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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q 
          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended May 2, 2020
OR 
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to           
Commission file number: 1-11893
GUESS?, INC.
(Exact name of registrant as specified in its charter)
Delaware
95-3679695
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
1444 South Alameda Street
Los Angeles,
California
90021
(Address of principal executive offices and zip code)
(213) 765-3100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
 
 
 
 
 
 
Common Stock, par value $0.01 per share
 
GES
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No x
As of June 8, 2020, the registrant had 67,602,723 shares of Common Stock, $.01 par value per share, outstanding.
 



GUESS?, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i


PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) 
 
May 2, 2020
 
Feb 1, 2020
 
(unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
419,415

 
$
284,613

Accounts receivable, net
239,532

 
327,281

Inventories
392,490

 
393,129

Other current assets
58,961

 
59,212

Total current assets
1,110,398

 
1,064,235

Property and equipment, net
244,681

 
288,112

Goodwill
34,490

 
34,777

Deferred tax assets
58,777

 
63,555

Restricted cash
213

 
215

Operating lease right-of-use assets
778,030

 
851,990

Other assets
120,163

 
126,078

 
$
2,346,752

 
$
2,428,962

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of borrowings and finance lease obligations
$
160,501

 
$
9,490

Accounts payable
214,937

 
232,761

Accrued expenses and other current liabilities
119,819

 
204,096

Current portion of operating lease liabilities
226,967

 
192,066

Total current liabilities
722,224

 
638,413

Convertible senior notes, net
250,176

 
247,363

Long-term debt and finance lease obligations
94,804

 
32,770

Long-term operating lease liabilities
659,947

 
714,079

Other long-term liabilities
128,878

 
130,259

 
1,856,029

 
1,762,884

Redeemable noncontrolling interests
3,934

 
4,731

 
 
 
 
Commitments and contingencies (Note 13)


 


 
 
 
 
Stockholders’ equity:
 

 
 

Preferred stock, $.01 par value. Authorized 10,000,000 shares; no shares issued and outstanding

 

Common stock, $.01 par value. Authorized 150,000,000 shares; issued 142,861,035 and 142,867,947 shares, outstanding 67,644,248 and 65,848,510 shares, as of May 2, 2020 and February 1, 2020, respectively
676

 
658

Paid-in capital
544,319

 
563,004

Retained earnings
973,006

 
1,130,409

Accumulated other comprehensive loss
(153,302
)
 
(139,910
)
Treasury stock, 75,216,787 and 77,019,437 shares as of May 2, 2020 and February 1, 2020, respectively
(893,045
)
 
(914,447
)
Guess?, Inc. stockholders’ equity
471,654

 
639,714

Nonredeemable noncontrolling interests
15,135

 
21,633

Total stockholders’ equity
486,789

 
661,347

 
$
2,346,752

 
$
2,428,962

 
See accompanying notes to condensed consolidated financial statements.

1


GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
May 2, 2020
 
May 4, 2019
Product sales
$
247,317

 
$
517,873

Net royalties
12,934

 
18,818

Net revenue
260,251

 
536,691

Cost of product sales
226,022

 
354,742

Gross profit
34,229

 
181,949

Selling, general and administrative expenses
143,288

 
204,645

Asset impairment charges
52,972

 
1,775

Net losses on lease terminations
456

 

Loss from operations
(162,487
)
 
(24,471
)
Other income (expense):
 

 
 

Interest expense
(5,462
)
 
(1,259
)
Interest income
610

 
361

Other income (expense), net
(19,580
)
 
2,071

 
(24,432
)
 
1,173

 
 
 
 
Loss before income tax benefit
(186,919
)
 
(23,298
)
Income tax benefit
(26,381
)
 
(2,717
)
Net loss
(160,538
)
 
(20,581
)
Net earnings (loss) attributable to noncontrolling interests
(2,872
)
 
793

Net loss attributable to Guess?, Inc.
$
(157,666
)
 
$
(21,374
)
 
 
 
 
Net loss per common share attributable to common stockholders (Note 3):
Basic
$
(2.40
)
 
$
(0.27
)
Diluted
$
(2.40
)
 
$
(0.27
)
 
 
 
 
Weighted average common shares outstanding attributable to common stockholders (Note 3):
Basic
65,715

 
79,925

Diluted
65,715

 
79,925


See accompanying notes to condensed consolidated financial statements.


2


GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 
Three Months Ended
 
May 2, 2020
 
May 4, 2019
Net loss
$
(160,538
)
 
$
(20,581
)
Other comprehensive income (loss) (“OCI”):
 

 
 

Foreign currency translation adjustment
 
 
 
Losses arising during the period
(18,499
)
 
(12,067
)
Derivative financial instruments designated as cash flow hedges
 

 
 

Gains arising during the period
3,536

 
4,436

Less income tax effect
(356
)
 
(572
)
Reclassification to net loss for gains realized
(1,988
)
 
(276
)
Less income tax effect
219

 
95

Defined benefit plans
 

 
 

Foreign currency and other adjustments

 
107

Less income tax effect
(1
)
 
(11
)
Net actuarial loss amortization
96

 
111

Prior service credit amortization
(16
)
 
(10
)
Less income tax effect
(9
)
 
(11
)
Total comprehensive loss
(177,556
)
 
(28,779
)
Less comprehensive income (loss) attributable to noncontrolling interests:
 

 
 

Net earnings (loss)
(2,872
)
 
793

Foreign currency translation adjustment
(3,626
)
 
310

Amounts attributable to noncontrolling interests
(6,498
)
 
1,103

Comprehensive loss attributable to Guess?, Inc.
$
(171,058
)
 
$
(29,882
)

See accompanying notes to condensed consolidated financial statements.


3


GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended
 
May 2, 2020
 
May 4, 2019
Cash flows from operating activities:
 

 
 

Net loss
$
(160,538
)
 
$
(20,581
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
17,024

 
18,598

Amortization of debt discount
2,599

 
213

Amortization of debt issuance costs
307

 
41

Share-based compensation expense
5,786

 
4,468

Forward contract gains
(1,102
)
 
(34
)
Net loss on impairment and disposition of property and equipment and long-term assets
53,483

 
2,250

Other items, net
9,951

 
82

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
84,667

 
68,482

Inventories
(7,894
)
 
(13,676
)
Prepaid expenses and other assets
1,059

 
(11,681
)
Operating lease assets and liabilities, net
27,704

 
89

Accounts payable and accrued expenses
(93,294
)
 
(145,077
)
Other long-term liabilities
(1,305
)
 
325

Net cash used in operating activities
(61,553
)
 
(96,501
)
Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(5,973
)
 
(17,865
)
Proceeds from sale of long-term assets
257

 

Net cash settlement of forward contracts

 
162

Other investing activities

 
521

Net cash used in investing activities
(5,716
)
 
(17,182
)
Cash flows from financing activities:
 

 
 

Proceeds from borrowings
245,961

 
78,892

Repayments on borrowings and finance lease obligations
(31,884
)
 
(34,185
)
Proceeds from issuance of convertible senior notes

 
300,000

Proceeds from issuance of warrants

 
28,080

Purchase of convertible note hedges

 
(60,990
)
Convertible debt issuance costs

 
(4,246
)
Purchase of equity forward contracts

 
(68,000
)
Dividends paid
(958
)
 
(18,642
)
Issuance of common stock, net of tax withholdings on vesting of stock awards
(3,036
)
 
(622
)
Purchase of treasury stock

 
(201,564
)
Net cash provided by financing activities
210,083

 
18,723

Effect of exchange rates on cash, cash equivalents and restricted cash
(8,014
)
 
(2,579
)
Net change in cash, cash equivalents and restricted cash
134,800

 
(97,539
)
Cash, cash equivalents and restricted cash at the beginning of the year
284,828

 
210,995

Cash, cash equivalents and restricted cash at the end of the period
$
419,628

 
$
113,456

 
 
 
 
Supplemental cash flow data:
 

 
 

Interest paid
$
3,960

 
$
566

Income taxes paid, net of refunds
$
590

 
$
(232
)
 
 
 
 
Non-cash investing and financing activity:
 
 
 
Assets acquired under finance lease obligations
$
86

 
$
665

 
See accompanying notes to condensed consolidated financial statements.

4


GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
 
For the three months ended May 2, 2020
 
Guess?, Inc. Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
Shares
 
Amount
 
Paid-in
Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Shares
 
Amount
 
Nonredeemable
Noncontrolling
Interests
 
Total
Balance at February 1, 2020
65,848,510

 
$
658

 
$
563,004

 
$
1,130,409

 
$
(139,910
)
 
77,019,437

 
$
(914,447
)
 
$
21,633

 
$
661,347

Net loss

 

 

 
(157,666
)
 

 

 

 
(2,872
)
 
(160,538
)
Other comprehensive loss, net of income tax of ($147)

 

 

 

 
(13,392
)
 

 

 
(3,626
)
 
(17,018
)
Issuance of common stock under stock compensation plans including tax effect
1,763,311

 
18

 
(24,264
)
 

 

 
(1,770,223
)
 
21,017

 

 
(3,229
)
Issuance of stock under Employee Stock Purchase Plan
32,427

 

 
(192
)
 

 

 
(32,427
)
 
385

 

 
193

Share-based compensation

 

 
5,771

 
15

 

 

 

 

 
5,786

Dividends, net of forfeitures on non-participating securities

 

 

 
248

 

 

 

 

 
248

Balance at May 2, 2020
67,644,248

 
$
676

 
$
544,319

 
$
973,006

 
$
(153,302
)
 
75,216,787

 
$
(893,045
)
 
$
15,135

 
$
486,789




5


GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
 
For the three months ended May 4, 2019
 
Guess?, Inc. Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
Shares
 
Amount
 
Paid-in
Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Shares
 
Amount
 
Nonredeemable
Noncontrolling
Interests
 
Total
Balance at February 2, 2019
81,379,660

 
$
814

 
$
523,331

 
$
1,077,747

 
$
(126,179
)
 
61,327,640

 
$
(638,486
)
 
$
16,418

 
$
853,645

Cumulative adjustment from adoption of new accounting guidance

 

 

 
(1,684
)
 
1,981

 

 

 

 
297

Net earnings (loss)

 

 

 
(21,374
)
 

 

 

 
793

 
(20,581
)
Other comprehensive income (loss), net of income tax of ($499)

 

 

 

 
(8,508
)
 

 

 
310

 
(8,198
)
Issuance of common stock under stock compensation plans including tax effect
545,881

 
5

 
(3,042
)
 

 

 
(211,221
)
 
2,225

 

 
(812
)
Issuance of stock under Employee Stock Purchase Plan
11,377

 
1

 
69

 

 

 
(11,377
)
 
120

 

 
190

Share-based compensation

 

 
4,440

 
28

 

 

 

 

 
4,468

Dividends, net of forfeitures on non-participating securities

 

 

 
(18,331
)
 

 

 

 

 
(18,331
)
Share repurchases
(10,264,052
)
 
(103
)
 
103

 

 

 
10,264,052

 
(201,564
)
 

 
(201,564
)
Equity component value of convertible note issuance, net

 

 
42,324

 

 

 

 

 

 
42,324

Sale of common stock warrant

 

 
28,080

 

 

 

 

 

 
28,080

Purchase of convertible note hedge

 

 
(46,440
)
 

 

 

 

 

 
(46,440
)
Equity forward contract issuance

 

 
(68,000
)
 

 

 

 

 

 
(68,000
)
Balance at May 4, 2019
71,672,866

 
$
717

 
$
480,865

 
$
1,036,386

 
$
(132,706
)
 
71,369,094

 
$
(837,705
)
 
$
17,521

 
$
565,078


See accompanying notes to condensed consolidated financial statements.

6


GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 2, 2020
(unaudited) 
(1)
Basis of Presentation and New Accounting Guidance
Description of the Business
Guess?, Inc. (the “Company” or “GUESS?”) designs, markets, distributes and licenses a leading lifestyle collection of contemporary apparel and accessories for men, women and children that reflect the American lifestyle and European fashion sensibilities. The Company’s designs are sold in GUESS? owned stores, to a network of wholesale accounts that includes better department stores, selected specialty retailers and upscale boutiques and through the Internet. GUESS? branded products, some of which are produced under license, are also sold internationally through a series of retail store licensees and wholesale distributors.
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheets as of May 2, 2020 and February 1, 2020, the condensed consolidated statements of loss, comprehensive loss, cash flows and stockholders’ equity for the three months ended May 2, 2020 and May 4, 2019. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for the three months ended May 2, 2020 are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended February 1, 2020.
The three months ended May 2, 2020 had the same number of days as the three months ended May 4, 2019. All references herein to “fiscal 2021,” “fiscal 2020” and “fiscal 2019” represent the results of the 52-week fiscal year ending January 30, 2021 and the 52-week fiscal years ended February 1, 2020 and February 2, 2019, respectively.
Reclassifications
The Company has made certain reclassifications to prior period amounts to conform to the current period presentation within the accompanying notes to the condensed consolidated financial statements.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosed in the accompanying notes. Significant areas requiring the use of management estimates relate to the allowances for doubtful accounts, sales return and markdown allowances, gift card and loyalty accruals, valuation of inventories, share-based compensation, recoverability of deferred taxes, unrecognized tax benefits, the useful life of assets for depreciation and amortization, evaluation of asset impairment, pension obligations, workers’ compensation and medical self-insurance expense and accruals, litigation reserves and restructuring expense and accruals. Actual results could differ from those estimates. Revisions in estimates could materially impact the results of operations and financial position.

7


As discussed further below, the coronavirus (or “COVID-19”) pandemic has materially impacted the Company’s results during the three months ended May 2, 2020. The Company’s operations could continue to be impacted in ways we are not able to predict today due to the developing situation. While the Company believes it has made reasonable accounting estimates based on the facts and circumstances that were available as of the reporting date, to the extent there are differences between these estimates and actual results, the Company’s results of operations and financial position could be materially impacted.
COVID-19 Business Update
The COVID-19 pandemic has had and is continuing to have a material impact on the Company’s financial performance. The pandemic is ongoing and dynamic in nature and, to date, the Company has experienced temporary closures in key regions globally, along with other major retailers. Beginning in mid-April, the Company began to reopen some of its stores in Europe. In May 2020, the Company began to reopen some of its stores in the U.S. and Canada. In Asia, where store closures related to COVID-19 began, all of the Company’s directly-operated stores have reopened. The Company will continue to reopen stores in phases, as state and local guidelines and conditions permit, taking an informed, measured approach based on a number of factors. The Company’s e-commerce sites remain open in all regions. In addition, retail stores that are open have and continue to experience significant reductions in traffic and therefore, revenue. The Company’s e-commerce sites have experienced lower traffic, but this has been partially offset by a strengthening in conversion. Many of the Company’s wholesale and licensing partners have also substantially reduced their operations. The Company has and will continue to bring back store associates and support staff as stores reopen. The extent and duration of the global pandemic remains uncertain and may continue to impact consumer purchasing activity throughout the year.
During the first quarter of fiscal 2021, in addition to the negative impact from lower net revenue, the Company’s operating results also reflected asset impairment charges as well as additional inventory valuation reserves and higher allowances for markdowns and doubtful accounts due to the ongoing effects of the COVID-19 pandemic. These charges were partially offset by the favorable impact from various European and U.S. government assistance programs related primarily to the recovery of employee payroll costs as well as certain favorable tax treatments.
During the first half of fiscal 2021, the Company implemented a number of measures to help mitigate the operating and financial impact of the pandemic, including: (i) furloughing its U.S. and Canada store associates and significant portions of its U.S. and Canada corporate and distribution center associates and permanently reducing U.S. corporate headcount; (ii) implementing temporary tiered salary reductions for management level corporate employees, including its executive officers; (iii) deferring annual merit increases; (iv) executing substantial reductions in expenses, store occupancy costs, capital expenditures and overall costs, including through reduced inventory purchases; (v) working globally with country management teams to maximize the Company’s participation in all eligible government or other initiatives available to businesses or employees impacted by the COVID-19 pandemic; (vi) drawing down on certain credit facilities and entering into certain term loans to ensure financial flexibility and maintain maximum liquidity; (vii) engaging with landlords to negotiate rent deferrals or other rent concessions; (viii) working with vendors to extend payment terms; and (ix) postponing its decision related to the payment of its quarterly cash dividend.
In response to the COVID-19 pandemic, governments in various jurisdictions have implemented relief programs to provide assistance in the form of wage subsidies and tax related payment deferrals (related to payroll, income, sales and other taxes). The Company is leveraging these relief initiatives where able to help mitigate expenses and provide additional liquidity. An example of such an economic relief program is the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was enacted by the U.S. government in March 2020. The provisions of the Act include the deferral of the employer portion of social security taxes, creation of refundable employee retention tax credits, relaxation of the net interest deduction limitations, technical amendment for qualified improvement property deduction and modification of net operating loss carryback periods.

8


In light of store closures, the Company has taken certain actions with respect to certain of its existing leases, including engaging with landlords to discuss rent deferrals as well as other rent concessions. Consistent with updated guidance from the Financial Accounting Standards Board (“FASB”) in April 2020, the Company has elected to treat such agreed-upon payment deferrals related to the COVID-19 pandemic as if there were no modifications to the lease contract and has accrued such amounts within the current portion of operating lease liabilities in the Company’s condensed consolidated balance sheet. The Company has elected to treat other rent concessions which result in reduced lease payments as variable lease payments if the concessions that are provided are for a period of less than 12 months. For any rent concessions which reduce the lease payments for a period of more than 12 months or change the payment terms from minimum rental amounts to amounts based on a percentage of sales volume for the remainder of the lease term, the Company has elected to treat such changes as lease modifications under the current lease guidance.
Revenue Recognition
The Company recognizes the majority of its revenue from its direct-to-consumer (brick-and-mortar retail stores and concessions as well as e-commerce) and wholesale distribution channels at a point in time when it satisfies a performance obligation and transfers control of the product to the respective customer.
The Company also recognizes royalty revenue from its trademark license agreements. The Company’s trademark license agreements represent symbolic licenses that are dependent on the Company’s continued support over the term of the license agreement. The amount of revenue that is recognized from the licensing arrangements is based on sales-based royalty and advertising fund contributions as well as specific fixed payments, where applicable. The Company’s trademark license agreements customarily provide for a multi-year initial term ranging from three to ten years, and may contain options to renew prior to expiration for an additional multi-year period. The unrecognized portion of upfront payments is included in deferred royalties in accrued expenses and other long-term liabilities depending on the short or long-term nature of the payments to be recognized. As of May 2, 2020, the Company had $6.5 million and $17.1 million of deferred royalties related to these upfront payments included in accrued expenses and other long-term liabilities, respectively. This compares to $6.7 million and $18.7 million of deferred royalties related to these upfront payments included in accrued expenses and other long-term liabilities, respectively, at February 1, 2020. During the three months ended May 2, 2020 and May 4, 2019, the Company recognized $3.6 million and $3.1 million in net royalties related to the amortization of the deferred royalties, respectively.
Refer to Note 8 for further information on disaggregation of revenue by segment and country.
Allowance for Doubtful Accounts
During the first quarter of fiscal 2021, the Company adopted authoritative guidance related to the measurement of credit losses on financial instruments. This guidance replaces the current “as incurred” loss model with an “expected loss” model which requires the recognition of an allowance for credit losses expected to be incurred over an asset’s lifetime. The adoption of this guidance did not have a material impact on the Company’s allowance for doubtful accounts.
In the normal course of business, the Company grants credit directly to certain wholesale customers after a credit analysis is performed based on financial and other criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses that may result from the inability of its wholesale customers and licensing partners to make their required payments. The Company bases its allowances on analysis of the aging of accounts receivable at the date of the financial statements, assessments of historical and current collection trends, an evaluation of the impact of current and future forecasted economic conditions and whether the Company has obtained credit insurance or other guarantees. Management performs regular evaluations concerning the ability of its customers and records a provision for doubtful accounts based on these evaluations.

9


As of May 2, 2020, approximately 54% of the Company’s total net trade accounts receivable and 66% of its European net trade receivables were subject to credit insurance coverage, certain bank guarantees or letters of credit for collection purposes. The Company’s credit insurance coverage contains certain terms and conditions specifying deductibles and annual claim limits. Management evaluates the creditworthiness of the counterparties to the credit insurance, bank guarantees, and letters of credit and records a provision for the risk of loss on these instruments based on these evaluations as considered necessary.
The Company’s credit losses for the periods presented were not significant compared to sales and did not significantly exceed management’s estimates. Refer to Note 5 for further information on the Company’s allowance for doubtful accounts.
Other Assets
During fiscal 2019, the Company invested $8.3 million in a privately-held apparel company and holds a 30% minority interest. The Company’s ownership in this company is accounted for under the equity method of accounting. The Company recognized its proportionate share of net losses of $2.1 million in other expense in its condensed consolidated statements of loss during the three months ended May 2, 2020.
New Accounting Guidance
Changes in Accounting Policies
In June 2016, the FASB issued authoritative guidance related to the measurement of credit losses on financial instruments. This guidance replaces the current “as incurred” loss model with an “expected loss” model which requires the recognition of an allowance for credit losses expected to be incurred over an asset’s lifetime. The measurement of expected credit losses is based on relevant information about past events, current conditions and reasonable and supportable forecasts impacting the collectibility of the reported amounts. This guidance was adopted as of February 2, 2020 on a modified retrospective basis and did not have a material impact on the Company’s consolidated financial statements or related disclosures.
In August 2018, the FASB issued authoritative guidance to modify the disclosure requirements on fair value measurements. This guidance was adopted as of February 2, 2020 on a prospective basis and did not have a material impact on the Company’s related disclosures.
In August 2018, the FASB issued authoritative guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company adopted this guidance as of February 2, 2020 on a prospective basis. Prior to the adoption of this guidance, the Company capitalized implementation costs related to a hosting arrangement that is a service contract to property and equipment, net in the Company’s consolidated balance sheets and included such expenditures within the investing section of the Company’s consolidated statements of cash flows. These assets were amortized over their estimated useful life with the related amortization included in depreciation and amortization in either cost of product sales or selling, general and administrative (“SG&A”) expenses in the Company’s consolidated statements of income (loss) depending on the nature of how the assets were used. Subsequent to the adoption of this guidance, these costs are included within other current assets or other assets in the Company’s consolidated balance sheets depending on the short or long-term nature of the underlying hosting agreement with such expenditures included in the operating section of the Company’s consolidated statements of cash flows. These assets are now amortized over the shorter of the estimated useful life or the term of the underlying hosting agreement, including any probable renewal periods, with the related amortization included in cost of product sales or SG&A expenses in the Company’s consolidated statements of income (loss), consistent with the presentation of the expense related to the underlying hosting arrangement. The adoption of this guidance, including the different classification requirements for the implementation costs, did not have a material impact on the Company’s consolidated financial statements or the related disclosures.

10


Recently Issued Accounting Guidance
In August 2018, the FASB issued authoritative guidance to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This guidance is effective for fiscal years beginning after December 15, 2020, which will be the Company’s first quarter of fiscal 2022, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its related disclosures.
In December 2019, the FASB issued authoritative guidance that simplifies the accounting for income taxes by eliminating certain exceptions to general principles related to intraperiod tax allocations, ownership changes in foreign investments and calculating income taxes in an interim period when year-to-date losses exceed total anticipated losses. The new guidance also simplifies the accounting for income taxes related to franchise taxes that are partially based on income, the step up in the tax basis of goodwill, allocation of current and deferred tax expense for certain legal entities and enacted changes in tax laws or rates during interim periods, among other improvements. This guidance is effective for fiscal years beginning after December 15, 2020, which will be the Company’s first quarter of fiscal 2022, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.
In March 2020, the FASB issued authoritative guidance to provide temporary optional expedients and exceptions related to contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as SOFR. This guidance may be adopted as of March 12, 2020 through December 31, 2022. This temporary relief cannot be applied to contract modifications after December 31, 2022. The Company is currently evaluating its election options and the impact on its consolidated financial statements and related disclosures.
(2)    Lease Accounting
The Company primarily leases its showrooms, advertising, licensing, sales and merchandising offices, remote distribution and warehousing facilities and retail and factory outlet store locations under operating lease agreements expiring on various dates through January 2039. The Company also leases some of its equipment as well as computer hardware and software under operating and finance lease agreements expiring on various dates through May 2027.
The Company’s lease agreements primarily provide for lease payments based on a minimum annual rental amount, a percentage of annual sales volume, periodic adjustments related to inflation or a combination of such lease payments. Certain retail store leases provide for lease payments based upon the minimum annual rental amount and a percentage of annual sales volume, generally ranging from 3% to 24%, when specific sales volumes are exceeded. The Company’s retail concession leases also provide for lease payments primarily based upon a percentage of annual sales volume, which averages approximately 36%.
In addition to the amounts as disclosed below, the Company has estimated additional operating lease commitments of approximately $10.9 million for leases where the Company has not yet taken possession of the underlying asset as of May 2, 2020. As such, the related operating lease ROU assets and operating lease liabilities have not been recognized in the Company’s condensed consolidated balance sheet as of May 2, 2020.

11


As of May 2, 2020 and February 1, 2020, the components of leases are as follows (in thousands):
 
Balance Sheet Location
May 2, 2020
 
Feb 1, 2020
Assets
 
 
 
 
Operating
Operating lease right-of-use assets
$
778,030

 
$
851,990

Finance
Property and equipment, net
15,159

 
15,972

Total lease assets
$
793,189

 
$
867,962

 
 
 
 
 
Liabilities
 
 
 
 
Current:
 
 
 
 
Operating
Current portion of operating lease liabilities
$
226,967

 
$
192,066

Finance
Current portion of borrowings and finance lease obligations
2,629

 
2,273

Noncurrent:
 
 
 
 
Operating
Long-term operating lease liabilities
659,947

 
714,079

Finance
Long-term debt and finance lease obligations
13,222

 
14,262

Total lease liabilities
$
902,765

 
$
922,680



As of May 2, 2020 and May 4, 2019, the components of lease costs are as follows (in thousands):
 
 
Three Months Ended
 
Income Statement Location
May 2, 2020
 
May 4, 2019
Operating lease costs
Cost of product sales
$
55,369

 
$
58,816

Operating lease costs
Selling, general and administrative expenses
5,176

 
5,264

Finance lease costs
 
 
 
 
Amortization of leased assets1
Cost of product sales
681

 
43

Amortization of leased assets1
Selling, general and administrative expenses
1,278

 
543

Interest on lease liabilities
Interest expense
282

 
287

Variable lease costs2
Cost of product sales
14,348

 
24,825

Variable lease costs2
Selling, general and administrative expenses
579

 
827

Short-term lease costs
Cost of product sales
239

 

Short-term lease costs
Selling, general and administrative expenses
1,789

 
212

Total lease costs
$
79,741

 
$
90,817

______________________________________________________________________
Notes:
1  
Amortization of leased assets related to finance leases are included in depreciation expense within cost of product sales or selling, general and administrative expenses depending on the nature of the asset in the Company’s condensed consolidated statements of loss.
2  
During the three months ended May 2, 2020, variable lease costs included certain rent concessions granted related to the COVID-19 pandemic. Refer to Note 1 for further information.

Maturities of the Company’s operating and finance lease liabilities as of May 2, 2020 are as follows (in thousands):
Maturity of Lease Liabilities
Operating Leases
 
Finance Leases
 
Total
20211
$
185,976

 
$
2,441

 
$
188,417

2022
198,951

 
3,660

 
202,611

2023
164,949

 
3,251

 
168,200

2024
136,666

 
3,072

 
139,738

2025
95,606

 
2,289

 
97,895

After 2025
189,303

 
4,867

 
194,170

Total lease payments
971,451

 
19,580

 
991,031

Less: Interest
84,537

 
3,729

 
88,266

Present value of lease liabilities
$
886,914

 
$
15,851

 
$
902,765

______________________________________________________________________
Notes:
1 
Represents the maturity of lease liabilities for the remainder of fiscal 2021 and also includes rent payments that have been deferred due to the COVID-19 pandemic. This amount does not include payments made during the three months ended May 2, 2020.

12


Other supplemental information is as follows (dollars in thousands):
Lease Term and Discount Rate
May 2, 2020
Weighted-average remaining lease term (years)
 
Operating leases
5.8 years
Finance leases
6.1 years
Weighted-average discount rate
 
Operating leases
3.5%
Finance leases
7.1%
 
Three Months Ended
Supplemental Cash Flow Information
May 2, 2020
 
May 4, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
 
Operating cash flows from operating leases
$
32,618

 
$
62,082

New operating ROU assets obtained in exchange for lease liabilities
$
16,332

 
$
68,804


Impairment
During the three months ended May 2, 2020, the Company recorded asset impairment charges of $28.2 million related primarily to ROU assets at certain retail locations in North America and, to a lesser extent, Europe. The asset impairment charges were determined based on the excess of carrying value over the fair value of the ROU assets. The Company uses estimates of market participant rents to calculate fair value of the ROU assets. There were no asset impairment charges recorded related to the Company’s ROU assets during the three months ended May 4, 2019. Refer to Note 15 for more information on the Company’s impairment testing.
(3)
Loss per Share
Basic earnings (loss) per share represents net earnings (loss) attributable to common stockholders divided by the weighted average number of common shares outstanding during the period. The Company considers any restricted stock units with forfeitable dividend rights that are issued and outstanding, but considered contingently returnable if certain service conditions are not met, as common equivalent shares outstanding. These restricted stock units are excluded from the weighted average number of common shares outstanding and basic earnings (loss) per share calculation until the respective service conditions have been met. Diluted earnings per share represents net earnings attributable to common stockholders divided by the weighted average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period, and the dilutive impact of the Company’s convertible senior notes and related warrants, as applicable.
The Company expects to settle the principal amount of its outstanding convertible senior notes in cash and any excess in shares. As a result, upon conversion of the convertible senior notes, only the amounts in excess of the principal amount are considered in diluted earnings per share under the treasury stock method, if applicable. See Note 10 for more information regarding the Company’s convertible senior notes.
In periods when there is a net loss, the potentially dilutive impact of common equivalent shares outstanding is not included in the computation of diluted net loss per share as the impact of the shares would be antidilutive. Nonvested restricted stock awards (referred to as participating securities) are excluded from the dilutive impact of common equivalent shares outstanding in accordance with authoritative guidance under the two-class method since the nonvested restricted stockholders are entitled to participate in dividends declared on common stock as if the shares were fully vested and hence are deemed to be participating securities. Under the two-class method, distributed and undistributed earnings attributable to nonvested restricted stockholders are excluded from net earnings (loss) attributable to common stockholders for purposes of calculating basic and diluted earnings (loss) per common share. However, net losses are not allocated to nonvested restricted stockholders because they are not contractually obligated to share in the losses of the Company.

13


In addition, the Company has granted certain nonvested stock units that are subject to certain performance-based or market-based vesting conditions as well as continued service requirements through the respective vesting periods. These nonvested stock units are included in the computation of diluted net earnings per common share attributable to common stockholders only to the extent that the underlying performance-based or market-based vesting conditions are satisfied as of the end of the reporting period, or would be considered satisfied if the end of the reporting period was the end of the related contingency period, and the results would be dilutive under the treasury stock method.
The computation of basic and diluted net loss per common share attributable to common stockholders is as follows (in thousands, except per share data):
 
Three Months Ended
 
May 2, 2020
 
May 4, 2019
Net loss attributable to Guess?, Inc.
$
(157,666
)
 
$
(21,374
)
Less net earnings attributable to nonvested restricted stockholders

 
161

Net loss attributable to common stockholders
$
(157,666
)
 
$
(21,535
)
 
 
 
 
Weighted average common shares used in basic computations
65,715

 
79,925

Effect of dilutive securities:
 

 
 

Stock options and restricted stock units1

 

Weighted average common shares used in diluted computations
65,715

 
79,925

 
 
 
 
Net loss per common share attributable to common stockholders:
Basic
$
(2.40
)
 
$
(0.27
)
Diluted
$
(2.40
)
 
$
(0.27
)

______________________________________________________________________
Notes:
1 
For the three months ended May 2, 2020 and May 4, 2019, there were 484,674 and 1,052,518, respectively, of potentially dilutive shares that were not included in the computation of diluted weighted average common shares and common equivalent shares outstanding because their effect would have been antidilutive given the Company’s net loss.
For the three months ended May 2, 2020 and May 4, 2019, equity awards granted for 3,157,824 and 2,137,004, respectively, of the Company’s common shares were outstanding but were excluded from the computation of diluted weighted average common shares and common equivalent shares outstanding because the assumed proceeds, as calculated under the treasury stock method, resulted in these awards being antidilutive. The Company excluded 227,729 and 1,075,085 nonvested stock units which are subject to the achievement of performance-based vesting conditions from the computation of diluted weighted average common shares and common equivalent shares outstanding because these conditions were not achieved as of May 2, 2020 and May 4, 2019, respectively.
The conversion spread on the Company’s convertible senior notes will have a dilutive impact on diluted earnings per share when the average market price of the Company’s common stock for a given period exceeds the conversion price of $25.78 per share of common stock. For the three months ended May 2, 2020 and May 4, 2019, the convertible senior notes have been excluded from the computation of diluted earnings per share as the effect would be antidilutive since the conversion price of the convertible senior notes exceeded the average market price of the Company’s common stock. Warrants to initially purchase 11.6 million shares of the Company’s common shares at an initial strike price of $46.88 per share were outstanding as of May 2, 2020. These warrants were excluded from the computation of diluted earnings per share since the warrants’ adjusted strike price was greater than the average market price of the Company’s common stock during the three months ended May 2, 2020 and May 4, 2019. See Note 10 for more information regarding the Company’s convertible senior notes.


14


(4)
Stockholders’ Equity
Share Repurchase Program
On June 26, 2012, the Company’s Board of Directors authorized a program to repurchase, from time-to-time and as market and business conditions warrant, up to $500 million of the Company’s common stock. Repurchases under the program 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, which may be discontinued at any time, without prior notice. There were no shares repurchased under the program during the three months ended May 2, 2020. The Company repurchased 10,264,052 shares at an aggregate cost of $201.5 million during the three months ended May 4, 2019, which is inclusive of the shares repurchased under the accelerated share repurchase agreement (the “ASR Contract”) as described below. As of May 2, 2020, the Company had remaining authority under the program to purchase $86.7 million of its common stock.
On April 26, 2019, pursuant to existing stock repurchase authorizations, the Company entered into an ASR Contract with JPMorgan Chase Bank, National Association (in such capacity, the “ASR Counterparty”), to repurchase an aggregate of $170 million of the Company’s common stock. Under the ASR Contract, the Company made an initial payment of $170 million to the ASR Counterparty and received an initial delivery of approximately 5.2 million shares of common stock, which represented approximately $102 million (or 60%) of the ASR Contract. The Company received a final delivery of an additional 5.4 million shares, or $68 million, under its ASR Contract during the third quarter of fiscal 2020. The final share amount was determined based on the daily volume-weighted average price since the effective date of the ASR Contract, less the applicable contractual discount. When combined with the 5.2 million upfront shares received at the inception of the ASR in April 2019, the Company repurchased approximately 10.6 million of its shares under the ASR at an average repurchase price of $16.09 per share. All shares were repurchased in accordance with the Company’s publicly announced ASR program, which was completed during the third quarter of fiscal 2020. The shares delivered under the ASR Contract reduced the Company’s outstanding shares and its weighted average number of common shares outstanding for purposes of calculating basic and diluted earnings per share.
Dividends
During the first quarter of fiscal 2021, the Company announced that its Board of Directors had deferred the decision with respect to the payment of its quarterly cash dividend. While the Company remains committed to returning capital to shareholders through a dividend on a long-term basis, the Board of Directors has decided to continue to postpone its decision with respect to the payment of its quarterly cash dividend at this time in order to preserve the Company’s cash position and provide continued financial flexibility in light of the uncertainties related to the COVID-19 pandemic. As a result, there was no cash dividend declared during the three months ended May 2, 2020. During the three months ended May 2, 2020, dividends paid related to the vesting of restricted stock units that are considered non-participating securities and are only entitled to dividend payments once the respective awards vest. During the three months ended May 4, 2019, the Company declared a cash dividend of $0.225 per share.
During the first quarter of fiscal 2020, the Company announced that its Board of Directors reduced the future quarterly cash dividends that may be paid to holders of the Company’s common stock, when, as and if any such dividend is declared by the Company’s Board of Directors, from $0.225 per share to $0.1125 per share to redeploy capital and return incremental value to shareholders through share repurchases.
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 the Company’s Board of Directors, which reserves the right to change or terminate the Company’s 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.


15


Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss), net of related income taxes, for the three months ended May 2, 2020 and May 4, 2019 are as follows (in thousands):
 
Three Months Ended May 2, 2020
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Defined Benefit Plans
 
Total
Balance at February 1, 2020
$
(137,289
)
 
$
6,300

 
$
(8,921
)
 
$
(139,910
)
Gains (losses) arising during the period
(14,873
)
 
3,180

 
(1
)
 
(11,694
)
Reclassification to net loss for (gains) losses realized

 
(1,769
)
 
71

 
(1,698
)
Net other comprehensive income (loss)
(14,873
)
 
1,411

 
70

 
(13,392
)
Balance at May 2, 2020
$
(152,162
)
 
$
7,711

 
$
(8,851
)
 
$
(153,302
)
 
Three Months Ended May 4, 2019
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Defined Benefit Plans
 
Total
Balance at February 2, 2019
$
(119,546
)
 
$
2,999

 
$
(9,632
)
 
$
(126,179
)
Cumulative adjustment reclassified from retained earnings due to adoption of new accounting guidance1

 
1,981

 

 
1,981

Gains (losses) arising during the period
(12,377
)
 
3,864

 
96

 
(8,417
)
Reclassification to net loss for (gains) losses realized

 
(181
)
 
90

 
(91
)
Net other comprehensive income (loss)
(12,377
)
 
3,683

 
186

 
(8,508
)
Balance at May 4, 2019
$
(131,923
)
 
$
8,663

 
$
(9,446
)
 
$
(132,706
)

______________________________________________________________________
Notes:
1 
During the first quarter of fiscal 2020, the Company adopted new authoritative guidance which eliminated the requirement to separately measure and report ineffectiveness for instruments that qualify for hedge accounting and generally requires that the entire change in the fair value of such instruments ultimately be presented in the same line as the respective hedge item. As a result, there is no interest component recognized for the ineffective portion of instruments that qualify for hedge accounting, but rather all changes in the fair value of such instruments are included in other comprehensive income (loss). Upon adoption of this guidance, the Company reclassified approximately $2.0 million in gains from retained earnings to accumulated other comprehensive loss related to the previously recorded interest component on outstanding instruments that qualified for hedge accounting.
Details on reclassifications out of accumulated other comprehensive income (loss) to net loss during the three months ended May 2, 2020 and May 4, 2019 are as follows (in thousands):
 
Three Months Ended
 
Location of (Gain) Loss Reclassified from Accumulated OCI into Loss
 
May 2, 2020
 
May 4, 2019
 
Derivative financial instruments designated as cash flow hedges:
 
   Foreign exchange currency contracts
$
(1,991
)
 
$
(230
)
 
Cost of product sales
   Interest rate swap
3

 
(46
)
 
Interest expense
      Less income tax effect
219

 
95

 
Income tax benefit
 
(1,769
)
 
(181
)
 
 
Defined benefit plans:
 
 
 
 
 
   Net actuarial loss amortization
96

 
111

 
Other income (expense)
   Prior service credit amortization
(16
)
 
(10
)
 
Other income (expense)
      Less income tax effect
(9
)
 
(11
)
 
Income tax benefit
 
71

 
90

 
 
Total reclassifications during the period
$
(1,698
)
 
$
(91
)
 
 


16


(5)
Accounts Receivable
Accounts receivable is summarized as follows (in thousands):
 
May 2, 2020
 
Feb 1, 2020
Trade
$
220,942

 
$
309,508

Royalty
14,876

 
12,775

Other
14,359

 
13,429

 
250,177

 
335,712

Less allowances1
10,645

 
8,431

 
$
239,532

 
$
327,281


______________________________________________________________________
Notes:
1 
During the first quarter of fiscal 2021, the Company adopted authoritative guidance related to the measurement of credit losses on financial instruments. This guidance replaces the current “as incurred” loss model with an “expected loss” model which requires the recognition of an allowance for credit losses expected to be incurred over an asset’s lifetime. The adoption of this guidance did not have a material impact on the Company’s allowance for doubtful accounts. Refer to Note 1 for further information.
Accounts receivable consists of trade receivables relating primarily to the Company’s wholesale business in Europe and, to a lesser extent, to its wholesale businesses in the Americas and Asia, royalty receivables relating to its licensing operations, credit card and retail concession receivables related to its retail businesses and certain other receivables. Other receivables generally relate to amounts due to the Company that result from activities that are not related to the direct sale of the Company’s products or collection of royalties.
(6)
Inventories
Inventories consist of the following (in thousands):
 
May 2, 2020
 
Feb 1, 2020
Raw materials
$
565

 
$
399

Work in progress
48

 
52

Finished goods
391,877

 
392,678

 
$
392,490

 
$
393,129


The above balances include an allowance to write down inventories to the lower of cost or net realizable value of $39.5 million and $24.5 million as of May 2, 2020 and February 1, 2020, respectively.
(7)
Income Taxes
Effective Tax Rate
Income tax expense for the interim periods was computed using the tax rate estimated to be applicable for the full fiscal year, adjusted for discrete items. The Company’s effective income tax rate was a benefit of 14.1% for the three months ended May 2, 2020, compared to a benefit of 11.7% for the three months ended May 4, 2019. During the three months ended May 2, 2020, the Company recognized a tax benefit of approximately $11.8 million from a tax rate change related to the ability to carryback net operating losses to tax years with a higher federal corporate tax rate as allowed under the CARES Act enacted in March 2020. This benefit was partially offset by a valuation allowance of $3.7 million resulting from jurisdictions where there have been cumulative net operating losses, limiting the Company’s ability to consider other subjective evidence to continue to recognize the existing deferred tax assets. Excluding the impact of these items, the change in the effective tax rate was due primarily to a shift in the distribution of earnings among the Company’s tax jurisdictions during the three months ended May 2, 2020, compared to the same prior-year period.
Unrecognized Tax Benefit
From time-to-time, the Company is subject to routine income and other tax audits on various tax matters around the world in the ordinary course of business. As of May 2, 2020, several tax audits were ongoing for various periods in multiple jurisdictions. These audits could conclude with an assessment of additional tax liability for the Company. These assessments could arise as the result of timing or permanent differences and could be

17


material to the Company’s net income or future cash flows. In the event the Company disagrees with an assessment from a taxing authority, the Company may elect to appeal, litigate, pursue settlement or take other actions. The Company accrues an amount for its estimate of additional tax liability which the Company, more likely than not, will incur as a result of the ultimate resolution of tax audits (“uncertain tax positions”). The Company reviews and updates the estimates used in the accrual for uncertain tax positions, as appropriate, as more definitive information or interpretations become available from taxing authorities, upon completion of tax audits, upon receipt of assessments, upon expiration of statutes of limitation, or upon occurrence of other events.
The Company had aggregate accruals for uncertain tax positions, including penalties and interest, of $34.6 million and $34.0 million as of May 2, 2020 and February 1, 2020, respectively. This includes an accrual of $19.9 million for the estimated transition tax related to the 2017 Tax Cuts and Jobs Act for each of the periods ended May 2, 2020 and February 1, 2020.
(8)
Segment Information
The Company’s businesses are grouped into five reportable segments for management and internal financial reporting purposes: Americas Retail, Americas Wholesale, Europe, Asia and Licensing. The Company’s Americas Retail, Americas Wholesale, Europe and Licensing reportable segments are the same as their respective operating segments. Certain components of the Company’s 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 terminations, restructuring charges and certain non-recurring credits (charges), if any. The Company believes this segment reporting reflects how its business segments are managed and how each segment’s performance is evaluated by the Company’s chief operating decision maker to assess performance and make resource allocation decisions. The Americas Retail segment includes the Company’s retail and e-commerce operations in the Americas. The Americas Wholesale segment includes the Company’s wholesale operations in the Americas. The Europe segment includes the Company’s retail, e-commerce and wholesale operations in Europe and the Middle East. The Asia segment includes the Company’s retail, e‑commerce and wholesale operations in Asia and the Pacific. The Licensing segment includes the worldwide licensing operations of the Company. The business segment operating results exclude corporate overhead costs, which consist of shared costs of the organization, asset impairment charges, net gains (losses) on lease terminations, restructuring charges and certain non-recurring credits (charges), if any. Corporate overhead costs are presented separately and generally include, among other things, the following unallocated corporate costs: accounting and finance, executive compensation, corporate performance-based compensation, facilities, global advertising and marketing, human resources, information technology and legal.

18


Net revenue and earnings (loss) from operations are summarized as follows for the three months ended May 2, 2020 and May 4, 2019 (in thousands):    
 
Three Months Ended
 
May 2, 2020
 
May 4, 2019
Net revenue:
 

 
 

Americas Retail
$
74,584

 
$
176,423

Americas Wholesale
25,875

 
46,205

Europe
106,473

 
210,055

Asia
40,385

 
85,190

Licensing
12,934

 
18,818

Total net revenue
$
260,251

 
$
536,691

Earnings (loss) from operations:
 

 
 

Americas Retail
$
(36,673
)
 
$
(1,812
)
Americas Wholesale
1,624

 
7,814

Europe
(44,406
)
 
(16,327
)
Asia
(22,777
)
 
(3,203
)
Licensing
10,094

 
16,644

Total segment earnings (loss) from operations
(92,138
)
 
3,116

Corporate overhead
(16,921
)
 
(25,812
)
Asset impairment charges1
(52,972
)
 
(1,775
)
Net losses on lease terminations2
(456
)
 

Total loss from operations
$
(162,487
)
 
$
(24,471
)
______________________________________________________________________
Notes:
1 
During the three months ended May 2, 2020, the Company recognized asset impairment charges related primarily to impairment of certain operating lease right-of-use assets and impairment of property and equipment related to certain retail locations resulting from lower revenue and future cash flow projections resulting from the ongoing effects of the COVID-19 pandemic. During the three months ended May 4, 2019, the Company’s asset impairment charges related primarily to impairment of property and equipment related to certain retail locations resulting from under-performance and expected store closures. Refer to Note 2 and Note 15 for more information regarding these asset impairment charges.
2 
During the three months ended May 2, 2020, the Company recorded net losses on lease terminations related primarily to the early termination of certain lease agreements.
The table below presents information regarding geographic areas in which the Company operated. Net revenue is classified primarily based on the country where the Company’s customer is located (in thousands):
 
Three Months Ended
 
May 2, 2020
 
May 4, 2019
Net revenue:
 

 
 

U.S.
$
69,465

 
$
164,371

South Korea
21,224

 
33,917

Italy
19,352

 
50,435

Canada
16,677

 
38,581

Spain
12,996

 
27,997

Other foreign countries
107,603

 
202,572

Total product sales
247,317

 
517,873

Net royalties
12,934

 
18,818

Net revenue
$
260,251

 
$
536,691


Due to the seasonal nature of the Company’s business segments, the above net revenue and operating results are not necessarily indicative of the results that may be expected for the full fiscal year.

19


(9)
Borrowings and Finance Lease Obligations
Borrowings and finance lease obligations are summarized as follows (in thousands):
 
May 2, 2020
 
Feb 1, 2020
Borrowings under credit facilities
$
193,725

 
$
3,957

Term loans
24,705

 

Mortgage debt
18,923

 
19,132

Finance lease obligations
15,851

 
16,535

Other
2,101

 
2,636

 
255,305

 
42,260

Less current installments
160,501

 
9,490

Long-term debt and finance lease obligations
$
94,804

 
$
32,770


Credit Facilities
On April 21, 2020, the Company entered into an amendment of its senior secured asset-based revolving credit facility with Bank of America, N.A. and the other lenders party thereto to extend the maturity date of the credit facility to April 21, 2023, among other changes (as amended, the “Credit Facility”). The Credit Facility provides for a borrowing capacity in an amount up to $120 million, including a Canadian sub-facility up to $20 million, subject to a borrowing base. Based on applicable accounts receivable and inventory balances as of May 2, 2020, the Company could have borrowed up to $91 million under the Credit Facility. The Credit Facility has an option to expand the borrowing capacity by up to $180 million subject to certain terms and conditions, including the willingness of existing or new lenders to assume such increased amount. The Credit Facility is available for direct borrowings and the issuance of letters of credit, subject to certain letters of credit sublimits, and may be used for working capital and other general corporate purposes.
All obligations under the Credit Facility are unconditionally guaranteed by the Company and the Company’s existing and future domestic and Canadian subsidiaries, subject to certain exceptions, and are secured by a first priority lien on substantially all of the assets of the Company and such domestic and Canadian subsidiaries, as applicable.
Direct borrowings under the Credit Facility made by the Company and its domestic subsidiaries shall bear interest at the U.S. base rate plus an applicable margin (varying from 0.75% to 1.25%) or at LIBOR plus an applicable margin (varying from 1.75% to 2.25%), provided that LIBOR may not be less than 1.0%. The U.S. base rate is based on the greater of (i) the U.S. prime rate, (ii) the federal funds rate, plus 0.5%, and (iii) LIBOR for a 30-day interest period, plus 1.0%. Direct borrowings under the Credit Facility made by the Company’s Canadian subsidiaries shall bear interest at the Canadian prime rate plus an applicable margin (varying from 0.75% to 1.25%) or at the Canadian BA rate plus an applicable margin (varying from 1.75% to 2.25%), provided that the Canadian BA rate may not be less than 1.0%. The Canadian prime rate is based on the greater of (i) the Canadian prime rate and (ii) the Canadian BA rate for a one-month interest period, plus 1.0%, provided that the Canadian prime rate may not be less than zero. The applicable margins are calculated quarterly and vary based on the average daily availability of the aggregate borrowing base. The Company is also obligated to pay certain commitment, letter of credit and other fees customary for a credit facility of this size and type. As of May 2, 2020, the Company had $2.3 million in outstanding standby letters of credit, no outstanding documentary letters of credit and $55.0 million in outstanding borrowings under the Credit Facility.

20


The Credit Facility requires the Company to comply with a fixed charge coverage ratio on a trailing four-quarter basis if a default or an event of default occurs under the Credit Facility or generally if borrowings exceed 80% of the borrowing base. In addition, the Credit Facility contains customary covenants, including covenants that limit or restrict the Company and certain of its subsidiaries’ ability to: incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, merge or consolidate and enter into certain transactions with affiliates. Upon the occurrence of an event of default under the Credit Facility, the lenders may cease making loans, terminate the Credit Facility and declare all amounts outstanding to be immediately due and payable. The Credit Facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults. The Credit Facility allows for both secured and unsecured borrowings outside of the Credit Facility up to specified amounts.
The Company, through its European subsidiaries, maintains short-term committed and uncommitted borrowing agreements, primarily for working capital purposes, with various banks in Europe. Some of these agreements include certain equity-based financial covenants. As of May 2, 2020, the Company had $133.4 million in outstanding borrowings, no outstanding documentary letters of credit and $0.6 million available for future borrowings under these agreements. The agreements are denominated primarily in euros and provide for annual interest rates ranging from 0.7% to 1.1%.
The Company, through its China subsidiary, maintains a short-term uncommitted bank borrowing agreement, primarily for working capital purposes. The multicurrency borrowing agreement provides for borrowing up to $20.0 million. The Company had $5.3 million and $4.0 million in outstanding borrowings under this agreement as of May 2, 2020 and February 1, 2020, respectively.
Term Loans
As a precautionary measure to ensure financial flexibility and maintain maximum liquidity in response to the COVID-19 pandemic, in addition to drawing down on certain of the credit facilities as noted above, the Company also entered into term loans with certain banks in Europe during the first quarter of fiscal 2021. These loans have terms ranging from one-to-four years and provide annual interest rates ranging between 0.5% to 1.5%. Certain of these loans also have an option to extend the term for a period of up to five years, subject to certain terms and conditions. As of May 2, 2020, the Company had outstanding borrowings of $24.7 million under these borrowing arrangements.
Mortgage Debt
On February 16, 2016, the Company entered into a ten-year $21.5 million real estate secured loan (the “Mortgage Debt”). The Mortgage Debt is secured by the Company’s U.S. distribution center based in Louisville, Kentucky and provides for monthly principal and interest payments based on a 25-year amortization schedule, with the remaining principal balance and any accrued and unpaid interest due at maturity. Outstanding principal balances under the Mortgage Debt bear interest at the one-month LIBOR rate plus 1.5%. As of May 2, 2020, outstanding borrowings under the Mortgage Debt, net of debt issuance costs of $0.1 million, were $18.9 million. At February 1, 2020, outstanding borrowings under the Mortgage Debt, net of debt issuance costs of $0.1 million, were $19.1 million.
The Mortgage Debt requires the Company to comply with a fixed charge coverage ratio on a trailing four-quarter basis if consolidated cash, cash equivalents, short-term investment balances and availability under borrowing arrangements fall below certain levels. In addition, the Mortgage Debt contains customary covenants, including covenants that limit or restrict the Company’s ability to incur liens on the mortgaged property and enter into certain contractual obligations. Upon the occurrence of an event of default under the Mortgage Debt, the lender may terminate the Mortgage Debt and declare all amounts outstanding to be immediately due and payable. The Mortgage Debt specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults.

21


On February 16, 2016, the Company also entered into a separate interest rate swap agreement, designated as a cash flow hedge, that resulted in a swap fixed rate of approximately 3.06%. This interest rate swap agreement matures in January 2026 and converts the nature of the Mortgage Debt from LIBOR floating-rate debt to fixed-rate debt. The fair value of the interest rate swap liability was approximately $1.2 million and $0.3 million as of May 2, 2020 and February 1, 2020, respectively.
Finance Lease Obligations
During fiscal 2018, the Company entered into a finance lease related to equipment used in its European distribution center located in the Netherlands. The finance lease primarily provides for monthly minimum lease payments through May 2027 with an effective interest rate of approximately 6%. As of May 2, 2020 and February 1, 2020, the finance lease obligation was $12.1 million and $12.6 million, respectively.
The Company also has smaller finance leases related primarily to computer hardware and software. As of May 2, 2020 and February 1, 2020, these finance lease obligations totaled $3.8 million and $4.0 million, respectively.
Other
From time-to-time, the Company will obtain other financing in foreign countries for working capital to finance its local operations.
(10)
Convertible Senior Notes and Related Transactions
2.00% Convertible Senior Notes due 2024
In April 2019, the Company issued $300 million principal amount of 2.00% convertible senior notes due 2024 (the “Notes”) in a private offering. In connection with the issuance of the Notes, the Company entered into an indenture (the “Indenture”) with respect to the Notes with U.S. Bank N.A., as trustee (the “Trustee”). The Notes are senior unsecured obligations of the Company and bear interest at an annual rate of 2.00% payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2019. The Notes will mature on April 15, 2024, unless earlier repurchased or converted in accordance with their terms.
The Notes are convertible in certain circumstances into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election, at an initial conversion rate of 38.7879 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $25.78 per share, subject to adjustment upon the occurrence of certain events. Prior to November 15, 2023, the Notes are convertible only upon the occurrence of certain events and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the Notes. Following certain corporate events described in the Indenture that occur prior to the maturity date, the conversion rate will be increased for a holder who elects to convert its Notes in connection with such corporate event in certain circumstances. The Notes are not redeemable prior to maturity, and no sinking fund is provided for the Notes.
If the Company undergoes a “fundamental change,” as defined in the Indenture, subject to certain conditions, holders of the Notes may require the Company to purchase for cash all or any portion of their Notes. The fundamental change purchase price will be 100% of the principal amount of the Notes to be purchased plus any accrued and unpaid interest up to but excluding the fundamental change purchase date.
The Indenture contains certain other customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of at least 25% in principal amount of the outstanding Notes may declare 100% of the principal of, and accrued and unpaid interest on, all the Notes to be due and payable.

22


Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The liability component was recorded at fair value, which was derived from a valuation technique used to calculate the fair value of a similar liability without an associated conversion feature. The carrying amount of the equity component, which was recognized as a debt discount, represented the difference between the proceeds from the issuance of the Notes and the fair value of the liability component of the Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 6.8% over the term of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. During the three months ended May 2, 2020, the Company recorded approximately $2.6 million of interest expense related to the amortization of the debt discount. During the three months ended May 4, 2019, the Company recorded approximately $0.2 million of interest expense related to the amortization of the debt discount.
Debt issuance costs related to the Notes were comprised of discounts and commissions payable to the initial purchasers of $3.8 million and third-party offering costs of approximately $1.5 million. In accounting for the debt issuance costs related to the issuance of the Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component were recorded as a contra-liability and are presented net against the convertible senior notes balance on the Company’s condensed consolidated balance sheets. These costs are amortized to interest expense using the effective interest method over the term of the Notes. During the three months ended May 2, 2020, the Company recorded $0.2 million related to the amortization of debt issuance costs. During the three months ended May 4, 2019, amortization of debt issuance costs was minimal. Debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.
The Notes consist of the following components as of May 2, 2020 and February 1, 2020 (in thousands):
 
May 2, 2020
 
Feb 1, 2020
Liability component:
 
 
 
Principal
$
300,000

 
$
300,000

Unamortized debt discount
(46,418
)
 
(49,017
)
Unamortized issuance costs
(3,406
)
 
(3,620
)
Net carrying amount
$
250,176

 
$
247,363

 
 
 
 
Equity component, net1
$
42,320

 
$
42,320

______________________________________________________________________
Notes:
1 
Included in paid-in capital within stockholders’ equity on the condensed consolidated balance sheets and is net of debt issuance costs and deferred taxes.
As of May 2, 2020 and February 1, 2020, the fair value of the Notes was approximately $133.5 million and $272.0 million, respectively. The fair value of the Notes is determined based on inputs that are observable in the market and have been classified as Level 2 in the fair value hierarchy.

23


Convertible Bond Hedge and Warrant Transactions
In connection with the offering of the Notes, the Company entered into convertible note hedge transactions whereby the Company had the option to purchase a total of approximately 11.6 million shares of its common stock at an initial strike price of approximately $25.78 per share, in each case subject to adjustment in certain circumstances. The total cost of the convertible note hedge transactions was $61.0 million. In addition, the Company sold warrants whereby the holders of the warrants had the option to purchase a total of approximately 11.6 million shares of the Company’s common stock at an initial strike price of $46.88 per share. Both the number of shares underlying the convertible note hedges and warrants and the strike price of the instruments are subject to customary adjustments. The Company received $28.1 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset dilution from the conversion of the Notes to the extent the market price per share of the Company’s common stock exceeds the adjusted strike price of the convertible note hedges. The warrant transaction may have a dilutive effect with respect to the Company’s common stock to the extent the market price per share of the Company’s common stock exceeds the adjusted strike price of the warrants. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period.
The Company had a deferred tax liability of $11.2 million in connection with the debt discount associated with the Notes and a deferred tax asset of $12.3 million in connection with the convertible note hedge transactions for each of the periods ended May 2, 2020 and February 1, 2020. The net deferred tax impact was included in deferred tax assets on the Company’s condensed consolidated balance sheets.
(11)
Share-Based Compensation
The following table summarizes the share-based compensation expense recognized under all of the Company’s stock plans during the three months ended May 2, 2020 and May 4, 2019 (in thousands): 
 
Three Months Ended
 
May 2, 2020
 
May 4, 2019
Stock options
$
695

 
$
590

Stock awards/units
4,926

 
3,815

Employee Stock Purchase Plan
165

 
63

Total share-based compensation expense
$
5,786

 
$
4,468


Unrecognized compensation cost related to nonvested stock options and nonvested stock awards/units totaled approximately $7.6 million and $20.2 million, respectively, as of May 2, 2020. This cost is expected to be recognized over a weighted average period of 1.8 years.
There were no stock options granted during the three months ended May 2, 2020. The weighted average grant date fair value of stock options granted was $6.72 during the three months ended May 4, 2019
Grants
As a precautionary measure to maintain maximum liquidity in response to the COVID-19 pandemic, the Company elected to pay out its fiscal 2020 corporate bonus in stock awards rather than cash compensation. As such, on April 27, 2020, the Company issued 811,944 restricted stock units that vested immediately. These awards were granted to certain of the Company’s employees that were eligible to receive the corporate bonus based on the satisfaction of certain performance measures during fiscal 2020.
In connection with a new employment agreement entered into between the Company and Carlos Alberini (the “Alberini Employment Agreement”), who became the Company’s Chief Executive Officer on February 20, 2019, the Company granted Mr. Alberini 600,000 stock options and 250,000 nonvested stock units which were subject to the achievement of certain performance-based vesting conditions. Mr. Alberini was also granted 150,000 restricted stock units which were considered contingently returnable as a result of certain service conditions set forth in the Alberini Employment Agreement. The service conditions were satisfied during the three months ended May 2, 2020.

24


On June 10, 2019, the Company made a special grant of 1,077,700 stock options to certain of its employees. On June 20, 2019, the Company also granted select key management 205,339 nonvested stock units which were subject to certain performance-based vesting conditions.
Annual Grants
On April 13, 2020, the Company made an annual grant of 743,800 nonvested stock awards/units to its employees. On March 29, 2019, the Company made an annual grant of 5,100 stock options and 280,700 nonvested stock awards/units to its employees.
Performance-Based Awards
The Company has granted certain nonvested stock units subject to performance-based vesting conditions to select executive officers. Each award of nonvested stock units generally has an initial vesting period from the date of the grant through either (i) the end of the first fiscal year or (ii) the first anniversary of the date of grant, followed by annual vesting periods which may range from two-to-three years.
The Company has also granted a target number of nonvested stock units to select key management, including certain executive officers. The number of shares that may ultimately vest with respect to each award may range from 0% up to 200% of the target number of shares, subject to the achievement of certain performance-based vesting conditions. Any shares that are ultimately issued are scheduled to vest at the end of the third fiscal year following the grant date.
The following table summarizes the activity for nonvested performance-based units during the three months ended May 2, 2020:
 
Number of Units
 
Weighted Average Grant Date Fair Value
Nonvested at February 1, 2020
1,140,023

 
$
16.66

Vested
(310,199
)
 
13.98

Forfeited
(236,404
)
 
11.72

Nonvested at May 2, 2020
593,420

 
$
20.03


Market-Based Awards
The Company has granted certain nonvested stock units subject to market-based vesting conditions to select executive officers. The number of shares that may ultimately vest will equal 0% to 150% of the target number of shares, subject to the performance of the Company’s total stockholder return (“TSR”) relative to the TSR of a select group of peer companies over a three-year period. Vesting is also subject to continued service requirements through the vesting date.
The following table summarizes the activity for nonvested market-based units during the three months ended May 2, 2020:
 
Number of Units
 
Weighted Average Grant Date Fair Value
Nonvested at February 1, 2020
288,202

 
$
13.43

Granted1
101,566

 
10.62

Vested1
(305,901
)
 
10.62

Nonvested at May 2, 2020
83,867

 
$
20.28


______________________________________________________________________

Notes:
1 
As a result of the achievement of certain market-based vesting conditions, there were 101,566 shares that vested in addition to the original target number of shares granted in fiscal 2018.

25


(12)
Related Party Transactions
The Company and its subsidiaries periodically enter into transactions with other entities or individuals that are considered related parties, including certain transactions with entities affiliated with trusts for the respective benefit of Paul Marciano, who is an executive and member of the Board of the Company, and Maurice Marciano, Chairman of the Board, and certain of their children (the “Marciano Trusts”).
Leases
The Company leases warehouse and administrative facilities, including the Company’s corporate headquarters in Los Angeles, California, from partnerships affiliated with the Marciano Trusts and certain of their affiliates. There were four of these leases in effect as of May 2, 2020 with expiration or option exercise dates ranging from calendar years 2020 to 2021.
Aggregate lease costs recorded under these four related party leases were approximately $1.3 million for each of the three months ended May 2, 2020 and May 4, 2019. The Company believes that the terms of the related party leases have not been significantly affected by the fact that the Company and the lessors are related.
Aircraft Arrangements
The Company periodically charters aircraft owned by entities affiliated with the Marciano Trusts (the “Aircraft Entities”), through informal arrangements with the Aircraft Entities and independent third-party management companies contracted by the Aircraft Entities to manage their aircraft. The total fees paid under these arrangements for the three months ended May 2, 2020 were approximately $0.2 million. There were no fees paid under these arrangements for the three months ended May 4, 2019.
These related party disclosures should be read in conjunction with the disclosure concerning related party transactions in the Company’s Annual Report on Form 10-K for the year ended February 1, 2020.
(13)
Commitments and Contingencies
Investment Commitments
As of May 2, 2020, the Company had an unfunded commitment to invest €3.6 million ($4.0 million) in a private equity fund. Refer to Note 15 for further information.
Legal and Other Proceedings
The Company is involved in legal proceedings, arising both in the ordinary course of business and otherwise, including the proceedings described below as well as various other claims and other matters incidental to the Company’s business. Unless otherwise stated, the resolution of any particular proceeding is not currently expected to have a material adverse impact on the Company’s financial position, results of operations or cash flows. Even if such an impact could be material, we may not be able to estimate the reasonably possible loss or range of loss until developments in the proceedings have provided sufficient information to support an assessment.

26


The Company has received customs tax assessment notices from the Italian Customs Agency (“ICA”) regarding its customs tax audit of one of the Company’s European subsidiaries for the period from July 2010 through December 2012. Such assessments totaled €9.8 million ($10.8 million), including potential penalties and interest. The Company strongly disagreed with the ICA’s positions and therefore filed appeals with the Milan First Degree Tax Court (“MFDTC”). Those appeals were split into a number of different cases that were then heard by different sections of the MFDTC. The MFDTC ruled in favor of the Company on all of these appeals. The ICA subsequently appealed €9.7 million ($10.7 million) of these favorable MFDTC judgments with the Appeals Court. To date, €8.5 million ($9.3 million) have been decided in favor of the Company and €1.2 million ($1.4 million) have been decided in favor of the ICA. The Company believes that the unfavorable Appeals Court ruling is incorrect and inconsistent with the prior rulings on similar matters by both the MFDTC and other judges within the Appeals Court, and plans to appeal the decision to the Supreme Court. The ICA has appealed most of the favorable Appeals Court rulings to the Supreme Court. To date, of the cases that have been appealed to the Supreme Court, €0.4 million ($0.5 million) have been decided in favor of the Company based on the merits of the case and €1.1 million ($1.2 million) have been remanded back to the lower court for further consideration. There can be no assurances the Company will be successful in the remaining appeals. It also continues to be possible that the Company will receive similar or even larger assessments for periods subsequent to December 2012 or other claims or charges related to the matter in the future. Although the Company believes that it has a strong position and will continue to vigorously defend this matter, it is unable to predict with certainty whether or not these efforts will ultimately be successful or whether the outcome will have a material impact on the Company’s financial position, results of operations or cash flows.
Redeemable Noncontrolling Interests
The Company is party to a put arrangement with respect to the common securities that represent the remaining noncontrolling interest for its majority-owned subsidiary, Guess Brasil Comércio e Distribuição S.A. (“Guess Brazil”), which was established through a majority-owned joint venture during fiscal 2014. The put arrangement for Guess Brazil, representing 40% of the total outstanding equity interest of that subsidiary, may be exercised at the discretion of the noncontrolling interest holder by providing written notice to the Company every third anniversary beginning in March 2019, subject to certain time restrictions. The redemption value of the Guess Brazil put arrangement is based on a multiple of Guess Brazil’s earnings before interest, taxes, depreciation and amortization subject to certain adjustments and is classified as a redeemable noncontrolling interest outside of permanent equity in the Company’s consolidated balance sheet. The carrying value of the redeemable noncontrolling interest related to Guess Brazil was $0.9 million and $1.2 million as of May 2, 2020 and February 1, 2020, respectively.
The Company is also party to a put arrangement with respect to the common securities that represent the remaining noncontrolling interest for its majority-owned subsidiary, Guess? CIS, LLC (“Guess CIS”), which was established through a majority-owned joint venture during fiscal 2016. The put arrangement for Guess CIS, representing 30% of the total outstanding equity interest of that subsidiary, may be exercised at the discretion of the noncontrolling interest holder by providing written notice to the Company during the period beginning after the fifth anniversary of the agreement through December 31, 2025, or sooner in certain limited circumstances. The redemption value of the Guess CIS put arrangement is based on a multiple of Guess CIS’s earnings before interest, taxes, depreciation and amortization subject to certain adjustments and is classified as a redeemable noncontrolling interest outside of permanent equity in the Company’s consolidated balance sheet. The carrying value of the redeemable noncontrolling interest related to Guess CIS was $3.0 million and $3.5 million as of May 2, 2020 and February 1, 2020, respectively.

27


A reconciliation of the total carrying amount of redeemable noncontrolling interests for the three months ended May 2, 2020 and May 4, 2019 is as follows (in thousands):
 
Three Months Ended
 
May 2, 2020
 
May 4, 2019
Beginning balance
$
4,731

 
$
4,853

Foreign currency translation adjustment
(797
)
 
(79
)
Ending balance
$
3,934

 
$
4,774


(14)
Defined Benefit Plans
Supplemental Executive Retirement Plan
On August 23, 2005, the Board of Directors of the Company adopted a Supplemental Executive Retirement Plan (“SERP”) which became effective January 1, 2006. The SERP provides select employees who satisfy certain eligibility requirements with certain benefits upon retirement, termination of employment, death, disability or a change in control of the Company, in certain prescribed circumstances.
As a non-qualified pension plan, no dedicated funding of the SERP is required; however, the Company has made periodic payments into insurance policies held in a rabbi trust to fund the expected obligations arising under the non-qualified SERP. The amount of any future payments into the insurance policies, if any, may vary depending on investment performance of the trust. The cash surrender values of the insurance policies were $64.0 million and $67.7 million as of May 2, 2020 and February 1, 2020, respectively, and were included in other assets in the Company’s condensed consolidated balance sheets. As a result of changes in the value of the insurance policy investments, the Company recorded unrealized gains (losses) of $(3.1) million and $3.2 million in other income and expense during the three months ended May 2, 2020 and May 4, 2019, respectively. The projected benefit obligation was $51.8 million and $51.9 million as of May 2, 2020 and February 1, 2020, respectively, and was included in accrued expenses and other long-term liabilities in the Company’s condensed consolidated balance sheets depending on the expected timing of payments. SERP benefit payments of $0.6 million and $0.4 million were made during the three months ended May 2, 2020 and May 4, 2019, respectively.
Foreign Pension Plans
In certain foreign jurisdictions, primarily in Switzerland, the Company is required to guarantee the returns on Company-sponsored defined contribution plans in accordance with local regulations. These plans are typically government-mandated defined contribution plans that provide employees with a minimum investment return, and as such, are treated under pension accounting in accordance with authoritative guidance. Under the Swiss plan, both the Company and certain of its employees with annual earnings in excess of government determined amounts are required to make contributions into a fund managed by an independent investment fiduciary. The Company’s contributions must be made in an amount at least equal to the employee’s contribution. Minimum employee contributions are based on the respective employee’s age, salary and gender.
As of May 2, 2020 and February 1, 2020, the foreign pension plans had a total projected benefit obligation of $34.3 million and $34.8 million, respectively, and plan assets held in independent investment fiduciaries of $28.4 million and $28.9 million, respectively. The net liability of $6.0 million and $5.9 million was included in other long-term liabilities in the Company’s condensed consolidated balance sheets as of May 2, 2020 and February 1, 2020, respectively.

28


The components of net periodic defined benefit pension cost for the three months ended May 2, 2020 and May 4, 2019 related to the Company’s defined benefit plans are as follows (in thousands):
 
Three Months Ended May 2, 2020
 
SERP
 
Foreign Pension Plans
 
Total
Service cost
$

 
$
764

 
$
764

Interest cost
319

 
8

 
327

Expected return on plan assets

 
(45
)
 
(45
)
Net amortization of unrecognized prior service credit

 
(16
)
 
(16
)
Net amortization of actuarial losses
10

 
86

 
96

Net periodic defined benefit pension cost
$
329

 
$
797

 
$
1,126

 
Three Months Ended May 4, 2019
 
SERP
 
Foreign Pension Plans
 
Total
Service cost
$

 
$
807

 
$
807

Interest cost
481

 
68

 
549

Expected return on plan assets

 
(77
)
 
(77
)
Net amortization of unrecognized prior service credit

 
(10
)
 
(10
)
Net amortization of actuarial losses
16

 
95

 
111

Net periodic defined benefit pension cost
$
497

 
$
883

 
$
1,380


(15)
Fair Value Measurements
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e. interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3—Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data.

29


The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of May 2, 2020 and February 1, 2020 (in thousands):
 
 
Fair Value Measurements
 
Fair Value Measurements
 
 
at May 2, 2020
 
at Feb 1, 2020
Recurring Fair Value Measures
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange currency contracts
 
$

 
$
8,970

 
$

 
$
8,970

 
$

 
$
4,854

 
$

 
$
4,854

Total
 
$

 
$
8,970

 
$

 
$
8,970

 
$

 
$
4,854

 
$

 
$
4,854

Liabilities:
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 

Interest rate swap
 
$

 
$
1,218

 
$

 
$
1,218

 
$

 
$
348

 
$

 
$
348

Deferred compensation obligations