Guess?, Inc. (GES) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us for this next session of the Goldman Sachs Global Retailing Conference. My name is Brooke Roach, and I cover the apparel, accessories and brand sector here at Goldman. I'm very pleased to welcome our next presentation with Guess?, Inc. Joining us today to discuss the strategy and the growth initiatives are Carlos Alberini, CEO; and Katie Anderson, CFO. Welcome, Carlos and Katie.

Thank you so much. Thank you for having us, Brooke.

Great. I'd love to kick it off with a question for you, Carlos. Can you provide an update on the progress that you've made on your 5-year strategic plan this year and the most exciting initiatives that Guess? has in place as you look ahead?

Yes. Thank you, Brooke. Just I came back to Guess? in early 2019 after I have been with Guess? for about 10 years between the years 2000 and 2010, and then I left to do a few other things, and I came back. And at the time, I was very excited to really work with the team here to develop a new strategic plan. And we put a lot of effort into that, and we unveiled this plan in December of 2019 with investors, analysts. And at the time, we were looking for an operating margin performance of about 10% in -- within the 5-year planning horizon that we have targeted. And we were very excited about that. Most of the improvements for value creation were created inside the P&L with a lot of operating efficiencies, a lot of margin expansion opportunities that we have identified, including logistics issues, sourcing opportunities and so forth. And I'm very happy to be here to tell you that we were able to accomplish that in a very short period of time, many of those initiatives were fulfilled, and we are now looking at a 10% operating margin this year, about 3 years earlier than we had originally targeted. And that was a very, very great experience, and we feel great about that. But with the pandemic, we were able to identify more opportunities to really transform the business model further. And one of the big things that we have set our eyes on was to elevate our brand. And the elevation of the brand touches almost every aspect of our business. Paul Marciano has been leading the charge here and has done a great job with the product teams and with all the different creative teams and people that touch the whole product cycle. And we have done a lot to elevate the style, the product, the quality that goes into the materials that we put into the product. The perceived value of the garments and of all the product lines has been reassessed, and prices have been changed accordingly. We have reduced the density of the product that we show in stores in order to provide a more sophisticated experience at the point of sale. We have done a lot with our website to really improve the presentation. We have done a lot in the imagery that touches all the campaigns that we do. And frankly, all this is working very well. And probably the most significant piece that we have done is to reduce promotional activity almost across the board. That has had an impact on our bottom line that is, I think, remarkable and probably at the top of the list and -- within our peer group. And we feel great about where we are because we feel that this year now has become kind of like a reset year where we are defining a new baseline. And we feel that next year and going forward we're going to start seeing growth that combined with the kind of margin expansions that we are experiencing that we believe are very sustainable and also show an opportunity for higher expansion. We are targeting now a 12% operating margin for fiscal year 2024. And when you put it together, we think we have a very, very strong formula to win in this environment. So we couldn't be more excited about the momentum and where the brand sits today.

That's great color. I'd love to dig in a little bit deeper on the evolution of the company's branding assortment and marketing efforts. Can you talk a little bit more about how you're reaching and connecting with each of your core customer demographics of your business, including that heritage, millennial and Gen Z customer?

Yes, yes. Thank you. Well, so starting with your question about product, just one of the big changes that we have made that touch assortment is the offering of a new global line of products. This is something that even in my previous time with the company, we always had as a big goal and, frankly, it was very difficult to achieve. And we took this opportunity as the pandemic began to really go for it. And I'm very happy to report that this has been very successful. Of course, we are in the early innings of the benefits that this global line is going to provide to the company, but the early signs are amazing, just that it was difficult to see that one whole line could be representing the brand across different territories. We do business in 100 countries today. So you can imagine how ambitious that goal is to really make that representation consistent. But I think that this is working very well. Bestsellers are bestsellers almost everywhere that should tell the whole story. But we are using this global line as a great platform to really fulfill different purchase occasions that the customer is looking for today. So we are doing a lot more with products that have a longer life. We have -- and that now represents a big part of our assortment. We also are very careful with providing products that address specific market needs of different countries or different markets that could be different. And for that, we have capital and design teams that are there to really enhance the offering accordingly. And then just to your question about the customer, as you mentioned, we have 3 very defined target customer groups. The first one called the heritage customer is a customer that has been with the brand for a long time and is very loyal, very repeat customer type of audience. And we feel that we have a very strong group of products that target and appeal to that customer day in, day out and for different occasions. The second group is the millennial group, and this is becoming very meaningful and very significant as part of our total customer group. We feel that the assortment that we have with the global line, and this goes across different categories, including accessories, is very effective for both groups, and we feel that we can service the different lifestyle occasions of those customers in an effective manner with that entire line. And then the third group is what we call the Generation Z customer. This is a different customer, and we feel that there is a big opportunity here to market to that customer with a completely new model. We have a group inside the company. It's called Brand Partnerships group. It's led by Nicolai Marciano. Nicolai has a very strong network where he knows a lot of people in that group of celebrities, people that are in the arts, music. And we have done a lot of collaborations and of -- using those collaborations to really market to this customer in a very different way, more with events. And we do product capsules that are used to really get closer and engage this customer group. Very recently, we had a big event here on campus in Los Angeles. More than 6,000 people attended that very successful event. And we feel that with the pandemic, things slowed down in this part of the business, but we are back to this and very excited to really renew all those activities. We have -- we are doing a lot of work on the analytics portion of the business, and that is something that maybe, Katie, you can talk a little bit about the analytics and what we're trying to do to enhance our capabilities in that area.

Yes. This is something I'm personally very excited about. We have very limited capacity to collect data and process it and utilize it. And so we're working on a new tool, which will be done next year for data capture, segmentation and analytics. And this is going to help us with personalized marketing. This is going to help us with clienteling. This is going to help us with consumer insight analysis. It's going to help us not only maximize sales for our existing customers but also target new customers. So the amount of value that we can unlock using this is going to be big.

That's great to hear. Carlos, in those comments, you talked a lot about product categories. And one of the aspects of your strategy is to expand into some new product categories and lean in a little bit more, including athleisure and accessories. Can you talk a little bit more to the company's product expansion strategy?

Yes. We have -- we think that one of the big levers that we have to renew the growth after the pandemic and everything else is category expansion. And we are very fortunate because, number one, we have several categories where we feel that even when we have a strong presence in the market, we don't think that those categories are maximized. So a good example of that is denim. Denim is a category that is part of the Guess? DNA. Just the brand started with a very strong presence in denim and built the brand around that category. But now denim represents a small part of the total business, and we think that we can grow it significantly and increase the penetration. And our denim business has been healthy. We think that there is a lot more to go with this. And we feel that denim is starting in a new cycle, which we believe that we can play a pretty significant role in. You mentioned athleisure. Athleisure is a category that we didn't have a couple of years ago. And as we saw where the customer was going and we felt that the brand could represent this category very effectively, and a whole new line of product has been developed and launched with great success. This represented in Europe at the wholesale level kind of like 7% or 8% of our total sales campaigns for a couple of seasons in a row. And we now have a very, very solid business. We think that there is more to be done here. We are -- we continue to expand the offering. And we are very happy with how the business is performing. Outerwear is another great category. Just -- when I was here initially, my -- in those 10 years that I mentioned, outerwear was just a dream. We were thinking about introducing that category and growing it. And when I came back, I couldn't believe how big and how solid and how beautiful the product is. I think that we are offering an incredible quality and at a price that is very difficult to match. So the business has grown tremendously. And I think that there is more to really do with that category. Another big category is you mentioned accessories. Within accessories -- and we have a strong accessories business. But within accessories, handbags is just an incredible offering. If you look at the quality that we offer, the styling, the colors, how beautiful the product is put together, and then you put that against the price that we ask for the product, and it's just -- I don't think that there is anything in the marketplace that matches that type of offering. So the business is very big already. But we feel that we are poised to continue to gain market share with that particular category. And then we have many other categories like dresses. Dresses has always been a very strong line for us and a strong part of the business. And now as the customer renews their interest in new social activities and so forth, we are seeing that the dressy categories, including dresses, are taking off. So we are very excited to participate in that. And as part of that is also the Marciano brand, which, for us, is relatively small, but we see tremendous opportunity. There are a lot of brands that were in that space that are no longer there. And we think that we can gain a significant share of that customer, of that market. And we are expanding the uses of the products for day and to night type of use, which is something that Marciano did not have in the past. So we think that we will cater to a much larger audience with the Marciano brand. So we put it all together and there are a lot of -- I'm not mentioning many other categories. We are truly a lifestyle brand. I don't think that there are many brands in our space that can make that claim. But truly, we have several product categories, men's and women's, and we are meaningful and relevant in each of those categories, which I think is something that differentiates us from others. So very excited with this. We see this as one of the pillars to increase sales productivity, both in our stores, also in our e-commerce business. Just -- we think that this is a big lever for us to grow that business, which we think is underpenetrated and can be significantly larger. And also at wholesale, we are seeing that many of our product categories are doing really well at wholesale, both here in the States and also in Europe. And we feel that there is a lot more to be had as the world continues to consolidate in a way with all the impact of the pandemic and the -- how the brands are becoming -- the ones that were stronger and are well positioned are becoming even stronger.

You mentioned each of your channels of distribution a moment ago, and I'd like to talk about that for a moment. Can you talk about your store footprint? What opportunities do you see to selectively grow and optimize that footprint going forward?

Yes. Yes, we are very lucky as a company, just this is truly a multichannel business. We have a big business in retail, and I'll come back to your question, Brooke. But we also have a big business in wholesale, very meaningful, very profitable and a growing basis. We have a very good business in e-comm with opportunities to grow. We have a great business in licensing as well, which is a great source of cash flow and great profitability. So we think that this business model is very synergistic. And we feel that each of them offers opportunities to grow. When it comes to retail, we have a very significant store base. The stores in Europe, for example, represent about 700 locations. Of them, 500 we operate directly, and the other ones are in the hands of partners or licensees of ours, but that represent the brand with the same levels of standard. We think that there are big opportunities across Europe with different countries that may be developed but not fully developed. Just if I told you that we only have 28 stores in Germany, a country with that type of magnitude and power, we think that we could have a lot more stores there. Just we have many stores in Poland. A few years ago, we didn't have that many, but the growth has been pretty significant during the last few years, and we're talking about 60 to 70 stores. If you look at a country like Russia, another big market, and we have big opportunities to continue to grow there. And there are multiple examples. There are some other countries like Italy where we are fully developed, but we still see growth just especially through our wholesale business and also increasing the productivity of the stores that we do have. With -- so a lot of country development. When you look at North America, it's interesting. We have closed a lot of stores. You take the U.S. We used to have a multi-hundred store chain, and now we are at a much smaller scale because we have closed a lot of stores that were or became unprofitable. We think that all that has been very accretive to our bottom line. But now we are seeing that the deals are very appealing, and there are opportunities, and we know those markets very well because we were there. So it's a very different risk/reward type of opportunity here. And landlords have been very open and very constructive in developing new deals. And we are reconsidering a lot of spaces. And in many cases, what we're doing is trying to test some new concepts with a much smaller footprint. We talked a little bit about accessory stores. We've talked about athleisure stores. We talked about a pop-up type of locations to test and then, based on results, just renew our commitment. So very exciting everything that we are seeing. Now of course, I don't touch on Asia. Asia is -- probably the biggest opportunity there is China. We did close a significant number of stores during the last 18 months. And we feel that we are in a reset type of position there. We have about 100 locations in China now. And of course, if you consider the size of that market, it could be just a multiple of that. But we want to really get the business on a strong footing before we move forward with store expansion there.

That's incredibly helpful color. Let's follow up on that with a discussion of your omnichannel capabilities, which are a focus for Guess?. Can you discuss the recent success of your omni initiatives, where you've invested most heavily? What investment should we be watching for as we look ahead?

Yes. So we've -- part of that strategic plan that I mentioned earlier, just one of the big initiatives is something that we call customer centricity. And we wanted to really place the customer at the center of everything we do. And one of the things that became very obvious as we were developing that plan was that our e-commerce business was underpenetrated, but also the tools that we had to really run the business were not up to par with what the customer expects today. So we decided to make a big investment in replatforming the entire business. We brought in a great platform, and we have since implemented that both in North America and also throughout Europe. We are done with that implementation, and the results have been very encouraging. We are seeing just improvement in navigation. We are seeing loading time for the homepage significantly faster. We are seeing a lower bounce rate. I mean there are multiple examples of improvements from the performance that we used to have. The next big topic here for us was omnichannel capabilities. Just the typical things that a lot of companies have and have had for some time. We did have those capabilities in North America under the old infrastructure, but we want to replace and upgrade those. And in Europe, we never had them and now we are rolling those out. So we have very high expectations for this project. We should be done by the middle of next year with the rollout of this whole project. And we think that, that is going to enable us to really conduct a more seamless type of experience for the customer, whether he or she are shopping in stores or online. And the third big thing is what Katie started mentioning about the analytics, and this is something that we are very excited about. A new project that we have embarked on is called Customer 360 is a product offered by Salesforce, too. And we think that this is going to be amazing. It's fully integrated, and it offers us the opportunity to really link all data capture to personalized marketing, to doing a better job analyzing results and, ultimately, clienteling. So very excited about this. And we think that once we complete that, which should also happen next year, we will be kind of like up to par with the best in the industry today. And we think that, that is going to enable us to accelerate the growth of that business as well.

Let's round out the channel discussion with a brief chat about wholesale. Can you talk to the trends that you're seeing in wholesale between sell-in and sell-through? How comfortable are you with your inventory levels at your wholesale partners?

Yes. So wholesale, I would say, we have 2 very different worlds within the Guess? ecosystem. What we saw in the Americas with the wholesale reaction to the crisis and so forth was somewhat different than what we saw in Europe, which are the 2 areas where we have very significant wholesale businesses. So in America, we saw a very extreme reaction initially and a lot of cancellations of orders. And we decided to preserve some inventory just to be able to service our customers and when that demand reinstated. And that was a great move because those customers were very constructive over time to really open their doors to additional inventory, and we were ready to service them and to partner with them. And as a result, I think that the business responded very quickly because the customer responded very positively as vaccination levels improved, and there was a lot of money through stimulus checks and everything else to really reinvigorate demand. So we were very pleased with that. We continue to see success. We just reported second quarter results in the Americas with wholesale, very strong. We were up 19%. We were -- our profitability was up like 54% with that business, very, very strong performance. Then on the other side, in Europe, we never saw the level of cancellations that I was referring to. What we saw was continued interest in our brand. And in many cases, what we were told by our key customer partners is that they were making decisions to really consolidate more of their buys into several brands that they felt were more or better equipped to service the business that they were investing in product development and new designs and customers or brands that were more reliable in terms of being able to deliver, considering all the disruptions that we were seeing with the supply chain. And we think that, that's still the case today. We just reported that our business at wholesale in Europe has been very strong. And maybe, Katie, you can chime in here with what we're seeing there in Europe.

Yes. In Europe, we saw -- we closed the Fall/Winter campaign. It was up high single digits. We're in the middle of the Spring/Summer campaign. It's up. We expect it to be up as well. So the core of the business is strong even though we've had some timing shifts in terms of when we're shipping the goods with the supply chain. And we saw a shift, as we talked about in our second quarter call, from the second quarter into the third quarter.

I'd like to briefly touch on 2 things that you just mentioned, and questions that we're asking all companies at our conference today. The first one for you, Carlos. How do you see the state of the health of the consumer into second half? Do you think that the impact of the stimulus payments moderating will drive any change? And do you think momentum will accelerate, decelerate or stay the same?

Yes. It's hard to anticipate exactly what's going to happen here. Just we are playing our game. We feel that the consumer is in a good place. And we think that just the changes that we have injected into the model with price changes and reducing the level of promotions significantly across all our different models has worked, and it works only for 2 reasons. One, the product is right. If you don't have the right product, I think it's very difficult to really make this type of moves that are so significant and deep. And the second reason is because the consumer is willing to spend and is ready to really reengage in shopping in our categories. And we don't see anything changing dramatically there. People are talking about stimulus checks, and it's hard to say what's going to happen tomorrow. But I think that the consumer has been very resilient, and I think that there is an interest to reengage in social activity, and that requires to really have the type of products that we sell. So we feel that we are very well positioned. And then when you look at Europe, we are very bullish there because we feel that Europe has been very successful in accelerating the levels of vaccination that the United States did so positively and effectively. So we feel that, that was the first big step that needed to happen in Europe in order to -- for them to really come out of the health crisis. And I feel that, that is already happening very clearly. And we feel that just the state of the consumer and the shopping cycle should follow. So overall, we feel very good about where we are, and we feel strongly that the second half should be a successful second half in our business. And we have given some outlook color, and we feel that we have a very solid opportunity to reach this 10% operating margin this year. We have given some color on top line. And we think that the mid-single-digit drop from LY for the full year, which is something that we started talking about a few months ago, is completely achievable. And we feel very solid about where we are going. The most important thing for us is that this is a year of reset. So for us, yes, the top line is being impacted, but we think that the margins are very strong. And we think that our growth will start renewing next year. And at that point, we are going to have both, just an increase in top line combined with an expanded margin opportunity should be a very, very good bottom line performer and an opportunity to really create shareholder value in a significant way. Just we are starting to regrow our store base. We're going to open between 80 and 90 stores this year, and some of them are going to be pop-up type of stores and more temporary, but the opportunity for square footage growth, I think, is there for us.

Great. And Katie, a quick question for you that we're asking all companies today. As you look at the second half, do you believe the current supply chain situation is largely a cost headwind? Or do you think it will be a constraint on your ability to meet demand? What is the biggest lever to mitigate the supply chain pressures?

Yes. I mean we've obviously taken a very proactive approach to the situation. It's been going on for a while. We don't expect it to end before the end of the year and going into next year. So we've been doing everything we can to get products sooner, working with our vendors. We've been sourcing closer to the distribution. We've also been investing in faster transportation where it makes sense. And so we've been doing everything we can to get the product there. The costs that we are incurring are built into our guidance, and we're on this every single day.

That's great. Now that we've kind of gotten the near term out of the way, I'd love to dig in a little bit more, and this has been referenced a few times today. The new 12% operating margin target by 2024, can you talk to your confidence in raising this target? And what the key levers are to achieve that 12% goal? What's the difference between -- is it sales leverage? Is it ongoing efficiencies? What are the key examples of those levers?

Yes. So I think, I mean, the first step in being confident in the 12% is being confident that the 10% is sustainable. So there's a lot of talk in the industry right now, "Hey, are these margins sustainable in the future?" And our answer to that is yes. And we had a few puts and takes this year where we had some onetime abatement or government subsidies. So we also had massive store closures in the first quarter, especially in Europe. And when we go through everything, we kind of even out to the 10% is sustainable. And I say that because we've done a lot of concrete things that aren't going to go away. So we've renegotiated 400 leases. We've closed 160 stores. That is, on a run rate basis, $20 million of operating profit. That's not going back. We have our global -- 1 global line and other IMU improvements, distribution improvements. So all of these things are concrete and not going away. So my first step is I feel like the 10% -- or we feel like the 10% is sustainable. And then how do you get from the 10% to the 12%? So we have a few -- most of -- the crux of the 10% was more in the middle of the P&L, as Carlos mentioned before. Now going forward from the 10% to the 12%, it's both sales leverage and more operational efficiency. So about half and half. And on the sales side, Carlos talked about the different drivers, and this year is about -- a reset year. We're guiding to down mid-single digits, which is about the amount of store closures. So really, if you exclude that, the core business is flat. But then we're going to hit $2.8 billion in 2 years, and that's a mid-single-digits CAGR. So that's the fun side of it. On the operational efficiency side, we have the annualization of a lot of things that we've done this year, one global line, the pricing, store closures. And then some of the other structural changes that we're making, global functions, et cetera, that just takes some more time. So those will be coming, too.

That's great color. I'd love to hear a little bit more about your capital allocation. You've made a few announcements recently. Can you talk to where you're most focused on with that cash? What are the biggest investment priorities? And beyond CapEx, where will you spend that cash?

Yes. So overall, our capital allocation strategy hasn't changed. So first is invest in our business to achieve our goals. And this is, as Carlos talked about investments that we're making in technology, remodels in relation to our brand elevation, new stores. And then after that is returning value to shareholders. So we have our dividend and also share repurchases. We just announced this past quarter, you referred to this, that we increased our share repurchase program from $48 million to $200 million. And we plan to use that opportunistically. We have a strong balance sheet. We closed last quarter with almost $460 million in cash. So we have the means and the program.

Great. And a final question on e-commerce and how you're thinking about that digital business from here. Can you talk to the overall growth rate that you're seeing in your e-commerce business? What level of growth do you think is sustainable from here? And what do you think digital penetration might be going forward?

Yes. So I'll start and then maybe, Katie, you can chime in, too. So we just closed the second quarter with an 11% growth in -- for North America and Europe on e-comm. That was -- that growth was a little bit more moderate than what we had seen in the past quarter. But we have been a lot less promotional in this channel as well. And we saw a very significant improvement in margin for the business. And we are very happy with that because we feel that we can grow that segment in a very significant way with a level of profitability that will be accretive to the overall company margin. So that's what we are performing right now. With respect to penetration, we have shared with investors that we expect for fiscal year '24 for this business to represent 23% of the direct-to-consumer business relative to where we do e-commerce business as well. And we feel that, that should be a very achievable target based on what we are seeing and based on the opportunities that we see. We are doing a lot to really expand the assortment online, and that has been very successful for us. We are adding new colorways that are not offered in the stores, for example. We are also doing a lot with exclusive products that are now being offered in the stores as well. And this is contributing to the growth of the segment. And then we have had some very meaningful partnerships with other customers that are of a pure play type of nature, and those businesses are growing as well. So we see a lot of opportunity with omnichannel. Probably the #1 goal here is to provide an incredible experience for the customer, and we are trying to really bring those 2 worlds of bricks and mortar and omni and digital together. And we think that with the new capabilities, we'll be able to accelerate that process.

And we've made big strides -- as Carlos mentioned, big strides in operating margin expansion in this channel. So it's exciting as the sales come in, we're going to have great flow-through.

Great. And with that, I'm afraid we are out of time. Carlos, Katie, thank you so much for sharing your thoughts on the strategy today, and thank you for all of those who are listening in on the webcast. We hope that you'll be joining us for our next session.

Thank you so much, Brooke. Thank you for having us, and it was really a great pleasure to be with you here.

Thank you.