Victor Herrero - Chief Executive Officer Sandeep Reddy - Chief Financial Officer

Randy Konik - Jefferies Omar Saad - Evercore David Buckley - Cowen & Company Dana Telsey - Telsey Advisors

Good day, everyone and welcome to the Guess? First Quarter Fiscal 2018 Earnings Conference Call. On the call are Victor Herrero, 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 a 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 by the SEC. I will now turn the call over to Victor Herrero.

Good afternoon, everyone. As you saw in our earnings release today, we reported that our revenue growth, adjusted first quarter operating margin and adjusted earnings per share all finished better than the high end of our guidance. We are pleased that our first quarter results showed a continuing trend of strong international results, because our European and Asian regions performed well while we made progress on reducing our store footprint in the Americas retail business. Again, it is important to note that as of the last year, the U.S. represents only 38% of our global business and is expected to be smaller as we shrink our footprint there. Let me start by discussing Europe. Revenues for the quarter grew 23% in U.S. dollars and 29% in constant currency, showing continued momentum from successful implementation of our strategic initiatives to elevate the quality of our sales and merchandising organization. The growth was driven by new store openings, comps including e-commerce, up 5% in U.S. dollars and up 11% in constant currency as well as wholesale revenue growth. We are especially pleased with the performance of our European wholesale business. The recently closed fall winter 2017 order book is showing a low double-digit constant currency increase, a significant acceleration from the previous two seasons, which were up in the low single-digits. This increase was driven primarily by improvement in same door sales, as we are beginning to see evidence that the strong comp performance in our directly operated retail stores over the past few seasons is reflecting in our wholesale channel as well. This is a result of our strategic initiatives to revitalize the wholesale channel by applying the same principles that are driving our retail channel. During the quarter, we opened 18 directly operated stores in the region on a net basis. We added new stores to our fleet in Italy, France, Spain, Portugal, UK, Germany, Belgium, Sweden, Turkey and Poland. Based on the strong performance of the stores we have opened so far, we have decided to accelerate our store opening in Europe from 60 to 70 stores this fiscal year. Most importantly, the adjusted operating margin of the European segment improved 890 basis points in the quarter, continuing the margin improvement that we have seen for four consecutive quarters now. Moving to Asia, first quarter revenues were up 17% in U.S. dollar and 16% in constant currency. Revenue growth in the region was driven by store openings, comps including e-commerce up 4% in U.S. dollar and 2% in constant currency. This includes a strong performance in Greater China despite the negative impact – timing impact of an earlier Chinese New Year that benefits fourth quarter of last year. Very importantly, the adjusted operating margins of the Asian segment improved 60 basis points in the quarter, marking the second consecutive quarter where we have experienced margin improvement in Asia. With the evidence of consistent revenue growth and improving profitability, we are beginning to reap the returns of our investment in the infrastructure we built in Asia. I believe that we are executing well on our strategic initiative to build a major business in Asia. Finally, some color on the Americas which includes the U.S., Canada, Mexico and Brazil. This is certainly the region where we face structural challenges, like many in the industry and we are taking proactive steps to address them. Americas Retail revenues and comparable sales, including e-commerce, for the quarter decreased 15% in U.S. dollar and in constant currency. This decline was driven by steep declines in traffic, and to a lesser extent, by lower average unit retail prices as well as softness in our e-commerce business. We made progress on our store closure plan in U.S. and Canada and closed 14 stores in the quarter. We remain on target to close 60 stores this year. In addition, as more than half of our leases will expire or have kick-out clauses in the next 3 years, we have a lot of flexibility to continue with the closure path this year to further improve profitability. If the structural changes in the retail environment do not improve materially, our store count in the U.S. and Canada in 3 to 4 years will be below 300 stores. Americas Wholesale revenue grew 6% in U.S. dollar and 8% in constant currency driven by growth in both the U.S. and Mexico in the quarter partially assisted by the timing of some shipments. I am very pleased at the relative stabilization of the wholesale channel in the past couple of quarters and believe we remain on track with our projection for the year. Before I conclude my remarks, I want to give you some more color on three important topics: number one, progress on our supply chain initiative; number two, actions we are taking to enhance the strength of our brand globally; and number three, actions to grow our digital footprint and engage our current and future customers. Supply chain, we are executing on our supply chain initiatives globally to drive IMU by way of product cost improvement. The estimated cost saving from this initiative is expected to be $24 million this year. Enhancing the strength of the brand, if there is one word Guess? has been associated with is sexy. Sexy is being more broadly interpreted where anyone can be sexy. Authenticity is seen and deemed real is more important than being perfect. It’s all about building a connection with your audience based on honesty and directness. People aren’t just buying our product. They are buying a mindset and an experience. Millennial and Gen Z consumer is seeking purpose-driven brands whose values align with their own. As always, we are adapting to this changing environment. Actions to grow our digital footprint, transition all our website to become a state-of-the-art responsive site, enhancing user experience by reducing the numbers of navigation steps and increasing the speed of the website in moving from the landing page to the final purchase, develop customer experience and enhancing loyalty programs with mobile app integration to provide maximum value to the mobile-connected shopper, upgrade omni-channel capabilities with robust buy online, pickup in the store integration and shop local technology, continue to partner with marketplace like Tmall, JD and vip.com in China, La Redoute and Otto in Europe and Amazon in the U.S. and Canada. Finally, I want to tell you in – that in first quarter, we repurchased 1.5 million shares of our stock for $80 million. As I said before, we have the financial wherewithal to finance our company’s aggressive growth in Europe and in Asia, to pay a healthy dividend to our shareholders and opportunistically buyback shares. I strongly believe in the future of the company and that’s why I continue to reinvest all my Guess? dividends in purchasing Guess? stock. Sandeep?

Thank you, Victor and good afternoon. During this conference call, our comments reference certain non-GAAP adjusted measures. Please refer to today’s earnings release for GAAP reconciliations or descriptions of such measures. First quarter revenues were $459 million, up 2% in U.S. dollars and 4% in constant currency versus prior year. I would like to highlight that this was the third consecutive quarter of revenue growth and revenues finished above the high end of our guidance. Total company gross margin decreased 30 basis points to 31.5%, as higher IMUs were more than offset by the negative impact of occupancy de-leverage. SG&A as a percentage of sales decreased by 40 basis points, mainly driven by overall leveraging. During the first quarter of fiscal 2018, we recorded asset impairment charges of $2.8 million related to store impairments, primarily in the Americas. Adjusted operating loss for the first quarter was $23 million. Adjusted operating margin finished up 10 basis points at negative 5%, including the negative impact of foreign currency of roughly 30 basis points. Please refer to our press release from today for additional information on operating margins by segment. Our first quarter adjusted tax rate was 3%, down from 19% last year. Adjusted diluted loss per share finished above the high end of our guidance at $0.24. This compares to adjusted diluted loss per share of $0.23 in last year’s first quarter. The net favorable impact of currency on loss per share in the quarter was roughly $0.03, in line with our guidance. Moving on to the balance sheet, accounts receivable was up 9% in U.S. dollars and 13% in constant currency. Inventories were $403 million, up 12% in U.S. dollars and 16% in constant currency versus last year, marking a sequential improvement versus the prior quarter. The increase in inventory is driven entirely by Europe and Asia to support their revenue growth plans, including some timing of receipts for new store openings. We have significantly reduced receipts of inventory in North America as we reduced our footprint in this region. Free cash flow was negative $49 million, essentially flat with the prior year. We ended the quarter with cash and cash equivalents of $316 million compared to last year’s $427 million. Cash less debt, at the end of the first quarter was $293 million compared to $400 million last year. Moving on to the guidance, I should point out that our outlook for the second quarter of fiscal 2018 and the full year of fiscal 2018 does not assume any restructuring or additional 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. Excluding currency impacts, the top end of our guidance for the year reflects 7% adjusted EPS growth and operating margin improvement of 20 basis points, as strength in the Europe and Asia business is expected to more than offset the weakness in the Americas Retail segment. For the second quarter of fiscal 2018, we expect revenues for the quarter to be up 3.5% to 5.5% in constant currency, driven by expected strong growth in Europe and Asia, partially offset by an expected decline in Americas Retail. At prevailing exchange rates, we estimate that currency will be roughly a 1.5 percentage point headwind on consolidated revenue growth for the quarter. Our gross margin is expected to be up slightly due to the IMU improvement from our supply chain initiatives. The SG&A rate is expected to be up compared to last year, primarily due to de-leverage in the Americas and some unfavorable timing of expenses. We are planning an operating margin for the quarter between 2.2% and 3%, including the impact of currency headwind of roughly 50 basis points. Earnings per share is planned in the range of $0.08 per share to $0.11 per share and does not assume any further share repurchases. Currency is expected to be a $0.04 negative impact on earnings per share in the quarter. Excluding currency impacts, the top end of our guidance for the quarter reflects flat adjusted EPS and operating margin improvement of 50 basis points for the quarter. Our tax rate for the second quarter is estimated to be 40%. We expect consolidated revenues for the year to be up between 4% and 5.5% in constant currency. It should be noted that we expect an increase in revenues even after closing many stores in the Americas. At prevailing exchange rates, we estimate that currency will be roughly 0.5 percentage point headwind 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. The SG&A rate is expected to be up for the year due to de-leverage in the Americas business and the reset of incentive compensation. Our tax rate for the year is estimated to be 40%. We are planning an adjusted operating margin between 2.3% and 3%, including the impact of currency headwind of roughly 10 basis points and our guidance assumes foreign currencies remain roughly at prevailing rates. Adjusted earnings per share is planned in the range of $0.34 and $0.44 per share, as we are raising estimates from our prior guidance of $0.28 to $0.40 per share for the year. The earnings per share guidance includes a currency headwind of roughly $0.03 per share. CapEx for the year is expected to range from $85 million to $95 million as we continue to invest in our retail expansion in Europe and Asia and have technology infrastructure to support that long-term growth. 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 June 7, 2017. In conclusion, we are very pleased with our start to the year and expect our Europe and Asia businesses to continue growing sales and profit margins for the remainder of the year, while we shrink our footprint in the Americas as we seek to restore profitability in that business. With that, I will conclude the company’s remarks and open the call up for your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Randy Konik of Jefferies. Go ahead Rany. Your line is now open.

Hi. Thanks a lot. Sandeep, you guys did a good job on the – ring fencing this U.S. business and really extending into this – Europe and Asia, so I guess my question is if we think about out over the medium-term, how should we be thinking about what normalized margins should look like in the more profitable higher return geographies of Europe and Asia. And then where do you think – how do we think about kind of the bottoming process of margin structure in the United States market? Thanks.

Hi Randy, so I think we are really pleased with where things are going with Europe and Asia, obviously because we have had a few consecutive quarters of sequential margin improvement. And as we said on the prepared remarks, we expect this sequential improvement to continue during the remainder of the year. So we expected this to be a driver of long-term operating margin in the total company as we drive towards our long-term operating margin goal of 7.5%. The problem honestly, as you can see has been the impact of the Americas business on our total operating margin. And the de-leverage that we were experiencing with the negative comps have definitely put pressure on the margins of the total company. However, I think we are taking profitability improvement measures, whether it’s IMU improvement, whether it’s looking at opportunities to close stores like we are doing very aggressively right now. And we are looking at cost structure improvements as well whether its rent reductions or its reducing our structural costs that support the Americas Retail business as quickly as we can. But I think the key would be to stabilize the comp degradation that’s been happening. And as soon as we can actually get one of two things to happen, the stabilization of the comps in the Americas or shrink the business in relative terms to a much smaller level than it is right now of the total company, the operating margins of the total company will really be – strongly on their path to expansion toward the 7.5% margin goal we have.

Great. So I guess, my other question I believe it was said that – I believe, U.S. you said about 38%. Are you thinking U.S. long-term could be as low as 25%? And in your long-term thinking on operating margin structure, does that assume kind of a double-digit margin basically in Europe and Asia and then a low single-digit or a mid single-digit margin in the U.S. market? Just curious there. Thanks.

Yes. I think let me take the first part of the question, which was really the share of the U.S. in the total portfolio. Rather than getting into a specific number, I would just say you are in the ballpark in terms of the share of the U.S. significantly reducing compared to where it is right now. So let’s say, a quarter as a round number would be about a right proportion over time, but not immediately but over time. And I think in terms of long-term operating margin, if we are thinking about 7.5% for the total company, it’s obviously going to come with stronger margins in Europe and Asia, which are already expanding right now relative to where they are. And the European historical margins are unlikely to get back to their peak levels, which was probably in the early 20s just because that was a wholesale-driven business at that time and now we are more of a retail and wholesale balanced business. But it should definitely improve from where it is right now. And so overall, we would expect the European and the Asian businesses to be more profitable margin businesses. And I think the Americas we will be looking to drive it towards a profitability level that we can sustain going forward.

Hi, Randy. I want to add something on that one is regarding the 38% that the – of our total sales in the U.S., I think that we are in 90 markets. And having one market with 38% of the sales is something that we should improve and having much more equal market share of each of the markets. So when I arrived, I think it was above 40%. Right now, we are in 38% for the last fiscal year ‘17. And we will continue, I think, as this trend looks like it’s going to go down and basically try to be much more balanced in terms of market representation for our brand.

That’s very helpful. Thanks, guys.

Thanks.

We have our next question. Our next question comes from Omar Saad of Evercore. Go ahead, Omar. Your line is now open.

Thanks for taking my question. Victor, I was hoping you could maybe elaborate a little bit on some of your comments in the prepared remarks around the role of sexy and how the culture has evolved a little bit. And help us understand how you are thinking maybe a little bit differently about the brand, the positioning in light of those comments you made. And especially in the context of the variation in the brand’s performance in North America versus Europe versus Asia, is there a different consumer perception out there that’s not matching – of the brand that’s not matching across the globe that you need to kind of straighten out or is there something else going on there? Thanks.

Hi, Omar. What is very important is what I was saying – what we have said in the press release note that it is crucial to stay connected with our customer and their aspirations. And this is essential for us. I mean, we are not changing any brand perception or whatever. What we are seeing is reality. I think we have to continue doing what we were doing for the last 35 years. We are a sexy company. We will continue being a sexy company. And basically, what we started to do at the – 2 years ago is to have a much more comprehensive collection where we have – basically our collection will be much more outfitted and also much more in terms of – we will have the core value product and also we will have some directional pieces. Directional pieces means trendy pieces that we should not miss as we are as well a fashion company. So, I think that basically what we are going to continue is we have a strong value – core value proposition, which is sexy to be very edgy and to continue being trendy.

Okay, that’s helpful. And then you are accelerating stores in Europe, you sounded like you are going to potentially accelerate store closures in North America. Help us understand – I think you are doing a lot of the same tactics and changes and the evolution of the business across the globe. Help us understand what you are seeing in those two different markets, Asia as well, I guess, that leads you to the kind of conclusion where you are going to accelerate the stores in one market, but maybe closing more at home here?

Yes. The point is a little bit coming back to Randy’s question is that, I mean, at the end of the day here, we have two markets, two main markets, which is U.S. and Canada. And we are closing particular stores in these two particular markets, because maybe at this moment, with all these structural challenges, we need to do that. But if, for example, Europe as we consider as a market, I mean, we have more than 20 markets. And we have great potential. And I think we were underdeveloped on some of the markets. Like for example, I think we have a lot of potential in Russia. We have a lot of potential in Poland. We have a lot of potential in Eastern European countries as well also in Turkey, where we are underpenetrated. So I think that we don’t have to think about Europe as a market. We have to see Europe as, I’ll call, a bunch of markets that we have a lot of potential and maybe that in the past we didn’t really see that potential. And regarding Asia, I think we have two main markets, one, which is Korea, which we have a big, strong presence, a lot of relevance. And also we have China. And in China, basically, it’s one market. And out of these 35 new openings, most of those openings will be in China. So in terms of store openings, we will – for this fiscal year ‘18, the number one country in opening stores will be China, much more than Europe per each market. And at the same time, let me tell you one other thing regarding China is that we have to always take into consideration the extreme or the huge potential that we have with the e-commerce and also with our partners in marketplace, which is mainly Tmall, JD.com and vip.com. And I think we are seeing a lot of potential and we are seeing kind of substantial growth in these three marketplaces.

Thank you. Good luck.

Thank you.

And our next question comes from John Kernan of Cowen and Company. Go ahead, John. Your line is now open.

Hi, guys. This is David Buckley on for John. Thanks for taking our question. Congrats on another good quarter of sales growth in Asia and Europe. I was just wondering in terms of Asia, how close are you to consistent operating profit in that region? What level of comp do you need to leverage expenses?

So David, I think on Asia, we are really pleased with what we’ve been seeing in the last couple of quarters. You saw Q4 was very strong. It was benefited a little bit by the timing of Chinese New Year and we saw margin expansion in Q4 last year. And this quarter, it’s actually especially pleasing that we managed to get margin expansion despite the negative impact of the timing of Chinese New Year. So, we feel pretty good that we are on a consistent path to improving margins and this momentum should be building as we are going through the next three quarters of the year as well. And that’s why we said we expect to see expanding margins for the balance of the year too. And longer term, I think I said it to Randy in the earlier comments as well, we expect both the Asian and the European segments to be definitely the most profitable segments in our business going forward.

Okay, great. That’s very helpful, Sandeep. Thanks. And then just back to operating margin. In Asia and Europe, should we expect expansion in both regions throughout the rest of the year?

Yes. That’s what I said in the prepared remarks and I am confirming that. I think it is going to get probably more and more difficult as we lap the previous margin expansions, but – and so Europe started a bit earlier, because I think on the second half of last year, we had pretty good margin expansion. So as we move into the second half, the level of expansion maybe more challenged, but the direction is what we are expecting to be positive as we go through.

Excellent. Thank you very much. Best of luck guys.

Thank you.

And then our next question comes from Dana Telsey of Telsey Advisors. Go ahead. Your line is now open.

Good afternoon everyone. As you think about the store base in the Americas, how are the conversations going with the landlords and how do you see that in – the change in rent expense, store closures, timing how is that all working? And then also on another note, on the wholesale business, what are you seeing in terms of the difference between the Americas and Europe in terms of wholesale orders and sales trends in either – in Europe and what you are seeing in the Americas? Thank you.

Basically, let me answer you the question about the real estate. I think we are seeing some opportunities at this moment, but what is important is what I said in my remarks now is that, I mean half of our fleet will be either with a lease expiration or a kick-out clause in the next coming – in the next 3 years. So I think we have plenty of opportunity to close the stores. And also what is important to say is that we are giving you a number in terms of in 3 years, 4 years we could be in around 300 stores between U.S. and Canada. Of course I think with the landlords, what we are trying to do is working with them, trying that they understand the reality of the market and the structural challenges that we are facing, not only us, I think most of the industry and trying to work with them on a win-win situation and trying to understand how we can try to find a solution with – to the situation we have at this moment.

And so I think on the wholesale question that you asked Dana, we are really pleased with what we are seeing in the wholesale business overall. But specifically on Europe, I think it’s really gratifying to see the acceleration that we saw on the fall-winter ‘17 order book. We have been saying for a while that the performance in our retail stores should be a leading indicator of what’s going to happen in the wholesale channel as well. And sure enough, I think it’s – we saw some improving momentum and stabilization in the past couple of seasons and now a good acceleration in the low double-digit increase for the fall-winter ‘17 book. So – and this was actually driven by same-door buys, which is really the equivalent of comps in retail stores. So it’s showing that the productivity of our wholesale customers is improving, their profitability is improving. And therefore, that’s more of a sustainable model for them and for us as we go forward. Then I think I will switch to the Americas. And Americas is a tale of two different markets. So there is the United States, which is a meaningful piece of our wholesale business in the Americas, but Canada and Mexico are also fairly important. And what we have seen is Canada had very strong performance last year. We were very pleased with it. And I think we are expecting Canada to be very – to be good this year as well and pretty stable. Mexico, this particular quarter, was also very strong. And we are very happy with our partners, our joint venture partners over there that we have had for over 10 years. And the performance of that business also is quite strong. So it really depends on which market you are talking about on wholesale. But overall, we are pleased with the fact that the channel is actually beginning to do better than where it was previously.

[Operator Instructions]

I think if there are no other questions at this time, we can close the call.

Thank you. Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for your participation. You may now disconnect.