NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 3, 2018
(unaudited)
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(1)
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Basis of Presentation and New Accounting Guidance
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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
November 3, 2018
and
February 3, 2018
, the condensed consolidated statements of
loss
and comprehensive income (loss) for the three and
nine months ended November 3, 2018
and
October 28, 2017
and the condensed consolidated statements of cash flows for the
nine months ended November 3, 2018
and
October 28, 2017
. 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 and
nine months ended November 3, 2018
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 3, 2018
.
The three and
nine months ended November 3, 2018
had the same number of days as the three and
nine months ended October 28, 2017
. All references herein to “fiscal
2019
,” “fiscal
2018
” and “fiscal
2017
” represent the results of the
52
-week fiscal year ending
February 2, 2019
, the
53
-week fiscal year ended
February 3, 2018
and the
52
-week fiscal year ended
January 28, 2017
, respectively.
Reclassifications
The Company has made certain reclassifications to prior year amounts to conform to the current period presentation within the accompanying notes to the condensed consolidated financial statements.
Net Gains (Losses) on Lease Terminations
During the
nine months ended November 3, 2018
, the Company recorded net gains on lease terminations of approximately
$0.2 million
related primarily to the early termination of certain lease agreements in North America
.
The net gains on lease terminations were recorded during the three months ended May 5, 2018
.
During the third quarter of fiscal 2018, the Company recorded net losses of
$11.5 million
on lease terminations related primarily to the modification of certain lease agreements held with a common landlord in North America. In connection with this modification, the Company made up-front payments of approximately
$22.0 million
, of which
$12.4 million
was recognized as net losses on lease terminations and
$9.6 million
was recorded as advance rent payments. During the third quarter of fiscal 2018, the Company also recorded net gains on lease terminations of approximately
$1.0 million
related primarily to the early termination of certain lease agreements in Europe.
New Accounting Guidance
Changes in Accounting Policies
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a comprehensive new revenue recognition standard which superseded previous existing revenue recognition guidance. The standard is intended to clarify the principles of recognizing revenue and create common revenue recognition guidance between GAAP and International Financial Reporting Standards. The standard also requires expanded disclosures surrounding revenue recognition. During fiscal 2017, the FASB issued additional clarification guidance on the new revenue recognition standard which also included certain scope improvements and practical expedients. The Company adopted this guidance (including clarification guidance issued) effective February 4, 2018 using the modified retrospective method and, as a result, recorded a cumulative adjustment to increase retained earnings by approximately
$5.8 million
, net of taxes. The adjustment related primarily to changes in the presentation of advertising contributions received from the Company’s licensees and the related advertising expenditures incurred by the Company. Under previous guidance, the Company recorded advertising contributions received from its licensees and the related advertising expenditures incurred by the Company on a net basis in its consolidated balance sheet. To the extent that the advertising contributions exceeded the Company’s advertising expenditures for its licensees, the excess contribution was treated as a deferred liability and was included in accrued expenses in the Company’s consolidated balance sheet. Under the new revenue recognition standard, advertising contributions and related advertising expenditures related to the Company’s licensing business are recorded on a gross basis in the Company’s condensed consolidated statements of
loss
. This change resulted in an increase to net revenue and selling, general, and administrative (“SG&A”) expenses of
$2.7 million
and
$2.5 million
, respectively, during the
three months ended November 3, 2018
compared to the same prior-year period. During the
nine months ended November 3, 2018
, this change resulted in an increase to net revenue and SG&A expenses of
$7.1 million
and
$7.2 million
, respectively, compared to the same prior-year period. Other minor differences related to the timing of revenue recognition from the Company’s e-commerce operations, which are now recognized when merchandise is transferred to a common carrier rather than upon receipt by the customer, and a minimal change in the valuation of the amount that is deferred related to points earned under the Company’s loyalty programs. Additionally, allowances for wholesale sales returns and wholesale markdowns are now presented as accrued expenses rather than as reductions to accounts receivable, and the estimated cost associated with the allowance for sales returns is presented within other current assets rather than included in inventories in the Company’s condensed consolidated balance sheet. Refer to Note 2 for the Company’s expanded disclosures on revenue recognition.
In January 2016, the FASB issued authoritative guidance which requires equity investments not accounted for under the equity method of accounting or consolidation accounting to be measured at fair value, with subsequent changes in fair value recognized in net income. In February 2018, the FASB issued additional clarification guidance which made targeted improvements to address certain aspects of recognition, measurement, presentation and disclosure requirements for financial instruments. The Company adopted this guidance (including the clarification guidance) effective February 4, 2018. The adoption of this guidance did not result in a cumulative-effect adjustment as of the beginning of the current year and did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
In October 2016, the FASB issued authoritative guidance which amends the accounting for income taxes on intra-entity transfers of assets other than inventory. This guidance requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The income tax consequences on intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party. The Company adopted this guidance effective February 4, 2018. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements or related disclosures.
In March 2017, the FASB issued authoritative guidance related to the presentation of net periodic pension cost in the income statement. This guidance requires that the service cost component of net periodic pension cost be presented in the same line as other compensation costs arising from services rendered by the employees during the period. The other non-service components of net periodic pension cost are required to be presented in the
income statement separately from the service cost component and outside of earnings from operations. This guidance also allows for the service cost component to be eligible for capitalization when applicable. The Company adopted this guidance effective February 4, 2018 on a retrospective basis for the presentation of the service cost component and other non-service components of net periodic pension cost in the income statement and on a prospective basis for capitalization of the service cost component. As a result, the Company reclassified
$0.5 million
and
$1.6 million
from SG&A expenses to other income (expense) during the three and
nine months ended October 28, 2017
, respectively, which resulted in a related improvement in operating loss during each of the respective periods. Other than the change in presentation of other non-service components of net periodic pension cost within the Company’s condensed consolidated statements of loss, the adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements and related disclosures.
In May 2017, the FASB issued authoritative guidance that provides clarification on accounting for modifications in share-based payment awards. The Company adopted this guidance effective February 4, 2018. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements or related disclosures.
In June 2018, the FASB issued authoritative guidance that expanded the scope of stock compensation to include non-employee share-based payment transactions. The Company early adopted this guidance during the second quarter of fiscal 2019. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
Recently Issued Accounting Guidance
In February 2016, the
FASB
issued a comprehensive new lease standard which will supersede previous lease guidance. The standard requires a lessee to recognize an asset related to the right to use the underlying asset and a liability that approximates the present value of the lease payments over the term of contracts that qualify as leases under the new guidance. The standard also requires expanded disclosures surrounding leases. The standard (including clarification guidance issued during fiscal 2019) is effective for fiscal periods beginning after December 15, 2018, which will be the Company’s first quarter of fiscal 2020, with early adoption permitted. The Company has completed the design phase of its selected lease management system and is in the process of completing its inventory of its lease contracts, validating data migration, as well as implementing processes and controls to enable the preparation of the required financial information for this standard. In July 2018, the FASB issued authoritative guidance that provides entities with an additional transition method of applying the new lease standard at the adoption date and recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Upon adoption of the standard, the Company expects to report material right-of-use assets and material lease liabilities as well as enhanced disclosures.
In June 2016, the FASB issued authoritative guidance related to the measurement of credit losses on financial instruments. This guidance is effective for fiscal years beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021. Early adoption is permitted for fiscal periods beginning after December 15, 2018, which will be the Company’s first quarter of fiscal 2020. The Company is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements and related disclosures.
In January 2017, the FASB issued authoritative guidance to simplify the testing for goodwill impairment by removing step two from the goodwill testing. Under current guidance, if the fair value of a reporting unit is lower than its carrying amount (step one), an entity would calculate an impairment charge by comparing the implied fair value of goodwill with its carrying amount (step two). The implied fair value of goodwill was calculated by deducting the fair value of the assets and liabilities of the respective reporting unit from the reporting unit’s fair value as determined under step one. This guidance instead provides that an impairment charge should be recognized based on the difference between a reporting unit’s fair value and its carrying value. This guidance also does not require a qualitative test to be performed on reporting units with zero or negative carrying amounts. However, entities need to disclose any reporting units with zero or negative carrying amounts that have goodwill and the amount of goodwill allocated to each. This guidance is effective for fiscal years beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not
expected to have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
In August 2017, the FASB issued authoritative guidance to better align the results of hedge accounting with an entity’s risk management activities. This guidance updates the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. In October 2018, the FASB clarified the new hedge accounting guidance by allowing the Secured Overnight Financing Rate to be eligible as a U.S. benchmark interest rate for purposes of applying hedge accounting. This guidance is effective for fiscal years beginning after December 15, 2018, which will be the Company’s first quarter of fiscal 2020, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with early adoption permitted. The updated presentation and disclosure guidance is required only on a prospective basis. The adoption of this guidance is not expected to have a material impact on the Company’s condensed 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 is effective for fiscal years beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its related disclosures.
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 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 guidance provides criteria for determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The capitalized implementation costs are required to be expensed over the term of the hosting arrangement. The guidance also clarifies the presentation requirements for reporting such costs in the entity’s financial statements. This guidance is effective for fiscal years beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements and related disclosures.
Significant Accounting Policies and Practices
Products Transferred at a Point in Time
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. For the Company’s brick-and-mortar retail stores and concessions, revenue is typically recognized at the point of sale. The Company adopted the new revenue recognition standard effective as of the first quarter of fiscal 2019, and accordingly, revenue generated from the Company’s e-commerce sites is recognized when merchandise is transferred to a common carrier. This is a change compared to the Company’s treatment under previous guidance where revenue from the Company’s e-commerce sites was recognized based on the estimated customer receipt date. This change had an immaterial impact on revenue for the three and
nine months ended November 3, 2018
. Revenue generated from the Company’s wholesale distribution channel is recognized when control transfers to the customer, which generally occurs upon shipment.
The amount of revenue that is recognized is based on the transaction price, which represents the invoiced amount and includes estimates of variable consideration such as allowances for sales returns
, markdowns and loyalty award obligations, where applicable
. The amount of variable
consideration included in the transaction price may be constrained and is included only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period.
The Company accepts payments at its brick-and-mortar retail locations and its e-commerce sites in the form of cash, credit cards, gift cards and loyalty points, where applicable. Payment terms, typically less than
one year
, are offered to the Company’s wholesale customers and do not include a significant financing component. The Company extends credit to wholesale customers based upon an evaluation of the customer’s financial condition and credit history and generally requires no collateral but does obtain credit insurance when considered appropriate. As of
November 3, 2018
, approximately
49%
of the Company’s total net trade receivables and
62%
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. The Company maintains allowances for doubtful accounts for estimated losses that result from the inability of its wholesale customers 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 economic conditions and whether the Company has obtained credit insurance or other guarantees. Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based on these evaluations. 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 regarding the Company’s allowance for doubtful accounts.
Shipping and handling costs associated with outbound freight incurred to transfer a product to a customer are accounted for as fulfillment costs and are included in SG&A expenses. Sales and usage-based taxes collected from customers and remitted directly to governmental authorities are excluded from net revenues. This is consistent with the presentation of such amounts in previous years.
The Company does not have significant contract balances related to its direct-to-consumer or wholesale distribution channels other than the allowance for sales returns and markdowns as well as liabilities related to its gift cards and loyalty programs. The Company also does not have significant contract acquisition costs related to its direct-to-consumer or wholesale distribution channels.
Sales Return Allowances
The Company accrues for estimated sales returns in the period in which the related revenue is recognized. To recognize the financial impact of sales returns, the Company estimates the amount of goods that will be returned based on historical experience and current trends and reduces sales and cost of sales accordingly. The Company’s policy allows retail customers in certain regions a grace period to return merchandise following the date of sale. Substantially all of these returns are considered to be resalable at a price that exceeds the cost of the merchandise.
The Company adopted the new revenue recognition standard effective as of the first quarter of fiscal 2019
, and accordingly, has included the allowance for sales returns in accrued expenses and the estimated cost associated with such sales returns within other current assets in its condensed consolidated balance sheet. Prior to the adoption of the new revenue recognition standard, the Company recorded the allowance for wholesale sales returns against accounts receivable and the estimated cost of inventory associated with the allowance for sales returns in inventories. The allowance for retail sales returns was included in accrued expenses which is consistent with the current presentation. As of
November 3, 2018
, the Company included
$26.1 million
in accrued expenses related to the allowance for sales returns and
$10.4 million
in other current assets related to the estimated cost of such sales returns. As of
February 3, 2018
, the Company included
$25.0 million
and
$2.9 million
in accounts receivable and accrued expenses, respectively, related to the allowance for sales returns and
$11.9 million
in inventories related to the estimated cost of such sales returns.
Markdown Allowances
Costs associated with customer markdowns are recorded as a reduction to revenues and any amounts unapplied to existing receivables are included in accrued expenses. These markdown allowances resulted from seasonal negotiations with the Company’s wholesale customers, as well as historical trends and the evaluation of the impact of current economic conditions.
The Company adopted the new revenue recognition standard effective as of the first quarter of fiscal 2019
, and accordingly, has included the allowance for markdowns in accrued expenses in its condensed consolidated balance sheet. As of
November 3, 2018
, the Company included
$11.2 million
in accrued expenses related to the allowance for markdowns. As of
February 3, 2018
, the Company included
$10.8 million
in accounts receivable related to the allowance for markdowns.
Gift Cards
Gift card breakage is income recognized due to the non-redemption of a portion of gift cards sold by the Company for which a liability was recorded in prior periods. Gifts cards are mainly used in the U.S. and Canada. The Company issues its gift cards in the U.S. and Canada through one of its subsidiaries and is not required by law to escheat the value of unredeemed gift cards to the state in which the subsidiary is domiciled. Estimated breakage amounts are accounted for under the redemption recognition method and are classified as additional net revenues as the gift cards are redeemed. The Company’s gift card breakage rate is approximately
5.5%
and
5.3%
for the U.S. retail business and Canadian retail business, respectively, based upon historical redemption patterns, which represents the cumulative estimated amount of gift card breakage from the inception of the electronic gift card program in late 2002. Based upon historical redemption trends, the Company recognizes estimated gift card breakage as a component of net revenue in proportion to actual gift card redemptions, over the period that remaining gift card values are redeemed. Any future revisions to the estimated breakage rate may result in changes in the amount of breakage income recognized in future periods. There have been no changes to the Company’s accounting for gift card breakage upon adoption of the new revenue recognition standard effective as of the first quarter of fiscal 2019. During the three and
nine months ended November 3, 2018
, the Company recognized
$0.3 million
and
$0.5 million
, respectively, of gift card breakage to revenue. During the three and
nine months ended October 28, 2017
, the Company recognized
$0.4 million
and
$0.6 million
, respectively, of gift card breakage to revenue. As of
November 3, 2018
and
February 3, 2018
, the Company included
$4.4 million
and
$5.2 million
in accrued expenses related to its gift card liability, respectively.
Loyalty Programs
The Company has customer loyalty programs in North America, Europe and Asia which cover all of its brands. Under certain of the programs, primarily in the U.S. and Canada, customers accumulate points based on purchase activity. Once a loyalty program member achieves a certain point level, the member earns awards that may only be redeemed for merchandise. Unredeemed points generally expire after
six months
without additional purchase activity and unredeemed awards generally expire after
two months
. Where applicable, the Company allocates a portion of the transaction price from sales in its direct-to-consumer channel to its loyalty program by using historical redemption rates to estimate the value of future award redemptions. This amount is accrued in current liabilities and recorded as a reduction of net revenue in the period which the related revenue is recognized. During the three and
nine months ended November 3, 2018
, activity related to the Company’s loyalty programs decreased net revenue by
$0.1 million
and
$0.5 million
, respectively. During the three months ended
October 28, 2017
, activity related to the Company’s loyalty programs had a minimal impact on the net revenues. During the
nine months ended October 28, 2017
, activity related to the Company’s loyalty programs increased net revenue by
$0.4 million
. The aggregate dollar value of the loyalty program accruals included accrued expense was
$4.5 million
and
$3.8 million
as of
November 3, 2018
and
February 3, 2018
, respectively. Future revisions to the estimated liability may result in changes to net revenue.
Intellectual Property Transferred Over Time
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 typical license agreement requires that the licensee pay the Company the greater of a royalty based on a percentage of the licensee’s net sales of licensed products or a guaranteed annual minimum royalty that typically increases over the term of the license agreement. Generally, licensees are also required to make contributions to advertising funds, as a percentage of their sales, over the term of the licensing agreement, and may elect to make additional contributions to support specific brand-building initiatives. The Company recognizes revenue from sales-based royalty and advertising fund contributions when the related sales occur, which is consistent with the timing of when the performance obligation is satisfied.
The Company adopted the new revenue recognition standard effective as of the first quarter of fiscal 2019
, and accordingly, has recorded advertising contributions in revenue on a gross basis separate from any related advertising expenditures made by the Company which are recorded in SG&A expenses in the Company’s condensed consolidated statements of income (loss). Prior to the adoption of the new revenue recognition standard, the Company recorded advertising contributions received from its licensees and the related advertising expenditures incurred by the Company on a net basis in its consolidated balance sheet. Under previous guidance, to the extent that the advertising contributions exceed the Company’s advertising expenditures for its licensees, the excess contribution was treated as a deferred liability and was included in accrued expenses in the Company’s condensed consolidated balance sheet. Refer to Note 1 for detail regarding the impact of this change on the Company’s condensed consolidated balance sheet and its condensed consolidated statements of income (loss) as a result of the adoption of the new revenue recognition standard. The Company records royalty and advertising payments received on the Company’s purchases of licensed product as a reduction of the cost of the licensed product.
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. Several of the Company’s key license agreements provide for specified, fixed payments over and above the normal, ongoing royalty payments in consideration of the grant of the license rights. These payments are recognized ratably as revenue over the term of the license agreement and do not include a significant financing component. 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
November 3, 2018
, the Company had
$6.7 million
and
$15.0 million
of deferred royalties related to these upfront payments included in accrued expenses and other long-term liabilities, respectively. This compares to
$6.8 million
and
$12.8 million
of deferred royalties related to these upfront payments included in accrued expenses and other long-term liabilities, respectively, at
February 3, 2018
. During the three and
nine months ended November 3, 2018
, the Company recognized
$3.6 million
and
$10.5 million
in net royalties related to the amortization of the deferred royalties, respectively. During the three and
nine months ended October 28, 2017
, the Company recognized
$3.0 million
and
$9.0 million
in net royalties related to the amortization of the deferred royalties, respectively.
Contract balances related to the Company’s licensing distribution channel consist primarily of royalty receivables and liabilities related to deferred royalties. Refer to Note 5 for further information on royalty receivables. The Company does not have significant contract acquisition costs related to its licensing operations.
Refer to Note 8 for further information on disaggregation of revenue by segment and country.
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(3)
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Earnings (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 (loss) per share represents net earnings (loss) 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. 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 due to the net loss incurred for periods presented. 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.
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 (loss) 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
|
|
Nine Months Ended
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
Net loss
|
$
|
(13,442
|
)
|
|
$
|
(2,860
|
)
|
|
$
|
(9,133
|
)
|
|
$
|
(8,934
|
)
|
Less net earnings attributable to nonvested restricted stockholders
|
187
|
|
|
186
|
|
|
577
|
|
|
581
|
|
Net loss attributable to common stockholders
|
$
|
(13,629
|
)
|
|
$
|
(3,046
|
)
|
|
$
|
(9,710
|
)
|
|
$
|
(9,515
|
)
|
|
|
|
|
|
|
|
|
Weighted average common shares used in basic computations
|
80,189
|
|
|
82,390
|
|
|
80,067
|
|
|
82,599
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock units
1
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average common shares used in diluted computations
|
80,189
|
|
|
82,390
|
|
|
80,067
|
|
|
82,599
|
|
|
|
|
|
|
|
|
|
Net
loss per common share attributable to common stockholders:
|
Basic
|
$
|
(0.17
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.12
|
)
|
Diluted
|
$
|
(0.17
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.12
|
)
|
__________________________________
Notes:
|
|
1
|
For the three and
nine months ended November 3, 2018
, there were
1,499,247
and
1,312,054
, 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 November 3, 2018
and
October 28, 2017
, equity awards granted for
1,310,933
and
2,901,025
, respectively, of the Company’s common shares and for the
nine months ended November 3, 2018
and
October 28, 2017
, equity awards granted for
1,610,091
and
3,104,027
, 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. For the three and
nine months ended November 3, 2018
, the Company also excluded
1,336,679
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
November 3, 2018
. For the three
and
nine months ended October 28, 2017
, the Company excluded
1,145,080
nonvested stock units which were 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
October 28, 2017
.
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.
During the
nine months ended November 3, 2018
, the Company repurchased
1,118,808
shares under the program at an aggregate cost of
$17.6 million
. The shares were repurchased during the three months ended May 5, 2018.
During the
nine months ended November 3, 2018
, the Company also paid an additional
$6.0 million
for shares that were repurchased during the fourth quarter of fiscal 2018 but were settled during the first quarter of fiscal 2019
.
During the
nine months ended October 28, 2017
, the Company repurchased
1,919,967
shares under the program at an aggregate cost of
$24.8 million
.
The Company repurchased
1,485,195
shares at an aggregate cost of
$17.8 million
during the three months ended April 29, 2017 and an additional
434,772
shares at an aggregate cost of
$7.0 million
during the three months ended
October 28, 2017
. As of
November 3, 2018
, the Company had remaining authority under the program to purchase $
374.6 million
of its common stock.
|
|
(4)
|
Stockholders’ Equity and Redeemable Noncontrolling Interests
|
A reconciliation of common stock outstanding, treasury stock and the total carrying amount of total stockholders’ equity, Guess?, Inc. stockholders’ equity and stockholders’ equity attributable to nonredeemable noncontrolling interests for the fiscal year ended
February 3, 2018
and
nine months ended November 3, 2018
is as follows (in thousands, except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Stockholders’ Equity
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
Guess?, Inc.
Stockholders’
Equity
|
|
Nonredeemable
Noncontrolling
Interests
|
|
Total
|
|
Redeemable
Noncontrolling
Interests
|
Balance at January 28, 2017
|
84,069,492
|
|
|
56,440,482
|
|
|
$
|
969,222
|
|
|
$
|
11,772
|
|
|
$
|
980,994
|
|
|
$
|
4,452
|
|
Net earnings (loss)
|
—
|
|
|
—
|
|
|
(7,894
|
)
|
|
3,993
|
|
|
(3,901
|
)
|
|
—
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
91,178
|
|
|
2,238
|
|
|
93,416
|
|
|
187
|
|
Loss on derivative financial instruments designated as cash flow hedges, net of income tax of $2,738
|
—
|
|
|
—
|
|
|
(19,994
|
)
|
|
—
|
|
|
(19,994
|
)
|
|
—
|
|
Actuarial valuation loss and related amortization, prior service credit amortization and foreign currency and other adjustments on defined benefit plans, net of income tax of $435
|
—
|
|
|
—
|
|
|
(1,647
|
)
|
|
—
|
|
|
(1,647
|
)
|
|
—
|
|
Issuance of common stock under stock compensation plans, net of tax effect
|
1,113,713
|
|
|
—
|
|
|
(1,257
|
)
|
|
—
|
|
|
(1,257
|
)
|
|
—
|
|
Issuance of stock under Employee Stock Purchase Plan
|
54,300
|
|
|
(54,300
|
)
|
|
566
|
|
|
—
|
|
|
566
|
|
|
—
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
18,852
|
|
|
—
|
|
|
18,852
|
|
|
—
|
|
Dividends
|
—
|
|
|
—
|
|
|
(76,048
|
)
|
|
—
|
|
|
(76,048
|
)
|
|
—
|
|
Share repurchases
|
(3,866,387
|
)
|
|
3,866,387
|
|
|
(56,159
|
)
|
|
—
|
|
|
(56,159
|
)
|
|
—
|
|
Noncontrolling interest capital contribution
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
11
|
|
|
951
|
|
Noncontrolling interest capital distribution
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,358
|
)
|
|
(1,358
|
)
|
|
—
|
|
Balance at February 3, 2018
|
81,371,118
|
|
|
60,252,569
|
|
|
$
|
916,819
|
|
|
$
|
16,656
|
|
|
$
|
933,475
|
|
|
$
|
5,590
|
|
Cumulative adjustment from adoption of new accounting guidance
|
—
|
|
|
—
|
|
|
5,829
|
|
|
—
|
|
|
5,829
|
|
|
—
|
|
Net earnings (loss)
|
—
|
|
|
—
|
|
|
(9,133
|
)
|
|
1,064
|
|
|
(8,069
|
)
|
|
—
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
(58,276
|
)
|
|
(994
|
)
|
|
(59,270
|
)
|
|
(786
|
)
|
Gain on derivative financial instruments designated as cash flow hedges, net of income tax of
($2,545)
|
—
|
|
|
—
|
|
|
17,242
|
|
|
—
|
|
|
17,242
|
|
|
—
|
|
Actuarial valuation and prior service credit amortization and foreign currency and other adjustments on defined benefit plans, net of income tax of
($89)
|
—
|
|
|
—
|
|
|
688
|
|
|
—
|
|
|
688
|
|
|
—
|
|
Issuance of common stock under stock compensation plans, net of tax effect
|
718,583
|
|
|
—
|
|
|
4,124
|
|
|
—
|
|
|
4,124
|
|
|
—
|
|
Issuance of stock under Employee Stock Purchase Plan
|
36,632
|
|
|
(36,632
|
)
|
|
613
|
|
|
—
|
|
|
613
|
|
|
—
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
12,534
|
|
|
—
|
|
|
12,534
|
|
|
—
|
|
Dividends
|
—
|
|
|
—
|
|
|
(55,955
|
)
|
|
—
|
|
|
(55,955
|
)
|
|
—
|
|
Share repurchases
|
(1,118,808
|
)
|
|
1,118,808
|
|
|
(17,587
|
)
|
|
—
|
|
|
(17,587
|
)
|
|
—
|
|
Noncontrolling interest capital distribution
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,069
|
)
|
|
(3,069
|
)
|
|
—
|
|
Balance at November 3, 2018
|
81,007,525
|
|
|
61,334,745
|
|
|
$
|
816,898
|
|
|
$
|
13,657
|
|
|
$
|
830,555
|
|
|
$
|
4,804
|
|
Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss), net of related income taxes, for the three and
nine months ended November 3, 2018
and
October 28, 2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Nov 3, 2018
|
|
Foreign Currency Translation Adjustment
|
|
Derivative Financial Instruments Designated as Cash Flow Hedges
|
|
Defined Benefit Plans
|
|
Total
|
Balance at August 4, 2018
|
$
|
(114,761
|
)
|
|
$
|
(142
|
)
|
|
$
|
(11,117
|
)
|
|
$
|
(126,020
|
)
|
Gains (losses) arising during the period
|
(10,564
|
)
|
|
1,596
|
|
|
37
|
|
|
(8,931
|
)
|
Reclassification to net loss
for losses realized
|
—
|
|
|
1,419
|
|
|
124
|
|
|
1,543
|
|
Net other comprehensive income (loss)
|
(10,564
|
)
|
|
3,015
|
|
|
161
|
|
|
(7,388
|
)
|
Balance at November 3, 2018
|
$
|
(125,325
|
)
|
|
$
|
2,873
|
|
|
$
|
(10,956
|
)
|
|
$
|
(133,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended Nov 3, 2018
|
|
Foreign Currency Translation Adjustment
|
|
Derivative Financial Instruments Designated as Cash Flow Hedges
|
|
Defined Benefit Plans
|
|
Total
|
Balance at February 3, 2018
|
$
|
(67,049
|
)
|
|
$
|
(14,369
|
)
|
|
$
|
(11,644
|
)
|
|
$
|
(93,062
|
)
|
Gains (losses) arising during the period
|
(58,276
|
)
|
|
12,175
|
|
|
314
|
|
|
(45,787
|
)
|
Reclassification to net loss for losses realized
|
—
|
|
|
5,067
|
|
|
374
|
|
|
5,441
|
|
Net other comprehensive income (loss)
|
(58,276
|
)
|
|
17,242
|
|
|
688
|
|
|
(40,346
|
)
|
Balance at November 3, 2018
|
$
|
(125,325
|
)
|
|
$
|
2,873
|
|
|
$
|
(10,956
|
)
|
|
$
|
(133,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Oct 28, 2017
|
|
Foreign Currency Translation Adjustment
|
|
Derivative Financial Instruments Designated as Cash Flow Hedges
|
|
Defined Benefit Plans
|
|
Total
|
Balance at July 29, 2017
|
$
|
(103,675
|
)
|
|
$
|
(8,751
|
)
|
|
$
|
(8,483
|
)
|
|
$
|
(120,909
|
)
|
Gains (losses) arising during the period
|
(8,184
|
)
|
|
2,749
|
|
|
97
|
|
|
(5,338
|
)
|
Reclassification to net loss for losses realized
|
—
|
|
|
235
|
|
|
88
|
|
|
323
|
|
Net other comprehensive income (loss)
|
(8,184
|
)
|
|
2,984
|
|
|
185
|
|
|
(5,015
|
)
|
Balance at October 28, 2017
|
$
|
(111,859
|
)
|
|
$
|
(5,767
|
)
|
|
$
|
(8,298
|
)
|
|
$
|
(125,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended Oct 28, 2017
|
|
Foreign Currency Translation Adjustment
|
|
Derivative Financial Instruments Designated as Cash Flow Hedges
|
|
Defined Benefit Plans
|
|
Total
|
Balance at January 28, 2017
|
$
|
(158,227
|
)
|
|
$
|
5,400
|
|
|
$
|
(8,562
|
)
|
|
$
|
(161,389
|
)
|
Gains (losses) arising during the period
|
46,368
|
|
|
(10,220
|
)
|
|
2
|
|
|
36,150
|
|
Reclassification to net loss for (gains) losses realized
|
—
|
|
|
(947
|
)
|
|
262
|
|
|
(685
|
)
|
Net other comprehensive income (loss)
|
46,368
|
|
|
(11,167
|
)
|
|
264
|
|
|
35,465
|
|
Balance at October 28, 2017
|
$
|
(111,859
|
)
|
|
$
|
(5,767
|
)
|
|
$
|
(8,298
|
)
|
|
$
|
(125,924
|
)
|
Details on reclassifications out of accumulated other comprehensive income (loss) to net loss
during the three and
nine months ended November 3, 2018
and
October 28, 2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Location of
(Gain) Loss
Reclassified from
Accumulated OCI
into Loss
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
|
Derivative financial instruments designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
$
|
1,618
|
|
|
$
|
(81
|
)
|
|
$
|
5,646
|
|
|
$
|
(1,360
|
)
|
|
Cost of product sales
|
Foreign exchange currency contracts
|
—
|
|
|
337
|
|
|
201
|
|
|
244
|
|
|
Other income (expense)
|
Interest rate swap
|
(21
|
)
|
|
57
|
|
|
(60
|
)
|
|
119
|
|
|
Interest expense
|
Less income tax effect
|
(178
|
)
|
|
(78
|
)
|
|
(720
|
)
|
|
50
|
|
|
Income tax expense (benefit)
|
|
1,419
|
|
|
235
|
|
|
5,067
|
|
|
(947
|
)
|
|
|
Defined benefit plans:
|
|
|
|
|
|
|
|
|
|
Net actuarial loss amortization
1
|
150
|
|
|
116
|
|
|
453
|
|
|
344
|
|
|
Other income (expense)
|
Prior service credit amortization
1
|
(7
|
)
|
|
(7
|
)
|
|
(21
|
)
|
|
(20
|
)
|
|
Other income (expense)
|
Less income tax effect
|
(19
|
)
|
|
(21
|
)
|
|
(58
|
)
|
|
(62
|
)
|
|
Income tax expense (benefit)
|
|
124
|
|
|
88
|
|
|
374
|
|
|
262
|
|
|
|
Total reclassifications during the period
|
$
|
1,543
|
|
|
$
|
323
|
|
|
$
|
5,441
|
|
|
$
|
(685
|
)
|
|
|
__________________________________
Notes:
|
|
1
|
These accumulated other comprehensive income (loss) components are included in the computation of net periodic defined benefit pension cost.
During the first quarter of fiscal 2019, the Company adopted new authoritative guidance which requires that the non-service components of net periodic defined benefit pension cost be presented outside of loss from operations
.
The Company adopted this guidance on a retrospective basis and, as a result, reclassified
these components
from SG&A expenses to other income (expense) for the
three and
nine months ended October 28, 2017
. Refer to Note 13 for further information.
|
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 beginning in the sixth year of the agreement, or sooner in certain limited circumstances, and every third anniversary from the end of the sixth year thereafter 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 condensed consolidated balance sheet. The carrying value of the redeemable noncontrolling interest related to Guess Brazil was
$1.4 million
and
$1.6 million
as of
November 3, 2018
and
February 3, 2018
, 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 condensed consolidated balance sheet. During fiscal 2018, the Company and the noncontrolling interest holder made additional capital contribution
totaling
$3.2 million
, of which
$2.2 million
was paid by the Company and the remaining amount was paid by the noncontrolling interest holder to retain the same pro-rata interest in Guess CIS. The carrying value of the redeemable noncontrolling interest related to Guess CIS was
$3.4 million
and $
4.0 million
as of
November 3, 2018
and
February 3, 2018
, respectively.
Accounts receivable is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Nov 3, 2018
|
|
Feb 3, 2018
|
Trade
|
$
|
282,919
|
|
|
$
|
290,478
|
|
Royalty
|
8,437
|
|
|
5,504
|
|
Other
|
6,453
|
|
|
13,233
|
|
|
297,809
|
|
|
309,215
|
|
Less allowances
1
|
11,703
|
|
|
49,219
|
|
|
$
|
286,106
|
|
|
$
|
259,996
|
|
__________________________________
Notes:
|
|
1
|
As of
February 3, 2018
, the accounts receivable allowance included allowances for doubtful accounts, wholesale sales returns and wholesale markdowns.
During the first quarter of fiscal 2019, the Company adopted a new revenue recognition standard on a modified retrospective basis which changed the presentation of allowances for wholesale sales returns and wholesale markdowns to be classified within accrued expenses rather than as a reduction to accounts receivable. Accordingly, the Company has included allowances of
$26.1 million
and
$11.2 million
related to wholesale sales returns and wholesale markdowns, respectively, in accrued expenses as of
November 3, 2018
. As of
November 3, 2018
, the accounts receivable allowance was only related to allowances for doubtful accounts. Refer to Notes 1 and 2 for further information regarding the impact from the adoption of the new revenue recognition standard on the Company’s condensed consolidated financial statements and related disclosures during the third quarter of fiscal 2019.
|
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.
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Nov 3, 2018
|
|
Feb 3, 2018
|
Raw materials
|
$
|
1,360
|
|
|
$
|
604
|
|
Work in progress
|
166
|
|
|
16
|
|
Finished goods
1
|
546,991
|
|
|
427,684
|
|
|
$
|
548,517
|
|
|
$
|
428,304
|
|
__________________________________
Notes:
|
|
1
|
During the first quarter of fiscal 2019, the Company adopted a new revenue recognition standard on a modified retrospective basis which changed the
presentation of the estimated cost associated with the allowance for sales returns to be included within other current assets rather than included in inventories. Accordingly, the Company has included
$10.4 million
related to the estimated cost associated with the allowance for sales returns in other current assets as of
November 3, 2018
. Refer to Notes 1 and 2 for further information regarding the impact from the adoption of the new revenue recognition standard on the Company’s condensed consolidated financial statements and related disclosures during the third quarter of fiscal 2019.
|
The above balances include an allowance to write down inventories to the lower of cost or net realizable value of $
26.7 million
and $
29.9 million
as of
November 3, 2018
and
February 3, 2018
, respectively.
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
61.7%
for the
nine months ended November 3, 2018
, compared to
508.6%
for the
nine months ended October 28, 2017
. The improvement in the effective income tax rate during the nine months ended November 3, 2018 was due primarily to the revision of provisional amounts recorded related to the impact of the 2017 Tax Cuts and Jobs Act in the U.S. (referred to herein as the “Tax Reform”) as discussed further below, lower losses during the nine months ended November 3, 2018 in jurisdictions in which the Company has valuation allowances, the impact of discrete non-deductible expenses as compared to the same prior-year period and, to a lesser extent, the reversal of a valuation allowance on certain deferred taxes.
In December 2017, the U.S. government enacted the Tax Reform, which significantly changed the U.S. corporate income tax laws, including lowering the U.S. federal corporate income tax rate from 35% to 21% and requiring a one-time mandatory transition tax on accumulated foreign earnings. The Tax Reform also establishes new tax laws that are effective for calendar 2018, including but not limited to (i) a new provision designed to tax global intangible low-taxed income (“GILTI”), (ii) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, (iii) a limitation on deductible interest expense and (iv) limitations on the deductibility of certain executive compensation.
Any income tax payable related to the transition tax is due over an eight-year period beginning in calendar 2018
. The SEC issued authoritative guidance which addresses accounting for the impact of the Tax Reform. This guidance provides a measurement period, which should not extend beyond one year from the enactment date, during which the Company may finalize the accounting for the impacts of the Tax Reform, and allows for the Company to record provisional estimates of such amounts. Based on the Company’s interpretation of the Tax Reform, reasonable estimates were made to record provisional adjustments during the fourth quarter of fiscal 2018. During the third quarter of fiscal 2019, the Company completed the preparation of its U.S. federal tax return for the fiscal year 2018 and concluded, based on the additional information that has become available, that no transition tax is due. As a result, during the three months ended
November 3, 2018
, the Company revised its provisional amount initially recorded in the three months ended
February 3, 2018
related to the Tax Reform and recognized a tax benefit of
$19.6 million
. The Company will continue to refine such amounts within the measurement period allowed if and when additional interpretations are issued.
On November 28, 2018, the U.S. Internal Revenue Service (“IRS”) announced a proposed regulation to revise the section of the underlying IRS code which gave rise to the Company’s change in the provisional calculation. In the event legislation is passed in the future to revise the relevant IRS code section, the Company could have additional tax expense and tax liabilities of approximately
$12.8 million
. In accordance with current legislation, such charges would be payable over the next seven years.
The Company had
no
amounts recorded in the condensed consolidated balance sheet related to the transition tax in accrued expenses or other long-term liabilities as of
November 3, 2018
. The Company included
$1.9 million
and
$17.7 million
related to the transition tax in accrued expenses and other long-term liabilities in its condensed consolidated balance sheets as of
February 3, 2018
, respectively.
From time-to-time, the Company is subject to routine income tax audits on various tax matters around the world in the ordinary course of business. As of
November 3, 2018
, several income tax audits were underway for various periods in multiple jurisdictions. The Company accrues an amount for its estimate of additional income tax liability which the Company, more likely than not, will incur as a result of the ultimate resolution of income tax audits (“uncertain tax positions”). The Company reviews and updates the estimates used in the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, upon completion of tax audits, 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 $
18.4 million
and
$19.0 million
as of
November 3, 2018
and
February 3, 2018
, respectively.
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, net gains (losses) from lease terminations, asset impairment charges, restructuring charges, and other non-recurring 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 North, South and Central America. 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, net gains (losses) on lease terminations, asset impairment charges and restructuring charges. 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.
Net revenue and loss
from operations are summarized as follows for the three and
nine months ended November 3, 2018
and
October 28, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
Americas Retail
|
$
|
186,925
|
|
|
$
|
187,021
|
|
|
$
|
555,390
|
|
|
$
|
561,903
|
|
Americas Wholesale
|
52,698
|
|
|
45,636
|
|
|
127,630
|
|
|
114,151
|
|
Europe
|
254,037
|
|
|
221,230
|
|
|
771,470
|
|
|
641,833
|
|
Asia
|
89,461
|
|
|
74,322
|
|
|
256,298
|
|
|
200,436
|
|
Licensing
1,2
|
22,286
|
|
|
20,744
|
|
|
61,779
|
|
|
53,267
|
|
Total net revenue
1,2
|
$
|
605,407
|
|
|
$
|
548,953
|
|
|
$
|
1,772,567
|
|
|
$
|
1,571,590
|
|
Earnings (loss) from operations:
|
|
|
|
|
|
|
|
|
|
Americas Retail
2,3
|
$
|
3,799
|
|
|
$
|
(2,414
|
)
|
|
$
|
3,701
|
|
|
$
|
(27,550
|
)
|
Americas Wholesale
2,3
|
10,392
|
|
|
8,562
|
|
|
21,743
|
|
|
20,783
|
|
Europe
3,4
|
7,410
|
|
|
9,095
|
|
|
17,608
|
|
|
38,147
|
|
Asia
3
|
1,938
|
|
|
2,954
|
|
|
7,637
|
|
|
5,734
|
|
Licensing
2,3
|
19,485
|
|
|
18,346
|
|
|
54,408
|
|
|
46,196
|
|
Total segment earnings from operations
2,4
|
43,024
|
|
|
36,543
|
|
|
105,097
|
|
|
83,310
|
|
Corporate overhead
2,4
|
(20,824
|
)
|
|
(23,443
|
)
|
|
(72,316
|
)
|
|
(67,403
|
)
|
Net gains (losses) on lease terminations
5
|
—
|
|
|
(11,494
|
)
|
|
152
|
|
|
(11,494
|
)
|
Asset impairment charges
6
|
(1,277
|
)
|
|
(2,018
|
)
|
|
(5,017
|
)
|
|
(6,013
|
)
|
European Commission fine
7
|
(42,428
|
)
|
|
—
|
|
|
(42,428
|
)
|
|
—
|
|
Total loss from operations
2,4
|
$
|
(21,505
|
)
|
|
$
|
(412
|
)
|
|
$
|
(14,512
|
)
|
|
$
|
(1,600
|
)
|
|
|
|
|
|
|
|
|
__________________________________
Notes:
|
|
1
|
During the fourth quarter of fiscal 2018, the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales to reflect its treatment as a reduction of the cost of such licensed product. Accordingly, net revenue for the
three and
nine months ended October 28, 2017
has been adjusted to conform to the current period presentation. This reclassification had no impact on previously reported loss from operations
.
|
|
|
2
|
During the first quarter of fiscal 2019, the Company adopted a comprehensive new revenue recognition standard using a modified retrospective method that does not restate prior periods to be comparable to the current period presentation. The
|
adoption of this guidance primarily impacted the presentation of advertising contributions received from the Company’s licensees and the related advertising expenditures incurred by the Company. The adoption of this guidance resulted in an increase in net royalty revenue within the Company’s Licensing segment of
$2.7 million
, as well as an increase in SG&A expenses in our Americas Retail, Americas Wholesale and Licensing segments as well as corporate overhead of
$1.0 million
,
$0.6 million
,
$0.3 million
and
$0.6 million
, respectively, during the
three months ended November 3, 2018
compared to the same prior-year period. The net
favorable
impact on loss from operations was approximately
$0.2 million
during the
three months ended November 3, 2018
compared to the same prior-year period. During the
nine months ended November 3, 2018
, the adoption of this guidance resulted in an increase in net royalty revenue within the Company’s Licensing segment of
$7.1 million
, as well as an increase in SG&A expenses in our Americas Retail, Americas Wholesale and Licensing segments as well as corporate overhead of
$3.3 million
,
$1.5 million
,
$0.7 million
and
$1.7 million
, respectively, during the
nine months ended November 3, 2018
compared to the same prior-year period. The net
unfavorable
impact on loss from operations was approximately
$0.1 million
during the
nine months ended November 3, 2018
compared to the same prior-year period. Refer to Note 1 for more information regarding the impact from the adoption of this new standard.
|
|
3
|
During the first quarter of fiscal 2019, the Company changed the segment accountability for funds received from licensees on the Company’s purchases of its licensed products. These amounts were treated as a reduction of cost of product sales within the Licensing segment but now are considered in the results of the segments that control the respective purchases for purposes of segment performance evaluation. Accordingly, segment results for the
three and
nine months ended October 28, 2017
have been adjusted to conform to the current period presentation
.
|
|
|
4
|
During the first quarter of fiscal 2019, the Company adopted new authoritative guidance which requires that the non-service components of net periodic defined benefit pension cost be presented outside of earnings (loss) from operations. Accordingly, loss from operations and segment results for the
three and
nine months ended October 28, 2017
have been adjusted to conform to the current period presentation
.
|
|
|
5
|
During the
nine months ended November 3, 2018
, the Company recorded net gains on lease terminations
related primarily to the early termination of certain lease agreements in North America
.
The net gains on lease terminations were recorded during the three months ended May 5, 2018
. During the nine months ended October 27, 2018, the Company recorded net losses on lease termination related primarily to the modification of certain lease agreements held with a common landlord in North America. Refer to Note 1 for more information regarding the net gains (losses) on lease terminations.
|
|
|
6
|
During each of the periods presented, the Company recognized asset impairment charges for certain retail locations resulting from under-performance and expected store closures. Refer to Note 14 for more information regarding these asset impairment charges.
|
|
|
7
|
During the third quarter of fiscal 2019, the Company recorded a charge of
€37.0 million
euro (
$42.4 million
) related to an estimated fine expected to be imposed on the Company by the European Commission related to its inquiry concerning possible violations of European Union competition rules by the Company. Refer to Note 12 for further information.
|
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
|
|
Nine Months Ended
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
U.S.
|
$
|
181,113
|
|
|
$
|
170,068
|
|
|
$
|
519,547
|
|
|
$
|
507,239
|
|
Italy
|
65,050
|
|
|
67,561
|
|
|
213,336
|
|
|
195,955
|
|
Canada
|
49,961
|
|
|
53,381
|
|
|
136,296
|
|
|
142,905
|
|
South Korea
|
40,623
|
|
|
41,709
|
|
|
114,706
|
|
|
114,547
|
|
Other foreign countries
|
268,660
|
|
|
216,234
|
|
|
788,682
|
|
|
610,944
|
|
Total net revenue
|
$
|
605,407
|
|
|
$
|
548,953
|
|
|
$
|
1,772,567
|
|
|
$
|
1,571,590
|
|
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.
|
|
(9)
|
Borrowings and Capital Lease Obligations
|
Borrowings and capital lease obligations are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Nov 3, 2018
|
|
Feb 3, 2018
|
Mortgage debt, maturing monthly through January 2026
|
$
|
19,885
|
|
|
$
|
20,323
|
|
Capital lease obligations
|
17,031
|
|
|
18,589
|
|
Other
|
2,876
|
|
|
3,129
|
|
|
39,792
|
|
|
42,041
|
|
Less current installments
|
3,538
|
|
|
2,845
|
|
Long-term debt and capital lease obligations
|
$
|
36,254
|
|
|
$
|
39,196
|
|
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
November 3, 2018
, outstanding borrowings under the Mortgage Debt, net of debt issuance costs of
$0.1 million
, were
$19.9 million
. At
February 3, 2018
, outstanding borrowings under the Mortgage Debt, net of debt issuance costs of
$0.1 million
, were
$20.3 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.
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 values of the interest rate swap asset as of
November 3, 2018
and
February 3, 2018
were approximately
$1.7 million
and
$1.5 million
, respectively.
Capital Lease Obligations
During
fiscal 2018
, the Company began the relocation of its European distribution center to the Netherlands. As a result, the Company entered into a capital lease of
$17.0 million
for equipment used in the new facility.
The capital lease primarily provides for monthly minimum lease payments through
May 2027
with an effective interest rate of approximately
6%
. As of
November 3, 2018
and
February 3, 2018
, the capital lease obligation was
$14.9 million
and $
17.3 million
, respectively.
The Company also has smaller capital leases related primarily to computer hardware and software.
As of
November 3, 2018
and
February 3, 2018
,
these capital lease obligations totaled
$2.1 million
and
$1.3 million
, respectively.
Credit Facilities
On June 23, 2015, the Company entered into a
five
-year senior secured asset-based revolving credit facility with Bank of America, N.A. and the other lenders party thereto (the “Credit Facility”). The Credit Facility provides for a borrowing capacity in an amount up to $
150 million
,
including a Canadian sub-facility up to $
50 million
,
subject to a borrowing base. Based on applicable accounts receivable, inventory, eligible cash balances and relevant covenant restrictions as of
November 3, 2018
, the Company could have borrowed up to
$134 million
under the
Credit Facility. The Credit Facility has an option to expand the borrowing capacity by up to $
150 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
0.25%
to
0.75%
)
or at LIBOR plus an applicable margin (varying from
1.25%
to
1.75%
). 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
0.25%
to
0.75%
) or at the Canadian BA rate plus an applicable margin (varying from
1.25%
to
1.75%
). The Canadian prime rate is based on the greater of (i) the Canadian prime rate, (ii) the Bank of Canada overnight rate, plus
0.5%
, and (iii) the Canadian BA rate for a one-month interest period, plus
1.0%
. 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
November 3, 2018
, the Company had $
2.0 million
in outstanding standby letters of credit,
no
outstanding documentary letters of credit and
no
outstanding borrowings under the Credit Facility.
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. As of
November 3, 2018
, the Company could have borrowed or entered into documentary letters of credit totaling up to $
87.1 million
under these agreements. As of
November 3, 2018
,
the Company had
no
outstanding borrowings
or outstanding documentary letters of credit under these agreements. The agreements are denominated primarily in euros and provide for annual interest rates ranging from
1.1%
to
5.0%
.
With the exception of
one
facility for up to $
39.9 million
that has a minimum net equity requirement, there are no other financial ratio covenants.
Other
From time-to-time, the Company will obtain other financing in foreign countries for working capital to finance its local operations.
|
|
(10)
|
Share-Based Compensation
|
The following table summarizes the share-based compensation expense recognized under all of the Company’s stock plans during the three and
nine months ended November 3, 2018
and
October 28, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
Stock options
|
$
|
824
|
|
|
$
|
571
|
|
|
$
|
2,191
|
|
|
$
|
1,761
|
|
Stock awards/units
|
3,692
|
|
|
3,658
|
|
|
10,154
|
|
|
10,539
|
|
Employee Stock Purchase Plan
|
29
|
|
|
31
|
|
|
189
|
|
|
110
|
|
Total share-based compensation expense
|
$
|
4,545
|
|
|
$
|
4,260
|
|
|
$
|
12,534
|
|
|
$
|
12,410
|
|
Unrecognized compensation cost related to nonvested stock options and nonvested stock awards/units totaled approximately $
4.2 million
and $
27.2 million
, respectively, as of
November 3, 2018
. This cost is expected to be recognized over a weighted average period of
1.6
years. The weighted average grant date fair value of stock options granted was
$5.89
and
$1.57
during the
nine months ended November 3, 2018
and
October 28, 2017
, respectively.
Grants
On June 25, 2018, the Company granted select key management
619,578
nonvested stock units which are subject to certain performance-based vesting or market-based vesting conditions. On April 28, 2017, the Company granted select key management
1,056,042
nonvested stock units which are subject to certain performance-based vesting or market-based vesting conditions.
Annual Grants
On March 30, 2018, the Company made an annual grant of
431,371
stock options and
490,528
nonvested stock awards/units to its employees. On March 29, 2017, the Company made an annual grant of
1,283,175
stock options and
707,675
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
nine months ended November 3, 2018
:
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Nonvested at February 3, 2018
|
1,300,921
|
|
|
$
|
14.01
|
|
Granted
|
489,646
|
|
|
21.83
|
|
Vested
|
(141,625
|
)
|
|
15.07
|
|
Forfeited
|
(52,312
|
)
|
|
15.37
|
|
Nonvested at November 3, 2018
|
1,596,630
|
|
|
$
|
16.27
|
|
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
nine months ended November 3, 2018
:
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Nonvested at February 3, 2018
|
388,477
|
|
|
$
|
12.28
|
|
Granted
|
129,932
|
|
|
20.28
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
Nonvested at November 3, 2018
|
518,409
|
|
|
$
|
14.28
|
|
|
|
(11)
|
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
November 3, 2018
with expiration or option exercise dates ranging from calendar years
2018
to
2020
.
Aggregate rent, common area maintenance charges and property tax expense recorded under these
four
related party leases were approximately $
3.7 million
and
$3.6 million
for the
nine months ended November 3, 2018
and
October 28, 2017
, respectively. 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
nine months ended November 3, 2018
and
October 28, 2017
were approximately
$1.0 million
and $
0.7 million
, respectively.
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 3, 2018
.
|
|
(
12
)
|
Commitments and Contingencies
|
Leases
The Company 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
December 2037
. Some of these leases require the Company to make periodic payments for property taxes, utilities and common area operating expenses. Certain retail store leases provide for rents based upon the minimum annual rental amount and a percentage of annual sales volume,
generally ranging from
4%
to
20%
, when specific sales volumes are exceeded. The Company’s retail concession leases also provide for rents primarily based upon a percentage of annual sales volume which average approximately
35%
of annual sales volume. Some leases include lease incentives, rent abatements and fixed rent escalations, which are amortized and recorded over the initial lease term on a straight-line basis. The Company also leases some of its equipment under operating lease agreements expiring at various dates through
October 2023
.
As discussed in further detail in Note 9, the Company leases equipment as well as computer hardware and software under capital lease obligations.
Investment Commitments
As of
November 3, 2018
, the Company had an unfunded commitment to invest
€3.6 million
(
$4.1 million
) in a private equity fund. Refer to Note 14 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 or results of operations. 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
.
On May 6, 2009, Gucci America, Inc. filed a complaint in the U.S. District Court for the Southern District of New York against Guess?, Inc. and certain third-party licensees for the Company asserting, among other things, trademark and trade dress law violations and unfair competition. The complaint sought injunctive relief, compensatory damages, including treble damages, and certain other relief. Complaints similar to those in the above action were subsequently filed by Gucci entities against the Company and certain of its subsidiaries in the Court of Milan, Italy, the Intermediate People’s Court of Nanjing, China and the Court of Paris, France.
The three-week bench trial in the U.S. matter concluded on April 19, 2012, with the court issuing a preliminary ruling on May 21, 2012 and a final ruling on July 19, 2012. Although the plaintiff was seeking compensation in the U.S. matter in the form of damages of $
26 million
and an accounting of profits of $
99 million
, the final ruling provided for monetary damages of $
2.3 million
against the Company and $
2.3 million
against certain of its licensees. The court also granted narrow injunctions in favor of the plaintiff for certain of the claimed infringements. On August 20, 2012, the appeal period expired without any party having filed an appeal, rendering the judgment final.
On May 2, 2013, the Court of Milan ruled in favor of the Company in the Milan, Italy matter. In the ruling, the Court rejected all of the plaintiff’s claims and ordered the cancellation of
three
of the plaintiff’s Italian and
four
of the plaintiff’s European Community trademark registrations. On June 10, 2013, the plaintiff appealed the Court’s ruling in the Milan matter. On September 15, 2014, the Court of Appeal of Milan affirmed the majority of the lower Court’s ruling in favor of the Company, but overturned the lower Court’s finding with respect to an unfair competition claim. That portion of the matter moved to a damages phase based on the ruling. On October 16, 2015, the plaintiff appealed the remainder of the Court of Appeal of Milan’s ruling in favor of the Company to the Italian Supreme Court of Cassation. In the China matter, the Intermediate People’s Court of Nanjing, China issued a ruling on November 8, 2013 granting an injunction in favor of the plaintiff for certain of the claimed infringements on handbags and small leather goods and awarding the plaintiff statutory damages in the amount of approximately
$80,000
. The Company strongly disagreed with the Court’s decision and appealed the ruling. On August 31, 2016, the Court of Appeal for the China matter issued a decision in favor of the Company, rejecting all of the plaintiff’s claims. In March 2017, the plaintiff petitioned the China Supreme Court for a retrial of the matter. On January 30, 2015, the Court of Paris ruled in favor of the Company in the France matter, rejecting all of the plaintiff’s claims and partially canceling
two
of the plaintiff’s community trademark registrations and
one
of the plaintiff’s international trademark registrations. On February 17, 2015, the plaintiff appealed the Court of Paris’ ruling.
In April 2018, the parties entered into an agreement to settle all pending worldwide intellectual property litigation and trademark office matters between the parties and their subsidiaries, including the previously active litigation matters in Italy, China and France. As part of the settlement, the parties agreed on the use of
various design elements by each party on a go-forward basis. The settlement did not have a significant impact on the Company’s financial results, and the terms of the settlement are not expected to have a negative impact on the Company’s business operations going forward.
The Company has received customs tax assessment notices from the Italian Customs Agency (“ICA”) regarding its customs tax audit of
one
of the Company’s European subsidiaries for the period from
July 2010
through
December 2012
. Such assessments totaled €
9.8 million
($
11.4 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
(
$11.0 million
) of these favorable MFDTC judgments with the Appeals Court. To date,
€6.3 million
(
$7.2 million
) have been decided in favor of the Company,
€1.3 million
(
$1.4 million
) have been decided in favor of the ICA, and
€2.1 million
(
$2.4 million
) remain pending. 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 the favorable Appeals Court rulings to the Supreme Court
.
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 or results of operations.
On
June 6, 2017
, the European Commission notified the Company that it had initiated proceedings to investigate whether certain of the Company’s practices and agreements concerning the distribution of apparel and accessories within the European Union breached European Union competition rules related to cross-border transactions, internet sales limitations and resale price restrictions. The Company has cooperated with the European Commission, including through responses to requests for information, through changes to certain business practices and agreements and by engaging in a settlement discussion process. Depending on the outcome of the proceedings, a broad range of remedies is available to the European Commission, including imposing a fine and/or injunctive relief prohibiting or restricting certain business practices. The Company has already made certain changes to its business practices and agreements in response to, and early in the course of, these proceedings, and the Company believes that such changes have not had, and will not have, a material impact on its ongoing business operations within the European Union.
Based on the settlement discussion process, the Company now believes that it is likely to incur a fine in an amount between
€37.0 million
(
$42.4 million
) and
€40.6 million
(
$46.6 million
) with no further modifications of the Company’s business practices and agreements beyond those already made. Accordingly, the Company accrued an estimated charge of
€37.0 million
(
$42.4 million
) during the
third quarter of fiscal 2019
. A final outcome in this matter could occur as early as the
fourth quarter of fiscal 2019
, although any resolution may be delayed or different than current expectations due to the inherent unpredictability of the proceedings.
|
|
(13)
|
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
$
61.6 million
and $
64.5 million
as of
November 3, 2018
and
February 3, 2018
,
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
loss
of
$
2.3 million
and
$
1.6 million
in other expense during the three and
nine months ended November 3, 2018
, respectively, and unrealized gains of
$
1.6 million
and
$
5.5 million
in other income during the three and
nine months ended October 28, 2017
, respectively
. The projected benefit obligation was
$
54.9 million
and
$
54.8 million
as of
November 3, 2018
and
February 3, 2018
, 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
$
0.4 million
and $
1.3 million
were made during the three and
nine months ended November 3, 2018
, respectively.
SERP benefit payments of
$
0.4 million
and
$
1.3 million
were made during the three and
nine months ended October 28, 2017
, 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
November 3, 2018
and
February 3, 2018
, the foreign pension plans had a total projected benefit obligation of $
27.9 million
and $
26.4 million
, respectively, and plan assets held in independent investment fiduciaries of $
22.4 million
and $
21.4 million
, respectively. The net liability of $
5.5 million
and $
5.0 million
was included in other long-term liabilities in the Company’s condensed consolidated balance sheets as of
November 3, 2018
and
February 3, 2018
, respectively.
The components of net periodic defined benefit pension cost for the three and
nine months ended November 3, 2018
and
October 28, 2017
related to the Company’s defined benefit plans are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Nov 3, 2018
|
|
SERP
|
|
Foreign Pension Plans
|
|
Total
|
Service cost
|
$
|
—
|
|
|
$
|
730
|
|
|
$
|
730
|
|
Interest cost
|
471
|
|
|
54
|
|
|
525
|
|
Expected return on plan assets
|
—
|
|
|
(72
|
)
|
|
(72
|
)
|
Net amortization of unrecognized prior service credit
|
—
|
|
|
(7
|
)
|
|
(7
|
)
|
Net amortization of actuarial losses
|
47
|
|
|
103
|
|
|
150
|
|
Net periodic defined benefit pension cost
|
$
|
518
|
|
|
$
|
808
|
|
|
$
|
1,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended Nov 3, 2018
|
|
SERP
|
|
Foreign Pension Plans
|
|
Total
|
Service cost
|
$
|
—
|
|
|
$
|
2,224
|
|
|
$
|
2,224
|
|
Interest cost
|
1,415
|
|
|
164
|
|
|
1,579
|
|
Expected return on plan assets
|
—
|
|
|
(221
|
)
|
|
(221
|
)
|
Net amortization of unrecognized prior service credit
|
—
|
|
|
(21
|
)
|
|
(21
|
)
|
Net amortization of actuarial losses
|
140
|
|
|
313
|
|
|
453
|
|
Net periodic defined benefit pension cost
|
$
|
1,555
|
|
|
$
|
2,459
|
|
|
$
|
4,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Oct 28, 2017
|
|
SERP
|
|
Foreign Pension Plans
|
|
Total
|
Service cost
|
$
|
—
|
|
|
$
|
492
|
|
|
$
|
492
|
|
Interest cost
|
461
|
|
|
22
|
|
|
483
|
|
Expected return on plan assets
|
—
|
|
|
(48
|
)
|
|
(48
|
)
|
Net amortization of unrecognized prior service credit
|
—
|
|
|
(7
|
)
|
|
(7
|
)
|
Net amortization of actuarial losses
|
38
|
|
|
78
|
|
|
116
|
|
Net periodic defined benefit pension cost
|
$
|
499
|
|
|
$
|
537
|
|
|
$
|
1,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended Oct 28, 2017
|
|
SERP
|
|
Foreign Pension Plans
|
|
Total
|
Service cost
|
$
|
—
|
|
|
$
|
1,452
|
|
|
$
|
1,452
|
|
Interest cost
|
1,382
|
|
|
64
|
|
|
1,446
|
|
Expected return on plan assets
|
—
|
|
|
(143
|
)
|
|
(143
|
)
|
Net amortization of unrecognized prior service credit
|
—
|
|
|
(20
|
)
|
|
(20
|
)
|
Net amortization of actuarial losses
|
114
|
|
|
230
|
|
|
344
|
|
Net periodic defined benefit pension cost
|
$
|
1,496
|
|
|
$
|
1,583
|
|
|
$
|
3,079
|
|
During the first quarter of fiscal 2019, the Company adopted new authoritative guidance which requires that the non-service components of net periodic defined benefit pension cost be presented outside of loss from operations
.
The Company adopted this guidance on a retrospective basis and, as a result, reclassified
approximately $
0.5 million
and
$
1.6 million
from SG&A expenses to other income (expense) for the
three and
nine months ended October 28, 2017
, respectively.
|
|
(14)
|
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.
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of
November 3, 2018
and February 3, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Nov 3, 2018
|
|
Fair Value Measurements at Feb 3, 2018
|
Recurring Fair Value Measures
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
$
|
—
|
|
|
$
|
7,527
|
|
|
$
|
—
|
|
|
$
|
7,527
|
|
|
$
|
—
|
|
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
51
|
|
Interest rate swap
|
|
—
|
|
|
1,707
|
|
|
—
|
|
|
1,707
|
|
|
—
|
|
|
1,460
|
|
|
—
|
|
|
1,460
|
|
Total
|
|
$
|
—
|
|
|
$
|
9,234
|
|
|
$
|
—
|
|
|
$
|
9,234
|
|
|
$
|
—
|
|
|
$
|
1,511
|
|
|
$
|
—
|
|
|
$
|
1,511
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
18,089
|
|
|
$
|
—
|
|
|
$
|
18,089
|
|
Deferred compensation obligations
|
|
—
|
|
|
14,197
|
|
|
—
|
|
|
14,197
|
|
|
—
|
|
|
13,476
|
|
|
—
|
|
|
13,476
|
|
Total
|
|
$
|
—
|
|
|
$
|
14,204
|
|
|
$
|
—
|
|
|
$
|
14,204
|
|
|
$
|
—
|
|
|
$
|
31,565
|
|
|
$
|
—
|
|
|
$
|
31,565
|
|
There were
no
transfers of financial instruments between the three levels of fair value hierarchy during the
nine months ended November 3, 2018
or during the year ended
February 3, 2018
.
Foreign exchange currency contracts are entered into by the Company principally to hedge the future payment of inventory and intercompany transactions by non-U.S. subsidiaries.
Periodically, the Company may also use foreign exchange
currency
contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries.
The fair values of the Company
’
s foreign exchange currency contracts are based on quoted foreign exchange forward rates at the reporting date. The fair values of the Company
’
s interest rate swaps are
based upon inputs corroborated by observable market data.
Deferred compensation obligations to employees are adjusted based on changes in the fair value of the underlying employee-directed investments. Fair value of these obligations is based upon inputs corroborated by observable market data.
During fiscal 2018, the Company invested
€0.5 million
(
$0.5 million
) in a private equity fund. During the
nine months ended November 3, 2018
, the Company made additional investments totaling
€0.9 million
(
$1.1 million
). As permitted in accordance with authoritative guidance, the Company uses net asset value per share as a practical expedient to measure the fair value of this investment and has not included this investment in the fair value hierarchy as disclosed above. During the three months ended
November 3, 2018
, there were no
changes in the value of the private equity investment. During the
nine months ended November 3, 2018
, the Company recorded an unrealized
loss
of
€0.1 million
($
0.2 million
) in other expense. As of
November 3, 2018
and
February 3, 2018
, the Company included
€1.3 million
($
1.4 million
) and
€0.5 million
(
$0.6 million
), respectively, in other assets in the Company’s condensed consolidated balance sheet related to this investment. As of
November 3, 2018
, the Company had an unfunded commitment to invest an additional
€3.6 million
(
$4.1 million
) in the private equity fund.
The carrying amount of the Company
’
s remaining financial instruments, which principally include cash and cash equivalents, trade receivables, accounts payable and accrued expenses, approximates fair value due to the relatively short maturity of such instruments. The fair values of the Company
’
s debt instruments (see Note 9) are based on the amount of future cash flows associated with each instrument discounted using the Company
’
s incremental borrowing rate. As of
November 3, 2018
and
February 3, 2018
, the carrying value of all financial instruments was not materially different from fair value, as the interest rates on the Company’s debt approximated rates currently available to the Company.
Long-Lived Assets
Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment quarterly or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The majority of the Company’s long-lived assets relate to its retail operations which consist primarily of regular retail and flagship locations. The Company considers each individual regular retail location as an asset group for impairment testing, which is the lowest level at which individual cash flows can be identified. The asset group includes leasehold improvements, furniture, fixtures and equipment, computer hardware and software and certain long-term security deposits and lease acquisition costs. The Company reviews regular retail locations in penetrated markets for impairment risk once the locations have been opened for at least
one
year in their current condition, or sooner as changes in circumstances require. The Company believes that waiting at least one year allows a location to reach a maturity level where a more comprehensive analysis of financial performance can be performed. The Company evaluates impairment risk for regular retail locations in new markets, where the Company is in the early stages of establishing its presence, once brand awareness has been established. The Company also evaluates impairment risk for retail locations that are expected to be closed in the foreseeable future. The Company has flagship locations which are used as a regional marketing tool to build brand awareness and promote the Company’s current product. Impairment for these locations is tested at a reporting unit level similar to goodwill since they do not have separately identifiable cash flows.
An asset is considered to be impaired if the Company determines that the carrying value may not be recoverable based upon its assessment of the asset
’
s ability to continue to generate earnings from operations and positive cash flow in future periods or if significant changes in the Company
’
s strategic business objectives and utilization of the assets occurred. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the estimated fair value, which is determined based on discounted future cash flows. The impairment loss calculations require management to apply judgment in estimating future cash flows and the discount rates that reflect the risk inherent in future cash flows. Future expected cash flows for assets in regular retail locations are based on management
’
s estimates of future cash flows over the remaining lease period or expected life, if shorter. For expected location closures, the Company will evaluate whether it is necessary to shorten the useful life for any of the assets within the respective asset group. The Company will use this revised useful life when estimating the asset group’s future cash flows. The Company considers historical trends, expected future business trends and other factors when estimating the future cash flow for each regular retail location. The Company also considers factors such as: the local environment for each regular retail location, including mall traffic and competition; the Company
’
s ability to successfully implement strategic initiatives; and the ability to control variable costs such as cost of sales and payroll and, in some cases, renegotiate lease costs. The estimated cash flows used for this nonrecurring fair value measurement are considered a Level 3 input as defined above. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, there may be additional exposure to future impairment losses that could be material to the Company
’
s results of operations.
The Company recorded asset impairment charges of
$1.3 million
and
$5.0 million
during the three and
nine months ended November 3, 2018
, respectively, and
$2.0 million
and
$6.0 million
during the three and
nine months ended October 28, 2017
, respectively. The asset impairment charges
related primarily to the impairment of certain retail locations in Europe and North America resulting from under-performance and expected store closures
.
|
|
(15)
|
Derivative Financial Instruments
|
Hedging Strategy
Foreign Exchange Currency Contracts
The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company has entered into certain forward contracts to hedge the risk of foreign currency rate fluctuations. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these hedges.
The Company’s primary objective is to hedge the variability in forecasted cash flows due to the foreign currency risk.
Various transactions that occur primarily in Europe, Canada, South Korea, China and Mexico are denominated in U.S. dollars, British pounds and Russian roubles and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their functional currencies. These types of transactions include U.S. dollar denominated purchases of merchandise and U.S. dollar and British pound denominated intercompany liabilities.
In addition, certain operating expenses, tax liabilities and pension-related liabilities are denominated in Swiss francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency.
The Company enters into derivative financial instruments
, including forward exchange currency contracts,
to offset some, but not all, of the exchange risk
on certain of these anticipated foreign currency transactions
.
Periodically, the Company may also use foreign exchange
currency
contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries.
Interest Rate Swap Agreements
The Company is exposed to interest rate risk on its floating-rate debt. The Company has entered into interest rate swap agreements to effectively convert its floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts.
Refer to Note 9 for further information.
The impact of the credit risk of the counterparties to the derivative contracts is considered in determining the fair value of the foreign exchange currency contracts and interest rate swap agreements. As of
November 3, 2018
, credit risk has not had a significant effect on the fair value of the Company’s foreign exchange currency contracts and interest rate swap agreements.
Hedge Accounting Policy
Foreign Exchange Currency Contracts
U.S. dollar forward contracts are used to hedge forecasted merchandise purchases over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges,
are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in cost of product sales in the period that approximates the time the hedged merchandise inventory is sold
. The Company also hedges forecasted intercompany royalties over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges,
are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in other income (expense) in the period in which the royalty expense is incurred.
The Company has also used U.S. dollar forward contracts to hedge the net investments of certain of the Company’s international subsidiaries over specific months.
Changes in the fair value of these U.S. dollar forward contracts, designated as net investment hedges, are recorded in foreign currency translation adjustment as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are not recognized in earnings (loss) until the sale or liquidation of the hedged net investment.
The Company also has foreign exchange currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of foreign exchange currency contracts not designated as hedging instruments are reported in net earnings (loss) as part of other income (expense).
Interest Rate Swap Agreements
Interest rate swap agreements are used to hedge the variability of the cash flows in interest payments associated with the Company’s floating-rate debt. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are
recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are amortized to interest expense over the term of the related debt.
Periodically, the Company may also enter into interest rate swap agreements that are not designated as hedging instruments for accounting purposes. Changes in the fair value of interest rate swap agreements not designated as hedging instruments are reported in net earnings (loss) as part of other income (expense).
Summary of Derivative Instruments
The fair value of derivative instruments in the condensed consolidated balance sheets as of
November 3, 2018
and
February 3, 2018
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Balance Sheet
Location
|
|
Fair Value at
Nov 3, 2018
|
|
Fair Value at
Feb 3, 2018
|
ASSETS:
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
Foreign exchange currency contracts
|
Other current assets/
Other assets
|
|
$
|
5,254
|
|
|
$
|
41
|
|
Interest rate swap
|
Other assets
|
|
1,707
|
|
|
1,460
|
|
Total derivatives designated as hedging instruments
|
|
|
6,961
|
|
|
1,501
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
Other current assets
|
|
2,273
|
|
|
10
|
|
Total
|
|
|
$
|
9,234
|
|
|
$
|
1,511
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
Foreign exchange currency contracts
|
Accrued expenses/
Other long-term liabilities
|
|
$
|
5
|
|
|
$
|
13,789
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
Accrued expenses
|
|
2
|
|
|
4,300
|
|
Total
|
|
|
$
|
7
|
|
|
$
|
18,089
|
|
Derivatives Designated as Hedging Instruments
Foreign Exchange Currency Contracts Designated as Cash Flow Hedges
During the
nine months ended November 3, 2018
, the Company purchased U.S. dollar forward contracts in Europe totaling US
$39.3 million
that were designated as cash flow hedges.
As of
November 3, 2018
, the Company had forward contracts outstanding for its European and Canadian operations of US
$93.7 million
and US$
8.8 million
, respectively, to hedge forecasted merchandise purchases, which are expected to mature over the next
10 months
.
As of
November 3, 2018
, accumulated other comprehensive income (loss) related to foreign exchange currency contracts included a net unrealized
gain
of approximately
$1.6 million
, net of tax, which
$0.8 million
will be recognized in cost of product sales
over the following 12 months, at the then current values on a pre-tax basis, which can be different than the current quarter-end values.
At
February 3, 2018
, the Company had forward contracts outstanding for its European and Canadian operations of US
$145.8 million
and US
$38.7 million
, respectively, that were designated as cash flow hedges.
Interest Rate Swap Agreement Designated as Cash Flow Hedge
During fiscal 2017
, the Company entered into an interest rate swap agreement with a notional amount of
$21.5 million
, designated as a cash flow hedge, to hedge the variability of cash flows in interest payments associated with the Company’s floating-rate debt. This interest rate swap agreement matures in
January 2026
and converts the nature of the Company’s real estate secured term loan from LIBOR floating-rate debt to fixed-rate debt, resulting in a swap fixed rate of approximately
3.06%
.
As of
November 3, 2018
, accumulated other comprehensive income related to the interest rate swap agreement included a net unrealized
gain
of approximately
$1.3 million
, net of tax, which
will be recognized in interest expense
after the following 12 months, at the then current values on a pre-tax basis, which can be different than the current quarter-end values.
The following table summarizes the gains (losses) before taxes recognized on the derivative instruments designated as cash flow hedges in OCI and net loss
for the three and
nine months ended November 3, 2018
and
October 28, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
Recognized in OCI
|
|
Location of
Gain (Loss) Reclassified from Accumulated OCI
into Loss
1
|
|
Gain (Loss) Reclassified from Accumulated OCI into Loss
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
$
|
1,630
|
|
|
$
|
3,215
|
|
|
Cost of product sales
|
|
$
|
(1,618
|
)
|
|
$
|
81
|
|
Foreign exchange currency contracts
|
—
|
|
|
38
|
|
|
Other income (expense)
|
|
—
|
|
|
(337
|
)
|
Interest rate swap
|
203
|
|
|
134
|
|
|
Interest expense
|
|
21
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains Recognized in OCI
|
|
Location of
Gain (Loss) Reclassified from
Accumulated OCI
into Loss
1
|
|
Gain (Loss) Reclassified from Accumulated OCI into Loss
|
|
Nine months ended
|
|
|
Nine months ended
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
$
|
13,690
|
|
|
$
|
(10,601
|
)
|
|
Cost of product sales
|
|
$
|
(5,646
|
)
|
|
$
|
1,360
|
|
Foreign exchange currency contracts
|
2
|
|
|
(958
|
)
|
|
Other income (expense)
|
|
(201
|
)
|
|
(244
|
)
|
Interest rate swap
|
308
|
|
|
(143
|
)
|
|
Interest expense
|
|
60
|
|
|
(119
|
)
|
__________________________________
Notes:
|
|
1
|
The Company recognized gains of
$0.6 million
and
$2.0 million
resulting from the ineffective portion related to foreign exchange currency contracts in interest income during the three and
nine months ended November 3, 2018
, respectively. The Company recognized gains of
$0.5 million
and
$2.0 million
resulting from the ineffective portion related to foreign exchange currency contracts in interest income during the three and
nine months ended October 28, 2017
, respectively. There was
no
ineffectiveness recognized
related to the interest rate swap during the three and
nine months ended November 3, 2018
and
October 28, 2017
.
|
The following table summarizes net after-tax derivative activity recorded in accumulated other comprehensive income (loss) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
Beginning balance gain (loss)
|
$
|
(142
|
)
|
|
$
|
(8,751
|
)
|
|
$
|
(14,369
|
)
|
|
$
|
5,400
|
|
Net gains (losses) from changes in cash flow hedges
|
1,596
|
|
|
2,749
|
|
|
12,175
|
|
|
(10,220
|
)
|
Net (gains) losses reclassified into loss
|
1,419
|
|
|
235
|
|
|
5,067
|
|
|
(947
|
)
|
Ending balance gain (loss)
|
$
|
2,873
|
|
|
$
|
(5,767
|
)
|
|
$
|
2,873
|
|
|
$
|
(5,767
|
)
|
Foreign Exchange Currency Contracts Not Designated as Hedging Instruments
As of
November 3, 2018
, the Company had euro foreign exchange currency contracts to purchase US
$28.0 million
expected to mature over the next
6 months
and Canadian dollar foreign exchange currency contracts to purchase US
$1.8 million
expected to mature over the next
2 months
.
The following table summarizes the gains (losses) before taxes recognized on the derivative instruments not designated as hedging instruments in other income (expense) for the three and
nine months ended November 3, 2018
and
October 28, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
Gain (Loss)
Recognized in Loss
|
|
Gain (Loss) Recognized in Loss
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange currency contracts
|
Other income (expense)
|
|
$
|
794
|
|
|
$
|
1,645
|
|
|
$
|
6,700
|
|
|
$
|
(5,688
|
)
|
At
February 3, 2018
, the Company had euro foreign exchange currency contracts to purchase US
$68.2 million
and Canadian dollar foreign exchange currency contracts to purchase US
$17.6 million
.
Dividends
On
November 28, 2018
, the Company announced a regular quarterly cash dividend of
$0.225
per share on the Company’s common stock. The cash dividend will be paid on
January 2, 2019
to shareholders of record as of the close of business on
December 12, 2018
.
|
|
ITEM 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
General
Unless the context indicates otherwise, when we refer to “we,” “us,” “our” or the “Company” in this Form 10-Q, we are referring to Guess?, Inc. (“GUESS?”) and its subsidiaries on a consolidated basis.
Important Factors Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including documents incorporated by reference herein, contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be contained in the Company’s other reports filed under the Securities Exchange Act of 1934, as amended, in its press releases and in other documents. In addition, from time-to-time, the Company, through its management, may make oral forward-looking statements. These statements relate to expectations, analyses and other information based on current plans, forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our goals, future prospects, global cost reduction opportunities and profitability efforts, capital allocation plans, cash needs and current business strategies and strategic initiatives. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “outlook,” “pending,” “plan,” “predict,”
“project,” “see,” “should,” “strategy,” “will,” “would,” and other similar terms and phrases, including references to assumptions.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed. These forward-looking statements may include, among other things, statements or assumptions relating to: our expected results of operations; the accuracy of data relating to, and anticipated levels of, future inventory and gross margins; anticipated cash requirements and sources; cost containment efforts; estimated charges (including the estimated fine expected to be imposed on the Company by the European Commission related to its inquiry concerning possible violations of certain European Union competition rules by the Company); plans regarding store openings, closings, remodels and lease negotiations; plans regarding the opening or relocation of our distribution centers; plans regarding business growth, international expansion and capital allocation; plans regarding supply chain efficiencies and global planning and allocation; e-commerce, digital and omni-channel initiatives; business seasonality; results and risks of current and future legal proceedings, industry trends; consumer demands and preferences; competition; currency fluctuations and related impacts; estimated tax rates, including the impact of the 2017 Tax Cuts and Jobs Act in the U.S. (referred to herein as the “Tax Reform”) and changes to provisional estimates; results of tax audits and other regulatory proceedings; the impact of recent accounting pronouncements; raw material and other inflationary cost pressures; consumer confidence; and general economic conditions. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances. Such statements involve risks and uncertainties, which may cause actual results to differ materially from those set forth in these statements. Important factors that could cause or contribute to such differences include those discussed under “Part I, Item 1A. Risk Factors” contained in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended
February 3, 2018
and in our other filings made from time-to-time with the Securities and Exchange Commission (“SEC”) after the date of this report.
Business Segments
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
.
Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before corporate performance-based compensation costs, net gains (losses) from lease terminations, asset impairment charges, restructuring charges, and other non-recurring charges
, if any.
The
Americas Retail
segment includes the Company’s retail and e-commerce operations in North, South and Central America. 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, net gains (losses) on lease terminations, asset impairment charges and restructuring charges. 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.
Information regarding these segments is summarized in “Part I, Item 1. Financial Statements — Note 8 — Segment Information.”
Products
We derive our net revenue from the sale of GUESS?, G by GUESS, GUESS Kids and MARCIANO apparel and our licensees’ products through our worldwide network of directly operated and licensed retail stores, wholesale customers and distributors, as well as our online sites. We also derive royalty revenue from worldwide licensing activities.
Foreign Currency Volatility
Since the majority of our international operations are conducted in currencies other than the U.S. dollar (primarily the Canadian dollar, Chinese yuan, euro, Japanese yen, Korean won, Mexican peso and Russian rouble),
currency fluctuations can have a significant impact on the translation of our international revenues and earnings (loss) into U.S. dollar amounts.
In addition, some of our transactions that occur primarily in Europe, Canada, South Korea, China and Mexico are denominated in U.S. dollars, Swiss francs, British pounds and Russian roubles, exposing them to exchange rate fluctuations when these transactions (such as inventory purchases) are converted to their functional currencies. As a result, fluctuations in exchange rates can impact the operating margins of our foreign operations and reported earnings (loss), and are largely dependent on the transaction timing and magnitude during the period that the currency fluctuates. When these foreign exchange rates weaken versus the U.S. dollar at the time U.S. dollar denominated inventory is purchased relative to the purchases of the comparable period, our product margins could be unfavorably impacted if the relative sales prices do not change.
During the first
nine months
of fiscal
2019
, the average U.S. dollar rate was weaker against the Canadian dollar, Chinese yuan, euro, Japanese yen and Korean won, and stronger against the Mexican peso, Russian rouble and Turkish Lira compared to the average rate in the same prior-year period. This had an overall
favorable
impact on the translation of our international revenues and an unfavorable impact on earnings from operations for the
nine months ended November 3, 2018
compared to the same prior-year period.
If the U.S. dollar strengthens relative to the respective fiscal
2018
foreign exchange rates, foreign exchange could negatively impact our revenues and operating results as well as our international cash and other balance sheet items during the remainder of fiscal
2019
, particularly in Canada, Europe and Mexico. Alternatively, if the U.S. dollar weakens relative to the respective fiscal
2018
foreign exchange rates, our revenues and operating results as well as our other cash balance sheet items could be positively impacted by foreign currency fluctuations during the remainder of fiscal
2019
, particularly in these regions.
The Company enters into derivative financial instruments
to offset some, but not all, of the exchange risk
on foreign currency transactions. For additional discussion regarding our exposure to foreign currency risk, forward contracts designated as hedging instruments and forward contracts not designated as hedging instruments, refer to “Item 3. Quantitative and Qualitative Disclosures About Market Risk.”
Strategy
The Company continues to remain focused on its five top strategic initiatives aimed at driving shareholder value, including: (i) elevating the quality of our sales organization and merchandising strategy to match the quality of our product and marketing; (ii) building a major business in Asia by unlocking the potential of the GUESS? brand in the region; (iii) creating a culture of purpose and accountability throughout the entire Company by implementing a more centralized organizational structure that reinforces our focus on sales and profitability; (iv) improving our cost structure (including supply chain and overhead); and (v) stabilizing and revitalizing our wholesale business. The following provides further details on the progress of these initiatives:
Sales Organization and Merchandising Strategy.
We are executing on our plan to elevate the quality of our sales organization and merchandising strategy which includes: (1) elevating the product knowledge of our sales force; (2) building a more strategic and operational online organization in order to increase millennials’ engagement with our brand through digital marketing and social media; (3) taking steps such as investing in key stores and developing stronger replenishment, visual, stockroom and cost-control standards in order to improve our overall field and store structure; (4) implementing a more effective yearly retail calendar to better enable each store to fully capture local opportunities; (5) using feedback from our sales force to improve our collections and increase the number and effectiveness of our SKU’s; and (6) implementing a global pricing system with greater clarity and simplicity.
Building our Asia Business.
We believe there continues to be significant potential in this region and plan to continue to allocate sufficient resources to fuel future growth.
Transforming our Company’s Culture.
In order to generate global synergies, major decisions (including supply chain, technology, finance, stock allocation and communications) are becoming more centralized in the Company’s management team in Los Angeles. This centralized approach reinforces our focus on sales and
profitability and fosters an environment of accountability and execution measured through key performance metrics.
Improving our Cost Structure.
We plan to continue improving our cost structure by identifying synergies among departments and strengthening our supply chain. We are executing on the following supply chain initiatives to drive improvements in product costs: (i) developing a sourcing network in new territories that can offer better costs; (ii) consolidating and building strategic partnerships with high-quality suppliers to gain scale efficiencies; and (iii) implementing a fabric platforming process for each of the regional design offices to develop and utilize common fabrics across multiple styles creating a consistently high quality global offer for our wholesale and retail customers. We are also working to shorten our lead times through partnering with our suppliers, exercising agility in the production process and continuously searching for new suppliers and sourcing opportunities in reaction to the latest trends.
We are also focused on improving the profitability of our retail business in the Americas. As almost
two-thirds of our leases in the U.S. and Canada are up for renewal or have lease exit options over the next three years, we continue to have the flexibility to further optimize our retail footprint, or renegotiate lower rents, as appropriate, in the coming years. However, we are not restricting ourselves to waiting for these dates to close stores or renegotiate rents.
Stabilizing our Wholesale Business.
We are partnering with our wholesale customers to emphasize a retail-oriented mindset and encourage the adoption of best practices, including high quality visual merchandising, frequent rotation of products and maximization of inventory turns.
Capital Allocation
The Company’s investments in capital for the full fiscal year
2019
are planned between $95 million and $100 million. The planned investments in capital are related primarily to retail and e-commerce expansion in Europe and Asia as well as continued investments in technology to support our long-term growth plans.
Comparable Sales
The Company reports National Retail Federation calendar comparable sales on a quarterly basis for our retail businesses which include the combined results from our brick-and-mortar retail stores and our e-commerce sites. We also separately report the impact of e-commerce sales on our comparable sales metric. As a result of our omni-channel strategy, our e-commerce business has become strongly intertwined with our brick-and-mortar retail store business. Therefore, we believe that the inclusion of e-commerce sales in our comparable sales metric provides a more meaningful representation of our retail results.
Sales from our brick-and-mortar retail stores include purchases that are initiated, paid for and fulfilled at our retail stores and directly operated concessions as well as merchandise that is reserved online but paid for and picked-up at our retail stores. Sales from our e-commerce sites include purchases that are initiated and paid for online and shipped from either our distribution centers or our retail stores as well as purchases that are initiated in a retail store, but due to inventory availability at the retail store, are ordered and paid for online and shipped from our distribution centers or picked-up from a different retail store.
Store sales are considered comparable after the store has been open for 13 full months. If a store remodel results in a square footage change of more than 15%, or involves a relocation or a change in store concept, the store sales are removed from the comparable store base until the store has been opened at its new size, in its new location or under its new concept for 13 full months. E-commerce sales are considered comparable after the online site has been operational in a country for 13 full months and exclude any related revenue from shipping fees.
Definitions and calculations of comparable sales used by the Company may differ from similarly titled measures reported by other companies.
Other
The Company operates on a 52/53-week fiscal year calendar, which ends on the Saturday nearest to January 31 of each year. The
nine months ended November 3, 2018
had the same number of days as the
nine months ended October 28, 2017
.
Executive Summary
Overview
Net
loss
attributable to Guess?, Inc.
in
creased
370.0%
to
$13.4 million
, or diluted loss of
$0.17
per common share, for the quarter ended
November 3, 2018
, compared to
$2.9 million
, or diluted loss of
$0.04
per common share, for the quarter ended
October 28, 2017
.
During the quarter ended
November 3, 2018
, the Company recognized asset impairment charges of
$1.3 million
, certain professional services and legal fees and related costs of
$0.1 million
, income tax benefits of
$19.6 million
related to changes in the provisional amounts recorded related to the Tax Reform, and charges of €37.0 million euros ($42.4 million) related to the estimated European Commission fine (or a combined
$24.0 million
after considering the related tax benefit of these adjustments of
$0.2 million
), or an
unfavorable
$0.30
per share impact. Excluding the impact of these items, adjusted net
earnings
attributable to Guess?, Inc. were
$10.6 million
and adjusted diluted earnings were
$0.13
per common share for the quarter ended
November 3, 2018
. During the quarter ended
October 28, 2017
, the Company recognized net
losses
on lease terminations of
$11.5 million
and asset impairment charges of
$2.0 million
. Combined, these items had a
$13.3 million
negative impact
after considering the related tax benefit of these adjustments of
$0.3 million
, or an
unfavorable
$0.16
per share impact. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were
$10.4 million
and adjusted diluted earnings were
$0.12
per common share for the quarter ended
October 28, 2017
. References to financial results excluding the impact of these items are non-GAAP measures and are addressed below under “Non-GAAP Measures.”
Highlights of the Company’s performance for the quarter ended
November 3, 2018
compared to the same prior-year period are presented below, followed by a more comprehensive discussion under “Results of Operations”:
Operations
|
|
•
|
Total net revenue
in
creased
10.3%
to
$605.4 million
for the quarter ended
November 3, 2018
, compared to
$549.0 million
in the same prior-year quarter. In constant currency, net revenue
in
creased by
13.1%
.
|
|
|
•
|
Gross margin (gross profit as a percentage of total net revenue)
in
creased
160
basis points to
36.4%
for the quarter ended
November 3, 2018
, compared to
34.8%
in the same prior-year period.
|
|
|
•
|
Selling, general and administrative (“SG&A”) expenses as a percentage of total net revenue (“SG&A rate”)
in
creased
40
basis points to 32.8% for the quarter ended
November 3, 2018
, compared to
32.4%
in the same prior-year period. SG&A expenses
in
creased
11.2%
to
$197.9 million
for the quarter ended
November 3, 2018
, compared to
$178.0 million
in the same prior-year period.
|
|
|
•
|
During the quarter ended
November 3, 2018
, the Company recognized asset impairment charges of
$1.3 million
, compared to
$2.0 million
in the same prior-year period.
|
|
|
•
|
During the quarter ended November 3, 2018,
the Company recognized charges of €37.0 million ($42.4 million) related to an estimated fine expected to be imposed on the Company by the European Commission related to its inquiry concerning possible violations of certain European Union competition rules by the Company.
|
|
|
•
|
Operating margin decreased
350
basis points to negative
3.6%
for the quarter ended
November 3, 2018
, compared to
negative
0.1%
in the same prior-year period. For the quarter ended
November 3, 2018
as compared to the same prior-year period,
the charges related to the estimated European Commission fine negatively impacted operating margin by 700 basis points,
lower losses on lease terminations positively impacted operating margin by 210 basis points and lower asset impairment charges
positively
impacted operating margin by
20
basis points.
|
|
|
•
|
Loss from operations
in
creased
5,120%
to
$21.5 million
for the quarter ended
November 3, 2018
, compared to
$0.4 million
in the same prior-year period.
|
|
|
•
|
Other
expense
, net (including interest income and expense), totaled
$5.8 million
for the quarter ended
November 3, 2018
, compared to other
income
, net, of
$2.4 million
in the same prior-year period.
|
|
|
•
|
The effective income tax rate
improved
to
53.1%
for the quarter ended
November 3, 2018
, compared to
182.6%
in the same prior-year period. During the quarter ended
November 3, 2018
, the Company revised the provisional amounts previously recorded related to impact of the Tax Reform, and recorded income tax benefits of
$19.6 million
.
|
Key Balance Sheet Accounts
|
|
•
|
The Company had
$138.9 million
in cash and cash equivalents and
$0.5 million
in restricted cash as of
November 3, 2018
, compared to
$233.1 million
in cash and cash equivalents and
$0.2 million
in restricted cash at
October 28, 2017
.
|
|
|
◦
|
The Company invested
$17.6 million
to repurchase
1,118,808
of its common shares during the
nine months ended November 3, 2018
.
During the
nine months ended November 3, 2018
, the Company also paid an additional
$6.0 million
for shares that were repurchased during the fourth quarter of fiscal 2018 but were settled during the first quarter of fiscal 2019
.
|
|
|
•
|
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
. Accounts receivable
in
creased by
$49.4 million
, or
20.9%
, to
$286.1 million
as of
November 3, 2018
, compared to
$236.7 million
at
October 28, 2017
, and
includes the impact of the reclassifications related to the adoption of the new revenue recognition standard in the first quarter of fiscal 2019.
On a constant currency basis, accounts receivable
in
creased by
$55.9 million
, or
23.6%
, when compared to
October 28, 2017
.
|
|
|
•
|
Inventory
in
creased by
$71.3 million
, or
15.0%
, to
$548.5 million
as of
November 3, 2018
, compared to
$477.2 million
at
October 28, 2017
, and
includes the impact of the reclassifications related to the adoption of the new revenue recognition standard in the first quarter of fiscal 2019.
On a constant currency basis, inventory
increased
by
$83.9 million
, or
17.6%
, when compared to
October 28, 2017
.
|
Global Store Count
In the
third quarter of fiscal 2019
, together with our partners, we opened
65
new stores worldwide, consisting of
22
stores in Europe and the Middle East,
30
stores in Asia and the Pacific,
six
stores in Central and South America,
four
stores in the U.S., and
three
stores in Canada. Together with our partners, we closed
35
stores worldwide, consisting of
18
stores in Asia and the Pacific,
one
store in the U.S.,
seven
stores in Central and South America,
no
stores in Canada and
nine
stores in Europe and the Middle East.
We ended the
third quarter of fiscal 2019
with
1,692
stores and
432
concessions worldwide, comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
|
|
Concessions
|
Region
|
|
Total
|
|
Directly
Operated
|
|
Partner Operated
|
|
Total
|
|
Directly
Operated
|
|
Partner Operated
|
United States
|
|
298
|
|
|
296
|
|
|
2
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Canada
|
|
89
|
|
|
89
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Central and South America
|
|
103
|
|
|
65
|
|
|
38
|
|
|
27
|
|
|
27
|
|
|
—
|
|
Total Americas
|
|
490
|
|
|
450
|
|
|
40
|
|
|
28
|
|
|
27
|
|
|
1
|
|
Europe and the Middle East
|
|
687
|
|
|
460
|
|
|
227
|
|
|
39
|
|
|
39
|
|
|
—
|
|
Asia and the Pacific
|
|
515
|
|
|
198
|
|
|
317
|
|
|
365
|
|
|
174
|
|
|
191
|
|
Total
|
|
1,692
|
|
|
1,108
|
|
|
584
|
|
|
432
|
|
|
240
|
|
|
192
|
|
Of the total
1,692
stores,
1355
were GUESS? stores,
218
were GUESS? Accessories stores,
70
were G by GUESS stores and
49
were MARCIANO stores.
Results of Operations
Three Months Ended
November 3, 2018
and
October 28, 2017
Consolidated Results
Net Revenue
.
Net revenue
in
creased by $56.5 million, or
10.3%
, to
$605.4 million
for the quarter ended
November 3, 2018
, compared to
$549.0 million
for the quarter ended
October 28, 2017
. In constant currency, net revenue
in
creased by
13.1%
as currency translation fluctuations relating to our foreign operations
unfavorably
impacted net revenue by
$15.5 million
compared to the same prior-year period. The
in
crease was driven primarily by retail expansion in our international markets and, to a lesser extent, the impact of positive comparable sales in all regions and higher wholesale shipments in Europe and the Americas.
Gross Margin.
Gross margin
in
creased
160
basis points to
36.4%
for the quarter ended
November 3, 2018
, compared to
34.8%
in the same prior-year period, of which
100
basis points was due to higher overall product margins and
60
basis points was due to a lower occupancy rate. The higher overall product margins were driven primarily by lower markdowns in Americas Retail and higher initial markups, partially offset by higher duties and freight costs in Europe. The lower occupancy rate was driven primarily by overall leveraging of expenses due mainly to higher European wholesale shipments and positive comparable sales and negotiated rent reductions in Americas Retail, partially offset by higher distribution costs related to the relocation of the Company’s European distribution center.
Gross Profit.
Gross profit
in
creased by
$29.0 million
, or
15.2%
, to
$220.1 million
for the quarter ended
November 3, 2018
, compared to
$191.1 million
in the same prior-year period. The
in
crease in gross profit, which included the
unfavorabl
e impact of currency translation, was due primarily to the
favorable
impact on gross profit from
higher
revenue and, to a lesser extent, the higher gross margins. Currency translation fluctuations relating to our foreign operations
unfavorabl
y impacted gross profit by
$5.6 million
.
The Company includes inbound freight charges, purchasing costs and related overhead, retail store occupancy costs, including rent and depreciation, and a portion of the Company’s distribution costs related to its retail business in cost of product sales. The Company also includes net royalties received on the Company’s inventory purchases of licensed product as a reduction to cost of product sales. The Company’s gross margin may not be comparable to that of other entities since some entities include all of the costs related to their distribution in cost of product sales and others, like the Company, generally exclude wholesale-related distribution costs from gross margin, including them instead in SG&A expenses. Additionally, some entities include retail store occupancy costs in SG&A expenses and others, like the Company, include retail store occupancy costs in cost of product sales.
SG&A Rate.
The Company’s SG&A rate
in
creased
40
basis points to
32.8%
for the quarter ended
November 3, 2018
, compared to
32.4%
in the same prior-year period driven primarily by higher distribution costs related to the relocation of the Company’s European distribution center.
SG&A Expenses.
SG&A expenses
in
creased by
$19.9 million
, or
11.2%
, to $
197.9 million
for the quarter ended
November 3, 2018
, compared to $
178.0 million
in the same prior-year period. The
in
crease, which included the
unfavorabl
e impact of currency translation, was driven primarily by higher selling and merchandising expenses, higher advertising expenses (in part due to classification changes under the new revenue recognition standard) and distribution costs related to the relocation of the Company’s European distribution center. Currency translation fluctuations relating to our foreign operations
unfavorabl
y impacted SG&A expenses by
$4.3 million
.
European Commission Fine.
During the quarter ended
November 3, 2018
,
the Company recognized charges of €37.0 million ($42.4 million) related to an estimated fine expected to be imposed on the Company by the European Commission related to its inquiry concerning possible violations of certain European Union competition rules by the Company.
Refer to “Part I, Item 1. Financial Statements — Note
12
— Commitments and Contingencies — Legal and Other Proceedings” for more information regarding this matter.
Asset Impairment Charges.
During the quarter ended
November 3, 2018
, the Company recognized asset impairment charges of
$1.3 million
, compared to
$2.0 million
in the same prior-year period.
Operating Margin.
Operating margin
de
creased
350
basis points to
negative
3.6%
for the quarter ended
November 3, 2018
, compared to
negative
0.1%
in the same prior-year period. For the quarter ended
November 3, 2018
as compared to the same prior-year period,
the charges related to the estimated European Commission fine negatively impacted operating margin by 700 basis points,
lower losses on lease terminations positively impacted operating margins by 210 basis points and lower asset impairment charges
positively
impacted operating margin by
20
basis points. Excluding the impact of these items, operating margin
in
creased by
130
basis points compared to the same prior-year period. The
positive
impact of currency on operating margin for the quarter ended
November 3, 2018
was approximately
20
basis points.
Loss from Operations.
Loss from operations increased by
$21.1 million
, or
5,119.7%
, to
$21.5 million
for the quarter ended
November 3, 2018
, compared to $
0.4 million
in the same prior-year period. Currency translation fluctuations relating to our foreign operations
unfavorabl
y impacted loss from operations by
$1.3 million
.
Interest Income, Net.
Interest income, net, was
minimal
for the quarter ended
November 3, 2018
, compared to
$0.2 million
for the quarter ended
October 28, 2017
and includes the impact of hedge ineffectiveness of foreign exchange currency contracts designated as cash flow hedges.
Other Income (Expense), Net
.
Other
expense
, net, was
$5.8 million
for the quarter ended
November 3, 2018
, compared to
other income, net, of
$2.2 million
in the same prior-year period. Other
expense
, net, in the quarter ended
November 3, 2018
consisted primarily of unrealized losses on non-operating assets and net realized mark-to-market revaluation losses on foreign currency balances, partially offset by realized mark-to-market revaluation gains on foreign exchange currency contracts. Other
income
, net, in the quarter ended
October 28, 2017
consisted primarily of unrealized gains on non-operating assets and net unrealized and realized mark-to-market revaluation gains on foreign exchange currency contracts.
Income Tax Expense (Benefit).
The income tax benefit for the quarter ended
November 3, 2018
was
$14.5 million
, or a
53.1%
effective tax rate, compared to income tax expense of
$3.7 million
, or a
182.6%
effective tax rate, in the same prior-year period. Generally, income taxes for the interim periods are computed using the tax rate estimated to be applicable for the full fiscal year, adjusted for discrete items, which is subject to ongoing review and evaluation by management. During the three months ended
November 3, 2018
, the Company revised provisional amounts initially recorded in the three months ended
February 3, 2018
related to the Tax Reform and recognized a tax benefit of
$19.6 million
. This benefit increased the effective tax rate by approximately 72%. The remaining change in the effective income tax rate during the quarter ended
November 3, 2018
compared to the same prior-year period was due primarily to the impact of discrete non-deductible expenses during the quarter ended
November 3, 2018
, and to a lesser extent, the mix of earnings in jurisdictions with different statutory tax rates and valuation allowances (including the lower U.S. tax rate due to the Tax Reform).
Net Earnings Attributable to Noncontrolling Interests.
Net
earnings attributable to noncontrolling interests were
$0.6 million
, net of taxes, for the quarter ended
November 3, 2018
, compared to
$1.2 million
, net of taxes, for the quarter ended
October 28, 2017
.
Net Earnings (Loss) Attributable to Guess?, Inc.
Net loss
attributable to Guess?, Inc.
in
creased by $10.6 million, or
370.0%
, to
$13.4 million
for the quarter ended
November 3, 2018
, compared to
$2.9 million
in the same prior-year period. Diluted loss per share increased to
$0.17
for the quarter ended
November 3, 2018
, compared to
$0.04
for the quarter ended
October 28, 2017
. During the quarter ended
November 3, 2018
, the Company recognized asset impairment charges of
$1.3 million
, certain professional services and legal fees and related costs of
$0.1 million
, income tax benefits of
$19.6 million
related to changes in the provisional amounts recorded related to the Tax Reform, and charges of €37.0 million ($42.4 million) related to the estimated European Commission fine (or a combined
$24.0 million
after considering the related tax benefit of
$0.2 million
), or an
unfavorable
$0.30
per share impact. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were
$10.6 million
and adjusted diluted earnings were
$0.13
per common share for the quarter ended
November 3, 2018
. We estimate that the
negative
impact of currency on diluted earnings per share for the quarter ended
November 3, 2018
was approximately
$0.02
per share. During the quarter ended
October 28, 2017
, the Company recognized asset impairment charges of
$2.0 million
and lease termination charges of
$11.5 million
(or
$13.3 million
after considering the related tax benefit of these adjustments of
$0.3 million
), or an
unfavorable
$0.16
per share impact. Excluding the impact of these amounts and the related tax effect, adjusted net earnings attributable to Guess?, Inc. were
$10.4 million
and adjusted diluted earnings were
$0.12
per common share for the quarter ended
October 28, 2017
. References to financial results excluding the impact of these items are non-GAAP measures and are addressed below under “Non-GAAP Measures.”
Information by Business Segment
The following table presents our net revenue and earnings (loss) from operations by segment for the three months ended
November 3, 2018
and
October 28, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
|
Change
|
|
% Change
|
Net revenue:
|
|
|
|
|
|
|
|
Americas Retail
|
$
|
186,925
|
|
|
$
|
187,021
|
|
|
$
|
(96
|
)
|
|
(0.1
|
%)
|
Americas Wholesale
|
52,698
|
|
|
45,636
|
|
|
7,062
|
|
|
15.5
|
|
Europe
|
254,037
|
|
|
221,230
|
|
|
32,807
|
|
|
14.8
|
|
Asia
|
89,461
|
|
|
74,322
|
|
|
15,139
|
|
|
20.4
|
|
Licensing
1,2
|
22,286
|
|
|
20,744
|
|
|
1,542
|
|
|
7.4
|
|
Total net revenue
1,2
|
$
|
605,407
|
|
|
$
|
548,953
|
|
|
$
|
56,454
|
|
|
10.3
|
%
|
Earnings (loss) from operations:
|
|
|
|
|
|
|
|
Americas Retail
2,3
|
$
|
3,799
|
|
|
$
|
(2,414
|
)
|
|
$
|
6,213
|
|
|
257.4
|
%
|
Americas Wholesale
2,3
|
10,392
|
|
|
8,562
|
|
|
1,830
|
|
|
21.4
|
|
Europe
3,4
|
7,410
|
|
|
9,095
|
|
|
(1,685
|
)
|
|
(18.5
|
)
|
Asia
3
|
1,938
|
|
|
2,954
|
|
|
(1,016
|
)
|
|
(34.4
|
)
|
Licensing
2,3
|
19,485
|
|
|
18,346
|
|
|
1,139
|
|
|
6.2
|
|
Total segment earnings from operations
2,4
|
43,024
|
|
|
36,543
|
|
|
6,481
|
|
|
17.7
|
|
Corporate overhead
2,4
|
(20,824
|
)
|
|
(23,443
|
)
|
|
2,619
|
|
|
11.2
|
|
Estimated European Commission fine
5
|
(42,428
|
)
|
|
—
|
|
|
(42,428
|
)
|
|
|
Net gains on lease terminations
|
—
|
|
|
(11,494
|
)
|
|
11,494
|
|
|
|
Asset impairment charges
6
|
(1,277
|
)
|
|
(2,018
|
)
|
|
741
|
|
|
|
Total loss from operations
2,4,5,6
|
$
|
(21,505
|
)
|
|
$
|
(412
|
)
|
|
$
|
(21,093
|
)
|
|
5,119.7
|
%
|
|
|
|
|
|
|
|
|
Operating margins:
|
|
|
|
|
|
|
|
Americas Retail
2,3
|
2.0
|
%
|
|
(1.3
|
%)
|
|
|
|
|
Americas Wholesale
2,3
|
19.7
|
%
|
|
18.8
|
%
|
|
|
|
|
Europe
3,4
|
2.9
|
%
|
|
4.1
|
%
|
|
|
|
|
Asia
3
|
2.2
|
%
|
|
4.0
|
%
|
|
|
|
|
Licensing
1,2,3
|
87.4
|
%
|
|
88.4
|
%
|
|
|
|
|
Total Company
1,2,4,5,6
|
(3.6
|
)%
|
|
(0.1
|
)%
|
|
|
|
|
__________________________________
Notes:
|
|
1
|
During the fourth quarter of fiscal 2018, the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales to reflect its treatment as a reduction of the cost of such licensed product. Accordingly, net revenue for the
three months ended October 28, 2017
has been adjusted to conform to the current period presentation. This reclassification had no impact on previously reported loss from operations.
|
|
|
2
|
During the first quarter of fiscal 2019, the Company adopted a comprehensive new revenue recognition standard using a modified retrospective method that does not restate prior periods to be comparable to the current period presentation. The adoption of this guidance primarily impacted the presentation of advertising contributions received from the Company’s licensees and the related advertising expenditures incurred by the Company.
The adoption of this guidance resulted in an increase in net royalty revenue within the Company’s Licensing segment of
$2.7 million
, as well as an increase in SG&A
|
expenses in our Americas Retail, Americas Wholesale and Licensing segments as well as corporate overhead of
$1.0 million
,
$0.6 million
,
$0.3 million
and
$0.6 million
, respectively, during the three months ended
November 3, 2018
compared to the same prior-year period. The net
favorable
impact on earnings from operations was approximately
$0.2 million
during the three months ended
November 3, 2018
compared to the same prior-year period. Refer to Note 1 to the Condensed Consolidated Financial Statements for more information regarding the impact from the adoption of this new standard.
|
|
3
|
During the first quarter of fiscal 2019, the Company changed the segment accountability for funds received from licensees on the Company’s purchases of its licensed products. These amounts were treated as a reduction of cost of product sales within the Licensing segment but now are considered in the results of the segments that control the respective purchases for purposes of segment performance evaluation. Accordingly, segment results for the
three months ended October 28, 2017
have been adjusted to conform to the current period presentation
.
|
|
|
4
|
During the first quarter of fiscal 2019, the Company adopted new authoritative guidance which requires that the non-service components of net periodic defined benefit pension cost be presented outside of earnings (loss)
from operations. Accordingly, loss from operations and segment results for the
three months ended October 28, 2017
have been adjusted to conform to the current period presentation
.
|
|
|
5
|
During the quarter ended
November 3, 2018
,
the Company recognized charges of €37.0 million ($42.4 million) related to an estimated fine expected to be imposed on the Company by the European Commission related to its inquiry concerning possible violations of certain European Union competition rules by the Company.
|
|
|
6
|
During each of the periods presented, the Company recognized asset impairment charges for certain retail locations resulting from under-performance and expected store closures. Refer to Note 14 for more information regarding these asset impairment charges.
|
Americas Retail
Net revenue from our
Americas Retail
segment
de
creased by
$0.1 million
, or
0.1%
, to
$186.9 million
for the quarter ended
November 3, 2018
, from
$187.0 million
in the same prior-year period. In constant currency, net revenue
in
creased by
1.1%
, driven primarily by positive comparable sales, partially offset by store closures. The store base for the U.S. and Canada
decreased
by an average of
35
net stores during the quarter ended
November 3, 2018
compared to the same prior-year period, resulting in an
8.4%
net
de
crease in average square footage. Comparable sales (including e-commerce)
in
creased
3%
in U.S. dollars and 4% in constant currency
. The inclusion of our e-commerce sales had a minimal impact on the comparable sales percentage in U.S. dollars and constant currency. Currency translation fluctuations relating to our non-U.S. retail stores and e-commerce sites had a negative impact of
$2.2 million
on net revenue during the quarter ended
November 3, 2018
.
Operating margin improved
330
basis points to
2.0%
for the quarter ended
November 3, 2018
, compared to
negative
1.3%
in the same prior-year period, due to higher gross margins, partially offset by a higher SG&A rate. The higher gross margins were driven primarily by lower markdowns and, to a lesser extent, cost reductions due primarily to negotiated rent reductions. The higher SG&A rate was driven primarily by higher store selling expenses.
Earnings from operations
from our
Americas Retail
segment were
$3.8 million
for the quarter ended
November 3, 2018
, compared to
operating loss
of
$2.4 million
in the same prior-year period. The improvement reflects the favorable impact on earnings from the higher product margins, positive comparable store sales and, to a lesser extent, lower occupancy costs driven primarily by negotiated rent reductions.
Americas Wholesale
Net revenue from our
Americas Wholesale
segment
in
creased by
$7.1 million
, or
15.5%
, to
$52.7 million
for the quarter ended
November 3, 2018
, compared to
$45.6 million
in the same prior-year period. In constant currency, net revenue
in
creased by
18.2%
, driven primarily by higher shipments in our U.S. wholesale business. Currency translation fluctuations relating to our non-U.S. wholesale businesses
unfavorably
impacted net revenue by
$1.2 million
.
Operating margin
improve
d
90
basis points to
19.7%
for the quarter ended
November 3, 2018
, from
18.8%
in the same prior-year period,
due primarily to higher gross margins
.
Earnings from operations from our
Americas Wholesale
segment
in
creased by
$1.8 million
, or
21.4%
, to
$10.4 million
for the quarter ended
November 3, 2018
, compared to
$8.6 million
in the same prior-year period.
Europe
Net revenue from our
Europe
segment
in
creased by
$32.8 million
, or
14.8%
, to
$254.0 million
for the quarter ended
November 3, 2018
, compared to
$221.2 million
in the same prior-year period. In constant currency, net revenue
in
creased by
19.8%
, driven primarily by retail expansion, higher shipments in our European wholesale business and positive comparable sales. As of
November 3, 2018
, we directly operated
460
stores in Europe compared to
385
stores at
October 28, 2017
, excluding concessions, which represents a
19.5%
in
crease over the same prior-year period. Comparable sales (including e-commerce)
in
creased
8%
in U.S. dollars
and
12%
in constant currency compared to the same prior-year period. The inclusion of our e-commerce sales increased the comparable sales percentage by
5%
in U.S. dollars and constant currency. Currency translation fluctuations relating to our
Europe
an operations
unfavorably
impacted net revenue by
$11.1 million
.
Operating margin
decrease
d
120
basis points to
2.9%
for the quarter ended
November 3, 2018
, from
4.1%
in the same prior-year period, driven primarily by lower gross margins and a higher SG&A rate. The lower gross margins were due primarily to higher distribution costs related to the relocation of the Company’s European distribution center. The higher SG&A rate was driven primarily by higher distribution costs related to the relocation of the Company’s European distribution center, partially offset by overall leveraging of expenses resulting from higher revenues.
Earnings from operations from our
Europe
segment
de
creased by
$1.7 million
, or
18.5%
, to
$7.4 million
for the quarter ended
November 3, 2018
, compared to
$9.1 million
in the same prior-year period, driven primarily by higher distribution costs related to the relocation of the Company’s European distribution center, partially offset by the favorable impact on earnings from higher revenue. Currency translation fluctuations relating to our
Europe
an operations
unfavorabl
y impacted earnings from operations by
$1.0 million
.
Asia
Net revenue from our
Asia
segment
in
creased by
$15.1 million
, or
20.4%
, to
$89.5 million
for the quarter ended
November 3, 2018
, compared to
$74.3 million
in the same prior-year period. In constant currency, net revenue
in
creased by
21.8%
, driven primarily by retail expansion and, to a lesser extent, positive comparable sales. As of
November 3, 2018
, we and our partners operated
515
stores and
365
concessions in Asia, compared to
482
stores and
371
concessions at
October 28, 2017
. As of
November 3, 2018
, we directly operated
198
stores and
174
concessions in Asia, compared to
132
directly operated stores and
183
concessions at
October 28, 2017
. Comparable sales (including e-commerce)
in
creased
8%
in U.S. dollars
and
9%
in constant currency. The inclusion of our e-commerce sales increased the comparable sales percentage by
3%
in U.S. dollars and constant currency. Currency translation fluctuations relating to our
Asia
n operations
unfavorably
impacted net revenue by
$1.1 million
.
Operating margin
decrease
d
180
basis points to
2.2%
for the quarter ended
November 3, 2018
, from
4%
in the same prior-year period, due to a higher SG&A rate, and to a lesser extent, lower gross margins. The higher SG&A rate
was driven by higher expenses due primarily to retail expansion
. The lower gross margins were driven primarily by the unfavorable impact of country mix on product margins.
Earnings from operations from our
Asia
segment
de
creased by
$1.0 million
, or
34.4%
, to
$1.9 million
for the quarter ended
November 3, 2018
, from
$3.0 million
in the same prior-year period, driven primarily by the unfavorable impact on earnings from higher SG&A expenses and lower product margins, partially offset by the favorable impact on earnings from revenue.
Licensing
Net royalty revenue from our
Licensing
segment
in
creased by
$1.5 million
, or
7.4%
, to
$22.3 million
for the quarter ended
November 3, 2018
, compared to
$20.7 million
in the same prior-year period. This
in
crease was driven by the impact from the adoption of new accounting guidance for revenue recognition which increased net royalty revenue by
$2.7 million
, or
13.0%
, during the quarter ended
November 3, 2018
compared to the same prior-year period.
Earnings from operations from our
Licensing
segment
in
creased by
$1.1 million
, or
6.2%
, to
$19.5 million
for the quarter ended
November 3, 2018
, compared to
$18.3 million
in the same prior-year period. The
in
crease was driven by the favorable impact to earnings from higher revenue.
Corporate Overhead
Unallocated corporate overhead
de
creased by
$2.6 million
to
$20.8 million
for the quarter ended
November 3, 2018
, compared to
$23.4 million
in the same prior-year period, driven primarily by lower general legal related expenses and performance-based compensation, partially offset by an increase in advertising expenses.
Nine Months Ended
November 3, 2018
and
October 28, 2017
Consolidated Results
Net Revenue
.
Net revenue
in
creased by
$201.0 million
, or
12.8%
, to
$1.8 billion
for the
nine months ended November 3, 2018
, compared to
$1.6 billion
for the
nine months ended October 28, 2017
. In constant currency, net revenue
in
creased by
11.2%
as currency translation fluctuations relating to our foreign operations
favorably
impacted net revenue by
$24.8 million
compared to the same prior-year period. The
in
crease was driven primarily by
retail expansion in our international markets, higher wholesale shipments in the U.S and Europe and positive comparable sales.
Gross Margin.
Gross margin
in
creased
170
basis points to
35.7%
for the
nine months ended November 3, 2018
, compared to
34.0%
in the same prior-year period, of which
140
basis points was due to
higher
overall product margins and
30
basis points was due to a
lower
occupancy rate. The higher overall product margins were driven primarily by lower markdowns in Americas Retail and higher initial markups.
The lower occupancy rate was driven primarily by overall global leveraging of expenses and cost reductions due primarily to negotiated rent reductions in Americas Retail, partially offset by higher distribution costs related to the relocation of the Company’s European distribution center.
Gross Profit.
Gross profit
in
creased by
$99.7 million
, or
18.7%
, to
$633.5 million
for the
nine months ended November 3, 2018
, compared to
$533.8 million
in the same prior-year period.
The
in
crease in gross profit, which included the
favorabl
e impact of currency translation, was due primarily to the favorable impact on gross profit from higher revenue and, to a lesser extent, the improved gross margin.
Currency translation fluctuations relating to our foreign operations
favorabl
y impacted gross profit by
$6.4 million
.
SG&A Rate.
The Company’s SG&A rate
in
creased
80
basis points to
33.8%
for the
nine months ended November 3, 2018
, compared to
33.0%
in the same prior-year period. The Company’s SG&A rate included the
negative
impact of
30
basis points from
certain professional service and legal fees and related costs, which the Company otherwise would not have incurred as part of its business operations
. Excluding these amounts, the Company’s SG&A rate would have
increased
50
basis points driven primarily b
y higher distribution costs related to the relocation of the Company’s European distribution center.
SG&A Expenses.
SG&A expenses
in
creased by
$82.9 million
, or
16.0%
, to
$600.7 million
for the
nine months ended November 3, 2018
, compared to
$517.9 million
in the same prior-year period. The
in
crease, which included the
favorabl
e impact of currency translation, was driven primarily
by higher distribution costs related to the relocation of the Company’s European distribution center and, to a lesser extent, higher selling and merchandising expenses.
Currency translation fluctuations relating to our foreign operations
favorabl
y impacted SG&A expenses by
$11.9 million
.
European Commission Fine.
During the
nine months ended November 3, 2018
,
the Company recognized charges of €37.0 million ($42.4 million) related to an estimated fine expected to be imposed on the Company by the European Commission related to its inquiry concerning possible violations of certain European Union competition rules by the Company.
Refer to “Part I, Item 1. Financial Statements — Note
12
— Commitments and Contingencies” for more information regarding this matter.
Net
Gains (Losses)
on Lease Terminations.
During the
nine months ended November 3, 2018
, the Company recognized net gains on lease terminations of
$0.2 million
related primarily to the early termination of certain lease agreements in North America
. There were net losses
on lease terminations of $11.5 million during the
nine months ended October 28, 2017
.
Asset Impairment Charges.
During the
nine months ended November 3, 2018
, the Company recognized asset impairment charges of
$5.0 million
, compared to
$6.0 million
in the same prior-year period.
Operating Margin.
Operating margin
de
creased
70
basis points to
negative
0.8%
for the
nine months ended November 3, 2018
, compared to
negative
0.1%
in the same prior-year period. The charges related to the estimated European Commission fine negatively impacted operating margin by
240
points and certain professional service and legal fees and related costs negatively impacted operating margin by
30
basis points. This was partially offset by the
favorable
impact on operating margin from
lower
asset impairment charges of
10
basis points during the
nine months ended November 3, 2018
compared to the same prior-year period. Lower losses on lease terminations of
$11.6 million
had a positive impact of
70
basis points on operating margin for the
nine months ended November 3, 2018
. Excluding the impact of these items, operating margin would have improved by
120
basis points compared to the same prior-year period. The
negative
impact of currency on operating margin for the
nine months ended November 3, 2018
was approximately
10
basis points.
Operating
loss
.
Operating
loss
was
$14.5 million
for the
nine months ended November 3, 2018
, compared to an operating
loss
of
$1.6 million
in the same prior-year period. Currency translation fluctuations relating to our foreign operations
unfavorabl
y impacted earnings from operations by
$5.6 million
.
Interest
Income
, Net.
Interest
income
, net, was
$0.5 million
for the
nine months ended November 3, 2018
, compared to
$1.4 million
for the
nine months ended October 28, 2017
and includes the impact of hedge ineffectiveness of foreign exchange currency contracts designated as cash flow hedges.
Other
Income (Expense)
, Net
.
Other
expense
, net, was
$7.1 million
for the
nine months ended November 3, 2018
, compared to
other income, net,
of
$1.9 million
in the same prior-year period. Other
expense
, net, in the
nine months ended November 3, 2018
consisted primarily of
net unrealized and realized mark-to-market revaluation losses on foreign currency balances and unrealized losses on non-operating assets, partially offset by net unrealized and realized mark-to-market revaluation gains on foreign exchange currency contracts
. Other
income
, net, in the
nine months ended October 28, 2017
consisted primarily of unrealized gains on non-operating assets and net unrealized mark-to-market revaluation gains on foreign currency balances, partially offset by net realized and unrealized mark-to-market revaluation losses on foreign exchange currency contracts.
Income Tax Expense (Benefit).
The income tax benefit for the
nine months ended November 3, 2018
was
$13.0 million
, or a
61.7%
effective tax rate, compared to income tax expense of
$8.7 million
, or a
508.6%
effective tax rate, in the same prior-year period. Generally, income taxes for the interim periods are computed using the tax rate estimated to be applicable for the full fiscal year, adjusted for discrete items, which is subject to ongoing review and evaluation by management. During the three months ended
November 3, 2018
, the Company revised provisional amounts initially recorded in the three months ended
February 3, 2018
related to the Tax Reform and recognized a tax benefit of
$19.6 million
. This resulted in an increase in the effective tax rate for the nine months ended
November 3, 2018
of approximately 93.0%. The remaining change in the adjusted effective tax rate was due primarily to higher losses incurred in certain foreign jurisdictions where the Company has valuation allowances in the same prior-year period, the impact of the mix of earnings in different taxable jurisdictions (including the
lower U.S. tax rate due to the Tax Reform), the impact of discrete non-deductible expenses during the quarter ended
November 3, 2018
, and the reversal of a valuation allowance.
Net Earnings Attributable to Noncontrolling Interests.
Net earnings attributable to noncontrolling interests were
$1.1 million
, net of taxes, for the
nine months ended November 3, 2018
, compared to
$1.9 million
, net of taxes, for the
nine months ended October 28, 2017
.
Net Loss Attributable to Guess?, Inc.
Net
loss
attributable to Guess?, Inc. was
$9.1 million
for the
nine months ended November 3, 2018
, compared to
$8.9 million
in the same prior-year period. Diluted
loss
per share was
$0.12
for the
nine months ended November 3, 2018
, compared to
$0.12
for the
nine months ended October 28, 2017
. During the
nine months ended November 3, 2018
, the Company recognized net gains on lease terminations of
$0.2 million
, asset impairment charges of
$5.0 million
, certain professional services and legal fees and related costs of
$5.9 million
, income tax benefits of $19.6 million related to changes in provisional amounts recorded due to the Tax Reform, and charges of $42.4 million (€37.0 million) related to the estimated European Commission fine (or a combined
$31.3 million
after considering the related tax benefit of
$2.3 million
), or a negative impact of
$0.39
per share. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were
$22.2 million
and adjusted diluted earnings were
$0.27
per common share during the
nine months ended November 3, 2018
. We estimate
there was no significant impact of currency on
diluted earnings per share for the
nine months ended November 3, 2018
. During the
nine months ended October 28, 2017
, the Company recognized asset impairment charges of
$6.0 million
and net losses on lease terminations of
$11.5 million
(or
$16.0 million
after considering the related tax benefit of these adjustments of
$1.5 million
), or an
unfavorable
$0.20
per share impact. Excluding the impact of these items and the related tax effects, adjusted net earnings attributable to Guess?, Inc. were
$7.1 million
and adjusted diluted
earnings
per share were
$0.08
per common share during the
nine months ended October 28, 2017
. References to financial results excluding the impact of these items are non-GAAP measures and are addressed below under “Non-GAAP Measures.”
Information by Business Segment
The following table presents our net revenue and earnings (loss) from operations by segment for the
nine months ended November 3, 2018
and
October 28, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
Nov 3, 2018
|
|
Oct 28, 2017
|
|
Change
|
|
% Change
|
Net revenue:
|
|
|
|
|
|
|
|
Americas Retail
|
$
|
555,390
|
|
|
$
|
561,903
|
|
|
$
|
(6,513
|
)
|
|
(1.2
|
%)
|
Americas Wholesale
|
127,630
|
|
|
114,151
|
|
|
13,479
|
|
|
11.8
|
|
Europe
|
771,470
|
|
|
641,833
|
|
|
129,637
|
|
|
20.2
|
|
Asia
|
256,298
|
|
|
200,436
|
|
|
55,862
|
|
|
27.9
|
|
Licensing
1,2
|
61,779
|
|
|
53,267
|
|
|
8,512
|
|
|
16.0
|
|
Total net revenue
1,2
|
$
|
1,772,567
|
|
|
$
|
1,571,590
|
|
|
$
|
200,977
|
|
|
12.8
|
%
|
Earnings (loss) from operations:
|
|
|
|
|
|
|
|
Americas Retail
2,3
|
$
|
3,701
|
|
|
$
|
(27,550
|
)
|
|
$
|
31,251
|
|
|
113.4
|
%
|
Americas Wholesale
2,3
|
21,743
|
|
|
20,783
|
|
|
960
|
|
|
4.6
|
|
Europe
3,4
|
17,608
|
|
|
38,147
|
|
|
(20,539
|
)
|
|
(53.8
|
)
|
Asia
3
|
7,637
|
|
|
5,734
|
|
|
1,903
|
|
|
33.2
|
|
Licensing
2,3
|
54,408
|
|
|
46,196
|
|
|
8,212
|
|
|
17.8
|
|
Total segment earnings from operations
2,4
|
105,097
|
|
|
83,310
|
|
|
21,787
|
|
|
26.2
|
|
Corporate overhead
2,4
|
(72,316
|
)
|
|
(67,403
|
)
|
|
(4,913
|
)
|
|
(7.3
|
)
|
Estimated European Commission fine
5
|
(42,428
|
)
|
|
—
|
|
|
(42,428
|
)
|
|
|
Net gains on lease terminations
|
152
|
|
|
(11,494
|
)
|
|
11,646
|
|
|
|
Asset impairment charges
6
|
(5,017
|
)
|
|
(6,013
|
)
|
|
996
|
|
|
|
Total loss from operations
2,4,5,6
|
$
|
(14,512
|
)
|
|
$
|
(1,600
|
)
|
|
$
|
(12,912
|
)
|
|
(807.0
|
%)
|
Operating margins:
|
|
|
|
|
|
|
|
Americas Retail
2,3
|
0.7
|
%
|
|
(4.9
|
%)
|
|
|
|
|
Americas Wholesale
2,3
|
17.0
|
%
|
|
18.2
|
%
|
|
|
|
|
Europe
3,4
|
2.3
|
%
|
|
5.9
|
%
|
|
|
|
|
Asia
3
|
3.0
|
%
|
|
2.9
|
%
|
|
|
|
|
Licensing
1,2,3,4
|
88.1
|
%
|
|
86.7
|
%
|
|
|
|
|
Total Company
1,2,4,5,6
|
(0.8
|
%)
|
|
(0.1
|
%)
|
|
|
|
|
__________________________________
Notes:
|
|
1
|
During the fourth quarter of fiscal 2018, the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales to reflect its treatment as a reduction of the cost of such licensed product. Accordingly, net revenue for the
nine months ended October 28, 2017
has been adjusted to conform to the current period presentation. This reclassification had no impact on previously reported loss from operations.
|
|
|
2
|
During the first quarter of fiscal 2019, the Company adopted a comprehensive new revenue recognition standard using a modified retrospective method that does not restate prior periods to be comparable to the current period presentation. The adoption of this guidance primarily impacted the presentation of advertising contributions received from the Company’s licensees and the related advertising expenditures incurred by the Company.
The adoption of this guidance resulted in an increase in net royalty revenue within the Company’s Licensing segment of
$7.1 million
, as well as an increase in SG&A expenses in our Americas Retail, Americas Wholesale and Licensing segments as well as corporate overhead of
$3.3 million
,
$1.5 million
,
$0.7 million
and
$1.7 million
, respectively, during the
nine months ended November 3, 2018
compared to the same prior-year period. The net unfavorable impact on earnings from operations was approximately
$0.1 million
during the
nine months ended November 3, 2018
compared to the same prior-year period. Refer to Note 1 to the Condensed Consolidated Financial Statements for more information regarding the impact from the adoption of this new standard.
|
|
|
3
|
During the first quarter of fiscal 2019, the Company changed the segment accountability for funds received from licensees on the Company’s purchases of its licensed products. These amounts were treated as a reduction of cost of product sales within the Licensing segment but now are considered in the results of the segments that control the respective purchases for purposes of segment performance evaluation. Accordingly, segment results for the
nine months ended October 28, 2017
have been adjusted to conform to the current period presentation
.
|
|
|
4
|
During the first quarter of fiscal 2019, the Company adopted new authoritative guidance which requires that the non-service components of net periodic defined benefit pension cost be presented outside of
earnings (loss)
from operations. Accordingly, loss from operations and segment results for the
nine months ended October 28, 2017
have been adjusted to conform to the current period presentation
.
|
|
|
5
|
During the quarter ended November 3, 2018,
the Company recognized charges of €37.0 million ($42.4 million) related to an estimated fine expected to be imposed on the Company by the European Commission related to its inquiry concerning possible violations of certain European Union competition rules by the Company.
|
|
|
6
|
During each of the periods presented, the Company recognized asset impairment charges for certain retail locations resulting from under-performance and expected store closures. Refer to Note 14 for more information regarding these asset impairment charges.
|
Americas Retail
Net revenue from our
Americas Retail
segment
de
creased by
$6.5 million
, or
1.2%
, to
$555.4 million
for the
nine months ended November 3, 2018
, from
$561.9 million
in the same prior-year period. In constant currency, net revenue
de
creased by
1.0%
, driven primarily by store closures, partially offset by positive comparable sales. The store base for the U.S. and Canada
de
creased by an average of
46
net stores during the
nine months ended November 3, 2018
compared to the same prior-year period, resulting in a
10.7%
net
de
crease in average square footage. Comparable sales (including e-commerce)
in
creased
3%
in U.S. dollars and constant currency. The inclusion of our e-commerce sales had a
0.2%
positive
impact on the comparable sales percentage in U.S. dollars and constant currency. Currency translation fluctuations relating to our non-U.S. retail stores and e-commerce sites
unfavorably
impacted net revenue by
$0.8 million
.
Operating margin
improve
d
560
basis points to
0.7%
for the
nine months ended November 3, 2018
, compared to
negative
4.9%
in the same prior-year period. This improvement was driven primarily
by higher product margins due to lower markdowns and lower occupancy costs due primarily to negotiated rent reductions.
Earnings
from operations from our
Americas Retail
segment improved by
$31.3 million
, or
113.4%
, to
$3.7 million
for the
nine months ended November 3, 2018
, compared to
loss from operations of
$27.6 million
in the same prior-year period. The improvement reflects the favorable impact on earnings fro
m improved gross margin.
Americas Wholesale
Net revenue from our
Americas Wholesale
segment
in
creased by
$13.5 million
, or
11.8%
, to
$127.6 million
for the
nine months ended November 3, 2018
, compared to
$114.2 million
in the same prior-year period. In constant currency, net revenue
in
creased by
12.8%
, driven primarily b
y higher shipments in our U.S. wholesale business, and to a lesser extent, our Mexican and Canadian wholesale businesses. Cu
rrency translation fluctuations relating to our non-U.S. wholesale businesses
unfavorably
impacted net revenue by
$1.1 million
.
Operating margin
decrease
d
120
basis points to
17.0%
for the
nine months ended November 3, 2018
, from
18.2%
in the same prior-year period,
due primarily to lower gross margins driven primarily by the liquidation of aged inventory
in the first half of the year.
Earnings from operations from our
Americas Wholesale
segment
in
creased by
$1.0 million
, or
4.6%
, to
$21.7 million
for the
nine months ended November 3, 2018
, from
$20.8 million
in the same prior-year period, driven primarily by the favorable impact on earnings from increased sales, partially offset by the unfavorable impact on earnings from lower gross margins.
Europe
Net revenue from our
Europe
segment
in
creased by
$129.6 million
, or
20.2%
, to
$771.5 million
for the
nine months ended November 3, 2018
, compared to
$641.8 million
in the same prior-year period. In constant currency, net revenue
in
creased by
16.9%
, driven primarily by the favorable impact fro
m retail expansion, higher shipments in our European wholesale business and to a lesser extent, positive comparable sales.
Comparable sales (including e-commerce)
in
creased
9%
in U.S. dollars and
5%
in constant currency compared to the same prior-year period. The inclusion of our e-commerce sales increased the comparable sales percentage by
5%
in U.S. dollars and
constant currency. Currency translation fluctuations relating to our
Europe
an operations
favorably
impacted net revenue by
$21.2 million
.
Operating margin
decrease
d
360
basis points to
2.3%
for the
nine months ended November 3, 2018
, from
5.9%
in the same prior-year period, driven primarily by lower gross margins and, to a lesser extent, a higher SG&A rate. The lower gross margins were due primarily to
higher distribution costs related to the relocation of the Company’s European distribution center. The higher SG&A rate was driven by higher distribution costs related to the relocation of the Company’s European distribution center, partially offset by overall leveraging of expenses resulting from higher revenues.
Earnings from operations from our
Europe
segment
de
creased by
$20.5 million
, or
53.8%
, to
$17.6 million
for the
nine months ended November 3, 2018
, compared to
$38.1 million
in the same prior-year period. The
de
crease was driven primarily by t
he higher distribution costs related to the relocation of the Company’s European distribution center, partially offset by the favorable imp
act on earnings from revenue increases. Currency translation fluctuations relating to our
Europe
an operations
unfavorabl
y impacted earnings from operations by
$5.6 million
.
Asia
Net revenue from our
Asia
segment
in
creased by
$55.9 million
, or
27.9%
, to
$256.3 million
for the
nine months ended November 3, 2018
, compared to
$200.4 million
in the same prior-year period. In constant currency, net revenue
in
creased by
25.1%
, driven primarily by retail expansion and, to a lesser extent, positive comparable sales. Comparable sales (including e-commerce)
in
creased
16%
in U.S. dollars and
13%
in constant currency compared to the same prior-year period. The inclusion of our e-commerce sales increased the comparable sales percentage by
4.4%
in U.S. dollars and constant currency. Currency translation fluctuations relating to our
Asia
n operations
favorably
impacted net revenue by
$5.5 million
.
Operating margin
improve
d
10
basis points to
3.0%
for the
nine months ended November 3, 2018
, compared to
2.9%
in the same prior-year period, due to higher gross margins, offset by a higher SG&A rate. The higher gross margins were due primarily to overall leveraging of occupancy costs. The higher SG&A rate
was driven by higher expenses due primarily to retail expansion
and country mix.
Earnings from operations from our
Asia
segment
in
creased by
$1.9 million
, or
33.2%
, to
$7.6 million
for the
nine months ended November 3, 2018
, compared to
$5.7 million
in the same prior-year period, driven primarily by the favorable impact on earnings from higher revenue, partially offset by higher SG&A expenses.
Licensing
Net royalty revenue from our
Licensing
segment
in
creased by
$8.5 million
, or
16.0%
, to
$61.8 million
for the
nine months ended November 3, 2018
, compared to
$53.3 million
in the same prior-year period. This
in
crease was driven primarily by the impact from the adoption of new accounting guidance for revenue recognition which increased net royalty revenue by
$7.1 million
, or
13.3%
, during the
nine months ended November 3, 2018
compared to the same prior-year period.
Earnings from operations from our
Licensing
segment
in
creased by
$8.2 million
, or
17.8%
, to
$54.4 million
for the
nine months ended November 3, 2018
, compared to
$46.2 million
in the same prior-year period. The
in
crease was driven by the favorable impact to earnings from higher revenue.
Corporate Overhead
Unallocated corporate overhead
in
creased by
$4.9 million
to
$72.3 million
for the
nine months ended November 3, 2018
, compared to
$67.4 million
in the same prior-year period, driven primarily by
$5.9 million
in
certain professional service and legal fees and related costs, which the Company otherwise would not have incurred as part of its business operations
, and increased advertising expenses, partially offset by lower general legal expenses and performance-based compensation.
Non-GAAP Measures
The Company’s reported financial results are presented in accordance with GAAP. The reported net
loss
attributable to Guess?, Inc. and diluted
loss
per share for the three and
nine months ended November 3, 2018
reflect the impact of net
gains
(losses) on lease terminations, asset impairment charges,
certain professional service and legal fees and related costs
, estimated charges related to the expected European Commission fine, the tax effects of these adjustments, and revisions to provisional amounts previously recorded related to the Tax Reform, where applicable. The reported net
loss
attributable to Guess?, Inc. and diluted
loss
per share for the three and
nine months ended October 28, 2017
reflect the impact of net
losses
on lease terminations, asset impairment charges and the tax effects of these adjustments. These items affect the comparability of the Company’s reported results. The financial results are also presented on a non-GAAP basis, as defined in Section 10(e) of Regulation S-K of the SEC, to exclude the effect of these items. The Company believes that these items are not indicative of the underlying performance of its business and that the “non-GAAP” or “adjusted” information provided is useful for investors to evaluate the comparability of the Company’s operating results and its future outlook when reviewed in conjunction with the Company’s GAAP financial statements. The non-GAAP measures are provided in addition to, and not as alternatives for, the Company’s reported GAAP results.
The adjusted measures for the
three months ended November 3, 2018
exclude the impact of asset impairment charges of
$1.3 million
, certain professional services and legal fees and related costs of
$0.1 million
, estimated charges of
$42.4 million
related to the expected European Commission fine, and the tax benefit related to changes in provisional amounts recorded related to the Tax Reform of
$19.6 million
. The asset impairment charges
related primarily to the impairment of certain retail locations in Europe and North America resulting from under-performance and expected store closures
. These items resulted in a combined
$24.0 million
impact (after considering the related tax benefit of
$0.2 million
), or an
unfavorable
$0.30
per share impact during the
three months ended November 3, 2018
. Net
loss
attributable to Guess?, Inc. was
$13.4 million
and diluted
loss
was
$0.17
per common share for the three months ended
November 3, 2018
. Excluding the impact of these items, adjusted net
earnings
attributable to Guess?, Inc. were
$10.6 million
and adjusted diluted earnings were
$0.13
per common share for the three months ended
November 3, 2018
.
The adjusted measures for the
nine months ended November 3, 2018
exclude the impact of net
gains
on lease terminations of
$0.2 million
, asset impairment charges of
$5.0 million
, certain professional services and legal fees and related costs of
$5.9 million
, estimated charges of
$42.4 million
related to the expected European Commission fine, and the net tax benefit related to the above non-GAAP adjustments, if any, and changes in provisional amounts recorded related to the Tax Reform of
$19.6 million
. The net
gains
on lease terminations
related primarily to the early termination of certain lease agreements in North America
. The asset impairment charges
related primarily to the impairment of certain retail locations in Europe and North America resulting from under-performance and expected store closures
. These items resulted in a combined
$31.3 million
impact (after considering the related tax benefit of
$2.3 million
), or an unfavorable
$0.39
per share impact during the
nine months ended November 3, 2018
. Net
loss
attributable to Guess?, Inc. was
$9.1 million
and diluted
loss
was
$0.12
per common share for the
nine months ended November 3, 2018
. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were
$22.2 million
and adjusted diluted earnings were
$0.27
per common share for the
nine months ended November 3, 2018
.
The adjusted measures for the three months ended
October 28, 2017
excluded the impact of net losses on lease terminations of
$11.5 million
and asset impairment charges of
$2.0 million
. The net losses on lease terminations related primarily to the modification of certain lease agreements held with a common landlord in North America. The asset impairment charges related primarily to the impairment of certain retail locations in North America resulting from under-performance and expected store closures. These items resulted in a
$13.3 million
impact (after considering the related tax benefit of
$0.3 million
), or an unfavorable
$0.16
per share impact during the three months ended
October 28, 2017
. Net loss attributable to Guess?. Inc. was
$2.9 million
and diluted
loss
was
$0.04
per common share for the three months ended
October 28, 2017
. Excluding the impact of these items, adjusted net
earnings
attributable to Guess?, Inc. were
$10.4 million
and adjusted diluted earnings were
$0.12
per common share for the three months ended
October 28, 2017
.
The adjusted measures for the
nine months ended October 28, 2017
exclude the impact of net losses on lease terminations of
$11.5 million
and asset impairment charges of
$6.0 million
. During the
nine months ended October 28, 2017
, these items resulted in a combined
$16.0 million
impact (after considering the related tax benefit of
$1.5 million
), or an unfavorable
$0.20
per share impact during the
nine months ended October 28, 2017
. Net
loss
attributable to Guess?, Inc. was
$8.9 million
and diluted
loss
was
$0.12
per share for the
nine months ended October 28, 2017
. Excluding the impact of these items, adjusted net
earnings
attributable to Guess?, Inc. was
$7.1 million
and adjusted diluted
earnings
were
$0.08
per common share for the
nine months ended October 28, 2017
.
Our discussion and analysis herein also includes certain constant currency financial information. Foreign currency exchange rate fluctuations affect the amount reported from translating the Company’s foreign revenue, expenses and balance sheet amounts into U.S. dollars. These rate fluctuations can have a significant effect on reported operating results under GAAP. The Company provides constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates. To calculate net revenue, comparable sales and earnings (loss)
from operations on a constant currency basis, operating results for the current-year period are translated into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year. To calculate balance sheet amounts on a constant currency basis, the current period balance sheet amount is translated into U.S. dollars at the exchange rate in effect at the comparable prior-year period end. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate. The constant currency information presented may not be comparable to similarly titled measures reported by other companies.
In calculating the estimated impact of currency fluctuations (including translational and transactional impacts) on other measures such as earnings (loss) per share, the Company estimates gross margin (including the impact of foreign exchange currency contracts designated as cash flow hedges for anticipated merchandise purchases) and expenses using the appropriate prior-year rates, translates the estimated foreign earnings (loss) at the comparable prior-year rates and excludes the year-over-year earnings impact of gains or losses arising from balance sheet remeasurement and foreign exchange currency contracts not designated as cash flow hedges for merchandise purchases.
Liquidity and Capital Resources
We need liquidity globally primarily to fund our working capital, occupancy costs, expansion plans, remodeling and rationalization of our retail stores, shop-in-shop programs, concessions, systems, infrastructure, other existing operations, international growth and potential acquisitions and investments. In addition, in the U.S. we need liquidity to fund share repurchases and payment of dividends to our stockholders. Generally, our working capital needs are highest during the late summer and fall as our inventories increase before the holiday selling period
.
During the
nine months ended November 3, 2018
,
we relied primarily on trade credit, available cash, real estate and other operating leases, capital leases, proceeds from short-term lines of credit and internally generated funds to finance our operations, payment of dividends, share repurchases and expansion. We anticipate that we will be able to satisfy our ongoing cash requirements during the next twelve months for working capital, capital expenditures, payments on our debt, capital leases and operating leases as well as lease termination payments, potential acquisitions and investments, share repurchases and dividend payments to stockholders, primarily with cash flow from operations and existing cash balances as supplemented by borrowings under our existing Credit Facility in the U.S. and Canada as well as bank facilities in Europe
as needed. Such facilities are described further below under “—Borrowings and Capital Lease Obligations.” Due to the seasonality of our business and cash needs, including to help fund our continuing retail expansion plans, we expect to increase borrowings under our established credit facilities from time to time, during the next twelve months.
In December 2017, the U.S. government enacted the Tax Reform, which significantly changed the U.S. corporate income tax laws, including moving from a global taxation regime to a territorial regime and lowering the future U.S. federal tax rate from 35% to 21%. The Company is also required to pay a transition tax on all historical earnings of foreign subsidiaries that have not been repatriated to the U.S.
Any income tax payable
related to the transition tax is due over an eight-year period beginning in calendar 2018
.
The Company included $1.9 million and $17.7 million amounts recorded in the condensed consolidated balance sheet related to the transition tax in accrued expenses or other long-term liabilities as of February 3, 2018, respectively. During the third quarter of fiscal 2019, the Company completed the preparation of its U.S. federal tax return for fiscal 2018 and concluded, based on the additional information that has become available, that no transition tax is due with respect to the Tax Reform. As a result, during the three months ended
November 3, 2018
, the Company reversed provisional amounts initially recorded during the three months ended February 3, 2018 and recorded a benefit of $19.6 million. Therefore, the Company had
no
amounts recorded in the condensed consolidated balance sheet related to the transition tax in accrued expenses or other long-term liabilities as of
November 3, 2018
.
The Company has provided for tax liabilities on amounts that are estimated to be repatriated from foreign operations as a result of the Tax Reform. We have not provided for other income taxes on undistributed foreign earnings expected to be reinvested outside the U.S. If in the future we decide to repatriate such earnings, we would incur other incremental taxes. Our current plans do not indicate a need to repatriate them to fund our U.S. cash requirements.
As of
November 3, 2018
, the Company had cash and cash equivalents of
$138.9 million
, of which approximately
$25.4 million
was held in the U.S.
Excess cash and cash equivalents, which represent the majority of our outstanding cash and cash equivalents balance, are held primarily in overnight deposit and short-term time deposit accounts.
Please see “—Important Factors Regarding Forward-Looking Statements” and “Part I, Item 1A. Risk Factors” contained in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended
February 3, 2018
for a discussion of risk factors which could reasonably be likely to result in a decrease of internally generated funds available to finance capital expenditures and working capital requirements.
The Company has presented below the cash flow performance comparison of the
nine months ended November 3, 2018
, compared to the
nine months ended October 28, 2017
.
Operating Activities
Net cash used in operating activities was
$46.9 million
for the
nine months ended November 3, 2018
, compared to
$34.2 million
for the
nine months ended October 28, 2017
, or a
decrease of
$12.7 million
. This
decrease was driven primarily by changes in working capital due mainly to higher inventory and payables resulting from retail expansion, partially offset by higher cash flows generated from net earnings for the
nine months ended November 3, 2018
compared to the same prior-year period.
Investing Activities
Net cash used in investing activities was
$83.2 million
for the
nine months ended November 3, 2018
, compared to
$68.6 million
for the
nine months ended October 28, 2017
. Net cash used in investing activities for the
nine months ended November 3, 2018
related primarily to capital expenditures incurred on retail expansion, investments in technology infrastructure and existing store remodeling programs. In addition, the cost of any business acquisitions, purchases of investments and other assets and the settlement of forward exchange currency contracts are also included in cash flows used in investing activities.
The
in
crease in cash used in investing activities was driven primarily by higher spending on retail expansion during the
nine months ended November 3, 2018
compared to the same prior-year period. During the
nine months ended November 3, 2018
, the Company opened
133
directly operated stores compared to
92
directly operated stores that were opened in the same prior-year period.
Financing Activities
Net cash used in financing activities was
$78.3 million
for the
nine months ended November 3, 2018
, compared to
$82.3 million
for the
nine months ended October 28, 2017
. Net cash used in financing activities for the
nine months ended November 3, 2018
related primarily to
the payment of dividends and repurchases of shares of the Company’s common stock. In addition, payments related to capital lease obligations and borrowings and proceeds from issuance of common stock under our equity plan, capital contributions from noncontrolling interests and borrowings are also included in cash flows used in financing activities.
The
de
crease in cash used in financing activities was driven primarily by higher proceeds from issuance of common stock under our equity plan, decrease in payments for repurchases of shares of the Company’s common stock and dividends paid to stockholders, partially offset by an increase in distributions to noncontrolling interests during the
nine months ended November 3, 2018
compared to the same prior-year period.
Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash
During the
nine months ended November 3, 2018
, changes in foreign currency translation rates
de
creased our reported cash, cash equivalents and restricted cash balance by
$19.8 million
. This compares to an
in
crease of
$20.8 million
in cash, cash equivalents and restricted cash driven by changes in foreign currency translation rates during the
nine months ended October 28, 2017
.
Working Capital
As of
November 3, 2018
, the Company had net working capital (including cash and cash equivalents) of
$522.1 million
, compared to
$640.9 million
at
February 3, 2018
and
$616.6 million
at
October 28, 2017
. The Company’s primary working capital needs are for accounts receivable and inventory.
Accounts receivable
in
creased by
$49.4 million
, or
20.9%
, to
$286.1 million
as of
November 3, 2018
, compared to
$236.7 million
at
October 28, 2017
.
On a constant currency basis, accounts receivable
in
creased by
$55.9 million
, or
23.6%
, when compared to
October 28, 2017
.
During the first quarter of fiscal 2019, the Company adopted a new revenue recognition standard on a modified retrospective basis which changed the presentation of allowances for wholesale sales returns and wholesale markdowns to be classified within accrued expenses rather than as a reduction to accounts receivable. Accordingly, the Company has included allowances of
$26.1 million
and
$11.2 million
related to wholesale sales returns and wholesale markdowns, respectively, in accrued expenses as of
November 3, 2018
.
The
in
crease was driven primarily by the reclassification of reserves to accrued expenses, and higher European wholesale shipments, partially offset by the favorable timing of collections during the
nine months ended November 3, 2018
compared to the same prior-year period
.
The accounts receivable balance
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
. As of
November 3, 2018
, approximately
49%
of our total net trade receivables and
62%
of our European net trade receivables were subject to credit insurance coverage, certain bank guarantees or letters of credit for collection purposes. Our credit insurance coverage contains certain terms and conditions specifying deductibles and annual claim limits
.
Inventory
in
creased by
$71.3 million
, or
15.0%
, to
$548.5 million
as of
November 3, 2018
, compared to
$477.2 million
at
October 28, 2017
. On a constant currency basis, inventory
increased
by
$83.9 million
, or
17.6%
, when compared to
October 28, 2017
. The adoption of the new revenue recognition standard also impacted the
presentation of the estimated cost associated with the allowance for sales returns to be included within other current assets rather than included in inventories. Accordingly, the Company has included
$10.4 million
related to the estimated cost associated with the allowance for sales returns in other current assets as of
November 3, 2018
. The increase in inventory was driven primarily by
retail expansion in our international markets
, partially offset by the reclassification of costs associated with sales returns to other current assets.
Special Payments
During the quarter ended November 3, 2018, the Company recognized charges of €37.0 million ($42.4 million) related to an estimated fine expected to be imposed on the Company by the European Commission related to its inquiry concerning possible violations of certain European Union competition rules by the Company. Refer to
“Part I, Item 1. Financial Statements — Note
12
— Commitments and Contingencies — Legal and Other Proceedings” for more information regarding this matter. Although such fines are typically payable within 90 days of the assessment date, the Company intends to request an extended pay period, if and when a fine is assessed. However, there can be no assurances that the Company will be granted any extension. Therefore, as of November 3, 2018, such amounts are classified as current within accrued expenses on the condensed consolidated balance sheet. If the Company is not granted an extension, the Company fully expects to have sufficient availability under existing credit facilities and working capital for full payment during the first quarter of fiscal 2020 if such fine is levied in the fourth quarter of fiscal 2019.
As discussed in more detail above, during the quarter ended November 3, 2018, the Company revised provisional amounts initially recorded in the three months ended
February 3, 2018
related to the Tax Reform and recognized a tax benefit of
$19.6 million
during the three months ended
November 3, 2018
.
On November 28, 2018, the U.S. Internal Revenue Service (“IRS”) announced a proposed regulation to revise the section of the underlying IRS code which gave rise to the Company’s change in the provisional calculation. In the event legislation is passed in the future to revise the relevant IRS code section, the Company could have additional tax expense and tax liabilities of approximately
$12.8 million
. In accordance with current legislation, such charges would be payable over the next seven years.
Capital Expenditures
Gross capital expenditures totaled $
74.9 million
, before deducting lease incentives of $6.0 million, for the
nine months ended November 3, 2018
. This compares to gross capital expenditures of $
65.3 million
, before deducting lease incentives of $6.0 million for the
nine months ended October 28, 2017
.
The Company’s investments in capital for the full fiscal year
2019
are planned between $95 million and $100 million. The planned investments in capital are related primarily to retail and e-commerce expansion in Europe and Asia as well as continued investments in technology to support our long-term growth plans.
We will periodically evaluate strategic acquisitions and alliances and pursue those that we believe will support and contribute to our overall growth initiatives.
Dividends
During the first quarter of fiscal 2008, the Company announced the initiation of a quarterly cash dividend of $0.06 per share of the Company’s common stock. Since that time, the Company has continued to pay a quarterly cash dividend, which has subsequently increased to $0.225 per common share.
On
November 28, 2018
, the Company announced a regular quarterly cash dividend of
$0.225
per share on the Company’s common stock. The cash dividend will be paid on
January 2, 2019
to shareholders of record as of the close of business on
December 12, 2018
.
The payment of cash dividends in the future will be at the discretion of our Board of Directors and will be based upon a number of business, legal and other considerations, including our cash flow from operations, capital expenditures, debt service and covenant requirements, cash paid for income taxes, earnings, share repurchases, economic conditions and U.S. and global liquidity.
Share Repurchases
On 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.
During the
nine months ended November 3, 2018
, the Company repurchased
1,118,808
shares under the program at an aggregate cost of
$17.6
million
. The shares were repurchased during the three months ended May 5, 2018.
During the
nine months ended November 3, 2018
, the Company also paid an additional
$6.0 million
for shares that were repurchased during the fourth quarter of fiscal 2018 but were settled during the first quarter of fiscal 2019
.
During the
nine months ended October 28, 2017
, the Company repurchased
1,919,967
shares under the program at an aggregate cost of
$24.8 million
.
The Company repurchased
1,485,195
shares at an aggregate cost of
$17.8 million
during the three months ended April 29, 2017 and an additional
434,772
shares at an aggregate cost of
$7.0 million
during the three months ended
October 28, 2017
. As of
November 3, 2018
, the Company had remaining authority under the program to purchase $
374.6 million
of its common stock.
Borrowings and Capital Lease Obligations
See “Part I, Item 1. Financial Statements — Note 9 — Borrowings and Capital Lease Obligations” in this Form 10-Q for disclosures about our borrowings and capital lease obligations.
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
$
61.6 million
and $
64.5 million
as of
November 3, 2018
and
February 3, 2018
,
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
loss
of
$
2.3 million
and
$
1.6 million
in other expense during the three and
nine months ended November 3, 2018
, respectively, and unrealized gains of
$
1.6 million
and
$
5.5 million
in other income during the three and
nine months ended October 28, 2017
, respectively
. The projected benefit obligation was
$
54.9 million
and
$
54.8 million
as of
November 3, 2018
and
February 3, 2018
, 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
$
0.4 million
and $
1.3 million
were made during the three and
nine months ended November 3, 2018
, respectively.
SERP benefit payments of
$
0.4 million
and
$
1.3 million
were made during the three and
nine months ended October 28, 2017
, respectively.
Inflation
The Company does not believe that inflation trends in the U.S. and internationally over the last three years have had a significant effect on net revenue or profitability.
Wholesale Backlog
We generally receive orders for fashion apparel three to six months prior to the time the products are delivered to our customers’ stores. The backlog of wholesale orders at any given time is affected by various factors, including seasonality, cancellations, the scheduling of market weeks, the timing of the receipt of orders and the timing of the shipment of orders and may include orders for multiple seasons. Accordingly, a comparison of backlogs of wholesale orders from period-to-period is not necessarily meaningful and may not be indicative of eventual actual shipments.
U.S. and Canada Backlog.
Our U.S. and Canadian wholesale backlog as of December 3,
2018
, consisting primarily of orders for fashion apparel, was $50.4 million in constant currency, compared to $36.9 million at December 4,
2017
.
Europe Backlog.
As of
December 2,
2018
, the European wholesale backlog was €247.0 million, compared to €224.8 million at December 3,
2017
. The backlog as of
December 2,
2018
is comprised of sales orders for the Fall/Winter 2018, Spring/Summer 2019 and Fall/Winter 2019 seasons.
Application of Critical Accounting Policies
Our critical accounting policies reflecting our estimates and judgments are described in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended
February 3, 2018
filed with the SEC on
March 29, 2018
. There have been no significant changes to our critical accounting policies during the
nine months ended November 3, 2018
.
Recently Issued Accounting Guidance
See “Part I, Item 1. Financial Statements — Note 1 — Basis of Presentation and New Accounting Guidance” in this Form 10-Q for disclosures about recently issued accounting guidance.