Guess(GES) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and related notes for Guess?, Inc. as of July 29, 2023, and for the three and six-month periods then ended Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, cash flows, and comprehensive notes, for Guess?, Inc Condensed Consolidated Balance Sheets This section details the company's financial position, showing changes in assets, liabilities, and equity between July 29, 2023, and January 28, 2023 Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Jul 29, 2023 | Jan 28, 2023 | | :--- | :--- | :--- | | Total Assets | $2,489,159 | $2,425,448 | | Cash and cash equivalents | $302,626 | $275,765 | | Inventories | $554,425 | $510,899 | | Total Liabilities | $1,954,765 | $1,843,543 | | Convertible senior notes due 2028, net | $266,110 | $— | | Total Stockholders' Equity | $533,821 | $572,751 | Condensed Consolidated Statements of Income This section details the company's financial performance, showing increased net revenue and earnings from operations for the three months ended July 29, 2023, compared to the prior year Q2 Fiscal 2024 vs Q2 Fiscal 2023 (in thousands, except per share data) | Metric | Three Months Ended Jul 29, 2023 | Three Months Ended Jul 30, 2022 | | :--- | :--- | :--- | | Net revenue | $664,512 | $642,690 | | Gross profit | $294,443 | $270,501 | | Earnings from operations | $64,600 | $53,446 | | Net earnings attributable to Guess?, Inc. | $39,033 | $23,962 | | Diluted EPS | $0.59 | $0.35 | Six Months Fiscal 2024 vs Six Months Fiscal 2023 (in thousands, except per share data) | Metric | Six Months Ended Jul 29, 2023 | Six Months Ended Jul 30, 2022 | | :--- | :--- | :--- | | Net revenue | $1,234,310 | $1,236,163 | | Earnings from operations | $63,678 | $89,821 | | Net earnings attributable to Guess?, Inc. | $27,228 | $31,932 | | Diluted EPS | $0.46 | $0.46 | Condensed Consolidated Statements of Cash Flows This section outlines the company's cash flow activities, showing significant improvement in operating cash flow and changes in investing and financing activities for the six months ended July 29, 2023 Cash Flow Summary - Six Months Ended (in thousands) | Cash Flow Activity | Jul 29, 2023 | Jul 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $47,273 | $1,502 | | Net cash used in investing activities | ($35,836) | ($51,236) | | Net cash provided by (used in) financing activities | $13,253 | ($181,149) | | Net change in cash and cash equivalents | $26,861 | ($241,193) | Notes to Condensed Consolidated Financial Statements This section provides detailed accounting policies and disclosures, covering segment performance, debt obligations, convertible notes, and ongoing legal proceedings - The company's Europe segment is the largest revenue contributor, generating $366.3 million in Q2 2024, an 8.8% increase YoY[73] - In April 2023, the company issued $275 million of 3.75% Convertible Senior Notes due 2028 and exchanged approximately $184.9 million of its existing 2.00% notes due 2024. This resulted in a $7.7 million loss on debt extinguishment[90][91] - The company is involved in ongoing legal proceedings, including a customs tax dispute with the Italian Customs Agency totaling €9.8 million and stockholder derivative lawsuits related to allegations against executive Paul Marciano[123][126][128] - In May 2023, the company acquired the remaining 30% noncontrolling interest in its Russian subsidiary, Guess CIS, for €8.0 million after the minority holder exercised a put option[132][133] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management provides an analysis of the company's financial condition and operational results for the second quarter and first half of fiscal 2024, covering segment performance, macroeconomic impacts, strategic priorities, and liquidity Business and Strategy Overview This section outlines the company's strategic priorities and addresses the impact of macroeconomic headwinds, including inflation and geopolitical conflicts, on its global operations - Macroeconomic conditions, including inflation and higher interest rates, continue to negatively impact the business[178] - Operations in Russia, Belarus, and Ukraine represented slightly more than 4% of total revenue for the six months ended July 29, 2023[195] - Strategic priorities include brand elevation, product excellence, customer centricity, optimizing global footprint, improving functional capabilities, and driving growth[204][205][206] - Capital allocation priorities include investments in growth and infrastructure, returning value to shareholders via dividends and share repurchases, and managing working capital[209] Executive Summary This section provides a high-level overview of the company's Q2 FY2024 performance, highlighting growth in net revenue, expansion in gross and operating margins, and an increase in net earnings Q2 FY2024 Performance Highlights | Metric | Q2 FY2024 | YoY Change | | :--- | :--- | :--- | | Total Net Revenue | $664.5M | +3.4% | | Gross Margin | 44.3% | +220 bps | | SG&A Rate | 34.6% | +100 bps | | Operating Margin | 9.7% | +140 bps | | Diluted EPS | $0.59 | +$0.24 | - Inventory increased 3.5% to $554.4 million as of July 29, 2023, from the prior year, or 0.2% on a constant currency basis[222] - The company and its partners opened 9 new stores and closed 28 stores worldwide during the quarter[222] Results of Operations - Three Months Ended July 29, 2023 This section details the company's operational results for the three months ended July 29, 2023, showing consolidated net revenue growth driven by Europe and Asia, offsetting declines in the Americas, with overall operating margin improvement Net Revenue by Segment (in thousands) | Segment | Q2 FY2024 | Q2 FY2023 | % Change | | :--- | :--- | :--- | :--- | | Europe | $366,311 | $336,707 | 8.8% | | Americas Retail | $167,568 | $181,655 | (7.8%) | | Americas Wholesale | $43,680 | $50,195 | (13.0%) | | Asia | $58,937 | $49,365 | 19.4% | | Licensing | $28,016 | $24,768 | 13.1% | | Total | $664,512 | $642,690 | 3.4% | Earnings from Operations by Segment (in thousands) | Segment | Q2 FY2024 | Q2 FY2023 | % Change | | :--- | :--- | :--- | :--- | | Europe | $47,196 | $34,538 | 36.6% | | Americas Retail | $15,261 | $23,921 | (36.2%) | | Americas Wholesale | $11,065 | $11,442 | (3.3%) | | Asia | ($539) | ($3,300) | (83.7%) | | Licensing | $26,354 | $21,206 | 24.3% | - Europe's revenue growth was driven by an 11% increase in comparable sales and higher wholesale revenue. Operating margin expanded by 260 basis points[242][243] - Americas Retail revenue declined due to a 6% decrease in comparable sales and net store closures. Operating margin compressed by 410 basis points[245][246] Results of Operations - Six Months Ended July 29, 2023 This section presents the operational results for the six months ended July 29, 2023, indicating flat net revenue, a decline in consolidated operating income, and a contraction in operating margin due to various factors Net Revenue by Segment - Six Months (in thousands) | Segment | H1 FY2024 | H1 FY2023 | % Change | | :--- | :--- | :--- | :--- | | Europe | $646,509 | $612,716 | 5.5% | | Americas Retail | $311,112 | $348,140 | (10.6%) | | Americas Wholesale | $95,073 | $118,552 | (19.8%) | | Asia | $129,712 | $105,587 | 22.8% | | Licensing | $51,904 | $51,168 | 1.4% | | Total | $1,234,310 | $1,236,163 | (0.1%) | - Consolidated earnings from operations decreased by $26.1 million (29.1%) YoY, with operating margin falling from 7.3% to 5.2%[257] - The decrease in operating margin was driven by higher expenses (270 bps), unfavorable currency (120 bps), and lower government subsidies (110 bps), partially offset by higher initial markups (190 bps)[266] - A loss on extinguishment of debt of $7.7 million was recorded in H1 FY2024 related to the partial retirement of the 2024 Notes[268] Liquidity and Capital Resources This section details the company's liquidity position, capital resources, and capital allocation strategies, including cash balances, borrowing capacity, debt transactions, share repurchases, and dividends - The company ended the quarter with $302.6 million in cash and cash equivalents and over $600 million in total liquidity including borrowing capacity[303] - Net cash from operating activities improved by $45.8 million YoY to $47.3 million, driven by favorable changes in working capital[304][305] - In H1 FY2024, the company repurchased 2.2 million shares for $42.8 million. As of July 29, 2023, $19.7 million remained under the share repurchase authorization[318] - A regular quarterly cash dividend of $0.30 per share was announced on August 23, 2023[315] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily foreign currency exchange rate fluctuations and interest rate changes, and its use of derivative instruments for mitigation - The company is exposed to exchange rate risk as over two-thirds of its product sales are denominated in currencies other than the U.S. dollar[327] - The company uses foreign exchange currency contracts to hedge against currency fluctuations. A uniform 10% weakening of the U.S. dollar would decrease the fair value of these derivatives by $28.2 million[329] - The company is exposed to interest rate risk on its floating-rate debt and uses interest rate swap agreements to convert some of this debt to a fixed-rate basis[330] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of July 29, 2023, with no material changes to internal control over financial reporting during the quarter - 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[336] - No material changes were identified in the company's internal control over financial reporting during the second quarter of fiscal 2024[337] PART II. OTHER INFORMATION This section provides additional disclosures, including details on legal proceedings, specific risk factors related to convertible notes, equity security transactions, and other pertinent information Item 1. Legal Proceedings This section directs readers to Note 13 of the financial statements for detailed information regarding the company's ongoing legal proceedings - For information on legal proceedings, the report directs readers to Note 13 in Part I, Item 1[339] Item 1A. Risk Factors This section outlines specific risks related to the company's convertible senior notes, including potential funding challenges for repurchases, limitations from other debt agreements, and impacts on financial condition from conditional conversion features - A key risk is the potential inability to fund the cash repurchase of its 2024 and 2028 convertible notes if required, which could be restricted by other debt agreements[341] - Provisions in the notes' indentures, such as the requirement to repurchase notes for cash upon a 'fundamental change', could make a takeover of the company more difficult or expensive[343] - If the conditional conversion feature of the notes is triggered, the company may be required to settle the obligation in cash, which could adversely affect liquidity and net working capital[344] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's equity security transactions, noting no repurchases under the public program during Q2 FY2024, with shares withheld for employee tax obligations and remaining repurchase authorization Issuer Purchases of Equity Securities (Q2 FY2024) | Period | Total Shares Purchased | Average Price Paid per Share | Purchased as Part of Publicly Announced Program | | :--- | :--- | :--- | :--- | | May 28, 2023 to July 1, 2023 | 203 | $20.26 | No | | Total Q2 | 203 | $20.26 | No | - No shares were repurchased under the company's publicly announced plan during the second quarter. The 203 shares acquired were related to employee tax withholding on vested stock awards[348][349] - The remaining capacity under the share repurchase program is $19.7 million as of the end of the quarter[348] Item 5. Other Information This section confirms that no directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the second quarter of fiscal 2024 - No directors or officers adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the second quarter[350] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - Exhibits filed include CEO and CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act[352]