Guess? Inc (GES) 2019 Q4 法說會逐字稿

Good day, everyone, and welcome to the Guess?

Fourth Quarter Fiscal 2019 Earnings Conference Call.

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

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

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

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

Thank you, operator.

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

As most of you know, I spent 10 years with Guess?

between the years 2000 and 2010 as President and Chief Operating Officer.

During those years, the company had tremendous revenue and profit growth, both domestically and internationally, and we created significant shareholder value.

During the last 9 years, I was co-CEO of Restoration Hardware and then investor and CEO of Lucky Brand.

I believe that those experiences and my time at Guess?

prepared me well for the role of CEO of Guess?.

This was and is my dream job, and I am thrilled to have the opportunity to work with Paul and the Guess?

team again.

While 9 years may seem like a long time, it took me no time to feel I was back home.

In my few weeks back here, I found the team to be highly committed and excited to take the company to the next level of growth and profitability.

Maurice and Paul, our entire board and our people at the company couldn't have been more welcoming to me in this new chapter, and I am very appreciative of the response that I received from the Guess?

team all over the world.

My decision to rejoin the company was about being part again of this strong culture, which reflects my own personal values and beliefs.

My decision was also about the opportunity to make a big contribution and create significant value.

Very early on, I learned that the Guess Brand had a tremendous global opportunity, and we drove exponential growth back then.

The international growth accelerated during the last few years, and today, Guess?

has distribution in more than 95 countries and has global sales at retail value of over $5 billion.

Considering the strong momentum and position that the brand has today in the global marketplace, its relevancy with consumers and the extensive white space that there is for the brand in all regions, it is easy to see that the opportunity for global growth is still significant.

Last, I'm also excited about this opportunity because I believe that there are multiple operating areas in the business where performance could and should improve, and I think that we can develop a vision and lead the team to drive those improvements.

We already started this work.

Let me now touch on Paul and our relationship.

I believe that working together towards a common goal with complete transparency, integrity and trust is the best and only way to win.

This is exactly the way Paul and I and, at the time, Maurice worked together.

We were always united.

We could disagree on certain issues, but we discussed them directly and with complete openness, and eventually, we agreed on a resolution that we all supported.

We then articulated our vision to the team and executed consistently.

I think the world of Paul and have tremendous respect for him.

He has incredible talent and a commitment to this company and to this brand that is unmatched.

I believe we both have different skill sets that complement one another, and we plan to take full advantage of our combined strengths.

I am very proud and extremely excited to join in this new journey together.

I would like to spend a few minutes sharing with you what I found coming back into the company.

First, brand relevancy.

Guess?

will turn 38 this year, and we all know how difficult it is to remain relevant with today's discerning consumers.

Through very innovative initiatives and highly meaningful collaborations with key celebrities, the Guess Brand is engaging new customer profiles that are representative of millenials and Generation Zs, which now represent more than half of the online customers doing business with Guess?

in the U.S. Great examples of brand partnerships driven by Nicolai Marciano and his team have been A$AP Rocky, J Balvin, 88Rising, Places + Faces and Sean Wotherspoon.

Through authentic positioning and product capsule, Guess?

has been able to attract a younger consumer that has developed into a community of brand ambassadors.

Second, big white space for global growth.

I have found that the store expansion over the past few years has been accretive and value-enhancing for our store portfolio.

The new stores are profitable with good lease conditions and, on average, are achieving plans.

Still, in spite of the accelerated growth, I believe that we have significant white space for global expansion.

As I mentioned, Guess?

has sales at retail value of over $5 billion, with a very diversified assortment of product categories, including an expansive offering of accessories, handbags and footwear.

We know that other comparable brands, which have similar country distribution but have less diversified assortments, have reached between $7 billion and $9 billion in retail sales globally, so our opportunity should exceed 40% to 80% of growth from current levels once we reach development in all global markets.

As part of this, many territories offer significant opportunities for further development, and we are seeing accelerated growth in them.

Good examples are China, Japan and Eastern and Northern Europe.

This revenue momentum has contributed to double-digit growth for us this past year.

Third, existing growing businesses.

I was very pleased to see that several businesses, which may have been considered mature, are showing healthy trends of growth.

Examples are many Licensing businesses and our Americas Wholesale and Retail businesses.

Fourth, gross margin expansion.

I was also pleased to see that our teams have been able to increase gross margins through IMU improvement and lower promotional activities while prices were realigned across markets and product categories.

I believe this is a very powerful development and speaks highly of our product and brand momentum.

Fifth, cost structure changes.

While many expense areas have been reduced, several other expense functions such as logistics and distribution costs have been increased considerably.

In addition, due to our transformation to more of a retail model, costs such as rent and store payroll have also increased in absolute terms.

While all these costs impacted profitability negatively in the recent periods, I see a significant opportunity to reduce costs over time, particularly in logistics and distribution, and to leverage our rent and store payroll costs to improve sales productivity in the future.

I would like to comment on the areas that I plan to focus on during my first 100 days in the job.

During the next few weeks, I plan to spend considerable time with Paul and our leadership team developing our strategic vision for our company and an implementation plan for our entire team to execute that vision.

I plan to share that plan with you by the end of the summer.

There are some key principles that I believe in that offer value-creation opportunities when compared with our current operating performance.

My first point is about capital allocation.

We will continue to prioritize our capital allocation towards investments that support growth and infrastructure.

We plan to always be highly disciplined in the way we allocate capital across projects, including new store development, remodels, technology investments and others.

We'll prioritize investments based on their strategic significance and their return on invested capital expectations.

Our second use of capital will be to fund the dividend based on our financial outlook.

And our third use of capital would be for share repurchases, where our approach will remain opportunistic when we believe that our stock is trading below its intrinsic value.

In addition, we will manage product buys and inventory ownership rigorously, and we plan to optimize overall working capital management consistently.

My second point is about product development and distribution optimization.

I strongly believe that our highly diversified customer base offers opportunities for an expanded distribution of certain product categories which may be mature in certain markets and underdeveloped in others.

Denim is a good example of this.

Denim has always been at our core and has always been a dominant product category for Guess?, one that brings the customer into the store.

Today, our denim penetration is much lower than our historic levels, and I believe that we can grow it back with a great product assortment, strong store presentation and effective marketing.

Other product opportunities include Marciano, our men's business and accessories across channels and territories, just to name a few.

My third point is about global strategies.

I believe that we have opportunities to leverage and support our global business more effectively, including areas such as sourcing and product development, data capture and analysis regarding product performance and customer history and behavior and information technology and innovation.

My fourth point is in connection with cost and structure optimization.

I think that there are several areas that present opportunities for cost savings in our company and also believe that we can structure our organization more effectively to improve accountability, collaboration and efficiency, which should, in turn, result in improved performance and better financial results.

And fifth and last, I'd like to have our organization to focus on a concept called customer centricity, which consists of placing the customer at the center of everything we do, including perfecting the omni-channel experience.

Regarding our financial results, for the fourth quarter, we reported another quarter of strong revenue growth.

Adjusted EPS finished within the range of our guidance despite pressure from higher distribution and logistic costs in Europe and elevated inventory levels in both Europe and China.

For the 2019 fiscal year, these are the highlights.

We increased revenues by 10% on top of an 8% revenue growth in the prior year.

We increased adjusted operating profit by 32% on top of a 36% increase in adjusted operating profit in the prior year.

We expanded adjusted operating margin by 70 basis points after an 80 basis points improvement in the prior year.

And we increased adjusted EPS by 40% after a 52% increase in the prior year.

Our adjusted profit growth, margin expansion and EPS growth for the prior year have all been modified to conform to the current year's presentation.

As strong as the profit growth and margin expansion have been over the past 2 years, these results were achieved despite misses on inventory management and with distribution and logistics costs that were higher than they should be.

These are 2 areas that represent top operational priorities that, combined with our strategic vision, which we will share at a later date, will place Guess?

on a solid foundation to deliver strong top and bottom line growth over the long term.

Before I pass the call to Sandeep, I want to say that I feel very strongly today about where our company is.

Our core values and culture are intact.

Our team is highly committed.

Our brand has tremendous relevancy, and our business and global footprint are extensive and continue to grow rapidly into the significant white space available.

I am very proud to say that today, the Guess Brand and its iconic image are recognized in every country in the world.

Most importantly, we continue to engage our heritage customer very effectively, and we are reaching new generations of customers that are responding to our products, our campaigns and celebrity partnerships with great enthusiasm and are embracing the coolness factor of our brand.

I am totally convinced that these new customers will drive the success of our brand and our company for many years to come.

I'm here to make sure that, that happens.

With that, I'll pass the call to Sandeep.

Sandeep?

Thank you, Carlos, and good afternoon.

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

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

Fourth quarter revenues were $837 million, up 6% in U.S. dollars and 9% in constant currency versus the prior year quarter, which included the 53rd week.

I would like to highlight that this was our 10th consecutive quarter of revenue growth.

Total company gross margin decreased 60 basis points to 36.6%, driven by the negative impact of occupancy deleverage from higher European logistics cost as well as pressure related to elevated inventory levels in Europe and China, partially offset by lower markdowns in the Americas, higher IMUs and overall leverage.

Adjusted SG&A as a percentage of sales decreased by 70 basis points, primarily driven by lower performance-based compensation.

Adjusted operating earnings for the fourth quarter were $77 million, an improvement of 7% versus the adjusted operating earnings last year, primarily driven by sales growth.

Adjusted operating margin finished 10 basis points better than last year at 9.2%, including a positive impact of foreign currency of roughly 30 basis points.

Our fourth quarter adjusted tax rate was 23%, down from 25% last year, driven by the mix of statutory earnings and a lower U.S. tax rate for the whole quarter this year.

Adjusted diluted earnings per share finished within the range of our guidance at $0.70.

The positive impact of currency on earnings per share in the quarter was $0.03.

The $0.70 in adjusted EPS represents a 13% improvement compared to adjusted EPS of $0.62 in last year's fourth quarter.

Now for some more color by segment.

Americas Retail revenues for the quarter finished down 1% in U.S. dollars and flat in constant currency, even after the negative impact of being up against an extra week from last year's fourth quarter.

Comp sales for the quarter, including e-commerce, were up 6% in U.S. dollars and 7% in constant currency, marking our fourth consecutive quarter of positive comps.

Similar to the third quarter, we were significantly less promotional than last year, with higher AURs and better conversion driving the comps.

Importantly, we finished the year with comps up 4%, the first time in 8 years we have delivered a positive comp for the year in the Americas.

Americas Retail operating margins in the quarter expanded 270 basis points, marking our sixth consecutive quarter of operating margin expansion.

This was achieved through lower markdowns, positive comps and better IMUs.

Staying in the Americas region, I want to take a moment to talk about the Americas Wholesale business.

Revenues grew 19% in U.S. dollars and 22% in constant currency, and were driven by a strong performance in our U.S. department store and specialty business.

The Americas Wholesale operating margins in the quarter expanded 500 basis points, primarily through higher IMU and sales leverage.

European revenues for the quarter grew 4% in U.S. dollars and 10% in constant currency and finished below our expectations mainly due to a shift in timing of wholesale shipments.

The growth was driven by new store openings, an increase in wholesale revenues, and comps, including e-commerce, of flat in U.S. dollars and up 6% in constant currency, partially offset by the negative impact of the 53rd week last year.

The comp increase marked the 14th consecutive quarter of constant-currency positive comps in the European region.

Our European wholesale business also continues to be very strong.

We have good visibility on our order book now for Fall/Winter 2019, and we are on track for our fifth consecutive season of double-digit growth.

The European wholesale channel growth is coming predominantly from higher same-door buys, indicating increased productivity for our wholesale partners.

European segment margin contracted by 480 basis points due to higher-than-expected logistics costs and pressure from higher inventory levels.

As we move into fiscal year 2020, we expect lower European logistics costs to contribute roughly 100 basis points of margin expansion in Europe.

Moving to Asia.

Fourth quarter revenues were up 22% in U.S. dollars and up 26% in constant currency.

Revenue growth in the region was driven by positive comps, including e-commerce, up 13% in U.S. dollars and up 17% in constant currency, by new store openings and the benefit from an earlier Chinese New Year.

Our e-commerce business in China, especially with Tmall, continues to gain momentum.

This year, Singles Day or 11/11 and 12/12 was again very strong for Tmall and Alibaba and even stronger for us.

We went up in the rankings of the top 100 international brands for both women's and men's on 11/11 and performed so strongly on 12/12 that we broke into the top 50 brands for women's and men's.

Operating margin for the Asia segment contracted 480 basis points in the quarter, driven primarily by the pressure from markdowns and aged inventory reserves in China.

Moving on to the balance sheet.

Accounts receivable was $322 million, up 24% in U.S. dollars and 33% in constant currency and includes a 17% increase due to the impact of classification changes from the adoption of the ASC 606 revenue recognition standard.

Inventories were $469 million, up 10% in U.S. dollars and 16% in constant currency versus last year and includes a 3% decrease due to the impact of classification changes from the adoption of ASC 606 revenue recognition standard.

We exited the year with higher inventories than planned, and we plan to move through this inventory over the course of the coming fiscal year through a combination of our own retail outlet stores as well as stock liquidation channels.

We expect the pressure to ease more in the back half of the coming fiscal year.

Free cash flow was negative $28 million, a reduction of $91 million versus $63 million last year, driven by lower operating cash flows and an increase in capital expenditures.

We ended the quarter with cash and cash equivalents of $211 million compared to last year's $367 million.

Cash less debt at the end of the fourth quarter was $171 million compared to $327 million last year.

This is after having returned $74 million in dividends and $18 million in cash paid for share repurchases to shareholders in the last 12 months.

Moving on to the guidance.

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

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

As Carlos mentioned earlier, there is still significant white space to support global growth going forward, and we intend to expand our footprint by strategically allocating capital to projects with high return on invested capital.

For fiscal year 2020, on a net basis, we expect to open 30 stores in Europe and 20 stores in Asia.

For the first quarter of fiscal 2020, we expect revenues for the quarter to be up 7% to 8% in constant currency.

At prevailing exchange rates, we estimate that currency will be roughly a 4.5 percentage point headwind on consolidated revenue growth for the quarter.

Our gross margin is expected to be up primarily due to IMU improvement from our supply chain initiatives.

The SG&A rate is expected to be up compared to last year primarily due to an increased investment in advertising.

We are planning an operating margin for the quarter between negative 4.5% and negative 4%, with a 10 basis points unfavorable impact from currency.

The loss per share is planned in the range of $0.29 per share to a loss of $0.25 per share, including an estimated $0.01 of tailwind due to currency.

Our tax rate for the first quarter is estimated to be 10%.

We expect consolidated revenues for the year to be up between 5.5% and 6.5% in constant currency.

At prevailing exchange rates, we estimate currency to have a 1.5% negative impact on consolidated revenue growth for the year.

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

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

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

This includes the benefits to our effective tax rate derived from lower U.S. federal tax rates resulting from the tax reform.

We are planning an adjusted operating margin between 4.8% and 5.3%, with a 10 basis points favorable currency impact on operating margin.

And our guidance assumes that foreign currencies will remain roughly at prevailing rates.

Earnings per share is planned in the range of $1.09 and $1.21, with a $0.02 tailwind from currency.

The high end of our new guidance represents a 23% increase over last year's adjusted EPS.

CapEx for the year is expected to range from $55 million to $65 million to support store openings, key store remodels and investments in our technology infrastructure to support long-term growth.

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

The lower CapEx combined with our inventory and working capital management focus are expected to generate improved free cash flow this year, even after considering the $46 million EU Commission fine payment in the first quarter.

The Board of Directors has approved a quarterly dividend of $0.225 per share payable to shareholders of record at the close of business on April 3, 2019.

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

(Operator Instructions) Our first question comes from Omar Saad from Evercore ISI.

Welcome back, Carlos.

Thank you.

I wanted to ask about the inventories in the guidance.

And I really like your perspective kind of looking back on the strategies being deployed at Guess?

during your tenure here.

It was very much square footage growth.

New store concept launches.

The Europe wholesale channel was a big growth area during your time.

And obviously, there's been a retrenchment and kind of a reset.

The stores -- the number of stores the company has is significantly lower today.

And I'd be curious if you could reflect upon how the market has changed, how the industry has changed during your journeys to -- and your round trip back to Guess?, if and how your framework has changed, how you think about growth for a brand like this, profitable growth for a brand like this, in that context.

Thank you, Omar, and I'm very excited to be back.

I think that during my 9 years that I wasn't with the company, I think a lot of things have changed in the industry and in retail overall.

Obviously, the whole impact of e-commerce into sales and how the customer is shopping today has been pretty fundamental and very, very challenging for many companies to adapt.

I think that there has been a significant view towards stores and whether the Americas are over-stored and so forth.

And I believe that all those areas have definitely impacted productivity across -- for the sector.

When I look at what happened at Guess?

during those 9 years, it's pretty phenomenal.

I think the international expansion that we have experienced here, I think that there is more retail and solid control of the brand distribution in the international markets.

Think of the recent expansion of stores throughout that whole region and also expansion of stores in Asia, China being the #1 case for this.

I think that has put a lot of control of the brand distribution in our hands.

I think that another change that I feel very, very significant is how much more relevant our brand is with young consumers.

This is something, as I said in my prepared remarks, that is so difficult to achieve for any brand, especially those that have been around for a long time, as Guess?

has.

And I am very excited to see that type of development.

I think that in our case, it's not just an example but something that is very, very meaningful and powerful.

And I think that we can really continue to develop those initiatives very, very significantly into the future.

E-commerce, I believe that we are doing a good job, but I think that we have a big opportunity to do even more in our penetration.

When I compare to what happens in the industry to those that have integrated e-commerce into a shopping experience that is seamless, I think we have a big opportunity with that.

And the other thing that I see that has changed is, in those days when I was COO, I think the company was very profitable.

And I think that, that was a combination of continued growth, which the company still has, but also with a very efficient cost structure.

And I believe that we have some opportunities in that as well.

I believe that there are many things that have not changed here, and one and probably the most significant for me to come back was our culture, the values, the commitment of the team here has for -- to the brand, to the company and to the team.

And I think it's very exciting to be back.

I think that we are going to be working together, as I said, just thinking about the vision for the company in the future.

But I think that there were so many things that have been done well for so many years here, and I couldn't be more thrilled to be part of this -- just in this effort to take the company to the next level of growth and profitability.

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

Welcome back, Carlos.

I guess maybe -- I just kind of wanted to expand a little bit on Omar's question.

I guess maybe if you could talk about, I know it's early days still, but just anything that you're envisioning or any differences in strategy or product aesthetic as we kind of look out over the next several years versus kind of what we've seen over the past couple of years.

And then maybe for Sandeep, I may have missed this, but maybe some more color around the Asia comp guide.

I think it's down low to mid for the first quarter but then accelerates for the rest of the year.

I just wasn't sure if there was a shift there or anything.

Yes.

Thank you, Susan.

You're absolutely right there, early days for me, and I'm really trying to get into everything very quickly.

But I think that I would like to come back to you on some of these points after we have the opportunity to work on our strategic vision, as I mentioned.

But just initially, I have to say just -- Guess?

has always been such a dominant brand in the denim space, and I feel that, that has lifts and it [AO1]shows a lot of opportunity.

When I look at the penetration that the denim product has today relative to what it used to be, I think that it's very clear that we have an opportunity to really increase our denim penetration, and that should be accretive to the entire box and the entire business.

So we are very excited about this.

We're already mobilizing to really put that into effect.

I think that there are other areas that offer big opportunities, as I mentioned, on other product categories.

And the great thing is that now, since the business is so well developed in many areas of the world, it's easy to see what regions or countries or markets offer an opportunity to increase penetration or do better in some of those product categories.

I mentioned in my remarks about men's.

I think that, that offers a big opportunity.

The Marciano brand also offers big opportunity.

And even when our accessories business, especially handbags, has been very well developed across the globe, we see a lot of opportunity to continue to grow that business as we believe that the competition for what we do is somewhat limited.

So it's a very exciting time for product.

I would not attempt to talk about product aesthetic.

I think that the aesthetic of our brand is very well represented by the product that we currently have.

And I believe that for that reason, we saw a significant turnaround in the business during the last few quarters.

Just -- I think if you look at the Americas, for example, and you look at how our recent performance has been, I think it's primarily driven by the product.

Obviously, the effective marketing that we -- that I alluded to is also very significant.

But overall, I think that product, we are on the right path.

And of course, I'm very proud of the gross margin improvements because in today's day and age, one thing that I didn't mention when Omar asked his question is about what happened to the promotional environment in the marketplace.

But it has been very pervasive, as we all know.

Most companies had a very difficult time to really maintain some level of traffic and sales unless they promote very, very heavily.

And I feel that this brand, our company, has gone exactly in the opposite direction to that, and it has done it very successfully.

And that's difficult to do unless you have very great product and a good offering in front of the customer.

Great.

That's very helpful.

Yes, I believe the product looks great.

Thank you.

And Susan, just to follow up on your question about the Asia comps, I think if we look at Q4, Q4, we did a plus 17% on Asia comps in constant currency, and that was definitely benefited by the timing of Chinese New Year.

But I think as we moved into the first quarter, we were always anticipating, and we are going to have a bit of timing impact going the other way on us in the first quarter.

But I think apart from that, there are a couple of other discrete items that are actually impacting us, which I want to touch on.

Number one, I think last year, if you go back to our first quarter, we basically had a very, very strong partnership with the GENERATIONS band in Japan.

And we had a partnership which showed -- which had a product capsule associated with it, which did extremely well and had a material impact on the comp for the quarter.

We're up against that, and that's actually something which is running against us right now in our expectations.

And I think the other thing which has been an impact is, after we got past Chinese New Year, the traffic in China has been less than we were expecting.

So we've taken that into consideration, and that's why our comps in the first quarter are guided down mid-single digits to low single digits.

But as we actually move into the rest of the year, we've taken into consideration the current trends post Chinese New Year, and that's included in our expectations in the comp guide.

But I think, Susan, the fundamental premise of what we were talking about on Asia all this time hasn't changed.

I think it's a tremendous opportunity.

I think as Carlos mentioned in the prepared remarks, China and Japan are hugely important markets for us with huge white space.

And the long-term margin goal of low double digits is still very much in our horizons.

I think it's just going to take more time to get there, but it's just very much an opportunity, especially as we can leverage the cost structure and as we realize the growth that's there and available for us over time.

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

Carlos, it's Janet.

I wanted to say welcome back and glad you're back.

Thank you.

Your observations on denim are something that I thought about for the brand over the last few years.

And I'm just wondering, you probably can't give me the penetration level now, but perhaps, you could give us the horizon of how long you think it will take to rebuild that business and if the investment will be on the basic side, the core side or if there's more opportunity on the fashion side and if you'll be doing any specific marketing around that.

And then I may have -- this may have already been answered.

I'm sorry, I'm on 2 calls at once.

But I just was wondering about the aged inventory that you've referenced that impacted operating margin in Asia and Europe and if that's all been cleaned up and just -- and if not, when it may be.

And lastly, when you think overall inventories will be where you think they should be.

Okay.

Thank you, Janet.

It's good to hear your voice.

I think our denim is a big opportunity, but -- and I think when I say that, I mean globally.

And I think we have the nimbleness to be able to move relatively quickly, and that is what we are going to try to do.

We all believe very strongly about this, and we feel that the team is very excited about reigniting the category in a big way.

But I think that in order to be successful, everything starts with great product in everything we do.

So for denim, I think there, it's a complex category.

We are talking about assortments.

You're talking about fabrics, washes, fits, styling and just being able to really be relevant on the fashion side as well.

We're going to be working on all that.

I think we have some terrific product in the lines, and I'm talking about not just what we have here in the Americas but also our line in Europe.

And there is a lot of opportunity to really mix and really come with a combined strength on this.

Then the second big thing is about presentation.

I think that today, if you go to our stores, you don't feel that we are the kind of powerful denim brand that we used to be.

And I think we have to change that, and we will.

So presenting the product in an effective way, so then the customer knows that we are in this business with complete confidence.

It's a big part of our objective, and that is going to happen soon.

And then the third big thing is marketing.

You test on it, but it's like how are we going to tell the consumers that we are back on this with big confidence to support what we want to do with both the product and the presentation in stores.

So we feel that we have all these in our sights, and we want to make it happen very quickly.

I cannot talk about numbers about penetration, but I can tell you that when you look at the penetration change between what it was and what it is, the opportunity is pretty significant considering the size of our business today.

And the other thing that we see is an opportunity for -- that is very accretive to the entire box.

So this is not just trading dollars from one category to another one.

It's about making the box more productive.

We think that denim is one of those products that nobody would come and buy without trying it on, and that gives our sales team a big opportunity to engage with that customer for a longer period of time and to be able to cross-sell and upsell into other categories that complement denim purchases.

So I think that the opportunity could be, just an increase in denim penetration, that could be in the 5-point area.

And that is a big number when you put it altogether.

Now with respect to your second question about aged inventory, Sandeep mentioned this during his prepared remarks.

We do have some of that excess inventory that we still own, and we have a plan to really move out of that through liquidations that will happen both through third parties outside and liquidators.

But also, some of the product is going to be liquidated through our own channel, especially outlets.

And we feel that we have a good plan to end the year with a very, very clean inventory situation.

This is a lot of inventory that we're talking about, but we feel that the plan is sensible, and we feel that the impact on margins has already been included in the guidance that you heard today.

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

Welcome back, Carlos.

Nice to hear your voice.

Thank you.

Thank you, Dana.

As you think about product -- the calendar of product development, as you think about replenishment cycles, what do you find different now in the business from when you left?

And how do you think about it going forward?

Yes.

I think that -- it's good to hear your voice, Dana.

Thank you.

I think that product development has changed quite a bit in the industry, and I think that most companies have tried to get significantly faster in their development.

When you are running and managing a brand like ours that operates in multiple channels, the challenge of speed is more significant because you still have to have a sample line to be able to show at market and so forth, and that adds a lot of issues for speed.

But that being said, I think that Guess?

has made some good progress in this, and there are several time lines that can be used here when we want to go faster with certain product categories.

I feel that there is -- when you ask about the future, I think that there's a big opportunity here to digitalize the supply chain processes, and there are many people in the industry that are working on this very, very effectively.

And we have something here at the company that we are going to be looking at to really make some progress in that area.

So I feel that overall, the team is working very well and effectively.

And I think that there have been some just big efforts to get more efficient on sourcing and supply chain in general, but I think that there is a lot more to do.

And it involves technology, and we're going to go after that.

And Carlos, what's the biggest -- since you've come back, what's the biggest changes or surprises that you're finding in the business that surprised you?

Obviously, you've been involved in apparel businesses over the past few years.

What's different from when you were there last and from your old company?

Yes.

I kind of touched on that.

But I would say, probably the biggest difference is that this business now is a lot more complex because of the international reach.

When I was here, we were expanding internationally very successfully, but we were somewhat concentrated in one region in Europe.

And that was giving us a lot of growth, but it was a wholesale-based business.

I think that today, we have just presence in so many countries, and in every one of those countries, we are going with a strategy that touches different channels like wholesale and retail but also licensing business.

And all those license categories play a big role in those businesses.

And I think that this is a -- it brings a level of complexity that is pretty significant.

Also, we have country management teams in almost every one of those significant markets, and that also adds a level of complexity.

Though I am very proud of how the team has organized, I think that we have a very, very big weapon here to be successful in each and every one of those markets because each is a different culture, is a different market dynamic, is a different customer.

And to have this kind of expertise in each of those markets to assess real estate or distribution is so important.

I think that the other side, I would say, is the opportunity for operating efficiencies.

So when I was here, we were looking at this kind of issues all the time, trying to become more efficient, trying to become more profitable.

I mean, that is kind part of the course.

But in this particular case, right now, I think there are some glaring opportunities.

Distribution and logistics is one.

But if you look at how much the company has grown in terms of top line and then you look at the cost structure, how much that has grown, there has been very little leverage in considering the kind of explosive growth that we have experienced.

You would expect that there is opportunity for cost reductions and operating efficiencies, and I am going to look into that right away.

Frankly, we are doing some work as we speak.

And the great thing about that is that, that should be the more easy part.

The hard part is to get brand momentum, to get sales, to get traction with product, to get the customer to pay attention to you, to get -- to engage customers that are beyond the heritage customer, as we call it.

And all those things, the company has done extremely well.

So we should be able to really go inside the P&L and make that bottom line significantly more powerful.

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

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

Thank you, operator.

I would like to conclude the call by reiterating how thrilled I am to be back at Guess?

and work with the Guess?

teams all over the world.

I am really thrilled.

There are so many opportunities to create more value for our shareholders, from growth through operational efficiencies, as we just talked.

And again, we will share with you our strategic vision for our company by the end of the summer.

I look forward to working with all of you in the future, and I am excited to be here.

Thank you to the team here, and thank you again for attending our call today.

And thank you, ladies and gentlemen.

That concludes today's conference.

Thank you for your participation.

You may now disconnect.

[AO1]Changed a little the wording as I don't think what was said during the call makes sense.

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