Q4 2021 Guess? Inc Earnings Call
Good day, everyone and walked into the guess fourth quarter and fiscal 2020, One earnings conference call and five year strategic plan updates on the call are Carlos <unk>, Chief Executive Officer, Kevin Anderson, Chief Financial Officer for a brief span of ruche VP of finance and Investor Relations.
<unk>.
During today's call the company will be making forward looking statements, including comments regarding future plans strategic initiatives capital allocation and short and long term outlook, including with respect to the company's fiscal 2025 strategic plan. The company's actual results may differ.
For materially from current expectations based on risk factors included in today's press release, and the company's quarterly and annual reports filed with the SEC.
Comments will also reference certain non-GAAP or adjusted measures GAAP reconciliations and descriptions of these measures can be found in.
Today's earnings release, and accompanying presentation materials posted earlier today on the Investor Relations section of guests Dot Com now I would like to turn the call over to Carlos.
Thank you operator, good afternoon, and thank you all for joining us our agenda today will include general commentary.
Regarding our fourth quarter and fiscal year financial results and then update to our strategic plan after which we will open the call for your questions.
In addition to our press release, we have posted a five year strategic plan update presentation onto our Investor section at guess Dot Com, we encourage you.
To view the materials along with the commentary when we discussed the strategic plan during our prepared remarks.
We are very pleased with our fourth quarter earnings performance, which was significantly ahead of our expectations in the period, we delivered adjusted earnings per share of $1 18 compared to $1 20.
Two last year, while our revenues were 23% below last year and in line with our expectations. Our digital business has accelerated more than what we had anticipated posting a 38% revenue increase in North America, and Europe, and our licensing business also outperformed.
Offsetting this.
These improvements were lower retail revenues due to additional store closures and restrictions, mostly in Europe, and Canada, and an anticipated shift in wholesale shipments in Europe into Q1.
In spite of the revenue decline, we managed our business well and delivered an adjusted operating margin of 11, 4% in.
In the period, only 70 basis points below last year. The main driver of the outperformance for the quarter was our gross margin, which increased 240 basis points versus last year.
With this performance, we closed a challenging but rewarding year for our company.
While we experienced a significant.
Difficult revenue contraction of 30% in the year due to the pandemic, we were very proactive and let the business carefully managing inventories well and controlling the expenses tightly all considered we were able to reverse our first quarter adjusted operating loss of a hunter and $9 million to close the year with an adjusted.
Operating profit of $20 million.
We ended the year in a good inventory position, we have the right product and our ownership is appropriate to service our business well in the new fiscal year.
As with the rest of our industry, we have experienced disruption in our supply chain both to.
Sourcing and transportation, which has caused some delays in product deliveries globally. However, given the fact that we were operating with restrictions in some regions, we were able to appropriately allocate the product to service our demand.
These conditions have resulted in limited supply contributing to lessen.
Promotional activity across the industry from which we are benefiting.
In addition to time this delays caused an increase in transportation costs of course, we have been prioritizing shipments in choosing alternative transportation options to minimize this cost we believe that the port congestion delays.
Less polluting the recent event and the Suez Canal will be normalized by the summer and we have made provisions to anticipate the receipt of goods wherever possible to mitigate further delays.
During the year, we prioritize our investments in our digital and omni channel initiatives and rationalized our global store.
In print and expense structure, we also returned value to our shareholders via dividends and we purchased $39 million of our shares we closed the year with a strong balance sheet with $469 million in cash.
I am encouraged by our trends entering the new year.
It is clear that the customer has to respond.
Sure footing, well to our products and Assortments, our digital channels are accelerating our wholesale business shows we are gaining market share and when our stores are open they are performing well with solid product sell throughs, our customer traffic is showing sequential improvement while still significantly below.
Low pre COVID-19 levels at the same time, our conversion continues to meaningfully exceed pre COVID-19 levels in the U S. We are experiencing a considerable acceleration in our direct to consumer businesses since the stimulus checks were announced.
We are confident in our business as we emerge from this pandemic.
As vaccination levels increase across different countries in the upcoming months as we have seen in the U S. The consumer will be inspired to ventured out and buy new clothes.
Our product assortment is ideal for post pandemic business in our industry I believe that lifestyles have been forever altered by dependent.
Mick and casually station is here to stay.
I am pleased that we expanded our line to include categories like Athleisure and essentials to support this lifestyle, but we also have rich assortments of dressy, our apparel and accessories for multiple locations, which will resonate as our customers begin to socialize again.
Before I turn the call to Katie to review our financial performance in more detail. Let me just say that I strongly believe this will say Europe test of character proof of courage and other opportunity to for all of US at guess with flourish in times like this.
There is a strength of character that is present in the guess DNA.
In Asia.
Our founders had this since day, one and Paul has that same strength and commitment for our company our team and our guests brand today something he'd demonstrates every single day with this work.
The proof of courage and guess is evident with every decision we make always running the business with.
With a long term view, leading our team with a clear vision to build the company and the value of our brand for the next generation not just the next quarter our capacity to adapt to each and every change in the industry and the business has been validated by the multiple business model changes our company has endured successfully.
Really over the last 40 years from.
From a denim category assortment to our lifestyle offering and brand image from own businesses to licensed ones from wholesale to retail from a domestic business to a global one from bricks and mortar retail to an omni channel model I strongly believe that our companies.
<unk> ability to adapt to change is the foundation of our business success and value creation.
I will now pass the call to Katie and I will return to review an update our five year strategic plan Katy.
Thank you Karla good afternoon, everyone I am happy to report that we finished the fiscal year strong with our fourth quarter earnings.
It can really exceeding our expectations. Despite higher COVID-19 resurgence is across the globe with revenue in line with our outlook, but margin significantly higher than expected, we were able to deliver $74 million and adjusted operating profit we.
We saw operating profit increases to prior year in all of our business segments.
<unk> net for Europe, which was significantly impacted by government mandated store closures and a shift in wholesale shipments.
Also saw a nice momentum in our e-commerce business, which was up 38% per the quarter in North America, and Europe versus 19% in Q3 and 9% in Q2.
Now, let me take you through the detail.
Yes.
Fourth quarter revenues were $648 million down 23% in U S dollars and 26% in constant currency.
Stronger than expected momentum in our European digital business and an increase in licensing revenue was offset by the impact of continued Covid research and assess the impact of temporary store closures on our sales.
Except prior year for the total company during the quarter was about 10% mostly in Europe, but also in Canada. We have some anticipated shifts in European wholesale shipments, which were worth about 6% of total company sales to prior year. Excluding these two factors the 23% Q4 sales decline would have been a decline.
Klein of about seven.
Now, let me get into the detail on sales performance by segment.
In Americas retail revenues were down 24% in constant currency were negative store comps and temporary and permanent store closures were partially offset by growth in our E Commerce business.
Store comps in the U S and Canada were down.
21% in constant currency slightly better than Q3, which was down 23% as continued sequential improvement in U S sales was offset by softening in Canada due to traffic declines as a result of the pandemic.
The underlying trend in the U S showed even greater recovery. However, the business was hurt by restrictions on capacity and.
And consumers avoiding crowds on what are typically the busiest shopping days of the year. In fact, if we remove the five super high volume days in Q4 from the sales calculation, our Q4 store sales comp in the U S and Canada would have been about 5% better than what we reported.
In Europe.
Revenues were down 32% in constant currency as you know the regions are experiencing increased lockdowns and operating restrictions at the end of Q3, which continued through the end of the fourth quarter and remain in place today store.
Our comps for Europe were down 26% in constant currency significantly impacted by the increase in COVID-19 levels.
That region.
Our e-commerce sales, however, accelerated nicely in the fourth quarter and helped to mitigate some of these headwinds as Carlos mentioned the wholesale business in Europe in Q4 was down to prior year as a result of the planned shift in shipments for the spring Summer collection into next year.
In Asia store comps were down.
<unk> and 2% in constant currency driven by a resurgence of the virus and some of those markets like Korea.
Our Americas wholesale business was down 14% in constant currency compared to down 34% last quarter and 49% in Q2 still under pressure from the deceleration in demand, but showing vast improvement quarter to quarter.
Order licensing revenues were strong up 12% to prior year in Q4, driven by a continuing recovery in the business, but also some timing in sales.
Gross margin for the quarter was 42, 6% 240 basis points higher than prior year, our product margin increased 140 basis points this quarter primarily.
As a result of higher IMU as well as lower promotions.
Occupancy rate decreased 100 basis points as a result of rent relief and business mix, partially offset by deleverage in sales.
This quarter, we booked roughly $15 million in rent credits for fully negotiated rent relief deals across Europe North America.
Yeah.
There's still some negotiations with our landlords that are outstanding and we are also extending our conversations with landlords to address the second round of closures.
Adjusted SG&A for the quarter was $202 million compared to $237 million in the prior year, a decrease of 35 million.
In Asia, or 15% and better than our expectations. We continue to benefit from changes to our expense structure lower advertising spend and a decrease in expenses related to permanent store closures versus last year. In addition, there were some one time benefits from government subsidies, mainly in Europe, which were partially offset by higher variable.
In us is related to the growth of our ecommerce business.
Adjusted operating profit for the fourth quarter was $74 million versus $102 million in Q4 of last year.
Our fourth quarter adjusted tax rate was 7% down from 17% last year driven by the mix of statutory earnings.
Inventories were $389 million down 1% in U S dollars and down 5% in constant currency versus last year.
Our inventory levels in Europe are artificially high due to the timing of inventory receipts and the increase in in transit inventory due to the transit delays that Carlos mentioned earlier.
We ended the.
With $469 million in cash versus $285 million in the prior year, and we had an incremental $272 million in borrowing capacity.
Capital expenditures for the year were $19 million down from 62 million prior year free.
Free cash flow for the year was $183 million in.
An increase of $50 million versus $133 million last year. This year, we benefited from lower capital expenditures extended payment terms with our vendors and unpaid rent in.
In addition last year's outflow included the non recurring payment of the 46 million dollar European Commission fine.
This.
The year strong finish to a tough year for the fiscal year, we lost almost 800 million or 30% of our sales versus prior year. As a result of the pandemic. However, we were still able to maintain positive adjusted operating profit of $20 million $130 million lower than prior year, allowing for only six.
It was 15% of those lost revenues to flow through to our bottom line. This demonstrates the tremendous control that we have over what we can control and a super dynamic global environment.
This year, we expanded product margins executed over $30 million in rent abatement and relief cut SG&A by over 20%.
<unk> managed our capital very tightly all the while we had our eye on the future of our brand positioning this company to win as we emerge from the pandemic, we returned value to our shareholders reinstating our dividend in Q3, and completing $39 million of share repurchases at an average price of $10.
And while Covid will.
And named a near term headwind there is reason to be hopeful as vaccines rollout.
Now, let's talk about our near term future given the continued level of uncertainty in the current environment. We are not going to provide formal guidance. However, I will walk you through how we're thinking about the first quarter I am going to anchor our comparisons to the pre co.
We'll remain Q1 of fiscal year 2020, which ended May four 2019 as this past year's fiscal first quarter is clearly not a normalized comparison.
We expect first quarter revenues to be down in the high single digits to fiscal year 2020, as pandemic related shutdowns and traffic declines are.
<unk> offset by continued momentum in our global E Commerce business and the favorable timing of our wholesale shipments in Europe.
Quarter to date, we have seen sales comps at our retail locations of down 4% in the U S and Canada down 19% in Europe and down 22% in Asia, our business in Europe continues to be impacted.
A partial government mandated store closures currently we have over 240 stores close with approximately 400 additional stores with reduced operating hours.
E Commerce growth has continued to accelerate and is up 58% to prior year for the quarter to date in North America and Europe.
Lastly, as discussed Q.
It will benefit from the shift of wholesale shipments in Europe for the spring Summer collection from Q4 of this past year.
We estimate that the negative impact of the temporary store closures will roughly offset the positive impact of the wholesale timing for the quarter.
In terms of profit adjusted gross margin in.
In the first quarter is expected to be around 200 basis points better than fiscal quarter, 2020, driven primarily by business mix as well as improved Imu's. We anticipate that this margin expansion will be offset by an increase in adjusted SG&A expenses as a percentage of sales as deleverage from lost revenue will be partially.
Offset by the cost savings initiatives rolled out over the last year.
For full fiscal year 'twenty 'twenty, two we expect revenue down in the high single digits to the fiscal year 'twenty 'twenty barring COVID-19 shutdowns past Q1.
This includes the resumption of a normal cadence for product development and shipments.
For European wholesale as you may recall in response to the pandemic last year, we made the strategic decision to elongate the fall winter season shipping window and cancel the development of the pre spring Summer line, we are not planning on repeating this in fiscal 'twenty 'twenty two.
With that I'll hand, it back to Carlos.
We'll have to talk about the five year strategic business plan.
Thank you Katy I'm very excited to share with you today my view of our future.
This past year was truly a year of crisis.
But like Winston Churchill said, we didn't let a crisis go to waste during.
During the year, we made great progress executing.
Our strategic plan and we're able to accelerate the implementation of several key initiatives today, we are confirming our strong belief that our opportunities for value creation remains intact for us.
Furthermore, we remain committed to delivering net revenues of $2 9 billion and non operating.
Margin of 10% by fiscal year 2025.
Im confident that we have an opportunity to more than double our earnings per share to $3 and increase our free cash flow by 65% by fiscal 2025 respect to fiscal 2020.
As a result, we plan to more than double.
Our return on invested capital to 26% by fiscal 2025% from 12% in fiscal 2020.
Let me begin with a quick review of our key accomplishments last year from the beginning of the pandemic, we focused on the areas, we could control, including our capital availability and liquidity.
We managed our capital effectively and we're able to return value to our shareholders through share repurchases and the reinstatement of our dividend when our visibility improved.
We were able to accelerate the implementation of our new sales force platform in the U S, Canada, and Europe, which is now fully complete.
This is a.
Sure milestone for us and the initial results are very strong for example in Europe, we have a faster platform with a homepage download over three five times faster at 13% lower bounce rates and an 18% increase in mobile conversion rate from our previous site.
We also rolled out.
A major channel capabilities in Europe. In addition to North America, and we expanded our online product assortment globally.
During the year, we were able to rationalize our store portfolio closing over 125 underperforming stores and renegotiating 290 leases at favorable.
As part of the store rationalization, we were successful in repositioning our business in China partnering with four new franchisees in separate regions of the country to represent guess with local market expertise and capital for expansion and.
And we also integrated our G by guess.
Turning into our guest factory business in the U S. Converting almost 60 of our stores, which have already shown very encouraging results.
Last but not least we identified ways to transform our business model. This includes a global reorganization of our team and omni channel.
Focus for our direct to consumer business. The development of our first global product line and the introduction of new product categories like Athleisure and essentials.
We also worked hard to eliminate redundancies and streamline processes across our operations.
Last year during our investor.
Investor Day, we shared our purpose to inspire our customers to feel confident and passionate about their style on their future at guess, we dare to dream.
That same day, we shared our vision for our organization and our commitment. These constitute a timeless foundation for our team and our company.
As I said, we see an extraordinary opportunity to create significant value for our stakeholders over the next four years and beyond.
This starts with our opportunity to gain market share in all the markets and businesses that we operate.
I believe the value of our offering represented by the quality styling and price of our.
Our product is unmatched in today's marketplace.
<unk> has been eliminated our space, primarily as a result of substantial store closures. Furthermore, many of our wholesale customers have chosen to concentrate thereby with fewer stronger brands and we're certainly one of them.
Somewhat.
Related to this is our opportunity for product category growth I believe that we have an amazing assortment in key product categories, such as denim outerwear and handbags to expand our presence in the marketplace and our new product lines like at leisure on Essentials gave us additional opportunity for growth.
While we are currently in approximately 100 countries, we have white space in multiple markets, where we are underdeveloped, China, Russia, Poland and Germany are just good examples of this.
Our opportunity for operating margin expansion has been well documented and the asset light model that we're creating a.
Guess will contribute to our ability to more than double our return on invested capital in the next few years.
Last year, we also share the six strategic objectives of our five year plan. This plan still constitutes the right roadmap for our future. Despite the changes in the environment over the last year.
Our six pillars are.
One organization and culture, we will always strive to have a best in class team that works effectively and efficiently together.
<unk> brand relevancy, we strive for our brands to be relevant with three key target consumer groups heritage Millennials and generation Z customers.
Three product excellence will design, making distributed amazing product to support our customers' lifestyles.
For customer Centricity.
We'll always place the customer at the center of everything we do.
Five is global footprint, we will develop an effective and profitable.
The global distribution ecosystem and six functional capabilities, we will always invest in our infrastructure to support our business well long term.
For our organization and culture objective, we are organizing our teams emphasizing global functional responsibilities and capitalizing on local.
<unk> market expertise and accountability.
We also plan to develop each market with an omni channel approach.
The accountability is placed on one team to develop all channels in the market instead of using a traditional approach with separate of that kind of weighted by channel and business unit.
At guess, we strive to be a conscious capitalist organization and we consider our ESG priorities a driving force for change we have big goals to improve our environmental agenda, and deliver 100% denim to be equal and 100% recycled synthetic material.
Cereals in packaging by 2030 today, we're at 25%.
The guess brand has always been in business with a strong and consistent point of view, we know who we are and we know who we are not our brand well protected is a lifetime asset.
And it is for this reason.
Now we have a plan to elevate our brand quality and consistency are key to strengthening our brand relevancy and the new customer environment.
Quality starts with product.
Quality of the materials, we use our sustainability focus on increased perceived value for each item are key to win in this.
This area, we plan to increase full price selling reduced promotional activity and focus on certain key product categories and last but not least in order to elevate our brand we must elevate the customer experience across our guests ecosystem, including stores websites wholesale partners and licensing.
<unk> all over the world.
In addition collaborations partnerships and unique go to market strategies are key to drive brand awareness and fuel new customer acquisition, especially for the younger consumers.
Our next strategic pillar is about product excellence in our business.
<unk> product is everything we have four key initiatives to fulfill this objective in the next four years first is product quality styling and assortment.
Second is our focus on key product categories. They consist of women's and men's apparel, including denim athleisure and essential products handbags.
Footwear and kids, our third program initiative is our one global line.
As we have said in the past this initiative drives consistency in all markets enables us to elevate the quality of our products and will result in significant efficiencies throughout our supply chain.
Our fourth initiative regarding.
<unk> product is the expansion of our assortment to support our omni channel business.
The next pillar is about customer centricity.
We have four big goals to optimize our strategy customer data collection and analysis, the understanding of our customer segments their journey and their preferences.
This creation of a seamless customer experience using world class tools, and the optimization of customer engagement and brand loyalty programs on the heels of our sales force and omni channel capability rollout. We are implementing customer 360, a fully integrated suite developed by sales force. This.
This solution.
<unk> will enable us to optimize data capture dissect the customer journeys engagement contact personalized marketing and analyze the results of every activity endpoint of engagement.
Regarding CRM and our loyalty program, we have a rich global base with almost 5 million customers in all three regions.
And we see big opportunities to put the customer 362 to work on this and grow this program in the next few years.
Regarding our global footprint I believe stores are a key component in our omni channel network, a great environment to represent our lifestyle brand and our number one customer acquisition.
From vehicle, we have been very successful and rationalizing our global store fleet over the last few years and still have significant flexibility to optimize our portfolio as 80% of our leases worldwide are expiring in the next three years, we made the decision to exit more than 15 unprofitable flagship.
Ship locations, some of which have already been closed while others are planned to close later this year.
And as I mentioned, we will continue to pursue opportunistic new store openings in those markets, where we are underrepresented altogether, we estimate that our plan will contribute to 200 basis points.
<unk> operating margin improvement by fiscal year 2025 versus fiscal year 2020.
Next I will touch on our functional capabilities over the next few years, we will focus on optimizing our product management leveraging technology to become a true data driven business and creating meaningful.
For efficiencies across our global organization.
We think about product management optimization from end to end. This means product development sourcing and production too distributional logistics to inventory management. There are a few key components to this plan we are migrating our suppliers to the most efficient.
Places and consolidating vendors to achieve both operational and cost efficiencies.
In fact over the last two years, we have reduced our number of suppliers by over 60% faster lead times to market are more important now than ever we are digitalized, our product development processes, which.
Which could reduce lead times by up to two months as well as conducting capacity planning with our key vendors to react quickly to changes in demand.
In distribution and logistics, we are developing an efficient global network that capitalizes on low cost labor regions and automation.
Inventory management is key.
To maximize in both sales and margin we.
We are focusing on assortment planning allocation fulfillment and markdown optimization.
I believe that becoming a data driven organization is a key enabler to allowing us to compete effectively in the future. This process is an evolution.
And must remain a constant focus for us our technology plan supports our strategic plan and is anchored in innovation and data analysis. Some initiatives. In addition to the technology work that we're doing on customer centricity include modernizing and enhancing our systems to ensure reliable secure and.
Integrated global infrastructure, and our migration to the cloud.
Lastly, as a global organization, we are focused on a true global infrastructure. This means simplifying our business practices and eliminating system and process redundancies across the globe in Europe, we have a multichannel.
<unk> multi country infrastructure in place, we will leverage this model to streamline the organization and drive cost savings. This is a big opportunity for us.
Before I turn it over to <unk> I want to express how much this company and plan means to me and how excited I am about our future.
This is the last chapter in my professional journey, and I am giving everything they have to make it extraordinary.
Have a great partner and Paul a great team, an incredible brand and our dynamic business our position in the market is strong and sustained focus on this roadmap will allow us to growth.
Our business very profitably.
I am very confident in our team's ability to execute our plan and meaningfully grow the value of this great company with that let me pass it to Kate.
Thanks, Carlo let me give you some more color on the financials that fall out of that strategic plan.
Carlos mentioned, we are confirming.
And farming the commitment that we presented in December of 2019 can deliver 10% operating margin by fiscal year 2025, and while we still believe in sales growth for our brand over the next few years I guess, particularly excited that the meat of our path to double EPS from fiscal year 2020 to $3 in fiscal year 2020.
Five lies in the middle of the P&L, but we have the most control and this past year is proof that we can execute what we can control as.
As we gave a Q1, we're going to anchor our comparisons in this conversation to the pre Covid fiscal year 2020, which ended February one 2024 more normalized comparison.
In terms of revenue, we anticipate that we will reach $2 9 billion in fiscal 2025 versus $2 7 billion in fiscal 2020.
Most of this growth is being fueled by our e-commerce business with growth in wholesale being offset by a decline in retail.
As a result, we see our e-commerce penetration of direct to consumer.
Sumer sales growing from 13% in fiscal year, 2020% to 23% in fiscal year 2025.
I'll mention that E. Comm penetration was 22% this past year, but that was inflated a bit with the pandemic induced store closures.
In terms of adjusted operating margin, we see 400.
40 basis points of growth over the next few years. The vast majority 400 basis points is coming from operational efficiencies with the remaining 40 coming from leverage on higher sales.
Store portfolio optimization represents a large portion of the margin expansion about 200 basis points. This is higher than we had modeled pre pandemic.
We expect 90 basis points of supply chain efficiencies, primarily from better Imu's. We've been very successful in expense remaining this year and are working on longer term opportunities as well, we anticipate 70 basis points of margin expansion from fiscal 2020 in this area.
Lastly, as logistics, which is expected to contribute.
Contribute 40 basis points of operating margin improvement the operational efficiencies that Carlos mentioned will be partially offset by variable costs associated with e-commerce growth.
We see the 400 basis points of operational efficiencies line roughly equally over the next four fiscal years as some of the initiatives require some lead time I.
I will say, though that while the underlying savings will be present in fiscal year 2022 sales deleverage will slightly offset the impact and operating margin expansion from these savings.
With that I'll pass it to Fabrizio walk you through the rest of the five year financials.
Thank you Katie and good afternoon, everyone.
<unk> strong.
Balance sheet and returning capital to shareholders was and remains a key priority for us.
We believe we can generate higher free cash flows over the next four years as we continue to remain disciplined on managing working capital and driving operating margin to 10%.
At the same time, we believe we can support our strategic plan with investment levels.
But 2020 of roughly $65 million.
This should result in $220 million of annual free cash flow by fiscal 2025 one.
One seven times that of our fiscal 2020.
Turning to capital allocation.
Picking old Theyre going for Walt will remain.
<unk>.
Our first priority is to make the investments that will enable the execution of our strategic plan.
Our second priority is to return capital to shareholders through dividend and share repurchases.
We will continue to prioritize capital allocations towards the technology and infrastructure that we.
<unk> bought our transformation into a truly customer centric data driven company.
We would invest in remodeling some of our key store locations across the globe and opening new stores in Underpenetrated markets.
One of our key objective is to improve our return on invested capital.
Plan provider.
Path to increase profitability from a smaller but more efficient portfolio of assets as we exit underperforming stores optimize our working capital and migrate to a capital light model where appropriate.
Joel is two more than doubled return on invested capital to 26% by fiscal 2025.
<unk> plus is 12% in fiscal 2020.
Our second priority is the dividend payment, which we resumed in Q3.
And finally share repurchases.
We have been able to deliver significant shareholder value here in the past.
As a reminder, we repurchased slightly over 25% of our shares over the two.
At an average price of $15 76.
We believe that our five year strategic plan provides a solid roadmap to value creation.
And we will continue to approach share repurchases opportunistically when we believe that our stock is trading below its intrinsic value.
With that I will conclude the company's name.
Two years net open up the call for your questions.
Thank you we will now begin the question and answer session.
I'd like to ask a question. Please press Star then the number one on your <unk>.
Touchtone phone if you are using a speakerphone. Please pick up your handset first before pressing any numbers.
Once again if.
If you'd like to ask a question. Please press Star then one.
And you touched on from.
Our first question comes from Susan Anderson from B Riley Securities. Your line is now open.
Hi, it's Alex leg on for Susan first of all nice job on the quarter and congratulations hopefully the momentum continues.
Net economies keep reopening up but first question. Thank you. Thank you and good afternoon.
Thank you. Thanks, Carlos So pre Covid you were already headed in the right direction for operating margins, but due to the pandemic. Unfortunately it was setback.
How much do you think you can get that back in.
This year and I know you aren't giving guidance for this year, but at a high level, if you're able to kind of breakdown the SG&A and gross margin leverage too.
Yes, let me just.
Kick us off on and then Katie will probably.
<unk> talk more about the the numbers on how we are looking at the plan.
But.
Just we were very excited as you remember when after we had the Investor day back a year ago.
And at that time, we had a lot of confidence in the.
Plan to reach 10% operating margin less Thiago.
Obviously set us back, but the great thing is that we use the crisis in a very effective way I think and we were able to transform the business model. We found significant opportunities to really accelerate the operating margin expansion plan that we had.
That includes several.
Pieces of the plan that we were able to effect this past year.
When you put it all together.
Same 10% operating margin that we're looking at is somewhat differently configure than what we share with you back then and we tried to really explain.
How those pieces are different.
Kt will talk a little bit more about this now.
Hi, So as Carlo said, we are still.
Well committed to the 10% in fiscal 2025, so the 440 basis points of margin expansion 400 of them are coming.
Blaine.
So about half that is store portfolio optimization. So this is higher than we had modeled pre pandemic and of course, the pandemic gave us opportunity to close a lot of under performing stores and renegotiate rents.
Second piece is supply chain, which is 90 basis points pretty much in line with what we had modeled.
<unk> from.
Pre pandemic and then expense streamlining we have at 70 basis points. This is more than we had modeled before because again, we found as we went through the process of.
Zero based budgeting et cetera. During this past year, we were able to find some more efficiencies that we had identified pre pandemic.
Model and then the last piece is logistics and this we have about 40 basis points, we still have good underlying savings and optimizing our logistics network.
We're going to have a business model shift.
Post pandemic as we're leaning more into E. Comm. So originally we had our.
E Comm penetration.
For of direct to consumer business go into 18, and now we see it going into 'twenty, three and with that comes from more variable costs that offset the logistics savings.
So that's the.
Those are the operational efficiencies and then we see 40 basis points of leverage coming from higher revenue.
So now I'll talk about kind of the geography.
Penetrating al So 400 of the.
Of the 400 basis points of the margin expansion is going to come in gross margin and 40 is going to come in SG&A and why is it more weighted in gross margin line SG&A well. One other reasons is you know I talked about the growth in the ecommerce business as a percent of our sales and with that.
Dot com higher variable costs and those costs live in SG&A.
Coming back to you know, what we think we're going to achieve in fiscal 'twenty two.
The 400 basis points of operating efficiencies that we see and.
And by fiscal 'twenty, five are going to flow evenly over the next four.
Beyond the plan.
And that includes fiscal 'twenty two so the underlying expense savings will be present in fiscal 'twenty. Two however, because the revenue is going to take some time to get back up to the levels that we saw pre pandemic, we're going to get some of that some of that will be offset by deleverage of sales.
And.
Four years exciting thing about this is that if you look at our plan.
Most of the.
Value created here is depending on.
Cost reductions or efficiencies that we will achieve over that four year period.
They are there is very little that is depending.
On top line growth, but.
That doesn't mean that we don't see big opportunities for top line growth just we are.
Very excited about the opportunity to gain market share here, we have a great brand. The product is incredible I think at the value that we represent in the marketplace.
Today with our assortment is just unmatched and and we are seeing that the customers not only the ultimate customers when they have an opportunity to shop, whether it's on line or or even in our stores. When we are open we see a tremendous response to the new line, but on top of that.
So we have a pretty meaningful.
Wholesale business, we are seeing that our retail customers and wholesale have been making significant investments with us as a brand and a and we believe that that will give us an opportunity to grow now of course, we have reduced some of the hour.
I was asking in terms of stores that we closed and frankly, we are we are very happy with where we are in terms of the portfolio, but we also have even more opportunities to.
Streamlining the portfolio further because we have a lot of flexibility on the leases.
That's extremely helpful.
Carlos and Katie and then I guess hopefully just a quick follow up just on inventory. It's down just 1%. This year are you in possession of the inventory right now or is that impacted and still stuck at the ports hopefully not the Suez Canal and considered in transit inventory.
Yeah, it's a great.
Great question.
Yes, we do have some of in transit inventory and those numbers you know, that's a accounting, but but it's true that we have.
And inventory that we are we feel that the ownership and the composition of that inventory ownership is is right where we.
We wanted to be we are we did experience some delays in inventory receipts. You know you were talking about between two and three weeks.
And obviously that is impacting some of these numbers, but the big driver for.
The minus 1% versus the day.
Significantly lower.
Inventory that we had relative to the year before when we closed the third quarter is related to the shift in shipments for wholesale in Europe, and we I think we made this clear the last time when we talked that we were expecting that a lot of the shipments that historically traditionally.
We would have occurred in the fourth quarter, we're going to move into the first quarter of this year.
Obviously in order to ship all of that and its significant by the way we had to have the inventory, which we did in the down 1% that we reported so and it is almost identical.
Remember that brings just everything that we had to ship this year and the great thing is that we're sitting here already with 90% of those shipments already materialized. So we are very happy with that and of course the numbers have significantly ahead of last year's because of this shift.
Now moving of shipments when you look at the rest of the inventory now of getting out of Europe.
Just our inventories down about 12% in North America is down significantly and in Asia as well and also we are very happy with the composition of those two pieces because.
It's not just we have been running pretty lean inventories at trying to anticipate what the demand was going to look like.
Based on the experience that we have been accumulating during pandemic days and and the great thing is that we have been exceeding our expectations. So inventories continue to be.
Leaner and that has allowed us to run really good with good margins, we are seeing a.
Gross margin improvements.
The board really into and this also applies to China.
Within our Asia War, you May remember, we took a significant charge last year by this time.
First quarter.
Just to clean up our inventory position and and now we're running with a much leaner.
Position and again, we're seeing a lot more.
Full price sell throughs in China, and we're seeing that margins are up very nicely there as well.
So very happy with the inventory position.
Perfect. Thank you.
Thank you.
Thank you. Our next question comes from Janine Stichter share from Jefferies. Your line is now all day.
Hi, everyone and thanks for all the detail.
How are you feeling about that.
Good.
Good how are you.
It's more about the tempo of that margin target I think you mentioned the benefits flowing roughly evenly over the next four years, maybe talk a bit about where are you.
Do you see the easiest wins and then what will take longer and then on the 400 basis points of gross margin expansion is there any assumption in there.
For our markdowns it seems like you and a lot of the industry has benefited from lower markdowns, just kind of given what the inventory position is and the promotional environment being fairly rationale do you assume that you give some of that back or do you assume that you can kind of build from where you are now I just don't see anything in the outlook about other market assumptions from play out would be helpful. Thank you.
Yeah, I think as in any great questions.
Let me, let me start I think.
Good.
The quick wins, we did a lot of the heavy work.
This past year, frankly, I mean, we we werent planning that everything was going to happen as it did but but we saw the opportunities to really.
Go after the whole store portfolio reorganization and we did a lot more than what we have planned in our original plan.
And we are very very pleased with where we are with that.
I think that that is pretty much kind of like.
Wait a.
Meaning we have.
Renegotiated 290 leases, we have close to 125 stores.
And many of this were not very.
Profitable locations or or not right for the brand. So so we did a lot of that and it's going to have a major impact on our profitability through.
Occupancy leverage.
Then you know another big win and I think it's probably somewhat masked is about logistics you know, we when we talked a year ago or more now.
We had a plan to really reorganize our network.
Especially in Europe and.
We had a big opportunity too.
Get rid of one big facility, which we did last year and we did it with no cost we just.
Past our entire obligations.
Onto the new tenant I think that the pandemic in this case helped us because people were looking for facilities like that.
This was in Venlo and and in the Netherlands.
And then we were able to cut a very good deal with a with a Polish provider and they are our partners now.
And.
That is a very attractive place to do logistics and distribution work because labor rates are very very appealing.
And now we are kind of like what we wanted to be and we did it much quicker. So we think that.
We are going to capture those savings faster.
Or bad like Katie said.
The issue is that these savings have somewhat masked by the fact that we are growing at a faster rate than we have planned our ecommerce business and that carries a variable cost and that is a somewhat offsetting the savings that we are expecting to get so.
Overall I would say those two are big I immune we have been.
Increasingly email for the last four years.
And consistently and but this was before we had the one global product line.
In place and we just put that in and of course, we are having a lot more.
Beverage and great volume efficiencies as a result of that and also there are other costs that go into that bucket.
Ah I email or cost of goods and we think that that that is going to help us as well of course, we have some headwinds with cotton prices, increasing and so forth, but but.
We feel that we're in a very good place to continue to grow our other immune in accordance with our plans. So I would say those are the big ones, but you know frankly.
This is one of the beauties of this flat and answer that.
Everything that we have there you know we have a plan and we are acting on it so all of those 454.
440 basis points are I think are very very tangible number. So if you asked me well what is the upside or what do you think we can go from here I think that you know a couple of points of top line growth can go a very long way here to even increase the numbers that youre seeing there. So that's.
That's why we're so excited.
And Janine in terms of your question about markdown.
We have plans.
Vincent Mark on the plan, but that 90 basis point is really focus on line.
Great. Thank you very much.
Thank you. Thank you.
You.
Your next question comes from Omar Saad from Evercore ISI. Your line is now open.
Thank you. Thanks for taking my question and also thanks for all the information that was a lot to absorb.
I have a couple questions sure.
I have a couple of questions I guess.
Start with.
The profitability the gross margin profitability, that's kind of going on in the business.
You talked about a less promotional environment significantly less promotional environment industry wide.
Given some of the supply constraints and strong gross gross margins as a result.
Sustainable is this is this dynamic do you.
Think as inventory frees up.
We should expect that component of the promotion Ality component of gross margin at least kind of more normalize or is it possible that.
The industry, maybe is going to operating on a leaner level of inventory.
Overtime, I guess that'd be my first question that.
And I have a follow up.
Yeah. Thank you Omar.
Yeah, it's hard to say what is going to happen and I think you know just we have chosen this road for our brand we want to elevate the brand we want to.
Have a better quality in everything we do.
And this touches every aspect, but for sure start with pricing.
Putting the right value to each garment each product that we sell and and then expecting that we're going to sell.
Most of what we buy at full price that is exactly where we're going now.
Obviously.
Asleep, if others do the same.
That is going to help us be more successful.
With our initiatives, but at the end of the day. It goes back to product. If you have amazing product that others cannot match and you Havent World price you know you should and.
And you buy it in sufficient quantities, but not in excess then.
You should be able to sell a lot of that at full price and we're hoping that that the environment is going to continue to be receptive to that are we.
We think we have a brand that can do that very effectively and so far it has worked really well I think that.
Just.
Looking at the mall, it's looking at how people are operating looking at what's happening on line you know I think that a lot of companies are going in this direction and many of the ones that were.
Promoting.
Very very aggressively I think that you know have have had to adjust their models in one way or the other either.
There are close to closing stores or doing other things and we feel that over time, just the reduced capacities all healthy for for the entire industry and we feel that we can be a big winter as I said before just by gaining share. So I don't know if margins are going to stay exactly where.
Where they are or if there is.
Just a more normalized environment that comes after.
The balance is more restored, but we we can control what we do and the way. We're looking at this is we're always looking at our sales and saying, Okay. What is our demand going to look.
Look like and then buying accordingly. So so then we can fulfill our margin expectations, but but we are not going to play somebody else's game we are.
We'd like the game we're playing.
Got it got it okay. Thank you Carlos that's helpful and then on China.
I know theres been a reposition.
Positioning you mentioned new partners. There can you talk a little bit more detail I mean, it's such a big market.
For fashion.
But it's still a really small business and it has gone through different iterations, maybe you could give a little bit more detail why you think this.
You just take a China is going to be the one that works.
Yeah.
Yes, well you know so the.
Our China plant has four parts you know first is product again going back to product and elevating the brand we think that deep deep.
Market and the way we had run that market was not necessarily in line with where we are going now.
And we wanted to clean up our both distribution and our product ownership on where we were showing the customers and it.
It took us some you know just over a year to do so we put a great team of merchants to help with the product assortment.
We are like.
Now we took some significant hits on too.
Just to move the inventory that we had but we are in a much healthier position today and we like where we're going we are also thinking about the local tastes and what the customer wants to see and leveraging our global line.
I said, then and trying to augment that with more local design.
And we have a we're putting together a team to be able to do that effectively.
The second Big part is what you alluded to a margin that is our portfolio and how do we approach the physical.
Store network.
<unk> and <unk>.
This is nothing new what we're doing now frankly, when I was with the company earlier.
We were structuring our.
Store base, they are with franchisee partners and this is not new for the company I mean, I think guess has done this with multiple locations we have many.
And very successful partnerships in other parts of the world.
And with France, the franchisee model I love it because I think it's a capital light and and I think that when you're dealing with a country that is of the size of China is such a huge market and in each.
Many gen is somewhat different and unique so having people that are very experienced in those particular areas and have access to capital and have the relationships with our landlords and can open stores, where they belong and represent the brand consistently across you know it gives you a lot of speed it.
Read flexibility and it gives you talent and expertise that otherwise would be very difficult to do.
Within a reasonable time period.
The third big piece is marketing and marketing is also impacted by this elevation of the brand initiative, we think that we were being too promotional.
It gives you and and we were doing things that you know.
Not exactly in line with the brand.
And what we stand for and we think that again be a more localized would help us we are doing a couple of collaborations with local artists and celebrities.
So we'll see how that goes but we have a lot of confidence that this is the right place to go and the last thing is about E. Commerce, we have big partners in Tmall and.
We want to reinvent that model too again stand up for innovation and quality in front of the consumer and we are making.
These aren't big strives towards that so you know big market is still a very high priority for us in fact, we were talking about Paul today.
Important this is on our priority list, yes, you're right is a small business now, but it can be huge and we think that our brand is vibrant.
There we love the consumer base is very very young and very energetic and and when we're talking about the biggest middle class in the world you are talking about.
Huge economy with 13 trillion dollars I mean is it.
Is a big deal. So so we want to win.
And we're gonna give everything we have to be able to win with good partners.
Got it very helpful. Thanks best wishes.
Thank you Omar.
Thank you Andrew reminder of your other.
Your question. Please press Star then one on your Touchtone phone.
Question.
N Antitrust Star then one on your Touchtone phone. Our next question comes from Janet Kloppenburg from J J K Research Associates. Your line is now open.
Hi, everybody and congratulations on all other potlatch.
Thank you Jenna.
I just want you to know.
Part of cash.
Good in years.
It's really quite exciting.
Im sorry.
Sorry, I Couldnt hear you.
In Europe.
You can hear me. Okay can you hear me now can you hear me, yes, yes, I can go ahead sorry.
But I wanted to day.
Dortmund.
Very strong strongest all day.
Oh. Thank you. Thank you very much we're very proud of I think Paul and the team have done an incredible job with.
Yeah.
So.
The first question is on the store closings.
When I look at the presentation.
It looks like a large portion of those are behind you or at least a big chunk was done.
In fiscal 'twenty one.
So when we talk about getting the 400 basis points improvement.
Some of that coming from lower win.
From.
From negotiations in 'twenty, one or other more to come and how should we think about the store base.
And secondly, I was wondering if you could about the store base and that there'll be more shrinkage going forward and then I was wondering about the direct business, how big do you see that getting and what the margin.
How they will ramp in the in that channel.
Lastly, it's exciting to see the licensing business, well again and the profitability improve.
So I'm just wondering what product categories are driving that.
And if you think there's a lot more room for growth in that in that business segment. Thank.
Okay. So I'm going to start with a couple of things and then I'm sure that Katy Perry's will chime in so with respect to the store closings you are right. We have done a lot this past year.
But there is more to come and.
We when you look at our network you know they are.
Our many.
The locations that we see within the next four years that we may even improve over what we currently have based on what we think are those locations are.
Can command.
The new environment, and we have been successful.
Renegotiating grants when when they became due so so some of that is.
Embedded in the numbers that you see or in our expectations.
Okay.
So Keith do you want to yeah.
Yeah, I'll just add so.
Janet we closed over 120 stores this year.
<unk> and <unk>.
And then when you look at our five year plan going from this year to fiscal 'twenty five it's not a lot there as the total store base isn't changing a lot and we have some more closures in the U S. Some additions in north or sorry in North America, some additions in Europe and China.
And.
<unk> you know, we don't see a lot of movement now from now until fiscal 'twenty. Five so that you know the 200 basis points of margin a lot of that is already baked by Carlos that it's made up of closures also rent relief on top of this you know Carlos mentioned in the prepared remarks that we closed over 15 flagships. This has a big impact here to you know those stores.
But only 20 had operating losses of $12 million. So now think about the environment now is even more than that so that's included as well.
Okay.
Yeah.
To say that you know our.
Our plan is a relatively conservative when it comes to our fleet.
And then we do expect to have a few openings in that plan, but.
But you know we are we are testing new things we're looking at.
Opportunities to really represent the brand.
Appropriately in several markets and like I said, we have a lot of underdeveloped markets. So if we.
You know that that we can do significantly better we will probably be more aggressive on this with respect to the directly since you know I think Katie talked about.
You look at our penetration of E com this year.
As a percentage of our direct to consumer business. So you know, adding the retail.
We see from there.
No. We are we close the year with about a 22% penetration rate you know obviously, that's somewhat artificial because of we had many stores closed for extended periods of time, so it diminishes the day number.
Of retail there.
Retail we are.
Targeting a 23 per cent by fiscal year 2025, and that assumes that obviously we are.
Accelerating the growth of e-commerce with respect to the rest of our business and and.
And at retail and we feel that that's the right.
But with two planted I mean.
Just to be honest, we were very pleased with the acceleration of this business. So it could be that we do even better than this and we are happy with that because our business.
Is a very accretive to our operating margin for the company. So.
The direct businesses.
Right.
Commerce businesses is making good money, we're talking about teens in and we're happy about that and we see opportunities to to make more money frankly with our business. So so we are excited and we think that once you are fully implemented and optimized with the customer 360 on sales force.
We think that we.
Or even a more broad.
Productive business, there and the last thing you mentioned licensing we're super excited I think that.
You know obviously the business is still down.
And it's still tough year, we were up this quarter, but you know it's just there were a couple of unusual things that happened during.
We can help so you cannot consider this a trend and I think it's important that you keep your expectations are.
No with respect to this because we have not seen an organic change in in the in the way we were planning the business. So.
There are a few categories that are doing better.
In the quarter and we are excited even watches which is a.
And very interesting category.
We are seeing better performance.
Our handbags I think are completely.
No.
None in the marketplace.
We think we have.
An incredible selection of.
Or I guess I don't know if you have seen them, but it's just.
That line that line keeps coming keeps getting better and better so amazing job they're doing there.
And you know we have some very nice bright spots in our footwear is doing well I mean, we have a lot of areas that you know.
Our eyewear.
And business is strong.
It's across the board, but obviously everybody is going through the the challenges of a wholesale business that has been.
Gravely distorted last deal with the pandemic.
Okay. Thanks, so much and lots of luck talk to you later, yeah. Thank you and.
We're a bit talk later Biogen, Inc.
Thank you and at this time, we have no further questions in queue I will now turn the call back to Carlos for closing comments.
Alright, well. Thank you very much I just wanted to say thank you to all of you for attending today's call and thank you for Europe.
Thank you were very generous time and attention I know that we had a lot on this agenda and we were somewhat concerned about how much or how long. It was but we felt that it was a good opportunity to really give you a lot of details and we appreciate your patience on this we are very excited about our plan and.
Your cannot wait to report to you on our progress I am just so et cetera, but what we're about to do please have a wonderful time this week and happy holidays to all of you. Thank you so much for your time.
Okay.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation you.
We can disconnect.
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You may now.
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