General
Unless the context indicates otherwise, when we refer to "we," "us," "our" or
the "Company" in this Form 10Q, we are referring to Guess?, Inc. ("GUESS?") and
its subsidiaries on a consolidated basis.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be contained in our other reports filed under the Securities Exchange Act of 1934, as amended, in our press releases and in other documents. Except for historical information contained herein, certain matters discussed in this Quarterly Report, including statements concerning the impacts of the COVID-19 pandemic, the conflict inUkraine and other events impacting the markets in which we operate; statements concerning our future outlook, including with respect to the third quarter and full year of fiscal 2023; statements concerning our expectations, goals, future prospects, and current business strategies and strategic initiatives; and statements expressing optimism or pessimism about future operating results and growth opportunities are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are frequently indicated by terms such as "expect," "could," "will," "should," "goal," "strategy," "believe," "estimate," "continue," "outlook," "plan," "create," "see," and similar terms, are only expectations, and involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from what is currently anticipated. Factors which may cause actual results in future periods to differ materially from current expectations include, among others: our ability to maintain our brand image and reputation; domestic and international economic or political conditions, including inflation and other events that could negatively impact consumer confidence and discretionary consumer spending; sanctions and export controls targetingRussia and other impacts related to the war inUkraine ; impacts related to the COVID-19 pandemic or other public health crises; risks relating to our indebtedness; changes to estimates related to impairments, inventory and other reserves, which were made using the best information available at the time; changes in the competitive marketplace and in our commercial relationships; our ability to anticipate and adapt to changing consumer preferences and trends; our ability to manage our inventory commensurate with customer demand; the high concentration of ourAmericas Wholesale business; risks related to the costs and timely delivery of merchandise to our distribution facilities, stores and wholesale customers; unexpected or unseasonable weather conditions; our ability to effectively operate our various retail concepts, including securing, renewing, modifying or terminating leases for store locations; our ability to successfully and/or timely implement our growth strategies and other strategic initiatives; our ability to successfully enhance our global omni-channel capabilities; our ability to expand internationally and operate in regions where we have less experience, including through joint ventures; risks relating to our$300 million 2.00% convertible senior notes due 2024 (the "Notes"), including our ability to settle the liability in cash; disruptions at our distribution facilities; our ability to attract and retain management and other key personnel; obligations or changes in estimates arising from new or existing litigation, income tax and other regulatory proceedings; risks related to the income tax treatment of our third quarter fiscal 2022 intra-entity transfer of intellectual property rights from certainU.S. entities to a wholly-owned Swiss subsidiary; catastrophic events or natural disasters; changes inU.S. or foreign income tax or tariff policy, including changes to tariffs on imports into theU.S. ; accounting adjustments to our unaudited financial statements identified during the completion of our annual independent audit of financial statements and financial controls or from subsequent events arising after issuance of this Quarterly Report; risk of future non-cash asset impairments, including goodwill, right-of-use lease assets and/or other store asset impairments; violations of, or changes to, domestic or international laws and regulations; risks associated with the acts or omissions of our licensees and third party vendors, including a failure to comply with our vendor code of conduct or other policies; risks associated with cyber-attacks and other cyber security risks; risks associated with our ability to properly collect, use, manage and secure consumer and employee data; risks associated with our vendors' ability to maintain the 36
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strength and security of information technology systems; changes in economic, political, social and other conditions affecting our foreign operations and sourcing, including the impact of currency fluctuations, global income tax rates and economic and market conditions in the various countries in which we operate; impacts of inflation and further inflationary pressures; fluctuations in quarterly performance; slowing in-person customer traffic; increases in labor costs; increases in wages; risks relating to activist investor activity; and the significant voting power of our family founders. In addition to these factors, the economic, technological, managerial, and other risks identified in "Part I, Item 1A. Risk Factors" of our most recent Annual Report on Form 10-K, "Part II, Item 1A. Risk Factors" herein and other filings with theSecurities and Exchange Commission , including but not limited to the risk factors discussed therein, could cause actual results to differ materially from current expectations. The current global economic climate, the impact of the COVID-19 pandemic, and uncertainty surrounding potential changes inU.S. policies and regulations may amplify many of these risks. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. COVID-19 Business Update The COVID-19 pandemic is continuing to negatively impact certain regions of our business, especially inAsia where our operations for the quarter endedJuly 30, 2022 were impacted by capacity restrictions and temporary store closures. Overall, this resulted in the closure of less than 1% of our directly operated stores as ofJuly 30, 2022 , mostly inAsia , the impact of which was minimal to our three and six months endedJuly 30, 2022 results. The COVID-19 pandemic has also contributed to disruptions in the overall global supply chain, contributing to industry-wide higher product and freight costs. We have been working actively to mitigate these headwinds to the extent possible through a number of global supply chain initiatives. In light of the fluid nature of the pandemic, we continue to carefully monitor global and regional developments and respond appropriately. We also continue to strategically manage expenses in order to protect profitability and to mitigate, to the extent possible, the effect of supply chain disruptions.
Business Segments
Our businesses are grouped into five reportable segments for management and internal financial reporting purposes: Americas Retail, Americas Wholesale,Europe ,Asia , and Licensing. Our Americas Retail, Americas Wholesale,Europe and Licensing reportable segments are the same as their respective operating segments. Certain components of ourAsia operating segment are separate operating segments based on region, which have been aggregated into theAsia reportable segment for disclosure purposes. Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before corporate performance-based compensation costs, asset impairment charges, net gains (losses) on lease modifications, restructuring charges and certain non-recurring credits (charges), if any. We believe this segment reporting reflects how our business segments are managed and how each segment's performance is evaluated by our chief operating decision maker to assess performance and make resource allocation decisions. Information regarding these segments is summarized in "Part I, Item 1. Financial Statements - Note 8 - Segment Information."
Products
We derive our net revenue from the sale of GUESS?, G by GUESS (GbG), GUESS Kids and MARCIANO apparel and our licensees' products through our worldwide network of directly-operated and licensed retail stores, wholesale customers and distributors, as well as our online sites. We also derive royalty revenue from worldwide licensing activities.
Foreign Currency Volatility
Since the majority of our international operations are conducted in currencies
other than the
Chinese yuan, euro, Japanese yen, Korean won, Mexican peso,
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Polish zloty, Russian rouble and Turkish lira), currency fluctuations can have a significant impact on the translation of our international revenues and earnings (loss) intoU.S. dollars. Some of our transactions, primarily those inEurope ,Canada ,South Korea ,China ,Hong Kong andMexico , are denominated inU.S. dollars, Swiss francs, British pounds and Russian roubles, exposing them to exchange rate fluctuations when these transactions (such as inventory purchases or periodic lease payments) are converted to their functional currencies. As a result, fluctuations in exchange rates can impact the operating margins of our foreign operations and reported earnings (loss), and are largely dependent on the transaction timing and magnitude during the period that the currency fluctuates. When these foreign exchange rates weaken versus theU.S. dollar at the time the respectiveU.S. dollar denominated payment is made relative to the payments made in the comparable period, our product margins have been and could continue to be unfavorably impacted. In addition, there are certain real estate leases denominated in a currency other than the functional currency of the respective entity that entered into the agreement (primarily Swiss francs, Russian roubles and Polish zloty). As a result, we may be exposed to volatility related to unrealized gains or losses on the translation of present value of future lease payment obligations when translated at the exchange rate as of a reporting period-end. During the first six months of fiscal 2023, the averageU.S. dollar rate was stronger against the euro, British pound, Turkish lira, Polish Slotzy, Canadian dollar, Japanese yen, Korean won, and Chinese yuan and weaker against the Russian rouble and Mexican peso, compared to the average rate in the same prior-year period. This had an overall unfavorable impact on the translation of our international revenues and on earnings from operations for the three and six months endedJuly 30, 2022 compared to the same prior-year periods. For the remainder of fiscal 2023, if theU.S. dollar remains relatively strong against fiscal 2022 foreign exchange rates, foreign exchange could negatively impact our revenues and operating results, as well as our international cash and other balance sheet items, particularly inCanada ,Europe (primarily the euro, Turkish lira, British Pound and Russian rouble) andMexico . Alternatively, if theU.S. dollar weakens relative to the respective fiscal 2022 foreign exchange rates, our revenues and operating results, as well as our other cash balance sheet items, could be positively impacted by foreign currency fluctuations during the remainder of fiscal 2023, particularly in these regions. At roughly prevailing exchange rates, we do expect currencies to continue to represent a significant headwind to revenues, operating profit and margin for the remainder of the fiscal year. We enter into derivative financial instruments to offset some, but not all, of the exchange risk on foreign currency transactions. For additional discussion regarding our exposure to foreign currency risk, forward contracts designated as hedging instruments and forward contracts not designated as hedging instruments, refer to "Item 3. Quantitative and Qualitative Disclosures About Market Risk."
Inflation Impacts
Our financial results have been and may continue to be impacted by inflationary pressures affecting our overall cost structure, including transportation, employee compensation, raw materials and other costs. We estimate certain of our costs are impacted by inflation and other factors as follows: Transportation. Our inbound and outbound transportation costs vary by the method of shipping, including air, ocean and ground. Each of these methods may be impacted by various factors, including inflation and other considerations, such as an imbalance between the overall freight capacity on the marketplace and demand. The increase in our transportation costs was primarily attributable to higher inbound freight costs.
Employee Compensation. We have been impacted by the ongoing shortage of
available qualified candidates for employment, as well as increases in
compensation to attract and retain employees. We continue to evaluate our
compensation and benefit offerings to be competitive with the current market and
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evaluate strategies to be more effective and efficient at all levels within the
organization, including how to best serve our customers.
Raw Materials. The costs of raw materials for our products have increased, both as a result of inflation and our ongoing initiatives to improve the quality and sustainability of our products. In addition, because a significant portion of our products are manufactured in other countries, declines in the relative value of local currencies versus theU.S. dollar have exacerbated many of these pricing pressures. We seek to minimize the impact of inflation by continuously optimizing our supply chain, including logistics, as well as efficiently managing our workforce. It is difficult to determine the portion of cost increases solely attributable to inflation versus other factors, such as the cost of improvements to our products and imbalances in the supply chain. These increased costs have negatively impacted our margins and expenses. Continued inflationary and other pressures could further impact our gross margin and selling, general and administrative expenses as a percentage of net sales if the sales price of our products does not increase with higher costs. Furthermore, prolonged inflationary conditions could have an adverse impact on consumer discretionary spending, which could negatively impact our sales and results in the future. In addition, inflation could materially increase the interest rates on any future debt we may incur. We expect inflationary pressures will persist in the near term. The extent to which such pressures may impact our business depends on many factors, including our customers' ability and willingness to accept price increases, our ability to improve our margins, and potential downward pricing pressures if our competitors do not also raise their prices. Please refer to "Part II, Item 1A. Risk Factors" of our most recent Annual Report on Form 10-K for further information on the potential impacts and risk associated with inflation.
Russia-Ukraine Conflict
We are currently operating inRussia through our wholesale and retail channels and we have immaterial wholesale operations through local wholesale partners inBelarus andUkraine . Our operations inRussia are operated primarily through Guess?CIS, LLC ("Guess CIS"), a majority-owned Russian subsidiary in which we had a 70% interest as ofJuly 30, 2022 andJanuary 29, 2022 . Guess CIS currently operates 43 retail stores inRussia and acts as a distributor for our wholesale partners inRussia . We also operate inRussia through other local wholesale partners and by selling directly to retail customers through our European online store. Prior toFebruary 2022 , we also sold directly to retail customers inUkraine andBelarus through our European online store. Our operations inRussia ,Belarus andUkraine represented less than 3% of the Company's total revenue for the year endedJanuary 29, 2022 and for the six months endedJuly 30, 2022 , with our operations inRussia comprising over 90% of this total revenue. As ofJuly 30, 2022 , our total assets inRussia , all of which are held by Guess CIS, represented less than 2% of our total assets, consisting primarily of leasehold right of use assets, store inventory, furnishings and fixtures, and receivables. We only maintain inventory inRussia in an amount sufficient for operating our Russian retail stores. We do not maintain inventory or hold any other significant assets inBelarus orUkraine . We do not rely, directly or indirectly, on goods sourced inRussia ,Belarus orUkraine . Other than such labor and services necessary to conduct our direct operations inRussia in the ordinary course of business, we do not rely, directly or indirectly, on services sourced inRussia ,Belarus orUkraine . There has been no material impact to our existing operations as a result of the ongoing conflict inUkraine , although we are limited in our ability to expand our business inRussia due to theU.S. ban on new investments inRussia described below under "-Impact of Sanctions and Trade Restrictions." With respect to our supply and distribution channels, we have experienced increased costs and transit times associated with deliveries related to ourRussia operations, due in part to new procedures and sanctions screening implemented in response to the conflict inUkraine and the imposition of related sanctions. These costs and delays have not materially impacted our business or results of operations. Additionally, retail deliveries for online orders toUkraine andBelarus have been suspended sinceFebruary 2022 due to increased logistics costs and other 39
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difficulties in delivering to these regions. While we intend to re-open online orders toUkraine andBelarus when appropriate, the suspension of these shipments has not had, and is not anticipated to have, a material impact on our business or results of operations. Our wholesale partner inUkraine partially suspended its operations at the outset of the conflict; however, sales were re-opened inJuly 2022 , and our business and results of operations were not materially impacted. In connection with our investment in Guess CIS, we are party to a put arrangement with respect to the securities that represent the remaining noncontrolling interest for Guess CIS. The put arrangement provides the noncontrolling interest holder of Guess CIS, a non-sanctioned Russian citizen, the right to compel the Company, through a wholly-owned European subsidiary, to purchase the remaining 30% of the total outstanding equity interest of Guess CIS at its discretion by providing written notice to the Company during the period afterDecember 28, 2020 , the fifth anniversary of the agreement, throughDecember 31, 2025 . The redemption value of the Guess CIS put arrangement is based on a multiple of Guess CIS's earnings before interest, taxes, depreciation and amortization, subject to certain adjustments. The carrying value of the redeemable noncontrolling interest related to the put arrangement was$9.8 million as ofJuly 30, 2022 . In addition, pursuant to an agreement entered into in 2018, the Company's European subsidiary,Guess Europe SAGL has also counter guaranteed up to$900,000 of Guess CIS's obligations under its local Russian guarantee line, as required by certain lease agreements.
Impact of Sanctions and Trade Restrictions
Our Russian operations are subject to various sanctions and export control measures targetingRussia ,Belarus , and the Russian-controlled regions ofUkraine (Crimea ,Donetsk , and Luhansk). These measures include: (i) blocking sanctions prohibiting dealings with various Russian senior government officials, and companies in various sectors important to the Russian economy, including major Russian financial institutions; (ii) expanded sectoral sanctions related to designated Russian entities' ability to raise capital; (iii) the disconnection of certain Russian and Belarusian banks from theSociety for Worldwide Interbank Financial Telecommunication ("SWIFT") financial messaging network; (iv) a ban on new investment inRussia ; (v) a ban on the provision of certain accounting, trust formation and management consulting services; (vi) bans on the import intothe United States of certain Russian origin products, including various energy products; (vii) bans on the conduct of business or investment activity in the Russian-controlledCrimea ,Donetsk and Luhansk regions ofUkraine ; and (viii) restrictions on the export of various products toRussia andBelarus , including certain dual-use industrial and commercial products, and luxury goods. Additionally, certain logistics operators have imposed bans on direct air deliveries toRussia and restrictions on land deliveries to and fromRussia ,Belarus andUkraine , none of which have had a material impact on our operations to date. We assessed the applicability of these sanctions and trade restrictions based on internal assessments of relevant regulations and concluded our existing operations inRussia andBelarus have not been materially affected by these sanctions and trade restrictions, although we are limited from further expansion of our business inRussia . All of our deliveries (both wholesale and retail) undergo sanctions screening, including screening for maximum product value of €300 per item and prevention of shipments to sanctioned final recipients. 40
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Our assessment of the impact of the various sanctions and export control
measures targeting
is subject to the following uncertainties and assumptions:
•The duration and extent of the armed conflict inUkraine ; •The impact of sanctions and trade restrictions targetingRussia andBelarus , and the possibility that such sanctions or trade restrictions may be expanded, or new sanctions or trade restrictions may be imposed; •Significant exchange rate fluctuation related to the Russian rouble during the first months of the conflict and the possibility of significant exchange rate volatility in the future; •Potential disruptions of normal cashflow resulting from the removal of Russian and Belarusian banks from the SWIFT financial messaging network and regulations of the Russian and Belarusian governments; •Disruptions of transport access to and fromRussia ,Belarus orUkraine ; and •The suspension of our online retail shipments toBelarus andUkraine . We continue to assess all of our operations inRussia to ensure compliance with applicable sanctions, including most notably theU.S. ban on new investment inRussia . See Part II, Item 1A. Risk Factors-Our business may also be affected by existing or future sanctions and export controls targetingRussia and other responses toRussia's invasion ofUkraine for additional information. We are actively monitoring the situation inUkraine . While the extent to which the Company's future operations inRussia ,Belarus andUkraine will be impacted by the ongoing conflict is impossible to predict, the impact is not expected to be material to the Company's results of operations, financial condition or cash flows. Strategy InMarch 2021 ,Carlos Alberini , our Chief Executive Officer, shared his updated strategic vision and implementation plan for execution, which included several key priorities to drive revenue and operating profit growth. These priorities are: (i) brand relevancy and brand elevation; (ii) product excellence; (iii) customer centricity; (iv) global footprint; and (v) functional capabilities; each as further described below: Brand Relevancy and Brand Elevation. We continue to optimize our brand architecture to be relevant with our three target consumer groups: Heritage, Millennials, and Generation Z. We have developed and launched one global line of product for all categories. We elevated our brand and improved the quality and sustainability of our products, allowing us to realize more full-priced sales and rely less on promotional activity. We continue to use unique go-to-market strategies and execute celebrity and influencer partnerships and collaborations as we believe that they are critical to engage more effectively with a younger and broader audience.
Product Excellence. We believe product is a key factor of success in our
business. We strive to design and make great products and will extend our
product offering to provide our customers with products for the different
occasions of their lifestyles. We will seek to better address local product
needs.
Customer Centricity. We continue to place the customer at the center of
everything we do. We plan to implement processes and platforms to provide our
customers with a seamless omni-channel experience and expand our digital
business.
Global Footprint. We continue to expand the reach of our brands by optimizing the productivity and profitability of our current footprint and expanding our distribution channels.
Functional Capabilities. We continue to drive operational improvements to
leverage and support our global business more effectively, primarily in the
areas of logistics, sourcing, product development and production, inventory
management, and overall infrastructure.
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Capital Allocation
We plan to continue to prioritize capital allocation toward investments that support growth and infrastructure, while remaining highly disciplined in the way we allocate capital across projects, including new store development, store remodels, technology and logistics investments and others. When we prioritize investments, we will focus on their strategic significance and their return on invested capital expectations. We also plan to manage product buys and inventory ownership rigorously and optimize overall working capital management consistently. In addition, we plan to continue to return value to shareholders through dividends and share repurchases. During fiscal 2022, the Board of Directors terminated our previous 2012$500 million share repurchase program (which had$47.8 million capacity remaining) and authorized a new$200 million share repurchase program. OnMarch 14, 2022 , the Board of Directors expanded the repurchase authorization by$100.0 million , leaving an available capacity of$249.0 million at that time. OnMarch 18, 2022 , in connection with this expanded authorization, we entered into an accelerated share repurchase agreement (the "2022 ASR Contract) with a financial institution (in such capacity, the "2022 ASR Counterparty") to repurchase an aggregate$175.0 million of our common stock. Under the 2022 ASR Contract, we made a payment of$175.0 million to the 2022 ASR Counterparty and received an initial delivery of approximately 3.3 million shares of our common stock onMarch 21, 2022 . We received a final settlement of an additional 5.2 million shares under the 2022 ASR Contract onJune 24, 2022 . Refer to "Part I, Item 1. Financial Statements - Note 4 - Stockholders' Equity" for further information on the 2022 ASR Contract. During the six months endedJuly 30, 2022 , we also repurchased approximately 0.5 million shares of our common stock in open market transactions totaling$11.7 million . Comparable Store Sales We reportNational Retail Federation calendar comparable store sales on a quarterly basis for our retail businesses which include the combined results from our brick-and-mortar retail stores and our e-commerce sites. We also separately report the impact of e-commerce sales on our comparable store sales metric. As a result of our omni-channel strategy, our e-commerce business has become strongly intertwined with our brick-and-mortar retail store business. Therefore, we believe that the inclusion of e-commerce sales in our comparable store sales metric provides a more meaningful representation of our retail results. Sales from our brick-and-mortar retail stores include purchases that are initiated, paid for and fulfilled at our retail stores and directly-operated concessions as well as merchandise that is reserved online but paid for and picked up at our retail stores. Sales from our e-commerce sites include purchases that are initiated and paid for online and shipped from either our distribution centers or our retail stores as well as purchases that are initiated in a retail store, but due to inventory availability at the retail store, are ordered and paid for online and shipped from our distribution centers or picked up from a different retail store. Store sales are considered comparable after the store has been open for 13 full fiscal months. If a store remodel results in a square footage change of more than 15%, or involves a relocation or a change in store concept, the store sales are removed from the comparable store base until the store has been opened at its new size, in its new location or under its new concept for 13 full fiscal months. Stores that are permanently closed or temporarily closed (including as a result of pandemic-related closures) for more than seven days in any fiscal month are excluded from the calculation in the fiscal month that they are closed. E-commerce sales are considered comparable after the online site has been operational in a country for 13 full fiscal months and exclude any related revenue from shipping fees. These criteria are consistent with the metric used by management for internal reporting and analysis to measure performance of the store or online sites. Definitions and calculations of comparable store sales used by us may differ from similarly titled measures reported by other companies. 42
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Other
We operate on a 52/53-week fiscal year calendar which ends on the Saturday
nearest to
same number of days as the six months ended
Executive Summary
Overview
Net earnings attributable to Guess?, Inc. decreased 60.8% to$24.0 million , or diluted net earnings per share ("EPS") of$0.35 per common share, for the quarter endedJuly 30, 2022 , compared to$61.1 million , or diluted EPS of$0.91 per common share, for the quarter endedJuly 31, 2021 . During the quarter endedJuly 30, 2022 , we recognized$1.9 million in asset impairment charges;$0.9 million in net gains on lease modifications;$1.3 million for certain professional service and legal fees and related (credits) costs; and$2.8 million for certain discrete income tax adjustments (or a combined$1.1 million positive impact after considering the related income tax benefit of$0.6 million ); and we excluded the dilutive share impact of the Notes in our adjusted diluted EPS (or a combined$0.04 negative per share impact). Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. was$22.9 million and adjusted diluted EPS was$0.39 per common share for the quarter endedJuly 30, 2022 . During the quarter endedJuly 31, 2021 , we recognized$1.5 million in asset impairment charges;$0.4 million in net gains on lease modifications;$0.1 million for certain professional services and legal fees and related (credits) costs;$2.8 million of amortization of debt discount related to our Notes; and$0.1 million for certain discrete income tax adjustments (or a combined$3.0 million , or$0.05 per share, negative impact after considering the related income tax benefit of these adjustments of$1.0 million ). Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. was$64.1 million and adjusted diluted EPS was$0.96 per common share for the quarter endedJuly 31, 2021 . References to financial results excluding the impact of these items are non-GAAP measures and are addressed below under "Non-GAAP Measures."
Highlights of our performance for the quarter ended
the same prior-year quarter are presented below, followed by a more
comprehensive discussion under “Results of Operations”:
Operations
• Total net revenue increased 2.2% to$642.7 million for the quarter endedJuly 30, 2022 , compared to$628.6 million in the same prior-year quarter. In constant currency, net revenue increased by 11.8%. • Gross margin (gross profit as a percentage of total net revenue) decreased 470 basis points to 42.1% for the quarter endedJuly 30, 2022 , compared to 46.8% in the same prior-year quarter. • Selling, general and administrative ("SG&A") expenses as a percentage of total net revenue ("SG&A rate") increased 80 basis points to 33.6% for the quarter endedJuly 30, 2022 , compared to 32.8% in the same prior-year quarter. SG&A expenses increased 5.1% to$216.0 million for the quarter endedJuly 30, 2022 , compared to$205.6 million in the same prior-year quarter.
• During the quarter ended
impairment charges, compared to
• During the quarter ended
lease modifications, compared to
• Operating margin decreased 560 basis points to 8.3% for the quarter endedJuly 30, 2022 , compared to 13.9% in the same prior-year quarter. The decrease in operating margin was mainly driven by 200 basis points from higher markdowns, 110 basis points from lower rent relief and government subsidies, 110 basis points from currency headwinds and 70 basis points from higher store labor costs in Americas Retail andEurope . Earnings from operations decreased 38.8% to$53.4 million for the quarter endedJuly 30, 2022 , compared to$87.4 million in the same prior-year quarter. 43
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• Other expense, net, totaled
compared to
• The effective income tax rate increased by 12.2% to 34.1% for the quarter
ended
Key Balance Sheet Accounts
•We had$174.4 million in cash and cash equivalents and no restricted cash as ofJuly 30, 2022 compared to$458.9 million in cash and cash equivalents and$0.2 million in restricted cash atJuly 31, 2021 . •As ofJuly 30, 2022 , we had$36.4 million in outstanding borrowings under our term loans and$58.3 million in outstanding borrowings under our credit facilities compared to$55.0 million in outstanding borrowings under our term loans and no outstanding borrowings under our credit facilities as ofJuly 31, 2021 . •During the six months endedJuly 30, 2022 , we made a payment of$175.0 million for share repurchases under the 2022 ASR Contract. During the six months endedJuly 31, 2021 , there were no share repurchases. •Accounts receivable consists of trade receivables relating primarily to our wholesale business inEurope and, to a lesser extent, to our wholesale businesses in theAmericas andAsia , royalty receivables relating to our licensing operations, credit card and retail concession receivables related to our retail businesses and certain other receivables. Accounts receivable increased by$1.7 million , or 0.6%, to$301.7 million as ofJuly 30, 2022 compared to$299.9 million atJuly 31, 2021 . On a constant currency basis, accounts receivable increased by$44.8 million , or 14.9%, when compared toJuly 31, 2021 .
•Inventory increased by
basis, inventory increased by
supply chain disruptions by ordering products earlier.
Global Store Count
During the quarter endedJuly 30, 2022 , together with our partners, we opened 27 new stores worldwide, consisting of 18 stores inEurope and theMiddle East , five stores inAsia and the Pacific, and four stores in theAmericas . Together with our partners, we closed 34 stores worldwide, consisting of 18 stores inEurope and theMiddle East , 11 stores inAsia and the Pacific, and five stores in theAmericas . We ended the second quarter of fiscal 2023 with stores and concessions worldwide comprised as follows: Stores Concessions Region Total Directly-Operated Partner Operated Total Directly-Operated Partner Operated United States 243 243 - - - - Canada 73 73 - - - - Central and South America 102 68 34 29 29 - Total Americas 418 384 34 29 29 - Europe and the Middle East 795 560 235 51 51 - Asia and the Pacific 418 120 298 254 113 141 Total 1,631 1,064 567 334 193 141
Of the total stores, 1,347 were GUESS? stores, 186 were GUESS? Accessories
stores, 59 were G by GUESS (GbG) stores and 39 were MARCIANO stores.
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Results of Operations
Three Months Ended
Consolidated Results
The following presents our condensed consolidated statements of income (in
thousands, except per share data):
Three Months Ended
Jul 30, 2022 Jul 31, 2021 $ change % change
Net revenue $ 642,690 100.0 % $ 628,624 100.0 % $ 14,066 2.2 %
Cost of product sales 372,189 57.9 % 334,538 53.2 % 37,651 11.3 %
Gross profit 270,501 42.1 % 294,086 46.8 % (23,585) (8.0 %)
Selling, general and
administrative expenses 216,043 33.6 % 205,617 32.8 % 10,426 5.1 %
Asset impairment charges 1,919 0.3 % 1,501 0.2 % 418 27.8 %
Net gains on lease
modifications (907) (0.1 %) (420) (0.1 %) (487) 116.0 %
Earnings from operations 53,446 8.3 % 87,388 13.9 % (33,942) (38.8 %)
Interest expense, net (2,776) (0.4 %) (5,548) (0.9 %) 2,772 (50.0 %)
Other expense, net (9,053) (1.4 %) (1,001) (0.1 %) (8,052) 804.4 %
Earnings before income tax
expense 41,617 6.5 % 80,839 12.9 % (39,222) (48.5 %)
Income tax expense 14,177 2.2 % 17,692 2.9 % (3,515) (19.9 %)
Net earnings 27,440 4.3 % 63,147 10.0 % (35,707) (56.5 %)
Net earnings attributable to
noncontrolling interests 3,478 0.6 % 2,085 0.3 % 1,393 66.8 %
Net earnings attributable to
Guess?, Inc. $ 23,962 3.7 % $ 61,062 9.7 % (37,100) (60.8 %)
Net earnings per common share attributable to common stockholders:
Basic $ 0.42 $ 0.94 $ (0.52)
Diluted $ 0.35 $ 0.91 $ (0.56)
Effective income tax rate 34.1 % 21.9 %
Net Revenue. Net revenue increased by $14 million , or 2%, compared to the same
prior-year quarter. In constant currency, net revenue increased by 12%. Roughly
50% of the increase was driven by higher wholesale shipments. Additionally, net
new store openings, operation of stores this quarter that had been temporarily
closed in the same prior-year quarter and positive store comp sales each
contributed to roughly 15% of the increase. Currency translation fluctuations
relating to our non-U.S. operations unfavorably impacted net revenue by $60.2
million compared to the same prior-year quarter.
Gross Margin. Gross margin decreased by 4.7% for the quarter ended July 30, 2022
compared to the same prior-year quarter, driven by a 390 basis point decrease in
product margin and an 80 basis point increase in occupancy rate. The lower
product margin was due to an unfavorable 200 basis point impact from higher
markdowns and an unfavorable 110 basis point impact from currency impact. The
higher occupancy rate was due to a 70 basis point unfavorable impact from lower
rent relief and a 60 basis point unfavorable impact from higher store occupancy
costs, partially offset by favorable leveraging of expenses from higher
revenues.
Gross Profit. Gross profit decreased $24 million for the quarter ended July 30,
2022 compared to the same prior-year quarter. The decrease in gross profit was
driven by $26 million of unfavorable impact from currency translation, $13
million due to higher markdowns, $5 million from unfavorable currency
transactional impacts, $5 million due to lower rent relief and $4 million higher
store occupancy expense, partially offset by $35 million of favorable impact due
to higher revenues in constant currency.
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Distribution costs include labor, inbound freight charges, purchasing costs and related overhead. Distribution costs related to supplying inventory to store locations within our retail business are included in cost of product sales. We also include net royalties received on our inventory purchases of licensed product as a reduction to cost of product sales. We generally exclude wholesale-related distribution costs from gross margin, including them instead in SG&A expenses. Additionally, we include retail store occupancy costs in cost of product sales. As a result, our gross margin may not be comparable to that of other entities. To ensure expenses are separated appropriately, we track activities at each distribution center location and record the costs associated with our shipments of goods either as cost of sales or as selling, general and administrative expenses, accordingly. SG&A Rate. Our SG&A rate increased 0.8% for the quarter endedJuly 30, 2022 from the same prior-year quarter. The unfavorable change in SG&A rate was mainly driven by 70 basis points related to higher labor in Americas Retail andEurope and a 40 basis point unfavorable impact from lower government subsidies. These unfavorable impacts were partially offset by leveraging of expenses from higher revenues. SG&A Expenses. SG&A expenses increased$10 million for the quarter endedJuly 30, 2022 from the same prior-year quarter. The increase in SG&A expenses, which included a favorable impact from currency translation, was mainly driven by$7 million of higher store selling expenses in Americas Retail andEurope and$3 million of lower government subsidies. Currency translation fluctuations relating to our foreign operations favorably impacted SG&A expenses by$18 million . Asset Impairment Charges. During the quarters endedJuly 30, 2022 andJuly 31, 2021 , we recognized$1.9 million and$1.5 million , respectively, of property and equipment and operating lease right-of-use assets impairment charges related to certain retail locations resulting from under-performance and expected store closures.Net Gains on Lease Modifications. During the quarters endedJuly 30, 2022 andJuly 31, 2021 , we recorded net gains on lease modifications of$0.9 million and$0.4 million , respectively, related primarily to the early termination of lease agreements for certain retail locations. Operating Margin. Operating margin decreased 5.6% for the quarter endedJuly 30, 2022 compared to the same prior-year quarter. The decrease in operating margin was due to unfavorable impacts of 200 basis points from higher markdowns, 110 basis points from lower rent relief and government subsidies, 110 basis points from currency translation fluctuations and 70 basis points from higher store labor costs in Americas Retail andEurope . Excluding the impact of higher asset impairment charges, certain professional service and legal fees and related (credits) costs and net gains on lease modifications, our operating margin would have decreased 5.4% compared to the same prior-year quarter. Earnings from Operations. Earnings from operations decreased by$34 million for the quarter endedJuly 30, 2022 compared to the same prior-year quarter. Currency translation fluctuations relating to our foreign operations unfavorably impacted earnings from operations by$8 million . Other Expense, Net. Other expense, net for the quarter endedJuly 30, 2022 was$9 million compared to$1 million in the same prior-year quarter. The change was primarily due to higher net unrealized and realized losses from foreign currency exposures compared to the same prior-year quarter. Income Tax Expense. Income tax expense for the quarter endedJuly 30, 2022 was$14 million , or a 34.1% effective income tax rate, compared to$18 million , or a 21.9% effective income tax rate in the same prior-year quarter. Generally, income tax expense for the interim periods is computed using the income tax rate estimated to be applicable for the full fiscal year, adjusted for discrete items, which is subject to ongoing review and evaluation by management. The change in the effective income tax rate was primarily due to a decrease in earnings, which included losses in certain tax jurisdictions for which the Company did not recognize an income tax benefit, in fiscal 2023 compared to the same prior-year period. 46
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Net Earnings Attributable to Guess?, Inc. Net earnings attributable to Guess?, Inc. decreased$37 million for the quarter endedJuly 30, 2022 compared to the same prior-year quarter. Diluted EPS decreased$0.56 for the quarter endedJuly 30, 2022 compared to the same prior-year quarter. We estimate a net positive impact of$0.06 from our adoption of the accounting guidance related to our Notes and share buybacks and a negative impact from currency of$0.17 on diluted EPS in the quarter endedJuly 30, 2022 when compared to the same prior-year quarter. Refer to "Non-GAAP Measures" for an overview of our non-GAAP, or adjusted, financial results for the quarters endedJuly 30, 2022 andJuly 31, 2021 . Excluding the impact of these non-GAAP items, adjusted net earnings attributable to Guess?, Inc. decreased$41 million and adjusted diluted EPS decreased$0.57 for the quarter endedJuly 30, 2022 compared to the same prior-year quarter. We estimate a net positive impact from our share buybacks of$0.05 and a negative impact from currency of$0.19 on adjusted diluted EPS in the quarter endedJuly 30, 2022 when compared to the same prior-year quarter.
Information by Business Segment
The following presents our net revenue and earnings (loss) from operations by
segment (in thousands):
Three Months Ended
Jul 30, 2022 Jul 31, 2021 $ change % change
Net revenue:
Americas Retail $ 181,655 $ 186,297 $ (4,642) (2.5 %)
Americas Wholesale 50,195 49,858 337 0.7 %
Europe 336,707 322,723 13,984 4.3 %
Asia 49,365 47,813 1,552 3.2 %
Licensing 24,768 21,933 2,835 12.9 %
Total net revenue $ 642,690 $ 628,624 14,066 2.2 %
Earnings (loss) from operations:
Americas Retail $ 23,921 $ 37,916 (13,995) (36.9 %)
Americas Wholesale 11,442 12,944 (1,502) (11.6 %)
Europe 34,538 51,417 (16,879) (32.8 %)
Asia (3,300) (4,847) 1,547 (31.9 %)
Licensing 21,206 20,154 1,052 5.2 %
Total segment earnings from operations 87,807 117,584 (29,777) (25.3 %)
Corporate overhead (33,349) (29,115) (4,234) 14.5 %
Asset impairment charges (1,919) (1,501) (418) 27.8 %
Net gains on lease modifications 907 420 487 116.0 %
Total earnings from operations $ 53,446 $ 87,388 (33,942) (38.8 %)
Operating margins:
Americas Retail 13.2 % 20.4 %
Americas Wholesale 22.8 % 26.0 %
Europe 10.3 % 15.9 %
Asia (6.7 %) (10.1 %)
Licensing 85.6 % 91.9 %
Total Company 8.3 % 13.9 %
Americas Retail
Net revenue from our Americas Retail segment decreased by $5 million , or 2% for
the quarter ended July 30, 2022 from the same prior-year quarter. In constant
currency, net revenue decreased by 2% compared to the same prior-year quarter.
The decrease in net revenue was driven by unfavorable impacts of $8 million from
negative comparable sales, $3 million from lower e-commerce sales and $1 million
from net permanent store closures. This was partially offset by favorable
impacts of $8 million from the operation of stores this quarter that had been
temporarily closed in the same prior-year quarter. Comparable sales (including
e-
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commerce) decreased 6% inU.S. dollars and 5% in constant currency compared to the same prior-year quarter. The inclusion of our e-commerce sales decreased the comparable sales percentage by 1% inU.S. dollars and a minimal impact in constant currency. As ofJuly 30, 2022 , we directly operated 384 stores in theAmericas compared to 389 stores atJuly 31, 2021 , excluding concessions, which represents a 1% decrease from the same prior-year quarter. Currency translation fluctuations relating to our non-U.S. retail stores and e-commerce sites had an unfavorable impact on net revenue of$1.8 million . Operating margin decreased 7.2% for the quarter endedJuly 30, 2022 from the same prior-year quarter. Approximately 350 basis points of the decrease was driven by higher markdowns, 300 basis points was due to the unfavorable impact of negative comps, 140 basis points was due to higher store labor costs and 130 basis points was due to lower COVID-19 relief compared to the same prior-year quarter. This was partially offset by 230 basis points of favorable impact from higher initial markups. Earnings from operations from our Americas Retail segment decreased by$14 million , or 37% for the quarter endedJuly 30, 2022 from the same prior-year quarter. The decrease was driven by a$6 million decrease from higher markdowns, a$4 million decrease from lower revenue, a$2 million decrease from higher store labor costs, and a$2 million decrease from lower COVID-19 relief. This was partially offset by a$4 million increase driven by higher initial markups.
Americas Wholesale
Net revenue from our Americas Wholesale segment increased by$0.3 million , or 1% for the quarter endedJuly 30, 2022 from the same prior-year quarter. In constant currency, net revenue increased by 2%. The increase in net revenues was driven by$6 million of favorable impact from higher shipments in our Central and South American business, mainly driven by increased sales inMexico . This was partially offset by a$6 million unfavorable impact from ourU.S. wholesale business. Currency translation fluctuations relating to our non-U.S. wholesale businesses had an unfavorable impact on net revenue of$1 million . Operating margin decreased 3.2% for the quarter endedJuly 30, 2022 compared to the same prior-year quarter. The decrease in operating margin was mainly driven by higher markdowns. Earnings from operations from our Americas Wholesale segment decreased by$2 million , or 12% for the quarter endedJuly 30, 2022 from the same prior-year quarter, mainly driven by$2 million of higher markdowns.
Net revenue from ourEurope segment increased by$14 million , or 4% for the quarter endedJuly 30, 2022 compared to the same prior-year quarter. In constant currency, net revenue increased by 21%. The increase in net revenue was mainly driven by$36 million higher wholesale revenue,$15 million from positive comparable store sales and$8 million in net new store openings, partially offset by$52 million of unfavorable currency translation fluctuations. Comparable sales (including e-commerce) decreased 4% inU.S. dollars and increased 10% in constant currency compared to the same prior-year quarter. The inclusion of our e-commerce sales negatively impacted the comparable sales percentage by 1% inU.S. dollars and and 2% in constant currency. As ofJuly 30, 2022 , we directly operated 560 stores inEurope compared to 524 stores atJuly 31, 2021 , excluding concessions, which represents a 7% increase from the same prior-year quarter. Operating margin decreased 5.6% for the quarter endedJuly 30, 2022 compared to the same prior-year quarter. The decrease in operating margin was almost entirely driven by a lower product margin. The decrease in product margin was mainly driven by a 210 basis point impact from currency translation fluctuations, a 170 basis point impact from lower initial markups and a 120 basis point impact from higher markdowns. Earnings from operations from ourEurope segment decreased by$17 million , or 33% for the quarter endedJuly 30, 2022 compared to the same prior-year quarter. The decrease in operating profit was mainly driven by$13 million of unfavorable currency impacts, including$8 million of unfavorable translation impact,$6 million of lower initial markups and$4 million due to higher markdowns, partially offset by the favorable impact of higher revenues. 48
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Net revenue from ourAsia segment increased by$2 million , or 3% for the quarter endedJuly 30, 2022 from the same prior-year quarter. In constant currency, net revenue increased by 15%. The increase in net revenue was driven by$3 million due to positive comparable store sales,$3 million in higher revenues inAustralia , and$1 million from higher revenue inSouth Korea as a result of the direct operation of certain new stores inSouth Korea , which we recently acquired from our wholesale partners. This was partially offset by$6 million of unfavorable currency translation impact. Comparable sales (including e-commerce) decreased 2% inU.S. dollars and increased 10% in constant currency compared to the same prior-year quarter. The inclusion of our e-commerce sales negatively impacted the comparable sales percentage by 4% inU.S. dollars and 3% in constant currency.
Operating margin increased 3.4% for the quarter ended
same prior-year quarter, mainly driven by leveraging of expenses.
Loss from operations from ourAsia segment decreased by$2 million , or 32% for the quarter endedJuly 30, 2022 compared to the same prior-year quarter, mainly driven by higher revenues. Currency translation fluctuations relating to ourAsia operations favorably impacted the loss from operations by$0.2 million .
Licensing
Net royalty revenue from our Licensing segment increased by$3 million , or 13% for the quarter endedJuly 30, 2022 from the same prior-year quarter, mainly driven by higher royalties in our handbag category. Earnings from operations from our Licensing segment increased by$1 million , or 5% for the quarter endedJuly 30, 2022 from the same prior-year quarter. The increase was driven by the favorable impact to earnings from higher revenues.
Corporate Overhead
Unallocated corporate overhead increased by$4 million , or 15% for the quarter endedJuly 30, 2022 compared to the same prior-year quarter, primarily due to higher personnel expenses and certain professional service and legal fees and related (credits) costs. 49 -------------------------------------------------------------------------------- Table of Content s Six months endedJuly 30, 2022 andJuly 31, 2021
Consolidated Results
The following presents our condensed consolidated statements of income (in
thousands, except per share data):
Six Months Ended
Jul 30, 2022 Jul 31, 2021 $ change % change
Net revenue $ 1,236,163 100.0 % $ 1,148,626 100.0 % $ 87,537 7.6 %
Cost of product sales 718,513 58.1 % 642,982 56.0 % 75,531 11.7 %
Gross profit 517,650 41.9 % 505,644 44.0 % 12,006 2.4 %
Selling, general and
administrative expenses 425,874 34.4 % 392,301 34.1 % 33,573 8.6 %
Asset impairment charges 3,463 0.3 % 1,942 0.2 % 1,521 78.3 %
Net gains on lease
modifications (1,508) (0.1 %) (2,565) (0.2 %) 1,057 (41.2 %)
Earnings from operations 89,821 7.3 % 113,966 9.9 % (24,145) (21.2 %)
Interest expense, net (5,295) (0.4 %) (11,100) (1.0 %) 5,805 (52.3 %)
Other expense, net (25,505) (2.1 %) (3,702) (0.4 %) (21,803) 589.0 %
Earnings before income tax
expense 59,021 4.8 % 99,164 8.6 % (40,143) (40.5 %)
Income tax expense 21,127 1.7 % 23,147 2.0 % (2,020) (8.7 %)
Net earnings 37,894 3.1 % 76,017 6.6 % (38,123) (50.2 %)
Net earnings attributable to
noncontrolling interests 5,962 0.5 % 2,949 0.2 % 3,013 102.2 %
Net earnings attributable to
Guess?, Inc. $ 31,932 2.6 % $ 73,068 6.4 % (41,136) (56.3 %)
Net earnings (loss) per common share attributable to common stockholders:
Basic $ 0.54 $ 1.13 $ (0.59)
Diluted $ 0.46 $ 1.10 $ (0.64)
Effective income tax rate 35.8 % 23.3 %
Net Revenue. Net revenue increased by $88 million or 8%, compared to the same
prior-year period. In constant currency, net revenue increased by 16%. Roughly
40% of the increase was driven by higher wholesale revenue, 30% from the
operation of stores in the current year period that had been temporarily closed
in the same prior-year period, slightly over 10% from net new store openings and
less than 10% from positive store comparable sales.
Gross Margin. Gross margin decreased 2.1% for the six months ended July 30, 2022
compared to the same prior-year period. The decrease in gross margin was driven
entirely by lower product margin. The product margin decrease was driven by 100
basis points due to higher markdowns, 90 basis points of unfavorable currency
impacts and 60 basis points of lower initial markups. Overall, occupancy rate
remained relatively flat, driven by lower COVID relief compared to the same
prior-year period, offset by leveraging of expenses.
Gross Profit. Gross profit increased $12 million for the six months ended July
30, 2022 compared to the same prior-year period. The increase in gross profit
was driven by $92 million due to higher net revenue in constant currency,
partially offset by $43 million of unfavorable currency translational impact,
$12 million of higher
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markdowns,
million
initial markups.
Distribution costs include labor, inbound freight charges, purchasing costs and related overhead. Distribution costs related to supplying inventory to store locations within our retail business are included in cost of product sales. We also include net royalties received on our inventory purchases of licensed product as a reduction to cost of product sales. We generally exclude wholesale-related distribution costs from gross margin, including them instead in SG&A expenses. Additionally, we include retail store occupancy costs in cost of product sales. As a result, our gross margin may not be comparable to that of other entities. To ensure expenses are separated appropriately, we track activities at each distribution center location and record the costs associated with our shipments of goods either as cost of sales or as selling, general and administrative expenses, accordingly. SG&A Rate. Our SG&A rate increased 0.3% for the six months endedJuly 30, 2022 from the same prior-year period. The unfavorable change in SG&A rate was due to a 100 basis point impact from higher store selling expenses and a 30 basis point impact from higher expenses related to certain professional service and legal fees and related (credits) costs, partially offset by higher revenues. SG&A Expenses. SG&A expenses increased by$34 million for the six months endedJuly 30, 2022 from the same prior-year period. The increase in SG&A expenses, which included a favorable impact from currency translation, was mainly driven by$25 million of higher store selling expenses in Americas Retail andEurope and$4 million of higher expenses related to certain professional service and legal fees and related (credits) costs. Currency translation fluctuations relating to our foreign operations favorably impacted SG&A expenses by$28 million . Asset Impairment Charges. During the six months endedJuly 30, 2022 andJuly 31, 2021 , we recognized$3.5 million and$1.9 million , respectively, of property and equipment and operating lease right-of-use assets impairment charges related to certain retail locations resulting from under-performance and expected store closures.Net Gains on Lease Modifications. During the six months endedJuly 30, 2022 andJuly 31, 2021 , we recorded net gains on lease modifications of$1.5 million and$2.6 million , respectively, related primarily to the early termination of lease agreements for certain retail locations. Operating Margin. Operating margin decreased 2.6% for the six months endedJuly 30, 2022 compared to the same prior-year period. The decrease in operating margin was driven by a 110 basis point impact from currency impacts, a 100 basis point impact from higher markdowns, a 100 basis point impact from higher store labor costs, and a 90 basis point impact from lower rent relief and government subsidies, partially offset by leveraging of expenses from higher revenues. Higher expenses related to certain professional service and legal fees and related (credits) costs unfavorably impacted operating margin by 30 basis points. Excluding the impact of higher asset impairment charges and certain professional service and legal fees and related (credits) costs and lower net gains on lease modifications, our operating margin would have decreased 2.1% compared to the same prior-year period. Earnings from Operations. Earnings from operations decreased by$24 million for the six months endedJuly 30, 2022 compared to the same prior-year period. Currency translation fluctuations relating to our foreign operations unfavorably impacted earnings from operations by$14 million . Other Expense, Net. Other expense, net for the six months endedJuly 30, 2022 was$26 million compared to$4 million in the same prior-year period. The change was primarily due to higher net unrealized and realized losses from foreign currency exposures and, to a lesser extent, net unrealized losses on our Supplemental Executive Retirement Plan ("SERP") related assets compared to net unrealized gains in the same prior-year period. Income Tax Expense. Income tax expense for the six months endedJuly 30, 2022 was$21 million , or a 35.8% effective income tax rate, compared to income tax expense of$23 million , or a 23.3% effective income tax rate, in the same prior-year period. Generally, income tax expense for the interim periods is computed 51
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using the income tax rate estimated to be applicable for the full fiscal year, adjusted for discrete items, which is subject to ongoing review and evaluation by management. The change in the effective income tax rate was primarily due to a decrease in earnings, which included losses in certain tax jurisdictions for which the Company did not recognize an income tax benefit, in fiscal 2023 compared to the same prior-year period. Net Earnings Attributable to Guess?, Inc. Net earnings attributable to Guess?, Inc. decreased$41 million for the six months endedJuly 30, 2022 compared to the same prior-year period. Diluted EPS decreased$0.64 for the six months endedJuly 30, 2022 compared to the same prior-year period. We estimate a net positive impact from our adoption of new accounting guidance related to our Notes and share buybacks of$0.09 and a negative impact from currency of$0.31 on diluted EPS in the six months endedJuly 30, 2022 when compared to the same prior-year period. Refer to "Non-GAAP Measures" for an overview of our non-GAAP, or adjusted, financial results for the six months endedJuly 30, 2022 andJuly 31, 2021 . Excluding the impact of these non-GAAP items, adjusted net earnings attributable to Guess?, Inc. decreased$40 million and adjusted diluted EPS decreased$0.55 for the six months endedJuly 30, 2022 compared to the same prior-year period. We estimate a net positive impact from our share buybacks of$0.06 and a net negative impact from currency of$0.33 on adjusted diluted EPS in the six months endedJuly 30, 2022 when compared to the same prior-year period.
Information by Business Segment
The following presents our net revenue and earnings (loss) from operations by
segment (in thousands):
Six Months Ended
Jul 30, 2022 Jul 31, 2021 $ change % change
Net revenue:
Americas Retail $ 348,140 $ 341,832 $ 6,308 1.8 %
Americas Wholesale 118,552 95,288 23,264 24.4 %
Europe 612,716 564,575 48,141 8.5 %
Asia 105,587 103,473 2,114 2.0 %
Licensing 51,168 43,458 7,710 17.7 %
Total net revenue $ 1,236,163 $ 1,148,626 87,537 7.6 %
Earnings (loss) from operations:
Americas Retail $ 38,187 $ 58,190 (20,003) (34.4 %)
Americas Wholesale 28,839 24,499 4,340 17.7 %
Europe 52,428 55,615 (3,187) (5.7 %)
Asia (6,787) (6,655) (132) 2.0 %
Licensing 45,650 39,585 6,065 15.3 %
Total segment earnings from operations 158,317 171,234 (12,917) (7.5 %)
Corporate overhead (66,541) (57,891) (8,650) 14.9 %
Asset impairment charges (3,463) (1,942) (1,521) 78.3 %
Net gains on lease modifications 1,508 2,565 (1,057) (41.2 %)
Total earnings (loss) from operations $ 89,821 $ 113,966 (24,145) (21.2 %)
Operating margins:
Americas Retail 11.0 % 17.0 %
Americas Wholesale 24.3 % 25.7 %
Europe 8.6 % 9.9 %
Asia (6.4 %) (6.4 %)
Licensing 89.2 % 91.1 %
Total Company 7.3 % 9.9 %
Americas Retail
Net revenue from our Americas Retail segment increased by $6 million , or 2% for
the six months ended July 30, 2022 compared to the same prior-year period. In
constant currency, net revenue increased by 2% compared to the same prior-year
period. The increase in net revenue was driven by $17 million from the
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operation of stores during the current year period that had been temporarily closed in the same prior-year period. This was partially offset by$4 million for each of lower e-commerce sales and negative comparable sales, and$2 million of net permanent store closures. Comparable sales (including e-commerce) decreased 2% inU.S. dollars and constant currency compared to the same prior-year period. The inclusion of our e-commerce sales decreased the comparable sales percentage by 1% inU.S. dollars and constant currency. As ofJuly 30, 2022 , we directly operated 384 stores in theAmericas compared to 389 stores atJuly 31, 2021 , excluding concessions, which represents a 1% decrease from the same prior-year period. Currency translation fluctuations relating to our non-U.S. retail stores and e-commerce sites had an unfavorable impact on net revenue of$2 million . Operating margin decreased 6.0% for the six months endedJuly 30, 2022 compared to the same prior-year period. Approximately 270 basis points of the decrease was driven by higher store labor costs, 260 basis points was due to higher markdowns, 140 basis points was due to lower rent relief and lower government subsidies and 120 basis points was due to negative store comparable sales. This was partially offset by higher initial markups. Earnings from operations from our Americas Retail segment decreased$20 million for the six months endedJuly 30, 2022 compared to the same prior-year period. Higher store labor costs drove$9 million of the decrease,$9 million was due to higher markdowns,$5 million was due to lower rent relief and government subsidies and$4 million was due to negative comparable store sales. This was partially offset by higher initial markups.
Americas Wholesale
Net revenue from our Americas Wholesale segment increased by$23 million , or 24% for the six months endedJuly 30, 2022 from the same prior-year period. Approximately 45% of the increase was driven by ourMexico wholesale business, 40% from ourU.S. wholesale business and 10% from ourCanada wholesale business. Currency translation fluctuations relating to our non-U.S. wholesale businesses had an unfavorable impact on net revenue of$0.5 million . Operating margin decreased 1.4% for the six months endedJuly 30, 2022 from the same prior-year period. The decrease in operating margin was driven by 280 basis points from higher markdowns and 90 basis points from lower government subsidies, partially offset by leverage from higher revenues. Earnings from operations from our Americas Wholesale segment increased by$4 million for the six months endedJuly 30, 2022 from the same prior-year period. Approximately$9 million of the increase is due to higher revenue, partially offset by$3 million due to higher markdowns and$1 million from lower government subsidies.
Net revenue from ourEurope segment increased by$48 million , or 9% for the six months endedJuly 30, 2022 from the same prior-year period. In constant currency, net revenue increased by 23%. The increase was driven by$48 million of higher wholesale shipments,$46 million from the operation of stores in the current year period that had been temporarily closed in the same prior-year period,$18 million of positive store comparable sales and$15 million of net new store openings, partially offset by$82 million of unfavorable currency translation impact. Comparable sales (including e-commerce) decreased 5% inU.S. dollars and increased 8% in constant currency compared to the same prior-year period. The inclusion of our e-commerce sales decreased the comparable sales percentage by 2% inU.S. dollars and 3% in constant currency. As ofJuly 30, 2022 , we directly operated 560 stores inEurope compared to 524 stores atJuly 31, 2021 , excluding concessions, which represents a 7% increase from the same prior-year period. Operating margin decreased 1.3% for the six months endedJuly 30, 2022 from the same prior-year period. The decrease in operating margin was driven by 270 basis points from lower initial markups, 230 basis points from unfavorable currency impacts and 100 basis points from lower rent relief and government subsidies, partially offset by favorable leverage from higher revenues. 53 -------------------------------------------------------------------------------- Table of Content s Earnings from operations from ourEurope segment decreased by$3 million , or 6% for the six months endedJuly 30, 2022 compared to the same prior-year period. The decrease in operating profit was mainly driven by$22 million of unfavorable currency impacts, including a$14 million unfavorable translation impact, a$16 million decrease in initial markups and a$6 million decrease in rent relief and lower government subsidies, partially offset by the favorable impact of higher revenues.Asia Net revenue from ourAsia segment increased by$2 million , or 2% for the six months endedJuly 30, 2022 compared to the same prior-year period. In constant currency, net revenue increased by 11%. The increase in net revenue was driven by$9 million from the impact of the direct operation of certain new stores inSouth Korea , which we recently acquired from our wholesale partners, and$4 million from ourAustralia wholesales business, partially offset by$10 million from the negative impact of the COVID-19 pandemic inChina . Comparable sales (including e-commerce) decreased 6% inU.S. dollars and increased 2% in constant currency compared to the same prior-year period. The inclusion of our e-commerce sales negatively impacted the comparable sales percentage by 2% inU.S. dollars and constant currency. Currency translation fluctuations relating to our Asian operations unfavorably impacted net revenue by$9 million .
Operating margin for the six months ended
to the same prior-year period.
Loss from operations from ourAsia segment increased by$0.1 million , or 2% for the six months endedJuly 30, 2022 from the same prior-year period. While we experienced approximately$5 million in lower profit inChina due to the impact of the COVID-19 pandemic, this was largely offset by approximately$1 million favorable impact from each of our businesses inSouth Korea ,Australia , andSingapore . Currency translation fluctuations relating to ourAsia operations unfavorably impacted the loss from operations by$0.1 million .
Licensing
Net royalty revenue from our Licensing segment increased by$8 million , or 18% for the six months endedJuly 30, 2022 compared to the same prior-year period, mainly driven by higher royalties in our handbag category. Earnings from operations from our Licensing segment increased by$6 million , or 15% for the six months endedJuly 30, 2022 compared to the same prior-year period. The increase was driven by the favorable impact to earnings from higher revenues. Corporate Overhead Unallocated corporate overhead increased by$9 million , or 15% for the six months endedJuly 30, 2022 from the same prior-year period, due to an increase of$4 million in expenses related to certain professional service and legal fees and related (credits) costs, an increase of$3 million due to higher personnel and performance based compensation and an increase of$1 million in advertising costs. Non-GAAP Measures The financial information presented in this Quarterly Report includes non-GAAP financial measures, such as adjusted results and constant currency financial information. For the three and six months endedJuly 30, 2022 andJuly 31, 2021 , the adjusted results exclude the impact of certain professional service and legal fees and related (credits) costs, asset impairment charges, net gains on lease modifications, non-cash amortization of debt discount on our Notes, the related income tax impacts of these adjustments, the impact from changes in the income tax law on deferred income taxes in certain tax jurisdictions, net income tax settlements and adjustments to specific uncertain income tax positions, as well as certain discrete income tax adjustments related primarily to an intra-entity transfer of intellectual property rights to a wholly-owned Swiss subsidiary, in each case where applicable. These non-GAAP measures are provided in addition to, and not as alternatives for, our reported GAAP results. 54
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These items affect the comparability of our reported results. The financial results are also presented on a non-GAAP basis, as defined in Section 10(e) of Regulation S-K of theSEC , to exclude the effect of these items. We have excluded these items from our adjusted financial measures primarily because we believe these items are not indicative of the underlying performance of our business and the adjusted financial information provided is useful for investors to evaluate the comparability of our operating results and our future outlook (when reviewed in conjunction with our GAAP financial statements).
A reconciliation of reported GAAP results to comparable non-GAAP results follows
(in thousands, except per share data):
Three Months Ended Six Months Ended
Jul 30, 2022 Jul 31, 2021 Jul 30, 2022 Jul 31, 2021
Reported GAAP net earnings attributable to
Guess?, Inc. $ 23,962 $
61,062
Certain professional service and legal fees
and related (credits) costs1
1,260 109 5,677 1,187 Asset impairment charges2 1,919 1,501 3,463 1,942 Net gains on lease modifications3 (907) (420) (1,508) (2,565) Amortization of debt discount4 - 2,781 - 5,562 Discrete income tax adjustments5 (2,772) 81 416 228 Income tax impact from adjustments6 (589) (1,036) (1,870) (1,471) Total adjustments affecting net earnings attributable to Guess?, Inc. (1,089) 3,016 6,178 4,883 Adjusted net earnings attributable to Guess?, Inc.$ 22,873 $
64,078
Net earnings per common share attributable to common stockholders:
GAAP diluted7
$ 0.35 $
0.91
Adjusted diluted7
$ 0.39 $ 0.96 $ 0.62 $ 1.17 Weighted average common shares outstanding attributable to common stockholders: GAAP diluted7 70,299 66,074 72,443 65,933 Adjusted diluted7 58,482 66,074 60,626 65,933
______________________________________________________________________
Notes:
1 Amounts recorded represent certain professional service and legal fees and related (credits) costs which we otherwise would not have incurred as part of our business operations. 2 Amounts represent asset impairment charges related primarily to impairment of property and equipment and operating lease right-of-use assets related to certain retail locations resulting from under-performance and expected store closures.
3 Amounts recorded represent net gains on lease modifications related primarily
to the early termination of certain lease agreements.
4 InApril 2019 , we issued$300 million principal amount of the Notes in a private offering. Prior to adoption of ASU 2020-06, we separated the Notes into liability (debt) and equity (conversion option) components. The debt discount, which represented an amount equal to the fair value of the equity component, was amortized as non-cash interest expense over the term of the Notes. We adopted ASU 2020-06 under the modified retrospective method as ofJanuary 30, 2022 . Upon adoption, the equity component was eliminated in the current period and recorded as an adjustment to retained earnings. Prior periods are not affected. 5 Amounts represent discrete income taxes related primarily to the adjustments from an intra-entity transfer of intellectual property rights to a wholly-owned Swiss subsidiary, impacts from cumulative valuation allowances and the income tax benefits from an income tax rate change due to net operating loss carrybacks. 6 The income tax effect of certain professional service and legal fees and related (credits) costs, asset impairment charges, net gains on lease modifications and the amortization of debt discount was based on the our assessment of deductibility using the statutory income tax rate (inclusive of the impact of valuation allowances) of the tax jurisdiction in which the charges were incurred. 7 Prior to adoption of ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40), for GAAP purposes, we incurred dilution above the initial strike price of our Notes of$25.78 . AtJuly 31, 2021 , there was no dilution related to the Notes for the period. We adopted ASU 2020-06 under the modified retrospective method as ofJanuary 30, 2022 . Upon adoption, we prospectively utilize the if-converted method to calculate GAAP diluted EPS. For GAAP purposes, we incur dilution of our Notes based on the initial conversion rate associated with the Notes. For the three and six months endedJuly 30, 2022 , shares used in computing diluted EPS increased by 11.8 million shares due to the change from the treasury stock method to the if-converted method. Diluted net income per share for the three and six months endedJuly 30, 2022 is calculated based on GAAP net income and diluted weighted-average shares of 70.3 million and 72.4 million, respectively, which also includes the potentially dilutive effect of our stock options, restricted stock units and the Notes. 55
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For adjusted diluted shares, we exclude the dilutive impact of the Notes at stock prices below$46.88 , based on the bond hedge contracts in place that will deliver shares to offset dilution. At stock prices in excess of$46.88 , we would have an obligation to deliver additional shares in excess of the dilution protection provided by the bond hedges. Our discussion and analysis herein also includes certain constant currency financial information. Foreign currency exchange rate fluctuations affect the amount reported from translating our foreign revenue, expenses and balance sheet amounts intoU.S. dollars. These rate fluctuations can have a significant effect on reported operating results under GAAP. We provide 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 and earnings (loss) from operations on a constant currency basis, operating results for the current-year period are translated intoU.S. dollars at the average exchange rates in effect during the comparable period of the prior year. To calculate balance sheet amounts on a constant currency basis, the current period balance sheet amount is translated intoU.S. dollars at the exchange rate in effect at the comparable prior-year period end. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different from the functional currency of that entity when exchange rates fluctuate. The constant currency information presented may not be comparable to similarly titled measures reported by other companies. In calculating the estimated impact of currency fluctuations (including translational and transactional impacts) on other measures such as earnings (loss) per share, we estimate gross margin (including the impact of foreign exchange currency contracts designated as cash flow hedges for anticipated merchandise purchases) and expenses using the appropriate prior-year rates, translate the estimated foreign earnings (loss) at the comparable prior-year rates and exclude the year-over-year earnings impact of gains or losses arising from balance sheet remeasurement and foreign exchange currency contracts not designated as cash flow hedges for merchandise purchases.
Liquidity and Capital Resources
We use our liquidity globally primarily to fund our working capital, occupancy costs, interest payments on our debt, remodeling and rationalization of our retail stores, shop-in-shop programs, concessions, systems, infrastructure, compensation expenses, other existing operations, expansion plans, international growth and potential acquisitions and investments. If we experience a sustained decrease in consumer demand, we may require access to additional credit, which may not be available to us on commercially acceptable terms, or at all. Generally, our working capital needs are highest during the late summer and fall as our inventories increase before the holiday selling period. In addition, in theU.S. , we need liquidity to fund share repurchases and payment of dividends to our stockholders. During the six months endedJuly 30, 2022 , we relied primarily on trade credit, available cash, real estate and other operating leases, finance leases, proceeds from our credit facilities and term loans and internally generated funds to finance our operations. We anticipate we will be able to satisfy our ongoing cash requirements for the foreseeable future, including at least the next 12 months, for working capital, capital expenditures, payments on our debt, finance leases and operating leases, as well as lease modification payments, potential acquisitions and investments, expected income tax payments, and share repurchases and dividend payments to stockholders, primarily with cash flow from operations and existing cash balances as supplemented by borrowings under our existing credit facilities and proceeds from our term loans, as needed. If we experience a sustained decrease in consumer demand related to the COVID-19 pandemic or to economic, political or other conditions or events, we may require access to additional credit, which may not be available to us on commercially acceptable terms or at all. (Such arrangements are described further in "Part I, Item 1. Financial Statements - Note 9 - Borrowings and Finance Lease Obligations" in the Form 10-Q.) Due to the seasonality of our business and cash needs, we may increase borrowings under our established credit facilities from time-to-time during the next 12 months and beyond. OnMay 5, 2022 , we entered into a €250 million revolving credit facility through a European subsidiary, which replaced certain European short-term borrowing arrangements. Refer to "Part I, Item 1. Financial Statements - Note 9 - Borrowings and Finance Lease Obligations" for further information. 56
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We expect to settle the principal amount of our outstanding Notes in 2024 in cash and any excess in shares. Our outstanding Notes may be converted at the option of the holders as described in "Part I, Item 1. Financial Statements - Note 10 - Convertible Senior Notes and Related Transactions" of this Form 10-Q and in "Note 10 - Convertible Senior Notes and Related Transactions" of the Consolidated Financial Statements included in our Annual Report on Form 10-K. As ofJuly 30, 2022 , none of the conditions allowing holders of the Notes to convert had been met. Pursuant to one of these conditions, if our stock trading price exceeds 130% of the conversion price of the Notes (currently$25.39 ) for at least 20 trading days during the 30 consecutive trading-day period ending on, and including, the last trading day of any calendar quarter, holders of the Notes would have the right to convert their convertible notes during the next calendar quarter. In accordance with the terms of the indenture governing the Notes, we have adjusted the conversion rate and the conversion price of the Notes for quarterly dividends exceeding$0.1125 per share. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in the manner and subject to the terms and conditions provided in the indenture governing the Notes. The convertible note hedge transaction we entered into in connection with our issuance of the Notes is expected generally to reduce the potential dilution upon conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of the Notes that are converted, as the case may be. We have historically considered the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested. As a result of the 2017 Tax Cuts and Jobs Act, we had a substantial amount of previously taxed earnings that could be distributed to theU.S. without additionalU.S. taxation. We continue to evaluate our plans for reinvestment or repatriation of unremitted foreign earnings and regularly review our cash positions and determination of indefinite reinvestment of foreign earnings. If we determine that all or a portion of such foreign earnings are no longer indefinitely reinvested, we may be subject to additional foreign withholding taxes andU.S. state income taxes, beyond the one-time transition tax. As ofJuly 30, 2022 , we determined that approximately$18.3 million of such foreign earnings are no longer indefinitely reinvested. The incremental tax cost to repatriate these earnings to theU.S. is immaterial. We intend to indefinitely reinvest the remaining earnings from the our foreign subsidiaries for which a deferred income tax liability has not already been recorded. It is not practicable to estimate the amount of income tax that might be payable if these earnings were repatriated due to the complexities associated with the hypothetical calculation. As ofJuly 30, 2022 , we had cash and cash equivalents of$174.4 million , of which approximately$27.9 million was held in theU.S. Excess cash and cash equivalents, which represent the majority of our outstanding balance, are held primarily in overnight deposit and short-term time deposit accounts and money market accounts. Please refer to "Forward-Looking Statements" discussed above and "Part I, Item 1A. Risk Factors" contained in our most recent Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 for a discussion of risk factors which could reasonably be likely to result in a decrease of internally generated funds available to finance capital expenditures and working capital requirements. COVID-19 Impact on Liquidity
Refer to the “COVID-19 Business Update” section and in “Part 1, Item 1.
Financial Statements – Note 1 – Basis of Presentation” for a discussion of the
impact from the COVID-19 pandemic on our financial performance and our
liquidity.
In light of store closures and reduced traffic in stores, we have taken certain
actions with respect to certain of our existing leases, including engaging with
landlords to discuss rent deferrals as well as other rent concessions. We
suspended rental payments and/or paid reduced rental amounts with respect to
certain of our retail stores that were closed or experiencing drastically
reduced customer traffic as a result of the COVID-19 pandemic. We also have
successfully negotiated with several landlords, including some of our larger
landlords and received rent abatement benefits as well as new lease terms for
some of our affected leases. In some instances, where negotiations with
landlords proved unsuccessful, we were engaged in litigation related to rent
obligations both during the COVID-19 pandemic and through the term of the lease.
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Six Months Ended July 30, 2022 and July 31, 2021
Operating Activities
Net cash provided by operating activities was$1.5 million for the six months endedJuly 30, 2022 , compared to$43.0 million for the same prior-year period, or a deterioration of$41.5 million . This deterioration was driven primarily by lower cash flows generated from net earnings and unfavorable changes in working capital, partially offset by a favorable impact from net income adjusted for noncash items. The unfavorable changes in working capital were due primarily to higher inventory levels as we placed orders earlier in order to mitigate some of the supply chain disruptions.
Investing Activities
Net cash used in investing activities was$51.2 million for the six months endedJuly 30, 2022 , compared to$20.8 million for the same prior-year period. Net cash used in investing activities for the six months endedJuly 30, 2022 related primarily to investments in existing store remodeling programs and retail expansion and, to a lesser extent, technology and other infrastructure. The increase in cash used in investing activities was driven primarily by higher retail remodel and expansion costs and higher investments in technology and other infrastructure during the six months endedJuly 30, 2022 compared to the same prior-year period. During the six months endedJuly 30, 2022 , we opened 36 directly-operated stores compared to 33 directly-operated stores that were opened in the same prior-year period.
Financing Activities
Net cash used in financing activities was$181.1 million for the six months endedJuly 30, 2022 , compared to$26.6 million for the same prior-year period. Net cash used in financing activities for the six months endedJuly 30, 2022 related primarily to our entrance into the 2022 ASR Contract to repurchase an aggregate of$175.0 million of our common stock, repayments on borrowings and finance lease obligations and payment of dividends, partially offset by proceeds from borrowings.
Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash
During the six months endedJuly 30, 2022 , changes in foreign currency translation rates decreased our reported cash, cash equivalents and restricted cash balance by$10.3 million compared to a decrease of$5.7 million during the same prior-year period. Refer to "Foreign Currency Volatility" for further information on fluctuations in exchange rates.
Working Capital
As of
equivalents) of
and
Our primary working capital needs are for the current portion of lease liabilities, accounts receivable and inventory. The accounts receivable balance consists of trade receivables relating primarily to our wholesale business inEurope and, to a lesser extent, to our wholesale businesses in theAmericas andAsia , royalty receivables relating to our licensing operations, credit card and retail concession receivables related to our retail businesses and certain other receivables. Accounts receivable increased by$1.7 million , or 0.6%, to$301.7 million as ofJuly 30, 2022 , from$299.9 million atJuly 31, 2021 . On a constant currency basis, accounts receivable increased by$44.8 million , or 14.9%, when compared toJuly 31, 2021 . As ofJuly 30, 2022 , approximately 52% of our total net trade receivables and 63% of our European net trade receivables were subject to credit insurance coverage, certain bank guarantees or letters of credit for collection purposes. Our credit insurance coverage contains certain terms and conditions specifying deductibles and annual claim limits. Inventory increased by$105.2 million , or 24.5%, to$535.5 million as ofJuly 30, 2022 , from$430.3 million atJuly 31, 2021 . On a constant currency basis, inventory increased by$164.6 million , or 38.3%, when compared toJuly 31, 2021 , driven primarily by management initiatives to mitigate supply chain disruptions, including accelerating product orders. 58
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Capital Expenditures
Gross capital expenditures totaled
incentives of
compares to gross capital expenditures of
incentives of
We will periodically evaluate strategic acquisitions and alliances and pursue
those we believe will support and contribute to our overall growth initiatives.
Dividends
OnAugust 24, 2022 , we announced a regular quarterly cash dividend of$0.225 per share on our common stock. The cash dividend will be paid onSeptember 23, 2022 to shareholders of record as of the close of business onSeptember 7, 2022 . In accordance with the terms of the indenture governing the Notes, we will adjust the conversion rate (which is expected to increase) and the conversion price (which is expected to decrease) of the Notes effective as ofSeptember 6, 2022 . Decisions on whether, when and in what amounts to continue making any future dividend distributions will remain at all times entirely at the discretion of our Board of Directors, which reserves the right to change or terminate our dividend practices at any time and for any reason without prior notice. The payment of cash dividends in the future will be based upon a number of business, legal and other considerations, including our cash flow from operations, capital expenditures, debt service and covenant requirements, cash paid for income taxes, earnings, share repurchases, economic conditions andU.S. and global liquidity.
Share Repurchases
During fiscal 2022, the Board of Directors terminated its previous 2012$500 million share repurchase program and authorized a new$200 million share repurchase program. OnMarch 14, 2022 , the Board of Directors expanded its repurchase authorization by$100.0 million . Repurchases may be made on the open market or in privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or other available means. There is no minimum or maximum number of shares to be repurchased under the program and the program may be discontinued at any time, without prior notice. OnMarch 18, 2022 , pursuant to existing share repurchase authorizations, we entered into the 2022 ASR Contract with the 2022 ASR Counterparty to repurchase an aggregate of$175.0 million of our common stock. Under the 2022 ASR Contract, we made a payment of$175.0 million to the 2022 ASR Counterparty and received an initial delivery of approximately 3.3 million shares of common stock onMarch 21, 2022 . We received a final settlement of an additional 5.2 million shares under the 2022 ASR Contract onJune 24, 2022 . During the three and six months endedJuly 30, 2022 , we repurchased 5,196,027 and 8,985,603 shares, respectively, of our common stock under our 2021 Share Repurchase Program at an aggregate cost of$105.0 million and$186.7 million , respectively, which is inclusive of the shares repurchased under the 2022 ASR Contract. As ofJuly 30, 2022 , we had remaining authority under the 2021 Share Repurchase Program to purchase$62.3 million of our common stock. There were no shares repurchased under our 2012 Share Repurchase Program during the three and six months endedJuly 31, 2021 .
Borrowings and Finance Lease Obligations and Convertible Senior Notes
Refer to "Part I, Item 1. Financial Statements - Note 9 - Borrowings and Finance Lease Obligations" and "Part I, Item 1. Financial Statements - Note 10 - Convertible Senior Notes and Related Transactions" in this Form 10-Q for disclosures about our borrowings and finance lease obligations and convertible senior notes.
Supplemental Executive Retirement Plan
As a non-qualified pension plan, no dedicated funding of our SERP is required; however, we have made periodic payments into insurance policies held in a rabbi trust to fund the expected obligations arising under the non-qualified SERP.
The cash surrender values of the insurance policies were
million
included in other assets in our condensed consolidated
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balance sheets. As a result of changes in the value of the insurance policy investments, we recorded unrealized losses of$0.2 million and$3.5 million in other income and expense during the three and six months endedJuly 30, 2022 , respectively, and unrealized gains of$2.2 million in other income and expense during the three and six months endedJuly 31, 2021 . The projected benefit obligation was$49.3 million and$49.4 million as ofJuly 30, 2022 andJanuary 29, 2022 , respectively, and was included in accrued expenses and other long-term liabilities in our condensed consolidated balance sheets depending on the expected timing of payments. SERP benefit payments of$0.5 million and$1.0 million were made during the three and six months endedJuly 30, 2022 , respectively. SERP benefit payments of$0.5 million and$1.0 million were made during the three and six months endedJuly 31, 2021 , respectively.
Material Cash Requirements
As ofJuly 30, 2022 , there were no material changes to our material cash requirements from known contractual and other obligations, including commitments for capital expenditures, outside the ordinary course of business compared to the disclosures included under "Liquidity and Capital Resources - Material Cash Requirements" in Item Part II, Item 7 in our Form 10-K for the fiscal year endedJanuary 29, 2022 . Refer to "Part I, Item 1. Financial Statements - Note 9 - Borrowings and Finance Lease Obligations" and "Part I, Item 1. Financial Statements - Note 10 - Convertible Senior Notes and Related Transactions" for further information on these arrangements.
Application of Critical Accounting Policies and Estimates
Our critical accounting policies reflecting our estimates and judgments are described in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 filed with theSEC onMarch 24, 2022 . There have been no significant changes to our critical accounting policies other than theJanuary 30, 2022 adoption of ASU 2020-06 which impacted the accounting and financial statement presentation of our Notes and our calculation of diluted earnings per common share. Refer to "Part I, Item 1. Financial Statements - Note 3 - Earnings per Share" and "Part I, Item 1. Financial Statements - Note 10 -Convertible Senior Notes and Related Transactions" for further information.
Recently Issued Accounting Guidance
Refer to “Part I, Item 1. Financial Statements – Note 1 – Basis of Presentation”
for disclosures about recently issued accounting guidance.
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