Q3 2025 Guess? Inc Earnings Call
Thank you.
Thank you. Thank you.
Speaker Change: Good day, everyone, and welcome to the Guest Third Quarter Fiscal 2025 Earnings Conference Call.
Speaker Change: I would like to turn the call over to Fabrice Benarouche, Senior Vice President of Finance, Investor Relations and Chief Accounting Officer.
Sir, you may begin.
Thank you for watching!
Speaker Change: Thank you, Operator. Good afternoon, everyone, and thank you for joining us today. On the call today with me are Carlos Alberini, Chief Executive Officer, and Dennis Secor, Interim Chief Financial Officer.
Speaker Change: 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 outlooks.
Speaker Change: The company's actual results may differ materially from current expectations based on risk factors included in today's press release and the company's quarterly and annual reports tied with the SEC.
Speaker Change: Comments will also reference certain non-GAAP or adjusted measures. GAAP reconciliations and descriptions of these measures can be found in today's earnings release. Now, I will turn it over to Carlos.
Carlos Alberini: Thank you Fabrice and thank you all for joining us for our Q3 Fiscal 2025 quarterly conference call.
Carlos Alberini: We are pleased to share with you our third quarter results and the progress we have made to date this year against a number of important operational, strategic and financial objectives as we continue to focus on driving sustainable revenue and earnings growth and creating value for our shareholders.
Carlos Alberini: As we entered fiscal 2025, we outlined six critical objectives that we were focused on.
Carlos Alberini: These objectives relate to organization and talent, growth, brand relevancy, customer centricity, product excellence, and optimization.
Carlos Alberini: I will speak about the progress that we have made against these objectives and I will provide details on our third quarter results and our near and long-term outlook.
Turning first to Alberini's results.
Carlos Alberini: In the quarter, we grew revenues by 13%, reaching $739 million, slightly lower than we had expected due to a stronger U.S. dollar than we had anticipated.
Carlos Alberini: Our company growth was fueled primarily by the addition of Bragg & Bone, along with a modest increase in sales from our core guest business.
Carlos Alberini: During the quarter, all of our offering segments posted revenue growth, with the exception of licensing, which was flat as a result of internalizing outerwear.
Carlos Alberini: For our core guest business, our revenue performance was at the low end of expectations, but we delivered earnings at the high end of expectations as a result of improved expense management.
Carlos Alberini: We performed well in European wholesale, delivering a mid-single-digit sales increase, which included some earlier-than-planned deliveries.
Carlos Alberini: Growth was even stronger in the America's wholesale business with sales increasing roughly 25% as this business benefited from internalizing outerwear.
Carlos Alberini: In European retail, we experienced a similar sales trend as in the second quarter and performed at the lower end of our expectations.
Carlos Alberini: We overcame softer-stroke traffic with stronger conversion and higher AURs, yielding a positive comp.
Carlos Alberini: In Asia, our core guest business declined slightly with softness in our South Korea and China businesses. Asia did not meet expectations in the quarter.
Carlos Alberini: Our guest America's Retail Business also missed our expectations and the business remained particularly challenging.
Stored traffic remains under pressure, yielding comp sales declines.
Carlos Alberini: We believe our full product is strong and we have made sure that the collection is well represented in our stores in the region including a strong presentation of global best sellers.
Carlos Alberini: We also believe that enhancing our marketing and customer engagement efforts is critical to turning this business around, and we are actively working on this opportunity for the holidays as we speak.
Carlos Alberini: In addition, we are evaluating our pricing strategy given current consumer sentiments and the competitive promotional environment. Moving next to our product performance, we experienced different performance levels across each region.
Carlos Alberini: In Europe, accessories, women's apparel, and footwear all delivered sales increases, while we experienced declines in both our men's apparel and Marciano businesses.
Carlos Alberini: For this season, Paul and the product teams introduced a lot of new products in the collection, including a new capsule of women's sweaters that perform strongly, while women's outerwear, denim pants, activewear, and men's sweaters also contributed to the comp increase.
Carlos Alberini: These trending categories more than offset some continued softness in our dress business in the region, as trends have shifted into other categories in the last few months.
Carlos Alberini: In the Americas, while both our women's and men's businesses were down, women's and men's sweaters performed strongly, just as they did in Europe, driven in part by the new capsule that I just mentioned.
Carlos Alberini: We also saw sales declines in most accessory categories, as well as in footwear and Marciano, though fragrances and watches were notable exceptions, both growing in the quarter.
Carlos Alberini: And finally, our licensing business performed better than expected and delivered flat royalties versus last year, with growth in fragrances, footwear, and handbags, offset by the categories that we internalized this year.
Carlos Alberini: Turning to Rag & Bone, we continue to be very pleased with the strong collaboration of our two teams and the progress of the integration of the business onto our platform.
Carlos Alberini: Rag and Bone's top line was short of our plans for the quarter, though some of that relates to a shift in the timing of wholesale shipments, which we now expect in Q4.
Carlos Alberini: Overall, the business remains on a solid trajectory and its direct-to-consumer trends were particularly strong in October.
Carlos Alberini: Thus far for the year, the Rag & Bone brand is delivering double-digit sales growth against its prior year numbers.
Carlos Alberini: Rag & Bone's team, led by Andrew Rosen as Executive Chair of the brand, and working in strong collaboration with Paul, is delivering solid growth for the company and many initiatives are now in progress to expand the business through new stores, product category and international expansion.
Carlos Alberini: Regarding third quarter total company margins, we delivered gross margin of 43.6%, consistent with our expectations going into the quarter.
Carlos Alberini: Turning to total company SG&A, we managed the expenses well during the quarter. About three quarters of our year-over-year expense increase in the third quarter was to support our near and longer-term growth objectives.
Carlos Alberini: As we had planned, we significantly increased our marketing and advertising investments, roughly an 85% increase against last year's third quarter.
Carlos Alberini: This growth includes increased investments in our guest brand, investments in rag and bone domestically and abroad, and in guest genes.
Carlos Alberini: These investments are primarily directed to build stronger brand awareness and enhance our engagement with our customers.
Carlos Alberini: In the quarter, we delivered adjusted operating profit of $43 million and an adjusted operating margin of 5.8%, both within the range of our expectations.
Carlos Alberini: And we delivered adjusted earnings per share of $0.34, also consistent with expectations in spite of a higher adjusted income tax rate for the period.
Carlos Alberini: Which brings me to our outlook. We are now adjusting our outlook for the year to incorporate our recent trends as well as external factors like currencies, freight costs and taxes outside our control but very impactful to our results.
Carlos Alberini: When we last provided our outlook, we had expected some stabilization in our retail businesses and an environment where we could manage promotions more tightly than last year.
Carlos Alberini: With the softness that we experience in the third quarter, primarily in North America and in Asia, we are adjusting our fourth quarter revenue outlook to reflect that softness and a consumer who is clearly more sensitive to price.
Carlos Alberini: We are also adjusting our promotional plans for the holiday season, giving the customers price sensitivity and our expectations of the overall competitive landscape.
Carlos Alberini: Freight costs, which have been volatile all year given the Red Sea crisis, also moved against us again, and that too will negatively impact Q4.
Carlos Alberini: On currencies, the recent strengthening of the US dollar will put further pressure on Q4 revenues and margins. And last, we expect the lower earnings will result in a higher income tax rate for the year.
Carlos Alberini: As a result, we now expect full-year revenues at or slightly below $3 billion, growing between 7% and 8%. And we have updated our adjusted EPS outlook for the year to a range of $1.85 to $2.
Carlos Alberini: Dennis will take you through our outlook in more detail in just a few minutes.
Carlos Alberini: So, let me now pivot and talk about the future as we continue to make progress against a number of important operational and strategic objectives.
Carlos Alberini: As I have discussed throughout the year, our vision for growth has evolved over time, and we are now focused on leveraging the powerful platform that we have built at this company to support not just the continual expansion of the guest brand, but the expansion of multiple brands.
Carlos Alberini: We have broad channel capabilities, distributing through our own stores, online, big department stores and thousands of mom and pop shops.
Carlos Alberini: We have a global footprint, with management teams and partners already distributing in 100 countries. We have an extensive global supply chain. And along with our licensee partners, we bring products to market in 25 different categories.
Carlos Alberini: Our platform enables us to do things that others simply cannot do, from expanding regional brands globally to transforming monocategory brands into lifestyle brands.
Carlos Alberini: As we look forward to further leverage our platform model, we continue to be focused on our key objectives and I will now elaborate on two of these, growth and marketing.
Carlos Alberini: Underlying all of this is our ongoing commitment to product excellence and optimization of our operations to drive efficiency.
Carlos Alberini: Let me start with growth. As I just said, we continue to seek great opportunities for growth with our Guess brand as well as with both Rag & Bone and Guess Jeans.
Carlos Alberini: Rag and Bone was already on a solid growth trajectory when we acquired it. In collaboration with our partners, Yehuda Schmidtman and his WHP Global team, our goal is to accelerate that growth with all the fuel that our platform brings.
Carlos Alberini: And that acceleration is already happening. With access to capital and additional capacity, the brand will expand through new stores, new and expanded product categories, and penetrating new markets.
Carlos Alberini: focusing initially on Europe, the Middle East, Mexico, Canada, and Australia.
Carlos Alberini: For Rag & Bone in Europe, we envision distribution that relies primarily on wholesale partners supported by retail stores in key cities to introduce the brand and build customer awareness in the region.
Carlos Alberini: We have signed a lease for a new store in Amsterdam and are actively pursuing additional stores in Munich, Dusseldorf, Stockholm, Copenhagen and Vienna. We have begun marketing to seed awareness even before the brand is available in those markets.
Carlos Alberini: We are also in discussions with potential partners to represent Rag & Bone outside of Europe in Mexico, the Middle East and Australia. We have already inked an enhanced handbag deal and are working with our licensees to bring more categories to the brand.
Speaker Change: Moving to Guess Jeans, under Nicolai Marciano's leadership, we are building momentum with this brand.
Speaker Change: We have augmented the line based on the feedback that we have received from the market and the response to our newest collection has been quite positive. The brand is doing well in wholesale accounts in Europe and in January we will be launching Guest Man at the PD Walmart trade show in Florence, Italy. We have opened three stores in Europe, in Berlin, Amsterdam and near Milan.
Speaker Change: And we are set to open two more stores, one in Tokyo with a big event to launch the brand in Japan, and the other one on Melrose in West Hollywood, California.
Speaker Change: In addition, Macy's just recently agreed to bring guest jeans to about a dozen of its stores in the U.S.
Speaker Change: For GES, in Europe, as we assess our category development, the competitive environment in the region and our brand positioning, we see significant opportunities to grow.
Speaker Change: specifically in the handbags and footwear business, outerwear and sweaters, women's and men's apparel, denim, athleisure and various accessories for both women and men including fragrances and luggage.
Speaker Change: Our results in North America have not been in line with the brand's potential, and we have a much smaller store portfolio today.
Speaker Change: However, we are developing strategies to reverse the trends that we have been experiencing, especially as it relates to customer acquisition and engagement.
Speaker Change: We are currently reviewing our pricing strategies in the region, especially in our factory business. Aligning that business with the expectations of our customers and the competitive environment, as this customer has become highly sensitive to price.
Speaker Change: Moving then to marketing, our experience is that today's consumers are more discerning in managing their spending and the world of social media and customer engagement has evolved significantly.
Speaker Change: We have challenged ourselves to broaden our own marketing capabilities to build a best-in-class marketing engine. For guests, our brand review and benchmarking study led us to the conclusion that there are opportunities to make incremental investments in social media, collaborations, customer engagement and CRM to connect more and differently with our customers and enhance their shopping experience.
Speaker Change: We also identified opportunities to place the customer at the center of our product development cycle, actively listen to our customers to impact product design and styling, and relentlessly focus on meeting their needs and expectations.
Speaker Change: Over the past year, with Paul's vision and guidance, the guest team has executed a dynamic and multifaceted marketing strategy designed to elevate our brand relevance among younger audiences and deepen connections with our loyal customers.
Key initiatives encompassed innovative collaborations with emerging talent,
Speaker Change: strategic influencer partnerships and immersive experiential activations that covered very cool destinations like a safari in Africa and branding events in beach clubs and winter resorts.
Speaker Change: This effort also included highly targeted campaigns tailored for millennial consumers featuring Georgina Rodriguez in our holiday campaign across print,
Speaker Change: out of home, connected TV and paid digital media, and hosting more than 80 in-store events during the period.
Speaker Change: This quarter, we engaged an external partner to help us develop a social media strategy that speaks to all of our customers across multiple customer segments.
Speaker Change: It's about a six-month program that will track the efficacy of our existing social media practices and refine our strategic framework to work with today's consumer.
Speaker Change: Ultimately, our goal is to build a powerful marketing engine that can support guests and our other brands. We have just begun this project and will be excited to share some of the key outcomes in the quarters to come.
Speaker Change: In closing, one of our company's most defining strengths is its ability to adapt, continuously evolving to seize new opportunities and achieve greater success.
This adaptability is embedded in our DNA.
Speaker Change: While it originated with our founders, it has become a hallmark of our culture, guiding our entire organization.
Speaker Change: Our journey at Guess began as a denim wholesaler, but over time, we expanded our horizons, evolving into a true lifestyle brand.
Speaker Change: We extended beyond U.S. wholesale, reinventing ourselves as a specialty retailer and embracing multi-channel capabilities along the way.
Speaker Change: Later, we set our sights on global expansion, and today, almost 75% of our sales come from international markets.
Speaker Change: Our track record speaks to our ability to identify opportunities, reposition resources, and execute on our vision.
Speaker Change: As we look ahead, our continued growth and value creation depends on our ability to once again evolve.
Speaker Change: Our focus is on optimizing our global platform to support and expand our existing businesses while fostering new ones, both organically, as with guest genes, and through strategic acquisitions like Rang & Bone.
This requires a dual focus.
Speaker Change: preserving the aspects of our business that are thriving while addressing areas of challenge. For instance, in our U.S. guest business, we see opportunities to improve.
Speaker Change: We are re-evaluating every element of our customer experience, understanding their needs, preferences, and expectations from product offerings to pricing and brand engagement.
Speaker Change: Additionally, we are assessing our organizational structure and leadership to ensure that we have the right talent and strategies in place for success.
Speaker Change: Guess has a proud legacy in the U.S. market, and we are fully committed to reclaiming and building upon that strength.
Speaker Change: Admittedly, the road ahead is ambitious, yet I'm confident in our team and our culture.
Speaker Change: Together, we have consistently proven our ability to manage the present while planning for the future.
Speaker Change: Some initiatives will deliver swift results, while others will require more time.
Speaker Change: Investments in marketing, for example, may not deliver immediate returns, and acquisitions like Rag & Bone will not occur every year. This dynamic could result in year-over-year growth rate variability, particularly as we transition from this year's acquisition-driven momentum to next year's focus on organic growth.
Speaker Change: Despite these nuances, I remain incredibly optimistic about the opportunities before us. Our business competencies and the caliber of our team position us for enduring success.
Speaker Change: Paul and I extend our deepest gratitude to our team members for their hard work and dedication. We also want to wish a happy Thanksgiving to them, their families, and our valued shareholders.
Speaker Change: Together, we look forward to a future filled with growth and achievement. And with that, I will hand over to Dennis to review the third quarter and share our outlook for the balance of the year. Dennis?
Thank you, Carlos, and good afternoon.
Dennis Secor: Before I get into the details, just a quick reminder that we've fully integrated Rag & Bone's operating results into our existing operating segments.
Dennis Secor: So, as Carlos mentioned, Q3 revenues increased 13% in U.S. dollars, reaching $739 million.
Speaker Change: With the steep strengthening of the US dollar in the quarter, currencies, which we'd expected would be about a one and a half point tailwind, actually turned to a small headwind, more than a $10 million revenue change versus expectations.
In constant dollars, our revenue grew 14%.
Speaker Change: Overall, our revenue growth was driven primarily by the addition of Rag & Bone.
Speaker Change: Revenues for the core guests in Marciano business grew modestly in the low single digits with growth in the America's wholesale and European businesses offsetting declines in both our America's retail and Asia businesses.
Speaker Change: In Europe, we grew U.S. dollar revenues by 7%, reaching $368 million.
Revenues grew 6% in constant currency.
Speaker Change: Retail comps, including econ, increased 8% in U.S. dollars and 7% in constant currency.
Speaker Change: As has been the case for several quarters, Turkey's hyperinflation had a meaningful impact on those comps.
Speaker Change: Excluding Turkey, that constant dollar comp increase would have been 5%.
Speaker Change: In our stores, we delivered a constant currency comp increase of 5%.
Speaker Change: As Carlos highlighted, we did experience softer traffic to our stores compared with a year ago, though a sequential improvement over the second quarter.
Speaker Change: Improved conversion and a higher AUR more than offset the small traffic decline to drive the positive comp.
Speaker Change: Our e-com business improves sequentially with a 16% constant currency comp increase.
Speaker Change: Our European wholesale business continues to perform well, with revenue growth in the mid-single digits. In fact, we shipped more in the quarter than we had anticipated to support the solid sales momentum in our customers' businesses.
Speaker Change: The operating margin on our European business was 8.8 percent 150 basis points lower than a year ago driven by higher selling, occupancy, and infrastructure costs, and increased marketing investments, all of which more than offset better product margins mainly driven by a lower level of markdown.
In America's retail, revenues grew 12%, reaching $173 million.
In constant dollars, the growth was 14%.
Speaker Change: Similar to last quarter, the segment's growth was driven by the addition of Rag & Bone's retail business, more than offsetting the declines from the core guest business.
Speaker Change: Traffic headwinds coupled with the decline in conversion resulted in an overall 14% constant currency comp decline in our US and Canadian stores.
including EECOM, the comp decline was 15%.
Speaker Change: America's retail posted an operating loss margin of 4.3 percent, roughly a 10 point decline from last year's third quarter.
Speaker Change: That margin decline was driven primarily by deleverage on the fixed cost base, given the comp decline, along with higher expenses, including store occupancy costs.
Speaker Change: In America's wholesale, revenues increased by 79% in U.S. dollars to $99 million, driven by the addition of rag and bone, along with higher shipments in the U.S.
The revenue increase in constant dollars was 83%.
Speaker Change: The growth in the U.S. guest business was driven by the direct operation of our out-of-work business, which last year was operated as a licensed business, and increased shipments to off-price accounts.
Speaker Change: Operating margin was 25.7%, 340 basis points lower than last year's Q3, driven mainly by the addition of rag and bone.
Speaker Change: In Asia, revenues increased 2% in U.S. dollars to $65 million.
Speaker Change: In constant currency, revenues also grew 2%. Growth from India and rag and bone was partially offset by declines in most of our Asian businesses, including South Korea and China, where traffic to our retail stores remains under pressure.
Speaker Change: Retail comps, including e-comps for the region, decreased 16% in constant currency.
Speaker Change: Our operating loss margin in Asia was 2% compared to a 1% operating profit margin in last year's third quarter. A negative three-point change due mainly to lower product margins and negative costs.
Speaker Change: And finally, our licensing segment revenues were flat despite the internalization of our outerwear business.
Segment operating margin was 91.8%.
Speaker Change: In the third quarter, total company gross margin reached 43.6%, 110 basis points below a year earlier.
Speaker Change: With the softness in our business coming from retail, which carries a higher product margin, channel mix was the biggest headwind to gross margins, along with occupancy deleverage given comp headwinds.
Partially offsetting that was an improved IMU and fewer markdowns.
Speaker Change: Adjusted SG&A expenses for the quarter increased 20% to 279 million dollars.
Speaker Change: The most significant drivers of this change resulted from our acquisition of Rag & Bone, as well as the incremental marketing investments that we're making to increase the exposure of the Guess brand and to build awareness for our new Guess Jeans brand.
Speaker Change: To reiterate Carlos' point, 77% of this expense increase results from these two items.
Speaker Change: In addition, we increased infrastructure expenses in both North America and Europe.
Speaker Change: Partially offsetting these increases was a lower level of performance-based compensation given this year's expected performance.
Speaker Change: For the quarter, our adjusted SG&A rate increased two points to 37.8%.
Speaker Change: In the quarter, our adjusted operating profit totaled $43 million, and with the lower gross margin and higher SG&A rate, our adjusted operating margin declined 310 basis points to 5.8%.
Speaker Change: Just as the recent strengthening US dollar affected our top line, it also negatively impacted our operating profit expectations by 3 million dollars.
Speaker Change: In the quarter, we recorded an adjusted effective tax rate of 36.6%.
Speaker Change: As we've adjusted our full-year estimate of earnings across our various companies and tax jurisdictions, we now expect to operate with a higher full-year adjusted tax rate.
Speaker Change: Therefore, our third quarter tax provision includes the accrual associated with third quarter earnings, along with the adjustment for the first half of the year.
Speaker Change: In the third quarter, we recorded $6 million in non-operating charges.
Speaker Change: primarily resulting from marking to market our foreign currency hedge contracts.
Speaker Change: One other item within non-operating activity, we reported a net charge of $40 million related to a non-cash, unrealized loss due to the remeasurements of derivatives associated with our convertible notes and related hedge.
Speaker Change: Consistent with prior quarters, we have excluded this latter $40 million amount from the adjusted results we were reporting in order to facilitate a better understanding of our normal commercial operations.
Speaker Change: Adjusted Q3 diluted earnings per share was $0.34 compared to $0.49 in last year's third quarter.
Moving now to the balance sheet.
Speaker Change: Our inventories were $676 million at the end of the quarter, up 20% from a year ago.
Speaker Change: Our investment in inventory includes rag and bones inventory, which we did not own last year.
That represents half of the growth.
Speaker Change: In addition, given the Red Sea crisis, we've taken steps to protect our European business and preserve deliveries to our customers.
Speaker Change: One consequence of this is the higher freight cost that Carlos discussed.
Speaker Change: In addition, we've accelerated deliveries from our suppliers, not ordering more, just taking deliveries sooner.
Speaker Change: Most of that inventory was in transit to our warehouses at the end of the quarter.
Those in-transit inventories represent about 8 points of the growth.
Speaker Change: factoring out those two discrete investments, inventories were up in the very low single digits.
Speaker Change: For the first nine months of the year, capital expenditures were roughly 64 million dollars, mainly driven by investments in store remodels and openings and technology.
Speaker Change: We ended the quarter with $141 million in cash compared to $244 million a year ago.
Speaker Change: Over the last four quarters, we've generated $135 million in free cash flow and drew $132 million on our various debt facilities.
Speaker Change: We repaid $33 million on our convertible notes, paid $184 million in dividends, repurchased $82 million of our common stock, and paid $57 million to acquire Rag & Bone.
Speaker Change: We ended the quarter with $345 million of borrowing capacity on our various global facilities, so $486 million of available liquidity.
Speaker Change: So now moving to Outlook, let me summarize the key factors from the third quarter that are impacting our Outlook for the remainder of this year. I'll start with Europe, which has been our strongest region in the recent past.
Speaker Change: As we shared before, in our wholesale business, we believe we have been gaining share among our wholesale accounts, bolstered by the performance of our brand in their stores and our reliability as a partner to deliver product despite the many challenges of the recent past, COVID, the supply chain crisis, and now the Red Sea.
Speaker Change: Our Spring-Summer 25 order book finished up 10%, and despite having one less selling week this year, we expect to deliver top-line growth for the full year.
So we continue to be quite pleased with this business.
Speaker Change: As I said earlier, we were able to deliver more of the current season in the third quarter than we had anticipated, so that will have an offsetting effect on our fourth quarter revenues.
Speaker Change: In European retail, our business generally performed in line, though at the lower end of our expectations, and our expected comp performance for this business remains largely unchanged for the fourth quarter.
Speaker Change: Also, as Carlos alluded, we anticipate now that freight costs will be higher to support our fourth quarter business, both because of higher ocean charges as well as additional air freight.
Speaker Change: These incremental freight headwinds, which we estimate in the $5 million range, will have the most consequential effect on our European business.
Speaker Change: Moving to North America, as you heard from Carlos, we were disappointed with the performance of our retail business in the third quarter.
Speaker Change: Traffic headwinds became stronger in the quarter, both in the U.S. and in Canada, and we were unable to convert that traffic better than we had in the past. We believe, given that inflation and economic concerns have been top-of-mind issues for consumers, especially in the United States,
Speaker Change: We are seeing this reflected in our customers as they shop.
Speaker Change: We expect that this dynamic will persist in the fourth quarter.
Speaker Change: As Carlos also shared, we're re-examining our pricing and promotional activity for the fourth quarter, and expect that all these factors will now impact our top line and margin expectations for this business.
Speaker Change: In Asia, especially in South Korea, we experience a similar dynamic to the U.S. and are also adjusting our expectations for fourth-quarter revenues and margins.
And now to currencies.
Speaker Change: In the past three months, the U.S. dollar has strengthened significantly against virtually all of the major currencies in which we operate. As an example, since August, the U.S. dollar has appreciated about 5.5% against both the euro and Swiss franc.
Speaker Change: Against our prior expectations, the stronger U.S. dollar, assuming it remains at roughly prevailing rates, will consume about $45 million in full-year revenues and about $10 million in operating profit for the full year, both including the third-quarter impact I mentioned a moment ago.
Speaker Change: Therefore, based on these factors, we have updated our outlook for the full year.
Speaker Change: We're adjusting our revenue expectations by roughly 70 to 80 million dollars and now expect revenue growth in the range between 7 and 8 percent.
Speaker Change: More than half of that change reflects the impact of the stronger U.S. dollar, with the balance reflecting the impact of weaker retail trends in North America and Asia.
Speaker Change: We now expect full-year adjusted operating margin between 6.2 and 6.5 percent, reflecting roughly a $35 to $45 million operating profit reduction from our prior expectations.
Speaker Change: The combined effects of the stronger U.S. dollar and higher freight costs result in about a third of that reduction.
Speaker Change: with the balance being driven by the lower expected sales and margins from our retail businesses.
Speaker Change: Given the higher expected adjusted tax rate along with the third quarter non-operating charges, we have updated our outlook for adjust EPS in the range of $1.85 to $2.00.
Speaker Change: For the fourth quarter, we expect revenue growth in the range between 2.2 and 5.4 percent, adjusted operating margin in the range of 12.2 and 13 percent, and adjusted EPS in the range of $1.37 to $1.52.
Speaker Change: As you look at our Q4 outlook, there are a few factors to consider.
Speaker Change: First, the fourth quarter last year included an extra week. The negative impact of that extra week on this year's fourth quarter growth rate is roughly five points.
Speaker Change: Also, given its large wholesale mix, Rag & Bone's largest selling quarter is typically the third, unlike the fourth quarter for our core guest business.
Speaker Change: Therefore, rag and bone in this first year of the acquisition will naturally contribute more to third quarter growth rate than to the fourth quarter growth rate, about three points more.
Speaker Change: Rag and Bone still contributes meaningfully to our Q4 growth, just not as much as it did in Q3.
This all should normalize once we fully re-anniversary the acquisition.
Speaker Change: Adjusting for these two factors should give you some additional insight into the sequential business trends.
Speaker Change: The Q4 operating earnings comparison to last year is similarly clouded by last year's extra week as well as by currencies.
Speaker Change: If we normalize for these two items, the midpoint of our implied Q4 Adjusted Operating Profit Outlook is roughly flat to last year.
Speaker Change: And finally, as to free cash flow outlook, we now expect free cash flow for the year of about $40 million at the upper end of our guidance.
Speaker Change: This is lower than we had previously expected due to the change in operating income and to the early receipt of inventories, which we ultimately expect to turn favorably once supply chain issues are resolved.
Speaker Change: So with that, we'll end our prepared remarks and open the call up to your questions. Operator?
Speaker Change: Thank you. Ladies and gentlemen, to ask the question please press star 1 1 on your telephone. You could then hear an automated message advising your hand is raised. Then wait for your name to be announced.
To withdraw your question, please press star 11 again.
Speaker Change: Hello, yes. Good afternoon. Thanks for taking our questions. Just wanted to get a better sense if you could bridge a little bit more, like how are you thinking about the Q4 revenue growth? Maybe I'm very interested in hearing like the impact from the Europe wholesale shipment. How much of that are you seeing? And then in terms of, if we think about, you know, the long-term.
Speaker Change: Sorry, operating margin opportunity. I know like this year, you have like several investments that you're doing and there's like some FX headwinds, but like looking into the longer term, where do you think that operating margin could recover at some point? Thank you.
Carlos Alberini: Hi Mauricio, this is Carlos. I'm gonna start and then Dennis will talk more about the bridge that you're asking. But you know we we were pleased with third quarter
Carlos Alberini: In terms of the top line, we were in line with what we had anticipated and the guidance that we had provided.
Carlos Alberini: And during the quarter, there was something that really helped us, contributed to the top line and also the bottom line performance, which was shipments in Europe in our wholesale business that were ahead of what we had anticipated. So some product shipped earlier than what we expected, which was going to be in the fourth quarter.
Carlos Alberini: And we, of course, that is expected to impact the fourth quarter, but that has already been considered within our revised outlook.
Carlos Alberini: And, you know, we were very pleased with this development because, number one, with the whole crisis of the Red Sea and the delays in shipping that we are experiencing throughout the supply chain.
Carlos Alberini: To be able to really secure the type of product that we needed to service the business well was a major success story for our team.
Carlos Alberini: And we feel that the other great part of this is that the brand is doing very well and our retailers, our customers at wholesale, are anxious to get more products from our brand. We think that we are taking market share during this time.
Carlos Alberini: And to have access to product, I think, is number one. We experienced the same thing back...
and we will continue to protect that ability, that capability.
Carlos Alberini: We have incurred significant costs to be able to do this.
and also we have adjusted our supply chain.
processes to be able to really get product earlier.
and working with our vendors in very close proximity.
Carlos Alberini: And we have made some changes in where the product is coming from that is also helping us in this particular case with some of the product being moved into proximity to where the product is going to be distributed.
You know, just with respect to operating margin opportunities...
Speaker Change: When I came back to the company at the time, we were looking at an operating margin of about mid-single digits, and we set our eyes on developing a model that was going to go back to a double-digit operating margin. We achieved that. Unfortunately, during the last few quarters, we had some challenges. We think that that is completely achievable for the type of business model that we have in the company. The investments that we have made…
Speaker Change: While they are just in their inception, especially Rag & Bone, which is of certain size, we're talking about a company that did $250 million last year, we think that this is a brand that has major opportunities to become a lifestyle brand and a global brand. That is what we are hoping that we will be able to achieve over time.
Speaker Change: Yes, Rag & Bone today is diluted to our operating margin, but we don't think that that's going to be the case for long. So we are hoping that after we make some of these initial investments that we'll be able to start gaining some, you know, just momentum with the brand. The business model, I think, is very attractive. We see, you know, all of their stores are doing really well in terms of four-wall EBITDA contribution, and we feel that...
Speaker Change: This should be a contributor to margin as opposed to a dilutive factor over time.
Speaker Change: So, you know, double-digit operating margin is definitely within our sights and, you know, I'm not saying that we, that that's going to happen next year, but we don't see any, you know, just limiting factors to be able to accomplish that with this company, especially considering that we are, you know, collecting over $100 billion in royalties every year with a 90% operating margin. So a lot of opportunity there.
Speaker Change: This Q4, you first have to start, there are some fairly sizable and significant non-POMP issues. A couple I mentioned in the prepared remarks you got last year had the extra week.
Speaker Change: Obviously, that creates a headwind as well as currency. So those combine, you know, to be a high single digit sort of headwind going into the quarter. Then you've got contributing rag and bone obviously as a non-competent going the other way. We get all that top one in the quarter. And the rest of the organic business, which you still get some level of growth, you know, similar to the third quarter, we're seeing growth coming from Europe.
Speaker Change: The wholesale business should be a strong contributor to our growth.
Speaker Change: As we said, the spring-summer order book was up in the 10% range. So, you know, notwithstanding the fact that we're going to have one fewer selling week in the year, we still see the European wholesale business growing.
Speaker Change: We still have tailwinds coming from the European retail business and the e-com business. The challenges are, as they were in the third quarter, here and in Asia, where we've got some headwinds in the retail business. The wholesale business of America also should be a contributor. We've internalized, rather, the...
Speaker Change: And the currency, you get to a, in the midpoint of our guide, you get to roughly a flat operating profit level year over year.
Speaker Change: Yeah, and this is after making additional investments in marketing, which are significant. You know, just you saw the change over our marketing investments last year.
top-line momentum.
Speaker Change: by investing in marketing overall. So we are doing this in a very surgical way and we are seeking some advice from some experts on social media.
Speaker Change: and all those projects are ongoing and I think that the team did a very good job during the last few months just increasing the intensity of the kind of activities where we are investing.
including a lot of influencer programs and experiential activations.
Speaker Change: We think that these are very, very powerful. We just did one in Vegas this past Saturday, for example, and the store was up 60% for the day, just to give you an idea of how powerful these moves are.
Speaker Change: and our plan is to go into several other countries in Q1 next year. But we are excited about this program. We think that this is very unique. It's truly omnichannel, the program.
Speaker Change: This is going to cater to a customer, overall customer in Europe. So, you know, we take the Eurozone as our field.
Speaker Change: And people are going to be able to redeem points or whatever we do in any one of those countries. So you don't have to be limited to your country of origin or where you live. And we think that this is going to be powerful as well. The program is also integrated with our clienteling app in-store, so then we can offer a better experience and service our customers with a full set of tools.
So I'll stop there. Thank you, Maricel.
Thank you and best of luck.
Thank you.
Speaker Change: Ladies and gentlemen, as a reminder to ask a question, please press star 11 on your telephone.
Please stand by for our next question.
Speaker Change: Our next question comes from the line of Eric Beder, Small Capital Consumer Research. Your line is open.
Good afternoon.
Speaker Change: So, I want to step back and think about this. So, if I look at the overarching kind of
shifts in the guest brand.
Speaker Change: It has been, over the last few years, a shift to a universal product.
Speaker Change: and a shift to escalate, excuse me, to elevate the brand in terms of products, in terms of way you do the stores, in terms of way you interact with the customer. And if you look at Europe, that's been a huge success for this. The elevation has led to more sales. And if you look at the US, especially the retail stores, that hasn't had the same impact.
Speaker Change: Does this concept of having a truly universal product offering make sense given these different
Speaker Change: How should we be thinking about this in terms of going forward in terms of the brand?
Speaker Change: implemented for all our product categories, which are 25 of them.
Speaker Change: Most of what we were trying to do now, this is impacting all the product lines, including our full-price outlet assortments and so forth.
and also in our hotel business.
and also in our e-commerce business.
Speaker Change: And we think that because, you know, just we have a...
Long legacy in wholesale with independent stores.
Speaker Change: You know, and many of our other brands that are in our space were kind of like, you know, just competing on the same floors, on the same locations. It was, it became more a price competition as opposed to, you know, just the uniqueness of the product that was being offered to the customer.
was perceived. But we feel that over time...
Speaker Change: Very pleased with the initial results of this offering but most of that business is at wholesale and is primarily in the European region.
Speaker Change: We think that there is a.
Speaker Change: Big opportunity here in the U S for that product because it is a lot more casual wear more reclaiming the.
The DNA of the denim part of the assortment for gas also price points are a lot more attractive.
Speaker Change: More.
Speaker Change: Directly or direct it to you.
Speaker Change: Young our customer.
Speaker Change: We are working on marketing, we think that that is going to be a key.
Speaker Change: Tool for us to really change the relevancy.
Speaker Change: The awareness of the brand.
Speaker Change: We are also looking at pricing.
Speaker Change: We have increased prices quite significantly we're talking about AUR growth of about 30% from.
Speaker Change: At the time.
Speaker Change: When just prior to everything that I'm, describing now I'm talking about pre COVID-19.
Speaker Change: Our prices are up 30% and we're seeing gross profit margin of.
Speaker Change: Increasing by about 900 basis points. So it's.
Speaker Change: It's a pretty significant change that we have effected we think that it will.
Was the right thing to do.
Speaker Change: And this changes have impacted.
Speaker Change: Most product categories with that you can finally in the store today.
Speaker Change: But that being said we are seeing that.
Speaker Change: A lot of our competition has been more aggressive with pricing and promotional activities and we are looking at that to make sure that we.
Speaker Change: Don.
Speaker Change: And.
Speaker Change: This type of comp.
Competitive environment.
Speaker Change: And we feel that.
We definitely have the rooms, because we have created that room through through the price increases.
Speaker Change: And but we want to make sure that we continue to run the business with that feeling that the brand is more elevated we're putting more quality into the garments. We are doing a lot of things that are.
Speaker Change: What's driving improvements and sustainability, we are doing a lot of things that we think are key for the customer that is really interested in our products and.
Speaker Change: We feel that.
Speaker Change: Just creating build big.
Speaker Change: Opportunities in key categories.
Speaker Change: Like.
Speaker Change: Just what we have and with outerwear.
We have in our accessories world. There is a company that does about 45% of the business and with accessories.
Speaker Change: 55% only.
Speaker Change: Our apparel.
Speaker Change: And we feel that that is very unique we have a big handbag business we have in our.
Speaker Change: Strong businesses with.
Speaker Change: Products and other apparel categories, we think that going back to gas genes can help us to develop further our men's business that has been.
Speaker Change: Contracting during the last few years, so we see a lot of opportunity here, obviously, we cannot do everything at once but we think that the brand has a big big place here in the U S and Canada, and we plan to go back and rebuild it.
Speaker Change: Okay.
Speaker Change: Ask the obligatory towers question obviously.
You have a much wider international base than most other companies that have U S operations. How is your ability to respond if the government races tariffs on goods from Asia and China. Thank you and good luck for the holiday season.
Speaker Change: Yes, Thank you Eric.
Speaker Change: Well of course, we are looking at tariffs and we're looking at.
Our.
Speaker Change: Sourcing.
Speaker Change: We have done a lot of work to really reduce our dependency on China. During the last few years, we have a very strong team in Europe that leads all of these efforts.
Speaker Change: And they have done a great job in reducing that.
Speaker Change: And while we do have today, we think that.
Speaker Change: There is.
Speaker Change: Plenty of flexibility to move.
Speaker Change: Sourcing to other places and we are looking into that as we speak.
Speaker Change: That being said.
Speaker Change: Of course, there are some products and some categories were.
Speaker Change: The Chinese vendors are very strong ads and we have to be very careful we still don't want to compromise the quality on the make of the products.
Speaker Change: We do make so.
Definitely we are going to be watching for this and then there are some other parts.
Speaker Change: Just read about Mexico being.
Just another target here for tariffs.
Speaker Change: We do not have significant sourcing now but.
Speaker Change: There are a few categories that we depend on Mexico and.
Speaker Change: We may have to look at the other.
Speaker Change: Relative sources.
Speaker Change: And we're not concerned about that because just the the business is.
Speaker Change: Can be can depend more on <unk>.
South America and other parts.
Speaker Change: We do especially in this type of product that we bring from Mexico. So overall you don't just definitely this is going to be.
Speaker Change: More challenging but.
Speaker Change: Because of all the work that has been done during the last few years.
Speaker Change: We don't see this as a very significant issue there are some categories where.
Speaker Change: Things are more challenging.
Speaker Change: But what we're looking at those as well.
Speaker Change: Okay. Thank you good luck for the holiday season.
Eric: Thank you Eric.
Eric: Thank you.
Speaker Change: Ladies and gentlemen at this time I would like to now turn the call back over to Carlos for closing remarks.
Carlos Alberini: Thank you operator, well I just want to say thank you to all of you for your participation today.
This was.
<unk> business, but we are very pleased with our performance this quarter.
Carlos Alberini: And we are also very pleased with all the progress that we're making this year, we feel that the.
Carlos Alberini: The company is going through.
Carlos Alberini: <unk> transformation, we are making significant investments.
Carlos Alberini: To create value for our shareholders in the long term.
Carlos Alberini: We are well positioned for the future we believe that.
Carlos Alberini: We have all the tools to really.
Carlos Alberini: Bringing a lot of value and we are very excited about our opportunities. So.
Carlos Alberini: We wish you all a very happy Thanksgiving with your families your friends.
Carlos Alberini: And we look forward to reconnecting for our year end report so have a great day and thank you again for your participation.
Speaker Change: Ladies and gentlemen that concludes today's conference call you may now disconnect.
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