Q3 2021 Guess? Inc Earnings Call
[music].
Good day, everyone and welcome to the.
Guess third quarter fiscal 2021 earnings conference call on the call are Carlos Overeating, Chief Executive Officer, and keep the Anderson Chief Financial Officer true.
During today's call the company will be making forward looking statements, including comments regarding future plans strategic initiatives capital allocation at short and long term outlook, including potential impacts from the Corona virus pandemic. The company's actual results may differ materially from current expectations based on risk.
Factors included in today's press release, and the company's quarterly and annual reports filed with the FCC.
Comments will also reference certain non-GAAP or the adjusted measures GAAP reconciliations and descriptions of these measures can be found in today's earning release now I would like to turn the call over to Carla. Thank you operator of good afternoon, and thank you all for joining us today.
I Hope you are all safe unhealthy in light of the current challenges.
I guess, we continue to control the or we can control and to make the health and well being of of our teams our customers. Some of the communities we serve our highest priority.
Fortunately with good planning and Carrefour execution, we have been able to protect our people the effectively.
I'm very pleased to report that our team continues to excel in this environment at times like these resilience of the ability to adapt faster decision, making and strong execution are proving critical to win and our team has exhibited every one of the trades at every turn.
This crisis continues to test us all of now with the second waves in multiple places. It is clear the we are not running at sprint by the marathon.
We continue to stay focused on servicing our customers well managing our cost structure tightly optimizing margins and controlling our inventories balance sheet and liquidity.
On behalf of Paul and myself I want to thank every member of our team you are doing a great job and you make us very proud I will now spend a few minutes on our results for the third quarter and then I will touch on how we are approaching the holiday selling season after that I will comment on our strategic business planning process and highlight key.
Accomplishments for the period.
I'm pleased to report that we had a very good third quarter, we exceeded our top line expectations and delivered a very strong bottom line reporting adjusted earnings per share of 58 cents versus 22 cents last year in.
In the quarter, we more than doubled our adjusted operating profit and achieved on the adjusted operating margin of 9.7%, which represents a 600 basis points expansion versus last year.
It's worth noting the we delivered strong earnings on a per cent decrease in revenues for the period.
You know very king of environment, we achieved the very solid gross margin performance and deliver healthy operating margin expansion in most of our businesses.
The most significant improvement was driven by our business in Europe, which benefited from increased total revenues. We enable the increased revenues when we hit on gated before winter season shipping window and canceled the development of the pre spring summer at line.
This proved to be a great strategy represented of revenue the increase in the period for Europe of about $50 million.
Total Q3 of revenues for Europe increased 16% and operating profit exceed at $51 million delivering a margin expansion of 900 basis points for the period.
As we continue to focus on key product categories that represent the foundation of our business, where women's and men's we are pleased with our progress to optimize our assortment by channel I'm product presentation in stores and online during the quarter essentially active wear denim accessories and shoes.
The outperformed the overall business.
We managed our balance sheet, well and ended the period with the cash and equivalents of $365 million and inventories, 24% below last year's levels.
As we look into the holiday season, we believe the we're well positioned with our product our marketing plans and our teams preparedness across the globe the.
Let me give you some color of what we are experiencing at our business now on the Kt will quantify the financial impact of each factor store.
Starting with the retail customer traffic into our stores continues to be challenged by the pandemic, especially during tradition of the high traffic period, it's like Black Friday.
That said those customers coming into the stores have a higher intention to purchase and this has consistently resulted in higher conversion rates.
Temporary government mandated shutdowns are also impacting several markets, especially in Europe, and Canada, where we have significant businesses. We're.
We are pleased to see that our E commerce business is accelerating partially offsetting the negative store trends.
Regarding our wholesale business in Europe as I mentioned, we've made the decision to cancel the development of the pre spring summer line to consolidate the development of spring summer products into one main collection versus two in the past the.
At this change will result in a smaller percentage of the shipments of that main collection occurring in the fourth quarter that compared to last year with the majority of the shipments to be completed in Q1 of the next year.
In connection with this we recently closed the spring summer sales campaign, which delivered orders that were only slightly below the two collections combined in the previous year. This.
This results exceeded our expectations on demonstrate the great momentum of that the brands is enjoying with our wholesale customers across Europe.
Really that many of our wholesale customers are concentrating their buys within fewer stronger highly reliable brands and we are clearly one of those preferred brands. So we are getting a bigger share of their buys.
We continue to plan our business based on expected demand and size, our inventories and expenses. Accordingly, we are confident in our assortments on our product ownership and have been pleased to see that the level of promotional activity in the marketplace remains moderate.
As we said in our previous call. We are in the process of updating our strategic business plan and we will schedule at an event to share we're kind of at a later date, let me just confirm today that we still believe that the opportunities we had identified to expand the operating margins by 500 basis points are still intact.
For now I will update you on the progress that we're making on some of our key initiatives and how we are leveraging the crisis to accelerate change I will speak specifically about the elevation of our brand our customer Centricity initiative and our organizational development strategy.
Elevating the customer's perception of our brand starts with our product price.
Product in our business has always been on continues to be king.
Offering at consistent line of product across all markets is a very ambitious goal. When you have a global presence that reaches nearly 100 countries.
I am thrilled to report that for the first time ever we now have one global line of products across all categories, including women's and men's apparel at leisure lingerie, all accessories, including handbags footwear kids multi channel for womens and mens on jewelry humming.
Becoming one global line will enable us to represent our guess brand consistently across all markets and significantly reduce product development costs throughout our supply chain.
Hundreds of sales per season, which in the past were developed in each region and now represented by one come on line for all markets. Just as an example, the new line development for the next free fall winter season for guess apparel resulted in a style reduction of 38% and this is after expanding.
The offering with multiple Carlos per style for E. Commerce that represented at a 7% increase of product choices on line.
I think the pull and the product teams in all of our regions did an incredible job to make this happen. It took strong vision tremendous courage and great teamwork to achieve this and deliver a line of product that can serve all global markets effectively.
To elevate the brand takes a strong commitment to raise the quality of everything we do.
This commitment starts with the quality of our products in order to accomplish this we reviewed every product challenge the styling guess DNA alignment of the quality and sustainability of flow fabrics and materials Macon fit perceived value and price today, we have a line that speaks to a larger audience with.
Consistent standing between genders solidly at grounded in the guess DNA offering has strong point of view on differentiation in the marketplace, we have beautiful products offering our customers tremendous value for the price and quality of each item I strongly believe that our product strategy will contribute to profit or market share gains.
We continue to make great progress with our sustainability goals in fact, PR news recently named guess the winner for best Sustainability CSR reported 2020.
We were honored to be recognized alongside iconic global brands like Pepsico in terms of Johnson.
Our commitment to elevate the quality of everything we do is also impacting other areas of the business, including the customer experience in stores, our websites digital media and marketing campaigns.
The visual merchandising presentation, the stores as being completely transformed in the last eight months the.
The focus assortments and boutique filling the you experience when you walk into our stores now represent a stark contrast to what we had a year ago I just visited stores in Italy, a few weeks ago I was very impressed with the overall experience as we have reduced the product density in stores to provide for a more sophisticated presentation. The.
Product shines on the shales and the environment is very easy to shop end with the emphasis placed on the product not on the price or discounts as an example of for the next summer in Europe. We plan on the SKU reduction in stores of about 35% and the NESCOE expansion on line of 9% we plan to.
The run the business with an omni channel customer focus regardless of where the customer chooses to shop and engage with our brand. Our goal is to leverage our entire assortment and inventory ownership with omni channel capabilities, such as buy online ship from store or buying store from our larger assortment on line and ship from the E Commerce.
Its warehouse this capabilities are available in the Americas today and will be fully implemented in Europe next year.
Next is our initiative about customer Centricity, which we introduced last year as you know since the pandemic began we have been working hard to accelerate the implementation of our plan.
We are pleased to report that we have completed the implementation of the Salesforce platform in the us and Canada and all over Europe, except for Russia, which is scheduled for next February we.
We are very pleased with the speed on overall performance of the platform and are confident it enables a significantly faster and improved customer experience better conversion on the engagement and the will contribute to significant growth of our digital business.
We also made significant progress with our customer Threesixty project. This suite has also being developed by sales force and as an integrated tool to optimize customer data capture journey engagement personalized marketing at results analysis, we have already implemented the customer service and marketing cloud.
Current.
Which are part of the suite and we're currently working on the social studio application.
We plan to complete the full implementation of the customer Threesixty solution by the end of next year.
The third initiative relates to our global organizational development strategy, we plan to optimize performance management and I kind of abilities will be eliminating redundancies across our global organization leveraging technology to do at lot more with less in every area of our operation.
Our goal is to complete the implementation of this project by the end of next year as well.
In closing since guess started at 40 years ago. The company has always adapted it's business very effectively to the challenges presented by the market the environment and new customer preferences through.
Throughout its entire history. This company has evolved successfully time and time again.
I strongly believe that today per since our company with yet another opportunity to transform our business and increase our earnings power. I also believe that we have the team to accomplish this and I look forward to the years of growth to come.
With that let me pass it to Katie.
Thank you Karla good afternoon, everyone.
So today is my one year anniversary I guess exactly a year ago, we are presenting our strategic business plan.
No. The they know then that we were going to have the year that lifestyle today I am very proud to report our results of the third quarter, which I believe demonstrates the power of agile planning at solid execution and the mix of the very challenging environment, we delivered substantial sequential improvement in sales exceeding our expectations significantly expanded.
Operating margin and tightly manage inventory and working capital we.
We are extremely happy with our liquidity position, which is especially strong given the extraordinary circumstances that we have today so far this year.
This is evidence that we've been able to adjust our cost structure and capital spending the partially offset the deceleration in the man at our industry has experienced throughout the pandemic.
But as importantly of knowing what the cat is knowing when and where to invest to fuel future growth in the company, while maintaining liquidity at profitability.
We continue to support our efforts and digital and omni channel initiatives as well of investments to support long term cost savings and we continue to return value to our shareholders. Our board has approved the payment of the cash dividend again this quarter at.
As I said last time, we spoke at our long term capital allocation strategy has not changed.
Now let me take you through some of the details of our performance at the corner.
Let's start with sales.
Third quarter revenues were $569 million down 80% of new at dollars and 10% in constant currency.
The biggest driver in our improvement versus last quarter, let's wholesale in Europe, which was at 39% in constant currency versus last year at.
As Carlos mentioned, we elongated the fall winter season shipping window and canceled the development of the pre spring Summer line, which resulted in higher revenues this quarter versus last year.
In retail store comps in the USA and Canada that were down 23% in constant currency in line with Q Taylor at momentum in the U. assets offset by softening in Canada to the traffic declines at the result of the pandemic.
Our at EM Asia at both showed an improvement in store sales this quarter.
Sarcom for down 18% in Europe in constant currency, well the strong momentum with tempered in the last week of the quarter by shutdown due to the second wave of the pandemic.
Store comps were down 17% in Asia in constant currency, driven by strengthening in China and Korea.
Across the globe, we continue to see traffic declines, partially offset by significantly higher conversion with our tour of centric store is experiencing a ton of recovery.
Our ecommerce business in North America, and Europe was up 19% for the quarter and improvement from up 9% in Q2, given by the momentum in Europe.
The Americas wholesale business was down 34% in constant currency sales under pressure from the deceleration in demand, but improving each quarter line.
The thing revenues other on for the versus Q2 down 12% of Q3.
Gross margin for the quarter was 42.11st at 480 basis points higher than prior year.
Our product margin increased by 200 basis point this quarter, primarily as the result of higher IMU as well as well the promotion.
Occupancy rate decreased 200 basis points as the result of business mix and rapidly debt.
This quarter, we booked roughly $8 million and rent credits are filling negotiated rent relief deals mostly in Europe. We continue discussions with our landlords and will realize any additional credits at the negotiations are finalized and signed.
Adjusted EPS for the quarter was $184 million compared to $206 million in the prior year at decrease of $22 million.
We continue the benefit from changes to our expense structure, particularly more stream line hourly labor staffing at the store level corporate head count of travel production and lower professional fees. In addition, there were some onetime benefits of government subsidies and decreased advertising in the period versus last year, but these were offset by higher variable cost.
Associated with the wholesale shipments.
Adjusted operating profit for the third quarter was $55 million per 140% more than the operating profit in Q3 last year at $23 million.
The third quarter adjusted tax rate was 16% down from 24% last year driven by the mix of statutory earnings.
Inventories were $393 million down 24% in U.S. dollar at 25% in constant currency versus last year.
We ended the third quarter with $365 million in cash versus the 110 million in the prior year, and we had an incremental $260 million and borrowing capacity.
Capital expenditures for the first nine months of the year were $12 million significantly lower than what we spent at the same period of the prior year.
Free cash flow for the first nine months of the year with an inflow of $83 million, an increase of $162 million versus an outflow of $79 million last year.
This year, we benefited from lower capital expenditures extended payment terms with our vendors and unpaid rent to landlords, while the finalize negotiations. In addition last year at outflow included at the nonrecurring payment of the $46 million European Commission line.
Given the continued level of uncertainty in the current environment, we are not going to provide formal guidance. However, let me walk you through how we are thinking about the fourth quarter. Please.
We expect fourth quarter revenues to be down in the low to mid 20. The prior year at Carlos mentioned there are three main factors driving the decrease.
At the pandemic percentage growth like we expect the continued pressure on customer traffic to negatively impact store sale at.
The same time the momentum in our ecommerce business will partially offset the decline.
We expect the net effect of these two trends to represent approximately half of the revenue decline in the fourth quarter.
Our businesses in Europe, and Canada that are currently being impacted by government mandated store closures.
Well at the height of the closure the November we had over 200 stores closed more than half of the have reopened and we expect further openings in the coming days.
The temporary closures as loss on permanent closures.
Second to represent a quarter of the decline.
The last quarter of the revenue decrease is the result of the shift of wholesale shipments in Europe for the spring Summer collection into next year.
In terms of profit gross margin in the fourth quarter is expected to be slightly down the last year at the IMU improvement is expected to be more than offset by the leverage on lower sales.
Given the expected level of revenue line, the seasonality of our business as well as the mix, we expect at CN a at the percentage of sales to de lever by approximately 400 basis points versus the prior year.
In closing I am very pleased with how the company continues to navigate this crisis, we have proven that our brand is relevant and resilient. We continue to showcase our team's ability to manage the business through a very fluid situation and while we realize that our path of growth may not be linear over the next few months given the uncertainty around the global health.
Crisis, we are at confident as ever in our long term strategic initiatives.
With that I will conclude at the company's remarks, and let's open up the call for your questions.
Thank you we will now begin the question and answer session. If you would like to ask your question. If you do sell by pressing Star then one on your Touchtone phone to allow time for all.
The question could you be cash we.
We ask the you. Please ask one question.
One follow up question. Our first question comes from Susan Anderson from B. Riley FBR. Your line is now open.
Hi, good evening at nice job managing through the quarter tough environment I guess.
Carlos Hi, Susan Thank you.
Sure I was wondering if you could maybe give some color on just kind of the trend you saw from October to November I mean, it definitely sounds like Europe flow because of the shutdowns there at maybe in the Americas. What you saw and then any color you could also give that you saw over at the Black Friday week, both online and in stores.
Yes, I think at.
No definitely.
It's the this is we are in the middle of at very very significant time for us.
As you know we have several important weeks in front of us and the curious where we have the the biggest volume since this is true both in Americas and also in Europe as well so it's.
What what we saw in October was.
Very very strong for some times, we saw an opportunity to.
To increase because from where we were.
Comps were down 18% in the in Europe.
For Q3 that was better than the the decline that we had experienced in Q2.
And then going into the Americas the.
The comps were pretty consistent with what we had seen in Q2 down 23%.
But we felt that the business was.
Of course correcting even when traffic was still challenge as the result of the pandemic.
In Asia, we had comps down, 17% and and that was a much better than the 26% decline that we saw in Q2.
Going into the.
Thanksgiving.
In the month of November of things.
Change we had at very good start in November as you may remember.
We had planned to an end and extend the holiday selling season and try to the.
More aggressive in the in the front end with a lot of marketing and visual and trying to invite the customers' end and on that work I mean, we had some very good strong weeks.
The leading into the Thanksgiving and then Thanksgiving.
There's a lot more challenging with the well first of all with all of the closures shorter.
Shorter hours, and then Thanksgiving or Black Friday was the was very challenging Katy.
Katy the on to talk about the numbers, yes share so what.
We're seeing as commented at high volume period, its really we were and I'll talk about the use of Canada first we are kind of tracking pretty steady at a little bit better than we were doing in Q3 at the 23%.
Except for the Super High volume day, So we're seeing that the consumer is acting as you would think day what is in the pandemic, which as you know traffic as in general meaningfully down, but then also there of boarding crowd. So in the Super High volume day like for example of Black Friday or the Saturday after that that's where we growth the trend.
Thanks were softer than ever seen before so we have in Europe at side of the same there their holiday season, as a little more level, but still on these busy day that flow, we're baking breaking the true but in Europe, the kind of thoughts steady going into November until the last week or sorry, the October until the last week.
The.
Of the quarter, when we had the shutdown and.
And I would add Susan debt.
We were very fortunate that we started seeing some significant acceleration in our ecommerce business as we saw the weakness is on brick and mortar end that was something that we consider as the as a good goal for us and Unfortunately, we are seeing that you know our business in the third quarter.
Order in E com was significantly better than it was in the second quarter.
Instead, we were up about 19% and that was driven primarily by Europe.
Which had a great third quarter, but.
But then going into the fourth quarter in November we have seen acceleration from those levels on both regions and we're pleased we see a lot of opportunity also keep in mind. The we went through a very challenging time, when we converted the entire platform of E commerce for both regions Thats.
Not a small project team of frankly, the teams did a phenomenal job with this.
The project was finished on time and on the most the in exciting thing about this is that we are seeing an incredible improvement in performance from with this platform versus the legacy platform. We are talking about in not just the loading time of at home page of three and a half times faster we're seeing at.
23% increase in conversion rates, we are seeing.
A lot of more engagement and more time spent the on the side as the result of all of the so so we are we are very excited and we think that now the all this that the challenges behind us we have a big opportunity in front of us with the ecommerce.
Well that's great. The Harrison thanks for all of the color there I guess just the one follow at on the profitability side very nice profitability in the quarter and it sounds like fourth quarter, maybe at the lower because of the expense deleverage on lower sales at I guess I'm curious just in terms of the profit how how much of the.
That is sustainable longer term and then how much of the is what will you be layering more cost back on is the sales kind of get back up to speed.
Yes, let me start.
You know just the obviously the third quarter was done at.
Somewhat unusual because of a lot of the increase in revenue is relative to what we were expecting came through the wholesale business in Europe and on the was a very profitable increment to two hour of top line and that allowed us to leverage our.
Our cost structure are much more efficiently on the same drove a lot of additional profitability.
Definitely we are looking at the fourth quarter in a different way. The you know of one hand, we have all the store closures that.
Yes.
Represented more than 200 stores at.
I'm following but we are looking at a very different picture now.
Then we have at this change that we made to our business at wholesale where we decided to cancel the free.
Spring Summer collection.
So then we could give time to the fall winter collection to sell through and frankly, the word but now obviously, we're not going to ship as much of that the spring summer collection. During the fourth quarter end that is impacting how the to the top line is going to behave and of course, a lot of the of the cost.
Actuaries, what a day so in the fourth quarter is going to be very difficult for us to lever.
When you have that set of of circumstances.
Chances and the good news about this is that all of that revenue base that we will be losing in the fourth quarter is not lost because the line has done very well as I said in my prepared remarks ill. Just we are barely down to the two collections of that we had last.
Last year or so so we feel that this is a huge success story and again that revenue base is not going away, but it's going to be reported or shipped in the first quarter of next year.
Katy.
Yes.
The reason, we gained 200 basis points end product margin this past quarter, mostly I knew and and then we also as part of that had been Leverages our business mix on the occupancy. The line. We also at $8 million of rent relief in the quarter. Most of that from Europe is worth about 140 basis points and you know again looking into Q4, we don't we're not going to see.
We were not expecting that type of expansion, we anticipate further at any effort.
But the across much of the pressure on the sales in that quarter were going to have the leverage.
Got it okay Thats really helpful. Thanks, So much you guys.
Good luck, thank you holiday season.
Thank you Susan simple you.
Thank you. Our next question comes from Jeanine share from Jefferies and company. Your line is now open.
Hi, Congrats on all the progress.
Yes.
Thank you Denny.
I wanted to ask about the the global product line seems like that's a pretty big accomplishment getting.
At complete end I want to hear more about the benefits you expect the season at both digitally in terms of global presentation. Then also on the new side, how you feel about driving efficiencies at.
Just as you're able to consolidate your bye. Thank you.
Great. Thank you, yes, no you just.
Hit exactly on the key points you notice we think that the most important thing about this is is just 2% the brand to the not consistent basis across the entire globe end and.
And that is such a hard thing to do.
We feel that we're finding the there we feel that the product is amazing and and it's great to even see our own people our own teams in the different territories and regions and our own customers moving our wholesale customers. When we did big presentation in Lugano very recently.
You know just seeing everybody embracing the the line for their own markets of course, the are going to be specific.
Specific needs and we plan to embrace of those needs as well and try to really adopt.
Certain pieces of or certain parts of the line.
For that reason, we have kept the sun capsules of of our design teams in different places just to again augment what that core line main line is going to be.
We think that in addition to that you know the of the opportunity to.
Really make the whole product development process.
Much more efficient is just phenomenal we have already benefited in IMU opportunities. We have made a big effort in the last few years, just trying to increase the immune very successfully and in many cases you know we were using similar fabrics, we were trying to.
Really the leverage the different vendor relationships that we had and I think at I mentioned that in the in a previous call that we had already consolidated our vendor base pretty dramatically not just the and that was by just using common vendors for both regions sales, especially Europe and the Americas, but now we.
I have one line that means that we can go to each of those vendors and the really go with a much larger volume to really plays a big orders and that.
Will result in significant reductions in costs. So so thats another big opportunity and then when you look at internally what it takes to develop the line you notice I think I mentioned in my prepared remarks that we saw a significant reduction in EPS can you development just because of the instead of doing the.
Same thing twice now youre going with just one one skew a one style and and when you do that obviously the the cost of development.
Throughout the supply chain also come down significantly. So you know just so im not in a position to total okay. What is the number of here but.
But the everywhere we are looking there are significant savings opportunities.
In addition to being able to position the line and the brand in a much solid.
Tone at with the customers and the and the receptivity non.
Just how people have received this EPS of in incredible even during the time, where we're at the businesses our challenges are true.
Funding.
And and we see that many of our wholesale customers are buying more.
Even with.
When you consider that the dependent make is the creating significant pressure on demand, but it's very clear to us that the or buying more from what we have and does the results we are taking share and.
And that the feeling very very good.
Good today, and I think of will have a big opportunity as the next once we are on the other side of this because I think that.
The those partners at sort of a run or continue to grow.
When I think of the plan you laid out last December I think a big piece of the margin improvement was coming from the logistics side, maybe just update us on where you are in terms of logistics improvement I think both in Europe, and then anything that's going on globally. Thank you.
Yes, I think of Janine.
Yes, you know it's the you may recall when when I came back to the company.
We the company was going through some some challenging times on logistics, especially in Europe. You know the had been a whole a reset of the network and there were several areas that were difficult there and one of my top priorities. When I started was to address that Fortunately.
The team did a great job on this as well and we were able to.
Reduce the cost pretty significantly we have renegotiated all of those contracts that were so painful to us up back then.
And then Oh.
One of the goals was to reduce the size of the networks. So.
We thought the we had the though too much capacity and the was dispersed in several facilities. So.
So we were able to close one of them in Vanloan, the Netherlands, and it was an expense at facility.
In the we were able to absorb the the quantities that we're being processed by that facility.
Growth through the the other facility that we already had there and and.
Very very successfully we transfer that facility to a third party and we were able to really do that without the absorbing any liabilities or the lease was taken over the assets were paid for.
The in paid for and and we consider that a big success and then we're also opening a new facility for now is temporary but we are considering the this new market as a long term opportunity and Poland and.
Labor rates are significantly lower there and so we're going to be servicing our ecommerce business from the air or part of it and we're very excited about the opportunities at that.
The new initiative is is presenting so.
Then the you look at the Americas, I think we have some opportunities to automate some things the special in Canada, and we'll probably the invest the money into this in the next couple of years. We we look forward to sharing more of the plans when we have that event. The one we share our strategy with you.
Great. Thanks, so much.
Thank you Tony.
Thank you. Our next question comes from Omar Saad from Evercore ISI. Your line is now open.
Thanks for taking my question very very nice quarter.
Yeah I was at one of the how are you Omar I wanted to dig.
Of course, great job.
Carlos I wanted to touch a little bit more about the Europe strength that was really really big numbers. There I know things of shut down a bit sense, but maybe you could dive in a little bit whats at the root of the demand it sounded like some of it's in the wholesale channel are you seeing kind of consumer social activity period.
But the underlying driver and then I think linked to that how does the the news of the vaccine effect your outlook, especially given guess.
I guess his position as of July and.
Total fashion brand and its kind of historically tied the going out and being social.
Maybe you could talk about those two so to to kind of supplement related topics. Thanks.
Yes, Thank you Omar.
Well I mean, Europe as you know has become our biggest business and.
We'd love to win there of course and reconsider the territory.
Very critical to our long term strategy.
But also we see a lot of white space still in the territory. So were very excited we're relatively mature if you look at the southern countries, but we have a lot of opportunity and we have been winning in the eastern countries and many other areas.
When you look towards the end or from from lot of those the Mediterranean basis and.
And I think that you know at the business is very well balanced we have a very strong retail base and and we have a super strong wholesale base wholesale.
Wholesale I think is probably eight consecutive seasons of growth and outstanding sell through performance. There. The were on fire. The have been end and of course, we have a very mature net.
Net work with eight at more than 8000 doors. So the distribution is very wide and very successful.
Obviously.
The everywhere.
Everybody is at feeling the pain here through the pandemic, but our business did not flow as much is not nearly as much as we had originally anticipated on one hand, I talked about end on getting the season, but the other thing that it was very successful is that they did have reorders and lower returns and the.
Award the no cancellation. So all of this really resulted in a much better stronger business.
We after the lockdown.
Yes, we are seeing that some of the of the direction. The we are taking is right on for what the market needs.
Less more timeless type of product being.
Being careful with the how we value the the product and and given more for the money the quality of that we are putting into the product is also resonating with those customers.
We have a strong focus on of leisure you know this is a category that we didn't even have.
A season or go and we just saw that.
At 7% of the adult apparel sales was at leisure. So you can see what type of success. We are having then denim carryover. This is a new program were using something called at.
At the close to what you are familiar with the never out of stock type of programming and this is working very well.
60% of our total denim sales are coming from that.
Our handbags are just second to non there was nothing in the marketplace compares to what we have the product we have at the price as we have and then we have a very strong line of mens.
The accessories and footwear for example, so all of this is driving a lot of of the success.
When you look at but when you talk about.
Customers I mean, we were having at very good trends in the third quarter at retail and then obviously the second waves really impacted us tremendously. We think at this is completely temporary and and we think that that customers just waiting on of course.
Yes, they the celebrate socializing at everything else, but but I think that that once people feel better about the virus.
We we are going to renew the momentum very quickly.
No doubt some very very excited about that and I think at people are loving the product and that is showing on line. So it's not that the.
We we are we are debt because of this debt we are seeing a big opportunity here to compensate for some of that loss of of business.
The business online in Europe, it's up significantly so we're very excited.
That's great really helpful color does the does the vaccine effect, how you plan for next year and how you think about the wearing occasions the drive in a lot of your brand.
It's an artist.
Yes, it's I mean, it's.
It's very tough to start thinking okay. When the of the vaccine going to be ready and then based on that we're going to plan. Our business frankly, we are worse staying on the on what we can control.
It's very hard to say when will we entered this post covered world, but in the meantime, we see like three big priorities for US one is the product strategy to is how do we approach each of the business models that we have E com from R&D, but we think of we're doing everything.
In line with the without per already wholesale and even stores, we think that we have done a great job in.
Looking at the cost structure of the stores and trying to really.
Leveled seven so from a zero based type of budgeting process and and as a result of out of where I think we are operating our stores much more efficiently and at the lower cost.
And then the third Big thing is about our organization and what do we do to support the business and that starts with the team, but as follows with the how we get organized to do more with less and the use technology in our advantage and I think we're doing a lot of that I think I mentioned that we plan to have that debt.
Project.
Finished by the end of next year, we are working hard on that.
Well at the quarter like that during the pandemic who needs the vaccine congratulations.
Well.
Thank you Omar we want the vaccine, though [laughter]. Thank you.
Once again, if youd like to ask a question. Please press Star then one of your touched on the.
End to ask a question. Please press Star then one on your Touchtone phone our.
Our next question comes from Janet Kloppenburg from JJ Research Associates incorporated your line is now open.
Hi, everybody and congrats on nice quarter.
Thank you.
Nice job.
I just wanted to thank.
Looking ahead to the vaccine in the recovery.
I guess any encouraging signs in Asia.
With respect to.
Glasses as the occasional even when what products that now might be willing to have a little bad assets. Just wondering if we could look forward to that in Europe, and North America going forward.
Yeah. Thank you Janet.
You know at the we are please.
Pleased with the the.
Performance that we had in especially in China, but also in Korea Korea at a very good period at.
As the and we're very pleased because.
The second quarter was pretty tough for us at first quarter two.
But the but China is the remarkable because we have a very young customer base there we.
We think that the brand resonates with the customer then we thought that we could do a lot of things internally to improve the business and we've put a team to work together with the local team, especially on product and I think that they have done a remarkable job.
And and as a result of all this we are seeing a lot of turn on on the business and we couldn't be more excited traffic Uh huh.
At it had a peak per.
Performance, the during Golden week, and and we and our performance bottom line also has the.
As shown significant improvement as well. So so we are happy when you look at the product you know we went back to our core line and and we try to really the very careful with non overbuying on having the.
The brand well represented in that market and guess what the war so.
We just said obviously, we have a good business in dresses and there are some some categories. The you would consider at least more dressy than just at the leisure which seems to be the of the only thing that has sold at very well end.
In the other markets while at the pandemic is there, but but I think that.
The overall in our case is not necessarily leveraging those types of products as much as representing the core brands in the right way and then looking at all of the basics for the business. We are doing the I think at great job in presenting the product at the stores look great.
I think at the team is very very engaged and and always shows tremendous energy there and they know the markets very well and then we did a lot of work to to really clean the portfolio. You know just in eliminating or the closing stores that were not in line with the brand.
For the we're not profitable so we're down to 102 stores and we believe that.
That is a good place. We're also working with the franchisees to represent us in several more secondary cities and and we have the already a few relationships and we plan to have.
More by the end of the year.
Thank you. Our next question comes from Dana Telsey from Telsey Advisory Group. Your line is now open.
Good afternoon, everyone. As you think about the expenses and preparing for the holiday and beyond what are you seeing in terms of shipping freight surcharges. Obviously, we've heard of increases there. How are you planning for that and the there any offsets on the expense line that we should be looking for as you continue to read.
The great the business. Thank you.
Yes. Thank you during the how are you.
No interest.
You know I'm going to just the.
Touch on on some of the of the comments or the question and then Katy can probably talk about the leverage in the fourth quarter, but.
Just so we have we have done a lot of work on expenses. This year I mean this is probably what every company has done the see her but oh, we have really tried to go to the lower level of of expenses in every single area to protect the bottom line not knowing exactly.
Back to what the man and the top line was going to look like for any of the periods you know.
But with that said the you know it gave us an opportunity to really the.
Go at.
At March and create a much more efficient lower cost structure in several areas and we are the.
Covering the we can operate really well with much of the.
Leaner organization.
When we look at holidays that was a tricky thing because if we wanted to make sure that we had enough resources to support the business.
You asked about freight freight is.
Especially inbound freight has been just very very expensive and and of course, we have been very picky with where we are you know accelerate freight in Odessa, depending on product categories that we thought it was worth paying the extra premiums that the market was demanding.
But then you notice with respect to shipping costs and so forth I think we are in pretty good shape, we have great relationships with our partners in that area and and what we did was the to negotiate capacity ahead of time and that is working well for us cash.
Katy So Dan as you know for the lot a lot of expenses at investing in a throughout the year end well continue to manage that really really tightly as we commented that high volume fourth quarter of we're going to get.
On the leverage on the EPS you in a margin just because of the fixed components at Ftn I had the we'll continue to see.
Progress on the expense.
Thank you.
Thank you.
And we have no further questions in queue at this time I will turn the call back over to Carlos.
Thank you well. Thank you all for your participation today I'm really grateful that we have the opportunity the determination and also the support to make our company better as a result of this very challenging times.
We'll keep you updated on our progress and we want to wish you all a very happy holidays, and a prosperous new year and thank you again for participating today.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
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