Guess? Inc (GES) 2016 Q1 法說會逐字稿

Good day, everyone, and welcome to the GUESS?

first-quarter FY16 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 risk factors included in the Company's quarterly and annual reports filed with the SEC.

Please note that this conference is being recorded.

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

Paul, you may begin.

Thank you.

Good afternoon, and thank you for joining us today.

We are pleased to report that our first-quarter earnings per share was $0.04, which was above the high end of our guidance.

Earning and operating margin were above the guidance we gave three months ago, we also expanded operating margin since last year, which is one of my key priorities.

Before I update you on the progress of our strategic initiative, let me talk about the business.

In our North America retail business, the early part of the quarter was impacted by the disruption of the west coast port issue, and extreme weather in all East Coast and Canada.

Despite these two headwinds, we did not see a deterioration of the trends compared to the first quarter and finished the quarter with comps down 4% in constant currency, and down 6% in US dollars.

E-commerce, which is one of our top priorities had another strong quarter, and delivered top line growth of 14% in the quarter, marking the 15th consecutive quarter of growth.

In terms of product, we were pleased with the performance of the Marciano product.

We finished the quarter with comps up in the middle single digits, despite the definite disruption to product flow from the coast port delay.

We were also pleased by the overall performance of our women's business as trend has improved in the first quarter, driven by dresses, denim, and wovens tops.

Going in Q2, we are seeing the continuation of the first-quarter trends in our women's business.

We believe that the design change we have made are really starting to show results.

On the accessory side, we saw footwear continue to comp positively, but we did see a slowdown in bags again as the port delay disrupted our deliveries.

However, as the new product reaches stores, we are seeing a return to positive comp trends for handbags again.

Europe, our retail stores performed well and delivered positive comps in the low single-digit in the quarter.

Our product plan is clearly resonating with our customers, as we were able to deliver this result despite soft traffic.

We're also encouraged by the trend so far in Q2, with comps in the middle single digits.

I've just returned from Spain, Portugal, and Italy last week, and was very pleased with what I saw during my trip with the products, the street had more activity but also the need of more product in the stores due to high sell through.

However, Europe continued to be the biggest source of our foreign exchange headwind, with the steep decline in the value of the euro against the US dollar and the Swiss franc, and that is beyond our control.

Moving to our guidance for the fiscal year, we are pleased to be able to raise both the low end and top end of the guidance for the year based on our first-quarter performance.

We will provide detail on this later during the call.

We're encouraged by the overall performance of our business so far this year, and believe this reflects the progress we have made in our four strategic initiatives outlined in last call.

First, omnichannel, as we said, we expect double-digit growth for the year in e-commerce, and are on track to achieve that in North America and Europe.

Second, integration of Marciano in GUESS?

stores, the process here is ongoing, and we're on track to double the number of stores with GUESS?

and Marciano Presents by the end of the fiscal year.

The integration enabled us to expand the distribution of Marciano line, and provides an upgrade and natural extension of the product offering within our GUESS?

stores.

Further, our store realignment, we remain on track our projection to close underperforming stores.

We plan to close up to 60 stores in North America this year, and have already closed 11 of these in the first quarter.

Finally, improve profitability of the Company.

This continues to be a key priority of mine, as well as the management team.

Sandeep will provide more detail on the first-quarter financial performance later, but excluding the impact of currency, we already have made progress in Q1, where we were able to deliver operating margin level above our initial expectation above last year.

In conclusion, I'm encouraged by the performance of the business so far this year.

I strongly believe this is the result of the product change we have made in the last few months, as well as a clear focus by management team to execute the strategy.

I'm confident these are the right steps to increase the long-term value of the brand, and we will discuss more on the Q&A.

Thank you.

With that, I will pass to Sandeep to discuss the financials.

Thank you, Paul, and good afternoon.

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

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

Moving on to the results, net earnings for the first quarter were $3 million, and diluted earnings per share was $0.04, compared to diluted loss per share of $0.03 in last year's first quarter.

The impact of currency on our earnings per share in the first quarter was less than $0.01.

First-quarter revenues was $479 million, 8% lower than the prior year, and relatively flat in constant currency.

Total Company gross margin increased 90 basis points to 34.6%, due to less markdowns and higher IMU in North America retail, partially offset by impacts of negative comparable store sales and currency headwind.

SG&A as a percentage of sales improved by 40 basis points versus prior year, mainly driven by a favorable segment mix.

SG&A was slightly lower than expectations, due to timing with the later part of the year.

Operating earnings for the first quarter was $4 million.

Our operating margin increased 130 basis points to 0.9%.

Foreign currency negatively impacted operating margins by 40 basis points.

Other net income was $3 million and mostly consisted of net unrealized gains and realized gains in other assets.

Our effective first-quarter tax rate was 41.5%, and up from 32% in the prior year's first quarter due to the mix of earnings distributions between different taxable jurisdictions.

Moving to segment performance, in North America retail, first-quarter revenues dropped 6% to $214 million, including the unfavorable impact of the weaker Canadian dollar compared to the first quarter of last year.

Negative comps in brick-and-mortar stores were partially offset by 14% growth in our e-commerce business.

Overall, comp store sales including e-commerce declined 6% in the US and Canada, and 4% in constant currency.

E-commerce sales improved overall comps by 2 percentage points.

Operating loss improved by $1 million to a loss of $7 million, and operating margin improved 30 basis points to negative 3.4%.

Compared to last year's quarter, gross margins were higher, primarily due to less markdowns, higher IMU, and lower occupancy costs, partially offset by negative comparable store sales and currency headwind.

The gross margin expansion was partially offset by a higher SG&A rate, due to negative comparable-store sales.

During the quarter, we closed 11 stores, ending the period with 470 stores.

In Europe, first-quarter revenues were $137 million, down 14% in US dollars, and up 8% in constant currency.

The constant currency revenue increase was driven by a shift of wholesale shipments from the fourth quarter of last year, as well as productivity improvement in our retail stores.

Operating loss improved by $3 million to a loss of $4 million, including the favorable foreign currency translation impact.

Operating margin increased by 150 basis points to negative 2.7%.

The increase in operating margin was primarily driven by the shift of wholesale shipments into the first quarter.

In Asia, revenues in the first quarter declined 9% to $64 million, and declined 6% in constant currency, mainly driven by negative comps.

Operating earnings increased 38% to $5 million, and operating margin increased 240 basis points to 7.2%.

The increase in operating margin was primarily driven by lower SG&A expense, due to the phasing out of the G by GUESS?

business in Korea.

In North America wholesale, which includes our businesses in the US and Canada, as well as in Mexico and Brazil, first-quarter revenues were down 5% compared to the prior year at $37 million and up 1% in constant currency, driven by a shift in the timing of shipments.

Operating profit decreased by 13% to $7 million, and operating margin decreased 160 basis points to 18.1%, primarily due to the unfavorable impacts of business mix and currency on gross margin.

Royalties generated from sales by our licensee partners were up 1% at $26 million.

Now, moving on to the balance sheet, accounts receivable in US dollars was 10% lower than last year at $196 million, and was impacted by the strengthening of the US dollar compared to the euro.

In constant currency, accounts receivable was up 5%, driven by the shift in timing of European wholesale shipments.

Inventories were down 12% versus last year at $327 million.

In constant currency, inventory was down 2%.

We ended the quarter with cash and short-term investments of $459 million, compared to last year's $478 million.

Free cash flow for the first quarter was a use of $2 million, compared to a use of $17 million in the prior-year first quarter, driven by changes in working capital, higher earnings, and lower capital expenditures compared to the same quarter last year.

In summary, excluding the impact of currency, we had a quarter where we were able to improve our gross margins, SG&A rate, and operating margin on the P&L while improving our free cash flow.

As Paul mentioned earlier in his remarks, this reflects a key priority for the management team, which is improving profitability.

We are pleased with our start to the year, and will continue to maintain the focus on all these metrics through the year.

Additionally, 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 July 3, 2015 to shareholders of record at the close of business on June 17, 2015.

With that I will pass the call over to Mike will take you through the outlook for the second quarter and full FY16.

Thank you, Sandeep, and good afternoon.

As discussed on our previous call, we expect currencies to be a significant headwind for FY16.

Excluding the impact of currency, we expect a top line that is roughly flat.

We plan to manage our inventory tightly, leverage reductions in input costs, and execute targeted price adjustments where appropriate, in order to offset some of the foreign exchange headwinds on gross margin.

Excluding currency impact, the top end of our guidance reflects over 30% EPS growth and operating margin expansion of over 200 basis points.

As a reminder, currencies impact the results in two ways.

First is the translation of our foreign entities results.

Second, the impact on transactions denominated in a currency other than the local one.

For example, the inventory purchases made by Europe in US dollars.

Our outlook for FY16 assumes currencies will be a headwind on sales growth, gross margin, operating margin, and EPS.

We estimate that the currency headwinds will really start to build in the second quarter and impact full-year EPS by roughly $0.45.

Over 80% of that amount is being driven by impact on the transactional side.

In order to give better visibility to the underlying trends in our outlook, we will also provide constant currency metrics, when applicable.

In North America retail, we're focusing on optimizing our retail store portfolio and executing on our omni-channel strategy.

We will stay very opportunistic with our store openings, and plan to open roughly 10 stores in the US and Canada during the year, primarily in the factory concept.

We plan to close approximately 60 underperforming stores in the US and Canada through lease expirations and kick outs.

As a reminder, roughly half of our leases have lease exit options coming up over the next three years.

So far in the second quarter, comp store sales have been down in the low single digits in constant currency, and we expect comp sales for the full quarter to range from a decline in the low single digits to an increase in the low single digits in constant currency.

Revenues in constant currency are expected to be down in the low single digits to flat in the second quarter.

In US dollars, we expect second-quarter comp sales to be down in the low single digits and for revenues to be down in the mid- to low single digits.

Looking forward, we believe that the improvement in our product offerings will positively impact trends in the back half of the year.

For the full year in constant currency, we plan for the comps to range from down in the low single digits to up in the low single digits, and for revenues to be down in the low single digits to flat.

For the full year in US dollars, we are projecting comps and revenues to be down in the low single digits.

So far in the second quarter, retail comps in Europe are up in the mid-single digits.

For the full quarter, we are planning for comps to be up in the low to mid single digits, as some holidays in Europe have occurred earlier in the quarter compared to last year.

For the full year, we expect comp sales to increase in the low single digits.

In Europe wholesale, our fall winter order book finished down 10% versus prior year, mainly driven by softness in Russia and Eastern Europe, combined with the decline in France, a key wholesale market for us.

Our expectations for the back half of the year do not include any material improvement in our wholesale business in Europe.

Considering these factors, as well as some timing in wholesale shipments, we expect Europe revenues for the second quarter to decrease in the low single digits in constant currency, and to decline in the low 20s in US dollars.

For the full year, we expect revenues to increase in the low single digits in constant currency and to decline in the low teens in US dollars.

At prevailing exchange rates, we estimate that the impact of currency headwinds on Europe revenue growth will be approximately 19 percentage points for the second quarter, and 16 percentage points for the year.

Now, turning to Asia.

The overall environment remains soft in South Korea, where comps have been negative so far in the second quarter, and we are assuming the environment will remain soft in our guidance.

For the second quarter, we expect Asia revenues to decline in the low single digits in constant currency and to decline in the mid-to high single digits in US dollars.

For the full year, we expect Asia revenues to decline in the low to mid single digits in constant currency, and decline in the mid-single digits in US dollars.

In our North America wholesale business, we expect second-quarter revenues to be down in the mid-teens in constant currency, and down in the low 20s in US dollars.

For the full year, based on recent trends in our US wholesale business, we are now planning for revenues to be down in the mid-to high single digits in constant currency, and to be down in the low double digits in US dollars.

In the licensing business, we are expecting royalties to decline into low single digits in the second quarter and the full year.

For the second quarter we expect overall gross margins to be down slightly as we start getting more severely impacted by currency headwinds relative to the first quarter.

For the full year, we now expect gross margins to be up slightly due to lower planned markdowns, targeted price increases, and lower average unit costs, partially offset by the currency headwinds.

With respect to operating expenses, we expect a higher SG&A rate for the second quarter, partially due to timing of expenses.

For the full year, we expect the SG&A rate to be slightly down to slightly up.

We are planning the full year with a 34% tax rate and our guidance assumes foreign currencies remain roughly at prevailing rates.

Considering all these factors for the second quarter of FY16, we expect consolidated revenues to decline between 3.5% and 1.5% in constant currency.

At prevailing exchange rates, we estimate that the impact of currency headwinds to consolidated revenue growth will be approximately 9.5 percentage points for the second quarter.

We are planning an operating margin between 3% and 4%, including the impact of currency headwinds of roughly 170 basis points.

Earnings per share is planned in the range of $0.12 per share to $0.16 per share.

The negative impact of currency on earnings per share in the quarter is estimated at $0.12.

Excluding the negative impact of currency, operating margins and earnings per share are projected to be up versus prior year for the quarter at the high end of guidance.

For the full year, we expect consolidated revenues to be down 1.5% to up 0.5% in constant currency.

At prevailing exchange rates, we estimate that the impact of currency headwinds on consolidated revenue growth will be approximately 7 percentage points for the full year.

We are planning an operating margin between 5% and 6%, including the impact of a currency headwind of roughly 130 basis points.

Earnings per share is planned in the range of $0.86 per share and $1.02 per share.

The earnings per share guidance includes a currency headwind of roughly $0.45 per share.

For the full year, we plan to manage our CapEx carefully and opportunistically by investing between $55 million and $65 million in capital expenditures, net of tenant allowances.

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

(Operator Instructions)

Eric Beder, Wunderlich Securities

Good afternoon this is actually [Pan Nall] calling in for Eric Beder.

My first question is actually in regards to the Gumball 3000 sponsorship.

Is a working, and is it flowing with your marketing plans?

Yes, this is Paul.

That event just finished last, two days ago so it's our first time, and it was a good event all over Europe.

We just came last weekend in Los Angeles and Las Vegas, but unfortunately, I was not able to attend there.

For family reasons.

But we don't know yet about the impact.

Okay great.

Also my second question, could you provide any color on the changes to the economy in Italy?

In Italy we see, I just came back from Italy last week and I have to tell you that I was quite pleased about what I see right now.

In fact across the country in Italy, our stores have been positive.

The last 2.5 years were not exactly easy for us in Italy.

Now I am very encouraged by what I see.

Erinn Murphy, Piper Jaffray.

Hi this is Eric Johnson on for Erinn.

Thanks for taking my question.

I was wondering what was specifically driving the women's improvement in denim?

Is that any type of fashion you have going on, or are you seeing broad-based traffic increase toward it, or conversion or anything you can say there to help us out?

Looking at denim, we have to bucket it into two buckets.

Our basics are still remaining a little bit soft, but we've and putting a lot of investment in our fashion or our premium denim, so we have some new fits and new fabric technologies.

One of them is flex denim, which is a very soft like pajama-type fabric that's very comfortable.

We've seen really great sellthroughs on that.

We also have a new fit that's called the Curve X which is very technical fabrics, and these are at the higher price points at $128, $138, $148, and we're seeing a really good response from our customers.

Randy Konik, Jefferies.

Great, thanks a lot.

I guess my question is first on the comp driver, are you seeing improved conversion in the business?

And then as you relate it to product trends, are the product trends that you are seeing domestically the same type of product trends you are seeing in Europe and Asia, in terms of trends, in terms of trending products?

And I guess lastly, are you thinking about, that we have finally reached a point in the cycle where we have got more visibility in the business, and we've reached a margin trough in this business?

Just wondering if that's there.

Thank you.

Looking at the comp driver in Q4, from Q4 to Q1, in Q1, we were able to -- the trends were pretty much the same, but we were impacted by the inclement weather and the port delays.

So even despite those headwinds, we were able to actually still maintain the same comps in constant currency.

One of the big drivers there was that AUR improved from Q4 into Q1, and also year-over-year.

And looking into Q2, we see that basically traffic, and conversion we see sequential improvement.

Now talking about the products and the relative performance between the regions, I'll turn it over to Sandeep.

Randy, this is Sandeep, and just to follow up on what Mike was talking about and what was happening in North America, in Europe also in Q1, traffic was a definite headwind for us.

The great news for us though was AURs were up pretty significantly, and also our conversions improved.

And between those two factors, we were more than able to offset the traffic headwinds that we saw, and we were up in the low single digits, and up in almost all the markets except a couple.

So what we have saw was the only markets that declined were France which was down in the mid-single digits, and Italy was down in the low single digits, with Italy having a stacked comp because of very difficult compares last year, which were still positive.

So we're pleased with what we're seeing in Europe so far in retail.

And I think moving on to your next question on operating margins, I think what you have seen so far in the first quarter is the results of all the initiatives we have started talking about since the back half of last year, to tighten up on our inventories, manage our product margins very closely, tighten our operating expenses, and that's what you've seen an operating margin expansion in the first quarter.

And from a free cash flow perspective, this is a really good quarter for us.

We've actually improved over last year by $15 million.

So as we go forward, just remember exchange is going to be a headwind, and that can impact our operating margins, and we have called this out in our guidance, and we'll talk more about it later.

John Kernan, Cowen & Company.

Good evening, this is Krista Zuber for John Kernan.

First, could you provide some visibility into the pace of store closings for the balance of FY16, and insight into what concepts will be affected?

Thank you.

This is Sandeep again.

For FY16, we have announced that we're going to be closing between 50 and 60 stores this year, and the store closures really are more heavily back-end loaded.

And so what we did say also when our previous calls was, it really goes across all the different concepts, and the criteria we are using is whether stores are unprofitable or no longer in brand-appropriate locations.

Extension of the leases.

Exactly.

So I think those are the drivers of how we decide what stores to close, and that's the visibility we have so far this year.

Betty Chen, Mizuho Securities.

Thank you, good afternoon, congrats on the nice progress in the first quarter.

I was wondering, just a follow-up on that question regarding the store closures, can you remind us what is the productivity difference between the closures versus the rest of the chain, and whether you have been able to project what is the margin lift that we could see at the end of the program?

And then I had another question as well.

Hi Betty, this is Sandeep.

From a profitability perspective, of the unproductive stores compared to the other ones, I think what we're looking at is taking the total flexibility in our portfolio because we have almost half our stores coming up over the next three years.

And what we did say was look, in the next one year, 50 to 60 stores are coming up with the productivity of those stores wasn't meeting our financial requirements and we were exiting those stores.

Closing these stores will be margin accretive, but remember that these stores are being closed more towards the back end of this year.

So the impact on this year is quite limited, but it's already in our guidance.

More of impact will come in the coming fiscal year, but we're not ready to give guidance for next year yet.

Okay, that's helpful.

And then my other question if I could is regarding the timing of investment.

It sounds like maybe some items or projects moved out of the first quarter, into the balance of the year.

Is that somewhat included in the second quarter guidance with the SG&A rate up year-over-year, or should we expect that more in the back half?

And if you can just remind us what those investments are please?

Yes Betty, if I'm not mistaken, you are referring to our expense timing in what your question refers to.

What we're saying is there was some timing benefit in Q1.

Some of that's going to impact us in Q2, and that's reflected in our guidance, but the way I would really think about SG&A is across the full-year, and across the full year, we are roughly flat from an SG&A perspective on a rate perspective.

Dorothy Lakner, Topeka Capital.

Thanks, and good afternoon, everyone.

A couple of questions.

One, the impact from the ports delays, is that -- are we through that at this point, or is there any residual impact that you will see in the second quarter?

And then just in terms of trends, what you're seeing in terms of dress trends.

It's been a pretty long dress cycle, and I know you've been quite successful with that, and with some of the lower price points, so I wonder what's going on there.

Knit tops, you spoke about success in the wovens business, but are you seeing any resonance on the knit top side?

And then the handbags seemed like they were improving, but then pulled back.

I just wondered what's going on there.

And then lastly on AUC, what we should expect in terms of direction of AUC over the next couple of quarters?

Thanks so much.

Okay, Dorothy this is Mike.

That definitely is a long question.

Anyway looking at the impact of the port delays, we actually were impacted in Q1 as Q2, the impact has subsided.

It's not across the board.

It was on various several categories.

One was handbags, we were comping positive in Q4 in handbags.

We went negative in Q1 due to product issues, we're now back to positive in Q2 as the product begins to flow.

Marciano was another category, we buy very, very lean there and the port delays did impact that product.

We still comped positive in the mid-single digits at the product category, but now we returned to the high single digits, now that the product is flowing.

Now moving on to the trends on dresses.

Dresses, we continue to do well, actually we're doing better in Marciano in the higher price points.

We have taken, and we have doubled the number of stores that Marciano denim primarily, the category is dresses, and our merchandise strategy is Good, Better, Best.

Marciano builds the best part of that strategy.

And the GUESS?

dresses, end at the 148 marc iano, it starts at 148, so we're seeing positive comps there, and customers, when the product is right, they definitely respond to it.

And so the next part your question was with respect to knit.

So knit is the category both in men's and women's, which has been trending positively.

We're moving into a knit cycle and moving into Q2.

We saw improvement from Q4 into Q1 and into Q2, we're comping positive in knits, so that's a good story.

Handbags, we did discuss.

If can add on that, this is Paul.

The two categories we discuss is footwear, footwear for women has been picking up across the board in every region.

And watches remain soft in general, over the last few quarters now.

So we are seeing, we're looking for some stability in watches, but it's still kind of soft.

And handbags are something we're doing well in, now that the port headwinds are gone.

There's a number of categories.

Our quilted line is doing very, very well and selling to the piece.

Our delanys tend to be strong so we're doing well with all those categories.

Last is AUCs.

We see cotton price decreases, those input costs are actually lowering AUCs in the back half of the year.

So, thank you.

Jeff Van Sinderen, B. Riley

Good afternoon.

You called out the women's business improving.

I'm just wondering if you could talk a little bit more about what you are seeing in the men's business?

And then also I think you said not sure if you actually said North American comp, traffic was down, but I'm assuming traffic was down.

Were transactions in North America up, or are they still down?

Okay so men's actually has softened.

We saw basically the acceleration in Q4 into Q1.

I think we had some missteps there.

Back in last fall, we were a little bit too casual, and then we swung a little bit too dressy, and a little bit more towards woven.

We've seen knits working, we're chasing it, but that's a category that's going okay.

But overall, we're working right now to balance the entire assortment to be even going into summer, so we feel good about the direction that we're going.

And in North America, yes, traffic was a headwind.

It was a headwind definitely into Q4, and that was caused by the weather and the port strike.

We see a sequential improvement into Q2, but it's still a headwind.

But the driver of the comps there was our average unit retail actually was higher in constant currency, both in Q1 and Q2.

Janet Kloppenburg, JJK Research.

I was wondering if you could talk a little bit about the performance in the outlet business, and the trend that you are seeing there.

I was also wondering if you could talk about the denim inventories for women.

Mike, are they balanced, do you have the fashion assortments that you need, the investment there?

And I'm sorry, I think it's the fashion that is working, and how should we think about AUR trends for the back half, in light of you owning or investing more in the higher AUR denim?

And I think that's probably enough.

Thank you.

Okay, thanks Janet.

It's Mike.

The outlet business basically is really performing in line with the chain in general.

We're facing some headwinds with tourist traffic.

Right now, as we look into Q1, basically the gulf between our tourist stores our non-tourist stores, the gap is increasing, so we are definitely seeing headwinds from the strong dollar there.

But even despite that factory still is performing basically the same as a chain in general, which we are pleased with.

And in terms of denim inventory, we've done a really good job managing our inventory, and I think we have the right balance between fashion and basics.

So the inventory levels are in line, and going into back-to-school, we're actually making a denim statement.

And like I said earlier in the call, we will be introducing some new cuts and some new fashion styles, and we feel pretty good that we will have the right mix in terms of basics and versus fashion.

Thank you.

That concludes the question and answer session.

We have no additional questions at this time.

Thank you ladies and gentlemen.

This concludes today's conference.

Think you for participating.

You may now disconnect.