Guess’, Inc. (NYSE:GES) Q4 2024 Earnings Call Transcript
Guess', Inc. (NYSE:GES) Q4 2024 Earnings Call Transcript March 20, 2024
Guess', Inc. beats earnings expectations. Reported EPS is $2.01, expectations were $1.56. Guess', Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, everyone, and welcome to the Guess?' Fourth Quarter Fiscal 2024 Earnings Conference Call. I would like to turn the call over to Fabrice Benarouche, Senior Vice President of Finance, Investor Relations, and Chief Accounting Officer.
Fabrice Benarouche: Good afternoon, everyone and thank you for joining us today. On the call today with me are Carlos Alberini, Chief Executive Officer; and Markus Neubrand, Chief Financial Officer. During today's call, the company will be making forward-looking statements including comments regarding future plans, strategic initiatives, capital allocation and short and long-term outlooks. The company's actual results may differ materially from current expectations based on risk factors included in today's press release and the company's quarterly and annual reports filed with the SEC. Comments will also reference certain non-GAAP or adjusted measures. GAAP reconciliations and descriptions of these measures can be found in today's earnings release. Now, I will turn it over to Carlos.
Carlos Alberini: Thank you, Fabrice. Good afternoon, everyone. We appreciate you joining us today. On behalf of Paul and myself, I would like to begin by thanking all of our associates worldwide for their valuable contributions throughout the past year. Our teams performed very well delivering solid top line growth, improved gross margins, and disciplined expense performance. The results speak for themselves, and we couldn't be more proud of our team's accomplishments this year. We closed our fiscal year with a very strong fourth quarter performance resulting in adjusted earnings per share of $3.14 for the year. The last time that our company reached this level of EPS performance was 12 years ago in fiscal year 2012. Revenues for the year increased to $2.8 billion, up 3% in both U.S. dollars and constant currency, and we delivered an adjusted operating margin of 9.2%.
Our ability to deliver this performance was the result of our strong brand momentum around the world, the robust customer response to our great product assortment, and the amazing attitude and discipline our teams continue to demonstrate. Our performance in both the fourth quarter and the full fiscal year shows the benefits of our unique diversified business model and how we are leveraging our powerful platform across multiple product categories, geography, and channels of distribution. We are at an inflection point in our company's development, and we couldn't be more excited about our future. Before I turn to our fourth quarter performance, I want to touch on two exciting announcements. First, the special dividends. As you know, returning capital directly to our shareholders is a high-priority for our board.
Over the past five years, we have returned nearly $840 million in capital to shareholders, either through share repurchases or quarterly dividends. In line with our commitment to reward our shareholders, our Board approved a special dividend of $2.25 per share, in addition to the regularly quarterly dividend of $0.30 per share. Both of those dividends will be paid on May 3, 2024 to shareholders of record as of April 17, 2024. We are very pleased with this action and proud of our performance that enabled it. Next, I would like to turn to our recently announced acquisition of rag & bone with the global management firm, WHP Global. This is the first acquisition in the 43-year history of Guess?, and we are thrilled to add such an iconic brand to our portfolio.
As Paul noted at the time of our acquisition announcement, rag & bone is a brand that is well-known for its preeminence in American fashion, that over the years, has stayed true to its roots and founding values, with an unwavering commitment to quality and authenticity. The brand is known for blending traditional craftsmanship with modern cultural references. And over the years, it has become synonymous with effortless quality clothing for men and women, with an innovative-yet-understated New York aesthetic and a strong expertise in denim. The brand appeals to a very attractive customer base that is complementary to that of our Guess? and Marciano brands. Currently, rag & bone directly operates 34 stores in the U.S. and two stores in the UK.
The stores are highly productive and generate healthy forward contributions. The product is also distributed in high-end boutiques, select department stores, and through e-commerce platforms globally. Last year, rag & bone generated sales of $252 million and adjusted EBITDA of $18 million. We are excited about the opportunities to grow this brand, and I'll speak more about those later on the call. Now moving to our fourth quarter results. We are very pleased with our performance as we deliver results ahead of our expectations for revenue and earnings growth. Revenues grow by 9% in the period, and adjusted earnings from operations reached $130 million, growing 21% versus last year. We achieved an adjusted operating margin of 14.6% in the quarter, which was 150 basis points ahead of last year.
Our segment results were impressive this quarter, as all of our five business segments grew revenues with Americas Wholesale, Asia, Licensing, and Europe posting the biggest increases to last year, all segments, but Americas Retail posted operating earnings growth in the period and delivered operating margin expansion. Regarding product performance, we continue to see different levels of performance across regions, with accessories, footwear, and Marciano performing best during the quarter. We closed the year with a strong inventory position, in spite of the ongoing supply chain challenges that we are facing due to the Red Sea crisis. Inventories were down 9% at the end of the year, and our inventory composition was in line with our plan. During the last few years, we have been able to re-architect our business to optimize inventory productivity and cash flow generation.
We believe that these changes represent a permanent improvement to our model. During our last earnings call, I spoke briefly about our strategic planning process and the six critical objectives that we are focused on going forward. Just to remind you, this relates to organization and talent; growth; brand relevancy; customer simplicity and digital expansion; product excellence; and last, optimization to drive efficiency, profitability, and return on invested capital. I would like to provide an update on our ongoing work in connection with this objective. Starting with our organization and talent objective, we have completed an organizational assessment and have identified key opportunities to improve accountability and facilitate decision-making.
We plan to act on this assessment and develop detailed plans in the next few weeks. In addition, we remain committed to building strong management capabilities across the organization to support growth and have launched three key searches for senior roles that will be based in Europe. Regarding our growth objective, we made tremendous progress during the period. We have already completed the internalization of the G3 licensed businesses; finalized the design of all products, including full new collections of outerwear and dresses; taken orders from our wholesale customers; and we are in production as we speak. With respect to our new GUESS Jeans brand, the first seasons collection has been developed and offered to customers around the world.
The first sales campaign for GUESS Jeans has been completed and the results were ahead of our initial expectations. As part of the brand's launch, we have already secured a few locations to open new GUESS Jeans stores in the U.S. and several key cities in the European market. We strongly believe that this brand and its products will serve Gen Z consumers around the world very, very well. In connection with the launch of the GUESS Jeans brand, Nicolai Marciano led two events to launch the brand worldwide. In October, GUESS Jeans launched exclusively to its top press and trade partners in Milan with a private exhibition hosted at Spazio Maiocchi. This was an exclusive immersive event showcasing the history, innovation, and sustainability of GUESS Jeans.
Following Milan, GUESS Jeans had its first public introduction at the January 2024 edition of [The Duomo] (ph) in Florence. With over 3,000 people in attendance, it was a monumental event for the brand. The exhibition, which spanned across four days, featured a denim-centric retrospective of the brand, and showcased the first look of the next 40 years of denim, with the introduction of GUESS AIRWASH, a state-of-the-art sustainable alternative to stone washing. Also during the quarter, we negotiated the purchase of the Guess? business in Chile and Peru, which was built over the last several years by our exclusive distributor in that market. The business consists of 15 Guess? stores, an e-commerce business, and a hotel business. This acquisition was executed a few weeks ago by a joint venture that we formed with Grupo Axo, our partners in our Mexico business for the last 18 years.
The stores are well-located and they have the potential to deliver about $20 million in sales annually in the short term, as we reposition and recapitalize the business, including strengthening inventory buys that have been insufficient for some time in the market compared to the potential of that market. And speaking about growth, probably the most exciting news of fall relates to our recently announced acquisition of rag & bone that I mentioned earlier on the call. Paul has jumped in with both feet to build on this dream. We have an ambitious vision for rag & bone and we plan to expand its product offering to a combination of own product development and licensing-specific categories that we believe have significant potential for growth. We also plan to expand the brand's presence and distribution internationally.
Guess? and WHP Global combined have an outstanding global distribution network and powerful licensees that will enable us to drive the growth of the rag & bone business globally. Leading up to the signing of the agreement to acquire rag & bone, Paul and I had the opportunity to spend time with Andrew Rosen, Chair of the Board, and the rag & bone management team. And we couldn't be more impressed with the quality, expertise, and depth of the leadership and of the overall organization, including store personnel. We can't wait to begin working together. Turning finally to optimization of our operations, we just launched a project to convert our distribution center operation in the U.S. to a third-party provider. We selected our logistics partners in Europe to run our facility located in Louisville, Kentucky.
This company is the number one global company in the business. Our Kentucky operation currently services our entire U.S. retail and wholesale businesses. We also plan to sell that facility and our partner will lease it back to operate it. We are currently negotiating a sale transaction with several interested parties. This change should have a positive impact on our cost structure and the expected benefits have been incorporated into our guidance. We look forward to further updating you on our strategic plan as the year progresses. This includes specific initiatives to address the observations our consultants have identified together with other key initiatives and strategies that we have developed, such as plans to optimize our product assortments and pricing, grow our digital business, enhance customer engagement, and increase the use of data and technology, all with the goal to improve our decision-making and operations further.
Moving to our outlook for the new fiscal year, we expect to grow our top line between 11.5% and 13.5% and deliver revenues of over $3 billion for the first time in our company's history. We also plan to generate adjusted operating margin between 7.5% and 8.5% and adjusted earnings per share of $2.56 to $3. This outlook includes the benefits of the rag & bone acquisition, the growth of our core business, and the other growth initiatives that I mentioned earlier. Markus will elaborate further about our guidance in just a minute. In closing, we are very pleased with our results this year. I'm very proud of our team's accomplishments. The company's performance demonstrates how Paul's vision and our team's efforts over the last few years to elevate our brand and transform our business are paying off.
We are enjoying strong momentum across the world with the Guess? and Marciano brands and customers are responding well to our product assortments across categories. We appeal to three distinct customer groups with our Guess?, GUESS Jeans, and Marciano brands. And now, by adding rag & bone to our portfolio, we are positioned to expand into a more affluent and very attractive customer base. We have a strong and highly diversified business model and a solid capital structure. We have built a platform that can power a bigger business, generate synergistic growth, and margin expansion, and deliver significant value creation over time. We have expertise in virtually every distribution model in which our products are sold. We work with wholesale partners from large department stores to Mom & Pop.
And we have developed a network of licensee partners that supports our portfolio of several different product categories. Over the past 43 years, those powerful capabilities have clearly served the Guess? brand well, bringing us to the precipice of a $3 billion company. The inflection point, the evolution for us, is that we view these capabilities as a platform to drive outsized growth. A platform that gives us the power to do things that others simply cannot do; the power to take a smaller regional or national brand and make it global, the power to leverage our portfolio of product categories and build a mono-category brand into a lifestyle brand, the power to make something exponentially bigger because we can grow it across multiple dimensions.
That's not easy to do, but we feel that we have built the right platform to do it. This is why we are so excited about our future. As we build this bigger ecosystem, we will continue to be opportunistic with the use of capital to drive our performance and create value, including continuing to invest in the business and opportunistically consider strategic acquisitions as well as continue to return capital to our shareholders. And with that, I conclude my remarks and pass the call to Markus. Thank you. Markus, please go ahead.
Markus Neubrand: Thank you, Carlos, and good afternoon, everyone. We surpassed our expectations for revenues, operating profit, and earnings per share in the fourth quarter. We grew revenues by 9%, expanded gross margin, and carefully managed costs. All of which enabled us to deliver an adjusted operating profit growth of 21% compared to last year's fourth quarter. Let me take you through our fourth quarter results in more detail. Total company revenues in the fourth quarter were $891 million, with all segments exceeding expectations. The fourth quarter's extra week accounted for nearly two-thirds of the total revenue increase in the period. Turning to our Segment performance, starting with Europe; in the fourth quarter our European business growth continued, driven by the extra week and strong demand for our collections with revenues rising 9% in U.S. dollars and 10% in constant currencies.
Fourth quarter retail comps including e-commerce increased 6% in U.S. dollars and 7% in constant currency. Our stores achieved a strong store comp growth of 12% in constant currency, which was mainly due to continued high AUR apparels and higher conversion. Our e-commerce comps declined by 8% in constant currency, compared to Q4 of last year, with our own website performing better than marketplaces. Our revenues in European wholesale improved 6% to last year when adjusted for currency fluctuations. Supported by the GUESS Jeans launch, our European wholesale orders for the fall/winter 2024 collection has increased by mid single-digits in constant currencies. The operating margin in our European business increased by 200 basis points to 18%. Higher initial markups and higher revenues were partially offset by the unfavorable impact from currencies and higher markdowns.
Americas Retail posted a 1% increase in revenues in U.S. dollars and was flat in constant currency, mainly driven by the benefit of the extra week. American retail comps, including e-commerce declined 2% in constant currency. In our North American stores, comps also dropped by 2% in constant currency. While traffic remained under pressure, similar to third quarter trends, we are very pleased with the improved conversion and high units per transaction. Our U.S. and Canada e-com comparable revenues decreased by 3% compared to Q4 of last year. Lower traffic to our website was offset by business initiatives that drove a high average order value and the higher conversion rate. Americas Retail posted a 15% operating margin compared to 15.4% operating margin a year earlier.
Before the basis points decrease in operating margin was mainly driven by the unfavorable impact from negative stock comps, partially offset by the favorable impact of currency. In American wholesale, revenues increased by 44% in U.S. dollars and 39% in constant currency, mainly driven by higher shipments in the U.S. and continued strong momentum in Mexico. Operating margins reached 28.5%, a meaningful improvement of 7.6 points from Q4 of last year, mainly driven by improved products margins, the benefit of higher revenues and expense leverage. In Asia, revenue grew 18% in U.S. dollars and 19% in constant currency. Revenue growth was driven by the extra week. Net new stores in Korea, e-commerce in Korea and China and our new business in India, retails comps including e-commerce for the region decreased 1% in constant currency.
Operating margin improved 200 basis points to 4.8%, driven by higher revenues and partially offset by lower product margins and higher expenses. We are very pleased to return Asia to a full-year profit. We improved the full-year earnings from operations by $13 million from negative 5 million to positive 8 million, mainly driven by Greater China and Korea. And finally, our Licensing segment had a strong quarter, and exceeded our expectations with revenues increasing 15% in both U.S. dollars and constant currency. Handbags, footwear and eyewear had a very strong performance during the quarter. Segment operating margin was 92.7%, and operating profit increased by 21%. In Q4, total company gross margin reached 45.4%, up 120 basis points from a year earlier.
Improved IMUs and high revenues were partially offset by negative currency impact and higher markdowns. Adjusted SG&A expense for the quarter increased 8% to $275 million from $254 million a year earlier. The 53rd week accounted for more than half of the increase in adjusted SG&A expense. For the quarter, our adjusted SG&A rate improved 30 basis points to 30.8%. Improvement is due to leverage, partially offset by moderate inflationary pressures on our cost structure, investments in our infrastructure, especially in Europe and currency headwinds. On a constant currency basis, our adjusted SG&A increased 7%. We exceeded our expectations for adjusted operating profits as it rose to $130 million for the quarter, a 21% improvement compared with last year's fourth quarter.
Our adjusted operating margin reached 14.6%, 150 basis points higher than last year's Q4, mainly driven by higher revenues and higher IMU, partially offset by the negative currency impact, higher expenses, and higher markdowns. In the quarter, we reported non-operating net income of $30 million. The income was primarily due to an unrealized gain to mark our SERP and deferred compensation plan assets to market and to realize gain on the sale of other assets. And we recorded an adjusted effective tax rate of 17.5% in the fourth quarter. For the fiscal year 2024, our adjusted effective tax rate was 22.2%, 3.5 points higher than last year as we recorded a discrete tax benefit in the prior year. Adjusted Q4 diluted earnings per share was ahead of our expectations, that's $2.01 compared to $1.74 of earnings per share in last year's fourth quarter.
Moving to the balance sheet, we delivered on our plan to reduce inventory across all regions. We ended the quarter with $466 million, down 9% in U.S. dollars and 6% in constant currency compared to last year. Overall, we are pleased with our inventory composition and forward orders and feel we're well-positioned to support our business. Our receivables were $315 million, an 8% decrease compared to last year's fourth quarter. On a constant currency basis, receivables decreased by 5%. For the year, capital expenditures were $74 million, mainly driven by investments in store remodels, new stores, and technology. This compared to $90 million last year. We ended the quarter with $360 million in cash, compared to $276 million a year-ago. The most significant drivers of that $84 million cash builds over the last full quarters include $248 million of free cash flow offset by $63 million in dividends, debt repayments of $62 million, and $31 million of net outflows related to the January exchange of convertible notes transaction.
We ended the quarter with a total of $392 million of borrowing capacity on our various global facilities, so, roughly $752 million of available liquidity. Our annual cash flow significant exceeded our plans for the year. That performance resulted both from our careful working capital management as well as sizable cash infusions from non-recurring events, including a litigation settlement and an investment sale. Also, as we previously announced in January, we exchanged an additional tranche of our 2024 convertible notes, which had been due next month, deferring $67 million of maturities into 2028. Again, we are pleased with the strength of our balance sheet that enabled both decision to improve a special dividend of $2.25 per share in addition to the regular quarterly dividend of $0.13 per share.
Turning now to our outlook for fiscal year 2025, overall we expect to see cautious consumer that is mindful of discretionary purchases in light of inflation and high interest rates. Regardless of the external environment, we will remain focused, and expect to make progress in executing against the critical strategic objectives that Carlos discussed. We are expecting opportunities that will transform the direction of our core Guess? and Marciano businesses in fiscal year 2025, based on the growth drivers that Carlos mentioned in his remarks. Overall, we anticipate our core Guess? and Marciano businesses to increase revenues in the low to mid single-digit range in fiscal year 2025. We are very excited about the rag & bone acquisition, and we expect to close this transaction in the latter part of the first quarter of fiscal year 2025.
Therefore, we have included the benefit of this business in today's guidance. With the expectation that it will contribute roughly two-thirds of this year's total company and revenue growth. Based on these assumptions, I've outlined, for fiscal year 2025 we expect revenues will increase in the range of 11.5% to 13.5% in U.S. dollars, and 12.5% to 14.5% in constant currency. This includes a net growth impact of roughly 1.5 points on revenue growth from the loss of the 53rd reporting week in fiscal year 2024. Based on the prevailing environment, currencies will be a headwind on revenues in the first-half of fiscal 2025. As we consider this year's profitability, we expect the headwind on inbound freight from the Red Sea crisis is roughly two-thirds of our global sourcing volume has impacted.
We anticipate that the rate pressure will moderate in the second-half of fiscal 2025 and have incorporated the development in our outlook provided today. Our expectation is that rag & bone will be modestly accretive to earnings this year. These assumptions reflect the fact that we will make investments into the brand and support the distribution expansion into U.S. and internationally throughout this year. In addition, to support our growth drivers outlined earlier, we continue investing into our infrastructure. Based on these assumptions for the full-year, we expect an adjusted operating margin between 7.5% and 8.5% and adjusted earnings per share in the range of $2.56 to $3. Turning the first quarter, we have couple of factors to keep in mind as you model the revenue growth.
The rag & bone acquisition is expected to close later in the first quarter. In European wholesale, the timing of our deliveries will be a headwind of roughly $15 million on revenues in the first quarter compared to last year. Overall, our wholesale business in Europe continues to be healthy, and our shipments in the second and third quarters should more than compensate for the low volume in the first quarter. As a result, for the first quarter we expect revenues will increase in the range of 1% to 2% in U.S. dollars and 3% to 4% in constant currency. We expect an adjusted operating loss margin between 2.3% and 2.8%, and an adjusted loss per share between $0.37 and $0.41. Overall, we expect revenue growth to accelerate in the next two quarters of the year as the second quarter will be the first quarter to fully benefit from the rag & bone acquisition, and the first out of our shipments in North America are planned to be delivered in the third quarter.
Going into the fourth quarter, we expect that revenue growth will be impacted as we go anniversary last year's 53rd week. Turning to operating margin, we do expect an adjusted operating margin of 6% to 7% in the second quarter and a modest sequential improvement in the third quarter. The fourth quarter should represent an opportunity for adjusted operating margin expansion compared to last year. We anticipate generating a free cash flow of roughly $160 million for the full-year. With the expected closing of the rag & bone acquisition later in the first quarter of fiscal 2025, approximately 56.5 million of purchase price will become due. We are currently working with our bankers to include certain acquired assets from rag & bone in the borrowing base of our asset-based revolving credit facility in North America and increase our borrowing capacity.
Our priority is to invest in our brands and businesses to support sustainable growth. We will remain highly disciplined in the way we allocate capital across projects. In closing, our performance in the past fiscal year and our plans for fiscal 2025 demonstrate the strength of our diversified business model and talented global team. And with that, we can now open the call up for questions.
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