Guess?, Inc. (NYSE: GES) today reported financial results for its fourth quarter and fiscal year ended February 1, 2020.
Carlos Alberini, Chief Executive Officer, commented, “I am very pleased to report that we had a strong fourth quarter performance, exceeding our guidance for earnings per share and delivering operating profit at the high end of our expectations. We closed the year with strong liquidity and a solid balance sheet, which positions us well to navigate through the current coronavirus crisis. In the near term, we are actively managing the global situation, prioritizing the health and well-being of our associates around the world. While we hope that the crisis will be temporary, we do expect it will have a significant negative impact on our financial results for the first quarter and may impact future results, including potential disruptions in our supply chain. That said, we currently are unable to determine with any degree of accuracy the impact the crisis may have in the future on our financial results or how long it may last. As a result, we are not in a position to issue guidance for the first quarter or fiscal year 2021.”
Mr. Alberini continued, “During the fourth quarter we grew operating earnings by 45% and adjusted operating earnings by 32%. Overall, the strength of our businesses in Europe and our licensing business enabled us to more than offset softness in the Americas Retail and Asian businesses and grow earnings in the quarter. This performance capped a strong year for our Company when we increased revenues, achieved significant earnings growth and meaningful operating margin expansion. We also generated improved cash flow which enabled us to go into the new year with a strong financial position.”
Mr. Alberini concluded, “In spite of the current crisis, I am very pleased with the progress we are making with the implementation of the strategic plan we presented at our Investor Day in December. I strongly believe all the opportunities we identified remain in place for the Company in the long term. I am proud of our team’s accomplishments and I continue to be very excited about our Company’s future.”
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 gains on lease terminations, (iii) certain professional service and legal fees and related (credits) costs, (iv) charges related to the European Commission fine, (v) non-cash debt discount amortization on our convertible senior notes, (vi) separation charges related to the departure of our former Chief Executive Officer (“CEO”), (vii) the related tax effects of the foregoing items as well as the impact from changes in the tax law on deferred taxes in certain tax jurisdictions, net tax settlements and adjustments to specific uncertain tax positions, and (viii) revisions to provisional amounts previously recorded related to the enactment of the 2017 Tax Cuts and Jobs Act (the “Tax Reform”), 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.
Share Repurchases. The Company has used substantially all of the net proceeds from its $300 million 2% convertible senior notes due 2024 issued during the first quarter of fiscal 2020 (after the related hedge and warrant transactions) to repurchase shares of its common stock. During the three months ended May 4, 2019, the Company used $170 million of such proceeds to enter into an accelerated share repurchase program (“ASR”), pursuant to which it received up-front approximately 5.2 million shares (representing approximately $102 million (or 60%) of the $170 million notional amount of the ASR). The Company received a final delivery of an additional 5.4 million shares under the ASR during the three months ended November 2, 2019. During the fiscal year ended February 1, 2020, the Company also repurchased approximately 6.1 million shares of its common stock in open market and privately negotiated transactions totaling $118.1 million, of which approximately 0.3 million shares of its common stock were repurchased at an aggregate cost of $7.5 million during the three months ended February 1, 2020. Combined, these transactions resulted in the repurchase of approximately 16.7 million shares for $288.1 million during the fiscal year ended February 1, 2020.
Fourth Quarter Fiscal 2020 Results
For the fourth quarter of fiscal 2020, the Company recorded GAAP net earnings of $79.6 million, a 242.6% increase compared to $23.2 million for the fourth quarter of fiscal 2019. GAAP diluted earnings per share increased 321.4% to $1.18 for the fourth quarter of fiscal 2020, compared to $0.28 for the same prior-year quarter. The Company estimates that the share buybacks offset by the convert transaction had a net positive impact of $0.19, or 67.9%, on GAAP diluted earnings per share and currency had a negative impact of $0.06 on diluted earnings per share in the fourth quarter of fiscal 2020.
For the fourth quarter of fiscal 2020, the Company recorded adjusted net earnings of $82.3 million, a 41.4% increase compared to $58.2 million for the fourth quarter of fiscal 2019. Adjusted diluted earnings per share increased 74.3% to $1.22, compared to $0.70 for the same prior-year quarter. The Company estimates that the share buybacks offset by the convert transaction had a net positive impact of $0.22, or 31.4%, on adjusted diluted earnings per share in the fourth quarter of fiscal 2020.
Net Revenue. Total net revenue for the fourth quarter of fiscal 2020 increased 0.6% to $842.3 million, compared to $837.1 million in the same prior-year quarter. In constant currency, net revenue increased by 1.8%.
- Americas Retail revenues decreased 4.1% in U.S. dollars and 4.4% in constant currency. Retail comp sales including e-commerce decreased 3% in U.S. dollars and constant currency.
- Americas Wholesale revenues decreased 3.0% in U.S. dollars and 3.8% in constant currency.
- Europe revenues increased 13.2% in U.S. dollars and 15.8% in constant currency. Retail comp sales including e-commerce increased 1% in U.S. dollars and 3% in constant currency.
- Asia revenues decreased 27.7% in U.S. dollars and 26.4% in constant currency. Retail comp sales including e-commerce decreased 26% in U.S. dollars and 25% in constant currency.
- Licensing revenues increased 22.7% in U.S. dollars.
Operating Earnings. GAAP earnings from operations for the fourth quarter of fiscal 2020 increased 44.6% to $96.5 million (including a $1.8 million unfavorable currency translation impact), compared to $66.7 million in the same prior-year quarter. GAAP operating margin in the fourth quarter increased 350 basis points to 11.5%, compared to 8.0% in the same prior-year quarter, driven primarily by lower logistics costs in Europe and higher initial markups in Europe and Americas Retail. The negative impact of currency on operating margin for the quarter was approximately 20 basis points.
For the fourth quarter of fiscal 2020, adjusted earnings from operations increased 32.2% to $101.7 million, compared to $76.9 million in the same prior-year quarter. Adjusted operating margin increased 290 basis points to 12.1%, compared to 9.2% in the same prior-year quarter, driven primarily by lower logistics costs in Europe and higher initial markups in Europe and Americas Retail.
- Operating margin for the Company’s Americas Retail segment decreased 240 basis points to 6.4% in the fourth quarter of fiscal 2020, from 8.8% in the same prior-year quarter, driven primarily by the unfavorable impact from higher markdowns and negative comparable sales, partially offset by higher initial markups.
- Operating margin for the Company’s Americas Wholesale segment increased 60 basis points to 19.6% in the fourth quarter of fiscal 2020, compared to 19.0% in the same prior-year quarter, driven primarily by lower markdowns, partially offset by overall deleveraging of expenses.
- Operating margin for the Company’s Europe segment increased 790 basis points to 18.9% in the fourth quarter of fiscal 2020, compared to 11.0% in the same prior-year quarter, driven primarily by lower logistics costs, higher initial markups, overall leveraging of expenses as well as lower markdowns.
- Operating margin for the Company’s Asia segment decreased 200 basis points to 1.6% in the fourth quarter of fiscal 2020, from 3.6% in the same prior-year quarter, driven primarily by deleveraging of expenses due mainly to negative comparable sales, partially offset by higher product margins.
- Operating margin for the Company’s Licensing segment increased 30 basis points to 87.1% in the fourth quarter of fiscal 2020, compared to 86.8% in the same prior-year quarter.
Other income, net, was $1.8 million for the fourth quarter of fiscal 2020, compared to $0.5 million in the same prior-year quarter. The change was driven primarily by higher unrealized gains on non-operating assets, partially offset by net unrealized mark-to-market revaluation losses on foreign currency balances compared to net unrealized gains in the same prior-year quarter.
Full Fiscal Year Results
For the fiscal year ended February 1, 2020, the Company recorded GAAP net earnings of $96.0 million, a 580.7% increase compared to $14.1 million for the fiscal year ended February 2, 2019. GAAP diluted earnings per share increased 731.3% to $1.33 for the fiscal year ended February 1, 2020, compared to $0.16 in the prior year. The Company estimates that the share buybacks offset by the convert transaction had a net positive impact of $0.06, or 37.5%, on GAAP diluted earnings per share and currency had a negative impact of $0.07 on diluted earnings per share for the fiscal year ended February 1, 2020.
For the fiscal year ended February 1, 2020, the Company recorded adjusted net earnings of $105.0 million, a 30.6% increase compared to $80.4 million for the fiscal year ended February 2, 2019. Adjusted diluted earnings per share increased 48.0% to $1.45, compared to $0.98 for the prior year. The Company estimates that the share buybacks offset by the convert transaction had a positive impact of $0.14, or 14.3%, on adjusted diluted earnings per share in fiscal 2020.
Net Revenue. Total net revenue for fiscal 2020 increased 2.6% to $2.68 billion, compared to $2.61 billion in the prior year. In constant currency, net revenue increased by 5.4%.
- Americas Retail revenues decreased 1.6% in U.S. dollars and 1.3% in constant currency. Retail comp sales including e-commerce were relatively flat in U.S. dollars and constant currency.
- Americas Wholesale revenues increased 9.1% in U.S. dollars and 9.7% in constant currency.
- Europe revenues increased 9.2% in U.S. dollars and 14.1% in constant currency. Retail comp sales including e-commerce were relatively flat in U.S. dollars and increased 4% in constant currency.
- Asia revenues decreased 10.8% in U.S. dollars and 7.5% in constant currency. Retail comp sales including e-commerce decreased 19% in U.S. dollars and 16% in constant currency.
- Licensing revenues increased 3.2% in U.S. dollars.
Operating Earnings. GAAP earnings from operations for fiscal 2020 increased 169.4% to $140.7 million (including a $2.8 million unfavorable currency translation impact), compared to $52.2 million in the prior year. GAAP operating margin in fiscal 2020 increased 330 basis points to 5.3%, compared to 2.0% in the prior year, driven primarily by the European Commission fine that was incurred in the prior year and the favorable impact from higher initial markups in Europe and Americas Retail. The impact of currency on operating margin for fiscal 2020 was minimal.
For the fiscal year ended February 1, 2020, adjusted earnings from operations increased 29.9% to $150.2 million, compared to $115.6 million for the fiscal year ended February 2, 2019. Adjusted operating margin increased 120 basis points to 5.6% for the fiscal year ended February 1, 2020, compared to 4.4% in the prior year, driven primarily by the favorable impact from higher initial markups in Europe and Americas Retail.
- Operating margin for the Company’s Americas Retail segment decreased 60 basis points to 2.7% in fiscal 2020, compared to 3.3% in the prior year, driven primarily by the unfavorable impact from higher markdowns and store payroll pressures, partially offset by higher initial markups.
- Operating margin for the Company’s Americas Wholesale segment increased 160 basis points to 19.1% in fiscal 2020, compared to 17.5% in the prior year. The increase in operating margin was due primarily to lower markdowns and higher initial markups.
- Operating margin for the Company’s Europe segment increased 560 basis points to 10.7% in fiscal 2020, compared to 5.1% in the prior year. This increase was driven primarily by higher initial markups, lower logistics costs and overall leveraging of expenses.
- Operating margin for the Company’s Asia segment decreased 580 basis points to negative 2.6% in fiscal 2020, from 3.2% in the prior year, driven primarily by deleveraging of expenses due mainly to negative comparable sales and higher markdowns.
- Operating margin for the Company’s Licensing segment decreased 100 basis points to 86.7% in fiscal 2020, from 87.7% in the prior year.
Other expense, net, was $2.5 million for fiscal 2020, compared to $6.6 million in the prior year. The change was due primarily to net unrealized gains on non-operating assets compared to unrealized losses in the prior year and lower net unrealized mark-to-market revaluations losses on foreign currency balances, partially offset by our proportionate share of net losses related to our minority investment in a privately-held apparel company and lower net mark-to-market gains on revaluation of foreign exchange currency contracts.
Recent Developments
The outbreak of the coronavirus (or “COVID-19”) is having a material impact on the Company’s financial performance. The outbreak is ongoing and dynamic in nature and, to date, the Company has experienced temporary closures in key regions globally, along with other major retailers. The extent and duration of the crisis remains uncertain and may impact consumer purchasing activity throughout the year if disruptions continue. We are monitoring the situation closely with regards to our employees, consumers and supply chain. Given the dynamic situation, we have not provided guidance for the first quarter ending May 2, 2020 or the full fiscal year ending January 30, 2021.
Due to the developing situation, the results of the first quarter ending May 2, 2020 and the full fiscal year ending January 30, 2021 could be impacted in ways we are not able to predict today, including, but not limited to, non-cash write-downs and impairments; unrealized gains or losses related to investments; foreign currency fluctuations; and collections of accounts receivables.
During March 2020, as a precautionary measure to ensure financial flexibility and maintain maximum liquidity in response to the coronavirus outbreak, the Company has drawn down approximately $212 million under certain of its credit facilities in the U.S., Canada and Europe. In addition, in light of the current uncertain situation, the Company has decided to postpone its decision related to the potential declaration of a quarterly cash dividend for the first quarter of fiscal 2021.
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 and fiscal year ended February 1, 2020, the adjusted results exclude the impact of asset impairment charges, certain professional service and legal fees and related (credits) costs, separation charges related to the departure of our former CEO, non-cash amortization of debt discount on our convertible senior notes, and the applicable tax effects of these adjustments as well as the impact from changes in the tax law on deferred taxes in certain tax jurisdictions, net tax settlements and adjustments to specific uncertain tax positions, where applicable. For the three months and fiscal year ended February 2, 2019, the adjusted results exclude the impact of asset impairment charges, net gains on lease terminations, charges related to the European Commission fine, separation charges related to the departure of our former CEO, certain professional service and legal fees and related costs, the applicable tax effects of these adjustments, and revisions to provisional amounts previously recorded related to the enactment of the Tax Reform, 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, comparable sales 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.
