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

Good afternoon, everybody. Thank you for joining us today. My name is Corey Tarlowe, I am Jefferies Specialty Retail Analyst. And I'm joined today by Dennis Secor and Fabrice Benarouche. Did I say that all right? Okay. I tried. And they are with Guess? Inc., and then I'll turn it over to Dennis for some opening comments.

Great. Thanks, Corey, and good afternoon, everybody. Thank you for joining us. Just before we begin, many of you will know that Guess? has been part of the Los Angeles community for the last 44 years. So many of our associates and customers and shareholders and other members of this community call L.A. their homes, and we are devastated by the impact that the fires have had on our community on the tragic loss of life and property. So our heart goes out to everyone in that community, and I know you join me in that. So let me just ask you to not now obviously, but take note of our safe harbor statements that we published with our filings with the SEC. What I'd like to do, though, is just give a quick overview of the company. For those of you who may not be as familiar with our story, share some strategic priorities, and then some recent performance highlights for the company. So Guess? was founded in 1981. And currently, our brands generate about $6 billion in revenue measured at full retail value. And $3 billion of those revenues sit on our own P&L. We're truly a global company, 3/4 of our revenues are generated from outside the United States, and our products are distributed in 100 different countries. And together with our licensee partners, we bring 25 different product categories to market, starting with apparel, but extending to numerous accessory categories. And we employ about 13,000 associates. We operate over 1,000 directly managed retail stores around the world. And when you include our partner stores, that number grows to about 1,600. We also operate e-comm sites in all of our regions. Regionally, our largest segment is Europe, where we operate 556 stores in addition to literally thousands of wholesale doors. And in the trailing 12 months, ended the third quarter. Europe has generated $1.5 billion in revenues for us, our largest market. Our next largest region is the Americas, where we operate 411 stores and work with wholesale partners as well. And our trailing 12 months in the Americas market is over $1 billion. Asia is next where we operate 90 stores trailing 12-month revenues there, $275 million. And finally, we operate a highly profitable licensing business where we generated roughly $120 million in sales over the last 12 months. So that's the footprint of our company. And now over the last several quarters, Carlos Alberini, who's our CEO, and was unfortunately unable to join us here today. But he's outlined 6 key strategic priorities that are really at the center of everything that we do as a company and how we deploy our resources. The first of those is organization and talent. We want a best-in-class team of engaged and committed individuals capable of leading us to the next level of performance and revenue growth. And we have many key global searches underway right now to complement our existing team, and that includes a search for a permanent CFO. Second is growth in our 44-year history, we've developed significant infrastructure and core competencies, and we intend to leverage those to drive revenue growth. That will include improving existing productivity growing organically in existing and in new markets, pursuing brand extensions and category expansion and considering opportunities that leverage our global infrastructure and network of licensees and wholesale partners, and our recent acquisition of rag & bone that we did in conjunction with WHP is a great example of that. Third is brand relevancy. We want to optimize our core Guess? brand architecture to be relevant to our three largest consumer groups, heritage, millennials and Gen Z. The addition of rag & bone in Guess? jeans, we believe, will allow us to reach attractive new customer segments, complementary to our core Guess? business. Fourth is customer centricity and digital expansion. We place the customer at the center of everything that we do. We plan to implement processes, tools and platforms to provide our customers with a seamless omnichannel experience and expand our digital business. Fifth is product excellence. We believe project is key to success in our business. We strive to design and make great products, and we'll extend our product offerings to provide our customers with products that support the different occasions of their lives. And finally, is optimization. We intend to operate at the highest level of efficiency and effectiveness. We plan to invest in our infrastructure and in technology and data analytics to improve our operations and our decision-making. So as to recent performance, we're not providing any color on our fourth quarter performance today. As is our practice, we will do that when we release our fourth quarter results in March. In November, though, we did update our outlook for the fiscal year, and that included full year U.S. dollar revenue growth between 7.1% and 8.1%, adjusted operating margin between 6.2% and 6.5% and adjusted EPS in a range of $1.85 to $2 per share. We also reported on our third quarter business where we grew revenues by 13%, largely driven by the rag & bone acquisition along with a modest level of growth from Guess?. Our European business grew 7% in the quarter, fueled by positive retail comps and by wholesale growth as well. Our Americas wholesale business grew 79%, largely driven again by the rag & bone acquisition, but also because of the internalization of our outerwear business, which previously had been a licensed business. Our North America retail business grew 12%, driven by the addition of rag & bone, which more than offset declines coming from our North American Guess? retail business, and I'll come back to that. And in these results, you can see the manifestation of several of those strategic imperatives and foremost is growth. The rag & bone acquisition is providing the lion's share of those -- this year's growth for us. That brand was already on a solid growth trajectory when we acquired it. We're working to leverage our platform to really supercharge that growth. We're already using our existing relationships to quickly bring the brand to market in new markets like Europe and beyond. We're seeing brand awareness in Europe even ahead of distribution. We're opening a store in Amsterdam and are pursuing many different other locations as well. We've already leveraged our licensee relationships, signing an enhanced handbag agreement and are working with our partners to bring even more categories to the brand. So that's a lot of progress in a relatively short period of time. We also highlight our progress with Guess? jeans, a new internally developed brand that speaks to a younger customer. In many ways, we're following a similar playbook. We've already opened three stores in Europe, and we're set to open one in Tokyo and another one in West Hollywood. We talked about North American retail and how our recent results, we believe, do not meet the potential of our brand and what we plan to do about that. We're currently reviewing our pricing strategies in the region, especially in factory stores to make sure that we're aligned with customer expectations and the competitive environment. Carlos on the call also talked about marketing, and how we're challenging ourselves to broaden our marketing capabilities. We conducted a brand review and benchmarking study for Guess? and based on that, we believe that there are opportunities for us to make incremental investments in marketing in areas like social media and others to connect more and differently with our customers. We've engaged an external partner to develop a social media strategy that speaks to all of our customers. And if you listen on our future calls, we'll share more about that important initiative. Ultimately, it's our goal to build a powerful marketing engine that can support both Guess? and other brands by driving more customers to our stores and websites. So I'll stop there and open up -- you know you have some questions for us. There's a lot going on, a lot that we're excited about, and let's take your questions.

That's great. Thank you, Dennis. Really appreciate that. I think one of the things that stands out to me when I look at the Guess? business is the idea -- and this is a relatively new idea, I think, is the idea of guess as a platform, the company, not just the brand, the company as a platform and how do you think about this and how do you position the business from an operational and financial perspective to then build and grow that platform?

So you sort of hit on it in your question, which is you kind of need to separate the company from the brand. And when you do that and you look at the Guess? -- the company has been in existence for 44 years. And if you look at the capabilities that we have built. So we have a management infrastructure in North America, very broad across multiple different disciplines. We have the same -- similar in Europe. We have management infrastructure in Asia. And as I alluded earlier, we operate in 100 different countries, either directly or through our partnerships. So we have access to a lot of the globe, and we have the ability to manage businesses there. So that exists. If you look at our capabilities in terms of distribution, we now have the internal know-how to operate virtually every distribution model known to mankind. We run our own stores, full price and outlets and partners run our Guess? branded stores, full price and outlets. We work with wholesale partners from large department stores, to the literally thousands that we have throughout Europe. And that's a very different model working with those big department stores to the mom-and-pops. We have over 25 different product categories that we can bring to market. So what we believe is that we have the capabilities to do what others simply cannot do or what would take others years significantly more time on their own than they can do on our platform. So we think that we have the ability to take a regional brand and extend it very quickly globally. We have the ability to take a mono brand and with our product categories turn it into a lifestyle brand. And we -- when Carlos has talked about this evolution of the company and summited the evolution in his mindset he described it as when he came back Carlos was previously the COO and President. He left in 2010 came back as the CEO in 2019. And he said, when he came back in 2019, his mindset was similar to the way he left, that to grow this business, we have to grow the Guess? brand. And what's evolved is that we still have opportunities with Guess? and parts of the business that aren't performing well that we need to address. But we can leverage that all those capabilities and partner with other brands and really grow things much more quickly than those brands could have done otherwise on their own. And rag & bone is the first manifestation of that. It's still early innings. We acquired that business in April. We obviously want to do it well and learn from it. But that's to me the power of this business model. It has the ability to manage things and grow things that others simply would not be able to do. Anything I missed in that?

No. And I think -- I mean you talked about rag & bone, there are other projects internally as well that we have really leveraged the platform that we have. I mean we've talked about the fact that we are internalizing the outerwear license from one of our licenses in North America because we have developed the capabilities internally to take over that business in Americas wholesale. We took also over the factory franchisee business in Korea because we had the expertise now on how to do it. So rag & bone is the continuation of that to a next level, of course, because it's a new brand, and it's an already very nice business.

That's great. As you think about Guess? brand, because we touched on Guess? the company, but the Guess? Brand specifically, what are some of the investments that you've made recently that you expect should continue to drive growth for the business? How sizable are those investments? And what do you think the impact could be both on an operational perspective and financials as well?

You want to...?

Sure. I think we've talked about a couple of those already. I mean, Carlos touched on that during the earnings call in Q3. I mean the first big one that we talked about is the investment in advertising and marketing, where -- when we look at our level of investments compared to the benchmark of our peers, we see that we are under investing. And if anything, when we look at the peers, we see that over time, they have actually increased their level of investments. So that's one area where we think that we should really focus on. And we started actually to do that in the second quarter. And the objective is to continue to increase the advertising and marketing investment. And it's not necessarily just about doing the same thing. It's looking at how we can be much more efficient in terms of reaching out the consumer, engage with them in a more efficient way. And I think Carlos mentioned that we have hired some consultants that are specialized in that domain and that they're going to add some projects in terms of really developing a full-blown plan in terms of how to really be much more efficient in this area. So that's one of the examples. Of course, Guess? jeans is another big one example in terms of where we are investing. It's a new brand that we are launching, that's going to -- the objective is that brand should really address and talk to a younger consumer with sharper price points, an assortment, which is probably leaning to our more basic goods apparel in terms of design, high emphasis as well on sustainability, which is very important for that younger consumer. So in there in terms of investment, of course, we've started to open some locations. I think we mentioned that. So in Europe, we've opened two, three stores. One in Germany, one in Amsterdam and then another one in Italy. We have launched the business there as well in wholesale. We are in the process of opening a store here in Los Angeles on Melrose, which is going to be a flagship for North America. And of course, kind of in relation with what we are talking about in terms of investment in advertising and marketing. We are also investing in marketing for Guess? jeans to create the brand awareness. For example, we had a big experiential event at Cochella towards a lot of impression worldwide. So we are very pleased with that. And we keep doing that as well over the globe actually. We also have some plans to open a flagship store in Japan that we think could be a very good opportunity for that brand.

That's very helpful. Obviously, this year, in the wake of you becoming a platform, you've acquired rag & bone. So I would love to just hear a little bit more color on rag & bone, what the growth is likely to appear like in the financials and how the acquisition has been going? And any color you can provide would be really helpful.

Sure. So I'll take this one. So first, like Dennis mentioned, we are very pleased with the acquisition of rag & bone, very pleased as well to have partnered with the WHP Global team. And we think there's a lot of opportunities there in terms of really, again, leveraging our platform we see very high level 2 dimensions where we can really accelerate the growth of rag & bone by plugging it on our platform. The first one is really from a geography point of view, when we -- in 2023, 9% of the revenues of rag & bone of that $250 million that generated back in 2023 was actually done in the U.S. domestically. And the remaining 10% was generated across Europe and Asia. And like Dennis mentioned, if you take us, if you take Guess?, I should say, 75% of the revenues of gas are generated outside of U.S. So that gives you an idea in terms of the potential for rag & bone. And the thing is if you think about rag & bone there's very little overlap. There's no real risk of cannibalization between rag & bone and the Guess? brand. If you look at the aesthetic, the ethos of the brand, the price points, it's very differentiated, and it's really talking to different consumers. So we really believe we have the ability to leverage our platform, for example, to accelerate the growth in Europe. We talk a lot about Europe, but you don't have to look at as far as Europe, you can look at Canada, for example, where the brand today has no real representation in retail, and we have a business in Canada or even Mexico, where we have a partnership with a joint venture partner. And Mexico has been a very good for us, both in retail and wholesale, and we believe, along with our partner, that rag & bone as very much a lot of potential in that market. And then the second I mentioned is really more from a product category or product assortment point of view, where I think so -- like Dennis mentioned, today, we have a very well-diversified product portfolio in Guess?. We have 25 different product categories. A lot of the product categories that are apparel are managed internally in terms of sourcing and design. And for the accessory categories such as handbags, footwear, eyewear and such, we rely on licensee partners with whom we have a lot of -- we've been doing business for a very long time. If you look at rag & bone, the product assortment is heavily today focused on apparel. Yes, there is some accessories, you're going to find some hand bags, you're going to find some footwear. But in terms of sales of penetration, it's relatively low. And there again, we believe that we can really have them accelerate the expansion of that product assortment and accessories. And one good example of that is handbag, which has been an amazing and very successful category for us worldwide. And we think we can really have them there in terms of accelerating and expanding. And if you look at the brand and what it stands for and the price points, there's really something very nice we could do there, and that's something that's in the works just to talk about it in terms of much shorter term in terms of the performance in the third quarter. It was -- there was puts and takes across China. I think when you put it all together, it was slightly below our expectations. Some of that was actually because of some wholesale timing of shipments being pushed out in the fourth quarter. Other than that, the business performed relatively in line with our with our expectations. So we were very pleased with that.

I'd just add that one of the other things that I think is important for us strategically with this acquisition. I talked about the difference confidence that we have as a company. Historically, M&A is not one of them. And this being the first, we want to make sure that we do it thoughtfully and we do it we do it well as we use the word to integrate them on to our platform, maybe the better concept is to plug them in to our platform because this was not a synergy play. We did not look at this in identify there's a lot of costs that we can take organizations that we could consolidate, although I think there is opportunities to leverage combined buy volumes to get better pricing. But -- but we want to do this well so that we learn how to bring another brand onto our platform. So when the next one opportunity comes along, we're able to acute it well. We don't -- we're not operating to a particular time line, but we want to make sure that we learn how to do this so that we don't miss the next opportunity.

That's very helpful. Could you maybe walk us through how to think about the bottom line growth and the different sort of puts and takes within margin as we look ahead?

Yes. I think there are two things that come to mind as we start to think about probably next year. You know that I think it's important to remember is the first one is currencies. As we've just said, we have a very diversified and global footprint. So our financials are kind of subject to currency fluctuation impact. And in the fourth quarter, at the beginning of fourth quarter, there was a strong strengthening of the U.S. dollar against a lot of currencies, especially the euro and that's one of the big drivers that push us to adjust our outlook for the fourth quarter. But again, as you start to think about next year, you have to be thoughtful about the fact that this happened just at the end of the of the fourth quarter. So we have to keep that in mind. And how is currency impacting our financials. There are high level, three different impacts. That's the first one which is translational. You know the simple fact that today, if we make EUR 100 of revenues or profit in euro, and it's less -- it's a much less in U.S. dollar as we create those euros, if you will. The second one is transactional. In Europe, for example, we purchased a lot of goods in U.S. dollar, we hedged some of that, but this is providing us just with some basically on protection only for so long. At some point is to feel the impact of that from a margin point of view. And that's going to exactly impact the margin. And the last point is really on the mark-to-market below operating profit, where we have to basically we measure some assets and liability based on exchange rates, and that has some impact, but below operating profit. So some impact on that and something to keep in mind, both from the revenue trajectory for next year exchange rates remain at the prevailing rate when we guided back at the end of November and then the margin impact. The second one is really around the impact of freight where -- as you all know, I mean, the Red Sea crisis has had some meaningful impact in terms of how goods are flowing, especially to Europe, where now who are not really able to go through the Suez Canal, they have to go around Africa, and that implies incremental cost and a little bit more delays in terms of receive the goods. So it's something to keep in mind. The -- there's been some fluctuation there. And then, of course, the last piece that's been probably on the minds of people in the last few weeks is tariffs with -- we're all looking at what the new administration is going to do. I think in the past, we've shown that we've been able to rebalance how we source from. Historically, we used to source like give or take globally more like 50% from China. Today, it's closer to like 30%. So there's more to be done, but we've been able to rebalance that over the last few years.

That's great. Thank you very much for all that color. Any closing remarks. Thank you so much for joining us today.

Thank you.

Thank you.