Q1 2026 Guess? Inc Earnings Call
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Speaker Change: Good day, everyone and welcome to the guess first quarter fiscal 2026 earnings conference call.
Speaker Change: At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to participate you will need to press star one one on your telephone.
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Speaker Change: He smelled Anticipant is being recorded.
Speaker Change: I would now like to turn the call over to Sabrina banner Bush Senior Vice President of Finance Investor Relations and Chief Accounting Officer. Please proceed.
Speaker Change: Thank you operator, good afternoon, everyone and thank you for joining us today.
Speaker Change: On the call today with me are Carlos <unk>, Chief Executive Officer, Denise Segal interim Chief Financial Officer, and Alberto <unk>, our incoming Chief Financial Officer.
Speaker Change: During today's call the company will be making forward looking statements, including comments regarding future plans strategic.
Speaker Change: 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 filed with the SEC.
Speaker Change: Comments will also reference certain non-GAAP or adjusted measures GAAP reconciliations and description of these measures can be found in today's earnings release.
Carlos: Now I will turn it over to Carlos.
Carlos: Thank you for brief and thank you all for joining us for our Q1 fiscal 'twenty 'twenty six quarterly conference call.
Carlos: We are pleased to report our Q1 operating results that came in ahead of expectations across key financial metrics, reflecting the successful integration of ragen bone and continued momentum in our guest wholesale businesses across Europe and the Americas.
Carlos: Disciplined expense management combined with our better than expected top line enabled us to report operating results ahead of our guidance range narrowing our loss for the quarter.
Carlos: In the period, we grew our business in U S dollars by 9%, despite a currency headwind that consumed about two and a half point of growth.
Carlos: The majority of that growth came from the acquisition of Ragen, born which added nine percentage points to our top line constant currency growth, reflecting a full quarter of ownership this year versus just one month in the prior year period.
Carlos: Our core gift business also contributed.
Carlos: About three points of constant currency growth driven by higher shipments in our wholesale operations across Europe, and the Americas. This gains more than offset softer results in Asia and in our Americas retail channel licensing revenue declined versus the prior year, creating a modest headwind.
Carlos: In the period.
Carlos: Forget our European wholesale business was the largest contributor of this growth.
Carlos: Posting a mid teen growth rate in the quarter.
Carlos: Our products continue to perform well among our wholesale partners in that region and we believe that we are being rewarded for ensuring reliable product deliveries. Despite some of the recent supply chain challenges.
Carlos: We shared on our last call that we are mitigating the supply chain risks caused by the Red Sea crisis by bringing in products. Early we are not buying more we are buying earlier.
Carlos: This near term working capital investment bore fruit during the quarter.
Carlos: Protecting our partners and our businesses as we were able to ship larger volumes than we had anticipated for the quarter, mainly driven by the availability of the product.
Carlos: In our European retail stores revenues came in slightly below our expectations posting at constant currency comp decrease of 4% as a decline in store traffic more than offset improved conversion improved AUR and better units per transaction.
Carlos: In the Americas wholesale business, the guess brand delivered double digit topline growth, surpassing our expectations for the quarter.
Carlos: Similar to Europe, we were also able to deliver more product earlier to our partners than what we had planned.
Carlos: And for the year, we expect this business to grow modestly.
Carlos: In the Americas retail basis, our performance improved in the latter part of the quarter and exceeded our expectations. While traffic headwinds remained our key productivity challenge, we were able to offset some of that with improved conversion as a result, we closed the period with a net 10%.
Carlos: Constant currency comp sales decline for the quarter.
Carlos: Our business in Asia continues to face headwinds and fell short of our expectations. This quarter with revenues declining by over 20% with significant weakness in the greater China market.
Carlos: Consistent with what we share with you on our last call. We are continuing to look for a partner to take on our business in this market and we have been contracting our operation tier, including head count reductions store closings and season to purchase product for future seasons.
Carlos: Sales declined in most of our Asia businesses and store traffic remains the key driver of the comp sales declines in our stores there.
Carlos: And finally in our licensing business royalties declined slightly more than what we had planned royalties decline in fragrances and footwear, while handbags royalties grow.
Carlos: Moving next to our product performance results varied by region and category throughout the quarter.
Carlos: In Europe women's apparel sales increased driven by strong performance in activewear, and sweaters and accessories fragrances and watches deliver positive comps in the Americas. The business was negative across most categories with women's activewear and watch it's performing well.
Carlos: Turning to ragen bone the business significantly outperformed our expectations for the quarter driven primarily by strong wholesale shipments.
Carlos: <unk> performance in the retail stores and online also outperformed our expectations.
Carlos: Paul has been working hard with many of our licensee partners to add new product categories into our rug unborn assortment.
Carlos: As we shared before we already signed a new handbag license and that business is doing well.
Carlos: We also have new license deals at various stages of completion and watches fragrances and eyewear and we are excited about the prospects for those categories in the future.
Carlos: Moving now to the rest of the P&L, we delivered total company gross margin of 39, 9% 200 basis points lower than last year and also below our expectations going into the quarter about 70% of that change was driven by business mix mainly low.
Speaker Change: Your royalty income and a higher contribution from wholesale which naturally carries lower product margins.
Carlos: There was a modest headwind due to increased promotional activity and that amount was fully offset by improvements in initial merchandise margins currencies were also a modest headwind to our margins during the period.
Carlos: Total company SG&A increased 11% year over year with the integration of dragonborn driving the majority of that increase in.
Carlos: In the quarter, we reported an adjusted operating loss of $26 million and an adjusted operating loss margin of 4%.
Carlos: Both of which represent an improvement over our expectations for the quarter.
Carlos: And we delivered an adjusted loss per share of 44.
Carlos: Also an improvement over our expectation.
Carlos: Before I update you on our strategic initiatives, let me spend a few moments discussing tariffs and how we believe they may impact our business and our outlook.
Carlos: On last quarter's call in our discussions of tariffs we shared a few important aspects of our business first roughly 75% of our business is done outside of the United States and therefore not directly impacted by the tariffs.
Carlos: Second the remaining 25% of directly produced and distributed products represents roughly $200 million in annual purchases, both our guests and rigor and sourcing teams have undertaken a massive effort to move a substantial amount of our production out of China to other market.
Carlos: We also reworked cost with vendors and pricing with retail customers. As a result of this effort, we expect that the year over year impact of tariffs on our margins this year will be less than $10 million and.
Carlos: And we have achieved that with very minimal price increases that $10 million is fully incorporated in the outlook that we are providing today.
Carlos: So that is the cost impact to our P&L based on what we know today.
Carlos: Tariffs have also sparked renewed fears of inflation or recession, but we have not attempted to predict how they may affect the consumer's appetite to spend their disposable income.
Carlos: Now I would like to turn to our strategic direction and provide an update on several key initiatives underway across our business on our last call I outlined the key strategic initiatives that our teams are driving to grow our business.
Carlos: Strengthening our organization.
Carlos: <unk> brand awareness and customer engagement to increase retail productivity.
Carlos: Build a more efficient infrastructure and optimize our business model to improve profitability and return on invested capital.
Carlos: Today.
Carlos: I will walk you through the progress that we're making against some of these priorities starting with one of our most immediate focus areas retail productivity.
Carlos: One of the key challenges for our business over the last several years has been the decline in customer traffic into our stores onto our website.
Carlos: Those trends have persisted in the U S and Asia for some time.
Carlos: And we are now seeing similar patterns emerge in our European retail business.
Carlos: To address this we are rolling out a range of initiatives aimed at re engaging customers and driving higher traffic across both physical and digital channels.
Carlos: We continue to see a significant opportunity to increase brand awareness and customer engagement through increased marketing investment.
Carlos: We are in the middle of a project working with general idea, which is a consulting firm to craft a new market a vision to transform our social media strategy that we believe will reignite our brand relevance and awareness with today's consumer.
Carlos: Nicolai Marciano is our internal need for this project, we are beginning with the implementation of several initiatives as we speak including the reorganization of our teams the.
Carlos: The deployment of new practices and increase in investment into social channels and relationships with Influencers and other collaborations to attract a younger audience.
Carlos: In addition, we recently launched a customer loyalty program in Europe, thus far in just two markets, Italy, and Poland and the learnings and results from this implementation have been very very positive in.
Carlos: And those markets among our loyalty customers, we saw increases in revenues from those customers of roughly 36% we.
Carlos: We also saw that those customers return to their stores with greater frequency.
Carlos: And they spend more per visit.
Carlos: Our plan is now to roll this program out to more countries in the region, starting next with Germany, Austria, and Spain with additional markets to come online later in the year as.
Carlos: As we continue to sign up more customers into our database and we gain insight into their shopping habits, we are investing in improving our customer insights capabilities using AI powered tools.
Carlos: Next there is an opportunity and how we buy.
Carlos: Over the past several years, we have been very successful in driving IMU improvements across our apparel line in.
Carlos: In order to drive production cost down it necessitated a larger and earlier commitment of our production volumes, therefore, leaving less open to buy later in the year.
Carlos: Undoubtedly that resulted in a missing certain trends.
Carlos: <unk> a level of revenues for the extra AMU point.
Carlos: We think there is an opportunity to better balance that going forward. Our team is developing fast track capabilities within our supply chain to more quickly replenish bestsellers and inject additional product into the market as trends develop in the season.
Carlos: We used to operate in this manner several years ago and had success primarily in North America. We are implementing this again with our spring summer 'twenty six collection with our goal ultimately to leave 50% of our bi open after we place our initial orders.
Carlos: We are also looking closely at pricing.
Carlos: Over the past several years, we implemented a strategy to elevate our brand and raise the perception of our brand among consumers.
Carlos: That initiative was anchored in building more quality into our products, including better fabrications better make better embellishments.
Carlos: While the program was successful in many ways. Our recent analysis of pricing suggests that some of our legacy customers were not able to make that journey with us.
Carlos: It's also reflective of what we have experienced with today's consumer who tends to be quite sensitive to pricing.
Carlos: Our plan now is to rebalance our product assortment to increase our penetration in offering of opening price point products.
Carlos: And finally, we think our existing clustering model is too rigid not addressing the unique dynamics of individual stores, not leaving store management with enough flexibility to assort stores based on the unique dynamics of their particular store.
Carlos: One store may attract a more casual customer while another may appeal to one that is looking for a more dressy outfit.
Carlos: Weather patterns may be different as well necessitating a different assortment based on seasonality.
Carlos: Our new model would create that greater flexibility to allow managers more autonomy to assort, our stores based on the unique characteristics of that store's customer.
Carlos: As part of this effort, we will also challenge the product categories to be offered in each store to optimize the product assortment and the space allocation based on expected productivity per square foot.
Carlos: Visual merchandising standards will be improved as well to optimize navigation throughout the stores and ease of shopping.
Carlos: Improving retail productivity for us is the highest priority that we have today.
Carlos: Just as a point of reference at 10% improvement in sales in our retail stores companywide.
Carlos: Would represent roughly $140 million in incremental revenue and around $70 million in incremental operating profit.
Carlos: Thus far the early reads on these initiatives have been encouraging.
Carlos: In both North America, and Europe, so far in the second quarter, we have seen sequential improvements in conversion rates with both regions posted sequential improvements in retail comps.
Carlos: Another area of opportunity for us to improve profitability in our business is rationalizing our business model Bill.
Carlos: Businesses are not static they evolve and change over time.
Carlos: Profitability of certain channels has changed as consumer shopping behaviors have evolved.
Carlos: Certain categories that represented large opportunities in the past may no longer generate the returns necessary to justify the investments.
Carlos: Markets that were once profitable may no longer generate appropriate levels of income.
Carlos: We're looking at this across all different dimensions of our business to ensure that we are making and sustaining investments that deliver solid returns to our shareholders.
Carlos: Examining our store portfolio, ensuring that every store serves our strategic and financial purpose to represent the brand in the marketplace and to deliver profit in that market.
Carlos: We shared on our last call that in North America, we are exiting non strategic unprofitable full price stores and we are consolidating some of our infrastructure supporting that business.
Carlos: We expect to reduce our North America store fleet, but roughly 20 stores with some of them closing this year at their natural lease explorations. So far this year, we have closed six of their stores.
Carlos: We are examining unproductive businesses those may be regions or brands.
Carlos: For example on our last call we shared the changes that we're making in China.
Carlos: While we continue to believe that there is an opportunity for guests in the greater China market, given the market size and our brands high awareness.
Carlos: We have not been a walk to make that business profitable over the many years that we have operated there.
Carlos: This year, we expect that business will lose roughly $20 million and we are committed to eliminating that loss for next year.
Carlos: We are looking for a third party partner to take over this business and we have already met with several potential candidates in the meantime, as I said before we are continuing to operate this business so as to minimize the negative impact on our earnings.
Carlos: And just to remind you. We expect these two initiatives North America stores, and greater China will unlock over $30 million in operating profit starting with the next fiscal year.
Carlos: But there are still other dimensions of our business that we are examining.
Carlos: We plan to address underperforming product categories unprofitable customer relationships unproductive Skus and also plan to consolidate further products at a global level, including additional categories for our factory outlet pieces, which are currently developed regionally.
Carlos: This is all to ensure that every aspect of our business is creating value.
Carlos: And finally is our infrastructure and its alignment to today's business.
Carlos: Since <unk> was founded in 1981, our business has evolved dramatically.
Carlos: He started as a pure wholesale denim supplier in the United States with one loan footprint here in Los Angeles that encompass every aspect of our business.
Carlos: Over time, we grew our business by opening our own retail stores, both full price and outlets.
Carlos: We entered new territories, adding both operating and infrastructure functions to support those businesses.
Carlos: We expanded globally, adding direct resources in new countries and ultimately developed regional centers as the business grew.
Carlos: We added multiple new categories, some internal some external and stood up the necessary infrastructure to support that expansion. We also added IP systems to support our business and we have evolved along with the consumer adding e-commerce capabilities as the shopping habits of consumers changed over.
Carlos: Time.
Carlos: Today's business is far more complex across multiple dimensions and requires a more sophisticated ecosystem.
Carlos: We believe that we have opportunities to re engineer those businesses to make sure that our infrastructure aligns with our business as it exists today.
Carlos: As an example of this we have separate support structures that our base now in both Los Angeles in Lugano, Switzerland.
Carlos: Want to support the North American business, while the other supports our European business performing.
Carlos: Performing largely the same functions.
Carlos: We see an opportunity to optimize these structures, creating one global center that can support both regions, taking advantage of the significant scale of our fleet and business.
Carlos: We believe our European supporting infrastructure presents a strong opportunity for consolidation and optimization.
Carlos: This year, our business in Europe should reach nearly $1 7 billion in sales.
Carlos: It's large and complex spanning more than 35 countries with a regional center multiple country support centers and several logistics centers throughout the region.
Carlos: As it has evolved over time it has undoubtedly created some duplication of effort where much of the same work that is done in the regional center is also replicated within the country.
Carlos: We see an opportunity to realign this resources, where strategy has developed and set from the regional center, leaving the in country resources to manage local execution.
Carlos: Logistics presents an opportunity as well in.
Carlos: In time, both in Europe, and North America, we have added logistics capabilities and centers to address specific needs or opportunities at that time.
Carlos: Today, we have eight centers throughout Europe, and another three in North America.
Carlos: Within each region, there are opportunities to consolidate and optimize these networks.
Carlos: Another area of opportunity is our systems environment.
Carlos: Our it team for structure has evolved similarly to our business very organically building and adding to our network based on the business needs of that moment.
Carlos: With different solutions and tools in different parts of our business.
Carlos: We believe that there are opportunities to restructure this and reengineer our systems network that is more uniform and standardized globally.
Carlos: These are just a few of the areas that we are tackling but they reflect our broader goal.
Carlos: To build a unified global platform that enables us to operate as one integrated business rather than a collection of regionally siloed operations.
Carlos: By centralizing, what makes sense and tailoring only where necessary.
Carlos: Aim to support our future growth with greater agility efficiency and strategic alignment.
Carlos: Now, let me share a few thoughts on our outlook for the remainder of this year.
Carlos: We have updated our outlook to reflect the relatively minor changes in business trends that we experienced in Q1.
Carlos: For the year, we still expect our revenue growth will be driven by owning dragonborn for a full year.
Carlos: <unk> growth from our European wholesale business and the conversion of our middle East business to our joint venture.
Carlos: We have moderated our expectation coming from our European retail stores, giving our first quarter experience.
Carlos: Though we do expect some improvement later in the year, giving our marketing and retail productivity initiatives that I just summarized.
Carlos: In addition.
Carlos: The U S. Dollar has weakened over the past two months, which should result in a stronger currency tailwind on revenues.
Carlos: All in we expect full year revenues to grow in the range of five 5% to seven 4%.
Carlos: For the full year, we now expect adjusted operating margin between four 4% and five 1% and adjusted EPS in the range of a $1 30 to $2 64 a share.
Dennis: Dennis will share more details in just a moment.
Speaker Change: Before I turn the call over I want to comment on our Chief financial officer transition in.
Dennis: In April we announced the appointment of Alberto Tony a seasoned executive with more than three decades of international experience in finance and operations.
Dennis: His proven ability to drive performance across design led retail and consumer facing organizations will be instrumental as we sharpen our focus on operational efficiency portfolio discipline and long term value creation for guests.
Dennis: Alberto will be based in Lugano, Switzerland, and will lead guesses financial team globally.
Dennis: Dennis Seeker interim CFO will remain onboard as executive Vice President through September of 2025 to ensure a seamless leadership transition.
Dennis: With a deep bench of finance leaders that includes <unk> been erosion. Several other talented executives, we are well positioned to advance our strategic priorities and deliver sustainable growth.
Dennis: In closing this year, we are managing through a complex environment and have made meaningful strides in advancing our operational strategic and financial priorities.
Dennis: Behalf of Paul and myself I want to extend our appreciation to our global teams for their dedication and strong execution.
Dennis: As we begin fiscal year 2026, we are energized by the opportunities ahead.
Dennis: Our strategic focus remains on driving higher productivity across our direct to consumer channels and enhancing profitability through targeted business and portfolio optimization.
Dennis: We are firmly committed to unlocking our full potential and delivering long term shareholder value.
Alberto Tony: With that let me welcome and pass the call to Alberto.
Alberto Tony: Thanks, Scott and good afternoon, everyone. This is my first week of working gas and I'm very thrilled to join such a great organization and an amazing brand I am currently in L. A to start a thorough handover from their needs to secure a smooth transition.
Dennis: Looking forward to contributing to the next chapter of guests longest successfully story so with that let me turn the call over to Dennis to walk you through our results and provide additional context on our outlook.
Dennis Seeker: Thank you Alberto and good afternoon, everyone.
Carlos: As Carlos shared total company revenues increased 9% in U S dollars to $648 million.
Dennis Seeker: In constant currency the increase was 12%.
Dennis Seeker: The biggest driver of the increase was the acquisition of ragen bone, adding nine points of constant currency growth.
Dennis Seeker: Last year's Ragen Bond results include revenues for just one month April the month of acquisition. While this year includes the full quarter.
Dennis Seeker: Core guest business grew 3% in constant currency in the quarter with growth in wholesale businesses, both in Europe, and the Americas offsetting negative comps from our direct businesses.
Dennis: In Europe, we grew 8% in U S dollars to $306 million.
Dennis: Constant currency the growth was 9%.
Dennis: Retail comps, including E com declined 4% in U S dollars and 3% in constant currency.
Dennis: Our wholesale business continues to perform well with revenues increasing in the mid teens in the quarter.
Dennis: Carlos shared we were able to ship some orders earlier than we had planned.
Dennis: The adjusted operating loss margin in our European business was two 9% 270 basis points lower than a year ago, driven primarily by the impact of the infrastructure spending and currencies.
Dennis: In Americas retail revenues grew 9% in U S dollars, reaching $157 million.
Dennis: In constant currency the growth was 12%.
Dennis: The segment's growth was driven primarily by the acquisition of Reagan bone more than offsetting the impact of negative comps in our core guests retail stores as well as the impact of currency.
Dennis: Comps from our U S and Canadian stores declined 10% in constant currency with the trend improving in the latter part of the quarter.
Dennis: Including our E comm business the constant currency comp decline was 11%.
Dennis: Traffic to our stores continued to be down, though some of that was offset with an improvement in conversion.
Dennis: Americas retail posted an adjusted operating loss margin of 10, 5%, a 330 basis point decline from last year's first quarter.
Dennis: That margin decline was driven primarily by deleverage on our fixed cost base given the comp declines both in store and online more markdowns and higher store costs, partially offset by the addition of the Reagan bond business and an increased IMU.
Dennis: In Americas wholesale revenues increased by 63% in U S dollars to $101 million driven by the addition of Reagan bone along with higher guest shipments in the U S and in Mexico.
Dennis: In constant currency the growth rate was 70%.
Dennis: The increase in the U S guests business was primarily to our off price accounts.
Dennis: Adjusted operating margin was 19, 9% 280 basis points lower than a year ago, primarily due to the impact of bragging bonds business.
Dennis: In Asia revenue decreased 20% in U S dollars to $58 million in constant currency the decline was 16%.
Dennis: Most of our Asian business has declined with the most impactful to the clients in South Korea, and China, where as Carla shared we are purposefully constraining our business.
Dennis: Retail comps, including E com for the region decreased 20% in constant currency.
Dennis: Our adjusted operating loss margin in Asia was three 1% 820 basis points lower than last year, driven mainly by the impact of the lower revenues on the expense base.
Dennis: And finally, our licensing segment revenues declined 14% to $25 million.
Dennis: As Carla shared we delivered total company gross margin of 39, 9% 200 basis points lower than last year, driven mainly by business mix.
Dennis: Adjusted SG&A expenses for the quarter increased 11% to $285 million.
Dennis: The most significant drivers of this change resulted from our acquisition of Ragen bone the conversion of our middle East business to a joint venture partially offset by the favorable impact of currencies on our expense base.
Dennis: For the quarter, the SG&A rate increased 80 basis points to 44%.
Dennis: In the quarter, our adjusted operating loss totaled $26 million and with a lower gross margin and higher SG&A rate, our adjusted operating margin declined 270 basis points to negative 4%.
Dennis: In the quarter, we recorded an adjusted effective tax rate of 18, 1% lower than what we expect for the full year.
Dennis: In the first quarter, we recorded $6 million and adjusted net nonoperating income, primarily resulting from a revaluation of certain of our foreign subsidiaries net assets and liabilities into U S. Dollar.
Dennis: Our adjusted Q1 diluted loss per share was <unk> 44.
Dennis: Compared to an adjusted Q1 loss per share last year of 27.
Dennis: Moving now to the balance sheet.
Dennis: We ended the quarter with $638 million of inventory up 15% in U S dollars and 14% in constant currency compared to last year's Q1.
Dennis: Three quarters of that increase is in Europe, where we've accelerated product deliveries to mitigate against potential disruptions given the red Sea crisis.
Dennis: And to support our growing business.
Dennis: That increase represents roughly five weeks of Europe's supply, where as Carlos said theyre not buying more just earlier.
Dennis: Our goal is that once that situation is resolved we can begin to reduce that working capital investment.
Dennis: The balance of the inventory growth is split roughly evenly between the Americas and Asia, our receivables were $331 million, an 11% increase in both U S and constant dollars compared to last year's Q1.
Dennis: This increase supports our growing wholesale business, both in Europe and the Americas.
Dennis: For the first quarter capital expenditures were $22 million, mainly driven by investments in store Remodels, new stores and technology and this compares to $21 million last year.
Dennis: We ended the quarter with $151 million in cash compared to $242 million a year ago.
Dennis: The most significant drivers about $91 million cash consumption over the last four quarters includes $70 million in dividends and minority interest distributions.
Dennis: $50 million in share repurchases from July of last year, and $21 million in free cash flow consumption, partially offset by $38 million of net borrowings and $40 million related to the gross proceeds from the sale of our U S distribution facility.
Dennis: We ended the first quarter with just under $350 million of borrowing capacity on our various global facilities, so roughly half a billion dollars of.
Dennis: <unk> liquidity.
Dennis: We also announced today that our board has approved our regular quarterly cash dividend of <unk> 30 per share.
Dennis: So moving now to our outlook.
Speaker Change: Carlos just shared the key drivers of our business for this year.
Speaker Change: <unk> only relatively modest changes to our expected business trends. Thus far therefore, we are making only minor adjustments to our outlook for the year.
Dennis: Moving positively Americas retail exceeded our Q1 expectations as did our European wholesale business. So some of that is just a shift between the first and second quarters.
Dennis: Trending lower than our expectations, our European retail stores, and our Asia business.
Dennis: We've also revised Americas wholesale as one of our customers. There has ceased operation and we've made a modest adjustment to the phasing of our middle East joint venture.
Dennis: We've also adjusted our outlook to the current currency environment, which is markedly different from our prior outlook that we'll know more favorably impacts both revenues and operating profit.
Dennis: And we've been able to reduce some anticipated spending so as Carla shared we've updated our full year outlook for revenue growth between five and a half and seven 4%.
Dennis: Adjusted operating margin between four four and five 1% and adjusted EPS between $1 32, and $1 64.
Dennis: And again this outlook fully absorbed the anticipated impact of tariffs based on what we know today.
Dennis: For the second quarter, we expect U S dollar revenues to grow between two nine and four 7% now let me give you some extra color to this to help you better understand the underlying trends.
Dennis: First the second quarter is our first fully comparable quarter with ragen bone. So we will no longer benefit from acquisition growth as we did in Q1 just from their organic growth.
Dennis: Second that Q2 revenue growth range includes roughly one point of tailwind from currencies.
Dennis: So in constant currency think of that in very round numbers is up 2% to 4%.
Dennis: That growth aligns with the 3% core constant currency growth rate that we just achieved in the first quarter.
Dennis: As we move into the second half of this year as we said on our last call. We do expect to see some improvement in retail trends as we benefit from the portfolio of marketing and retail productivity initiatives that Carlos described.
Dennis: We expect adjusted Q2 operating margin between two and a half and three 3% and adjusted earnings per share between 11% and 21.
Dennis: The lower operating margin versus last year is split roughly evenly between a higher occupancy rate and a higher SG&A rate largely due to the comp declines in our retail businesses.
Dennis: The full year, we still expect free cash flow of roughly $55 million, including $65 million of Capex. We are planning to changes in the earnings outlook to be offset by a tightening of working capital and with that I'll conclude our prepared remarks and open the call up to your questions operator.
Dennis: And as a reminder to ask a question simply press Star one one on your telephone and wait for your name to be announced.
Dennis: To remove yourself press star one again.
Dennis: Meanwhile, we compile the Q&A roster.
Dennis: Yeah.
Dennis: And that is star one one to get in the queue.
Speaker Change: One moment for our first question please.
Speaker Change: And it comes from Mauricio Serna with UBS. Please proceed.
Mauricio Serna: Great. Good afternoon. Thanks for taking my question I was wondering if you could talk a little bit more about how are you thinking about the rag and bone brand.
Speaker Change: Organic growth expectations for the year.
Speaker Change: And then maybe.
Speaker Change: On the Americas retail business, you said that won't change ahead of your expectations in Q1, how are you thinking about that business.
Speaker Change: Trajectory as the year.
Speaker Change: Progress and your initiatives kind of like start.
Speaker Change: Materializing into hopefully better performance. Thank you.
Speaker Change: Thank you Mauricio and good afternoon and I appreciate your questions. So let me start with Doug on the bone.
Speaker Change: We have been very pleased with this business and with the acquisition and with everything that is bringing to to the gas business and our portfolio.
Speaker Change: We had a very good first quarter.
Speaker Change: This was on top of Alpha.
Speaker Change: A year or the 10 months that we owned the business.
Speaker Change: We exceeded our expectations.
Speaker Change: We had.
Speaker Change: I think very high expectations for this year are coming in and we were able to really do better than that in the first quarter.
Speaker Change: And the great thing is that most of the.
Speaker Change: Performance is that were better than expected were across the different channels. So we had a great.
Speaker Change: Wholesale business in the first quarter.
Speaker Change: The business.
Speaker Change: Shipped a lot more than what we had anticipated and.
Speaker Change: It came from multiple accounts.
Speaker Change: In addition to that our direct to consumer business was also strong both in stores and E Commerce.
Speaker Change: Where we saw some pretty significant increases over what.
Speaker Change: Over the prior year, we have a big plan for this year.
Speaker Change: We are talking about three.
Speaker Change: <unk> $320 million plus.
Speaker Change: And that is just to put a give you a point of reference here before we acquired the company.
Speaker Change: $250 million on an annualized basis so.
Speaker Change: To go from $2 52 over three <unk>.
Speaker Change: Pretty significant increase.
Speaker Change: Of course some of this is.
Speaker Change: Driven by the addition of new stores.
Speaker Change: Have.
Speaker Change: We currently have 41 stores when we acquired the company, we have 38 and.
Speaker Change: And we have an expectation to open.
Speaker Change: Over 10 stores in the next few months, so a lot of that.
Speaker Change: Growth is going to come from that but in addition to that we are seeing same store sales growth. In addition to the organic growth of our.
Speaker Change: Wholesale business.
Speaker Change: And we are adding new markets, we are trying to expand the presence of the brand into the European markets. We opened one store and we have two more to open in the next few months in Germany. The ones that we opened this in.
Speaker Change: Amsterdam.
Speaker Change: <unk>.
Speaker Change: And we are also trying to develop other markets.
Speaker Change: Worldwide.
Speaker Change: The brand has already represented in Korea.
Speaker Change: A few other markets, where we have a presence and we think that the brand and really be very aligned with what customers are looking for in those and those new markets.
Speaker Change: And then you have.
Speaker Change: Additional product categories, which are.
Speaker Change: Represented by both internal development team is working on new categories new products.
Speaker Change: And the products look amazing and.
Speaker Change: We can see that our customer set at wholesale.
Speaker Change: Very very excited about growing their business with us.
Speaker Change: But in addition to that we are adding licensed products.
Speaker Change: To the assortment we did.
Speaker Change: Steel and handbags that Paul drove with our licensee has been our partner for many many years.
Speaker Change: And the bags are already in the stores that are doing very well, we're very excited with that.
Speaker Change: There is there are some other deals that are being worked on as we speak including fragrances.
Speaker Change: Have a couple of deals already done with watches and eyewear and more to come so overall.
Speaker Change: The team is doing a phenomenal job.
Speaker Change: Leadership of.
Speaker Change: Andrew Rosen.
Speaker Change: We couldnt be more pleased that he is with us.
Speaker Change: And on driving a great business.
Speaker Change: They are doing a lot of great things on the product.
Speaker Change: To really expand certain product categories that have been very successful, including denim. We have a very unique product called Miramar that has been just phenomenal for us.
Speaker Change: They have been strengthening the team, which is another big thing to really drive the business to a completely new level. So we have a new chief marketing officer that is starting.
Speaker Change: Soon.
Speaker Change: And we have a new head of human resources and several others.
Speaker Change: And we continue to look for.
Speaker Change: Just ways to strengthen our talent there. So very excited about everything that is going on we have changed some of the business models, including outlets for example.
Speaker Change: That used to run the stores with excess product.
Speaker Change: From the other channels.
Speaker Change: Now we have created.
Speaker Change: And the entirely new business model, where we are making product for those stores. We have opened several stores.
Speaker Change: Just to expand our outlet distributions so very excited in the business on fire there.
Mauricio Serna: Your second question Mauricio So it's about Americas retail and.
Speaker Change: I'm very excited about this.
Speaker Change: Definitely we continue to see some weakness in traffic and that traffic is impacting our ability to to really.
Speaker Change: Turning around the business.
Speaker Change: But but we are seeing a lot of great moves here.
Speaker Change: With the changes that we have made starting with product.
Speaker Change: I think we shared with you in the last call that we were going after more casual assortment I'm trying to really.
Speaker Change: Bringing a lot more denim into.
Speaker Change: Product selection that we had in those stores and.
Speaker Change: Bringing more casual and less dressy type of product.
Speaker Change: Also we are addressing.
Speaker Change: Pricing there.
Speaker Change: Trying to cover.
Speaker Change: Any of the opening price points that we had not had any.
Speaker Change: I'll try and assortment or an offering.
Speaker Change: We are doing a lot in terms of.
Speaker Change: Allocating the product where it belongs.
Speaker Change: On the characteristics of the stores that we are trying to serve.
Speaker Change: We have done more in the whole retail process.
Speaker Change: Addressing people and addressing visual merchandising to do a better job and we've seen that for.
Speaker Change: For the first time in a long time that.
Speaker Change: Many days, we are seeing positive comps in the stores, which is very exciting and of course, we only have 60 stores in that chain I'm talking about full price upfront free.
Speaker Change: Free standing stores.
Speaker Change: Sorry.
Speaker Change: Yes, just thanks for the full price and Thats, what you are saying right.
Speaker Change: Yeah full priced stores.
Speaker Change: Yes.
Speaker Change: And as part of this we are seeing for example in the first quarter that women's apparel was positive.
Speaker Change: Plus 3% just we haven't seen this in a very long time in our business now is primarily focused on women.
Speaker Change: We think that the customer represents about 85% of the total customer base and of course, if we turn of women's.
Speaker Change: Major major sign of success for us. So so we are excited we're seeing conversion up about 6%.
Speaker Change: In spite of traffic being down about 11%, but that traffic trend is better than what we saw in the fourth quarter, we are seeing AUR.
Speaker Change: We are seeing.
Speaker Change: And all of this is is converting into a much better bottom line.
Speaker Change: Relative to what we were expecting and this has been a.
Speaker Change: One of the major reasons, why we had a better first quarter than what we had expected.
Speaker Change: We expect just our outlook today.
Speaker Change: It does not include a significant change from the current trends, but between US I think that could happen. It could happen that we continue to see improvement and.
Speaker Change: Yes.
Speaker Change: Could turn.
Speaker Change: From the trends that we are experiencing now and this could include.
Speaker Change: Our other part of the business, which is more of the factory outlet business, which is a much bigger business for US now here in North America.
Speaker Change: The full price stores.
Speaker Change: And we have seen improved conversion in that business as well we are addressing pricing and I think we mentioned this in the past that we thought that in some cases, we have opportunities.
Speaker Change: <unk> recapture customer.
Speaker Change: Sure.
Speaker Change: By addressing prices and we are being more promotional but we were able to absorb that with increased mill.
Speaker Change: During the period. So so we feel good about how we are positioned with that business as well.
Speaker Change: So I'll stop there and.
Speaker Change: Now if you have a follow up question.
Speaker Change: Now this is very encouraging and super helpful to hear I guess, just a quick follow up as Youre thinking about the second half of the year and maybe.
Speaker Change: Thinking about the ranges of your operating margin outlook.
Speaker Change: How are you thinking about like second half potentially being able to have.
Speaker Change: A little bit of modest margin expansion or maybe like flattish margins on a year over year basis on the second half not not one year.
Speaker Change: Yes, let me take that I think.
Speaker Change: Yes, I'd start first I think the way to understand this year is really the first understand the top line.
Speaker Change: Our model has a lot of moving parts, but but if you start with the topline the shape of this year as growth curve is really in an inverted bell curve. We start restart high then we moderated a bit in the middle two quarters still positive and then up again in the fourth quarter. So you start with say a quarter. We're just.
Speaker Change: Completed 99.
Speaker Change: Nine 4% back.
Speaker Change: And that's buoyed by the extra two months that we get from Ragen bones, some earlier shipments a bit in wholesale but as we said the core guests business grew at three three points and that's an important data point to keep in mind, but within that that first quarter. We're also flying into about two and a half point.
Speaker Change: Headwind on currency as you move into the second quarter I mean, we just guided to that using again very round number is about 3% to 5% top line growth now with a one point tailwind that's the 2% to 4% we talked about which compares to that 3% core organic growth that we talked about third quarter.
Speaker Change: It looks pretty similar to that it's mostly the organic growth at work there.
Speaker Change: Always a little bit of noise from wholesale shipments we start to see some modest improvement in the retail business based on the initiatives that we've got going.
Speaker Change: But again Thats generally the dynamic of those middle quarters, and then when you get to the fourth quarter.
Speaker Change: Based on what we know right now we see <unk>.
Speaker Change: <unk> change.
Speaker Change: Mostly due to currency, we expect the fourth quarter to be up in the high single to approaching 10% range.
Speaker Change: It's an important quarter for us, it's the biggest quarter for us in the year.
Speaker Change: Organic growth is still working were starting to see as Carlos alluded to those.
Speaker Change: Retail improvements that we talked about but in Q4 currency become was a five point tailwind based on where it is right now so one data point for you. The Euro now was today with over 114. It was 105 on average last Q4, so that's almost a 9%.
Speaker Change: 9% growth so from the first quarter to the fourth quarter about an eight point swing. So for the full year, we guided to five 5% to seven and a half round numbers organic growth of guesses and they're at about three points. The extra two months of Ragen bond gives us about two points of growth in currencies based on where they are.
Speaker Change: Right now another two points of growth. So if you look at that and then from an operating margin perspective.
Speaker Change: The first three quarters generally relative to last year are still in that same range that we should expect to see some compression of our operating margins, but when we get to the fourth quarter, that's the opportunity with that currency tailwind there some better performance in the retail business as we start to leverage our fixed cost base.
Speaker Change: So.
Speaker Change: I hope that gives you some insight into how we see the year progressing.
Speaker Change: Very very helpful. Thank you so much.
Speaker Change: Best of luck.
Marissa: Thank you Marissa.
Speaker Change: As a reminder, if you do have a question simply press star.
Speaker Change: One one.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Alright.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Hello.
Speaker Change: Is that Eric the LIFO correctly here.
Speaker Change: How are you.
Speaker Change: Sure Eric.
Speaker Change: I'm Susan go ahead, we get.
Speaker Change: Okay.
Speaker Change: Thank you for the color on this in a lot of pieces here. When you look at how should we be thinking about inventories.
Speaker Change: Know that this quarter was unusual how are you going to kind of look at the rest of the year.
Speaker Change: Terms.
Speaker Change: Slowing inventories based upon tariffs and the rest of the world here.
Eric: Hi, Eric.
Speaker Change: I'll start on.
Speaker Change: And then I'm sure that Dennis will finish but.
Speaker Change: Our inventories are up about 15% in dollars and about 14% in constant currency.
Speaker Change: This numbers are a little bit higher than what we had anticipated.
Speaker Change: But everything that drove this numbers.
Jess: Intentional Jess.
Speaker Change: Yes, we have been watching the whole supply chain challenges, especially.
Speaker Change: All the inventory that is coming into Europe, or from Asia Asian countries and with the Red Sea crisis.
Speaker Change: It has been.
Speaker Change: A significant challenge to make sure that inventory or product was available to support both our.
Speaker Change: Wholesale business and also our own retail direct to consumer businesses. So.
Speaker Change: We have been very aggressive in bringing product early even if that.
Speaker Change: <unk> represented.
Speaker Change: Need for an additional investment and we are happy we did because.
Speaker Change: Having access to all of that product.
Speaker Change: Well to us.
Speaker Change: To really ship product early and because the product is selling well and our.
Speaker Change: Retail customers are very happy with our relationship.
Speaker Change: I want to take that product early and this happens in both.
Speaker Change: In Europe, but it also happened here in North America.
Speaker Change: I mean, we will continue to really make sure that we can support our business for sure.
Speaker Change: But.
Speaker Change: Of course over the long term, we expect to really run the business with a more streamline inventory ownership.
Speaker Change: We are now comparing apples and apples, meaning just now we have anniversaried the acquisition of ragen bonds. So so.
Speaker Change: 15% is a true 15% increase in inventory.
Speaker Change: And we think that over time.
Speaker Change: We could take.
Speaker Change: A lot of that increase.
Speaker Change: Out of the model, but I'm talking about more medium term.
Speaker Change: We don't anticipate that we'll be able to close the year with with a number that is significantly different than that of course, we are trying to work.
Speaker Change: In such a way that we protect the business, but also we run with a streamlined and efficient model and if we see opportunities to reduce inventory levels.
Speaker Change: We will try to do so even this year, but.
Speaker Change: Over the medium term, especially if the supply chain issues with in transit times.
Speaker Change: Get normalized we would fully expect to really.
Speaker Change: A reduction in inventory ownership.
Speaker Change: I would add to that we're focused Eric on driving improvements to our cash flows and Carlos prepared remarks, you talked a lot about profit initiatives and growth initiatives. Those obviously are designed to improve cash flow as working capital is another area. We have made the investments.
Speaker Change: I would size that investment is somewhere in the order of $50 million.
Speaker Change: That has been very important to protect the business, we believe and we've heard from our accounts that we are rewarded and gaining share because we've been so reliable.
Speaker Change: On delivering products and once the rapeseed crisis.
Speaker Change: Wanes and it's a more normal environment, we expect to be able to reclaim that that cash.
Speaker Change: Well once again.
Speaker Change: Okay could we get an update on.
Speaker Change: This genes.
Speaker Change: Thank you James.
Speaker Change: We are very pleased with <unk>.
Speaker Change: Development of guest James just we have.
Speaker Change: Very nice distribution, especially in Europe and.
Speaker Change: The business is primarily a wholesale business now.
Speaker Change: We have been able to do.
Speaker Change: Deliver.
Speaker Change: A few seasons now.
Speaker Change: We continue to exceed our expectations now bye.
Speaker Change: Huge amount but.
Speaker Change: But we are doing better than what we had anticipated.
Speaker Change: There is a lot of.
Speaker Change: Work that is being done by the teams here too.
Speaker Change: To really improve our product offering they have been very very much in listening mode and are working with the different accounts just to understand.
Speaker Change: Whether we have everything that they want or or they need more and we have been developing more product based on that both for men and women.
Speaker Change: And we are trying to understand just where what are the customer is gravitating and tried to.
Speaker Change: Strengthen the offering based on that.
Speaker Change: We think that we are in a very good place in terms of the.
Speaker Change: Type of trends.
Speaker Change: Our.
Speaker Change: In the marketplace and how we are addressing them with our products I think.
Speaker Change: Product line looks great.
Speaker Change: And we think that the pricing model that we're following is also pretty much in line with what it needs to be.
Speaker Change: We have several accounts in North America.
Speaker Change: That.
Speaker Change: North America business was bigger by now, but we think that at.
Speaker Change: At the end of the day is like in every one of our businesses and our products to win.
Speaker Change: We are also excited about.
Speaker Change: Our marketing initiatives, because we think that what we are talking about and doing as.
Speaker Change: As it relates to social media.
Speaker Change: There's also going to impact.
Speaker Change: A brand like yes, James that appeals to a much younger consumer that is.
Speaker Change: Lives with social media. So so we're excited about that as well and we are trying to really make sure that all of those new practices that we are trying to implement.
Speaker Change: As it relates to marketing that they have in to consideration.
Speaker Change: S jeans needs.
Speaker Change: Clooney influencers, including.
Speaker Change: The whole idea of collaborations.
Speaker Change: And things that we can do to really expand the distribution on the awareness. We are excited about the new stores we have.
Speaker Change: Open we have now three stores opened in Europe, and we are trying to open Melrose here in Los Angeles, We are planning to open Tokyo and a few months. So so we have a lot going on to really put the brand out there and and.
Speaker Change: Every time that we do one of these events, we get significant participation.
Speaker Change: And a lot of excitement from that younger consumer. So we think that there is just the beginning of a great opportunity.
Speaker Change: Great. Thank you good luck for the rest of the year.
Eric: Thank you Eric.
Speaker Change: Operator.
Speaker Change: Yes.
Speaker Change: Alright, well.
Speaker Change: In closing I want to thank you all for participating today.
Speaker Change: We're very pleased with the start of our year. We are encouraged by the early results of our initiatives regarding product marketing and retail productivity in both North America and in Europe.
Speaker Change: And we believe that this success is can be leveraged across the rest of our direct to consumer business and.
Speaker Change: Especially in the second half of the year as Dennis was just alluding to so we are excited we have a.
Speaker Change: A big plan for the second half, but we think that we have opportunities to.
Speaker Change: Meet and exceed those plans we have a strong.
Speaker Change: Just opportunity.
Speaker Change: With our direct to consumer business, but also in our wholesale business our trends are very strong.
Speaker Change: And we are excited and ready to drive the business and gain market share leveraging the strong inventory position that we have built we look forward to reporting back to you on our progress.
Speaker Change: We wish you have a great day. Thank you so much.
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