Guess?, Inc. (NYSE: GES) today reported financial results for its first quarter ended May 2, 2020.
Carlos Alberini, Chief Executive Officer, commented, “The COVID-19 Crisis has had a material impact on our Company, including our operations and our financial results. I couldn’t be more proud of our teams around the world as they acted decisively, quickly and strongly to control what could be controlled and demonstrated a level of commitment, leadership and empathy that is unparalleled. Our top priority has been the safety and well-being of our associates, customers and the communities we serve. To minimize our loss and protect our liquidity, we challenged every aspect of our business which was being significantly impacted by extensive store closures and lower customer demand. In addition to postponing our decision related to the payment of the quarterly dividend, we were able to reduce expenses, adjust inventory levels and purchases, lower capital expenditures and extend vendor payment terms to react to the Crisis.”
Mr. Alberini continued, “Today we have all stores open in Asia, over 400 stores in Europe and over 180 stores in the U.S. and Canada. We are encouraged by our initial results, which have been better than anticipated. Our sales productivity for re-opened stores for the second quarter to date has reached roughly 75% in the U.S. and Canada and 70% in Europe as compared to last year’s level.”
Mr. Alberini concluded, “Looking forward, the building blocks of our long-term strategy are still intact. We remain focused on enhancing our omni-channel platform centered around the consumer and are accelerating our efforts to gain efficiencies across our global operations and rationalize our store portfolios. I fully expect to be on the other side of this Crisis with a more efficient business model, a more focused and consistent global brand strategy and a more nimble and agile organization.”
Adjusted Amounts
This press release contains certain non-GAAP, or adjusted, financial measures. References to “adjusted” results exclude the impact of (i) asset impairment charges, (ii) net losses on lease terminations, (iii) certain professional service and legal fees and related costs, (iv) certain separation charges, (v) non-cash debt discount amortization on our convertible senior notes, (vi) the related tax effects of the foregoing items, and (vii) certain discrete tax adjustments, in each case where applicable. A reconciliation of reported GAAP results to comparable non-GAAP results is provided in the accompanying tables and discussed under the heading “Presentation of Non-GAAP Information” below.
COVID-19 Business Update
The coronavirus (or “COVID-19”) pandemic has had and is continuing to have a material impact on the Company’s financial performance. During the first quarter of fiscal 2021, in addition to the negative impact from lower net revenue, the Company’s operating results also reflected asset impairment charges as well as additional inventory valuation reserves and higher allowances for markdowns and doubtful accounts due to the ongoing effects of the COVID-19 pandemic. These charges were partially offset by the favorable impact from various European and U.S. government assistance programs related primarily to the recovery of employee payroll costs as well as certain favorable tax treatments.
During the first half of fiscal 2021, the Company implemented a number of measures to help mitigate the operating and financial impact of the pandemic, including: (i) furloughing its U.S. and Canada store associates and significant portions of its U.S. and Canada corporate and distribution center associates and permanently reducing U.S. corporate headcount; (ii) implementing temporary tiered salary reductions for management level corporate employees, including its executive officers; (iii) deferring annual merit increases; (iv) executing substantial reductions in expenses, store occupancy costs, capital expenditures and overall costs, including through reduced inventory purchases; (v) working globally with country management teams to maximize the Company’s participation in all eligible government or other initiatives available to businesses or employees impacted by the COVID-19 pandemic; (vi) drawing down on certain credit facilities and entering into certain term loans to ensure financial flexibility and maintain maximum liquidity; (vii) engaging with landlords to negotiate rent deferrals or other rent concessions; (viii) working with vendors to extend payment terms; and (ix) postponing its decision related to the payment of its quarterly cash dividend.
Beginning in mid-April, the Company began to reopen some of its stores in Europe. In May 2020, the Company began to reopen some of its stores in the U.S. and Canada. In Asia, where store closures related to COVID-19 began, all of the Guess-operated stores have reopened. The Company will continue to reopen stores in phases, as state and local guidelines and conditions permit, taking an informed, measured approach based on a number of factors. The Company’s e-commerce sites remain open in all regions. In addition, retail stores that are open have and continue to experience significant reductions in traffic and therefore, revenue. The Company’s e-commerce sites have experienced lower traffic, but this has been partially offset by a strengthening in conversion. Many of the Company’s wholesale and licensing partners have also substantially reduced their operations. The Company has and will continue to bring back store associates and support staff as stores reopen.
First Quarter Fiscal 2021 Results
For the first quarter of fiscal 2021, the Company recorded GAAP net loss of $157.7 million, compared to $21.4 million for the first quarter of fiscal 2020. GAAP diluted loss per share was $2.40 for the first quarter of fiscal 2021, compared to $0.27 for the same prior-year quarter. The Company estimates that its prior year share buybacks and convertible notes transaction had a net negative impact of $0.50 on GAAP diluted loss per share and currency had a negative impact of $0.09 on diluted loss per share in the first quarter of fiscal 2021.
For the first quarter of fiscal 2021, the Company recorded adjusted net loss of $118.9 million, compared to $19.6 million for the first quarter of fiscal 2020. Adjusted diluted loss per share was $1.81, compared to $0.25 for the same prior-year quarter. The Company estimates that its prior year share buybacks and convertible notes transaction had a net negative impact of $0.36 on adjusted diluted loss per share in the first quarter of fiscal 2021.
Net Revenue. Total net revenue for the first quarter of fiscal 2021 decreased 51.5% to $260.3 million, compared to $536.7 million in the same prior-year quarter. In constant currency, net revenue decreased by 50.1%.
- Americas Retail revenues decreased 57.7% in U.S. dollars and 57.4% in constant currency.
- Americas Wholesale revenues decreased 44.0% in U.S. dollars and 41.8% in constant currency.
- Europe revenues decreased 49.3% in U.S. dollars and 47.4% in constant currency.
- Asia revenues decreased 52.6% in U.S. dollars and 50.6% in constant currency.
- Licensing revenues decreased 31.3% in U.S. dollars.
Operating Loss. GAAP loss from operations for the first quarter of fiscal 2021 was $162.5 million (including $53.0 million in non-cash impairment charges taken on certain long-lived store related assets and a $4.6 million favorable currency translation impact), compared to $24.5 million in the same prior-year quarter. GAAP operating margin in the first quarter decreased 57.8% to negative 62.4%, from negative 4.6% in the same prior-year quarter, driven primarily by overall deleveraging of expenses due to the negative impact from the COVID-19 pandemic on our global operations and higher asset impairment charges. The negative impact of currency on operating margin for the quarter was approximately 20 basis points.
For the first quarter of fiscal 2021, adjusted operating loss was $108.6 million, compared to $22.4 million in the same prior-year quarter. Adjusted operating margin decreased 37.5% to negative 41.7%, compared to negative 4.2% in the same prior-year quarter, driven primarily by overall deleveraging of expenses due to the negative impact from the COVID-19 pandemic on our global operations.
- Operating margin for the Company’s Americas Retail segment decreased 48.2% to negative 49.2% in the first quarter of fiscal 2021, from negative 1.0% in the same prior-year quarter, driven primarily by the deleverage impact of temporary store closures as a result of the COVID-19 pandemic.
- Operating margin for the Company’s Americas Wholesale segment decreased 10.6% to 6.3% in the first quarter of fiscal 2021, from 16.9% in the same prior-year quarter, due mainly to the negative impacts from the COVID-19 pandemic which resulted in higher markdowns and overall deleveraging of expenses.
- Operating margin for the Company’s Europe segment decreased 33.9% to negative 41.7% in the first quarter of fiscal 2021, from negative 7.8% in the same prior-year quarter, driven primarily by overall deleveraging of expenses due to lower revenue as a result of the COVID-19 pandemic.
- Operating margin for the Company’s Asia segment decreased 52.6% to negative 56.4% in the first quarter of fiscal 2021, from negative 3.8% in the same prior-year quarter, due mainly to the negative impacts from the COVID-19 pandemic which resulted in significantly higher inventory reserves and overall deleveraging of expenses.
- Operating margin for the Company’s Licensing segment decreased 10.4% to 78.0% in the first quarter of fiscal 2021, from 88.4% in the same prior-year quarter.
Other expense, net, was $19.6 million for the first quarter of fiscal 2021, compared to other income, net, of $2.1 million in the same prior-year quarter. The change was driven primarily by market volatility which resulted in higher unrealized losses on the translation of foreign currency balances and net unrealized losses on our SERP-related assets compared to net unrealized gains in the same prior-year quarter.
Outlook
We expect that the global crisis will continue to have a material impact on our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2021. Based on the sales data we have for the brick-and-mortar stores that have re-opened since May 2, 2020, we have experienced sales productivity for reopened stores of roughly 75% in the U.S. and Canada and 70% in Europe as compared to last year’s level. This data may not be indicative of future trends as this is only representative of a portion of our stores for a relatively short period of time. In addition, the extent and duration of the global pandemic remains uncertain and may continue to impact consumer purchasing activity throughout the year. Given the dynamic situation, we have not provided detailed guidance for the second quarter ending August 1, 2020 or the full fiscal year ending January 30, 2021. However, based on these trends, we currently expect revenues for the second quarter of fiscal 2021 to have a decrease similar to that of the first quarter.
Dividend
During the first quarter of fiscal 2021, the Company announced that its Board of Directors had deferred the decision with respect to the payment of its quarterly cash dividend. While the Company remains committed to returning capital to shareholders through a dividend on a long-term basis, the Board of Directors has decided to continue to postpone its decision to pay the quarterly cash dividend at this time in order to preserve the Company’s cash position and provide continued financial flexibility in light of the uncertainties related to the COVID-19 pandemic.
Presentation of Non-GAAP Information
The financial information presented in this release includes non-GAAP financial measures such as adjusted results, constant currency financial information and free cash flow measures. For the three months ended May 2, 2020, the adjusted results exclude the impact of certain professional service and legal fees and related costs, certain separation charges, asset impairment charges, net losses on lease terminations, non-cash amortization of debt discount on the Company’s convertible senior notes, the related tax impacts of these adjustments as well as certain discrete tax adjustments, where applicable. For the three months ended May 4, 2019, the adjusted results exclude the impact of certain professional service and legal fees and related costs, asset impairment charges, non-cash amortization of debt discount on the Company’s convertible senior notes and the related tax impacts of these adjustments, where applicable. These non-GAAP measures are provided in addition to, and not as alternatives for, the Company’s reported GAAP results.
The Company has excluded these items from its adjusted financial measures primarily because it believes these items are not indicative of the underlying performance of its business and that the adjusted financial information provided is useful for investors to evaluate the comparability of the Company’s operating results and its future outlook (when reviewed in conjunction with the Company’s GAAP financial statements). A reconciliation of reported GAAP results to comparable non-GAAP results is provided in the accompanying tables.
This release also includes certain constant currency financial information. Foreign currency exchange rate fluctuations affect the amount reported from translating the Company’s foreign revenue, expenses and balance sheet amounts into U.S. dollars. These rate fluctuations can have a significant effect on reported operating results under GAAP. The Company provides constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates. To calculate net revenue and earnings (loss) from operations on a constant currency basis, actual or forecasted results for the current-year period are translated into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate. However, in calculating the estimated impact of currency on our earnings (loss) per share for our actual or forecasted results, the Company estimates gross margin (including the impact of merchandise-related hedges) and expenses using the appropriate prior-year rates, translates the estimated foreign earnings at the comparable prior-year rates, and excludes the year-over-year earnings impact of gains or losses arising from balance sheet remeasurement and foreign currency contracts not designated as merchandise hedges. The constant currency information presented may not be comparable to similarly titled measures reported by other companies.
The Company also includes information regarding its free cash flows in this release. The Company calculates free cash flows as cash flows from operating activities less (i) purchases of property and equipment and (ii) payments for property and equipment under finance leases. Free cash flows are not intended to be an alternative to cash flows from operating activities as a measure of liquidity, but rather provides additional visibility to investors regarding how much cash is generated for discretionary and non-discretionary items after deducting purchases of property and equipment and payments for property and equipment under finance leases. Free cash flow information presented may not be comparable to similarly titled measures reported by other companies. A reconciliation of reported GAAP cash flows from operating activities to the comparable non-GAAP free cash flow measure is provided in the accompanying tables.
