Victor Herrero - CEO Sandeep Reddy - CFO

Omar Saad - Evercore ISI John Kernan - Cowen & Company Susan Anderson - B. Riley Janine Stichter - Jefferies

Good day, everyone and welcome to the Guess First Quarter Fiscal 2019 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 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 Mr. Victor Herrero.

Good afternoon, everyone. Today, we reported that our sales, our adjusted operating profit margin, and our adjusted earnings per share for the first quarter all finished above the high end of our guidance. And as Sandeep will detail later, we are increasing our full-year guidance for the current fiscal year. We are pleased that our first quarter results continued the trend of a strong sales growth in our European and Asian region, while we made significant progress on improving our profitability in Americas retail. The turnaround in the company results that started last year is on track, and we will continue to allocate the majority of our capital investment to Europe and Asia where the returns are superior. Let’s start in Europe. European revenues for the quarter grew 24% in US dollar and 9% in constant currency, continuing the momentum from the successful implementation of our strategic initiatives to elevate the quality of our sales and merchandising organization. The growth was driven by new store openings by an increase in wholesale revenues and by positive comps, including e-commerce, up 15% in US dollars and up 1% in constant currency. The comp increase was slightly above our expectation and marks the 11th consecutive quarter of positive comp for the European region, and this was despite a very soft start to the quarter with adverse weather and unfavorable impact from an earlier Easter this year. During the quarter, we opened seven directly operated stores in Europe on a net basis, including Italy, France, Spain, Turkey, Finland, Russia, and Poland. Our European wholesale business continued to be very strong. We have now closed the wholesale order book for fall/winter 2018 and locked our third consecutive season of double digit growth in European wholesale extending our progress on the strategic initiative to revitalize the wholesale China. European segment margin contracted by 930 basis points, primarily due to the pressure of incremental distribution costs related to the move of our European distribution center to Venlo. The pressure from these distribution costs were higher than expected as we continued to invest in adapting our long-term logistics and distribution infrastructure to the volume growth in the region being ahead of initial plans. Moving to Asia, first quarter revenues were up 33% in US dollar and 25% in constant currency. Revenue growth in the region was driven by positive comps, including e-commerce, up 22% in US dollars and up 15% in constant currency and by new store openings. These positive comps were helped by the favorable impact from the shift in timing of Chinese New Year. Performance in the quarter was particularly strong in Greater China and Japan, even after excluding the impact of the shift in timing of Chinese New Year. During the quarter, we opened 12 stores in Asia on a net basis, including 8 directly operated stores in China. We opened stores in Hangzhou in the East, Harbin in the Northeast, Shiyan in the Northwest, Wenzhou in the South Central; and Shenzhen, Fuzhou, and Haikou in the Southeast. I want to tell you more about the store we opened in Hangzhou. The store is in [indiscernible], the first shopping mall opened by Alibaba, adjacent to their headquarters in Hangzhou. Our partnership with Alibaba continues to be very strong. And as I mentioned on previous call, we are thrilled with our growth on their Tmall platform. We have been chosen by Alibaba as one of the few international brand partners with existing physical stores for this new mall. Most of their brands in the mall are online-only brands. This is a unique opportunity for us to collaborate with Alibaba in this experiment in experiential physical retail that we believe will provide us consumer insight that will enhance our e-commerce business, both with them on Tmall and in our physical stores. Moving to a true omni-channel model that integrates both the offline and an online experience. Finally, we are very pleased that the operating margins of the Asia segment improved 430 basis points in the quarter making this the sixth consecutive quarter of margin expansion in Asia. As you can see, we are executing very well on our strategic initiatives to build a major business in Asia. Turning to Americas Retail, revenue for the quarter decreased 1% in US dollar and 2% in constant currency. Comp sales, including e-commerce, for the quarter, were up 2% in US dollar and 1% in constant currency. While the positive comps in the quarter were very exciting, what was very satisfying for us is that we achieved these comps while being significantly less promotional than last year with higher AURs. We made sequentially even greater progress this quarter on improving our profitability in Americas Retail than in the fourth quarter and delivered a 910 basis point improvement in operating margins. This was achieved through lower markdowns, better IMUs, and negotiating rent reductions. As a reminder, almost two-third of our leases have either a kickout [ph] close or a lease expiration in the next three years, giving us an ample flexibility to continue to negotiate rent reductions. I now want to share something that we are very excited about. We are consolidating multiple ongoing digital efforts across the globe to launch the Guess? Digital Office, which will be our new digital and technology innovation hub. The idea of the Guess? Digital Office is to embrace the way technology is transforming the new retail environment, adapting innovative solutions that leverage data intelligence on products and customer behavior to make the purchase and consumer experience more seamless. This global digital office is such a higher strategic importance that will report directly to me with technological oversight from our CIO. Another exciting update I would like to share is an innovative new concept called Farmers Market, which was a two-day event held in May in Los Angeles. We messaged the event through social media and began seeing lines from the night before. The event presents our newest capsule collection, Farmers Market. This vintage has inspired throwback collection to cues from Guess? 80s and 90s archives. The collections sold out completely inside the two day. Events like Farmers Market or ComplexCon which we participated last year are unique opportunities to showcase our brand and connect with Gen Zs and Millennials. We fully intend to do more events of this nature to build on the excitement around the brand. One more thing about Q1. During the quarter, we repurchased 1.5 million shares for approximately USD24 million. As I have told you before, we have the financial strength to seize the opportunity when we believe that our stock is trading below its intrinsic value. Looking forward to the second quarter, operating profit for Americas Retail are expected to continue to improve and both Europe and Asia are expected to continue to generate very strong double digit top line growth with a lot of runway remaining in both markets. Sandeep?

Thank you, Victor 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. First quarter revenues were $521 million, up 15% in US dollars and 8% in constant currency versus the prior quarter. I would like to highlight that this was a seventh consecutive quarter of revenue growth. Total company gross margin increased 160 basis points to 33.4%, driven by higher IMUs, less markdowns and lower rents, partially offset by the negative impact of occupancy de-leverage from higher European logistics costs, related to the start up of our new distribution center in Venlo. This was our fourth consecutive quarter of gross margin expansion for the company. Adjusted SG&A as a percentage of sales, increased by 60 basis points, mainly driven by an increase in advertising expenses and pressure from distribution expenses in Europe. Adjusted operating loss for the first quarter was $20 million, an improvement of 8% versus adjusted operating loss last year, primarily driven by sales growth and gross margin expansion, offset by the aforementioned increase in SG&A. Adjusted operating margin finished 100 basis points better than last year at minus 3.9%, 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, including fiscal 2018 segments restated for comparable purposes. Our first quarter adjusted tax rate was 23%, up from 3% last year. Adjusted diluted loss per share finished better than the high end of our guidance at $0.23. This represents a 4% improvement compared to adjusted diluted loss per share of $0.24 in last year's first quarter. The unfavorable impact of currency on loss per share in the quarter was roughly $0.03. Moving on to the balance sheet, accounts receivable was $243 million, up 26% in US dollars and 17% in constant currency, primarily driven by growth in wholesale revenues. Inventories were $435 million, up 8% in US dollars and 2% in constant currency versus last year. This was another sequential improvement in constant currency versus the prior quarter. The net increase in inventory is driven by Europe and Asia to support revenue growth plans as well as early receipts related to the transition to our new distribution center in Venlo. Free cash flow was negative $87 million, a reduction of $38 million versus the negative $49 million in the prior, driven by changes in working capital. We ended the quarter with cash and cash equivalents of $232 million, compared to last year’s $316 million. Cash less debt at the end of the first quarter was $192 million compared to $293 million last year. This is after having returned $75 million in dividends and $56 million in cash paid for share repurchases to shareholders in the last 12 months. At the end of the quarter, we still have $375 million available after $500 million share purchase plan, previously approved by our board. Since the start of our dividend program in 2007, we have returned over $1.4 billion to our shareholders in the form of dividends and share buybacks. Moving on to the guidance, I should point out that our outlook for the second quarter and full year fiscal 2019 does not assume any asset impairment charges. The outlook includes the adoption of a new revenue standard, which became effective in the first quarter. Also, guidance for revenue and comp sales for the total company and by segment is included in a supplemental table attached to our earnings release. For the second quarter of fiscal 2019, we expect revenues for the quarter to be up 11% to 12.5% in constant currency, driven by expected strong growth in Europe and Asia. At prevailing exchange rates, we estimate that currency will be roughly a 3 percentage point tailwind on consolidated revenue growth for the quarter. Our gross margin is expected to be up due to the IMU improvement from our supply chain initiatives, lower markdowns, lower rents and the favorable impact from foreign exchange, partially offset by pressure from distribution costs related to our move to the new distribution center in Europe. The SG&A rate is expected to be up compared to last year, primarily due to an increase investment in digital marketing and advertising as well especially from the aforementioned European distribution cost. We are planning an operating margin for the quarter between 5% and 5.5% with a 60 basis point tailwind from currency. Earnings per share is planned in the range of $0.27 per share to $0.30 per share and does not assume any further share buybacks. Excluding currency, this represents a 16% increase in adjusted EPS and a 50 basis point improvement in adjusted operating margin for the quarter at the high end of guidance. Our tax rate for the second quarter is estimated to be 25%. We expect consolidated revenues for the year to be up between 6.5% and 7.5% in constant currency. It should be noted that we expect an increase in revenues even after closing stores in the Americas and even after taking into account the comparative negative impact from the 53-week in the prior year. At prevailing exchange rates, we estimate that currency will be a roughly 2 percentage point tailwind 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, lower markdowns, lower rents and the favorable impact of currency, partially offset by the pressure from distribution costs in Europe. The SG&A rate is expected to be up for the year due to increase in investment of digital marketing and advertising and pressure from distribution expenses. Our tax rate for the year is estimated to be 25%. This includes the benefits of our -- to our effective tax rate from the tax reform. We are planning our adjusted operating margin between 4.2% and 4.6%, including the impact of a currency tailwind of roughly 10 basis points and our guidance assumes foreign currencies remain roughly at prevailing rates. We are raising our adjusted earnings per share guidance for the year to a range of $0.88 to $0.99 cents per share. The earnings per share guidance includes a currency tailwind of roughly $0.10 per share. This compares to our prior guidance of $0.86 to $0.98, which included $0.15 of currency tailwinds. In other words, we have effectively increased our guidance by $0.06 at the top end, excluding the impact of currency. The higher end of our new guidance represents a 41% increase over last year's adjusted EPS. Excluding currency impacts, the higher end of our guidance represents a 27% increase in adjusted EPS and represents an adjusted operating margin improvement of 80 basis points. 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 in our 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 13, 2018. With that, I will conclude the company's remarks and open the call up for your questions.

[Operator Instructions] And we have our first question from Omar Saad with Evercore ISI.

Hey, good evening. Thanks for taking my question. Nice to see the progress in the business. Before I ask a fundamental question, I wanted to ask if there's any update on the controversial issue around some previous Guess? models? I think there was an internal investigation that was happening. Any kind of clarity you could provide there would be really helpful?

Hey, Omar, thank you for asking. Basically, as we mentioned on our last call, the investigation is still ongoing, and we are not having further comments.

Shall I proceed to the next question?

Yes, please.

Thank you. Our next question comes from John Kernan with Cowen & Company.

Good afternoon, Victor, Sandeep. Congrats on the momentum. Just wanted to ask a question on Americas Retail, obviously a pretty massive change there year-over-year, positive 2 comp versus down 15 in Q1 last year and the inflection in profitability was very significant as well. So I’m just wondering, Sandeep, what you're embedding in the full fiscal year EPS guidance as it relates to profitability in the North American retail segment at this point? I know you've talked to breakeven, but it feels like you've got an opportunity to do quite better than that at this point?

Yeah. John, I think this is really definitely an area that we feel very pleased. I mean, look at the numbers, we had 9, 10 basis points of margin expansion in the first quarter, and this is after doing 620 basis points of improvement in the fourth quarter, which frankly is a larger revenue quarter. This first quarter is our smallest revenue quarter, so to get the kind of expansion we got in the first quarter was fantastic, and it was driven by a number of good factors. Essentially, all the things that we talked about last year kept on going on. The IMU improvement that we worked on right through the year continued into the first quarter. We got into a much better position with inventories, and therefore markdowns were much less. We were much less promotional. So, the third thing I would say is we've been working very hard on renegotiating rents with our landlords. That's actually helping as well in terms of the bottom line. And then we did close some stores which were unprofitable, and all of that lifted the numbers to the margin expansion that we saw. And if you go back to the last call we did a couple of months ago, we said at that time that with the comp guidance that we had on a full-year basis, if we got to that comp guidance, we actually will get to a point where we can actually get to breakeven on North America retail. Now, if you look at the guidance that we have provided compared to the last time where it was down in the low-single digits, we are guiding from down lows to up lows, so you can see that we've actually raised our topline guidance. So it goes to saying the obvious that we now expect profitability in the Americas Retail segment based on the trends that we're seeing in the business.

Many of you, you've been asking me for the last few quarters when we are going to turn North American business. And I think that at this moment, I think it’s the time where we're turning around a little bit the American business. And I want to let you know as well why I think we are basically at this moment. I think that I mean we've been with product consistency for the last three years. I think the customer or our customer or our new customer is really having -- they like our product. I think we've been extremely careful in terms of what type of promotions we are doing and also I think that what is very important is that we continue to win the total outlook, the visual merchandising, the way that we’ve been doing for three years, we've been very consistent, and also I think, we have a lot of fresh product in the stores. And this is helping us, as well, because I mean you don't have too much clearance, you don't have too much -- too many promotion and the store looks fresh. So, I think all these things plus all these digital marketing efforts that we've been doing for the last three years is starting to pay back in – paying back in North American business.

Okay. That’s helpful. Just on Europe, obviously the change in distribution was pretty dilutive to earnings in the first quarter. I’m just wondering if the year-over-year change in that profitability really was solely due to that change in distribution and that headwind fades into Q2 and beyond.

Yes. So John, I think, let me just talk about the distribution center situation for a bit, because it's actually something where it's a good problem to have in some ways, because our plans in terms of unit volume expansion and revenue growth have been pacing much ahead of what we'd initially planned when we’d actually put the distribution center plan together, and so as we look at what we’ve achieved plus what's in front of us, we now want to make sure that we equip ourselves in terms of infrastructure that has the capacity to fulfill our growth needs. So we're making investments as we go along. We are adjusting our infrastructure to cope with our long-term growth, and sure there's going to be some cost pressure, and yes we have seen this cost pressure in the first quarter, a little bit more than we expected, but we really think it’s just investing for the long term. And so, there could be some unevenness in terms of margin expansion, but we're totally on track for our double digit margins in Europe. It's just a question of the path being uneven because we’re making these investments.

And then finally, just Victor, can you talk to the white space you clearly are seeing in Asia. We’re starting to see not only the top line accelerate, but also the margin profile improved pretty significantly year over year as well. Can you – you’ve obviously learned a lot in your prior role at Inditex. I’m just wondering what your brining to the Guess? brand as it relates to Asia and particularly China. Thank you.

Well, first of all, John, I want to say that we've been six consecutive quarters with margin expansion in Asia. And particularly I think right now, we are starting to see two realities apart of course Korea. Korea has been a very stable business for us for ages and right now, we are seeing two realities, which are Mainland China and Japan and both of them with kind of a good healthy comps and they've been having healthy comps for several quarters. Regarding China, we continue with the same model as we were mentioning to you in the last few quarters. I think store development comes in existing stores and also very strong partnership with the marketplace with Tmall and VIP.com, particularly with Tmall, we open with them as I mentioned in my call, one shopping mall, shop inside the first shopping -- physical shopping mall and we are trying to apply a lot of new technology into the retail shop and I think the partnership with them is stronger and stronger and I'm very pleased to see that partner that I mean, being a foreign company in China, they treat us as a partner, as if we will be really kind of -- they always call us for any particular new projects they have. So I'm very pleased on that one. China, I think is -- has a lot of potential for us in the future and I think we should continue trying to benefit from that.

Our next question comes from Susan Anderson with B. Riley.

I guess, back to the Americas Retail, really nice to see that turn. I was curious what you are seeing in terms of traffic in your stores. Has that been part of the improved drivers? Or it's mainly been AUR? And then also I was kind of curious if the improvement has been across all regions? Or has it been more in the bigger tourist stores?

Yeah. And I think if you look at our business, AURs clearly was a driver and that's why we called out that as one of the drivers of the improved performance that we’re seeing. But what I'll say is traffic even towards the fourth quarter got a bit better in last year and it's been slightly better, but that's really not a huge driver by itself. I think it's just more what Victor talked about earlier, it's the product, it's our consistency, it's our execution. The fact that we're in much better position from an inventory perspective and the newness is basically what’s selling and driving those AURs. And that's really what I would say is key and frankly the performance has been better across the fleet. Tourist stores are less of a drag now, which is across the market, but it's not the only area, it's across the board that we’re doing better.

Great. That's good to hear. And then in Europe, I know there were some weather issues also over there in the first quarter. Just curious kind of did you see -- and good job on the sales growth. But did you see the comps kind of swing very dramatically when weather improved and then also in the second quarter do you feel like that's better positioned with better weather?

Well, I think Susan that weather affected us at the first part of the quarter, but not the second part of the quarter, but we don't -- we didn't see a significant lift on sales during the second part of the quarter But I mean definitely, the first part of the quarter was affected by severe weather. But as well I want to tell you that I think the Easter shift affected us a little bit as well as I mentioned in my call. I think anyways, Europe, the good thing is that we have 30 markets, all the 30 markets are really performing. We are opening starting in seven markets this quarter. We will continue opening some stores. I think what is very, very important to emphasize is that, we’ve been 11 quarters with positive comps. Our e-commerce channel is performing well. Our retail channel is performing well and also our wholesale channel is performing well for several quarters and so we are quite happy and confident with our European business.

Great. That's good to hear. And then last one on the Americas Wholesale segment. I think the op margin was lower driven by the lower gross margin, but sales were up quite a bit. Maybe just if you could give some color on that. That would be great.

Yeah. So Susan, I think you're right. I think the operating margins were a bit lower on pretty strong revenue growth that we had and it’s across the board that we had strong revenue growth. Some of it was a little bit of timing, but a lot of it was pretty strong and this is US, Canada and Mexico are the three major markets there. I think what we had in terms of pressure on the operating margins was from gross margins and we had some old inventory that needed to be moved through. So we just took the action to actually move it through and that put pressure on the margins in the quarter. But if you look at the total size of the business, we're not talking about a lot of money, it’s just -- the margin movement is quite significant on that size business.

[Operator Instructions] And we have our next question from Janine Stichter with Jefferies.

I just wanted to get some more color on Europe. Looks like you tweaked the comp guidance there just slightly downwards. So why don’t you just take the cost in the updated outlook. And then on licensing, any color you can provide there, it looks like excluding the accounting changes, you're guiding down mid-singles for the year. Just any color you can give by product category and when we should see that segment start to impact positively?

Yeah. So Janine, on the comp guidance, yeah, we just took it down a touch. I think we had low single – mid singles last time and I think we have low singles. We're just being cognizant of what's been happening in the marketplace and just moderating our expectations a little bit, but I think we still feel really confident on what the business has actually got in front of it and we feel pretty good about it and that's why if you look at the revenue guidance actually for the entire year, for the company and this is Europe included, you'll note that our revenue guidance for the year went from 5% to 6% in constant currency last time to 6% to 7.5% -- 6.5% to 7.5%. So we took up the total company guidance by a full 1.5 points. And this basically demonstrates our confidence in revenues and it's driven a lot by the way also by Europe because our wholesale business is doing extremely well over there. We had our third consecutive season of double digit revenue increase in the fall/winter ’18 sales campaign and I think some of that momentum is being recognized in the projections that we're giving you right now. So really -- feeling pretty good about revenues in general in Europe. And I think your other question was on licensing. So on licensing, we had a pretty good first quarter. We had plus 23% that we saw reported, but this partly is due to the accounting change on the revenue recognition standard and I think if you adjust for that, we are something like 9% up in the quarter. But I think there was some timing in that number, so I think you kind of expect to actually extrapolate that for the year and that's why, when you look at the full year guidance, it's actually lower than what we have in the first quarter, but I think we feel pretty confident again in the licensing business. It's stabilized as we went through the year last year and the momentum seems pretty good and we're pretty confident in what we're seeing in front of us and it's across the board. It's not one specific product category. It's broad based and I think we've said this before, but it reflects the performance in our other businesses. It's coming through in the licensing business right now.

And just to confirm Janine, do you have any follow-up questions?

No. That’s all. Thank you.

And thank you. And we have no further questions at this time. Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.