Q2 2020 Earnings Call
Good day, everyone and welcome to the guess second quarter fiscal 2020 earnings conference call on the call are Carlos Alberto <unk>, Chief Executive Officer, and Sandeep Reddy, Chief Financial Officer. During today's call. The company will be making forward looking statements, including comments regarding future plans business and financial opportunities strategic initiatives capital allocation and short and long term financial outlook. 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 FCC.
Now I will turn the call over to Carlos.
Thank you operator, good afternoon, and thank you all for joining us today.
I am very pleased to report our second quarter financial results, which exceeded our expectations in several parts of our business for the second quarter. We reported another period of solid revenue growth, achieving a 6% increase in revenues and 9% in constant currency. During the period, we increased gross margin by 180 basis points, which was partially offset by a 50 basis point increase in adjusted SGN. They expenses driving an adjusted operating margin increase of 130 basis points to 7% for the quarter.
The revenue increase combined with the expansion in adjusted operating margin resulted in a 30% increase in adjusted operating profit, which was well ahead of our guidance for the period.
During the quarter, our sales comp performance for our direct to consumer businesses, which include stores and E Commerce.
Were in line with our guidance in all regions and our wholesale business in North America, and Europe delivered very strong performance compared to our expectations. Even after considering that a portion of the business was positively impacted by early shipments of fall product.
As we had expected in Asia that performance was soft in our three major markets, Japan, China Korea and Japan.
While the environment remains challenging we believe that the guess brand and our product offerings are very relevant to the Asian consumer and that the long term opportunity in this region remains intact.
In the meantime, we will continue to monitor the situation very closely and reassess our investment plans accordingly.
We managed inventories effectively during the period and are well positioned for the fall and holiday seasons. We are confident in our business for the second half and have increased our guidance for the full year based on our current trends on forecast, we have successfully mitigated the terrorists risk in China through productive negotiations with our vendors and we expect minimal impact this year from potential tariff increases.
On for next year, we expect to reduce the estimated tariff rates from China production into the U.S. to only 12% of our total apparel production.
We're still working on this to further reduce our dependency on China.
I'm also pleased to report that we have made solid progress with our key initiatives since our last earnings call in June .
As I mentioned, then we had begun our work on our strategic business plan. We now expect to share our plans with you at the end of October during an analyst day in New York When we will have several of our team leaders representing key regions global functions from across the company.
During this webcast event, we will share our key findings on top strategic priorities to take us to the next level of growth and profitability.
During the last few months, we continue to operate the business. Following the key principles that I have alluded to in our previous calls to take advantage of value creation opportunities for our company.
Let me begin with an update on capital allocation.
As we reported in our last call. We made the strategic decision to redeploy capital and return incremental value to our shareholders through significant share repurchases, while reducing our dividend by 50%.
As of today, we estimate that all of the net proceeds from our convertible debt transaction have been disbursed and we believe that all then we will be able to repurchase over 16 million shares represented approximately 20% of our 81.4 million shares outstanding at the beginning of this fiscal year.
We now expect the impact of the convert transaction and share repurchases to be accretive to our adjusted EPS. This year by 13 cents per share or about 10% and accretion could reach 20% in the next fiscal year.
The combined effect of the reduction of dividends and the shares retired through the buyback will positively impact our cash flow by approximately $30 million this year and $40 million next year.
We continue to prioritize capital investments that support our growth plans on those that will improve our infrastructure to position the company for further growth in connection with this we have decided to upgrade our e-commerce platform and implement Salesforce one of the best Global Omni channel platforms available in the marketplace.
We believe that the benefits will be significant.
We will be able to impact conversion rates of our global ecommerce business meaningfully.
We are currently designing the architecture on sequencing plan for the implementation of the Salesforce platform and plan to roll out the new technology in the Americas and in Europe before the end of next fiscal year.
Another area that we have targeted for improvement has been our inventory management function.
I am very pleased to report that we have made significant progress in just a few months in this area and have been able to reduce our overall investment in inventories to be more aligned with expected sales and to improve the composition and quality of what we own.
This has resulted in a meaningful margin improvement this quarter and we expect further margin benefits in the remainder of the year and into next year as a result of this initiative.
Also as part of our capital allocation review, we have decided to transition the direct operation of our stores in Australia to one of our key partners.
They already have a wholesale presence in the market and a management structure. So the combination will enable us to develop the guess brand to its full potential in this market and ultimately create incremental value for our shareholders.
The second principle that I have discussed in the past and would like to update you on our progress is regarding product development on distribution optimization.
This relates to certain product categories, such as denim accessories marciano in mens just to name a few.
We have made progress with our Assortments and are very pleased with our fall and holiday collections for the respective product lines for denim as we mentioned before we plan to install new denim presentations in 220 stores worldwide.
And this will happen during the upcoming September October months.
Regarding marciano the North American line is now being fully developed by the regional team based in Los Angeles and the European collection is being conceived by our European team in stab Youre, Switzerland.
We are confident that both lines will represent much more effectively the local consumer preferences for each market and we believe that customer response will be strong.
With respect to our accessories lines on men's products. We have made an effort to design for the three specific customer profiles that represent the majority of our business and our growth.
I'm, referring to our heritage customer and our emerging customer groups millennials and generation Z.
We also performance on tests during the quarter and a handful of guest stores in the us by adapting the Assortments store marketing and visual merchandising to the Gen Sequencers and the results were encouraging with an improvement in trends of 8% for the test stores over the entire guest chain.
The third principal I have talked about in the past relates to our opportunity to pursue global strategies. The main areas that we have focused on in addition to inventory management, our logistics on distribution sourcing of product development real estate and omni channel capabilities, which include E Commerce.
Other functions already operating with a global focus include finance strategy, I T and human resources.
For logistics and distribution, we now have one team overseeing the Americas and European businesses.
This team is focusing on assessing and optimizing the network in Europe , including productivity improvements through the adoption of some best practices from our more mature North American platform.
This is a high priority for us as the costs can and should be significantly reduced here.
Regarding sourcing and product development, we have a signed global oversight to our European leadership team.
This team is working with our team in North America, focusing on integrating common development and key fabrics consolidating vendors on migrating sourcing into lower cost countries of origin, particularly out of China.
I couldn't be more proud with the progress made by this team in the last few months to migrate our production to lower cost countries on preparing for vendor consolidation.
As a result of this efforts, we see meaningful opportunities for IMU improvement.
Regarding omnichannel capabilities, including E Commerce.
Beyond the implementation of Salesforce, we're looking at several other applications to improve data capturing customer profiling on segmentation.
Predictive modeling personalize marketing and customer relationship management.
Last we have reorganized our real estate teams for all three regions and are implementing consistent practices for the function globally, including return models for project approvals and operating performance requirements.
The fourth principle I discussed relates to our cost structure optimization as we mentioned during our last call. We have engaged an external consulting firm to help us on this and we have now completed our assessment of our cost structure in North America, and Europe and have identified several opportunities for further efficiencies and cost savings.
We plan to implement some of the recommendation as certainly as Q4 this year and into next year.
Unexpected profitability improvements as a result of such implementations in the short and medium term.
We're also looking at our lease portfolio and see opportunities to reduce occupancy occupancy costs over time.
We have been able to renegotiate favorable lease terms and are now considering smaller stores to increase store productivity as we prove omnichannel capabilities that allow us to carry a larger assortment online completely access ore from on through our stores.
The fifth area relates to our customer Centricity initiative, and our objective to perfect our omnichannel experience worldwide.
We continue to focus our efforts in this area and have made it a key part of our strategic business planning work.
We see significant opportunities to improve the customer experience across the board and increase the penetration of e-commerce sales overtime globally.
Our ultimate goal is to offer a seamless customer experience regardless of the channel that the customer chooses to engage with our brand.
Before I turn the call over to Sandeep I want to focus on three big opportunities that I see in the future for our gas brands and for our company.
First brand relevancy, and attracting a new younger customer.
Guess is truly a global brand with distribution in 100 countries, which represents a significant competitive advantage.
Today, only 29% of our business is generated in the us.
The guess brand continues to gain relevancy, both with our heritage customer and with the new emerging segments of younger consumers that love our brands.
The celebrity partnerships collaborations and big experiential events, we are driving to connect with those consumers are impacting our engagement I'm, placing guess at a different level in our space.
Jennifer Loftus recent tour. It's my party was a resounding success all over the world. She is a global icon a great performer at the height of her career and is amazingly relevant with all consumer groups and an incredible ambassador for the guest Brown and the Latino community with multiple generations.
She now has 99 million followers on Instagram on one of her pose with a gas logo top got four and a half million likes in only a few hours.
We got incredible exposure through her tour with millions of impressions.
Anticipation during and post every show in 29 cities, where she performed 36 shows during the summer.
Regarding special events. This last weekend, our brand partnerships team led by Nikolai Marciano organize and experiential event in lot five at our headquarters campus to launch guest sport a capsule collection celebrating archival moments rooted in the culture of sports.
The activities, including tournament of basketball soccer skateboarding food and beverage game for Kids limited expression lead design products in collaboration with multiple brands that were available for purchase music artist performed live and a collection of vintage cars worse on display during the event. We believe that these types of events and engagements are very unique and set us apart with that younger consumer that values experiences with authenticity creativity and origin I'd in a world of sameness.
We continue to believe that this emerging customers represents our biggest opportunity for growth both domestically and at a global level. So our focus is in securing partnerships and collaborations that have a global reach augmented by local relationships with strong customer followings.
Second top line momentum and significant white space to grow globally.
As we assess the entire sales network, we have in the world as part of our strategic planning efforts. It became very apparent that we still have tremendous white space to grow in multiple markets and our multi channel formula offers great opportunities to expand efficiently, while optimizing capital utilization.
A great example is Europe , where we are experiencing strong momentum across all channels and were several markets are still underdeveloped compared to our brand potential.
Also as we open many stores in multiple regions in the last few years, a significant part of our fleet is young and store productivity can improve meaningfully before we reach maturity.
I see this as a great opportunity to grow revenues without significant additional investments.
But the opportunity for global growth for gas goes well beyond bricks and mortar and applies to our E Commerce business, which as I have said before is very underdeveloped compared to best in class companies in our space.
As I mentioned earlier, we are in the process of ensuring that we have the right tools and capabilities to deliver a great omnichannel experience.
Third is our operating earnings growth and margin expansion opportunity.
The more time I spend with our teams looking at our current organizational and cost structure, our processes and our business performance.
The more excited again about our opportunities to increase productivity reduce overall costs and increase efficiencies across our model.
As we execute on this opportunities and capitalize on the revenue growth potential that we have.
We see a clear path for operating margin expansion, which should position us to reach double digit operating margins.
In closing I'm very excited about our future and I'm convinced that we're putting in place a solid plan to tackle our opportunities head on we have strong talent throughout our organization and the commitment and passion that you will find in our team is at the top of the chart.
I am thrilled to be in this journey with Paul and our entire team to maximize our purpose as an organization and I am highly confident in our ability to grow our top line improve our profitability and create significant value for all stakeholders with that let me turn the call over to Sandeep to review the financials and our outlook Sunday.
Thank you Carlos and good afternoon.
During this conference call, our comments reference certain non-GAAP or adjusted measures.
Please refer to today's earnings release for GAAP, reconciliations or descriptions of such measures.
Second quarter revenues were $683 million up 6% in us dollars and 9% in constant currency versus the prior year.
I would like to highlight that this was our twelveth consecutive quarter of revenue growth and is the highest second quarter revenue number in our company's history.
Total company gross margin increased 180 basis points to 38.9% driven by higher lime use and occupancy leverage.
This was on top of a 230 basis points improvement in gross margins in last years second quarter.
Adjusted as soon as a percentage of sales increased by 50 basis points, primarily driven by higher advertising and corporate expenses.
Adjusted operating profit for the second quarter was $48 million, an increase of 30% was will be adjusted operating profit last year and was above our expectations.
Adjusted operating margin finished 130 basis points higher than last year at 7%.
This was on top of a 130 basis points improvement in adjusted operating margin in last years second quarter.
I would like to point out that we recorded $6.4 million of non operating expenses due to unrealized losses on non operating assets and net revaluation losses on foreign currency exposures.
This compared to non operating income of $1.4 million in the second quarter last year.
Our second quarter adjusted tax rate was 28% up from 23% last year.
Driven by the mix of statutory earnings and some discrete items.
Adjusted diluted earnings per share finished at 38 cents above the high end of our guidance of 30 cents and included a four cents favorable impact from timing of wholesale shipments from the third quarter to the second quarter.
Also included in the EPS was three cents in accretion from the convert transaction and share repurchases.
Which was more than offset by a negative impact of nine cents.
Between non operating expense and the higher tax rate.
Now for some more color by segment.
America's retail revenues for the quarter finished up 1% in us dollars and in constant currency.
Comp sales for the quarter, including ecommerce were up 2% in us dollars and in constant currency.
Marking our sixth consecutive quarter of positive comps.
Positive comps in the quarter were driven by better conversion and new PT.
E Commerce had an immaterial impact on comps for the quarter.
Americas retail operating margins in the quarter expanded 20 basis points, marking our eighth consecutive quarter of operating margin expansion.
This was achieved through better line reviews and positive comps.
Partially offset by extremely de leverage due to wage pressure and higher markdowns.
Staying in the Americas region, I want to take a moment to talk about the Americas wholesale business.
Revenues grew 22% in us dollars and in constant currency and were driven by a continuing strong performance in our U.S Department store and specialty business.
The Americas wholesale operating margins in the quarter expanded 460 basis points, primarily through higher IMU.
European revenues for the quarter grew grew versus last year by 9% in us dollars and 14% in constant currencies and were driven by new store openings growth in wholesale revenue and positive comps.
Pumps, including ecommerce finished down 3% in us dollars and up 1% in constant currency.
Ecommerce improved the comps for the quarter by three percentage points.
The comp increase marked the 16th consecutive quarter of constant currency positive comps for the European region.
Our European wholesale business also continues to be very strong.
We are currently building the order book for the spring Summer 2000, Twentys season, and are on track for our sixth consecutive season of double digit growth.
European segment margin improved by 540 basis points due to higher I am use lower distribution costs leverage and lower retail markdowns that drove a 4% improvement in comp gross profit dollars.
We now expect lower European logistics cost to contribute at least 125 basis points to margin expansion in Europe for the year.
We also expect to be much less promotional than last year during the remainder of the clearance period in the third quarter.
Moving to Asia second quarter revenues were up 1% in us dollars and up 5% in constant currency.
Comps, including E Commerce were down 13% in us dollars and down 8% in constant currency.
Ecommerce improved comps by one percentage point.
We experienced broad based weakness in our major markets in Asia.
That is Korea, China, and Japan, where the weak trend in traffic across all three markets in the quarter.
Operating margin for the Asia segment contracted 780 basis points in the quarter.
Primarily due to higher markdowns and expense deleverage as a result of the negative comps.
During the quarter, we closed the transaction to sell our owned and operated stores in Australia to Australia wholesale distributor.
Our guidance for the third quarter and full year revenues for the segment has been updated to reflect the impact of this transaction.
Moving onto the balance sheet.
Accounts receivable was $293 million up 3% in us dollars and 7% in constant currency in line with our revenue growth.
Inventories were $484 million up 4% in us dollars and 7% in constant currency versus last year.
This was another quarter of sequential improvement and was achieved despite accelerated receipts from China into the us during the quarter in anticipation of the impending list for tariff increases.
We're still carrying some excess inventory from the end of last year and expect to make progress on our plans to move through this inventory through a combination of our own retail outlet stores as well as stock liquidation channels during the balance of the year.
Free cash flow was negative $59 million, an improvement of $9 million was negative $68 million last year, driven by $11 million lower capital expenditures.
This includes a $46 million payment for the EU Commission fine.
So our free cash flows improved by $55 million, excluding the impact of the EU Commission fine.
During the quarter, we repurchased 0.7 million shares.
The cost of $11 million on the open market.
This does not include any shares that may have been bought but not yet delivered under the $117 million MSR, we entered into during the first quarter of this year.
As a reminder, 5.2 million shares have already been delivered to US again is in the first quarter with the balance expected to be delivered after completion of VSR by the beginning of September .
We ended the quarter with cash and cash equivalents of $131 million compared to last year's $219 million.
Cash less debt at the end of the quarter was negative $179 million.
Compared to $179 million last year.
Moving onto the guidance I should point out that the outlook for the third quarter and full year of fiscal 2020 does not assume any asset impairment charges.
However, any potential impact from the list for tariff increases is now included in our guidance.
Also guidance for revenues and comp sales for the total company and by segment.
Is included in the supplemental table attached to our earnings release.
For the third quarter fiscal 2020, we expect revenues for the quarter to be up 4.5% to 5.5% in constant currency.
At prevailing exchange rates, we estimate that currency will be roughly a 2.5 percentage point headwind on consolidated revenue growth for the quarter.
Our gross margin is expected to be up primarily due to IMU improvement from our supply chain initiatives.
The history, new rate is expected to be up compared to last year, primarily due to an increased investment in advertising.
We are planning an operating margin for the quarter between three and 3.5% with the 10 basis points unfavorable impact from currency.
The adjusted earnings per share is planned in the range of 15 cents per share an 18 cents per share, including a penny of tailwinds due to currency.
The earnings per share guidance includes a two cents in accretion due to the impact of the convert transaction.
And share repurchases.
Note that our Q3 EPS guidance includes a four cents negative impact from the shift in timing of wholesale shipments from the third quarter to the second quarter.
Our adjusted EPS guidance includes an assumption of $1.7 million of cash interest expense and amortization of loan fees related to the convertible debt transaction.
Our tax rate for the quarter was estimated to be 30%.
We expect consolidated revenues for the year to be up between 6% and 6.5% in constant currency.
At prevailing exchange rates, we estimate currency to have a three percentage point negative impact on consolidated revenue growth for the year.
For the full year, we expect gross margins to be up due to improved dime used in both the Americas and Europe .
As well as lower logistics and distribution costs in Europe .
The adjusted assuming rate is expected to be up for the year due to an increase in investment in advertising as well as performance based compensation.
Our adjusted tax rate for the year is estimated to be 25%.
We are planning an adjusted operating margin between 5.3, and 5.6% with the 10 basis points negative currency impact on operating margin.
And our guidance assumes that foreign currencies will remain roughly at prevailing rates.
Adjusted earnings per share is planned in the range of a $1.28 and $1.36 with an eight cents headwind from currency.
This includes 13 cents in estimated accretion due to the share repurchases and convert transaction.
Our adjusted EPS guidance include an assumption of $5.3 million of cash interest and loan amortization expense.
As a reminder, our prior guidance for the year was a $1.19 to $1.30 with the currency headwinds of three cents.
The high end of our new guidance now represents a 39% increase over last year's adjusted EPS.
Capex for the year is expected to range from $63 million to $68 million to support.
Store openings key store Remodels and investments in our technology infrastructure to support long term growth.
This includes incremental investments on the development and rollout of our Salesforce platform that were not contemplated at the beginning of the year.
Please note that this is down from $108 million in the prior year.
As I mentioned earlier on the call excluding the impact of the $46 million You Commission fine our free cash flow improved over last year by $55 million in the first half.
This was driven by improvement in inventory and working capital management. In addition to lower capital expenditures.
We expect to see a similar improvement in free cash flow in the second half of the year due to continued benefits from working capital management and lower capital expenditures.
In addition to this as Carlos mentioned earlier on the call are cash outflow for dividends will be lower than last year by approximately $30 million.
In the current quarter. The board of Directors has approved a quarterly dividend of limb Lebanon, the quarter cents per share payable to shareholders of record at the close of business on September 11th 2019.
With that I will conclude the company's remarks and open the call up for your questions.
Thank you.
Begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone.
To answer your phone please pick up your handset first before parsing numbers. Once again, if you have a question. Please press Star then one on your Touchtone phone.
Our first question comes from Susan Anderson from B. Riley.
Your line is now open.
Hi, good evening. Thanks, so much for taking my question nice job on the quarter to see the continued strong performance and I was curious and you mentioned the higher markdowns in the Americas retail and curious what was driving that and I guess should we expect that also for third quarter and and then also I was wondering on non op margin guidance for third quarter, why the step down I guess year over year. After the strong second quarter performance and then it looks like to get to the year baked into that fourth quarter.
Hi, Susan that Sandy.
So I'll take you how are you doing.
Okay. So.
I think I'll take your question, there's two pieces to address the I think the first on Americas retail.
One of the things that I think was very important to note was if we went through our performance last year.
The EU our performance was a big driver of our comp improvement right through the year and especially in the second quarter and right right through the second half as well and that was driven by a very lean inventory position last year as we got into the.
Now this meant that essentially as trends are improving in the marketplace, we potentially lost celadon and left sales on the table, but we actually had a very very low markdown rate last year because of that lean inventory level.
But this year as we came into the quarter came into the year frankly, we made sure that we have sufficient inventory to fulfill demand and I think we're now at a more normalized level of markdowns, which is why youre seeing a slight pressure on on you are that was actually better in the quarter. This similar dynamic was expected to last into Q3 as well, but I think again, we feel pretty good about the inventory that made caring and about the cadence of the business. We don't feel it's it's two to do over our clearing of inventory and and the margins are very healthy that we're experiencing on the Americas business.
And.
I think on the second question that you had Susan you were talking about the op margin guide and I think we are talking about 3% to 3.5% compared to 3.7% last year. The important point to note is that we experienced four cents worth of timing and a benefit in the second quarter because of the timing of wholesale shipments shifting from the third quarter into the second quarter and if you actually take touch timing and put it back into the third quarter, our margins would have been expanding into third quarter at least on the high end. So I think that's that's an important dynamic to take into consideration when looking at the current quarter by itself, but but we feel really good about the performance of the company so far in the year and on a full year basis. So when you look at the full year guidance. We are now raising the full year guidance to 5.3 to 5.6, which is a pretty material improvement in guidance, especially because we lost 10 basis points and currency and I think we feel very comfortable that the business is going the right direction and thats reflected in our guidance.
Great. That's really helpful. If I could ask maybe one follow up on Asia. It looks like from your third quarter Guide, maybe you're seeing some improvement there and I don't know if there is any color you could give on gess third quarter to date, so far in China, if you've seen some of that pressure I guess dissipate or if you're seeing out you're seeing that weakness and again a little bit better.
Yes, Susan this is Carlos I, let me take that test.
Asia is.
Is obviously, a big opportunity for us, but also we are seeing some softness just to make a little bit of history. I think we talked about this in the last call but.
Let me address this and kind of like three different pieces. The first one is about the environment in Asia. The second one is what we are doing about it and then let me talk a little bit about what this means for the long term for our business there and the opportunity.
So let me start with the environment.
We saw a very sudden change in the trends at the beginning of the year. This was right after Chinese new year and.
The big sudden change was primarily driven by.
Lower weak customer traffic into our stores and this happened in the three major Asian markets that we have so it wasn't just China, but also in Korea and Japan.
We believe that this is not specific to our brand in any one of those markets and we believe that this is more of a macro type of issue.
The key performance indicators that we follow very intensely into our stores show that the customer is still responding when they are in the stores. So all of the key things such as conversion rates or units per transaction or average order value of the all those metrics seem very consistent with what we saw in the path. The and then we saw that when we.
When with public sales too.
Just drive additional traffic to clear product and this is completely.
Customary during those times, we didn't see that the traffic was was coming into the stores.
We also understand that many companies that operate in the same space are experiencing the same type of customer trends. So we know that this is not just about that and we know that the risk weak traffic even into department stores specialty in Korea, and Japan that we know for a fact, so you put all this together and we say okay definitely know that however, what can we do to really improve our business, we I visited China and met with the team there a few weeks ago and.
I had a big opportunity to spend time with the team and we have a great team.
We saw significant opportunities first of all I was completely amazed with the how vibrant our guess brand is in China and I saw this with my own eyes. There. Its just exciting. There is this is a very young customer a lot of excitement in the stores. Many customers have Frank close on they are sharing with others had lot of social interaction in the stores and tremendous energy, which is very inspiring and then I saw a big opportunity on the product we are working on.
Styling, Prince sightseeing fit they are all issues that are very much more specific to the markets and right. Now we don't have a specific product for those markets, but we think that we can really developed.
With that much more accuracy the type of product that that customer will respond to including speed to market opportunities and initiatives.
We are also very revisiting the entire customer experience.
We think that.
This could include in addition to all the technological issues and opportunities that we have that we currently don't have omnichannel and digital capabilities are part of that but also including the layout of the store. We don't have as many fitting rooms as you would expect considering the kind of activities that we're seeing so there are a lot of things that we can do to really improve that experience. While the customer is in the stores and even loyalty membership, which is a big opportunity for US. We are seeing great response, when we offer customers to join this this membership and.
And we believe that there is an opportunity here to also integrate data analyses with what we do on line.
Last but not least we think that there is a lot that we can do on marketing and in fact, the team is working very hard to coordinate with our brand partnerships team here.
To bring some of the relationships that we have.
Into their markets and and even going into.
Those markets with groups that could be very much more local and having a much more impact at the local level. So in September and October for example, we are doing our collaboration with 88, rising which is a group that.
The the relationship was born here within equalize that team and and this group is going to send you notice that they are going to perform they are going to have.
Big advance we are going to be represented in Hong Kong Macau, Taiwan, and then we're going to China in October and November prior to their tour in Chengdu and this the group that is going to perform their score higher brothers.
And there was going to be a tour from them on there from there so very exciting that and then last thing I would say is about the teams. We have people that have been doing this for a very long time, they have tremendous expertise in the markets and and I feel that we have an incredible team on this applies to all those major markets that I mentioned.
In addition to the tenure I think that there is tremendous.
Expertise in those markets to really lead us in the right direction.
So what does all this mean just we keep looking at the Asia business. Obviously this represents a big opportunity for us as a company long term and that long term potential does not change in our eyes. We have a good base of stores in China. For example, we have about 200 doors right now.
We have more space to grow in tier three and tier four cities, but because of our business model. We have the opportunity to work with potential franchisees. So then we can minimize the capital deployment and still we can develop the brand really quickly.
So in the meantime of course, we are going to be very careful we are reassessing our investment plans.
And we plan to make capital decisions that are based on on through trends and the potential that we see.
So overall, yes, I think that yes, we are going through a little bit of softness here with the business.
But when you look at the overall potential and how the brand is positioned over there I think that.
We have an incredible opportunity here that for now we are going to absolutely support every single day.
Great. That's very helpful. Thanks for all the details that go up again and good luck next quarter.
Thank you Susan.
Our next question comes from Jeanine good share from Jefferies. Your line is now open.
Hi, good afternoon nice progress.
On the inventory.
Just think about where it ended the quarter versus anywhere you're expecting it feels like it ended may be a little bit better than we would have it.
And then just some parameters on how much more you feel like.
Maybe kind of how that breaks out.
Let me let me just start here I'm sure Sandeep will have.
In our comments to add but.
You know, yes, we put up pretty aggressive plan for inventories to be monitored and managed very effectively and and I am just so happy.
With how the team has embraced this initiative and this is big companies are complex company.
I have been back in the company now for seven months and I'm incredibly proud and amazed at how much.
We are accomplishing and and this is not my two micro but the team really is just an incredible.
Energy that is coming through.
So so with inventories is.
We looked at the inventory position that we had and I think we may have said in the past there were two big things that we needed to do one was to address what we owned at the time and there was a lot of.
In that in the composition of the inventory that was not desirable. So we had to really find a way to really make all that inventory.
Just be liquidated and.
And we put plans in place and even Sandeep mentioned today that we still have some procedural from that and we have a plan for it.
The second Big thing and I think that this is probably even more.
Just critical is to make sure that we don't replicate we don't duplicate that that's those same mistakes just done and it's more about how we plan on how we buy as opposed to what we own and so we are putting a lot of emphasis on the the those processes and making sure that we never buy more than what we think we can sell at healthy margins. Because this has an impact not only on the liquidation on margins performance, but also on the brand and that is the most important thing to us.
So we are.
In that process, we are very happy with the progress that we have made so far.
You are absolutely right. We ended the second quarter, and then better place than what we originally thought.
And frankly, we are now anticipating that we may end this year in a better place than what we originally thought as well.
And we are just looking at this every single day is the only way to do it well.
Being obsessed about it.
I think.
We just took this to add you asked for some regional color.
When we came into the year, we talked about Europe , and Asia being the more challenged regions in terms of inventory levels.
As well as composition and I think what's what's really been very encouraging is in Europe . We've made a lot of progress in the first six months and Thats been a big driver of the performance of inventory so far in the first half and.
I think we still have more work to do in Asia, especially because sales trends have decelerated compared to where we thought they were going to be at the beginning of the year and so that's the work that we will be doing in the backup appear to to to get that under.
Into a better place by the end of the year and I think on the Americas business like I mentioned earlier in my answer to Susan we feel pretty good about where our inventories are so I think overall when you think about the different regions that gives you some color for where things are at.
Thanks, Jason.
And then just one quick follow up on the Americas wholesale fulminate.
But putting that can you give us a sense of where the growth is coming from Kevin.
Got it.
Yes, so generally the first clarification the four cents is not just.
Americas wholesale but also includes European wholesale so we had early shipments in both businesses.
And with respect to Americas up just I know this is another.
Wonderful thing coming back into the company has seen their relevancy that the brand has today we are seeing.
A pretty significant traction with.
Retailers partners.
Such as urban Outfitters Pacific Sound, where this are retailers that do very well with that younger consumer and that has fueled some of our health and and strength in the wholesale business and in addition to that we have had very good business with other partners that are more traditional meaning like Macy's wait wait for whom our business is very healthy and very strong and growing.
So we are we're very pleased with our wholesale business not only top line, but also the profitability is also pretty much in line with our expectations because we are seeing that.
The the sell throughs of this product is very healthy as well so.
Obviously this has a major impact on margins and our I mean those are up.
Great. Thank you.
Thank you.
Our next question comes from John Kernan from Cowen and company. Your line is now open.
Yeah, Good afternoon, Sandeep and Carlos Congrats on outperforming lot of your peers across retail both in North America and Europe is water.
Thank you John Thank you.
Carlos Thank you.
Your confidence.
Sounds increase.
This quarter overlap.
It sounds like you're excited not only on the top line, but also on the cost structure and margin structure and you talked about the Mets Nathanson. Please.
That you may see start to play out next year and beyond can you just.
Talk to it since you're right.
And rejoined the company.
What you've learned and where do you see.
The most the biggest opportunity for margin expansion going forward, then sandeep I have a couple of questions for you as well thanks.
Sure Yes.
Thank you John .
I think that.
If you think about the typical peer now.
There are three big things that can drive operating margin right on the at the top I think is definitely revenues.
At this company continues to grow in spite of the fact that we have a very sizable business.
But I think at the the big opportunity here is to continue to penetrate the world and Thats those are big words, but.
Guess has done it time and time again so.
$2.7 billion business I have talked about a 5 billion to our brand and with opportunities to continue to grow and we see that as we did a lot of the detailed work.
And looking at different countries penetration and opportunities to continue to grow we see a lot of white space. So so that is first and obviously, if we can get topline growth.
Just finding leverage and to expand operating margins I think is a very much more to our thing to do the second big thing is about margins gross margins I'm talking about and and I think that the team has done a great job on higher revenue growth.
And you would think okay, well now we're done with that what do we do next but I think that there is still a lot of opportunity to IMMU lower cost of cancer of origin in the migration from China out going into lower labor market.
I think that there is a lot of opportunity in fabric platforming, but also using common fabrics across the different designs that we have.
We see a lot of opportunities in other accessory costs within the makeup of the product and and then organizationally I think that we can do a lot of things more efficiently right now.
We have three different teams and different regions doing very similar things we have.
Vendor bases that are not completely integrated so there is a lot that we can do in this whole world and the great thing is that we already on it we have a team that is driving this in a very aggressive on progressive way.
In addition to that.
You look at how we are managing inventories and.
Doing allocations and making sure that we are effective with the use of the product that we buy and we see a lot of opportunity as part of the efficiencies that we identified with the use of this consultant that we work with is about this whole world and this would require.
A new way of thinking and also will require some additional tools and we are looking at what kind of tools to implement to be able to go after that opportunity. So and this should result in lower markdowns and and.
Lower.
Out of stock situations. So then we can maximize sales as well.
And then if you look inside the PNM and Youre going to the cost structure. There are a lot of opportunities.
Starting with how we run stores and how we are located.
Labor hours to meet customer demands and enhance conversion rates there are things across the.
Logistics and distribution.
Area that obviously, we had some issues and in Europe last year, we are on that and looking for how to optimize that whole area, but there are many opportunities in the whole world of of logistics and distribution. In addition to that one particular transition that I'm referring to.
They are big opportunities inside the the whole corporate structure and we are looking at that as well and when you put it all together.
We see that we could be looking at a double digit operating margin and and we see that nothing has changed dramatically to be able to get there.
Got it and support through October when you give us some more detail Sandeep I know you lapped some one time.
Hi disruption in logistics in in Europe in the first half of this year and certainly the margin recovery is quite impressive I'm. Just wondering how we should think about European profitability as we go into the back half of the year.
Yes, and I think that's a great question, John and I think one thing that we will partially or picked up on the European margins in this particular quarter was.
For the first time, I'd say I think probably eight quarters now.
We actually saw the logistics cost being a tailwind to margins and its going in the right direction, but we've said that from the beginning of the year that we expect and now we've updated to say 125 basis points of margin expansion just from the logistics cost alone this year.
But if you look at the halfway point of your were up about 440 basis points and margins already with the pill will be starting in this quarter. So there's more going on beyond just the logistics costs. The IMU improvement is definitely helping we were a lot less promotional during the second quarter in our retail stores, because we got ourselves in a good position with inventories and we were able to drive comp gross profit dollars and we expect to see more of the same as we go into the third quarter and the rest of the year and when the sales are growing at the rate at which they are growing we are seeing leverage and we expect to see more leverage as we go through the year. So we're very excited about where margins are going in the European business and we see very good potential to recover a lot of the margin that we lost last year through all the drivers I just mentioned this year.
Got it Thats very helpful. And then final question just on inventory.
It sounds like you guys are common in terms of direction, and where its going and how you're buying and if the overall top line environment. So just wondering should inventory be relatively in line with sales with this week, we try to model the free cash flow for the year. Thank you.
Yes, I think what do you see already by the second quarter, John is that inventories and sales are relatively aligned already what we see more potential to do better in the back half of the year because as we move towards the back half we were carrying too much of inventory last year. So we should actually see potentially are outpacing in terms of where dollars an inventory are relative to sales growth and have inventory should actually be more than the prior year as we go through the back half.
Right.
They are that.
One thing that we're doing is we're not just looking at last year's inventories and trying to be just lower than that we are trying to forget about what what the company owned in the past and say why would be ideal to own in the future and that's the way we are managing inventories. So you may see that the reduction in inventories as much more than what you would expect.
Based on the sales trends because it could be that the company was carrying excess inventory that was not completing necessary to produce itself that it was producing.
Got it thank you.
Thank you John .
Our next question comes from Omar Saad from Evercore ISI. Your line is now open.
Thanks, guys. This is Scott.
Hi, good quarter and.
I wanted to dig in a little bit deeper on Jan the customer.
Stuart test that you're doing.
Continue to kind of reach a customer I know you already mentioned.
Strong reception piece on an urban I'll also notice in foot locker for the first time, which is.
That something I wouldnt sign.
Many years ago, but as you think about it.
Continuing to be set customer how do you incorporate it into the store environment that you have or do you plan on rolling out more specific aligned stores for that customer.
Yes, it's a good question on frankly, we continue to study this particular topic.
For now we are thinking about the three big groups of customers of profiles that that we are having.
Good.
Rapport with and response from.
And I'm one of those customers is this GNC customer differently the efforts on on the marketing side.
That.
That brand partnerships team as is driving.
I'll have really created this this opportunity for us and what we are doing now is looking at how we can participate in that lifestyle of that customer and developing product for them.
For the locations that that customer may participate in and and some of this is being done through the brand partnerships group.
Now.
When it comes to the tests.
We have done.
Just we took the product that was already available. So it's not that we win there and we said okay. Lets go on this design convey in new products for this test we took that the product that was available but that was more prepayments or more in line with what the customer is looking for and then we change the the visual presentations, we gave more space to this type of product and to get away from some of the other product and and changes the whole marketing outside with the visuals and images and and the results were very compelling.
It's only a limited number of stores that we're talking about and.
The stores were selected based on the penetration of this type of product for previous sales. So obviously, we are going after those areas, where we think that there is an alignment with this customer.
That that being said you know just the key thing here is not different whether we are talking about the generation see customer or the heritage customer or the millennial customer because it's all about capturing data.
Then taken all that data and analyzing it and doing segmentation and trying to really understand how this customers shop by how they behave what type of activities. They participate in and then doing personalized marketing and personalized.
Product, if we think that that is necessary in this case, we believe that that is necessary because the pace and on the lifestyles are very different than from that out there.
Heritage customer for example, so as a result, we are preparing our line plans, meaning saying, okay. What do we won in the line and when we do that we are.
Allocating.
A portion of that assortment to be specifically.
Design for this type of customers and that includes what the brand partnerships team is doing in addition to what our core designers are doing as well.
That sounds great and.
So something.
Seemingly.
Big in new today is rolling out the new E Commerce platform.
CRM.
You kind of think about that one can you tell us.
What your penetration is today and to where you think the main focus point time.
To improve the.
The App conversion is it to back end inventory.
To your line.
Where do you think you can leverage e-commerce that you Havent to date. Thank you.
Yes, sure, yes, so starting with penetration I think we have said in the past 13, our penetration is about 12% of our direct to consumer sales. So and this is a global number.
It's very low if you think about companies that are best in class here. You know, we we are looking at numbers between 30 and 40%.
Now it is not.
An apples and apples comparison, because we are a brand that has licensees we have very significant wholesale business. So so it's not that you can compare us to a vertically integrated retailer in Ontario, when it comes to this penetration, but that being said we know that there is a tremendous opportunity for me for us.
So we started looking at the tools that we had and on our ecommerce platform is one that is completely design and maintain in house and when we look at other opportunities outside mirror, what we saw that that Salesforce is definitely among the best in the market today and it all for things such as.
A platform that is built for performance.
You have a much faster response time.
We can improve our search algorithms and be significantly more effective with search.
They have artificial intelligence recommendations that today, we don't have access to.
They can do customer group second segmentation and personalization, which today has to be sitting on top of our infrastructure to be able to do anything like that.
We can improve our visual merchandising complete control over.
All the price books that we used to run the business. So there are a lot of things, but probably the most significant one that is going to drive money to the bottom line is.
And increase conversion rate, we have a pretty significant cart abandonment rate today that can be completely.
Just improved and when we compare you know even if I hadn't told you any of this when we compare our conversion rates to the industry. We know that we are trending at about half of what where the industry is so imagine what that means with the same traffic, where we could be doing double the business that we are doing today. So.
We know that this is an incredible investment for us is going to take us some time, but we feel that we have a great team that is driving it we are going to be.
Just looking at what this architecture will look like because we don't just want to convert one brand or one territory. We want to go after the entire world over time.
Initially we are starting with both Europe , and the Americas, and we want to be done before the end of next year.
And just one question on that is.
The investment.
We'll be both the capital and I'm sure. Some margin you is that going to impact the cadence of your margin improvement as you make the investment banking.
Over the next year and a half two years.
Yes, yes, no. It's a great question. So so with respect to the capital that is going to be required to implement the the application and the platform.
It's the hour necessary capital for this year is already included in our guidance I think we took at the upper ends of Capex to $68 million and and that is up from 65 million before.
This doesn't imply that we are going to spend $3 million in all the numbers a little bit higher than that but we were able to find some opportunities to cut some of the other capital requirements for this year. So so we're comfortable with this $68 million or Max.
For this year there is more capital that is going to hit next year and it's about the same type of size and magnitude.
That being said, yes, there's going to be some impact on the on the cost structure on an ongoing basis is the way this the compensation for Salesforce works.
But we have done the numbers in multiple ways and the return on this is kind of insane. If if you believe some of the conversion rate growth that we can see.
All right. Thanks.
Outlets October congratulation guys.
Yes. Thank you. Thank you so much.
Our next question comes from Dana Telsey from Telsey Advisory Group. Your line is now open.
Good afternoon, everyone and nice to see the progress.
Yes. Thank you how are you doing.
Good how are you it seems like obviously, you've made some nice changes and you're doing a lot of testing whether it's this test stores that you have.
The Gen Z customer, where those stores were up around 8%, what you doing that with the denim in order to enhance denim with new denim presentation, where are you on these tests.
Are they globally that you're doing these tests, what's the cost of these tests and how quickly do you see them rolling out.
Yes, so so so far the tests are.
Not very costly if you take about the GNC test that was just using everything we had including product, including images and so forth. So so that.
In the way that you would expect to be presented to continue to be a dominant company and brand in that category. So all we're doing is.
Kind of like bringing that presentation back into the stores, we used to have them and and now we want them back. So we are going to hit about 220 stores.
This is a global two years.
Just talking about your question and and we feel that this is just the beginning we are going to do more as we get close to.
The next season and so forth.
But overall, it's just giving a great presentation to a category that we know is is a very very critical category for us for us and is strategic to not only bring the customer end, but also to enhance the whole experience and increase total.
Units per transaction and sale so.
We are we are very excited about this the total cost is included in our capital.
For this year and is not a big number, but but we're talking about a few hundred thousand dollars to to be able to do that 200 stores that we are all 220 stores that we are introducing now.
Okay and denim how do you see the growth of Dan how do you see the fall fall and holiday and it seems like the order book remains strong in Europe .
Yes, you know we are seeing some early signs that are encouraging on denim, but it's too early not the installations are not even out the we only have a couple of stores that we did test initially just to see how we felt about the presentation, but.
But this is going to happen in.
Towards the end of September and October .
And we have done a lot of work on the assortment of denim and we are very excited and we'll see how things work and you know there are a lot of new things in denim that that we feel that we didn't have in the assortment that now we will have and.
And it's an exciting time for us and this is this applies to both.
Women and men.
Thank you.
Thank you Dana.
We have no further questions in queue at this time I will turn the call back to Carlos for closing remarks.
Yes, thank you operator.
I just want to say, thank you to all of you for participating today.
We had at terrific second quarter, that's the way we feel here we had great results in spite of the softness that we are experiencing in Asia.
Our business in Europe continues to thrive in all channels and our Americas business continues to gain momentum and grow profitability. So we feel very.
Sided to continue to report on our progress to be honest for tier. So we hope to see you in October for our analyst day and again. Thank you for participating have a great day.
Thank you ladies and gentlemen that concludes today's conference call. Thank you for your participation you may now disconnect.