Q4 2022 Guess? Inc Earnings Call
Good day, everyone at Walker, <unk>, <unk> fourth quarter fiscal 2022 earnings conference call.
I'd like to turn the call over to you for Bruce.
Vice President of finance and Investor Relations.
Thank you operator, good afternoon, everyone and thank you for joining yesterday on the call today with me are Kellow Subcommittee, Chief Executive Officer, and Katie Anderson Chief Financial Officer.
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 approach, including potential impacts from Dakota never spent any and the why you clean.
The company's actual results may differ materially from current expectations based on risk sector.
In today's press release, and the company's quarterly and annual reports filed with the SEC.
Comments will also reference certain non-GAAP adjusted measures GAAP reconciliations and descriptions of these measures can be found in today's earnings release.
Now I will turn it over to Carlos.
Thank you for a brief <unk> good afternoon, everyone and thank you for joining us today.
This is a very difficult time for all of US. The current situation in Ukraine is heartbreaking and very hard to process. Our hearts go out to all those being impacted by this horrific violence.
While our opportunity to help is limited at guess, we have been doing everything we can to assist in the humanitarian efforts there.
In addition to our charitable efforts our team in Poland is supplying refugees with housing food blankets and other necessities and we are very grateful that we have extraordinary people with big Hearts that responds strongly and adapt to a crisis like this one.
Regarding our business in Russia, we have a joint venture structure. There. So we are not a 100% direct operation, we're actively discussing and negotiating actions with our Russian partner for the time being we are suspending deliveries and investments into Russia and closing our direct E Commerce based.
We will continue to monitor the situation with our partner as we move forward.
As part of our announcements today, we shared that Katie Anderson will be leaving guests to pursue another opportunity a CFO of a privately held company.
Kt is very excited about her new role and we fully support her position I wish her the very best in this new chapter of her career, we want to thank Katy for all her contributions to guests during the last two and a half years that she was with us.
To support gas during this transition period I'm very pleased to report that Dennis Seeker World returned to guests as interim Chief Financial Officer.
Dennis spent over six years as Chief financial Officer of guests between 2006, and 2012 and he brings significant experience and strong leadership capabilities to the role.
Many of US know Dennis well he is highly respected within our organization and understands our business. We are confident that this will be a seamless transition and I want to welcome Dennis back to the team.
Going forward as many of the global functions are being consolidated in Switzerland. Following our IP migration, we will be launching a search for a permanent CFO based in Switzerland.
Now onto our performance I'm very pleased to report strong fourth quarter results, where we met our topline and exceeded our bottom line expectations. This capped an outstanding year for our company for the year, we reached at 12% adjusted operating margin and exceeded 300.
$10 million and adjusted operating profit more than doubling our pre pandemic levels in fiscal year 2020 for both measures.
We ended the year with a strong balance sheet and our return on invested capital of 26% the highest it has been in 10 years.
We also returned capital to our shareholders via our increased dividend as well as the repurchase of over $50 million in shares in Q4. This means that we have repurchased $378 million of powershares over the last three years at an average price of $16 from 41 said representing 28.
Percent of the outstanding and today, we announced that our board has approved an increase of our share repurchase authorization to $300 million and our intention to enter into a 175 million darice accelerated share repurchase program. As we continue this commitment to return value to our shareholders.
Our strong performance. This year is a clear testament to the strength and capabilities of our people across the world Paul and I. Once again want to congratulate our entire team of associates, who worked together relentlessly on fiercely to make this company better every single day no matter how challenging.
The circumstances.
We have an amazing team and culture here at guess and we could not be prouder of what we have accomplished together.
Let me now give you some color on our fourth quarter and full year results by segment.
Our retail business in the Americas had another remarkable quarter driven by both positive comps and significant margin expansion. This business closed the year with earnings from operations of $125 million over five times that of pre pandemic levels and we believe that there is more growth to come.
As we drive topline here with a much more profitable model.
Our wholesale business in the Americas also had another strong quarter of growth closing the year at 170% and operating profit to last year and 51% to L O y.
Our European business performed well, despite a significant impact from mommy chrome variant in that region, while retail sales were challenged by restrictions and consumer sentiment surrounding the COVID-19 surge wholesale and e-commerce showed meaningful growth.
The spring Summer order book, which shipped in the fourth quarter of last year in the first quarter of this year was up 12% versus LOI.
And I'm happy to report that this momentum continued with our order book for fall Winter 2022, which finished up 14% versus last year and will ship in the second and third quarters of this year.
Altogether operating profit for the Europe segment was $175 million, which is 162% higher than the prior year and 30% higher than L. O Y. Our Asia segment continued to be impacted by the Covid situation on government restrictions in several countries, including China, Japan and Taiwan.
One, but even with sales down 30% to L. O Y for the year. The segment performed significantly better from a bottom line perspective than L wide as it is healthier because of the actions that we took and lastly, our licensing business had a terrific year with sales up 31% to last year.
<unk> and 13% to L Y in spite of shipping challenges due to supply chain disruptions.
Let's talk about product.
Paul and the entire creative team have delivered and their vision is extraordinary.
I'm really encouraged by the product trends that we saw over the fourth quarter, which showed strength in our key focus categories showcasing that our strategies are working.
This quarter, we had strong performance in both women's and men's outerwear and activewear, including our new Athleisure line. Our men's business continues to outperform in women's knit tops and denim, which represent over 40% of the business outperformed other categories. In addition, we saw traction.
In footwear watches and our high end Marciano assortment.
Demand for handbags has been solid but lack of inventory due to supply chain delays in this category impacted that business in the fourth quarter. Our overall trends clearly indicate the customer is venturing out of their home and enjoying more social interactions guesses at true lifestyle brand and we are confident.
That our product lines are well positioned to capitalize on this return to pre pandemic life regarding the supply chain. We have been successfully navigating this dynamic and challenging global environment and are confident that we will have the appropriate inventory to support our businesses here we.
We ended the year with inventories up 19% to last year and the L. Y period, we have a higher portion of product in transit and placed orders earlier to mitigate delay risk we.
We're very happy with the makeup of what we own and have strategically plant. Our buys to include more timeless assortments like essentials, which gives us the capacity to support higher demand without taking significant inventory risk.
We are seeing some signs of decrease congestion of the ports that have built our plans assuming prices will remain elevated for the remainder of the year.
Now I will walk you through the transformation of our business model that we successfully executed over the last two years, then I will take you through the building blocks for our future growth, we have elevated the gifts and marciano brands redefined the company's global ecommerce strategy optimize our store footprint and <unk>.
Hence supply chain and driven efficiencies across the business I'm going to summarize this most for you as I believe understanding the drivers behind the margin expansion demonstrates its true sustainability.
I will of course start with the elevation of the brand, which has been led by Paul and the product and creative teams and has produced incredible results for us. This year, we have elevated the quality and sustainability of our product and upgraded our marketing and visual merchandising for the first time in the company's history, we can.
<unk> the launch of our global product line for all categories. This allowed us not only to maintain consistency of our product worldwide, but also streamline our vendor base from over 500 suppliers three years ago to around 100 today, a reduced SKU development by over 40.
Percent during that time.
We were able to eliminate overhead increased SKU productivity and drive down our cost with higher volume buys over the last few years, we have done a lot of work on driving <unk> growth, including moving sourcing to lower cost regions and consolidating vendors, we have strategically aligned our prices with.
The perceived value of the product and the competitive environment, resulting in AUR growth of over 15% in both North America and Europe . As a result, I EMEA expansion contributed roughly 250 basis points of margin this year versus the pre pandemic a white period in spite of investments that we're making in both.
Sustainability and the enhanced quality of our products we.
We have adjusted our buying strategies to maximize full price selling resulting not only in a cleaner and more upscale image of our brand, but also a margin pickup of nearly 200 basis points. This year.
For example, the portion of our sales sold at full price last year in North America increased 11% versus pre pandemic LOI period in North America, we integrated our G by guess brand into our factory business, reducing cost and driving productivity, resulting in an improvement in store.
<unk> of almost three times versus LOI.
In our retail channel, we closed underperforming stores, representing 16% of our store base, including highly unprofitable flagship locations, eliminating roughly $20 million of operating losses, we renegotiated over 490 leases, leaving us with much better terms for our existing stores.
These initiatives drove around 120 basis points of efficiencies in our occupancy rate and lastly, we streamlined our organizational structure with globalizing functions, allowing us to reduce costs and increase accountability.
This business model transformation has built a strong base for sustainable and profitable growth as we move the business into its next phase of growth.
I would classified last year as a baseline year, while we suppressed demand by decreasing promotions and increasing prices and faced challenges, including significant decreases in customer traffic due to COVID-19 and lack of product availability as a result of supply chain disruptions. This gives us a great opportunity to be.
Build the topline from care, let me walk you through some of the key initiatives for this year that will drive our growth and the future of our brand.
The upgrades that we have made to our brand have positioned us very well in the marketplace. Our wholesale partners are embracing our product and buying more the customer in our stores is doing the same.
We have cleaned up our store portfolio to eliminate unproductive stores and concentrate our retail operations in the stores in which we see growth opportunities. In addition to align our store image with the elevated branding we have embarked on our remodeling program that will ultimately touch over 600 stores.
With around 230, Remodels completed so far including our new stores. This will represent almost 80% of our entire fleet of stores in Europe and North America.
We have also re imagined our assortment for example for our guests North America business, just a year ago, 75% of our denim assortment was represented by Skinny jeans with additional styles like flare boot leg straight leg and the mom Jean Skinny jeans, now will represent only 50% of our assortment going.
Forward.
Our handbags have no competition in the market given the unique quality styling and colors that we offer at our price point dress.
Dresses have always been a key driver of our women's business in the past we were focused primarily on fashion trends, but now we also.
So have a foundation of essential dresses that are doing very well. This combination is powerful for expanding this important category, our outerwear collection for womens mens and kids is incredible and is selling very well.
Outerwear is another key category for us with high price points to build spend and increase store productivity and profitability. These are just some examples of levers that we will continue to fill our comp growth in our wholesale business this year and into the future.
Digital has been a priority for us So let me talk a bit about our progress for that business as you might recall in 2020, we finished the rollout of our new faster and more user friendly E Commerce platform, which helped us to deliver 15% growth in E. Commerce sales this past fiscal year.
<unk> in Europe , and North America in late 2021, we launched our new CRM platform in Europe , which gives us at 360 degree view of our customer and enables us to improve the way, we segment and personalize, our communication marketing and promotional strategies.
Our customer database in Europe grew by almost 20% last year the customers in our database represent roughly one third of our sales spending 20% more per transaction and engaging more across categories and our generic customers. We can now facilitate multi step journey powered by.
AI tools to optimize communication using various levels of customer data. This includes optimal times to send messages when the customer is more likely to engage as well as segmentation tools to predict content, which will most likely resonate with the customer and the customer sensitivity to various discounts.
These tools will allow us to further drive engagement and spend from this already valuable customers. We have been testing. This platform in three pilot markets in Europe and engagement with communications has increased 40% versus the benchmark. We are quickly learning the capabilities of the two in Europe .
Which will enable us to drive quick wins in North America. When we rolled this out here later this year.
Using these tools paired with the elevation of our product our stores and our online platforms, we will focus on driving customer lifetime value and retention rates and lowering customer acquisition costs.
This represents a significant could go forward growth opportunity for our company. We continue to believe in the importance of our stores as the customer is increasingly engaging with brands on an omnichannel level. We opened 87, new stores last year and are planning to open 50 to 60 new stores. This year we have.
<unk> white space for stores and many of our markets as well as the opportunity for specialty concepts like accessories Activewear Marciano kids in our TNC concept gastro regionals.
Current market dynamics are allowing us to open shorter term pop up stores, providing us with a cost effective way to test markets and concepts. In addition to completing the omnichannel experience our stores showcase the lifestyle attributes of our brand and drive new customer acquisition.
And with the work that we have done to optimize our margins stores represent a profitable and synergistic path for future growth.
Sustainability continues to be a top priority of guests. We released our sustainability report last summer with ambitious goals to empower our people and protect our planet guests.
Gas is the first name fashion and one of the first thing in the world to have its report undergo a reasonable level of assurance review with the examination led by big for assurance provider KPMG.
We have ambitious environmental goals and in Q4, we made our first ever purchase of renewable energy solar and wind in the Americas, Europe , and Asia equivalent to power approximately 20% of our stores globally.
We also continued to strengthen diversity and inclusion in 2022 guests has made diversity and inclusion training mandatory for U S Associates and we are working to expand this abroad.
Currently 40% of our senior executive leaders have female and over 70% of our managers are female and fiscal year 2021, we achieved gender pay parity at the U S. Corporate headquarters and will continue to monitor and report on this metric globally as we are committed to maintaining eco.
Pay for equal work at guess.
We also incorporate diversity and inclusion values into our performance review metrics across the organization.
Now I want to give you some context around our expectations for this fiscal year.
I will start with a macro environment, where we see both opportunities and challenges in fiscal 2023.
We believe consumer demand will remain strong as wages continue to rise and people return to life outside the home post pandemic for this year, we see a recovery in store traffic, particularly in regions, which have been slower to rebound from the pandemic like Europe .
We expect an international tourism will provide renewed business across regions, particularly in the back half of the year at.
At the same time, we will continue to be impacted by supply chain disruptions, including the recent COVID-19 surge in China, and we will face more uncertainty and volatility given the potential global impacts of the war and Ukraine.
We are confident in our plans to capture the demand and navigate through the challenges in fiscal 2023.
We are expecting sales growth of up low single digits versus fiscal year 'twenty two for total revenue of almost $2 7 billion.
As you May recall last year's first quarter was materially impacted by Covid related store closures, especially in Europe , and Canada for fiscal 'twenty to 'twenty three we do expect stores to be opened which will benefit this year's revenues by roughly $60 million or 2% of revenue growth.
We are also planning for positive comp store sales. The elevation of the brand has fueled higher AUR through higher prices and lower promotions, we expect AUR to help drive positive store comp sales in fiscal 2023, especially in the front half of the year as fiscal 2022 benefited from it.
In the back half.
As mentioned earlier, we also expect tourism to start recovering in the back half of the year and drive higher traffic into our stores.
Turning to wholesale as I previously mentioned this business has momentum in Europe , our order books for spring Summer and fall Winter 2022 are up double digits with a growth in that channel being driven by higher average buys from our wholesale partners.
Finally, we still believe that our e-commerce business has the potential to continue to grow as we augment our customer analytic capabilities.
We will have a healthy business in fiscal year 'twenty, three with high margins and lower promotions, we expect operating margin to be around 10, 5% almost doubled pre pandemic levels, but less than this past fiscal year, mostly driven by cost pressures in product costs on logistics and wages.
Especially in the first half of the year Kt will take you through the details here in a few minutes.
Regarding fiscal 2024, we're still confident in our goals to reach sales of $2 8 billion and a 12% operating margin. We believe that many of the headwinds that we're facing this year like elevated freight costs will normalize and we will realize the benefits of both sales leverage and additional operational.
Efficiencies in the longer term.
In closing the last two years with the global pandemic, we are very challenging for the world for our industry and for our company.
Covid impacted the way we live the way we work the way, we prioritize life and for sure the way we shop.
Paul and I are very proud of how our team and our company responded to this crisis to transform our business, leaving no stone unturned.
We executed well and adapted with agility encouraged to make guests better not just for the next quarter or the next year, but for the next generation.
Today, I believe our company is better positioned than ever with a business model that delivers sustainable double digit operating margins and high return on invested capital today, our guest brand enjoys strong momentum and is capitalizing on its elevated position globally today, we have significant opportunities.
To grow our business profitably and today, we have a strong team that is highly engaged and greatly inspired to take guess to the next level of growth and profitability no matter what challenges lie ahead and this is a team that is highly committed to delivering inspiring product to our customers.
An extraordinary value to all our shareholders today and for many years to come.
With that let me pass it to Katie to review our financials in more detail Katy.
Carlos Good afternoon, everyone.
Fiscal year 2022 different marketable year for our company, we have fundamentally reengineer, our business model to be more agile and profitable and this is showcased by our results a doubling of operating profit and EPS versus pre pandemic levels are.
Our strategic moves and investments in our brands are gaining momentum as evidenced by our expectations for revenue of almost $2 $7 billion. This year, despite a volatile operating environment we.
We are confident in our plans and our people and we'll continue to push our business forward and deliver long term growth and drive shareholder value.
Now let me take you through the details on the quarter fourth quarter revenues were $800 million up 23% to last year and down 5% compared to ally right in line with our expectations.
The 5% decrease in revenue to pre pandemic ally was almost entirely driven by permanent and temporary store closures worth about 4% Aloe line <unk>.
Additionally growth in ecommerce, partially offset negative comp store sales in Europe , and Asia due to the continued presence of the pandemic.
Let's talk a bit about sales performance by segment.
In Americas retail revenues are up 26% versus last year and down 4% versus ly.
Again this quarter declined to Aloe line was entirely driven by permanent store closures, which are worth roughly 6% of sales.
Store comps in the U S and Canada were up 1% in constant currency versus al why same store sales in the U S remains a solid positive. Despite continued negative traffic trends with a positive conversion in AUR growth of over 25% an increase of last quarter driven by even further reductions in markdown sales in Canada.
That softened slightly since Q3, driven by traffic at the omicron wave impacted that region more than the U S.
The gap between sales trends in our tourist stores versus non tourist stores within narrows and has been since the pandemic started and about half of what it was last quarter, which presents upside for us at the tourist stores continue to recover.
I need to make progress in the profitability in this segment operating margin in Q4 was over 17% versus 6% in ally and operating profit was about two five times, what it was pre pandemic even on lower sales.
In Europe revenues were up over 30% versus last year and down 4% versus ally.
The omicron wave impacted Europe more than our north American businesses as governments in Paris, more restrictions and consumers are more cautious.
Stockholm for Europe are down 19% in constant currency versus ally driven by significantly negative traffic associated with the pandemic conversion in AUR remained positive the wholesale business in this region continued its momentum with the spring summer and fall winter <unk> clothing up double digits.
In Asia revenue was down 4% to last year and 20% to ally in both cases more than half of this decline was driven by permanent store closures are.
So our comps were down 19% in constant currency versus allo, why 6% better than Q3 the.
The improvement is coming mostly from Korea, which had a sales comp in the negative low single digits to our alloy sales in China also improved versus Q3, driven by traffic, but Japan continue to struggle with the pandemic.
Our Americas wholesale sales were up 32% to last year, and 12% driven by higher sales in the U S and licensing revenue was down 10% to last year and up 1% to ly driven by handbags and footwear, partially offset by fragrances.
Total company gross margin for the quarter was 46, 3% more than 600 basis points higher than two years ago.
Our product margin increased 370 basis points this quarter versus ally, primarily as a result of higher iron ore and lower promotions, partially offset by increased freight which is worth almost 150 basis points this quarter.
Occupancy rate decreased 240 basis points, driven by lower rents and permanently close stores.
Adjusted SG&A for the quarter with $245 million.
Compared to 237 million two years ago.
The increase is a result of variable costs associated with the e-commerce business, which grew materially to ally as well as higher performance based compensation.
Adjusted operating profit for the fourth quarter was $126 million versus $74 million last year, and 102 million two years ago. This is a 69% increase to last year and 24% increase to pre pandemic levels.
Other net expense was $19 million and mostly consisted of net realized and unrealized losses from foreign currency exposures.
Our fourth quarter adjusted tax rate was 25, 2% up 870 basis points versus two years ago due to the mix of statutory earnings specifically our business in the U S with more profitable and carry the higher tax rate.
Adjusted diluted earnings per share finished at $1 14 versus $1 18 last year and $1 20 to two years ago at higher adjusted operating profit was offset by higher other net expenses and tax rate.
Now, let's talk about our balance sheet, which remains very strong.
We ended the fourth quarter with $416 million in cash $53 million lower than last year's balance at the end of Q4, our cash balance was impacted by $107 million of U S tax payments made in connection with the IP transfer that we discussed last quarter <unk> copper overtime as well as $51 million in share repurchases.
Inventories were $462 million up 19% in U S dollars and 26% in constant currency versus last year. This increase reflects our strategy to secure goods in advance in light of the global supply chain disruptions and elongated transit times.
We are particularly focused on ensuring that we have the proper inventory levels to deliver on our open orders for wholesale while we are still living in a highly dynamic environment. We are seeing some improvement in lead times and our inventories are well positioned to meet demand for the spring.
Fiscal year capital expenditures were $64 million up from $19 million in the prior year and $62 million in LOI, mainly driven by investments in new stores Remodels and technology.
Free cash flow for the year was $61 million driven down by the $107 million U S tax payment that I previously mentioned, excluding this tax payment our free cash flow would have been $168 million.
We continue to allocate value to our shareholders as you recall last quarter, we doubled our quarterly dividend from <unk> 11 in the cornerstone to $22.05 in the fourth quarter, we repurchased two 3 million shares for $51 million at an average price of $22 28.
Today, we announced that our board approved an increase to our repurchase authorization to $300 million.
Leaving us with $249 million available and as Carlos mentioned, we intend to enter into $875 million accelerated share buyback. This was a strong finish to an incredible year for our company for the fiscal year, we delivered $311 million and adjusted operating profit more than <unk>.
Double pre pandemic adjusted operating profit of $150 million.
We expanded adjusted operating margin by over 600 basis points, reaching a 12% versus pre pandemic five 6%.
We achieved that in spite of the varied and unprecedented challenges that have continue to arise as a result of this multi year pandemic.
We returned value to our shareholders as well as invested in our infrastructure in stores to support future growth.
As Carlos mentioned, we are pleased with the momentum in our business, but continue to operate in an uncertain environment globally.
We are expecting our revenue growth rate in the low single digits.
Q1, we will benefit from lapping significant COVID-19 related temporary store closures from last year. We are planning positive comp store sales as we continue to benefit from higher AUR and lower promotions in the first half of the year as well as an expected recovery in tourism in the back half of the year revenues.
Revenues are also expected to benefit from new store openings, we opened 87 stores in fiscal 2022 and plan to open roughly 50 to 60 new stores in fiscal 2023. Finally, we expect growth in both our e-commerce and wholesale businesses.
On the other hand, we have modeled significant disruption to our business in Russia, which represents less than 3% of revenue for the total company on an annual basis. In addition, we are assuming currency at prevailing rates, which had a negative impact on our revenue growth of around 4% versus last year.
In terms of margin, we expect to deliver approximately 10, 5% operating margin. Let me walk you through the puts and takes to explain the 150 basis point decline in operating margin versus our 12% in fiscal 2022.
We're expecting 200 basis points of supply chain cost pressures, including raw material pressure and freight which is more prevalent in the first half of the year currency headwinds will impact our bottom line by 50 basis points, and we had 50 basis points of onetime benefits that we received last year and will not repeat.
This is partially offset by a 150 basis points of sales leverage all in we expect gross margin contraction of about 200 basis points for the year versus last year, which is partially offset by about 50 basis points of leverage on the SG&A rate.
For the first quarter, we are expecting revenue to be up low teens versus prior year, driven by last year's temporary store closures, which is worth roughly 10% of revenue growth wholesale growth and positive store comps.
In terms of profit operating margin for the first quarter is expected to be roughly flat to prior year.
Martin is expected to decline by nearly 70 basis points, driven primarily by higher inbound freight and raw material costs, partially offset by pricing and lower promotions.
We anticipate that the adjusted SG&A rate will be down around 70 basis points as a result of sales leverage.
And lastly, as we announced today this will be my final earnings call I guess.
I would like to thank Paula and Carlos and the amazing team here at gas for an incredible journey over the last two and a half years.
This is a great company with truly special people and I'm. So proud of what we've accomplished together and I'm excited for what lies ahead as guests continued its growth path and it will be cheering you on every step of the way and with that I will hand, it back to Carlos.
Thanks, Katy before we move to Q&A I want to briefly address the recent matter regarding lithium partners.
Gas has a long track record of shareholder engagement and responsiveness and in line with this members of our board of Directors and management have met with representatives of lithium partners to better understand their views and engage constructively for the benefit of all shareholders.
Our board reached out to Legion partners with the goal of achieving a mutually agreeable path forward.
Notably leisure partners has publicly and privately complemented the company's transformation strategy on our strong business performance.
Our board of directors and management team remain focused on executing on our strategic plan and delivering value for guests shareholders. While we remain open to an appropriate resolution that allows us to focus all of our energy and time on execution. We do not have further details to share related to lithium pardon.
And therefore ask that your questions today are focused on our financial results and business performance with that I will conclude the company's remarks, and let's open up the call for your questions.
Thank you we will now begin the question and answer session. If you would.
I'd like to ask a question. Please press Star then one on your Touchtone phone. If you are using a speaker phone you need to pick up your handset first before pressing any numbers once again, if you'd like to ask a question. Please press Star then one.
On your Touchtone phone standing by for questions.
Our first question comes from Cory <unk> from Jefferies. Your line is now open.
Good afternoon, and thank you for taking my question.
Would you mind walking hi, Carlos how are you.
Very well thank you.
Great would you mind, just walking through the 5% operating margin guide for the full year.
Bye bye.
I have in terms of the first half on the second half I think it was helpful to get a little bit of color as it relates to the first.
Quarter with gross margin expected to be down I believe 70 basis points, but I think it would be.
Very helpful to get maybe some color as youre thinking about the first half in the second half.
Ideally this whole supply chain pressures cost.
Thanks.
Yes, Cory let me let me just kick this off and then Katy will jump in with them.
A more granular description of the numbers and how we see the bridge between this year's operating margin on next years.
Our or last year than this year, but rather so.
Let me just say that we are very pleased with our performance in the whole transformation of our business model. We are we couldnt be more excited about.
The brand elevation strategy is working and how our customers are embracing this not only our ultimate customers in stores and online, but also our wholesale customers and this has been at.
Tremendous initiatives that everybody is behind and we are seeing the results already.
To really occur.
Cumulated with each of our lines since we started with it.
We have adjusted prices to perceived value and we have been very careful with this this is done product by product, we have tightened promotions and we have maximize full price selling and so we are seeing the results of that as well.
Everything that we have done to optimize the store fleet I think is working well as few let me share her 419 leases have been.
Renegotiated we have closed a lot of stores that were not producing for us or whatnot right for the brand and we have done a lot to improve our supply chain.
Machine and very successfully I couldnt be more excited global line.
The launch has been a.
Tremendous change for us and it's working very well, we're seeing the bestsellers are bestsellers everywhere and.
The vendor consolidation has also contributed quite a bit.
So overall, we think that all of these levers are here to stay and we see a double digit operating margin performance to be long lasting.
This year, we are dealing with some very unique issues that we think are very much a temporary.
A great degree.
And we think that going back to the 12% in fiscal year 'twenty four is completely.
Within our goals.
Within the card.
They are like four big topics that I think kt is going to touch on one is supply chain.
Because of all the increased costs some of them because of everything that we're doing to increase quality, but some of them because of the inbound freight costs.
There is a foreign exchange issue there are some one off.
Factors that were impacting this past year that we don't see them coming in.
The fourth thing is more about where we can do with leverage on the revenue side. So with that Katie do you want to get into the details yes, Cory So I laid out these numbers in the prepared remarks, let me walk you through some more details and each one so I'll start with sales leverage so that's going to be a positive about 150 basis points, we're planning on positive comp positive.
Sales from net new stores wholesale and ecommerce growth.
On the negative side the supply chain is going to cost us about 200 basis points.
Rob mentioned, we are going to continue to see pressures from freight, especially in the first half of the year because last year. It really started in the back half of the year as well as inflation on raw material costs.
And then we have some one off which is worth about 50 basis points that we benefited from this past year, but will not benefit our last year will not benefit. This year. So this is government subsidies for closed stores rent relief et cetera, and then the last one is currency. So we have about 50 basis points of currency with the euro being weaker.
Last year was about $1 18, euro to USD and and the prevailing right now it is much weaker until the time that we have translational and transactional impacts on our P&L and actually if you adjust for this in terms of margin as well as on the top line the impact of FX on our model for next year is 25.
Operating profit. So if you add that back really the business is about flat and operating profit. This year to last year and then in terms of the cadence. The first quarter last year, we had a lot of stores closed we have temporary store closures and mostly in Europe also stemming Canada, So we're really going to benefit.
This year from all our stores being open and that's why we're modeling up.
Low teens to prior year in Q1, so that's not only going to benefit sales, but it's also going to help us get some leverage and that's why operating profit is flat, but as we go Q2, that's not going to repeat and we are still under pressure with supply chain et cetera. So I would say Q2 operating margin is going to be closer to 10% versus 14% last year.
So that's how we see the ksi.
Yes, and I think that.
I would add when you think about the first quarter, obviously, because we are lapping all of those store closures.
The growth in topline is significantly higher than what we expect in the rest of the year, So second quarter youre going to see that.
Low teens coming down to mid singles or something great for the rest of the year.
Yes.
That's very helpful. And then would you also just mind unpacking the recent momentum.
Witnessed regionally.
And perhaps what's embedded in the first quarter guidance for in terms of sales and comps.
Well I'm going to start again.
Just when you think about what.
As happened during the last.
Few months Youll notice there is a significant.
Significant difference between our momentum in the business and it's primarily driven by customer traffic in each region that has been.
Greatly impacted by what happened with the omicron at the time and Covid in general and.
And.
The North America business.
Did a lot better and recover.
A lot better and faster, especially in the U S and we have seen a momentum that has been very consistent.
Throughout the year and we continue to see that.
Then you have Canada that really was impacted more severely and by Covid.
That impacted our customer traffic and in many cases, we have to be closed for extended periods of time and of course that are reflected in our revenue performance as well.
But since the stores reopen we are seeing a pretty healthy momentum there as well and then you look at Europe and Europe has been very very challenged because COVID-19 was a very tough across.
And then multiple countries almost all of them and.
And because governments.
Established significant restrictions that impacted customer traffic severely in and that in turn impacted our ability to conduct a big business from stores.
Our e-commerce business, Fortunately picked up quite a bit of that.
But overall.
The overall tone of the business was impacted greatly and now we have all stores opened so definitely we have a big expectation that things are going to get significantly better and thats, what we mentioned in our prepared remarks.
And then we have and in some cases, obviously the impact of the current situation in Ukraine.
Somewhat limited to the area, where where the war is taking place.
And in.
And obviously the situation in Russia as I mentioned in my prepared remarks, but.
Overall, I think that we continue to see a complete alignment between.
Colgate and how the regions have responded with customer traffic and that impacted our our sales. The good thing is that we see that conversion continues to be very healthy we see that when when the COVID-19 situation is under control.
People are coming into our stores, our customer traffic continues to improve.
I think Katie mentioned that even for those tourist centers were seeing that the gap between the performance of those tourist centers or those.
Stores that are impacted by tourism versus the rest of the chain.
<unk> has been narrowing quite a bit. So we're excited about that we see that as a big opportunity for us.
That's great and then final question.
Which is just a housekeeping item on the <unk>.
Store openings for this year I believe it was 50% to 60, new stores is that a net number.
No that's it.
That's a gross number.
The net number could be.
Up to half of that.
Understood great. Thank.
Thank you very much and best of luck.
Yes. Thank you. Thank you thank you Corey.
Okay.
Thank you as a reminder, if you would 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. As you think about some of the macro topics, we've talked about supply chain, but inflation, how do you see inflation impacting the business, whether it's in wages, whether its in raw materials pricing and potential price increases does it differ by region and then lastly, Carlos you mentioned lower customer acquisition.
Cost.
What is the marketing look like for this year and how you're thinking about the new social media presence, that's been enhanced with guests and what what.
Hello, it's delivering in terms of conversion. Thank you.
Thank you Dana good afternoon World So.
Let me start with.
Your first question about micro Youll notice of course.
We read all the same papers.
We see inflationary forces at work here in every aspect of everything we do and this is not just limited to <unk>.
Any particular reason, but it's definitely a global phenomenon so.
We have been watching every one of those factors I mean of course, we are seeing.
Seeing the increases in the cost of raw materials.
And that has been compounded by the fact that we are increasing the quality of what we put into the product. So we.
We see a big factor that is contributing to higher average unit cost for us.
But for now we haven't seen a significant increase.
In everything that we own today, but we are anticipating that we will see it as we go into the back half of the year.
We see also increases in wages of course, we have been.
Making adjustments everywhere to stay very competitive because we are committed to getting the best talent that we can have in and the competitive environment is pretty high here not only in North America, but in Europe , as well and even in Asia, we are seeing that.
We have made price increases.
Something that has touched every product category, but we have done it in a very surgical way meaning.
Going back to the way, we are pricing everything which is perceived value of the product we start with that and it's like what is the perceived value based on that we do make price.
Price adjustments of course is a dynamic and fluid process. So.
I've never done, especially during an inflationary moment like we are experiencing right. Now. So we will continue to look at that but but we want to be balanced in the way we approach pricing.
We think that in a way we suppressed demand this past year, because we didn't.
Not only did we increase prices, but also within and push for promotions or additional discounts our whole strategy here is to retrain the customer to really buy primarily at full price and we can do that because we feel that the price of the.
Product is representative of the true value of the product.
You know just you asked about changes by region I would say that this is happening across the board really there are some regions, where this is more noticeable but overall just we see that price increases are.
Embraced by the customer win when they are right for the product and we think that we are doing a great job I mean in all my years with gas I think.
I've never seen the kind of integrity that we have with pricing.
Every product in the line and this includes not only what we do internally, but also what our licensees are doing so this this exercise and this practice is impacting every single product in our entire language is pretty wide as you know and we're seeing that in some cases because of the customer really likes the product.
The price increases can be very significant you know what I'm talking about 20, 30% in some categories and and that is because the product work that kind of price.
The last question you had is about marketing and I'd have to say we.
We have.
<unk> made a plan here that.
Relies on additional spending.
And.
For marketing in General if you go to Europe today, and you just walked through multiple all the big cities Youre going to see gift everywhere, we have been spending on increasing our investment.
And the brand significantly I don't think that there is any other brand that is at our level in terms of visibility and imaging.
And that also applies to our social media.
Our spend in and you can see that we are in Instagram constantly we are doing some things in China that are very interesting you know pick talk over there to Ian.
And.
It's representing about 25% of our business now and that has happened almost overnight. So we're seeing a lot of opportunities that.
Good investment can bring great return on investment.
In Europe , our spend has been very productive we are seeing that in addition to what we're doing online with with our new infrastructure.
Knowing more about customer analytics, and being able to really redirect our spend has been.
The way to really.
Create more momentum and.
And deliver more value with the with that spin and.
The big thing for Us is somewhat.
Muted because everybody talks about digital but is our stores we have.
With all the stores, including the ones that we ran plus the ones that our partners run you know, we're talking about 1600 stores worldwide and this overall tools to be able to acquire customers for the guess brand and <unk>.
To us this is a huge huge driver for customer acquisition and those customers are always a lot more loyal.
Over time, because they see the brand they see the entirety of the lifestyle that we offer.
The brand with multiple products and everything presented in the way that it can be outfitted. So overall I think that we have a great plan.
Just in the past we have been very efficient with how we spend marketing dollars I think Paul does an incredible job on this.
<unk>.
And we don't use agencies.
We do all this direct and <unk> and obviously that gives us a lot more power for the money that we spend.
Yeah.
Thank you.
Yes, Youre welcome thing.
Thank you and our next question comes from Susan Anderson from B Riley FBR. Your line is now open.
Hi, good evening, Thanks for taking my question.
Carlos I was wondering I guess as the European business continues to recover from a sales perspective. This year do you expect the profit of that business I guess to improve and maybe move closer to the U S. And then also I was just curious in terms of the margin pressures this year because of free et cetera should we think about that.
Equally across all of the different regions.
Yes, Hi, Susan.
Yeah, no. So I think that the profitability for Europe .
Should definitely improve because we are talking about comparing a year with all stores opened versus.
A lot of stores close and in a very limited customer traffic.
Environment because of Covid. So we are definitely.
Excited about what this could mean and then when you put on top of that the fact that our E. Commerce business has a lot of energy and great momentum.
You put on top of that the fact that our wholesale business is growing.
Up double digits.
And when you think about wholesale.
Between.
During summer and fall winter Youre talking about three quarters, so that are kind of like.
Completely.
<unk> booked so so seeing double digit growth in the business is very very strong.
You put it altogether and August businesses are accretive so we should be able to really do better in terms of profitability on the other hand.
The situation with Russia, obviously has an impact.
<unk> talked about how big this business is.
And going to a breakeven. This is what you got in our outlook.
So overall that is already embedded into the numbers that we are giving you today.
And then with respect to inbound freight.
No.
It's different because we have different ways that we received product and with more product depending whether we are.
Dealing with.
With product that we do in house versus where we bought from licensees and so forth. So it's the mix and the formulas are somewhat different.
But you know obviously the delays are a lot more pronounced right now into America, especially on the west coast because of all the congestion that we're seeing in Los Angeles and adjust to the product that we're bringing through the east coast is coming through a lot faster and more seamlessly.
Without the kind of disruption that we're seeing on the west coast. So overall, just said, it's kind of like a big puzzle.
We I think our team has done a great job with this and we have been able to minimize air.
Airfreight.
In spite of all that you know we spend about 9% of our.
In airfreight versus 3% historically, so obviously this has implications everywhere.
Got it okay, that's really helpful.
And then maybe if you could just talk about just what you're expecting from the promotional environment. This year are you expecting.
To give I guess some of those back as we get a little bit more to normalized inventory levels at some point this year.
Yes, Susan I mean of course, I don't know exactly whats going to happen with the environment Nobody does but.
What I know is how we are running our business and frankly, we are buying based on what we think we are going to be able to sell so you know.
<unk> demand is whats driving every decision that we make respect with respect to product purchases and we I think after spent many many years in this industry I think that that's the only way to really control promotion says to buy enough. So then you can sell at full price and not.
By more than that and and I think that that has been working obviously, we are talking about a very unusual period in the last two and a half years with COVID-19 and everything else, but but I think that the methodology should continue to work.
So far our increases in <unk>.
Full price selling.
There have been significant in spite of price increases, which gives me a lot of confidence that if you have the right product you will be able to sell a lot at full price and and if you don't overbuy, you'll be able to really maintain this kind of a balance between demand and supply so.
So margins could be optimized.
And.
That's all I can tell you that the entire team here.
From all the way from the top to the bottom you know everybody is absolutely aligned on our elevation of the brand strategy and.
In many cases, we'll be very careful not to buy more even if we could sell more.
Just to protect the business and to train the customer to know that we are always going to be selling at full price. We want the customer to come in and say Oh, My God, If I don't buy it today, I mean, not having tomorrow and on Abbvie.
I am perfectly fine with paying what is gone on his work.
And but because they've had on buyer today I may not have it.
Okay, Great and then one last question I guess, just on the consumer and sales you kind of talked about trends by region. Just curious if youre seeing I guess any.
Concrete evidence maybe that the consumer is starting to pull back on spending because of inflation.
Concerns about inflation as I kind of look forward either in the U S or Europe .
You know I would be speculating justify if I said that we are seeing a significant.
Change you know of course you.
You have to keep in mind that we are about to cycle through the stimulus.
Tests.
Event from last year last year in the second quarter, we had.
And a nice increase in the momentum of the business when the stimulus checks were released so we know that there was some kind of impact attributable to that but then as soon as we kind of like finished the second quarter moved into the third quarter.
These are just the momentum slowed down.
Other than that you know.
If I told you I mean, it's.
It's exactly the opposite in certain areas.
We are having a tremendous momentum with marciano, that's our highest price.
Assortment that we have.
But the product is amazing. So then the customer is absolutely open to spending more because again going back to how we are pricing.
They are getting a great product for the price that theyre paying and I'm talking about 2030, 40% increases in.
Yes.
As a result of a higher AUR, coupled with significant demand for the product overall, including.
Units that they want to buy so so I really think that if we have the right product and well priced.
Consumer is completely out there and open to to really buy.
And this is true for womens is true for accessories is true for apparel is true for mens. So we are seeing uneven kids and our kids line is doing extremely well.
But his incredible product for the price that you pay.
Great. That's really helpful. Thanks, so much good luck the rest of the year.
Thank you Susan.
Thank you. Our next question comes from Omar Saad from Evercore ISI. Your line is now open.
Thanks, Thanks for taking my question.
Carlos and Katie maybe you guys could talk a little bit about how you're thinking about promotions. It seems like you're modeling lower gross margin, but that seems to be more from the inflation side and raw materials. How are you thinking about your kind of promotional assumptions embedded in that lower guidance.
Hi, Omar.
Yeah. So.
I'll start and then I'm sure Kt will have.
Comments about the numbers.
But you know overall.
Just.
There have been very little changes in terms of taking prices down we're running with a lot less clearance.
And that has been by design.
And that is the plan, which is we size our buys based on the sell through that we expect at full price and they're going into a clearance mode. So so by definition you will always have.
More limited.
Quantity in the and what you buy.
We have also done a lot and we continue to.
Reduce SKU density both in stores and the way we are buying the lines, including our E Commerce business. So you know just.
We made a few mistakes buying probably too much and too many too many styles in two broad now we are you know.
Really in this back and trying to buy less and.
In terms of assortment. So then.
Each SKU works.
Harder and get more productivity and really we think that this is the way to go we have been being.
Being very very.
Critical of this just trying to be.
Careful with the way whereby Avalon the other thing that is helping US a lot is that for.
For the first time I think at least in my years with the company, we have a complete alignment between what we're buying what we're showing in the campaigns and advertising and marketing and what we're showing in the stores and what we're showing with the other partners that we have both had holds.
Phil.
<unk>.
And our franchisee partners.
Plus we have an online so you put it all together and we can select the big buys on the big categories, where we're going to make significant investments and and as a result of that I think that we have a better opportunity to deliver good margins. So we are not planning margins when it comes to.
Two.
<unk> that is not.
Depending on.
The cost side of the equation down.
Down at all in fact, if anything we see some opportunities further opportunities to do better in that area because the product is selling so well.
So when when Katy tells you that she is expecting a 200 basis points.
Drag in supply chain is primarily coming from cost and it's coming from inbound freight costs.
And it's not coming from increased markdowns or being more promotional or extending further discounts at all.
Last year, we had 200 basis points of margin expansion associated with lower promotion birthday as the pre pandemic period. This year, we expect the promotional impact would be roughly flat to what we saw in fiscal 'twenty two.
Got it.
Impressive thanks, so much for all the information.
Thank you Omar.
We have no further questions in queue at this time, so I will turn the call back to Carlos for closing comments.
Thank you operator.
Katy.
Good luck to you and your next chapter with really enjoyed having you here. Thank you.
And again, thanks, everyone for your time and your questions today, we couldnt be more excited about our business and our future. The fundamentals of our business are so strong and this gives us great confidence in the value of our company.
Our commitment today to repurchase a significant amount of shares showcases that confidence.
Thank you and have a very good day bye bye.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.
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