Guess?, Inc. (GES) Q1 2025 Earnings Call Transcript

We are working to navigate the current environment and drive improvements in this business. We feel good about our current product assortment and have been evaluating opportunities to drive more business and improve trends through marketing investments, including trialing different promotional actions, both in store and online.

Our Americas Wholesale business was strong and grew 21% in the quarter to $62 million driven mainly by rag & bone shipments as well as growth from Mexico. In Asia, revenues increased 3% to $73 million. And finally, our Licensing business performed extremely well, delivering a revenue increase of 21% to $29 million. We are pleased to have delivered on our earnings objectives for the quarter in addition to driving other key strategic initiatives across our business.

Growing Guess? and expanding our global reach has always been foundational to our strategic vision since Paul and his brothers started the business. In the 43 years since then, we have built a powerful platform, anchored by successful regional management centers across the globe. Our products are sold in over 100 countries, and we have developed broad capabilities to sell through virtually every distribution model. Between our company and our network of licensee partners, we bring products to market across 25 different categories, leveraging a diverse supply chain that we feel is truly best-in-class. As a result, we have built Guess? into the thriving $5.5 billion retail business that it is today.

Looking to the future, we continue to see multiple opportunities to further grow the Guess? brand. Beyond that, we can leverage our powerful platform to support more than just one brand. We know that with our capabilities, we can do more. We have built a platform that can power a bigger and broader business, generate synergistic growth and margin expansion and deliver significant value creation over time. This is what we call the inflection point, the evolution that I described in our last call. That was to leverage that platform and drive outsized growth through our multiple existing brands, through internally developed or segmented brands or through acquisitions of new brands.

Looking at our core Guess? brand, the business remains healthy and has been performing well. It is gratifying to see continued success in mature markets in Europe. In addition to that, we are excited about our growth opportunities in newer markets such as Turkey, Middle East, India and Latin America, where the business is enjoying strong momentum.

For our Guess? brand, handbags have been instrumental in growing the brand, and we see opportunities for further growth as we expand our footprint. That’s why we are pleased to share that Paul has renegotiated the extension of our handbag license, cementing that important partnership until 2039 on very favorable terms. The new contract included a $40 million upfront cash payment for the license renewal. Going forward, we see handbags as a strong category to augment the apparel assortment of other lifestyle brands beyond Guess? as well, rag & bone is a great example with this potential.

As you know, we have recently launched our Guess Jeans brand and just finished its first sales campaign, an exciting moment for our company. While it hearkens to the legacy of the Guess? brand, Guess Jeans is a completely new lifestyle brand with its own identity and multi-category assortment. It employs a brand new store concept with its own marketing strategy and advertising campaigns targeting the younger Gen-Z customer, but welcoming all customers.

Guess Jeans is an environmentally conscious brand that is introducing AirWash, an innovative stone washing process for denim that dramatically reduces water consumption. This, combined with an eco-friendly store environment defined by sustainable store materials, will connect well with its target consumer. And, with its casual offering and more compelling price points, it fits well within our overall brand and pricing architecture. The brand is already ahead of expectations with wholesale accounts showing great enthusiasm for the brand and product.

In France, Galeries Lafayette just featured Guess Jeans with a special installation on pop-up at their flagship Paris Haussmann store that included air wash visual effects, a denim customization station with a special product displayed [and signage] (ph). They also featured our first Guess Jeans advertising campaign on the [facade] (ph) of this iconic store, which is located in a very high traffic area in Paris.

Also in June, Italian department store chain La Rinascente plans to do a special Guess Jeans presentation in its flagship store on Corso Vittorio Emanuele in Milan. Under the direction of Nicolai Marciano, we just completed the first Guess Jeans advertising campaign featuring English fashion model and actress, Iris Law, the daughter of actor Jude Law. We believe her imprints will help expand the reach of the Guess Jeans brand globally online, imprint and across social media as well.

Also for the third year during Coachella weekend, Guess Jeans hosted celebrity guests and brand ambassadors in a luxury compound of homes. The weekend included multiple after parties hosted by top performing artists Anderson Paak, Metro Boomin and Kaytranada with a star studded guest list, including Billie Eilish, Ice Spice, J Balvin, Robert Pattinson, Justin and Hailey Bieber and more. The event proved enormously successful, resulting in nearly 4 billion impressions and 58 million views.

As you know, we completed our acquisition of rag & bone in Q1 through a partnership with WHP Global. Rag & bone is already a $250 billion business, a Heritage brand with proven longevity, with a diverse product offering for both women and men, commanding premium pricing and margins and appealing to a highly affluent consumer base. This nicely complements our existing business. Rag & bone also brings with it an experienced and talented management team led by Andrew Rosen. Paul and I want to welcome them all to the Guess? family.

We hope you also saw that on Tuesday, we announced Andrew’s appointment as Rag & Bone’s Executive Chair.

Andrew has been a key figure in American fashion, playing a pivotal role in rag & bone since 2006. With a wealth of experience and expertise, he guides the brand strategically to fulfill its mission. Despite only a few months passing, our teams are already collaborating effectively.

Paul has been actively engaged with Andrew, the rag & bone team, licensees, and country management teams to implement an ambitious plan for business growth through new product categories and international expansion. The brand is being advertised in both existing and new markets, with a focus on finding new store locations in key European cities. As rag & bone remains an independent fashion brand, our collaboration aims to improve operations by sharing resources and leveraging scale, including sourcing opportunities.

In terms of product development, we have made significant strides in reducing our SKU count to enhance efficiency in our global apparel lines. We have also streamlined our retail store assortments to increase productivity and service levels by concentrating on fewer SKUs.

Additionally, we are refining our pricing structure to align with customers’ perceived value for each product. Our focus on continuous improvement extends to all aspects of our operations, driving efficiencies and enhancing our overall performance.

To support our goals, we are transitioning to a third-party provider to manage our U.S. distribution center. This transition to GXO Logistics, our long-standing distribution partner in Europe, is expected to lower costs and improve service levels. The sale of the facility to GXO, with a leaseback arrangement, is underway and expected to be finalized by the end of the third quarter.

Looking ahead, we anticipate strong revenue growth exceeding $3 billion this year, a milestone for our company. Our commitment to optimizing operations and expanding our brand portfolio fuels our confidence in delivering outsized growth and value for our shareholders.

While traffic declined modestly, our teams drove AUR growth and a higher conversion. Key actions we took over the last six months continue to benefit our performance, including improved assortments, replenishment, and better customer experience.

Improving from fourth quarter trends. Our e-commerce comps declined by 1% in constant currency compared to Q1 of last year. Our revenues in European wholesale increased low-single-digit in constant currency. This was partially driven by earlier than anticipated shipments to wholesale accounts that welcomed our product to support good sales momentum in their businesses. The operating margin in our European business decreased by 80 basis points to negative 0.2% due to higher expenses and currency headwinds, partially offset by higher revenues and improved initial markups.

Revenues for Americas Retail increased roughly 0.5% in U.S. dollars and remained roughly flat in constant currency. The decline in retail comps in our core business in the U.S. and Canada was offset by the addition of rag & bone and robust retail comps in Mexico. American Retail comps including e-commerce declined 8% in constant currency. In our U.S. and Canada stores, comps fell by 12% in constant currency as a result of lower levels of traffic and conversion.

As Carlos mentioned, we are taking action to improve our performance. Our U.S. and Canada e-com comparable revenues decreased by 1% compared to Q1 of last year. Lower traffic to our website was partially offset by business initiatives that drove a higher conversion rate. Americas Retail posted a negative 7.2% operating margin, a roughly five point decrease in operating margin compared to last year, which was driven by the unfavorable impact from lower store comps and higher expenses, partially offset by lower markdowns and a higher IMU.

In Americas Wholesale, revenues increased by 21% in U.S. dollars and 18% in constant currency, mainly driven by the first time consolidation of rag & bone. Operating margin reached 22.7%, a decrease of 280 basis points from last year’s first quarter, mainly driven by the impact of new acquired businesses. In Asia, revenue grew 3% in U.S. dollars and 7% in constant currency. Revenue growth was mainly driven by our new business in India and e-commerce in China. Retail comps, including e-commerce for the region, decreased 5% in constant currency.

Operating margin in Asia decreased 30 basis points to 5.1%. Higher revenues were offset by lower product margins and higher expenses. And finally, our Licensing segment had a strong quarter and exceeded our expectations with revenues increasing 21% in both U.S. dollars and constant currency. The first quarter benefited from the amortization of the upfront payment for the handbag license renewal. Segment operating margin was 92% and operating profit increased by 20%.

In Q1, total company gross margin reached 41.9%, up 120 basis points from a year earlier, mainly driven by higher revenues, improved IMUs and lower markdowns, partially offset by higher expenses. Adjusted SG&A expense for the quarter increased 11% to $256 million. The increase was mainly due to rag & bone and investments in marketing and infrastructure, especially in Europe. For the quarter, our adjusted SG&A rate increased 2.8 points to 43.2%.

In the quarter, our adjusted operating margin for the company decreased 160 basis points to a negative 1.3%, driven by high expenses and an unfavorable impact from currencies, offset by higher revenues and IMU. In the quarter, we further reported non-operating net income of $36 million. This includes a net non-cash gain due to a re-measurement of derivatives related to our convertible notes and related hedge. With the completion of the convertible notes exchange transactions earlier this year, the accounting treatment changed to fair value, resulting in a non-operating, non-cash gain or loss.

Further, our GAAP corporate overhead expenses in the quarter were impacted by $11 million of charges related to the rag & bone transaction and the transition of our Kentucky distribution center to a third-party provider. And, we recorded an adjusted effective tax rate of 12.3%. Adjusted Q1 diluted loss per share was $0.27 compared to $0.7 of loss per share in last year’s first quarter.

Moving to the balance sheet. Our inventories were $555 million at the end of the quarter. Excluding rag & bone, our core inventories were down 4% in U.S. dollars and 1% in constant currency compared to last year, underscoring our disciplined inventory management. For the quarter, capital expenditures were roughly $20 million mainly driven by investments in store remodels, technology, and the acquisition of certain assets in Chile and Peru.

We ended the quarter with $243 million in cash compared to $299 million a year ago. The most significant drivers of that $56 million cash consumption over the last four quarters include $234 million of free cash flow, which includes $40 million of upfront payment in connection with the handbag license renewal more than offset by $185 million in dividends, the rag & bone acquisition of $57 million, $31 million in share repurchases and $12 million in minority capital distributions. We ended the quarter with a total of $279 million of borrowing capacity on our various global facilities. So, roughly $520 million of available liquidity.

As Carlos mentioned, we issued a special dividend of $2.25 per share to our shareholders, while also repaying $33 million in 2024 convertible notes due in April. Furthermore, in connection with the closing of the rag & bone acquisition, we increased the borrowing capacity of our asset-based revolving credit facility in North America by roughly $50 million. We also exchanged an additional tranche of our 2024 convertible notes, which had been due last month, deferring $15 million of maturities in 2028. We are very pleased with our free cash flow for the last 12 months, which improved more than $100 million compared to the prior period. That performance resulted from both our careful working capital management as well as sizable cash infusions from non-recurring events.

Turning to our outlook for fiscal year 2025.

Our outlook for the year remains consistent with what we shared in March. We anticipate a cautious consumer influenced by factors like inflation, credit availability, and higher interest rates will continue to impact our core retail business in the U.S. and Canada. We are implementing initiatives to drive improvements in this area as mentioned by Carlos earlier.

In Europe, we expect our business to remain strong, with the addition of rag & bone contributing significantly to this year’s growth. We will remain agile in response to new developments, both opportunities and challenges, due to the diversification of our model.

For fiscal year 2025, we project revenue growth of 10.7% to 12.7% in U.S. dollars, net of headwinds from the previous year’s extra week and currency exchange rates. We anticipate easing currency headwinds in the latter half of fiscal 2025.

Despite disruptions from the Red Sea, we anticipate freight cost headwinds and plan to invest in marketing and infrastructure to support growth initiatives. For the full year, we expect an adjusted operating margin between 7.7% and 8.5% and adjusted earnings per share between $2.62 and $3.

In the second quarter, we foresee revenue growth of 9% to 11% in U.S. dollars, with currency headwinds impacting growth by approximately two points. Adjusted operating margin is expected to be between 5.3% and 6.1% with adjusted earnings per share between $0.38 and $0.47.

Revenue growth is expected to accelerate in the third quarter, driven by the first outerwear shipment in North America and the new Guess Jeans brand. However, fourth-quarter revenue growth may be negatively impacted due to the anniversary of last year’s 53rd week.

We anticipate margin pressure to lessen in the third quarter compared to last year, with potential for expanded adjusted operating margin in the fourth quarter. Our free cash flow outlook remains unchanged, with an estimated free cash flow of around $160 million for the full year. Our focus is on investing in our brands and businesses for sustainable growth while maintaining disciplined capital allocation.

In conclusion, we are optimistic about our growth prospects and remain committed to achieving operational excellence through data analytics. Our strategic objectives will guide us in driving sustainable profitable growth and delivering meaningful shareholder returns. We are now open for questions. In terms of revenue, as Carlos just mentioned, our guidance remains consistent with strong growth in revenue, adjusted operating margin, and adjusted EPS at the top end of 8.5% and $3 per share.

For the second quarter, we are expecting U.S. dollar revenue growth between 9% and 11%, adjusted operating margin between 5.3% and 6.1%, and EPS between $0.38 and $0.47. This is in line with our expectations for the second quarter, with some adjustments due to performance in European wholesale customers and softness in the Americas retail business.

Looking ahead to the back half of the year, we see opportunities for adjusted operating margin expansion, especially in the fourth quarter, which is traditionally our strongest revenue quarter.

Regarding the fourth quarter, we anticipate improved full price selling, lower markdowns, and the impact of our partnership with rag & bone. We have been disciplined in our inventory buying strategy, focusing on future demand and optimizing margins by avoiding overbuying and discounting.

We are excited about the potential for rag & bone’s international expansion and are actively seeking retail space in Europe to support this growth. Thank you for your question, Eric.

We just made a big announcement with Andrew Rosen becoming the rag & bone chair and we couldn’t be more excited about the team. We couldn’t be more excited about the opportunities that we’re going to pursue together. So let me start there. But just we have a lot to do. We see two huge opportunities. One is to really increase the product assortment that the company has operated with. And the second big thing is about making this brand global and just bringing more into the international landscape. And we are working on both fronts, the two teams are.

And we believe that in order to represent the brand appropriately and give the kind of brand awareness that the brand needs, especially in a region like the European region, we definitely need store presence in some of the key cities. So we have been looking into the opportunities that could be available to us. The great thing is that, as you know, we have a major infrastructure and a great platform at Guess? and with an amazing team that is represented in multiple centers in the European markets and that whole team has been mobilized to really look for these opportunities.

Now just we haven’t selected anything yet, but we are moving very quickly. And then there is also a big opportunity on the product side to really look at opportunities for additional product categories and that today may be represented inside the assortment that the brand offers, but that they have — they show an opportunity be bigger businesses and we are thinking about also a licensing model for some of those categories as well.

With respect to stores in the domestic business and market, you’re right. I mean, the company has only 34 stores and we think that there is an opportunity to be expanded in a bigger way, but we are going slowly. The great thing is that this company did not have full access to capital in the past under the previous ownership and we think that we can provide that.

So, there is a lot more flexibility to move into that type of expansion. But we are going to go slowly. And again, this is just Andrew Rosen and the team are thinking about all these things. We are working on putting a new plan together. But all things are going to take some time and we’re going to move carefully and be very judicious with the way we employ capital. The great thing is that their retail business is highly successful.

Just they have great productivity in the stores that they do have. I think at every single store it produces positive cash flow and we would expect that that type of experience will be replicated with new stores.

Of course, we have incredible relationships with landlords and that is also the case with Andrew and the team at rag & bone. And we are working together to really maximize those relationships and make sure that we are just teaming up on things that are important to the brand and the growth. So, we couldn’t be more excited. And I know that it’s reasonably early. The product seems to be working really well, just our partners, I’m talking about department stores and the people that are buying the brand are super excited about the collections. And as a result, we see a very nice trend in our wholesale business and that should also translate into the retail business when the same product is sold at the point of sale in retail, same thing with the e-commerce business.

So, overall very, very happy and excited about the future for the brands and for us together.

Eric Beder

Just a quick follow-up. So, for the first time you talked about the platform being levered for other brands and being able to take it like rag & bone to kind of the next level. When you look out longer term here three, four, six, whatever amount of years, do you see Guess? as kind of this multi-branded platform that leverages its worldwide connections to have like three or four of these different brands? And I guess is that acquisition or is that a combination of acquisition and internal like you’re doing with Guess Jeans? Thank you.

Carlos Alberini

Yes. Thank you, Eric. Yes. No, I mean, we do believe that the power of this platform is pretty significant and we do think that there is an opportunity here to bring other businesses through that platform, whether it’s from internally developed brands or segmented brands.

Just the Guess Jeans example is a great one where it’s not something that we necessarily fully develop, but because it is absolutely anchored in our heritage and what Guess? just has in its DNA. But it’s a separate brand and it’s definitely an incremental business, which by the way is doing very, very well. And we are excited about the opportunity for growth with that brand. But that is just an example.

Rag & bone is another great example of where we can use the platform that has been built over the last 43 years since Paul and his brother started the business just to be able to really optimize and grow those different businesses.

I think that it will be super premature to start thinking about, okay, now we’re going to add another one and another one. I think that right now we are fully focused on just growing our core business, which is a big one, but offers a lot of opportunities. And we are definitely putting a lot of energy into the rag & bone acquisition strategy.

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