven by a 2% revenue increase and a gross margin increase of 90 basis points, which was offset by an adjusted SG&A rate increase of 90 basis points due to pressure from corporate investments during the quarter.

Our performance reflected mixed results across our regional businesses.

Europe had a terrific quarter with very strong performance across all channels.

While the Americas showed strength in our wholesale business, we experienced deceleration in our retail business with comp sales below our expectations.

Asia was also weaker, and our licensing business had a better performance than we expected in the quarter.

I believe that our business in North America was influenced by factors at a macro level, primarily impacting customer traffic, including weather and tourism and internal factors related to our Fall/Winter product collection and inventory position.

As we focused on operating our retail business with leaner inventories, we believe our ownership and product for certain classifications would have benefited from more inventory depth and breadth to comp last year's volumes.

We are correcting this as we speak and are confident that we will be in a much stronger position in the new year.

Regarding Asia, the issues we faced earlier in the year in our 3 major markets of Greater China, South Korea and Japan still persist today.

Similarly to the Americas Retail business, we believe that some of the factors impacting our business here are macro-driven and not in our control.

These include specific regional issues, such as the Hong Kong protest situation and the China trade war development.

But there is a lot about our product assortment and styling, our inventory levels and our promotional cadence that are totally in our control, and we can impact going forward to improve on our current trends.

All considered, we continue to believe that the Guess?

brand and our product offering are very relevant to the Asian consumer, and that the long-term opportunity in this region is very compelling and remains intact in spite of the current challenges.

We're monitoring the situation very closely and have adjusted our investment plans for the region based on the current trends and our medium term expectations.

Regarding our product in Asia, specifically, we strongly believe that we have an opportunity to improve our offering by developing a more local assortment that caters to specific customer needs and taste regarding styling, sizing and fit, which are very different by market or subregion and also different from our existing lines.

We are mobilizing our teams to create product capabilities to address this.

In addition, we should have had more newness on the floor and online, but we're impacted by the high levels of older season inventory that we came into the year with.

As we work through the inventory on hand, we are ensuring that future buys incorporate the newness the consumer will expect from our brand.

In terms of marketing, we believe that we can do a better job partnering with local celebrities and influencers while leveraging social media platforms and live streaming capabilities to market to consumers more effectively.

Lastly, regarding our promotional cadence, the Chinese market is very competitive, and we have an opportunity to adjust prices for certain products, where local brands have been very aggressive with fast development and sharp pricing to capture share.

We are also taking action on this in the fourth quarter.

Our business in Europe had a very strong quarter with revenues up 9% and operating earnings up 163% for the period.

Operating margin more than doubled in the quarter, and we are very pleased with our performance across all channels and all markets in the region.

During the quarter, we continued to manage our company's overall inventories effectively, and we ended the period with a reduction in global inventory of 5% versus last year.

And we are on track to end the year with a decrease of inventory in the double-digit range.

We continue to make good progress in reducing our dependency on China sourcing and mitigating potential tariff risk without compromising the quality of our products while improving cost performance.

Our product development and sourcing teams are doing a phenomenal job with this and I believe that their work will have a significant long-term impact in our infrastructure and in our product capabilities regarding quality, speed and cost optimization.

We are also reaching productive costing negotiations with vendors that remain committed to China sourcing but are willing to offer very compelling prices in spite of potential tariff increases.

As a result, our expected percentage of China sourced apparel product may increase from 12% to 23% for next year.

This increase will have no negative impact on our costs if the new tariffs get enacted.

Let me now comment on our updated guidance for the year.

We have raised the low end of our EPS guidance by $0.03 due to our Q3 beat while maintaining high end of guidance.

The fact that we have been able to do this in light of revenue softness in the Americas Retail and Asia speaks to the strength of our diversified business model where the positive momentum this year in Europe and Americas Wholesale, coupled with effective expense management, have helped offset the weakness that we are seeing in the two other regions.

I am very confident that we have several levers to pull as we continue to drive improved profitability in our business model.

I now have been back with Guess?

for almost 10 months, and I feel great about the progress that we are making in multiple fronts.

I strongly believe that the last few months, in particular, have been critical for our team and our organization as we finalize our strategic business plan.

We look forward to sharing our plan with you during our Investor Day event that is planned for this coming Tuesday, December 3 at the Intercontinental Hotel in New York.

For the event, we'll have a few of our executives present.

And Katie Anderson, our new CFO, will also participate in the meeting.

Katie joins us from California Pizza Kitchen, where she is currently CFO and brings a strong background in finance and strategy.

I hope that you can come to our event.

And if you haven't been invited and have interest in attending, we would love to hear from you so we can accommodate you.

This will be a webcast event, and we will share our key strategic priorities for the next 5 years to take Guess?

to the next level of growth and profitability.

I think you will like what you will hear.

As we worked on our long-term strategy, we continue to operate the business and developing our model, following the key principles I articulated during my first call back with Guess?

in March.

The first one of those principles relates to capital allocation.

As you know, we made the decision to redeploy capital and return incremental value to our shareholders through significant share repurchases while reducing our dividend by 50%.

During the third quarter, we completed the accelerated share repurchase program, which amounted to $170 million.

With this, we have now repurchased a total of 16.4 million shares, representing slightly over 20% of our shares outstanding at the beginning of the year.

The expected accretion for this year is forecasted at $0.13 per share and is included in our guidance.

Regarding cash flows.

As a result of this transaction of the dividend reduction, we continue to expect a positive impact to our cash flow generation of approximately $30 million this year and $40 million next year.

In addition, we plan to spend not more than $68 million in capex this year versus $108 million last year, and we also expect a meaningful improvement in free cash flow generation over last year through improved operating results coupled with better working capital management.

And on the subject of working capital, apart from inventory management, we have targeted extending the payment terms to our suppliers to better align them with our cash conversion cycle, the benefits of which we should see in our free cash flows starting next year.

Also, as part of our capital allocation review, we have decided to transition the operation of our Underwear business in South Korea to a local licensee that has established strength in the category.

This will enable us to focus on our core lines while leveraging the expertise of this licensee partner and reduce our capital investments in the business.

Our guidance for the fourth quarter for Asia reflects this transition as we expect it to be executed during the fourth quarter.

The second principle I have discussed on previous calls relates to product development and distribution optimization.

We have made good progress with denim development and expanded product presentation in both our stores and online, all of which is contributing to improved results.

We are also pleased with our progress with the Marciano brand, both in North America and Europe, as we have strengthened our design teams and refocused our merchandising efforts.

We also expect continued improvement in sales and profitability with this business.

Regarding men's and accessories.

Our efforts to develop products that are more specific to each customer segment are continuing, and we expect the results of this effort will benefit us in the next fiscal year.

As we continue to search for efficiencies in our global model, we have identified an opportunity to develop and leverage a single factory outlet line to serve both North America and Europe instead of the 2 separate lines that we have today.

It is clear that the assortments and styling between both lines are very consistent and offer a big opportunity for consolidation.

This will yield even more brand consistency across both regions, improved product quality and significant cost savings as we leverage the scale of the buys and we reduce development costs.

Additionally, we plan for our e-commerce offering to be our largest assortment and become the biggest representation of the brand so that our customers can find their choice of product on our site if they cannot find it in a store.

This will also equip our store teams with a broader assortment to service our customers.

This is an important initiative to support our omni-channel vision.

The third principle I have alluded to in the past relates to the opportunity to pursue global strategies across key functional areas.

The main areas that we have focused on are inventory management, logistics and distribution, sourcing and product development, IT, real estate and omni-channel capabilities.

These functional capabilities are a critical part of what will drive our strategic business plan, and we will tell you more about our vision for them during our Investor Day meeting.

The fourth principle I have mentioned in the past relates to our overall cost structure and opportunities for optimization.

Regarding this, we have plans to optimize the inventory allocation and replenishment process and refine our store labor scheduling model to better align with traffic patterns.

In addition to this, we see opportunities for rent reduction and rationalization of our cost structure by simplifying and streamlining processes.

The fifth principle I have mentioned in the past is customer centricity.

You will hear more about our approach during our Investor Day next week.

But our goal is to significantly improve our customer experience, enhance data capture, strengthen data analysis and customer segmentation and develop a strong personalized marketing model.

That's our road map.

We believe that we have a big opportunity here at a global level, and these initiatives should result in increased sales productivity and better conversion rates.

As part of this initiative, we continue to work on our implementation plan for Salesforce as our main e-commerce platform to service our business in both North America and Europe.

This will be a critical enabler of the improved customer experience and a driver of future sales growth.

We continue to believe that the new model and capabilities should result in increased penetration of e-commerce sales that are more in line with best-in-class performers in our industry.

In closing, I want to say that I strongly believe our opportunity to continue to expand globally is very significant and unique due to the power of the Guess?

brand.

And so is our opportunity to continue to attract customers with 3 distinct profiles: heritage, millennials and generationZ's, primarily due to our highly differentiated approach.

These customers are engaging with our brand at a deeper level and are very attractive to our company's future.

Last but not least, our company has a large sales base.

However, our profitability is not a good representation of our business model and margin potential.

And this is despite our adjusted operating profit growing over 30% annually in the last 2 years and our guidance for adjusted operating profit projected to grow above 25% this year.

I believe there is a lot more operating margin expansion opportunity here, and it is in our control.

We plan to discuss these topics in more depth next week and hope you will leave the event with a clear understanding of our opportunity and our plan to attack it.

I now want to pass the call to Sandeep, who is here in his last earnings call with us.

I want to thank Sandeep for all his contributions to our company during his last 9 years with Guess?.

Sandeep leaves a very strong team in all his areas of responsibility.

And I know that we will not miss a beat during the transition.

I also want to wish you the very best in your future, Sandeep.

It has been great working together during the last few months.

Thank you, and please go ahead.

Thank you, Carlos.

That is much appreciated.

Good afternoon, everyone.

During this conference call, our comments reference certain non-GAAP or adjusted measures.

Please refer to today's earnings release for GAAP reconciliations or descriptions of such measures.

Third quarter revenues were $616 million, up 2% in U.S. dollars and 4% in constant currency versus the prior year.

I would like to highlight that this was our 13th consecutive quarter of revenue growth.

Total company gross margin increased 90 basis points to 37.3%, driven by higher IMUs.

This was on top of a 160 basis point improvement in gross margins in last year's third quarter.

Adjusted SG&A as a percentage of sales increased by 90 basis points primarily driven by pressure from corporate investments.

Adjusted operating profit for the third quarter was $23 million, an increase of 4% versus the adjusted operating profit last year.

Adjusted operating margin finished at 3.7%, flat with last year and better than the high end of our guidance.

The operating margin guidance included a negative impact in the third quarter this year of 50 basis points due to a shift in timing of shipments that benefited the second quarter.

I would like to point out that on a net basis, we reported minimal nonoperating expense in the quarter as net unrealized losses on nonoperating assets were offset by unrealized revaluation gains on foreign currency exposures.

This compared to nonoperating expense of $5.8 million in the third quarter last year.

Our third quarter adjusted tax rate was 24%, down from 32% last year, primarily driven by the mix of statutory earnings.

Adjusted diluted earnings per share finished at $0.22, above the high end of our guidance of $0.18 per share, driven by better adjusted operating profit and the lower-than-expected tax rate.

This compared to last year's adjusted diluted earnings per share of $0.13.

Also included in adjusted EPS this year was $0.02 in accretion from the convert transaction and share repurchases.

Now for some more color by segment.

Americas Retail revenues for the quarter finished down 5% in U.S. dollars and 4% in constant currency.

Comp sales for the quarter, including e-commerce, were down 3% in U.S. dollars and in constant currency, finishing below our expectations.

The negative comps in the quarter were driven by negative traffic and AURs as our comp trends for the quarter deteriorated, starting with the Labor Day weekend.

E-commerce had an immaterial impact on comps for the quarter.

Americas Retail operating margins in the quarter contracted 110 basis points, breaking a sequence of 8 consecutive quarters of operating margin expansion.

The contraction in margins was driven by markdowns and deleverage from lower sales, partially offset by better IMUs.

Moving to Americas Wholesale.

Revenues grew 7% in U.S. dollars and 8% in constant currency and were driven by a continuing strong performance in our U.S. department store, specialty and off-price business.

The Americas Wholesale operating margins in the quarter expanded 20 basis points.

European revenues for the quarter grew versus last year by 9% in U.S. dollars and 13% in constant currency and were driven by new store openings, growth in wholesale revenue and positive comps.

Comps, including e-commerce, finished up 1% in U.S. dollars and up 5% in constant currency.

E-commerce improved the comps for the quarter by 3 percentage points.

The comp increase marked the 17th consecutive quarter of constant currency positive comps for the European region.

Our European wholesale business also continues to be very strong.

We closed the order book for the Spring/Summer 2020 season during the quarter and recorded our sixth consecutive season of double-digit growth in the region.

European segment margin improved by 410 basis points due to higher IMUs, lower distribution costs, leverage and lower retail markdowns.

We now expect lower European logistics cost to contribute at least 150 basis points to margin expansion in Europe for the year.

Moving to Asia.

Third quarter revenues were down 8% in U.S. dollars and down 5% in constant currency.

Comps, including e-commerce, were down 21% in U.S. dollars and down 19% in constant currency.

E-commerce decreased comps by 2 percentage points.

Our performance in the region was significantly below our expectations as traffic trends in the stores deteriorated during the second half of the quarter.

The weakness was consistent across all our major markets in Asia, that is Korea, China and Japan.

Operating margin for the Asia segment contracted 520 basis points in the quarter primarily due to higher markdowns and expense deleverage as a result of the negative comps.

Moving on to the balance sheet.

Accounts receivable was $300 million, up 5% in U.S. dollars and 6% in constant currency.

Inventories were $520 million, down 5% in U.S. dollars and down 4% in constant currency versus last year.

This was another quarter of sequential improvement.

While we've made a lot of progress on inventory this year, we are still carrying some excess inventory from the end of last year, and expect to continue to dispose of this inventory through a combination of selling it in our own retail outlet stores as well as using stock liquidation channels so we can end the year at significantly healthier position than last year.

Free cash flow for the first 9 months of the year was negative $79 million, an improvement of $43 million versus negative $122 million last year driven by $26 million lower capital expenditures and $17 million of improvement in working capital.

If we exclude the impact of the $46 million EU commission fine paid earlier this year, our free cash flows improved by $89 million versus last year.

As Carlos mentioned, during the quarter, we completed the $170 million ASR that we entered into during the first quarter of this year.

A total of 5.4 million shares were delivered to us in September to close out the ASR.

As a reminder, 5.2 million additional shares were already delivered to us against the ASR during the first quarter of this year.

Including open market purchases and the $170 million ASR, we have repurchased a total of 16.4 million shares at a cost of $281 million this year, resulting in an average price per share of $17.13.

We ended the quarter with cash and cash equivalents of $110 million compared to last year's $139 million.

Cash less debt at the end of the quarter was negative $207 million compared to $99 million last year.

Moving on to the guidance.

I should point out that our outlook for the fourth quarter and full year of fiscal 2020 does not assume any asset impairment charges.

Also, guidance for revenues and comp sales for the total company and by segment is included in a supplemental table attached to our earnings release.

For the fourth quarter of fiscal 2020, we expect revenues for the quarter to be up 2.5% to 3.5% in constant currency.

At prevailing exchange rates, we estimate that currency will be roughly a 1.5 percentage point headwind on consolidated revenue growth for the quarter.

Our gross margin is expected to be up due to IMU improvement from our supply chain initiatives as well as lower markdowns and obsolescence expense due to a cleaner inventory position than last year.

The SG&A rate is expected to be down slightly to up slightly compared to last year.

We are planning an operating margin for the quarter between 11.5% and 12% with a 20 basis point unfavorable impact from currency.

The adjusted earnings per share is planned in the range of $1.07 per share and $1.12 per share, including $0.05 of headwind due to currency.

The earnings per share guidance includes $0.21 in accretion due to the impact of the convert transaction and share repurchases.

Our adjusted EPS guidance includes an assumption of $1.7 million of cash interest expense and amortization of loan fees related to the convertible debt transaction.

Our tax rate for the quarter is estimated to be 21%.

We expect consolidated revenues for the year to be up between 5.7% and 6% in constant currency.

At prevailing exchange rates, we estimate currency to have a 3% negative impact on consolidated revenue growth for the year.

For the full year, we expect gross margins to be up due to improved IMUs in both the Americas and Europe as well as lower logistics and distribution costs in Europe.

The adjusted SG&A rate is expected to be up for the year due to an increase in performance-based compensation.

Our adjusted tax rate for the year is estimated to be 25%.

We are planning an adjusted operating margin between 5.4% and 5.6% with a 10 basis point negative currency impact on operating margin, and our guidance assumes that foreign currencies will remain roughly at prevailing rates.

Adjusted earnings per share is planned in the range of $1.31 and $1.36 with a $0.06 headwind from currency.

As a reminder, our prior guidance for the year was $1.28 to $1.36.

So we have raised the low end of our guidance by $0.03 and maintained the high end.

The guidance includes $0.13 in estimated accretion due to share repurchases and convert transaction and includes an assumption of $5.3 million of cash interest and loan amortization expense.

The high end of our new guidance represents a 39% increase over last year's adjusted EPS.

CapEx for the year is expected to range from $63 million to $68 million to support store openings, key store remodels and investments in our technology infrastructure to support long-term growth.

Please note that this is down from $108 million in the prior year.

As I mentioned earlier on the call, excluding the impact of the $46 million EU commission fine, our free cash flow has improved over last year-to-date by $89 million.

This was driven by improvements in inventory and working capital management in addition to lower capital expenditures.

We expect to see further improvement in free cash flow in the final quarter of the year, and to finish with a $90 million improvement in free cash flow for the year, which is $136 million, excluding the impact of the EU commission fine due to continued benefits from working capital management and lower capital expenditures.

In the current quarter, the Board of Directors has approved a quarterly dividend of $0.1125 per share payable to shareholders of record at the close of business on December 11, 2019.

Before I close the prepared remarks, I would like to take the opportunity to say that it's been a privilege to work at Guess?

for the past 9 years.

It has been an incredible journey for me, both personally and professionally.

I would like to thank my finance team for their support over the years.

And I'm so proud of them for the way we've evolved the function.

Finally, I would like to thank Carlos, Paul and Maurice Marciano, the Board and all the associates I worked with for their partnership and wish the company continued success in the future.

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

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

I guess, I would like to maybe get a little bit more color on the Americas Retail comp and kind of the step back that we're seeing it take and then into the fourth quarter as well as the operating margin.

What are your thoughts, I guess, around the store base given now the slower comp and then also the deleverage on the operating margin front?

And do you think you can get the comp back positive?

Thank you, Susan.

This is Carlos.

Just what we saw during the third quarter was primarily driven by traffic and AUR.

We -- traffic has been negative in -- for the early part of the year, first quarter and second quarter.

However, what we saw in the first and second quarter was we were able to more than offset the traffic declines with conversion and UPT improvement.

So during the third quarter, our conversion in UPT was better than a year ago, was not as positive as it was earlier in the year to be able to more than compensate the traffic declines and the AUR declines as well.

We -- as we mentioned in the prepared remarks, we're also light in very specific key categories where we lack breadth and depth.

I think that, that might have impacted conversion to a certain extent.

And even when conversion was a tailwind, as I indicated, it was not as strong as it has been.

We do expect this trend to continue into Q4, even when we are making changes to our inventory position as fast as we can to really strengthen those categories that -- where we were light.

With respect to the comps going forward, while we see that pressure in the fourth quarter, we were up against healthy comps in the third quarter and we were up against even healthier comps in the fourth quarter from last year.

So what we see that pressure impacting us, we think that going into the new year, things are going to be very different.

And of course, we are correcting the inventory position that we go into next year with, we definitely have time to be able to adjust.

I think that your question was also about the store base and the deleveraging.

Just we are pleased with the stores and the portfolio that we have.

Obviously, we continue to look at opportunities to improve on occupancy cost structure.

And as we have many stores that are coming to lease expiration, we take every single opportunity to try to improve on that.

And if the numbers don't look compelling, we do what we have always done, which is we exit the location if we cannot achieve a reasonable deal.

Every store has to stand on its own.

And I think, as you asked also about operating margin and the cadence going into Q4, Susan.

So I think, obviously, with the comp guidance for Q4 are down mid-single digits to down low single digits, which is a bit of a deceleration against Q3, there is going to be pressure on operating margins into the fourth quarter as well.

But as Carlos mentioned, we're taking a lot of actions to actually remediate that as we go into the end of the year and into next year.

So I think we're fully expecting to start recovering as those initiatives take hold.

One more thing I would say is just during the quarter, we saw tourist locations underperforming the non-tourist locations.

Obviously, this is a global brand.

And we are impacted by how tourists react and how they are shopping.

Also, weather was not ideal.

And because it was warmer, it wasn't conducive for cold weather products so -- and this is a key classification, both inside the third quarter and also impacting fourth quarter.

We have, I think, a terrific assortment of product that is conducive for cold weather.

And obviously, the weather in the fourth quarter could be a major permanent factor to really move both the level of business and also AUR.

Got it.

And then if I could just add a follow-up on Asia.

It looks a little bit worse there also.

I know that's been a tough geography for a lot of people given the macro issues.

Are you seeing any stability at all with some of the initiatives you're working on in terms of fit and adjusting the product and marketing?

And maybe if you could talk about what else you're doing to kind of try and get that back on track.

Yes.

Thank you.

Well, definitely, the softness in Asia has been now with us for a few quarters.

We saw a very sudden change in trends, as you know, at the beginning of the year.

And it was just after Chinese New Year we experienced softness in our 3 major markets.

I'm talking about Greater China, Japan and Korea.

And those trends got even softer during the Q3, as you indicated.

The change is, when you look at what happened and how it happened, these changes lead us to believe that there is something that is playing out at a macro level, and we know that there is a lot that is impacting the region that is completely outside of our control, like the Hong Kong situation, the China-U.

S. trade war, also Korea and Japan trade war, unusual weather.

There were a lot of things that happened during this quarter.

I don't know if those are the reason why the softness accelerated.

But what we do know is that the retail environment is challenging, and our customer traffic is down across all markets.

There is not that much that we can do on that, but we see significant opportunities to improve internally.

And many of those things start with product, and you referred to that.

We believe that the product requirements for the region are very specific.

In Korea and Japan, we are developing a specific product, and we have been for several years.

But we do not do that in China at the moment.

So we do have an opportunity to better address the customer needs in terms of product styling, sizing and fit.

And also, we think that as we study the flow of our inventory, we believe that we have been impacted by insufficient newness in our inventory position, especially in Greater China.

The composition of the product offering has been impacted by the high level of older season inventory that we came into with.

And as we work through the current inventory and all that excess, we are ensuring that we are very careful with how we buy the future product and we do incorporate newness.

We think that there is also an opportunity on prices.

We have been analyzing our price points by products, and compared to some other brands that are -- have become relevant in the market.

And we think that these brands have been aggressive with fast development and also very sharp pricing.

So we are adjusting to that.

And then with respect to specific products, as you asked, we think that, that is going to take some time.

We are really trying to analyze whether our existing lines from Korea and Japan can serve that purpose to a great degree, but we still think that there is a need for a very specific, more localized market product strategy, and that's what we're doing and we are building the team to be able to do that.

It is -- you didn't ask about marketing, but we think that marketing is a big factor here, too.

We think that there is an opportunity to enhance the -- how we collaborate with partnerships with music bands, celebrities and influencers.

And we have now proven that working with the groups that have high local relevancy is very effective.

A great example of this is GENERATIONS that we use.

In Japan, about a year ago, we did a big collaboration and it was super successful.

And when we go with groups that are not as relevant to the local markets, we don't see the same level of success.

So for that reason, we're doing another collaboration with GENERATIONS in Japan this coming Q1, and we are excited about that.

At the end of the day, the key thing here is when we look at the region, is the long-term potential for Guess?

in Asia.

And I am very convinced that this potential remains very compelling and represents a great example of what I call asymmetrical risk.

What does that mean?

It means that the business is relatively small compared to our overall business.

We have a relatively variable expense structure especially when you think about the stores and flexible rents that we have there or short leases and kick out clauses.

And the opportunity for growth is incredible, especially with our brand.

The brand is well known.

It resonates with the Asian consumer.

We have done it before, and I think that we'll do it again.

So we -- when I look at this, obviously, is somewhat disappointing to have to go through the current slowness.

But when you think about the size of the market that we are talking about, we're talking about roughly a $13 trillion economy in Greater China.

That is huge.

Their middle class is the biggest middle class in the world.

So we see a lot of opportunity, and we think that we are protecting the downside.

And we have a business model that can really navigate through the challenging times, especially considering that the size of the business is not that big compared to the total company.

So we are going to talk more about this when we see you on Tuesday.

But I think that the opportunity remains very, very powerful and a great one for Guess?.

Great.

That's very helpful.

Good luck this holiday.

And Sandeep, I wish you all the best.

Thank you.

Thank you, Susan.

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

I wanted to switch gears a little bit and talk about Europe.

You saw some nice margin improvement there.

It seems like you're beating your own internal forecast of what you can do to improve the European logistics costs on that side of the business.

If you can just -- can you talk a little bit about what's going on there?

How you're driving that improvement?

And then ultimately, what the time line looks like for recapturing some of that headwind that you saw last year from the DC transition?

Sure, Janine.

Thank you.

We are obviously super, super excited about the business in Europe.

We have seen strength across the board, across countries, across channels.

So we couldn't be more pleased.

When you think about -- I think Sandeep mentioned how strong our wholesale businesses, too.

We have seen several years now of significant improvement and growth in our wholesale businesses.

It's not easy to do, and I think it speaks about the strength of the brand and how good the product is and how well perceived our business and our relationships are.

So very excited there.

With respect to the retail business, there are some major differences to what we see in other parts of the world.

And it starts with traffic.

Our traffic in the retail stores is positive.

And we also see a similar type of momentum online.

So the momentum overall is very positive.

I think that, that also enabled us to really move very quickly through the inventory, just the changes that we wanted to make.

As you may remember, we ended last year with some excess inventory in Europe and we had a plan to really dispose of that through both internal channels like our outlet stores and also using the off-price channel.

And we have been able to move quicker as just as we navigated those inventory parts, which really also contributed to giving us more ability to invest in newness and really have a very good inventory position already.

So overall, I think that the business is doing very well.

With respect to the operating side, obviously, we are expecting and we are guiding to a major operating margin expansion in Europe this year.

And we feel that, that is something that is definitely happening, but it still leaves a lot of opportunity for continued growth of operating margin.

You mentioned logistics and distribution.

We're going to talk more about that next week.

But we do have a plan to continue to improve on that.

We think as we look at what's happening with other businesses that are similar to ours and the kind of logistics and distribution costs that those businesses consume, we know that there is a big opportunity for us to do better, and we have a plan to do so.

And I think I just want to add something to that, Janine.

I think for the margin recapture you talked about, I think, for the first 9 months, we were already over 400 basis points in margin improvement for Europe.

We expect to see this continuing trend.

And if we actually get to that, we get very close to double-digit margins because last year, we were 5.4% in operating margins.

And so I think the thing about this is it's extremely powerful in terms of the total company business model as well.

And as Carlos spoke to it, as a diversified business model, the strength of the European business has been able to offset the weakness that we saw in the Americas Retail and Asia business.

And this is really critical, and actually, the 120 basis point improvement that we're talking about for the current year despite the softness.

And there's much more that we can actually go for because operating efficiencies also have contributed in the current year, but there's a lot more that we'll talk about next week.

So I think it's really exciting to see that even with this softness, we've been able to drive so much of margin expansion.

That's really helpful color.

I just had a quick one also on the Americas Wholesale business.

You saw nice growth this quarter, and you have been seeing nice growth.

And it looks like you're guiding to a decline in the fourth quarter.

Is there anything there with timing?

Are you seeing anything in terms of sell-throughs changing with your wholesale partners?

Yes.

No, it's -- actually, I think, a better way to look at this is more on an annualized basis.

I mean, obviously, we did have some timing issues that impacted both second quarter and third quarter and now fourth quarter.

We still consider that the business is very healthy.

And we -- you shouldn't think about the negative number in the fourth quarter to represent anything other than a timing issue.

We think that our partners are really doing very well.

And we are -- we have a very strong relationship.

Obviously, we continue to see growth and that is very unique, considering what's happening in the markets out there.

So I think it speaks about the brand and the strength of the product.

Our next question comes from John Kernan from Cowen & Company.

Sandeep, while we have you on the call one last time, I just wanted to grill you a little bit on the fourth quarter guidance.

It seems like there's a fair amount of operating margin expansion embedded in the outlook are guiding to negative comps in North America and slower comps in Europe.

I think they're guided up low singles on a constant currency.

So just wanted to drill down on the SG&A leverage assumption that seems to be implied in the EPS guidance.

Can you talk about the dynamic between gross margin and SG&A in the fourth quarter?

Obviously, Europe being a very strong region right now where there's a lot of margin expansion.

I'm just trying to balance that against other areas.

Sure, John.

I think when you look at what happened last year and our cadence in terms of gross margin performance, we actually had gross margin expansion in all of the first 3 quarters.

And the only quarter last year where gross margins declined was the fourth quarter.

And the reason a decline in the fourth quarter last year is because we went into the fourth quarter into a too heavy an inventory position, had to take markdowns during the quarter, and we had to take inventory reserves during the fourth quarter as well by the end of the fourth quarter.

This year, in contrast, we're entering the fourth quarter in a very good position relative to where we were last year, and we expect to be even cleaner by the end of the year.

And so the assumption that's embedded from a gross margin perspective is definitely to be significantly better.

And if you look at the guidance, we're saying that SG&A basically is roughly flat with last year.

So almost all of the growth of the operating margin improvement that we're talking about for the company is coming from gross margin.

And it's been very consistent in the first 9 months of the year, and it's driven by all the initiatives that we talked about, the IMU improvement, the fact that, especially in Europe, we've been a lot less promotional on a pretty significant business.

All of those things are able to offset some of the weakness that we've talked about in Asia and Americas.

And the logistics costs are very material because of the size of the European business, and that's also contributing in a big way in the gross margin line.

So you put all that together, that's why we're pretty comfortable with the operating margin guidance that we provided, but it really ties back to the gross margin cadence.

Got it.

That makes sense.

And then just maybe a follow-up on Europe.

You obviously have a lot of detail on -- at the Investor Day on this.

But can you -- when you think about the white space in Europe, can you talk to us on how you feel about the dynamic between wholesale and retail?

Both have worked well in tandem together this year, but I'm just -- how are you viewing those channels as we head into the fourth quarter and beyond?

And any update on the backlog going into next year would be helpful, too.

Yes.

Thank you, John.

Well, let me start that.

During the last few years, the company invested considerably to expand the store base and -- in Europe, I'm talking about, but also in other regions.

But I feel that we have a great platform right now.

And I think that we have an opportunity here to continue to build productivity in those stores.

Many of those stores are very new, obviously.

And we feel there is an opportunity to continue to build the retail business through them and same-store sales growth.

With respect to the wholesale business, I think that we have done -- the company has done a great job in looking at the different distribution that we had by country.

A lot of the countries are doing extremely well with expanding distribution and is not necessarily more accounts, though, we do have more accounts, but also more productivity with the different accounts that we have been doing business with.

So -- and I think all this and expanding in different product categories has really fueled the kind of growth that we have experienced during so many years.

So I think that the balance is pretty significant.

And I think that is synergistic for the brand.

And the third big piece that we will talk more also during next week is about e-comm.

We believe e-comm has been growing at a very fast clip.

And we see that as we equipped the business with Salesforce and additional capabilities, we can do even better and significantly faster.

So we are very excited about that initiative.

We will share more about how we are approaching it next week.

But you put it all together and you think about some of the white space that we had in Europe.

When I was here 9, 10 years ago, our presence in Europe was very limited, and it was limited to the southern countries.

And now, when you see how much the company has done to really expand north and to the east, and it has done it so successfully, I think it speaks very, very strongly about the more opportunities that we have to continue to grow in the region.

And John, you asked about the backlog.

I think we -- as we mentioned in the prepared remarks, the Spring/Summer '20 backlog is up in the double digits, and that's the -- our sixth consecutive season, which is about 3 years' worth of double-digit growth that we're seeing in the wholesale business.

And this is a reminder that Spring/Summer '20 product ships in the fourth quarter of this year and first quarter of next year.

We're in the process of collecting orders for the Fall/Winter '20 season, which is coming next year.

And typically, we update during the March call on that cadence.

And so we'll have more on that at that point.

(Operator Instructions) Our next question comes from Dana Telsey from Telsey Advisory Group.

As you think about the wholesale business, both in America and in Europe, what are you seeing there in terms of order patterns?

What are you seeing there in terms of pricing and promotion?

And how are you working with the wholesale distribution channel?

Well, so we -- our business in America and the business in Europe at wholesale are very different.

In America, we have a business that is concentrated on a few accounts, and you have some -- within that, have a company like Macy's, which definitely represents a big, big partner for us.

And then we have some distribution with other retail chains, such as Urban and Pacific Sunwear, sorry, that represents a very significant opportunity for us to deal with product that is somewhat different and caters to a consumer that is younger.

We have talked about the Generation Z opportunity here.

I think when you look at Europe, Europe is a much more fragmented business.

We have an excess of 8,000 accounts throughout the region.

And I think that, obviously, there is a very -- just the diversified base of businesses depending on where these accounts are located and what kind of countries they are just participating in.

The order flow has been very in line with what we have seen in the past.

I think that's just the -- Sandeep just talked about Europe and how the different seasons are extended into -- each season is a 6-month season.

And what we see in the flow, there is a sales campaign that is relatively rigorous in terms of times and the weeks that this takes.

And what we see is that those order patterns have been pretty much consistent with the past and exciting to see the growth that we have seen.

And the business in the Americas, I think, has also been traditional in terms of how the orders have been placed.

I think that we are very pleased with the distribution model that we have.

We are very pleased with our partners, and we see opportunities to continue to grow together.

And the promotional environment, as we go into the fourth quarter, how do you think it will be different than last year?

So it's very hard to say.

You will probably know more about what is the inventory situation for most, what -- the only thing that we know is what we see and what we hear.

Obviously, we have a big change here in calendars and obviously, that is impacting how the business is behaving.

We saw some level of promotional activity even before Thanksgiving, which is -- was more unusual in the past.

But considering that the calendar is significantly more compressed, just that kind of makes sense.

So we are happy with where we are in terms of inventory position.

And I think we -- like we said, we are targeting to end the year with inventories down about in double digits, which is -- it will be a significant accomplishment for us.

(Operator Instructions) And presenters, at this time, I show no further questions in queue.

And I would now like to turn the call over to Carlos for closing remarks.

Well, in closing, I want to thank you all for your participation today.

We had a good third quarter, and we are well positioned to have a strong fourth quarter and close a terrific year with strong top line growth and significant profit improvement.

We look forward to reporting on our progress.

And we certainly hope to see you next week at our Investor Day event.

We're really looking forward to that.

Sandeep, good luck to you in your future, and thanks again for all you have done.

Happy Thanksgiving to everyone, and enjoy your time with your families.

Thank you again.

Thank you, ladies and gentlemen.

This concludes today's conference call.

Thank you for your participation.

You may now disconnect.