General
Unless the context indicates otherwise, when we refer to "we," "us," "our" or
the "Company" in this Form 10ÂQ, we are referring to Guess?, Inc. ("GUESS?") and
its subsidiaries on a consolidated basis.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including documents incorporated by
reference herein, contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements may also be contained in our other reports filed under the Securities
Exchange Act of 1934, as amended, in our press releases and in other documents.
Except for historical information contained herein, certain matters discussed in
this Quarterly Report, including statements concerning the potential actions and
impacts related to the COVID-19 pandemic; statements concerning our future
outlook; statements concerning our expectations, goals, future prospects, global
cost reduction opportunities, profitability efforts, capital allocation plans,
cash needs and current business strategies and strategic initiatives; and
statements expressing optimism or pessimism about future operating results and
growth opportunities are forward-looking statements that are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements, which are frequently indicated by terms such
as "expect," "could," "will," "should," "goal," "strategy," "believe,"
"estimate," "continue," "outlook," "plan," "create," "see," and similar terms,
are only expectations, and involve known and unknown risks and uncertainties,
which may cause actual results in future periods to differ materially from what
is currently anticipated. Factors which may cause actual results in future
periods to differ materially from current expectations include, among others:
our ability to maintain our brand image and reputation; domestic and
international economic or political conditions, including economic and other
events that could negatively impact consumer confidence and discretionary
consumer spending; the continuation or worsening of impacts related to the
COVID-19 pandemic, including business, financial, human capital, litigation and
other impacts to us and our partners; our ability to successfully negotiate rent
relief or other lease-related terms with our landlords; our ability to maintain
adequate levels of liquidity; changes to estimates related to impairments,
inventory and other reserves, including the impact of the CARES Act, which were
made using the best information available at the time; changes in the
competitive marketplace and in our commercial relationships; our ability to
anticipate and adapt to changing consumer preferences and trends; our ability to
manage our inventory commensurate with customer demand; risks related to the
timing and costs of delivering merchandise to our stores and our wholesale
customers; unexpected or unseasonable weather conditions; our ability to
effectively operate our various retail concepts, including securing, renewing,
modifying or terminating leases for store locations; our ability to successfully
and/or timely implement our growth strategies and other strategic initiatives;
our ability to successfully implement or update information technology systems,
including enhancing our global omni-channel capabilities; our ability to expand
internationally and operate in regions where we have less experience, including
through joint ventures; risks related to our convertible senior notes issued in
April 2019, including our ability to settle the liability in cash; our ability
to successfully or timely implement plans for cost reductions; our ability to
effectively and efficiently manage the volume and costs associated with our
European distribution centers without incurring shipment delays; our ability to
attract and retain key personnel; obligations or changes in estimates arising
from new or existing litigation, income tax and other regulatory proceedings;
risks related to the income tax treatment of our third quarter fiscal 2022
intra-entity transfer of intellectual property rights from certain U.S. entities
to a wholly-owned Swiss subsidiary; risks related to the complexity of the 2017
Tax Cuts and Jobs Act (the "Tax Reform"), future clarifications and legislative
amendments thereto, as well as our ability to accurately interpret and predict
its impact on our cash flows and financial condition; the risk of economic
uncertainty associated with the United Kingdom's departure from the European
Union ("Brexit") or any other similar referendums that may be held; the
occurrence of unforeseen epidemics, such as the COVID-19 pandemic; other
catastrophic events; changes in U.S. or foreign income tax or tariff policy,
including changes to tariffs on imports into the U.S.; accounting adjustments to
our unaudited financial statements identified
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during the completion of our annual independent audit of financial statements
and financial controls or from subsequent events arising after issuance of this
release; risk of future non-cash asset impairments, including goodwill,
right-of-use lease assets and/or other store asset impairments; restructuring
charges; our ability to adapt to new regulatory compliance and disclosure
obligations; risks associated with our foreign operations, such as violations of
laws prohibiting improper payments and the burdens of complying with a variety
of foreign laws and regulations (including global data privacy regulations);
risks associated with the acts or omissions of our third party vendors,
including a failure to comply with our vendor code of conduct or other policies;
risks associated with cyber-attacks and other cyber security risks; risks
associated with our ability to properly collect, use, manage and secure consumer
and employee data; risks associated with our vendors' ability to maintain the
strength and security of information technology systems; and changes in
economic, political, social and other conditions affecting our foreign
operations and sourcing, including the impact of currency fluctuations, global
income tax rates and economic and market conditions in the various countries in
which we operate. In addition to these factors, the economic, technological,
managerial, and other risks identified in Part I, Item 1A. Risk Factors of our
most recent Annual Report on Form 10-K, as such risk factors may be updated in
our other filings with the Securities and Exchange Commission, could cause
actual results to differ materially from current expectations. The current
global economic climate, length and severity of the COVID-19 pandemic, and
uncertainty surrounding potential changes in U.S. policies and regulations may
amplify many of these risks. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
COVID-19 Business Update
The coronavirus (or "COVID-19") pandemic is continuing to negatively impact our
businesses. Although we achieved slightly higher net revenue during the third
quarter of fiscal 2022 compared to the third quarter of fiscal 2020, we remained
challenged by lower traffic and capacity restrictions. In addition, while we
began the third quarter of fiscal 2022 with 100% of our directly operated stores
open for business, we started to incur a new round of government-mandated
temporary store closures toward the end of the quarter. This resulted in the
closure of less than 5% of our directly operated stores as of October 30, 2021,
mostly in Europe, the impact of which was minimal to our third quarter results.
As of November 29, 2021, approximately 1% of our directly operated stores were
closed.
The COVID-19 crisis has also contributed to disruptions in the overall global
supply chain, leading to industry-wide product delays and higher freight costs.
We have been working actively to mitigate these headwinds to the extent possible
through a number of global supply chain initiatives.
In light of the fluid nature of the pandemic, we continue to carefully monitor
global and regional developments, such as the recent spread of the Omicron
variant, and respond appropriately. We also continue to strategically manage
expenses in order to protect profitability and to mitigate, to the extent
possible, the effect of the supply chain disruptions.
Business Segments
Our businesses are grouped into five reportable segments for management and
internal financial reporting purposes: Americas Retail, Americas Wholesale,
Europe, Asia and Licensing. Our Americas Retail, Americas Wholesale, Europe and
Licensing reportable segments are the same as their respective operating
segments. Certain components of our Asia operating segment are separate
operating segments based on region, which have been aggregated into the Asia
reportable segment for disclosure purposes.
Management evaluates segment performance based primarily on revenues and
earnings (loss) from operations before corporate performance-based compensation
costs, asset impairment charges, net gains (losses) on lease modifications,
restructuring charges and certain non-recurring credits (charges), if any. We
believe this segment reporting reflects how our business segments are managed
and how each segment's performance is evaluated by our chief operating decision
maker to assess performance and make resource allocation decisions. Information
regarding these segments is summarized in "Part I, Item 1. Financial Statements
- Note 8 - Segment Information."
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Products
We derive our net revenue from the sale of GUESS?, G by GUESS (GbG), GUESS Kids
and MARCIANO apparel and our licensees' products through our worldwide network
of directly-operated and licensed retail stores, wholesale customers and
distributors, as well as our online sites. We also derive royalty revenue from
worldwide licensing activities.
Foreign Currency Volatility
Since the majority of our international operations are conducted in currencies
other than the U.S. dollar (primarily the British pound, Canadian dollar,
Chinese yuan, euro, Japanese yen, Korean won, Mexican peso, Polish zloty,
Russian rouble and Turkish lira), currency fluctuations can have a significant
impact on the translation of our international revenues and earnings (loss) into
U.S. dollar amounts.
Some of our transactions that occur primarily in Europe, Canada, South Korea,
China, Hong Kong and Mexico are denominated in U.S. dollars, Swiss francs,
British pounds and Russian roubles, exposing them to exchange rate fluctuations
when these transactions (such as inventory purchases or periodic lease payments)
are converted to their functional currencies. As a result, fluctuations in
exchange rates can impact the operating margins of our foreign operations and
reported earnings (loss) and are largely dependent on the transaction timing and
magnitude during the period that the currency fluctuates. When these foreign
exchange rates weaken versus the U.S. dollar at the time the respective U.S.
dollar denominated payment is made relative to the payments made in the
comparable period, our product margins could be unfavorably impacted.
In addition, there are certain real estate leases that are denominated in a
currency other than the functional currency of the respective entity that
entered into the agreement (primarily Swiss francs, Russian roubles and Polish
zloty). As a result, we may be exposed to volatility related to unrealized gains
or losses on the translation of the present value of future lease payment
obligations when translated at the exchange rate as of a reporting period-end.
During the first nine months of fiscal 2022, the average U.S. dollar rate was
weaker against the euro, Canadian dollar, Chinese yuan, Mexican peso, Korean won
and British pound and stronger against the Japanese yen, Russian rouble and
Turkish lira compared to the average rate in the same prior-year period. This
had an overall favorable impact on the translation of our international revenues
and on earnings from operations for the nine months ended October 30, 2021
compared to the same prior-year period.
If the U.S. dollar strengthens in fiscal 2022 relative to the respective fiscal
2021 foreign exchange rates, foreign exchange could negatively impact our
revenues and operating results, as well as our international cash and other
balance sheet items, during the remainder of fiscal 2022, particularly in
Canada, Europe (primarily with respect to the euro, Turkish lira and Russian
rouble) and Mexico. Alternatively, if the U.S. dollar weakens relative to the
respective fiscal 2021 foreign exchange rates, our revenues and operating
results, as well as our other cash balance sheet items, could be positively
impacted by foreign currency fluctuations during the remainder of fiscal 2022,
particularly in these regions.
We enter into derivative financial instruments to offset some, but not all, of
the exchange risk on foreign currency transactions. For additional discussion
regarding our exposure to foreign currency risk, forward contracts designated as
hedging instruments and forward contracts not designated as hedging instruments,
refer to "Item 3. Quantitative and Qualitative Disclosures About Market Risk."
Strategy
In December 2019 and updated in March 2021, Carlos Alberini, our Chief Executive
Officer, shared his strategic vision and implementation plan for execution which
included the identification of several key priorities to drive revenue and
operating profit growth over the next several years. These priorities are: (i)
brand relevancy; (ii) product excellence; (iii) customer centricity; (iv) global
footprint; and (v) functional capabilities; each as further described below:
Brand Relevancy. We plan to optimize our brand architecture to be relevant with
our three target consumer groups: Heritage, Millennials, and Generation Z. We
also plan to elevate our brand and improve the
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quality of our products, allowing us to realize more full-priced sales and rely
less on promotional activity. We will continue to use unique go-to-market
strategies and execute celebrity and influencer partnerships and collaborations
as we believe that they are critical to engage more effectively with a younger
and broader audience.
Product Excellence. We believe product is a key factor of success in our
business. We strive to design and make great products and will extend our
product offering to provide our customers with products for the different
occasions of their lifestyles. We will seek to better address local product
needs.
Customer Centricity. We intend to place the customer at the center of everything
we do. We plan to implement processes and platforms to provide our customers
with a seamless omni-channel experience.
Global Footprint. We will continue to expand the reach of our brands by
optimizing the productivity and profitability of our current footprint and
expanding our distribution channels.
Functional Capabilities. We expect to drive material operational improvements in
the next three years to leverage and support our global business more
effectively, primarily in the areas of logistics, sourcing, product development
and production, inventory management, and overall infrastructure.
Capital Allocation
We plan to continue to prioritize capital allocation toward investments that
support growth and infrastructure, while remaining highly disciplined in the way
we allocate capital across projects, including new store development, store
remodels, technology and logistics investments and others. When we prioritize
investments, we will focus on their strategic significance and their return on
invested capital expectations. We also plan to manage product buys and inventory
ownership rigorously and optimize overall working capital management
consistently. In addition, we plan to continue to return value to shareholders
through dividends and opportunistic share repurchases.
Comparable Store Sales
Except as described below in connection with the COVID-19 pandemic, we report
National Retail Federation calendar comparable store sales on a quarterly basis
for our retail businesses which include the combined results from our
brick-and-mortar retail stores and our e-commerce sites. We also separately
report the impact of e-commerce sales on our comparable store sales metric. As a
result of our omni-channel strategy, our e-commerce business has become strongly
intertwined with our brick-and-mortar retail store business. Therefore, we
believe that the inclusion of e-commerce sales in our comparable store sales
metric provides a more meaningful representation of our retail results.
Sales from our brick-and-mortar retail stores include purchases that are
initiated, paid for and fulfilled at our retail stores and directly-operated
concessions as well as merchandise that is reserved online but paid for and
picked up at our retail stores. Sales from our e-commerce sites include
purchases that are initiated and paid for online and shipped from either our
distribution centers or our retail stores as well as purchases that are
initiated in a retail store, but due to inventory availability at the retail
store, are ordered and paid for online and shipped from our distribution centers
or picked up from a different retail store.
Store sales are considered comparable after the store has been open for 13 full
fiscal months. If a store remodel results in a square footage change of more
than 15%, or involves a relocation or a change in store concept, the store sales
are removed from the comparable store base until the store has been opened at
its new size, in its new location or under its new concept for 13 full fiscal
months. Stores that are permanently closed or temporarily closed (including as a
result of pandemic-related closures) for more than seven days in any fiscal
month are excluded from the calculation in the fiscal month that they are
closed. E-commerce sales are considered comparable after the online site has
been operational in a country for 13 full fiscal months and exclude any related
revenue from shipping fees. These criteria are consistent with the metric used
by management for internal reporting and analysis to measure performance of the
store or online sites. Definitions and calculations of comparable store sales
used by us may differ from similarly titled measures reported by other
companies.
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As a result of significant and varying temporary store closures and other
various restrictions during the COVID-19 pandemic, we have not disclosed any
comparable store sales measures when discussing the results of operations for
the three and nine months ended October 30, 2021, compared to the three and nine
months ended October 31, 2020. We believe that comparable store sales measures
between these periods are not meaningful to the evaluation of our results due to
such COVID-19 variations.
Other
We operate on a 52/53-week fiscal year calendar which ends on the Saturday
nearest to January 31 of each year. The nine months ended October 30, 2021 had
the same number of days as the nine months ended October 31, 2020.
Executive Summary
Overview
Given the significant impacts to our business that began in fiscal 2021 as a
result of the COVID-19 pandemic, this Executive Summary includes highlights of
our performance for the three and nine months ended October 30, 2021 compared to
both (a) the three and nine months ended November 2, 2019 (the pre-COVID periods
from two years prior) and (b) the three and nine months ended October 31, 2020
(the COVID-impacted periods from one year ago). Management believes the
additional comparison to the two-year ago period is helpful to provide
additional context to the current year results.
Net earnings attributable to Guess?, Inc. increased 140.5% to $29.9 million, or
diluted earnings per share ("EPS") of $0.45, for the quarter ended October 30,
2021 compared to $12.4 million, or diluted EPS of $0.18 for the quarter ended
November 2, 2019. Net earnings attributable to Guess?, Inc. increased 13.3% for
the quarter ended October 30, 2021 compared to $26.4 million, or diluted
earnings per share of $0.41 for the quarter ended October 31, 2020.
During the quarter ended October 30, 2021, we recognized $1.2 million of asset
impairment charges; $3.0 million net losses on lease modifications; $0.6 million
of certain professional service and legal fees and related (credits) costs;
$2.8 million of amortization of debt discount related to our convertible senior
notes; and $5.9 million in additional income tax expense from certain discrete
income tax adjustments related primarily to an intra-entity transfer of
intellectual property rights to a wholly-owned Swiss subsidiary (or a combined
$11.7 million, or $0.17 per share, negative impact after considering the related
income tax benefit of $1.7 million). Excluding the impact of these items,
adjusted net earnings attributable to Guess?, Inc. were $41.6 million and
adjusted diluted EPS was $0.62 for the quarter ended October 30, 2021.
References to financial results excluding the impact of these items are non-GAAP
measures and are addressed under "Non-GAAP Measures."
Third Quarter Fiscal 2022 Results Compared to Third Quarter Fiscal 2020
For the third quarter of fiscal 2022, we recorded net earnings attributable to
Guess?, Inc. of $29.9 million, a 140.5% increase from $12.4 million for the
third quarter of fiscal 2020. Diluted EPS increased 150.0% to $0.45 for the
third quarter of fiscal 2022 compared to $0.18 for the third quarter of fiscal
2020. We estimate a net positive impact from our share buybacks and convertible
notes transaction of $0.04 and a negative impact from currency of $0.12 on
diluted EPS in the third quarter of fiscal 2022 when compared to the third
quarter of fiscal 2020.
Net Revenue. Total net revenue for the third quarter of fiscal 2022 increased
4.4% to $643.1 million from $615.9 million in the third quarter of fiscal 2020.
In constant currency, net revenue increased by 2.1%.
Earnings from Operations. Earnings from operations for the third quarter of
fiscal 2022 increased 190.0% to $65.7 million (including $3.0 million net losses
on lease modifications, $1.2 million non-cash impairment charges taken on
certain long-lived store related assets and a $2.0 million unfavorable currency
translation impact) from $22.6 million (including $1.8 million in non-cash
impairment charges taken on certain long-lived store related assets) in the
third quarter of fiscal 2020. Operating margin in the third quarter of fiscal
2022 increased 6.5% to 10.2%, from 3.7% in the third quarter of fiscal 2020,
driven primarily by
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lower markdowns, higher initial markups, overall leveraging of expenses and
lower occupancy costs, partially offset by higher performance-based compensation
costs. The negative impact of currency on operating margin for the quarter was
approximately 40 basis points.
Third Quarter Fiscal 2022 Results Compared to Third Quarter Fiscal 2021
For the third quarter of fiscal 2022, we recorded net earnings attributable to
Guess?, Inc. of $29.9 million, a 13.3% increase from $26.4 million for the third
quarter of fiscal 2021. Diluted EPS increased 9.8% to $0.45 for the third
quarter of fiscal 2022, compared to $0.41 for the same prior-year quarter. We
estimate a minimal impact from our share buybacks and convertible notes
transaction and a positive impact from currency of $0.02 on diluted EPS in the
third quarter of fiscal 2022 when compared to the same prior-year quarter.
Net Revenue. Total net revenue for the third quarter of fiscal 2022 increased
13.0% to $643.1 million, from $569.3 million in the same prior-year quarter. In
constant currency, net revenue increased by 12.8%.
Earnings from Operations. Earnings from operations for the third quarter of
fiscal 2022 increased 47.7% to $65.7 million (including $3.0 million net losses
on lease modifications, $1.2 million non-cash impairment charges taken on
certain long-lived store related assets and a $0.2 million favorable currency
translation impact), from $44.5 million (including $10.3 million in non-cash
impairment charges taken on certain long-lived store related assets and minimal
net gains on lease modifications) in the same prior-year quarter. Operating
margin in the third quarter of fiscal 2022 increased 2.4% to 10.2% from 7.8% in
the same prior-year quarter, driven primarily by lower non-cash impairment
charges, lower markdowns, higher initial markups and overall leveraging of
expenses, partially offset by higher performance-based compensation costs. The
positive impact of currency on operating margin for the quarter was
approximately 60 basis points.
Nine-Month Period Fiscal 2022 Results Compared to Nine-Month Period Fiscal 2020
For the nine months ended October 30, 2021, we recorded net earnings of $102.9
million, compared to $16.4 million for the nine months ended November 2, 2019.
Diluted EPS was $1.55 for the nine months ended October 30, 2021, compared to
$0.22 for the nine months ended November 2, 2019. We estimate a net positive
impact from our share buybacks and convertible notes transaction of $0.19 and a
negative currency impact of $0.18 on diluted EPS for the nine months ended
October 30, 2021 when compared to the nine months ended November 2, 2019.
Net Revenue. Total net revenue for the first nine months of fiscal 2022
decreased 2.4% to $1.79 billion from $1.84 billion for the nine months ended
November 2, 2019. In constant currency, net revenue decreased by 4.8%.
Earnings from Operations. Earnings from operations for the first nine months of
fiscal 2022 were $179.6 million (including $0.4 million net losses on lease
modifications, $3.1 million non-cash impairment charges taken on certain
long-lived store related assets and a $3.9 million unfavorable currency
translation impact), compared to $44.2 million (including $5.1 million non-cash
impairment charges taken on certain long-lived store related assets) for the
nine months ended November 2, 2019. Operating margin for the first nine months
of fiscal 2022 increased 7.6% to 10.0%, from 2.4% for the nine months ended
November 2, 2019, driven primarily by higher initial markups, lower occupancy
costs and lower markdowns. The negative impact of currency on operating margin
for the first nine months of fiscal 2022 was approximately 50 basis points.
Nine-Month Period Fiscal 2022 Results Compared to Nine-Month Period Fiscal 2021
For the nine months ended October 30, 2021, we recorded net earnings of $102.9
million, compared to a net loss of $151.6 million for the nine months ended
October 31, 2020. Diluted EPS was $1.55 for the nine months ended October 30,
2021, compared to diluted loss per share of $2.35 during the same prior-year
period. We estimate a net positive impact from our share buybacks and
convertible notes transaction and currency of $0.05 and $0.12, respectively, on
diluted EPS for the nine months ended October 30, 2021 when compared to the same
prior-year period.
Net Revenue. Total net revenue for the first nine months of fiscal 2022
increased 45.9% to $1.79 billion, from $1.23 billion in the same prior-year
period. In constant currency, net revenue increased by 41.7%.
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Earnings (Loss) from Operations. Earnings from operations for the first nine
months of fiscal 2022 were $179.6 million (including $0.4 million net losses on
lease modifications, $3.1 million non-cash impairment charges taken on certain
long-lived store related assets and a $1.8 million favorable currency
translation impact), compared to a loss from operations of $132.4 million
(including $0.5 million net gains on lease modifications and $75.3 million
non-cash impairment charges taken on certain long-lived store related assets) in
the same prior-year period. Operating margin in the first nine months of fiscal
2022 increased 20.8% to 10.0%, from negative 10.8% in the same prior-year
period, driven primarily by overall leveraging of expenses, lower non-cash
impairment charges and lower markdowns. The positive impact of currency on
operating margin for the nine months ended October 30, 2021 was approximately 20
basis points.
Key Balance Sheet Accounts
•We had $391.1 million in cash and cash equivalents and $0.2 million in
restricted cash as of October 30, 2021 compared to $365.3 million in cash and
cash equivalents and $0.2 million in restricted cash at October 31, 2020.
•For the intra-entity transfer of the intellectual property rights, the Company
made a U.S. income tax payment of $80.4 million in the quarter ended October 30,
2021.
•As of October 30, 2021, we had $52.3 million in outstanding borrowings under
our term loans and $7.1 million in outstanding borrowings under our credit
facilities compared to $51.9 million in outstanding borrowings under our term
loans and $9.2 million in outstanding borrowings under our credit facilities as
of October 31, 2020.
•There were no share repurchases during the nine months ended October 30, 2021.
During the nine months ended October 31, 2020, we repurchased 4.0 million shares
of our common stock for $38.8 million.
•Accounts receivable consists of trade receivables relating primarily to our
wholesale business in Europe and, to a lesser extent, to our wholesale
businesses in the Americas and Asia, royalty receivables relating to our
licensing operations, credit card and retail concession receivables related to
our retail businesses and certain other receivables. Accounts receivable
increased by $20.9 million, or 6.9%, to $321.3 million as of October 30, 2021
compared to $300.4 million at October 31, 2020. On a constant currency basis,
accounts receivable increased by $22.4 million, or 7.5%, when compared to
October 31, 2020.
•Inventory increased by $89.3 million, or 22.7%, to $482.5 million as of
October 30, 2021, from $393.2 million at October 31, 2020. On a constant
currency basis, inventory increased by $86.8 million, or 22.1%, when compared to
October 31, 2020.
Global Store Count
In the third quarter of fiscal 2022, together with our partners, we opened 40
new stores worldwide, consisting of 27 stores in Europe and the Middle East, and
13 stores in Asia and the Pacific. Together with our partners, we closed 27
stores worldwide, consisting of 13 stores in Asia and the Pacific, 12 stores in
Europe and the Middle East, one store in the U.S. and one store in South
America.
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We ended the third quarter of fiscal 2022 with stores and concessions worldwide
comprised as follows:
Stores Concessions
Region Total Directly-Operated Partner Operated Total Directly-Operated Partner Operated
United States 244 243 1 1 - 1
Canada 74 74 - - - -
Central and South America 105 70 35 29 29 -
Total Americas 423 387 36 30 29 1
Europe and the Middle East 760 540 220 46 46 -
Asia and the Pacific 427 125 302 268 103 165
Total 1,610 1,052 558 344 178 166
Of the total stores, 1,340 were GUESS? stores, 177 were GUESS? Accessories
stores, 59 were G by GUESS (GbG) stores and 34 were MARCIANO stores.
Results of Operations
Three Months Ended October 30, 2021 and October 31, 2020
Consolidated Results
The following presents our condensed consolidated statements of income (in
thousands, except per share data):
Three Months Ended
Oct 30, 2021 Oct 31, 2020
$ % $ % $ change % change
Net revenue $ 643,070 100.0 % $ 569,284 100.0 % $ 73,786 13.0 %
Cost of product sales 349,466 54.3 % 329,764 57.9 % 19,702 6.0 %
Gross profit 293,604 45.7 % 239,520 42.1 % 54,084 22.6 %
Selling, general and
administrative expenses 223,775 34.8 % 184,739 32.5 % 39,036 21.1 %
Asset impairment charges 1,152 0.2 % 10,335 1.8 % (9,183) (88.9 %)
Net (gains) losses on lease
modifications 3,006 0.5 % (21) (0.0 %) 3,027 (14,414.3 %)
Earnings from operations 65,671 10.2 % 44,467 7.8 % 21,204 47.7 %
Interest expense, net (5,063) (0.8 %) (5,247) (0.9 %) 184 (3.5 %)
Other expense, net (7,800) (1.2 %) (6,521) (1.2 %) (1,279) 19.6 %
Earnings before income tax
expense 52,808 8.2 % 32,699 5.7 % 20,109 61.5 %
Income tax expense 20,441 3.2 % 5,145 0.9 % 15,296 297.3 %
Net earnings 32,367 5.0 % 27,554 4.8 % 4,813 17.5 %
Net earnings attributable to
noncontrolling interests 2,487 0.4 % 1,178 0.2 % 1,309 111.1 %
Net earnings attributable to
Guess?, Inc. $ 29,880 4.6 % $ 26,376 4.6 % 3,504 13.3 %
Net earnings per common share attributable to common stockholders:
Basic $ 0.46 $ 0.41 $ 0.05
Diluted $ 0.45 $ 0.41 $ 0.04
Effective income tax rate 38.7 % 15.7 %
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Net Revenue. In constant currency, net revenue increased by 12.8%, driven by
positive comparable sales resulting from increased store traffic and higher
average unit retail, higher wholesale shipments, new stores, and higher
e-commerce and licensing revenues, partially offset by permanent store closures.
Currency translation fluctuations relating to our foreign operations favorably
impacted net revenue by $1.0 million compared to the same prior-year period.
Gross Margin. Gross margin increased 3.6% for the quarter ended October 30, 2021
compared to the same prior-year period, of which 2.2% was due to lower occupancy
rate and 1.4% was due to higher product margin. The lower occupancy rate
resulted primarily from higher revenue and lower occupancy costs. The higher
product margin was mainly driven by the favorable impact from lower markdowns
and higher initial markups, partially offset by higher freight costs.
Gross Profit. Gross profit increased by $54.1 million for the quarter ended
October 30, 2021 compared to the same prior-year period primarily due to the
favorable impact from higher revenue, lower markdowns, higher initial markups,
and lower occupancy costs, partially offset by higher freight costs. Currency
translation fluctuations relating to our foreign operations favorably impacted
gross profit by $0.3 million.
We include inbound freight charges, purchasing costs and related overhead,
retail store occupancy costs, including lease costs and depreciation and
amortization, and a portion of our distribution costs related to our retail
business in cost of product sales. We also include net royalties received on our
inventory purchases of licensed product as a reduction to cost of product sales.
Our gross margin may not be comparable to that of other entities since some
entities include all of the costs related to their distribution in cost of
product sales and others, like us, generally exclude wholesale-related
distribution costs from gross margin, including them instead in selling, general
and administrative ("SG&A") expenses. Additionally, some entities include retail
store occupancy costs in SG&A expenses and others, like us, include retail store
occupancy costs in cost of product sales.
SG&A Rate. Our SG&A rate increased 2.3% for the quarter ended October 30, 2021
from the same prior-year period driven primarily by higher performance-based
compensation costs and higher variable expenses, partially offset by leveraging
of expenses due to higher revenues.
SG&A Expenses. SG&A expenses increased by $39.0 million for the quarter ended
October 30, 2021 from the same prior-year period driven primarily by higher
variable expenses and higher performance-based compensation costs in the current
year quarter. Currency translation fluctuations relating to our foreign
operations unfavorably impacted SG&A expenses by $0.1 million.
Asset Impairment Charges. During the quarter ended October 30, 2021, we
recognized $0.7 million for impairment of certain operating lease right-of-use
("ROU") assets and $0.5 million of property and equipment impairment charges
related to certain retail locations compared to impairments of $5.6 million for
ROU assets and $4.7 million for property and equipment during the quarter ended
October 31, 2020, resulting from lower revenue and future cash flow projections
from the ongoing effects of the COVID-19 pandemic and expected store closures.
Currency translation fluctuations relating to our foreign operations had minimal
favorable impact on asset impairment charges.
Net (Gains) Losses on Lease Modifications. During the three months ended
October 30, 2021 and October 31, 2020, we recorded net losses on lease
modifications of $3.0 million and minimal amount of net gains on lease
modifications, respectively, related primarily to the early termination of lease
agreements for certain of our retail locations.
Operating Margin. Operating margin increased 2.4% for the quarter ended
October 30, 2021 compared to the same prior-year period driven primarily by
lower non-cash impairment charges, lower markdowns, higher initial markups, and
overall leveraging of expenses, partially offset by higher performance-based
compensation costs and net losses from lease modifications. Lower asset
impairment charges, partially offset by net losses compared to net gains from
lease modifications, favorably impacted operating margin by 1.2% during the
quarter ended October 30, 2021 compared to the same prior-year period. Excluding
the impact of lower asset impairment charges, net losses compared to net gains
on lease modifications and lower separation charges, our
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operating margin would have increased 1.2% compared to the same prior-year
period. The positive impact of currency on operating margin for the quarter was
approximately 60 basis points.
Earnings from Operations. As a result of our operating results, earnings from
operations increased by $21.2 million for the quarter ended October 30, 2021
compared to the same prior-year period. Currency translation fluctuations
relating to our foreign operations favorably impacted earnings from operations
by $0.2 million.
Other Expense, Net. The change was driven primarily by market volatility which
resulted in higher net unrealized losses on the translation of foreign currency
balances compared to the same prior-year period.
Income Tax Expense. Income tax expense for the quarter ended October 30, 2021
was $20.4 million, or a 38.7% effective income tax rate, compared to income tax
expense of $5.1 million, or a 15.7% effective income tax rate in the same
prior-year period. Generally, income taxes for the interim periods are computed
using the income tax rate estimated to be applicable for the full fiscal year,
adjusted for discrete items, which is subject to ongoing review and evaluation
by management.
Net Earnings Attributable to Guess?, Inc. Net earnings attributable to Guess?,
Inc. increased $3.5 million for the three months ended October 30, 2021 compared
to the same prior-year period. Diluted EPS increased $0.04 for the three months
ended October 30, 2021 compared to the same prior-year quarter. We estimate a
minimal impact from our share buybacks and convertible notes transaction and a
positive impact from currency of $0.02 on diluted EPS in the third quarter of
fiscal 2022 when compared to the same prior-year quarter.
Refer to "Non-GAAP Measures" for an overview of our non-GAAP, or adjusted,
financial results for the three months ended October 30, 2021 and October 31,
2020. Excluding the impact of these non-GAAP items, adjusted net earnings
attributable to Guess?, Inc. increased $4.2 million and adjusted diluted EPS
increased $0.04 for the three months ended October 30, 2021 compared to the same
prior-year quarter. We estimate minimal impact from our share buybacks and our
convertible notes transaction and a positive impact from currency of $0.02 on
adjusted diluted EPS in the third quarter of fiscal 2022 when compared to the
same prior-year quarter.
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Information by Business Segment
The following presents our net revenue and earnings (loss) from operations by
segment (in thousands):
Three Months Ended
Oct 30, 2021 Oct 31, 2020 $ change % change
Net revenue:
Americas Retail $ 169,617 $ 130,328 $ 39,289 30.1 %
Americas Wholesale 58,999 35,971 23,028 64.0 %
Europe 330,736 321,574 9,162 2.8 %
Asia 57,137 61,978 (4,841) (7.8 %)
Licensing 26,581 19,433 7,148 36.8 %
Total net revenue $ 643,070 $ 569,284 73,786 13.0 %
Earnings (loss) from operations:
Americas Retail $ 24,070 $ 473 23,597 4,988.8 %
Americas Wholesale 17,316 8,247 9,069 110.0 %
Europe 44,509 51,476 (6,967) (13.5 %)
Asia (2,399) 1,415 (3,814) (269.5 %)
Licensing 24,402 18,228 6,174 33.9 %
Total segment earnings from operations 107,898 79,839 28,059 35.1 %
Corporate overhead (38,069) (25,058) (13,011) 51.9 %
Asset impairment charges (1,152) (10,335) 9,183 (88.8 %)
Net gains (losses) on lease modifications (3,006) 21 (3,027) (14,414.3 %)
Total earnings from operations $ 65,671 $ 44,467 21,204 47.7 %
Operating margins:
Americas Retail 14.2 % 0.4 %
Americas Wholesale 29.3 % 22.9 %
Europe 13.5 % 16.0 %
Asia (4.2 %) 2.3 %
Licensing 91.8 % 93.8 %
Total Company 10.2 % 7.8 %
Americas Retail
Net revenue from our Americas Retail segment increased by $39.3 million for the
quarter ended October 30, 2021 from the same prior-year period. In constant
currency, net revenue increased by 28.5% due primarily to higher comparable
sales driven by higher store traffic and average unit retail, slightly offset by
permanent store closures. As of October 30, 2021, we directly operated 387
stores in the Americas compared to 402 stores at October 31, 2020, excluding
concessions, which represents a 3.7% decrease from the same prior-year period.
Currency translation fluctuations relating to our non-U.S. retail stores and
e-commerce sites favorably impacted net revenue by $2.1 million.
Operating margin increased 13.8% for the quarter ended October 30, 2021 from the
same prior-year quarter driven primarily by overall leveraging of expenses,
lower markdowns and higher initial markups, partially offset by higher freight
costs.
Earnings from operations from our Americas Retail segment increased by $23.6
million for the quarter ended October 30, 2021 from the same prior-year period
due primarily to the favorable impact on earnings from higher revenue, lower
markdowns and higher initial markups.
Americas Wholesale
Net revenue from our Americas Wholesale segment increased by $23.0 million for
the quarter ended October 30, 2021 from the same prior-year period. In constant
currency, net revenue increased by 61.0%, driven primarily by increased demand
in our U.S. wholesale business. Currency translation fluctuations relating to
our non-U.S. wholesale businesses favorably impacted net revenue by $1.1
million.
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Operating margin increased 6.4% for the quarter ended October 30, 2021 compared
to the same prior-year quarter due mainly to leveraging of expenses and higher
initial markups.
Earnings from operations from our Americas Wholesale segment increased by $9.1
million for the quarter ended October 30, 2021 from the same prior-year period.
The increase reflects the favorable impact on earnings from higher revenue and
higher initial markups.
Europe
Net revenue from our Europe segment increased by $9.2 million for the quarter
ended October 30, 2021 compared to the same prior-year period. In constant
currency, net revenue increased by 3.6% driven primarily by increased demand,
partially offset by an unfavorable shift in wholesale shipments. As of
October 30, 2021, we directly operated 540 stores in Europe compared to 511
stores at October 31, 2020, excluding concessions, which represents a 5.7%
increase from the same prior-year period. Currency translation fluctuations
relating to our European operations unfavorably impacted net revenue by $2.4
million.
Operating margin decreased 2.5% for the quarter ended October 30, 2021 compared
to the same prior-year quarter driven primarily by higher expenses and higher
freight costs.
Earnings from operations from our Europe segment decreased by $7.0 million for
the quarter ended October 30, 2021 compared to the same prior-year period driven
primarily by an unfavorable shift in wholesale shipments, higher expenses and
higher freight costs, partially offset by increased demand. Currency translation
fluctuations relating to our European operations unfavorably impacted earnings
from operations by $0.4 million.
Asia
Net revenue from our Asia segment decreased by $4.8 million for the quarter
ended October 30, 2021 from the same prior-year period. In constant currency,
net revenue decreased by 8.1%, due primarily to lower comparable sales driven by
reduced store traffic resulting from the COVID-19 pandemic. Currency translation
fluctuations relating to our Asian operations favorably impacted net revenue by
$0.2 million.
Operating margin decreased 6.5% for the quarter ended October 30, 2021 from the
same prior-year quarter driven primarily by the deleveraging of expenses due to
lower revenue.
Loss from operations from our Asia segment was $2.4 million for the quarter
ended October 30, 2021, compared to earnings from operations of $1.4 million in
the same prior-year period. The deterioration was driven primarily by the
unfavorable impact from lower revenue. Currency translation fluctuations
relating to our Asia operations unfavorably impacted loss from operations by
$0.2 million.
Licensing
Net royalty revenue from our Licensing segment increased by $7.1 million for the
quarter ended October 30, 2021 from the same prior-year period due primarily to
higher demand and strong performance in handbags, footwear, perfume and watches.
Earnings from operations from our Licensing segment increased by $6.2 million
for the quarter ended October 30, 2021 from the same prior-year period mainly
due to the favorable impact on earnings from higher revenue.
Corporate Overhead
Unallocated corporate overhead increased by $13.0 million for the quarter ended
October 30, 2021 compared to the same prior-year period primarily due to higher
performance-based compensation costs and higher overall discretionary expenses.
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Nine months ended October 30, 2021 and October 31, 2020
Consolidated Results
The following presents our condensed consolidated statements of income (loss)
(in thousands, except per share data):
Nine Months Ended
Oct 30, 2021 Oct 31, 2020
$ % $ % $ change % change
Net revenue $ 1,791,696 100.0 % $ 1,228,074 100.0 % $ 563,622 45.9 %
Cost of product sales 992,448 55.4 % 807,297 65.7 % 185,151 22.9 %
Gross profit 799,248 44.6 % 420,777 34.3 % 378,471 89.9 %
Selling, general and
administrative expenses 616,076 34.4 % 478,320 39.0 % 137,756 28.8 %
Asset impairment charges 3,094 0.2 % 75,276 6.1 % (72,182) (95.9 %)
Net (gains) losses on lease
modifications 441 0.0 % (450) (0.0 %) 891 (198.0 %)
Earnings (loss) from operations 179,637 10.0 % (132,369) (10.8 %) 312,006 (235.7 %)
Interest expense, net (16,163) (0.9 %) (15,604) (1.3 %) (559) 3.6 %
Other expense, net (11,502) (0.6 %) (20,553) (1.6 %) 9,051 (44.0 %)
Earnings (loss) before income
tax expense (benefit) 151,972 8.5 % (168,526) (13.7 %) 320,498 (190.2 %)
Income tax expense (benefit) 43,588 2.4 % (14,850) (1.2 %) 58,438 (393.5 %)
Net earnings (loss) 108,384 6.1 % (153,676) (12.5 %) 262,060 (170.5 %)
Net earnings (loss) attributable
to noncontrolling interests 5,436 0.3 % (2,028) (0.2 %) 7,464 (368.0 %)
Net earnings (loss) attributable
to Guess?, Inc. $ 102,948 5.8 % $ (151,648) (12.3 %) 254,596 (167.9 %)
Net earnings (loss) per common share attributable to common stockholders:
Basic $ 1.58 $ (2.35) $ 3.93
Diluted $ 1.55 $ (2.35) $ 3.90
Effective income tax rate 28.7 % 8.8 %
Net Revenue. In constant currency, net revenue increased by 41.7% driven
primarily by lower comparable sales due to reduced store traffic and temporary
store closures resulting from the COVID-19 pandemic in the same prior-year
period and, to a lesser extent, revenue growth in our European and Americas
wholesale businesses and a shift in European wholesale shipments into fiscal
2022. Currency translation fluctuations relating to our foreign operations
favorably impacted net revenue by $52.0 million, compared to the same prior-year
period.
Gross Margin. Gross margin increased 10.3% for the nine months ended October 30,
2021 compared to the same prior-year period, of which 8.0% was due to lower
occupancy rate and 2.3% was due to higher product margin mainly driven by lower
markdowns, higher initial markups and significant inventory reserves in Asia
included in the prior-year period. The lower occupancy rate was primarily driven
by overall leveraging of expenses.
Gross Profit. Gross profit increased 89.9% or $378.5 million for the nine months
ended October 30, 2021 compared to the same prior-year period primarily due to
the favorable impact on gross profit from higher
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revenue, lower markdowns and higher initial markups. Currency translation
fluctuations relating to our foreign operations favorably impacted gross profit
by $19.0 million.
SG&A Rate. Our SG&A rate decreased 4.6% for the nine months ended October 30,
2021 from the same prior-year period, driven by overall leveraging of expenses
due mainly to higher revenues.
SG&A Expenses. SG&A expenses increased by $137.8 million for the nine months
ended October 30, 2021 from the same prior-year period driven primarily by
higher variable expenses and higher performance-based compensation costs in the
current year period, as well as lower payroll and lower overall discretionary
expenses due to significant COVID-19 impacts in the same prior-year period.
Currency translation fluctuations relating to our foreign operations unfavorably
impacted SG&A expenses by $17.4 million.
Asset Impairment Charges. During the nine months ended October 30, 2021, we
recognized $0.7 million for impairment charges of certain ROU assets and $2.4
million for property and equipment related to certain retail locations resulting
from lower revenue and future cash flow projections from the ongoing effects of
the COVID-19 pandemic and expected store closures. This compares to $42.1
million in impairment of certain ROU assets and $33.2 million for property and
equipment and related to certain retail locations resulting from
under-performance and expected store closures during the nine months ended
October 31, 2020. Currency translation fluctuations relating to our foreign
operations favorably impacted asset impairment charges by $0.1 million.
Net (Gains) Losses on Lease Modifications. During the nine months ended October
30, 2021 and October 31, 2020, we recorded net losses on lease modifications of
$0.4 million and net gains on lease modifications of $0.5 million, respectively,
related primarily to the early termination of lease agreements for certain of
our retail locations.
Operating Margin. Operating margin increased 20.8% for the nine months ended
October 30, 2021 compared to the same prior-year period driven primarily by
overall leveraging of expenses, lower non-cash impairment charges and lower
markdowns. Lower asset impairment charges and lower separation charges favorably
impacted operating margin by 6.1% during the nine months ended October 30, 2021
compared to the same prior-year period. Excluding the impact of these items, our
operating margin would have increased 14.7% compared to the same prior-year
period. The positive impact of currency on operating margin for the first nine
months of fiscal 2022 was approximately 20 basis points.
Earnings (Loss) from Operations. As a result of our operating results,
earnings from operations increased by $312.0 million for the nine months ended
October 30, 2021 compared to a loss from operations in the same prior-year
period. Currency translation fluctuations relating to our foreign operations
favorably impacted earnings from operations by $1.8 million.
Other Expense, Net. Other expense, net decreased $9.1 million for the nine
months ended October 30, 2021 compared to the same prior-year period driven
primarily by market volatility which resulted in lower net unrealized losses on
the translation of foreign currency balances compared to the same prior-year
period.
Income Tax Expense (Benefit). Income tax expense for the nine months ended
October 30, 2021 was $43.6 million, or a 28.7% effective income tax rate,
compared to income tax benefit of $14.9 million, or an 8.8% effective income tax
rate, in the same prior-year period. Generally, income taxes for the interim
periods are computed using the income tax rate estimated to be applicable for
the full fiscal year, adjusted for discrete items, which is subject to ongoing
review and evaluation by management.
Net Earnings (Loss) Attributable to Guess?, Inc. Net earnings attributable to
Guess?, Inc. increased $254.6 million for the nine months ended October 30, 2021
compared to a net loss attributable to Guess?, Inc. in the same prior-year
period. Diluted EPS increased $3.90 for the nine months ended October 30, 2021
compared to diluted loss per share in the same prior-year period. We estimate a
net positive impact from our share buybacks and convertible notes transaction
and currency of $0.05 and $0.12, respectively, on diluted EPS for the nine
months ended October 30, 2021 when compared to the same prior-year period.
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Refer to "Non-GAAP Measures" for an overview of our non-GAAP, or adjusted,
financial results for the nine months ended October 30, 2021 and October 31,
2020. Excluding the impact of these non-GAAP items, adjusted net earnings
attributable to Guess?, Inc. increased $201.7 million and adjusted diluted EPS
increased $3.06 for the nine months ended October 30, 2021 compared to an
adjusted net loss attributable to Guess?, Inc. and adjusted diluted loss per
share in the same prior-year period. We estimate our share buybacks and
convertible notes transaction and currency had a net positive impact of $0.05
and $0.11, respectively, on adjusted diluted EPS during the nine months ended
October 30, 2021 when compared to the same prior-year period.
Information by Business Segment
The following presents our net revenue and earnings (loss) from operations by
segment (in thousands):
Nine Months Ended
Oct 30, 2021 Oct 31, 2020 $ change % change
Net revenue:
Americas Retail $ 511,449 $ 314,977 $ 196,472 62.4 %
Americas Wholesale 154,287 82,131 72,156 87.9 %
Europe 895,311 633,898 261,413 41.2 %
Asia 160,610 152,554 8,056 5.3 %
Licensing 70,039 44,514 25,525 57.3 %
Total net revenue $ 1,791,696 $ 1,228,074 563,622 45.9 %
Earnings (loss) from operations:
Americas Retail $ 82,260 $ (40,904) 123,164 (301.1 %)
Americas Wholesale 41,815 11,559 30,256 261.8 %
Europe 100,124 27,865 72,259 259.3 %
Asia (9,054) (24,729) 15,675 (63.4 %)
Licensing 63,987 39,833 24,154 60.6 %
Total segment earnings from operations 279,132 13,624 265,508 1,948.8 %
Corporate overhead (95,960) (71,167) (24,793) 34.8 %
Asset impairment charges (3,094) (75,276) 72,182 (95.9 %)
Net gains (losses) on lease modifications (441) 450 (891) (198.0 %)
Total earnings (loss) from operations $ 179,637 $ (132,369) 312,006 (235.7 %)
Operating margins:
Americas Retail 16.1 % (13.0 %)
Americas Wholesale 27.1 % 14.1 %
Europe 11.2 % 4.4 %
Asia (5.6 %) (16.2 %)
Licensing 91.4 % 89.5 %
Total Company 10.0 % (10.8 %)
Americas Retail
Net revenue from our Americas Retail segment increased by $196.5 million for the
nine months ended October 30, 2021 compared to the same prior-year period. In
constant currency, net revenue increased by 60.0% due primarily to lower
comparable sales driven by reduced store traffic and temporary store closures
resulting from the COVID-19 pandemic in the same prior-year period. The store
base for the U.S. and Canada decreased by an average of 26 net stores during the
nine months ended October 30, 2021 compared to the same prior-year period,
resulting in a 6.3% net decrease. Currency translation fluctuations relating to
our non-U.S. retail stores and e-commerce sites favorably impacted net revenue
by $7.5 million.
Operating margin increased 29.1% for the nine months ended October 30, 2021
compared to the same prior-year period driven primarily by leveraging of
expenses, and to a lesser extent, lower markdowns and higher initial markups.
Earnings from operations from our Americas Retail segment increased $123.2
million for the nine months ended October 30, 2021 compared to loss from
operations in the same prior-year period primarily due to the
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favorable impact on earnings from higher revenue, and to a lesser extent, lower
markdowns and higher initial markups.
Americas Wholesale
Net revenue from our Americas Wholesale segment increased by $72.2 million for
the nine months ended October 30, 2021 from the same prior-year period. In
constant currency, net revenue increased by 83.0%, driven primarily by our U.S.
wholesale business due mainly to higher demand. Currency translation
fluctuations relating to our non-U.S. wholesale businesses favorably impacted
net revenue by $4.0 million.
Operating margin increased 13.0% for the nine months ended October 30, 2021 from
the same prior-year period due primarily to leveraging of expenses and higher
initial markups.
Earnings from operations from our Americas Wholesale segment increased by $30.3
million for the nine months ended October 30, 2021 from the same prior-year
period, which reflects the favorable impact on earnings from higher revenue.
Europe
Net revenue from our Europe segment increased by $261.4 million for the nine
months ended October 30, 2021 from the same prior-year period. In constant
currency, net revenue increased by 35.8%, driven primarily by a shift in
wholesale shipments into fiscal 2022 and increased demand. Currency translation
fluctuations relating to our European operations favorably impacted net revenue
by $34.2 million.
Operating margin increased 6.8% for the nine months ended October 30, 2021 from
the same prior-year period, driven by overall leveraging of expenses due to a
shift in wholesale shipments and increased demand, and lower markdowns,
partially offset by higher freight expenses.
Earnings from operations from our Europe segment increased by $72.3 million for
the nine months ended October 30, 2021 compared to the same prior-year period
driven primarily by the favorable impact on earnings from higher revenue and
lower markdowns, partially offset by higher freight expenses. Currency
translation fluctuations relating to our European operations unfavorably
impacted earnings from operations by $0.3 million.
Asia
Net revenue from our Asia segment increased by $8.1 million for the nine months
ended October 30, 2021 compared to the same prior-year period. In constant
currency, net revenue increased by 1.1% due primarily to lower comparable sales
driven by reduced store traffic resulting from the COVID-19 pandemic in the same
prior-year period, as well as new store openings, partially offset by permanent
store closures. Currency translation fluctuations relating to our Asian
operations favorably impacted net revenue by $6.3 million.
Operating margin improved 10.6% for the nine months ended October 30, 2021 from
the same prior-year period, as the same prior-year period included significant
inventory reserves.
Loss from operations from our Asia segment decreased by $15.7 million for the
nine months ended October 30, 2021 from the same prior-year period driven
primarily by significant inventory reserves in the same prior-year period.
Currency translation fluctuations relating to our Asian operations unfavorably
impacted loss from operations by $0.4 million.
Licensing
Net royalty revenue from our Licensing segment increased by $25.5 million for
the nine months ended October 30, 2021 compared to the same prior-year period
due primarily to higher demand and strong performance in footwear, handbags,
perfume and watches.
Earnings from operations from our Licensing segment increased by $24.2 million
for the nine months ended October 30, 2021 compared to the same prior-year
period driven primarily by the favorable impact on earnings from higher revenue.
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Corporate Overhead
Unallocated corporate overhead increased by $24.8 million for the nine months
ended October 30, 2021 from the same prior-year period primarily due to higher
performance-based compensation costs and higher overall discretionary expenses.
Non-GAAP Measures
The financial information presented in this Quarterly Report includes non-GAAP
financial measures, such as adjusted results and constant currency financial
information. For the three and nine months ended October 30, 2021 and
October 31, 2020, the adjusted results exclude the impact of certain
professional service and legal fees and related (credits) costs, certain
separation charges, asset impairment charges, net (gains) losses on lease
modifications, non-cash amortization of debt discount on our convertible senior
notes, the related income tax impacts of these adjustments as well as certain
discrete income tax adjustments related primarily to an intra-entity transfer of
intellectual property rights to a wholly-owned Swiss subsidiary, in each case
where applicable. These non-GAAP measures are provided in addition to, and not
as alternatives for, our reported GAAP results.
These items affect the comparability of our reported results. The financial
results are also presented on a non-GAAP basis, as defined in Section 10(e) of
Regulation S-K of the SEC, to exclude the effect of these items. We have
excluded these items from our adjusted financial measures primarily because we
believe these items are not indicative of the underlying performance of our
business and the adjusted financial information provided is useful for investors
to evaluate the comparability of our operating results and our future outlook
(when reviewed in conjunction with our GAAP financial statements).
A reconciliation of reported GAAP results to comparable non-GAAP results follows
(in thousands, except per share data):
Three Months Ended Nine Months Ended
Oct 30, 2021 Oct 31, 2020 Oct 30, 2021 Oct 31, 2020
Reported GAAP net earnings (loss)
attributable to Guess?, Inc. $ 29,880 $ 26,376 $ 102,948 $ (151,648)
Certain professional service and legal fees
and related (credits) costs1 550 (195) 1,737 (56)
Separation charges2 - 703 - 3,383
Asset impairment charges3 1,152 10,335 3,094 75,276
Net (gains) losses on lease modifications4 3,006 (21) 441 (450)
Amortization of debt discount5 2,782 2,599 8,344 7,796
Discrete tax adjustments6 5,912 635 6,140 805
Income tax impact from adjustments7 (1,729) (3,069) (3,200) (17,295)
Total adjustments affecting net earnings
(loss) attributable to Guess?, Inc. 11,673 10,987 16,556 69,459
Adjusted net earnings (loss) attributable to
Guess?, Inc. $ 41,553 $
37 363 $ 119,504 $ (82,189)
Net earnings (loss) per common share attributable to common stockholders: GAAP diluted $ 0.45 $ 0.41 $ 1.55 $ (2.35) Adjusted diluted $ 0.62 $ 0.58 $ 1.79 $ (1.27)
________________________________________________________________________
Remarks:
1 Amounts recorded represent certain professional service and legal fees and
related (credits) costs, which we otherwise would not have incurred as part of
our business operations.
2 Amounts represent certain separation-related charges due to headcount
reduction in response to the pandemic and due to the separation of our former
Chief Executive Officer.
3 Amounts represent asset impairment charges related primarily to impairment of
operating lease right-of-use assets and property and equipment related to
certain retail locations resulting from lower revenue and future cash flow
projections from the ongoing effects of the COVID-19 pandemic and expected store
closures.
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4 Amounts recorded represent net (gains) losses on lease modifications related
primarily to the early termination of certain lease agreements.
5 In April 2019, we issued $300 million principal amount of 2.00% convertible
senior notes due 2024 (the "Notes") in a private offering. We have separated the
Notes into liability (debt) and equity (conversion option) components. The debt
discount, which represents an amount equal to the fair value of the equity
component, is amortized as non-cash interest expense over the term of the Notes.
6 Amounts represent discrete income tax adjustments related primarily to the
impacts from an intra-entity transfer of intellectual property rights to a
wholly-owned Swiss subsidiary during the quarter ended October 30, 2021, impacts
from cumulative valuation allowances and the income tax benefits from an income
tax rate change due to net operating loss carrybacks.
7 The income tax effect of certain professional service and legal fees and
related (credits) costs, separation charges, asset impairment charges, net
(gains) losses on lease modifications and the amortization of debt discount was
based on our assessment of deductibility using the statutory income tax rate
(inclusive of the impact of valuation allowances) of the tax jurisdiction in
which the charges were incurred.
Our discussion and analysis herein also includes certain constant currency
financial information. Foreign currency exchange rate fluctuations affect the
amount reported from translating our 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. We provide 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 and earnings (loss) from operations on a constant currency basis,
operating 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. To calculate balance sheet amounts on a constant currency basis, the
current period balance sheet amount is translated into U.S. dollars at the
exchange rate in effect at the comparable prior-year period end. The constant
currency calculations do not adjust for the impact of revaluing specific
transactions denominated in a currency that is different from the functional
currency of that entity when exchange rates fluctuate. The constant currency
information presented may not be comparable to similarly titled measures
reported by other companies.
In calculating the estimated impact of currency fluctuations (including
translational and transactional impacts) on other measures such as earnings
(loss) per share, we estimate gross margin (including the impact of foreign
exchange currency contracts designated as cash flow hedges for anticipated
merchandise purchases) and expenses using the appropriate prior-year rates,
translates the estimated foreign earnings (loss) 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 exchange currency contracts not
designated as cash flow hedges for merchandise purchases.
Liquidity and Capital Resources
We need liquidity globally primarily to fund our working capital, occupancy
costs, interest payments on our debt, remodeling and rationalization of our
retail stores, shop-in-shop programs, concessions, systems, infrastructure,
other existing operations, expansion plans, international growth and potential
acquisitions and investments. In addition, in the U.S. we need liquidity to fund
share repurchases and payment of dividends to our stockholders. Generally, our
working capital needs are highest during the late summer and fall as our
inventories increase before the holiday selling period.
During the nine months ended October 30, 2021, we relied primarily on trade
credit, available cash, real estate and other operating leases, finance leases,
proceeds from our credit facilities and term loans and internally generated
funds to finance our operations. We anticipate we will be able to satisfy our
ongoing cash requirements during the next 12 months for working capital, capital
expenditures, payments on our debt, finance leases and operating leases, as well
as lease modification payments, potential acquisitions and investments, expected
income tax payments, and share repurchases and dividend payments to
stockholders, primarily with cash flow from operations and existing cash
balances as supplemented by borrowings under our existing Credit Facilities and
proceeds from our term loans, as needed. Due to the seasonality of our business
and cash needs, we may increase borrowings under our established credit
facilities from time-to-time during the next 12 months. If we experience a
sustained decrease in consumer demand related to the COVID-19 pandemic, we may
require access to additional credit, which may not be available to us on
commercially acceptable terms or at all.
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Our outstanding convertible senior notes may be converted at the option of the
holders as described in "Part I, Item 1, Financial Statements - Note 10 -
Convertible Senior Notes and Related Transactions" of this Form 10-Q and in
"Note 10 - Convertible Senior Notes and Related Transactions" of the
Consolidated Financial Statements included in our Annual Report on Form 10-K. As
of October 30, 2021, none of the conditions allowing holders of the convertibles
notes to convert had been met. Pursuant to one of these conditions, if our stock
trading price exceeds 130% of the conversion price of the convertible notes
(currently $25.78) for at least 20 trading days during the 30 consecutive
trading-day period ending on, and including, the last trading day of any
calendar quarter, holders of the convertible notes would have the right to
convert their convertible notes during the next calendar quarter. Upon
conversion, we will pay or deliver, as the case may be, cash, shares of our
common stock or a combination of cash and shares of our common stock, at our
election, in the manner and subject to the terms and conditions provided in the
indenture governing the convertible notes. The convertible note hedge
transaction we entered into in connection with our issuance of the convertible
notes is expected generally to reduce the potential dilution upon conversion of
the convertible notes and/or offset any cash payments we are required to make in
excess of the principal amount of convertible notes that are converted, as the
case may be. We expect to settle the principal amount of our outstanding
convertible senior notes in 2024 in cash and any excess in shares.
We have historically considered the undistributed earnings of our foreign
subsidiaries to be indefinitely reinvested. As a result of the Tax Reform, we
had a substantial amount of previously taxed earnings that could be distributed
to the U.S. without additional U.S. taxation. We continue to evaluate our plans
for reinvestment or repatriation of unremitted foreign earnings and regularly
review our cash positions and determination of permanent reinvestment of foreign
earnings. If we determine that all or a portion of such foreign earnings are no
longer indefinitely reinvested, we may be subject to additional foreign
withholding taxes and U.S. state income taxes, beyond the one-time transition
tax. For example, as of October 30, 2021, the Company determined that
approximately $7.0 million of such foreign earnings are no longer indefinitely
reinvested. The incremental tax cost to repatriate these earnings to the U.S. is
immaterial. We intend to indefinitely reinvest the remaining earnings from our
foreign subsidiaries for which a deferred income tax liability has not already
been recorded. It is not practicable to estimate the amount of income tax that
might be payable if these earnings were repatriated due to the complexities
associated with the hypothetical calculation. As of October 30, 2021, we had
cash and cash equivalents of $391.1 million, of which approximately $192.0
million was held in the U.S.
Excess cash and cash equivalents, which represent the majority of our
outstanding cash and cash equivalents balance, are held primarily in overnight
deposit and short-term time deposit accounts and money market accounts. Please
see "-Important Factors Regarding Forward-Looking Statements" discussed above
and "Part I, Item 1A. Risk Factors" contained in our most recent Annual Report
on Form 10-K for the fiscal year ended January 30, 2021 for a discussion of risk
factors which could reasonably be likely to result in a decrease of internally
generated funds available to finance capital expenditures and working capital
requirements.
COVID-19 Impact on Liquidity
Refer to the "COVID-19 Business Update" section above for a discussion of the
impact from the COVID-19 pandemic on our financial performance and our
liquidity.
In light of store closures and reduced traffic in stores, we have taken certain
actions with respect to certain of our existing leases, including engaging with
landlords to discuss rent deferrals as well as other rent concessions.
Throughout the COVID-19 pandemic, we have suspended rental payments and/or paid
reduced rental amounts with respect to certain of our retail stores that were
closed or experiencing drastically reduced customer traffic as a result of the
COVID-19 pandemic. During fiscal 2022 and 2021, we have successfully negotiated
with several landlords, including some of our larger landlords and have received
rent abatement benefits as well as new lease terms for some of our affected
leases. We continue to engage in discussions with additional affected landlords
in an effort to achieve appropriate rent relief and other lease concessions and,
in some cases, to terminate existing leases. In some instances, where
negotiations with landlords have proven
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unsuccessful, we are engaged in litigation related to rent obligations both
during the COVID-19 pandemic and through the term of the lease.
Nine Months Ended October 30, 2021 and October 31, 2020
Operating Activities
Net cash provided by operating activities was $4.6 million for the nine months
ended October 30, 2021, compared to $98.4 million for the nine months ended
October 31, 2020, or a deterioration of $93.8 million. This deterioration was
driven primarily by unfavorable changes in working capital, partially offset by
higher cash flows generated from net earnings. Cash flows generated from net
earnings were negatively impacted by the $80.4 million U.S. income tax payment
related to the intra-entity transfer of intellectual property rights transaction
during the third quarter of fiscal 2022. We currently expect to make an
additional $27 million U.S. income tax payment related to the transaction in
January 2022.
Investing Activities
Net cash used in investing activities was $40.4 million for the nine months
ended October 30, 2021 compared to $14.6 million for the nine months ended
October 31, 2020. Net cash used in investing activities for the nine months
ended October 30, 2021 related primarily to investments in technology and other
infrastructure and, to a lesser extent, existing store remodeling programs and
international retail expansion.
The increase in cash used in investing activities was driven primarily by higher
retail remodel and international expansion costs and higher strategic
investments in technology during the nine months ended October 30, 2021 compared
to the same prior-year period. During the nine months ended October 30, 2021, we
opened 55 directly-operated stores compared to 13 directly-operated stores that
were opened in the same prior-year period.
Financing Activities
Net cash used in financing activities was $28.5 million for the nine months
ended October 30, 2021 compared to $4.5 million for the nine months ended
October 31, 2020. Net cash used in financing activities for the nine months
ended October 30, 2021 related primarily to repayments on borrowings and finance
lease obligations and payment of dividends, partially offset by proceeds from
borrowings.
The change in cash used in financing activities was driven primarily by lower
proceeds received from borrowings and higher payment of dividends, partially
offset by lower repayments of borrowings and finance lease obligations and lower
repurchases of shares in the Company's common stock during the nine months ended
October 30, 2021 compared to the same prior-year period.
Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash
During the nine months ended October 30, 2021, the change in foreign currency
translation rates decreased our reported cash, cash equivalents and restricted
cash balance by $13.8 million compared to an increase of $1.4 million during the
nine months ended October 31, 2020. Refer to "Foreign Currency Volatility" for
further information on fluctuations in exchange rates.
Working Capital
As of October 30, 2021, we had net working capital (including cash and cash
equivalents) of $466.6 million compared to $470.0 million at January 30, 2021
and $397.5 million at October 31, 2020.
Our primary working capital needs are for the current portion of lease
liabilities, accounts receivable and inventory. The accounts receivable balance
consists of trade receivables relating primarily to our wholesale business in
Europe and, to a lesser extent, to our wholesale businesses in the Americas and
Asia, royalty receivables relating to our licensing operations, credit card and
retail concession receivables related to our retail businesses and certain other
receivables. Accounts receivable increased by $20.9 million, or 6.9%, to $321.3
million as of October 30, 2021, from $300.4 million at October 31, 2020. On a
constant currency basis, accounts receivable increased by $22.4 million, or
7.5%, when compared to October 31, 2020. As of October 30, 2021, approximately
45% of our total net trade receivables and 59% of our European net trade
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receivables were subject to credit insurance coverage, certain bank guarantees
or letters of credit for collection purposes. Our credit insurance coverage
contains certain terms and conditions specifying deductibles and annual claim
limits. Inventory increased by $89.3 million, or 22.7%, to $482.5 million as of
October 30, 2021, from $393.2 million at October 31, 2020. On a constant
currency basis, inventory increased by $86.8 million, or 22.1%, when compared to
October 31, 2020, driven primarily by management initiatives to mitigate supply
chain disruptions, including accelerating product orders.
Capital Expenditures
Gross capital expenditures totaled $40.6 million, before deducting lease
incentives of $2.2 million, for the nine months ended October 30, 2021. This
compares to gross capital expenditures of $12.4 million, before deducting lease
incentives of $1.2 million, for the nine months ended October 31, 2020.
We will periodically evaluate strategic acquisitions and alliances and pursue
those we believe will support and contribute to our overall growth initiatives.
Dividends
On November 23, 2021, we announced an increase to our regular quarterly cash
dividend from $0.1125 to $0.225 per share on our common stock. The cash dividend
will be paid on December 24, 2021 to shareholders of record as of the close of
business on December 8, 2021. In connection with the increase to the quarterly
cash dividend announced on November 23, 2021, we will adjust the conversion rate
(which is expected to increase) and the conversion price (which is expected to
decrease) of our convertible senior notes in accordance with the terms of the
indenture governing the convertible senior notes, to be effective as of December
7, 2021.
Decisions on whether, when and in what amounts to continue making any future
dividend distributions will remain at all times entirely at the discretion of
our Board of Directors, which reserves the right to change or terminate our
dividend practices at any time and for any reason without prior notice. The
payment of cash dividends in the future will be based upon a number of business,
legal and other considerations, including our cash flow from operations, capital
expenditures, debt service and covenant requirements, cash paid for income
taxes, earnings, share repurchases, economic conditions and U.S. and global
liquidity.
Share Repurchases
On August 23, 2021, our Board of Directors terminated the previously authorized
2012 share repurchase program (which had $47.8 million capacity remaining) and
authorized a new program (the "2021 Share Repurchase Program") to repurchase,
from time-to-time and as market and business conditions warrant, up to $200
million of our common stock. Repurchases may be made on the open market or in
privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or
other available means. There is no minimum or maximum number of shares to be
repurchased under the program and the program may be discontinued at any time,
without prior notice.
During the three and nine months ended October 30, 2021, there were no shares
repurchased under our 2021 or 2012 Share Repurchase Programs. There were
4,000,000 shares repurchased at an aggregate cost of $38.8 million under the
2012 program during the nine months ended October 31, 2020. The shares were
repurchased during the three months ended August 1, 2020. As of October 30,
2021, we had remaining authority under the 2021 Share Repurchase Program to
purchase $200 million of our common stock.
Borrowings and Finance Lease Obligations and Convertible Senior Notes
See "Part I, Item 1. Financial Statements - Note 9 - Borrowings and Finance
Lease Obligations" and "Part I, Item 1. Financial Statements - Note 10 -
Convertible Senior Notes and Related Transactions" in this Form 10-Q for
disclosures about our borrowings and finance lease obligations and convertible
senior notes.
Supplemental Executive Retirement Plan
As a non-qualified pension plan, no dedicated funding of our Supplemental
Executive Retirement Plan ("SERP") is required; however, we have made periodic
payments into insurance policies held in a rabbi trust to fund the expected
obligations arising under the non-qualified SERP.
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The cash surrender values of the insurance policies were $73.0 million and $72.1
million as of October 30, 2021 and January 30, 2021, respectively, and were
included in other assets in our condensed consolidated balance sheets. As a
result of changes in the value of the insurance policy investments, we recorded
unrealized gains of $0.1 million and $2.3 million in other income (expense)
during the three and nine months ended October 30, 2021 and unrealized gains
(losses) of $(0.3) million and $1.7 million in other income (expense) during the
three and nine months ended October 31, 2020, respectively. The projected
benefit obligation was $51.7 million and $52.3 million as of October 30, 2021
and January 30, 2021, respectively, and was included in accrued expenses and
other long-term liabilities in our condensed consolidated balance sheets
depending on the expected timing of payments. SERP benefit payments of $0.5
million and $1.4 million were made during the three and nine months ended
October 30, 2021, respectively. SERP benefit payments of $0.4 million and $1.3
million were made during the three and nine months ended October 31, 2020,
respectively.
Contractual Obligations and Commitments
As of October 30, 2021, there were no material changes to our contractual
obligations and commitments outside the ordinary course of business compared to
the disclosures included in our Form 10-K for the fiscal year ended January 30,
2021. See "Part I, Item 1. Financial Statements - Note 9 - Borrowings and
Finance Lease Obligations" and "Part I, Item 1. Financial Statements - Note 10 -
Convertible Senior Notes and Related Transactions" for further information on
these arrangements.
Application of Critical Accounting Policies and Estimates
Our critical accounting policies reflecting our estimates and judgments are
described in "Part II, Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations," in our Annual Report on Form 10-K for the
fiscal year ended January 30, 2021 filed with the SEC on April 9, 2021. There
have been no significant changes to our critical accounting policies during the
nine months ended October 30, 2021.
Recently Issued Accounting Guidance
See "Part I, Item 1. Financial Statements - Note 1 - Basis of Presentation and
New Accounting Guidance" for disclosures about recently issued accounting
guidance.
ITEM 3.Quantitative and Qualitative Disclosures About Market Risk.
Exchange Rate Risk
More than two-thirds of product sales recorded for the nine months ended October
30, 2021 were denominated in currencies other than the U.S. dollar. Our primary
exchange rate risk relates to operations in Europe, Canada, South Korea, China,
Hong Kong and Mexico. Changes in currencies affect our earnings in various ways.
For further discussion on currency-related risk, please refer to our risk
factors under "Part I, Item 1A. Risk Factors" contained in our most recent
Annual Report on Form 10-K for the fiscal year ended January 30, 2021.
Foreign Currency Translation Adjustment
The local selling currency is typically the functional currency for all of our
significant international operations. In accordance with authoritative guidance,
assets and liabilities of our foreign operations are translated from foreign
currencies into U.S. dollars at period-end rates, while income and expenses are
translated at the weighted average exchange rates for the period. The related
translation adjustments are reflected as a foreign currency translation
adjustment in accumulated other comprehensive income (loss) within stockholders'
equity. In addition, we record foreign currency translation adjustments related
to our noncontrolling interests within stockholders' equity. Accordingly, our
reported other comprehensive income (loss) could be unfavorably impacted if the
U.S. dollar strengthens, particularly against the British pound, Canadian
dollar, Chinese yuan, euro, Japanese yen, Korean won, Mexican peso, Polish
zloty, Russian rouble and Turkish lira. Alternatively, if the U.S. dollar
weakens relative to those currencies, our reported other
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comprehensive income (loss) could be favorably impacted. Our foreign currency
translation adjustments recorded in other comprehensive income (loss) are
significantly impacted by net assets denominated in euros.
Periodically, we may also use foreign exchange currency contracts to hedge the
translation and economic exposures related to our net investments in certain of
our international subsidiaries. Changes in the fair values of these foreign
exchange currency contracts, designated as net investment hedges, are recorded
in foreign currency translation adjustment as a component of accumulated other
comprehensive income (loss) within stockholders' equity.
During the nine months ended October 30, 2021, the total foreign currency
translation adjustment decreased stockholders' equity by $15.4 million, driven
primarily by the weakening of the U.S. dollar against the euro.
Foreign Currency Transaction Gains and Losses
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency,
including gains and losses on foreign exchange currency contracts (see below),
are included in the condensed consolidated statements of income (loss). Net
foreign currency transaction losses of $17.4 million and $10.2 million were
included in the determination of net earnings (loss) for the nine months ended
October 30, 2021 and October 31, 2020, respectively.
Foreign Exchange Currency Contracts
We operate in foreign countries, which exposes us to market risk associated with
foreign currency exchange rate fluctuations. Various transactions that occur
primarily in Europe, Canada, South Korea, China, Hong Kong and Mexico are
denominated in U.S. dollars, British pounds and Russian roubles and thus are
exposed to earnings risk as a result of exchange rate fluctuations when
converted to their functional currencies. These types of transactions include
U.S. dollar-denominated purchases of merchandise and U.S. dollar- and British
pound-denominated intercompany liabilities. In addition, certain operating
expenses, tax liabilities and pension-related liabilities are denominated in
Swiss francs and are exposed to earnings risk as a result of exchange rate
fluctuations when converted to the functional currency. Further, there are
certain real estate leases that are denominated in a currency other than the
functional currency of the respective entity that entered into the agreement
(primarily Swiss francs, Russian roubles and Polish zloty). As a result, we may
be exposed to volatility related to unrealized gains or losses on the
translation of present value of future lease payment obligations when translated
at the exchange rate as of a reporting period-end. We are also subject to
certain translation and economic exposures related to our net investment in
certain of our international subsidiaries. We enter into derivative financial
instruments to offset some, but not all, of our exchange risk. In addition, some
of the derivative contracts in place will create volatility during the fiscal
year as they are marked-to-market according to the accounting rules and may
result in revaluation gains or losses in different periods from when the
currency impact on the underlying transactions are realized.
Foreign Exchange Currency Contracts Designated as Cash Flow Hedges
During the nine months ended October 30, 2021, we purchased U.S. dollar forward
contracts in Europe totaling US$132.0 million that were designated as cash flow
hedges. As of October 30, 2021, we had forward contracts outstanding for our
European operations of US$136.0 million to hedge forecasted merchandise
purchases, which are expected to mature over the next 15 months. Our foreign
exchange currency contracts are recorded in our condensed consolidated balance
sheet at fair value based on quoted market rates. Changes in the fair value of
the U.S. dollar forward contracts, designated as cash flow hedges for forecasted
merchandise purchases, are recorded as a component of accumulated other
comprehensive income (loss) within stockholders' equity and are recognized in
cost of product sales in the period that approximates the time the hedged
merchandise inventory is sold. Changes in the fair value of the U.S. dollar
forward contracts, designated as cash flow hedges for forecasted intercompany
royalties, are recorded as a component of accumulated other comprehensive income
(loss) within stockholders' equity and are recognized in other income (expense)
in the period in which the royalty expense is incurred.
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As of October 30, 2021, accumulated other comprehensive income (loss) related to
foreign exchange currency contracts included a $3.6 million net unrealized gain,
net of tax, of which $2.8 million will be recognized in cost of product sales
over the following 12 months, at the then current values on a pre-tax basis,
which can be different than the current quarter-end values.
As of October 30, 2021, the net unrealized gain of the remaining open forward
contracts recorded in our condensed consolidated balance sheet was approximately
$3.8 million.
At January 30, 2021, we had forward contracts outstanding for our European
operations of US$100.0 million that were designated as cash flow hedges. At
January 30, 2021, the net unrealized loss of these open forward contracts
recorded in our condensed consolidated balance sheet was approximately $3.3
million.
Foreign Exchange Currency Contracts Not Designated as Hedging Instruments
We also have foreign exchange currency contracts that are not designated as
hedging instruments for accounting purposes. Changes in fair value of foreign
exchange currency contracts not designated as hedging instruments are reported
in net earnings (loss) as part of other income (expense). For the nine months
ended October 30, 2021, we recorded a net gain of $0.9 million for our euro
dollar foreign exchange currency contracts not designated as hedges, which has
been included in other income (expense). As of October 30, 2021, we had euro
foreign exchange currency contracts to purchase US$14.0 million expected to
mature over the next one month. As of October 30, 2021, the net unrealized gain
of these open forward contracts recorded in our condensed consolidated balance
sheet was approximately $0.5 million.
At January 30, 2021, we had euro foreign exchange currency contracts to purchase
US$19.0 million. At January 30, 2021, the net unrealized loss of these open
forward contracts recorded in our condensed consolidated balance sheet was
approximately $1.2 million.
Sensitivity Analysis
As of October 30, 2021, a sensitivity analysis of changes in foreign currencies
when measured against the U.S. dollar indicates that, if the U.S. dollar had
uniformly weakened by 10% against all of the U.S. dollar denominated foreign
exchange derivatives totaling US$150.0 million, the fair value of the
instruments would have decreased by $16.7 million. Conversely, if the U.S.
dollar uniformly strengthened by 10% against all of the U.S. dollar denominated
foreign exchange derivatives, the fair value of these instruments would have
increased by $13.6 million. Any resulting changes in the fair value of the
hedged instruments may be partially offset by changes in the fair value of
certain balance sheet positions (primarily U.S. dollar denominated liabilities
in our foreign operations) impacted by the change in the foreign currency rate.
The ability to reduce the exposure of currencies on earnings depends on the
magnitude of the derivatives compared to the balance sheet positions during each
reporting cycle.
Interest Rate Risk
We are exposed to interest rate risk on our floating-rate debt. We have entered
into interest rate swap agreements for certain of these agreements to
effectively convert our floating-rate debt to a fixed-rate basis. The principal
objective of these contracts is to eliminate or reduce the variability of the
cash flows in interest payments associated with our floating-rate debt, thus
reducing the impact of interest rate changes on future interest payment cash
flows. We have elected to apply the hedge accounting rules in accordance with
authoritative guidance for certain of these contracts.
In April 2019, we issued $300 million principal amount of convertible senior
notes in a private offering. The fair value of the convertible senior notes is
subject to interest rate risk, market risk and other factors due to a conversion
feature. The fair value of the convertible senior notes will generally increase
as our common stock price increases and will generally decrease as our common
stock price declines. The interest and market value changes affect the fair
value of the convertible senior notes but do not impact our financial position,
cash flows or results of operations due to the fixed nature of the debt
obligation. Additionally, we carry the convertible senior notes at face value,
less any unamortized discount on our balance sheet and we present the fair value
for disclosure purposes only.
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Interest Rate Swap Agreement Designated as Cash Flow Hedge
The fair value of the interest rate swap agreement is based upon inputs
corroborated by observable market data. Changes in the fair value of the
interest rate swap agreement, designated as a cash flow hedge to hedge the
variability of cash flows in interest payments associated with our floating-rate
real estate secured loan (the "Mortgage Debt"), are recorded as a component of
accumulated other comprehensive income (loss) within stockholders' equity and
are amortized to interest expense over the term of the related debt.
As of October 30, 2021, accumulated other comprehensive income (loss) related to
the interest rate swap agreement included a net unrealized loss of $0.3 million
net of tax, which will be recognized in interest expense over the following 12
months, at the then current values on a pre-tax basis, which can be different
than the current quarter-end values. As of October 30, 2021, the net unrealized
loss of the interest rate swap recorded in our condensed consolidated balance
sheet was approximately $0.4 million. As of January 30, 2021, the net unrealized
loss of the interest rate swap recorded in our condensed consolidated balance
sheet was approximately $1.0 million.
Sensitivity Analysis
As of October 30, 2021, we had indebtedness related to term loans of $52.3
million, finance lease obligations of $20.1 million and the Mortgage Debt of
$18.0 million. The term loans provide for annual interest rates ranging between
0.8% to 2.2%. The finance lease obligations are based on fixed interest rates
derived from the respective agreements. The Mortgage Debt is covered by a
separate interest rate swap agreement with a swap fixed interest rate of
approximately 3.06% that matures in January 2026. The interest rate swap
agreement is designated as a cash flow hedge and converts the nature of our
Mortgage Debt from LIBOR floating-rate debt to fixed-rate debt.
The fair values of our debt instruments are based on the amount of future cash
flows associated with each instrument discounted using our incremental borrowing
rate. As of October 30, 2021 and January 30, 2021, the carrying value was not
materially different from fair value, as the interest rates on our debt
approximated rates currently available to us. The fair value of our convertible
senior notes is determined based on inputs that are observable in the market and
have been classified as Level 2 in the fair value hierarchy.
ITEM 4. Controls and Procedures.
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act
of 1934, as amended. Based on this evaluation, our principal executive officer
and our principal financial officer concluded that our disclosure controls and
procedures were effective as of the end of the quarterly period covered by this
report.
There was no change in our internal control over financial reporting during the
third quarter of fiscal 2022 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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