Guess? Inc (GES) 2016 Q4 法說會逐字稿

Good day, everyone, and welcome to the Guess?

fourth quarter FY16 earnings conference call.

On the call are Victor Herrero, 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, 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'd like to turn the call over to Victor Herrero.

Good afternoon and thank you for joining us.

As you saw in our fourth quarter's earnings release today, earnings per share was within the range of our guidance, while operating profit and margin finished near the low end of our guidance.

Sandeep will talk more about the quarter and full-year results later in the call.

But before he does, I would like to update you on our progress on our five strategic initiatives, as well as to share with you the financial outlook over the next three years that should result from the successful execution of these initiatives.

The first initiative is to elevate the quality of our sales and merchandising organization.

You might recall that on my first earnings call, I stated that our emphasis will be on consistently achieving positive comps, quarter after quarters.

And while we still have more work to do, I am pleased to report that we have made significant progress on this front.

During this quarter, in constant currency, we delivered positive comps in Americas Retail, in Europe, and in Mainland China.

These results are partly attributable to the initiative that we put in place, which I outlined in detail to you on my first earnings call.

The second initiative is to build a major business in Asia.

China will be our biggest source of growth in the region, where we will more than double the number of stores.

Over the past few months, I made multiple visits to China and I witnessed firsthand the strong traffic and conversion that we have experienced in our newly opened stores, as well as the improving performance of our existing stores.

I'm truly excited by our growth potential in China, as I believe we are significantly underpenetrated there relative to the white space that exist for our brand.

Our third initiative is to reinforce a strong culture of purpose and accountability throughout the organization.

On our last earnings call, we discussed our focus on execution.

This relentless focus on execution is key contributing factor to the strong comp results that we have experienced in the fourth quarter.

And to further reinforce our culture of accountability, I'm in the process of designing a long-term stock bonus plan for the management of our Company in order to more directly link rewards with performance.

A direct link between rewards and performance is very important to me.

Our fourth initiative is to improve our cost structure.

As I promise you on our first earnings call, I have done a detailed review of our cost structure and I have started executing a global cost reduction plan that is expected to generate $25 million in annualized operating cost savings.

What I really like about this initiative is not only that it will increase EPS by roughly $0.20, which is a 21% increase from FY16; but I'm particularly excited because I'm convinced that this cost reduction will accelerate the metabolism of our Company.

Bureaucracy is my enemy and I am determined to defeat it.

Our fifth initiative is to stabilize our wholesale business.

The main focus here is on partnering with our wholesale clients to instill a retail orientated mindset and to encourage the adoption of our retail best practice, including high quality visual merchandising, frequent rotation of product, and maximization of inventory turns.

In other words, what is working in our retail business should also work in our wholesale business, provided that our wholesale partners execute like we do in our retail business.

Now that I have been at Guess for eight months, I am prepared to quantify for you the financial impact of our strategic initiative over the next three years.

Here it is.

Assuming currency remains constant, we are planning for our annual revenues to grow from the current level of $2.2 billion to $3 billion in three years, which is a compound annual growth rate of 11%.

This $800 million growth in revenues will be fueled by e-commerce, new store openings, and comp growth across all concepts.

We expect licensing revenues and our wholesale business to remain flat.

Geographically, the $800 million growth in revenues will come from the following areas.

Approximately $300 million from the Americas, with a particular focus on e-commerce, factory stores, and G by Guess.

We plan a net increase of 60 stores in the Americas over the three-year period.

Approximately $300 million from Europe, including our new joint venture in Russia.

We plan a net increase of 140 stores in Europe over the three-year period, and approximately $200 million from Asia, where we expect to generate more than 66% of sales growth from greater China.

We plan a net increase of 200 stores in Asia over the three-year period.

As a result of this growth in revenues, again assuming currency remains constant, we expect operating margins to increase by 200 basis points to 7.5% over the three-year period and we expect earnings per share to increase at a compound annual growth rate of 20%.

Capital allocation is the most fundamental responsibility of management, because cash has an opportunity cost, which is the value of the next best alternative.

So unless capital has been allocated to its highest and best use, it is underperforming relative to its opportunity cost.

In order to drive this growth, we expect to allocate $250 million to $300 million for capital expenditures over the three-year time frame.

This is somewhat higher than our average historical CapEx commitment, but we fully expect that over the three-year period we will generate sufficient cash flow to finance our growth while sustaining our dividend.

Even though we have $445 million of cash on our balance sheet and virtually no debt, it is very important to me to be able to finance our growth from free cash flow.

Finally, as Sandeep gives you guidance for first quarter of this year, please keep in mind that the next six months is a transition period for the implementation of our three-year plan, which will include one-time changes and other anomalies.

Do not interpret the guidance for the next two quarters as a deviation from our two-year to three-year plan, but rather as a transition period that will make our three-year plan possible.

One last point before I turn it over to Sandeep.

As I truly believe in the potential of the Guess?

brand, ever since I started working at Guess?, I have reinvested 100% of my dividends to purchase more stock in our Company, and I intend to continue doing so for the foreseeable future.

Thank you, Victor, 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.

Diluted earnings per share was $0.57, which includes a negative impact of roughly $0.19 due to foreign currency movement.

This compares to a diluted earnings per share of $0.63 in last year's fourth quarter.

Earnings per share declined 10% versus prior year, including the negative foreign currency impact of roughly 30%.

Fourth quarter revenues were $658 million, up 1% in constant currency and down 6% in US dollars versus prior year.

This was within the range of our guidance, with a stronger than expected performance from Europe being offset by weaker than expected results in our Asian business.

Total Company gross margin decreased 90 basis points to 36.5%, primarily due to the negative impact of currency.

This decline in gross margin was worse than our expectations, as we were more promotional than we planned to be in Americas Retail over the holidays and in Europe during the mark-down period.

SG&A as a percentage of sales decreased by 100 basis points versus prior year, primarily driven by lower impairment charges.

Operating earnings for the fourth quarter were $70 million.

Operating margin finished up 10 basis points to 10.6%, including the negative impact of foreign currency of roughly 180 basis points.

Our effective fourth quarter tax rate was 30%, down from 31% in the prior year's fourth quarter.

Moving on to segment performance, revenue for the Americas Retail segment increased 1% in constant currency and decreased 3% in US dollars.

We finished the quarter with comps up 2% in constant currency and down 1% in US dollars.

E-commerce, which continues to be one of our top priorities, slowed versus our expectations in the quarter, as we anniversaried some of the initiatives from last year, but we still delivered top line growth of 9%, marking the 18th consecutive quarter of growth in the US and Canada.

In terms of product trends in constant currency, our Women's category comped positive, driven by dresses, knit tops and wovens.

On the Accessories side, we saw an improving trend in our handbag category, as we comped positive.

Footwear also improved sequentially to finish roughly flat.

The watch category continued to be soft and was down, as has been the case all year.

In Europe, fourth quarter revenues were up 6% in constant currency and down 5% in US dollars.

Retail comps in the region were very strong and were up in the high single digits for the quarter.

This was above the high end of our expectations and we are pleased with the continuing strength in the business, as we posted a comp increase in the low double digits in Spain and Portugal and a high single digit comp increase in Italy.

In addition to the strong retail performance, we had smaller than expected decline in our wholesale shipments, due to a shift in timing between the fourth quarter and the first quarter of next year.

In Asia, fourth quarter revenues were down 14% in constant currency and down 18% in US dollars.

We were encouraged by the improving performance in mainland China, where we achieved mid-teens comps in our retail stores.

The sharp decline in tourist traffic into Hong Kong continues to be a headwind in that territory.

In Korea, where we have completed the phase out of our G by Guess product line, we saw a continuation of the sequential improvement in comp trends relative to the first half of the year.

In Americas Wholesale, fourth quarter revenues were down 1% in constant currency and down 9% in US dollars.

Royalties generated from sales by our licensee partners were down 7%, at $25 million.

This was slightly below our expectations for the quarter, driven by broadly weaker results across our smaller licensees.

In a year like this, with significant headwinds from currency, we think it is important to focus on the underlying results excluding the impact of currency.

For this reason, we have provided a table in the press release that shows the impact of currency on sales of all segments.

For the full fiscal year, consolidated revenues were down 1% in constant currency and down 9% in US dollars, as the negative impact of currency on sales for the year was approximately $191 million.

Operating earnings were $121 million, down 4% from prior year's operating earnings of $126 million.

Overall, our operating margin of 5.5% was up 30 basis points from last year's operating margin.

We estimate that currency fluctuations negatively impacted operating margins for the Company by approximately 140 basis points.

For the fiscal year, earnings per share was $0.96, a 14% decrease from prior year's earnings per share of $1.11.

We estimate the negative impact of currency on earnings per share was approximately $0.43, or 39%.

Moving on to the balance sheet, accounts receivable was up 7% in constant currency and up 3% in US dollars.

The constant currency increase in accounts receivable was driven by timing and collection of non-trade accounts receivable.

Inventories were $312 million, up 2% in constant currency and down 2% in US dollars versus last year.

During the fourth quarter, we completed the purchase of our US distribution center in Kentucky for $28.8 million.

The purchase provided the Company greater flexibility in execution of the long-term revenue plan for the Americas that Victor communicated earlier.

Subsequent to the end of the fourth quarter, the Company entered into a $21.5 million financing arrangement to partially fund the purchase.

Adjusted free cash flow for the year, excluding the distribution center purchase, was $124 million, compared to $82 million in the prior year, an increase of $42 million.

This improvement was driven by changes in working capital and lower capital expenditures.

We ended the year with cash and cash equivalents of $445 million, compared to last year's $483 million.

We have continued to demonstrate our commitment to delivering value to our shareholders in the form of dividends and share buybacks and returned $121 million to our shareholders during the year.

Since the start of our dividend program in 2007, we have returned over $1.2 billion to our shareholders in the forms of dividends and share buybacks.

Moving on to the guidance, as Victor mentioned earlier on the call, we expect FY17 to include a transition period as we set the platform for our long-term growth goals.

We expect currencies to be a headwind, as the foreign currency hedges we had in place last year in the first half at favorable rates have rolled off, resulting in an expected currency transaction headwind this year.

Our full-year guidance assumes that the currency headwinds will impact EPS by roughly $0.11.

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

Consistent with Victor's fourth initiative to improve our cost structure, we have started a global cost reduction plan to generate future savings that we expect to fully realize in FY18.

Our outlook for the first quarter of FY17 and the full FY17 excludes any restructuring costs associated with this plan.

The global cost reduction plan includes a plan to reduce non-store payroll by elimination of positions in all regions in which we operate.

It also includes a plan to reduce other operating expenses.

Please note that guidance for revenues and comp sales by segment is included in a table in the press release.

Please refer to this table for guidance by segment, as we will only provide color on underlying segment drivers for the Company guidance in the prepared remarks.

In Americas Retail, our focus for FY17 will be driving revenue growth through e-commerce expansion, store openings, and comp growth.

Our plan on a net basis is to open roughly 15 stores in the US and Canada during the year, primarily in the Factory and G by Guess concepts.

The reason we are focusing on Factory and G by Guess is both because of the attractive economics on potential new stores, as well as the white space we see for further development of both these concepts.

So far in the first quarter, Americas Retail comps have been down in the low single digits in constant currency, as we continue to see significant headwinds in our tourist stores.

We expect this headwind from tourist stores to continue through the first half of the year.

As a reminder, revenue growth for the Americas Retail segment in the first quarter will be negatively impacted by the net store closures from the last nine months of last year.

In Europe, we will be focused on growing our store base, comps, and e-commerce.

Overall, this is a very similar strategy to the Americas.

Our plan on a net basis is to open roughly 45 owned and operated stores across Europe during the year.

Slightly less than 33% of these stores will be openings by our newly formed JV partnership in Russia.

We are excited by this new partnership, as we believe it will accelerate the development of our operations in Russia.

We have confidence in the effectiveness and profitability of this store rollout, given the improvement and productivity in our existing store base in the past year, as well as the attractive economics on potential new stores.

Our retail comps for the region so far in the first quarter have been up in the low 20s, driven by a strong performance during the mark-down period that is now behind us.

We expect comps to slow in the remainder of the quarter, but still finish strongly up in the mid-teens.

In Europe Wholesale, we expect the shift in timing of revenues out of the first quarter into the fourth quarter to negatively impact our first quarter EPS by $0.03.

As a reminder, our Spring-Summer book was down 8%, excluding the shift.

Trends from our Fall-Winter order book are showing a sequential improvement versus the Spring-Summer book, and we forecast to finish roughly flat in orders for the season.

Moving to Asia, as Victor has mentioned previously, we have more than doubled our capital allocation for the year, primarily for the opening of new stores, as we see a lot of white space, especially in Greater China.

Our plan on a net basis is to open roughly 65 owned and operated stores in Asia.

So far in the first quarter, comps in mainland China continue to be positive, as we see strong demand for our brand there.

However, Hong Kong continues to be negatively impacted by the steep decline in tourist traffic.

In Korea, we are seeing a continuing of the momentum from the back half of last year and have been comping positive so far in the quarter.

As a reminder, revenue growth for the Asia segment in the first quarter will be impacted by the phase out of the G by Guess concept in Korea that was only closed late last year.

With regards to our first quarter FY17 guidance for the Company, which we recognize is below where we would have liked, note that it's impacted by some discrete events, such as a negative impact from foreign exchange, lower wholesale shipments, including the shift in timing I referred to earlier, increased advertising and marketing investments, some timing of expenses, and the anniversary of non-operating income from last year.

For the total Company, we expect revenues for the first quarter to be down 1.5% to down 0.5% in constant currency, driven by the anniversary of store closures from last year and lower wholesale sales.

At prevailing exchange rates, we estimate that the impact of currency headwinds on consolidated revenue growth will be approximately 2 percentage points for the quarter.

For the quarter, we expect gross margins to be down, due to currency headwinds partially offset by IMU improvements.

The SG&A rate is expected to be up in the quarter as a percentage of sales, due to investments in advertising and marketing and some timing of expenses.

We are planning an operating margin for the quarter between minus 5% and minus 4%, including the impacts of currency headwind of roughly 130 basis points.

Earnings per share is planned in the range of a loss of $0.20 per share to a loss of $0.17 per share and is not assuming any share repurchases in the quarter.

The negative impact of currency on earnings per share in the quarter is estimated at $0.04.

For the total Company, we expect consolidated revenues for the year to be up between 7% and 9% in constant currency, driven by an increase in store openings, positive comps, and e-commerce growth.

At prevailing exchange rates, we estimate that the impact of currency headwinds on consolidated revenue growth will be approximately 1 percentage point for the full year.

For the full year, we expect gross margins to be roughly flat, as the foreign currency headwinds are expected to be offset by better IMUs and occupancy leverage.

The SG&A rate is expected to be up for the year, due to investments in advertising and marketing to fuel our top line growth, as well as a reset of planned incentive compensation versus prior year levels, partially offset by slightly over $10 million of savings, driven by our global cost reduction plan.

Our expectation on the tax rate is 34% for the full year.

We are planning an operating margin between 4% and 5%, including the impact of a currency headwind of roughly 50 basis points, and our guidance assumes foreign currencies remain roughly at prevailing rates.

Earnings per share is planned in the range of $0.65 per share and $0.85 per share.

The earnings per share guidance includes a currency headwind of roughly $0.11 per share.

Excluding currency impacts, the top end of our guidance reflects flat EPS and operating margin versus last year.

A question you may ask is, why are we not seeing EPS growth in the first year when the three-year goal outlined by Victor called for a 20% compound annual growth rate in EPS?

As a reminder, Victor said that the first half of this year will be a transition period.

Capital investment in new stores and cost reduction plans vital to our three-year revenue and operating margin goals start getting executed during the first year of the three-year plan, but their returns extend over the second and third year of the plan.

We are confident in the cadence of earnings growth in the plan.

For this year, we are planning to ramp up our CapEx significantly to fund the new store growth Victor commented on.

CapEx for the year is expected to range from $90 million to $100 million net of tenant allowances.

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

(Operator Instructions)

Erinn Murphy, Piper Jaffray.

Great.

Thanks.

Good afternoon.

A couple of questions I think, Victor, for you, really (inaudible) comps that you see continuing.

Has anything changed in your assumption for pricing for the product, both in the US, Europe, as well as China?

Erinn, this is Sandeep.

I'm sorry, you just broke up in the middle of your question.

Could you please repeat it?

Yes, sorry, I apologize for that.

I was curious if anything has changed in your assumptions for pricing in the US, Europe and in China as you think about the path to continued positive comps?

No, not at all.

I think that the price alignment that we did a few months ago has been giving good results, and I believe that this is going to be without changing for the foreseeable future.

Okay.

So you don't see any further changes in pricing?

What you have right now you feel very comfortable with, just to reiterate.

I'm comfortable, and we are already seeing the results.

Because we are growing quite significantly Europe.

We are quite growing as well in China, and we are quite stable in the US.

Got it.

Okay.

Thank you.

And then on Asia, you talk about a $200 million incremental revenue opportunity over the next three years.

I think last time you spoke to us on the Street, Victor, you talked about a $750 million opportunity over time.

So that would be an incremental $500 million, roughly, from where you're at today.

So is that now off the table?

Or just help us (Inaudible) the three-year versus maybe the longer term outlook for you.

Erinn, I'll take this and answer the question.

If we go back to the first call that Victor was on, we talked about a goal of $750 million, but five years or more out, not within a shorter time period.

And so, I think what we are saying right now is this particular three-year plan that we've communicated to you contemplates an increase of $200 million over the three-year period.

But to me, this $750 million in total is the goal that Victor talked about.

So versus the $240 million that we did this year, it's a cumulative $500 million or more that we're talking about over time, for five years or more.

And so we feel that with this increase in the first three years, we're very much on track with the cadence of growth.

And as the base starts building, it's certainly within reach.

Dana Telsey, Telsey Advisory Group.

Good afternoon, everyone.

Certainly a lot of moving pieces in place.

As you think about that three-year plan to get the operating margin to 7.5%, I think it was double digits a couple years ago, given the expense initiatives, the cost reductions going on, help bridge the gap and why not a higher operating margin target long term?

So Dana, this is a great question.

So I think there's a number of pieces in this that I'd like to actually get to.

And we'll get to the three-year, but I think it's important to understand the cadence of earnings growth.

So I think first off, when you look at Q1 itself, it's a tough number when you look at a $0.20 change versus LY.

And there are a few moving pieces in that and a number of discrete impacts.

So in that is really, let's say about a quarter of it in terms of the decline, is coming from the softer wholesale shipments in Europe, part of which was the timing shift that I talked about earlier.

Another quarter of it is the FX impact, which I telegraphed last time on the call, as well.

And the remainder of it is coming from SG&A and non-operating income.

And within SG&A, we've actually said very clearly that we're investing in advertising and marketing to drive our future growth in sales.

And there's also some timing of expenses, which is occurring in Q1, but I think you should look at SG&A really on a full year basis, because I think there's some different cadences across the different quarters.

So when we actually say, okay, this is what happened in Q1, let's roll forward into the full year FY17.

And we're saying that, look, on the Wholesale business for Europe, we're seeing some change in trend.

We're very glad to see a sequential improvement versus Spring-Summer 2016.

So we're assuming really flat Wholesale for the balance of the year.

And then from a revenue standpoint on the Retail side, one thing to remember is now that we're getting into the second quarter and beyond, we lap the closures from last year, so that's no longer a headwind from a top line perspective.

Then I think we also talked about, on Americas Retail specifically, we are actually going to, by the end of the first half, lap the tourist headwind that we have, and that should be another tailwind from a revenue standpoint.

And then most importantly, I think with these initiatives have already borne fruit, as evidenced by Q4 and some of the other things that are going on in Europe, as well.

So we see this as being a sequential driver of incremental comp, as well, as we go into the back half of the year.

And also, from a P&L point of view, the foreign exchange headwind starts to abate as we get past the first half.

And so the earnings, if you look at them, are actually weighted similarly to last year.

When you look at the ratio or the proportion of Q1 versus the remaining three quarters, it's not that different when you go back and take a look at what the expected growth is going to be from the last nine months versus last year.

So it makes sense.

It's really because of the timing of investments that we're making.

And the results that we're going to get will actually be coming later on in the course of the plan.

And therefore, when you look at the three-year plan, same kind of logic, except it goes from one year to three years out.

And investments are being made in opening of new stores.

And the global cost reduction plan gives us some benefit in FY17.

It'll give us a little bit more benefit in FY18.

But we're continuously in investment mode.

We're actually growing our number of property stores from about 800-odd stores by almost 50% over the three years.

So it's going to take some time for the revenues to actually build through and deliver the profitability that we're looking at.

And one last very important point is that you talked about double digit operating margins some years ago.

We're talking about a very different channel structure in this growth plan that we're articulating.

It's going to be much more heavily weighted towards retail than in the past, which is very wholesale oriented.

So looking at it from that perspective, I think should be an important dimension.

And last but not least, we've come off a year where FX was a massive headwind.

And so I think when you put all these pieces together, the 7.5% operating margin assumes currencies remain at prevailing rates, which are quite significantly different from where things were at when we had double digit operating margins.

Thank you.

John Kernan, Cowen and Company.

Hello.

This is Krista on for John.

Could you give us a sense on the licensing front, are there any changes planned for FY17 in terms of adding or dropping?

I believe you have potentially some contract renewals that we should be aware of, perhaps on watches, and how this -- I know the guidance was given for a flat expectation for the three-year plan, but can you go through the cadence of how that should flow out, as well?

Thank you.

Yes, this is Sandeep.

So I think from a licensing perspective, I'll take it in sequence.

In Q4, results came in slightly lower than what we expected, because some of our smaller licensees came in a bit different from what we had in our forecast.

And then as we go into the new year, it's the first time we're guiding for the year, obviously, and within the licensing business, we rely on the forecasts from our licensee partners.

And the projections that they've given us at this time are for the business to continuing being soft for the coming year and we expect to see declines in the mid-single digits, which is what we've guided to.

If you go to the three-year plan, what we're talking about here is flat licensing revenues.

And I think this really takes into account the fact that there's a projected decline in the first year.

So, over the second and third year, we'll have to increase to actually get to flat.

And that's the assumption that is underlying in the licensing projection.

Okay.

Thanks.

And one quick follow-up, if I may.

Could you give us a sense of what your cash flow objective then is for FY17?

Thank you.

We don't specifically guide for cash flow, but what I will say is if you go back to the prepared remarks that Victor was talking about, from a free cash flow perspective over the three-year period, we expect to be more than covering the dividend, basically, from what we're looking at.

Obviously, because we're ramping up CapEx up quite significantly this year, there will be less head room this year than there will be in the outer years, as the profits and cash flow build.

Eric Beder, Wunderlich Securities.

Good afternoon.

Hello, Eric.

Hello.

This is a pretty audacious, aggressive plan you're rolling out here for the next three years.

Could you talk about what gives you confidence in the US market to expand the store base?

I know before Victor joined, that you had actually been closing stores in the US.

What was the thought process in the US, if you can get an incremental $300 million and that you're going to open additional stores here?

Hello, Eric.

So here's the thing.

When you're talking about the growth of $300 million, it's coming from the Americas, not just from the US.

So there's Canada, there's Mexico, there's Brazil, which are key components of that region in the first place.

Second, if you look at where the growth is coming from, we're saying it's coming from three different sources.

One is e-commerce, the second is comp improvement, which we've always been saying we're going to be focused on, and the third is store openings.

So it's not the only driver.

And I think if you look at which concepts we're focusing on, we're being very, very focused on the Factory and G by Guess concepts, where the profitability of those stores are attractive.

The economics are very attractive.

And I think we've actually said this previously in previous calls, as well, that especially the Factory stores are where we've been focusing on openings.

Nothing's really changed from that perspective.

And I think overall from a door closure perspective, we did close a number of doors.

And I think where we're really focused on is leveraging the portfolio we have right now to drive more productivity in.

Okay.

And in Asia, you talked a lot about China.

Are there other regions where you see unit expansion potential that you want to tap in the next three years?

Well, China is going to be the main driver of our growth in Asia.

But, for example, this quarter, this first quarter, we are going to open Taiwan as a new market, where we don't have any shops, and basically also Japan, Korea.

And outside Asia, Russia is going to be a very important part of our growth.

Also, Turkey is going to be also another important market for us.

And the good thing about Guess?

is that we are present in more than 90 markets.

So we don't depend only in the US market.

And I think this is a good thing at this moment, because our growth, that you define as an aggressive growth, is going to come from other regions that are not going to be the US.

So I'm quite comfortable with this $300 million in Europe and the $200 million from Asia.

Particularly in Asia, as I mentioned before, is going to be driven by China.

Betty Chen, Mizuho Securities.

Thank you.

Good afternoon.

Related to the prior question, I was curious, beyond this year in terms of store openings, how many stores should we expect in years 2 and 3 to meet the regional sales goals that you've laid out?

And then also, outside of North America, are the store openings also -- how should we think about the nameplate where the openings would be?

Is it Guess?, is it Marciano, or G by Guess, et cetera?

My second question is for the cost savings, I believe, Sandeep, you said that it's about $10 million to be recognized in FY17.

Any sort of quarterly cadence you can help us think about, and is it all in SG&A, and should we expect the balance of that to hit in the next fiscal year, or divided in the two subsequent years?

Thanks.

Hello, Betty.

This is Sandeep.

So I think when you ask about the cadence of store openings, it's actually in Victor's prepared remarks, effectively if you bridge between the guidance that I gave for the year and the three-year plan that Victor talked about.

So we're guiding for a net 15 stores in FY17 and we're guiding for a net 60 stores in the three-year plan for the Americas.

I think that answers your question on the Americas.

But I think it's the same logic for Europe, as well as Asia, where in Europe we're guiding for 45 net stores in the next fiscal year and 140 over the three-year period.

And in Asia, we're guiding for a net 65 stores in the current fiscal year and a net 200 over the three-year plan.

And so I think from a build perspective, it's exactly where we want to see it, and it's going to be accelerating as we go along, and we're comfortable with that.

Then moving on to the cost savings, you're correct, $10 million is expected to be the number for this year.

And that's what's incorporated into our guidance.

We annualize to $25 million by FY18.

In terms of quarterly cadence within the year, I'm not going to get into that at this point.

There's some choppiness in timing, but it's in the full-year number.

Sandeep, in terms of the store openings, is it also mainly Factory and G by Guess in other regions outside of North America?

Or -- ?

I think it varies depending on which country.

Because I think there's going to be a different profile over there.

But I think when we talked about Factory and G by Guess, it was specifically more in the Americas, which are more Retail -- which are more mature markets.

This is Victor.

There will be a combination between Guess?

and Factory stores in each market.

David Glick, Buckingham Research.

Thank you.

Just going back to this new store opening and capital plan, I'm just trying to process the significant change here.

You've been a net store closer for the last few years and now talking about increasing the store base by 50% in three years when you're just starting to see some of the fruits of Victor's labor and strategy here.

So obviously you're going to be taking on -- making significant capital investments and taking on significant lease obligations.

I'm just wondering, given your current, I think, if I'm not mistaken, high single digit return on invested capital, how this all folds into an ROIC target for the Company.

Obviously, investors want to see this result in improving the return on invested capital.

Thank you.

David, this is Sandeep.

And what I will tell you is -- I'll repeat what Victor said a bit earlier.

A lot of this growth is coming from international locations, where we've been seeing tremendous velocity in terms of results.

In Europe, particularly, we're seeing very good comps in the last two quarters, and so far in the first quarter, as well.

And on a stack basis, we're basically -- well, we're up in the low singles in the third quarter, and then on the fourth quarter, we were up in the mid-singles, and now based on the guidance that we have on a stack basis, we're expecting to be up in the low double digits.

So sequentially, things are improving in Europe.

And when we look at the pro formas of all the new stores that are coming up on the annual, from a return on invested capital perspective, these are really basically hitting the thresholds.

And what we do internally is, we always make sure that when we make investments in new stores, we're looking for a two- to three-year payback.

And if a store's going to be opened there's two criteria.

The first criteria, it should be a two- to three-year payback.

And the second criteria is we have an internal hurdle rate from a formal contribution perspective, which varies a little bit by concept and by geography.

And obviously, this adapts over time, as well.

But we have these criteria so we're very, very focused on where we're deploying new capital to ensure that the returns that are being delivered are above the cost of capital.

Dorothy Lakner, Topeka Capital Markets.

Thanks and good afternoon, everyone.

Thanks for all of the color and the detail that you gave in your part of the call.

I wondered if Victor could perhaps provide a little bit more color on the first initiative you talked about, elevating the quality of the sales and merchandising organization.

And I know you've given some color on that in the past, but I'm wondering if you could talk a little bit more about the things that you feel indicate significant progress there and where you think there's more work to do.

And then maybe for Sandeep, on the cost cutting initiative, perhaps a bit more color on where the cost-cutting is coming initially and where you think you're going to be getting savings as you move through the next two years.

Thanks.

Dorothy, this is Mike.

So yes, looking at elevating the sales organization, the first initiative, we've made a number of -- a number of progress there.

And if we look at the fact that basically we've comped positive in Europe, comped positive in China, comped positive in the Americas in constant currency, it shows these initiatives are working.

One of the big initiatives here is really to expand the SKU assortment, because what we feel here is that the US specifically, Europe specifically, they're very, very big countries.

And having a homogeneous or a monolithic assortment really doesn't necessarily work the most optimally.

So by actually having some more unique SKUs so that we could drive to the weather patterns and to the unique needs of each market, this will help us maximize sales.

And to do this, we've actually implemented a new position called Project Manager.

And these people are actually liaison between the stores and the merchant and the designers.

So they actually are pulling off what their store's specific requirements are and making sure that corporate delivers on those.

So we've seen a really, really good result from this initiative.

And so Sandeep, if you want to talk about the cost cutting.

Yes.

So from a cost cutting initiative perspective, we talked about $25 million in annualized savings that we're going after.

But 2/3 of these costs are expected to come from payroll reductions, roughly, and the rest of it is coming from other operating expenses.

Here we've been very surgical and focused, and we're trying to make sure that where we're looking for reductions is primarily in the Americas and Europe, where we have established infrastructures.

And it's really about a redeployment of resources for investment in markets like Asia, specifically China, where we need to make sure that we have infrastructure to support our growth.

And that's something that is very, very key for us, and we're certainly being very cautious about the way we've approached this cost reduction plan.

Janet Kloppenburg, JJK Research.

Good evening, everyone.

I just had a couple of questions.

One, Victor, if you would talk about your initiatives on the supply chain and the outlook for lead times to be reduced and the product line to have a quicker response time, enabling you to be more flexible to the business trends.

And I just wanted to talk a little bit about the store openings in the US.

They're focused on Factory and G by Guess.

How has been the performance of these two brands in the last six months?

Are there encouraging trends there, and is that why you chose those particular brands to continue or to accelerate expansion in?

And lastly, if you could just talk about the margins in Europe, I know the top line trends have been okay there, but I think for the last couple of quarters, they may have been helped by a strong response during the sale period.

And I was just wondering how the full price or the maintain margin was tracking in the European retail business.

Thanks so much.

Okay.

Hello, Janet, this is Mike.

Hello, Mike.

I can touch on the supply chain initiatives.

I've been working very closely with Victor on these.

We've made significant progress.

Not only in terms of speed, but also in terms of AUC, or average unit cost reductions.

We've had those in the past few quarters and we're continuing to deliver those.

The first thing is on lead times, we're actually doing a lot of proximity sourcing, so we're sourcing in Mexico and local markets where we can react quicker.

We have multiple calendars.

And on our long-term calendar, which includes salesman samples, we've been able to reduce the lead time across every concept.

So we've made significant progress.

Victor's relentless on actually making us trim, trim the calendar there.

And then we've established a fast track group.

So this team is really focused on looking at the latest trends and using available fabric in the market and getting goods from concept into our DC, and we're talking about 6 to 10 weeks here.

So it's very, very quick.

We're also looking to leverage our volumes globally.

So we're working more closely with Europe and the other regions to take and aggregate volumes and really drive those across key suppliers to make sure that we can really leverage those volumes and get good pricing.

And of course, this is helped by the reduction in material costs.

We've seen fabrics and fuel costs coming down, which has affected rayon and synthetics.

So we've made some good progress there, along with adopting some core fabrics that we can use with different printing, different colors, but that enables us to really drive speed here.

So just one thing that I want to say, as well, is that all these initiatives is in order to improve our IMU.

And this is what we are trying to do quarter by quarter.

And we will do, as well, during this three-year plan.

And we have taken a lot of initiatives which are helping us to improve our IMUs.

And when do you see that unfolding?

Is it unfolding now, Victor?

Well, one of the things is, Janet, this is an $0.11 currency headwind in FY17, and that's being offset partially by these IMU savings that we have.

Add on to what Mike was saying, remember Janet, because you've been following us for a while, we've actually been seeing IMU improvements now for two years, and this is the third year that we're talking about IMU improvements.

So this is a continuous process.

I think Victor coming in has actually pushed it even further along.

But I think as a company, we've been doing a lot to improve the IMU.

It's relentless.

We have to be doing it, as Victor said.

We will not stop doing it.

But from an operating margin perspective, as you look three years out, the expectation and what is incorporated in the guidance for this year is IMU improvement.

But really, the big driver of operating margin expansion over the three-year plan is sales leverage.

What about the maintain margin, Sandeep, how has that been trending?

It's been doing fine.

It's been doing fine.

I think Q4 was an aberration.

Because I think if you look at the cadence of last year, we actually did quite well in the first nine months of the year, but in Q4, especially in the US market, things were a lot more promotional than we expected it to be, and I think that's where we lost a bit of ground.

But otherwise, our maintain margin has been fine.

And if you look at, our gross margins are roughly flat for last year, and we're guiding to roughly flat again this year.

And this was after taking a currency headwind that we had, a massive currency headwind last year.

Richard Magnusen, B. Riley & Company.

Hello.

This is Richard Magnusen, in for Jeff Van Sinderen.

Can you give us a bit more on developments at G by Guess, where you're seeing strengths and weakness in merchandise content in terms of sell-throughs and more about how you focus on evolving and what we should expect to unfold for G by Guess in 2016?

In G by Guess, obviously the goal there is to capture a younger consumer, millennials, with fashion that's trend right at a decent price.

One of the things that differentiates G by Guess and really excites us is that if we look at Guess?, Guess?

is about 25%, more or less, 25% men, 75% women's.

But with G by Guess, it's actually mixed 50/50.

So we really have a strength in the men's market, which is less competitive, and we think there's a tremendous opportunity there.

Now looking at what sells, obviously, it's more fashion than basic.

But a lot of those categories that are strong, are knit tops do particularly well.

Actually basic denim is -- that's with a slight fashion twist, is performing okay, and accessories, handbags and such.

So we actually see a fairly decent response from our consumer there.

Okay.

And could you speak more about traffic and conversion trends at your North American stores, any geographic differences in performance outside of tourist and non-tourist markets, and what are your expectations for traffic in the near term for the domestic stores?

Well, in Q4, basically, we saw traffic was actually a tail wind.

And it was a tail wind across the concepts.

And we saw, if we look at -- AUR was lower, but that was actually offset by increases in UPT.

And our conversion was actually a tail wind, also.

So things worked.

Coming into Q1, we see a slight reduction in traffic.

And mainly, if we drill that down, to your point, the tourist locations actually are performing much, much more poorly.

And the gap from Q4 has actually widened, where we see performance less in the tourist locations than in the non-tourist locations.

Bridget Weishaar, Morningstar.

Hello.

Thanks for taking my question.

Looking at the three-year plan, it looks like the focus is really going to be more on Retail.

But looking at the Wholesale side, we've seen a lot of department stores in North America struggle and pulling back on inventory.

Can you discuss with us your thoughts about the Wholesale channel and opportunities there and any updates on order books?

Thanks.

Yes, Bridget, this is Sandeep.

So I think from a Wholesale perspective, as Victor mentioned in his prepared remarks, we're looking really to get to stabilize that Wholesale channel and then look to actually drive further growth beyond that, once we stabilize it.

So specifically within the Wholesale channel, the big piece of it is the European Wholesale business.

And over there, we've been seeing a sequential improvement and trend for the Fall-Winter 2016 book, where we're forecasting to be roughly flat, compared to a decline of 8% that we saw in Spring-Summer 2016.

And I think if you go across to the other side, to the Americas, within the US, yes, it is a challenging situation in the department stores, but it's a relatively small component of our business compared to the European business.

And then, of course, you have Mexico and Canada, which are substantial pieces of our Wholesale business, as well, where the business has been fairly stable.

So that really is why I think when you look at the total Wholesale channel, you've got a fairly stable Mexico and Canada and Europe, and that's what's driving the outlook.

The US business has been challenging, but it isn't such a significant portion of our total Wholesale business.

Okay.

And then another question was, on the last call, you noted that the basic denim model had been weak and you were reducing SKUs strategically and working through that excess inventory.

Have you been able to introduce newness there and have you seen improved performance?

Yes, the denim itself has been a challenging category, not just for us, but for other retailers.

But in basics, we have been able to make progress and we actually are seeing positive results.

So on Womens' Basics, we've actually reduced the number of SKUs.

And we've been injecting newness quite regularly there, in terms of new washes.

And before, it was pretty basic.

Now we actually put some destroy and some other fashion touches there.

And we are seeing a very positive reaction there and we are comping positive in the basic denim.

But fashion is -- we do have weakness there.

David Glick, Buckingham Research.

Thank you.

I had a couple follow-ups.

You mentioned in your plan that the licensing business is expected to be flat over the three-year plan.

And I'm just trying to reconcile that with obviously, if you grow your retail store base, I believe you'll recognize higher licensing revenues from licensed products sold through those stores.

That's the first follow-up.

And then secondly, the higher CapEx and new store opening, how does that impact how you look at working capital and where, given the increase in CapEx and potentially higher working capital needs of the business, what does the pro forma for cash flow profile look like relative to [health]?

David, you tailed off towards the end.

Let me see if I -- I think I got the first question, and I think you were going into cash flow on the second.

Let me answer the first question on licensing.

I may have answered it earlier on the call, as well.

Essentially, what we got from our licensing partners is a projection of revenues for us which are down in the mixed single digits at the aggregate.

And that's why I think when we say flat for the three years, there's an implicit assumption of growth in years 2 and 3. And you're right, a lot of it is tied to the retail development that we're doing over the three years, which should generate license products and royalty revenues from those licensed products, as well.

Then I think on your other question on higher CapEx and working capital needs, that's definitely embedded and contemplated, and that's why in Victor's prepared remarks, we talked about free cash flow over the three-year time period roughly covering the dividend.

So I think overall, we feel pretty confident in the cash flow projections, taking into account these elements.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating and you may now disconnect.