Guess(GES) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion for Guess?, Inc. for the first quarter of fiscal 2023 Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Guess?, Inc. as of April 30, 2022, and for the three-month period then ended, including balance sheets, statements of income, comprehensive income, cash flows, and stockholders' equity, along with detailed notes explaining the basis of presentation and significant accounting policies Condensed Consolidated Financial Statements The company's total assets decreased to $2.25 billion as of April 30, 2022, from $2.56 billion as of January 29, 2022, primarily due to a reduction in cash and cash equivalents, while net revenue increased to $593.5 million from $520.0 million in the prior-year period, and net earnings attributable to Guess?, Inc. decreased to $8.0 million from $12.0 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Apr 30, 2022 | Jan 29, 2022 | | :--- | :--- | :--- | | Total Current Assets | $1,023,382 | $1,284,094 | | Cash and cash equivalents | $147,897 | $415,565 | | Inventories | $483,927 | $462,295 | | Total Assets | $2,250,006 | $2,555,628 | | Total Current Liabilities | $758,491 | $817,874 | | Total Liabilities | $1,808,913 | $1,892,485 | | Total Stockholders' Equity | $431,239 | $653,643 | Condensed Consolidated Statement of Income Highlights (in thousands, except per share data) | Metric | Three Months Ended Apr 30, 2022 | Three Months Ended May 1, 2021 | | :--- | :--- | :--- | | Net revenue | $593,473 | $520,002 | | Gross profit | $247,149 | $211,558 | | Earnings from operations | $36,375 | $26,578 | | Net earnings attributable to Guess?, Inc. | $7,970 | $12,006 | | Diluted EPS | $0.12 | $0.18 | - Net cash used in operating activities was $54.6 million for the three months ended April 30, 2022, a slight increase from $53.6 million in the prior-year period. Net cash used in financing activities increased significantly to $176.8 million, primarily due to the purchase of an equity forward contract ($105.0 million) and treasury stock ($81.7 million)[16] Notes to Condensed Consolidated Financial Statements The notes provide detailed explanations of the company's accounting policies and financial results, covering the ongoing business impact of COVID-19, adoption of new accounting guidance for convertible instruments, lease accounting, segment performance, borrowings, share-based compensation, and legal contingencies - The COVID-19 pandemic continued to negatively impact operations, especially in Asia, with temporary store closures and capacity restrictions. The company is also experiencing disruptions in the global supply chain, leading to product delays and higher costs[28][29] - The company adopted new guidance for convertible instruments on January 30, 2022, which simplified the accounting for its 2.00% convertible senior notes, resulting in an increase to the notes' carrying amount and a cumulative adjustment to retained earnings[41][55] Segment Revenue and Operating Earnings (in thousands) | Segment | Net Revenue (Q1'23) | Operating Earnings (Q1'23) | Net Revenue (Q1'22) | Operating Earnings (Q1'22) | | :--- | :--- | :--- | :--- | :--- | | Americas Retail | $166,485 | $14,266 | $155,535 | $20,274 | | Americas Wholesale | $68,357 | $17,397 | $45,430 | $11,555 | | Europe | $276,009 | $17,890 | $241,852 | $4,198 | | Asia | $56,222 | $(3,487) | $55,660 | $(1,808) | | Licensing | $26,400 | $24,444 | $21,525 | $19,431 | - On May 5, 2022, a European subsidiary entered into a new €250 million revolving credit facility, replacing previous short-term borrowing arrangements totaling €120 million[160] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results for the first quarter of fiscal 2023, highlighting a 14.1% increase in net revenue to $593.5 million and a 36.9% increase in operating earnings to $36.4 million compared to the prior-year quarter, covering performance by business segment, foreign currency impact, strategic priorities, and a detailed review of liquidity and capital resources, including a significant $175.0 million accelerated share repurchase program Executive Summary and Results of Operations For Q1 FY2023, total net revenue rose 14.1% (20.6% in constant currency) to $593.5 million, driven by store reopenings and strong wholesale performance, with gross margin improving by 90 basis points to 41.6% and operating margin increasing by 100 basis points to 6.1%, though net earnings attributable to Guess?, Inc. declined 33.6% to $8.0 million, or $0.12 per diluted share, impacted by higher other expenses and a higher effective tax rate Q1 FY2023 vs. Q1 FY2022 Performance | Metric | Q1 FY2023 | Q1 FY2022 | % Change | | :--- | :--- | :--- | :--- | | Net Revenue | $593.5M | $520.0M | +14.1% | | Gross Margin | 41.6% | 40.7% | +90 bps | | Operating Margin | 6.1% | 5.1% | +100 bps | | Net Earnings (to Guess) | $8.0M | $12.0M | -33.6% | | Diluted EPS | $0.12 | $0.18 | -33.3% | - The Europe segment was a key driver of performance, with operating earnings increasing over 300% to $17.9 million, benefiting from expense leverage on higher sales. Americas Wholesale also saw strong growth, with operating earnings up 50.6%. In contrast, Americas Retail operating earnings declined 29.6% due to higher store labor costs and markdowns[219] - On an adjusted basis, excluding items like impairment charges and certain legal fees, adjusted diluted EPS was $0.24 for the quarter, compared to $0.21 in the prior-year period[194][195][237] Liquidity and Capital Resources The company's cash and cash equivalents decreased to $147.9 million from $415.6 million at the start of the fiscal year, largely due to financing activities, including a $175.0 million accelerated share repurchase (ASR) agreement and $13.7 million in dividends, while net cash used in operating activities was $54.6 million, reflecting higher inventory levels intended to mitigate supply chain disruptions, with the company believing it has sufficient liquidity for the next 12 months from cash flow, existing cash, and credit facilities - Cash and cash equivalents stood at $147.9 million as of April 30, 2022, with the majority held outside the U.S. The company determined that approximately $12.7 million of foreign earnings are no longer indefinitely reinvested[200][247] - Financing activities used $176.8 million in cash, primarily driven by a $175.0 million payment for the 2022 ASR Contract and other open market share repurchases totaling $11.7 million[187][255] - Inventory increased 19.5% year-over-year to $483.9 million (30.7% in constant currency), a strategic move to mitigate supply chain disruptions by accelerating product orders[258] - A regular quarterly cash dividend of $0.225 per share was announced on May 25, 2022[260] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks, primarily from foreign currency exchange rate fluctuations and interest rate changes, with over two-thirds of Q1 sales in non-U.S. dollar currencies, and uses derivative instruments, such as forward contracts and interest rate swaps, to hedge some of these risks, while a strengthening U.S. dollar negatively impacted stockholders' equity by $17.9 million in the quarter due to translation adjustments - The company's primary exchange rate risk relates to operations in Europe, Canada, South Korea, China, Hong Kong, and Mexico. Net foreign currency transaction losses included in net earnings were $10.6 million for the quarter, up from $4.1 million in the prior-year period[272][277] - As of April 30, 2022, the company held forward contracts of US$149.0 million for its European operations to hedge forecasted merchandise purchases. These are designated as cash flow hedges[279] - The company is also exposed to interest rate risk on its floating-rate debt. It uses interest rate swap agreements to effectively convert this debt to a fixed-rate basis, including for its Mortgage Debt[286][290] Item 4. Controls and Procedures Management, including the CEO and interim CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of April 30, 2022, with no material changes in internal control over financial reporting during the first quarter of fiscal 2023 - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of the end of the quarterly period[292] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[293] PART II. OTHER INFORMATION This section covers legal proceedings, updated risk factors, equity security sales, and other corporate information for Guess?, Inc. Item 1. Legal Proceedings This section refers to Note 13 of the financial statements for information on legal proceedings, including an ongoing customs tax dispute with the Italian Customs Agency and several legal actions involving allegations against the company's Chief Creative Officer, Paul Marciano - The company is involved in various legal proceedings. For detailed information, the report refers to Note 13 in Part I, Item 1[295] Item 1A. Risk Factors The company states there have been no material changes to its risk factors as disclosed in its Annual Report on Form 10-K, with the exception of a new risk factor concerning the potential impact of sanctions and export controls targeting Russia due to the invasion of Ukraine - A new risk factor has been added regarding the potential adverse effects of sanctions and export controls targeting Russia following its invasion of Ukraine. The company operates in Russia through wholesale, retail, and a joint venture, with sales from Russia and Ukraine representing slightly less than 3% of fiscal 2022 revenues[297] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the first quarter of fiscal 2023, the company repurchased 3,789,576 shares of its common stock at an aggregate cost of $81.7 million, including an initial delivery of 3.3 million shares under a $175.0 million Accelerated Share Repurchase (ASR) agreement initiated in March 2022, with $62.3 million remaining available for repurchase under the authorized program as of April 30, 2022 Issuer Purchases of Equity Securities (Q1 FY2023) | Period | Total Shares Purchased | Average Price Paid per Share ($) | Publicly Announced Program | | :--- | :--- | :--- | :--- | | Jan 30 - Feb 26 | 0 | N/A | 0 | | Feb 27 - Apr 2 | 3,531,646 | $21.49 | 3,531,646 | | Apr 3 - Apr 30 | 257,930 | $22.60 | 257,930 | | Total | 3,789,576 | $21.57 | 3,789,576 | - On March 18, 2022, the company entered into a $175.0 million Accelerated Share Repurchase (ASR) contract, receiving an initial 3.3 million shares. The final number of shares will be determined based on the volume-weighted average stock price during the repurchase period, expected to end in July 2022[298] Item 5. Other Information On April 22, 2022, stockholders approved an amendment and restatement of the Guess?, Inc. 2004 Equity Incentive Plan, increasing the number of available shares by 680,000, modifying the share counting ratio for full-value awards, extending the plan's term to 2032, and making non-employee directors eligible for awards - The 2004 Equity Incentive Plan was amended to increase the aggregate number of shares available for grants by 680,000 and extend the plan's term through March 26, 2032[301] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, new credit facility agreements, amended equity incentive plans, and certifications by the CEO and CFO as required by the Sarbanes-Oxley Act - A list of exhibits filed with the report is provided, including certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[303]