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

Good afternoon, and welcome to another session of our Goldman Sachs Global Retailing Conference. My name is Brooke Roach, and I cover the apparel and accessories brands here at Goldman. And I'm thrilled to introduce our next session with Guess? Inc. Here with me today are Dennis, Interim CFO; and Fabrice, SVP of Finance, IR and Chief Accounting Officer. Thank you so much for joining us.

Thank you very much for having us.

Dennis, would you like to kick it off with some opening remarks?

Sure. I'd love to. Thanks. Thanks, and thank you all for your participation here today. I would ask if you would, at some time, just take note of our safe harbor statements with our filings. And one apology, I want to apologize on behalf of Carlos Alberini, our CEO, who would love to have been here. Unfortunately, his travel commitments don't allow them to be in New York right now. So now we just reported our second quarter last week. Our revenues increased 10% in U.S. dollars, up 13% in constant dollars. We delivered $0.42 of adjusted earnings per share. And we share those numbers. We updated our outlook for the year. But equally importantly, we outlined some of our critical strategic objectives and we reported on how we're progressing against some of those. So I'd like to share that with the group. But first, maybe a quick introduction of the company for those of you who may not be as familiar with the name, Guess? was founded in 1981 by the 4 Marciano brothers. So we're 43 years old. And in that time, we've built the Guess? brand to be a truly global lifestyle brand at full retail value. The brand is about $5.5 billion. We distribute in about 100 countries with 25 different product categories, about 12,500 associates and 3/4 of our revenues are generated outside of the United States. So truly a global brand. And as important as that brand is to us and it is, we believe that we've built a very powerful business model and a platform that gives us significant competitive advantage to drive long-term sustainable growth and to create shareholder value. So what does that look like? So we have a strong management team, both based here in North America, where our base is in Los Angeles, as well as a strong team in Europe. We're based in Lugano, Switzerland there. As I said just a moment ago, we distribute in 100 countries. And we distribute our products in virtually always every model that our products are distributed. We operate our own stores, both full price and outlets. We operate e-commerce sites. We work with wholesale partners from large department stores to the literally thousands of mom-and-pop shops that we work with in Europe. We operate with concessions and franchise and a licensing business. So on top of the apparel products that we manage ourselves and develop that product ourselves, we work with a network of product licensees that deliver products like handbags and footwear and fragrances to name a few, that brings our total product categories to 25. We also have a very strong global supply chain. We partner -- with partners in many countries around the world. And we believe that, that presents a very powerful arsenal that allows us to do things that we believe others simply cannot do. We can take regional brands and with that network extends them globally. We can transform single category brands and with that stable of products, we can turn them into lifestyle brands. We can grow things exponentially because we can grow things in multiple dimensions and we're supported by a strong capital structure, significant cash flow generation and ample access to capital. And with that strong platform, we very much view ourselves as a growth company. And this year, in particular, is an inflection point for us in the way we view that growth opportunity because for the first time in our history, we've opted to leverage that strong platform to drive that growth through an acquisition. In April of this year, in partnership with WHP Global, we acquired rag & bone. Guess? invested $57 million in that transaction. rag & bone as many of you know, is a brand with an authentic New York aesthetic. It caters to both women and men. It's primarily distributed here in the United States through its own stores and through wholesale partners. It also has a small presence in the U.K. And we think on our platform, we can really supercharge rag & bone's growth with global expansion, bringing more categories to the brand and leveraging our global infrastructure. It's only been a few months since April and we're working the relationship is going very well, making great progress with the brand. In those just a few short months, we've begun expanding our rag & bone marketing investments in existing markets, mainly in the United States, but we're also seeding awareness in new markets like Europe. We began looking for locations to open new stores in multiple cities in Europe and beyond as well. We've already signed an agreement for a new store in Amsterdam to create brand awareness in Europe. And beyond Europe, we're in discussions with potential partners to represent rag & bone in other new markets like Mexico, Latin America, Middle East and Australia, all places where we already have relationships and a presence. We've reached an agreement with one of our partners that will enhance rag & bone's handbag offering with more to come. So that shows and really demonstrates the momentum that we can build with our platform in a very short period of time. So that's rag & bone. And on the call from last week, Carlos also updated on the progress on several other key initiatives. And if I could share just a few more highlights. We're also leveraging our platform with a new internally generated brand that we recently launched, Guess Jeans. Guess Jeans is a completely new lifestyle brand with its own identity, a multi-category assortment for both men and women and a brand-new store concept. It targets a younger Gen Z customer, but it's welcoming to all customers. It employs a casual offering with compelling price points. So it fits well within our overall brand and pricing architecture to add an incremental business. We've opened already 2 stores, 1 in Amsterdam, 1 in Berlin, great locations to introduce the brand to that customer. Another area of strategic importance to drive growth for us is marketing. Consumers are becoming more selective in the world of social media and customer engagement continues to evolve. So we, as a company, are challenging ourselves to enhance our marketing organizational capabilities to better support our existing brands as well as other brands to come. We've engaged with a partner, an external partner to conduct a brand review. And we've benchmarked our marketing investments against many others in our space. And from that work, we believe that there are opportunities to make incremental investments in social media, collaborations, customer engagement fit, CRM to connect more and better and differently with our customers. We want to ensure that we're listening to our customers and putting them at the center of everything that we do, ultimately designed to drive more traffic into our stores and to our websites. We've already begun those investments, we said on our second quarter call that we more than doubled our marketing investments, and we plan to continue at those higher levels. There are other examples of important pillars on our strategic plans. But one more important to me as the interim CFO is that we're poised with a very strong capital structure. Over the last year or so, we've refinanced our convertible notes that were coming due in 2024, and the majority of that was refinanced into 2028. We extended our North American credit facility by another $50 million. That supports the rag & bone business. We just extended our European facility by EUR 100 million. So we ended the second quarter with about $600 million of availability, which gives us a lot of flexibility to pursue our objectives. And while our capital allocation priorities start with our business and supporting our strategic objectives, we're also very focused on -- I'm not sure what that was -- very focused on returning capital to shareholders. We've been very active with both dividends and repurchases. Over the last 5 years, we've returned over $1 billion of capital to our shareholders, $360 million in dividends and $690 million through repurchases, which we manage very opportunistically. So investors are very much part of our mindset. So an exciting time at Guess?, lots going on, lots to be excited about, very happy about our future. And again, I appreciate your time. We've got some time for questions.

Excellent. Well, thank you so much for that great introduction regarding some of the strategic initiatives that Guess?, Inc. has on the horizon. Let's dig into a few of those with a little bit more detail, starting with rag & bone. Can you speak a little bit more to the strategy behind the acquisition? What are the most important opportunities that you see ahead as you add the brand to the Guess? platform? And I know that it's early days, but I'm curious if you can provide any insights on initial integration efforts.

Sure. I'll take this one. Thank you. So I think we are very excited with the opportunity to acquire rag & bone along with WHP. And I think it started with the brand. I think when we look at the brand and the amazing job that the rag & bone team has done over the 20 years to really protect the brand, keep it pristine, being very careful in terms of how they approach promotions. We love the brand. And then the products. I think, when you look at the product assortment, it's very differentiated from Guess?. The price points are not really competing with Guess?. And we just love the product as well the stores, the visual merchandising. So the brand of products, the positioning and how it was complementary to the Guess? brand was for us, I think, some of the reasons of why we thought there was an opportunity. But as well, what was interesting is that we saw the opportunity to really take that brand, plug it into the business model of the engine that Dennis described and really accelerate the growth of that business. And I'll just give you a couple of metric there is what's interesting is, if you look at last year, rag & bone generated give or take, $250 million of revenues, but 90% of that was generated domestically in the U.S. 10% -- the remaining 10% was basically spread across Europe and Asia. Now you can look at Guess?. You can look at us. And what's interesting is that today, after that 43-year journey that Dennis described, actually 75% of the Guess? revenues are generated internationally with only 25% being generated here in the U.S. And I think that could give you an idea in terms of down the road, what rag & bone could be from a geographical point of view. I think the opportunity internationally is very material. And the good thing about us, again, going back to the what Dennis mentioned is, we already have the platform. We already have the management teams across the globe, all the partners that can help us really expand rag & bone, whether it's through DTC or wholesale. That's number one, really that geographical opportunity. And then number 2 is really more from a product category point of view, where if you look at our penetration today by category, we have a very nice distribution of revenues for Guess? really across many different product categories, especially accessories. And today, if you go into rag & bone stores, they already have a small representation of accessories, but nowhere near what it is for us. And we see a lot of opportunities there. And I would just call it one category, which is handbags, which has been a category that has been extremely successful for us. And we're working here with a licensee partner that has been with us for over 30 years. And for us, when we see handbags, when we see the apparel product assortment for rag & bone, we can see a big opportunity there, for example, for accessories and handbags. I mean, I think in terms of price point, there is really something to be done there, that could be accretive for the consumer, and then for us as well from a top line and a profitability point of view, and that's the second piece. So I think between that -- those opportunities geographically and across product categories, and then the brand, the way it is, we see a lot of opportunities. Again, like Dennis mentioned, we're already starting to look at locations in Europe. We have secured one location in Amsterdam. We also have, in Europe, a vast network of wholesale partners that we used to distribute the Guess? account -- the Guess? products, we have access to like 7,000 different accounts. I'm not saying all of those accounts are appropriate for the rag & bone brand, but there's no opportunity there. And then besides Europe, Mexico, even Canada, there's a lot of things that we can really do there to accelerate the growth. I would just want to say, of course, here, as usual, we want to do things well and carefully. So we'll be thoughtful about how fast we go, correct. Yes.

I think this is indicative of -- for any of you who may have been following the sort of the journey that Carlos has been talking about is that this is really an evolution of the way that we think about our company. He tells it, he was the COO from 2000 to 2010. He left for 9 years, came back in '19. And he says, he came back with the same mindset that he initially left with, which is it's all about how do we drive value and growth in Guess?. And we believe that there are those opportunities. I alluded to some of them in my opening remarks. But the evolution is really on how we see the value of that platform and how we can use it to really ignite growth in other brands. When I think of the metrics that Fabrice has talked about, brand going from 90-10 and think about the potential -- not a prediction, but 25-75, I mean just if you do that math, it's a really compelling opportunity. Early days, we want to walk before we run. We want this transaction to go very smoothly and really assimilate the brand onto our platform. But we're really excited about the opportunity to grow this brand and to continue to leverage our platform.

That's really great color. Thank you for all of that insight. Let's shift to the other new brand launch that you have in the platform, which is Guess Jeans, how should we be thinking about the scaling and cadencing of growth between DTC and wholesale by geography?

Sure. So I'll start maybe then Den. We're pretty excited about it. And I want to make sure that everybody understands, because we have the question a lot is we really look at that as a new brand, Guess Jeans brand, where it's going to have its own line of products, it's going to have its own visual identity. We have a specific store concept we've worked on for our own stores. We've also worked on special fixturing for the wholesale partners. It's really going to target a younger consumer than for the Guess? brands. The price points are going to be also slightly lower, the assortment is going to skew a bit more towards basic, and it's going to have a multi-category representation, if you think, of course, about Denim. But sweaters, knit tops, outerwear as well are going to be part of the assortment. We have just launched that basically business very recently. We introduced that to our wholesale partners in Europe as part of the Fall/Winter '24 collection. The order book eventually finished higher than expectation. And we are just about completing the order book for our Spring/Summer '25 collection in Europe, again, very pleased with the feedback we got from our wholesale partners. And really, the way we envision that brand to play out is really -- we see that as a global opportunity, number one. We see an opportunity as well for that to be a multichannel business. So of course, I've just talked about the wholesale in Europe. We're also introducing that in other wholesale markets across the globe and retail. So we've just announced that we have opened like a couple of stores in Europe, 1 in Amsterdam, 1 in Berlin. We have a few more in the pipeline. We have already secured a location in Los Angeles on metals, and we have another few locations across the globe and e-commerce as well. Again, similar to what we've said on rag & bone, we think that could be a big opportunity for the new growth for the long-term. But again, we want to make sure that we do it the right way. Again, we are at the very early innings of launching that brand. We are also investing in marketing to make sure that -- to create and enhance augment that brand awareness with the consumer. We had a big event, for example, at Coachella a few months ago, where we had a big compound with a lot of events and parties with celebrities and social influencers, again, to really build up that awareness. So we are doing that as well. You saw some of that impact, of course, on our marketing and the P&L in the second quarter. But again, we think that there's opportunity globally. We just want to take the time to do it relatively well. And the good thing is, I think if you think about what we've done with the mother brand, I would say, the Guess? brand and the brand elevation over the last 2, 3 years in terms of really augment -- I mean, augmenting the aesthetic of the apparel line, increasing the quality of the product, the fabrication, we -- and then adjusting the price points accordingly to that. In a way, we have designed that void on the more casual side of the product assortment, slightly lower price point where we think that there's a role for now to play for the Guess Jeans brand. So that's -- I think if you look now the brand architecture with Guess Jeans, Guess? and then rag & bone, we are really talking to a very broad audience. And I think that's very exciting in terms of what lies ahead in terms of opportunities.

Yes. I think that last point, too, I mean, I think of it from my seat as the finance guy. I love the beauty of our model is that we have a lot of chips spread across the table. We don't -- and if you look at the diversification of our business. So we already have a lot of diversification built in and that we're in 100 different countries. We are in 25 different product categories. We're in different channels. So if that risk is spread. And the opportunity is there. And if you think about the architecture from a pricing perspective, these are creating incremental opportunities, incremental access to customers. So we're being very thoughtful and strategic about the way we're approaching this as well.

That's really helpful color. Given the broad-based nature of the business that you have today, I'm curious to get your thoughts on the industry and the health of the consumer outlook. How would you describe the current health of the consumer by geography today? What trends are you seeing in consumer spending? And how are these impacting your business?

Well, maybe I can use -- I mean, the challenge when you have a fairly complicated business model is that there's never 1 answer that fits. So maybe if I can talk about what we saw in the second quarter in different parts of our business and how that is informing the way we think about the rest of the year. So we -- as I mentioned earlier, we grew 10% in the second quarter, we delivered $733 million of revenue. We were up 13% in constant currency. So flying into a bit of a currency headwind in the second quarter. From a regional perspective, we actually over-delivered our revenues from -- against our expectations in our European wholesale business by about $20 million. We had expected -- some products were some shipments, which would slip from the second quarter into the third because of the Red Sea crisis and the disruptions in the supply chain that didn't happen. So we were able to over deliver our business there. Now that's just the timing, and I'll come back to Europe wholesale in a minute. In our retail businesses, both in Europe and in the Americas, we saw a consumer that was being prudent with their spending. There's a lot going on. Costs are still high in most markets in a lot of markets. So we saw some behavior. We had negative traffic or traffic headwinds in both Europe and in North America. We were able to offset in Europe with pricing and conversion to actually deliver positive comps, but less than we had expected for the period, similarly in North America, although where our comps were negative there. We underperformed what our expectation was. So that we sized that at around $20 million to $25 million shortfall in the second quarter. And our expectations for the rest of the year is that, that general trend will continue. So we reduced our expectations for the balance of the year for both the third and fourth quarters in our retail businesses. One thing that also happened, we don't control the currencies improved. The U.S. dollar weakened against many of the currencies that we operate with, so that turn, like I mentioned we were flying into a currency headwind in the second quarter. The currencies are now better than we had expected 3 months ago and actually turn if they hold where they are to a tailwind in the third and fourth quarter. So that's going to help offset some of that weakness in the retail business. Our European wholesale business. We saw a very strong performance as we were -- went to market with our Spring/Summer '25 collection. That business -- that order book was up about 10%, and that product largely begins to deliver in the fourth quarter. We believe that we are gaining share in the European wholesale customer base. They operate in the same market as our own retail stores. But what we believe is happening is that customers are allocating more of their buys to the best brand with the best assortments, and to companies that are being -- they're able to rely in terms of deliveries. One of the things that we learned coming out of -- in the supply chain crisis post-COVID was that we invested in inventories, not buying more, but just buying earlier to make sure that we were supporting our business and our partners' business. So that's allowing us to gain share. So we've increased our expectations in the European wholesale business to accommodate those orders. So the net effect of all of that, we did reduce our expectations. We still expect to grow between 9.5% and 11% this year. But again, it's an accumulation of various factors moving in both directions.

One of the questions that we're asking all companies at our conference is about their outlook for promotions. How should we be thinking about your company in the back half of the year? Will it be more or less promotional this holiday season versus last year? And how does that compare to your expectation for the industry?

Sure. I think this one. So I start by talking about what we've done over the last 2, 3 years in terms of brand elevation. Again, where we saw an opportunity, when we look at our product assortment to really compare to the competition, to really elevate the product offering, elevating the quality of the products and the line overall and being less promotional. And I think if you look at something we've said is if you look at our AURs in retail, today compared to prepandemic on average, they are up, again, depends across regions, but between 25% and 30%. And a lot of that is really driven by those 2 aspects. One is increasing MSRPs to align the prices to the quality of the product we're offering compared to the competition partly and then as well the fact we are less promotional. So we've done a lot around that. We -- in terms of how we buy inventory, we do the best we can to align inventory buys to the expected consumer demand. So we don't necessarily to have to be overly promotional. And that's no different in terms of how we're approaching the business today. I think if you look at our inventory position at the end of the second quarter, up give or take 9%. A lot of that actually one is because of the acquisition of rag & bone. And then two, if you look at our expectation in terms of outlook for revenues for the back half of the year, you'll see that the inventories at the end of Q2 are relatively aligned with that for the back half of the year. So here, we do not expect to be -- I mean, we expect actually to be less promotional than last year, and there are 2 components to that. The first one that actually relates more to what happened last year, especially in the European wholesale business, where -- last year, we had to be a bit more promotional, especially in the fourth quarter because of the inventory position. Today, we do not believe we are in a similar position. So we think we'd be able to run a more normalized business. So it's more about, again, lapping what happened last year. And in the Americas retail, based again on the inventory position and all the work we've done in the first half of the year, we think we have an opportunity to be slightly less promotional. But again, at the company level, what's expected to be more impactful is lapping last year, second half of the year. One thing I want to say is, of course, there's always going to be those times in the year where you have to be promotional, correct. I mean, I think if you think about Black Friday, for example, this is the time of the year, for example, where you have to play a little bit of the game. I think what you want to avoid as a brand is probably not having a 60% of the entire store. But there's always going to be those times where you have to play a little bit of the game. But again, at the end is mitigating the impact of maximizing, I should say, the impact of full price selling from a GP point of view.

That's very helpful. As we think about the consumer right now, one of the things that we've heard in the industry is that they're looking for value. What does that mean to you? And as we think about that, do you think that the consumer looking for value is a cyclical or a secular trend?

Yes. I mean we are hearing the same thing. And obviously, we are -- that's what we are seeing playing out in our business. And like Dennis mentioned, that's what we saw playing out in the second quarter going into the third quarter, where -- what we see is a consumer that's more price sensitive and more prudent in terms of how he or she is basically using their disposable income. And I think -- that's what we are seeing, playing out. And what it means is you have to -- I think it comes down to product and the value that you are focusing to the consumer in terms of the product and that's where we are really focusing on, correct? Yes.

It's really helpful. We only have a couple of minutes left. So let's move to margins. How do you think about the puts and takes in gross margins. We've seen a lot of different pieces with freight, IMUs, occupancy, et cetera. We've also been very focused on how to think about the moving pieces within cost pressures. How should we be thinking about loans? Are they going to be same, better or worse as we move into 2025?

Well, I think -- so with the way we see the trajectory of the business for the rest of this year. We saw some margin compression in the second quarter. We still expect to see margin compression in the third, but not to the same extent that we saw in the second quarter. Some of that -- and there's going to be some additional pressure. One of the things that we also talked about was that freight. We saw freight rates increase. So that will actually impact our third quarter more so than the second that abates in the fourth. The largest part of our spending in marketing will happen in the third quarter. So that's going to be the biggest impact on that from an operating margin perspective. But currencies begin to turn to start to abate some of those margin pressures. By the time we get to the fourth quarter, we start lapping some of the issues that Fabrice mentioned that should give us an opportunity to expand margins in the fourth quarter. Again, currencies become more of a lift there, marketing becomes more -- less impactful on our model in the fourth quarter as well. IMUs we're expecting are going to be contributors actually throughout the whole of this year.

That's really helpful. Putting it all together, how should we be thinking about a normalized operating margin for Guess?, Inc., now that you have new brands under your platform umbrella and so many moving pieces within your strategic initiatives?

Sure. So here, we haven't really communicated any long-term goal in terms of operating margin. So it's going to be hard to give you a number. But again, I think one thing I would keep in mind is we are in that investment model around marketing. We want to make sure that we are allocating the right amount of dollars to support our growth initiatives, whether it's rag & bone or Guess Jeans. I think during the call as well, for example, Carlos mentioned, we have other markets where we see a lot of opportunities and then a few, India, we are very excited about that market, the Middle East as well. So we want to make sure we invest there. So I would keep that in mind as I think about operating margin. But of course, we are also very committed to improve the productivity of the current store fleet, correct? And the expectation at some point that should help as well, should help from a productivity point of view. We'll have to see how the whole situation on the Red Sea plays out. As we mentioned, that's putting some short-term pressure from a profitability point of view. We don't know exactly when those cost pressure will abate, but potentially that should be also an opportunity as well. So it's a long answer here in the way, but to tell you we have some investments we need to make to support the growth initiatives, but we remain committed as well to drive operating margin leverage at some point. I think, hopefully, at some point, we have more to share with you, but that's one of our objectives as well.

That's great color. With that, I'm afraid we are about out of time. Thank you, Dennis. Thank you, Fabrice, and thank you to all in the audience for joining us today.

Thank you very much.

Thank you.