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Guess CEO on Slow Q2: ‘Seeing Some Relief’ from Freight Peaks

Europe drove sales growth at Guess as the denim-centered lifestyle brand’s second-quarter revenue increased 2 percent to $642.7 million, but increased by 12 percent on a constant-currency basis. Net income totaled $24 million.

Across Europe, revenue increased 4 percent in U.S. dollars and 21 percent in constant currency to $336.7 million as the euro trades at a two-decade low against the U.S. dollar and European consumers need more euros to buy product.

With concerning macroeconomic headwinds in play, the company lowered its full-year sales guidance.

In a Nutshell: Guess CEO Carlos Alberini highlighted the more successful product categories for the retailer, which saw strength in “dressy products, including dresses and skirts, woven shirts and non-denim pants for both women and men, men’s blazers and special outerwear pieces.” Dresses represent about one-third of the women’s business in Guess, and abour half of the business at sister brand Marciano, he said.

Alberini said the “very strong” accessories business was driven by “outstanding” women’s handbag sales. Guess also delivered positive results in women’s and men’s travel accessories, small leather goods, jewelry, eyewear, fragrances and watches.

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Inventories at Guess totaled $535.5 million at the end of the second quarter, up 24 percent from the $430.3 million of product as of July 31, 2021. The increase occurred as the company ordered product earlier to meet demand.

About 80 percent of this increase represents anticipated deliveries, with roughly half of that received in company warehouses, and the other half in transit, according to Alberini. The remaining 20 percent comes from increases in average unit costs, reflecting quality upgrades and the effect of inflation.

“We are very pleased with the quality and mix of our inventory ownership and future orders to service our business well during the remainder of the year,” Alberini said. “With respect to inbound freight cost increases, we are seeing some relief from last year’s peak levels. We have focused on reducing our air freight with success resulting in meaningful cost reductions. While the freight cost pressures we experienced may subside in the future, we are not planning significant improvements for the second half of this year.”

To help bolster inventory visibility, and deliver more effective planning and allocation processes, Guess has been investing in several new applications to upgrade existing systems to improve information availability, productivity and data analytics.

Guess already has implemented some of the solutions in Europe with “very good results,” Alberini said, with the company planning to complete the rollout in North America by mid-next year. The high-end lifestyle brand has also re-architected its replenishment processes into stores to accelerate the delivery cycle to improve conversion and sell-throughs.

The company also is implementing upgrades to its store and e-commerce infrastructure, including the implementation of Salesforce’s Customer 360 in Europe. This includes a new CRM platform, a new segmentation tool, a new marketing tool and a clienteling app, Alberini said. Optimization in Europe will finish by year end, while the North American rollout wrapping early next year.

Total gross margin contracted 470 basis points (4.7 percentage points) to 42.1 percent, from 46.8 percent in the prior-year second quarter. The margin slip was driven mainly by product margin compression, primarily by a different mix of full-price versus markdown business, both in the Americas and in Europe, along with the currency headwinds which intensified in the quarter.

For the third quarter, Guess expects revenues to be down approximately 4.5 percent in U.S. dollars, but up approximately 4.5 percent in constant currency, versus the prior-year quarter. During the quarter, the company expects diluted earnings per share (EPS) of 45 cents, with adjusted diluted EPS of 55 cents.

Guess revised its full-year outlook downward, now forecasting revenue to be up nearly 1.5 percent in U.S. dollars and up 9.5 percent in constant currency. Initially, revenues were projected to increase 4 percent in U.S. dollars and 10 percent in constant currency. Expected adjusted operating margins have declined to 10 percent, compared to initial projections of 10.3 percent.

Diluted EPS for the fiscal year is $2.11, while adjusted diluted EPS is $2.65.

Net Revenue: Total net revenue for the second quarter of fiscal 2023 increased 2 percent to $642.7 million from $628.6 million in the same prior-year quarter. In constant currency, net revenue increased by 12 percent.

Americas retail revenues decreased 2 percent in U.S. dollars and constant currency to $181.7 million from $186.3 million in the year-ago period. Retail comparable sales in the region, which includes e-commerce, decreased 6 percent in U.S. dollars and 5 percent in constant currency.

Americas wholesale revenues increased 1 percent in U.S. dollars and 2 percent in constant currency to $50.2 million.

Revenues across Europe fared better than their North and South American counterparts, increasing 4 percent in U.S. dollars and 21 percent in constant currency to $336.7 million. Retail comparable sales, including e-commerce, decreased 4 percent in U.S. dollars and increased 10 percent in constant currency.

Asia revenues increased 3 percent in U.S. dollars and 15 percent in constant currency to $49.4 million. Retail comparable sales, including e-commerce, decreased 2 percent in U.S. dollars and increased 10 percent in constant currency.

Licensing revenues increased 13 percent in U.S. dollars and constant currency to $24.8 million, up from the $21.9 million generated in the year-ago period.

Net Earnings: For the second quarter, Guess recorded net earnings of $24 million, down from $61.1 million for the same prior-year quarter. Diluted net earnings per share (EPS) decreased to 35 cents for the quarter, compared to 91 cents for the prior-year period.

Adjusted net earnings were $22.9 million, a decline from $64.1 million for the same prior-year quarter. Adjusted diluted EPS is now 39 cents, down from 96 cents for the prior-year quarter.

Earnings from operations for the second quarter were $53.4 million, including $1.9 million in non-cash impairment charges taken on certain long-lived store related assets, $0.9 million net gains on lease modifications and a $7.8 million unfavorable currency translation impact. This is down from the $87.4 million in earnings in the year-ago quarter, which included $1.5 million in non-cash impairment charges taken on certain long-lived store related assets and $0.4 million net gains on lease modifications.

Operating margin for the company were 8.3 percent of revenue, down 560 basis points (5.6 percentage points) from the 2021 period’s 13.9 percent operating margin.

CEO’s Take: “We have significantly improved the quality of our products across the board, including fabrics, trims, and make and we have priced every product based on its respective perceived value,” Alberini said. “We have raised prices but very thoughtfully, so the customer recognizes why these increases are warranted. We are now focused on further tightening our assortments and buying the big story groups with significant conviction to improve sales and optimize service levels. We also plan to develop exclusive products for our direct-to-consumer channels, leveraging a speed-to-market model anchored on new sourcing countries that are in proximity to where the product will be distributed for sale. We believe this is a big long-term opportunity for us.”