Guess? Inc (GES) 2015 Q3 法說會逐字稿

Good day everyone, and welcome to the Guess third-quarter FY15 earnings conference call.

On the call are Paul Marciano, Chief Executive Officer; Michael Relich, Chief Operating Officer; and Sandeep Reddy, Chief Financial Officer.

During today's call, the Company will be making forward-looking statements including comments regarding future plans and financial outlook.

The Company's actual results may differ materially from current expectations based on the risk factors included in the Company's quarterly and in the annual reports filed with the SEC.

Now I would like to the call over to Mr. Paul Marciano.

Thank you.

Good afternoon, and thank you for joining us today.

We reported third-quarter result and posted earnings per share of $0.24, which was above our guidance.

Our operating performance was in line with our expectations.

Overall, the environment remains soft in the North America retail stores.

We have a continuation of the last quarter trend.

In Europe, despite a softer third quarter than expected, we are encouraged by the current performance of both our retail and wholesale businesses.

In North America, our e-comm business grew by 38% in the third quarter, extending the very good momentum we have seen since a year ago.

The effort we have taken in the past year to build the true omni-channel experience across brick-and-mortar, online and mobile platforms continues, creating a true and consistent shopping experience for our brands in every channel enabled by the strong technology platform we establish.

Our retail stores in regular malls continue to operate with challenging traffic and in a constant promotional environment.

With that, our total North America retail business, including e-comm, finish in line with expectation, with comp sales down 5% percent for the quarter.

In terms of product, as expected, we saw weaknesses in women's, especially woven, basic denim, and dresses.

But we are pleased with the improved performance of our accessories and footwear business.

In particular women handbags and women's footwear comped positively in the quarter, driven by strong new product introduction.

On the men's business, woven and knit tops performed well and posted positive comp.

And the Marciano brand total business finished up 6% for the quarter.

Now looking at the fourth quarter so far.

Including the Thanksgiving weekend, we have seen a slowdown in comps in North America as a result of traffic trend and conversion.

But clearly also GUESS?

products in the store did not perform up to expectation due to prior design and buys we discussed on our last call.

However, we remain pleased with the performance with Marciano which comped positive double-digit for the month and is gaining momentum.

This product is unique for what is in the market today.

Improving the product assortment in our GUESS?

Women's business is our top priority.

As we discussed in the prior call, again we have realigned the women design team and we are confident that we are going to have the right product offering in the spring season.

In Europe, our retail stores performed below our top-line expectation as the unusual warm weather over the course of the third quarter caused a slowdown in traffic and resulted in comps down in the mid single digits However, fourth quarter definitely improved, and went back to positive comp for the entire region.

In Europe wholesale, we made encouraging progress as well, even as the actual business was weak during the third quarter.

We just concluded the market for spring/summer 2015 collection, and we are pleased with the definite improvement and trend we are seeing.

Looking at the same-store buy, we were up in the low single digit.

This along with the slowing of the rate of door closure by our wholesale partners shows a stabilization of trends.

This is quite an improvement compared to the fall/winter 2014.

In Asia, our business finished slightly below expectation in the third quarter.

The South Korean economy remained soft in consumer demand, and we have to be more promotional than we plan.

In Greater China we continue to see softness in comp, mainly driven by overall macroeconomic environment.

Mike will address our updated guidance later in the call, but before that I would like to address my key focus which is to improve the Company profitability.

A central part of that plan, in addition to constant drive to improve our product offering, is to evaluate the profitability of the different businesses in our global portfolio, reducing the size and cost structure of the less profitable ones, while skewing capital investment to the one with more profit potential growth in this area.

We are executing currently the integration of our GUESS?

and Marciano brand, as well as the Factory and G by Guess brand, with the goal of gaining synergies by leveraging common teams while elevating the product assortment in both GUESS?

full-price and GUESS?

Factory stores.

By reducing the complexity across our brand portfolio, we can utilize a common platform over time to support all of our businesses and leverage our cost structure further.

This year has not been an easy year for our Company from product standpoint to change of management to retail landscape in general; we could and we should have perform better than what we did.

For that, I believe we made the change needed in each of these area, from the merchandisers to design direction and reassessment of the store portfolio.

I am convinced with our team that we have made every right decision we have to make, even if it has been somehow painful.

We are committed, we are engaged, and we are determined to make it happen.

To make sure that 10 years from now we will be here to celebrate 43 years in business.

It is our goal to carry on and improve our profitability, but to always keep protecting the brand as a priority.

This has been our ultimate goal in the last three decades, and will always be.

With that, I will pass it now to Sandeep to discuss the financial.

Thank you Paul, and good afternoon.

During this conference call, all our comments for the third quarter are on adjusted basis which excludes the impact of certain restructuring charges in the prior year's third quarter.

You can find more details of the prior year charges and a full GAAP reconciliation to these and other non-GAAP measures in today's earnings release.

Moving on to the results.

Net earnings for the third quarter was $21 million, and diluted earnings per share was $0.24 compared to $0.42 adjusted diluted earnings per share in last year's third quarter.

Third-quarter revenues were $590 million, 4% lower than the prior year, and down 3% in constant currency.

Total Company gross profit for the third quarter was below our expectations at $214 million, down 6%.

And gross margin declined 90 basis points to 36.3%, due primarily to negative comparable store sales and more markdowns in North America retail.

SG&A dollars increased 6% versus the prior year to $189 million.

The increase in SG&A was primarily due to higher asset impairment charges related to underperforming retail stores in North America and Europe.

Operating earnings for the third quarter was $25 million.

Our operating margin declined 390 basis points to 4.2%.

Other net income was $7 million, and mostly consisted of net unrealized and realized gains on foreign currency contracts and net unrealized gains on other nonoperating assets.

Our effective third quarter tax rate was 33%.

This is higher than our expected full year tax rate of 32%, due to a shift in earnings distributions between different taxable jurisdictions within the quarters.

Moving to segment performance.

In North America retail, third-quarter revenues dropped 4% to $243 million, including the unfavorable impact of the weaker Canadian dollar.

Negative comps in brick-and-mortar stores were partially offset by 38% growth in our e-commerce business.

Overall, comp store sales including e-commerce declined 5% in US and Canada and 4% in constant currency.

E-commerce sales improved the overall comps by two percentage points.

Operating earnings decreased by $17 million to a loss of $11 million, and operating margin declined 670 basis points to negative 4.3%.

Compared to last year's quarter, gross margins were lower due to occupancy deleverage and more markdowns.

The SG&A rate deteriorated due primarily to higher impairment charges.

During the quarter, we opened 8 new stores and closed 4, ending the period with 492 stores.

In Europe third-quarter revenues were $190 million, a decline of 6% in US dollars and 3% in local currency.

This was driven by the impact of the weaker euro, negative mid-single digit comp sales in our retail stores, and as well as lower wholesale shipments.

Operating earnings decreased by 43%, or $6 million, to $8 million.

Operating margin decreased by 270 basis points to 4%, driven by the impact of negative comps and higher asset impairment charges.

In Asia, revenues in the third quarter declined 2% to $71 million, and declined 5% in constant currency.

The decline in revenues was mainly driven by negative comps in South Korea and China.

Operating earnings fell 64% to $2 million, and operating margin dropped 510 basis points to 3%.

The decline in operating margin was primarily driven by promotional pressure on gross margins in South Korea, and a higher SG&A rate due primarily to an increase in store selling expenses.

In North America Wholesale, third-quarter revenues were flat compared to a prior year at $54 million, partially helped by a timing shift of sales previously expected in the fourth quarter.

Operating profit increased by 15% to $14 million, and operating margin increased 350 basis points to 26.1%, primarily due to improvements in product margins.

Royalties generated from sales by our licensing partners were down 1% at $32 million, in line with our expectation.

Now moving onto the balance sheet.

Accounts receivable was 9% lower at $236 million, and overall DSOs improved slightly compared to last year.

Inventories were down 3% versus last year at $413 million.

The decline in inventory continues to be driven by reduction in European inventories that is partially offset by a buildup of excess inventory in North America.

We ended the quarter with cash and short-term investments of $375 million compared to last year's $360 million free cash flow for the first nine months was an outflow of $58 million, driven by changes in working capital and lower earnings with capex spend slightly below last year.

Our Board of Directors has approved a quarterly cash dividend of $0.225 per share on the Company's common stock.

The dividend will be payable on January 2, 2015 to shareholders of record at the close of business on December 17, 2014.

With that, I will pass the call over to Mike who will take you through the outlook for the fourth quarter.

Thank you Sandeep, and good afternoon.

Today I will update you on our business trends and provide our outlook for the fourth quarter and for the full FY15.

Most of the change in our outlook is driven by softer trends in our North America retail business.

In our North America retail business, comp sales are down in the high single digits so far in the fourth quarter.

And we are planning the fourth quarter assuming a comp decline in the high single digit range.

This would translate into a revenue decrease in the mid-single digits.

For the full year, we expect comp sales to decrease in the mid-single digits, and for revenues to be down in the mid-single digits.

In European retail, so far in the fourth quarter comp store sales have been up in the low single digits.

For the full quarter, we expect the comps to range from an increase in the low single digits to a decline in the low single digits.

For the full year, we are now planning a comp store sales with a decrease in the low single digits.

In Europe Wholesale, we have completed our sales order campaign on the spring/summer collection, and the final order book is down in the low single digits, reflecting a same-stores buys increase in the low single digits.

Considering these factors, we expect total Europe fourth-quarter revenues to decline in the low single digits in local currency.

Assuming the euro remains at prevailing rates, this will result in a revenue decline in the low double digits in US dollars.

For the full year, we are now expecting revenues to decline in the mid-single digits, both in local currency and in US dollars.

In Asia, economic conditions continue to be challenging, especially in Korea, where comps continue to be soft so far in the fourth quarter.

For the fourth quarter, we expect revenues to decline in the mid to high single digit range.

For the full year, we continue to expect revenue to decline in low single digits.

In our North America Wholesale business, we expect revenues to decrease in the low double digit to mid-teens for the fourth quarter, partly driven by the timing of shipments that benefited the third quarter.

For the year, this will result in a decline in the mid- to high single digits.

In our licensing business, we are expecting royalties to decline in the low single digits in the fourth quarter, and to decline in the mid-single digits for the full year.

For the fourth quarter and for the full year, we expect overall gross margins to decline as continued markdown pressure and occupancy deleverage are expected to more than offset the product cost improvements we are seeing in North America.

With respect to operating expenses, we expect a higher SG&A rate for the fourth quarter, mainly driven by the deleverage impact of expected sales declines.

For the full year, we expect the SG&A rate to increase, driven by deleverage due to declining sales, costs associated with store closures, and reorganization in the back half, as well as higher compensation expenses.

We are planning the fourth quarter with a 30.5% tax rate and for the full year with a 32% tax rate, and our guidance assumes foreign currencies remain roughly at prevailing rates.

Considering all these factors, for the fourth quarter of FY15 we expect consolidated revenues in the range of $695 million and $710 million.

We are planning on operating margin between 9.5% and 11.5%.

And for earnings per share in the range of $0.53 per share and $0.63 per share.

These expectations will result in full-year consolidated revenues between $2.42 billion and $2.43 billion, operating margin between 5% and 5.5%, and earnings per share in the range of $1.00 and $1.10 per share.

For the full year, we plan to continue to manage our CapEx carefully and opportunistically by investing between $70 million and $80 million in capital expenditures, net of tenant allowances, primarily through remodels and new stores.

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

(Caller instructions)

Operator?

Thank you.

(Operator Instructions)

Eric Beder, Wunderlich Securities.

Good afternoon.

Hi, Eric.

Hi.

We've heard a lot about the death of denim, no one's wearing denim.

Could you talk about how -- what you think of this, and how you're going to combat this going forward?

Yes, a lot of people talk about that in the industry, and we have seen ourselves some slowdown in the basic denim and a big pick-up in fashion denim.

And interestingly enough, the [$128] jeans has not been a price resistance for us.

So clearly because maybe is a market discount of such rates (inaudible) any price you want from $200 to $29, -- maybe it is seen more as a commodity than anything else, but the fashion denim has picked up clearly for us, men -- women more than men.

Great, thank you.

Thank you.

Erinn Murphy, Piper Jaffray.

Great.

Thank you, and good afternoon.

I just wanted to know if you could talk a little bit more about the fourth quarter.

You've always talked about it starting a little bit softer, kind of down high single digit in North America.

We'd just love to -- if you could speak about some of the product categories that have been the biggest culprits quarter to date, and then maybe just some perspective on how traffic versus ticket has looked in your stores?

Sure.

Hi Erinn, it is Mike.

We are still early in the quarter, and December represents a large amount of our revenue, but so far the Q4 quarter to date trend's been softer than the third quarter.

And the main driver for that conversion is conversion year over year.

The ADS actually improved from Q3, and the headwinds that we saw in AUR have gone away.

But the big issue has been a traffic decline, and that's been down in the mid-single digits.

Actually that continued right into Black Friday.

We saw really no different.

And our comps have been down in the low double digits.

Now, in terms of what worked, we saw outerwear with women's work quite well.

Our denim, like Paul had mentioned, we have a Curve X, which is a new fit in performance fabric, that actually -- we're chasing -- that performed quite well.

And -- but we saw weakness in a couple of categories, and that was in wovens and knits for women.

For mens in Q3 performed well.

Q4 was a little bit softer, especially the denim that Paul mentioned.

Erinn, this is Sandeep.

Good afternoon.

Hi, good afternoon.

Just one small amendment.

I think Mike mentioned the trends in the fourth quarter were down in the low double digits.

It's actually down in the high single digits.

Thank you that's helpful for the clarification.

And then just a second follow-up question on Europe.

It sounds like things have actually gotten better in the quarter-to-date period.

Just would love to hear your perspective from a regional perspective, what has been the biggest region driving that improvement?

I think on Europe we are really happy with the change in trend as we got into November, and really the story is quite simple.

It's about the weather.

The weather in October especially was unseasonably warm, and the traffic really slowed down quite significantly across the board, across the entire region at the end of the third quarter, and that's why we actually came in a little bit softer than we would have liked.

But in Q4 the traffic has come back and we're up in the low single digits.

We're very pleased, and again it is across the board.

So we are happy with what's happening.

Great.

Thank you guys, and best of luck.

Thank you.

John Kernan, Cowen and Company.

Good afternoon, everyone.

Thanks for taking my questions.

Just wondered if you could talk a little bit about the licensing business?

The revenues there have been, obviously been a lot more stable than the rest of the business.

What's holding that up in that segment?

And just from a category perspective, between watches, handbags, eyewear, footwear, what's performing best?

How should we think about the sustainability of the trend in licensing revenues as you see some revenue pressure in other segments?

Thank you.

This is Paul, hi.

I think that's what you see in licensing because we have multiple licensees around the world, and not recently but for the last 30 years.

If you take, for example, handbag globally, I think you would look at maybe 7,000, maybe even 8,000 or 9,000 doors because we have a big business of wholesale.

So sample watches, you would be much more than that.

So we were the very first in watch business as a licensee, like 28 years ago.

And we establish very, very strong position in many markets, places that you would not believe that we can sell 300,000 watches a year in Indonesia.

Which sounds enormous as what is when you see the average price.

But we have a very stable business, and when you have a region which slow down, another region pick up.

And again, because the reason for that so easy is made mainly of multibrand stores, not from freestanding stores.

If you are talking about just accessory stores, the picture would be different.

But we are department stores all over the world on every region, being in Europe, in Asia, in Middle East, in America of course.

That's what shows stability.

And the watches right now being a little bit slower and the handbags picked up a lot compared to last year.

And three years ago it was exactly reversed, the watch were very strong and the handbag was slowing down.

So it is really a good balanced business we have there.

Okay.

Just one quick follow-up.

[Didn't] you guys thought at all about what the right footprint is for the total store base in North America, given what continues to be a lot of headwinds for everyone for traffic, and have you given any more thought to store closures at this point?

Thanks.

Yes.

For example, we announced that we are going to reduce 50 doors in the next 18 months.

We announced that three or four months ago.

We are doing that currently, and we're on plan to do that.

It's definitely done, on the sense that all the steps have been taken for that.

But again, when we see opportunities coming up, for example now we just find some new interesting doors for Marciano is doing really well, 2,000 square feet store, no problem, we take it, because we see opportunity there.

Marciano grows now, also in GUESS?

store we are too big, because we wanted to reduce.

So we combined that, and the result has been very, very good for us, to add an elevated product in a GUESS?

store.

I just came back from Singapore, and two weeks ago.

And our GUESS?

stores now include a very large portion of Marciano, and the business picked up, (technical difficulties) picked up more than 20% on all these doors.

Because you give an elevated perception of the store when you walk in, it's probably between $100 to $350 in many of the guess jean and accessories.

We are adopting to where we have to go.

We are combining the GUESS with Marciano.

We're combining the G with Factory.

And that takes time, and we do what we have to do.

But clearly, if you talk to me about the footprint for North America, right now we are at 492 stores, I think.

Let's see if we have 492, that makes a profit we want to make now.

I would preferred to have 410 doors to make major profit than 500 doors [we've done] major profit we want.

That can answer your question.

Thank you.

(Operator Instructions)

Robert Ohmes, Bank of America Merrill Lynch.

Hi, guys, this is Dan O'Hare on for Robbie Ohmes.

Congrats on the impressive e-comm growth.

Can you remind us what the size of e-comm is, and then how is it structured?

Do you have multiple platforms across regions?

And then lastly, it looks like you have a solid social media presence across platforms.

I'm just curious how are you using social media to leverage your e-commerce platform?

Thanks.

Yes.

Hi, this is Mike.

To answer your question, our e-commerce business is growing substantially, and I think if you look at our press release you can see what the size is.

But as terms of your answer on the platform, we leverage our platform that we have here in the US that is quite advanced into Europe.

So Europe uses the same exact technology, and anything we develop here is leveraged by them.

So we do have a business in e-commerce in Europe that's growing pretty much at the same rate as we see here, albeit on a smaller base.

And you'll keep in mind that our concentrations in Southern Europe, in like Italy where e-commerce isn't quite mature, but we are seeing decent growth there, and this is a big initiative for us.

Then just on social media?

Sorry.

Social media, so we are -- do do a number of things with Facebook, with Pinterest, et cetera, and with Instagram.

And I think there was one study that showed we were the fastest growing denim brand on social media.

So we work with Facebook on doing ads.

We want to drive awareness and to drive interaction with the customer.

And then we do other campaigns to drive traffic to our website for sales.

And we've had success in all of those measures.

Thanks.

And then just lastly on Europe, you said that comps were up low single digits.

I was just wondering if there was any divergence between regions?

Is north performing better than south, or anything to call out in particular there?

Thanks.

This is Sandeep, Dan.

I think in Europe we've seen across-the-board improvement, as I mentioned earlier, but especially I think we are really happy with Southern Europe, and I've picked on Italy and Spain over there, which is doing well in the quarter so far.

Betty Chen, Mizuho Securities.

Hi.

It's Alex Pham on for Betty Chen.

I was wondering if you could talk a little bit about the softness we're seeing in Asia?

It seems like Asia, and particularly it seems like South Korea in general, has been weak for number of quarters now.

Wondering if you could talk a little bit about some of the strategies or initiatives that we can do to combat the weakness we've seen so far?

Thanks.

Keep in mind as we look at Asia, Korea is two-thirds of our business, and we still are the number one denim brand in Korea, and we're quite proud of that.

But the consumer environment there remains very soft.

It is not -- soft not just for us, but also all of our competitors.

And the government there just announced, I think a couple of months ago, an initiative to try to spur demand.

So we see weakness all together there.

But we are investing there.

We've invested in our design group.

We've got some new design resources to try to inject fashion into the line to make sure that we can keep customers coming.

But overall, we are facing a tough macroeconomic environment there.

(Operator Instructions)

Jeff Van Sinderen, B. Riley.

Hello.

This is Richard Magnuson in for Jeff Van Sinderen.

Can you talk more about your promotional levels in Q3?

Did you stick to your original plan, or did you trigger some unplanned promos?

And overall were you more or less promotional, or were your discounting levels higher or lower in Q3 this year versus last year?

And then looking at Q4, are you planning to be more or less promotional, or run a higher or lower level of discounts versus Q4 last year?

Then lastly, how should we think about merchandising margin for Q4?

This is Sandeep.

I think on the margins for Q3 specifically, I'm taking it at the total Company level, we did have some benefits from IMU improvements which we talked about on the previous call which helped us.

But that was more than offset by the promotions that we had to do to clear some of the extra inventory that we had.

But if you look at our cadence in terms of gross margins, we actually narrowed the gap against what we saw in Q2, which is (inaudible) basis points degradation.

We were just 90 basis points in Q3, and that's an improvement that we had.

Going into Q4, you're going to see a -- similar kind of situation where you have the IMU benefit, but we do have excess inventory that we need to work through.

So because of that there's going to be markdowns to try to get through that excess inventory, and accordingly our margin are expected to be going down.

David Glick, Buckingham Research.

Yes, thank you very much.

Just a question on your strategy to right-size the North American retail footprint.

As part of that process are you considering any elimination of any nameplates, or it's more a location-by-location analysis and keeping the same nameplates that you are currently running?

Yes.

I think that the Marciano clearly (inaudible), and we have like, I think, 85 doors -- I'm sorry.

We have 45 -- no - (inaudible)

(Multiple speakers) yes.

And definitely the GUESS?, the Factory, and Marciano are here the one that we decided to combine with Factory would be G by Guess, but we have -- we are looking at the leases.

We are looking at the product to be introduced on the Factory as we just did now already, and the one I think (inaudible) has been very good for that.

And over the years, I think the next two years, it will be basically (inaudible) G by Guess becoming G by Guess in Factory.

The plate on the mall will not be there.

From a wholesale perspective, are you going to maintain that brand?

Because I have seen it in various department stores.

Yes, in the stores but not in apparel.

We don't do any apparel in wholesale.

We do only -- you have seen maybe shoes?

I've seen some handbags, yes.

And handbags, exactly.

We don't have watches, we don't have eyewear, we don't have anything.

Only shoes and handbags.

Then one last one, if I could.

Last year you guys did a great job of bringing down SG&A levels, and into the first quarter of this year that's -- obviously you've made some investments this year.

How are you thinking about your SG&A base going forward?

You mentioned some reorganization efforts within North American retail.

Should we see the dollars going down, and are there any one-timers this year that may inflate the SG&A base?

You mentioned compensation expense, I don't know if that severance expense.

But how should we think about your SG&A dollar base going forward?

Hi, David.

This is Sandeep.

So if you go back to the last call we talked about $20 million of savings that we were expecting to get on an annualized basis, but really mostly into next year because there's going to be so late in the year that we execute it.

This would be across all of our businesses in North America.

It includes North America retail, North America Wholesale, and the corporate organization.

So, and this is a gross number.

So you're going to have investment that may be offsetting it.

So I wouldn't really get into specific direction of what that's going to be, but we talk about our guidance next year you'll have a better idea.

Jeff Van Sinderen, B. Riley.

This is Richard Magnuson for Jeff Van Sinderen.

I had one more question.

It's tagging onto the last part, and that is the merchandise margin in Q3, was that up or down?

I'm sorry, can you repeat the question?

Merchandise margins?

Is the merchandise margin for this past Q3, was that up or down?

They were up, because -- up for the IMU, but down net because of the markdowns.

All right, thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.