Guess?, Inc. Reports First Quarter Results

Q1 Fiscal 2020 Revenues Increased 3% to $537
Million; Increased 8% in Constant Currency

Q1 Fiscal 2020 and Q1 Fiscal 2019 GAAP Net Loss
per Share of $0.27; Q1 Fiscal 2020 Adjusted Net Loss per Share of $0.25,
Compared to $0.23 in Q1 Fiscal 2019

LOS ANGELES–(BUSINESS WIRE)–Guess?, Inc. (NYSE: GES) today reported financial results for its first
quarter ended May 4, 2019.

Carlos Alberini, Chief Executive Officer, commented, “I am pleased with
our progress this period, as we had another quarter of solid performance
with strong revenue growth, improved gross margins and well managed
expenses. We reported a revenue increase of 3% in U.S. dollars and 8% in
constant currency. Our business in the Americas and Europe posted strong
revenue growth, which was partially offset by weakness in Asia. During
the quarter we were also able to complete a convertible debt transaction
at very favorable terms to deploy funds to buy back Company shares.”

Mr. Alberini concluded, “I couldn’t be more excited about our Company’s
future. Guess today has a powerful global network, significant brand
relevancy and is attracting a new generation of young customers who love
our brand. We continue to see significant white space to grow globally
and our opportunities to improve operations and reduce costs are very
material. I am confident that our potential to create significant
shareholder value is strong.”

Adjusted Amounts

This press release contains certain non-GAAP, or adjusted, financial
measures. References to “adjusted” results exclude the impact of (i)
asset impairment charges, (ii) net gains on lease terminations, (iii)
certain professional service and legal fees and related costs, (iv)
non-cash debt discount amortization on our convertible senior notes and
(v) the related tax effects of the foregoing items, in each case where
applicable. A reconciliation of reported GAAP results to comparable
non-GAAP results is provided in the accompanying tables and discussed
under the heading “Presentation of Non-GAAP Information” below.

Convertible Senior Notes. In April 2019, the Company
issued $300 million aggregate principal amount of 2.00% convertible
senior notes due 2024 in a private offering, for which it received total
cash proceeds of $296.2 million, net of the initial purchasers’
discounts and commissions and offering costs of $3.8 million. In
connection with the issuance of these notes, the Company (i) entered
into convertible note hedge transactions for which it paid an aggregate
$61.0 million and (ii) sold warrants for which it received aggregate
proceeds of $28.1 million. These transactions are intended to reduce the
potential dilution with respect to the Company’s common stock upon
conversion of the notes and/or offset any cash payments the Company may
be required to make in excess of the principal amount of the converted
notes.

Share Repurchases. The Company intends to use
substantially all of the net proceeds from the convertible senior notes
(after the hedge and warrant transactions) to repurchase shares of its
common stock. During the three months ended May 4, 2019, the Company
used $170 million of such proceeds to enter into an accelerated share
repurchase program (“ASR”), pursuant to which it received up-front
approximately 5.2 million shares (representing approximately $102
million (or 60%) of the $170 million notional amount of the ASR), with
the remaining portion expected to be completed by the end of the third
quarter of calendar 2019. During the three months ended May 4, 2019, the
Company also repurchased approximately 5.1 million shares of its common
stock in open market and privately negotiated transactions totaling
$99.6 million. Combined, these transactions resulted in the repurchase
of approximately 10.3 million shares for $201.6 million during the first
quarter of fiscal 2020, with the remaining portion of the ASR to be
determined based on the average volume-weighted price of the Company’s
shares during the term of the ASR (less an agreed discount).

First Quarter Fiscal 2020 Results

For the first quarter of fiscal 2020, the Company recorded GAAP net loss
of $21.4 million, a 0.7% deterioration compared to $21.2 million for the
first quarter of fiscal 2019. GAAP diluted loss per share was $0.27 for
the first quarter of both fiscal 2020 and fiscal 2019. The Company
estimates that currency had a minimal impact on diluted loss per share
in the first quarter of fiscal 2020.

For the first quarter of fiscal 2020, the Company recorded adjusted net
loss of $19.6 million, a 10.0% deterioration compared to $17.8 million
for the first quarter of fiscal 2019. Adjusted diluted loss per share
deteriorated 8.7% to $0.25, compared to $0.23 for the prior-year quarter.

Net Revenue. Total net revenue for the first quarter of
fiscal 2020 increased 3.0% to $536.7 million, compared to $521.3 million
in the prior-year quarter. In constant currency, net revenue increased
by 8.2%.

  • Americas Retail revenues increased 3.0% in U.S. dollars and 3.9% in
    constant currency. Retail comp sales including e-commerce increased 4%
    in U.S. dollars and 5% in constant currency.
  • Americas Wholesale revenues increased 13.6% in U.S. dollars and 15.5%
    in constant currency.
  • Europe revenues increased 2.2% in U.S. dollars and 12.3% in constant
    currency. Retail comp sales including e-commerce decreased 1% in U.S.
    dollars and increased 8% in constant currency.
  • Asia revenues increased 1.4% in U.S. dollars and 6.6% in constant
    currency. Retail comp sales including e-commerce decreased 15% in U.S.
    dollars and 10% in constant currency.
  • Licensing revenues decreased 4.9% in U.S. dollars and constant
    currency.

Operating Loss. GAAP loss from operations for the first
quarter of fiscal 2020 improved 1.7% to $24.5 million (including a $1.9
million favorable currency translation impact), compared to $24.9
million in the prior-year quarter. GAAP operating margin in the first
quarter improved 20 basis points to negative 4.6%, compared to negative
4.8% in the prior-year quarter, driven primarily by the favorable impact
from positive comparable sales in Europe and Americas Retail, higher
initial markups in Europe and Americas Retail and lower expenses related
to certain professional service and legal fees and related costs,
partially offset by overall deleveraging of expenses, mainly in Asia.
The impact of currency on operating margin for the quarter was minimal.

For the first quarter of fiscal 2020, adjusted operating loss
deteriorated 9.5% to $22.4 million, compared to $20.5 million in the
same prior-year quarter. Adjusted operating margin was negative 4.2%, a
deterioration of 30 basis points compared to the same prior-year
quarter, driven primarily by overall deleveraging of expenses, mainly in
Asia, partially offset by the favorable impact from positive comparable
sales and higher initial markups in Europe and Americas Retail.

  • Operating margin for the Company’s Americas Retail segment improved
    230 basis points to negative 1.0% in the first quarter of fiscal 2020,
    compared to negative 3.3% in the prior-year quarter, driven primarily
    by the favorable impact from positive comparable store sales and
    higher initial markups, partially offset by higher markdowns.
  • Operating margin for the Company’s Americas Wholesale segment
    increased 210 basis points to 16.9% in the first quarter of fiscal
    2020, compared to 14.8% in the prior-year quarter, due primarily to
    higher initial markups and overall leveraging of expenses.
  • Operating margin for the Company’s Europe segment improved 210 basis
    points to negative 7.8% in the first quarter of fiscal 2020, compared
    to negative 9.9% in the prior-year quarter, driven primarily by lower
    markdowns, leveraging of expenses due primarily to positive comparable
    sales and higher initial markups, partially offset by an unfavorable
    impact from business mix.
  • Operating margin for the Company’s Asia segment decreased 860 basis
    points to negative 3.8% in the first quarter of fiscal 2020, from 4.8%
    in the prior-year quarter, driven primarily by overall deleveraging of
    expenses.
  • Operating margin for the Company’s Licensing segment was flat at 88.4%
    in the first quarter of fiscal 2020, compared to the same prior-year
    quarter.

Other income, net, was $2.1 million for the first quarter of fiscal
2020, an improvement of $4.7 million, compared to other expense, net, of
$2.6 million in the same prior-year quarter. This change was driven
primarily by higher unrealized gains on non-operating assets and lower
net unrealized mark-to-market revaluations losses on foreign currency
balances, partially offset by lower net unrealized and realized
mark-to-market gains on revaluation of foreign exchange currency
contracts.

Impact from Adoption of New Lease Standard

During the first quarter of fiscal 2020, the Company adopted a
comprehensive new lease standard which superseded previous lease
guidance. The standard requires a lessee to recognize an asset related
to the right to use the underlying asset and a liability that
approximates the present value of the lease payments over the term of
contracts that qualify as leases under the new guidance. The standard
also requires expanded disclosures surrounding leases. The Company
adopted this guidance using the modified retrospective approach and
recorded a cumulative adjustment to increase retained earnings by
approximately $0.3 million, net taxes, with no restatement of prior
periods. In addition, the Company elected the package of practical
expedients permitted under the transition guidance within the new
standard, which among other things, allows the Company to carry forward
historical lease classifications. Under this new guidance, leases we
previously referred to as “capital leases” are now referred to as
“finance leases.”

The Company’s condensed consolidated balance sheet reflects the impact
of recording operating lease right-of-use assets and operating lease
liabilities. As of May 4, 2019, the operating lease right-of-use assets
totaled $921.1 million and the operating lease liabilities totaled
$981.3 million. The adoption of the standard did not materially impact
our condensed consolidated statements of loss or cash flows.

Impact from Adoption of Hedging Standard

The Company adopted new authoritative guidance during the quarter which
eliminated the requirement to separately measure and report
ineffectiveness for instruments that qualify for hedge accounting and
generally requires that the entire change in the fair value of such
instruments ultimately be presented in the same line as the respective
hedge item. As a result, there is no interest component recognized for
the ineffective portion of instruments that qualify for hedge
accounting, but rather all changes in the fair value of such instruments
are included in other comprehensive income (loss). Upon adoption, the
Company recorded a cumulative adjustment for the previously recognized
interest component on outstanding instruments that qualified for hedge
accounting, which resulted in a decrease to retained earnings and a
decrease to accumulated other comprehensive loss of approximately $2.0
million.

Dividends

During the first quarter of fiscal 2020, the Company announced that its
Board of Directors intends to reduce future quarterly cash dividends
that may be paid to holders of the Company’s common stock, when, as and
if any such dividend is declared by the Company’s Board of Directors,
from $0.225 per share to $0.1125 per share to redeploy capital and
return incremental value to shareholders through share repurchases.
Consistent with that prior announcement, the Company’s Board of
Directors has approved a quarterly cash dividend of $0.1125 per share on
the Company’s common stock. The dividend will be payable on July 5, 2019
to shareholders of record at the close of business on June 19, 2019.

Outlook

The Company’s expectations for the second quarter ending August 3, 2019
and its updated outlook for the fiscal year ending February 1, 2020 are
as follows:

Outlook for Total Company1
           
Second Quarter of Fiscal 2020

 

Fiscal Year 2020

 
Consolidated net revenue in U.S. dollars increase between 4.0% and 5.0% increase between 3.5% and 4.5%
 
Consolidated net revenue in constant currency2 increase between 7.0% and 8.0% increase between 6.0% and 7.0%
 
GAAP operating margin 4.5% to 5.0% 4.7% to 5.1%
 
Adjusted operating margin3 4.5% to 5.0% 4.8% to 5.2%
 
Currency impact included in operating margin4 (20) basis points 0 basis points
 
Cash interest expense, and amortization of loan fees related to
convertible senior notes
$1.7 million $5.3 million
 
Amortization of debt discount related to convertible senior notes $2.4 million $7.5 million
 
Estimated diluted shares outstanding5 72.1 million 72.9 million
 
GAAP EPS5 $0.24 to $0.27 $1.09 to $1.20
 
Adjusted EPS3, 5 $0.27 to $0.30 $1.19 to $1.30
 
Currency impact included in EPS4 $(0.02) $(0.03)
 
Estimated impact of convertible senior notes and share repurchases
included in GAAP EPS5, 6
$0.00 $0.02
 
Estimated impact of convertible senior notes and share repurchases
included in adjusted EPS5, 7
$0.03 $0.10
 

Notes:

1

    The Company’s outlook for the second quarter and fiscal year ending
February 1, 2020 assumes that foreign currency exchange rates remain
at prevailing rates and does not assume any impact from the
recently-announced potential expansion of U.S. tariffs on imports
from China and Mexico which could include apparel and accessories.
 

2

Eliminates the impact of expected foreign currency translation to
give investors a better understanding of the underlying trends
within the business.
 

3

The adjusted operating margin and adjusted EPS guidance for the
fiscal year 2020 reflect the exclusion of certain items which the
Company believes are not indicative of the underlying performance of
its business. Refer to the table below for a reconciliation of our
GAAP and adjusted outlook.
 

4

Represents the estimated translational and transactional gains
(losses) of foreign currency rate fluctuations within operating
margin and EPS measures presented.
 

5

These amounts rely upon estimates of future weighted average share
count including the impact from actual shares repurchased during the
first quarter of fiscal 2020 and the estimated impact of the
remaining shares yet to be repurchased under the ASR. These
estimates are subject to change and are dependent upon the stock
price for the ultimate quantity of shares repurchased as well as
timing of the repurchases.
 

6

Represents the estimated net impact of share repurchases, cash
interest expense, and amortization of debt discount and debt
issuance costs (related to the $300 million convertible senior notes
issued during the first quarter of fiscal 2020) on our GAAP EPS
outlook.
 

7

Represents the estimated net impact of share repurchases, cash
interest expense and amortization of debt issuance costs (related to
the $300 million convertible senior notes issued during the first
quarter of fiscal 2020) on our adjusted EPS outlook.
 

A reconciliation of the Company’s outlook for GAAP operating margin to
adjusted operating margin and GAAP earnings per share to adjusted
earnings per share for the second quarter ending August 3, 2019 and the
fiscal year ending February 1, 2020 is as follows:

Reconciliation of GAAP Outlook to Adjusted Outlook
               

Second Quarter of

Fiscal 2020

Fiscal Year 2020
 
GAAP operating margin 4.5% to 5.0% 4.7% to 5.1%
Certain professional service and legal fees and related costs1 —% 0.0%
Asset impairment charges2 —% 0.1%
 
Adjusted operating margin 4.5% to 5.0% 4.8% to 5.2%
 
GAAP earnings per share $0.24 to $0.27 $1.09 to $1.20
Certain professional service and legal fees and related costs1 $—

$0.00

Asset impairment charges2 $— $0.02
Amortization of debt discount3 $0.03

$0.08

 
Adjusted earnings per share $0.27 to $0.30 $1.19 to $1.30
 

Notes:

1

   

Amounts for the full fiscal year include certain professional
service and legal fees and related costs recognized during the
three months ended May 4, 2019 which the Company otherwise would
not have incurred as part of its business operations. The Company
is unable to predict future amounts as these expenditures are
inconsistent in amount and frequency and certain elements used to
estimate such items have not yet occurred or are out of the
Company’s control. As such, the Company has not considered any
future charges in the accompanying GAAP outlook.

 

2

Amounts for the full fiscal year include asset impairment charges
for certain retail locations recognized during the three months
ended May 4, 2019 that resulted from store under-performance and
expected store closures. The adjusted results do not assume any
additional asset impairment charges as the Company has recorded
amounts currently anticipated under GAAP.

 

3

Amounts for the second quarter and full fiscal year represent
amortization of the debt discount related to the $300 million
convertible senior notes issued during the first quarter of fiscal
2020.

 

On a segment basis, the Company expects the following ranges for
percentage changes for comparable sales including e-commerce (“comps”)
and net revenue in U.S. dollars and constant currency compared to the
same prior-year period:

Outlook by Segment1
                     
Second Quarter of Fiscal 2020 Fiscal Year 2020
U.S. Dollars Constant Currency2 U.S. Dollars Constant Currency2
Americas Retail:
Comps __ down LSD to up LSD __ up LSD
Net Revenue down LSD to up LSD down LSD to up LSD flat to up LSD up LSD
 
Americas Wholesale:
Net Revenue up MSD up MSD up LSD up LSD
 
Europe:
Comps __ up LSD to MSD __ up LSD
Net Revenue up MSD to HSD up LDD up MSD to HSD up LDD
 
Asia:
Comps __ down LDD __ down HSD
Net Revenue up LSD up MSD up LSD up LSD to MSD
 
Licensing:
Net Revenue down LSD __ down LSD __
             
Notes:

1

    As used in the table above, “LSD” is used to refer to the range of
Low-Single-Digits, “MSD” is used to refer to the range of
Mid-Single-Digits, “HSD” is used to refer to the range of
High-Single-Digits, and “LDD” is used to refer to the range of
Low-Double-Digits.
 

2

Eliminates the impact of expected foreign currency translation to
give investors a better understanding of the underlying trends
within the business.
 

Presentation of Non-GAAP Information

The financial information presented in this release includes non-GAAP
financial measures such as adjusted results, constant currency financial
information and free cash flow measures. For the three months ended May
4, 2019, the adjusted results exclude the impact of asset impairment
charges, certain professional service and legal fees and related costs,
non-cash amortization of debt discount on our convertible senior notes
and the applicable tax effects of these adjustments. For the three
months ended May 5, 2018, the adjusted results exclude the impact of
asset impairment charges, net gains on lease terminations, certain
professional service and legal fees and related costs and the applicable
tax effects of these adjustments. These non-GAAP measures are provided
in addition to, and not as alternatives for, the Company’s reported GAAP
results.

The Company has excluded these items from its adjusted financial
measures primarily because it believes these items are not indicative of
the underlying performance of its business and that the adjusted
financial information provided is useful for investors to evaluate the
comparability of the Company’s operating results and its future outlook
(when reviewed in conjunction with the Company’s GAAP financial
statements). A reconciliation of reported GAAP results to comparable
non-GAAP results is provided in the accompanying tables.

This release also includes certain constant currency financial
information. Foreign currency exchange rate fluctuations affect the
amount reported from translating the Company’s foreign revenue, expenses
and balance sheet amounts into U.S. dollars. These rate fluctuations can
have a significant effect on reported operating results under GAAP. The
Company provides constant currency information to enhance the visibility
of underlying business trends, excluding the effects of changes in
foreign currency translation rates. To calculate net revenue, comparable
sales and earnings (loss) from operations on a constant currency basis,
actual or forecasted results for the current-year period are translated
into U.S. dollars at the average exchange rates in effect during the
comparable period of the prior year. The constant currency calculations
do not adjust for the impact of revaluing specific transactions
denominated in a currency that is different to the functional currency
of that entity when exchange rates fluctuate. However, in calculating
the estimated impact of currency on our earnings (loss) per share for
our actual and forecasted results, the Company estimates gross margin
(including the impact of merchandise-related hedges) and expenses using
the appropriate prior-year rates, translates the estimated foreign
earnings at the comparable prior-year rates, and excludes the
year-over-year earnings impact of gains or losses arising from balance
sheet remeasurement and foreign currency contracts not designated as
merchandise hedges. The constant currency information presented may not
be comparable to similarly titled measures reported by other companies.

The Company also includes information regarding its free cash flows in
this release. The Company calculates free cash flows as cash flows from
operating activities less (i) purchases of property and equipment and
(ii) payments for property and equipment under finance leases. Free cash
flows are not intended to be an alternative to cash flows from operating
activities as a measure of liquidity, but rather provides additional
visibility to investors regarding how much cash is generated for
discretionary and non-discretionary items after deducting purchases of
property and equipment and payments for property and equipment under
finance leases. Free cash flow information presented may not be
comparable to similarly titled measures reported by other companies. A
reconciliation of reported GAAP cash flows from operating activities to
the comparable non-GAAP free cash flow measure is provided in the
accompanying tables.

Investor Conference Call

The Company will hold a conference call at 4:45 pm (ET) on June 6,
2019 to discuss the news announced in this press release. A live webcast
of the conference call will be accessible at
www.guess.com
via the “Investor Relations” link. The webcast will be archived on the
website for 30 days.

About Guess?

Guess?, Inc. designs, markets, distributes and licenses a lifestyle
collection of contemporary apparel, denim, handbags, watches, footwear
and other related consumer products. Guess? products are distributed
through branded Guess? stores as well as better department and specialty
stores around the world. As of May 4, 2019, the Company directly
operated 1,174 retail stores in the Americas, Europe and Asia. The
Company’s licensees and distributors operated 550 additional retail
stores worldwide. As of May 4, 2019, the Company and its licensees and
distributors operated in approximately 100 countries worldwide. For more
information about the Company, please visit www.guess.com.

Forward-Looking Statements

Except for historical information contained herein, certain matters
discussed in this press release or the related conference call and
webcast, including statements concerning the Company’s expectations,
future prospects, business strategies and strategic initiatives;
statements expressing optimism or pessimism about future operating
results, growth opportunities and projected sales (including comparable
sales), earnings, capital expenditures, operating margins, cost
reduction opportunities, results of the ASR and cash needs; and guidance
for the second quarter and full year of fiscal 2020, are forward-looking
statements that are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995.

Contacts

Guess?, Inc.
Fabrice Benarouche
VP, Finance and Investor
Relations
(213) 765-5578

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