Q3 2022 Guess? Inc Earnings Call
Good day, everyone and welcome to the guess third quarter fiscal 2022 earnings conference call I would like to turn the call over to Bruce kind of Roche Vice President of Finance and Investor Relations. Sir you may begin.
Thank you very good afternoon, everyone and thank you for joining us today.
We'll go to deal with.
Chief Executive Officer.
S P a.
<unk>.
During today's call the company will be making forward looking statements, including comments regarding future plans.
<unk> condition and short and long term.
It could be potential effects on the corner.
The company's actual results may differ materially from current expectations.
Just on disposals included in todays press release, and the company's cluster and annual reports filed with the SEC.
Comments may also reference certain non-GAAP or adjusted measures.
First negotiation and description of these measures can be found in todays earnings release.
<unk>.
Before I.
I would like to mention that we will be participating in a sense that Chuck and Sylvia.
Morgan Stanley Global Consumer conference on Wednesday December.
At 95 P M eastern.
The fireside chat will also be available via webcast details on how to connect to the live webcast will be available on our investor website.
First off does get dotcom, we hope to see you Deb now accounts.
Thank you <unk> good afternoon, everyone and thank you for joining us today.
I am very pleased to report another strong performance this quarter, which exceeded our expectations for revenue growth.
And margin expansion and bottom line results.
Revenues increased 13% for the quarter versus last year, and adjusted operating profit reached $70 million.
Delivering an adjusted operating margin of almost 11% and adjusted earnings per share of <unk> 62.
Versus 58% last year and 22 cents in the pre pandemic third quarter.
This performance was driven by the hard work vision and dedication of our teams around the world. The business transformation that we have executed on the amazing product and strong momentum of the gifts brand.
I want to thank our teams for their strong contributions, particularly during this challenging time, we are very proud of you.
I strongly believe our company is positioned better than ever to extend its distribution gain market share and increase profitability.
We have a strong balance sheet and solid cash generation power to support our business growth and return excess cash to our shareholders.
Our board's commitment is evident with the previously announced <unk>.
And used 200 million borrowed share repurchase authorization and today's approval to double our dividend.
We firmly believe our stock is trading below its intrinsic value.
To execute share repurchases opportunistically.
Over the last two years, we have successfully executed a full transformation of our business.
And what better proof that our strategy is working and our results. This fiscal year. When we are guiding to double our operating margin and profit from pre pandemic levels.
The first piece of this transformation is the elevation of our brand, including launching our first global line elevating the quality and sustainability of our product upgrading our marketing and visual merchandising optimizing full priced selling remodeling our store fleet and enriching.
And the customer experience.
Paul has led this critical initiative and together with the product and creative teams they have been doing an incredible job.
The second piece of the transformation is the reset of our business model, we have optimized our distribution in both retail and wholesale by removing unproductive stores on accounts, reducing our product offering to result in a simpler business with more productive skus from our blower line we have.
Also remained laser focused on margin expansion with improvements coming from my new optimization lower occupancy on cost reductions, including the consolidation of certain functions in euro.
That's a natural extension of this efforts during the third quarter, we completed an intra entity transfer of certain intellectual property rights from the U S to Switzerland more closely aligning our IP rights with our business operations. We are operating in a more capital efficient way turn the inventory faster with less.
Non productive assets. This transformation has repositioned this company's ability to deliver strong growth significant profitability and superior shareholder returns into the future.
Sustainability remains a key focus for our brand and we are committed to being part of the solution to climate change, we have aggressive internal targets to reduce corporate greenhouse gas emissions by 50% and supply chain emissions by 30% by 2030 and to achieve net zero by 2000.
<unk> and.
In fact last month, we signed an open letter to G 20 leaders, calling for policies that are aligned with this goal. We also supported the United Nations Conference a few to ensure the collective youth boys from climate negotiations is hurt.
We are actively working on our climate action roadmap that includes store efficiency measures investment in renewables and changes to the way that we create and produce our product.
Wouldn't be prouder of our leadership in this very important area.
Let me add some color to our third quarter results.
Our retail and wholesale businesses in North America had remarkable performance in the period with significant increases in operating profit and margin expansion. Our licensing business also reported a strong quarter all driven by the strong momentum our brand is enjoying in the marketplace.
Our Europe segment performed well positively impacted by a shift in business to L. A Y due to the timing of inventory receipts and I am proud to say that we closed the spring summer order book for our European wholesale business this quarter with orders up 12% to LOI an hour.
Sales campaign for the pre fall winter season is looking promising for double digit growth as well.
These results clearly signals that we are continuing to gain market share.
Our Asia segment had a challenging quarter and continued to be impacted by the COVID-19 situation on government restrictions in several countries, including China, Japan and Taiwan.
I am really encouraged by the momentum that we saw in the third quarter and our top line, which of course starts with our brands and our product we had strong performance in dresses sweaters outerwear and denim as well as our high end Marciano brand North America saw a pop and knit tops, while Europe remained strong.
In his Legion, our mens business outperformance in North America, and in accessories sales of handbags and watches were solid in both regions.
I believe the strength that we have been seen in categories like denim Marciano handbags dresses and outerwear bodes well for the future.
These provide us key levers to drive same store sales growth.
<unk> is a true lifestyle brand and is poised to capitalize on current consumer trends casually.
Cash utilization is here to stay which will help fuel our continued growth in categories like denim, we havent diversified denim offering with silhouette, including skinny leg monitoring of media player.
<unk> a key opportunity for future growth at the same time, we see consumers returning to social activities and fashion oriented product, which is still in other key areas of our business like dresses and marciano.
Regarding our store fleet, we opened 55, new stores. So far this year, most of which were pop ups with new gas and factory stores and also specialty concepts like accessories, Activewear Marciano kids and our TMT counted against the original.
We continue to believe that we have substantial white space for new stores and many of our markets and stores are a key pillar to represent the lifestyle attributes a power brand provide a tool for new customer acquisition, we will complete the omnichannel experience.
In connection with the elevation of our brand we embarked on our remodeling program, but that will ultimately touch roughly 630 stores Inc.
Including new stores. This will represent 80% of our entire fleet in Europe, and North America by the end of next year.
We continue to invest in technology, including upgrades to our store infrastructure to drive efficiencies and enhance the customer experience.
Our E Commerce business continues to grow with sales in North America, and Europe in the third quarter up 15% from last year and 37% to al NOI.
This is a source of both revenue and profitability growth for our brand and it represents a material go forward opportunity for us.
And we continue to make progress on our customer centricity initiatives, including Omnichannel capabilities and advanced data analytics and customer segmentation in Europe, we are rolling out Omnichannel and ship from store capabilities in all countries and we have launched a new gift card application for the holiday.
Regarding customer analytics, we have nearly 6 million contactable customers in our database in North America, and Europe and have added 1 million new customers. This year, so far over 85% of this customers provide us with their mobile phone number and over 20% with their home address so we can learn.
<unk> SMS marketing on mailers.
As part of their customer 360 project, we recently launched our CRM platform, which gives US a 360 degree view of our customer and enables us to improve the way, we segment and personalize our communications marketing and promotional strategy.
This is fully implemented in Europe and early results are very promising the same application will be implemented in North America next year, we will continue to drive innovation in this area and finally investments in technology and customer analytics.
Regarding inventory in the supply chain it will come as no surprise that our product development cycle has been impacted by the unprecedented challenges that the world is facing on the supply and logistics side.
Our team is doing an incredible job mitigating this challenge is to the extent possible.
Our work to consolidate our vendors growing from over 500 to around 135 as well as the execution of the global mine, which reduces skus by over 40% has enabled us to leverage higher volumes to push through production.
We maintain a globally diversified sourcing strategy, which has helped us to limit impacts when areas experienced disruptions. We are also moving roughly 10% of our apparel sourcing two locations that are closer to the final distribution to cut down on incentive time and cost as well as exploring alternatives.
Mr licensing to move faster between China, and Europe and.
And we are surgically investing in air transportation, whether it makes sense to get our product in time to sell.
This year, we have gone through a bond at 7% usage of air freight versus a prior year average of about 3%.
In addition, as with the rest of the industry, we are experiencing increases in raw material costs like cotton.
We have contracts for certain raw materials that cover us into Q3 next year and simultaneously are looking at alternative options like recycled cotton made of post consumer waste products.
All of this is obviously, resulting in elevated costs, which we have built into our outlook importantly, we have been successful in increasing prices with AUR up 15% to 20% alongside our innovation and product quality to mitigate the impact of these cost increases are having on our profitable.
As of the end of Q3, we had over 100 million barrels of inventory in transit, representing almost 25% of our total ownership compared to 12% and pre pandemic Q3.
A lot of this product will support our post holiday business, primarily to service, our European wholesale business and our on hand inventory today is completely aligned with our demand expectations for the upcoming holiday season.
I feel strongly about our plans for the holiday business, we have a lot of new units coming to stores, our assortment and the elevated quality of our priorities is clearly resonating with our customers as evidenced by our strong start to the fourth quarter.
In North America traffic is gaining momentum recently and we are experiencing good conversion and strong AUR reached.
The recent improvement in trends in our tourist locations suggest that we are getting a boost from the change in travel restrictions implemented in the U S. Earlier. This month in Europe. We have also seen positive sequential momentum in sales comps at the start of the quarter driven by material increases in traffic as AUR also.
It remains strong.
As we have done all year, we plan to continue to be less promotional than in the past, especially with star wars level discounts.
We are increasing marketing to fuel customer acquisition, we are expanding the use of direct mail and catalog thesis planning to send out $1 2 million pieces during the quarter as well as increasing our investment in digital marketing to drive traffic to our sites.
We have bought key product feature and our marketing campaigns and significant debt. We have also added video capabilities to show product attribute more effectively.
When you put it altogether, we see top line growing in excess of 20% in the fourth quarter period versus last year and operating profit exceeding $100 million.
This represents an increase in both the top and bottom line to our previous outlook for the year and Katie will give us more color on this in a few minutes.
Looking past this year, we remain confident in our longer term goals to reach revenue of $2 8 billion.
And operating margins of 12% in fiscal year 2024.
In closing, let me just say that I could not be prouder of what our team has accomplished in the last two and a half years since I've been back.
We have highly dedicated people who share an incredible passion to pursue our purpose.
And on this team when we commit to something we deliver we committed to elevating our brand we are delivering.
I think Paul and our product teams have done extraordinary work with this.
Today, we have one line of product for the entire world across all categories and our products are the best they have been in our company's history highly elevated of great quality and very consistent with the DNA of the guess brand.
We committed to transforming the business. We are delivering we have re architected every aspect of our business model, including our store portfolio digital business sourcing and logistics operations and systems infrastructure. We also committed to expanding our margins and we are delivering here too.
We now expect to reach an 11% operating margin this year double our margin of two years ago and well ahead of our initial plan.
While these are all significant accomplishment I strongly believe that the best is yet to come for US. We are in an inflection point of guests and I'm very confident that our business is well positioned to generate superior returns in the future and our results will be here to prove it.
Our commitment.
With that let me pass it to Katie to review our financials in more detail.
Katy.
Thank you Carlos and good afternoon, everyone.
I'm excited to tell you more about our financial performance this quarter, which truly exceeded our expectations.
We tripled earnings the pre pandemic level and are raising both our top and bottom line outlook for the year. The brand is showing strong momentum going into the holiday season, and despite a challenging supply chain, we have the product to support that demand.
These results are again.
Uh-huh organization's commitment to flexibility to adapt during volatile times I'm sure Greg.
Being part of this passionate team.
Now let me take you through the details on the quarter.
Third quarter revenues were $643 million up 13% to last year and up 4% compared to ally.
This exceeded our expectation as our Americas retail European wholesale and licensing businesses all outperformed.
Overall, the 4% revenue increase the pre pandemic Aloe line was the result of growth in our European <unk>.
Kevin myself, including a shift in sales from Q2 to Q3 as well as ecommerce.
This was partially offset by permanently close story and negative same store sales in Europe.
Excluding.
Over 170 stores that we've closed since the pandemic Q3 revenue would have been up 9% in alkali.
And let me just remind you that these stores that are accretive to operating profit by about $20 million on a run rate basis.
Let's talk a bit about performance.
In Americas retail revenues were up 30% versus last year and down 5% versus al online better than our expectation.
Again this quarter the decline for Allied was driven entirely permanent store closures, which are worth roughly 7% of sales.
Youre constantly U S and Canada that we're at 2% constant currency versus Earl y.
Same store sales in the U S remain positive despite continued negative traffic trends with positive conversion in AUR growth over 20%.
I'm happy to report that sales.
Over 70 stores in Canada have improved substantially driven by a material increase in traffic in that region as the pandemic.
Wayne.
This quarter, we continued to be a lot less promotional lapping outdoor events and holidays and labor that we didn't do this year, which has an impact on our topline but of course.
The bottom line.
I can't help but point out the increase in profitability that we have brought to this section and is allowing us to capitalize on our positive downtime.
Operating margin in Q3 with over 14% versus less than 1% in the prior two years and operating profit.
<unk>.
Is that a L. L Y even on lower sales, what an incredible business transformation.
In Europe revenues were up 3% versus last year, and 19% versus Earl y.
The increase to ally is primarily a result of growth in our wholesale bank.
As you may recall from last quarter, our shipments for the fall winter season, where a few weeks delay due to challenges with the supply chain. So we have shifted sales from Q2 Q3.
But even absent the chef this business has positive momentum.
Market share here.
While our retail business continues to be pressured by pandemic related traffic decline, we saw a significant sequential improvement.
Sure.
Or your appetite down 13% in constant currency versus Earl online, a 7% improvement from down 20% last quarter as a result of improved traffic and continued increase in AUR.
In Asia revenue was down 8% in the last year and 31% L. L y.
Half of this decline was driven by the permanent store closures.
<unk> costs were down 25% in constant currency versus allied 5% higher than Q2 with negative sales comps in South Korea, and China and more moderate than other carriers.
This region has struggled with the resurgence of COVID-19, as well as the lack of consumer confidence, which is deeply impacting our sales.
Our Americas wholesale sales were up 64% to last year, 5% to Aloe line driven by higher sales in the U S and licensing revenue continues to outperform at 37% to last year and 20% to I don't know why in Q3, driven by strong performance in Q perfume.
Perfume and watch it.
Total company gross margin for the quarter was 45, 7% more than 800 basis points higher than two years ago.
Product margin increased 340 basis points this quarter versus al online, primarily as a result of lower promotion and higher IMU, partially offset by business mix increased freight which was worth about 100 basis point this quarter.
Ill Covid decreased 500 basis point, driven by business mix lower rent permanently close the doors.
Adjusted SG&A for the quarter with $223 million compared to 206 million two years ago.
The increase is a result of variable cost for both the e-commerce and wholesale benefit mostly in Europe, which grew up materially to our online as well as higher performance based compensation.
Adjusted operating profit for the third quarter was $70 million versus 55 million last year, and 23 million two years ago.
This is a 27 protection create the last year and over 200% increase.
And Dennis level.
Our balance sheet remains strong.
Ended the third quarter with $391 million in cash $26 million higher than last year.
The Q3.
Our cash balance was impacted by an $80 million U S.
Made in connection with the IP transfer that Carlos mentioned, we expect to recoup this amount in Switzerland over the next five to 10 years.
Inventories were $482 million up 23% in U S dollar, 22% constant currency versus last year and down 8% constant currency to I don't know why.
This increase reflects our strategy to secure debt.
Holidays in Q1 in light of the global supply chain disruption.
Got it.
Year to date capital expenditures were $41 million from $12 million in the prior year, but below pre pandemic level, mainly driven by investments in new stores Remodels and technology.
Free cash flow for the first three quarters of the year with negative $41 million driven down by $80 million of U S tax payment that I previously mentioned, excluding this tax center on free cash flow would have been positive $39 million.
Let me touch on capital allocation, we are confident in our ability to generate sustainable and profitable growth and ample free cash flow. As a result, we have the runway not only to fund our growth initiatives, but also the kind of incremental capital to our shareholders.
As you recall last quarter, we expanded our share repurchase program to $200 million today, we announced that our board of directors has approved a 100% increase in our quarterly dividend 11 in a cornerstone to 'twenty two.
As a reminder, our dividend.
Before we executed a 300 million dollar convertible note to fund share repurchases in April.
Yes.
So now let's talk about our go forward expectations.
We are raising our outlook for the fourth quarter and the full fiscal year for.
For the fourth quarter, we are expecting that to be down mid single digits versus L. L Y driven by timing in our wholesale business and permanently closed stores, partially offset by growth in our ecommerce and that.
Wanted to note that in light of the recent developments with the pandemic in Europe, we have built in more prudent assumption for revenues for our European retail business in the fourth quarter.
In terms of profit adjusted operating margin for the fourth quarter is expected to be about 100 basis points higher than L. L y.
Gross margin is expected to expand by around 500 basis points, driven primarily by business mix lower occupancy.
On the oceans and in person yet.
And with the rest of the industry, we are seeing some cost pressures, particularly in whichever.
Which are built into these numbers.
Indicate that the adjusted SG&A rate will be up around 400 basis points as cost savings offset by business mix investments in labor and higher incentive based compensation.
For the year, we now expect revenue to be down in the low single digits versus L. L Y and adjusted operating margin reached just over 11% for the year versus $5. Six account all why this represents a doubling of adjusted operating margin.
With margin expansion of over 550 basis points.
Fantastic.
Lower back.
So Brady Daphne this margin expansion come from about 250 basis points of lower promotional activity 200 basis points of IME, a program of 150 basis points.
Yes.
And 200 basis points of cannot make some onetime benefit this.
This was partially offset by about 150 basis points of higher inbound freight and 100 basis points of increases from Janney, mostly higher performance based compensation for this year.
We are very confident in ability of this margin improvement.
We realized that the current environment, a significant demand and limitations as product availability have triggered broad increases in margin in our history.
Most of our margin.
Concrete changes in our business model and Carlos Lucky through earlier, and they're not circumstantial, but more permanent in nature.
This margin expansion combined with the potential for future top line growth at gap is very powerful for.
For these reasons, we remain confident in our longer term goals and we look forward to sharing our outlook for the next fiscal year with you when we report Q4.
With that I will conclude the company's remarks, and let's open up the call to your questions.
Thank you we will now begin the question and answer session. If you would like to ask a question you can do so by pressing Star then one on your Touchtone phone. If you are using a speakerphone you need to pick up your handset first before pressing any numbers once again to ask a question. Please press Star then the number one on your touch.
Joan Fallon.
Our first question comes from Susan Anderson from B Riley FBR. Your line is now open.
Hi, good evening nice job on the quarter.
So maybe just to start off I'd like to get your thoughts around the U S. Retail growth was obviously very strong maybe if you could talk about the drivers there in terms of product categories, What's doing Wow men's versus women's and also are you seeing new customers come into the store or is this more existing customers come back.
And then also just on that front to the op margin. There was very very strong. So if you could talk about you know just kind of like the drivers there versus some more flattish op margin in 2019. Thanks.
Yeah. Thank you Susan.
You know Americas retail has been transformed in a pretty significant way. When you think about the makeup of our business and most of the big lever that we have been referring to our presence in the transformation of that business and not significant way so starting with our margins.
What we have done to really improve.
Our sourcing and consolidating vendors and are doing more with less and ink.
Integrating a lot of the pieces that are part of that supply chain to really deliver a better margin.
We are sourcing from the best countries.
Costs has been optimized as well.
So that's the first big thing the second Big thing is about.
Lower promotions, we have done a lot to reduce promotional activity and this has impacted Americas retail in a significant way as well we have also increased prices.
And we have done this very strategically.
We have an opportunity here that we see to really deliver on the demand that the customers are having on showing us our traffic has improved in North America and that is a big driver of our improvements in our profitability as well.
But the most important thing here too is while we have done on occupancy and our optimization of our.
Our footprint.
We have closed a lot of underperforming stores, we have also renegotiated a lot of leases.
And globally the number of slide 400 leases that we have renegotiated.
And as a result of all those pieces, we are doing more with less we have integrated the <unk> business into our factory outlet business. I think that has also proven to be a very good move.
The stores are doing significantly better.
And we have eliminated significant part as a result of that integration.
Altogether.
Very very compelling.
Asked about you know what.
We are seeing with the customers you know we mentioned that we have seen a lot of new customers shopping with.
The numbers that we provided we're more global but.
A fair share of that number that relates to North America.
We're very pleased with.
Commerce business and how it's integrating.
Omnichannel level with the stores. So you put it all together, we're very very happy with everything that we're seeing here.
But this is just the beginning because when you think about.
Many of the of the levers that I referred to like price increases or many other things that we.
Like being less promotional we are just seeing a partial year.
In the third quarter, you saw some activity, but we expect that this will.
Want to annualize it.
Perhaps even more important impact on the year. So very very happy overall, we are doing a lot of indirect mail you had mentioned that in my prepared remarks as well.
And.
And the biggest the lion's share of what we're doing impacts in North America.
Of the.
One 2 million pieces that I referred to about 800000 or.
Delivering North America. So we feel that this is a great effective way to reach the customer and also.
We present, our new lines.
The elevation of the product is all depicted in the elevation of the images as well. So we feel that this is going to be a powerful as well.
Of course, the fourth quarter is the most profitable quarter. So we have a tight.
The fourth quarter for this business as well and we feel that.
Now.
Our our sights on.
No just we have a great business model.
Great margins, but we think that we can grow and there are a lot of places.
In North America, where we have been before we were very successful at that time.
This is a time for us depends on.
Don't be surprised to start seeing growth in this business as well.
Great. That's really helpful. Thanks for all the details and I guess, if I could add one follow up I'm just curious in Europe. How that's performed at those countries opened up over the summer there and then also I guess as we look forward over this winter are you concerned that that could slow down again, given some increase locked down in certain countries there.
<unk>.
Yeah, well so.
We have a big business in Europe, and and it's very critical for us to win we think that the brand has incredible momentum right now and and the reason why we can say that with a lot of confidence as we are talking to our customers on the wholesale side and we are seeing that our.
And we are seeing growth I think as we mentioned we were up 12% in the spring summer.
Uh huh.
Right.
And now we are in the market with a pre fall winter line and we are seeing that double digits out there for us as well. So when you think about okay with all the lockdowns.
Slower activity, how can it be that that we could be up and we think that there is only one answer and that is we are gaining market share. We have built with these customers in a very effective way, we took care of them during the tough times.
We serve product for them and we haven't seen cancellations, which is very unusual so so.
But going back you know just we saw an uptick in our business and we were getting excited about that and we see that there is opportunity for us to really capitalize on the next 10 weeks, which are very critical in that region as well.
Yes, Austria, just announced another round of lockdown for three weeks, but we think that they are trying to do is to really anticipate and really deal with the virus situation. So then they can reopen and people can shop for the holiday. So we think that there may be some some movement above.
<unk>.
Ill take place, but but we think that this is not going to be that's damaging for us and of course.
That is holiday as you know Australia only represents 14 stores for us.
Great.
Hello.
Yeah, No I was hoping just to go from that.
We think that we have seen how.
How things play out we have a very strong e-commerce business that is growing at a very fast rate and.
We also have good businesses with all marketplaces. So you put it all together, we think that we can weather the storm, but you know as Katie mentioned, we did consider this in our outlook.
Have a more moderate expectation for the business, but we have inventory to do more business. If the demand is there.
Okay, great. Thanks, so much good luck this holiday.
Thank you Susan.
Thank you.
As a reminder, if you'd like to ask a question. Please press Star then one on your Touchtone phone. Our next question comes from Dana Telsey from Telsey Advisory Group. Your line is now open.
Good afternoon, everyone and nice to see the progress.
Carlos can you give me condensate on.
The global product line now.
Certainly seems like you're seeing the benefits as anything differing how is the denim category doing and with inflation and cotton how are you thinking about price increases going forward. Thank you.
Yes.
Got it.
Maybe Katie can walk will jump in on that.
So the global line has been just an incredible initiative for us because.
Not only we are seeing significant efficiencies as a result of that.
But.
Even more importantly.
Now in a position to offer a consistent consistent assortment of product.
All over the world political reasons, which is something we never have.
We have color pallets that are more coordinated we have differentiation between the lionsgate and marciano and one representation of each of those lines in a very with a lot of integrity, we have a tighter presentation and scores.
Merchandising, we have elevated the also the customer experiences and of course, we have been able to really.
Each product based on the perceived value of that product based on the competitive landscape and we think that we are really well for us across the board. This has enabled us to reduce our promotional activity and I think that has been a major advantage and it is impacting our bottom line.
So it has also helped us to optimize our supply chain. So we are leveraging the global line to drive costs down.
Doing global buys that are focused on key vendors. So that is also resulting in an improvement in costs and we are sourcing from low cost countries, where we can but now with all the supply chain issues, we are bringing sourcing to new York countries tensions that are closer to.
The ultimate distribution of the product.
And about 10% of what we're sourcing we plan to move into those countries with respect to product we are very happy with the initial.
We're getting all the products that are part of this new assortment, but we also have a lot of newness coming in we see that.
Especially on the dressy side with customer cravings.
They're looking for newness, they're looking for they're looking for in the U S.
Understood.
Given that we have a nice assortment, but there is more to come so Keith.
Keith do you want to mention about that.
And how you feel.
Yeah sure I mean.
As I said, we're seeing the performance in denim in North America, and Europe, and and with the whole with trying to capitalization, we see this continuing.
And I think going forward. This is gonna be a key lever that we have to grow our same store sales along with some other categories that are doing well outerwear handbags et cetera, and then Dan that you also asked about calling in inflation and Carlos mentioned pricing a little bit you know or what kind of going to wave that we have.
Looking for alternative sources for cotton and contracts to cover off into next year and then also as Carlos said, we've been successful in pricing or AUR that 15% to 20% we saw that strong AUR starting out this quarter and we see that continuing.
And by the way is that the EUR increase is a combination of being less promotional with a combined with the price increases in about 50 50 of that to AUR increases coming from each of those two components and we.
We are excited about that because we think that.
These changes are here to stay.
We are very fundamental to the way we are structuring the business.
And yes of course, there are some.
Normal circumstances that we see today with the supply and demand not being in balance, but we think that what are the things that we are changing and what we have changed our.
A lot more fundamental and more.
More of a permanent in nature as Kathy said in her prepared remarks.
Thank you.
And thank you at this time, we have no further questions in queue I will turn the call back over to Carlos for closing comments.
Alright, Thank you well I guess.
I just wanted to say we are in front of the more significant period of the year for us.
Just we have a lot of business that we are expecting to get we have a great teams. We are well positioned we have the inventory and that is so important.
During this time, we have bought inventory to really be able to satisfy this demand and we think we are super well positioned inventories here, we want to thank you all for participating today, and we wish you happy Thanksgiving and happy holidays.
We hope to talk to you very soon thank you so much.
Okay.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
Paul.
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Good day, everyone and welcome to the guess third quarter fiscal 2022 earnings conference call.
I'd like to turn the call over to for brief span of Roche Vice President of Finance and Investor Relations. Sir you may begin.
Thank you Alberto good afternoon, everyone and thank you for joining us today.
On the call today will be upheld February chief Executive Officer and <unk>.
<unk> financial.
During today's call the company will be making forward looking statements, including comments regarding future plans.
Initiatives extend ambition and short and long term outlook.
Including potential impact on the corner of our expanding.
The company's actual results may differ materially from current expectations based on risk vessels, including into this press release and the company's quarterly and annual reports filed with the SEC.
Comments, we also reference certain non-GAAP or adjusted measures.
GAAP reconciliations and descriptions of these measures can be found in todays earnings release.
Before turning the call to <unk> I would like to mention that we will be participating in a factset jet and the mutual Morgan Stanley Global Consumer conference on Wednesday December.
At 955, a M eastern.
Fireside chat will also be available via live webcast details on how to connect with the live webcast will be available on our investor website at investors <unk> Com, we hope to see you adapt now to calix.
Thank you <unk> good afternoon, everyone and thank you for joining us today.
I am very pleased to report another strong performance this quarter, which exceeded our expectations for revenue growth operating margin expansion and bottom line results Rev.
Revenues increased 13% for the quarter versus last year, and adjusted operating profit reached $70 million.
Delivering an adjusted operating margin of almost 11% and adjusted earnings per share of <unk> 62.
Versus 58 test last year and 22 in the pre pandemic third quarter.
This performance was driven by the hard work vision and dedication of our teams around the world. The business transformation that we have executed on the amazing product and strong momentum of the gifts brand.
Paul and I want to thank our teams for their strong contributions, particularly during this challenging time, we are very proud of all of you.
I firmly believe our company is positioned better than ever to extend its distribution gain market share and increased profitability.
We have a strong balance sheet and solid cash generation power to support our business growth and return excess cash to our shareholders.
Our board's commitment is evident with the previously announced and store and used 200 million borrowed share repurchase authorization and today's approval to double our dividend.
We firmly believe our stock is trading below its intrinsic value and plan to execute share repurchases opportunistically.
Over the last two years, we have successfully executed a full transformation of our business.
And what better proof that our strategy is working and our results. This fiscal year. When we are guiding to double our operating margin and profit from pre pandemic levels.
The first piece of this transformation is the elevation of our brand, including launching our first global line elevating the quality and sustainability of our product upgrading our marketing and visual merchandising optimizing full priced selling remodeling our store fleet and enriching.
And the customer experience.
Paul has led this critical initiative and together with the product and creative teams they have been doing an incredible job.
The second piece of the transformation is the reset of our business model, we have optimized our distribution in both retail and wholesale by removing unproductive stores on accounts, reducing our product offerings to result in a simpler business with more productive skus from our global lines we have.
Also remained laser focused on margin expansion with improvements coming from my new optimization, lower occupancy and cost reductions, including the consolidation of certain functions in Europe.
As a natural extension of this efforts during the third quarter, we completed an intra entity transfer of certain intellectual property rights from the U S to Switzerland more closely aligning our IP rights with our business operations. We are operating in a more capital efficient way turn the inventory faster with less.
Non productive assets. This transformation has repositioned this company's ability to deliver strong growth significant profitability and superior shareholder returns into the future.
Sustainability remains a key focus for our brand and we are committed to being part of the solution to climate change, we have aggressive internal targets to reduce corporate greenhouse gas emissions by 50% and supply chain emissions by 30% by 2030 and to achieve net zero by 2000.
<unk> and.
In fact last month, we signed an open letter to G 20 leaders, calling for policies that are aligned with this goal. We also supported the United Nations Conference of <unk> to ensure the collective youth boys from climate negotiations is hurt.
We're actively working on our climate action roadmap that includes store efficiency measures investment in renewables and changes to the way that we create and produce our product.
I couldn't be prouder of our leadership in this very important area.
Let me add some color to our third quarter results.
Our retail and wholesale businesses in North America have remarkable performance in the period with significant increases in operating profit and margin expansion.
Our licensing business also reported a strong quarter all driven by the strong momentum our brand is enjoying in the marketplace.
Our Europe segment performed well positively impacted by a shift in business to L. A y due to the timing of inventory receipts and.
I am proud to say that we closed the spring summer order book for our European wholesale business this quarter with orders up 12% to LOI on our sales campaign for the pre fall winter season is looking promising for double digit growth as well.
These results clearly signals, but we are continuing to gain market share.
Our Asia segment had a challenging quarter and continued to be impacted by the COVID-19 situation on government restrictions in several countries, including China, Japan and Taiwan.
I am really encouraged by the momentum that we saw in the third quarter and our top line, which of course starts with our brand and our product we had strong performance in dresses sweaters outerwear and denim as well as our high end Marciano brand North America saw a pop in knit tops, while Europe remained strong.
In that region, our mens business outperformance in North America and in accessories sales of handbags and watches were solid in both regions.
I believe the strength that we have been seen in categories like denim Marciano handbags dresses and outerwear bodes well for the future as these provide us key levers to drive same store sales growth.
<unk> is a true lifestyle brand and is poised to capitalize on current consumer trends.
Cash utilization is here to stay which will help fuel our continued growth in categories like denim, we have a diversified denim offering with silhouettes, including skimming Meg monitoring and media player and CBS, a key opportunity for future growth at the same time, we see consumers returning.
The social activities and fashion oriented product, which is still on other key areas of our business like dresses and marciano.
Regarding our store fleet, we opened 55 new stores so far this year.
Most of which were pop ups with new gas on factory stores and also specialty confidence like accessories, Activewear, Marciano kids and our DMC counted against the original.
We continue to believe that we have substantial white space for new stores and many of our markets and stores are a key pillar to represent the lifestyle attributes of our brand provide a tool for new customer acquisition, we will complete the omnichannel experience.
In connection with the elevation of our brand we embarked on our remodeling program, but that will ultimately touch roughly 630 stores.
Including new stores. This will represent 80% of our entire fleet in Europe, and North America by the end of next year.
We continue to invest in technology, including upgrades to our store infrastructure to drive efficiencies and enhance the customer experience.
Our E Commerce business continues to grow with sales in North America, and Europe in the third quarter up 15% to last year and 37% through out of the way.
This is a source of both revenue and profitability growth for our brand and it represents a material go forward opportunity for us.
And we continue to make progress on our customer centricity initiatives, including Omnichannel capabilities and advanced data analytics and customer segmentation in Europe, we are rolling out Omnichannel and ship from store capabilities in all countries and we have launched a new gift card application for the holiday.
Regarding customer analytics, we have nearly 6 million contactor world customers in our database in North America, and Europe and have added 1 million new customers. This year so far.
Over 85% of this customers provide us with their mobile phone number and over 20% with their home address so we can leverage SMS marketing on mailers.
As part of the customer 360 project, we recently launched our CRM platform, which gives US a 360 degree view of our customer and enables us to improve the way, we segment and personalize our communications marketing and promotional strategy.
This is fully implemented in Europe and early results are very promising the same application will be implemented in North America next year, we will continue to drive innovation in this area and planned investments in technology and customer analytics.
Regarding inventory in the supply chain it will come as no surprise that our product development cycle has been impacted by the unprecedented challenges that the world is facing on the supply and logistics side.
Our team is doing an incredible job mitigating these challenges to the extent possible.
Our work to consolidate our vendors growing from over 500 to around 135 as well as the execution of the global line, which reduces skus by over 40% has enabled us to leverage higher volumes to push through production.
We have order product in advance to allow for extended lead times on our inventory levels at the end of Q3 reflect this we.
We maintain a globally diversified sourcing strategy, which have helped us to limit impacts when areas experienced disruptions.
We are also moving roughly 10% of our apparel sourcing two locations that are closer to the final distribution to cut down on transit times and costs as well as exploring alternative shipping methods licensing to new products faster between China and Europe.
And we are surgically investing in Aero transportation when it makes sense to get our product in time to sell.
This year, we have grown to about a 7% usage of airfreight versus a prior year average of about 3%.
In addition, as with the rest of the industry, we are experiencing increases in raw material costs like cotton.
We have contracts for certain raw materials that cover us into Q3 next year and simultaneously are looking at alternative options like recycled product made of post consumer waste products.
All of this is obviously, resulting in elevated costs, which we have built into our outlook.
Importantly, we have been successful in increasing prices with AUR up 15% to 20% alongside our innovation and product quality to mitigate the impact of these cost increases are having on our profitability.
As of the end of Q3, we had over 100 million barrels of inventory in transit, representing almost 25% of our total ownership compared to 12% and pre pandemic Q3.
A lot of this product will support our post holiday business, primarily to service our European wholesale business on our on hand inventory today is completely aligned with our demand expectations for the upcoming holiday season.
I feel strongly about our plans for the holiday business.
Have a lot of newness coming to stores, our assortment and the innovative quality of our priority is clearly resonating with our customers as evidenced by our strong start to the fourth quarter.
In North America traffic is gaining momentum recently and we are experiencing good conversion and strong AUR reached.
The recent improvement in trends in our tourist locations suggest that we are getting a boost from the change in travel restrictions implemented in the U S. Earlier. This month in Europe. We have also seen positive sequential momentum in sales comps at the start of the quarter driven by material increases in traffic as AUR also.
It remains strong.
As we have done all year, we plan to continue to be less promotional than in the past, especially with store wide level discounts.
We are increasing marketing to fuel customer acquisition, we are expanding the use of direct mail and catalog thesis planning to send out $1 2 million pieces during the quarter as well as increasing our investment in digital marketing to drive traffic to our sites.
We have bought key product feature and our marketing campaigns insignificant debt. We have also added video capabilities to show product attributes more effectively.
When you put it altogether, we see top line growing in excess of 20% in the fourth quarter periods versus last year and operating profit exceeding $100 million.
This represents an increase in both the top and bottom line to our previous outlook for the year and Katie will give us more color on this in a few minutes.
Looking past this year, we remain confident in our longer term goals to reach revenue of $2 8 billion.
And operating margins of 12% in fiscal year 2024.
In closing, let me just say that I could not be prouder of what our team has accomplished in the last two and a half years since I've been back.
We have highly dedicated people who share an incredible passion to pursue our purpose.
And on this team when we commit to something we deliver.
We committed to elevating our brand we are delivering.
I think Paul and our product teams have done extraordinary work with this.
And today, we have one line of product for the entire world across all categories and all.
Our products are the best they have been in our company's history highly elevated of great quality and very consistent with the DNA of the guess brand.
We committed to transforming the business we are delivering we are.
Reactive ticket every aspect of our business model, including our store portfolio digital business sourcing and logistics operations and assistance infrastructure. We also committed to expanding our margins and we are delivering here too. We now expect to reach an 11% operating margin this year double.
Our margin of two years ago, and well ahead of our initial plan. While these are all significant accomplishment I strongly believe that the best is yet to come for US. We are in an inflection point of guests and I am very confident that our business is well positioned to generate superior returns in the future and our results will be here too.
You have our commitment with that let me pass it to cater to review our financials in more detail.
Katy.
Thank you Carlos good afternoon, everyone I'm excited to tell you more about our financial performance this quarter, which truly exceeded our expectations. We tripled earnings the pre pandemic level and are raising both our top and bottom line outlook for the year. The brand is showing strong momentum going into the holiday season, and despite a challenging.
We have the size to support that demand.
These results are again, a testament of our organization's commitment to win flexibility to adapt during volatile times and pure grant and loves being part of this passionate team.
Now let me take you through the details on the quarter.
Third quarter revenues were $643 million up 13% to last year and up 4% compared to ally.
This exceeded our expectation as our Americas retail European wholesale and licensing businesses all outperformed.
Overall, the 4% revenue increase decreases on a al online was the result of growth in our European <unk>.
Driven by wholesale including a shift in sales from Q2 to Q3 as well as ecommerce.
This was partially offset by permanently closed stores and negative same store sales in Europe and Asia.
Excluding sales on the over 170 stores that we've closed since the pandemic Q3 revenue would have been up 9% of alkali.
And let me just remind you that these stores are accretive to operating profit by about $20 million on a run rate basis.
Let's talk a bit about the performance by segment.
In Americas retail revenues were up 30% versus last year and down 5% versus ally better than our expectation.
Again this quarter the decline for Allied was driven entirely by permanent store closures, which are worth roughly 7% of sales.
We're constantly U S and Canada were up 2% in constant currency versus Earl y.
Same store sales in the U S remain positive despite continued negative traffic trends with positive conversion in AUR growth over 20%.
Im happy to report that sales in our over 70 stores in Canada have improved substantially driven by a material increase in traffic in that region as the pandemic there is beginning to wane.
This quarter, we continued to be a lot less promotional lapping outdoor events on holiday I think labor day that we get into this year, which had an impact on our topline but of course, a benefit to our bottom line.
I can't help to point out the increase in profitability that we have brought to this segment that is allowing us to capitalize on our positive sales trends.
Operating margin in Q3 with over 14% versus less than 1% in the prior two years and operating profit at 15 times when it was increasing direct LOI, even on lower sales, what an incredible business transformation.
In Europe revenues were up 3% versus last year and 19% versus LOI.
The increase to LOI is primarily a result of growth in our wholesale business.
As you may recall from last quarter, our shipments to the fall winter season, where a few weeks delay challenges with the supply chain. So we had a shift in sales from Q2 into Q3.
But even absent the shift this business has positive momentum we are gaining market share here.
While our retail business continues to be pressured by pandemic related traffic decline, we saw a significant sequential improvement in our sales last quarter.
So our comps for your App was down 13% constant currency versus ally, a 7% improvement from down 20% last quarter as a result of improved traffic.
These increases in AUR.
In Asia revenue was down 8% in the last year and 31% to L. L Y nearly half of this decline was driven by the permanent store closures.
Store comps were down 25% in constant currency versus <unk>, 5% higher than Q2 with negative sales comps in South Korea, and China and more moderate than other carriers in the region.
This region has struggled with the resurgence of COVID-19, as well as the lack of consumer confidence, which is deeply impacting our sale.
Our Americas wholesale sales were up 64% to last year, and 5% to al lines, driven by higher sales in the U S.
Licensing revenue continues to outperform at 37% to last year and 20% to ally in Q3, driven by strong performance in Q perfume and watch it.
Total company gross margin for the quarter was 45, 7% more than 800 basis points higher than two years ago.
Product margin increased 340 basis points this quarter versus allied primarily as a result of lower promotion and higher IMU, partially offset by business mix increased freight which was worth about 100 basis point this quarter.
Occupancy rate increased 500 basis point, driven by business mix lower rent permanently closed stores.
Adjusted SG&A for the quarter with $223 million compared to 206 million two years ago.
Increase is a result of variable cost per Boe, the e-commerce and wholesale benefit mostly in Europe, which grew materially to our online as well as higher performance based compensation.
Adjusted operating profit for the third quarter was $70 million versus $55 million last year, and 23 million two years ago.
This is a 27% increase to last year and over 200% increase decreasing anthemic level.
Our balance sheet remains strong.
Ended the third quarter with $391 million in cash $26 million higher than last year.
The Q3.
Our cash balance was impacted by an $80 million U S.
Made in connection with the IP transfer that Carlos mentioned, we expect to recoup that amount in Switzerland over the next five to 10 years.
Inventories were $482 million.
23% in U S dollars and 22% in constant currency versus last year and down 8% in constant currency to outweigh this.
This increase reflects our strategy to secure debt at the holidays in Q1 in light of the global supply chain disruption and elongated transit times.
Year to date capital expenditures were $41 million.
At the $12 million in the prior year, but below pre pandemic level, mainly driven by investments in new stores Remodels and technology.
Free cash flow for the first three quarters of the year with negative $41 million driven down by $80 million of U S tax payments that I previously mentioned, excluding this tax payment our free cash flow would have been positive $39 million.
Let me touch on capital allocation, we are confident in our ability to generate sustainable and profitable growth and ample free cash flow. As a result, we have the runway not only to fund our growth initiatives, but also over time incremental capital to our shareholders. As you recall last quarter, we expanded our share repurchase program to $200 million.
Today, we announced that our board of directors has approved a 100% increase in our quarterly dividend from <unk> 11 in the cornerstone to 'twenty two.
As a reminder, our dividend with Amazon before we executed the 300 million dollar convertible note to fund share repurchases in April.
Yeah.
Now, let's talk about our go forward expectations.
We are raising our outlook for the fourth quarter and the full fiscal year.
For the fourth quarter, we are expecting revenue to be down mid single digits versus L. L Y driven by timing in our wholesale business and permanently closed stores, partially offset by growth in our ecommerce business.
I wanted to note that in light of the recent developments with the pandemic in Europe, we have built in more prudent assumption for revenues for our European retail business in the fourth quarter.
In terms of profit adjusted operating margin for the fourth quarter is expected to be about 100 basis points better than LOI.
Gross margin is expected to expand by around 500 basis points, driven primarily by business mix lower occupancy cost.
Promotions and improved on year end.
And with the rapidly industry, we are seeing some cost pressure, particularly in freight which are built into these numbers.
Dissipated the adjusted SG&A rate will be up around 400 basis points as cost savings offset by business mix investments in labor and higher incentive based compensation.
For the year, we now expect revenue to be down in the low single digits versus Aloe line and adjusted operating margin to reach just over 11% for the year versus $5. Six account all why this represents a doubling of adjusted operating margin.
With margin expansion of over 550 basis points to our pre pandemic business, despite a lower revenue base.
So Barry Mccaffrey. This margin expansion comes from about 250 basis points of lower promotional activity 200 basis points of IME on equipment of 130 basis points of lower occupancy.
And Tim a rebased decline of 10 Opex onetime benefit.
This was partially offset by about 150 basis points of higher inbound freight and a 100 basis points of increases in G&A, mostly higher performance based compensation for this year.
We are very confident in ability of these mining equipment.
We realized that the current environment, a significant demand and limitations and product availability has triggered broad increases in margins in our industry.
Most of our margin improvement.
Concrete changes in our business model and Carlos walking through earlier and are not circumstantial, but more permanent in nature. This margin expansion combined with the potential for future top line growth at gap is very powerful for.
For these reasons, we remain confident in our longer term goal and we look forward to sharing our outlook for the next fiscal year with you when we report Q4.
With that I will conclude the company's remarks, and let's open up the call to your questions.
Thank you we will now begin the question and answer session. If you would like to ask a question you can do so by pressing Star then one on your Touchtone phone. If you are using a speakerphone you need to pick up the handset first before pressing any numbers once again to ask a question. Please press Star then the number one on your touch.
Stonestown.
Our first question comes from Susan Anderson from B Riley FBR. Your line is now open.
Hi, good evening nice job on the quarter.
<unk>.
Maybe just to start off.
I'd like to get your thoughts around the U S. Retail growth was obviously very strong maybe if you could talk about the drivers there in terms of product categories, what's doing wow men's versus women's and all.
Or are you seeing new customers come into the store or is this more existing customers come back.
And then also just on that front to the op margin. There was very very strong. So if you could talk about.
Just kind of like the drivers there versus the more flattish op margin in 2019. Thanks.
Yeah. Thank you Susan.
Americas retail has been transformed in a pretty significant way when you think about the makeup of our business and most of the big lever that we have been referring to our presence in the transformation of that business in a significant way so starting with.
Margins and what we have done to really improve.
Our sourcing and consolidating vendors and doing more with less.
Integrating a lot of the pieces that are part of that supply chain to really deliver a better margin.
We are sourcing from the best countries.
Costs has been optimized as well.
So that's the first big thing the second Big thing is about.
Lower promotions, we have done a lot to reduce promotional activity and this has impacted Americas retail in a significant way as well we have also increased prices.
And we have done this very strategically.
We have an opportunity here that we see to really deliver on the demand that the customer is having on showing us.
Our traffic has improved in North America, and that is a big driver of our improvement in our profitability as well.
But the most important thing here too is while we have done on occupancy and our optimization of our.
Our footprint we.
We have closed a lot of underperforming stores. We have also renegotiated a lot of leases in notices and globally. The number of slide 400 leases that we have renegotiated.
And as a result of all those pieces, we are doing more with less we have integrated.
The <unk> business into our factory outlet business I think of that has also proven to be a very good move and the stores are doing significantly better.
And we have eliminated significant quarter as a result of that integration put it altogether.
Very very compelling.
About what.
What we're seeing with the customers. We mentioned that we have seen a lot of new customers shopping with the numbers that we provided we're more global but.
There is a fair share of that number that relates to North America.
We were very pleased with our e-commerce business and how it's integrating.
The omnichannel level with the stores. So you put all together we are very very happy with everything that we're seeing here is that this is just the beginning because when you think about Oh.
Many of the of the levers that I referred to with rent increases or many other things.
We like being less promotional we are just seeing a partial year. So in the third quarter you saw some activity, but we expect that this will.
Want to annualize it.
Even more important.
<unk> on the year, so very very happy overall, we are doing a lot in direct mail as I mentioned in my prepared remarks, as well and.
And the biggest the lion's share of what we're doing impacts North America.
The.
One 2 million pieces that I referred to about 800000 or.
Delivering North America. So we feel that this is a great very effective way to reach the customer and also.
We present, our new lines on the <unk>.
Quality is the elevation of the product is all depicted in the elevation of the images as well. So we feel that this is going to be powerful as well.
Of course, the fourth quarter is a more profitable quarters. So we have a high for us.
The fourth quarter for this business as well and we feel that.
Now.
Our our sights on.
Just we have a great business model.
Great margins, but we think we can grow and there are a lot of places.
In North America, where we have been before we were very successful.
Three of that.
The time for us to come back so don't be surprised to start seeing growth in this business as well.
Great. That's really helpful. Thanks for all the details and I guess, if I could add one follow up I'm just curious in Europe. How that's performed at those countries opened up over the summer there and then also I guess as we look forward over this winter are you concerned that that could slow down again, given some increase locked down in certain countries there.
<unk>.
Yeah, well so.
We have a big business in Europe.
And it's very critical for us to win we think that the brand has incredible momentum right now and.
And the reason why we can say that with a lot of confidence as we are talking to our.
Customers on the wholesale side and we are seeing that our growth and we are seeing growth I think as we mentioned we were up 12% in the spring summer.
Great.
And now we are in the market with a pre fall winter line and we are seeing that double digits out there for us as well. So when you think about okay with all the lockdowns.
Lower activity, how can it be that that we could be up and we think that there is only one answer and that is we are gaining market share. We have built with these customers in a very effective way, we took care of them during the tough times.
We serve product for them and we haven't seen cancellations, which is very unusual so.
But going back just we saw an uptick in our business and we were getting excited about that and we see that there is opportunity for us to really capitalize on the next 10 weeks, which are very critical in that region as well.
Yes, Australia, just announced another round of lockdown for three weeks, but we think that they are trying to do is to really anticipate and really deal with the virus situation. So then they can reopen and people can shop for the holiday. So we think that there may be some some movement about win.
The sales take place, but but we think that.
This is not going to be.
That is damaging for us and of course.
That is already <unk> in Austria, only represents 14 store for us.
Great.
Can you tell us.
Yes, no. It does just to close on that.
We think that we have seen how things play out we have a very strong E. Commerce business that is growing at a very fast rate.
And we also have.
Good businesses weighed on marketplaces. So you put it all together, we think that we can weather the storm, but you know us.
Katie mentioned.
We did consider this in our outlook.
To have a more moderate expectation for the business, but we have inventory to do more business. If the demand is there.
Okay, great. Thanks, so much good luck this holiday.
Thank you Susan.
Thank you.
Mind, you if you'd like to ask a question. Please press Star then one on your Touchtone phone. Our next question comes from Dana Telsey from Telsey Advisory Group. Your line is now open.
Good afternoon, everyone and nice to see the progress.
Can you give me condensate on.
On the global product line now that certainly seems like you're seeing the benefits as anything deferring how is the denim category doing and with inflation and cotton how are you thinking about price increases going forward. Thank you.
Yes.
Start up then maybe Katie can also jump in on that.
So the global line has been just an incredible initiative for us because.
Not only we are seeing significant efficiencies as a result of that.
But even.
Even more importantly.
Now in a position to offer a consistent consistent assortment of product.
Over the worlds political reasons, it just doesn't matter.
Now we have color pallets that are more coordinated we have differentiation between the lines gas and marciano and.
One representation of each of those lines that are very with a lot of integrity, we have a tighter presentation and scores.
Actual merchandising we have elevated also the customer experiences and of course, we have been able to really.
Rise each product based on the perceived value of that product based on the competitive landscape and we think that we are really world class across the board.
This has enabled us to reduce our promotional activity I think that has been a major advantage and it is impacting our bottom line. So it has also helped us to optimize our supply chain. So we are leveraging the global line to drive costs down.
Doing global buys that our focus on key vendors. So that is also resulting in an improvement in costs.
And we are sourcing from low cost countries, where we can but now with all the supply chain issues, we are bringing.
Sourcing to newer countries.
That are closer to the ultimate distribution of the product.
And about 10% of what we're sourcing we plan to move into those countries.
With respect to product, we are very happy with it.
Initial reads that were getting an orphan product for that.
Part of this new assortment, but we also have a lot of units coming on we see that.
Basically on the dressy side with customer the creativity that you know are there.
Looking for newness Theyre looking for new things. They are looking for new styles. When it comes to denim in particular, we have a nice assortment but.
More so.
Do you want to mention about denim and how you feel.
Yeah sure I mean, as Carlos said, we're seeing the performance in denim in North America, and Europe, and and with the whole with trends of capitalization, we see that continuing and I think going forward. This is going to be a key lever that we have to grow our same store sales along with some other categories that are doing well outerwear handbags.
<unk> et cetera, and then Dan that you also asked about cotton inflation, and Carlos mentioned pricing a little bit you know or what kind of going to wave that we have and youre looking for alternative sources for cotton and other contracts that cover off into next year and then also as Carlos said, we've been successful in placing our AUR that 15% to 20% we saw that strong AUR.
Starting out this quarter and we see that continuing.
And by the way is that the EUR increase is a combination of being less promotional with a combined with the price increases.
About 50 50.
That AUR increases coming from each of those two components.
We are excited about that because we think that.
These changes are here to stay they are very fundamental to the way we are structuring the business and yes of course there are some.
Normal circumstances that we see today with the supply and demand being in balance, but we think that what were the things that we are changing.
We have changed our.
A lot more fundamental and.
More and more of a permanent nature.
Kidney said to her prepared remarks.
Thank you.
Alright, thank you.
Yes.
Just wanted to say we are in front of the most significant period of the year for us.
Just we have a lot of business that we are expecting to get we have a great team, we are well positioned and we have the inventory and that is so important.
During this time, we have bought inventory to retail to be able to satisfy this demand and we think we are super well positioned inventories here, we want to thank you all for participating today, and we wish you happy Thanksgiving and happy holidays.
We hope to talk to you very soon thank you so much.
Okay.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.